INCOME TAXATION WHOLE BOOK Individual taxpayers
CHEAT SHEET (Progressive Income tax)
LAWS, PRINCIPLES, AND APPLICATIONS Corporate income taxpayers(corporate
By Rex B. Banggawan, CPA, MBA income tax)
Philippine Copyright, 2014
OVERVIEW OF CONTENTS Special individual tax rules:
Introductory concepts to taxation Taxable trust &Estates
The concept of tax, tax laws and tax Special corporate tax rules:
administration Gross Income tax
The concept of gross income under MCIT
taxation IAET
Taxation schemes, accounting period, Branch profit remittance tax
methods and income reporting
Final income taxes CHAPTER 1
Capital gains taxes INTRODUCTION TO TAXATION
Exclusions and exempt income Chapter Overview and Objectives
Income subject to regular income tax This chapter discusses the fundamental
Compensation income principles of taxation.
Fringe benefits and the fringe benefitsAfter this chapter, readers must be able
tax to comprehend and demonstrate
Dealings in properties subject to regular
mastery of the following:
tax 1.Concept of taxation and its necessity
Allowable deductions from gross for every government
income 2. Lifeblood doctrine and its implication
Specific regular tax rules applicable to taxation
individuals 3. Theories of government cost
Specific regular tax rules applicable to
allocation
corporations 4.Inherent power of the state
5.Scope of the taxation power
THE CONCEPT MAP OF INCOME 6.Limitations of the taxation power
TAXATION 7.Stages of taxation
Introductory concepts 8.Concept of situs in taxation
9.Fundamental principles surrounding
taxation
GROSS INCOME 10.Various escapes from taxation
11. Concept of tax amnesty and
condonation
What is taxation?
Taxation may be defined as a state
Final Income Regular power, a legislative process, and a
Income mode of government cost distribution.
Taxation Capital Gains taxation 1.As a state power-Taxation is an
taxation inherent power of the state to enforce a
proportional contribution from its
subjects for public purpose.
2.As a process-Taxation is a process of
levying taxes by the legislature of the
state to enforce proportional
Fringe benefits Gains on contributions from its subjects for
dealings in public purpose.
properties 3.As a mode of cost distribution
Taxation is a mode by which the state
Gross Income PXXX allocates its costs or burden to its
Less: subjects who are benefited by its
Deductions XXX spending.
Personal exemptions XXX
Taxable income PXXX The theory of taxation
Every government provides a vast array
of public services including defense,
public order and safety, health,
education and social protection among
others.A system of government is
indispensable to every society. Without
it, the people will not relish the benefits
of a civilized and orderly society.
However, a government cannot exist
without a system of funding. The
government’s necessity for funding is
the theory of taxation.
The basis of taxation
The government provides benefits to
the people in the form of public
services, and the people provide the
funds that finance the government. This
mutuality of support between the
people and the government is referred
to as the basis of taxation.
This mutuality is illustrated as:
Public services-people-taxes-
government-public services
Receipt of benefits is conclusively
presumed
Every citizen and resident of the state
directly or indirectly benefits from the
public services rendered by the
government. These benefits can be in
the form of daily free usage of public
infrastructures, access to public health
or educational services, the protection
and security of person and property, or
simply the comfort of living in a civilized
and peaceful society which is
maintained by the government.
While most public services are received
indirectly, their realization by every
citizen and resident is undeniable. In
taxation, the receipt of these benefits
by the people is conclusively presumed.
Thus, taxpayers cannot avoid payment
of taxes under the defense of absence
of benefit received. The direct receipt
or actual availment of government
services is not a precondition to
taxation.
THEORIES OF COST ALLOCATION
Taxation is a mode of allocating
government costs of burden to the
people. In distributing the costs or
burden, the government regards the
following general considerations in the
exercise of its taxation power:
1.Benefit received theory
2.Ability to pay theory.
Benefit received theory
The benefit received theory
presupposes that the more benefit one
receives from the government, the
more taxes he should pay.
Ability to pay theory.
The ability to pay theory presupposes
that taxation should also consider the
taxpayer’s ability to pay. Taxpayers a.Income received in advance is taxable the general
should be required to contribute based upon receipt. govern welfare
on their relative capacity to sacrifice for b.Deduction for capital expenditures ment of the
the support of the government. and prepayments is not allowed as it people
In short, those who have more should effectively defers the collection of Perso Comm Commun Owner
be taxed more even if they benefit less income tax. ns unity ity if of the
from the government. Those who have c.A lower amount of deduction is affect or class of propert
less shall contribute less even if they preferred when a claimable expense is ed class individua y
receive more of the benefits from the subject to limit. of ls
government. d. A higher tax base is preferred when individ
Aspects of the ability to pay theory the tax object has multiple tax bases. uals
1.Vertical equity-vertical equity INHERENT POWERS OF THE STATE Amou Unlimi Limited(I No
proposes that the extent of one’s ability A government has its basic needs and nt of ted(Ta mpositio amount
to pay is directly proportional to the rights which co-exist with its creation. It Impo x n is impose
level of his tax base. has rights to sustenance, protection, sition based limited d. (The
For example, A has P200,000 income and properties. The government on to cover govern
while B has P400,000. In taxing income, sustains itself by the power of taxation, govern cost of ment
the government should tax B more than secures itself and the well-being of its ment regulatio pays
A because B has greater income; hence people by police power, and secures its needs. n) just
a greater capacity to contribute. own properties to carry out its public ) compe
2.Horizonatl equity-requires services by the power of eminent nsation
consideration of the particular domain. .)
circumstance of the taxpayer. For These rights, dubbed as “powers” are Impor Most Most Import
example, both A and B have P300,000 natural, inseparable, and inherent to tance import superior ant
income. A is single without child while B every government, No government can ant
is married with four children. In taxing sustain or effectively operate without Relati Inferio Superior Superio
income, the government should tax A these powers. Therefore, the exercise, onshi r to to r to the
more than B because A has a greater of these powers by the government is p the the”Non- “Non-
capacity to contribute since he has no presumed understood and with “Non- impairme impair
dependents to support. B has less acknowledged by the people from the the impair nt ment
capacity to contribute considering the very moment they establish their Cons ment Clause” Clause”
support requirements of his government. These powers are tituti Clause of the of the
dependents. naturally exercisable by the government on ” of Constitu Constit
Vertical equity is a gross concept while even in the absence of an express grant the tion ution.
horizontal equity is a net concept. of power in the Constitution. Constit
The lifeblood doctrine The Inherent Powers of the State ution
Taxes are essential and indispensable to 1.Taxation power-is the power of the Limit Constit Public Public
the continued subsistence of the State to enforce proportional ation utional interest purpos
government. Without taxes, the contribution from its subjects to sustain and and due e and
government would be paralyzed for lack itself. inhere process just
of motive power to activate or operate 2.Police power-is the general power of nt compe
it.(CIR vs. Algue) the State to enact laws to protect the limitati nsation
Taxes are the lifeblood of the well-being of the people. ons
government, and their prompt and 3.Eminent domain-is the power of the
certain availability are an imperious State to take private property for public Similarities of the three powers of the
need. Upon taxation depends the use after paying just compensation. State
government’s ability to serve the Comparison of the three powers of the They are all necessary attributed of
people for whose benefit taxes are State sovereignty.
collected.(Vera vs. Fernandez) Point Taxatio Police Eminen They are all inherent to the state.
Implication of the lifeblood doctrine in of n Power t They are all legislative in nature
taxation: Differ Domain They are all ways in which the State
1.Tax is imposed even in the absence of ence interferes with private rights and
a Constitutional grant. Exerci Gover Governm Govern properties.
2. Claims for tax exemption are sing nment ent ment They all exist independently of the
construed against taxpayers. autho and Constitution and are exercisable by the
3.The government reserves the right to rity private government even without
choose the objects of taxation. utilities Constitutional grant. However, the
4.The courts are not allowed to Purpo For the To For Constitution may impose conditions or
interfere with the collection of the se suppor protect public limits for their exercise.
taxes. t of the use
5. In income taxation:
They all presuppose and equivalent
form of compensation received by the
persons affected by the exercise of the
power.
The exercise of these powers by the
local government units may be limited
by the national legislature.
Scope of the taxation power
The scope of taxation is widely regarded
as comprehensive, plenary, unlimited
and supreme.
However, despite the seemingly
unlimited nature of taxation, it is not
absolutely unlimited. Taxation has its
own inherent limitations and limitations
imposed by the Constitution.
THE LIMITATIONS OF THE TAXATION
POWER
Inherent limitations
1.Territoriality of taxation
2.International comity
3.Public purpose
4.Exemption of the government
5.Non-delegation of the taxing power
B.Constitutional limitations
1.Due process of law
2.Equal protection of the law
3.Uniformity rule in taxation
4.Progressive system of taxation
5.Non-improsonment for non-payment
of debt or poll tax
7.Free worship rule
8.Exemption of religious or charitable
entities, non-profit cemeteries,
churches and mosque from property
taxes
9.Non-appropriation of public funds or
property for the benefit of any church,
sect or system of religion
10.Exemption from taxes of the
revenues and assets of non-profit, non-
stock educational institutions.
11. Concurrence of a majority of all
members of Congress for the passage of
a law granting tax exemption.
12. Non-diversification of tax collections
13. Non-delegation of the power of
taxation
14. Non-impairment of the jurisdiction
of the Supreme Court to review tax
cases
15. The requirement that
appropriations, revenue or tariff bills
shall originate exclusively in the House
of Representatives.
16. The delegation of taxing power to
local government units.
INHERENT LIMITATION OF TAXATION
Territoriality of Taxation
Public services are normally provided
within the boundaries of the state.
Thus,it can be imposed only within the
territories of the state. There is no basis
in taxing foreign subjects abroad since
they do not derive benefits from our
government. Furthermore,
extraterritorial taxation will amount to
encroachment of foreign sovereignty.
Exception to the territoriality principle
1.In income taxation, resident citizens
and domestic corporations are taxable
income derived within and outside the
Philippines.
2. In transfer taxation, residents or
citizens such as resident citizens, nor
resident citizens and resident aliens are
taxable on transfers of property located
within or outside the Philippines.
International Comity
International comity pertains to mutual
courtesy or reciprocity between states
is a basic principle of international law
that all states are equally sovereign.
Each states observes co-equal
sovereignty by not taxing the
properties, income, or effects of fellow
state.
Consistent with this, embassies or
consular offices of foreign governments
in the Philippines including
international organizations and their
non-filipino staff are not subject to
Philippine taxation. Under the National
Internal Revenue Code(NIRC), The
income of foreign government and
foreign government-owned and
corporations are not subject to income
tax.
When a state enters into treaties with
other states, it is bound to honor the
agreements as a matter of mutual
courtesy, and in the case its treaty
agreements with other states conflict
with its local tax law, its treaty
agreements are given primacy.
Public purpose
Tax is intended for the common good.
Taxation must be exercised absolutely
for public purpose. It cannot be
exercised to further any private interest.
Exemption of the government
The taxation power is broad. The
government can exercise the power
upon anything including itself. However,
the government normally does not tax
itself as this will not raise additional
funds but will only impute additional
costs.
Under the NIRC, government properties
and income from essential public
functions are not subject to taxation.
However, income of the government
from its properties and activities
conducted for profit including income
from government owned and controlled
corporations is subject to tax.
Non-delegation of the taxing power
The legislative power is vested
exclusively in Congress and is non-
delegable pursuant to the doctrine of
separation of the branches of the
government to ensure a system of
checks and balances.
The power of lawmaking, including
taxation, is delegated by the people to
the legislature. So as not to spoil the
purpose of delegation, it is held that
what has been delegated cannot be
further delegated.
Exceptions to the rule of non-delegation
1.Under the Constitution, local
government units are allowed to
exercise the power to tax to enable
them to exercise their fiscal autonomy.
2.Under the tariff and customs code,
The president is empowered to fix the
amount of tariffs to be flexible to trade
conditions.
3.Other cases that require expedient
and effective administration and
implementation of assessment and
collection of taxes.
CONSTITUTIONAL LIMITATIONS OF
TAXATION
Observance of due process of law
No one should be deprived of his life,
liberty, or property without due process
of law. Tax laws should neither be harsh
nor oppressive.
Aspects of Due process
1.Substantive due process
Tax must be imposed only for public
purpose, collected only under authority
of a valid law and only by the taxing
power having jurisdiction. An
assessment without a legal basis
violates the requirement of due
process.
2.Procedural due process-There should
be no arbitrariness in assessment and
collection of taxes, and the government
shall observe the taxpayer’s right to
notice and hearing. The law established
procedures which must be adhered to
in making assessments and in enforcing
collections.
Under the NIRC, assessments shall be
made within three years from due date
of filing of the return of from the date
of actual filing, whichever is later.
Collection shall be made within five
years from the date of assessment. The
failure of the government to observe
these rules violates the requirements of
due process
Equal protection of the law
No person shall be denied the equal
protection of the law. Taxpayers should
be treated equally both in terms of
rights conferred and obligations
imposed.
This rule applies where taxpayers are
under the same circumstances and
conditions. This requirement would
mean Congress cannot exempt sellers
“ballot” while subjecting sellers of
“penoy” to tax since they are essentially
the same goods.
Uniformity rule in taxation
The rule of taxation shall be uniform
and equitable. Taxpayers under
dissimilar circumstances should not be
taxed the same. Taxpayers should be
classified according to commonality in
attributes, and the tax classification to
be adopted should be based on
substantial distinction. Each class is
taxed differently, but taxpayers filing
under the same class are taxed the
same. Hence, uniformity is relative
equality.
Progressive system of taxation
Congress shall evolve a progressive
system of taxation. Under the
progressive system, tax rates increase
as the tax base increases. The
constitution favor progressive tax as it is
consistent with the taxpayer’s ability to
pay. Moreover, the progressive system
aids in an equitable distribution of
wealth to society by taxing the rich
more than the poor.
Non-imprisonment for non-payment of
debt or poll tax
As a policy, no one shall be imprisoned
because of his poverty, and no one shall
be imprisoned for mere inability to pay
debt.
However, this Constitutional guarantee
applies only when the debt is acquired
by the debtor in good faith. Debt
acquired in bad faith constitutes estafa,
a criminal offense punishable by
imprisonment.
Is non-payment of tax equivalent to
non-payment of debt?
Tax arises from law and is a demand of
sovereignity. It is distinguished from
debt which arises from private contacts.
Non-payment of tax compromises
public interest while the non-payment
of debt compromises private interest.
The nonpayment of tax is similar to a
crime. The Constitutional guarantee on
non-improsonment for non-payment of
debt does not extend to non-payment
of tax except poll tax.
Poll, personal, community or residency
tax
Poll tax has two components:
Basic community tax
Additional community tax
The constitutional guarantee of non-
imprisonment for non-payment of poll
tax applies only to the basic community
tax. Non-payment of the additional
community tax is an act of tax evasion
punishable by imprisonment.
Non-impairment of obligation and
contract
The state should set an example of
good faith among its constituents. It
should not set aside obligations from
contacts by the exercise of its taxation
power. Tax exemptions granted under
contract should be honored and should
not be cancelled by a unilateral
government action.
Free worship rule
The Philippine adopts free exercise of
religion and does not subject its
exercise to taxation. Consequently, the
properties and revenues of religious
institutions such as tithes or offerings
are not subject to tax. This exemption,
however, does not extend to income
from properties or activities of religious
institution that are propriety or
commercial in nature.
Exemption of religious, charitable or
educational entities, non-profit
cemeteries, churches and mosques,
lands, buildings, and improvements
from property taxes
The Constitutional exemption from
property tax applies for properties
actually, directly, and exclusively(i.e.
primarily) used for charitable, religious
and educational purposes.
In observing this Constitutional
limitation, the Philippines follows the
doctrine of use wherein only properties
actually devoted for religious,
charitable, or educational activities are
exempt from real property tax.
In observing this Constitutional
limitation, the Philippines follows the
doctrine of use wherein only properties
actually devoted for religious,
charitable, or educational activities are
exempt from real property tax. Under
the doctrine of ownership, the
properties of religious, charitable, or
educational entities whether or not
used in their primary operations are
exempt from real property tax. This,
however, is not applied in the
Philippines.
Non-appropriation of public funds or
property for the benefit of any church,
sect, or system of religion
This constitutional limitation is intended
to highlight the separation of religion
and the state. To support freedom of
religion, the government should not
favor any particular system of religion
by appropriating public funds or
property in support thereof.
It should be noted, however, that
compensation to priests, imams, or
religious ministers working with the
military, penal institutions, orphanages,
or leprosarium is not considered
religious appropriation.
Exemption from taxes of the revenues
and assets of non-profit, non-stock,
educational institutions including
grants, endowments, donations, and
contributions for educational purposes.
The Constitution recognizes the
necessity of education in state building
by granting tax exemption on revenues
and assets of non-profit educational
granting tax exemption on revenues
and assets of non-profit educational
institutions. This exemptions, however,
applies only on revenues and assets
they are actually, directly, and
exclusively devoted for educational
purposes.
Consistent with this constitutional
recognition of education as a necessity,
the NIRC also exempts government
educational institutions from income
tax subjects private educational
institutions to a minimal 10% income
tax.
Concurrence of a majority of all
members of Congress for the passage of
law granting tax exemptions.
Tax exemption law counters against the
lifeblood doctrine as it deprives the
government of revenues. Hence, the
grant of tax exemption must proceed on
upon a valid basis. As a safety net, the
Constitution requires the vote of the
majority of all members of Congress in
the grant of tax exemption.
In the approval of an exemption law, an
absolute majority or the majority of a
members of Congress, not a relative
majority or quorum majority, is
required.However, in the withdrawal of
tax exemption, only a relative majority
is required.
Non-diversification of tax collections
Tax collections should be used for public
purpose. It should never be diversified
or used for private purpose.
Non-delegation of the power of
taxation
The principle of checks and balances in
a republican state requires that taxation
power as part of lawmaking be vested
exclusively in Congress.
However, delegation may be made on
matters involving the expedient and
effective administration and
implementation of assessment and
collection of taxes. Also, certain aspects
of the taxing process that are non-
legislative in character are delegated.
Hence, implementing administrative
agencies such as the Department of
Finance and the Bureau of Internal
Revenue (BIR) issues revenue
regulations, ruling orders, or circulars to
interpret and clarify the application of
the law. But even so, their functions are
merely intended to interpret or clarify
the proper application of the law. They
are not allowed to introduced new
legislations within their quasi legislative
authority.
Non-impairment of the jurisdiction of
the Supreme Court to review tax cases
Notwithstanding the existence of the
Court of Appeals, which is a special
court, all cases involving taxes can be
raised to and finally decided by the
Supreme Court of the Philippines.
Appropriations, revenue, or tariff bills
shall originate exclusively in the House
of representatives, but the Senate may
propose or concur with amendments.
Laws that add income to the national
treasury and those that allows spending
therein must originate from the House
of Representatives while Senate may
concur with amendments. The
origination of a bill by Congress does
not necessarily mean that the House
bill must become the final law. It was
held constitutional by the Supreme
court when Senate changed the entire
house version of a tax bill.
Each local government unit shall
exercise the power to create its own
sources of revenue and shall have a just
share in the national taxes
This is a constitutional recognition of
the local autonomy of local
governments and an express delegation
of the taxing power.
STAGES OF THE EXERCISE OF TAXATION
POWER
1.Levy or imposition
2.Assessment and collection
Levy or imposition
This process involves the enactment of
a tax law by Congress and is called
impact of taxation. It is also referred to
as the legislative act in taxation.
Congress is composed of two bodies:
1.The house of representatives,and
2.The senate
As mandated by the Constitution, a tax
bill must originate from the House of
Representatives. Each may, however,
have their own versions of a proposed
law which is approved by both bodies,
but tax bill cannot originate exclusively
from the senate.
Matters of legislative discretion in the
exercise of taxation
1.Determining the object of taxation
2.Setting the tax rate or amount to be
collected
3.Determining the purpose for the levy
which must be public use
4.kind of tax to be imposed.
5.Apportionment of the tax between
the national and local government
6.Situs of taxation
7. Method of collection
Assessment and Collection
The tax law is implemented by the
administrative branch of the
government. Implementation involves
assessment of the determination of the
tax liabilities of taxpayers and
collection. This stage is referred to as
incidence of taxation or the
administrative act of taxation.
SITUS OF TAXATION
Situs is the place of taxation. It is the tax
jurisdiction that has the power to levy
taxes upon the tax object. Situs rules
serves as frames of reference in gauging
whether the tax object is within or
outside the tax jurisdiction of the taxing
authority.
Examples of Situs rules:
1.Business tax situs:Businesses are
subject to tax in the place where the
business is conducted.
Illustration
A taxpayer is involved in car dealership
abroad and restaurant operation in the
Philippines.
The restaurant business will be subject
tax in the Philippines since the business
is conducted herein, but the car dealing
business is exempt because the
business is conducted abroad.
2.Income tax situs on services-Service
fees are subject to tax where they are
rendered.
Illustration
A foreign corporation leases a
residential space to a non-resident
Filipino citizen abroad. The rent income
will exempt from Philippines taxation as
the leasing service is rendered abroad.
3.Income tax situs on sale of goods-The
gain on sale is subject to tax in the place
of sale.
Illustration
While in China, a non-resident OFW
citizen agreed with a Chinese friend to
sell his diamond necklace to the latter.
They stipulated that the delivery of the
item and the payment will be made a
week later in the Philippines. The sale
consummated as agreed.
The contract of sale is consensual and is
perfected by the meeting of the minds
of the contracting parties. The
perfection of the contract of sale is in
China. The situs of taxation is in China.
The gain on sale of the necklace will be
taxable abroad and exempt in the
Philippines.
4.Property tax situs:Properties are
taxable in their location
Illustration-An overseas Filipino worker
has a residential lot in the Philippines
He will still pay real property tax despite
his absence in the Philippines because
his property is located herein.
5.Personal tax situs:Persons are taxable
in their place of residence
Illustrations:
Ahmed Lofti is a Sudanese studying
medicine in the Philippines
Ahmed will pay personal tax in the
Philippines even if he is an alien
because he is residing in the
Philippines.
Other fundamental doctrines in
taxation
1.Marshall doctrine-“The power to tax
involves the power to destroy.” Taxation
power can be used as an instrument of
police power. It can be used to
discourage or prohibit undesirable
activities or occupation. As such,
taxation power carries with it power to
destroy.
However, the taxation power does not
include the power to destroy if it is used
solely for the purpose pf raising
revenues.(Roxas vs. CTA)
2.Holme’s Doctrine-“Taxation power is
not the power to destroy while the
court sits”. Taxation power may be used
to build or encourage beneficial
activities or industries by the grant of
tax incentives.
While the Marshall doctrine and the
Holme’s doctrine appear to contradict
each other both are actually employed
in practice. A good manifestation of the
Marshall doctrine is the imposition of
excessive tax on cigarretes while
application of the Holme’s doctrine
include creation of Ecozones with
holidays and provision of incentives,
such as the Omnibus Investment
Code(E.0 226) and the Barangay Micro-
Business Enterprise(BMBE) Law.
3. Prospectivity of tax laws
tax laws are generally prospective in
operation. An ex post facto law or that
retroacts is prohibited by the
Constitution.
Exceptionally, income tax laws may
operate retrospectively if so intended
congress under certain justifiable
conditions. For example, even after that
tax on income earned during periods of
foreign occupation even after the war.
4.Non-compensation or set-off
Taxes are not subject to automatic set-
off or compensation. The taxpayer
cannot delay payment of tax to wait for
the resolution of a lawsuit involving his
pending claim against the government.
Tax is not a debt, hence, it is not subject
to set-off. This rule is important to allow
the government sufficient period to
evaluate the validity of the claim. (see
Philex Mining Corporation CIR G.R.
125704)
Exceptions:
a.Where the taxpayer’s claim has
already become due and demandable
such as when the government already
recognized the same and appropriation
for refund was made
b.Cases of obvious overpayment of
taxes
c.Local taxes
5.Non-assignment of taxes
Tax obligations cannot be assigned or
transferred to another entity contract.
Contracts executed by the taxpayer to
such effect shall not prejudice the right
of the government to collect.
6.Imprescritibility in taxation
Prescription is the lapsing of a right due
to the passage of time.When one sleep
on his right over an unreasonable
period of time, he is presumed to be
waiving his right. The government’s
right to collect taxes does not prescribe
unless the law itself provides such
prescription
Under the NIRC, tax prescribes if not
collected within 5 years from the date
of its assessment. In the absence of an
assessment, tax prescribes if not
collected by judicial action within 3
years from the date the return is
required to filed. However, taxes due
from taxpayers who did not file a return
or the who filed fraudulent returns do
not prescribe.
7.Doctrine of Estoppel
Under the doctrine of estoppel, any
misrepresentation made by one party
toward another who relied therein in
good faith will be held true and binding
against that person who made the
misrepresentation.
The government is not subject to
estoppel. The error of any government
employee does not bind the
government. It is held that the neglect
or omission of government officials
entrusted with the collection of taxes
should not be allowed to bring harm or
detriment to the interest of the people.
Also, erroneous applications of the law
by public officers do not block the
subsequent correct application of the
same.
8.Judicial Non-interference
Generally, courts are not allowed to
issue injunction against the
government’s pursuit to collect tax as
this would unnecessarily defer tax
collection. This rule is anchored on the
Lifeblood doctrine.
9.Strict Construction of tax laws
When the law clearly provides for
taxation, taxation is the general rule
unless there is a clear exemption.Hence
the maxim, “Taxation is the rule,
exemption is the exception.”
When the language of the law is clear
and categorical, there is no room for
interpretation. There is only room for
application. However, when taxation
laws are vague, the doctrine of strict
legal construction is observed.
Vague tax laws
Vague tax laws are construed against
the government and in favor of the
taxpayers. A vague tax laws means no
tax laws. Obligation arising from law is
not presumed. The Constitutional
requirement of due process requires
laws to be sufficiently clear and
expressed in their provision.
Vague exemption laws
Vague tax exemption laws are
construed against the taxpayer and in
favor of the government. A vague tax
exemption law means no exemption
law. The claim for exemption is
construed strictly against the tax payer
in accordance with the lifeblood
doctrine.
The right of taxation is inherent to the
state. It is a prerogative essential to the
perpetuity of the government. He who
claims exemption from the common
burden must justify his claim by the
clearest grant of organic or statue law.
(Iloilo, et al. vs. Smart Communications,
Inc, G.R. No. 167260, February 27,
2009)
When exemption is claimed, it must be
shown indubitably to exist. At the
outset, every presumption is against it.
A well-founded doubt is fatal to the
claim, it is only when the terms of the
concession are too explicit to admit
fairly of any other construction that the
proposition can be supported. (Ibid)
Tax exemption cannot arise from vague
inference. Tax exemption must be clear
and unequivocal. A taxpayer claiming a
tax exemption must point to a specific
provision of law conferring on the
taxpayer, in clear and plain terms,
exemption from a common burden. Any
doubt whether a tax exemption exists is
resolved against the taxpayer.(see
Digital Telecommunications, Inc. vs. City
Government of Batangas, et al)
DOUBLE TAXATION
Double taxation occurs when the
taxpayer is taxed twice by the same tax
jurisdiction for the same thing.
Elements of double taxation
1.Primary element:Same object
2.Secondary elements:
a.same type of tax
b.same purpose of tax
c.same taxing jurisdiction
d.same tax period.
Types of Double taxation
1.Direct double taxation
This occurs when all the element of
double taxation exists for both
impositions.
Examples:
a.An income tax of 10% on monthly sale
and a 2% income tax on the annual
sales(total of monthly sales)
b.A 5% tax on bank reserve deficiency
and another 1% penalty per day as a
consequence of such reserve deficiency.
2.Indirect double taxation
This occurs when at least one of the
secondary elements of double taxation
is not common for both impositions.
Examples:
a.The national government levies
business tax on the sales or gross
receipts of business while the local
government levies business tax upon
the same sales or receipts.
b.The national government collects
income tax from a taxpayer on his
income while the local government
collects community tax upon the same
income.
c.The Philippine government taxes
foreign incomes of domestic
corporations and resident citizens while
a foreign government also taxes the
same income (international double
taxation)
Nothing in our law expressly prohibits
double taxation. In fact, indirect double
taxation is prevalent in practice.
However, direct double taxation is
discouraged because it is oppressive
and burdensome to taxpayers. It is also
believed to counter the rule of equal
protection and uniformity in the
Constitution
How can double taxation be minimized?
The impact of double taxation can be
minimized by any one or a combination
of the following:
a.Provision of tax exemption
b.Allowing foreign tax credit (deduction
for taxes paid abroad)
c.Allowing reciprocal tax treatment
between the home country and a
foreign country.
d.Entering into treaties or bilateral
agreements.
ESCAPE FROM TAXATION
Escapes from taxation are the means
available to the taxpayer to limit or
even avoid the impact of taxation.
Categories of Escapes from taxation
A.Those that result to loss government
revenue
1.Tax evasion-also known as tax
dodging, refers to any act or trick that
tends to illegally reduce or avoid the
payment of tax. In income taxation, this
can be perpetrated by undue
understatement of income,
overstatement of expenses or non-
declaration of income.
2.Tax avoidance-also known as tax
minimization, refers to any act or trick
that reduces or totally escapes taxes by
any legally permissible means. This may
be done by selecting tax options
allowed by law which minimizes tax
liability or by careful tax planning to
reduce tax exposure.
3.Tax exemption-also known as tax
holiday, refers to the immunity,
privilege or freedom from being subject
to a tax which others are subject to.Tax
exemptions may be granted by the
Constitution, law, or contract.
All forms of tax exemptions can be
revoked by Congress except the granted
by the Constitution and those granted
under contracts.
B.Those that do not result to loss of
government revenue
1.Shifting-This is the process of
transferring tax burden to other
taxpayers.
Forms of shifting
a.Forward shifting-This is the shifting of
tax which follows the norm flow of
distribution (i.e, from manufacturer to
wholesalers, retailers, consumers).
Forward shifting is common with
essential commodities and services
such as food and fuel.
b.Backward shifting-This is the reverse
of forward shifting, Backward shifting is
common with non-essential
commodities where buyer have
considerable market power and
commodities with numerous substitute
products.
c.Onward shifting-This refers to any tax
shifting in the distribution channel that
exhibits forward shifting or backward
shifting.
Shifting is common with business taxes
where taxes imposed on business
revenue can be shifted or passed-on to
customers.
2.Capitalization-This pertains to the
adjustment of the value of an asset
caused by changes in tax rates.
For instance, the value of a mining
property will correspondingly decrease
mining output is subjected to higher
taxes. This is a form of backward
shifting of tax.
3.Transformation-This pertains to the
elimination of wastes or losses the
taxpayers to form tax savings to
compensate for the tax imposition on
increase in taxes.
Tax amnesty
Amnesty is a general pardon granted by
the government for erring taxpayers to
give them a chance to reform and
enable them to have a fresh start to be
part of a society with a clean slate. It is
an absolute forgiveness or waiver by
the government on its right to collect
and is retrospective in application.
Tax condonation
Tax condonation is forgiveness of the
tax obligation of a certain taxpayer
under certain justifiable grounds. This is
also referred to as tax remission.
Because they deprive the government
of revenues, tax exemption, tax refund,
tax amnesty, and tax condonation are
construed against the taxpayer and in
favor of the government.
Tax amnesty vs. tax condonation
Amnesty covers both civil and criminal
liabilities, but condonation covers only
civil liabilities of the taxpayer.
Amnesty operates retrospectively by
forgiving past violations. Condonation
applies prospectively to any unpaid
balance of the tax; hence, portion
already paid by the taxpayer will not be
refunded.
Amnesty is also conditional upon the
taxpayer paying the government of a
portion of the tax whereas condonation
requires no payment.
CHAPTER 1:SELF-TEST EXERCISES
Discussion Questions
1.Define taxation
2.Distinguish the theory and the basis
of taxation
3.What are the theories of government
cost allocation?Explain each
4.Differentiate the Lifeblood doctrine
5.Enumerate and explain the inherent
powers of the state
6.Distinguish the three powers of the
state and enumerate their similarities
7.Differentiate vertical and horizontal
equity
8.Describe the scope of the power of
taxation
9.Distinguish substantive due process
from procedural due process.
10. Distinguish the concept of equality
from the concept of uniformity in
taxation
11.Distinguish non-payment of debt
versus non-payment of tax in terms of
consequences
12. What institutions are exempt from
real property tax in the Constitution?
13.Which of the constitutional
limitations are also classified as
inherent limitations?
14. Explain the stages of the exercise of
taxation power.
15. Explain the concept of situs.
16. Distinguish the Marshall Doctrine
from the Holme’s Doctrine
17.Discuss the doctrine of strict
construction of tax laws.
18.Explain double taxation, its
elements, and its types.
19.What are the categories of escapes
from taxation? Enumerate and explain
each means of escape under each
category.
20.Distinguish tax amnesty from tax
condonation.
Exercise drills
In the space provided for, indicate
whether the statement relates to a
Constitutional limitation©, or inherent
limitation(I).If it is not a limitation to the
taxing power, indicate (N).
1.Non-assignment of taxes-N
2.Territoriality of taxation-I
3.Taxes must be for public use-I
4.Exemption of the property of religious
institutions from income tax-C
5.Exemption of the revenues and assets
of non-profit, non-stock educational
institutions.-C
6.Non-delegation of the taxing power-I
7.Non-appropriation for religious
purposes-C
8.The requirement of absolute majority
in the passage of a tax exemption law-N
9.Non-improsonment for non-payment
of tax or debt-C
10.Taxpayers under the same
circumstances should be treated equal
both in terms of privileges and
obligations.C
11.Exemption from property taxes of
religious, educational and charitable
entities.C
12.Government income and properties
are not objects of taxation.I
13.Each local government shall have the
power to create its own sources of
revenue.C
14.Imprescribility in taxation N
15.Non-impairment of obligation and
contracts.C
16.Gurantee of proportional system of
taxation.C
17.International courtesy-I
18.Non-impairement of the jurisdiction
of the Supreme Court to review tax
cases.C
19.The government is not subject to
estppel.N
20.Improsonment for non-payment of
poll taxN
TRUE OR FALSE
1.Eminent domain involves confiscation
of prohibited commodities to protect
the well-being of the people.F
2.Horizontal equity requires
consideration of the circumstances of
the taxpayer.T
3.Taxes are the lifeblood of the
government.T
4.Taxation is a mode of apportionment
of government costs to the people.T
5.There should be direct receipt of
benefit before one could be compelled
to pay taxes.F
6.The exercise of taxation power
requires Constitutional grant.F
7.Taxation is inherent in sovereignity.T
8.Police power is the most superior
power of the government. Its exercise
needs to be sanctioned by the
Constitution.F
9.All inherent powers presupposes an
equivalent form of compensation.
10.The reciprocal duty of support
between the government and the
people underscores the basis of
taxation.T
True or false
1.The constitutional exemption of
religious, charitable, and non-profit
cemeteries, churches and mosques
refers to income tax and real property
tax.F
2.Taxpayers under the same
circumstance should be taxed
differently.F
3.Taxation is subject to inherent and
Constitutional limitations.T
4.International comity connotes
courtesy between nations.T
5.Collection of taxes in the absence of a
law is violative of the Constitutional
requirement for due process.T
6.The scope of taxation is regarded as
comprehensive, plenary, unlimited, and
supreme.T
7.No one shall be imprisoned for non-
payment of tax.T
8.The lifeblood doctrine requires to
override its obligations an contracts
when necessary.F
9.2/3 of all members Congress is
required to pass a tax exemption law.F
10.The government should tax itself.F
Multiple Choice-Theory:Part 1
1.The point at which tax is levied is also
called
a.Impact of taxation-
b.Situs of taxation
c.Incidence of taxation
d.Assessment
2.Which of the following
inappropriately describes the nature of
taxation?
a.Inherent in sovereignty
b.Essentially a legislative function
c.Subject to inherent and constitutional
limitation
d.Generally for public purpose-
3.Which is correct?
a.Tax condonation is a general pardon
granted by the government
b.The BIR has five deputy
commissioners
c.The government can still collect tax in
disregard of a constitutional limitation
because taxes are the lifeblood of the
government
d.The president of the Philippines can
change tariff or imposts without
necessity of calling Congress to pass a
law for that purpose.-
4.A.The power to tax includes the
power to exempt.
B.The power to license includes the
power to tax
Which is true?
a.A only
b.B only
C. A and B
d.Neither A nor B-
5.International double taxation can be
mitigated by any of the following
except?
a.Providing allowance for tax credit
b.Provision of reciprocity provisions in
tax laws
c.Provision of tax exemptions
d.Entering into treaties to form regional
trade blockage against the rest of the
world.-
6.Which is not an object taxation?
a.Persons
b.Business
c.Transactions
d.Public properties-
7.That courts cannot issue injunction
against the government’s effort to
collect tax is justified by
a.Lifeblood doctrine-a
b.imprescribility of taxes
c.the ability to pay theory
d.the doctrine of estoppel
8.The power to enforce proportional
contribution from the people for the
support of the government is
a.Taxation-
b.Police power
c.Eminent domain
d.Exploitation
9.This theory underscores that taxes are
indispensable to the existence of the
state.
a.Doctrine of equitable recoupment
b.The lifeblood doctrine-
c.The benefit received theory
d.The Holmes Doctrine
10.A. Taxation is the rule, exeption is
the exemption.
B.Vague taxation laws are interpreted
liberally in favor of the government.
Which is false?
a.A only
b.B only a.Tax exemption based on contract
c.Both A and B- b.Tax exemption based on the
d.Neither A nor B Constitution
11.Select the incorrect statement c.Tax exemption based on law
a.The power to tax includes the power d.Both A and B
to exempt D c.Tax holiday-
b.Exemption is construed against the 20.Which statement is incorrect?
taxpayer and in favor of the a.Every person must contribute his
government share in government costs.
c.Tax statues are construed against the b.The existence of a government is
government in case of doubt expected to improve the lives of the
d.Taxes should be collected only for people.
public improvements- c.The government provides protection
12. Which is not a public purpose? and other benefits while the people
a.Public education provide support
b.National defense d.Only those who are able to pay tax
c.Transportation can enjoy the privileges and protection
c.None of these.- of the government.-
13.Which does not properly describe 21.Which is the most incorrect
the scope of taxation? statement regarding taxes?
a.Comprehensive a.Taxes are necessary for the continued
b.Supreme existence of the government.
c.Discretionary- b.The obligation to pay taxes does not
d.Unlimted rest upon the privilege enjoyed by or
14. the protection afforded to the citizen of
All of these are secondary purposes of the government but upon the necessity
taxation except of money for the support of the state.
a.To reduce social inequality c.There should be personal benefit
b.To protect local industries enjoyed from the government before
c.To raise revenue for the support of the one is required to pay tax-
government- d.Taxes should be collected without
d.To encourage growth of local unnecessary delay but its collection
industries should not be tainted with
15.What is the theory of taxation? arbitrariness.
a.Reciprocal duties of support and 22.Statement 1: In the selection of the
protection objects of taxation, the courts have no
b.Necessity- power to inquire into the wisdom,
c.Constitutionality objectivity, motive, expediency, or
d.Public purpose necessity of a tax law.
16.A. Taxes should not operate Statement 2:An imposition can be both
retrospectively a tax and a regulation. Taxes may be
B.Tax is generally for public purpose levied to provide means for
Which is true? rehabilitation and stabilization of
a.A only threatened industry.
b.B only Which is incorrect?
c.A and B a.Statement 1 only
d.Neither A nor B b.Statement 2 only
17.Which provision of the Constitution c.Both statements
is double taxation believed to violate? d.Neither statements-
a.Equal protection guarantee 23. Which of the following acts in
b.Progressive scheme of taxation taxation is administrative by nature?
c.Uniformity rule a.Determination of the amount to be
d.Either A or C imposed
d b.Fixing the allocation of the amount to
18.Which limitation of taxation is the be collected between the local
concept of “situs of taxation” based? government and the national
a.Territoriality- government.
b.Public purpose c.Levy or distraint of taxpayer’s
c.International comity property for tax delinquency-C
d.Exemption of the government d.Determining the purpose of the tax to
19.Which tax exemption is irrevocable? impose.
24.This refers to the privilege or
immunity from a tax burden which
others are subject to:
a. Exclusion
b.deduction
d.Reciprocity
25.Statement 1: The benefit received
theory presupposes that some
taxpayers within the territorial
jurisdiction of the Philippines will be
exempted from paying tax so long as
they do not receive benefits from the
government.
Statement 2:The ability to pay theory
suggests that some taxpayers may be
exempted from tax provided they do
not have the ability to pay the same.
Which statement is true?
a.Only statement 1
b.Only statement 2-
c.Both statements 1 and 2
d.Neither statement 1 and 2
26.Which is not a legislative act?
a.Determiantion of the subject of the
tax
b.Setting the amount of the tax
c.Assessment of the tax-
d.Determining the purpose of the tax
27.Statement 1:Taxation is the rule;
exemption is the exception
Statement 2:Taxation may be used to
implement the police power of the
state
a.1 is true
b.2 is true
c.1 and 2 are true
d.1 and 2 are not true
c
28.Which of the following powers of the
Commissioner of Internal Revenue
cannot be delegated?
a.The examination of tax return and the
determination of tax due thereon
b.To refund or credit tax liabilities in
certain cases
c.The power to compromise or abate
any tax liability involving basic
deficiency tax of P500,000 and minor
criminal violations
d.The power to reverse a ruling of the
Bureau of Internal Revenue
d
29.When exemption from a tax
imposition is silent or not clearly stated,
which is true?
a.Taxation applies since exemptions are
construed against the government.
b.Exemption still applies since this is an
instance of exemption by omission.
c.Taxation applies since exemptions are
construed against the taxpayer.-
d.Exemption applies since obligation
arising from law cannot be presumed
and hence construed against the
government
30.What is the basis of taxation?
a.Reciprocal duties of support and
protection-a
b.Constitutionality
c.Public purpose
d.Necessity
31.When the provisions of tax laws are
silent as to the taxability of an item,
which is true?
a.Taxation applies since taxation is the
rule,exemption is the exception.
b.Exception applies since vague tax laws
are construed against government.-
c.Taxation applies due to the Lifeblood
doctrine
d.Exemption applies since obligation
arising from law is presumed; ignorance
of the law is not an excuse.
32.Which of the following statements
does not support the principle that tax
is not subject to compensation or set-
off?
a.The government and the taxpayer are
not creditors and debtors of each other.
b.Tax is not in the nature of contract but
it grows out of a duty wherein
taxpayers are bound to obey even
without the personal consent of the
taxpayer.
c.Taxes arises from law, not from
contracts.
d.Both tax and debt partake the nature
of an obligation.-
33.Which is not legally tenable in
refusing to pay tax?
a.Absence of benefit from the
government-a
b.Lack of jurisdiction of the taxing
authority
c.Prescription of the tax authority’s
right to collect
d.All of these
34. What is the primary purpose of
taxation?
a.To enforce contribution from its
subjects for public purpose
b.To raise revenue-
c.To achieve economic and social
stability
d.To regulate the conduct of business or
profession
Multiple choice-Theory:Part 2
1.The Constitutional exemption of
religious or charitable institutions refers
only to
a.Real property tax-
b.Income tax
c.Property tax and income tax
d.Business tax
2.The agreement among nations to
lessen tax burden of their respective
subjects is called
a.Reciprocity
b.International comity-
c.Territoriality
d.Tax minimization
3.An educational institution operated
by a religious organization was being
required by a local government to pay
real property tax. Is the assessment
valid?
a.Yes, with respect to all properties held
by such educational institution
b.Yes, with respect to properties not
actually devoted to educational
purposes.-
c.No, with respect to any properties
held by such educational institution
d.No, with respect to properties not
actually devoted to educational
purposes.
4.Which is not a Constitutional
limitation?
a.No tax law shall be passed without
the concurrence of a majority of all
members of Congress.-a
b.Non-appropriation for religious
purposes
c.No law impairing government
obligations on contracts shall be
passed.
d.Non-impairment of religious freedom
5.Which of the following is not an
inherent limitation of the power to tax?
a.Tax should be levied for public
purpose
b.Taxation is limited to its territorial
jurisdiction
c.Tax laws shall be uniform and
equitable-
d.Exemption of government agencies
and instrumentalities
6.The following are inherent limitations
to the power of taxation except
one.Choose the exception
a.Territorialy of taxes
b.Legislative in character
c.For public purpose
d.Non-appropriation for religious
purposes.-d
7.That all taxable articles or properties
of the same class shall be taxed at the
same rate underscores
a.Equality in taxation
b.Equity of taxation
c.Uniformity in taxation-
d.None of these
8,The following are limitations of
taxation:
a.Territoriality of taxation
b.Exemption of the government
c.Taxation is for public purpose
d. non-impairment of contracts
e.Non-delegation of the power to tax.
Which of these are classified as both
constitutional and inherent limitations?
a.A and B
b.B and C
c.C and E
d. D and E
b
9.The provisions in the Constitution
regarding taxation are
a.Grants of the power to tax
b.Limitations to the power to tax-
c.Grants and limitations to the power to
tax
d.Limitations against double taxation.
10.The Constitutional exemption of
non-stock, non-profit educational
institutions refers to
a.Real property tax
b.Income tax-
c.Property tax and income tax
d.Business tax
11.Which of the following is violative of
the principle of non-delegation?
a.Requiring that legislative enactment
must exclusively pertain to Congress.
b.Authorizing the President to fix the
amount of impost on imported and
exported commodities
c.Authorizing certain private
corporation to collect taxes
d.Allowing the secretary of finance and
the BIR to issue regulation or rulings
which go beyond the scope of a tax
law.-
12.Which of the following violates
Constitutional provisions?
a.Payment of salaries to priests or
religious ministers employed by the
armed forces of the Philippines.
b,Imposing tax on properties of
religious institutions which are not
directly and exclusively used for
religious purposes.
c.Imposition of license for the sale of
religious literature.-
d.Authorizing the President of the
Philippines to fix the rates of tariffs or
imposts.
13.In order to phase-out a huge deficit,
the President of the Philippines passed
a law offering all taxpayers with
previous tax delinquency to pay a
minimum tax in exchange for relief from
tax assessment in the period of
delinquency. Is this a valid exercise of
taxation power?
a.Yes, because the measure adopted is
grounded upon necessity
b.Yes, because the President is merely
exercising his presidential discretion
c.No, because the power of taxation is
non-delegated.-
d.No, because only the Department of
Finance can issue such ruling.
14.Concerned with increasing
unemployment rates in the country, the
president of the Philippines encouraged
the Philippine Senate to pass a law
granting special tax privileges to foreign
investors who will establish businesses
in the country. The senate accordingly
drafted the bill and passed to Congress
for approval.
Is this valid exercise of taxation power?
a.Yes, it is the discretion of the
President to adopt any measures he
deemed necessary to alleviate poor
conditions in the country.
b.Yes, any means beneficial to the
public interest should be given
optimum priority.
c.Yes, the president’s proposal will have
to be finally approved and passes by the
legislature. The rule on non-delegation
of taxation would not be violated.
d.No.tax bills shall originate from the
House of Representatives.-
15.Ram is the only practicing lung
transplant specialist in Baguio City. The
City Government of Baguio passed a
local ordinance subjecting the practice
of lung transplant to 2% tax based on
receipts. Ram objected claiming that
other transplant specialists in other
regions of the country are not subjected
to tax.
Is Ram’s contention valid?
a.Yes, because the rule of taxation
should be uniform and equitably
enforced.
b.Yes, because Ram is the only one
subject. Other practitioners who would
later practice would not be covered by
the ordninance.
c.No, because the ordinance would
cover all transplant specialist who
would practice in Baguio City. The
uniformity rule would not be violated.
d.No, because subjecting the new
industry to taxation would hamper
economic growth.
16.With the country under incessant
shortage of sugar, the Philippine
Congress enacted a law providing tax
exemptions to rice farmers who
produce the staple food of the
Philippines. Is the new law valid?
a.Yes, since there is a valid classification
of the taxpayers who would be
exempted from tax.-
b.Yes, since sugar is more important
than rice.
c.No, since the grant of exemption is
construed in favor of taxpayers.
d.No, because there is no uniformity in
the grant of tax exemption.
17.Congress passed a law subjecting
government-owned and controlled
corporations(GOCCs) to income tax. Is
the law valid?
a.Yes, because all government agencies
and instrumentalities are subject to tax.
b.Yes, because GOCCs are not
government agencies and are
essentially commercial in nature.-
c.No, because government agencies are
exempt. This would pose a violations of
the equality clause in the Constitution.
d.No, because GOCCs are
constitutionally exempted from paying
taxes.
18.Which of the following is not a
constitutional limitation of the power to
tax?
a.Non-impairment of obligations or
contracts
b.Due process and equal protection of
the law
c.Non-appropriation for religious
purposes
d.Non-delegation of police power-
19.The Philippine enacted a law
requiring foreign banks to withhold
taxes earned by Filipino residents in
their country and to remit the same to
the Philippine Government. Is this a
valid exercise of taxation power?
a.Yes, because foreign banks are within
the territorial jurisdiction of the
Philippines.
b.Yes, The Philippines can enforce tax
requirements to subjects of foreign
sovereignty even if they are outside the
country,
c.No, as this leads to encroachment of
foreign sovereignty
c.No, this is prohibited by the
Constitution.
C implementing police power?
20.Which of the following normally pays
real property tax?
a.Bantay Bata, a non-profit institution
b.Jesus Crusade movement, a religious
institution
c.University of Pangasinan, a private
propriety educational institution
d.AM Property Holdings, a registered
property development company.-
21.Tax exemption bills are approved by
a.Majority of all members of Congress
b.Solely by the President of the
Republic
c.2/3 of all members of Congress
d.Majority of the representatives
constituting a quorum
-a
22.The Japanese government invested
P100,000,000 in a Philippine local bank
and earned P10,000,000 interest.
Which is correct?
a.The income is exempt on grounds of
territoriality.
b.The income is exempt due to
international comity--
c. The income is subject to tax on the
basis of sovereignty
d. The income is subject to tax because
the income is earned within the
Philippines.
Multiple choice-Theory:Part 3
1.When a legislative body taxes persons
and property, rights and privileges
under the same taxable category at the
same rate, this is referred to as
compliance with the constitutional
limitation of:
a.Equity
b.Uniformity---
c.Due process
d.Equal protection clause
2.Which is not a legislative act?
a.Assessment of the tax--
b.Setting the amount of the tax
c.Determination of the subject of the
tax
d.Determining the purpose of the tax
3.The inherent powers of the state are
similar in the following respect. except:
a.They are inherent to the existence of
the state.
b.They are exercisable without the need
for an express constitutional grant.
c.All are not exercised by private
entities.-
d.They are exercised primarily by the
legislature.
c
4.Which is mandatorily observed in
a.Public interest
b.Just compensation
c.Public use
d.All of these—
5.Which is considered in the exercise of
eminent domain?
a.Public use
b.Just compensation
c.Both a and b
d.Nether a nor b
--c
6.The general power to enact laws to
protect the well-being of the people is
called
a.police power-a.
b.eminent domain
c.taxation
d.all of these
7.Which of the following entities will
least likely exercise the power of
eminent domain?
a.Electric cooperatives
b.water cooperatives
c.telecommunication business
d.transportation operators.d
8.In exercising taxation, the government
need not consider
a.Inherent limitations
b.just compensation
c.due pricess of law
d.constitutional limitations—d
9.Licensing of business or profession is
an exercise of
a.police power-
b.taxation
c.eminent domain
d.all of these
10.Select the correct statement
a.Eminent domain refers to the power
to take public property for private use
after paying just compensation
b.Police power being the most superior
power of the state is not subject to any
limitation.-
C.Taxation power shall be exercised by
Congress even without an express
Constitutional grant.C
d.Taxes may be collected even in the
absence of a laws since obligation
arising from law is always presumed.
11.Which is principally limited by the
requirement of due process?
a.Eminent domain
b.police power--
c.taxation
d.all of these
12.Statement 1: Congress can exercise
the power of taxation even without
Constitutional delegation of the power
to tax
Statement 2:Only the legislature can
exercise the power of taxation, eminent
domain, and police power.
Which statement is correct?
a.Statement 1
b.statement 2
c.statements 1 and 2
d,neither statement 1 nor 2 purpose of raising revenue is an invalid
13.Which of the state affects the least tax law.
number of people? Which is incorrect?
a.police power a.Statement 1
b.eminent domain--d b.statement 2
c.taxation c.Both statements
d.taxation and police power d.Neither statement
14.Select the correct statement. d
a.The benefit received theory explains 19.Select the correct statement
that the government is obliged to serve a.The provisions on taxation in the
the people since it is benefiting from Philippines Constitution are grants of
the tax collection from its subject. the power to tax.
b.The lifeblood theory underscores that b.The power to tax includes the power
taxation is the most superior power of to destroy
the state. c.When taxation is used as a tool for
c.The police power of the state is general and economic welfare, this is
superior to the non-impairment clause called fiscal purpose.
of the constitution.c d.The sumptuary purpose of taxation is
d.The power of taxation is superior to to raise funds for the government.
the non-impairment caluse of the B.
constitution. 20.Which of the following powers is
15.Which of the following is not inherent or co-existent with the
exercised by the government? creation of the government?
a.Taxation a.Police power
b.Police power b.Eminent domain
c.eminent domain c.Taxation
d.exploitation d.all of these
d D
16.Select the incorrect statements 21.Which of the following is not an
a.Since thre is compensation, eminent inherent limitation of the power to tax?
domain raises money for the a.Tax should be levied for public
government purpose
b.Once a government is established, b.Taxation is limited to its territorial
taxation is exercisable jurisdiction
c.The most important of the power of c.Tax laws shall be uniform and
taxation equitable.
d.Police power is more superior than d.Government agencies and
the non-impairment clause of the instrumentalities are exempt from tax
Constitution c
a. 22.Select the incorrect statement
17.The following statements reflect the a.The power to tax includes the power
differences among the inherent powers to exempt
except: b.Exemption is construed against the
a.The property taken under eminent taxpayer and in favor of the
domain and taxation are preserved but government.
that of police power is destroyed. c.Tax statutes are construed against the
b.Eminent domain and police power do government in case of doubt
not require Constitutional grant, but d.Taxes should be collected only for
taxation, being a formidable power, public improvement.d
requires constitutional grant.-b 23.Which of the following is not a
c.Only eminent domain can be constitutional limitation of the power of
exercised by private entities. tax?
d.Taxation, police power, and eminent a.Non-impairment of obligation or
domain are ways which the government contracts
interferes with private right and b.Due process and equal protection of
property. the law
18.Statement 1:The taxation power can c.Non-appropriation for religious
be used to destroy if the law is valid. purposes.
Statement 2:A tax law which destroys d.Non-delegation of the taxing power.
things, business, or enterprises for the d
24.Which of powers of the state is the 1.Constitution
most superior? Which is regarded as 2.Statues and Presidential decrees
the most important? 3.Judicial decisions or case laws
a.Taxation;Eminent domain 4.Executive orders and batas pambansa
b.Police power; taxation 5.Administrative issuances
c.Eminent domain;police power 6.Local ordinances
d.All the powers are equally superior 7.Tax treaties and conventions with
and important foreign countries
b 8.Revenue Regulations
CHAPTER 2 Types of Administrative Issuances
TAXES, TAX LAWS, AND TAX 1.Revenue regulations
ADMINSTRATION 2.Revenue memorandum orders
Chapter Overview and Objectives 3.Revenue memorandum rulings
This chapter discusses tax laws, taxes, 4.Revenue memorandum circulars
and their distinction from similar items, 5.Revenue bulletins
and the administration of the tax 6.BIR rulings
system. Revenue regulations are issuances
After this chapter, readers are expected signed by the secretary of finance upon
to comprehend and demonstrate recommendations of the Commissioner
knowledge on the following: of Internal Revenue(CIR) that specify,
a.The type of taxation laws prescribe, or define rules and
b.Distinction among tax laws, revenue regulations for the effective
regulations, and rulings enforcement of the provisions of the
c.tax, its elements, and classifications National Internal Revenue Code(NIRC)
d.Distinction of tax from similar items and related statutes.
e.Tax system and its types Revenue regulations are formal
f.The principles of a sound tax system pronouncements intended to clarify or
g.How tax is administered explain the tax law and carry into effect
h.The powers of the Bureau of Internal its general provisions by providing
Revenue(BIR) and the Commissioner of details of administration and procedure.
Internal Revenue(CIR) and the non- Revenue regulation has the force and
delegated powers of the CIR. effect of a law, but it is not intended to
9.The criteria for selection of large expand or limit the application of the
taxpayers law; otherwise, it is void.
TAXATION LAW Revenue Memorandum
Taxation law refers to any law that Orders(RMOs)are issuances that
arises from the exercise of the taxation provide directives or
power of the state. instructions;prescribe guidelines; and
TYPES OF TAXATION LAWS outline processes, operations, activities,
1.Tax laws refers to any law that arises workflows, methods, and procedures
from the exercise of the taxation power necessary in the implementation of
Types of taxation power stated policies, goals, objectives, and
1.Tax laws-These are laws that provide programs of the Bureau in all areas of
for the assessment and collection of operations except auditing.
taxes. Revenue Memorandum
Examples: Rulings(RMRs)are rulings, opinions and
a.The National Internal Revenue Code interpretations of the CIR with respect
(NIRC) to the provisions of the Tax code and
b.The tariff and Customs Code other tax laws applied to a specific set
c.The local tax code of facts, with or without established
d.The real property tax code precedents, and which the CIR may
2.Tax exemption laws-These are laws issue from time to time for the purpose
that grant immunity from taxation of providing taxpayers guidance on the
Examples: tax issued RMRs; otherwise, the Rulings
a.The minimum wage law are null and void ab initio.
b.The Omnibus Investment Code of Revenue Memorandum
1987(E.O 226) Circulars(RMCs)are issuances that
c.Barangay Micro-Business Enterprise publish pertinent and applicable
Law(BMBE) portions as well as amplifications of
d.Cooperative Development Act laws, rules, regulations, and precedents
Sources of taxation laws
issued by the BIR and other agencies or
offices.
Revenue Bulletins(RB) refer to periodic
issuances, notices and official
announcements of the Commissioner of
Internal Revenue that consolidate the
Bureau of Internal Revenue’s position
on certain specific issues of law or
administration in relation to the
provisions of the Tax code, relevant tax
laws, and other issuances for the
guidance of the public.
BIR Rulings are official positions of the
Bureau to queries raised by taxpayers
and other stakeholders relative to
clarification and interpretation of tax
laws.
Rulings are merely advisory or a sort of
information service to the taxpayer
such that none of them is binding
except to the addressee and may be
reversed by the BIR at anytime.
Types of rulings
1.Value added tax(VAT) rulings
2.International Tax affairs division (ITAD)
rulings
3.BIR rulings
4,Delegated Authority (DA) rulings
Generally Accepted Accounting
Principles (GAAP) vs. Tax laws
Generally accepted accounting
principles or GAAP are not laws, but are
mere conventions of financial reporting.
They are benchmarks for the fair and
relevant valuation and recognition of
income, expenses, assets, liabilities, and
equity of a valuation and recognition of
income, expenses, assets, liabilities and
equity of a reporting entity for general
purpose financial reporting. GAAP
accounting reports are intended to
meet the common needs of a vast
number of users in the general public.
Tax laws including rules, regulations,
and rulings prescribe the criteria for tax
reporting, a special form of financial
reporting which is intended to meet
specific needs of tax authorities.
Taxpayers normally follow GAAP in
recording transactions in their books.
However, in the preparation and filing
of tax returns, taxpayers are mandated
to follow the tax law in cases of conflict
with GAAP.
NATURE OF PHILIPPINE TAX LAW
Philippine tax laws are civil and not
political in nature. They are effective
even during periods of enemy
occupation. They are laws of the
occupied territory and not by the
occupying enemy. Tax payments made
during occupations of foreign enemies
are valid.
Our internal revenue laws are not penal
in nature because they do not define
crime. Their penalty provisions are
merely intended to secure taxpayer’s
compliance.
TAX
Tax is an enforced proportional
contribution levied by the lawmaking
body of the State to raise revenue for
public purpose.
Elements of a valid tax
1.Tax must be levied by the taxing
power having jurisdiction over the
object of taxation
2.Tax must be uniform and equitable
3.Tax must not violate constitutional
and inherent limitations.
4.Tax must be for public purpose.
5.Tax must be proportional in character.
6.Tax is generally payable in money.
Classification of taxes
A.As to purpose
1.Fiscal or revenue tax-a tax imposed
for general purpose
2.Regulatory- a tax imposed to regulate
business, conduct, acts or transactions.
3.Sumptuary-a tax levied to achieve
some social or economic objectives.
B.As to subject matter
1.Personal, poll or capitation-a tax on
persons who are residents of a
particular territory.
2.Property tax-a tax on properties, real
or personal
3.Excise or privilege tax-a tax imposed
upon the performance of an act,
enjoyment of a privilege or engagement
in an occupation.
C.as to incidence
1.Direct tax-When both the impact and
incidence of taxation rest upon the
same taxpayer, the tax is said to be
direct. The tax is collected from the
person who is intended to pay the
same. The statutory taxpayer is the
economic taxpayer.
2.Indirect tax-when the tax basis is paid
by any person other than the one who
is intended to pay the same, the tax is
said to be indirect. This occurs in the
case of business taxes where the
statutory taxpayer is not the economic
taxpayer.
The statutory taxpayer is the person
named by law to pay the tax. An
economic taxpayer is the one who
actually pays the tax.
D.As to amount
1.Specific tax-a tax of a fixed amount
imposed on a per nit basis such as per
kilo, liter or meter, etc.
2.Ad valorem-a tax of a fixed proportion
imposed upon the value of the object.
E.As to rate-
1.Proportional tax-this is a flat or fixed
rate tax. The use of proportional tax
emphasizes equality as it subjects all
taxpayers with the same rate without
regard to their ability to pay.
2.Progressive or graduated tax-This is a
tax which imposes increasing rates as
the tax base increases. The use of
progressive tax rates results in equitable
taxation because it gets more tax to
those who are more capable. It aids in
lessening the gap between the rich and
the poor.
3.Regressive tax-This tax imposes
decreasing tax rates as the tax base
increase.This is total reverse of
progressive tax. Regressive tax regarded
as anti-poor. It directly violates the
Constitutional guarantee progressive
taxation.
4.Mixed tax-this tax manifest tax rates
which is a combination of any of the
above types of tax.
F.As to imposing authority
1.National tax-tax imposed by the
national government
Examples:
a.Income tax-tax on annual income,
gains or profits
b.Estate tax-tax on gratuitous transfer
of properties by a decedent upon death
c.Donor’s tax-tax on gratuitous tax
collected by VAT business taxpayers.
e.Other percentage tax-consumption
tax collected by non-VAT business
taxpayers
f.Excise tax-tax on sin products and non-
essential commodities such as alcohol,
cigarettes and metallic minerals. This
should be differentiated with the
privilege tax which is also called excise
tax.
g.Documentary stamp tax-a tax on
documents, instruments, loan
agreements and papers evidencing the
acceptance, assignment, sale or transfer
of an obligation, right, or property
incident thereto.
2.Local tax- tax imposed by the
municipal or local government.
Examples:
a.Real property tax
b.Professional tax
c.Business taxes, fees, and charges.
d.Community tax
e.Tax on banks and other financial
institutions
DISTINCTION OF TAXES WITH SIMILAR
ITEMS
Tax vs. Revenue
Tax refers to the amount imposed by
the government for public purpose.
Revenue refers to all income collections
of the government which includes
taxes, tariff, licenses, toll, penalties and
others. The amount imposed is tax but
the amount collected is revenue.
Tax vs. License fee
Tax is broader subject than license. Tax
emanates from taxation power and is
imposed upon any object such as
persons, properties, or privileges to
raise revenue.
License fee emanates from police
power and is imposed to regulate the
exercise of a privilege such as
commencement of a business or a
profession.
Taxes are imposed after
commencement of a business or
profession whereas license fee is
imposed before engagement in those
activities. In other words, tax is a post-
activity imposition whereas license is a
pre-activity imposition.
Tax vs. Toll
Tax is a levy of government; hence, it is
a demand of sovereignty. Toll is a
charge for the use of other’s property;
hence, it is a demand of ownership.
The amount of tax depends upon the
needs of the government, but the
amount of toll is dependent upon the
value of the property leased.
Both the government and private
entities impose toll, but private entities
cannot impose taxes.
Tax vs. Debt
Tax arises from law while debt arises
from private contracts. Non-payment of
tax leads to imprisonment, but non-
payment of debt does not lead to
imprisonment. Debt can be subject to
set-off but tax is not. Debt can be paid
in kind(dacion en pago) but tax is
generally payable in money.
Tax draws interest only when the
taxpayer is delinquent. Debt draws
interest when it is so stipulated by the
contracting parties or when the debtor
incurs a legal delay.
Tax vs. Special Assessment
Tax is an amount imposed upon
persons, properties, or privileges.
Special assessment is levied by the
government on lands adjacent to a
public improvement. It is imposed on
land only and is intended to
compensate the government for a part
of the cost of the improvement.
The basis of special assessment if the
benefits in terms of the appreciation in
land value caused by the public
improvement. On the other hand, tax is
levied without expectation of a direct
proximate benefit.
Unlike taxes, special assessment
attaches to the land. It will not become
a personal obligation of the land owner.
Therefore. the non-payment of special
assessment will not result to
imprisonment of the owner (unlike in
non-payment of taxes).
Tax vs. Tariff
Tax is broader than tariff. Tax is an
amount imposed upon persons,
privileges, transactions, or properties.
Tariff is the amount imposed on
imported or exported commodities.
Tax vs. Penalty
Tax is an amount imposed for the
support of the government. Penalty is
an amount imposed to discourage an
act. Penalty may be imposed by both
the government and private individuals.
It may arise both from law or contract
whereas tax arises from law.
TAX SYSTEM
The tax system refers to the methods or
schemes of imposing, assessing, and
collecting taxes. It includes all the tax
laws and regulations, the means of their
enforcement, and the government
offices, bureaus and withholding agents
which are part of the machineries of
the government in tax collection. The
Philippine tax system is divided into
two: the national tax system and the
local tax system
Types of tax systems according to
imposition
1.Progressive-employed in the taxation
of income of individuals, and transfers
of properties by individuals.
2.Proportional-employed in taxation of
corporate income and business.
3.Regressive-not employed in the
Philippines.
Types of tax system according to impact
1.Progressive system
A progressive tax system is one that
emphasizes direct taxes. A direct tax
cannot be shifted. Hence, it encourages
economic efficiency as it leaves no
other resort to taxpayers than to be
efficient. This type of tax system
impacts more upon the rich.
2.Regressive system
A regressive system is one that
emphasizes indirect taxes. Indirect taxes
are shifted by businesses to consumers;
hence, the impact of taxation rests
upon the bottom end of the society. In
effect, e regressive tax system is anti-
poor.
It is widely believed that despite the
Constitutional guarantee of a when necessary.
progressive taxation, the Philippine has
a dominantly regressive tax system due
to the prevalence of business taxes.
TAX COLLECTION SYSTEMS
1.Withholding system-Under this
collection system, the payor of the
income withholds and remits the same
to the government. The following are
the withholding taxes collected under
this system:
a.Withholding tax on compensation-a
tax withheld by the employer from
payments of compensation income of
employees.
b.Expanded withholding tax-a
withholding tax prescribed on certain
income payments and is creditable
against the income tax due of the payee
for the taxable quarter or year in which
the particular income was earned.
c.Final withholding tax-a kind of
withholding tax which is prescribed on
certain income payments and is not
creditable against any income tax due
of the payee for the taxable year.
d.Withholding tax on government
payments-the tax withheld by the
national government agencies and
instrumentalities including government-
owned and controlled corporations on
their payments to taxpayers, suppliers,
or payees.
2.Voluntary compliance system-Under
this collection system, the taxpayer
himself determines his income, reports
the same through income tax returns
and pays the tax to the government.
This system is also referred to as the
“self-assessment method”.A portion of
the tax due payable herein may have
been withheld under the withholding
system, such as:
a.withholding tax on compensation by
compensation earners
b.Expanded withholding tax by taxpayer
engaged in business or exercise of
profession
The taxes withheld are treated as tax
credit( deduction) against the tax due of
the taxpayer in the income tax return.
The taxpayer shall pay any balance still
due after such credit or claim refund or
tax credit for excess tax withheld.
3.Assessment or enforcement system-
Under this collection system, the
government identifies non-compliant
taxpayers, assesses their tax dues and
penalties, and enforces collections by
coercive means such as summary
proceeding or judicial proceedings
PRINCIPLES OF A SOUND TAX SYSTEM
According to Adam Smith, governments
should adhere to certain principles or
canons to evolve a sound tax system:
a.Fiscal adequacy
b.Theoretica justice
c.Administrative fesibility
Fiscal adequacy
Fiscal adequacy requires that the
sources of government funds must be
sufficient to cover government costs.
The government must not incur a
deficit. A budget deficit paralyzes the
government’s ability to deliver the
essential public services to the people.
Hence, taxes should increase in
response to increase in government
spending.
Theoretical justice
Theoretical justice or equity suggests
that taxation should consider the
taxpayer’s ability to pay. It also suggests
that the exercise of taxation should not
be oppressive, unjust, or confiscatory.
Administrative feasibility
suggests that the tax laws should be
capable of efficient and effective
administration to encourage
compliance. Government should make
it easy for the taxpayer to comply by
avoiding administrative bottlenecks and
reducing compliance costs.
The following are applications of the
principle of administrative feasibility:
1.E-filing and e-payment of taxes
2.Substituted filing system for
employees
3.Final withholding tax on non-resident
aliens or corporations
4.Accreditation of authorized agent
banks in the filing and payment of
taxes.
TAX ADMINSTRATION
Tax administration refers to the
management of the tax system. Tax
administration of the national tax
system in the Philippines is entrusted to
the Bureau of Internal Revenue which is
under the supervision and
administration of the Department of
finance.
Chief Officials of the Bureau of Internal
Revenue
Commissioner
4 Deputy Commissioners, each to be
designated to the following:
a.Operations group
b.Legal Enforcement group
c.Information systems group
d.Resource management group
POWERS OF THE BUREAU OF INTERNAL
REVENUE
1.Assessment and collection of taxes
2.Enforcement of all forfeitures,
penalties, and fines, and judgements in
all cases decided in its favor by courts.
3.Giving effect to, and administering the
supervisory and police powers
conferred to it by the NIRC and other
laws.
4.Assignment of internal revenue
officers and other employees to other
duties.
5.Provision and distribution of forms,
receipts, certificates, stamps,etc. to
proper officials.
6.Issuance of receipts and clearances
7.Submission of annual report,
pertinent information to Congress and
reports to the Congressional Oversight
Committee in matters of taxation
POWERS OF THE COMMISSIONER OF
INTERNAL REVENUE
1.To interpret the provisions of the
NIRC, subject to review by the Secretary
of Finance
2.To decide tax cases, subject to the
exclusive appellate jurisdiction of the
Court of tax appeals, such as:
a.Disputed assessments
b.Refunds of internal revenue taxes,
fees, or other charges
c.Penalties imposed
d.Other NIRC and special law matters
administered by the BIR
3.To obtain information and to
summon, examine, and take testimony
of persons to effect tax collection
Purpose:For the CIR to ascertain:
a.The correctness of any tax return or in
making a return when none has been
made by the taxpayer
b.The tax liability of any person for any
internal revenue tax or in correcting any
such liability
c.Tax compliance of the taxpayer.
Authorized acts:
a.To examine any book, paper, record or
other data relevant to such inquiry
b.To obtain on a regular basis any
information from any person other than
the person whose internal revenue tax
liability is subject to audit.
c.To summon the person liable for tax or
required to file a return, his employees,
or any person having possession and
custody of his books of accounts and
accounting records to produce such
books, papers, records or other data
and to give testimony
d.To take testimony of the person
concerned, under oath, as may be
relevant or material to the inquiry
e.To cause revenue officers and
employees to make canvass of any
revenue district
4.To make assessment and prescribe
additional requirement for
administration and enforcement
5.To examine tax returns and determine
tax due thereon
The CIR or his duly authorized
representatives may authorize the
examination of any taxpayer and the
assessment of the correct amount of
tax. Failure to file a return shall not
prevent the CIR from authorizing the
examination.
Tax or deficiency assessments are due
upon notice and demand by the CIR or
his representatives.
Returns, statements or declarations
shall not be withdrawn but may be
modified, changed amended by the
taxpayer within 3 years from the date of
filing, except when a notice for audit or
investigation has been actually served
upon the taxpayer.
When a return shall not be forthcoming
within the prescribed deadline or when
there is a reason to believe that the
return is false, incomplete or
erroneous, the CIR assess the proper
tax on the basis of best evidence
available.
In case a person fails to file a required
return or other documents at the time
prescribed by law or willfully files a false
or fraudulent return or other
documents, the CIR shall make or
amend the return from his own
knowledge and from such information
obtained from testimony. The return
shall be presumed prima facie correct
and sufficient for all legal purposes.
6.To conduct inventory taking or
surveillance.
7.To prescribe presumptive gross sales
and receipts for a taxpayer when:
a.the taxpayer failed to issue receipts;
or
b.The CIR believes that the books or
other records of the taxpayer do not
correctly reflect the declaration in the
return
The presumptive gross sales or receipt
shall be derived from the performance
of similar business under similar
circumstances adjusted for other
relevant information.
8.To terminate tax period when the
taxpayer is:
a.Retiring from business
b.Intending to leave the Philippines
c.Intending to remove, hide, or conceal
his property
d.Intending to perform any act tending
to obstruct the proceedings for the
collection of the tax or render the same
ineffective
The termination of the taxable period
shall be communicated through a
notice to the taxpayer together with a
request for immediate payment. Taxes
shall be due and payable immediately.
9.To prescribe real property values
The CIR is authorized to divide the
Philippines into zones and prescribe
real property values after consultation
with competent appraisers. The values
prescribed are referred to as zonal
value.
For purposes of internal revenue taxes,
fair value of real property shall mean
whichever is higher of:
a.Zonal value prescribed by the
Commissioner
b.Assessed value per the Provincial and
City Assessor’s Office
For purposes of local taxes, fair value of
real property pertains to the assessed
value.
10.To compromise tax liabilities of
taxpayers.
11.To inquire into bank deposits, only
under the following instances:
a.Determination of the gross estate of
the decedent
b.To substantiate the taxpayer’s claim of
financial incapacity to pay tax in an
application for tax compromise.
In cases of financial incapacity, inquiry
can proceed only if the taxpayer waives
his privilege under the Bank deposit
secrecy act.
12.To accredit and register tax agents
The denial by the CIR of application for
accreditation is appealable to the
Department of Finance. The failure of
the secretary of finance to act on the
appeal within 60 days is deemed an
approval.
13.To refund or credit internal revenue
taxes
14.To abate or cancel tax liabilities in
certain cases
15.To prescribe additional procedures
or documentary requirements
16.To delegate his powers to any
subordinate officer with a rank
equivalent to division chief of an office.
Non-delegated power of the CIR
The following powers of the
Commissioner shall not be delegated:
1.The power to recommend the
promulgation of rules and regulations
to the secretary of finance
2.The power to issue rulings of first
impression or to reverse, revoke or
modify any existing rulings of the
Bureau
3.The power to compromise or abate
any tax liability
Exceptionally, the regional evaluation
boards may compromise tax liabilities
under the following:
a.assessments are issued by the
regional offices involving basic
deficiency tax of P500,000 or less, and
b.minor criminal vioaltions discovered
by regional and district officials.
Composition of the Regional Evaluation
Board
a.Regional Director as chairman
b.Assistant Regional Director
c.Heads of the Legal, Assessment and
Collection Division
4.The power to assign and resign
internal revenue officers to
establishments where articles subject
to excise tax are produced or kept.
Rules in assignments of revenue officers
to other duties
1.Revenue officers assigned to an
establishment where excisable articles
are kept shall in no case stay there for
more than 2 years.
2.Revenue officers assigned to perform
assessment and collection function shall
not remain in the same assignment for
more than 3 years.
3.Assignment of internal revenue
officers and employees of the Bureau to
special duties shall not exceed 1 year.
Agents and Deputies for collection of
National Internal Revenue Taxes
The following are constituted agents for
the collection of internal revenue taxes:
1.The commissioner of Customs and his
subordinates with respect to collection
of national internal revenue taxes on
imported goods.
2.The head of appropriate government
offices and his subordinates with
respect to the collection of agency tax.
3. Banks duly accredited by the
Commissioner with respect to receipts
of payments of Internal revenue taxes
authorized to be made thru banks.
These are referred to as authorized
government depository banks (AGDB).
OTHER AGENTS TASKED WITH TAX
COLLECTIONS OR TAX INCENTIVES
RELATED FUNCTIONS
1.Bureau of Customs
2.Board of Investments
3.Philippines Economic Zone Authority
4.Local Government Tax Collecting Unit
Bureau of Customs(BOC)
Aside from its regulatory functions, the
bureau of Customs is tasked to
administer collection of tariffs on
imported articles and collection of the
Value Added Tax on importation.
Together with the BIR, the BOC is under
the supervision of the Department of
Finance.
The Bureau of Customs is headed by
the Customs Commissioner and assisted
by five Deputy Commissioners and 14
District Collectors.
Board of Investments (BOI)
The BOI is tasked to lead the promotion
of investments in the Philippines by
assisting Filipino investors to venture
and prosper in desirable areas of
economic activities. It supervises the
grant of tax incentives under the
Omnibus Investment Code. The BOI is
an attached agency of the Department
of Trade and Industry (DTI).
The BOI is composed of five full-time
governors, excluding the DTI secretary
as its chairman. The president of the
Philippines shall appoint a vice
chairman of the board who shall act as
the BOI’s managing head.
Philippine Economic Zone Authority
(PEZA)
The PEZA is created to promote
investments in export-oriented
manufacturing industries in the
Philippines and, among other myriads
of functions, supervise the grant of
both fiscal and non-fiscal incentives.
PEZA registered enterprises enjoy tax
holidays for certain years, exempt from
import and export taxes including local
taxes. The PEZA is also an attached
agency of the DTI.
The PEZA is headed by a director
general and is assisted by three deputy
directors.
Local Government Tax Collecting Units
Provinces, municipalities, cities and
barangays also imposed and collect
various taxes to rationalize their fiscal
autonomy. These will be discussed
under business and transfer taxation by
the same author.
TAXPAYER CLASSIFICATION FOR
PURPOSES OF TAX ADMINISTRATION
For purposes of effective and efficient
tax administration, taxpayers are
classified into large and non-large. Large
taxpayers are under the supervision of
the Large taxpayers service(LTS) of the
BIR. Non-Large taxpayers are under the
supervision of the respective Revenue
District Officers (RDOs) where the
business, trade, or profession of the
taxpayer is situated.
The following are the criteria for
determining large taxpayers:
A.As to payment
1.Value added tax-at least P200,000 per
quarter for the preceding year
2.Excise tax-At least P1,000,000 tax paid
for the preceding year
3.Income tax-At least P1,000,000
annual income tax paid for the
preceding year.
4.Withholding tax-At least P1,000,000
annual withholding tax payments or
remittances from all types of
withholding taxes
5.Percentage tax-At least P200,000
percentage tax paid or payable per
quarter for the preceding year
6.Documentary stamp tax-At least
P1,000,000 aggregate amount per year
As to financial conditions and results of
operations
1.Gross receipts or sales-
P1,000,000,000 total annual gross sales
or receipts
2.Net worth-P300,000,000 total net
worth at the close of each calendar or
fiscal year
3.Gross purchases-P800,000,000 total
annual purchases for the preceding year
4.Top corporate taxpayer listed and
published by the Securities and
Exchange Commission
Automatic classification of taxpayer as
large taxpayers
The following taxpayers shall be
automatically classified as large
taxpayers upon notice in writing by the
CIR:
1.All branches of taxpayers under the
Large Taxpayer’s Service
2.Subsidiaries, affiliates, and entities of 4.Tax collected upon persons who are 3.Income tax
conglomerates or group of companies not the stator taxpayers-indirect tax 1,000,000 per year
of a large taxpayer 5.Tax that is imposed based on the 4.Withholding tax
3.Surviving company in case of merger value of the tax object-ad valorem 1,000,000 per year
of consolidation of a large taxpayer 6. Tax for general purpose- 5.Percentage tax
4.A corporation that absorbs the fiscal/revenue tax 200,000 per quarter
operation or business in case of spin-off 7.Tax imposed by the national 6.Documentary stamp tax
of any large taxpayer government-national tax 1,000,000 per year
5.Corporation with an authorizes 8.A tax on sin products or non-essential As to condition and operations
capitalization of at least P300,000,000 commodities-excise tax 1.Gross receipts or sales
registered with the SEC 9.Imposed on the gratuitous transfer of 1,000,000 in a year
6.Multinational enterprises with an property upon death-estate tax 2.Net worth
authorized capitalization or assigned 10.Tax on residents of a country- 300,000 at year end
capital of at least P300,000,000 personal, poll, or capitation 3.Gross purchases
7.Publicly listed Corporations 11.Tax that remains at flat rate 800,000 in the preceding year
8.Universal, commercial, and foreign regardless of the value of the tax Multiple Choice-Theory:Part 1
banks(the regular business unit and object-proportional tax 1.When tax is collected upon someone
foreign currency deposit unit shall be 12.Tax which is collected on a per unit who is effectively reimbursed by
considered one taxpayer for purposes basis-specific tax another, the tax is regarded as
of classifying them as large taxpayer) 13.Tax is collected upon the statutory a.direct
9.Corporate taxpayers with at least taxpayer-direct tax b.indirect=
P100,000,000 authorizes capital in 14.Tax imposed to regulate business or c.personal
banking, insurance, telecommunication, profession-regulatory d.illegal
utilities, petroleum, tobacco, and 15.Tax upon performance of an act or 2.All are ad valorem taxes, except one,
alcohol industries enjoyment of a privilege- Select the exception
10.Corporate taxpayers engaged in the excise/privilege tax a.poll tax==
production of metallic minerals. Exercise Drill No.2 b.estate tax
CHAPTER 2:SELF-TEST EXERCISES Identify which item is described by the c.Real property tax
Discussion Questions following: d.Capital gains tax on real property
1.Distinguish tax law from tax 1.It refers to all income collections of capital asset.
exemption law. the government-Revenue 3.Taxation power can be used to destroy
2.Enumerate the sources of tax laws 2.It is an imposition for the support of a.as a revenue measure
3.Discuss the nature of Philippines tax the government-Tax b.even is the tax is invalid
law. 3.It is imposed upon land adjacent to c.as an implement of police power==
4.Distinguish tax laws, revenue public improvements-special d.when the state is in dire need of funds
regulations, and rulings assessment 4.Which is not a characteristic of tax?
5.Define tax and identify its elements 4.It is imposed on imported and a.It is an enforced contribution
6.What are the classifications of taxes? exported commodities-custom’s duties b.It is generally payable in money
Enumerate and provide examples for 5.It is a charge imposed prior to the c.It is subject to assignment==
each classification commencement of business or exercise d.It is levied by the law-making body of
7.Compare tax with revenue, license, of a profession-license fees the state having jurisdiction
toll, debt, special assessment, tariff and 6.It is a post-activity rather than a pre- 5.Which of the following is a local tax?
penalty activity imposition-Tax a.Value added tax
8.What is a tax system?What are its 7.It is subject to compensation or set- b.Real property tax==
types? off-Tax debt c.Documentary tax
9.Enumerate the principles of a sound 8.It is a charge for the use of others’ d.Other percentage tax
tax system. Explain each property-toll 6.Which is not a source of tax law?
10.Enumerate the powers of the BIR 9.It is an imposition intended to a.CHED regulations==
11.Enumerate the non-delegated discourage an act.-penalty b.BIR rulings
powers of the CIR 10.It arises from contracts rather than c.Judicial decisions
Exercise Drill No.1 from law-debt d.Other percentage taxes
Identify the type of tax that is describe Exercise Drill No. 3 7.Tax as to purpose is classified as
by the following: Indicate the criteria for the selection of a.Fiscal or regulatory=
1.A consumption tax collected by non- large taxpayer for each of the following: b.Direct or indirect tax
VAT businesses-other percentage tax As to payment c.National or local tax
2.Tax on gratuitous transfer of property Criteria d.Specific or ad valorem tax
by a living donor-donor’s tax 1.Value added tax 8.Tax as to incidence is classified as
3.Tax that decreases in rates as the 200,000 per year a.Fiscal or regulatory
amount or value of the tax object 2.Excise tax b.Direct or indirect tax
increases-regressive tax 1,000,000 per year c.National or local tax=
d.Specific or ad valorem tax
9.Tax as to source is classified as
a.Fiscal or regulatory
b.Direct or indirect tax
c.National or local tax=
d.Specific or ad vaorem tax
10.Which is not a measure of tax?
a.Enforced proportional contribution
b.Enforced within the territorial
jurisdiction of the taxing authority
c.Levied by the lawmaking body
d.Generally payable in kind=
11.Taxes that cannot be shifted by the
statutory taxpayer are referred to as
a.direct tax=
b.insirect tax
c.business tax
d.personal taxes
12.Which is a local tax?
a.Donor’s tax
b.Professional tax=
c.Documentary stamp tax
d.Excise tax
13.As to subject matter, taxes do not
include
a.Property tax
b.Regulatory tax=
c.Poll tax
d.Excise tax
14.A tax that is imposed upon the
performance of an act, the enjoyment
of a privilege or the engagement in a
profession is known as
a.income tax
b.license
c.excise tax=
d.transfer tax
15.Which is a national tax?
a.Real property tax
b.Community tax
c.Income tax=
d.Professional tax
16.Which of the following distinguishes
license from tax?
a.Unlimited in imposition
b.Imposed for revenue
c.Does not renders business illegal
d.Pre-activity in application=
17.Which is correct?
a.Taxes may be subject to compensation
b.Toll, being a demand of ownership, is
exercised only by private entities.
c.Dacion en pago and cession in
payment are applicable to taxation.
d.Special assessment applies only when
public improvement is made=
18.Tax as to determination of amount is
classified as
a.Fiscal or regulatory
b.Direct or indirect tax
c.National or local tax
d.Specific or ad valorem tax=
19.Tax classifications as to object do not 27.Mr. A has a tax obligation to the
include government amounting to P80,000.
a.Poll tax Since he is leaving the country, he
b.Property tax entered into a contract with Mr. B
c.Regulatory tax= wherein Mr. B shall pay the P80,000 tax
d.Excise tax in his behalf. On due date, Mr. B failed
20.A. Tax must be not violate to pay the tax. The BIR sent a letter of
constitutional and inherent limitation demand to Mr. A which he refused to
B.Tax must be uniform and equitable pay.
C.Tax must be for public purpose Which of the following statements is
D.Tax must be levied by the lawmaking correct?
body a.The government cannot enforce
E.Tax must be proportionate in collection charges against Mr. A since he
character has validly transferred his obligations to
F.Tax is generally payable in money B under the contract.
Which of the above is/are not an b.The government can no longer run
essential characteristic of a valid tax? after Mr. A because he is already
a.All of the above outside the Philippine territory.
b.All except F c.The government should wait until Mr.
c.None, except F B becomes solvent again.
d.None of the above= d.The government should force Mr. A to
21.To limit the production of an pay because taxes are non-assignable.=
environmentally harmful commodity, 28.Philippine tax laws are by nature,
Congress passed a law subjecting the a.political
sales of an environmentally unfriendly b.civil=
commodity to a P10/kilo tax but a 5% c.political and civil
tax is imposed on sales exceeding d.penal and civil
P100,000. 29.Motor vehicles tax is an example of
Which is incorrect? a.Property tax
a.The tax is a combination of an ad b.Privilege tax=
valorem tax and specific tax c.Income tax
b.This is an example of a regulatory tax d.Indirect tax
c.This is a national tax 30.Which of the following statements is
d.This is a local tax correct?
22.Which is not an excise tax? a.The Marchall Doctrine is not used in
a.Income tax practice since it is unconstitutional.
b.Community tax= b.An ex post facto tax law violates the
c.Estate tax constitution
d.Occupation tax c.A tax bill personally drafted by the
23.Which is an indirect tax? president shall become a law after
a.Value added tax= approval by congress.=
b.Donor’s tax d.It is in the public interest that errors
c.Income tax of public officials should bind the
d.Donor’s tax government to limit government abuse.
24.Which is not an ad valorem tax? 31.Tax rulings are issued by the
a.Real property tax a.Secretary of finance
b.Excise tax on cigar= b.Supreme court
c.Income tax c.Court of appeals
d.Donor’s tax d.Commissioner of Internal Revenue=
25.A tax that is imposed based on a per 32.Which of the following is limited in
unit or per head basis known as application?
a.Proportional tax a.Tax laws
b.Specific tax= b.Revenue regulations
c.Ad valorem tax c.Tax treaties
d.Progressive tax d.BIR ruling=
26.Tax as to rates excludes 33.Which is not a source of tax law?
a.Specific tax= a.Judicial decisions
b.Progressive tax b.Revenue regulations
c.Mixed tax c.Opinions of tax experts=
d.Proportional tax d.Tax treaties and ordinances
34.Which issues revenue regulations?
a.Department of finance= 45.Which of the following levy is fiscal b.License
b.Congress or revenue by nature? c.Police power
c.Commissioner of Internal Revenue a.Tax law geared to phase out a deficit d.Toll
d.Commissioner of Customs balance of the government 9.Toll exhibits all of the following
35.Which is not an element of tax? b.Tax law intended to prohibit gambling characteristic, except one. Which is the
a.It must be for public purpose in the Philippines exception?
b.It must not violate Constitutional or c.Tax law intended to protect local a.Demand of ownership
inherent limitation industries= b.Compensation for the use of
c.It must be progressive by nature d.Tax law supporting the development another’s property
d.It must be uniform and equitable= of a particular industry c.Maby impsed by private individuals
36.Tax as to purpose does not include Multiple choice-Theory:Part 2 d.Levied for the support of the
a.Revenue 1.Which is not an excise tax? government.=
b.Sumptuary= a.Income tax= 10.Which of the following is incorrect?
c.Regulatory b.Business tax a.The collected tax is referred to as
d.Poll c.Personal tax revenue
37.When the impact and incidence of d.Transfer tax b.Tax is the sole source of government
taxation are merged into the statutory 2.Which of the following do not relate revenue=
taxpayer, the tax is known as to tax? c.License is imposed before
a.Personal tax a.Does not render business illegal when commencement of a business or
b.Direct tax not paid profession
c.Indirect tax b.Arises from law rather than from d.Debt can be subject to compensation
d.National tax= contracts or set-off.
38.Tax as to object includes c.Intended to cover cost of regulations= 11.Debt as compared to tax
a. Personal tax d.Intended for public purpose a.It is a demand of ownership
b.Property tax= 3.A levy from a property which derives b.It is not assignable
c.Excise tax some special benefit from public c.It will not cause imprisonment when
d.All of these improvement is not paid.=
39.Which is not an indirect tax? a.special assessment = d.It is generally payable in money.
a.duties b.eminent domain 12.Select the incorrect statement.
b.impost c.taxation a.Tax may be unlimited in amount
c.excise tax d.toll b.Non-payment of license renders the
d.personal tax= 4.A.Government revenue may come business illegal.
40.A tax that cannot be avoided is from tax, license, toll and penalties. c.Special assessment is not a liability of
a.direct tax= B.Penalty may arise either from law or the person owning the property.
b.indirect tax contracts. d.Special assessment can be imposed
c.specific tax Which is false? on building and other real right
d. personal tax a.A only attaching or pertaining to land.=
41.Statement 1:Taxes are voluntary b.B only 13.Tax as to subject matter does not
contributions to the government c.A and B include
Statement 2:Taxes are mandatory d.Neither A nor B= a. Real property tax
contributions to the government 5.What distinguishes tax from license? b.Personal tax
Which is correct? a.Tax is a regulatory measure c.Excise tax
a.Only statement 2 is correct b.Tax is a demand of ownership d.Regulatory tax=
b.Only statement 2 is correct= c.Tax arises from contract 14.What distinguishes debt from tax?
c.Both statements are correct d.Tax is a post-activity imposition= a.Arises from contract=
d.Neither statements are correst 6.Which of the following distinguishes b.Never draws interest
42.Which is an indirect tax? license from tax? c.Non-payment will lead to
a.Other percentage tax= a.It is imposed under taxation power. imprisonment
b.Income tax b.It is a charge for other’s property d.Generally payable in money
c.Donor’s tax c.Non-compliance to it will render Multiple Choice-Theory:Part 3
d.Estate tax business illegal= 1.The Commissioner of Internal
43.Income tax is not a/an d.It is generally payable in money Revenue is not authorized to
a.Ad valorem tax 7.The amount imposed is based on the a.interpret the provisions of the
b.direct tax value of the property National Internal Revenue Code
c.revenue tax a.Eminent domain b.promulgate Revenue Regulations=
d.Property tax= b.License c.terminate an accounting period
44.A transfer tax is not a/an c.Toll= d.prescribe presumptive gross receipts
a.Regressive tax= d.Special assessment 2.Which is not a power of the
b.Ad valorem tax 8.Which is intended to regulate Commissioner of Internal Revenue?
c.National tax conduct? a.To change tax periods of taxpayers.
d.Excise tax a.Penalty= b.To refund internal revenue taxes
c.To prescribe assessed value of real
properties=
d.To inquire into bank deposits only
under certain cases
3.The principles of a sound tax system
exclude
a.Economic efficiency-=
b.Fiscal adequacy
c.Theoretical justice
d.Administrative feasibility
4.Which of the following best describes
the effect of tax condonation?
a.It only covers the unpaid balance of a
tax liability=
b.It is conditional on the taxpayer
paying some portion of the unpaid tax
c.It generally applies to all taxpayers
d.All of these
5.Which is not an application of a
principle of a sound tax system?
a.Taxes should adjust based on
government needs
b.Taxation should be progressive=
c.Taxation should encourage convenient
compliance
d.None of these
6.By which principle of a sound tax
system is the elasticity in tax rates is
justified?
a.Theoretical justice
b.Fiscal adequacy
c.Adminstrative feasibility
d.All of these=
7.Violation of this principles will make a
tax law invalid
a.Fiscal adequacy
b.Theoretical justice
c.Administrative feasibility
d.Economic consistency
8.Which of the following is not an
application of the lifeblood doctrine?
a.The government has the right to
select the object of taxation
b.Taxation is the rule, exemption is the
exception
c.Claim for exemption is strictly
construed against the taxpayer.=
d.None of these
9.Which one of the following is the BIR
not empowered to do?
a.Assess national taxes=
b.Collect income, business and transfer
taxes
c.Assess and collect local taxes
d.Enforce forfeitures, penalties and
fines
10.Which principle demands that ax
should be just, reasonable, and fair?
a.Theoretical justice=
b.Fiscal adequacy
c.Administractive feasibility
d.Economic consistency
11.Which among the following powers
of the Commissioner of Internal
Revenue can be delegated?
a.The power to conduct inventory
surveillance
b.The power to recommend
promulgation of revenue regulations
c.The power to issue rulings of first
impression
d.The power to reverse a ruling, amend,
or modify an existing ruling=
12.The Commissioner of Internal
Revenue is not empowered to
a.Make or amend a tax return for an din
behalf of the taxpayer.
b.Obtain information and to summon,
examine, and take testimony of persons
to effect tax collections.=
c.Compromise tax liabilities of taxpayers
d.Grant amnesty for erring taxpayers
13.Which is true with tax amnesty?
a.It is unconditional
b.It covers both criminal and civil
liability of the taxpayer=
c.It applies for past and future non-
compliance
d.All of these
14.Which of the following may tax
exemption come from?
a.Contract
b.Constitution
c.Law
d.All of these
15.Exemption based upon which of the
following is repealable?
a.Contract
b.Constitution
c.Law=
d.None of these
16.Select the incorrect statement
regarding tax amnesty and
condonation.
a.In tax amnesty, violators are required
to pay a portion of the tax assessed.
b.When the remaining unpaid portion
of the tax is condoned, the taxpayer
cannot ask for refund for the balance
already paid.
c.Tax amnesty operates as a general
pardon and is rarely available
d.Tax condonation operates on the
whole balance of the assessed tax;
hence, the taxpayer can ask for refund
for the paid portion of the tax.=
17.Which of the following is a power of
the Commissioner of Internal Revenue?
a.Assessment and collection of taxes
b.Enforcement of all forfeitures,
penalties, and fines
c.Interpretation of the provisions of the
NIRC=
d.Giving effect to and administering the
supervisory and police powers
conferred by the NIRC and other laws.
18.The Commissioner of Internal
Revenue can delegate the power to
a.refund or credit internal revenue tax=
b.recommend rules and regulations to
the secretary of finance
c.assign and re-assign revenue officer to
establishments of excisable articles.
d.compromise or abate tax liability
19.The BIR is under the supervision of
a.The Bureau of Customs
b.The president
c.The department of finance=
d.Congress
20.Who is not a legal taxpayer?
a.Mining companies
b.Listed companies
c.Banks with P120M authorized capital
d.None of these=
21.In terms of financial measure, which
of the following threshold for
qualification as large taxpayers is
incorrect?
a.Gross receipts exceeding P1B.
b.Net worth exceeding P300M.
c.Gross purchases exceeding P800M.
d.Gross sales exceeding P1.5B.
22.As to tax payments measures, which
of the following threshold for the
qualification as large taxpayers is
incorrect?
a.Annual income tax payments of P1M.
b.Annual value added tax payments of
P1M.=
c.Quarterly percentage tax payments of
P200,000
d.Annual documentary stamp tax of
P1M.
CHAPTER 3
INTRODUCTION TO INCOME TAXATION
Chapter Overview and Objectives
This chapter discusses the concept of
tax income, the situs of income, and the
types of taxpayers.
After this chapter, readers are expected
to comprehend and demonstrate
knowledge on the following:
1.The concept of gross income
2.The types of income taxpayers
3.The general rules in income taxation
4.The income tax situs rules
THE CONCEPT OF INCOME
Why is income subject to tax?
Income is regarded as the best measure
of taxpayer’s ability to pay tax. It is an
excellent object of taxation in the
allocation of government costs.
What is income for taxation purposes?
The tax concept of income is simply
referred to as “gross income” under the
NIRC. A taxable item of income is
referred to as an “item of gross income”
or “inclusion in gross income”/
Gross income simply means taxable
income in layman’s term. Under the
NIRC however, the term “taxable
income” refers to certain item of gross
income less deductions and personal
exemptions allowable by law.
Technically, gross income is broader to
pertain to any income that can be
subjected to income tax.
Gross Income is broadly defined as any
inflow of wealth to the taxpayer from
whatever source, legal or illegal, that
increases net worth. It includes income
from employment, trade, business or
exercise of profession, income from
properties, and other sources such as
dealings in properties and other regular
or casual transactions.
ELEMENTS OF GROSS INCOME
1.It is a return on capital that increases
net worth.
2.It is a realized benefit.
3.It is not exempted by law,contract, or
treaty.
RETURN ON CAPITAL
Capital means any wealth or property.
Gross Income is a return on wealth or
property that increases the taxpayer’s
net worth.
Illustration
ABC purchased goods for P300 and sold
them for P500. The P500 consideration
can be analyzed as follows:
Selling price (total consideration
received)P500 Total return
Cost (value of inventory forgone)
300 Return of capital
Mark-up (Gross income)
P200 Return on capital
The return on capital that increases net
worth is income subject to income
tax.Return of capital merely maintains
net worth; hence; it is not taxable.An
improvement in net worth indicates an
ability to pay tax.
Capital items deemed with infinite
value
There are capital items that have
infinite value and are incapable of
pecuniary valuation. Anything received
as compensation for their loss is
deemed a return of capital.
Examples:
1.Life
2.Health
3.Human reputation
Life
The value of life is immeasurable by
money. Under Sec. 32 of the NIRC, the
proceeds of life insurance policies paid
to the heirs or beneficiaries upon death
of the insured, whether in a single sum
or otherwise, are exempt from income
tax.
The proceed of a life insurance contract
collected by an employer as a
beneficiary from the life insurance of an
officer or any person directly interested
with his trade are likewise exempt.
These proceeds are viewed as advanced
recovery of future loss.
However, the following are taxable
return on capital from insurance
policies:
a.Any excess amount received over
premiums paid by the insured upon
surrender or maturity of the policy (i.e,
the insured outlives the policy.)
b. Gain realized by the insured from the
assignment or sale of his insurance
policy.
c.Interest income from the unpaid
balance of the proceeds of the policy
d.Any excess of the proceeds received
over the acquisition costs and premium
payments by an assignee of a life
insurance policy.
Health
Any compensation received in
consideration for the loss of health such
as compensation for personal injuries or
tortuous act is deemed a return of
capital.
Human Reputation
The value of one’s reputation cannot be
measured financially. Any indemnity
received as compensation for its
impairment is deemed a return of
capital exempt from income tax.
Examples include moral damages
received from:
a.Oral defamation or slander
b.Alienation of affection
c.Breach of promise to marry
Recovery of lost capital vs. Recovery of
lost profits
The loss of capital results in decrease in
net worth while the loss of profits does
not decrease net worth. The recovery of
lost capital merely maintains net worth
while the recovery of lost profits
increases net worth. Therefore, the
recovery of lost profits is a return on
capital.
Taxable recovery of lost profits
The recovery of lost profits through
insurance, indemnity contracts, or legal
suits constitutes a taxable return on
capital.
The following are taxable recoveries of
lost profits:
a.Proceeds of crop or livestock
insurance
b.Guarantee payments
c.Indemnity received from patent
infringement suit
Illustration 1
Mang Tomas insured his strawberry
crop in a P200,000 crop insurance
coverage against calamities. The crop
was eventually destroyed by an unusual
frost. Mang Tomas was paid the
P200,000 insurance proceeds.
The P200,000 proceeds which is a
reimbursements for the lost value of the
future harvest, is an item of gross
income. The value of the lost crops is, in
effect realized not through actual
harvest but through the insurance
contract.
Illustration 2
Mr. Santiago purchased a franchise. The
franchisor guaranteed an annual
franchise income of P100,000 to Mr.
Santiago. In the first year of operation,
Mr. Santiago’s outlet only earned
P60,000. The franchisor paid the
P40,000 difference to Mr. Santiago.
The P40,000 guarantee payment is not
a gratuity but a recovery of lost profit
for Mr. Santiago; hence subject to
income tax. Mr. Santiago shall report
P100,000 as franchise income.
Illustration 3
Mindoro Inc. experienced an unusual
decline in its income after a competitor
copied its patented invention. Mindoro
sued the competitor for patent
infringement and was awarded an
indemnity of P3,000,000.
The P3,000,000 indemnity is a
compensation for the income not
realized by Mindoro due to the patent
infringement. The same is an item of
gross income.
The recovery of lost income or profits is
not intended to compensate for the loss
of capital. It is as good as realization of
income;hence; it is an item of gross
income.
REALIZED BENEFIT
What is meant by realized benefit?
The “benefit” concept
The term “benefit” means any form of
advantage derived by the taxpayer.
There is benefit when there is an
increase in the net worth of the
taxpayer. An increase in net worth
occurs when one derives income,
donation, or inheritance.
The following are not benefits, hence,
not taxable:
a.Receipt of a loan-properties increases
but obligations also increase resulting in
an offsetting effect in networth.
b.Discovery of lost properties-under the
law, the finder has an obligation to
return the same to the owner.
c.Receipt of money or property to be
held in trust for, or to be remitted to,
another person
If the taxpayer is entitled to keep for his
account portion of a receipt, only that
portion is a benefit
Illustration
1.An employee was granted P20,000
transportation advance. He liquidated
P18,000 transportation expenses and
was allowed by his employer to keep
the P2,000. Only the P2,000 retained by
the employee is considered income
since this was the extent he was
benefited.(RR2-98)
2.A security agency receives P120,000
from clients, P100,000 of which is for
the salaries of security guards. Under
RMC 39-2007, only the P20,000
attributable to the agency is considered
income of the agency since it is the
extent it is benefited. The P100,000
pertaining to salaries of security guards
is recognized by the agency as a liability
upon receipt.
The “realized” concept
The term realized means earned. It
requires that there is a degree of
undertaking or sacrifice from the
taxpayer to be entitled of the benefit.
Requisites of a realized benefit:
1.There must be an exchange
transaction
2.The transaction involves another
entity
3.It increases the net worth of the
recipient
Types of Transfers
1.Bilateral transfers or exchanges, such
as:
a.Sale
b.Barter
These are referred to as “onerous
transactions”.
2.Unilateral transfers, such as:
a.Succession-transfer of property upon
death
b.Donation
These are referred to as “gratuitous
transactions”
Under current usage, unilateral
transfers are simply referred to as
“transfers” while bilateral transfers are
called “exchanges”. Benefits derived
from onerous transactions are “earned
or realized”; hence, they are subject to
income tax, Benefits derived from
gratuitous transactions are not realized
because of the absence of an earning
process. Benefits derived from
gratuitous transactions are subject to
transfer tax,not income tax.
3.Complex transactions
Complex transactions are partly
gratuitous and partly onerous. These
are commonly referred to as “transfers
for less than full and adequate
consideration”.The gratuitous portion of
the transaction is subject to transfer tax
while the benefit from the onerous
portion is subject to income tax.
Illustration
A taxpayer sold his car which was
previously purchased for P100,000 and
with a current fair value of P180,000 for
only P130,000.
The transaction will be analyzed as
follows:
Fair value P180,000
Selling price 130,000 P50,000-
Subject to transfer tax
Cost 100,000 P30,000-
Subject to income tax
The excess of fair value over selling
price is a gratuity whereas the excess of
the selling price over the cost is an item
of gross income.
What is meant by another entity?
Every person, natural, or juridical, is an
entity. Natural persons are living
persons while juridical persons are
those created by law such as
partnerships and corporations.An entity
may be taxable entity or an exempt
entity. A taxable item of gross income
arises from transactions which involve
another natural or juridical entity.
Gains or income derived between
relatives, corporations, and between a
partner and the partnership are taxable
since it is made between a holding or
parent company and its subsidiaries and
between sister companies regardless of
the underlying economic relationship.
However, the sales of a home office to
its branch office are not taxable
because they pertain to one and the
same taxable entity. Furthermore, the
income between businesses of a
proprietor should not be taxes since
proprietorship businesses are taxable
upon the same owner. Note that a
proprietorship business is not a judicial
entity.
Benefits in the absence of transfers
The increase in wealth of the taxpayer
in the form of appreciation or increase
in the value of his properties or
decrease in the value of his obligations
in the absence of a sale or barter
transaction is not taxable.
These are referred to as unrealized
gains or holding gains because they
have not yet materialized in an
exchange transaction.
Examples of unrealized gains or holding
gains:
a.Increase in value of investments in
equity or debt securities.
b.Increase in value of real properties
held(revaluation increment)
c.Increase in value of foreign currencies
held or receivable
d. Decrease in value of foreign currency
denominated debt by virtue of
favorable fluctuation in exchange rates.
e.Birth of animal offsprings, accruals of
fruits in an orchard or growth of farm
vegetables.
f.Increase in value of land due to the
discovery of mineral reserves.
Benefits in the absence of transfers
The increase in wealth of taxpayers in
the form of appreciation or increase in
the value of his properties or decrease
in the value of his obligations in the
absence of a sale or barter transaction
is not taxable.
These are referred to as unrealized
gains or holding gains because they
have not materialized in an exchange
transaction.
Examples of unrealized gains or holding
gains:
a.Increase in value of investments in
equity or debt equities
b.Increase invalue of real properties
held (revaluation increment)
c.increase in value of foreign currencies
held or receivable
d.Decrease in value of foreign currency
dominated debt by virtue of favorable
fluctuation in exchange rates.
e.Birth of animal offspring, accrual of
fruits in an orchard or growth of farm
vegetables.
f.Increase in value of land due to the
discovery of mineral resources.
Rebdering of services
The rendering of services for a
consideration is an exchange but does
not cause a lost of capital.Hence, the
entire consideration received from
rendering services such as
compensation income or fees is an item
of gross income.
Illustration
Mr. Saladin lists the following possible
items of gross income:
Compensation income P200,000
Winnings from gambling 100,000
Increase in value of investments 50,000
Appreciation in the value of land owned
300,000
Debt of Saladin cancelled by creditors in
consideration for services he rendered
to them 150,000
Debt of Saladin cancelled by his creditor
out of affection 250,000
Loan received from a bank 400,000
The items of gross income are:
Compensation income P200,000
Winnings from gambling 100,000
Debt of Saladin forgiven in
consideration for service rendered to
his creditors 150,000
Note:
1.Gains from gambling and the
forgiveness of debt in consideration of
services or properties received are
realized gains from exchanges.
2. The forgiveness of debt out of
affection or mere generosity of the
creditor is a gratuitous transfer subject
to transfer tax.
3.The loan received from a bank
constitutes a transfer but is not a
benefit.
Basis of exemption of unrealized
income
Normally, taxpayers will have the ability
to pay tax when their income
materializes in an exchange transaction
since tax is generally payable in money.
This does not mean, however, that only
income realized in cash is subject to tax.
Income realized in non-cash
properties are, in effect, received in
cash but the taxpayer used the same to
acquire the non-cash property. Income
received in non-cash properties are, in
effect, received in cash but the taxpayer
used the same to acquire the non-cash
property. Income received in non-cash
considerations is taxable at the fair
value of the property received.
Moreover, exempting income realized in
non-cash considerations would open
considerations would open a wide
avenue for tax evasion.
Mode of Receipt/ Realization Benefits
Taxable items of income may be
realized by the taxpayer in two ways:
1.Actual receipt
Actual receipt involves physical taking of
the income in the form of cash or
property.
2.Constructive receipt
Constructive receipt involves no actual
physical taking of the income but the
taxpayer is effectively benefited.
Examples:
a.Offset of debt of the taxpayer in
consideration for the sale of goods or
service
b.Deposit of the income to the
taxpayer’s checking account
c.Matured detachable interest coupons
on coupon bonds not yet encashed by
the taxpayer.
d.Increase in the capital of a partner
from the profit of the partnership.
Inflow of wealth without increase in net
worth
The inflow of wealth to a person that
does not increase his net worth is not
income due to the total absence of
benefit.
Examples:
a.Receipt of property in trust
b.Borrowing of money under an
obligation to return
In law, the proceeds of embezzlement
or swindling where money is taken
without an original intention to return
are considered as income because of
the increase in net worth of the
swindler.
NOT EXEMPTED BY LAW, CONTRACT, OR
TREATY
An item of gross income is not
exempted by the Constitution, law,
contract, treaties from taxation.
The following items of income are
exempted by law from taxation; hence,
they are not considered items of gross
income:
a.Income of qualified employee trust
fund
b.Revenues of non-profit non-stock
educational institutions
3.PCSO or lotto winnings
4.SSS,GSIS,Pag-ibig or PhilHealth
benefits
5.Salaries and wages or minimum wage
earners and qualified senior citizen
6.Regular income of Barangay Micro-
business Enterprises (BMBEs)
7.Income of foreign governments and
foreign government-owned and
controlled corporations
8.Income of international missions and
organizations with income tax immunity
Items of gross income tax are exempted
from taxation are discussed extensively
under Exclusions in Gross Income in
Chapter 8.
TYPES OF INCOME TAXPAYERS
A.Individuals
1.Citizen
a.Resident citizen
b.non-resident citizen
2.Alien
a.Resident alien
b.Non-resident alien
a.engaged in trade or business
b.not engage in trade or business
3.Taxable estates and trusts
B.Corporations
1.Domestic corporation
2.Foreign corporations
a.Resident foreign corporations
b.Non-resident foreign corporation
INDIVIDUAL INCOME TAXPAYERS
Citizens
Under the Constitution, Citizens are:
a.Those who are citizens of the
Philippines at the time of adoption of
the Constitution on February 2, 1987
b.Those whose fathers or mothers are
citizens of the Philippines
c.Those born before January 17,1973 of
Filipino mothers who elected Filipino
citizenship upon reaching the age of the
majority.
d.Those who are naturalized in
accordance with the law
Classification of citizens:
A.Resident Citizen-A Filipino citizen
residing in the Philippines
B.Non-residebt citizen-includes:
1.A citizen of the Philippines who
establishes to the satisfaction of the
Commissioner the fact of his physical
presence abroad with a definite
intention to reside therein;
2.A citizen of the Philippines who leaves
the Philippines during the taxable year
to reside abroad, either as an immigrant
of for an employment on a permanent
basis;
3.A citizen of the Philippines who works
and derives from abroad and whose
employment thereat requires him to be
physically present abroad most of the
time during the taxable year;
4.A citizen who has been previously
considered as non-resident citizen and
who arrives in the Philippines at
anytime during the taxable year to
reside permanently in the Philippines
shall likewise be treated as a non-
resident citizen for the taxable year in
which he arrives in the Philippines with
respect to his income derived from
sources abroad until the date of his
arrival in the Philippines.
Filipinos working in the Philippines
embassies or Philippine consulate
offices are not considered non-resident
citizens.
Alien
a.Resident alien-an individual who is
residing in the Philippines but is not a
citizen thereof such as:
1.An alien who lives in the Philippines
without definite intention as to his
stay;or
2.One who comes to the Philippines for
a definite purpose which in its nature
would require an extended stay and to
that end makes his home temporarily in
the Philippines, although it may be his
intention at all times to return to his
domicile abroad.
An alien who has acquired residence in
the Philippines retains his status as such
until he abandons the same or actually
departs from the Philippines.
B.Non-resident alien-an individual who
is not residing in the Philippines and
who is not a citizen thereof
1.Non-resident aliens engaged in
business(NRA-ETB)-aliens who stayed in
the Philippines for an aggregate period
of more than 180 days during the year.
2.Non-resident aliens not engaged in
business (NRA-NETB)-include:
a.Aliens who come to the Philippines
for a definite purpose which in its
nature may be promptly accomplished;
b.Aliens who shall come to the
Philippines and stay therein for an
aggregate period of not more than 180
days during the year.
THE GENERAL CLASSIFICATION RULE
FOR INDIVIDUALS
1.Intention
The intention of the taxpayer regarding
the nature of his stay within or outside
the Philippines shall determine his
appropriate residency classification. The
taxpayer shall submit to the CIR of the
BIR documentary proofs such as visas,
work contracts and other documents
indicating such intention.
2.Lenght of stay
In default of such documentary proof,
the length of stay of the taxpayer is
considered:
a.Citizens staying abroad for a period of
at least 183 days are considered non-
resident
b.Aliens who stayed in the Philippines
for more than 1 year as of the end of
the taxable year are considered resident
c.Aliens who are staying in the
Philippines for not more than 1 year but
more than 180 days are deemed non-
resident engaged in business
d.Aliens who stayed in the Philippines
for not more than 180 days are
considered non-resident aliens not
engaged in trade or business.
Illustration 1
Luiz Mario Aresmedi, a Mexican actor,
was contracted by the Philippine
television company to do a project in
the Philippines. He arrived in the
country on February 29, 2015 and
returned to Mexico three weeks later
upon completion of the project.
Luiz Mario Aresmedi shall be classified
as an NRA-NETB in 2015. His stay is for
a definite purpose which in its nature
will be accomplished immediately.
Illustration 2
Mamoud Jibril, a Libyan national arrived
in the country on November 4, 2015.
Mr. Jibril stayed in the Philippines since
then without any working visa or work
permit.
For the year 2015, Mr. Jibril would be
considered an NRA-NETB because he
stayed in the Philippines for less than
180 days as of December 31,2015. If he
still within the Philippine until
December 31,2015, he will qualify as a
resident alien for 2016.
Illustration 3
Without any definite intention as to the
nature of his stay, Juan Masipag, a
Filipino citizen, left the Philippines and
stayed abroad from March 15,2014 to
April 1,2015 before returning to the
Philippines.
For the year 2014, Juan is still a non-
resident citizen because he is absent for
more than 183 days but he will be
classified as resident citizen for the year
2015 because he is absent for less than
183 days in 2015.
Taxable estate and trusts
1.Estate
Estate refers to the properties, rights
and obligations of a deceased person
not extinguished by his death
Estates under juridical settlement are
treated as individual taxpayers. The
estate is taxable on the income of the
properties left by the decedent.Estates
under extrajudicial settlement are
exempt entities. The income of the
properties of the estate under
extrajudicial settlement is taxable to the
heirs.
2.Trusts
A trust is an arrangement whereby one
person (grantor or trustor) transfers (i.e
donates) property to another person
(beneficiary), which will be held under
the management of a third party
(trustee or fiduciary).
A trust that is irrevocable designated by
the grantor is treated in taxation as if it
is an individual taxpayer. The income of
the property held in trust is taxable to
the trust. Trusts that are not designated
as revocable by the grantor are not
properties held under revocable trusts
is taxable to the grantor not to the
trust.When the trust agreement is silent
as to revocability of the trust, the trust
us presumed to be revocable.
CORPORATE INCOME TAXPAYERS
The term “corporation” shall include
partnerships, no matter how created or
organized, joint-stock companies, joint
accruals, associations, or insurance
companies, except general professional
partnerships and joint venture or
consortium formed for the purpose of
undertaking construction projects or
engaging in petroleum, coal,
geothermal, and other energy
operations pursuant to an operating
consortium agreement under a service
contract with the government.
Hence, the term corporation includes
profit-oriented and non-profit
institutions such as charitable
institutions, cooperatives, government
agencies, and instrumentalities,
associations, leagues, civic or religious
and other organizations.
Domestic Corporations
Domestic Corporations is a corporation
that is organized in accordance with
Philippine law.
Foreign Corporation
A foreign corporation is one organized
under foreign law.
Types of foreign corporations:
1.Resident Foreign Corporation(RFC)-a
foreign corporation which operates and
conducts business in the Philippines
through a permanent establishment (i.e
a branch)
2.Non-resident foreign
corporation(NRFC)-a foreign
corporation which does not operate or
conduct business in the Philippines
Note:
1.A corporation that incorporates in the
Phillippins is a domestic corporation
under the incorporation test even if the
same is controlled by foreigners.
2.A foreign corporation that transacts
business with residents through a
resident branch is taxable on such
transactions as a resident foreign
corporation through its branch.
However, is it transacts directly to
residents outside the branch, it is
taxable as a non-resident foreign
corporation on the direct transactions.
Special Corporations
Special Corporations are domestic or
foreign corporations which are subject
ot special tax rules or preferential tax
rates.
OTHER CORPORATE TAXPAYERS
1.Partnerships
A partnership is a business organization
owned by two or more persons who
contribute their industry o resources to
a common fund for the purpose of
dividing profits from the venture.
Types of partnership
a.)General professional
partnership(GPP)
A GPP is a partnership formed for the
exercise of a common profession. All
partners must belong to the same
profession.
A GPP is not treated as a corporation
and is not a taxable entity. It is exempt
from income tax, but the partners are
taxable in their individual capacity with
respect to their share in the income of
the partnership.
b.)Business partnership
A business partnership is one formed
for profit. It is taxable as a corporation.
2.Joint Venture
A joint venture is a business
undertaking for a particular purpose. It
may be organized as a partnership of a
corporation.
Types of joint venture
a.Exempt joint ventures
Exempt joint ventures are those formed
for the purpose of undertaking
construction projects or engaging in
petroleum, coal, geothermal, and other
energy operations pursuant to an
operating consortium agreement under
a service contract with the
Government.
Similar to a GPP, this type of joint
venture is not treated as a corporation
and is tax-exempt on its regular income,
but their venturers are taxable to their
share in the net income of the joint
venture.
b.Taxable joint venture
All other joint ventures are taxable as
corporations
3.Co-ownership
A co-ownership is a joint venture
ownership of a property formed for the
purpose of preserving the same and/ or
dividing its income.
A co-ownership that is limited to
property preservation or income
collection is not a taxable entity and is
exempt but the co-owners are taxable
on their share on the income of the co-
owned property.
However, a co-ownership that reinvests
the income of the co-owned property
to other income-producing properties
or ventures will be considered as
unregistered partnership taxable as
corporation
THE GENERAL RULES IN INCOME
TAXATION
Individual taxpayers
Taxable on income earned
Within Without
Resident citizen
/ /
Non-resident citizen
/ The rule on extraterritorial taxation on
Resident alien
/ corporations exposes taxpayers to
Non-resident alien
/ allows a tax credit for taxes paid in
Corporate taxpayers
Domestic corporation
/ /
Resident foreign corporation
/ credit.
Non-resident foreign corporation
/ The situs of income is the place of
Notes:
1.Consistent with the territoriality rule,
all taxpayers except resident citizens
and domestic corporations are taxable
only on income earned within the
Philippines.
2.The NIRC uses the term “without the
Philippines” to mean outside the
Philippines.
The residency and Citizenship Rule
Taxpayers who are resident and citizens
of the Philippines such as resident
citizen and domestic corporations are
taxable on all income from sources
within and without the Philippines. A
corporation is a citizen of the country of
incorporation. Thus, a domestic
corporation is a citizen of the
Philippines.
Basis of the extraterritorial taxation
Resident citizens and domestic
corporations derive most of the
benefits from the Philippines
government compared to all other
classes of taxpayers by virtue of their
proximity to the Philippines
government citizens and domestic
corporations enjoy preferential privilege
over aliens. Also, between resident and
non-resident citizens, resident citizens
unarguable enjoy many of the public
services and privileges because they are
in the country. The taxation of foreign
income of resident citizens and
domestic corporations properly reflects
this difference in benefits consistent
with the Benefit received theory.
The extra-territorial tax treatment of
resident citizens and domestic
corporations is also intended as a safety
net to the potential loss of tax revenues
brought by situs relocation of the
practice of executing or structuring
transactions such that income will be
realized abroad to avoid Philippines
income taxes.
The issue of international double
taxation
resident citizens and domestic
double taxation. However, the NIRC
foreign countries. In fact, resident
citizens and domestic corporations pay
minimal taxes in the Philippines on their
foreign income because of the tax
SITUS OF INCOME
taxation of income. It is the jurisdiction
that has the authority to impose tax
upon the income.
Situs of income vs. sources of income
Situs of income should be differentiated
from the source of income. The latter
pertains to the activity or property that
produces the income.
Situs is important in determining
whether or not an income is taxable in
the Philippines. Situs is particularly
important to taxpayers taxable only on
income within, However, it is also
important to taxpayers taxable on
global income for purposes of the
computation of the foreign tax credit.
INCOME SITUS RULES
Types of income Place of
taxation(situs)
1.Interest income Debtor’s
residence
2.Royalties Where Dividends on domestic stocks 1.Domestic Corporation-the entire
the tangible is employed 150,000 P400,000 is earned within
3.Rent income The following table summarizes the 2.Non-resident foreign corporation-the
Location of the property situs of the foregoing income: entire P400,000 is earned abroad.
4.Service income Place 3.Resident foreign corporation-The
where the service is rendered Within Without P400,000 dividend shall be split.
Illustration Gain on sale of domestic stocks Gross Income
A taxpayer had the following income: P200,000 Ratio=P600,000/P1,000,000=60%
Interest income from deposits in a Gain on sale of foreign bonds Earned within the Philippines
foreign bank P300,000 P100,000 (60%XP400,000) P240,000
Interest from domestic bonds Gain on sale of commercial lot Earned without the Philippines
50,000 500,000 (40%XP400,000) 160,000
Royalties from books published in the Gain on sale of car in Canada Total dividends
Philippines 100,000 200,000 P400,000
Rent income from properties abroad Gain on sale of machineries Supposing that the ratio is 40%.The
(the lease contracts were executed in 250,000 entire P400,000 will be deemed earned
the Philippines) 150,000 Interest on foreign bonds outside the Philippines.
Professional fees for services rendered 50,000 C.Merchandising Income-earned where
in the Philippine to non-resident clients Dividends on domestic stocks the property is sold.
(paid in US dollars) 400,000 150,000 Illustration
Applying the situs rules the following Total Source of gross income
are the situs of the aforementioned P1,100,000 Amount
income: P350,000 Goods purchased and sold within
B.Dividend income from: P200,000
Within Without 1.Domestic corporation-presumed Goods purchased within and sold
Interest on foreign deposits P- earned within abroad 100,000
P300,000 2.Foreign corporation Goods purchased abroad and sold
Interest from domestic bonds a.)Resident foreign corporation- within 150,000
50,000 depends on the pre-dominance test Goods purchased and sold abroad
Royalties from books in the Phils. The pre-dominance test 350,000
100,000 If the ratio of the Philippines gross The income within and without shall be:
Rent income of foreign properties income over the world gross income of
150,000 the resident foreign corporation in the Within Without
Professional fees three-year period preceding the year of Purchased and sold within
400,000 dividend declaration is: P200,000
Total -At least 50% the portion of the Purchased within and sold abroad
P550,000 P450,000 dividend corresponding to the P100,000
Other Income situs rules Philippine gross income ratio is earned Purchased abroad and sold within
A.Gain on sale of properties within 150,000
1.Personal properties -Less than 50%, the entire dividends Purchased abroad and sold abroad
-Domestic securities-presumed earned received is earned abroad 350,000
within the Philippines b.)Non-resident foreign corporation- Total
-Other personal properties-earned in earned abroad. P350,000 P450,000
the place where the property is sold Illustration D.Manufacturing income-Earned where
2.Real Property-Earned where the In 2014, Sarah received a P400,000 the goods are manufactured and sold
property is located. dividend income from ABC Corporation. Operations
Illustration ABC Corporation had the following Remark
A taxpayer had the following income: gross income in 2011 through 2013: Production Distribution
Gain on sale of domestic stocks 2011 Within Within
P200,000 2012 2013 Total Total income from production and
Gain on sale of foreign bonds Philippines P100,000 distribution is earned within the
100,000 P200,000 P300,000 Philippines
Gain on sale of a commercial lot in P600,000 Without Without
Baguio City 500,000 Abroad 200,000 Total income from production and
Gain on sale of car in Ontario, Canada 100,000 100,000 distribution is earned without the
200,000 400,000 Philippines.
Gain on sale of machineries in Mexico. Total P 300,000 Within Without
Pampanga 250,000 P300,000 P400,000 Production income is earned within,
Interest income on foreign bonds P1,000,000 Distribution income is earned without
50,000 If ABC Corporation is a :
Without Within taxation shall be the place of sale g.Dividend income from domestic
Distribution income is earned within, without regard to the seller or the corporation
production income is earned without supplier. h.Dividend income from resident
Illustration 1 The following are the situs of income foreign corporation
Butual Inc. manufactures goods and for the parent corporation: i.Merchandising income
sells them through its branch, Butuan Scenario Parent Subsidiary Exercise Drill No. 1:Return of capital and
bills its branch at established market Within Without return on capital
prices. Butuan reported the following No.1 Philippines Philippines Indicate the amount representing
gross income: P1,600,000 P- return of capital or return on capital:
Hom No.2 Abroad Abroad Consideration For the loss of
e office Branch Total - 1,600,000 Return of capital Return on
Sales No. 3 Philippines Abroad capital
P4,000,000 P2,000,000 1,600,000 - 1.P1,000,000 Health
P6,000,000 No. 4 Abroad Philippines 1,000,000 0
Cost of goods sold 2,400,000 - 1,600,000 2.P500,000 P400,000 car
1,200,000 3,600,000 The following are the situs of income 400,000 100,000
Gross Income for the subsidiary corporation 3.P300,000 P350,000
P1,600,000 P800,000 Scenario Parent Subsidiary building 300,000
P2,400,000 Within Without 0
The following shows the situs of the No.1 Philippines 4.P600,000 Income
gross income of Butuan under each of Philippines P800,000 P- 0 600,000
the following scenario: No.2 Abroad Abroad 5.P1,200,000 Life
Scenario Home office - 800,000 1,200,000 0
Branch Within Without No.3 Philippines Abroad Exercise Drill no.2 Income tax and
No.1 Philippines - 800,000 transfer tax
Philippines P2,400,000 P0 No.4 Abroad Philippines Transaction Income tax
No.2 Abroad 800,000 - Transfer tax
Abroad 0 CHAPTER 3:SELF-TEST EXERCISES 1.Barter of properties /
2,400,000 Discussion Questions 2.Sale of goods /
No.3 Philippines 1.Enumerate the characteristics of gross 3.Indemnity of moral damages
Abroad 1,600,000 income. /
800,000 2.What are capital items considered 4.Harvested fruits from an orchard /
No.4 Abroad with infinite value?Enumerate 5.Compensation income /
Philippines 800,000 3.When is income considered realized? 6.Interest income /
1,600,000 4.Distinguish exchange from transfer 7.Amount received by the insured in
Note:Both production and distribution 5.What is a complex transaction?How is excess of insurance premiums paid /
are conducted by the same taxable it taxed?
entity, Butuan Inc. The branch is not a 6.What is a holding gain?Why is it
separate taxable entity but is an integral exempt from taxation?
part of Butuan Inc.;hence, its income is 7.Compare actual receipt with
taxable to Butuan Inc. constructive receipt
Illustration 2 8.Enumerate and explain the
Assuming production is conducted by a classifications of individual taxpayers
parent corporation and the distribution 9.What constitute a taxable estate and
is conducted by its subsidiary trust?
corporation: 10.Enumerate and explain the
Parent classifications of corporate taxpayers.
Subsidiary Total 11.Discuss the taxability of each of class
Sales of taxpayers.
P4,000,000 P2,000,000 12.Explain situs.Differentiate situs from 8.Proceeds of life insurance received by
P6,000,000 source of income the heirs of the insured
Cost of goods sold 13.What is the situs of the following /
2,400,000 1,200,000 income: 9.Gain on sale of goods by the home
3,600,000 a.Interest income office to its branch
Gross income b.Service income /
P1,600,000 P800,000 c.Royalty income 10.Gain on sale of goods and services
P2,400,000 d.Rental income between relatives /
The gross income recognized by each e.Gain on sale of movable property 11.Gain on sale of goods by the parent
corporation is taxable to each f.Dividend income from domestic corporation to a subsidiary
corporation because each corporation is corporation corporation /
a separate taxpayer. The situs of
12.Appreciation in the value of land 7.A Japanese who married a beautiful 9.Taxable trusts established by a Filipino
/ Filipina and has been residing in the citizen in the Philippines /
13.Birth of animal offspring Philippines for 2 years RA 10.Taxable estate of a non-resident
/ 8.A 2nd year Korean college student citizen judicially administered abroad
14.Income of a registered Barangay studying in the Philippines /
Micro-Business Enterprise RA Exercise Drill No. 6:Location and situs of
/ 9.A corporation incorporated under income
15.Cancellation of debt out of gratuity Philippine law Compute how much is earned within
of the creditor DC and earned outside the Philippine from
/ 10.A foreign corporation doing business each of the following independent
16.Cancellation of debt by the creditor in the Philippines cases:
in exchange of services rendered by the RFC Income description
debtor / 11.Trust designated by the donor as Within Without
17.Matured interest from coupon irrevocable 1.Rey earned P100,000 interest income;
bonds / RC 40% of these were from non-resident
18.Receipt of bank loan 12.Trust designated by the donor as debtors P60,000 P40,000
/ revocable 2.A finance company earned
19.Salaries of a minimum wage earner NT P1,000,000
/ 13.A business partnership royalties from a franchise; 40% of these
20.PCSO or lotto winnings DC were derived abroad P600,000
/ 14.A joint venture organized under a P400,000
21.Benefits from GSIS, SSS, Pag-Ibig or foreign law and is not operating in the 3.Raymond earned P100,000 rent from
Philhealth Philippines NRFC OFWs from his apartment in U.S.He
/ 15.An estate of a Filipino citizen also earned P40,000 rent from his
22.Discovery of hidden treasure judicially administered in Japan Philippine condominium unit P40,000
/ NRC P100,000
Exercise drill no.4:Income taxpayer 16.An estate of a Filipino citizen extra- 4.Chester, a resident citizen,works
classifications judicially administered in the home online and submits his output to
Indicate the appropriate classification Philippines NT clients
for each of the following taxpayers: 17.A taxable joint venture organized in He collected P100,000 service fee from
DC-Domestic Corporation the Philippines foreign clients and P20,000 from
RFC-Resident foreign corporation DC resident clients P120,000 P0
NRFC-Non-resident foreign corporation 18.A non-profit corporation organized 5.Mark rendered audit services to client
NRA-ETB- Non-resident engaged in in the Philippines in Afghanistan for P500,000. The
trade or business DC services were paid in Afghanistan 0
NRA-NETB-Non-resident alien not Exercise Drill No 5:General Income tax P500,000
engaged in trade or business rule 6.Jun has a store in a tourist park in
NT-Not a taxpayer Check the box properly corresponds to Baguio City, Philippines. He earned a
RC-Resident citizen the taxability of the following tax total of P40,000 gain from selling
NRC-Non-resident citizen payers: souvenir items 40% were from foreign
RA-Resident alien Taxpayer tourists P40,000 P0
Person or Entity World Income Philippine 7.Don Mariano sold at a gain of
Classification Income P2,000,000 to a client abroad a
1.A fat Mexican tourist 1.Non-resident citizen commercial building located in Quezon
NRA-NETB / City, Philippines P2,000,000
2.A hardworking overseas Filipino 2.Resident alien 8.John sold his stocks in a domestic
worker / corporation to a foreign investor at a
NRC 3.Non-resident alien engaged in trade gain of P50,000. P50,000 P0
3.An expatriate employee or business 9.Manso received P20,000 dividends
NRC / from a domestic corporation and
4.A Filipino who is privately employed 4.Resident foreign corporation P30,000 dividend income from a non-
in the Philippines / resident foreign corporationP20,000
RC 5.Resident citizen P30,000
5.An unemployed Filipino residing in / 10.Andrew received P40,000 dividends
the Philippines 6.Non-resident alien not engaged in from a resident foreign corporation;60%
RC business of its
6.A Chinses Businessman who has his / historical income is from the Philippines
domicile in the Philippines for 6 months 7.Non-resident foreign corporation P24,000 P16,000
NRA-NETB / 11.CDO,Inc. manufactures in the
8.Domestic corporation Philippines and sells to unaffiliated
/ export clients. A total of P100,000 gross
income was earned during the period d.Both a and b 15.Transfers for insufficient
P100,000 P0 8.Why is income subject to taxation? consideration are subject to
12.ABC manufactures abroad and sells a.Income is the most prevalent source a.Income tax
to its branch at market prices. of a taxpayer’s wealth b.Transfer tax
Production cost abroad were b.Income is the best measure of c.Either a or b
P200,000.Billings to the branch totaled taxpayer’s ability to pay tax= d.Both a and b=
P300,000 while branch sales totaled c.Rich people tend to have more 16.Which is specifically exempted from
P450,000 P150,000 P100,000 income than the poor. income taxation by virtue of legal
13.James received P100,000 dividends d.Any of these consideration
from resident foreign corporation which 9.Which is not an item of gross income a.Minimum wage
realized 40% of its income in the because of the absence of an b.Gain on sale of prohibited drugs
Philippines. P0 P100,000 undertaking from the taxpayer? c.Unrealized gain
14.Ellis received P20,000 dividends a.Proceeds of a life insurance policy d.all of the above=
from a non-resident foreign corporation b.Forgiveness of indebtedness as an act Multiple choice-Theory:Part 2
P0 P20,000 of gratuity= 1.A resident alien naturalized in
15.Davao plant manufactures tables c.Revaluation surplus on properties accordance with Philippine law is a
and sells to resident clients. A total of d.Service fees a.Resident citizen=
P400,000 gross income was realized 10.Which is subject to income tax? b.Resident alien
during the period P400,000 P0 a.Proceeds of life insurance policy c.Non-resident alien engaged in trade
Multiple Choice-Theory:Part 1 received by the family of the insured or business
1.Which is not a requisite of gross b.Excess of proceeds over the d.Non-resident alien not engaged in
income? premiums paid received by the trade or business
a.Return on capital taxpayer= 2.Who is not a resident alien
b.Realized profit c.Life insurance proceeds by the a.An alien who stayed in the Philippines
c.Exempted by law= corporation from the insurance of a for more than two years
d.Not exempted by law deceased officer b.An alien who married and stayed in
2.Which is taxable item of income? d.None of these the Philippines for one year=
a.Increase in numbers of a herd of 11.Which of the following is exempted c.An alien who stayed in the Philippines
animals from income taxation because of the for more than one year
b.Compensation for personal injuries absence of ability to pay? d.An alien who established his intention
c.Moral damages a.Damages received from patent before the CIR to stay in the Philippines
d.Interest on moral damages= infringement suit for an extended period of time
3.Which is not a subject to income tax? b.Unrealized income from investment= 3.Which taxpayer is not a natural
a.Donation= c.Gain on sale of goods person?
b.Sale of service d.inheritance a.Resident citizen
c.Sales of goods 12.Income tax may be imposed for the b.Taxable estate=
d.Barter of goods following purposes,except c.Non-resident alien engaged in trade
4.The total consideration received from a.To provide large amounts of or business
the sale of services constitute revenues.= d.Non-resident alien not engaged in
a.Return on capital= b.To limit corruption trade or business
b.Return of capital c.To offset regressive sales and 4.A Filipino who has been abroad for
c.Either a or b consumption taxes. more than 183 days is classified as a
d.Both a and b d.To mitigate the evils from the a.Resident alien
5.When paid for, which of the following inequalities in the distributions of the b.Non-resident alien
items may involve a return on capital? income and wealth c.Non-resident citizen=
a.House and lot= 13.Which of the following constitute d.Non-resident citizen not engaged in
b.Life taxable income? trade or business
c.Dignity a.Return of premium on life insurance 5.Which of the following is not an
d.Health received by the insured. income taxpayer classification?
6.The total consideration received from b.Moral damages from slander a.Resident citizen
the sale of goods at a gain represents? c.Proceeds of crop insurance= b.Non-resident alien
a.Return on capital d.Compensation for personal injury c.Resident foreign corporation
b.Return of capital 14.Which of the following is not a d.General professional partnership=
c.Either a or c constructive receipt of income? 6.An American who showed proof to
d.Both a and b= a.Foregiveness of indebtedness in the satisfaction of the Commissioner of
7.The total consideration received from consideration of service Internal Revenue of his intention to stay
the sale of goods and services at a loss b.Matured detachable interest coupons in the Philippines as an immigrant is
represents c.Deposit of income to taxpayer’s bank classified as a
a.Return on capital accounts a.Resident citizen
b.Return of capital= d.Cash salary of an employee= b.Resident alien=
c.Either a or b
c.Non-resident alien engaged in trade
or business
d.Non-resident alien not engaged in
trade or business
7.A Japanese who is staying in the
Philippines for 183 days is a
a.Resident citizen
b.Resident alien=
c.Non-resident alien engaged in trade
or business
d.Non-resident alien not engaged in
trade or business
8.A Canadian who is staying in the
Philippines for more than one year is a
a.Resident alien=
b.Non-resident alien
c.Non-resident alien engaged in trade
or business
d.Non-resident alien not engaged in
trade or business
9.An alien who stayed less than one
year in the Philippines is classified as a
non-resident alien not engaged in trade
or business if he stayed herein for less
than
a.180 days=
b.1 year
c.183 days
d. 2 years
10.A corporation incorporated
according to Philippine laws is a
a.Domestic Corporation=
b.Resident Corporation
c.Non-resident Corporation
d.De jure Corporation
11.A foreign corporation which
operates a branch in the Philippines is a
a.Domestic Corporation
b.Resident Corporation
c.Non-resident Corporation=
d.De jure Corporation
12.A foreign corporation which
operates a branch in the Philippines is a
a.Resident corporation
b.Resident Corporation=
c.Non-resident Corporation
d.De jure corporation
13.A partnership which dominantly
operates business abroad is a
a.Domestic corporation
b.Resident corporation
c.Non-resident corporation=
d.De jure corporation
14.Which is required to pay income tax?
a.Revocable trusts
b.Estates under extrajudicial settlement
d.Business partnership=
15.Which is not an income taxpayer?
a.Non-resident foreign corporation
b.Non-resident alien not engaged in
trade or business
c.Joint venture engaged in energy
operation pursuant to a service contract
with the government=
d.Irrevocable trusts=
16.Which of the following taxpayers is
taxable only on income earned from the
Philippines?
a.Resident Corporation=
b.Domestic Corporation
c.Resident Corporation
d.All of these
17.All of the following are taxable only
on income earned from sources within
the Philippines,except
a.Resident alien
b.Non-resident alien
c.Non-resident alien
d.Domestic Corporation=
18.Which is taxable on world income?
a.Resident corporation
b.Non-resident corporation
c.Resident citizen=
d.Resident alien
Multiple Choice-Theory:Part 3
1.The place of taxation is
a.Situs rule=
b.Situs
c.Territoriality
d.Gross Income
2.Which is an incorrect statement
regarding situs of income?
a.Service Income is earned in the
domicile of the taxpayer=
b.Interest income is earned in the
residence of the debtor
c.Royalty is earned where the intangible
is employed.
d.Rent is earned in the location of the
property
3.Which statement is correct regarding
situs of income?
a.The gain on the sale of real property is
earned in the location of the property=
b.The gain of sale of any property is
earned in the place of sale.
c.Merchandising income is earned in
the residence of the proprietor.
d.Manufacturing income is earned in
the place of sale.
4.Pedro, a non-resident citizen, lent
money to Shino, a resident Chinese. The
indebtedness was collateralized by a
property located in Japan. The interest
income is earned in
a. the Philippines
b.China
c.Japan
d.Japan, China and the Philippines=
5.Gains on the sale of goods
manufactured and sold by the taxpayer
within the Philippines is subject to tax
a.wherever sold.
b.If sold abroad only
c.without the Philippines only
d.within the Philippines only=
6.Yvonne, a resident alien, bought a car
manufactured in the Philippines and
exported the same at a gain to Carla, a
non-resident citizen. Which is correct?
a.The gain is subject to tax in the
Philippines since the commodity
involved is manufactured in the
Philippines
b.The gain is subject to tax in the
Philippines since the buyer is a citizen of
the Philippines
c.The gain is both subject to tax in the
Philippines and abroad since the
commodity involved is manufactured in
the Philippines.=
d.The gain is taxable abroad because it
is sold abroad.
7.Juan, a resident alien, and Pedro, a
non-resident alien, executed a contract
of sale in Japan whereby Pedro shall
purchase the lot owned by Juan in the
Philippines Juan gains P1,000,000 in the
exchange.
Which is true?
a.The gain is exempt since the gain is
derived outside the Philippines
b.The gain is not subject to Philippines
tax since Juan is a resident alien
c.The gain is subject to Philippine tax
because Juan is a resident alien
d.The gain is subject to Philippine tax
because the property is in the
Philippines.
Multiple Choice-Problems
Beth negotiated a P1,000,000 non-
interest bearing promissory note to
Candy. Candy paid Beth P950,000.On
due date, Beth paid Candy
P1,000,000.Which is true?
a.Beth earned P50,000 return on capital
b.Candy earned P50,000 return on
capital=
c.Candy received P50,000 donation
d.Candy received P1,000,000 return of
capital
Problem 3-2
Andrew received a total sum of P42,000
from his employer consisting of the
following
-P5,000 reimbursements for employer’s
expenses paid by Andrew
-P15,000 payment of Andrew’s
computer set purchased by the
employer
-P22,000 monthly salary
Andrew’s computer set cost him
P12,000. Compute the total return on
capital which can be subjected to c.P60,000=
income tax d.P0
a.P42,000 Problem 3-7
b.P37,000 Alexander Company insured the life of
c.P25,000= its president for P2,000,000. A total of
d.P22,000 P500,000 in premiums was paid before
Problem 3-3 the president died. The company
Betty paid P20,000 annual premium on collected the total proceeds.
a life insurance contract which would Compute the return on capital
pay her P1,000,000 in case of her death, a.P0=
After paying for 4 years. Betty assigned b.P1,500,000
the policy to Carlos for P120,000. c.P500,000
Compute the return on capital d.P2,000,000
a.P42,000 Problem 3-8
b.P37,000 Onyoc insured his newly constructed
c.P25,000= building costing P1,000,000. Within a
d.P22,000 few days, the building was totally
Problem 3-3 destroyed by a fire. The insurance
Betty paid P20,000 annual premium on company reimbursed Onyoc
a life insurance contract which would P1,500,000,which represents the fair
pay her P1,000,000 in case of her value of the building.
death. After paying for 4 years, Betty Which statement is false?
assigned the policy to Carlos for a.P1,000,000 of the proceeds is a return
P120,000. Compute the return on of capital
capital b.P500,000 of the proceeds is a return
a.P120,000 on capital
b.P80,000 c.P1,500,000 is a return of capital=
c.P40,000= d.Only A and B
d.P0 Problem 3-9
Problem 3-4 Guilbert is worried that his entire
Becky purchased a P1, 500,000 life potato plantation which is expected to
insurance policy for P100,000. During yield P400,000 income will be totally
the year, Becky died and heir heirs devastated by bad weather conditions.
collected the entire proceeds. How He obtained a P300,000 crop insurance
much of the proceeds is exempt from cover for P30,000. Just before harvest, a
income tax? rare frost totally destroyed Guilbert’s
a.P1,500,000= plantation. The insurance company paid
b.P1,400,000 the policy proceeds.
c.P100,000 Compute the total recovery of loss
d.P0 profits to be recognized by Guilbert as
Problem 3-5 income
Dan purchased the P1,000,000 life a.P0
insurance policy of Ben for P120,000. b.P100,000
Dan paid the P20,000 annual premium c.P300,000=
on the policy for 4 years after which ben d.P370,000
died.Compute the total return on Problem 3-10
capital for Dan. Felix sells hot-chilli flavored using
a.P1,000,000 pancakes using a secret formula he
b.P880,000 patented. He sued a competing pancake
c.P800,000= house for alleged patent infringement
d.P0 and claimed a total indemnity f
Problem 3-6 P1,200,000.
Carlos paid P20,000 annual premium *P1,000,000 for loss of profits from loss
for a P1,000,000 life insurance policy. of sales
After 7 years, Carlos surrendered the *P200,000 as Attorney’s fee
policy and was paid by the insurance reimbursement
company P200,000 which represents If Felix wins the case and is awarded the
the cash surrender value of the policy. total indemnity, compute his total
Compute the return on capital return of capital
a.P1,000,000 a.P1,000,000
b.P860,000 b.P800,000
c.P0
d.P200,000=
Problem 3-11
Henson was one of the passengers of a
van that fell off a ravine. Henson sued
the bus company and was awarded an
indemnity of P800,000 for the
following:
a.P500,000 for the impairment of his
health resulting to the amputation of
his legs
b.P200,000 for his loss of salaries during
hospitalization
c.P100,000 for his attorney’s fees
Copmute Henson’s return on capital
a.P800,000
b.P300,000
c.P200,000=
d.P0
Problem 3-12
Jake sued an unscrupulous person for
derogatory remarks which he
considered to have besmirched his
reputation. The court awarded him an
indemnity of P1,000,000 inclusive of
P200,000 reimbursement for Attorney’s
fees and P100,000 exemplary damages.
Compute Henson’s total return on
capital
a.P1,000,000
b.P800,000
c.P700,000
d.P0=
Problem 3-13
Kendrick received the following items
during the year:
-P200,000 donation from a girlfriend
-P100,000 service fee from professional
services
-P300,000 inheritance from his
deceased father
-P100,000 income from illegal gambling
-P50,000 gain on sale of his personal car
-P250,000 profits from his bar
restaurant
Compute the total income subject to
income tax
a.P1,050,000
b.P750,000
c.P550,000
d.P500,000=
Problem 3-14
Pines Corporation has a branch in
Manila and a 70% owned subsidiary,
Choco Hills, Inc. in Davao. The following
data shows Pines Corporation’s sales
transactions during the year:
-Pines Corporation billed the Manila
branch P1,500,000 for merchandise
shipped to the latter at a mark-up of
50% above acquisition costs. The
branch stored the merchandise and did a.P1,800,000 b.P200,000=
not operate during the year. b.P1,550,000 c.P300,000
-Sold merchandise to unrelated parties c.P200,000 d.P500,000
at a gain of P800,000. d.P250,000= Problem 3-22
-Sold merchandise to Darrel Asuncion, Problem 3-17 A non-resident citizen is an
Pines Corporation’s controlling A condominium home owner’s international financier who earned
stockholder at a gain of P100,000 association collects dues from unit P400,000 interest income from resident
-Sold various merchandise to Choco holders and remits the same to service debtors and P300,000 from foreign
Hills, Inc. at a gain of P200,000 providers on their behalf. Such dues debtors. How much is subject to
Compute the total income of Pines include electricity, water, security, and Philippine income tax?
Corporation subject to income tax? maintenance. The association unit a.None
a.P1,700,000 holders an additional 2% of their utility b.P300,000
b.P1,200,000 bills as service charge. c.P400,000=
c.P1,100,000= During the year, the association d.P700,000
d.P900,000 processed utility bills for unit holders Problem 3-23
Problem 3-15 totaling P5,000,000 Sarah has the following items of
Denver is a supervisory employee of How much taxable income is realized by income:
Atlantis Corporation. He had the the association? P
following items of gross income during a.P5,000,000 hilippines Abroad
the year: b.P4,900,000 Business income
-Denver was paid P800,000 salaries c.P100,000= P200,000
-Denver’s P100,000 personal loan was d.P0 P100,000
paid by Atlantis Corporation as reward Problem 3-18 Professional fees
for his excellent performance Kenny used to bet in PCSO lotto. On 100,000
-Denver’s P50,000 advances to the June 3,2014, he won the P20,000,000 50,000
company was paid by Atlantis’ chief jackpot prize from the 6/45 lotto. One Compensation Income
executive officer as a gift P20-ticket out of 10 bets took the prize. 400,000
-Denver is entitled to excess How much is Kenny’s total income -
representation and transportation subject to tax? Rent Income
allowances. Denver received P200,000 a.P20,000,000 300,000
total allowance out of which P120,000 b.P19,999,990 200,000
was disbursed by him. c.P19,999,900 Interest Income
Compute Denver’s total income subject d.P0= 30,000
to income tax Problem 3-19 40,000
a.P980,000= An American citizen has been staying in 1.Assuming Sarah is a resident citizen,
b.P900,000 the Philippines since August compute the total income subject to
c.P880,000 15,2013.What would be his taxpayer Philippine income tax.
d.P800,000 classification for the year 2013 and a.P390,000
Problem 3-16 2014, respectively? b.P1,180,000
Jen is engaged in business. The a.Non-resident alien engaged in trade c.P1,030,000
following pertains to her transactions or business; resident alien d.P1,420,000=
during 2014: b.Non-resident alien not engaged on 2.Assuming Sarah is a resident alien,
-Sold his personal car which was trade or business; resident citizen compute the total income subject to
purchased at P200,000 to a friend who c.Non-resident alien engaged in trade Philippines income tax
paid only half of the car’s P500,000 or business; resident citizen a.P1,420,000
current fair value. d.Non-resident alien not engaged in b.P1,180,000
-Sales of merchandise was P800,000 trade or business; resident alien= c.P1,030,000=
and the cost of goods sold was Problem 3-20 d.P390,000
P600,000 A citizen who left the Philippines on 3.Assume Sarah is a resident
March 1,2013 would be classified as corporation, compute the total income
-Jen acquired several stocks from the a.Non-resident for the year 2013.= subject to Philippine income tax.
Philippine Stock Exchange for b.Resident citizen for the year 2013. a. P1,420,000
speculation.These stocks have an c.Non-resident for the year 2014 b.P1,030,000=
aggregate purchase price of P400,000 d.Resident citizen for the year 2014. c.P1,180,000
but with P700,000 fair value by Problem 3-21 d.P390,000
December 31,2014. An alien received P200,000 4.Assuming Sarah is a domestic
-Jen’s house and lot which he acquired compensation income in the Philippines corporation, compute the total income
for P1,500,000 in 2010 now have a and P300,000 rental income from subject to Philippines income tax
current fair value of P2,500,000. abroad. How much will be subject to a. P390,000
Compute Jen’s total income subject to Philippine income tax? b.P1,030,000
income tax a.None c.P1,180,000
d.P1,420,000=
Case Problems
Case Problem 1
Jaypee has the following income in
2017:
 P10,000 interest income from a
non-resident Japanese friend
 P40,000 interest income from
Philippine residents
 P500,000 rent income from a
commercial complex located in
the USA which is leased to
resident Filipinos
 P200,000 rent income from a
boarding house in Baguio City,
Philippines
 P200,000 professional fees
rendered to Chinese clients in
Hongkong
 P300,000 salary from a resident
employer
 P100,000 gain from sale of
merchandise imported and sold
to Filipino residents
 P50,000 gain from sale of
merchandise imported and sold
during business travel in
Hongkong
 P400,000 gain on sale of the
boarding house located in
Baguio City to a non-resident
buyer
Required:
Compute the total income
earned from sources
1.Within the Philippines-
P1,040,000
2.Outside the Philippines-
P760,000
Case Problem 2
Joy earns franchise fees from his
Hot burger franchise. He also
deals in various properties.
Johnny realized the following
gains in 2017:
 P500,000 royalty fees from local
Hot Burger outlets
 P200,000 royalty fees from
foreign Hot Burger outlets
 P100,000 gain from sales of
equipment to foreign
franchisees
 P200,000 gain from sales of
equipment to local franchisees
 P50,000 gains from sale of
investment in domestic stocks to
foreign investors
 P40,000 gains from sale of
investments in foreign stocks to
Filipino investors
Required:
Compute the total income
earned from sources
a.Within the Philippines-750,000
b.Without the Philippines-
340,000
Case Problem 3:
TC Company manufactures
wooden furniture for the local
and export market. It has a
distribution outlet abroad which
handles foreign sales. It bills all
customers, including the foreign
outlet, 70% above
manufacturing costs. The
foreign outlet bills its customers
100% above TC Company’s
billing price. TC Company
reports P3,400,000 in total sales,
exclusive of sales to the foreign
outlet. The foreign outlet
reports P2,720,000 total sales to
customers
Compute the manufacturing
income,respectively earned
within and earned without the
Philippines
a. P1,960,000; P1,360,000
b. P1,400,000;P1,360,000
c. P840,000;P1,920,000
d. d.P840,000;P1,360,000
CHAPTER 4 INCOME TAX
SCHEMES, ACCOUNTING
PERIODS, ACCOUNTING
METHODS, AND REPORTING
Chapter Overview and
Objectives
This chapter provides and
overview of the income tax
schemes under the NIRC.
After this chapter, readers are
expected to gain familiarization
and demonstrate mastery of the
following:
a. Types of taxation schemes
and their scope
b. Concept of accounting
period and its types
c. Concept of accounting
methods and their
accounting procedures
d. Types of tax returns, their
deadline and place of filing
INCOME TAXATION SCHEMES
There are three income taxation
schemes under the NIRC:
a.Final income taxation
b.Capital gains taxation
c.Regular income taxation
An item of gross income is taxable in
any of these taxa schemes:
Items of gross income-Taxable to any
one of:Final income taxation, capital
gains taxation and regular income
taxation
Mutually exclusive coverage
The tax schemes are mutually exclusive.
An item of gross income that is subject
to tax in one scheme will not be taxed
by the other schemes. Similarly, items
of income that are exempted in one
scheme are not taxable by the other
schemes.
CLASSIFICATION OF ITEMS OF GROSS
INCOME
Because of the different tax schemes,
items of gross income can be classified
as follows:
1.Gross income subject to final tax
2.Gross income subject to capital gains
tax
3. Gross income subject to regular tax
*Readers are advised to master the
coverage of both final income tax and
capital gains tax. A thorough
understanding of these exceptional tax
treatments is very essential to our
masters of Income Taxation
FINAL INCOME TAXATION
Final income taxation is characterized
by final taxes where taxes are withheld
or deducted at sources. The taxpayer
receives income net of tax. The payor of
income remits the tax to the
government. Final taxation is applicable
only to certain passive income. Not all
passive income is subject to final tax.
Passive Income vs. Active Income
Passive income are earned with very
minimal or even without active
involvement of the taxpayer in the
earning process.
Examples of passive income
a.Interest income from banks
b. Dividends from domestic
corporations
c.Royalties
Active or regular income arises from
transactions requiring a considerable
degree of effort or undertaking from
the taxpayer. It is the direct opposite of
passive income.
Examples of active income
1.Compensation income
2.Business income
3.Professional income
Final income taxation will be discussed
in Chapter 5
CAPITAL GAINS TAXATION
A capital gains tax is imposed on the
capital gain on the sale, exchange and
other disposition of certain capital
assets. Also, not all capital gains are
subject to capital gains tax. Most of
them are subject to regular income tax.
Capital assets vs ordinary assets
Capital assets include all other assets
than ordinary assets. Ordinary assets
are assets directly used in the business,
trade or profession of the taxpayer such
as inventory, supplies and items of
property, plant and equipment.
Capital gains vs. ordinary gains
Capital gains arise from the sale,
exchange and other disposition of
capital assets. Ordinary gains arise from
the sale, exchange and other
disposition of ordinary assets.
The NIRC identifies capital gains tax as a
final tax but they are not actually final
tax similar to those imposed under final
income taxation. The taxpayer still files
a capital gains tax return to report the
gain to the government and pay the
corresponding tax. Capital gains
taxation applies only to two types of
capital assets: domestic stocks and real
property.
Capital gains taxation will be discussed
in detail in Chapter 6.
REGULAR INCOME TAXATION
The regular income taxation is the
general rule in income taxation and
covers all other income such as:
1.Active income
2.Gains from dealings in properties
a.Dealings in ordinary assets
b.Dealings in other asset not subject to
capital gains tax
3.Other income, active or passive, not
subject to final tax
Items of gross income from these
sources are measured using an
accounting method, accumulated over
an accounting period, and reported
through an income tax return.
ACCOUNTING PERIOD
Accounting period is the length of time
over which income is measured and
reported.
TYPES OF ACCOUNTING PERIODS
1.Regular accounting period-12 months
in length
a.Calendar
b.Fiscal
2.Short accounting period-less than 12
months
Calendar year
The calendar accounting period starts
from January 1 and ends December 31.
This accounting period is available to
both corporate taxpayers and individual
taxpayers.
Under the NIRC, the calendar year shall
be used when the:
1.taxpayer’s annual accounting period is
other than fiscal year
2.taxpayer has no annual accounting
period
3.taxpayer does not keep books
4.taxpayer is an individual
Fiscal year
A fiscal accounting period is any 12-
month period that ends on any day
other than December 31. the fiscal
accounting period is available only to
corporate income taxpayers and is not
allowed to individual income taxpayers.
Deadline of Filing of the Income tax
return
Under the NIRC, the return is due for
filing on the fifteenth day of fourth
month following the close of the
taxable year of the taxpayer. The regular
tax due is payable upon filing of the
income tax return.
Illustration:Due date of the annual
income return
1.Taxpayers under the calendar year
must file their annual income tax return
for the current period not later than
April 15 of the following year.
2.A corporate taxpayer with fiscal year
ending June 30,2014 must file its
annual income tax return not later than
October 15, 2014.
INSTANCES OF SHORT ACCOUNTING
PERIOD
1.Newly commenced business-The
accounting period covers the date of
the start of the business until the
designated year-end of the business.
Illustration
Palawan Inc. started business operation
on June 30,2014 and opted to use the
calendar year accounting period.
Palawan should file its first income tax
return covering June 30 to December
31, 2014 for the year 2014. The return
must be filed on or before April 15,
2015.
2.Dissolution of business-The
accounting period covers the start of
the current year to date of dissolution
of the business.
Illustration
Tawi-Tawi Inc. is on the fiscal year of
accounting period ending every March
31. It ceased business operation on
August 14, 2014.
Tawi-Tawi should file its last income tax
return covering April 1 to August 15,
2014.
Under the old NIRC, dissolving
corporations shall file their return
within 30 days from the cessation of
activities or 30 days from the approval
of merger by the Securities and
Exchange Commission in the case of
merger. (BPI VS. CIR, GR 144653, August
28,2011).Hence, the return shall be
filed on or before September 15, 2014.
For individuals, the return shall be due
on or before April 15, 2015. There is no
requirement for early filing under the
NIRC.
3.Change of accounting period by
corporate taxpayers-The accounting
period covers the start of the previous
accounting period up to the designated
year-end of the new accounting period.
Note the BIR approval is required in
changing an accounting period. It is not
automatic.
Illustration 1
Effective February, 2014, Sulu
Corporation changed its calendar
accounting period to a fiscal year
ending every June 30.
Sulu Corporation shall file an
adjustment return covering the income
from January 1 to June 30, 2014 on or
before October 15, 2014.
Illustration 2
Effective August 2014, Zamboanga
Company changed its fiscal year
accounting period ending every June 30
to the calendar year.
Zamboanga Company should file an
adjustment return covering July 1 to
December 31,2014 or before April 15,
2015.
4.Death of the taxpayer-The accounting
period covers the start of the calendar
year until the death of the taxpayer
Illustration
Mr. Jacob died on November 2, 2014.
The heirs of Mr. Jacob or his estate
administrators or executors shall file his
last income tax return covering his
income from January 1 to November 2,
2014. Hence, the income tax return
shall be filed early filing in case of death
of taxpayers. Hence, the income tax
return shall be filed on or before the
usual deadline, April 15, 2015.
5.Termination of the accounting period
of the taxpayer by the Commissioner of
Internal Revenue-The accounting period
covers the start of the current year until
the date of the termination of the the future period they expire or are Payment of accrued expenses of 2015
accounting period. used in the business, trade, or - 100,000
Illustration profession of the taxpayer. Payment of expenses of the following
The accounting period of a taxpayer Normally, the expensing of year 200,000 300,000
under the calendar year basis was prepayments does not properly reflect
terminated by the CIR on August 2, the income of the taxpayer. It also Tax Accrual Basis
2014. contradicts the Lifeblood Doctrine as it
The taxpayer must file an income tax effectively defers the recognition of 2015 2016
return covering January 1 to August 2, income. Cash Income
2014. The income tax return and the tax 3.Special tax accounting requirement P500,000 P800,000
shall be due and payable immediately. must be followed Accrued Income
ACCOUNTING METHODS There are cases where the tax law itself 500,000 400,000
Accounting methods are accounting provides for a specific accounting Collection for future services-advances
techniques used to measure income. treatment of an income or expense. The 300,000 200,000
Types of Accounting Methods specified method must be observed Total gross income
1.The general methods even it departs from the basis regularly P1,300,000 P1,400,000
a.Accrual basis employed by the taxpayer in keeping his Less:Deductions
b.Cash basis books. Cash expenses
2.Installment and deferred payment The accrual basis income is determined P400,000 P600,000
method as follows: Accrued expenses
3.Percentage of completion method Cash income Pxx 100,000 150,000
4.Outright and spread-out method Accrued (uncollected) income xx Amortization of 2015 prepaid expense
5.Crop year basis Advanced income xx - 200,000
General Methods for Income from sale Gross income Pxx Total deductions
of goods or services The tax accrual basis expense is P500,000
1.Accrual basis determined as follows: P950,000
Under the accrual basis of accounting, Cash expenses Pxx Net Income
income is recognized when earned Accrued(unpaid expense) xx P800,000
regardless of when received. Expense is Amortization of prepayments and P450,000
recognized when incurred regardless of depreciation of capital expenditures xx Points to consider in converting GAAP
when paid. Deductions Pxx Accrual Basis to Tax Accrual Basis
Income is said to have accrued when The tax cash basis income is determined 1.In accounting accrual basis income is
the right to receive is established or as follows: recognized when earned even if not yet
when an enforceable right to secure Cash income PXX received. Advanced income is
payment is created against the Advanced income XX inherently not included in net income.
counterparty. Gross Income PXX For purposes of taxation, advanced
2.Cash basis The tax cash basis expense is income is taxable. Hence, it must be
Under the cash basis of accounting, determined as follows: added to accrual basis gross income.
income is recognized when received Cash expenses Pxx 2.In accounting, expense is recognized
and expense is recognized when paid. Amortization of prepayments and when accrued even if not yet paid.
Tax and accounting concepts of accrual depreciation of capital expenditures Prepaid expenses are inherently not
basis and cash distinguished xx deducted. Hence, no adjustment for
The financial accounting concept of Deductions prepayments is necessary under accrual
accrual basis and cash basis are similar Pxx basis.
to their tax counterparts, except only Illustrations
for the following tax rules: A taxpayer providing services reported Tax Cash Basis
1.Advanced income is taxable upon the following in 2015 and 2016:
receipt. 20 2015 2016
Income received in advance is taxable 15 2016 Collection from services rendered
upon receipt in pursuant to the Collections from services rendered P500,000 P1,270,000
Lifeblood doctrine and the Ability to pay P500,000 P800,000 Collection for future services-advances
theory. The subsequent taxation of Accrued Income from services rendered 300,000 200,000
advanced income in the period earned 500,000 400,000 Total gross income
will expose the government to risk of Collection from accrued income of 2015 P1,300,000 P1,400,000
non-collection - 470,000 Less:deductions
2.Prepaid expense is non-deductible Collection for services not yet rendered Cash expenses
Prepaid expenses are advanced 300,000 200,000 P400,000 P700,000
payment for expense of future taxable Payment of expenses of current period Amortization of 2015 prepayments
periods. These are not deductible 400,000 600,000 - 200,000
against gross income in the year paid. Accrued expenses Total deductions
They are deducted against income in 100,000 150,000 P400,000 P900,000
Net Income
P400,000 P570,000
Note:P800,000+P470,000=P1,270,000;P
600,000+P100,000=P700,000
Points to consider in converting GAAP
cash basis to Tax cash basis
1.Under the accounting cash basis,
income is recognized when received not
when it is earned .Advanced income is
inherently recognized as income.
Hence, no adjustment is necessary on
income.
2.Under accounting cash basis, expense
is deducted when paid including
prepaid expenses, Hence, the deducted
prepaid expenses must be reversed for
purposes of taxation.
Sellers of goods
The gross income of taxpayers selling
goods is determined as follows:
Sales
Pxx
Less:Cost of goods sold
xx
Gross income
Pxx
The cost of sales is computed using the
inventory method:
Beginning inventory
Pxx
Add:Purchases
xx
Total goods available for sale
Pxx
Less:Ending inventory xx
Cost of goods sold
Pxx
The expensing of the purchase cost of
goods does not properly and fairly
reflect the income of the taxpayer
particularly when there are significant
fluctuations in inventory levels between
accounting periods. This could expose
the taxpayer to risk of BIR assessment.
The use of the accrual method is
suggested but of course subject to
practical and cost considerations.
Hybrid basis
The Hybrid basis is any combination of
accrual basis, cash basis, and or other
methods of accounting. It is used when
the taxpayer has several businesses
which employ different accounting
methods.
Illustration
Mr.Roxas has two proprietorship
business: a service business which used
cash basis and a trading business which
accrual basis.
The gross income as determined by Canlubang received a P200,000 cash
cash basis in the service business and downpayment and a P1,800,000
the gross income as determined by the promissory note for the balance
accrual basis in the trading business are payable in six installment of P300,000
simply combined. There is no every July 3 and January 3 thereafter.
requirement to measure the income of The selling price and gross profit on the
different businesses under a single sale is computed as follows:
accounting period. Cash downpayment P200,000
Sales of goods with extended payment Notes receivables 1,800,000
terms Selling price P2,000,000
The sale of goods with extended Less:Tax basis of machine sold
payment terms may be reported using 1,200,000
the accrual basis, installment method, Gross profit P800,000
or deferred payment method. Accrual basis
Installment method Under the accrual basis, the entire
Under the installment method, gross P800,000 gross profit shall be reported
income is recognized and reported is as gross income in 2016, the year of
proportion to the collection from the sale.
installment sales. Installment basis
Installment method is available to the Canlubang cannot readily use the
following taxpayers: installment method because it is a
1.Dealers of personal property of the dealer of cars rather than a dealer of
sale of properties they regularly sell machineries. The sale of properties of
2.Dealers of real properties, only if their which the seller is not a dealer is
initial payment does not exceed 25% of referred to as “casual sale”.Hence, the
the selling price. ratio of initial payment shall be tested
3.Casual sale of non-dealers in property, first.
real or personal, when their selling The initial payment of Canlubang can be
price exceeds P1,000 and their initial computed as follows:
payment does not exceed 25% of the Cash downpayment (January 3,2016)
selling price. P200,000
Initial payment First installment (July 3, 2016)
Initial payment means total payments 300,000
by the buyer, in cash or property, in the Initial payment
taxable year the sale was made. The P500,000
term “initial payment” is broader than Ratio of initial payment
downpayment. It also includes the (P500,000/P2,000,000) 25%
installment payments in the year of Canlubang can use the installment
sale. method. The contract price or the
Selling price amount due shall be determined next.
Selling price means the entire amount Since there is no mortgage assumed by
for which the buyer is obligated to the the buyer, the selling price is the
seller.It is computed as follows: contract price.
Cash received and/or receivable Pxx The gross profit will be reported in
Fair market value of property received gross income throughout the
or receivable xx installment period by the formula:
Mortgage or any indebtedness assumed (Collection/Contract price)xGross profit
by the buyer xx Canlubang shall recognize the following
Selling price gross income:
Pxx At the date of sale:
Contract price (P200k/P2MXP800,000)P80,000
The contract price is the amount Upon every installment:
receivable in cash or other property (P300k/P2MXP800,000) P120,000
from the buyer. It is usually the selling If Canlubang is a dealer in machinery, it
price in the absence of an agreement can avail of the installment method
whereby the debtor assumes even if the ratio of its initial payment
indebtedness on the property. over selling price exceeds 25% so long
Comprehensive illustration as the selling price of the installment
Canlubang Company, a car dealer, sold a sale exceeds P1,000.
machine with tax basis of P1,200,000 With indebtedness assumed by the
on installment on January 3, 2016. buyer
The application of the installment Upon every installment: Initial payment
method will slightly vary when the (P200,000/P1,000,000XP600,000) P500,000
buyer assumes indebtedness on the P120,000 Ratio of initial payment
property sold. Indebtedness assumed exceeds tax (P500,000/P2,000,000) 25%
In this case, the selling price is no basis of property sold The contract price shall be computed
longer the contract price. The contract When the indebtedness assumed by as:
price is the residual amount after the buyer exceeds the tax basis of the Selling price
deducting the mortgage from the property sold, the excess is an indirect P2,000,000
selling price. Thus, receipt realized by the seller. This is an Less:Mortgage assumed by the buyer
Selling price Pxx indirect downpayment which must be 1,500,000
Less:Motgage assumed by buyer xx added as part of the contract price and Cash collectible
Contract price Pxx the initial payment. Note also that P500,000
Illustration under this condition, all collection from Excess mortgage (P1,500,000-
On January 3, 2016, Tagaytay, Inc. a real the contract including the excess P1,300,000) 200,000
property dealer, sold a lot costing mortgage is a collection of income. Contract price
P1,400,000 for P2,000,000. The lot was The contract price shall be computed as P700,000
encumbered by a P1,000,000 mortgage follows:
which was assumed by the buyer. The Selling price Pxx Note that the gross profit on the sale is
buyer paid P20,000 downpayment. The Less:Mortgage assumed by buyer xx the same as the contract price. Hence,
balance is due over four installments of Cash Collectible Pxx any collection from the contract
P200,000 every July 3 and January 3 Add:Excess indebtedness-constructive including the excess mortgage shall be
thereafter. receipt xx recognized as gross income upon
The gross profit can be computed as Contract price collection.
follows: Pxx Canlubang shall recognize the following
Selling price P2,000,000 The initial payment shall be computed gross income:
less:tax basis of lot sold 1,400,000 as follows: At the date of sale
Gross profit P600,000 Downpayment (P200kdown+P100kexcess) P300,000
Note that dealers of real properties are Pxx Upon receipt of first installment-
subject to limitation on the use of Installment in the year of sale 12/31/2016 200,000
installment method. The ratio of initial xx Upon receipt of second installment-
payment shall be determined first. Excess of mortgage over tax basis 7/1/2017 200,000
January 3, 2016 cash downpayment xx Total gross profit on the contract
P200,000 Initial payment P700,000
June3, 2016 installment Pxx Deferred payment method
200,000 Illustration The deferred payment method is a
Initial payment On July 1,2016, a taxpayer made a variant of the accrual basis and is used
P400,000 casual sale of property with a tax basis in reporting income when a non-
Ratio of initial payment of P1,300,000 for P2,000,000. The interest bearing note is received as
(P400,000/P2,000,000) 20% property was subject to a P1,500,000 consideration in a sale.
Tagaytay is qualified to use the mortgage which was agreed to be Under the deferred payment method,
installment method. The contract price assumed by the buyer. The buyer paid a the gross income is computed based on
should be determined next. P100,000 down payment with the the present value(discounted value) of
Selling price balance due in two installments of a note receivable from the contract. The
P2,000,000 P200,000 on December 31,2016 and discount interest on the note is
Less:Motgage assumed by the buyer July 1,2017. amortized (i.e., spread) as interest
1,000,000 The gross profit on the sale is income over the installment term.
Contract price determined as follows: Illustration
P1,000,000 Selling price On December 31, 2015, a taxpayer sold
Alternatively, the contract price can be P2,000,000 an office building costing P1,400,000 for
computed directly as follows: Less:Tax basis of property sold P2,000,000. The buyer made
Cash downpayment 1,300,000 P1,000,000 downpayment and the
P200,000 Gross profit balance, evidence by a note is due in 2
Collectible balance(P200,000x4 P700,000 annual installments of P500,000 every
installments) 800,000 The initial payment shall be determined December 31 starting December
Contract price first: 31,2016.
P1,000,000 Downpayment Note that the installment method
Tagaytay shall recognize the following P100,000 cannot be allowed since the ratio of
gross income: December 31, 2016 installment initial payment is already 50%
At the date of sale: 200,000 (P1,000,000/P2,000,000)
(P200,000/P1,000,000XP600,000) Excess mortgage (P1,500,000- Assume the note is non-interest bearing
P120,000 P1,300,000) 200,000 but can be discounted at a local bank
for P900,000.Under the deferred income upon completion of the
payment method, the reportable gross 2015 2016 improvement in 2016.This is not income
income for each year shall be: Contract price in its totality, but this is the amount
P5,000,000 P5,000,000 referred to by the regulation.
2015 2016 2017 Multiply by:% of completion Spread-out method
Cash downpayment 70% 100% The depreciated value of the property
P1,000,000 Construction revenue at the termination of the lease is the
Present value of the note P3,500,000 P5,000,000 value of the years of usage of the lessor.
900,000 Less:Construction revenue in prior year This can be computed by splitting the
Selling price - 3,500,000 value of the improvement as follows:
P1,900,000 Construction revenue this year User Years of usage
Less:Tax basis of the property P3,500,000 P1,500,000 Allocation Cost
1,400,000 Less:Expense during the year -Lessee 20 20/30
Gross income 3,000,000 1,200,000 XP4,500,000 P3,000,000
P500,000 Construction gross income -Lessor 10 10/30
Interest income (P1,000,000-P900,000) P500,000 P300,000 XP4,500,000 1,500,000
P50,000 P50,000 Income from Leasehold Improvement Total 30
Note: Leasehold improvements are tangible P4,500,000
1.The difference between the face value improvements made by the lessee to Under the spread-out method,
and the present value of the note, the property of the Anderson shall spread the P1,500,000
known as discount, will not be lessor.Improvements will benefit the income over 20 periods or recognize an
recognized in gross income at the date lessor when their useful life extends annual income of P75,000 from the
of sale but will be deferred and beyond the lease term. This benefit is leasehold improvement from year 2016
recognized as interest income referred to as income from leasehold through year 2035.
2.The discount is amortized as interest improvement. Note to the readers
income upon every collection on the Under Revenue Regulations No. 2, the It should be pointed out that this rule
balance of the note as follows income from leasehold improvement only in regulation and is absent in the
:P500,000 installment/P1,000,000 total can be reported using either of the NIRC.Some taxpayers are questioning its
note balance XP100,000 discount following method at the option of the validity pointing out lack of legal basis.
In the case of interest-bearing notes, taxpayer: However, it is fairly proper to consider
the use of the deferred payment a.Outright method the depreciated value of the
method bear the same results as the The lessor may report as income the improvement that remains to the lessor
accrual basis of accounting fair market value of such buildings or upon termination of the lease as
The percentage of Completion method improvements subject to the lease at income because it is an actual benefit
for Construction Contracts the time when such buildings or to the lessor. These are, in effect,
Under the percentage of completion improvements are completed. additional rental consideration in kind.
method, the estimated gross income b.Spreadout method However, the treatment specified by
from construction is projected based on The lessor may spread over the life of the outright method is perceived as
the percentage of completion of the lessee the estimated depreciated unjust and abusive, and is improper
construction project. value of such buildings or introduction of legislation.
There are several methods of improvements at the termination of the The depreciated value of the
estimating project completion in lease and report as income for each improvement at the termination of the
practice, but the output method based year of the lease an aliquot part lease should be proper value to be
on engineering survey is prescribed by thereof. recognized as gross income under the
the NIRC. The depreciated value of the leasehold outright method. This view is supported
Illustration improvement is computed as: by the fact that the spread-out method
In 2015, Cagayan Construction Cost of improvementxExcess useful life could not have been an option if the
Company accepted a P5,000,000 fixed- over lease term/Useful life of the outright method intended to tax the
price construction contract. The improvement entire fair value of the improvement
following shows the details of its Illustration considering the huge disproportion in
construction activities: On January 1, 2016, Anderson leased a the reportable gross income in the two
vacant lot to Greg under a 20-year lease options.
2015 2016 contract. Greg immediately constructed The outright method as mandated by
Construction expenses a building on the lot at a total cost of the regulation will best apply in cases
P3,000,000 P1,200,000 P4,500,000. The building has a useful where lessees pay the lessor rentals in
Engineer’s estimate of completion life of 30 years. the form of leasehold improvements or
70% 100% Outright method when leasehold improvements made by
The reportable gross income on Under the plain wordings of section 49 lessees are treated as reductions to
construction will simply be computed as of Revenue Regulations No.2, Anderson cash rentals.
follows: shall recognize the entire P4,500,000 In such cases, the fair value of the
fair value of the improvement as gross leasehold improvements upon
completion is unquestionable income to Under the NIRC, the change in returns are also subject to penalties,
the lessor for taxation purposes. accounting methods by any taxpayer fines and or imprisonment.
Farming income and the change in accounting period by MODE OF FILING INCOME TAX RETURNS
Farming income is commonly corporate taxpayers require prior BIR 1.Manual Filing System
recognized using the cash basis or notice. The traditional manual system of filing
accrual basis. However, long-term crops INCOME TAX REPORTING income tax return is by paper
or those that take more than one year THE SELF-ASSESSMENT METHOD documents where taxpayers fill up BIR
to harvest may be accounted for under In preparing their tax return, taxpayers forms to report income, expenses, or
the crop year basis. declare their income and expenses, and any declaration required to be filed with
Crop year basis personally determine the tax due the BIR.
Under the crop year basis, farming thereon. The government relies on the Under the NIRC, the income tax return
income is recognized as the difference good faith of taxpayers in the shall be filed to the following, in
between the proceeds of harvest and preparation of their tax returns but descending order of priority, within the
expenses of the particular crop employs detective techniques to revenue district office where the
harvested. The expenses of each crop ascertain non-compliance or under- taxpayer is registered or required to
are accumulated and deducted upon compliance register:
the harvest of the crop. Types of income tax-related returns 1.An authorized agent bank
Illustration filed to the government 2.Revenue Collection Officer
Juan de la Cruz, a farmer, plants a 1.Income tax returns. 3.Duly authorized city or municipal
certain crop that takes more than a year 2.Withholding tax returns treasurer
to harvest. Juan had the following data 3.Information returns 2.e-BIR Forms
on his farming operations: Types of income tax return The BIR introduced the e-BIR forms
1.Capital gains tax return which come with an offline and online
2015 2016 2017 2.Regular income tax return versions. Taxpayers fill up their income
Proceeds of harvest P- THE WITHHOLDING SYSTEM tax returns in electronic spreadsheets
P750,000 P1,000,000 Aside from the income tax return, the without the need of writing on paper
st
1 cropping expenses government also requires taxpayers to returns. The system ensures
400,0000 200,000 withhold (i.e., deduct) taxes on their completeness of data on the return and
- income payments (i.e., expenses). is capable of online submission. If there
2nd cropping expenses These withheld taxes are called are no penalties that require BIR
- 500,0000 300,000 “withholding tax”.The taxpayer must assessments, taxpayers would have to
The reportable farming income using deduct the withholding tax on his print a hard copy of the filled tax
crop year method would be: income payments, file a withholding tax returns and proceed directly to the
return, and remit the withheld tax to bank for payment.
2015 2016 2017 the government. 3.Electronic Filing and Payment System
Proceeds of harvest Non-compliance to the withholding tax (Efps)
- P750,000 rules shall expose the taxpayers The Efps is a paperless tax filing system
P1,000,000 penalties and fines aside from the developed and maintained by the
Less:Cropping expenses disallowance of the expense as BIR.Taxpayers file tax returns including
Incurred last year deduction against income. attachments in electronic format and
400,000 500,000 Types of withholding tax pay the tax through the internet.
Incurred this year a.Final withholding tax Taxpayers mandated to use the Efps
200,000 300,000 b.Creditable withholding tax 1.Large taxpayers duly notified by the
Farming gross income Final withholding taxes are the full taxes BIR
P150,000 P200,000 upon the income of the recipient. The 2.Top 20,000 private corporations duly
Crop year basis is an accounting recipient will not pay additional taxes notified by the BIR
method and is not an accounting are advance taxes. The recipient of the 3.Top 5,000 individual taxpayers duly
period. income payments must report the notified by the BIR
Use of different accounting methods income in his income tax returns claim 4.Taxpayers who wish to enter into
Taxpayers with more than one type of the creditable withholding tax withheld contracts with government offices
business using different accounting as tax credit against his tax due. 5.Corporations with paid-up capital of
methods can consolidate the income INFORMATION RETURNS P10,000,000
reported using the different methods. Certain taxpayers are also required to 6.PEZA-registered entities and those
There is no need to restate the income file information returns to the located within Special Economic Zones
to a common accounting method. government. These information returns 7.Government offices, in so far as
However, the methods applied to each do not involve any payment or remittance of withheld VAT and
business should be applied consistently withholding of tax but essential to the business tax are concerned.
from period to period. government in its tax mapping efforts 8.Taxpayers included in the Taxpayer
and in its evaluation of tax compliance. Account Management program (TAMP)
Change in Accounting Methods and Non-filing of required information 9.Accredited importers, including
Accounting Periods prospective importers required to
secure the Importers Clearance
Certificate (ICC) and Custom brokers
Clearance Certificate(BCC)
In case of unavailability of the Efps
during maintenance or instances of
technical errors, Efps enrolled taxpayers
may file manually.
GROUPING OF TAXPAYERS UNDER EFPS
1.Group A
a.Banking Institutions
b.Insurance and pension funding
c.Non-bank financial intermediation
d.Activities auxiliary to financial
intermediation
e.Construction
f.Water transport
g.Hotels and restaurants
h.Land transport
2.Group B
a.Manufacture and repair of furniture
b.Manufacture of basic metals
c.Manufacture of chemicals, and
chemical products
d.Manufacture of coke, refined
petroleum, and fuel products
e.Manufacture of electrical machinery,
and apparatus NEC
f.Manufacture of fabricated metal
products
g.Manufacture of foods, products, and
beverages
h.Manufacture of machineries,
precision, and optical instruments
i.Manufacture of medical, precision,
and optical instruments
j.Manufacture of motor vehicles,
trailers, and semi-trailers.
k.Manufacture of office, accounting,
and computing machineries
l.Manufacture of other non-metallic
mineral products
m.Manufacture of other transport
equipment
n.Manufacture of other wearing
apparel
o.Manufacture of papers, and paper
products
p.Manufacture of radio, TV, and
communication equipment, and
apparatus
q.Manufacture of rubber and plastic
products
r.Manufacture of textiles
s.Manufacture of tobacco products
t.Manufacture of wood and wood
products
u.Manufacturing N.E.C.
v.Metallic ore Mining
w.Non-metallic mining and quarrying
3.Group C
a.Retain sale
b.Wholesale trade and commission PENALTIES FOR LATE FILING OR
trade PAYMENT OF TAX
c.Sale, maintenance, repair of motor The late filing and payment of taxes is
vehicle, and sale of automotive fuel subject to the following additional
d.Collection, purification, and charges:
distribution of water 1.Surcharge
e.Computer and related activityes a.25% of the basic tax for failure to file
f.Real estate activities or pay deficiency tax on time
4.Group D b.50% for willful neglect to file and pay
a.Air transport taxes
b.Electrcity, gas, stream, and hot water The non-filing is considered “willful
supply neglect” if the BIR discovered the non-
c.Postal and telecommunications filing first. This is the case when the
d.Publishing, printing, and reproduction taxpayer received a notice from the BIR
of recorded media to file return. If the taxpayer filed a
e.Recreational, cultural, and sporting return before the receipt of such notice,
activities the same is considered simple neglect
f.Recycling subject to the 25% surcharge.
g.Renting out of goods and services 2.Interest-20% per annum considering
h.Supporting and auxiliary transport the following period factor:
activities. Delay
5.Group E Period factor
a.Activities of membership For everyday of delay
organizations Inc. Number of days/365 days
b.Health and social work For every month of delay
c.Private eeducational services Number of months/12
d.Puclic administration and defense For everyyear of delay 1
compulsory social security Note:
e.Public educational services a.The period factor shall be multiplied
f.Research and development by 20% interest rate to get interest
g.Agriculture, hunting, and forestry factor which will be multiplied to the
h.Farming of animals tax due to compute the interest penalty
i.Fishing b.A 30-day period in a month is
j.Other service activities considered 1 month (i.e. March 1 to
k.Miscellaneous business activities March 31), but the 1-day excess on 31-
l.Unclassified activities day month is ignored.Hence, March 15
PAYMENT ON INCOME TAXES to April 15 is still 1 month on interest if
The capital gains tax and regular income March has 31 days.
tax are paid as the taxpayer files his These rules were deducted after careful
return. Installment payment of income examination of the illustrative
tax is allowed on certain conditions. guidelines on interest penalty
Taxpayers under the EFPS system shall calculation under RR12-99
e-pay their tax online through the Illustration 1
internet banking service. The account of The tax return of the taxpayer was due
the taxpayer will be auto-debited for on April 15,2017 but was filed on June
the amount of taxes to be paid. 30, 2017. The tax return of the taxpayer
BASIC COMPARISON OF FILING AND amounts to P100,000.
PAYMENT SYSTEMS April 15,2017 to June 15, 2017 is 2
months;June 15 to June 30 is 30 days.
Manual e-BIR Forms Hence, the period factor shall be
Efps (2/12+15/365) or 0.2077626. The
Data entry interest factor shall be 0.2077626 x 20%
Manual Electronic or 0.041555252. The interest penalty
Electronic shall be computed as
Filing/Submission P100,000x0.04155252=P4,155.25.
Manual Electronic This may be computed directly as .
Electronic 2077626x20%XP100,000.
Tax payment Illustration 2
Manual Manual A taxpayer with a tax due of P100,000
Electronic late filed on July 31, 2017. The deadline
of the return was on April 15, 2016.
April 15,2015 to April 15,2017 is 1 year. of income tax in Appendix 4 for your
April 15,2017 to July 15, 2017 is 3 reference.
months.July 15 to July 31 is 16 days. PENALTIES FOR NON-FILING OR LATE OF
Hence, the period factor shall be INFORMATION RETURN
(1+3/12+16/365) or 1.2938356 For each failure to file a separate
XP100,000.The interest penalty shall be information return, statement of lists,
P25,876. or keep any record, or supply any
3.Compromise Penalty information required by the Code or by
Compromise penalty is an amount paid the Commissioner on the date prescribe
in lieu of criminal prosecution over a tax therefor, unless it is shown that such
violation. failure is due to reasonable cause not to
The schedules of compromise penalty willful neglect, shall be subject to a
related to income taxes are included in penalty of P1,000 for each failure.
Appendix 4 for your reference. Provided that the amount imposed for
INTEGRATIVE ILLUSTRATION all failure during a calendar year shall
An individual taxpayer filed his 2014 not exceed P25,000.00
income tax return with a computed tax CHAPTER 4:SELF-TEST EXERCISES
due of P100,000 on July 15, 2015. A Discussion Questions
total of P20,000 withholding taxes was 1.What are the three income taxation
deducted by various income payors schemes? Briefly discuss the scope of
from his gross income. each.
The total amount to be paid by the 2.Discuss the nature of final income
taxpayer including penalties shall be: taxation
Tax due P100,000 3.What are ordinary assets? Compare
Less:Tax credits(withholding taxes) them with capital assets.
20,000 4.What capital gains are subject to
Net tax due P80,000 capital gains taxation?
Net tax due P80,000 5.What are the special features of
Plus:Penalties regular income taxation?
Surcharge(P80,000x25%) 20,000 6.Enumerate the instances wherein
Interest (P80,000x20%x3/12) 4,000 short accounting period will arise
Compromise penalty 15,000 7.What are the tax accounting methods
Total tax due P119,000 in reporting income? Briefly explain
Note: each.
1.The deadline of the 2014 income tax 8.What are the two types of income tax
return is April 15, 2015. April 15, 2015 return?
to July 15, 2015 is a 3-month delay. TRUE OF FALSE 1
2.Interest is computed from the net 1.Both active income and passive
amount of tax due before the 25% income do not require direct
surcharge participation of the taxpayer in earning
3.The compromise penalty is taken from the income-F
the table of compromise penalties for 2.There are three types of gross income
failure to file and or pay internal for taxation purposes.T
revenue tax at the time or times 3.The three tax schemes are mutually
required by law, as follows: inclusive in coverage.False
If the amount of tax unpaid 4.Regular income tax generally covers
Exceeds But not exceeds active income and capital gains-True
Compromise is 5.Final tax generally covers passive
… … income-True
… 6.Capital gains arise from the sale,
10,000 20,000 exchange, and other disposition of any
5,000 assets.-False
20,000 50,000 7.There are only two types of assets for
10,000 purposes of taxation-True
50,000 100,000 8.An ordinary asset is defined to include
15,000 all other assets other than capital asset-
100,000 500,000 False
20,000 9.The technique used to measure
You may check the schedule of income is referred to as an accounting
compromise penalty for late payment method. The length of time over which
income is reported is referred to as an
accounting period.True
10.Regular accounting periods are
calendar and fiscal-True
11.Individuals file their income tax
return on or before April 15 of the
following calendar year.True
12.All taxpayers can change their
accounting period when there is a
change in the nature of their business,
but the BIR must be notified in all
cases.False
13.The first accounting period of a
starting business will more likely to be
less than 12 months.True
14.The accounting period of a deceased
taxpayer shall be terminated on
December 31 in the year of death.False
15.Accrual basis and cash basis are the
most common accounting methods
used in practice.True.
TRUE OR FALSE 2
1.Advanced income is an item of gross
income for accrual basis taxpayers.True
2.Generally, prepayments are non-
deductible in the current accounting
period.True
3.Prepayments are deductible but in
the future period they expire or are
consumed in the business or trade of
the taxpayer.True
4.The use of different methods for
different businesses of the same
taxpayer is permitted by law.True
5.Initial payment includes
downpayment and installments in the
year of sale.True
6.Contract price is a synonymous with
selling price.False
7.The crop year method is an
accounting method.True.
8.Under the percentage of completion
method, gross income is reported
based on the cash collections from the
contract price.True
9.The depreciated value of the property
upon termination of the lease
constitutes income to the lessee.False
10.The withheld taxes on the income
payment made by the taxpayers are tax
credit against their income tax due.
False.
11.There are three types of income tax
return for each income tax
scheme.False.
12.All taxpayers, small or large, are
encouraged to file their income tax
return through EFPS system of the
BIR.False
13.Large taxpayers are under the
supervision of the BIR Large Taxpayer
Service.True
14.Non-filing and or non-payment of
tax is subject to penalties such as
surcharges, interest, compromise and
imprisonment.False
15.The interest on unpaid taxes is
computed on the basic tax only
excluding the surcharge.True.
16.Only large taxpayers shall file under
Efps-false
17.Both manual filing and filing through
e-BIR forms makes use of manual
payment.True
18.Efps is fully electronic tax
compliance-True
19.e-BIR forms makes use of electronic
data entry and filing –True
20.Efps filers may file manually when
there is a BIR system downtime.True.
Multiple Choice-Theory:General
Concepts
1.Which is not a scheme in taxing
income?
a.Ordinary gain taxation=
b.Regular income taxation
c.Capital gains taxation
d.Final income taxation
2.Which is a correct statement
regarding income taxes?
a.An item of income subjected to final
tax can still be subject to regular tax.
b.An item of income exempted from
final tax is nevertheless taxable to
regular tax.
c.An item of income subjected to capital
gains tax may be subject to regular
income tax.
d.An item of income exempted from tax
is likewise exempt from capital gains tax
and regular income tax.=
3.Which is not a feature of final tax?
a.Covers certain passive income
b.Covers all capital gains=
c.Withholding at source
d.None of these
4.Which of the following properties
when classified as capital asset is
subject to capital gains tax?
a.Domestic stocks sold directly to buyer
b.Real property
c.Both a or b=
d.None of these
5.Capital asset means
a.real properties used in the business
b.personal properties used in business
c.real properties not used in business
d.any property, real or personal, not
used in business=
6.Which is not an item of passive
income?
a.Royalties
b.Prizes
c.Deposit interest income
d.Professional income=
7.Which is the following accounting
methods is most consistent with the
lifeblood doctrine?
a.Crop year method
b.Cash basis
c.Installment method
d.Accrual method=
8.These are accounting techniques or
conventions used to measure income
a.Accounting methods=
b.Accounting periods
c.Accrual basis
d.Cash basis
9.These are distinct and equal time
periods over which income is measured
a.Accounting methods
b.Accounting periods=
c.Crop year basis
d.Cash basis
10.Income is recognized when received
rather than when earned
a.Cash basis=
b.Installment basis
c.Accrual basis
d.Deferred payment basis
11.Income is recognized when earned
regardless of when received
a.Cash
b.Accrual basis=
c.Installment method
d.Percentage of completion
12.Initial payment means
a.Downpayment
b.Total collection within the year the
installment sale was made.=
c.Installment payments, exclusive of
downpayment, within the year
installment sale was made.
d.Total collections within one year from
the date the installment sale was made
13.Income is reported by reference to
the extent of project completion in
a.Deferred payment method
b.Installment method
c.Percentage of completion method=
d.Completed contract method.
14.Which statement is correct?
a.Dealers of real properties can use the
installment method without limitation.
b.Dealers of personal properties can
use the installment method without
limitation.=
c.Non-dealers of properties can use the
installment method if initial payment
exceeds 25% of the selling price.
d.Dealers of properties can use the
installment method only if initial
payment does not exceed 25% of the
selling price.
15.Leasehold income is recognized over
the lease term in
a.Outright method
b.Cash basis
c.Spread-out method=
d.Percentage of completion method
16.Statement 1:The excess of mortgage
assumed by the buyer over the basis of
the properties sold is the amount of the
gain on the sale.
Statement 2:Any collection from an
installment contract where the
mortgage exceeds the tax basis of the
properties received constitutes
collection of income.
Which statement is true?
a.Statement 1 only
b.Statement 2 only=
c.Both statements are true
d.Neither statement is true
17.Which is correct regarding the crop
year method?
a.Crop year method is an accounting
period.
b.Crop year method recognizes farming
income when the next planting season
commenced.
c.Crop year method matches cropping
expenses with the income upon
harvest.=
d.Crop year method recognizes
cropping expenses when incurred and
harvest income when realized.
18.Which is an incorrect statement
regarding the use of accounting period?
a.Individuals can either choose the
calendar year of or fiscal year
accounting period.=
b.The regular accounting period for any
taxpayer is 12 months
c.Individual taxpayers are not allowed
to report income using the fiscal
accounting period.
d.Corporations may opt to use either
calendar or fiscal accounting period.
19.Under which of the following will
short accounting period not arise?
a.Change of accounting period by a
corporate taxpayer.
b.Change of accounting period by an
individual taxpayer=
c.Death of a taxpayer
d.Dissolution and liquidation of a
business.
20.Which is not a special feature of
regular income taxation?
a.Use of accounting methods
b.Use of accounting periods
c.Annual payment of income tax=
d.Final withholding tax at source
Multiple Choice-Problem 4-
1:Accounting period
1.An individual income taxpayer shall
file his or her income tax return on or
before the
a.15th day of the fourth month of the
same calendar year.
b.15th day of the fourth month of the
following calendar year.=
c.15th day of the fourth month of the
same fiscal year.
d.15th day of the fourth month of the
following fiscal year.
2.Anderson died on March 31,2017,
Which is a correct statement?
a.Anderson’s 2017 income tax return
shall cover January 1, 2016 to
December 31. 2017.
b.Anderson’s 2017 income tax return
shall cover January 1, 2017 to
December 31,2017.
c.Anderson’s 2017 income tax return
shall cover January 1,2017 to March 31,
2017=
d.Anderson’s 2017 income tax return
shall cover April 1, 2017 to December
31, 2017.
3.Mrs. Julian started business on July
15, 2016. What should be the coverage
of her 2016 income tax return?
a.January 1 to July 15, 2016
b.July 15, 2016 to December 31, 2016=
c.July 16, 2016 to July 15, 2017
d.January 1 to December 31, 2016
4.A corporation reporting on a fiscal
year ending every March 31 shall file its
2017 income tax return not later than
a.April 15, 2017
b.June 15,2017
c.July 15,2017=
d.April 15, 2018
5.Metersbonwe Corporation started
business on April 5, 2016 and opted to
report income tax on a fiscal year
ending every October 31.
Metersbonwe’s first income tax return
shall cover
a.April 6,2016 to October 31, 2016
b.April 5,2016 to October 31, 2016=
c.April 5,2016 to December 31,2016
d.April 5, 2016 to April 5, 2017
6.Beneco Corporation reports on a
calendar year. On August 15, 2016, it
stopped business due to persistent
losses. Beneco Corporation’s last
income tax return shall cover
a.January 1 to December 31, 2016
b.January 1 to August 15,2016=
c.August 15, 2013 to August 15, 2016 3.Berlin Corp. reported the following
d.August 15 to December 31,2016 data for 2015:
7.Effective March 1, 2017, Jonah, Inc. *Total net sales made to customers
changed its calendar year to fiscal year were P2,000,000 in cash
ending every June 30. An adjustment *Goods purchased for sale totaled
return shall be filed covering the period P1,200,000 in cash. Beginning inventory
a.March 1 to June 30, 2017 and ending inventory of goods for sale,
b.January 1 to June 30, 2017= respectively were P200,000 and
c.January 1 to March 1, 2017 P300,000.
d.January 1 to December 31,2017 *1-year advanced rent of P30,000 to
8.During 2017, Klein Corporation apply for 2016 was received from
changed its accounting period to the sublease contract
calendar year. The adjustment return P40,000 total interest income from
shall be filed on or before customers promissory note earned
a.April 15, 2017 P30,000 of this was collected.
b.July 15, 2017 *Unrealized foreign exchange gains
c.April 15, 2018= from foreign currency receivable
d.July 15, 2018 totaled P60,000
9.Effective July 2, 2016, Rofelson Using cash basis, compute the total
Company changed its fiscal year ending income subject to income tax
every March 31 to another fiscal year a.P990,000
ending every August 31. An adjustment d.P960,000=
return shall be filed covering the period c.P750,000
a.April 1 to July 2, 2016 d.P690,000
b.April 1 to July 1, 2016 2,000,000
c.April 1 to August 31, 2016= -1,200,000
d.July 3 to August 31,2016 800,000
10.Effective May 15, 2017, Tabuk, Inc. +30,000
changed its fiscal year ending every 40,000
April 30 to the calendar year. An 30,000
adjustment return shall be filed 900,000
covering the period +60,000
a.May 1 to December 31,2017= 960,000
b.January 15 to December 31, 2017 4.Using accrual basis, compute the total
c.January 1 to April 30, 2017 income subject to income tax.
d.April 30 to December 31, 2017 a.P1,060,000
Multiple Choice-Problems 4-2:Tax b.P1,000,000
schemed and accounting methods c.P960,000
1.Astercor, Inc. reported the following d.P970,000=
during the year: P2,000,000
-P400,000 proceeds of life insurance of -1,200,000
an officer where Antercor is the 800,000
beneficiary(P600,000 still uncollected.) 30,000
-P800,000 interest income, exclusive of 40,000
P200,000 uncollected and accrued 900,000
interest. 30,000
-P300,000 increase in value of 40,000
investment in stocks. 970,000
Compute the gross income under cash 5.Santiago, Inc. has the following
basis receipts during 2018:
a.P800,000= From service billings to clients P400,000
b.P1,000,000 Advances from clients 100,000
c.P1,200,000 Total cash collection P500,000
d.P1,400,000 The P100,000 advances refer to services
2.Compute the gross income under which will be rendered next year. Total
accrual basis uncollected billing increased from
a.P800,000 P100,000 on December 31, 2017 to
d.P1,000,000= P150,000 on December 31, 2018
c.P1,200,000 Compute the gross income using cash
d.P1,400,000 basis
a.P400,000
b.P450,000 Installment method-taxpayer, personal- How much gross income is to be
c.P500,000= dealer of household property- reported in 2016?
d.P550,000 appliances) a.P400,000
6. Compute the gross income using 10.using the accrual basis of b.P250,000
accrual basis accounting, compute Lancelot’s gross c.P116,667=
a.P400,000 income subject to income tax in 2016 d.P108,219
b.P450,000 a.P360,000 13.In the immediately preceding
c.P500,000 b.P320,000 problem, assuming Mr. Marangley is not
d.P550,000= c.P275,000 a dealer of car, how much gross income
7.In 2016, Bright Inc, sold its parking lot d.P250,000 is to be reported in 2016?
for P2,400,000 payable on installment. Cash sale(buo ang recognize na income) How much gross income is to be
The lot was previously acquired for 11.Merville is a dealer in real reported in 2016?
P1,500,000. The buyer has an properties. Merville requires 20% a.P400,000=
outstanding unpaid balance of downpayment, and the balance is b.P250,000
P1,800,000 as of December 31,2016. payable over 36 monthly installments c.P116,667
Bright’s year-end. starting on the last day of the month d.P108,219
Compute Exquisite’s gross income in following the month of sale. Merville 13.Luccio accepted a P1,000,000
2016 using the installment method. sold properties in 2015 and 2016 with construction contract in early 2016. As
a.P900,000 terms as follows: of December 31, Luccio incurred total
b.P675,000 .House and Lot No.1 was sold for construction costs of P600,000 and
c.P225,000= P1,350,000 on November 11, 2015 estimates additional P200,000 to bring
d.P112,500 .House and Lot No. 2 was sold for the project to completion. Compute
8.Equisite Corporation sold its old P1,800,000 on July 5, 2016 Luccio’s 2016 construction income using
warehouse with carrying amount (tax Both properties were sold at a gross the percentage of completion method.
basis) of P600,000 for P1,000,000. A profit rate of 40% based on the selling a.P40,000
downpayment of 15% was collected on price. b.P200,000=
July 1, 2016. Additional P150,000 Compute Merville’s gross income c.P160,000
installment payments were received as subject to income tax in 2015 and 2016, d.P400,000
of December 31, 2016. respectively. Solution:
Compute the gross profit to be reported a.P120,000;P720,000 Contract price P1,000,000
for the year 2016. b.P120,000;P864,000= Multiply by:% of completion 80%
a.P60,000 c.P540,000;P720,000 Construction revenue P800,000
b.P120,000 d.P540,000;P864,000 Less:Expense during the year P600,000
c.P400,000=(P1,000,000- DP P270,000 Construction gross income P200,000
P600,000=P400,000) Subsequent installment 30,000 15.Crevar constructs residential
d.P450,000 Total 300,000 additional personal rule properties for clients and reports
9.Lancelot is a dealer of household casual application of installment: income by the percentage of
applicanes. He reported the following in a.)SP>P1,000 completion method. In 2016, Crevar
2015 and 2016: S.)1P>25% of cash sale started a P2,000,000 construction
Sale 100% 1,350,000 contract. Details of his 2016 and 2017
2015 2016 COS 60% construction follow:
Installment sales GP rate 40%
P500,000 P800,000 300,000/1,350,000=0.22 Cash 2016 2017
Cost of installment sales sale=more than 65% Annual construction costs
250,000 440,000 200,000 payment for July/August to P200,000 P800,000
Collections December Estimated cost to finish
300,000 600,000- +360,000 800,000 250,000
100,000=P500,000 560,000 Initial payment Extent of completion
Lance’s 2016 collection is inclusive of 12.In 2016, Mr. Marangley, a dealer of 20% 80%
P100,000 accounts from 2015. car disposed a brand new sports utility Compute the construction income in
Using the installment method, compute vehicle (SUV) which costs P800,000 for 2016 and 2017.
Lancelot’s gross income subject to P1,200,000, inclusive of under the a.P200,000;P560,000
income tax in 2016. following terms: b.P200,000;P400,000=
a.P360,000 July 1, 2016-as down payment c.P400,000;P400,000
b.P320,000 P100,000 d.P400,000;P560,000
c.P250,000 Monthly installment thereafter 2016
d.P275,000= 50,000 2017
Collection/Contract price XGP= Mr. Marangley will choose whichever Construction revenue P2,000,000
225,000+50,000=275,000 favorable permissible income reporting P2,000,000
P500,000x45%=225,000 method for him. Extent of completion 20%
P100,000x50%=50,000 80%
Construction revenue P 400,000 lease contract. Just after the second Farming gross income P500,000
P1,600,000 year of the lease,Tomas renovated the Add:revenue from tree branches for
Less:Expenses 200,000 premises and made improvements at a firewood P50,000
400,000 Construction revenue in prior cost of P1,200,000. These Total income subject to tax P550,000
year improvements are expected to last for Multiple choice-Problem 4-3:Tax
Construction Gross income P200,000 12 years. Compute Rafi’s annual income compliance
P 800,000 expenses from the leasehold improvement using 1.A taxpayer was 6 months and 12 days
the spread-out method. in filing his income tax return. If he has
P 400,000 Gross income a.P50,000 P40,000 net tax due, compute the
16.Oliver entered into a 40-year lease b.P37,500 penalties in the form of interest
contract with Berna. Per agreement, c.P30,000 a.P4,263=
Oliver will construct a building on d.P20,000= b.P4,211
Berna’s lot and operate the same for 40 User Years of usage c.P4,267
years. Ownership of the building will Allocation Cost d.P5,329
transfer to Berna upon the termination -Lessee 10 10/12x1,200,000 Interest(P40,000x20%x(6/12+12/365))=
of the lease. The lease will not 1,000,000 4,263
commence until the building is -Lessor 2 2/12 x1,200,000 2.What is the total surcharge penalty?
completed. Oliver completed the 200,000/10=P20,000 a.P0
building a total cost of P40,000,000 on Total 12 1,200,000 1,200,000 b.P8,000
January 1, 2017. The building is Under the spread-out method, c.P10,000=
expected to be useful over 50 years. Anderson shall spread the P200,000 d.P20,000
Compute Berna’s income from the income over 10 periods or recognize an Surcharge(P40,000x25%)=P10,000
leasehold improvement to be reported annual income of P20,000 from the 3.A taxpayer received a notice from the
in 2017 using the spread-out method. leasehold improvement BIR to file his income tax return after
a.P200,000= 19.Hasan started raising swine for sale incurring 9 months of delay. The tax due
b.P4,000,000 by purchasing 5 gifts and a boar at a per his return is P100,000.What is the
c.P8,000,000 total purchase price of P50,000 on total surcharge penalty?
d.P32,000,000 January 2016. As of December 31, a.P0
User Years of usage 2016, Hassan’ herd grew to 15 guilts, 2 b.P20,000
Allocation Cost boars and 20 piglets. The total herd has c.P25,000
-Lessee 40 40/50 a fair value of P196,000 when sold as is. d.P50,000=
P32,000,000 During the year, Hassan earned Surcharge(50%XP100,000)=P50,000
-Lessor 10 10/50 P180,000 from selling piglets. How The non-filing is considered “willful
8,000,000/40=P200,000 much should hassan report as farming neglect” if the BIR discovered the non-
Total P40,000,000 income in 2016? filing first. This is the case when the
50 a.P326,000 taxpayer received a notice from the BIR
Under the spread-out method, b.P180,000= to file return. If the taxpayer filed a
Anderson shall spread the P8,000,000 c.P146,000 return before the receipt of such notice,
income over 40 periods or recognize an d.P130,000 the same is considered simple neglect
annual income of P200,000 from the subject to the 25% surcharge.
leasehold improvement from 2017 4.What is the total interest penalty?
through year 2056. 20.Pedro,a farmer, uses the crop-year a.P12,500
17.In the immediately preceding method in reporting his income from b.P14,900
problem, assume that the building was long-term crops. The following data are c.P15,000=
completed on July 1, 2017, what is the relevant to his farming operations in d.P25,000
income using outright method 2017: Interest (P100,000x20%x9/12)=15,000
a.P4,000,000 -Sales of crops harvested, P900,000 5.Compute the compromise penalty
b.P8,000,000 -Expenses on harvested crops, P400,000 a.P10,000
c.P32,000,000 -Expenses on maturing crops, P200,000 b.P15,000=
d.P40,000,000= -Expenses on newly crops, P100,000 c.P20,000
Outright method -Sales of tree branches for firewood, d.P30,000
Under the plain wordings of Section 49 P50,000 If the amount of tax unpaid
of Revenue Regulations No. 2, Anderson Pedro uses the crop year method in Exceeds But not exceeds Compromise
shall recognize the entire P40,000,000 reporting income. Compute Pedro’s is
fair value of the improvement as gross total income subject to tax. … … …
income upon completion of the a.P240,000 10,000 20,000 5,000
improvement in 2017. This is not b.P340,000 20,000 50,000 10,000
income in its totality, but this is the c.P540,000 50,000 100,000 15,000
amount referred to by the regulation d.P550,000= 100,000 500,000 20,000
18.Tomas leases an office space from Proceeds of harvest P900,000 6.Mani Pakyaw failed to pay file his
Rafi, Inc. in a non-renewable 10-year Less: Cropping expenses 400,000 income tax return for the year 2916
which should have been filed on or tax rates is extremely crucial to your Items of passive income are earned
before April 15, 2017. The BIR sent him mastery of income taxation. with very minimal involvement from
a notice to file and pay his taxes on or After finishing this chapter, readers are the taxpayer and are generally irregular
before July 18, 2017. Mani Pakyaw filed expected to demonstrate: in timing and amount. Unlike items of
return showing a basic tax due of a.Undestanding and appreciation of the active income, they are not usually
P1,000,000. Compute the total interest features and scope of final tax specifically monitored by taxpayers.
penalty. b.Mastery of those certain passive When not recorded by the taxpayers,
a.P0 income subject to final tax and their their existence can be difficult to
b.P51,644= corresponding final tax rates. predict while their actual amount may
c.P64,555 c.Mastery of the general final tax rates be difficult to determine. Thus, the final
d.P59,863 on certain non-residents and their withholding at source is the most
exxceptions. favored scheme in taxing items of
Interest penalty d.Knowledge of the other applications passive income.
(20%XP1,000,000X(3/12+3/365))=51,64 of the final income tax scheme Non-resident persons not engaged in
4 business in the Philippines
7.Mr. Pakyaw must pay a surcharge of FEATURES OF FINAL INCOME TAXATION Non-resident persons not engaged in
a.P0 1.Final tax trade of business in the Philippines,
b.P250,000 2.Tax withholding at source such as non-resident aliens not
c.P500,000= 3.Territorial imposition engaged in trade or business (NRA-
d.P1,000,000 4.Imposed on certain passive income NETBS) and non-resident foreign
Surcharge(50%x1,000,000)=500,000 and persons not engaged in business in corporations (NRFCs), have high risk of
8.Rich Goma Corporation failed to file the Philippines non-compliance. These taxpayers
its income tax return for the fiscal year THE FINAL WITHHOLDING SYSTEM usually do not have principal offices or
ending August 31, 2016. On June 6, The final withholding system imposes fixed places of business in the
2017, it filed an income tax return with upon the persons making income Philippines. Their distance and absence
a basic tax still due and payable for the payments the responsibility to withhold from the Philippines make it very
fiscal year amounting to P500,000 the tax. The taxpayer receives the unlikely for tax compliance to be
Compute the interest penalty to be income net of tax and there would be expected.
imposed by the BIR no need for him to file an income tax Thus, the law subjects them to final
a.P47,694= return to report the same. income tax. Philippine resident shall
b.P52,845 The final withholding system is withhold the following final tax from
c.P64,275 inherently territorial. It applies only to their gross income, active or passive,
d.P35,873 certain passive income earned from from all sources within the Philippines:
sources within the Philippines. The Non-resident General final tax
Interest (P500,000 Philippine government cannot compel person not rate
x20%x10/12x6/365)= non-resident subjects to foreign engaged in trade
9.Compute the total assessment to be countries to withhold the tax as this or business
paid, excluding the compromise would amount to infringement of Non-resident 25%
penalty. foreign sovereignty. Hence, all items of alien not
a.P672,694= income earned from sources abroad, engaged in trade
b.P677,845 passive or active, are subject to tax or business
c.P689,275 under the general scope of the regular Non-resident 30%
d.P660,873 income tax. foreign
Tax due P500,000 Rationale of Final Income taxation corporation
Less: penalties The final withholding tax is built upon
Surcharge (25%x500,000) 125,000 the taxpayer and government PASSIVE INCOME SUBJECT TO FINAL TAX
Interest 47,694 convenience. It relieves the taxpayer of 1.Interest or yield from bank deposits
Total tax due P672,694=a the obligation to file an income tax or deposit substitute
CHAPTER 5 return. This is very convenient for 2.Domestice dividends, in general
FINAL INCOME TAXATION taxpayers who are limited by distance, 3.Dividend income from a Real Estate
Chapter Overview and Objectives time and cost to comply. For the Investment Trust
This chapter discusses the features of government, the final withholding 4. Share in the net income of business
final income taxation, the items of gross system is the most convenient and partnership, taxable associations, joint
income, and the class of taxpayers effective system in collecting taxes on ventures, joint accounts, or co-
subject to final income tax income where there is high risk on non- ownership
Final tax is one of the exceptions to the compliance or tax evasion. 5.Royalties, in general
scope of regular income tax. An Under the NIRC, final income tax is 6.Prizes exceeding P10,000
excellent understanding of the items of imposed on certain passive income and 7. Winnings
passive income and those taxpayers upon non-resident persons not engaged 8. Informer’s tax reward
subject to final tax including their final in business in the Philippines.
Passive Income
9.Interest income on tax-free corporate 2-year time deposit 12,000 previously untaxed or exempted
covenant bonds x20% 2,400 interest income will be subjected to the
FINAL TAX ON INDIVIDUALS AND 5-year time deposit 40,000x0% 0 following final taxes upon pre-
CORPORATIONS Final withholding tax termination:
Unless otherwise indicated, the final tax P4,000 Holding period Final tax
rates to be discussed in the following Corporate taxpayers P60,000 x 20% Less than 3 years 20%
sections apply to all taxpayers P12,000 3 years to less 12%
(individuals and corporation) other The exemption of individuals on interest than 4 years
than: income on long-term deposits is 4 years to less 5%
a.Non-resident alien not engaged in anchored on the fact that long-term than 5 years
trade or business (NRA-NETB), and deposits are usually channeled to the 5 years or more 0%
b.Non-resident foreign financing of long-term projects such as Illustration 1
corporation(NRFC) infrastructures, property developments, On January 1, 2011, Alice invested
INTEREST INCOME OR YIELD and other construction projects which P1,000,000 in Baguio Bank’s 5-year time
Interest income or yield from local are deemed essential to the deposit. The deposit pays 10% interest
currency bank deposits or deposit development of the country. Note that annually. Alice pre-terminated the
substitutes are subject to final tax as exemption is limited only to individuals deposit on July 1, 2014.
follows: to the exclusion of corporations. The final tax on pre-termination will be
Recipient Illustration 2 computed as follows:
Source of Individ Corporati A resident taxpayer received a P16,000 2011 interest income (P1,000,000x10%)
interest uals ons interest income from a bank. Determine P100,000
income the final tax withheld at source. 2012 interest income (P1,000,000x10%)
Short term 20% 20% Solution: 100,000
deposits Gross Interest income (P16,000/80%) 2013 interest income (P1,000,000x10%)
Long-term Exempt 20% P20,000 100,000
deposits/invest * Multiply by:final tax rates 20% 2014 accrued interest income
ment Final tax withheld P4,000 (P1,000,000x10%x6/12 months) 50,000
certificates Illustration 3 Total interest income
Note:*Exemptions does not include Banko Negro incurs the following P350,000
NRA-NETB interest in its savings and time deposits Final tax rate applicable to less than 4-
Short-term deposits are those for a accounts from the following depositors: year pre-termination 12%
period of less than five years. Long-term Depositors Amount Final tax P42,000
deposits or investment certificates refer Resident individuals P600,000 The net proceeds of the deposit and
to certificate of time deposit or Resident and domestic corporations accrued interest to be released to the
investment in the form of savings, 800,000 depositor upon pre-termination shall
common or individual trust funds, Non-resident aliens not engaged in be:
deposit substitutes, investment business 200,000 Principal balance P1,000,000
management accounts, and other Non-resident corporation 100,000 Accrued interest for 2014 50,000
investments with a maturity of not less Total accrued interest expense Final tax to be withheld (42,000)
than five years,the form of which shall P1,700,000 Net proceeds to be released to the
be prescribe by the BSP and issued by Required:Compute the total final depositor P1,008,000
banks only (not by non-bank financial income tax to be withheld by Banko Savings or time deposits with
intermediaries or finance companies) to Negro. cooperatives are not subject to final tax
individuals in denominations of P10,000 Solution: The final tax is limited to banks and
and other denominations as may be Depositors Amount Rate Final tax shall not be applied with time and
prescribed by the BSP. (RMC 18-2011) Resident individuals P600,000 x20% savings account deposit maintained by
Illustration 1 P120,000 members with cooperatives and by
A taxpayer earned the following income Resident and domestic corporations primary cooperatives with their
from various time deposits: 800,000 x 20% federations.(Dumaguete Cathedral
6-month time deposit P8,000 P160,000 Credit Cooperatives vs. CIR, G.R.
2-year time deposit 12,000 NRA-NETB 200,000 X25% 182772)
5-year time deposit 40,000 50,000 Other applications of the final tax on
Total interest income P60,000 NRFCs 100,000 x30% 30,000 interest
Required: Compute the final tax if the Total accrued interest expense 1.Deposit substitute
taxpayer is an individual and if a P1,700,000 2.Government securities
corporation. P360,000 3.Money market placements
Solution: Tax on pre-termination of long-term 4.Trusts funds
Individual taxpayers deposits of individuals 5.Other investments evidenced by
6-month time deposit P8,000x20% If the deposit or investment placement certificates prescribed by the Bangko
P1,600 of individual taxpayers is pre- Sentral ng Pilipinas (BSP)
terminated before 5 years, any
Deposit substitute means an alternative Is the bank account is jointly in the
form of obtaining funds from at least 20 name of a non-resident and a resident
persons at any one time other than taxpayer. 50% of the interest shall be
deposits through the issuance, exempt while the other 50% shall be
endorsements, or acceptance of debt subject to the 7.5% final tax .(RR10-98)
instruments for the borrowers own Illustration
account, for the purpose of relending or Mr Siman is an Overseas Filipino
purchasing of receivables and other Worker, He deposits all his savings in a
obligations, or financing their own savings account under the foreign
needs or the needs of their agent or currency deposit unit (FCDU) of a
dealer. domestic bank. During the month, the
Government debt instruments and savings deposit account earned $1,000
securities including Treasury bonds, interest equivalent to P41,500.
Treasury bills, and treasury notes shall Scenario 1: Mr. Siman deposited his
be considered as deposit substitute savings through the account of his
irrespective of the number of lender at resident wife.
origination if such debt The final tax shall be P3,112.50
instrumentalities and securities are to computed as follows:
be traded or exchanged in the Interest income P41,500
secondary market. Final tax rate 7.5%
Foreign currency deposit with foreign Final tax P3,112.50
currency depositary banks Scenario 2:Mr. Siman deposited his
The interest income from foreign savings through a joint account with his
currency deposit under the foreign resident wife.
currency deposit system or expanded The final tax shall be P1,556.25
foreign currency deposit system by computed as follows:
residents is subject to a final tax of Interest income P41,500
7.5%. Portion taxable 50%
Taxpayer Individual Corporations Taxable interest income P20,750
s Multiply by: final tax rate 7.5%
Resident 15% 15% Final tax P1,556.25
s Scenario 2:Mr. Siman deposited his
Non- Exempt Exempt savings account through his own
residents account
In this case, the interest income shall be
Note: exempt from final tax.
1.Resident taxpayers include resident Interest income subject to regular tax
citizens, resident aliens, domestic Interest income from the following
corporations and resident foreign sources is subject to regular income tax,
corporations not to final tax:
2.Non-residents taxpayers is include 1.Lending activities, whether or not in
non-resident citizens, non-resident the course of business
aliens and non-resident foreign 2.Investments in bonds
corporations 3.Promissory notes
3.It should be emphasized that NRA- 4.Foreign sources, whether bank or
NETBs and NRFCs are also exempt. non-bank
4.There is no long-term or short-term 5.Penalty for legal delay or default
classification of foreign currency DIVIDENDS
deposits. “Dividends” means any distributions
The reduced final tax rates on interest made by a corporation to its
income on foreign currency deposit and shareholders out of its earnings or
the exemption of non-resident profits and payable to its shareholders,
depositors are intended to encourage whether in money or in other property.
the deposit of foreign currencies in our (Sec 73, NIRC)
banks which will be used in the Types of dividends:
financing of our international trades. 1.Cash dividends-paid in cash
Our Philippine Peso is not a globally 2.Property dividends-paid in no-cash
accepted currency. Our foreign trade properties including stocks or securities
will be limited without adequate foreign of another corporation
currency reserves in our banking sector. 3.Scrip dividends-those paid in notes or
Joint accounts on forex deposits. evidence of indebtedness corporation
4.Stocks dividends-paid in the stocks of
the corporations
5. Liquidating dividends-distribution of
corporate net asset
As a rule, dividends are income subject
to tax. However, the following income
for taxation purposes:
1.Stock dividends
Stock dividends representing transfer of
surplus to capital account shall be
subject to tax. Stock dividends are in
the form of increase in corporate value
(i.e., capital gain) which should be
properly taxable when realized through
disposal or sale of the stocks
investment
The distribution of stocks of another
corporation as dividends is a taxable
property dividend and not a stock
dividend
2.Liquidating dividends
Under the NIRC, the receipt of
liquidating dividends in not viewed as
income but as exchange of properties.
When the liquidating dividends exceeds
the costs of the investments, the excess
is a taxable capital gain, subject to
regular income tax. Any loss is
deductible only to the extent of capital
gain.
TAXABILITY OF STOCK DIVIDENDS
Normally, stock dividends are exempt
from income tax. Exceptionally, stock
dividends are subject to tax at the fair
value of the stocks received under the
following conditions:
a.Subsequent cancellation and
redemption
If a corporation cancels or redeems
stock issued as a dividend at such time
and in such manner as to make the
distribution and cancellation
redemption, in whole or in part,
equivalent to the distribution of a
taxable dividend, the amount so
distributed shall be taxable to the
extent it represent a distribution of
earnings or profit.
For instance, a corporation declared
stock dividends and immediately called
stock dividends for redemption and
cancellation. This act is equivalent to
declaration of cash dividends.
b.If it leads to substantial alteration in
ownership in the corporation
Substantial alteration in ownership in a
corporation may occur when stock
dividends are given in lieu of cash
dividends or when the corporation
declared an optional stock or cash
dividend
Stock dividend or stock split Total dividends P750,000 domestic corporations since business
Stock dividend is a capitalization of The total final tax to be withheld by partnerships are considered
earnings while stock split results in Aborian Company shall be: corporations under the NIRC. However,
reduction in the par value of stock and Shareholders Dividends Rate the exemption does not extend to
an increase in the number of shares of Final tax dividends received by general
shareholders. Assuming a 2-for-1 split, a Resident aliens and citizens professional partnership, exempt joint
shareholder holding one P50-par value P500,000x10% P50,000 ventures and exempt co-ownership
stock will be given two P25-par value NRAs engaged in trade or business because they are not considered
stocks. While stock dividend may be 100,000 x20% 20,000 corporations under the NIRC.
taxable under certain conditions, stock NRAs-NETBs 50,000 x25% 12,500 On the other hand, the exemption of
split will never be subject to income tax. NRFCs 100,000 x30% 30,000 inter-corporate dividend does not apply
DIVIDEND TAX RULES Total P750,000 P112,500 to the share of a corporation from the
Recipient Historical dividend tax rates net income of a business partnership
of The imposable final tax rates vary due to absence of express legal
dividends depending on the source of the exemption. Exemption is restricted to
Source of Individua Corporatio dividends declared: dividend declaration only.
dividends ls ns Source Final tax Dividends from Cooperatives
Domestic 10% final Exempt Earnings before January 1,1998 Under RA 9520, the distribution by an
Corporatio tax Exempt exempt cooperative to its members
ns Earnings from 1998 6% either representing interest on capital
Foreign Regular Regular tax Earnings from 1999 8% or as patronage refunds shall not be
Corporatio tax Earnings from 2000 and thereafter 10% subject to tax.
ns Any distribution made to shareholders ENTITIES TAXABLE AS CORPORATIONS
or members of a corporation shall be ARE SUBJECT TO 10% FINAL TAX
Note: deemed to have been made from the The 10% final withholding tax also
1.A NRA-ETB is subject to a 20% final most recently accumulated profits or applies to dividends or share in the net
tax on dividend, not to the usual 10%, surplus and shall constitute a part of income of entities considered
but an NRA-NETB is subject to a 25% the annual income of the distributive corporations under the NIRC and
final tax. for the year in which received.(Sec. special laws, such as:
2. A NRFC is not exempt but is subject 73( C), NIRC) 1.Real Estate Investment Trusts
to the 30% general final tax rate. Exempt Dividends 2.Business partnerships
However, the imposable dividend tax 1.Inter-corporate dividends 3.Taxable associations
rate shall be 15% when the tax sparing 2.Dividends from cooperatives 4.Taxable joint ventures, joint accounts
rule applies. This will be discussed later. Inter-corporate dividends or consortia
Illustrative 1 Inter-corporate dividends received by a 5.Taxable co-ownerships
Calbayog Company declared a total of domestic corporation are exempted Real Estate Investment Trust or REIT
P2,000,000 dividends. P800,000 is due under the NIRC to minimize double A REIT is a publicly listed corporation
to corporate shareholders while taxation principally for the purpose of owning
P1,200,000 is due to individual Illustration income-generating real estate assets.
shareholders. B, Inc. owns 100% of A Corp. During the The following recipients of REIT
The final tax to be withheld by Calbayog year, A Corp. declared P100,000 dividends are exempt from the final tax:
Company shall be: dividends to B, Inc., in turn, declared a.Non-resident alien indivudals or non-
Shareholders Amount Rate the same dividends to its shareholders. resident foreign corporations entitled to
Amount The following table illustrates the claim preferential tax rate pursuant to
Individual shareholders P1,200,000 double taxation: applicable tax treaty.
x10% P120,000 A Corp. B Inc. b.Domestic corporations or resident
Corporate shareholders Dividends declared P100,000 foreign corporations
800,000x0% P0 P90,000 c.Overseas Filipino investors-exempt
Final tax P120,000 Less:10% dividends tax 10,000 9,000 from REIT dividend tax until August
Illustration 2 Aborian Company Net Dividends P90,000 12,2018 (7 years from the effectivity of
declared a total of P1,000,000 dividends P81,000 RR13-2011 which took effect on August
in March 2014. An analysis of the This is a form of direct duplicate 12, 2011)
recipient shareholders is as follows: taxation. To eliminate the impact of Business partnership,taxable
Shareholders Amount double taxation, inter-corporate associations, joint ventures, joint
Resident aliens and citizens P500,000 dividends such as those declared by A accounts or co-ownerships
NRAs engaged in trade or business Corp. to B Inc. is exempted from final Under Sec. 73 of the NIRC, the net
100,000 tax. When the dividend finally falls to an income of these entities is deemed
NRAs not engaged in trade or business individual shareholder, the 10% final tax constructively received by the partners,
50,000 applies. members, or ventures, respectively, in
Non-resident corporations 100,000 This exemption extends to dividends the same year the net income is
received by business partnerships from reported. Hence, the 10% final tax
applies at the point of determination of
the income, not at the point of actual
distribution.
Share in business partnership net
income
The “share in net income” includes the
share in the residual profit and
provisions for salary, interest and bonus
to a partner. However, if the provisions
for salaries, interests and bonuses are
expensed as such in the books of the
partnership, they are subject to regular
tax to the receiving partner, not to the
final tax. In this case, only the share in
the residual income after such
provisions is subject to final tax.
Illustration
The partnership profit distribution of
partners Andy and Mar based on their
agreed profit distribution scheme is as
follows:
Andy Mar
Salaries to industrial partner P40,000
P0
Interest to capitalist partner -
P12,000
Bonus to industrial partner 25,000 -
Residual profit sharing 8,000
24,000
Profit sharing P73,000
P36,000
Assuming the salaries, interest and
bonus are not expense in the book, the
10% final tax shall be:
Profit sharing P73,000 P36,000
Multiply by: Final tax rate 10%
10%
Final tax P7,300
P3,600
Note:A PARTNER, MEMBER, OR
VENTURE WHO IS AN NRA-ETB, NRA-
NETB, OR NRFC SHALL BE SUBJECT
RESPECTIVELY TO 20%, 25% AND 30%
FINAL TAX RATE.
The Improperly Accumulated Earnings
Tax
Domestic corporations cannot avoid the
dividends tax by simply not declaring
dividends. Corporations which
accumulate earnings beyond the
reasonable needs of business will be
imposed the 10% Improperly
Accumulated Earnings Tax, a penalty
tax. This topic will be discussed in detail
in Chapter 15-B.
ROYALTIES
Passive Income received from sources
within the Philippines is subject to the
following final tax rates:
Source of passive royalties Recipient
Books, literary works, and musical
compositions Individuals
Corporations
10% final
tax 20% final tax
Other sources 20% final tax
20% final tax
Note:
1.Under the regulations, the 10%
preferential royalty final tax on books
and literary works pertain to printed
literatures. Royalties on books sold on
e-copies or CDs such as e-books are
subject to the 20% final tax.
2.Royalties on cinematographic films
and similar works paid to NRA-ETBs,
NRA-NETBs or NRFCs is subject to a final
tax of 25%.
Passive vs. Active royalties
Royalties of a passive nature such as
royalties of claim owners or land
owners of mining properties, royalties
of inventors from companies that
manufacture and sell their invention,
and royalty from licensing agreements
that transfers the use of trademark or
technology are subject to 20% final tax.
When royalties accrues from an
undertaking where the taxpayer has
active involvement, it is an active
income subject to the regular income
tax.
Illustration
E-Soft Inc. develops application
programs for establishments. These
programs were individually tailored to
meet specific requirements of the
establishments and required upgrades,
occasional troubleshooting, and
adjustments for problems. The
developer receives 1% of the sales of
the establishments as royalty.
E-soft also developed a utility program
and assigned it to an e-marketer which
sells the utility program through the
Internet. E-Soft receives 30% royalty on
each copy of the program sold.
The royalties from application programs
are active income subject to regular
income tax. The royalty from the utility
programs is passive income subject to
final withholding tax, but if the e-
marketer is not a resident in the
Philippines, the passive income from
abroad shall be subject to regular tax.
Royalties, active of passive, earned from
sources abroad are subject to regular
income tax.
PRIZES
The taxation of prizes varies. Prizes may
be exempt from income tax or subject
to either final tax or regular income tax.
Exempt prizes
1.Prizes received by a recipient without
any effort on his part to join a contest.
Examples include prizes from such
awards as Nobel prize, Most
Outstanding Citizen, Most Benevolent
Citizen of the year, and similar awards.
2.Prizes from sports competitions that
are sanctioned by their respective
national sport organizations
Requisite of exemption
1.The recipient was selected without
any action on his part to enter the
contest.
2.The recipient is not required to render
substantial future services as a
condition to receiving the price or
reward.
Taxable prizes
For individual income taxpayers, taxable
prizes are subject to either final tax or
regular tax depending on the amount of
the price. However, there is no final tax
imposition on corporate prizes under
the NIRC. Hence, the same must be
subject to regular income tax.
Amount of taxable prize Recipient
Prizes exceeding P10,000 Individuals
Corporations 20% final tax
Regular tax
Prizes not exceeding P10,000 Regular
tax Regular tax
Recall also that final taxation does not
apply to foreign passive income; hence,
prizes from foreign sources are subject
to the regular income tax.
WINNINGS
For individual income taxpayers,
winnings received from sources within
the Philippines are generally subject to
20% final tax with the exception of the
following exempt winnings:
1.Philippin Charity Sweepstakes Office
(PCSO) winnings
2.Lotto winnings
Similar to prizes, there is no final tax
imposed on corporate winnings under
the NIRC. Winnings that are not
subjected to final tax by the payor
should be reported as part of the
regular income. Also, winnings from
foreign sources are subject to regular
income tax.
Recipient
Types of Winnings Individuals
Corporations
PCSO or Lotto winnings Exempt
Exempt
Other winnings, in general 20% final tax
Regular tax
Note:The exemption on PCSO or lotto
winnings also extends to NRA-NETBs
and NRFCs.
TAX INFORMER’S AWARDS
A cash reward may be given to any
person instrumental in the discovery of
violations of the National Internal
Revenue Code or discovery and seizure
of smuggled goods. The tax informer’s
reward is subject to 10% final tax.
Requisite of Tax Informer’s Reward:
1.Definite sworn information which is
not yet in the possession of the BIR
2.The information furnished lead to the
discovery of fraud upon internal
revenue laws or provisions thereof.
3.Enforcements results in recovery of
revenues, surcharges, and fees and/or
conviction of the guilty party or
imposition of any fine or penalty.
4.The informer must not be a:
a.BIR official or employee
b.Other public official or employee
c.relative within the 6th degree of
consanguinity of those officials or
employee in a, and b.
Amount of Cash Reward-whichever is
the lower of the following per case:
1.10% of revenues, surcharges, or fees
recovered and or fine or penalty
imposed and collected or.
2. P1,000,000
The amount of cash reward is subject to
10% final withholding tax which shall be
withheld by the government.
Illustration
Ms. Kirsten provided information to the
BIR leading to the recovery of
P12,0000,000 unpaid taxes. The cash
shall be computed as follows:
10% cash reward (P12,000,000x10%)
P1,200,000
Cash reward limit P1,000,000
Cash reward (whichever is lower)
P1,000,000
Less:10% final withholding tax
100,000
Net amount to be released to the tax
informer P900,000
TAX-FREE CORPORATE COVENANT
BONDS
Interest income of non-resident aliens,
citizens of the Philippines on bonds,
mortgages, deeds of trusts, or other
similar obligations of domestic or
resident foreign corporations with tax-
free or tax-deduction provision where
the obligor shoulders in whole or in part
any tax on the interest shall be subject Special aliens are NRA-NETBs employed
to a final withholding tax of 30%. by regional or area headquarters and
Bond investor regional operating headquarters of
Individuals multinational companies, offshore
Corporations banking units, or petroleum service
Tax on interest income on tax-free contractors or subcontractors. Special
corporate covenant bonds 30% final aliens are subject to a final tax of 15%
tax Regular income tax on gross income from their employees.
Note: Illustration:NRA-NETBs
1.The final tax applies to all individuals, In 2014, Mr. Tih Wong, an NRA-NETB, is
regardless of classifications a consultant to Raha Humabon
2.There is no similar final tax provision Manufacturing Company (RHMC), a
for corporate recipients of “tax-free” domestic manufacturer. RHMC also
interest; hence, the regular income tax pays MR. Wong royalty for using his
shall apply invention. During the year, Mr. Wong
EXCEPTIONS TO THE GENERAL FINAL purchased shares of RHMC and sold
TAX ON NON-RESIDENT PERSONS NOT them directly to a buyer.
ENGAGED IN TRADE OR BUSINESS IN Royalties from invention P300,000
THE PHILIPPINES Professional fees 1,000,000
NRA-NETB Gain on sale of domestic stocks directly
NRFC to a buyer 40,000
General Final Tax Rate 25% 30% Required:
Exceptions: Compute the total final tax withheld at
1.Capital gain on sale of domestic stocks source
directly to buyer 5%-10% Solution:
capital gains tax 5%-10% Royalties from invention P300,000
capital gains tax Professional fees 1,000,000
2.Rentals on cinematographic films and Total gross income P1,300,000
similar works 25% of rentals 25% Multiply by:Final tax on NRA-NETB 25%
of rentals Total final withholding tax
3.Rentals of vessels 25% of rentals P325,000
4.5% of rentals Note
4.Rentals of aircrafts, machineries, and 1.The final tax applies on gross income,
other equipments 25% of rentals whether active or passive. The same
7.5% of rentals. rule applies with NRFC except that the
5.Special aliens(special employees) final tax rate is 30%
15% of gross income from employer 2.Mr. Wong shall file a capital gains tax
N/A returns for the gain on the sale of
6.Lotto and PCSO Winnings Exempt domestic stocks,
Exempt The tax sparing rule
7.Interest income under the foreign NRFCs shall be subject to a 15% final tax
currency deposit system Exempt on dividend income instead of the 30%
Exempt general final tax if the country of
8.Interest on foreign loans N/A 20% domicile of the NRFC credits against the
9.Dividend income 25% 15% tax due of such NRFC taxes presumed to
if tax sparing rule is applicable have been paid by such as NRFC from
10.Tax on corporate bonds 30% 30% the Philippines equivalent to 15% of the
CAPITAL GAINS TAX dividends.
As a rule, NRA-ETBs and NRFCs do not In applying the tax sparing rule, the
file tax returns. Exceptionally,NRA- Supreme Court ruled that the NIRC
NETBs and NRFCs are required to file does not require that the foreign law of
income tax returns to report their gain the non-resident corporation must give
from dealings in domestic stocks a deemed paid tax credit for dividend
directly to buyers. Ownership of the equivalent to the percentage points
stocks shall not be transferred to the waived by the Philippines pointing that
assignee without the required return the NIRC merely require the country of
and tax clearance (Certificate the NRFC to a deemed paid tax
Authorizing Registration or CAR) from equivalent to that waived by the
the BIR that the tax on the transfer has Philippines.(CIR vs. Procter and Gamble
been paid. Philippines Manufacturing Corporation
Special Aliens and the CTA (G.R.66836))
Thus, the requirement of the tax
sparing rule is deemed satisfied if the
country to which the NRFC is domiciled
imposes no tax on dividends from
foreign sources.(BIR Ruling 104-2012,
March 22, 2012)
Illustration:The tax sparing rule with
NRFCs
An NRFC is due to receive a dividend of
P1,000,000 from a domestic
corporation. The final tax to be imposed
by the Philippines which shall be
withheld by the domestic corporation
shall be 15%, not 30%, if the country of
domicile of the NRFC also reduces its
income tax upon the P1,000,000
dividend by at least 15%, the dividend
tax percentage waived by the
Philippines from the 30% general final
tax rate. If the country of the NRFC does
not reduce its tax on the dividend by
atleast 15% the Philippines shall impose
the 30% final tax.
OTHER APPLICATIONS OF FINAL
INCOME TAX
1.Compensation income of filipinos
qualified as special aliens
2.Fringe benefits of managerial or
supervisory employees
3.Income payments of residents other
than depository banks under the
expanded foreign currency deposit
system (EFCDS) to offshore banking
units (OBUs) and expanded foreign
currency deposit units (EFCDUs)
4.Income payments to oil explorations
service contractors or sub-contractors
FILIPINO EMPLOYEES QUALIFIED AS
SPECIAL ALIENS
Filipino employees occupying the same
position as those held by special aliens
subject to 15% final tax may opt to be
taxed at the same 15% final tax. This
will be discussed in detail in Chapter 10.
FRINGE BENEFIT TAX
Fringe Benefits include all
remunerations under an employer-
employee relationship that do not form
part of compensation income. The
fringe benefits of managerial and
supervisory employees are subject to a
final fringe benefits tax.
This will be discussed in detail in
Chapter 11.
INTEREST AND OTHER INCOME
PAYMENTS TO DEPOSITORY BANKS
UNDER THE EXPANDED FOREIGN
CURRENCY DEPOSIT SYSTEM
Residents other than depository banks
under expanded foreign currency
deposit system,shall withhold 10% final
tax on income payments such as
interest income on loans from offshore
banking units (OBUs) and expanded
foreign currency deposit units( FCDUs).
The final taxation of FCDUs, EFCDUs and
OBUs will be discussed in Chapter 15-A.
INCOME PAYMENTS TO SUB-
CONTRACTORS OF PETROLEUM SERVICE
CONTRACTORS
Under PD 1354, every subcontractors,
whether domestic or foreign, entering
into a contract with a service contractor
engaged in petroleum operations in the
Philippines shall be liable to a final
income tax equivalent to eight percent
(8%) of its gross income derived from
such contract, such tax to be in lieu of
any and all taxes, whether national or
local.
Provided, however, that any income
received from all other sources within
and without the Philippines in the case
of domestic subcontractors and within
the Philippines in the case of foreign
subcontractors shall be subject to the
regular income tax under the NIRC.
The term “gross income” means all
income earned or received as a result of
the contract entered into by the
subcontractor with a service contractor
engaged in petroleum operations in the
Philippines under Presidential Decree
No. 87.
Note that the 8% final tax applies to
subcontractors, whether individuals or
corporations, resident or non-resident.
Petroleum service contractors are
subject to the regular income tax.
Persons or entities contracted by a
petroleum service contractor to locally
supply goods and materials that are
required by and in, or that are
inherently necessary or incidental to, its
exploration and development of
petroleum mineral resources and are
entitled to the preferential 8% final tax
on their gross income derived from
such contracts.
(BIR Ruling No. 024-2001, June 13,
2001)
FINAL WITHHOLDING TAX RETURN
The final withholding tax return (BIR
Form 1601-F), Monthly Remittance
Return of Final Income taxes
withheld,shall be filed in triplicate by
every withholding agent or payor who is
either an individual or corporation
DEADLINE AND PLACE FOR MANUAL
FILING
The return shall be filed and the tax
shall be paid or before the 10th day of
the month following the month in
which withholding was made with:
a.The authorized agent bank of the
revenue district office having
jurisdiction over the withholding
agent’s place of business
b.In places where there are no
authorized agent banks, to the revenue
collection officer
c.The authorized city or municipality
agent’s place of business is located.
Deadline for Efps FILING
In accordance with the schedule set
forth in RR No. 26-2002, the deadline
for filing of return is as follows:
Group A-Fifteen (15) days following the
end of the month
Group B-Fourteen (14) days following
the end of the month
Group C-(Thirteen (13) days following
the end of the month
Group D-Twelve (12) days following the
end of the month
Group E-Eleven (11) days following the
end of the month
Note:Please check the groupings of
taxpayers under Efps in Chapter 4.
Penalties for Late Filing or Remittance
of Final Income taxes withheld
The same penalties for late payment of
income taxes as discussed in Chapter 4
apply for non-withholding or non-
remittance of final taxes.
ENTITIES EXEMPT FROM FINAL INCOME
TAX
1.Foreign governments and foreign
government-owned and controlled
corporations
2.International missions or
organizations with tax immunity
3.General Professional partnership
4.Qualified employee trust fund
The first two categories are exempt on
grounds of international comity.
General professional partnerships and
qualified employee trust funds are
expressly exempt from any income tax
imposed under the NIRC.
These entities are exempt not only to
final tax but also to capital gains tax and
regular income tax.
A comprehensive summary of final tax
rates is presented in Appendix 1.
CHAPTER 5:SELF-TEST EXERCISES
Discussion Questions
1.What are the features of income
taxation?
2.Explain withholding at source
3.Enumerate the passive income
subject to final tax and their
corresponding tax rates.
4.What are the two types of taxpayers
who are subject to final tax rates on all
income from within the Philippines?
What are the general tax rates
applicable to each?
5.Enumerate the requisites of the tax
informer’s reward.
6.Discuss the procedures and deadline
in remitting the final withholding taxes.
True or false
1.Generally, interest income from non-
bank sources is subject to regular
income tax. T
2. Foreign income is subjected to final
tax if the taxpayer is taxable on global
income.False
3.Items of passive income from abroad
are subject to final tax-False
4.Interest income on government
securities are subject to final tax.T
5.All items of passive income on
government securities are subject to
final tax-False
6. Final tax is collected at source; hence,
there is noe need to file an income tax
return-False
7. Corporations are tax exempt on inter-
corporate dividends from any
corporation. –False
8. Individuals and corporations are tax
exempt on interest income on long-
term deposits.-False
9. Dividends from resident corporations
are subject to regular tax.-False
10. Dividends from real estate
Investment Trusts are exempt from final
tax-False
11. Stock dividends are always exempt
from final tax. False
12. Corporations are subject to final tax
on prizes-False
13. The share in the net income of a
business partnership is subject to a
creditable withholding tax, not to final
tax.-False
14. General professional partnerships
are subject to final tax but not to
regular tax-False
15. All non-residents are exempt from
final tax but not to regular tax-False
16. Royalties, active or passive, are
subject to regular income tax.-False
17. The tax sparing rule is applicable to
resident and non-resident foreign
corporations-False
TRUE OR FALSE 2
1.A government employee may claim
the tax informer’s reward.False
2. The final tax on winnings applies to
corporations-False
3. Individuals, except corporations, are b.Final tax applies only on certain
subject to final tax on winnings passive income earned within the
abroad.False Philippines-
4. Winnings which are not more than c. Items of income exempt under final
P10,000 in amount are subject to the tax are subject to regular tax.
regular income tax.-False d.Final income tax applies to all passive
5. PCSO or lotto winnings are exempt income from Philippines sources
from all types of income tax-True 3. Interest income from which of the
6.Special aliens do not file a regular following sources is subject to final
income tax return on their income tax?
compensation income.-True a.Lending
7. The final tax on interest on tax-free b.Mortgage loans
corporate covenant bonds applies only c.Bond Investment
to resident individual or corporate d.Money Market placements-
taxpayers.-False 4.The final tax does not apply to interest
8. NRA-NETB and NRFC are subject to on (select the best answer)
final tax only to passive income from a.Long-term deposit
sources in the Philippines. False b. Trust funds
9. NRA-NETB and NRFCs are not c.Deposit substitute
required to file the regular income tax d. Promissory notes
return.-True 4. The final tax does not apply to
10. Residents shall withhold 10% final interest on(select the best answer)
tax upon interest on foreign currency a.Long-term deposit
loans of FCDU banks and OBUs under b. Trust funds
the expanded foreign currency deposit c.Deposit substitute
system. d. Promissory notes-
11. A qualified employee trust fund is 5. The exemption on final tax on
not subject to final tax.-True interest from long-term deposit is not
12. The income of FCDU banks from applicable to
fellow depository banks under the a.citizens indivduals
expanded foreign currency deposit b.Corporations-
system is subject to 10% final tax.-False c.Resident corporation or individuals
13.Petroleum service subcontractors d.All of these
are subject to 8% final tax on their 6.Which interest income is not subject
income from petroleum service to any income tax?
contractors-True a.Interest income from discount notes
14. The final withholding tax return b.Interest income from bonds issued by
shall be filed by the withholding agent a bank
on or before the 15th day of the month c. Imputed interest-
the final taxes were withheld.-False d. Interest income from deposit
15. Foreign governments and foreign substitute
government-owned and controlled 7.The final tax rates on pre-termination
corporations are exempt from final tax.- of long-term deposits is not relevant to
True a.any corporations-
Multiple choice-Theory 1 b.resident citizens
1.Which is correct with regard to the c.resident aliens
final income taxation? d.non-resident citizens
a.Taxpayers need not to file an income 8.Which of the following is subject to
tax return.- 7.5% final tax on interest from foreign
b.It covers all items of passive income currency deposits made within
from whatever sources. Philippine banks?
c.It applies to all items of gross income a. Non-resident corporation
of any non-resident earned from b.Non-resident alien engaged in trade
sources within the Philippines. or business
d. It applies to passive income earned c. Non-resident alien engaged in trade
abroad or business-c
2. Which statement is correct regarding d. None of these
final income tax? 10. The interest income from long-term
a.Items of income subjected to final tax peso deposit made with foreign banks is
can still be subjected to regular tax. a.subject to 20% final tax
b.Exempt from any tax
c.subject to regular tax-c
d. None of these
11. What is the final tax on interest
income on 6-year deposit pre-
terminated less than 2 years before
maturity?
a.20%
b.12%
c.5%-
d.0%
12. Which of the following recipients is
exempt from final tax on dividends?
a. Resident citizens
b.Non-resident alien
c.Resident corporation-
d.Resident alien
13.A dividend declaration in 2015 is
subject to a final tax of
a.6%
b.8%
c.10%-
d.20%
14. Dividends declared by a resident
corporation is
a.exempt from any tax
b.subject to 10% final tax
c.subject to regular income tax-
d.subject to 20% final tax
15. Between the date of declaration
and the date of record, BCD, Inc. sold an
investment representing stock of ABC,
Inc., a domestic corporation. Which
statement is correct?
a.ABC, Inc., shall withhold 10% dividend
tax if the buyer of the sale is an
individual.
b. ABC, Inc., shall withhold 10%
dividend tax if the buyer of the sale is a
corporation.
c. ABC, Inc. shall withhold 10% dividend
tax if the seller of the sale is an
individual.
d.ABC, Inc. shall withhold 10% dividend
tax if the seller of the sale is a
corporation.
Multiple Choices-Theory 2
1. Which is covered by final tax?
a.Interest income from foreign
banks
b.Share in the net income of a joint
venture-
c. P10,000 taxable prizes from the
Philippines
d. Share in the net income of a
general professional partnership
2. Which is not subject to 20% final tax?
a.Interest income from trusts funds
b.Royalties from musical compositions-
c.P11,000 worth of prizes
d.Winnings
3. Which is not subject to 10% final tax?
a.Royalties from literary works c.subject to either final tax or regular
b.Dividends from a domestic tax
corporation d. always subject to regular tax
c.Share in the net income of a business 12. The winnings of a resident alien
partnership from abroad is
d. Royalties from a business trademark- a.subject to regular tax
4. Which of the following is taxable? b. subject to final tax
a.Prize on sports competitions c.subject to either final or regular tax.
sanctioned by the national sports d. not subject to Philippine income tax-
organizations 13. Royalty income of a domestic
b.Prize from dance competition abroad- corporation from abroad is
c.Nobel Prize a.subject to regular tax.-
d.Any prize received without effort b. subject to final tax
5. Which winning is taxable to a final c. subject to either final tax or regular
tax? tax
a. Winnings exceeding P10,000 d.not subject to Philippine income tax
b.Winnings not exceeding P10,000 14.Winnigns from PCSO are
c.Winnings from illegal gambling a. exempt from any tax-
d.All of these- b. subject to regular tax
6.Prizes from sources abroad is subject c.subject to 20% final tax
to final tax d,subject to both final and regular tax.
a. if the amount of prizes exceeds 15.The final tax rates on passive income
P10,000 are generally similar to the following
b. if the amount of prizes does not taxpayers. except one.
exceed P10,000 Select the exception.
c. if it is given to the taxpayer without a.Domestic corporation
effort b.Resident alien
d.under no circumstance- c.Non-resident citizen
7.The following winnings are exempt d.Non-resident corporation-
from tax, except one, Which is the 16.The tax informer’s reward may be
exception? granted to
a.Jueteng winnings- a.Officials of the BIR
b. Lotto winings b. Public officials or employees
c.PCSO winnings c.Close relatives of public government
d.All of these employees
8. Which of the following is exempt d.Relatives of government employees
from final tax? beyond the 6th degree of consanguinity-
a. Interest income earned by a bank 17.Which is not subject to final tax?
from deposits in another bank a.Compensation to non-resident aliens
b.Royalties from books not engaged in trade or business
c.Interest income earned by a bank b.Fringe benefits of supervisory and
from lending activities- managerial employees
d.All of these c.Income of non-resident foreign
9. Dividends income from domestic corporations
corporations is subject to final tax d.Fringe benefits of rank and file
effective employees-
a.2000 18. Which of the following is exempt
b.1999 from final tax?
c.1998- a.Winnings in competitions by a local
d.1997 trading company
10. Prizes arising from sources within b.Prizes in a body building competition
the Philippines may be c.Dividends from a foreign corporation-
a.subject to final tax d. Winnings from a casino
b. subject to regular tax Multiple Choice-Problem 1
c.exempt from tax 1.Winnie, a resident citizen, deposited
d. exempt or subject to final tax or P2,000,000 in the 180-day time deposit
regular tax- of Banco de Oro. The deposit pays 8%
11. Any royalties earned abroad by a interest. Compute the final tax on
non-resident corporation is maturity of the deposit.
a.not subject to Philippine income tax a.P6,000
b. always subject to final tax b.P8,000
c.P20,000 7.Jake Corporation, a domestic deposit pays 8% annual interest.
d.P16,000- corporation. deposited P1,000,000 in Compute the final tax to be withheld in
2,000,000x0.08=16,000 the five-year time deposit of Banco dollars in the first year.
16,000x6/2=80,000 Pilipino which pays 10% annual interest. a.$0=
80,000x.20=16,000 Compute Jake Corporation’s net interest b.$12,000
2.Assume that Winnie is a non-resident income in the first year of the deposit c.$32,000
alien not engaged in trade or business; a.P100,000 d.$42,000
compute the final tax on maturity of the b.P90,000 13. Vernon is a non-resident citizen
deposit c.P80,000 working abroad. He invested his
a.P6,000 d.P70,000 $1,000,000 personal saving in a FCDU
b.P8,000 1,000,000x0.10-100,000 bank under a joint account with his
c.P20,000- 8. Assume Jake Corporation is a non- resident wife. The bank pays 8% annual
d.P16,000 resident corporation; compute the final interest. Compute the final tax to be
2,000,000x0.08=160,000 tax on interest income withheld in one year.
160,000x180/360=80,000 a.P0 a.$0=
80,000x.25=20,000 b.P10,000 b.$3,000-
3.Renz received P42,000 interest from c.P20,000 c.$6,000
short-term deposits. Compute the final d.P30,000- d.$8,000
tax withheld on the interest 1,000,000x.30=300,000 1,000,000x0.08=40,000x15%=6k
a.P10,500- 300,000x0.10=30,000 14. Yvonne, a non-resident alien not
b.P9,000 9.On January 2, 2011, Quezon, Inc. engaged in trade or business, made a
c.P5,000 placed P1,000,000 in the 5-year time $5,000,000 deposit to an FCDU Bank.
d.P4,500 deposit of Bank of Laguna. The The deposit pays 8% annual interest.
42,000/0.8=52,500 placement earns 10% annual interest. Compute Yvonne’s final tax in the first
52,500x20%=10,500 Quezon, Inc. preterminated the deposit year.
4.On January 1, 2014, Mr. Albuera on June 30,2014. Compute the final tax a.$0
invested P2,000,000 in the six year time to be withheld on pre-termination. b.$30,000
deposit of Sulu Unibank which pays a.P0 c.$80,000
10% annual interest. Compute the final b.P10,000- d.$100,000
tax to be withheld by Sulu Unibank on c.P17,500 15. Gerry, a resident alien, deposited
December 31, 2014. d.P42,000 $1,000,000 in a depository bank under
a.P0- paid by the bank on a yearly basis at the expanded foreign currency deposit
b.P100,000 the end of 1,000,000x10%x6/2=50,000 system. The five-year savings deposit
c. P200,000 each yearx20%=10,000 pays 10% annual interest. Assuming a
d.P250,000 P45:$1 exchange rate, how much final
5. Assume Mr. Albuera pre-terminated 10. Francis, a resident citizen, invested tax on interest would be withheld in the
the time deposit on July 1, 2018; P1,000,000 in a debt first year?
compute the final tax to be withheld on instruments( deposit substitute) issued a.P0
pre- termination. by Unibank. The debt instruments pay b.P7,500
a.P5,000 10% annual interest payable every c.P20,000
b. P12,000 quarter. How much tax should Unibank d.P337,500=
c.P45,000 withhold in the first quarter of the Multiple Choice-Problems 2
d.P108,000 issue? 1.Kendrick Inc., a domestic corporation,
2,000,000x10%=200,000 a.P0 was credited $46, 250 interest income
200,000x45=900,000 b.P5,000- depositary account in an FCDU Bank.
900,000x.05=45,000 c.P6,250 How much final tax was withheld?
6.Boy, a resident citizen, received the d.P20,000 a.$0
following interest income: 11. Cyndrell, a resident citizen, b.$3,750-
-P80,000 from short-term peso deposit deposited P5,000,000 in a non-resident c.$3,468.75
-P16,000 from a five-year bonds issued foreign depository bank which pays d.$11,562.50
by a commercial bank 12% annual interest. How much final 2.Assuming Kendrick Inc, is a resident
-P24,000 from 5/6 lending to market tax shall be withheld in the first year? foreign corporation, how much final tax
vendors a.P0= withheld?
How much final tax must have been b.P45,000 a. $11,562.50
withheld from Boy’s interest income? c.P120,000 b.$3,468.75
a.P0 d.P150,000 c.$3,750-
b.P16,000 12. Rodrigo, a non-resident citizen, d.$0
c.P20,000- deposited his $2,000,000 savings in a 3. Tuzan Corporation declared
d.P24,000 two-year time deposit in Blue bank, a P1,000,000 dividends in 2014. 40% of
80,000/80%=`100,000 depository bank under the expanded its outstanding shares is held by its only
100,000x20%=20,000 foreign currency deposit system. The corporate investor, Abdul, Inc. Compute
the amount of dividends tax to be c.P10,000 14. Mr. Tuao won an P800,000 prize in a
withheld on declaration. d.P0- national dancing competition. The
a.P0 9. Teddy is a venture sharing 50% in the organizer of the event declared that the
b.P40,000- profits of Wise Ventures, an P800,000 grand prize was “tax free”.
c.P60,000 unicorporated joint venture, engaged in How much final tax must be remitted by
d.P100,000 the trading of home appliances. Wise the organizer to the BIR?
1m x.60=600,000x10%=60,000 subject Ventures reported P200,000 profits for a.P200,000=
to the individual 2014. How much final tax will be b.P160,000
4. Mr. Neis, a resident alien, owns 40% withheld by Wise ventures? c. P88,889
of the shares of Coco Corporation, a a.P0 d.P0
resident corporation. Coco declared b.P10,000 800,000/80=1m
P200,000 dividends in 2014. How much c.P20,000- 1mx.20=200,000
final tax should be withheld from Mr. d.P40,000 15. Mr. Crocodile owns a mining
Neis’ dividend income? 10.Zamboanga Corporation, a resident property in Prosperidad. He allowed a
a.P40,000 corporation, is a venture in Southern mining company to operate under a
b.P20,000 Philippine Ventures (SPV), an condition that he will be paid 10%
c.P8,00 incorporated joint venture formed royalty on the gold production. The
d. P0- under Philippine laws. Zamboanga owns mining company produced P8,000,000
E-RFC 30% interest on SPV. During 2014, SPV worth of gold during the year. How
Coco income out reported P3,000,000 profit and much net royalties will be paid to Mr.
NEIC RC=In out declared P1,000,000 in dividends. How Crocodile?
5. Carrots, Inc. owns 20% of the stocks much final tax will be withheld from the a.P800,000
of cabbage corporation. Carrots and dividend distribution to Zamboanga b.P640,000-
Cabbage are both domestic Corporation? c.P720,000
corporations. Cabbage declared a.P100,000 d.P160,000
P120,000 dividends in 2014. b.P30,000 8,000,000x.10=800,000x.20=160,000
How much dividend income after any c.P90,000 Multiple Choice-Problem 3
applicable tax will Carrots receive? d.P0- 1.Mr. Aguak earned the following prizes
a.P24,000- 11.Pedrodrill Ventures is a joint venture from two different competitions:
B.p20,000 which operates under a service contract Date Event Gross
C.P19,000 with the government. Petrodrill is 30% Prize
d.P18,000 owned by individual investors. The rest January 4, 2017 Singing competition
6. Mr. Siegfried, a resident citizen, is owned by corporate oil exploration P12,0000
received P100,000 dividend income companies. Petdrodrill reported February 14, 2017 Painting competition
from Vodka, Inc., a domestic P2,000,000 profit which was to be 10,100
Corporation. How much final tax must distributed. Compute the total final tax that should
have been withheld by Vodka, Inc.? How much final tax will Petrodtrill have been withheld from the above
a.P0 withhold? prizes.
b.P11,111- a.P200,000 a.P5,500
c.P20,000 b.P60,000 b.P4,420-
d.P25,000 c.P140,000 c.P3,000
7. Ms. Gina owns 40% of the capital and d.P0- d.P2,400
profits of Cebu Ventures, a business 12. Mr. Bayugan published his book 2.Mr. Rems Orayt participated in two
partnership engaged in the trade of abroad for the international market. different events on January 4, 2017:
tourist souvenirs. Cebu Ventures During the first quarter, he earned a Date Organizer Competition Gross
reported P200,000 net income in 2014. gross royalty of P1,000,000. How much Prize
Compute the total final tax to be final tax will be withheld by the foreign January 4, 2017 Ang mahiwagang Boses
withheld be the partnership on Gina’s publisher? Singing P10,000
profit sharing. a.P250,000 January 4, 2017 Samahang Sexy Body
a. P0 b.P200,000 Dancing 10,000
b.P8,000- c.P100,000 Compute the total final tax that should
c.P10,000 d.P0-RIT have been withheld from the above
d.P20,000 13.Sison. Inc. is the only corporate prizes.
8.Raymond owns 20% of the capital and shareholder of Surigao Inc. declared a a.P0-
profits of a general professional P1,000,000 dividend. Compute the final b.P4,420
partnership. The partnership reported income tax to be withheld by Surigao. c.P3,000
P500,000 profits in 2014. How much a.P100,000 d.P2,400
final tax will be withheld from b.P60,000 3.Mr. Conrado won the P50,000,000
Raymond? c.P40,000- 6/49 Superlotto Jackpot of the
a.P100,000 d.P0 Philippine Charity Sweepstakes Office.
b.P50,000 How much final tax will be withheld?
a. P500,000
b. P200,000
c.P100,000
d.P0-
4.Ms. Matti won a gold medal and
P50,000 cash prize for chess
competition in the Palarong Pambansa.
How much final tax should be withheld
from the prize?
a.P20,000
b.P10,000
c.P5,000
d.P0-
5.Tiong Sang Department Store
conducted a sales promotion where
customers purchases exceeding P1,000
in one transaction shall be entitled to a
ticket for a chance to win P500,000. Mr.
Shing won the prize.
How much shall Tiong Sang withhold
from the grand prize?
a.P200,000
b.P100,000-
c.P50,000
d.P0
6. Tacurong, a resident citizen, won
$1,000,000 from the U.S lottery. The
lottery winning is
a. exempt from tax
b. subject to 20% final tax
c. subject to 10% final tax
d. subject to regular tax-
7. Mr. Curandang submitted a sworn
statement regarding the alleged tax
evasion practices of Chitie Corporation.
This led the BIR to recover P20,000,000
unpaid taxes. How much net tax
informer’s reward shall be paid to Mr.
Curandang?
a. P1, 800,000
b.P1,600,000
c.P1,000,000
d.P900,000-
8. A concerned government employee
furnished the BIR a statement detailing
the improper tax practices of a
corporate taxpayer. The information
was instrumental to the collection of
P500,000 tax. How much informer’s tax
reward after ta shall be released to the
informant?
a.P0-
b.P40,000
c.P45,000
d.P50,000
9. Roy invested P1,000,000 in the “tax-
free” corporate bonds of RBC
Corporation. The bond pays 8.75%
interest annually net of taxes. How
much final tax must RBC Corporation
withheld from the annual interest
payment to Roy?
a.P36,000
b.P16,800
c.P37,500-
d.P0
10. A taxpayer wants to manually file
his Monthly Remittance Return of Final
Income Tax Withheld for the month of
February 2017. What is the deadline for
the return?
a.February 14, 2017
b. February 29, 2017
c.March 10, 2017-
d. April 15, 2017
11. In reviewing its tax compliance,
Rang-ay Banco that it failed to remit the
P90,000 final taxes it withheld for the
month of February 2017. Compute the
total amount of taxes due including the
penalties of Rang-ay Banco settles the
obligation on March 20, 2017.
a.P90,000
b.P112,500
c.P113,000
d.P128,000-
12. Bangko Illustrado failed to withhold
the final tax on the P1,200,000 interest
expense which was credited to various
accounts of individual depositors in the
month of April 2015. It wants to settle
the unpaid final withholding tax on June
10, 2015. Compute the surcharge and
interest penalty due.
a.P450,000
b.P320,000
c.P64,000-
d.P58,000
13. The Ibanag Bank of Gattaran failed
to withhold final taxes on interest on its
time deposits resulting in P8,000
interest penalty for six months of
delinquency. The delinquency was
subject to a compromise penalty of
P15,000. Compute the total tax due
inclusive of penalties.
a.P123,000-
b.P108,000
c.P95,000
d.P88,000
CHAPTER 6
CAPITAL GAINS TAXATION
CLASSIFICATION OF TAXPAYER’S
PROPERTIES
1.Ordinary assets-assets used in
business, such as:
a. Stock in trade of a taxpayer or other
real 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.
b.Real property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or business.
c. Real property used in trade or
business of a character which is subject
to the allowance for depreciation.
d.Real property used in trade or
business of the taxpayer.
Basically, ordinary assets are
a. Assets held for sale-such as
inventory
b. Assets held for use-such as
supplies and items of property,
plant and equipment like
buildings, property
improvement, and equipment
2.Capital assets-any assets other than
ordinary assets
Basically, capital assets are:
1. Personal(non-business) assets of
individual taxpayer
2. Business assets of any taxpayer
which are:
a. Financial assets-such as
cash, receivables,
investments
b. Intangible assets-such as
such as patents, copyrights,
leasehold rights; franchise
rights.
ANAYSIS OF PROPERTIES HELD
BY TAXPAYERS
INDIVIDUAL TAXPAYERS
Personal Assets Business asset
(All capital assets)
OrdinaryCapital asset-
asset-for
financial
sale or for use
intangible
Corporate taxpayers
Ordinary assets Capital asset
Asset Classification is relative
The classification of assets or properties
as ordinary asset or capital asset does
not depend upon the nature of the
property but upon the nature of the
taxpayer’s business and its usage by the
business.
Example:
1.A domestic stock is an ordinary asset
to a dealer in securities but is a capital
asset to a non-security dealer.
A ‘dealer in securities” is a merchant of
stocks of stocks or securities with a
registered place of business, regularly
engaged in the purchase of securities
and their re-sale to customers.
3. A vacant and unused lot is an
ordinary asset to a taxpayer
engaged in the real estate
business such as realty dealer,
realty developer, or lessor but is
a capital asset to those not
engaged in the real estate
business.
Interestingly, the revenue
regulations classifies real and other
properties acquired(ROPA) by banks
as ordinary assets even if banks are
not actually engaged in the realty
business. This is an apparent
recognition of the fact that ROPA
are normally acquire and sold by
banks in their normal course of
business. However, ROPA in the
form of domestic stocks held by
banks are capital asset” means all
stocks and securities held by
taxpayers other than dealers in
securities.
Asset Classification Rules
A. A property purchased for future
use in business is an ordinary
asset even though this purpose
is later thwarted by
circumstances beyond the
taxpayer’s control.
B. B. Discontinuance of the active
use of the property does not
change its character previously
established as a business
property.
C. C.Real properties used, being
used, or have been previously
used, in trade of the taxpayer
shall be considered ordinary
assets
D. D.Properties classified as
ordinary assets for being used in
business by a taxpayer not
engaged in the real estate
business are automatically
converted to capital assets upon
showing of proof that the same
have not been used in business
for more than 2 years prior to
the consummation of the
taxable transaction involving
such property.
E. A depreciable assets is an
ordinary asset even if it is fully
depreciated, or there is a failure
to take depreciation during the
period of ownership
F. Real properties used by an
exempt corporation in its
exempt operations are
considered capital assets
G. The classification of property
transferred by sale, barter, or
exchange, inheritance, donation,
declaration of property
dividends shall depend on
whether or not the acquirer
used it in business.
H. For real properties subject of
involuntary transfer such as
exprorpriation and foreclosure
sale, the involuntariness of such
sale shall have no effect on the
classification of such real
property.
I. Change in business from real
estate to non-real estate
business shall not change the
classification of ordinary assets
previously held/
Taxpayers engaged in real estate
business includes real estate dealer,
real estate developer, real estate
lessor and taxpayers habitually
engaged in real estate business.
Taxpayers habitually engaged in
real estate business include those
registered with the HLURB or
BUDCC as dealer or developer or
those with at least 6 taxable real
estate sales transactions in the
preceding year.
Illustration 1- Property previously
used in business
Mr. Ginebra has a building which
was previously used as an office and
is subject to periodic allowance for
depreciation. In July 1, 2015, Mr.
Ginebra implemented a strategic
shist in his business operations
resulting to the relocation of its
administrative office in another city
and the resultant abandonment of
its office.
Case 1: Mr. Alfonso is a not engaged
in real estate business
Effective July 3, 2015(i.e., more than
two years from discontinuance of
use, the old office building shall be
reclassified as capital asset upon
showing of proof that the same has
not been use for more than two
years.
Case 2: Mr. Alfonso is engaged in
real estate business
The old office shall continue to be
an ordinary asset despite the
abandonment or idling of the
property from active use.
Illustration 2-Property acquired to
be used in business
In June 1, 2014, Mr. Alfonso
purchased a building to be used as a
branch sale office. The building
remained idle as of December 31,
2017 due to an ongoing civil war.
Case1: Mr. Alfonso is not engaged in
real estate business
The property shall remain to be an
ordinary asset. The tow-year rule
applies only to properties which are
classified as ordinary asset for being
used in business. A property
purchased for future use in
business, even though this is later
thwarted by circumstances beyond
the taxpayers control, does not lose
its character as an ordinary asset.
Case 2: Mr. Alfonso is engaged in
real estate business
The property shall remain to be
considered as an ordinary asset.
Properties acquired by taxpayers
engaged in real estate business
shall remain to be ordinary asset
even if discontinued from active use
and even if they discontinue their
real estate business.
Illustration 3-Disposal of Property
Juan, a realty dealer, donated one of
his house and lot inventory to his
son as dowry for his upcoming
marriage. His son shall use the same
as his family residence. He also
donated another house and lot as
initial capital of his daughter who
will commence a realty leasing
business.
The house and lot shall be
considered capital asset to the son
because he will not use it in
business. The house and lot donated
to the daughter shall be considered
ordinary asset to the daughter
because she will use it in business.
Illustration 4- Exempt non-business
operation
Bantay Bata Foundation owns
Building A-1. which its uses for its
non-profit operations. It also owns
another building A-2. which it
leased out to various commercial
lessees.
Building A-1 is a capital asset since
it is employed in a non-taxable
operations. Building 2 is an ordinary
asset since it is employed in taxable
operations.
TYPES OF GAINS ON DEALINGS IN
PROPERTIES
1.Ordinary gains-arises from the
sale, exchange, and other
disposition including pacto de retro
sales and other conditional sales of
ordinary assets
2.capital gain-arises from the sale,
exchange, and other disposition
including pacto de retro sales and
other conditional sales of capital
assets
Taxation of Gains on Dealings in
Properties
Types of gain Applicable taxation
scheme
Ordinary gains Regular income
tax
Capital gains General rule: Regular
income tax
Exception rule: Capital
gains tax
-Sale of:domestic stocks sold
directly to buyer(15%), real
properties not used in business(6%)
CAPITAL GAINS CUBJECT TO CAPITAL
GAINS TAX
There are only two types of capital
gains tax subject to capital gains tax:
1. Capital gains on the sale of
domestic stocks sold directly to
buyer.
2. Capital gains on the sale of real
properties not used in business
SCOPE OF CAPITAL GAINS TAXATION
Gains on dealings in capital assets
Tax rates
Gain on the sale, exchange, and
other disposition of domestic stocks
directly to buyer Train law 15%
Sale, exchange, and other
disposition of real property in the
Philippines 6% capital
gains tax
Gains from other capital assets
Regular income tax
The tax treatment of gains on
dealings in other properties other
than those subject to capital gains
tax will be discussed in detail in
Chapter 12.
SALE, EXCHANGE AND OTHER
DISPOSITION OF DOMESTIC STOCKS
DIRECTLY TO BUYER
Domestic Stocks
Domestic Stocks are evidence of
ownership or rights to ownership in
a domestic corporation regardless
of its features, such as:
1.Preferred stocks (participative,
cumulative, etc.)
2.Common stocks
3.Stock rights
4. Stock options
5. stock warrants
6. Units of participation in any
association, recreation, or
amusement club (golf,polo, or
similar clubs)
The capital gains tax covers only
sales of domestic stocks for cash but
also exchange of domestic stocks in
kind and other dispositions such as:
1.Foreclosure of property in
settlement of debt
2. Pacto de retro sales- sale with
buy back agreement
3. Conditional sales-sales which will
be perfected upon completion of
certain specified conditions
4. Voluntary buy back of shares by
the issuing corporation-redemption
of shares which may be re-issued
and non intended for cancellation
The term other disposition does not
include:
1.Issuance of stocks by a
corporation
2. Exchange of stocks for services
3. Redemption of shares in a mutual
fund
4. Worthlessness of stocks
5. Redemption of stocks for
cancellation by the issuing
corporation
6. Gratuitous transfer of stocks
Issue of stocks including treasury
stocks
The issue of stocks to stockholders
by a corporation is a financing
transaction rather than a sale
transaction. The excess of fair value
received over the par value of
shares issued is an additional capital
to the corporation.
Stocks acquired by the corporation
from its shareholders, treasury
shares, cannot be considered assets
or investments in accounting sense.
The excess of the consideration
received in the re-issuance of
treasury stocks is called treasury
share premium is an additional
capital and is not income.
Under the US tax rules, treasury
shares can be considered as
investments if the corporation
trades on its shares as it would in
the shares of other corporations. As
such, the treasury share premium is
viewed as a capital gain.
Under the NIRC, and RR6-2008,
however, there is no express
provision taxing treasury share
premium. Hence, treasury share
premium should not be subjected to
capital gains tax.
Exchange of stocks for services
Similarly, the exchange or issue of
stocks for services cannot be
considered as exchange for
property. No gain or loss can be
imputed as it involves payment of
expense in kind.
Redemption of shares in a mutual
fund
Gains from redemption of shares in
a mutual fund are exempted by the
NIRC from income taxation.
Worthlessness of stocks
The value of stocks becoming
worthless is considered a capital
loss subject to the rules of regular
income tax. This will be discussed in
Chapter 12.
Redemption of stocks by the issuing
corporation
Under RR6-2008, any gain or loss on
the mandatory redemption of
stocks by the issuing corporation for
the purpose of stock cancellation
shall be subject to the rules of
regular income tax discussed under
Dealings in Properties in Chapter 12.
It should be noted, therefore, that
the gain by the investor on
redemption of redeemable
preferred shares shall be subject to
regular income tax.
Note, however, that this does not
include the voluntary buy-back of
the shares by the issuing
corporation to be held in treasury
which may later on be re-issued.
The gain or loss realized by the
investor on voluntary buy-back of
shares by the issuing corporation is
taxable under capital gains taxation.
Gratuitous transfer of stocks
The gratuitous transfer of stocks
either by way of donation inter-
vivos or donation mortis causa is
subject to transfer tax, not to
income tax.
MODES OF DISPOSING DOMESTIC
STOCKS
Shares of stocks may be sold,
exchanged, or disposed:
1.Through the Philippine Stock
Exchange (PSE) or
2. Directly to buyer
Stock transaction tax SPX1%X1/2 or
SPx0.5%
TAX ON SALE OF DOMESTIC STOCKS
THROUGH THE PSE
The sale of domestic stocks
classified as capital assets through
the PSE is not subject to capital
gains tax. It is subject to a stock
transaction tax of ½ of 1% of the
selling price.
Illustration 1:Non-dealer in stocks
Mr. San Juan, not a dealer in stocks,
sold the following stock investments
through the Philippine stock
Exchange:
Date Stock Code Selling Price
Cost Gain (Loss)
4/5/2015 AC P4,000,000
P3,700,000 P300,000
4/5/2014 SMB
3,000,000 3,200,000 (200,000)
P7,000,000
P6,900,000 P100,000
The stock transaction tax shall be
computed as follows:
Total selling prices of stocks through
the PSE P7,000,000
Multiply by: Transaction tax rate
0.5%
Transaction tax
P35,000
Note:
1. The stock transaction tax applies
on the selling price regardless of
the existence of a gain or loss on
the sale transactions
2. 2. The P65,000 net capital gains,
after deduction of the P35,000
transaction tax, is exempt from
income tax. It will no longer be
subject to capital gains tax or to
regular income tax.
Illustration 2:Dealer in stocks
Assume the same data in the
previous illustration except that Mr.
San Juan is a dealer in stocks.
Mr. San Juan shall not be subject to
the stock transaction tax but the
P300,000 gain is an ordinary gain
reportable as item of gross income
subject to regular income tax. The
P100,000 loss is also an ordinary
loss reportable as item of deduction
against gross income under the
regular income tax.
TAX ON SALE, EXCHANGE, AND
OTHER DISPOSITIONS OF DOMESTIC
STOCK DIRECTLY TO BUYER.
The net gain on the sale, exchange,
and other disposition of domestic
stocks directly to a buyer, is subject
to a two-tiered capital gains tax:
Tax rate
Net gain up to P100,000.00 5%
Excess net gain above P100,000 10%
The net gain is determined as
follows:
Selling price
Pxxx.xxx
Less:
Basis of stocks disposed Pxxx.xx
Selling expenses xxx.xx
Documentary stamp tax on the
sale xxx.xx
xxx.xx
Net capital gain(loss) Pxxx.xx
Selling price shall mean:
*In case of cash sale, the total
consideration received per deed of
sale
*If total consideration is paid partly
in money and partly in property, the
same sum of money and fair values
of consideration received.
Illustration
Mr. Cool sold his stocks receiving in
exchange a building with a tax basis
of P2,000,000 but with a fair value
of P2,500,000 goods worth
P100,000, and P400,000 cash
The selling price shall be computed
as follows:
Fair value of buildings received
P2,500,000
Fair value of goods received
100,000
Cash
400,000
Total consideration or selling price
P3,000,000
What is the tax basis of stocks?
 If acquired by purchase, tax
basis is the cost of the
property which shall be
determined by the following
methods in descending order
of priority:
-Specific identification, if the
shares can be specifically
identified.
-moving average method, if
books of accounts are
maintained by the seller
where transaction of every
particular stock is recorded.
First-in, First out method, if
the stocks cannot be
specifically identified.
 If acquired by devise,
bequest, or inheritance, the
tax basis is the fair value at
the time of death of the
decedent
 If acquired by gif-the tax
basis is the lower of the fair
market value at the time of
gift and the basis in the
hands of the donor or the
last preceding owner by
whom it was not acquired by
gift.
 If acquired for inadequate
consideration-the tax basis is
the amount paid by the
transferee for the property.
 If acquired under tax-free
exchanges, the tax basis is
the substituted basis of the
stocks.
Illustration 1:Cost of acquisition
Mrs. La Carlota purchased 1,000
shares of Bacolod Corporation
for P100,000 and paid the
broker’s commission of P1,000.
The stocks were subject to a
chattel mortgage of P10,000
which Mrs. La Carlota assumed.
The cost basis of the stocks shall
be:
Cash paid P100,000
Obligations assumed on the
property purchased 10,000
Direct acquisition costs-broker’s
commission 1,000
Total cost(tax basis)
P111,000
Illustration 2:Costing procedures
Mr. Alcantara had the following
purchases and sales of shares of
the stocks of El Dorado
Corporation:
Date Transaction Shares Price
Cost
January 1 Purchase 10,000
P10.00 P100,000
March 1 Purchase 5,000
11.03 55,150
March 23 Purchase 20,000
12.00 240,000
April 4 Sale 25,000
15.00
The cost of the shares sold shall
be determined as follows:
1.Assuming Mr. Alcantara presumed from the cost of the (Dona Karena) who did not
identified that the shares sold first 25,000 shares bought: acquire the property by gift, and
were those bought on March 1 Date Transaction Shares Unit -P2,500,000, the fair value at the
and March 23, the applicable cost Cost date of donation, hence,
method is specific identification January 1 Purchase 10,000 P400,000
method. P10.00 P100,000 2.Inheritance:Assuming the
Under specific identification, the March 1 Purchase 5,000 shares were inherited by Mrs.
actual cost of the shares sold 11.03 55,150 Lipa when Don Bosco died in
and remaining stocks shall be: March 23 Purchase 20,000 March 2013, the basis of the
March 1 purchase 5,000 shares 12.00 240,000 shares to Mrs. Lipa shall be
P55,150 35,000 P2,500,000, the fair value at the
March 23 purchase 20,000 P395,150 date of death of Don Bosco.
shares 240,000 Less: Cost of goods sold: 3.Purchase for an inadequate
Cost of the remaining 10,000 January 1 10,000 consideration:Assuming the
stocks P100,000 P10.00 P100,000 shares were bought by Mrs. Lipa
2.Assuming Mr. Alcantara March 1 5,000 from Don Bosco for only
cannot identify the shares 11.03 55,150 P1,200,000 the basis of the
actually sold but retains detailed March 23 10,000 shares to Mrs. Lipa shall be
records of purchase and sale in 12.00 120,000 P1,200,000, the actual price
the stocks and sale in the stocks (P275,150) paid for the,.
of El Dorado, the applicable 25,000 The computation of adjusted
method is the moving average Quantity and cost of ending basis on tax-free exchanges will
method. shares 10,000 12.00 be discussed under tax-free
Under the moving average P120,000 exchanges in this chapter.
method, the cost of the shares Note: Stocks sold below their fair
sold and the remaining shares 1.The 10,000 and 5,000 shares value
shall be computed as follows: from January 1 and March 1 The excess of the fair value over
Date Transaction Shares respectively are deemed first the selling price is subject to
Unit cost Cost sold. The other 10,000 shares donor’s tax.
January 1 Purchase 10,000 sold are deemed coming from Illustration
P10.00 P100,000 the last purchase on March23. Mr. Navotas sold his investment
March 1 Purchase 2. The cost of the 10,000 shares in domestic stocks directly to a
5,000 11.03 55,150 in the last purchase is computed buyer for P500,000. The shares
March 23 Purchase 20,000 as have a fair value of P650,000
12.00 240,000 10,000/20,000Xp240,000=P120, and P300,000 tax basis and
35,000 P11.29 P395,150 000 expenses on the date of sale.
Less:Cost of shares sold 25,000 Illustration 3:Acquisition by Fair value-P650,000 -150,000
P11.29 gratuitous title 0.5% gratuity subject to transfer
(P282,250) In March 2013, Mrs. Lipa tax
Quantity and cost of ending received by gratuitous Selling price 500,000
shares 10,000 P11.29 acquisition shares of stocks of Less:Cost and expenses 300,000
P112,900 Taal Corporation from her father P200,000 gain subject to capital
Don Bosco. Don Bosco acquired gains tax
Note: the same shares by donation in The rules on the determination
1.Average unit cost June 1999 from his mother. of fair value of stocks and
=P395,000/35,000=P11.29 Dona Karena, who bought the transfer taxation will be
2.Under the moving average shares for P400,000 in April discussed in the book, Business
method, the average unit cost of 1996. The shares had a fair value and Transfer Taxation, by the
the stocks is determined after of P700,000 in June 1999 and same author.
every purchased P2,500,000 in March 2013. SCOPE OF THE TWO-TIERED
3. The cost of ending shares can Assuming the shares were CAPITAL GAINS TAX
be computed as 10,000 acquired by Mrs. Lipa from her The two-tiered capital gains tax
Xp11.29/ father by way of: applies for all classes of
3.Assuming Mr. Alcantara 1.Donation:Assuming the shares taxpayers, individuals and
cannot identify the stocks and were donated by Don Bosco to corporations, regardless of the
does not maintain detailed Mrs. Lipa in March 2013- the place of sale, the identity of the
records of transactions in the basis of the shares to Mrs. Lipa buyer,and the length of time the
shares of El Dorado, the shall be whichever is lower of: domestic stocks were held by
applicable method is the First-in, -P400,000, the basis in the hand the taxpayer. Even NRA-NETBs
first-out method . The cost of of the last preceding owner and NRFCs are required to file
the shares sold shall be the capital gains tax return. Due
to this, it is regarded as the most
universal rule in income
taxation.
The transfer by a non-resident
alien or a foreign corporation to
anyone of share of stocks issued
by a domestic corporation shall
not be effected in its books
unled the transferor has filed
with the Commissioner a bond
conditioned upon the future
payment by him of any income
tax that may be due on the gains
derived from such transfer, or
the Commissioner has certified
that the taxes, if any, due on the
gain realized from such sale or
transfer have been paid.
It shall be the duty of the
transferor and the corporation
the shares of which are sold or
transferred, to advise the
transferee of his requirement.
CAPITAL GAINS TAX
COMPLIANCE
1.Transactional capital gains tax
2. Annual capital gains tax
TRANSACTIONAL CAPITAL GAINS
TAX
The capital gains or losses are
required to be reported after
each sale, exchange, and other
dispositions through capital
gains tax return, BIR form 1707.
Illustration:Computation of
Capital Gains tax
Cherry disposed her investments
in domestic stocks costing
P100,000 directly to a buyer. She
paid on the sale of P2,000 and
P500 respectively, for broker’s
commissions and documentary
stamp tax expense.
Compute the capital gains tax
under each of the following
conditions:
1.Selling price=P180,000
Selling price
P180,000
Less: Cost and expenses
Purchase cost P100,000
Commission expense 2,000
Documentary stamp tax
expense 500 102,500
Capital gain
P77,500x15%=11,625
First P100,000 of gain P77,500
Multiply by applicable rate: 5%
Capital gains tax due P3,875
2.Selling price=P240,000
Selling price P240,000 The final capital gains tax payable
Less: Cost and expenses 102,500 (refundable) shall be:
Capital gain P137,500 Annual net capital gain P170,000
x15%=20,625 Less: First P100,000 net gain
First P100,000 gain at 5% 100,000x5%=P5,000
P100,000 Excess net capital gain P70,000x10%
Excess gain at 10% 7,000
37,500 Annual capital gains tax due
P5,000 P12,000
3,750 Less: Total transactional capital gains
Capital gains tax due taxes paid
P8,750 10,500
Capital gains tax payable (refundable)
Deadline of the transactional capital P1,500
gains tax return
The capital gains tax return (BIR Form Annual capital net gain
1707) shall be filed within 30 days after 170,000x15%=25,000
each sale, exchange, and other Annual capital gains tax due less
disposition of stocks. If the tax is transactions (30,000)
qualified for payment under the Tax refundable 4,500
installment method, the tax is due Deadline of annual capital gains tax
within 30 days after each installment. return
The installment payment of capital The annual capital gains tax return, BIR
gains tax will be discussed later in this Form 1707-A, shall be filed on or before
chapter. the 15th day of the fourth month
ANNUALIZED CAPITAL GAINS TAX following the close of taxable year of
The tax on capital gains on the sale, the taxpayer.
exchange, and other disposition of Illustration
domestic stocks directly to a buyer is In the immediately preceding
based on the annual net capital gains. illustration, the P1,500 net capital gains
The annual net capital gain or loss is tax payable is due on or before October
th
computed as transactional capital gains 15, 2016, the 15 day of the fourth
less transactional capital losses. month following the fiscal-year-end,
The transactional capital gains taxes June 30. 2016.
paid during the year are deducted as For individual taxpayers, the P1,500
tax credit against the annual capital capital gains tax shall be payable on or
gains tax due. The excess of the annual before April 15, 2016 since individuals
capital against ax due over the sum of are allowed only the calendar year
the transactional capital gains taxes accounting period.
paid during the year is a capital gains INSTALLMENT PAYMENT OF THE 5%-
tax payable. The excess of the sum of 10%, CAPITAL GAINS TAX
transactional capital gains tax over the When domestic stock is sold in
annual capital gains tax due is capital installments, the capital gains tax may
gains tax refundable. also be paid in installments if the:
Illustration a.Selling price exceeds P1,000; and
Allisson, Inc., disposed several equity b.Initial payment does not exceed 25%
directly to a buyer during its fiscal year of the selling price
ending June 30,2016: Illustrative Case:Basic
Date Equity Securities Selling price Cost On November 1, 2016, Mr. Batanes
and Expenses Capital gains(losses) made a sale of domestic stocks costing
Capital gains tax Train Law P700,000 directly to a buyer for
1/12 Preferred stock P210,000 P1,000,000. The buyer agreed to pay in
P100,000 P110,000 P6,000 16,500 P100,000 monthly installments starting
3/18 Common stocks 80,000 90,000 November 30.
(10,000)- The capital gains tax shall be:
5/14 Stock rights 160,000 Selling price P1,000,000
70,000 90,000 4,500 13,500=30,000 Less: Cost of shares sold 700,000
6/17 Stock options 80,000 100,000 Net capital gain
(20,000) - P300,000x15%=45,000-----subject to
P170,000 P10,500 capital gains tax because, SP 1,000,000
(exceeds 1,000) installments
100,000(did not exceed 25% of 1m
x25%)=250,000
Less:First P100,000 x5% P5,000
Excess gain P200,000x10% 20,000
Net capital gains tax due P25,000
Illustration 1:No mortgage on the
shares sold
Initial payment:
First installment(November30)
P100,000
Second installment (December31)
100,000
100,000/1mx45,000=4,500
Total initial payment
P200,000
Ratio of initial payment
(P200,000/P1,000,000) 20%
The taxpayer is qualified to pay capital
gains by installment.
Under the installment method, the tax
shall be paid based on the pattern of
collection of the contract price. The
contract price is the total sum of money
collectible from the contract. It is
normally the selling price in the
absence of any indebtedness on the
shares sold.
Under the installment method, the
capital gains tax payable every
installment shall be computed
as:Collection/Contract pricexCapital
gains tax
The capital gains tax payable for every
installment shall be P2,500 computed
as P100,000/P1,000,000 XP25,000
100,000/1MX45,000=4,500
Note that the selling price is used to
measure the initial payment ratio, but
the contract price is used in determining
the capital gains tax installment.
Illustration 2: With mortgage on stocks
but not in excess of cost
Assume the stocks were previously
mortgaged for P600,000 which the
buyer assumed. The P400,000 balance
is payable in monthly installments of
P100,000 starting November 30, 2016.
The gain and the capital gains tax shall
be the same as P300,000 and P25,000
respectively. The contract price or total
sum collectible on the sale shall be:
Selling price P1,000,000
100,000/400,000x45,000=11,250
Less:mortgage assumed
(*indebtedness) 600,000
Contract price P400,000
The capital gains tax payable every
installment shall be P6,250 computed
as P100,000/P400,000XP25,000.
Illustration 3:With excess mortgage
over cost
Assume instead that the stock was
subject to P750,000 mortgage which
the buyer assumed. The P250,000
balance is payable in monthly
installments of P50,000 starting
November 30,2016.
The gain and the capital gains tax shall
be the same as P300,000 and P25,000
respectively. The excess of mortgage
over the basis of the stocks is an
indirect downpayment, a form of
constructive receipt.
Selling price P1,000,000
Less:Mortgage assumed 750,000
Cash collectible P250,000
Constructive receipt (P750k mortgage-
P700k basis) 50,000
Contract price P300,000
The initial payment shall be computed
as follows: (1 year)
Indirect downpayment (constructive
receipt) P50,000
First installment (November 30)
50,000
Second installment(December 31)
50,000
Total initial payment
P150,000
Ratio of initial payment
(P150,000/P1,000,000)=15%
The taxpayer is qualified to pay capital
gains tax in installments.
The capital gains tax shall be as follows:
For the sale :P50,000/P300,000
XP25,000 P4,166.67
For every
installment:P50,000/P300,000Xp25,000
P 4,166.67
SPECIAL TAX RULES IN CAPITAL GAIN OR
LOSS MEASUREMNT
1. Wash sales of stocks
2. Tax-free exchanges
a.Exchange of stocks pursuant to
a merger or consolidation
b.Transfer of stocks resulting in
corporate control
WASH SALES RULE
Wash sale of securities is deemed to
occur when within 30 days before and
30 days afer the sale (also referred to
as the 61-day period), the taxpayer
acquired or entered into a contract or
option to acquire substantially identical
securities.Capital losses on wash sales
by non-dealers in securities are not
deductible against capital gains.
30 days Day of losing sale
30
days
Securities for purposes of the 61-day
rule include stocks and bonds. The wash
sales rule has significance on the
recognition of reportable capital losses
on domestic stocks sold directly to
buyer.
For the purposes of this rule,
substantially identical means that stocks
or bonds of the same class with the
same features. A common stocks is not
substantially identical to a preferred
stock. Participating and non-
participating stocks are not substantially
identical.
Illustration 1:Acquisition of identical
shares before a losing sale
In 2016, Mr. Toledo had the following
transactions in the shares of Talisay,
Inc., a domestic corporation:
Date Transaction Shares Price Cost
January 5 Purchase 10,000 P4.00
P40,000
March 1 Purchase 10,000 4.10
41,000
March 18 Sale* 10,000 3.80
38,000
*Those purchased January 5, 2016
The capital gain or loss on March 18,
2016 shall be computed as follows:
Selling price P38,000
Less:Cost of goods sold 40,000
Capital Loss P2,000
Pursuant to the wash sales rule, The
P2,000 capital loss on the sale shall not
be deductible in the computation of the
annual net capital gains in 2016 since
the shares sold were fully replaced
within the 61-day period.
There is full replacement or cover-up
when the quantity of the shares
acquired in the 61-day period is at least
equal to the quantity of the shares sold.
In this case, the loss is deferred and is
added to the tax basis of the
replacement shares.
The adjusted basis of the replacement
shares acquired on March 1, 2016 shall
be:
Purchase price P41,000
Add: Deferred loss on March 18 wash
sales 2,000
Basis on replacement shares P43,000
What if the replacement shares are less
than the shares sold?
Assume that the shares bought on
March 1, 2016 were only 8,000 shares
for P32,800.
Only the portion covered with
replacement shares shall be disallowed.
The portion without replacement cover
is a deductible realized loss. Thus, the
capital loss shall be split as follows:
Deferred loss( 8,000 shares/10,000
sharesxP2,000) P1,600
Deductible loss(2, 000 shares/10,000
sharesx P2,000) 400
Capital loss P2,000
The adjusted basis of the replacement
shares acquired on March 1, 2016 shall
be:
Purchase price P32,800
Add:Deferred loss on March 18 wash
sales 1,600
Basis of 8,000 replacement shares
P34,400
What is the 10,000 shares bought on
March 1, 2016 were the same shares
sold at a loss on March 18, 2016?
Note that wash sales involve the sale of
shares at a loss, but the same shares
were effectively re-acquired before or
after the sale by a covering acquisition.
In this case, the P2,000 capital loss is
not a wash sales since there is no
acquisition of replacement shares
within the 61-day period. Hence, the
capital loss is deductible against capital
gains.
Illustration 2: Acquisition of identical
shares after a losing sale
In 2016, Mr. Balangkayan had the
following transactions in the stocks of
Sta. Rita Corporation, a domestic
corporation:
Date Transaction Shares Price Cost
January 4 Purchase 10,000 P20.00
P200,000
February 28 Sale 10,000 18.00
180,000
March 4 Purchase 12,000 16.00
192,000
The capital gains or capital loss shall be
computed as follows:
Selling price P180,000
Less: Cost of shares sold 200,000
Capital loss (P20,000)
Since there is a full replacement over
(i.e., 12,000 shares) within the 61-day
period (i.e., March 4, 2016) the capital
loss shall be deferred and included as
part of the cost of the replacement
shares.
The basis of the replacement shares
purchased on March 4 shall be:
Purchase price P192,000
Add: Deferred loss on wash sale
20,000
Basis of 12,000 replacement shares Add:Deferred loss (5,000
P212,000 shares/8,000XP16k) 10,000
What if replacement shares are less Basis of the 5,000 replacement shares
than the shares sold? on February 15
Assume instead that only 7,000 shares P115,000
were bought on March 4 for P110,000.
In this case, the capital loss shall be split
The adjusted basis of the replacement
as follows: shares acquired on March 4, 2016 shall
Deferred loss(7,000/10,000XP20,000) be:
P14,000 Purchase Price P48,000
Deductible loss (3,000/10,000
Add:Deferred loss (3,000 shares/8,000
XP20,000) 6,000 shares XP16K) 6,000
Capital loss P20,000
Basis of 3,000 replacement shares on
The adjusted basis of the replacement March 4
shares acquired on March 4, 2016: P54,000
Purchase Price P110,000Illustration 4:No replacement shares in
Add:Deferred loss on wash sales 14,000the 61-day period
Basis of 7,000 replacement shares On January 18, 2016, Mr. Malunay
P124,000 bought 10,000 shares of Gen. Luna
Illustration 3:Acquisition of Identical
Corporation for P100,000. On February
shares before and after losing sale 6, 2016, he sold the same shares for
In 2016, Mr. Iriga had the following P95,000. On March 28, 2016, he bought
transactions in the shares of Naga 5, 000 shares for P55,000.
Corporation, a domestic corporation: Note that the March 28 acquisition is
Date Transaction Shares Price/Share
beyond the 61-day period. Since there
Value is no acquisition of replacement shares
January 4 Purchase 15,000
within the 61-day period, the P5,000 is
P20.00 P300,000 not a wash sales loss but a deductible
February 15 Purchase 5,000
realized loss against capital loss against
21.00 105,000 capital gain from the sale of domestic
February 28 Sale* 12,000
directly to a buyer. The basis of the
18.00 216,000 shares bought on March 28, 2016 shall
March 4 Purchase 3,000
be P55,000.
16.00 48,000 Rationale of the wash sales rule
April 1 Purchase 7,000
The wash sale rule is intended to
14.00 98,000 prevent taxpayers from feigning
The shares sold on February 28 were attemporary losses which could enable
a loss shares bought on January 4, them to manipulate their reportable
2016. The capital loss is P24,000 taxable net gain. Hence, the prohibition
computed as (P18/share selling price- against the claim of wash sales is not
P20/share cost)x12,000 shares sold. absolute rule but is a form of deferral of
There were 12,000 shares sold at a loss
loss.
while there were a total of 8,000 The wash sales rule is not applicable to
replacement shares in the 61-day dealers in securities as it is normal
period:5,000 shares acquired on business for them to buy and sell stocks
February 15 (i.e., before the sale) and
and realize gains or incur losses within
3,000 shares acquired on March 4 (i.e.,
short term periods of time.
after the sale). TAX FREE EXCHANGES
Since this is a partial replacement, the
Merger or Consolidation
capital loss shall be split as follows:
Stockholders of a domestic corporation
Deferred loss (8,000 shares/12,000 may exchange their stocks for the
sharesxP24K) P16,000 stocks of another corporation pursuant
Deductible loss(4,000/12,000 shares x to a plan of merger of consolidation
P24K) 8,000 The gains or losses on share-for-share
Capital loss P24,000
swaps pursuant to a plan of merger of
consolidation will not be recognized for
The adjusted basis of the replacement taxation purposes. In a share-swap
shares acquired on February 15, 2016 pursuant to a plan of merger or
shall be: consolidation, the shareholders of the
Purchase price P105,000 acquired corporation will be integrated
in the acquiring corporation. The shares
of the acquired corporation will be
called in for replacement with the
shares of the acquiring corporation.
In effect, the transaction merely
involves a replacement of shares of
stocks of the shareholders of the
absorbed corporation with them being
simply integrated as shareholders of the
acquiring corporation.
Illustration
Mr. Santiago was required to surrender
his Carranglan Inc. shares in exchange
for Baler shares with total fair value of
P1, 200,000 pursuant to the merger of
Carranglan Inc., and Baler Inc. The
Caranglan shares were previously
purchased by Mr. Santiago for
P1,000,000.
Fair value of Baler shares received
(selling price) P1,200,000
Less: Cost of Carranglan shares
exchanged 1,000,000
Indicated gain P200,000-not
taxable
The P200,000 indicated gain is not
taxable as the exchange involves stocks
for stocks. Similarly, an indicated loss
shall not likewise be recognized. The
P1,000,000 tax basis of the Carranglan
shares given shall be carried over as the
substituted basis of the Baler shares
received.
Initial Acquisition of control
No gain or loss shall also be recognized
if property is transferred to a
corporation by a person in exchange for
the stocks or units or participation in
such a corporation of which as a result
of such as exchange, said person, alone
or together with others not exceeding
four, gains control of said corporation.
“Control” shall mean ownership of
stocks in a corporation possessing at
least 51% of the total voting power of
all classes of stocks entitled to vote.
This rule may be relevant only to the
capital gains tax or the recognition of
capital gains when stocks are exchanged
in the acquisition of corporate control.
Illustration
Mr. Gapan exchanged his shares in
Cabanatuan Corporation costing
P2,000,000 in exchange for the shares
of Dingalan Corporation with fair value
of P1,800,000. The transfer resulted in
Mr. Gapan acquiring 51% ownership
(corporate control) in Dingalan
Corporation.
Total consideration received or selling
price P1,800,000
Less: Cost of Cabanatuan stocks
exchanged 2,000,000
Indicated loss
(P200,000)
The P200,000 indicated loss shall not be
recognized. Any indicated gain shall not
also be recognized. The law views initial
acquisition of corporate control by not
more than persons as an investing
transaction. The tax basis of the
Dingalan shares received shall be
P2,000,000, the same as the tax basis of
the Gapan shares exchanged.
Exchanged not solely for stocks
In tax-free exchanges, if stocks are
exchanged not solely for stocks but with
other consideration such as cash and
other properties, the gains but not
losses are recognized up to the extent
of cash and other properties received.
Illustration 1:Cash and property
received exceed indicated gain
Assume that pursuant to the plan of
merger between Carranglan Inc. and
Baler Inc., Mr. Santiago was required to
surrender his Carranglan Inc., shares
costing P1,000,000 in exchange for
Baler shares with total fair value of
P900,000 plus P100,000 cash and
P200,000 worth of goods.
Total consideration received or selling
price
(P900,000+P100,000+P200,000)
P1,200,000
Less:Cost of stocks exchanged
1,000,000
Indicated gain
P200,000
The amount of cash and other
properties received is considered
realization of gains to the extent of the
indicated gain. The excess amount of
cash and other properties received is a
return of capital. Hence,
Realized return on capital
(to the extent of the indicated gain)
P200,000
Return of capital (in excess of the
indicated gain) 100,000
Total cash and other properties
received P300,000
Illustration 2: Indicated gain exceeds
cash and other properties received
Assume that pursuant to the plan of
merger between Carranglan Inc. and
Baler Inc., Mr. Santiagp was required to
surrender his Carranglan, Inc. shares
costing P1,000,000 in exchange for
Baler shares with total fair value of
P1,050,000 plus P150,000 cash
Total consideration received or selling
price
(P1,050,000+P150,000) P1,200,000
Less: Cost of stocks exchanged
1,000,000
Indicated gain
P200,000
The indicated gain is recognized to the
extent of the cash and/or other
properties received. The indicated gain
is considered as follows:
Realized gain (up to the value of cash
and other properties received)
P150,000
Unrealized return on capital (in excess
of the value of cash and other
properties received) 50,000
Total indicated gain
P200,000
200,000-150,000=50k
The substituted tax basis of the Baler
shares received shall be:
Basis of the Carranglan shares
exchanged P1,000,000
Add: Basis of other properties
exchanged 0
Less: Return on capital
0
Basis of the Baler shares received
P1,000,000
Regulatory Formula on Tax Substituted
Basis
The regulations prescribe the following
formula in computing the tax basis of
properties arising from the tax-free
exchanges:
Tax basis of old shares exchanged
Pxxx.xx
Add: Gain recognized on the transfer
xxx.xx
Less: Cash or other properties received
xxx.xx
Tax basis of new shares received
Pxxx.xxx
If we apply this formula to the two
previous illustrations, we would come
up with essentially the same tax bases
as computed.
Minimum public float requirement of
publicly listed corporations
Listed corporations are mandatorily
required to maintain a minimum public
ownership under Philippine Stock
Exchanges(PSE) regulations.
The minimum public ownership is the
higher of:
1.The 10% of issued and outstanding
shares and
2. The minimum public ownership
required by the Securities and Exchange
Commission or the Philippine Stock
Exchange.
Non-compliance to the minimum public
ownership shall result in the de-listing
of the stocks of the corporation in the
PSE. Under RR16-2012, the sale of listed
stocks which fall below their minimum
public ownership requirement will be
subject to the 5%-10% capital gains tax
and not the ½ of 1% stock transaction
tax.
Comprehensive Illustrations
Illustration 1: Sale by a security dealer
Benjie, a security dealer, sold various
domestic stocks for P1,200,000, net of
selling expenses. These stocks were
acquired at a cost of P800,000.
The capital gains tax is nil because
domestic stocks are ordinary assets to a
security dealer. The P400,000 net gains
is an ordinary gain subject to regular
income tax.
Illustration 2:sale of domestic bonds
Carlo, not a security dealer, sold
domestic bonds directly to a buyer at a
net gain of P200,000. Carlo is not a
dealer of domestic bonds.
The capital gains tax is nil. The gain on
the sale of domestic bonds is a capital
gain subject to regular income tax.
Illustration 3: Exchange pf stocks for
other securities
Debbie, an NRA-NETB, exchanged her
domestic stocks costing P300,000 for
bonds with a fair value of P400,000.
The P100,000 capital gain is subject to
capital gains since it is not a share-for-
share swap pursuant to a plan of
merger or consolidation. The same rule
applies for share-for-share swap not
pursuant to a plan of merger or
consolidation. Non-resident persons not
engaged in business in the Philippines
such as NRA-NETBs and NRFCs are
subject to the capital gains and are
required to file a capital gains tax
return.
Illustration 4:Issuance of stocks
HKG Inc., a domestic corporation,
issued 10,000 P10-par ordinary shares
in exchange for a vacant lot owned by
KIT, Inc. The vacant lot has a fair value
of P500,000. Compute the capital gains
tax.
The transaction involves issue by HKG
Inc. of its own shares of stocks. These
stocks do not represent investment in
the shares of another corporation. The
share premium of P300,000,(P500,000-
(10,000XP10)), is part of HKG’s
corporate capital, not an income.
Hence, it is not subject to capital gains
tax.
Illustration 5: Sale of stocks ex-dividend
Ms. Pearl bought 10,000 shares of
Zuma, a domestic Corporation, at
P10/shares. On February 14, 2016,
Zuma declared a dividend of P2/share
with record date of March 20,2016 and
payment date of April 20, 2016, Ms.
Pearl sold all the shares for P15 per
share directly to a buyer. The selling
expenses were P5,000.
The shareholder’s right to dividend
accrues at the date of declaration. The
stocks may pass through different
hands anytime. However, those who are
registered as shareholders of the
corporation at record date shall receive
the dividends/
Between the date of record and the
date of payment, stocks are said to be
selling ex-dividend. The seller receives
the dividends/ The price of the stocks
on those dates include only the selling
price of the stocks.
Thus, the capital gains shall be normally
computed as follows:
Total selling prize (P25x 10,000)
P150,000
Less: cost of stocks and
expenses(P10x10,000+P5,000)105,000
Capital gains P45,000
In this case, the dividends to be
received by Ms. Pearl shall be subject to
the 10% final tax to be withheld by
Zuma Corporation.
Illustration 6:Sale of stocks dividend-on
Ms. Pearl owns 10,000 P10 par value
shares of Zuma, a domestic
Corporation. On February 14, 2016,
Zuma declared a dividend of P2/share
with record date of March 20,2016 and
payment date of April 20,2016. On
February 18, 2016. Ms. Pearl sold all the
shares for P15 per share directly to Mr.
Lover. The selling expenses were
P4,000.
Between the date of declaration and
the date of record, stocks are said to be
selling dividend-on; that is, the buyer
shall receive the dividends. The selling
price of stocks on these dates includes
both the price of the stocks and the
dividends on the stocks.
Thus, the capital gains of Ms. Pearl on
the disposition of the stocks dividend-on
shall be determined as follows:
Total selling price (P15x10,000) 150,000
Less:Cost and
expenses(P10x10,000+P4,000)104,000
Net dividends
receivable(P2x10,000x90%) 18,000
Capital gains P28,000
It should be noted that the dividends to
be received by Pearl is net of the 10%
final withholding tax on dividends of
individual taxpayers.
TAX ISSUE: SALE OF STOKCS DIVIDEND-
ON TO A CORPORATE BUYER
Dividends may escape taxation when
stocks are sold dividend-on by
individual taxpayers to a corporate
buyer between the date of declaration
and the date of record. At the date of
record, the corporate buyer will be
listed as shareholder in the corporate
books and will not be subjected to the
10% dividend tax.
Assuming the same data under
Illustration 6, the capital gain shall be
computed as follows:
Total selling price (P15x10,000)
P150,000
Less: Costs and expenses
(P10x10,000+P4,000) 104,000
Dividends receivable (P2x10,000x100%)
20,000
Capital gains P26,000
Note that the individual seller
effectively realizes the entire dividend
income under the cloak of the dividend
exemption of the corporate buyer who
will be registered as shareholder at the
date of record.
How should the dividend on the stocks
sold be taxed?
Under the NIRC, all income not
expressly exempted or not subjected to
final tax or capital gains tax must be
included in gross income subject to
regular income tax. Hence, the
individual seller shall exceptionally
report the P20,000 domestic dividend
in gross income subject to regular
income tax
Persons not liable to the 5%-10% capital
gains tax
1. Dealers in securities
2. Investors in shares of stocks in a
mutual fund company in
connection with gains realized
upon redemption of stocks in
the mutual company.
3. All other persons, whether
natural or juridical, who are
specifically exempt from
national revenue taxes under
existing investment incentives
and other special laws.
Examples:
 a.Foreign governments and
foreign government-owned and
controlled corporations
b.Qualified employee trust
funds
SALE, EXCHANGE, AND OTHER
DISPOSITION OF REAL PROPERTY
CLASSIFIED AS CAPITAL ASSET LOCATED
IN THE PHILIPPINES
The sale, exchange, and other
disposition of real property capital
assets in the Philippines, is subject to a
tax of 6% of the selling price or the fair
value, whichever is higher.
Under the NIRC, the fair value of real
property is whichever is higher of the:
a.Zonal value, which is the value
prescribed by the Commissioner of
Internal Revenue for real properties for
purposes of enforcements of internal
revenue laws, and
b. Assessed value, which is the value
prescribed by the City of Municipal
Assessor’s Office for purposes of the
real property tax.
Zonal value exists only for land, but
assesses value is prescribed separately
for land and improvements
For lands, the capital gains tax is 6% of
whichever is the highest of the selling
price (bid price in the case of
foreclosure sales), zonal value, or
assessed value.
Note that independent appraisal
valuation, the fair value commonly used
in external financial reporting, is not
used in the computation of the capital
gains tax.
Illustration 1
Terry sold a parcel of land for
P5,000,000. The land has an appraisal
value of P8,000,000, zonal value of
P6,000,000, assessed value of
P5,000,000 and was previously
purchased by Terry for P4,000,000.
The highest of the selling price, zonal
value, and assessed value is the
P6,000,000 zonal value. Hence, the
capital gains tax would be computed
P6,000,000x6%; hence, P360,000. It
should be emphasized that the
independent appraisal value is not
used.
Illustration 2
Anjo sold his residential and lot for
P5,000,000. Anjo purchased the lot
when it was worth P1,000,000 and
constructed on it the house at a total
cost of P2,500,000. The lot had a zonal
value of P4,000,000 and assessed value
of P2,500,000. The house had an
assessed fair value of P2,000,000.
Selling price P5,000,000-
Fair value of land(P4M or 2.5 w/e is
higher)P4,000,000
Assessed fair value of improvement
2,000,000
Fair market value (HIGHER) P6,000,000
The capital gains tax shall be computed
at 6% x P6,000,000 or P360,000.
Illustration 3
A real property dealer sold a condo unit
costing P1, 200,000 to a client for P1,
500,000. The unit has a total assessed
value of P900,000 and zonal value of
land and assessed value on
improvements of P1,000,000 at the
date of sale.
The capital gains tax is nil. The condo
unit is an ordinary asset to a realty
dealer, lessor or developer. The actual
gain of P300,000(P1,500,000-
P1,200,000) is an ordinary gain subject
to regular income tax.
BIR TAX CLEARANCE
No registration of any document
transferring real property shall be
effected by the Registry of Deeds unless
the Commissioner or his duly
authorized representative has certified
that such transfer has been reported,
and the capital gains or creditable
withholding tax, if any, has been paid.
(Sec. 58€, NIRC)
The certificate for purposes of this legal
requirement is referred to as the
“Certificate Authorizing Registration
(CAR)”.
NATURE OF THE 6% CAPITAL GAINS TAX
a.Presumption of capital gains
The 6% capital gains tax applies even if
the sale transaction resulted to a loss.
Gain is always presumed to exist. The
basis of taxation is the selling price or
fair value whichever is higher, not the
actual gain.
b.Non-consideration to the
involuntariness of the sale
The capital gains tax applies if the sale is
involuntary or is forced by
circumstances such as the case of
expropriation sale, foreclosure sale,
dispositions by judicial order, and other
forms of forced disposition. It also
applies to conditional sales and pacto
de retro sales.
SCOPE AND APPPLICABILITY OF THE 6%
CAPITAL GAINS TAX
Location of the property Taxpayers
Individuals
Corporations
Within the Philippines All individuals
Domestic Corporation only
Outside the Philippines Not applicable
Not applicable
The 6% capital gains tax is applicable to
all individual taxpayers but it applies
only to domestic corporations.
Interestingly, the NIRC did not impose
final capital gains tax on foreign
corporations. However, in cases where
foreign corporations realize gains from
the sale of real property classified as
capital assets, the capital gain shall be
subject to the regular income tax.
Under the NIRC, the sale of real
property located abroad is not covered
by the capital gains tax. Hence, the
actual gains on sale, exchange, and
other dispositions of properties abroad
are subject to the regular income tax if
the taxpayer is taxable on global income
such as resident citizens and domestic
corporations. For all other taxpayers,
the capital gain realized abroad is
exempt.
EXCEPTIONS TO THE 6% CAPITAL GAINS
TAX
1. Alternative taxation rule
2. Exemption rules
a. Exemption under the NIRC
b. Exemption under the special
laws
ALTERNATIVE TAXATION
An individual seller of property capital
assets has the option to be taxed at
either:
a.6% capital gains tax or
b. The regular income tax
It should be noted that this is
permissible only when:
1. The seller is an individual
taxpayer, and
2. The buyer is the government a
vacant lot for P800,000. The lot
was purchased for P200,000 in
1980 and had an assessed value
of P400,000 and zonal value of
P500,000 at the date of sale.
Gretchen may opt to be subject to
tax at 6% OF P800,000 or report the
P600,000 (P800,000-P200,000)
actual capital gain in her regular
income tax return.
Basis of Alternative Taxation
The alternative taxation is intended
to ease the burden of government
expropriation where taxpayers may
incur losses on the forced
expropriation sale and are required
to pay tax.
Illustration
An individual taxpayer bought a
house and lot near a highway at a
cost of P2,000,000. After several
years, the government invoked its
power of eminent domain to buy
the property for the expansion of
the highway.
Assuming the property has a fair
value of P1,800,000 for purposes of
the expropriation, the taxpayer
would be forced to incur P200,000
loss( P1.8,-P2.0M) and still pay the
6% capital gains tax. This would be
too oppressive to the taxpayer. With
the alternative regular income tax
option, the taxpayer would be given
the benefit of deduction of the
P200,000 capital loss without being
imposed the 6% capital gains tax.
EXEMPTION TO THE 6% CAPITAL
GAINS TAX UNDER THE NIRC
The sale, exchange and other
disposition of principal residence for
the re-acquisition of a new principal
residence by individual taxpayers is
exempt from the 6% capital gains
tax.
Principal residence
Principal residence means the
house and lot which is the primary
domicile of the taxpayer. If the
taxpayer has multiple residences,
his principal residence is deemed
that one shown in his latest tax
declaration.
Requisite of exemption:
1.The seller must be a citizen or
resident alien.
2. The sale involves the principal
residence of the seller-taxpayer.
3. The proceeds of the sale is
utilized in acquiring a new principal
residence.
4. The BIR is duly notified by the
taxpayer of his intention to avail of
the tax exemption within 30 days of
the sale through a prescribed return
(BIR Form 1706) and “Sworn
Declaration of intent.”
5. The reacquisition of the new
residence must be within 18 months
from the date of sale
6. The capital gain is held in escrow
in favor of the government.
7. The exemption can only be
availed of once in every 10 years.
8. The historical cost or adjusted
basis of the principal residence sold
shall be carried over to the new
principal residence built or
acquired.
It must be emphasized that the sale
of principal residence must precede
the acquisition of the new principal
to be exempt. (BIR Ruling No. 038-
2015)
Illustration 1
Helen sold her principal residence
with a fair market value of
P6,000,000 for P5,000,000. Helen
purchased the residence for
P3,000,000 several years ago. The
imposable capital gains tax in 6% of
P6,000,000 or P360,000.
Helen should indicate her intention
to apply for exemption in the capital
gains tax return to be filed and
submit a sworn declaration of
Intent. She will be required to
deposit the P360,000 capital gains
tax in an escrow account in favor of
the government.
Full utilization is exempt
Assuming Helen acquires a new
principal residence for P5,200,000
within 18 months, the P360,000
capital gains tax in escrow will be
released to her.
If Helen does not acquire a new
principal residence within 18
months, the capital gains tax escrow
will be taken by the government.
Basis of new residence with full
utilization
If the proceeds is fully utilized, the
tax basis of the new residence shall
be the basis of the old residence
plus additional cost incurred by the
taxpayer in acquiring the new
residence. The additional cost is the
excess of the purchase price of the
new residence over the selling price
of the old residence.
Thus, the tax basis of the new
residence shall be:
Basis of old residence P3,000,000
Add: Additional out-of-packet
costs(P5.2M-P5M) 200,000
Basis of new residence P3,200,000
Tax basis has no relevance for real
property capital assets because the
actual gain on the sale is irrelevant
to capital gains taxation. However,
when the real property capital
assets subsequently qualifies as
ordinary assets such as when they
are later employed in business, the
tax basis of the property becomes
necessary for gain or loss
measurement. That’s why the basis
of the new property needs to be
monitored.
Partial utilization of proceeds is
partially exempt
Assume Helen uses only P4,500,000
out of the P5,000,000 proceeds in
acquiring the new residence.The
portion representing the unused
proceeds shall be subject to tax. The
capital gains tax held in escrow
account including any accrued
interest shall be allocated as
follows:
To Helen P324,000
(P4.5M/P5MXP360,000)
To the government 36,000
(P0.5M/P5MXP360,000)
Total amount in escrow P360,000
Note: Any interest which might have
accrued on the escrow fund shall be
released to the taxpayer. The
government is entitled to the
amount of the unpaid tax only.
Tax basis of the new residence with
less than full utilization
If the proceeds is not fully utilized,
the tax basis of the new residence
shall be reduced as accordingly as
follows:
Tax basis of old residence x utilized
proceeds/total proceeds
The tax basis of the new principal
residence shall be computed as
P3,000,000 x P4,
500,000/P5,000,000=P2,700,000.
Illustration 2
Alberto sold his residential lot with
fair value of P1,000,000 for
P2,000,000. He purchased a new
residence for P1,500,000 within 18
months.
Alberto will be required to pay
P120,000 (P2,000,000 x6%) capital
gains tax whether or not he utilized
the proceeds to acquire a new
residence. Note that the exemption
rule envisages a sale of a principal
residence for the acquisition of a
new principal residence.
Illustration 3
Afraid of ghosts that frequently
appear in his mansion residence,
Raymund left his mansion and
bought a new home for
P17,000,000 as his principal
residence. Within 3 months,
Raymund was able to sell his
mansion for P40,000,000.
The sale of the mansion will be
subject to 6% capital gains tax. For
purposes of the exemption, the sale
of the old residence must precede
the purchase of the new.
CAPITAL GAINS TAX EXMEPTION
UNDER SPECIAL LAWS
1. Sale of land pursuant to the
Comprehensive Agrarian Reform
Program
2. Sale of socialized housing units
by the National Housing
Authority
Sale of land under the
Comprehensive Agrarian Reform
Program
The sale of agricultural lands by land
owners pursuant to the
Comprehensive Agrarian Reform
Program of the government shall be
exempt from capital gains tax.
Similarly, interest income on the
selling price that may have agreed
by the land owner and the tenant-
buyer shall be exempt from income
tax.
Sale of socialized housing units by
the National Housing Authority
The sale of socialized housing units
for the underprivileged and
homeless citizens by the National
Housing Authority (NHA) pursuant
to the Urban Development and
Housing Act of 1992 is exempt from
the capital gains tax.
This exemption is limited to
socialized housing units only. The
BIR ruled that the sale of the NHA of
commercial lots which is not part of
the socialized housing project for
the poor and homeless is subject to
capital gains tax or regular tax and
documentary stamp tax.
To qualify for exemption, the
socialized housing units of the NHA
must comply with price ceilings set
by the NIRC and other special laws.
PAYMENT OF THE 6% CAPITAL
GAINS TAX IN INSTALLMENT
The capital gains tax may be paid in
installment if, under the payment
terms, the initial payment does not
exceed 25% of the selling price. The
“initial payment” refers to the
collections in the taxable year the
sale is made.
Illustration 1: Without mortgage
On December 1, 2016, Ms. Batanes
sold for P4,000,000 an unused lot
with a cost and fair value of
P2,000,000 and P5,000,000,
respectively. The buyer agreed to
pay P500,000 monthly installments
starting December 31,2016.
Capital gains tax=P5,000,000x6%
P300,000
Initial payment (December
installment) P500,000
Ratio of initial
payment=P500,000/P4,000,00012.5
0%
The installment sale qualifies under
the ratio ceiling: hence the capital
gains tax can be paid in installment.
The capital gains tax payable every
installment shall be P37,500
computed as
P500,000/P4,000,000XP300,000.
Illustration 2:With mortgage not in
excess of cost
Assume that the lot in the previous
illustration is mortgaged for
P1,000,000 which the buyer
assumed and the buyer agreed to
pay the P3,000,000 balance in
P300,000 monthly installments
starting December 31, 2016.
Capital gains tax=P5,000,000x6%
P300,000
Initial payment (December
installment) P300,000
Ratio of initial payment
(P300,000/P4,000,000) 7.5 %
The contract price shall be
computed as follows:
Selling price P4,000,000
Less: Mortgage assumed by buyer
1,000,000
Contract price P3,000,000
The capital gains tax payable every
installment shall be P50,000
computed as
P300,000/P3,000,000Xp300,000
capital gains tax.
Illustration 3: With mortgage in
excess of cost
Assume further that the lot is
mortgage for P2,500,000 which the
buyer assumed and the buyer
agreed to pay the P1,500,000
balance in P300,000 monthly
installment starting December 31,
2016.
It should be recalled that the excess
of the mortgage over the tax basis
of the property is an indirect
downpayment which must be
included in the initial payment and
contract price. Capital gains tax is
P5,000,000 x6% orP300,000.
The contract price shall be
computed as follows:
Selling price P4,000,000
Less: Mortgage assumed 2,500,000
Cash collectible P1,500,000
Add: Constructive downpayment-
excess mortgage
(P2.5M mortgage-P2.0M
cost)500,000
Contract price
P2,000,000
The initial payment shall be
computed as:
Constructive downpayment(excess
mortgage)
P500,000
December 31 installment
300,000
Initial payment
P800,000
Ratio of initial
payment=P800,000/P4,000,000 20%
The installment plan qualifies under
the ratio ceiling; hence, the capital
gains tax can be paid in installment.
Under the installment method, the
capital gains tax payable shall be:
For the
sale:P500,000/P2,000,000Xp300,00
0 P75,000
For every installment:
P300,000/P2,000,000XP300,000
P45,000
Illustration 4:Initial payment
exceeds 25% of selling price
Assume that the initial payment of
the sale of Ms. Batanes exceeds
25% of the selling price.
The sale would be taxed as if itwere
a cash sale. The capital gains tax
shall be paid in lump sum upon
filing of the capital gains tax return.
This applies without regard to
whether or not any mortgage on
the property exceeds the cost of the
property disposed.
Deadline for payment of the capital
gains tax
The 6% capital gains tax will be filed
through BIR From 1706 and is due
within 30 days from the date of sale
or exchange. For foreclosure sales, it
is due within 30 days from the
expiration of the applicable
statutory redemption period. When
the tax on the sale is qualified for
installment payment, It is due 30
days upon receipt of every
installment.
Statutory redemption period on
foreclosure sale
Foreclosed properties are subject to
a right of redemption by individual
mortgagor within a year counted
not from the date of sale but from
the time of registration of the sale
in the Office of the Registry of
Deeds. (Santos vs. Register of Deeds
of Manila)
For juridical persons, redemption
must be made before the
registration of the certificate of
foreclosure sale with that applicable
Register of Deeds or within 3
months from foreclosure, whichever
is earlier.
DOCUMENTARY STAMP TAX ON THE
SALE OF CAPITAL ASSETS
Documentary stamp tax on the sale,
exchange, and other dispositions of
domestic stocks directly to a buyer
The sale of domestic stocks is
subject to a documentary stamp tax
of P0. 75 for every P200 of the par
value of the stocks sold.(RA. 9243)
Illustration
A taxpayer sold domestic stocks
with total par value of P800,000 for
P1,200,000. The stocks have a fair
value of P1,250,000 and were
acquired for P1,000,000.
The documentary stamp tax shall be
P3,000 computed as P0.75/P200 x
P800,000.
Documentary Stamp tax on the sale
of real properties
The sale of real property capital is
subject to a documentary stamp tax
on the gross selling price or fair
value whichever is higher.
The documentary stamp tax is P15
for every P1,000 and fractional parts
of the tax basis thereof. However, if
the government is a party to the
sale, the basis shall be the
consideration paid.
Illustration
A taxpayer disposed a real property
capital asset acquired for
P2,000,000 10 years ago for
P4,000,000. The property has a
zonal value of P5,000,000 and
declared real property per real
property tax declaration of
P3,000,000.
The documentary stamp tax shall be
computed from the fair value since
it is higher than the selling price.
Hence, the documentary stamp tax
shall be P75,000 computed as
P15/P1,000 x P5,000,000.
PENALTIES FOR LATE/NON-FILING
OR NON-PAYMENT OF CAPITAL
GAINS TAX
The late filing and payment of
capital gains tax at the time or times
required by law is subject to the
same penalties discussed in Chapter
4.
ENTITIES EXEMPT FROM CAPITAL
GAINS TAX
The same lists of entities exempt
from final tax in Chapter 5 are
likewise exempt from capital gains
tax.
CHAPTER 6: SELF-TEST EXERCISES
Discussion Questions
1. What are ordinary assets and
capital assets? Discuss
2. Enumerate the two types of
capital assets subject to capital
gains tax.
3. What are the transactions
considered as “other
disposition” of domestic stocks?
What transactions are not
considered as “other
dispositions”?
4. Discuss the rules on tax basis of
stocks acquired by purchase,
inheritance, donation, for an
inadequate consideration, and
under a tax-free exchange.
5. Enumerate the methods in
costing stocks in order of
priority
6. Discuss the compliance
requirements of the two-tiered
capital gains tax.
7. Explain the concept of a wash
sale.
8. Enumerate and discuss the tax-
free exchanges
9. What are the criteria of
alternative taxation to the 6%
capital gains tax?
10. Enumerate the exemption
requirements to the 6% capital
gains tax
11. Discuss the nature of the 6%
capital gains tax.
12. Discuss the nature of the 6%
capital gains tax.
13. Compare the taxpayers covered
by the 5%-10% capital gains tax
and the 6% capital gains tax.
True or false
1. A vacant and unused lot is an
ordinary asset to a real estate
dealer. True
2. For taxpayers not engaged
business, assets shall cease to
be ordinary assets when they
are discontinued from active use
for more than two years.False
3. Real and other properties
acquired are ordinary assets to
banks even if they are not
engaged in the realty business.
True
4. Capital assets will not become
ordinary assets when used in
business.False
5. The sale of real property capital
assets will never be subject to
regular income tax.-False
6. The sale of real property capital
assets will never be subject to
regular income tax.False
7. Donated assets become
ordinary assets even if the done
do not employ the same in
business-True
8. An ordinary asset continues to
be an ordinary asset even if
idled for more then two years if
the taxpayer is engaged in realty
business. True
9. The real properties used by
exempt corporations in their
exempt operations are capital
assets- True
10. Dealers in realties are subject to
the regular tax on their sale of
properties. True
11. Capital gains from assets other
than domestic stocks and real
properties are subject to regular
income tax. True
12. Dealers in securities are not
subject to the stock transaction
tax but are subject to the
regular income tax on gains
realized upon the sale of stocks
through the Philippine stock
exchange True
13. Unit of participations in golf,
polo, and similar clubs are
considered domestic stocks.True
14. The excess premium on the re-
issuance of treasury stocks is
subject to capital gains tax-false
15. The issuance of shares of stock
for property is subject to capital
gains tax. False
16. The sale of foreign stocks
directly to a buyer is subject to
capital gains tax.-False
17. The two-tiered final tax cannot
apply unless and until there is a
gain on the sale, exchange, and
other disposition of stocks
directly to a buyer. True
18. The stock transaction ax on the
sale of stocks through the PSE
cannot apply unless there is a
gain on the transaction. False
 19. The 6% capital gains tax cannot
apply unless there is a gain on
the sale of real property. False
20. The sale of real properties
located abroad is subject to the
6% capital gains tax.False
True or false 2
1. The annual capital gains tax
return is simultaneously due
with the annual regular income
tax return. True
2. The basis of properties received
by way of inheritance is the
basis in the hands of the last
owner who did not acquire the
same by donation. False
3. When specific identification is
impossible, the cost of the
stocks sold is determined by the
weighted average method. False
4. The basis of the stocks received
in tax-free exchanges is the basis
of the share from the date of
sale. True
5. The gain on the sale of stocks for
stocks pursuant to a plan of
merger and consolidation is
exempt if it resulted in the
transferor acquiring corporation
over the absorbed corporation.
True
6. The gain on the sale of stocks for
stocks pursuant to a plan of
merger consolidation is exempt
if it resulted in the transferor
acquiring corporation over the
absorbed corporation. True
7. Installment payment of capital
gains tax is allows if the ratio of
downpayment over the selling
price of the sales does not
exceed 25%.
False
8. The selling price is used to
determine the propriety of using
the installment indirect method
but the contract price is used to
determine the capital gains tax
payable in installment. True
9. The excess of mortgage over the
basis assumed by the buyer
constitutes an indirect receipt
which is part of the initial
payment and the selling
price.False
10. Wash sales occur when there is
a repurchase of shares within 30
days before and 30 days after
the date of disposal of securities
at a loss. True
11. Control means more than 50% a. Vacant lot held for future
ownership in the voting power development
of a corporation. True b. Construction equipment
12. The sale of delisted stocks is c. Domestic stocks-
subject to stock transaction tax d. Head office building of the
and not to capital gains tax. developer
False 4. Which is an ordinary asset?
13. Fain and loss in a share-for-share a. Home appliances
swap pursuant to a plan of b. Personal car
merger consolidation shall be c. Personal cellphone
recognized up to the extent of d. Office supplies-
the cash and other properties 5. Which of the following assets, if
received. True not used in business, is subject
14. The sale by the National Housing to regular tax?
Authority of commercial lots is a.Real property
subject to capital gains tax. True b. Domestic stock rights
15. If the assessed value is lower c. Domestic stock option
than the selling price, then the d. Taxpayer’s personal car-
fair value of the property is the
6. Which is a capital asset for a security
zonal value. False dealer?
16. Title to a property shall not be
a. Domestic stocks
registered by the Registry ofb. Domestic bonds
deeds unled the Commissioner c. Real property held for speculation-
or his representatives has D.Office equipment
certified that the tax on the7.Which is subject to the 5%-10%
transfer has been paid. True capital gains tax?
17. Domestic corporations are
a.Sale of domestic stocks directly to a
exempt from capital gains tax on
buyer within or outside the
the sale, exchange, and otherPhilippines.=
disposition of real properties.
b. Sale of domestic bonds directly to a
False buyer within the Philippines.
18. The sale of land pursuant to the
c.Sale of domestic stocks through the
Agrarian Reform Program is Philippine stock exchange
exempt from capital gains tax.
d. All of the above
True 8. Who is not subject to capital gains tax
19. Foreign corporations are
on the sale of domestic stocks directly
required to pay capital gains tax
to a buyer?
on the sale of domestic stocks
a. Dealer of cars
and on the sale of real b. Real property developer
properties capital assets. False
c.Dealer of securities-
20. The alternative taxation on an
d. Realty dealer
expropriations sale is not 9.Which of the following, when sold is
applicable to corporate
not subject to capital gains tax?
taxpayers. True a. Boarding house
Multiple Choice-Theory part 1 b. Warehouse
1. Which is an ordinary asset? c. House and lot
a. Personal car d.A and B-
b. Principal residence of the10. Which is not subject to the 6%
taxpayer capital gains tax?
c. Delivery truck- a. Donation of property-
d. Wedding ring of the taxpayer
b.Foreclosure of a mortgaged property
2. Which is not an ordinary asset?
c. Expropriation of one’s property in
a. Personal laptop of the favor of the government.
taxpayer- d. Sale of property for an insufficient
b. Machineries and equipment consideration.
c. Real property held for sale
11.Statement 1: Capital gains may arise
d. Leasehold improvements from sale, exchange, and other
disposition of movable properties used
in business.
3. Which is a capital asset to a Statement 2: Ordinary gains may arise
realty developer? from sale, exchange, and other
disposition of real properties not used
in business.
Which is true?
a.Statement 1 is correct
b. Statement 2 is correct
c. Both statements are false-
d. Both statements are correct.
12. Statement 1:The gains on sale of
domestic stocks directly to a buyer is
presumed.
Statement 2:The gain on sale of real
properties is presumed.
Which of the following correct?
a. Both the statements are true.
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true-
13.Which of the following
properties when sold may be
subject to capital gains tax?
a. Domestic stocks-
b. Foreign stocks
c. Patent
d. Office buildings
14. Statement 1:Only
depreciable properties of
business can be classified as
ordinary assets.
Statement 2:Land used in
business is a capital asset since
it is not subject to depreciation.
Which of the following correct?
a. Statement 1 is false
b. Statement 2 is false
c. Both statements are false-
d. A, B and C
15.Statement 1:Ordinary gains
arise from sale, exchange, and
other dispositions of real
properties used in business.
Statement 2:Capital gain may
arise from sale, exchange, and
other dispositions of real
properties not used in business.
Which is false?
a. Statement 1 is correct
b. Statement 2 is correct
c. Both statements are false
d. Both statements are
correct.-
Multiple Choice-Theory:Part 2
1. Which of the following
properties, when sold, may
be covered by regular
income tax?
a. Share options
b. Preferred stocks
c. Share warrants
d. Promissory notes-
2. Which of the following
assets may be subject to
capital gains tax upon
disposal?
a. Parking lot
b. Dormitory
c. Farm lot-
d. Office supplies
3. The sale of an office building
will be subject to
a. ½ of 1% percentage tax.
b. 6% capital gains tax
c. 5%-10% capital gains tax
d. Regular tax-
4. The term “asset disposition”
covers
a. Foreclosure sales
b. Auction sales
c. Expropriation by the
government
d. Any of these-
5. Which of the following sales
of domestic stocks is subject
to capital gains tax?
a. Sale of domestic stocks
through the PSE
b. Issue of domestic stocks
to subscribers
c. Sale of domestic stocks
directly to a buyer-
d. Exchange of stocks for
stocks in a corporate
merger.
6.The sale of listed shares
may be subjected to
a. 6% of capital gains tax
only.
b. ½ of 1% percentage tax
only
c. 5%-10% capital gains tax
only-
d. Any of these
7. The sale of non-listed
shares may be subjected to
a. 6% capital gains tax only
b. ½ of 1% percentage tax
only
c.5%-10% capital gains tax
only.-
d. Any of these
8. Which of the following
when sold may be exempted
from the 6% capital gains
tax?
a.Unused land to the
government
b. Residential lot
c. Developed residential
properties for sale
d. Principal residence-
9. Statement 1:The sale or
exchange must result to an
-actual gain before the 5%
-10% capital gains tax is
imposed.
Statement 2:The sale or
exchange must result to an
actual gain before the 6%
capital gains tax is imposed.
a. Both statements are
correct
b. Both statements are
incorrect
c. Only statement 1 is
correct-
d. Only statement 2 is
correct
10. When the annualized capital gains
tax exceeds the transactional capital
gains tax the excess is a
a. Tax credit
b. Tax payable-
c. Tax refundable
d. A or B
11.1st statement:Properties acquired by
real estate dealers are ordinary assets
2nd statement:Properties of real estate
dealers continue to be classified as
ordinary asset even if they change the
nature of their business.
a. First statement is correct
b. Second statement is correct
c. Neither statement is correct
d. Both statements are correct.-
12. 1st statement:When realty
businesses discontinue used of assets
for more than 2 years, the same shall be
reclassified as capital assets/
2nd statement: When realty businesses
discontinue used of assets for more
than 2 years, the same shall be
reclassified as capital assets.
a. First statement is correct
b. Second statement is correct
c. Neither statement is correct-
d. Both statement are correct
13.Which is an incorrect statement?
a. The capital gains tax on the
disposition of capital stock presumes
the existence of gain on the sales
transaction
b. The buyer of real property capital
asset shall withhold the tax at source
and remit the same to the government-
c. Capital gains tax is identified under
the NIRC as a form of final tax.
d. The capital gains tax on the
disposition of real property presumes
the existence of gain on the sales
transaction.
14. Which of these shall pay the two-
tiered capital gains tax?
a. A real property developer-
b. A dealer in stocks
c. A merchandiser or trader of goods
d. A or B
15. The sale of real properties which
would otherwise be subject to the 6%
capital gains tax may nevertheless be
subject to regular income tax if all of
the following conditions are met, except
one. Which is the exception?
a. the seller must be an individual
taxpayer
b. the sale involves the principal
residence of the taxpayer-
c. the buyer is the government
d. the taxpayer opted to be subjected to
regular tax.
16. Which of these pay the 6% capital
gains tax?
a. Security dealer-
b. Real property dealer
c. Real property developer
d. None of these
17. The sale of a principal residence is
exempt from the capital gains tax if all
of the following conditions are met,
except
a. The proceeds is fully utilized in
acquiring a new principal residence
b. The reacquisition must be by
purchase-
c. The reacquisition must have been
made within 18 months from the date
of sale.
d. The capital gains tax must be
deposited in escrow.
Multiple choice-Theory: Part 3
1. The transactional 5%-10%
capital gains tax is to be paid
a.Within 30 days from the date
of sale or exchange-
b. Within 30 days from the end
of month of sale
c. On the 15th day the fourth
month following the close of the
quarter when the sale was made
d. On the 15th day of the fourth
month following the taxpayer’s
year-end.
2.The annual 5%-10% capital gains tax
return is due
a. within 30 days from the end of the
month of sale
b. within 30 days from the date or
exchange
c.on or before the 15th day of the fourth
month following the taxpayer’s year-
end-
d. on or before the 15 th day of the
fourth following the close of the quarter
when the sale was made
3.Capital gains that is not payable on
installment basis is due
a.within 30 days from the date of sale
or exchange-
b.within 30 days from the end of month
of sale
c. on or before the 15th day of the
fourth month following the close of the
quarter when the sale was made.
d. on or before the 15 th day of the
fourth month following the taxpayer’s
year-end
4. Installment payments of the 6%
capital gains tax is due
a.Within 10 days from the date of sale
of each installment payment.
b.Within 30 days from the date of each
installment payment-
c. Within 15 days from the date of each
installment payment
d. Within 20 days from the date of each
installment payment.
5. The installment payment of capital
gains tax is applicable to the
a.5% and 10% capital gains tax only
b. 6% capital gains tax only
c. Both A and B-
d. Neither A nor B
6. The installment payment of capital
gains tax is applicable to
a. Individual taxpayers only
b. Corporate taxpayers only
c. Dealers in properties
d. A or B-
7. Which of these capital gains is
subject to capital gains tax?
a. Gain on the sale of stock rights-
b. Gain on the sale of derivative
financial instruments linked to
commodity prices
c. Gain on sale of interest in a
professional partnership
d. Gain on sale of bonds
8. Paulo indicated in his return his
intent to avail of the exemption from
the 6% capital gains tax. Under what
condition will he be exempted?
a.When the proceeds of the sale
exceeds the cost basis of the property
sold
b. When the proceeds of the sale
exceeds the acquisition price of the new
residence
c. When the cost basis of the property
sold exceeds its selling price
d. When the acquisition price of the
new property exceeds the proceeds of
the old property sold-
9. Partial taxation under the 6% capital
gains tax will result when
a. The proceeds from the sale of the old
property exceeds both its cost and the
acquisition price of the new property.
b. The proceeds of the sale exceeds its
zonal value and assessed value
c. The proceeds of the old property
exceeds the acquisition price of the new
property regardless of the tax basis,
zonal value, and assessed value of the
old property.-
d. The zonal value is greater than the
sale proceeds of the old property.
10. The transactional capital gains tax
on domestic stocks is
a. not a final tax.
b. included to the regular income tax.
c.creditable to the regular income tax.
d. creditable to the annual capital gains
tax due-
11. The 5%-10% capital gains tax does
not apply to
a. Resident citizen dealers of stocks-a
b. Non-resident citizen dealers of cars
c. Resident alien dealers of computer
parts
d. Domestic corporations dealing in real
properties
12. The documentary stamp tax on the
sale of domestic stocks directly to a
buyer is based on
a. Selling price
b. Par value-
c. Fair value
d. Cost
13. The documentary stamp tax on the
sale of real property is based on
a. Selling price
b. Fair value
c. Cost
d. A or B, whichever is higher-
14. The 6% capital gains tax does not
apply to
a. Domestic corporations
b. Resident aliens
c. Non-resident citizens
d. Foreign corporations-
15. Who shall file the capital gains tax
return for the sale, exchange, and other
disposition of real property?
a.Seller
b. Buyer
c. Transfer agent
d. The registry of deeds
Multiple choices-Problems:Part 1
1. Mr. Dionisio sold domestic
stocks directly to a buyer at a
mark-up on cost of P200,000. He
paid P5,000 broker’s
commission and P8,000
 documentary stamp tax on the loan from the latter. Digong a.P20,000
sale. Compute the capital gains acquired the shares for b.P16,000
tax. P300,000. Ignoring c.P12,800
a. P15,000 documentary stamp tax, d.P0-
b. P14,500 compute the capital gains 12.Compute the taxable gain on the
c. P14,200 tax on the transaction. December 7 sale
d. P13,700- a. P0 a. P64, 118
2. Mr. Abdul, a non-resident alien, b. P7,500 b. P60,000-
sold domestic stocks directly to c. P5,000 c.P51, 467
a buyer at a net gain of P70,000. d. P2,500- d.P44,000
Compute the capital gains tax. 7. On January 5, 2017, Mercy, a e.P44,000
a. P8,000 stock dealer, disposed the 13. Mr. Trinidad has the following
b. P6,000 following shares directly to a transactions during the year on the
c. P4,000 buyer: common stocks of Philippines Pines, a
d. P3,500- Shares Selling price Cost domestic non-listed company:
3. Mr. Panay, a non-resident Stock rights P200,000 Date Transaction Gain(loss)
citizen, sold domestic stock P170,000 5/8/2017 Sale P120,000
rights directly to a buyer at a net Common stocks100,000 8/5/2017 Sale (10,000)
gain of P320,000. Compute the 110,000 9/8/2017 Sale 250,000
capital gains tax Ignoring the documentary Compute the final capital gains tax on
a.P30,000 stamp tax, the capital gains April 15, 2018
b.P25,000 tax payable on the sale is a.P29,000
c.P27,000- a. P0- b.P22,000
d.P15,000 b. P1,000 c.P3,000-
4.Mr. Digos sold shares of a resident c. P1,500 d.P0
foreign corporation directly to a buyer. d. P3,000 14. Mr. Kalibo shows the following
The shares were purchased for 8.Kidapawan, Inc. a domestic service transactions in the shares of Aklan
P100,000 and were sold at a net selling company, has the following transactions Corporation, a closely held corporation:
price of P210,000. Compute the capital on the sale of another domestic Date Transaction Quantity Price
gains tax. corporation: 2/8/2017 Buy 10,000
a.P11,000 Transaction Quantity Net Price P120,000
b.P6,000 Purchase 20,000 P40,000 4/5/2017 Sell 10,000
c.P5,500 Purchase 30,000 63,000 100,000
d.P0 Sale 40,000 92,000 5/1/2017 Buy 20,000
5. Grace sold domestic shares directly Assuming the first-in, first-out method, 240,000
to buyer. The following relates to the compute the capital gains tax on the What is the tax basis of the shares
sale: sale acquired on May 1, 2017?
Fair market value of shares P400,000 a.P500- a. P300,000
Selling price 300,000 b.P480 b. P260,000-
Cost 150,000 c.P400 c. P240,000
Compute the capital gains tax. d.P0 d. P220,000
a.P7,500 9. Assuming the moving-average 14. Mrs. Aurora, a resident citizen,
b.P9,925 method, compute the capital gains tax purchased 100,000 shares of
c.P10,000- on the sale PhilHotdogs, a domestic listed
d.P15,000 a.P500 company. The shares were
6. Texas Inc. exchanged its investments b.P480- acquired at P200,000. She
representing domestic shares for a c.P400 disposed the shares through the
piece of land owned by E Inc. d.P0 Philippine stock Exchange at a
Fair market value of shares P400,000 10. Koron Company, a trading company, fair value of P250,000.
Fair market value of land 500,000 made the following transactions during Compute the capital gains tax.
Par value of shares 300,000 the year involving the stocks of Xurpas, a.P0-
Cost of shares 350,000 a domestic corporation: b.P5,000
Compute the capital gains tax Date Transaction Shares Net price c.P2,500
a. P5,000 6/15/2017 Purchase 10,000 P30 d.P10,000
b. P7,500 9/30/2017 Sale 8,000 28 15.Mr. Bosun disposed various stocks at
c. P9,988- 10/3/2017 Purchase 15,000 25 a total consideration of P400,000 and
d. P15,000 12/7/2017 Sale 10,000 32 paid thereon stock transaction tax of
6. Digong Inc. exchanged its Koron uses the FIFO method in using P2,000. Aggregate gains realized totaled
share investment from Bee the Xurpas stocks. P98,000 after the stock transaction tax.
Inc., as payment of its Compute the deductible loss on the What is the capital gains tax?
P350,000 long outstanding September 30 sale. a.P0-
b.P4,900 The deductible capital loss against property. What is the classification of
c.P5,000 capital gain on the wash sale is the property?
d.P9,800 a.P0 a. Ordinary asset-
Multiple Choice-Problems:Part 2 b.P13,333 b.Capital asset
1. A certain taxpayer shows the c.P10,000- c.Either A or B at the discretion of the
following over-the-counter d.P20,000 BIR
transactions shares of a 6. What is the cost of the 15,000 shares d.Either A or B depending on the intent
domestic corporation: acquired in the preceding problem? of the buyer
Date Transaction Quantity Net a. P150,000 2. Assuming the same date in the
price b.P160,000 preceding number except that the
2/8/2015 Purchase 10,000 P112,000 c.P180,000 property was not disposed of but the
4/5/2015 Sale 10,000 100,000 d.P190,000- same was used as a sales outlet which it
5/1/2015 Purchase 8,000 80,000 7. Isidro sold 1,500 shares of stocks of became vacant for more than two
6/7/2015 sale 5,000 60,000 Achievers Corporation directly to a years. What is the classification of the
Compute the capital gains on June 7, buyer. The share’s par value per shares property?
2015 that is subject to capital gains tax. was P85. Isidro purchased the shares a.Ordinary asset, regardless of the
a.P4,000 for P90 each. On the date of sale, the taxpayer
b.P5,000 shares had a selling price of P120 per b.Capital asset, regardless of the
c.P10,000 share. taxpayer
d.P12,000 What is the capital gains tax on the c.Ordinary asset, if taxpayer is not
2.A non-security dealer sold domestic sale? engage in real estate business
stocks directly to a buyer on October 1, a.P2,65 d.Capital asset, if the taxpayer is not
2017 under the following terms: b.P2,250- engaged in real estate business-
Selling price P500,000 c.P14,000 3.Anderson disposes a vacant lot for
Cost 200,000 d.P11,375 P3,000,000. The lot has an assessed
Downpayment 10% 8. Mr. Palangdan purchased domestic value of P2,800,000, a zonal value of
Installments in 2015 50,000 stocks which were priced at 150% P3,200,000, and an appraisal value of
Compute the total capital gains tax in above their par values. After two years, P3,500,000. What is the capital gains
2017. he sold the stocks when the fair value tax?
a.P30,000 doubled. He paid P3, 750.00 a.P0
b.P25,000 documentary stamp and P10,000 in b.P180,000
c.P6,250 commission expenses on the sale. c.P192,000-
d.P5,000 Compute the selling price of the stocks. d.P210,000
3.ABC realized the following gains or a.P3,000,000- 4.Puerto Prinsesa Company sold its
losses in selling various securities: b.P2,500,000 parking lot for P2,000,000. The lot has a
Gain on sale of domestic stocks C.P1,500,000 zonal value of P2,500,000 and appraisal
P300,000 d.P1,000,000 value of P1,800,000. The capital gains
Par value of domestic stocks sold 9.Compute the capital gains tax. tax on the sale of lot is
200,000 a.P143, 625- a.P0
Gain on the sale of interest in a b.P145,000 b.P108,000
partnership 200,000 c.P152,750 c.P120,000
Gain on the sale of stocks of foreign d.P153,725 d.P150,000
corporations 150,000 10. On June 20, 2016, Mr. Lito filed the 5. Mr. Antonio disposed his principal
Compute the capital gains tax capital gains tax return involving the residence for P2,000,000 and
a.P45,000 sale of domestic stocks on February 20, immediately acquired a new one for
b.P40,000 2016. The net gain was P140,000. P1,800,000. The old residence cost Mr.
c.P35,000 Compute the total amount due Antonio P1,000,000 and had a fair
d.P25,000- including penalties except compromise market value of P2, 500,000 on the date
4. Compute the documentary stamp tax penalty. of sale.
in the preceding problem a.P11, 250 Compute the capital gains tax to be
a.P0 b.P11,500 deposited in escrow.
b.P562.50 c.P11,700- a.P0
c.P1,125 d.P12,250 b.P60,000
d.P750- Multiple Chocie-Problems:Part 3 c.P120,000-
5. A wash sale of domestic shares 1.A taxpayer purchased a building to be d.P150,000
wherein 20,000 shares were disposed used as a future plant site. The building 6. What would be the tax basis of Mr.
at a loss of P40,000 were subsequently remained unused for 3 years due to a Antonio’s new residence?
covered up within the 30-day period by significant decline in customer’s a. P1,800,000
purchase of 15, 000 shares for demand in product of the taxpayer. The b.P1,000,000
P12/share taxpayer eventually disposed the c.P900,000
d.P800,000-
7. How much of the capital gains tax will Multiple choice-Problems:Part 4 Fair value of other properties received
be released to the taxpayer? 1.Mr. Quirino exchanged his stock in 250,000
a.P150,000 Carmen Corporation for the shares of Compute the capital gains tax.
b.P135,000- stock of Dingalan Corporation. The a.P0
c.P120,000 stocks acquired by Mr. Quirino b.P5,000
d.P15,000 represent 60% of the stocks of Dingalan c.P10,000-
8. On August 15, 2011, Ms. Mones sold Corporation. d.P20,000
a 500-square meter residential house Basis of the stocks given P3,000,000 7. What is the tax basis of the B
and lot for P3,000,000. The house was Fair market value of the stocks given company received by Raymund?
acquired in 2005 at P2,000,000. The 5,000,000 a.P0
assessed fair market values of the Fair market value of stocks received 4, b.P1,100,000-
house and lot, respectively, were 500,000 c.P1,200,000
P1,500,000 and P1,000,000. The zonal What is the capital gains tax? d.P1,350,000
value of the lot was P5,000 per square a.P0- 8. What is the basis of the “boot” or
meter. b.P45,000 other properties received by Raymund?
What is the capital gains tax? c.P145,000 a.P0
a. P180,000 d.P195,000 b.P150,000
b. P120,000 2.In the immediately preceding c.P250,000-
c. P150,000 problem, what is the basis of the stocks d.P400,000
d. P240,000- received by Mr. Quirino? 9. What is the basis of the A company
9.Manny, a resident Filipino citizen sold a.P0 shares received by B company?
his principal residence (house and lot) b.P3,000,000- a.P0
at its original purchase price of c.P4,500,000 b.P1,100,000
P11,000,000. The property had a d.P5,000,000 c.P1,200,000
P13,000,000 fair value at that time. 3. Mr. Eller exchanged his DEF shares d.P1,350,000
If the proceeds of the sale were not for shares of EFG pursuant to a plan of 10. Mrs. Joson sold a residential lot on
invested in the new principal residence merger. Mr. Eller bought his shares for July 1, 2014 for P2,000,000. The
but, instead, new funds of P15,000,000 P1,000,000. The shares had a fair value property had a zonal value of
were used to construct it, the capital of P1,500,000 on the date of exchange, P2,500,000 and an assessed value of
gains tax is Mr. Eller received EFG shares with fair P1,000,000.
a.P0 value of P1,300,000 plus cash of On July 1, 2014, Mrs. Joson was
b.P660,000 P200,000. compelled to pay the capital gains upon
c.P750,000 Compute the capital gains tax the request of the buyer. The
d.P780,000- a.P0 compromise penalty was determined to
Numbers 8 through 10 are based on the b.P10,000 be P200,000.
following information: c.P15,000- Compute the total tax due.
Mr. Pepito sold his residential land in d.P45,000 a. P150,000
Manila with fair market value of 4.What is the basis of the shares b. P180,000
P12,000,000 for P10,000,000. received by Mr. Eller? c. P217, 500
10. If Mr. Pepito utilized all of the a.P0 d. P237,500-
P10,000,000 in buying a house and lot b.P1,000,000- 11. Basic Company paid P9,000
to be used as his new principal c.P1,200,000 documentary stamp tax on the sale of a
residence, the final tax due from him is d.P1,300,000 real property capital asset. Compute
a. P720,000- 5. What is the basis of the DEF shares the capital gains tax on the sale.
b.P600,000 received by EFG Company? a.P9,000
c.P120,000 a.P0 b.P16,000
d.P0 b.P1,000,000 c.P36,000-
11. If Mr. Pepito utilized only c.P1,200,000- d.P42,000
P7,000,000 from the proceeds of the d.P1,300,000 12. Mr. Bassit Unay sold a residential
sale in acquiring a new residence, the 6. Raymund exchanged his A company land for P4,000,000. The land had a fair
final tax due from him is shares pursuant to a plan of value of P3,500,000 and an assessed
a.P720,000- consolidation where A company will be value of P2,000,000. What is the total
b.P216,000 integrated with B company. The income and documentary stamp tax
c.P180,000 following relates to the exchange: due?
d.P0 Basis of A company shares given a. P0
12.The documentary stamp tax due on P1,200,000 b.P300,000-
the sale is Fair value of A company shares given c.P400,000
a.P179, 895 1,300,000 d.P450,000
b.P180,000- Fair value of B company shares received CHAPTER 7
c.P149,985 1,100,000 INTRODUCTION TO REGULAR INCOME
d.P150,000 TAX
This chapter provides an overview of
the regular income tax intended to
acquaint readers with the nature and
tax structures of the regular income tax.
It also discusses regular tax reporting
and income tax determination.
Subsequent chapters deals with specific
aspects of the regular income tax.
After this chapter, readers are expected
to demonstrate knowledge on the
following:
1. The scope of regular income and
its tax model
2. The features of the regular
income tax
3. The concept of inclusion and
exclusions from gross income
4. The types of gross income
subject to regular tax
5. The concept of deduction and
personal exemption
6. The concept of deductions
compared to personal
exemptions
7. Measurement of gross income
from employment and business
and the treatment of other
income
8. The concept of operating
income or revenue and the
difference in tax presentation of
individuals and corporate
taxpayers.
9. The procedural computation of
taxable income of corporations
and different individual
taxpayers
10. The computation of the regular
tax for individuals and
corporations
11. The deadline of the regular tax
returns
12. Applicability of the quarterly
filing and its deadlines
THE REGULAR INCOME TAX MODEL
Gross Income Pxxx,xxx
Less: Allowable deductions xxx,xxx
Personal exemptions xxx,xxx
Taxable income Pxxx,xxx
CHARACTERISTICS OF THE REGULAR
INCOME TAX
1. General in coverage
2. A net income tax
3. An annual tax
4. Creditable withholding tax
General coverage
The regular income tax applies to all
items of income except those that
are subject to final tax, capital gains
tax, and special tax regimes.
Net Income taxation
The regular tax is an imposition on
residual profits or gains after
deductions for expenses and
personal exemptions allowable by
law.
Annual tax
The regular income tax applies on
yearly profits or gains. The gross
income and expenses of the
taxpayer are measured using the
accounting methods adopted by the
taxpayer and are reported to the
government over the accounting
period selected by the taxpayer.
Creditable withholding taxes
Most items of regular income are
subject to creditable withholding
tax(CWT). The CWT is withheld at
source by customers or clients but is
not a final tax. It is an advance tax
deductible against the annual
income tax due of the taxpayer.
Final Withholding tax (FWT) vs.
Creditable Withholding Tax (CWT)
Similarities of FWT and CWT
1.In both cases, the income payor
withholds a fraction of the income
and remits the same to the
government.
2.By collecting at the moment cash
is available, both serve to minimize
cash flow problems to the taxpayer
and collection problems to the
government,
Differences between FWT and CWT
Final Withholding Tax
Creditable Withholding tax
Income tax withheld Full Only a
portion
Coverage Certain passive income
Certain passive and active income
Who remits the actual tax Income
payor Income payor for the CWT
and the taxpayer for the balance
Necessity of an annual consolidated
return Not required
GROSS INCOME
For purposes of the regular income tax,
gross income constitutes all items of
income that are neither excluded in
gross income nor subjected to final tax
or capital gains tax. The items of gross
income subject to regular income tax
will be extensively discussed in Chapter
9.
Exclusion from Gross Income
These pertain to items of income that
are excluded; hence, exempt from
income taxation. These will be
discussed in detail in Chapter 8.
Excluded income vs. exempt income
Excluded income is also exempt income.
Both are not included in gross income,
but differ only as to source. Excluded
income traces their origin from the
NIRC, but exempt income trace their
origin from either the NIRC or special
laws.
ALLOWABLE DEDUCTIONS
Allowable deductions, or simply
“deductions” are expenses in the
conduct of business or exercise of
profession. Deductions can be claimed
itemized wherein the taxpayer supports
every item of deduction or standardized
through the Optional Standard
Deductions wherein the deduction is
simply presumed as a percentage of
gross sales, gross receipts, or gross
income.
The book sub-divided the vast topic of
deductions as follows:
1.Principles of deductions-Chapter 13
2.Regular allowable Itemized
deductions-Chapter 13-A
2.Special allowable Itemized Deductions
and net operating loss carry over
Chapter 13-B
4.The standard optional
deductions(OSD)-Chapter 13-C
PERSONAL EXEMPTIONS
Ideally, income taxation should not
apply to the basic subsistence and
support of individual taxpayers because
imposing tax on these would be
tantamount to killing the goose that
lays the golden eggs. The amount
exempted by law in lieu of the personal,
living, and family expenses of an
individual taxpayer is referred to as
personal exemption. Personal
exemption will be discussed in detail in
Chapter 14.
Allowable Deduction vs. Personal
exemption
1. Allowable deductions pertain to
costs or expenses of earning
items of gross income while
personal exemptions are
deductions in lieu of the
personal, family and cost of
living of individual taxpayers.
2. Personal exemption is applicable
only to individual taxpayers.
Corporations cannot claim
personal exemptions. However,
both corporations and
individuals can claim
deductions.
 3. Allowable deductions are
generally deductible by
corporations. For individual
taxpayers, only self-employed
individuals or those engaged in
business or exercise of a
profession can claim deductions.
No deduction is allowed to
individuals who are purely
employed while exemption is
allowed to individuals whether
purely employed or self-
employed.
4. Allowable deductions are
deductible only from gross
income from business or
exercise of a profession.
Personal exemption is
deductible against all types of
gross income subject to regular
income tax.
5. Allowable deductions are
considered in the determination
of net income from business or
profession whereas personal
exemption is considered in the
computation of taxable income.
TYPES OF GROSS INCOME SUBJECT
TO REGULAR INCOME TAX
1. Compensation income
2. Business or professional income
3. Other income-non-business
income and non-compensation
such as:
a. gains from dealings in
properties
b. other active or passive
income not subject to final
tax
THE REGULAR TAX MODEL IN
EXPANDED FORM
Employment Business or
profession Others Total
Gross income xxx xxx xxx
Less:
Deductions (xxx)
Personal exemptions(xxx)
Taxable income xxx+xxx+xxx=xxx
COMPENSATION INCOME
In taxation, the term “compensation
income” generally comprises all
remunerations under an employer-
employee relationship, such as the
regular pay of employees every payroll
period and other benefits or incentives
other than the basic pay which
commonly known as fringe benefits.
Classification of employee
remunerations
Rank and file employees
Managerial or supervisory employees
Regular pay Compensation income Freight-in xxx
Compensation income Total goods available for sale Pxxx
Fringe Benefits Compensation income Less: Ending inventory xxx
Fringe Benefit Cost of goods sold Pxxx
Compensation income is subject to Under the perpetual system, the cost of
regular income tax. The fringe benefits goods sold is determined through bar
of rank and file employees are included codes of the goods sold by stock cards
as part of compensation income and indicating the costs of the goods sold.
are subject to regular income tax while Under the periodic system, the cost of
the fringe benefits of managerial or goods sold is established by counting
supervisory employees are excluded in the inventories. The cost of missing
compensation income are subject to a items at every reporting date is
special final tax, called fringe benefit considered sold. For purposes of
tax. This special taxation will be costing, the freight costs of the goods
discussed in Chapter 11. purchased are allocated to all units
TAX REPORTING OF COMPENSATION purchased.
INCOME Cost of sales of a manufacturing
Compensation income is presented in business
the income tax return as follows: The cost of goods sold of a
Gross compensation income Pxxx manufacturing business is computed in
Less: Non-taxable compensation almost the same way with those of a
xxx(SSS, PHIC, Pag-ibig, Union Dues) trading business. The detailed costing
Gross taxable compensation income Pxx procedures for inventories of a
Less:personal exemption xxx manufacturing business will be
Net taxable income discussed in Chapter 13.
Pxxx Illustration
Non-taxable compensation includes A taxpayer had the following data
items of compensation income that are during the year:
exempted by law, contracts, or treaty Gross sales P4,000,000
from income taxation. The detailed tax Sales discounts 100,000
rules on compensation income will be Sales return 200,000
discussed in Chapter 10. Beginning inventory 600,000
BUSINESS INCOME Purchases 2, 500,000
Business Income arises from habitual Purchases returns and allowances
engagement in any commercial activity 150,000
involving regular sales of goods or Freight-in 200,000
services by an individual or a Ending inventory 800,000
corporation. The income from business, The cost of sales shall be computed as
legal, or illegal, registered or follows:
unregistered, is taxable. Beginning inventory P600,000
The business gross income from the Net purchases(P2.5 M-P150K) 2,
sale of goods is computed as: 350,000
Sales Pxxx Freight-in
Less: Cost of goods sold(cost of sales) 200,000
xxx Total goods available for sale P3,
Gross income Pxxx 150,000
Cost of sales Less: Ending inventory
Cost of sales pertains to the acquisitions 800,000
cost of the goods sold or the Cost of sales
manufacturing cost of the goods sold. P2,350,000
Cost of sale of a trading business The business gross income shall be
The cost of goods sold may be computed as follows:
determined by the specific Sales(P4M-P100K-P200K) P3,700,000
identification using perpetual inventory Less:cost of sales 2, 350,000
system with the aid of point-of- Gross income P1,350,000
sale(POS) machines or by periodic PROFESSIONAL INCOME
inventory system using the following The gross income from exercise of a
formula: profession or business gross income
Beginning inventory Pxxx from the sales of services is measured
Purchases, net of returns and as follows:
allowances xxx Revenues or gross receipts Pxxx
Less: Cost of services xxx Less: Cost of services 2,112,000
Gross income Pxxx Gross income P2,388,000
Service providers using the accrual basis TAX REPORTING OF BUSINESS OR
shall report their revenues while those PROFESSIONAL INCOME
using the cash basis shall report their Tax Reporting by Individual Taxpayers
gross receipts or collections. Net Sales/Revenues/Receipts/Fees Pxxx
Cost of services Add:Other taxable income from
Cost of services pertains to all direct operation not subject to final tax
costs of rendering the services such as xxx
cost of labor, materials, and overhead Total sales/revenues/receipts/fees
costs. The cost of services should be Pxxx,xxx
distinguished from the costs of Less:Cost of sales or services xxx,xxx
administration and marketing of the Gross Income from
business. These two are separately business/professionPxxx,xxx
presented under the deduction Add:Non-operating income xxx,xxx
category “Regular allowable itemized Total Gross income Pxxx,xxx
deductions.” Less: Allowable deductions xxx,xxx
Illustration Net Income Pxxx,xxx
A practicing auditor had the following Sales, revenues, receipts, and fees and
income and expenses during the year: fees distinguished
Billing for services rendered and out-of- Revenue is a general term which
pocket costs P4,500,000 pertains to the gross inflow of benefits
Salaries of audit staff 1, 400,000 (total return) arising from the primary
Salaries of administrative employees operations of the business. Sales
200,000 pertains to revenue from the sale of
Transportation expenses to and from goods while “fees” pertains to revenue
clients 12,000 from the sale of service. Receipts
Supplies used in various engagements pertains to cash collections from the
250,000 sale of goods or services.
Supplies and general utilities 120,000 The terms sales or fees simply revenue
Depreciation of office equipment are commonly used to denote the
80,000 income of taxpayers using the accrual
Depreciation of laptops issued to audit basis while the term receipts is used to
staff 50,000 denote the income of taxpayers using
Insurance expense on office properties the cash basis.
20,000 Revenue vs. Gross income
Rent expenses allocable to workspaces Revenue is a gross concept pertaining
400,000 to the total return in a transaction
Rent expenses allocable to which includes the return on capital
administrative offices 50,000 and the return on capital. Gross income
Bad debts expense on non-paying is a net concept pertaining to the return
clients 100,000 on capital in a transaction. Gross
The cost of services shall include only income is net of the cost of sales or cost
those directly incurred or related gross of services.
revenue from the rendition of services Other taxable income from operations
such as: Other taxable income from operations
Salaries of audit staff includes revenues or receipts from
P1,400,000 incidental or secondary operations
Transportation expenses to and from aside from the primary operations.
clients 12,000 Examples:
Rental expenses on staff workspaces 1.A school has tuition fees as primary
400,000 revenue, but its income from its
Supplies used in various engagements bookstore. canteen or student
250,000 dormitories constitutes other operating
Depreciation of laptops revenues.
50,000 2. A manufacturing firm has its gross
Total cost of services P2, income from sale of finished goods as
112,000 its primary revenue, but its income
The gross income shall be computed as from scrap sales constitutes other
follows: operating revenues.
Revenue P4,500,000
3. A private hospital has patient service
fees as its primary revenue, but may
have room rental and sale of medicines
at its other operating revenues.
4. A dormitory has boarding fees as its
primary revenue, but may have laundry
fees and canteen income as other
operating revenues.
5. A retail store has its sales of
merchandise as its primary revenue,
but may earn consignment commission
income as other operating revenues.
6. A bus transport company has the
receipts from passengers and baggage
as primary revenue, but may earn
income from bus stop restaurants and
washrooms as other operating
revenues.
Non-operating income
Non-operating income includes all other
items of gross income such as:
1.Gains from dealings in properties
Gains are net of cost of the property
sold. They are gross income items
rather than revenue. Hence, they are
excluded under
“sale/Revenues/Receipts/Fees” of
individual taxpayers and are included
under “Non-operating income.”
Dealings in properties pertain to the
sale, exchange, and other disposition of
properties by the taxpayer. The rules on
gains in dealing in properties not
covered by the capital gains tax will be
discussed in Chapter 12 under regular
income taxation.
2.Income distribution from a general
professional partnership, taxable trusts
or estate, or from an exempt joint
venture
Income distributions from these entities
are not revenue, but items of gross
income, hence, included as part of the
non-operating income of individuals
3.Casual active income
This includes active income from
isolated or one time transaction such as
casual capentry income of a person not
engaged in carpentry business. Any
expense on casual transactions is set off
with the casual income. The net gain or
income is a non-operating income.
4.Passive income not subject to final
tax
This includes passive income not
connected with the business of the
taxpayer and is not subjected to final
tax such as interest on advances to
employees and dividends from foreign
corporations. Similar to casual
income,these do not arise from the
regular business operations, hence, Illustration
classified as non-operating income. Assuming the same data in the previous
Illustration illustration except that the taxpayer is a
An individual taxpayer who is using the corporation, the business income shall
accrual basis in his manufacturing be reported as follows:
business reported the following results Net
of operations in the preceding year. sales/Revenues/Receipts/Fees(P4M+P0.
Sales, net of returns, and discounts 2M) P4,200,000
P4,000,000 Less:Cost of sales
Cost of sales 1,800,000 1,800,000
Dividends income, net of final tax Gross Income from operations
36,000 P2,400,000
Business expenses Add: Other taxable income not subject
1,600,000 to final tax
Gain on sale of old equipment Gain on sale of equipment
100,000 P100,000
Sale of scrap metals Interest income on employee
200,000 advances 45,000
Interest income on employee advances 145,000
45,000 Total gross income P2,545,000
Gain on sale of domestic stocks directly Less:Allowable deductions(Business
to buyer 10,000 expenses) 1, 600,000
The business income of the individual Net Income P945,000
will be presented in the income tax The difference in presentation between
return as follows individuals and corporations is
Net Sales/Revenues/Receipts/Fees necessitated by the Optional Standard
P4,000,000 Deduction(OSD). The basis of the OSD
Add:Other taxable Income from for individual taxpayers is the total
operations-Scrap sales revenues or receipts from operations
200,000 while the basis of the OSD for
Total sales/ Revenues/ Receipts/ Fees corporations is on total gross income
P4,200,000 subject to regular income tax whether
Less:Cost of sales or services or not they arise from the regular
1,800,000 business operations.
Gross Income from Business/Profession Separate bookkeeping for business and
P2,400,000 professional practice
Add:Non-operating income Individual taxpayers engaged in
Gain on sale of equipment business or exercise of a profession
P100,000 must maintain a separate record of
Interest income on employee their transactions from business or
advances 45,000 professional transactions. The personal
Total Gross Income P2, transactions of the individual taxpayer
545,000 must not be mixed with the
Less:Allowable dedcutions(Business transactions of the business or
Expenses) 1,600,000 professional practice.
Net Income This is important in the tax treatment of
P945,000 expenses. The personal expense of the
Note:For corporate taxpayers, revenues taxpayer cannot be deducted against
or receipts from secondary or incidental the gross income of the business. The
operations will be included under the allowable personal exemption fixed by
classification ,”Sales/Revenues/Receipts law for individual taxpayers is in lieu of
/Fees.” all the actual personal, family, and cost
Other taxable income not subject to of living expenses of the taxpayer.
final tax DETERMINATION OF TAXABLE INCOME
This category includes other items of The taxable income shall be computed
gross income whether or not arising upon the basis of the taxpayer’s annual
from the operations of the corporation accounting period in accordance with
such as gains in dealings in properties, the method of accounting regularly
income distribution from an exempt employed in keeping the books of such
joint venture, and other passive income taxpayer; however, if no such method
not subject to final tax. of accounting has been so employed, or
if the method employed does not
clearly reflect the income, the
computation shall be made in
accordance with such method that in
the opinion of the Commissioner,
clearly reflects the income.
TAXABLE INCOME OF CORPORATE
TAXPAYERS
The taxable income of corporate
taxpayers is simply the net income from
business because corporations cannot
claim personal exemptions.
TAXABLE INCOME OF INDIVIDUAL
TAXPAYERS
The computation of the taxable income
of an individual taxpayer depends on
whether he or she is a:
1. Pure compensation income
earner
2. Pure business income earner or
pure professional income earner
3. Mixed income earner
Pure compensation income earner
The taxable income of a pure-
compensation income earner is
computed as follows:
Gross taxable compensation income
Pxxx
Less:Personal exemptions xxx,xxx
Taxable compensation income Pxxx,xxx
Individuals deriving pure compensation
income from one employer and without
other income outside their employment
may avail of the substituted filing
system where the employer withholds
the total income tax on compensation
of the employee income. The employee
need not file an income tax return
provided that the employer withheld
the correct amount of tax.
Treatment of other income of a pure
compensation earner
The other income is simply added to
the taxable compensation income as
follows:
Gross taxable compensation income
Pxxx
Taxable compensation income Pxxx
Add:other income xxx
Taxable income Pxxx
Note: Employed individuals with other
income outside employment are
required to file the annual income tax
return for pure compensation earner.
(BIR Form 1700).
Pure Business or professional income
earner
The taxable income of a pure business
or professional earner is the net income
from business or profession less the
personal exemptions:
Net income from business or profession Case 1: A compensation earner with Over But Basi Pl Of
Pxxx other gross income not c tax us excess
Less: personal exemption xxx Compensation income P400,000 over over
Taxable business income Pxxx Less:Personal exemption 125,000 P0.00 P10,00 P0 5 P 0.00
Treatment of other income of a pure Taxable compensation income P275,000 0.00 %
business or professional income earner Add:other gross income 20,000 10,000 30,000 500 10 10,000
The other income of individuals is Taxable income P295,000 .00 .00 .00
integrated in the business or Case 2: A business income earner with %
professional net income through the other gross income 30,000 70,000 2,50 15 30,000
category “non-operating income.” Gross business income P400,000 .00 .00 0 .00
%
Mixed Income Earner Add:other gross income 20,000 70,000 140,00 8,50 20 70,000
The taxable income of individual Total gross income P420,000 .00 0.00 0 % .00
taxpayers deriving income from both Less:Allowable deductions 280,000 140,00 250,00 22,5 25 140,00
employment and self-employment in Net income P140,000 0.00 0.00 00 % 0.00
business or exercise of a profession Less: Personal exemption 125,000 250,00 500,00 50,0 30 250,00
shall be determined as follows: Taxable income P15,000 0.00 0.00 00 % 0.00
Taxable compensation income Pxxx,xxx Case 3: A mixed income earner- 500,00 - 150, 32 500,00
Net income from business or profession negative taxable compensation income 0.00 000 % 0.00
xxx, xxx Gross taxable compensation income
Total taxable income Pxxx,xxx P100,000 Note:Examinees are not required to
Note: self-employed individuals, estates Less: personal exemption 125,000 memorize this tax table for Board exam
and trusts, and mixed income earners Taxable compensation income purposes
shall file BIR From 1701. (P25,000) Scope of progressive tax
A negative taxable compensation Gross business income P400,000 The progressive tax covers all
income is deductible from net business Other gross income 20,000 individuals including taxable estates and
or professional income in consonance Total gross income P420,000 trusts except those subject to final
with the rule that personal exemption is Less: deductions 280,000 income tax:
deductible against all types of income 140,000 a.NRA-NETB-subject to 25% final tax on
subject to regular tax. Taxable income gross income
However, a net operating loss on P115,000 b. Special aliens or special employees-
business or professional practice is not Note: A negative taxable compensation subject to 15% final tax on gross income
deductible against compensation income is deductible against business or from employment
income. A net operating loss is allowed professional net income. Illustration 1:Income tax computation
to be carried over as an item of Case 4:Mixed income earner-with A resident citizen with a personal
deduction (Net Operating Loss Carry- business/professional net loss exemption of P50,000 has a
over or NOLCO) against any net income Gross taxable compensation income compensation income of P150,000
in the succeeding three years. This will P400,000 within the Philippines and P100,000
be discussed under chapter 13-B. Less: personal exemption 125,000 from abroad.
Illustration:Individual income taxpayer Taxable compensation income The taxable income of the resident
Case Case Case Case P275,000 citizen shall be computed as follows:
1 2 3 4 Gross business income P200,000 Gross compensation income
Compe P400 P100 P400 Add:other gross income 20,000 (P150K+P100K) P250,000
nsation ,000 ,000 ,000 Total gross income P220,000 Less: Personal exemption 50,000
income Less:deductions 280,000 Taxable compensation income P200,000
Gross P400 400, 200, Net Loss(NOLCO) (P60,000) The income tax due shall be computed
busines ,000 000 000 Taxable income as follows:
s P275,000 Tax due
income Note: A net operating loss from Taxable compensation income P200,000
Deducti 280, 280, 280, business or profession is not deductible Less: Lower limit of the income bracket
ons 000 000 000 against taxable compensation income. where the taxable income
Other 20,0 20,0 20,0 20,0 Types of Regular Income tax qualifies 140,000
gross 000 00 00 00 1.Individual income tax P22,500
income 2. Corporate income tax Excess P60,000
Persona 125, 125, 125, 125, INIDIVIDUAL INCOME TAX Multiply by: 25% 15,000
l 000 000 000 000 The individual income tax or Total income tax due P37,500
exemp progressive tax is determined in Over But Basic Pl Of
tion reference to a tax table of progressive not tax us excess
Taxable income shall be determined in tax rates. over % over
each of the above case as follows: The Income tax table for Individual P70,0 P140,0 P8,50 2 P70,0
Taxpayers 00.00 00.00 0 0 00.00
 % income. The RCIT applies to any monitoring compliance with the
140,0 250,00 22,5 2 140,0 corporation other then those: creditable withholding tax by exempt
00.00 0.00 00.0 5 00.00 a. Subject to final tax such as non- corporations.
0 % resident foreign corporation and Exempt corporations with gross income
250,0 500,00 50,00 3 250,0 FCDU interest income not subject to the regular corporate income
00.00 0.00 0.00 0 00.00 subjected to final tax tax shall file BIR From 1702-RT for such
% b. Special corporations or those income.
subject to special tax regimes RULES IN ROUNDING OF CENTAVOS IN
Note:Recall that a resident citizen is such as PEZA and TIEZA- THE INCOME TAX RETURN
taxable on global income. registered enterprises. The requirement for entering centavos
Illustration 2:Income tax Computation c. Exempt corporations on their in the latest version of the income tax
A resident alien with a P100,000 exempt income. return (June 2013 version) has been
personal exemption has a business net Illustration eliminated. If the amount of centavos is
income of P750,000 in the Philippines A corporation has a net income of 49 or less, the centavos are dropped
and P250,000 from abroad. P1,200,000 in the Philippines and down. If the amount is 50 centavos or
The taxable income of a resident alien P800,000 from abroad. more, it is rounded up to the next peso.
shall be computed as follows: Assuming the corporation is a domestic Hence, an amount for P100.49 shall be
Business net income corporation, the income tax due shall entered in the income tax return as
P750,000 be computed as follows: P100. An amount of P100.50 shall be
Less:Personal exemption 100,000 Taxable income (world) rounded to P101.00.
Taxable net income P2,000,000 DEADLINE OF FILING THE INCOME TAX
P650,000 Multiply by:Tax rate RETURN
30% The annual income tax return is due for
The income tax due shall be computed Income tax due P600,000 filing on the 15th day of the fourth
as follows: month following the taxable year of the
Tax due Assuming the corporation is a resident taxpayer. The income tax due shall be
Taxable income P650,000 foreign corporation, the income tax due paid upon filing.
Less: Lower limit of the income bracket shall be computed as follows: REQUIRED ATTACHMENT IN THE
where the taxable income Taxable Income(Philippines)P1,200,000 ANNUAL INCOME TAX RETURN
qualifies500,000 Multiply by:tax rate 30% 1. Certificate of Independent CPA-if
P125,000 Income tax due P360,000 gross quarterly sales, earnings,
Excess P150,000 Note: receipts, or output exceed
Multiply by: bracket marginal rate 32% 1. Recall that a domestic P150,000)
48,000 corporation is taxable on global 2. Supplemental form for taxpayers
Total income tax due income while resident foreign with multiple activities per tax
P173,000 corporation is taxable on regime
Philippine income. 3. Account information form and
Over But Basi Pl Of 2. Under RR2-2014, corporations financial statements(FS)
not c tax us excess file their annual income tax showing:
over % over return using: a.Sales/receipts/fees
140,00 250,00 22,5 25 140,00 a.BIR Form 1702-RT for b.Cost of sales/services
0.00 0.00 00 % 0.00 corporations subject only to c.Non-operating and other
250,00 500,00 50,0 30 250,00 regular income tax taxable income
0.00 0.00 00 % 0.00 b. BIR Form 1702-EX for exempt d. Itemized deductions (if
500,00 - 125, 32 500,00 corporations under the NIRC taxpayer did not avail of OSD)
0.00 000 % 0.00 and special laws with no other e. Taxes and licenses
taxable income f. Other information prescribed
c.BIR Form 1702-MX for to be disclosed in the FS
Note:Recall that a resident alien is corporations with income 4. Statement of management
taxable only on Philippine income. subject to multiple income tax responsibility (SMR)
Special Alien Employees rates or with income subject or 5. Certificate of income payments not
These pertain to employees who are preferential rate. subjected to Withholding Tax (BIR Form
subject to a 15% final tax on gross Exempt Corporations 2304)
compensation income. These will be It should be noted that exempt 6. Certificate of creditable withheld at
discussed in detail in Chapter 10. corporations are required to report source (BIR Form 2307)
CORPORATE INCOME TAX their results of operations through BIR 7. Duly approved Tax debit memo, if
The corporate income tax, commonly From 1702-EX even if they do not have applicable
referred to as the regular corporate taxable income. They are mandated to 8. Proof of prior year’s excess credits, if
income tax (RCIT), is a proportional or use the Itemized deductions in their applicable
flat tax at a rate of 30% on taxable income tax return. The rule is 9. Proof of foreign tax credits, if
apparently intended to assist the BIR in applicable
10. For amended return, proof of tax
payment and the return previously filed
11. Certificate of tax treaty
relief/Entitlement issued by the
concerned investment promotion
agency (IPA)
QUARTERLY FILING OF INCOME TAX
RETURN
Corporations and individuals engaged in
business and those engaged in the
practice of a profession are required to
file three quarterly returns aside from
the annual consolidated income tax
return.
Individual tax payers engaged in
business or practice of profession shall
file their income tax returns using BIR
Form 1701 Q. Corporations shall file
their quarterly income tax returns using
BIR Form 1702Q.
Taxpayers make estimated quarterly tax
payments. These quarterly tax
payments are claimed as tax credit
(deductions) to the annual consolidated
income tax due of the taxpayer.
Deadline of Quarterly Income tax
returns
Income Taxpayers Corporations
tax Individual
returns s 1.There are two types of regular income
st
1 April 15, 60 days end
quarter same year of 1st Qtr
ITR
2nd August 15, 60 days end
Quarter same year of 2nd Qtr
ITR
3rd November 60 days end
Quarter 15, same of 3rd QTR
ITR year
CHAPTER 7:SELF-TEST EXERCISES
Discussion Questions
1. Discuss the scope of the regular
income tax especially on passive
income and capital gains.
2. Enumerate the characteristics of
the regular income tax
3. What are exclusion in gross
income?
4. Distinguish allowable deductions
from personal exemption
5. Demonstrate the computation
of the gross income from
employment and the gross
income from business or
exercise of a profession
6. How is cost of goods sold
determined?
7. What are included in cost of
services?
8. What composes the
compensation income of a rank
and file employee and a
managerial and supervisory
employee?
9. How does the tax presentation
of the composition of gross
income in the tax return differ
between individuals and
corporate taxpayers?
10. Distinguish “other taxable
income from operations” from
non-operating income.
11. Distinguish revenue from sales,
fees, and receipt
12. Discuss how the taxable income
of the following is determined:
a.Corporate taxpayer
b.Purely compensation earner
c.Purely business or professional
income earner
d.Mixed income earner
13. What is the treatment of negative
taxable compensation income and
negative business income?
14. What are the deadlines of the
quarterly regular income tax for
individuals and corporations?
True or false
tax: proportional income tax for
corporations and progressive income
tax for individuals.True
2.NRA-NETBs and NRFCs are also
subject to regular income tax.-False
3.All taxpayers are subject to final tax
False
4. Taxable income is synonymous to net
income.False
5.For all taxpayers, taxable income
means the pertinent items of gross
income not subject to capital gains tax
and final tax less allowable deductions
personal exemption.True
6.All taxpayers are subject to regular
income tax.-False
7. Employed taxpayers can claim
expenses from their employment as
deductions against their compensation
income. False
8. Items of gross income subject to final
tax and capital gains tax are excluded in
gross income subject to regular income
tax. True
9.The personal exemption allowable to
individual taxpayers is in lieu of the
personal and business expenses.False
10. The basic pay of both rank and file
employees and managerial or
supervisory employees is considered
compensation income and is subject to
regular income tax-True.
True or false 2
1.The gross income from compensation
is measured as gross compensation less
the non-taxable compensation
income.True
2.The deadline of filing the corporate
quarterly return is the same with the
deadline of the quarterly income tax
return of individuals.False
3.Business expenses can be deducted
against all types of gross income subject
to regular tax-False
4, Deductions are considered in the
determination of net income wile
personal exemption is considered in the
determination of taxable income-True
5.Personal exemption relates to
individual taxpayers while deductions
relate to corporations.False
6.The gross income from business is
measured as sales or gross receipts less
cost of sales or cost of services. True
7. The tax due of individuals is
determines by means of a tax table.
True
8. The tax due of corporations is
determined by multiplying their taxable
income by 30%. True
9. The deadline of the annual income
tax return using the calendar year is
similar to the deadline for individual
taxpayers. True
10. Personal exemptions are deductible
against all types of gross income subject
to regular tax. False
Multiple choice-Theory:Part 1
1. The general rule in income
taxation is
a. Final income taxation
b. Capital gains taxation
c. Regular income taxation-
d. Fringe benefit taxation
2. Active income is subject to
a.regular tax-
b.Capital gains tax
c.final tax
d.any of these
3.Question 3 and 4 are based on the
following:
A.Regular tax B. Final tax C. Capital
gains tax
Which of the foregoing are passive
incomes subject to?
a.A only
b.B only
c.Both A and B
d.Either A or B-
4. Which of the foregoing are capital
gains subject to?
a. A only
b. Conly
c. Either A or C-
d.Both A and C
5. The net amount of regular income
subject to regular tax is called
a.Taxable income-
b.compensation income
c. net income
d.gross income
6.Which is not generally subject to
regular income tax?
a. Compensation income
b. Business income
c.Professional income
d.Passive income-
7.What are allowable deductions
against gross income?
a.Business expenses-
b.Family support
c.Personal expenses by the taxpayer
d.Expenses of employment
8.Deductions are allowed to
a. employed taxpayers.
b.inidividual taxpayers only
c.corporate taxpayers only
d.taxpayers engaged in business-
9. Personal exemptions are allowed to
a.employed taxpayers
b.inidividual taxpayers only-
c.corporate taxpayers only
d.taxpayers engaged in business
10.Which is not a feature of the regular
income tax?
a.Net income tax
b.Final withholding tax-
c.Annual tax
d.Creditable withholding tax
11.Which is true with the final
withholding tax?
a.The taxpayer still needs to file an
annual consolidated return
b. It applies to all items of gross income
c. It constitutes a partial payment of
income tax
d. It applies to certain passive income-
12.Which is not true with the creditable
withholding tax?
a.Advances to the annual tax due
b.No need to pay further taxes-
c.Need to file annual income tax return
d.Applicable to items of regular income
13.Progressive income tax is applicable
to
a.corporate taxpayers
b.individual taxpayers-
c.compensation earners only
d.individuals in business only
14.Proportional regular income tax is
applicable to
a.Corporation only-
b. Compensation earners only
c.Individuals engaged in business
d. both individuals and corporations
15.Which of the following individual
taxpayers is not subject to tax on
taxable income?
a.Non-resident citizen
b.Resident alien
c.Non-resident alien not engaged in
trade or business-
d.Non-resident alien engaged in
business
16.Which of the following employers is
least likely to have special alien
employees?
a. Regional operating headquarters of
multinational companies
b. offshore banking units
c. Petroleum service contractors under
service contracts with the government
d.Foreign currency deposit unit-
17. Which of the following corporate
taxpayers is not subject to tax on
taxable income?
a.Domestic corporation
b.Business partnership
c.Non-resident foreign corporation-
d.Resident foreign corporation
18.Which is a source of income subject
to regular income tax?
a.Employment
b.Trade or business or exercise of
profession
c.Casual sales transactions
d.All of these-
19. Which interest income will not be
included in the income tax return?
a.Interest income from bank deposits-
b.Interest income from lending
c.Interest income from notes
d.Interest income from employees
20. What type of employee benefit may
be subjected to final tax?
a.Fringe benefit-
b.Compensation income
c.De minimus benefits
d.B and C
21.Which is not subject to final tax?
a.Prizes amounting to P11,000
b.Interest income from bank deposits
c.Winnings from the Philippines
d.Share on the net income of general
professional partnership-
22.Which of the following is a passive
income but is nevertheless subject to
regular tax by virtue of exclusion under
final income taxation?
a.Prizes amounting to P10,000-
b.Service income
c.Merchandising income
d.Divididends from domestic
corporations
Multiple Choice-Theory:Part 2
1. The following may be relevant in
the determination of taxable
income”
A.Gross income subject
toregular tax
B.Gross income subject to final
tax
C.Deductions from gross income
D.Personal exemption
Which is not considered in the
determination of corporate
taxable income?
a.A and D
b. C and D
c. D only
d. B and D only-
2. In the immediately preceding
problem, which is not considered in the
determination of individual taxable
income?
a.A and D
b. B and D
c. D only
d.B only-
3. Which is correct statement regarding
exclusion in gross income?
a. They are included in gross income
subject to regular income tax.
b.They are ignored in the determination
of gross income.
c. They are presented in gross income
but are presented as deductions.-
d.They are subject to final tax.
4.Which of these of employees may be
subject to final fringe benefit tax?
a.Managerial employees
b.Supervisory employees
c.Rank and file employees
d.A and B-
5.Which is not considered an operating
income?
a.Consignment commission income by a
retail store-
b.Fees from the rendering of services
c.Interest income from advances to
employees
d.Sale of scrap
6.Which is a non-operating income?
a.Gain on sale of office building-
b.Sale of goods by a retail store
c.Gate receipts of cockpits
d.Gate receipts of cinemas
7.Which is an incorrect statement?
a.Business expenses are deductible by
individuals and corporations
b.Personal exemptions are deductible
by individuals and corporations-
c.Personal exemptions are deductible
by individuals, estates and trusts.
d.Deductions are considered in the
determination of net income.
8.Which of the following will least likely
to be considered an operating income
of a security dealer?
a.Dividend income from domestic
corporation-
b. Gain on sale of stocks
c.Gain on sale of bonds
d. Interest income from bonds
9.The distinction between operating
and non-operating income is not
required in the income tax return of
a.Self-employed individuals in business
b.Mixed income earners
c.self-employed professionals
d.Purely employed individuals-
10.The reporting classification of gross
income into operating and non-
operating income is unnecessary for
a.Corporate taxpayers-
b.Individual taxpayers
c.Both A and B
d.Neither a nor b
11.Which is not part of compensation
income?
a.Basic pay of rank and file employees
b.Fringe benefits of managerial or
supervisory employees-
c.Basic pay of managerial or supervisory
employees
d.Fringe benefits of rank and file
employees
12.Who cannot claim deductions?
a.Employed taxpayers-
b.Self-employed taxpayers in business
c.self-employed professional taxpayers
d.B and C
13.Who are required to file quarterly
declaration of income?
a.Individuals engaged in business
b.Corporations and individuals engaged
in business-
c.Corporations
d.All individuals and corporations
14.Mr. Jones wishes to file his 2014
income tax return. To avoid penalty, he
must file his return on or before
a. April 15, 2014
b.April 15, 2015-
c.August 15,2015
d.November 15, 2015
15. An individual taxpayer must file his
income tax return for the third quarter
of 2014 on or before
a.April 15, 2015
b.August 15, 2014
c.November 15, 2015
d.November 15, 2014-
16. Avida Corporation is filing its income
tax return for the quarter ending
February 28, 2014. The return must be
field on or before
a.April 15, 2015
b.August 15, 2014
c.April 20,2014-
d. March 30, 2014
17.Which of these taxpayers is required
to file an income tax return?
a.An employee covered by the
substituted filing system?
b. A taxpayer deriving purely passive
income subject to final tax.
c. A special alien with respect to his
compensation income.
d.A resident citizen who derives his
entire income from sources outside
Philippines.-
18.The taxable income of corporate
taxpayers is the
a.Net income from business-
b.Net income from business less
personal exemption
c.Taxable compensation income
d.Taxable compensation income plus
net income from business
19.The taxable income of a pure
compensation income earner is the
a. net income from business less
personal exemption
b. taxable compensation income plus
net income from business
c.taxable compensation income-
d. net income from business
20.The taxable income of amazed
income earner is the
a. net income from business less
personal exemption
b. net income from business
c. taxable compensation income
d.taxable compensation income plus
net income from business-
21.The taxable income from a pure
professional income earner is the
a. net income from business
b. taxable compensation income
c. taxable compensation income plus
net income from business
d. net income from profession less
personal exemption-
22. Which of the following statements is
incorrect with respect to the
determination of the taxable income of
individual taxpayers with other income?
a.The other income of pure
compensation earners is simply
included taxable compensation income.
b. The other income of a professional
income earner is included as part of
non-operating income and is included in
net income.
c, The other income of a mixed income
earner is also treated as part of non-
operating income and is included in net
income.
d.The other income is simply ignored in
the computation of taxable income.-
23.Statement 1:Individuals with higher
income are subject to higher tax rates.
Statement 2:Corporations with higher
income are subject to higher tax rates.
Which is correct regarding the regular
income tax?
a.Statement 1 only-
b.Statement 2 only
c.Both statements 1 and 2
d.Neither statement 1 nor 2
24.Which is incorrect in the
determination of the taxable income of
individual taxpayers?
a.A negative compensation income is
deducted against net income from
business.
b.A net operating loss is deductible
against taxable compensation income-
c.The taxable compensation income is
added to the net income from business
d.Personal exemption is deducted
against compensation income.
25.Statement 1:Corporations with the
same net income may not have the
same tax due.
Statement 2:Individuals with the same
net income may not have the same tax
due
Which statement is incorrect regarding
the regular income tax?
a.Statement 1-
b. Statement 2
c. Both statements 1 and 2
d. None
Multiple choice-Problems 1
1. Mrs. Sanchez Mira had a gross
taxable compensation income of
P400,000 and her money in time
deposits plus P3,000 interest
income from lending money to a
friend.
Compute her taxable income.
a.P303,000-
b.P302,000
c.P300,000
d.P305,000
2.Ms. Claveria had a business net
income of P300,000. She also
earned P5,000 commission from
selling cellular cards and P12,000
dividends from a domestic
corporations. Ms. Claveria has
P500,000 personal exemption.
 Compute her taxable income. d.P270,000 Compute the taxable income if Lesde,
a.P250,000 8. In 2015, Ms. Balayan earned Inc., was a domestic corporation.
b.P262,000 P450,000 gross compensation income a.P3.5M
c.P255,000- but incurred P120,000 net loss in her b.P3.7M-
d.P267,000 business. What is her taxable income C.P1.380M
3. Mr. Pamplona earned total gross assuming she had a personal exemption d.P1.3M
receipts of P800,000 and paid of P100,000? 2.Compute the income tax due in the
P300,000 in expenses in his a.P350,000- immediately preceding problem.
accounting practice. During the b.P450,000 a.P1, 149,000
same year. he also earned a total of c.P230,000 b.P390,000
P60,000 net gain from the sale of d.P0 c.P1,110,000-
domestic stocks directly to a buyer. 9.In the immediately preceding d.P381,000
He also disposed a vacant lot at a problem, compute the income tax due 3. Compute the taxable income
net gain of P140,000. of Ms. Balayan. assuming Lesde Corporation was a
What is that taxable income of Mr. a.P110,000 resident foreign corporation.
Pamplona assuming he has b.P105,000 a.P3,700,000
P100,000 personal exemption? c.P80,000- b.P3,500,000
a.P400,000- d.P0 c.P1,380,000
b.P460,000 10.Mr. Gudani, with a P75,000 personal d.P1,300,000-
c.P540,000 exemption, had the following data in 4.Coompute the income tax due in the
d.P600,000 2015: immediately preceding problem.
4.Mr. Monreal earned a gross Philippines Abroad a.P390,000-
compensation income of P200,000 Gross income from sales P4M P600K b.P1,110,000
and gross business income of Interest income from deposits 40K 80K c.P1,149,000
P500,000 before expenses of Less:Deductions 2M d.P381,000
P200,000. He also earned book 3.6M 5.Compute the tax due if Lesde, Inc.
royalties of P10,000 and P8,000 Compute the taxable income if Mr. was a non-resident foreign corporation.
interest income from client’s Gudani was a resident citizen. Assume that the tax sparing is not
promissory notes. Mr. Monreal has a.P4,405,000- applicable to Cavite.
a personal exemption of P150,000 b.P4,445,000 a.P3,015,000
and personal expenses of P170,000 c.P1,965,000 b.P3,039,000-
during the year. d.P1,925,000 c.P3,000,000
What is Mr. Monreal’s taxable 11.In the immediately preceding d.P429,000
compensation income? problem. compute the taxable income if 6. Mr. Allan derived the following
a.P0 Mr. Gudani was a non-resident citizen. income in 2015:
b.P68,000 a.P4,445,000 Business income P200,000
c.P58,000 b.P4,405,000 Compensation income 300,000
d.P50,000- c.P1,925,000- Interest income from 5/6 lending to
5. What is Mr. Monreal’s net income d.P1,965,000 clients 100,000
from business? 12. What is the tax due in the Interest Income from bank deposits
a.P308,000- immediately preceding problem? 20,000
b.P300,000 a.P581,000- Royalty Income 100,000
c.P310,000 b.P589,500 Capital gain on sale of personal car
d.P518,000 c.P593,800 20,000
6.What is Mr. Monreal’s taxable d.P577,500 Capital gain on the sale of stocks
income? 13. What is the total tax due from the directly to a buyer 40,000
a.P518,000 taxpayer if Mr. Gudani was a non- Ordinary gain on sale of old office
b.P350,000 resident alien not engaged in trade or furniture 10,000
c.P358,000- business? Dividend income 50,000
d.P368,000 a.P510,000 Compute the total passive income
7. Mr. Bangul earned a compensation b.P1,000,000 subject to final tax.
income of P120,000 and net income c.P991,250 a.P170,000-
from business of P300,000. He also d.P1,010,000- b.P1,370,000
earned P8,000 prizes from a dancing Multiple choice-Problems 2 c.P270,000
competition and P45,000 royalties from 1.Lesde, Inc., had the following income d.P1,470,000
his musical composition. Mr. Bangul has in 2015: 7. Compute the total income subject to
P150,000 personal exemption. Philippines Abroad regular tax.
Compute the taxable income. Rent income P10M P12M a.P1,730,000
a.P323,000 Dividend-domestic 50K 200K b.P630,000-
b.P278,000- Royalties 80K 200K c.P1,470,000
c.P308,000 Business expenses 8.7M 9.8M d.P530,000
8. Compute the capital gain subject to
capital gains tax
a.P70,000
b.P40,000-
c.P60,000
d.P0
CHAPTER 8
REGULAR INCOME TAX:EXCLUSIONS
FROM GROSS INCOME
Chapter Overview and Objectives
This chapter discusses the items of
income that are excluded from gross
income, hence not subject to income
tax under the NIRC. It also discussions
of other exempt income under special
laws, treaties, or contracts.
After this chapter, readers must be able
to demonstrate:
1.Mastery of the list of exclusions from
gross income
2.Comprehension of exclusion
conditions or limitations of certain
items of income
3.Knowledge of the list of entities
exempt under the NIRC and special
laws.
EXCLUSIONS FROM GROSS INCOME
Exclusions from gross income are
income which will not be subject to
income tax. They are not included in
gross income subject to regular tax,
capital gains tax, or final tax.
Under Sec. 32(B) of the NIRC, the
following items shall not be included in
gross income and shall be exempt from
taxation:
A.Proceeds of life insurance policy
B.Amount received by the insured as a
return of premium
C. Gift, Bequest, or descent
D.Compensation for injuries or sickness
E.Income exempt under treaty
F.Retirement benefits, pensions,
gratuities, etc.
G.Miscellaneous items
1. Income in the Philippines of foreign
government or foreign government-
owned and controlled corporations
2. Income of the government and its
political subdivisions
3. Prizes, and awards in recognition of
religious, charitable, scientific,
educational, artistic, literary, or civic
achievements.
4. Prizes and awards in athletic sports
competitions
5. Contributions to GSIS, SSS,
Philihealth, Pag0Ibig, and union Dues
6. Contributions to Personal Equity
Retirement Account (PERA)
7.PERA investment income and PERA
distributions
8. 13th month pay and other benefits
not exceeding P90,000.
9. Gains from sale of bonds,
debentures, or certificates of
indebtedness with maturity of more
than 5 years.
10. Gains from redemption of shares in
mutual fund
EXCLUSION FROM GROSS INCOME
A. Proceeds of a Life Insurance
policy-The proceeds of life
insurance policies paid to the
heirs or beneficiaries upon the
death of the insured, whether in
a single sum or otherwise;
however, if such amounts are
held by the insurer under an
agreement to pay interest
thereon, the interest payments
shall be included in gross
income. Life is regarded as a
capital item with infinite value.
Hence, the proceeds of life
insurance is a return of capital.
B. Amount received by the insured
as a return of premium-The
amount received by the insured
as a return of premiums paid by
him under life insurance,
endowment, or annuity
contracts, either during the term
or at the maturity of the term
mentioned in the contract or
upon surrender of the contract.
The amount received by the insured
as a return of premium on any
insurance contract is a return of
capital;hence, it is included from
gross income.
Illustration 1:Life insurance
contracts
Alberto is insured in a P1,000,000
life insurance policy with annual
premium payments of P20,000 for
10 years. If Alberto outlives the
policy after the 10th year, he will be
paid a P500,000 maturity value.
Scenario 1
Alberto died on the 8th year and his
heirs collected the P1,000,000
proceeds.The entire insurance
proceeds of P1,000,000 is not
taxable.
Scenario 2
Upon the death of Alberto, the
insurance company negotiated for
an extension of the payment of the
proceeds wherein the insurance
company shall pay P1,050,000 on
the extended payment. The
1,000,000 proceeds will not be
taxed upon collection, but the
P50,000 excess representing
interest is a taxable of gross income.
Illustration 1:Life Insurance
contracts
Alberto is insured is a P1,000,000
life insurance policy with annual
premium payments of P20,000 for
10 years. If Alberto outlives the
policy after the 10th year, he will be
paid a P500,000 maturity value.
Scenario 1
Alberto died on the 8th year of
coverage and his heirs collected the
P1,000,000 proceeds. The entire
insurance proceeds of P1,000,000 is
not taxable.
Scenario 2
Upon the death of Alberto, the
insurance company negotiated for
an extension of the payment of the
proceeds wherein the insurance
company shall pay P1,050,000 on
the extended payment. The
P1,000,000 proceeds will not be
taxed upon the collection, but the
P50,000 excess representing interest
is a taxable item of gross income.
Scenario 3
Alberto outlived the policy and
collected the maturity value of
P500,000.
The total proceeds shall be analyzed
as:
Total proceeds
Return of premium (P20,000x10
years) P500,000
Return of premium (P20,000x10
years) (200,000)
Return on capital (item of gross
income) P300,000
Scenario 4
After 6 years of payment, Alberto
assigned the policy to Glino who
paid him P130,000. Glino continued
the premium payments for two
more years after which Alberto
died. Glino collected the P1,000,000
insurance proceeds.
The assignment or sale of proceeds
by Glino resulted in P170,000 return
of capital(P130,000+
(P20,000x2))and P830,000 taxable
return on capital. There is loss of life
in this scenario but it does not
pertain to the purchaser of the life
insurance policy. Hence, the excess
must be taxable to the heirs.
Illustration 2:Life Insurance of
company officers
Alberto is insured by his employer
corporation for P1,000,000 with the
employer corporation as the
beneficiary. Alberto subsequently
died, and the corporation collected
the P1,000,000 life insurance
proceeds.
It is interesting to note that the
entire proceeds under this insurance
arrangement are held within the
purview of the NIRC exemption;
hence, it is not taxable.
Property insurance contracts
The proceeds of property insurance
contracts in excess of the tax basis
of the property lost is destroyed is a
taxable return on capital.
Illustration:Property insurance
Aztec Company secured a fire
insurance covering the entire
P2,000,000 fair value of its
depreciated building. The building
was completely destroyed by fire
when the depreciated cost(tax
basis) of the building was
P1,800,000. Aztec recovered the
P2,000,000 insurance proceeds.
The total proceeds shall be analyzed
as follows:
Total proceeds P2,000,000
Less:Basis of property destroyed
(return of capital) 1,800,000
Return on capital (item of gross
income) P200,000
C. Gifts, Bequests and Devises or
Descent-The value of property
acquired by gift, bequest,
devise, or descent. Provided,
however, that income from such
property as well as gift, bequest,
devise. or descent of income
from any property, in cases of
transfers of dividend interest,
shall be included in gross
income.
Illustration
Mark received a restaurant business
as a gift on April 1, 2010. On that
date, the restaurant had total
properties amounting to P400,000
including P50,000 cash income
earned since January 1, 2010. The
restaurant posted an additional
P150,000 cash income from April 1
to December 31, 2010.
The transfer of business properties
worth P400,000 to Mark is a
gratuity subject to transfer tax, not
income tax. However, the P50,000
donated income shall be included in
gross income but in the income tax
return of the donor.The P150,000
income of the donated property
afer the perfection of the donation
is included as item of gross income
in the tax return of Mark, the
donee.
Gift distinguished from exchange
The transferor’s intention or motive
must be evaluated in determining
whether a transfer is a gift or an
exchange. Gifts are characterized by
pure liberality or disinterested
generosity and are given without
any consideration. An exchange
always involves a consideration.
Employment Gratuities
Gratuities given under an employer-
employee relationship are normally
treated in exchange for services
rendered by employees. Hence,
they are subject to income tax. The
transfer of properties by the
employer to managerial or
supervisory employees is generally
subject to fringe benefit tax.
Christmas or major anniversary gifts
granted by the employer to
employees are de minimis benefit
subject to income tax.
D. Compensation for injuries and
sickness-amounts received
through accident or health
insurance or under Workmen’s
compensation acts as
compensation for personal
injuries or sickness, plus the
amounts of any damages
received, whether by suit or
agreement, on account of such
injuries or sickness.
Illustration 1
Andrew was hit by a jeepney. He
spent 3 months in the hospital
and paid P100,000 for
hospitalization expenses. He
sued the jeepney driver and was
awarded by the court an anguish
and sufferings;P40,000 for his
lost salaries, and P100,000 as
reimbursements for his hospital
bills.
The P200,000 indemnity and the
P100,000 reimbursement for
hospitalization expenses are
non-taxable returns of capital.
Note that health is a capital
item with infinite value.
However, the P40,000
reimbursement for lost salary is
a recovery of lost profit; hence,
an item of gross income.
Illustration 2
Mr. Pogi was driving his brand
new P1,200,000 car when a
truck bumped it resulting to the
total wreckage of his car. Luckily,
he managed to escape the
incident unharmed. He received
P1,300,000 indemnity from the
accident.
The P100,000 excess indemnity
is an item of gross income. Note
that the law pertains to
personal physical injury rather
than injury to rights or property.
E.Income exempt under treaty
Income items that are excluded
by international agreement to
which the Philippine
government is a signatory are
excluded from income tax. It
must be recalled that treaty
agreements override provisions
of our revenue tax laws in case
of conflict under the exemption
under the exemption doctrine of
international comity
F.RETIREMENT BENEFITS,
PENSIONS, GRATUITIES AND
OTHER BENEFITS
1.Retirement benefit under R.A
7641 and those received by
officials and employees of
private firms in accordance with
a reasonable private benefit
plan maintained by the
employer.
Requisites of exemption:
(Pneumonica:1-10-50-RPBP)
a. This is the first time
availment of retirement
benefit exemption
b. The retiring official or
employee has been in the
services of the same
employer for at least ten
(10) years.
c. The retiring employee is at
least fifty(50) years of age at
the time of retirement.
d. The employer maintains a
reasonable benefit plan
A reasonable private benefit
plan means a pension, gratuity,
stock bonus or profit-sharing
plan maintained by an employer
for the benefit of some or all of
his officials or employees,
wherein contributions are made
by such employer for the
officials or employees, or both,
for the purpose of distributing
to such officials and employees
the earnings, or both, for the
purpose of distributing to such
officials and employees the
earnings and principal of the
fund this accumulated, and
wherein it is provided in said
plan that at no time shall any
part of the corpus or income of
the fund be used for, or be
diverted to, any purpose other
than for the exclusive benefit of
the said officials and employees.
To be exempt, the retirement
benefit plan must be “trusteed”
plan where the fund is held
under the management of a
trustee free from both employer
and employee control.
The 10-year service period
requirement pertains to
cumulative years of employment
with the same employer. It does
not need to be continuous years
of employment. A requirement
for continuous employment
would be prejudicial to working
women.
Illustration 1
Angel was employed in 1990
when she was 25 years old. In
2010, she availed of the early
retirement program of her
employer.
Angel satisfied the 10-year
cumulative employment
requirement but she is only 45
years old(i.e.,25+(2010-1990))at
the time of her retirement. The
retirement benefit is taxable. It
is an inclusion in gross income
as compensation income.
Illustration 2
Assume that Angel joined
another employer and worked
therein for 7 more years after
which she retired from her
employment.
Although Angel is 50 years old
by then, she is only 7 years
under the employ of her second
employer. The second
retirement benefit is also
taxable as compensation income
since she failed the residency
requirement.
Illustration 3
Assume instead that Angel was
30 years old when she joined
her first employer and worked
therein for 20 years after which
she retired at 50. She
immediately joined another
employer and retired after 10
years of service when she was
60 years old.
The first retirement benefit from
the first employer is exempt
since Angel is 50 years old and
has rendered at least 10 years
of service (i.e, 20 years). The
second retirement benefit from
the second employer is taxable
even if she met the residency
and age requirements since
these retirement benefit
exemption can be availed of
only once in a lifetime.
2.Separation or Termination
Requisite of exemption:
1.The separation or termination
must be due to job-threatening
sicknesss, deaths, or other
physical disability; and
2. The same must be due to any
cause beyond the control of the
employee or official such as:
a.Redundancy
b. Rentrenchment
c.Closure of employer’s business
d.Employee lay-off
e.Downsizing of employer’s
business
f.Sickness or death of the
employee
The phrase “beyond the control
of the employee” connotes
involuntariness on the part of
the employee. In other words,
the separation must not be of
his own making.
Abandonment of office such as
the registration and subsequent
appointment to another office is
considered as a voluntary
separation and does not fall
within the purview of the phrase
“for any cause beyond the
control of such official or
employee”.(BIR Ruling 054-2001)
The exemption of termination or
separation benefits does not
extend to:
1. Backwages or illegal
deductions repaid by the
employer upon
termination(BIR Ruling 003-
2004)
2. Terminal leave pay or the
commutation of
accumulated unused leave
credits (BIR Ruling No. 199-
2011)
To avail of the tax
exemption, the employee or
his heirs shall request for a
ruling or certificate of
exemption(CTE) from the
BIR. The request for the CTE
and other required
documents shall be filed at
the RDO where the
employer is registered.
Illustration 1
Yvonne is an employee of
Goldfish Company which
closed its business during
the year.
Yvonne’s last paycheck shows the
following details:
Unpaid salary in the last two months
P30,000
Current month salary 15,000
Separation pay 100,000
Total pay P145,000
The current month salary and the
P30,000 backwages are subject to
income tax. The P100,000 separation
pay is an exclusion from gross income;
hence, not taxable.
Illustration 2
Henson’s employer was downsizing its
business operations. Henson was
identified among others to be laid off.
To avoid implications of inefficiencies on
his part, Henson filed a resignation
letter to the company and received a
separation pay of P120,000.
The separation pay is taxable as
compensation income since the
underlying reason of the severance of
the employment(i.e., resignation) is
within the control of the employee. If
Henson got terminated without
resigning, the separation pay would be
exempt.
Illustration 3
Mr. Swabe was diagnosed to have
sexually transmitted disease (STD). Due
to this, his employer decided to
terminate his services but granted him
P1,000,000 separation pay.
The P1,000,000 separation pay is
taxable as STD does not normally
render the employee incapable of
working.
3.Social Security Benefits, Retirement
Gratuities, and Other similar benefits
from foreign government and other
institutions, private or public,
received by resident or non-resident
citizens or aliens who come to settle
permanently in the Philippines.
Illustration
John was an OFW employed by
Microsoft Corporation in the USA. John
retired and returned to permanently
settle in the Philippines. He is paid a
$2,000 monthly pension from
Microsoft’s pension fund and another
$800 monthly benefit from the US
social security benefit.
Both the pension and the social security
benefits are exempt. Note that these
benefits were earned abroad when the
taxpayer was a non-resident. Under
situs rule, the foreign income of non-
residents is not taxable in the
Philippines. This holds true even if the
taxpayer subsequently receives the
income as a resident of the Philippines.
4.United States Veterans
Administration(USVA) –administered
benefits
under the laws of the United States
received by any person residing in the
Philippines
Illustration
Mr. Jackson is a retires US serviceman
from the Iraqui war. He married a
beautiful Filipina and settled in the
Philippines. He is receiving a $1,000
monthly benefit from the USVA
The USVA benefit is excluded in gross
income. The same rule applies to USVA
benefits for beneficiaries of Filipino
veterans who fought under the
American flag in World War 11.
5.Social security system (sss) benefits
under RA 8282
6.GSIS benefits under RA 8291
including retirement gratuity received
by government officials and employees.
G. Miscellaneous items
1.Income derived on investments in
the Philippines in loans, stocks, bonds
or other domestic securities, or from
interest on deposits in banks in the
Philippines by:
a. Foreign governments
b.Financing institutions owned,
controlled, or enjoying refinancing from
foreign government.
c. International or regional financial
institutions established by foreign
governments
These are exempt under the exemption
doctrine of international comity.
2.Income derived by the government
and its political subdivisions from:
a. Any public utility or
b. Exercise of essential government These pertains to the employee share in
function the premium contributions to GSIS, SSS,
Government agencies and Philhealth, Pag-Ibig and union dues. The
instrumentalities portion of the salary thus contributed is
The general rule with government exempt from income tax.
agencies and instrumentalities is Under RMC No. 21-2011, the exclusion
exemption because of their public pertains only to the mandatory or
service nature. However, taxation compulsory monthly contributions.
aoolies when they engage in income- Voluntary contributions to Pag-Ibig 2,
producing activities which are GSIS, or SSS in excess of the mandatory
proprietary or commercial in nature. monthly contribution are taxable. Note
This exemption does not extend to that Pag-Ibig is now called the Home
government-owned and controlled development Mutual Fund or HDMF.
corporations(GOCCs), GOCCS are Illustration
generally taxable as regular corporation An employee has a gross compensation
because their operations are income of P400,000 in 2016. His
proprietary in nature. employer deducted P5,000 SSS, P4,000
3. Prizes and Awards made Philhealth, P3,000 HDMF, P2,000 union
primarily in recognition of dues and P80,000 creditable
religious, charitable, withholding tax.
scientific, educational, Illustration
artistic, literary, or civic An employee has a gross compensation
achievements but only if: income of P400,000 in 2016. His
a. The recipient was employer deducted P5,000 SSS, P4,000
selected without any Philhealth, P3,000 HDMF, P2,000 union
action on his part to dues and P80,000 creditable
enter the contest or withholding tax.
proceeding; and Thus, the gross income subject to
b. The recipient is not regular tax shall be computed as
required to render follows:
substantial future Gross compensation income
services as a condition to P400,000
receiving the prize or Less: Excluded compensation income or
award. contributions
Prizes of this kind partake the nature of Contributions to SSS P5,000
a unilateral transfer and hence, exempt Contributions to Philhealth 4,000
from income tax. These transfers are Contributions to HDMF 3,000
also exempt by law from transfer tax. If Union dues 2,000
the recipient exerted effort for the grant 14,000
of the prize such as joining a contest or Gross taxable compensation income
is required to render service for its P386,000
grant, the prize would be construed as 6. Contributions to Personal
received in an exchange; hence, taxable Equity Retirement
as income. Account(PERA)
Examples of exempt prizes: PERA is a contributor’s voluntary
a.Nobel Prize award retirement account established from
b.Gawad ng Sining Award qualified contributions of the
c. CNN hero of the year contributor and or his employer for the
d. Most outstanding citizen sole purpose of being invested in
4. Prizes and Awards in Sports qualified PERA investment products.
Competitions granted to athletes: Each OFW is allowed to contribute up to
a.In local or international competitions P200,000 per year to a PERA account.
and tournaments; Non-OFWs are allowed P100,000
b.Whether held in the Philippines or contributions per year. Husband and
abroad; and wife can each contribute up to the
c.Sanctioned by their national sports maximum allowable contribution.
associations. Contributions to PERA accounts are
5.Contributons for GSIS, SSS, exclusions in gross income. This is an
Philhealth, Pag-Ibig, and Union dues of additional exclusion and is separate
individuals. with the exclusion for contributions to
SSS or GSIS. Moreover, PERA
contributors are allowed to claim 5% of
their PERA contributions as tax credit
against any internal revenue taxes.
7.PERA investment income and PERA
distributions
PERA investment income are exempt
from taxes (i.e., final tax, capital gains
tax and regular income tax). The PERA
account assets will be distributed back
to the contributor either in lump sum,
life pension or in installment upon
reaching the age of 55 or to his heirs or
beneficiaries upon his or her death.
PERA distributions are likewise in gross
income of the contributor or his heirs or
beneficiaries as the case may be.
8.13th Month pay and other benefits
received by officials and employees of
public or private entities not exceeding
P90,000
13th month pay and other benefits will
be discussed in detail in Chapter 10.
9.Gains from sale of bonds,
debentures, or other indebtedness
with a maturity of more than 5 years.
This exemption is grounded upon the
same assumption that long-term
indebtedness is diverted to the
financing of long-term projects which is
viewed as beneficial to the
development of the country.
The term “gain” however, does not
include “interest”.(Nippon Life
Insurance Company of the Philippines
vs. CIR, CTA Case No. 6142)
Illustration
On September 1, 2014, an individual
taxpayer sold 6-year term bond
investment for P1,100,000. These
bonds bear 8% interest payable every
December 31 and were previously
acquired at P1,000,000 face value on
January 1, 2014.
The gain on sale will be computed as
follows:
Selling price P1,100,000
Less: Cost of bonds sold 1,000,000
Interest
accrued(P1MX8%X9mos./12mos.)60,00
0 4. Income of non-stock, non-profit
Gain on sale P40,000
The gain on sale of the long-term bonds
is exempt because the bonds have a
maturity period of more than 5 years.
However, the accrued interest income is
an item of gross income subject to
regular income tax.
10. Gains realized from redemption of
shares in a mutual fund company by
the investor
The term mutual fund company shall
mean an open-end and close-end
investment company as defined under
the Investment Company Act.
Mutual funds pool the money invested
by different investors and invest the
money to earn investment income
which shall add up to the net assets of
the fund. A participating investor must
purchase participation shares from the
fund at their Net Asset Value(NAV).
Upon redemption of his participation
shares, the investor gains or losses by
his proportionate share in the increase
or decrease in the Net Asset Value of
the fund.
Illustration
A taxpayer bought 10,000 shares from
Golden Dragon Mutual Fund at P120
NAV per share. The taxpayer redeemed
his shares when the NAV per share was
P180.
The P600,000 gain, computed as((P180-
P120)X10,000), on redemption is
excluded from gross income; hence
exempt from taxation.
The exemption is apparently intended
to mitigate double taxation. Most of the
items of income of mutual funds are
subject to final tax at source. The
subsequent distribution of these to the
investors at redemption should no
longer be subject to income tax. On the
other hand, the exemption may have
been intended to promote the growth
of mutual funds which are widely
regarded as key participants in
providing liquidity in most financial
markets.
OTHER EXEMPT INCOME UNDER THE
NIRC AND SPECIAL LAWS
1. Minimum wage and certain
benefits of Minimum wage
earners
2. Income of Barangay Micro-
Business Enterprises Act(RA
9178)
3. Income of cooperatives (RA
9520)
entities
5. Income of qualified employee
trust funds
Minimum Wage Earners
A minimum wage earner is an individual
recipient of a minimum wage as fixed
by the Regional Tripartite Productivity
Wage and Productivity Board of the
Department of Labor and Employment.
A minimum wage earner is exempt
from income tax on the minimum wage
including holiday pay, overtime pay,
night shif differential pay and hazard
pay.
Barangay Micro-Business
Enterprise(BMBE)
A BMBE is a business entity or
enterprise engaged in the production,
processing, or manufacturing of
products or commodities, including
those arising from loans but exclusive of
the land on which the particular
business entity’s office, plant, and
equipment are situated, do not exceed
P3,000,000.
The term service excludes those
rendered by licensed professionals and
partnership and corporations engaged
in consultancy, advisory and similar
services and corporations are
essentially carried out through licensed
professionals.
A BMBE shall include any individual
owning such business entity or
enterprise, partnership, cooperative,
corporation, association, or other entity
incorporated and/ or organized and
existing under Philippine laws and
registered with the office of the
treasurer of a city or municipality.
To qualify as a BMBE, an enterprise
must not be a branch or a subsidiary of
a large scale enterprise such as in the
case of franchises.
To avail of the benefits and privileges of
a BMBE, an applicant must secure a
certificate of authority to operate as a
BMBE from the office of the Treasurer
of the city or municipality that has
jurisdiction.
Tax exemptions on Income from
Operations.
Aside from other incentives afforded by
the law, the income of BMBE from their
operation is exempt;, hence, excluded
from the gross income subject to
regular income tax. BMBEs file an
annual information return in lieu of the
income tax return. However, their non-
operating, passive, and capital gains are
subject to the appropriate type of
income tax.
Illustration
William has a bakery with total assets of
P4,000,000 inclusive of a lot with a
book value of P1,200,000.
Gross income from sales of bread
P300,000
Interest on promissory notes of retail
store clients 12,000
Royalties on sale of recipe books 36,000
Dividend income from domestic stocks
10,000
Note that William’s total asset is
P2,800,000, excluding the lot. Hence,
William’s business qualifies as a BMBE,
If William obtained a certificate of
authority to operate as a BMBE. If
William obtained a certificate of
authority to operate as a BMBE, the
following items of operating income are
exempt from income tax:
Gross income from sales of bread
P300,000
Other operating income:
Interest income from client
promissory notes 12,000
Total exempt income
P312,000
Assuming William’s bakery is not
registered as a BMBE, the P312,000
total operational income will be subject
to the regular income tax.
Either way, the royalty income and
dividend income are exclusions in the
gross income subject to regular tax but
are inclusions in the gross income
subject to final tax.
Another illustration
Chris Santa has an accounting and
auditing firm with total assets of
P2,500,000. He derived a total
operating income of P1,000,000 in
2014.
The entire P`1,000,00 is taxable since
Mr. Santana is a professional service
provider not qualified to be a BMBE.
Revocation of BMBE Tax Exemptions
The income tax exemption of a BMBE
may be revoked for any of the following
reasons:
1.Transfer of place of business
2.Value of assets exceeds P3,000,000
3. Voluntary surrender of the Certificate
of Authority
4.Death of the registered individual
owner; violation or non-compliance
with the provisions of RA 9178
4.Merger or consolidation with an
entity which is not eligible to be a
BMBE.
6.Sale or transfer of the BMBE if a sole
proprietorship without prejudice to the
transferee applying for registration.
7.Submission of fake or falsified
documents
8. Retirement from business, or
cessation/suspension of operations for
one year
9. Making false or omitting required
declarations or statements
Cooperatives
Cooperatives that transact business
purely with members are exempt from
all taxes and fees. Cooperatives that
transact business with non-members
are likewise exempt from all taxes and
fees if their accumulated reserve and
undivided savings do not exceed P10M.
Otherwise, the amount of surplus
allocated for interest on capital is
subject to regular tax.
However, the income of any
cooperative from non-related sources is
fully taxable to regular tax.
Non-Stock and Non-profit Entities
Non-stock entities that are not
organized for profit are exempt from
income tax on their income from
operations. However, their income from
unrelated sources is taxable.
Qualified Employees’ Trust Fund
An employees’ trust fund which forms
part of a pension, stock bonus or profit
sharing plan of an employer for the
benefit of some or all of his employees
is exempt from any income tax under
the NIRC.
Conditions for exemptions of
employee trust funds
a.Contributions are made to the trust
by such employer, or employees, or
both for the purpose of distributing to
such employees the earnings and
principal of the fund accumulated by
the trust in accordance with such plan.
b. The asset of the fund shall not be
diverted for other purposes other than
the exclusive benefit of the employees.
QUALIFICATION OF EXEMPTION OF
EXEMOT ENTITIES
Tax incentive or exemption is highly
disfavored by law. It is not automatic.
Taxpayers with exemptions or tax
incentives under any existing laws or
contracts must establish their
entitlement by filing required
documents with the BIR. BMBEs need
to secure a Certificate of Authority.
Cooperatives need to secure a
Certificate of Tax Exemption/Ruling
(CTE). Once exemption is established, it
only operates prospectively.
INCOME SUBJECT TO FINAL TAX OR
CAPITAL GAINS TAX
Items of income that are subject to final
tax or capital gains tax are not items of
gross income subject to regular income
tax. Also income items that are
exempted in the coverage of final tax or
capital gains tax are not taxable to the
regular income tax.
EXCLUSIONS VS. DEDUCTIONS
Exclusions from gross income are not
included in the amount of reportable
gross income in the income tax return.
The amount of deductions is initially
included in the amount of gross income
but is separately presented as
deduction against gross income in the
income tax return.
Note to readers:
Exclusions in gross income
represents one of the
exceptions to the general
scope of the regular income
tax. Readers are advised to
master or, at least, familiarize
themselves with the list and
their respective exclusion
criteria before proceeding to
the next chapters of the book.
This is important in assisting
readers in mastering the
regular income tax.
CHAPTER 8:SELF-TEST EXERCISES
Discussion Questions
1.Enumerate the exclusions from gross
income
2. What capital items are considered
with infinite value?
3.Enumerate the exclusion conditions of
retirement benefits.
4.Discuss the exclusion condition of
termination benefits.
5.Discuss the rules on taxation of prizes
6.Enumerate the exclusions from gross
compensation income in the
determination of gross taxable
compensation income.
7.Who is a minimum wage earner?
8. Enumerate the benefits of minimum
wage earners exempt from income tax
9.What is a BMBE?
10.What are the exemption conditions
of an employee trust fund?
True or false
1.The proceeds of life insurance
received by the heirs of the insured
upon his death is excluded in gross
income-True
2.The amount received in excess of the
premium paid in an insurance contract
constitutes an item of gross income.
True
3.Donated income is included in the
gross income of the donee.False
4.Compensation for injuries and
sickness constitutes profit; hence, an
inclusion in gross income.False
5. It is sufficient that the employee
rendered more than 10 years of service
for his retirement benefit to be
exempt.False
6.An employee can secure retirement
benefit exemption only once in a
lifetime.True
7.It is a must that the employer
maintains a reasonable pension benefit
plan for the retirement benefit to be
exempt.True
8.An employee must have rendered
more than 10 years of service before
claiming exemption for his termination
benefits.False
9.The income of the Philippine
government from essential public
functions is exempt from any income
tax.True
10. Prizes paid to corporations are an
inclusion in gross income subject to
final tax.False
11.Only the mandatory portion of GSIS,
SSS, PhilHealth, and union dues can be
excluded in gross compensation
income. True.
12.Social security benefits, retirement
gratuities, and other benefits from
foreign governments are excluded in
gross income.True.
13.Social security benefits, retirement
gratuities, and other benefits from
foreign private entities are included in
gross income.False
14.The gain from redemption of shares
in mutual fund is an exclusion in gross
income subject to regular tax because it
is an inclusion in gross income subject
to capital gains tax-False
15.13th month pay and other benefits
are taxable only up to P82,000.False
True or False 2
1.GSIS and SSS benefits are included in
gross income to the extent they exceed
P82,000.False
2.Prizes awarded upon the condition
that the recipient shall render specified
future services is an item of gross
income.True
3. Prizes from contests are included in
gross income subject to regular income
tax.False
4.The income of government-owned
and controlled corporations is an item
of gross income.True
5.The employer’s share to SSS,
PhilHealth, and Pag-Ibig contributions
are an exclusion in gross income.True
6.The employer’s share to SSS,
PhilHealth, and Pag-Ibig contributions
are an exclusion in gross income.False
7.Compared to exclusion, deduction is
included in the amount of gross income
but both exclusion and deductions are
not reflected in the amount of taxable
income.True.
9. Cooperatives that transact business
only with members will, in no case, be
subject to income tax-False
10. Cooperatives, regardless of their
classification, are taxable on income
from their unrelated activities.True
11.The gain on the sale of long-term
bonds with a maturity of five years is an
exclusion in gross income.False
12.A non-stock, non-profit entity is
subject to tax on income from
unrelated activities.True
13.A general professional partnership
can be registered as a BMBE.
14.A general professional partnership
can be registered as a BMBE.False
15. A BMBE must have a net asset not
exceeding P3,000,000 to be
exempt.False
Multiple Choice-Theory 1
1.Statement 1:Items of passive income
from abroad are subject to regular
income tax
Statement 2:Items of passive income
from the Philippines are generally
subject to final income tax.
Which statement is generally correct?
a.Both statements
2.Which is true with the regular income
tax?
a.Tax is payable at regular intervals
3. Which is not a feature of regular
income tax?
c.Gross income tax
//It generally applies to all items of
gross income not subject to final tax,
creditable withholding tax, accounting
period.
4.Statement 1:Capital gains are
generally subject to capital gains tax.
Statement 2:Items of passive income in
the Philippines are generally subject to
regular income tax.
False
5.Deductions from gross income are-
Business expenses
6. Which of the following statements
best distinguishes deductions from
exclusions from gross income?-
Deductions are outflows from gross
incomes while exclusions are not
outflows from gross income.
7.Progressive income tax does not apply
to a special alien
8.Proportional income tax does not
apply to a General professional
partnership
9.Which is not included under the term
“corporation”?
Co-ownership
/Business partnership, non-profit
charitable institution, joint venture
10.The highest marginal tax rate for
individual income tax payers is
a.25%
b.30%
c.35%
d.32%-
11.Which corporate taxpayer is not
subject to regular income tax?
a.Non-resident foreign corporation-
b.Domestic corporation
c.Resident foreign corporation
d.Business partnership
12.Which individual income taxpayer is
not subject to regular tax?
a.Non-resident alien not engaged in
trade or business
//Resident alien not engaged in trade or
business, Non-resident citizen not
engaged in trade or business, Non-
resident alien engaged in trade or
business
13.Which is correct with respect to
exclusions from gross income?
a.They are included as part of gross
income but are subsequently deducted.
b.They are not included in gross income
but are added to the taxable income
c.They are not considered in the
computation of taxable income-
d.They are synonymous with deductions
14.Which is correct with respect to
deductions from gross income?
a.They pertain to expenses of
generating items of business or
professional gross income.-
b. They are excluded from the
determination of taxable income
c.They include all expenses incurred in
the generation of any income
d.They include personal exemptions
15.Which constitutes a taxable item of
gross income?
a.Compensation for personal injuries
b.Gain from sale of shares in mutual
funds
c.Gain from sale of government bonds-
d.Income exempt under treaty
Multiple Choice-Theory 2
1.The proceeds of an insurance policy
received by the corporation as
beneficiary on the life insurance of its
officers is
a.a gift
b.a taxable income
c.an inheritance
d.exempt from income tax-
2.Mr. Buguey was insured in a life
insurance with his daughter, Ybon, as
the irrevocable beneficiary. Ybon was
paid the entire proceeds when Mr.
Buguey died. The proceeds constitute
a.A taxable inheritance
b.a taxable gift
c.a taxable income
d.an exclusion from gross income-
3.A policy holder who outlived the
policy and received a cash surrender
value in excess of premiums paid is
exempt upon
a.The amount representing a return of
premiums-
b.The entire amount received
c.the excess of the amount received
over the premiums paid
d.None of these
4.The assignment of an insurance policy
at an amount in excess of the premium
paid on the policy is subject to
a.donor’s tax
b.income tax-
c.estate tax
d.any of these
5.A widow who collected the life
insurance proceeds of her deceased
husband is
a.exempt to the entire amount of the
proceeds-
b.taxable to the excess of the proceeds
over the premiums paid by the husband
c.taxable to the excess of the proceeds
over the premiums paid by the widow
d.exempt with respect to the portion of
the proceeds representing returns of
premium
6.The policyholder of a life insurance
contract outlived his insurance policy,
He was paid P300,000 upon maturity of
the policy. He paid P250,000 total
premium. What is the inclusion in gross
income?
a.P300,000
b.P250,000
c.P50,000-
d.P0
7.Which of the following is subject to
tax?
a.Proceeds of crop insurance
b.Proceeds of livestock insurance
c.Indemnity under patent infringement
suit
d.All of these-
8.Which is not a requisite of exemption
of a retirement benefit plan?
a.10 years of employment
b.The employer maintains a reasonable
pension benefit plan
c.The retiree must be a senior citizen.-
d.First time availment of retirement
exemption
9.Termination benefits are exempt from
income tax provided that the reason for
termination is
a.beyond the employer’s control-
b.within the employer’s control
c.within the employee’s control
d.beyond the employer’s control
10.Which is not an item of exclusion
from gross income?
a.SSS benefits
b.Income of the government and its
political subdivisions
c.Income from government-owned and
controlled corporations-
d.Income of foreign governments
11. Which of the following government-
owned and controlled corporations is
subject to income tax?
a.Social security system
b.National Development corporation-
c.Philippine Charity Sweepstakes office
d.Philippine Health Insurance
Corporation
12.Which is not an acceptable ground
for exemption of termination pay?
a.Mass employee lay-off
b.Closure of employer’s business
c.Grave misconduct and neglect of
duty-
d.Retrenchment of employer’s business
13.Which is not an item of gross income
for taxation purposes?
a.Income earned between related
parties
b.Unrealized income-
c.Advanced income
d.All of these
14.Which is subject to income tax?
a.Gain on sale of 6-year bonds
b.Gain on sale of shares in mutual fund
c.Interest income on long-term bonds
with maturity period exceeding five
years-
d. Interest income on long-term
deposits by individual taxpayers
15.Which of the following is not an
exclusion from gross income?
a.Income from government properties-
b.Income taxes collected by the Bureau
of Internal Revenue
c.Dividend Income payable to a foreign
government
d.Social Security benefits
Multiple Choice-Problem:Part 1
1.Mr. Bisligo collected the P1,000,000
insurance proceeds of Mr. Pantukan
which he bought from the latter for
P400,000. Before the death of Mr.
Pantukkan, Mr. Bisligo paid total
premiums of P200,000
Determine respectively the exclusion in
gross income and the inclusion in gross
income.
a.P1,000,000;P0
b.P0;P1,000,000
c.P400,000;P600,000
d.P600,000;P400,000-
2.Mr. Kabacan surrendered his life
insurance policy and received a cash
surrender value of P800,000 after
contributing P700,000 in annual
premiums. Determine respectively the
total exclusion in gross income and the
inclusion in gross income.
a.P800,000;P0
b.P0;P800,000
c.P100,000;P700,000
d.P700,000;P100,000-
3.Mr. Tarragoza died. His heirs collected
the P2,000,000 proceeds of his
insurance policy. Mr. Tarragoza
previously paid a total payment of
P500,000 in premiums. Determine
respectively the exclusion in gross
income and the inclusion in gross
income.
a.P2,000,000;P0
b.P500,000;P1,500,000
c.P2,000,000;P0-
d.P0;P2,000,000
4. Mr. Malalag collected the P5,000,000
fire insurance proceeds of his building
which was destroyed by fire. The
building had a tax basis of P4,500,000 at
the occurrence of the fire. Determine
respectively the total exclusion in gross
income and the inclusion in gross
income.
a.P5,000,000;P0
b.P0;P5,000,000
c.P4,500,000;P500,000-
d.P500,000;P4,500,000
5.Mr. Cateel insured his crops for a
P1,000,000 insurance cover against
calamities. He paid and expensed
P100,000 insurance premium. How
much will be included in gross income?
a.P900,000
b.P1,000,000-
c.P100,000
d.P0
6.Ms. Sindangan received a
condominium including its accrued
income as inheritance from her
deceased grandfather on April 1, 2014. a.P0 Compute the total exemptions and
The following data relates to the b.P5,000,000 exclusions from gross income
property: c.P100,000,000- a.P46,000-
Fair value of property P125,000,000 d.P105,000,000 b.P56,000
Rent income earned before death of 11. Mr. Bangus, a rank and file c.P38,000
decedent 4,000,000 employee, received the following 13 th d.P36,000
Rent income earned after death of month pay and other benefits during 15.Mang Antonio collected P2,000,000
decedent 6,000,000 the year: from the fire insurance company that
Interest on deposits of rentals(40% 13th month pay P48,000 insured his building which had a tax
accruing after death) 100,000 Productivity pay 22,000 basis of P1,800,000 when the fire
How much of the above income will be Excess de minimis above legal limits occurred. During the same period, he
included in the gross income of Mr. 24,000 also collected P300,000 crop insurance
Sindangan and in the gross income of Compute the total exemptions and proceeds pertaining to his crops
the decedent? exclusions from gross income: destroyed by frost. The total item of
a.P6,040,000;P4,060,000- a.P82,000- gross income is
b.P6,000,000;P4,000,000 b.P94,000 a.P2,300,000
c.P4,060,000;P6,040,000 c.P70,000 b.P200,000
d.P4,000,000;P6,000,000 d.P46,000 c.P300,000
7.Mr. Dimaling was hurt in a bus 12. Mr. Alvarez had the following d.P500,000-
accident. He received a total indemnity income during the year: Multiple Choice-Problems:Part 2
of P800,000 from the insurer of the bus. Gross compensation income 1.Wary of his deteriorating health
Mr. Dimaling paid P250,000 in hospital including P25,000 13th month pay conditions, Mr. Benigno resigned from
bills due to the accident. Compute the P325,000 his job at age 40 after working as a
total amount to be excluded in gross Less:tardiness or absences (10,000) supervisor for 12 years. He was paid
income. Net Compensation income P315,000 P2,000,000 as separation pay. Is the
a.P0 SSS deductions 12,000 P2,000,000 separation pay subject to
b.P250,000 PhilHealth deductions 9,000 income tax?
c.P550,000 Pag-Ibig deductions 10,000 a.No, because the reason for Mr.
d.P800,000- Union dues 5,000 Benigno’s termination was beyond his
8.At the age of 54, Mrs. Sindangan was Withholding tax 40,000 control
awarded a retirement gratuity of Net pay P239,000 b.Yes, because Mr. Benigno resigned-
P2,000,000 for her 30 years of service in Compute the total exclusions from c.No, because Mr. Benigno worked for
the Sirawai Company. The employer’s gross income. the company for more than 10 years
retirement benefit plan was with an a.P36,000 d. Yes, because Mr. Benigno is not yet
employee participation feature where b.P61,000- 50 years old.
Mrs. Sindangan contributed a total c.P66,000 2. On December 25, 2014, Mr. Reynon
premium of P800,000 in the fund. Mrs. d.P71,000 was terminated by his employer at age
Sindangan also received P500,000 13. Mr. Henares received the following 60 due to his failing eyesight. He joined
benefit from the SSS. during the year: the company in February 2006 and has
Compute the total exclusion in gross Donated properties P200,000 since then worked as treasurer of the
income Income of donated property before company. Is Mr. Reynon’s retirement
a.P1,700,000- donation 50,000 pay exempt from income tax?
b.P1,300,000 Income of donated property after a.Yes, because his termination was
c.P800,000 donation 30,000 beyond his control-
d.P2,500,000 Inherited properties 100,000 b.No, because he was employed for less
9. Mrs. Candoni retired from the How much is taxable to Mr. Henares? than 10 years
government after 30 years of service at a.P380,000 c. Yes, because he is over 50 years old
the age of 55. He received a total b.P80,000 d.No, because the employee is already
retirement pay of P1,800,000 plus c.P30,000- a senior citizen.
P400,000 GSIS benefits. How much will d.P50,000 3. Mr. Henson retired from her job after
be excluded in gross income? 14. Mr. Tacurong has the following data 25 years of service. She joined the
a.P0 during the year: company at the age of 23 and was
b.P400,000 Basic salary P400,000 promoted from an accounting clerk to
c.P2,200,000 Income tax withheld 50,000 VP Finance. She was paid P2,000,000
d.P1,800,000- 13th month pay 40,000 total retirement pay from the
10.The professional regulations SSS 2,000 employer’s contributory pension plan
commission collected a total sum of Philhealth 1,800 which was duly registered with the BIR.
P100,000,000 from professional license Pag-Ibig 1,700 out of the total proceeds, Ms. Henson
fees. It also collected P5,000,000 from Union dues 500 contributed P600,000. This was Ms.
rentals of government properties. What Capital build up contribution in a social Henson’s first retirement from
is the total exclusion in gross income? fund 2,000 employment.
How much is excluded from gross
income?
a.P600,000-
b.P1,400,000
c.P2,000,000
d.P0
4.Assuming Ms. Henson transferred to
another company and was retired after
15 years of service. The second
employer paid P1,500,000 out of its
non-contributory pension fund as
retirement pay to Ms. Henson. The
pension fund was also duly registered
with the BIR. Is the second retirement
pay exempt from income tax?
a.No, because this is the second time
Ms. Henzon retired from employment.
b.Yes, because Ms. Henson is already a
senior citizen
c.Yes, because this is the first time Ms.
Henson qualifies for retirement pay
exemption-
d.No, because an employee must work
under one employer until retirement to
qualify for retirement exemption.
5. Mr. Baracho won P500,000 in a local
chess competition that was sanctioned
by a sports organization that is currently
applying for accreditation from the
national sports association. Is the
P500,000 prize considered an item of
gross income?
a.Yes, because all prizes are subject to
income tax
b.No, because the chess competition is
not an international competition
c.No, because the sport competition is a
local competition
d.Yes, because the organizer is not an
accredited sports organization-
6. Mr. Sibuco discovered teleport
technology where people can be
transported over thousand miles in
seconds. Due to this, he was awarded
by the scientific community the most
coveted Nobel Prize award in 2015. The
total award was $150,000,000.
What is the most correct statement
regarding the taxation of the award?
a.The award is an inclusion in gross
income subject to regular income tax
since final taxes do not apply abroad.
b.The award is an inclusion in gross
income subject to final tax since it is
more than P10,000.
c.The award is an exclusion in gross
income subject to final tax since it is an
inclusion in items of gross income
subject to final tax.
d.The award is an exclusion in gross
income.-
7.The following relates to the b.P415,800
compensation income of Ms. Lamitan in c.P15,800
2107: d.P0
Compensation P2,400,000 11.In the immediately preceding
Contributions to SSS, Philhealth, and problem, compute the total inclusions
HDMF: in gross income subject to final tax.
-Mandatory contributions 125,000 a.P0
-Voluntary contributions 150,000 b.P15,800-
Contribution to PERA 120,000 c.P6,800
Creditable withholding taxes 190,000 d.P9,000
Employer’s share in SSS, Philhealth and 9,000+6800=15800
HDMF 105,000 13. KKB, a multi-purpose credit
What is the total exclusion in gross cooperative, had the following
income? income in 2015:
a.P225,000-120+105=225 Income from related activities P400,000
b.P230,000 Income from unrelated activities:
c.P395,000 -Dividend from stocks 20,000
d.P465,000 -Income from time deposits 18,000
8. In 2014, Ms. Kabacan invested -Rent income 60,000
P8,000,000 in the 10-year bonds of Compute the total exclusion from gross
Compostela Mining Corporation. She income subject to regular tax of the
disposed the investment in 2016, for a cooperative
total consideration of P8,500,000 a.P0
inclusive of the P400,000 accrued b.P38,000
interest. What are respectively the c.P438,000-
inclusion in gross income and the d.P400,000
exclusion in gross income? P400+20+18=P438,000
a.P500,000;P0 14.A non-stock, non-profit charitable
b.P100,000;P400,000 entity received the following during
c.P400,000;P100,000- 2015:
d.P0;P500,000 Contributions from the public
9. Ms. Sibuco invested in the mutual P1,400,000
fund and savings deposit of BCBC Bank. Income from the sale of merchandise
She acquired a 100,000 participation 500,000
shares when the net asset value per Gain on the sale of properties
unit of the fund was P98.00. She pulled 300,000
out her investment when the net asset What is the total exclusions from gross
value per unit was P101.00. Ms. Sibuco income subject to regular tax?
also had P100,000 accrued interest in a.P2,200,000
her savings deposit. b.P1,900,000
Which statement is incorrect? c.P1,400,000-
a.The P300,000 gain is an exclusion in d.P1,300,000
gross income. 15. Mr. Santiago purchased a life
b.The P100,000 interest income is an annuity for P100,000 which will pay him
exclusion in gross income subject to P10,000 a year. The life expectancy of
regular tax. Mr. Santiago is 12 years. Which of the
C.The P100,000 interest income is an following can Mr. Santiago exclude from
inclusion in gross income subject to his gross income?
final tax. a.P10,000
d.The P300,000 is an inclusion in gross b.P20,000
income subject to regular tax, but the c.P120,000
P100,000 is an exclusion in gross d.P100,000-
income subject to final tax.- CHAPTER 9
10. The following income relates to a REGULAR INCOME TAX:
proprietorship registered as a BMBE. INCLUSION IN GROSS INCOME
Gross Income from sales P400,000 Chapter Overview and Objectives
Dividend income-domestic 9,000 This chapter discusses inclusion in gross
Interest on deposits 6,800 income subject to the regular income
Compute the total exclusion in gross tax
income subject to regular tax. After this chapter, readers are expected
a.P400,000- to demonstrate:
1.Mastery of the NIRC of items of gross
income subject to regular tax and their
measurement rules
2.Knowledge of the boundary between
income subject to final tax or capital
gains tax and those to regular income
tax
3.Knowledge of the link between items
of exempt income and income subject
to regular income tax
4.Comprehension of the effect of
accounting methods and situs rules on
the reportable amount of gross income
5.Knowledge of the treatment of
creditable withholding tax
6. Understanding the treatment of
income from pass-through entities
7.Mastery of the rules on recoveries of
past deductions
8. Appreciation of the essence and
purposes of transfer pricing regulation
ITEMS OF GROSS INCOME
The term items of gross income or
inclusions in gross income is a broad
category pertaining to all items of
income subject to taxation, namely:
1.Gross income subject to final tax
2.Gross income subject to capital gains
tax
3.Gross income subject to regular tax
Items of gross income subject to final
tax and items of gross income subject
to capital gains tax are respectively
discussed in Chapter 5 and Chapter 6.
This chapter focuses on the items of
gross income subject to regular tax.
ITEMS OF GROSS INCOME SUBJECT TO
REGULAR TAX
Gross income includes, but is not
limited to, the following items:
1.Compensation for services in
whatever form paid
2.Gross income from the conduct of
trade, business, or exercise of a
profession
3.Gains derived from dealings in
properties
4.Interest
5.Rents
6.Royalties
7.Dividends
8.Prizes and winnings
9. Annuities
10.Pensions
11.Partner’s distributive share from the
net income of general professional
partnership
Compensation for services in whatever
form paid
Under current tax rules, the term
“compensation income” technically
pertains to the types of employee
benefits that are subject to regular tax.
The fringe benefits of managerial or
supervisory employees are not
considered compensation income and
are subject to final tax.
To minimize the complexity of this
section, compensation income is
separately discussed in Chapter 10.
Gross income from the conduct of
trade, business or exercise of a
profession
This includes income from any trade or
business, legal or illegal, and whether
registered or unregistered.
Gross income from business or
profession is determined as follows:
Sales/Revenues/Receipts/Fees Pxxx,xx
Less:Cost of sales or services xxx,xx
Gross income from operations Pxxx,xx
The following business income shall not
be included in gross income subject to
regular tax:
1.Business income exempt from
income tax such as:
a.Gross income from a Barangay Micro-
Business Enterprise(BMBE) under RA
9178
b. Gross income from enterprises
enjoying tax holiday incentives under
EO 226 which have not yet graduated to
their income tax holiday incentives
2.Business income subject to special
tax regime such as:
a.Philippine Economic Zone
Authority(PEZA) –registered enterprises
subject to 5% gross income tax
b.Tourism infrastructure and Enterprise
Zone Authority(TIEZA)-registered
enterprises subject to 5% gross income
tax
3.Business income subject to final tax
when not subjected to final tax by the
payor
a.Subcontractors of petroleum service
contractos subject to 8% final tax
b.Business income of foreign currency
deposit units(FCDUs) and offshore
banking units(OBUs) from Philippine
residents subject to 10% final tax
Taxpayers with multiple type of
business income shall report their gross
income subject to regular tax under the
column “Regular” in the computation of
tax per regime in the annual income tax
return. Gross income subject to special
rate and those exempt are presented
respectively under the columns”Total
Speical”and “Total Exempt”.
Gains from Dealings in properties
The gains or losses in dealing in
ordinary assets are subject to regular
income tax.Dealings in capital assets
other than domestic stocks and real
properties are also subject to regular
income tax.
Ordinary gains are included as items of
gross income. Ordinary losses are items
of deductions against gross income. The
net capital gain from other capital
assets after deducting capital losses is
also included as an item of gross
income. A net capital loss is not an item
of deduction against gross income.
To avoid complicating this section, the
tax rules on measurement and
recognition of gains from dealings in
properties are discussed in detail in
Chapter 12.
Interest income
This particularly refers to interest
income other than passive interest
income subject to final tax. A taxable
interest income must have been
actually paid out of an agreement to
pay interest. It cannot be imputed. (CIR
vs. Filinvest Development Corporation,
GR 163653 and 167689).
Examples of interest income subject to
regular income tax:
1.Interest income from lending
activities to individuals and
corporations by banks.
1.Interest income from lending
activities to individuals and
corporations by banks, finance
companies and other lenders
2.Interest income from bonds and
promissory notes
3. Interest income from bank deposits
abroad
Exempt interest income
The following are exempt from regular
income taxation:
1.Interest income earned by
landowners in disposing their lands to
their tenants pursuant to the
Comprehensive Agrarian Reform Law
2.Imputed Interest income
Imputed interest income (the
opportunity cost of money) does not
constitute an actual income; hence; it is
exempt from income tax.
The power of the Commissioner to
allocate income and deduction does not
include the power to impute
“theoretical interest”.(Ibid)
Illustration
Sapphire Bank has the following income
in 2014:
Interest income from loans
P3,000,000
Interest income from deposits with
other banks 400,000
Interest income from notes
rediscounting 100,000
Interest income from Treasury notes
50,000
Only the interest income from loans and
notes rediscounting are items of gross
income subject to regular income tax.
The interest on deposits and treasury
notes are items of gross income subject
to final tax.
Rents
Rent income arises from leasing
properties of any kind. It is a passive
income but is not subject to final tax
under the NIRC; hence, it is subject to
regular income tax.
Special consideration on rent
1.Obligations of the lessor that are
assumed by the lessee are additional
rental income to the lessor.
2.Advance rentals are
a.Items of gross income upon receipt if:
i.Unrestrected or
ii.Restricted to be applied in future
years upon the termination of the lease
b.Not an item of gross income is:
i.It constitutes a loan
ii.It is a security deposit to guarantee
payment or rent subject to contingency
which may or may not happen.
3.Leasehold improvements made by the
lessee on the leased property are
recognized by the lessor as income
using the spread-out method or
outright method discussed in Chapter 4.
Illustration
Under the Iba Leasing Corporation’s
standard lease contract, leases shall run
for a non-preterminable 12-month
period for a monthly rental of P25,000.
The lessee shall pay three months
rental in advance plus one month
security deposit. The rent for the last
two months of the lease shall be taken
from the advance while the security
deposit will be returned if there are no
damages sustained by the property
during the lease term.
The entire P75,000 rental payments for
the current month and the advanced
rental for the last two months is an
item of income subject to regular tax.
The P25,000 security deposit is not an
income.
Royalties
Royalties earned from sources within
the Philippines are generally subject to
final income tax except when they are
active by nature. Active royalty income
and royalties earned from sources
outside the Philippines are subject to
regular income tax.
Illustration 1
Forressoftware is a distributor of a
computer program and earns royalties
from its licensed users. Computer
programs are specifically tailored to
each client and regular continuing
maintenance services are provided.
During the year, client-users remitted a
total of P500,000 royalty payments.
The entire P500,000 is subject to
regular income tax since the royalty is
an active income to Forresofware.
Illustration 2
Mang Damian has the following
royalties:
Royalties from mining properties in the
Philippines P550,000
Royalties from books published in the
Philippines 200,000
Royalties from books published abroad
300,000
Royalties from franchise exercised
abroad 400,000
The royalties from mining properties
and from books in the Philippines are
subject to final tax. The royalties from
sources abroad aggregating P700,000
are items of gross income subject to
regular income tax. Remember that the
final withholding tax does not apply to
foreign income.
dividends
This pertains to dividends declared by
foreign corporations. It should be
recalled that dividends declared by
domestic corporations are generally
subject to 10% final tax if recipient is an
individual taxpayer and exempt if the
recipient is a domestic or a resident
foreign corporation. Cash, property, and
script dividends from foreign
corporations are items of gross income
subject to regular income tax
stock dividends
It should be recalled that stock
dividends are exempt from income tax,
but when the declaration confers to the
recipient a different interest of right
after the stock dividend declaration or
when stocks dividend are subsequently
redeemed such that it amounts to
payment of cash dividend, the fair
market value of the stock dividends
received is taxable.
Liquidating dividends
Liquidating dividend is not income. The
liquidating dividend are considered an
amount in exchange for the investment
of the investor and are subject to the
rules of dealings in properties in
Chapter 12.
Illustration
Caloocan Corporation, a domestic
corporation, received cash dividends
from the following corporations:
Domestic corporations P400,000
Resident foreign corporations 200,000
Non-resident foreign corporations
300,000
The P400,000 inter-corporate dividends
declared by a domestic corporation is
exempted from final tax. Therefore, it is
not an item of gross income subject to
regular income tax.
The P500,000 total dividends from the
resident and non-resident foreign
corporations are items of regular
income subject to regular income tax
and shall be reported as follows:
Scenario 1:
Assuming Caloocan Corporation is a
domestic corporation, the P500,000
total dividend from foreign corporations
shall be included in gross income
because domestic corporations are
taxable on world income.
Scenario 2:iAssuming Caloocan
Corporation is a resident foreign
corporation, only a portion of the
P200,000 dividends from the resident
corporation determined as earned
within by the pre-dominance test
discussed in chapter 3 shall be included
in gross income. Note that the situs of
dividends from the non-resident foreign
corporation is abroad.
Annuities
The excess of annuity payments
received by the recipient over premium
paid is taxable income in the year of
receipt.
Illustration
Andrew purchased an annuity contract
for P100,000 which shall pay him
P10,000 annually until he does.
The receipt of the first 10 annual
annuity payments is a return of capital.
Any further receipt from year 11
onwards is an item of gross income
subject to regular income tax.
Prizes and winnings
Prizes and winnings that are exempted
from final tax are not items of gross
income subject to regular income tax.
Exempt prizes and winnings:
1.Prizes received without effort to join a
contest
2.Prizes in athletic competitions
sanctioned by their respective national
sports association
3.Winnings from PCSO or lotto
The following table summarizes the
rules of taxable prizes and winnings to
individual taxpayers:
Earned from
sources
Within Abroad
Prizes:
P10,000 and below Regular tax
Regular tax
More than P10,000 Final tax Regular
tax
Winnings other than PCSO and lotto
Final tax Regular tax
Note: PCSO and lotto winnings are
exempt from any income tax. However,
lotto winnings from abroad are items of
gross income subject to regular tax for
taxpayers taxable on global income.
The final taxation of prizes and winnings
for corporations is not contemplated in
the NIRC. Hence, the taxable prizes and
winnings of corporations are subject to
regular income tax.
Illustration
The city of Baguio held its Panagbenga
flower festival. During the festivities,
Mr. Erorita, the proprietor of Mr. Sexy
Body Gym, won the P500,000 second
prize in the flower float competition.
John Hay Management Corporation
won the P600,000 first prize.
The city of Baguio shall withhold 20%
final tax on the winnings of Mr. Erorita.
The prize of John Hay Management
Corporation shall be subjected to a 20%
final tax but to creditable withholding
tax. John Hay shall include the prize in
its gross income subject to regular
income tax.
Pensions
These pertains to pensions and
retirement benefits that fail to meet the
exclusion criteria and hence subject to
regular tax.
Partner’s distributable share from the
net income of the professional
partnership
It should be recalled that general
professional partnerships are not
subject to income tax(i.e., final tax,
capital gains tax or regular income tax)
because they are merely viewed as
pass-through entities. The partners are
the ones subject to regular tax on their
share in the net income of the general
professional partnership.
For this purpose, the net income of the
general professional partnership shall
include items of income which are
exempted from final tax or capital gains
tax to the general professional
partnership.
For this purpose, the net income of the
general professional partnership shall
include items of gross income which are
exempted from final tax or capital gains
tax to the general professional
partnership.
Illustration
Zef and Siegfried practice their
profession in a general professional
partnership and share profits 60:40.
Their firm reported the following:
Gross receipts P2,000,000
Less:Professional expenses 1,200,000
Net income from operations P800,000
Interest income from banked deposits
20,000
Distributive net income P820,000
The share of the partners in the net
income of the partnership shall be
computed as:
Total distribution of Zef(60%Xo820,000)
P492,000
Total distribution to
Siegfried(40%P820,000)328,000
Distributive net income
P820,000
The partners shall include their
respective shares in their gross income
subject to regular income tax.
Note that this rule applies to other
pass-through entities such as:
1.Exempt joint ventures
2.Exempt c-ownership
Business partnership and taxable joint
venture
These entities are subject to corporate
income tax. The distributive share of
the partner, venture, or co-owner from
the net income of these entities, if
organized within the Philippines, is
subject to 10% final withholding tax.
However, if these entities are organized
or constituted abroad, the share from
their profit is subject to regular income
tax for taxpayers taxable on global
income. It should be recalled again that
the final income taxation is territorial
and does not apply to foreign income.
GENERAL CRITERIA FOR ITEMS OF
GROSS INCOME
Items of gross income subject to regular
income tax are not limited to the
aformentioned NIRC list. Under the
NIRC, the regular income tax has a
catch-all provision for all income
derived from whatever sources that are:
1.not subject to final tax, capital gains
tax, and special tax regime, and
2.not excluded or exempted by law,
treaty, or contract from taxation.
OTHER SOURCES OF GROSS INCOME
1.Income distributions from taxable
estates or trusts
2.Share from the net income of other
pass-through entities:
a.Exempt joint venture
b.Exempt co-ownership
3.Farming income
4.Recovery of past deductions
5.Reimbursement of expenses
6.Cancellation of indebtedness for a
consideration
Income Distributions from taxable
estates or trusts
Any income distributions received by an
heir or beneficiary from a taxable
estates or trust shall be included in his
gross income subject to regular tax,
provided that such income must not
have been subjected to final tax or
capital gains tax.
Illustration:Estates
Roman is one of several heirs to the
business estate of his father which is
under judicial settlement. The
administrator distributed the following
income for the support of Roman:
Domestic dividends P22,500
Business income 70,000
Roman shall include in his gross income
subject to regular income tax the
P70,000 distribution from business
income. The estate shall present the
same amount as a deduction against its
gross income. The P22,500 dividend
income shall not be reported by Roman
since this was already subjected to final
tax at source.
Illustration:Trusts
Horace received the following income
distributions in his capacity as
beneficiary to an irrevocable trust
designated by his grandmother:
Net capital gains on sale of domestic
stocks P9,500
Rental income 12,000
Horace shall report only the P12,000
rental income in his gross income
subject to regular income tax. The net
gain on the sale of stocks is subject to
capital gains tax to the trust.
Share from the net income of exempt
joint ventures and co-ownerships
The same tax treatment on recognition
of share in the net income of a general
professional partnerships applies to the
share from the net income of exempt
joint ventures and co-ownerships.
Farming income
Farming operations can be classified as:
1. Raise and sell operation
The proceeds on the sales of
livestock or farm products is
included in gross income subject
to regular income tax. Animal
raising expenses are presented
as items of deductions against
gross income.
2.Purchase and sell operation
The gross profit from the sale
(sales less cost of purchase) is
included in gross income.
Taxpayers may follows accrual or
cash basis in accounting for
inventories of livestock or farm
products. The crop year basis
discussed in Chapter 4 may be
used for recognizing for long-
term crops.
It should be recalled that the
proceeds of crop or livestock
insurance constitute a taxable
item of gross income because
they are recovery of lost profits.
RECOVERIES OF PAST
DEDUCTIONS
When past year deductions from
gross income are subsequently
recovered by the taxpayer or
when accrued expense
previously deducted are
subsequently paid as an amount
less than the deduction claimed,
they should be analyzed
whether or not they resulted in
tax benefit to the taxpayer.
Examples of recoveries of past
deductions:
1.Recovery of previously
claimed bad debts expense
2.Refund of local tax expense
3. Refund of foreign tax
previously claimed as deduction
4.Re-commissioning of
abandoned petroleum service
contracts or mining properties
5.Release of reserve funds of
insurance companies
6.Interest expense which were
subsequently condoned by the
lender.
Past deductions that created
benefit to the taxpayer must be
reverted back to gross income in
the year of recovery so that the
government will recover the tax
lost from the deduction.
Tax benefit
There are two ways a taxpayer
may benefit from a deduction:
a.Direclty,through reduction of
taxable income in the year
deduction is made
b. Indirectly, through reduction
of future taxable income
through carry-over of net
operating loss.
Note:
1.Under our tax laws, the excess
of deductions over gross income
in a taxable year is carries over
as or NOLCO, Because of this,
almost all prior year deductions
have tax benefit; hence, their
recovery is taxable.
2.NOLCO will be discussed in
Chapter 13-B, It is partially
discussed here because of its
relevant to the topic at hand.
Illustration 1:With Net Income
in the year of deduction
A taxpayer incurred P60,000 bad
debts expense in 2015 out of
which P35,000 was recovered in
2017:
2015 2016 2017
Net income P100,000 P80k
P120k
(Bad debts expense)/Recoveries
(60K) 0 35K
Net income after bad debts
expense P40K 80K ???
The entire P60,000 deduction in
2015 is a tax benefit to the
taxpayer. Hence, the P35,000
recovery from this deduction is a
tax benefit which must be
reverted back to gross income in
2017. The taxable net income in
2017 shall be P155,000.
Illustration 2:With operating
loss and NOLCO carry-over
before recovery
A taxpayer incurred a P90,000
bad debts expense in 2015 out
of which P60,000 was
recovered in 2017
2015 2016 2017
Net income before bad debts
expense P70k P100K 120K
(Bad debts expense)/Recoveries
(90K) 0 60K
Net income after bad debts
expense (P20,000)
P100,000 ??
Less:NOLCO application
(20,000)
Net income for ’16-P80K
The entire P90K deduction is a
tax benefit. The taxpayer
benefited by the P70K reduction
in 2015 taxable income plus the
P20,000 carry-over of NOLCO.
The P60,000 recovery from the
deduction in 2017 is a tax
benefit subject to tax. The
reportable net income in 2017
shall be P180,000.
Illustration 3:With expired
NOLCO before recovery
Suppose a tax payer deducted a
P500 interest expense in 2012
but failed to pay the same due
to financial difficulty. The lender
condoned the interest in 2016.
’12 ‘13’14’15’16
Income before interest P100
(P130) P80 (P160) (P70)
Less:Interest expense(500) – 0 –
500
Net income(NOLCO)(P400)
(P130) P80 (P160) P???
NOLCO application (P80)
P???
Net income P0
The interest expense saved the
2012 P100 pre-tax income and
the 2014 P80 net income from
taxation. Note than NOLCO can
be deducted only against net
income in the next three years.
The P320 remaining NOLCO
expired in 2015 without tax
benefit. The P500 interest
deduction only benefited the
taxpayer P180. Hence, only
P180 of the P500 recovery in
2016 be reverted back to the
2016 gross income.
Illustration 4:With operating
loss in the year of recovery
A taxpayer incurred a P90,000
bad debt expense in 2015 out of
which P60,000 was recovered in
2016.
’15 ‘16
Net income/(loss) before bad
debts/recovery P70K (P15K)
(Bad debts expense)/Recovery
(90K) 45K
Net income after bad debts
expense (P20K) P???
An increase in NOLCO which has
not expired before the beginning
of the taxable year in which the
recovery takes place shall be
 treated as tax benefit. Thus, the
entire P90,000 is a tax benefit to
the taxpayer. Hence, the
P45,0000 recovered out of it is a
tax benefit which must be
reverted back to gross income in
2016.
Net Loss before recovery
(P15,000)
Add: Recovery 45,000
Net income P30,000
Less:NOLCO application-2015
20,000
Taxable net income P10,000
Illustration 5:Without benefit of
NOLCO carry-over
A corporate taxpayer had a
change in 80% of its
shareholders in 2016. Thus, any
net operating loss incurred
before 2015 is not allowed to be
carried over. A P90,000 bad debt
write-off was made in 2015 out
of which P60,000 was recovered
in 2017.
’15 ’16 ‘17
Net Income before bad debts
expense P70K P100K P120K
(Bad debts
expense)/Recoveries(90K) - 2016 net income shall be P100,000.
60K
Net Income after bad debts
expense (P20K) 60K
???
The tax benefit of the P90,000
bad debts expense to the
corporation in this case shall be
determined using the As-IF
Approach
Re-compute the net income in
the year of deduction by
adjusting the deduction as if the
subsequent deduction recovery
is known. The computed net
income is compared to what
was previously reported to
determine the income that is
saved from taxation.
Assuming the future recovery is known,
the 2015 net income should have been:
Net income before bad debts expense
P70,000
Less: Bade debts expense if recovery is
known(P90,000-P60,000) 30,000
Net income if recovery in known
P40,000
The tax benefit is the income that
escaped taxation in 2015 computed as:
Net Income if subsequent recovery is
known P40,000
Less:Net income as reported in 2015
(recovery is unknown) 0 pocket expenses of a professional
Tax benefit of the bad debts expense
P40,000
P40,000 out of the P60,000 recovery in
2017 constitutes tax benefits which
must be included in the 2017 gross
income. The 2017 net income shall be
P160,000.
Illustration 6:Taxpayer is exempt in the
year of deduction
Kalinga Corporation is an exempt BMBE
taxpayer in 2015 but became a taxable
regular income taxpayer in 2016. It
deducted P120,000 bad debts expense
in 2015. In 2016, it recovered P40,000
out of bad debts.
2015 2016
Net Income before bad debt expense
P70,000 P100,000
(Bad debts expense)/Recovery
(120,000) 40,000
Net Income after bad debts expense
(P50,000) P???
Deductions have no tax benefits to a
taxpayer who is exempt from tax.Future
recoveries from deductions made in the
year of exemption are non-taxable. The
P40,000 recovery is not income. The
Refund of non-deductible expense
Expenses or payments which are non-
deductible against gross income in the
computation of taxable net income will
never create benefit to the taxpayer. As
such, their recovery should not be
included in gross income.
Hence, the refund of the following non-
deductible items is not taxable:
1.Philippine income tax
2.Estate or donor’s tax
3.Income tax paid or incurred to a
foreign country if the taxpayer claimed
a credit for such tax in the year it was
paid or incurred.
4.Stock transaction tax in disposing
stocks through the Philippine Stocks
Exchange
5. Special assessments
REIMBURSEMENTS OF EXPENSES
Expenses of the taxpayer that are
reimbursed or paid by the customer or
client constitute additional income to
the taxpayer.
Examples:
1.When the lessee pays the ownership
costs of the lessor such as real property
tax and insurance on the property, the
payment constitutes income to the
lessor.
2.When a client reimburses the out-of-
practioner, the reimbursements are
income to the practitioner.
CANCELLATION OF INDEBTEDNESS
The cancellation of indebtedness may
amount to gratuity or payment of
income.
The cancellation of debt:
a.In consideration of service or goods-t
treated as income
b.As an act of gratuity-treated as gift;
not as income
c.As capital transaction such as
forfeiting the right to receive dividends
in exchange of the debt-treated as
dividend income.
SPECIAL CONSIDERATIONS IN
REPORTING OF GROSS INCOME
1.Accounting methods
2.Situs rules
3.Effect of value added tax
4.Creditable withholding tax
5.Power of the CIR to redistribute
income and expenses
ACCOUNTING PERIOD
The accounting period method adopted
by the taxpayer has a direct effect on
the reportable amount of gross income
subject to regular income tax.
For instance, cash-basis taxpayers will
report their revenue consisting of
collected and uncollected income as
gross income.
It must be recalled also that regardless
of the accounting methods of the
taxpayer, advanced income must be
included in gross income in the period
received.
SITUS RULES
The situs rules of taxation also affects
the extent of income included as items
of gross income of the taxpayer. It must
be recalled that all taxpayers are
taxable only on Philippine income
except resident citizens and domestic
corporations which are taxable on
global income.
For taxpayers taxable only on Philippine
income,only their items of gross income
subject to regular tax from sources
within the Philippines are included in
gross income.
For taxpayers taxable on global income,
their items of gross income subject to
regular tax from sources within and
without the Philippines are included in
gross income.
Integrative Illustration
Nomisma, a finance corporation, lends
to various clients:
Interest income from loans to Philippine
residents P400,000
Interest income from loans to non-
residents clients 500,000
Interest income from bank deposits in
the Philippines 20,000
Interest income from bank deposits
abroad 10,000
Required:
Determine the total amount of gross
income subject to final tax and the
reportable amount of gross income
subject to regular income tax assuming
the taxpayer is a:
1.Non-resident foreign corporation
2.Resident foreign corporation
3.Domestic corporation
Solution:
An analysis of the situs of the above
income is shown below:
Within Without
Loan interest income P400,000
P500,000
Bank interest income 20,000
10,000
Total P420,000
P510,000
The following are the amounts subject
to final tax and the amounts to be
reported in gross income subject to
regular income tax:
Subject to
Final tax Regular
tax
1.Non-resident foreign corporation
P420,000 P0
2.Resident foreign corporation 20,000
400,000
3.Domestic corporation 20,000
910,000(420,000+510,000)
Note:
1.Non-resident foreign corporations are
subject to final income tax on gross
income within Philippine residents shall
withhold 30% final tax on their gross
income.
2. The interest income from banks in
the Philippines is an item of gross
income subject to 20% final tax. The
gross income subject to regular income
tax to resident foreign corporations
includes only those earned from
sources within
3.Income from sources abroad, passive,
or active, are subject to regular income
tax for taxpayers subject to tax on
global income. The gross income of
domestic corporations includes items of
gross income subject to regular tax
from sources within and outside the
Philippines. Thus, P400k+P500k+P10K.
Illustrative Illustration 2 2.The 5%-10% capital gains tax is the
A certain taxpayer had the following most universal rule in taxation that
details of income during the year. applies to all taxpayers regardless of
Service fees from Philippine clients classification.
P400,000 3.Inter-corporate dividends are exempt
Service fees from foreign clients from final tax, except when the
500,000 recipient is a non-resident foreign
Gain on sale of domestic stocks directly corporation.
to a buyer 150,000 EFFECTS OF VALUE ADDED TAX
Dividends from domestic corporations Under the NIRC, taxpayers who are
5,000 engaged in business or exercise of a
Interest income on bank deposits profession are required to register as
abroad 30,000 business taxpayers.
Required: Business taxpayers are either:
Determine the amount of gross income a.VAT taxpayers-these are usually large
subject to regular income tax, final tax taxpayers with sales or receipts
and capital gains tax assuming that the exceeding P1,915, 500 in any 12-month
taxpayer is: period.
1.an individual b.Non-vat taxpayers-these are usually
a. Non-resident alien not engaged in smaller taxpayer below the VAT
trade or business (NRA-NETB) threshold and those designated by the
b.Non-resident alien engaged in trade law to pay percentage taxes.
or business(NRA-ETB), a resident alien Every VAT taxpayers is mandatorily
(RA) or a non-resident citizen(NRC) required to charge 12% output tax on
c. Resident citizen(RC) their sales or receipts. The regulations
2.a corporation presume that the amount charged to
a. Non-resident foreign corporation customers is inclusive of the 12% VAT.
b.Resident foreign corporation The output VAT will be paid to the
c.Domestic corporation government net of VAT paid by the
Solution: taxpayer (input VAT) on his purchases.
An analysis of the situs of the foregoing As such, the amount of reportable gross
income is as follows: income shall not include the output
Within Without VAT.
Service fees P400,000 P500,000 Illustration 1:VAT taxpayers
Gain on sale of domestic stocks 150,000 A VAT-registered taxpayer charged
Domestic dividends 5,000 P78,400 to a client for rental.
Interest income from foreign bank – The VAT-taxpayer shall split the billing
30,000 as follows:
Total P555,000 Rental income (P78400/112%) P70,000
P530,000 Plus:Output VAT (P78,400X12/112)
8,400
The following are the amounts to be Invoice price P78,400
included in gross income subject to final Only the rental income is subject to
income tax(FIT), capital gains tax(CGT), income tax. The output VAT shall be
and regular income tax(RIT): recorded as a liability. The collection of
Taxpayers FIT CGT RIT the rental is recorded in accounting as
Individuals follows:
1.NRA-NETB P405,000 P150,000 P- Cash P78,400
2.NRA-ETB, RA, or NRF 5,000 150,000 Rent Income 70,000
400,000 Output vat 8,400
3.RC 5,000 150,000 930,00 Illustration 2:Non-VAT taxpayers
Corporations A non-VAT taxpayer charged P78,400 to
4.NRFC P405,000 P150,000 P- a client for rental.
5.RFC - 150,000 Non-VAT taxpayers are not subject to
400,000 VAT. The entire amount they charge for
6.DC - 150,000 their sales of goods or services is gross
930,000 income subject to income tax.
Note: CREDITABLE WITHHOLDING TAX
1.NRFCs and NRA-NETBs are subject to Creditable withholding taxes(CWT)
final tax on Philippine income. deducted by income taxpayors against
the gross income of the taxpayer are
not exclusions in gross income. These
should be added back to the reportable
amount of gross income. CWTs are tax
credits that are deductible against the
annual income tax due of the taxpayer.
Illustration
Denzo, Inc., a non-VAT domestic
corporation, reported the following:
Rent income, net of 5% or P25,000 CWT
P475,000
Professional fees, net of 10% of P40,000
CWT 360,000
Interest income, net of 20% final tax
40,000
Dividends from a domestic corporation
10,000
Business expenses 500,000
Required:
Determine the total reportable gross
income and the income tax due and still
due under the regular income tax.
The total reportable gross income shall
be:
Rent
income[P475K/95%or(P475K+P25K)]
P500,000
Professional
fees[P360K/90%or(P360K+P40K)
400,000
Total Gross income P900,000
Note:The interest income and the
dividend income are subject to final tax.
They should not be included in the item
of gross income subject to regular
income tax.
The income tax due and still due shall
be determined as:
Total gross income P900,000
Less: Allowable deductions(business
expenses) 500,000
Taxable net income P400,000
Multiply:Corporate tax rate 30%
Income tax due P120,000
Less:Creditable withholding tax
-Rent P25,000
-Professional fess 40,000 65,000
Income tax still due
P55,000
Note:
1.The CWTs are actually advances to the
annual income tax due of corporations
and individuals and are deductible(i.e.,
creditable)thereto. Same procedures
are applied with individuals except that
their income tax dues are determined
by progressive tax rates.
2. The final taxes should not be credited
against the annual income tax due.
Creditable withholding tax and VAT
VAT taxpayers shall revert back to gross
income amounts of withholding tax but
withheld tax by the client evidenced by
a BIR From 2307.
The VAT taxpayer shall compute his
service income subject to regular tax as
follows:
Cash received P55,000
Plus:Withholding tax(BIR From 2307)
1,000
Invoice price (inclusive of VAT)
P56,000
Less:Output VAT (P56,000X12/112)
6,000
Service fees(Gross income)
P50,000
Illustration 2
A VAT taxpayer collected P85,600 rental
from a lessee who withheld 5%
creditable withholding tax.
The VAT taxpayer shall compute his rent
income subject to regular tax as follows:
Cash received(inclusive of 12% but net
of 5% CWT) P85,600
Divide by: (100%+12%-5%) 107%
Rent income(Gross income)
P80,000
The VAT and withholding tax are as
follows:
Rent income P80,000
Plus:Output VAT (P80,000X12%) 9,600
Less:Withholding tax(P80,000x5%)
4,000
Cash payments to the lessor P85,600
POWER OF THE CIR TO REDISTRIBUTE
INCOME AND DEDCUTIONS
In the case of two or more
organizations, trades or
businesses(whether or not incorporated
and whether or not organized in the
Philippines) owned or controlled
directly or indirectly by the same
interests, the Commissioner is
authorized to distribute, apportion, or
allocate gross income or deductions
between or among such organizations,
trade or business, if he determined that
such distributions, apportionment or
allocation is necessary in order to
prevent evasion of taxes or clearly to
reflect the income of any such
organization, trade or business. (Sec.
50,NIRC)
Examples:
1.A domestic corporation which is
subject to 30% corporate tax in the
Philippines has a subsidiary that
operates in a tax haven country where
no income tax is imposed. The domestic
corporation transfers goods to its
foreign subsidiary at a transfer pricing
based on production cost so that no
gross income will be recognized in the
Philippines while the entire gross
income will be recognized abroad
where no tax is imposed.
2.A foreign corporation subject to 10%
corporate tax in its home country has a
branch in the Philippines which is
subject to the 30% corporate income
tax herein. The foreign corporation
transfers goods at a pricing method that
will allow very minimal profit for the
Philippine branch to minimize exposure
to higher income tax.
3. Mr. Wais has a business enjoying a
tax holiday under an investment
promotion law. Mr. Wais also has a
business that is subject to regular
income tax. Mr. Wais orders his taxable
business to sell goods and supplies at
cost to his exempt business thereby
shifting profits to the exempt business
to save from income tax.
The transfer pricing guideline
Those enumerated scenarios are just a
few of the problems in taxation brought
about by unfair pricing practices. To
limit these unfair practices and to
properly reflect the income of
associated enterprises, the BIR and the
Department of Finance promulgated
Revenue Regulations No. 2 series of
2013 (RRS-2013) on transfer pricing.
What are associated enterprises?
Under RR2-2013, two or more
enterprises are associated if one
participates directly or indirectly in the
management, control, or capital of the
other;or if the same persons participate
directly or indirectly in the
management, control, or capital of the
enterprises. Associated enterprises are
also called”related parties”.
Examples of associated enterprises:
1.Parent corporation and its subsidiary
corporation
2.Sister companies or businesses
owned by the same parent corporation
3.All corporations controlled under the
same holding company
4.Businessess owned by the same
person
The arm’s length principle
Under RR2-2013, transfer pricing
between associated enterprises shall be
made under comparable conditions and
circumstances as those entered into
between independent parties where
market forces drive the terms and
conditions of the transaction rather
than being controlled solely by reason
of special relationship between the
associated enterprises.
In other words, an uncontrolled pricing
method determined by free market
forces also called arms’s length pricing,
is preferred. The failure to comply may
expose the taxpayer to a transfer
pricing adjustment where the BIR re-
computes the proper income of the
associated enterprises.
The arm’s length principle shall be
applied to:
1.Cross-border transactions between
associated enterprises
2.Domestic transactions between
associated enterprises
When operations are conducted cross-
boarder, the taxpayer may enter into an
“advanced pricing agreement” with
the BIR where a pricing rate is pre-
agreed to apply for a period of time.
Although this is not a mandatory
requirement, this may serve as a safety
net for the taxpayer to avoid the risk of
transfer pricing examination and
adjustment and the inconvenience it
may possible cause.
Transfer pricing methods
When the pricing methods between
associated enterprises do not reflect
arm’s length pricing, the BIR will adjust
the controlled transactions to their
arm’s length values using the most
appropriate of the following method
considering the circumstance of the
taxpayer:
1.Comparable uncontrolled price(CUP)
method-The transaction is valued in
reference to the amount charged in a
comparable uncontrolled transaction
under comparable circumstances.
This method works best for standard
tangible goods sold in an open market.
It does not apply to products containing
unique characteristics such as those
patented products or those containing
trade secrets.
2.Resale price method(RPM) –The
transaction is valued based on the
functions performed by the reselling
party to the product. This is used when
products purchased from a related
party are resold to an independent
party.
3.Cost plus method(CPM)-The
transaction is measured by valuing the
function performed by the supplier of
the property or services.
4.Profit split method(PSM)-The profit
or loss on the transaction is split based
on the division of profits(or losses) that
independent enterprises would have
expected to realize from engaging in the
transaction or transactions.
a.Residual profit split approach-Profit
is first allocated to provide a basic
return appropriate for the type of
transaction the participant is engaged
in. The residual profit after such
allocation is further allocated among
the parties based on an analysis of how
the residual would have been divided
between independent parties.
b.Contribution profit split approach-The
combined profits from controlled
transactions are divided between
associated enterprises in a single stage
based upon the parties’ relative
contribution to the profit or the relative
value of the functions performed by
each of the associated enterprises
participating in the controlled
transactions.
5.Transactional net margin
method(TNMM)-This is similar to the
cost plus and the resale price methods
in the sense that it uses the margin
approach by reference to the operating
profit earned in comparable
uncontrolled transactions.
When no comparatives can be derived
within the industry of the subject
taxpayer, the BIR may consider;
a.Extension of the transfer pricing
methods using comparatives derived
from another industry segment
b.Use a combination of the transfer
pricing methods or other methods.
Illustration 1:With an advanced pricing
agreement
The Crosby Manufacturing Corporation
usually bills its foreign branch at
cost;however, it entered into an
advanced pricing agreement (APA) with
the BIR which fixed its cross-border
pricing to its foreign branch at 150% of
cost.
Crosby compiled the following costs
and sales during the year:
Philippines Branch
Sales through the branch (intra-
company sales):
Sales P7,000,000 P12,000,000
Less:cost of sales 7,000,000 7,000,000
Gross income P0 P5,000,000
Sales to unassociated domestic
enterprises:
Sales P3,000,000
Less:Cost of sales 1,200,000
Gross Income P1,800,000
Total gross income P5,300,000
Applying the APA, the gross income
earned from within and outside the
Philippines shall be computed as:
Within Outside Total
Sales through the branch(intra-
company sales):
Sales *P10,500,000 P12,000,000
P12,000,000
Less:Cost of sales 7,000,000 10,500,000
7,000,000
Gross income P3,500,000 P1,500,000
P5,000,000
Sales to unassociated domestic
enterprises:
Sales P3,000,000 P0
P3,000,000
Less:cost of sales 1,200,000 0
1,200,000
Gross income P1,800,000 P0
P1,800,000
Total gross income P5,300,000
P1,500,000 P6,800,000
Note:
1.The total income on the P12,000,000
sales is split between the Philippines
gross income and foreign gross income
using the APA rate. The Philippine sales
shall be measured as:P7,000,000 cost of
goods transferred and
soldx150%=P10,500,000.The amount
determined as Philippines sales shall be
the deemed cost of sales of the foreign
branch*
2.Transfer pricing rule does not apply to
transactions with unrelated parties.
Scenario 1:Crosby is a domestic
corporation
Crosby shall report P6,800,000 gross
income since Crosby is taxable on global
income.Note that the transfer pricing
rule is only important in the
measurement of the proper income
from foreign sources for purposes of
the computation of the foreign tax
credit.
Scenario 2:Crosby is a domestic
corporation, and the foreign operation
is not a branch but a foreign subsidiary
incorporated abroad.
Crosby shall report P5,300,000 gross
income. The income of the foreign
subsidiary is not taxable in the
Philippines as it is a non-resident
foreign corporation. Note the
importance of the transfer pricing rule
in measuring the fair and proper
amount of the reportable gross income
from within. The profits on the sales of
Crosby to the foreign affiliates could
have escaped taxation without this rule.
The same procedures in this scenario
will be applied if Crosby is a resident
foreign corporation.
Illustration 2:Without an advanced
pricing agreement
Hot Corporation, a foreign corporation,
sells cosmetics products in the
Philippines through its branch. The
Philippine branch filed an income tax
return reflecting the following gross
income:
Sales P4,000,000
Less:Cost of goods sold 3,500,000
Gross income P500,000
Scenario 1:The BIR determined that
Hot Corporation is billing its branch at
200% of cost. Meanwhile, other
competitors of Hot Corporation which
offer similar product lines are billing
their Philippine independent
distributors at an average of 150% of
cost.
The gross income of the Hot
Corporation for purposes of Philippine
income tax shall be restated by re-
measuring the cost of goods sold as
follows:
Cost of sales at 200% billing
rate(i.e.200% xCost) P3,500,000
Cost to the selling party
(P3,500,000/200%) 1,750,000
Cost at arms’ length price
(150%XP1,750,000) 2,625,000
Thus, the gross income of Hot
Corporation shall be treated as follows:
Sales P4,000,000
Less:Cost of goods sold(arm’s length
cost) 2,625,000
Gross income P1,375,000
Note:Hot corporation will be given an
assessment by the BIR for the
incremental tax plus penalties that may
be due from this restatement.
Scenario 2:Hot Corporation bills its
branch at established market prices
Since the transfer price of Hot
Corporation reflect’s arms’ length
pricing, no transfer pricing adjustment
shall be made.
Selection of Transfer Pricing method
To minimize the risks of transfer pricing
adjustments, taxpayers may also
consider using the transfer pricing
methods used by the BIR in pricing their
transactions with associated
enterprises. The taxpayer must support
the propriety of the method adopted
through proper documentation.
PERIOD IN WHICH OF GROSS INCOME
ARE INCLUDED
The amount of all items of gross income
shall be included in the gross income
for the taxable year in which received
by the taxpayer, unless, under methods
of accounting permitted, any such
amounts are to be properly accounted
for as of a different period.
CHAPTER 9:SELF-TEST EXERCISES
Discussion Questions
1.Enumerate the NIRC list of items of
gross income.
2.What are the broad categories of
gross income
3.Discuss in detail the taxation of
interest income. Which is subject to
final tax?Which is subject to regular
income tax?
4.Discuss the treatment of gains from
dealings in properties, Which gains are
subject to capital gains tax?Which gains
are subject to regular income taxation
5.Discuss the taxation of dividends
6.Discuss the taxation of royalties
7.Discuss the taxation of prizes and
winnings
8.Compare actual distribution and the
share in the net income of the
partnership.Which one is included in
the gross income of the partner?
9. Discuss the taxability of recoveries of
past deductions
10. Enumerate examples of pass-
through entities. Are they taxable to
final tax, capital gains tax, or regular
income tax?
11. Enumerate and discuss the transfer
pricing methods?
True or False 1
1.Items of gross income subject to
regular income tax and capital gains tax
are reportable to the government-True
2.Rent is a passive income, but is not
subject to final tax.-True
3.The interest income from bonds
issued by banks is subject to final tax.-
False
4.Gains from dealings in capital assets
are generally subject to the regular
income tax-True
5.The gross income from operations
enjoying tax holiday are included in
gross income subject to regular tax, but
are presented as deductions in the
income tax return.False
6.The share in a business partnership is
subject to final tax, but the share is a
general professional partnership is
subject to regular income tax.True
7.Gains from dealings in ordinary assets
are subject to regular income tax.True
8.Items of passive royalty income are
subject to regular income tax while
items of active royalty income are
subject to regular income tax.True
9.Compensation income is an inclusion
in gross income subject to regular tax
except compensation income of special
aliens.True
10.The reportable gross income from
business or the exercise of a profession
is net of the cost of goods sold or cost
of services. True
11.Items of income which are included
in gross income subject to final tax are
excluded in gross income subject to
regular income tax.True
12.Imputed interest income is an item
of gross income subject to regular
income tax. False
13.Advanced rentals are income in the
year received.True
14.Real property tax and insurance on
the property if assumed by the lessee
constitute income to the lessor.True
15.Corporate winnings are exclusions in
gross income;hence, they are exempt
from income tax.False
16. Stock dividend are never subject
income tax.False
17.Pensions or retirement benefits are
inclusions in gross income subject to
regular income tax if the employee is
terminated due to any cause within his
control.True.
18.Prizes in athletic competitions
sanctioned by Philippine government
are exclusions in gross income subject
to final tax, but are inclusions in gross
income subject to regular income tax.
False
19.Corporate prizes are exclusions in
gross income subject to final tax but are
inclusions in gross income subject to
regular income tax.True
20. Stock splits are never subject to
income tax.True
True or false 2
1.The distributable net income of a
general professional partnership is
subject to creditable withholding
tax.True
2.Exempt joint ventures and co-
ownerships are treated as pass-through
entities and are subject to income
tax.False
3.The distribution by the GPP of items
of passive income is an inclusion in
gross income of the partner subject to
regular income tax.True
4.General professional partnerships are
exempt from tax and hence, exempt
from withholding.True
5.The share from the net income of a
joint venture organized abroad is
subject to 10% final withholding
tax.False
6.Income distribution from taxable
estates and trusts is an inclusion in
gross income subject to regular tax by
the heir or beneficiary.True
7.The recovery of past deduction must
be reverted back to gross income of
taxpayers using the accrual basis.True
8. The recovery of bad debts need not
be reverted to gross income of
taxpayers using the cash basis.False
9. The recovery of deduction from an
exempt year is subject to tax.False
10. General professional partnerships
are not exempt from regular tax but are
subject to final tax and capital gains
tax.False
11. An indebtedness cancelled by the
creditor out of mercy is an income to
the debtor.False
12. When there is a net loss in the
period the deduction is taken, the
subsequent recovery of the deduction
will not have any tax benefit.False
13.The refund or recovery of non-
deductible taxes shall not be reverted
back to gross income.False
14. The loss of the partnership can be
claimed by the partners as deduction in
their income tax returns.False
15. The accounting period of the
taxpayer has a direct impact upon the
amount of gross income to be
reported.False
16. The power of the CIR to redistribute
income and expense includes the
power to impute income between
affiliated enterprises.False
17. The situs of taxation has an impact
on the extent of the reportable gross
income.True
18. Creditable withholding taxes are
added back to the amount of
reportable gross income.True
19. The output VAT must be included as
part of gross income of VAT
taxpayers.False
20. The requirement to revert back to
gross income the amount of withheld
taxes applies only to VAT
taxpayers.False
21. Generally, all items of income of
NRA-NETB and NRFCs from the
Philippines are inclusions in gross
income subject to final tax.True
22. The taxpayer must enter into an
advanced pricing agreement with the
BIR for its cross-border transfer pricing
with associated enterprises.False
23. Transfer pricing between associated
enterprises must be made at arm’s
length.True
24. The transfer pricing regulations
apply only to cross-border transfers of
goods and services between associated
enterprises.False
25. Corporations under the direct and
indirect control of the same controlling
individual or corporation are associated
enterprises.False
26. Under the accrual basis of
accounting, items of gross income are
reported in the period they are
received.False
27. Basically, transfer pricing
adjustment is needed when the income
reported for Philippine taxation is
underrated.True.
Multiple Choice-Theory:Part 1
1.What is not subject to income tax?
a.Gain from sale of shares in mutual
funds by the investor
b.Prizes in recognition of civic, religious,
and artistic achievements
c.PCSO and lotto winnings
d.All of these
2.Which is an item of gross income
subject to regular tax?
a.Gain on sale of lot by a realty dealer
b.Interest income from bank deposits
c.Passive royalty income
d.Capital gain on the sale of domestic
stocks
3.Which is not an item of gross income
subject to final tax?
a.Dividends from a domestic
corporation
b.Prizes in excess of P10,000 by an
individual
c.Share in the income of a general
professional partnership
d.Winnings
4.Which of these employee benefits is
subject to final tax?
a.Fringe benefits to rank and file
employees
b.Regular pay of supervisory and
managerial employees
c,Fringe benefits to supervisory and
managerial employees
d.Regular pay of rank and file
employees
5.All of these are items of gross income
subject to regular tax except one. Select
the exception.
a.Compensation income
b.Interest income from long-term bank
deposits
c.Ordinary gain on sale of properties
d.Interest on notes receivables
6.Which is an income exempt from
income tax?
a.Income of a general professional
partnership
b.Foreign dividends
c.Taxes collected by the government
d.Income of government-owned and
controlled corporations
7.All of these are subject to regular
income tax. except
a.Professional fees
b.Wages and commissions
c.Business income
d.Capital gain from the sale of real
property located in the Philippines
8. Which is exempt from regular tax?
a.Income from construction
b.Income of qualified pension plans
c.Income from merchandising or trading
d.Income from financing or leasing
9. Which item of gross income is not
subject to regular tax?
a.Interest income from foreign bank
deposits
b.Capital gains on the sale of binds
with more than 5 years maturity
c.Gain on sale of domestic stocks by a
security dealer
d.Capital gain on sale of patent
10.Which is not part of compensation
income subject to regular tax?
a.Director’s fees
b.Bonuses and fixed allowances
c.Portion of salary contributed to SSS
d.Portion of salary used to pay salary
loans
11.Which is included in the gross
income subject to regular tax of a
resident alien?
a.Gross income from the sale of goods
abroad
b.Interest income from promissory
notes of resident clients
c.Interest income from relatives abroad
d.Gain from sale of domestic stocks
directly to a buyer
12. Which of the following deductions
from gross compensation income is
included as part of gross income subject
to regular tax?
a.Pag-Ibig Contributions
b.Contributions to union
c.PhilHealth Contributions
d.dues Withholding tax
13. Which interest income is subject to
regular tax?
a.Interest income from notes
b.Interest income from bonds
c.Interst income from lending
d.All of these
14. Dividends subject to regular tax
includes
a.Foreign dividends
b.Domestic dividends
c.Both a and b
d.Neither a nor b
15.Statement 1:All prizes earned abroad
are subject to regular tax.
Statement 2:All prizes in the Philippines
are subject to final tax.
Which statement is generally correct?
a.Statement 1
b.Statement 2
c.Both statements 1 and 2
d. Neither statements is true
16.Which is an item of gross income
subject to regular tax?
a.Lottery winnings abroad
b. Imputed interest income
c.Advanced rent representing security
deposit for contingency which may or
not may not happen
d.Leasehold improvement with useful
life not extending beyond the lease
term
17. Which of the following is not
subject to regular tax of a domestic
corporation or resident citizen?
a.Deposit interest income from abroad
b.Prize not exceeding P10,000 from the
Philippines
c.Income from abroad exempt under
treaty
d.Royalties from abroad
18.Which is subject to regular tax to a
non-resident foreign corporation or
non-resident alien not engaged in trade
or business?
a.Business income from the Philippines
b.Capital gain from the sale of stocks
directly to a buyer in the Philippines
c.Dividends from domestic corporations
d.None of these
19.Which is subject to regular tax to a
resident foreign corporation?
a.Service fees abroad
b.Gain from sale of real property
capital assets in the Philippines
c.Dividends from a domestic
corporation
d.Gain from dealings in properties
abroad
20. The proceeds of life insurance
received by the wife of the insured is
a.exempt from income tax
b.subject to final tax
c.part of taxable income
d.partly exempt and partly taxable
Multiple Choice-Theory:Part 2
1.Which of the following will not be
reported in gross income?
a.Receipt of inheritance
b.Share in the net income of a foreign
partnership
c.Royalties from foreign sources
d.Income distributions from a taxable
estate
2.Which is not a reportable type of
gross income?
a.Passive royalties
b.Dividends from a foreign corporations
c.Rent income
d.Capital gains from the sale of
domestic stocks through the PSE
3.Which of the following is included in
gross income subject to regular tax?
a.Sub-contract income from petroleum
service contractors
b.Interest income from government
securities
c.Share in the net income of a taxable
co-ownership
d.Farming income
4.All income earned abroad that would
otherwise be subject to final taxes if
earned within the Philippines shall be
subject to progressive tax of a
a.domestic corporation
b.resident citizen
c.resident alien
d.all taxpayers
5.All items if passive income earned
abroad are subject to regular tax to
a.resident citizen only
b.a domestic corporation only
c.a resident citizens and domestic
corporations
d.all taxpayers
6. All itmes of passive income earned
abroad are subject to regular tax to
a.a resident citizen only
b.a domestic corporation only
c.a resident citizens and domestic
corporations
d.all taxpayers
7. Which individual taxpayer is not
subject to progressive tax?
a.NRA-ETB
b.Special aliens
c.Resident alien
d.Resident citizen
8.Which corporate taxpayer is not
subject to regular tax?
a.Domestic corporation
b.resident corporation
c.Business partnership
d.Non-resident foreign corporation
8.Individual taxpayers shal report
income on
a.fiscal year
b.a calendar year
c.either a fiscal or calendar year
9. Corporaions are allowed to report
their income on
a.a fiscal year
b.a calendar year
c.either a fiscal year or calendar year
10. Which is subject to progressive tax
to an individual taxpayer?
a.Proceeds of life insurance policy
b.Gift
c.Amounts received by the insured in
excess of premiums paid
d.Compensation for personal injuries
11.Which of these is subject to
Philippine regular income tax to a
foreigner?
a.Rent income on properties located
abroad
b.Dividend income from a domestic
corporation
c.Interest income on a deposit abroad
d.Interest income from domestic
bonds
12. If not covered by the substantiated
filing system, employed individual
taxpayers shall report their regular
income
a.monthly
b.annually
c.quarterly
.quarterly and annually
13.Corporations and individuals
engaged in business or in the exercise
of a profession are required to report
their regular income
a.monthly
b.quarterly
c.annually
d.quarterly and annually
14.Which is incorrect concerning
transactions between associated
enterprises?
a.Transactions between related parties
should not be controlled
b.Pricing should be determined by free
market forces
c.Pricing should be motivated by the
need to save from total income tax
d.Non-arms’ length between related
parties may be restated by the BIR to
reflect the arms’ length value of
transactions
15.Which is not an associated
enterprise to the controlling individual
of a holding company?
a.An associate of a subsidiary in the
group
b. The parent company
c.A direct subsidiary company
d.A subsidiary of a subsidiary in the Interest income, net of final tax 10,000 Advances for future services to be
group Dividend income 50,000 rendered P30,000
Multiple choice-Problems:Part 1 Total Income Collections for past services
1.Mr Lolong, a supervisory employee, P1,780,000 rendered 70,000
received the following income in 2015: Less:Admin and Selling expenses Reimbursements for client expenses
Gross compensation income, before 1,000,000 40,000
contributions to SSS, PhilHealth, and Net Income P780,000 Reimbursements for out-of-pocket
HDMF totaling P124,000 Compute the total gross income subject expenses 10,000
P800,000 to regular tax. How much will be included in
Fringe benefits 200,000 a.P1,720,000-until interest income Croki’s gross income for regular
Gain from redemption of shares in a from customers income tax purposes?
mutual fund P100,000 b.P1,770,000 a.P150,000
Commission income 150,000 c.P1,780,000 b.P140,000
Gain on sale through the PSE 400,000 d.P840,000 c.P110,000-
Determine the total income to be 5.Precy, Inc., a domestic corporation, d.P100,000
reported by Mr. Lolong in gross income. reported the following income in 2014: all are subject to gross income for
a.P1,526,000 Philippines Abroad regular income tax purposes
b.P1,426,000 Service fees P400,000 P300,000 9.The Big bird Security Agency
c.P1,026,000 Interest income-bank 40,000 70,000 (BBSA) received P3,000,000 from its
d.P826,000 Royalties-franchise 80,000 30,000 clients. P2,400,000 of this was
2.Calixto, employed, derived the Compute the total gross income subject designated for salaries of guards
following income during the year: to regular income tax. assigned to various client
Gross salaries P400,000 a.P920,000 establishments.
th
13 month pay and other benefits b.P860,000 How much will be included in the
40,000 c.P800,000- gross income of BBSA?
SSS, PhilHealth, and Pag-Ibig d.P700,000 a.P600,000
contributions 20,000 Service fees from ph of P400,000 add b.P2,400,000
Deductions for loans repayments interest income from abroad and c.P3,000,000
50,000 royalties from abroad regular tax. d.P0
Deductions for withholding tax 60,000 6. If Precy, Inc., is a resident 10.Farmers, Inc., purchased an
Compute the compensation income to foreign corporation, compute agricultural lot for P1,000,000. It
be reported in the annual income tax the gross income subject to was later discovered that the lot
return. regular tax. had gold deposits. Thus fair value
a.P440,000 a.P520,000 increased to P4,000,000. This
b.P330,000 b.P480,000 increase in fair value is
C.P380,000 c.P400,000- a.exempt from income tax
d.P390,000 add the withholding tax d.P440,000 b.subject to income tax
3.Corazon company resigned in 2015 only in Philippines is subject to c.partially exempt and partially
after 12 years of service. She had the regular tax when earn in Ph.of taxable
following income during the year: service fees d.Any of these
Salary, net of P80,000 withholding tax, 7. Andres leases a building to a 11.Northern Cattle Company
P20,000 SSS, P18,000 Philhealth and client. During the year, he produces beef meat. In 2015, it
P40,000 13th month pay P480,000 received the following reported the following:
Separation pay 1,000,000 remittance from the lessee: Sale of live cattle P600,000
Compute the gross income subject to Rental, net of 5% creditable Sale of young feeders 200,000
progressive (regular) tax. withholding tax P1,900,000 Increase in value of cattle inventory
a.P1,480,000 Real property tax for leased building 300,000
b.P1,560,000 50,000 Compute the income subject to
c.P560,000 Reimbursement for utilities used by regular tax
d.P480,000 the lessee paid by Andres 200,000 a.P1,100,000
add the salary and separation pay plus How much will be included in gross b.P800,000
wt for subject to tax income subject to regular tax? c.P900,000
4.Iriga Corporation is engaged in the a.P2,050,000 all are subject to d.P600,000
sales of goods. It reported the following regular tax.- 12.Don Juanito has the following
summarized financial statements during b.P2,250,000 income in 2015:
the year: c.P2,000,000 Sales from vegetables P400,000
Sales P3,500,000 d.P1,950,000 Sales from fruits
Less:Cost of sales 2,000,000 8.Mr. Croki, a professional 200,000
Gross profit P1,500,000 practitioner, received the following Sales from carabao(acquired for
Commission on consignment 200,000 from his clients: P30,000 in 2015) 35,000
Interest income from customers 20,000
Interest income from tenants on the
sale of agricultural land pursuant to
the Agrarian Reform program
12,000
The gross income subject to
progressive tax is or regular
a.P647,000
b.P617,000
c.P600,000
d.P605,000-
P400,000+200,000+5k=605k
13.Mr. Conner purchased a life
annuity for P1,000,000 which will
pay him P100,000 a year. What will
Mr. Conner include in his gross
income on the 11th year of the
policy?
a.P1,000,000
b.P100,000 a year
c.P200,000
d.P1,200,000
14. Edwin purchased the life
insurance policy of Paulo for
P50,000. He continued the policy by
paying P20,000 premium after
which Paulo died. Edwin collected
the P500,000 proceeds of the policy.
How much will Edwin exclude from
hi gross income?
a.P500,000
b.P430,000
c.P70,000-P50,000+P20,000
d.0
15.Mr. Benson insured his life with
his children as beneficiaries. He died
after paying P200,000 premiums,
His children collected the
P1,000,000 life insurance proceeds.
How much will be excluded from
Mr. Benson’s gross income?
a.P800,000
b.P1,000,000
c.P200,000
d.P0
16. Pedro’s crop was destroyed by
incessant rains. He received
P200,000 from an insurer that
insured his crop. The proceeds of
the insurance is an
a.Item of gross income subject to
regular tax.
b.item of gross income subject to
final tax
c.exclusion from gross income
d.exempt from gross income
17.In 2016, Northern Crest
Corporation(NCC) reported a 21.In the immediately preceding
P40,000 recovery from bad debts
that was claimed as deduction
against gross income in 2012. In
2012, the write-off increased the
operating loss of NCC to P50,000. b.P4,000
NCC was very profitable from 2013 c.P10,000
to the present. How much of the d.P0
P40,000 recovery is subject to tax? 22. An accrual basis taxpayer recovered
a.P60,000 a P20,000 local tax expense which was
b.P10,000 refunded by the local government in
c.P40,000 2015. The local tax expense was paid in
d.P0 2013 when the taxpayer sustained a
18. West oil abandoned an oil P5,000 net operating loss. How much
facility in 2012 and expensed the shall be reverted to income?
P300,000 unrecovered investment a.P0
in the facility as abandonment loss. b.P5,000
The 2012 taxable income before c.P20,000
provision for the loss was P100,000. d.P15,000 20k-5k=15k
West posted continuous losses until 23.A taxpayer under the cash basis
2015. With increasing prices of wrote-off P50,000 receivables in 2010.
crude oil in 2016, West re- In 2015, P30,000 of the receivables was
commissioned the facility for use. recovered.Determine the amount to be
How much will be included in its included in gross income in 2015
gross income in 2016? assuming that the taxpayer incurred a
a.P300,000 net operating loss of P40,000 in 2010.
b.P200,000 a.P0
c.P100,000 B.P10,000
d.P0 c.P30,000
19. Sarah Baby International d.P40,000
graduated from its income tax 24.Multiple Choice-Problems:Part 2
holiday incentive and is effectively 1. Mr. Cordillera owns 20% interest in a
subject to tax beginning 2015. In joint venture engaged in construction
2016, it collected a P4M, from a projects. In 2015, the joint venture
P4M receivable which was written reported profits of P500,000, inclusive
off as bad debt expense in 2013. of P20,000 from time deposits
Before the write off, Sarah Compute the total income to be
International had P1M profit. Sarah reported in gross income of Mr.
posted profits in 2014 and 2015 in Cordillera?
excess of its operating loss in 2013. a.P0
Compute the amount of recovery b.P4,000
subject to regular income tax c.P96,000
a.P6,000,000 d.P100,000
b.P1,000,000 P500k times 20%=96k
c.P4,000,000 2. Mr. Buwaya had the following
d.P0 data to be reported for his
20. In 2015, an accrual basis income tax return in 2015:
taxpayer received a cash refund for Sales P490,000
an income tax assessment which he Gross compensation income 120,000
paid in 2011 consisting of the Personal exemption 150,000
following: Cost of sales 200,000
Basic tax P40,000 Administrative and selling expenses
Surcharge 10,000 120,000
Interest 4,000 Personal expenses 70,000
Total taxes paid P54,000 What is the net income?
How much must be reverted back to a.P170,000
gross income in 2015? b.P290,000
a.P0 c.P100,000
b.P4,000 d.P20,000do not include personal
c.P10,000 expenses
d.P44,000 3. Compute the taxable compensation
income.
problem, compute the tax benefit if the a.(P150,000)
refund was of local tax instead of b.(P30,000)
income tax. C.P0
a.P44,000 D.120,000
Personal exemption 150,000 in gross income assuming the employee What is the amount to be reported in
Less:admin and se 120,000 is a Filipino rank and file employee? gross income if the taxpayer is a
30k a.P0 resident citizen?
170k-30k=140k b.P1,147,500 a.P900,000
or ni=170- c.P1,500,000 b.P1,100,000
140-170=-30k d.P1,350,000 c.P1,500,000
4.Compute the taxable income. gross income d.P2,000,000
a.P70,000 8. A corporation had the following 14.In the immediately preceding
b.P100,000 gains from dealings in problem, what is the reportable gross
c.P140,000 properties: income assuming the taxpayer is a
d.P0 Sale of delivery truck P150,000 resident alien?
5. Raymund and Zeus practice their Sale of domestic stocks 50,000 a.P0
accounting profession through general Sale of 3-year corporate bonds 12,500- b.P900,000
professional partnership. They short term c.P600,000
contributed equal capital and agreed to Sale of 6-year corporate bonds 7,500 d.P400,000
share in profits equally. The following What is the total amount of gain to be 15. In 2015, the taxpayer received the
relates to their gross receipts and included in gross income? following prizes and winnings:
expenses. a.P150,000 Passive income Philippines Abroad
Gross receipts P4,000,000 b.P162,500 Prizes P10,000 P400,000
Less:Cost of services 1,800,000 c.P170,000 Winnings 400,000 100,000
Gross income from operations d.P212,500 What is the reportable item of gross
P2,200,000 10. Shown below is a compilation of the income if the taxpayer respectively is a
Add:other non-operating income gain on the sale of real properties: resident citizen and a non-resident
Gain on sale of equipment P100,000 Real properties classified as Philippines citizen?
Interest on time deposit 40,000 Abroad a.P500,000;P0
140,000 Ordinary assets P300,000 P800,000 b.P510,000;P10,000
Total gross income P2,340,000 Capital assets 400,000 200,000 c.P0;P500,000
Less:Allowable deductions 1,200,000 What is the amount of income to be d.P910,000;P410,000
Net profits P1,140,000 included in gross income subject to 16. What is the reportable item of gross
What is the reportable income in the regular income tax assuming the income of the taxpayer is a domestic
tax return of Raymund? taxpayer is a domestic corporation? corporation and a resident foreign
a.P1,170,000 a.P1,300,000 corporation, respectively?
b.P500,000 b.P1,100,000 a.P500,000;P0
C.P550,000 c.P1,700,000 b.P510,000;P10,000
D.P570,000 d.P300,000 c.P910,000;P410,000
6.In the immediately preceding 11.What is the gain to be included in D.P500,000;P10,000
problem, determine the amount of gross income subject to regular income 17.Mang Sipalay registered his business
income to be reported by Zeus tax if the taxpayer is a resident foreign as a BMBE. He made a total sales of
assuming that their partnership is a corporation? P500,000 and incurred cost of sales of
beauty parlor. a.P300,000 P400,000. He also earned P10,000
a.P0 b.P400,000 interest income from time deposits.
b.P570,000 c.P700,000 What is the total reportable gross
c.P550,000 d.P1,100,000 income?
d.P500,000 12.What is the gain to be included in a,P0
7.An alien employee in an RHQ had the gross income if the taxpayer is a b.P190,000
following in 2015: resident alien? c.P210,000
Gross compensation income a.P700,000 d.P400,000
P1,500,000 b.P400,000 18. Mr. Siayan is a 5-6 lender. During the
Contributions to SSS, PhilHealth and c.P300,000 year, he granted loans totaling
HDMF 150,000 d.P1,100,000 P2,000,000 and collected P400,000 in
Creditable withholding tax 202,500 13.A taxpayer collected the following interest. He also earned P8,000 in
What is the total amount to include in passive income during the year: temporary investments in domestic
gross income subject to regular income Passive income Philippines Abroad bonds plus additional P6,000 from bank
tax? Interest income from banks P300,000 deposits substitutes. Direct cost of
a.P0 P800,000 lending was P100,000.
b.P1,147,500 Royalties from books 200,000 What is the total amount to be reported
c.P1,350,000 100,000 in gross income subject to regular tax?
d.P1,500,000 Rent of properties 400,000 a,P0
8. In the immediately preceding 200,000 b.P300,000
problem, what is the amount to include c.P414,000
d.P308,000
19. Boracay company is registered as a
TIEZA locator subject to 5% gross
income tax.During the year, it made a
total P400,00 gross receipts from
various tourist assistance services. It
also incurred P210,000 in direct
services.
What is the amount to be included in
gross income subject to regular income
tax?
a.P0
b.P190,000
c.P210,000
D.P400,000
20. Mr. Asuncion received the following
royalties from the following sources:
Mining claims P150,000
Novel,”Alicia in Wonderland” 250,000
Basic Accounting textbook 80,000
Musical composition “Dayang-Dayang”
P40,000
What is the total amount to be reported
in gross income?
a.P0
b.P150,000
c.P400,000
d.P520,000
Multiple choice-Problems:Part 3
1. Mrs. Kapalong has several
interests in various businesses
and partnerships. He received
the following income during the
year:
Dividends from a domestic corporation
P120,000
Dividends from a resident foreign
corporation 80,000
Share in net income of a business
partnership 200,000
Share in the net income of a
professional partnership 100,000
What is the total income to be reported
in gross income?
a.P0
b.P380,000
c.P300,000
d.P180,000
2. Ms. Panabo received a total P200,000
from her father for her support. During
the year, she also received a P150,000
total distribution from the trust
irrevocably designated by her
grandfather in her favor. She also
received P120,000 income distribution
from the estate of her grandmother
undergoing judicial settlement.
What is the total amount to be included
in her gross income?
a.P200,000
b.P270,000
c.P350,000
d.P470,000
3. A non-VAT taxpayer collected
P45,000 net of P5,000 withholding tax.
Compute the gross income subject to
regular tax.
a.P5,000
b.P40,000
c.P45,000
d.P50,000
4.A VAT taxpayer collected P66,600,
inclusive of P7,200 VAT and net of P600
withholding tax. Compute the gross
income subject regular income tax.
a. P59,400
b.P67,200
c.P66,000
d.P60,000-
P66,000+P600-P7,200=P60,000
5.A non-VAT taxpayer collected
P79,200, net of 1% withholding tax.
What is the amount subject to regular
income tax?
a.P71,351
b.P71,429
c.P80,000
d.P79,200
6.A VAT taxpayer received P45,900
inclusive of VAT and net of 10%
creditable withholding tax. Compute
the gross income subject to regular tax.
a.P45,000
b.P45,900
c.P45,536
d.P51,000
7.A non-VAT taxpayer received P8,000
interest income, net of 20% final
withholding tax. Compute the amount
subject to regular income tax.
a.P0
b.P6,400
c.P8,000
d.P10,000
8. A VAT-registered taxpayer received
P18,000 dividend, net of 10% final
withholding tax. Compute the amount
subject to regular income tax.
a.P0
b.P17,647
c.P17,857
d.P20,000
9.A resident foreign corporate taxpayer
entered into an advanced pricing
agreement(APA) with the BIR with
respect to the pricing of its export sales
to a foreign country. A markup ratio of
50% of the cost is set in the APA. During
the year, the corporation manufactured
goods costing P12,000,000 and
exported 80% of the production to its
foreign affiliate at a price of
P12,000,000.
What is the amount of gross income
subject to Philippine tax?
a.P2,000,000
b.P4,800,000
c.P2,400,000
d.P6,000,000
10. Ms. Nene Gosio registered a
manufacturing business as a BMBE
exempt from tax. She also owns
another taxable business which is
engaged in the reading of goods. Ms.
Gosio ordered her BMBE business to
sell its production to her trading
business at ultimate sales prices.
You were tasked by your audit
supervisor to conduct a transfer pricing
evaluation of Ms. Gosio’s businesses.
Based on your study, you determined
that the retail profit rate(on sales) of
trading businesses with similar
operations involving similar goods is
40%. During the year, the trading
business made a total purchases of
P400,000 from the BMBE and sold 75%
of these for P500,000.
What is the gross income of the trading
business to be subjected to regular
income tax following the arm’s length
principle?
a.P0
b.P100,000
C.P200,000
d.P120,000
400,000x75%=300,000/500,000=0.60
200,000/500,000=40%
Cost of selling
party(400,000x0.60=240,000)
500,000x40%=200,000
CHAPTER 10
COMPENSATION INCOME
Chapter Overview and Objectives
This Chapter discusses the employee
benefits considered as compensation
income. It discusses the types of
employees, and exempt and taxable
benefits. It also delineates the gap
between the compensation income
subject to regular income tax and the
fringe benefits subject to fringe benefits
tax.
After this chapter, readers are expected
to demonstrate:
1.Understanding of the concept of an
employer-employee relationship
2.Knowledge of the classifications of
employees and the tax treatment of
their compensation income and fringe
benefits
3.Mastery of the list of employee
benefits exempted under the NIRC and
special laws and the de minimis list
4. Knowledge of the condition for
exemption of employee benefits under
treaty or international agreements
5. Understanding of the concept of
“employer convenience” rule and the
“necessity of the employer” rule.
6. Understanding of the conditions of
exemption of a minimum wage earner
7. Knowledge of the classification rules
for items of gross taxable compensation
income
8. Mastery of the composition of “13th
month pay and other benefits” for rank
and file employees and managerial or
supervisory employees
9. Comprehension of the fringe benefits
subject to regular tax and fringe
benefits subject to fringe benefits tax
10.Understanding of the conditions for
citizens to be considered special aliens
EMPLOYER-EMPLOYEE RELATIONSHIP
Employer-refers to any person for
whom an individual performs any
service of whatever nature as employee
of such person.
An employer is the person who has
control over the payment of the
employee remuneration. However, if
such person is a non-resident not
engaged in trade or business in the
Philippines, the employer is deemed
the person paying remuneration in their
behalf.
Employee-refers to any individual who
is a recipient of wages and includes
officer, employee or elected official of
the Government of the Philippines or
an political subdivisions, agency or
instrumentality thereof. The term also
includes an officer of a corporation.
Elements of employer and employee
relationship under case law:
1.Selection and engagement of
employees-There is a screening process
for employees to hire
2.Payment of wages-The employer
usually fixes and controls the payment
of wages
3.Power of dismissal-Employer has
power to retrench or terminate
employees when incurring heavy losses
or other reasonable basis.
4. Power to control-The employer has
power to control the employee on the
means and methods by which the work
is accomplished
An arrangement which do not manifest
all the elements is not an employer-
employee relationship but an
independent contract for the provision
of services.
The following are not considered
employees:
1.Consultants
2.Directors without management
function
3.Talents and artists on TV shows or
radio broadcasts(Sonza vs. ABS-CBN
Broadcasting Corporation, G.R No.
138051)
The income or fees of these individuals
are not compensation income but are
business or professional income.
TYPES OF EMPLOYEES AS TO FUNCTION
1.Managerial employees-Those who are
given powers or prerogatives to lay
down and execute managerial policies
and/or to hire, transfer, suspend, lay-off,
recall,discharge, assign, or discipline
employees
2.Supervisory employees-Those who
effectively recommend such managerial
actions if the exercise of such authority
is not merely routinary or clerical in
nature but requires the use of
independent judgement.
3. Rank and file employees-Those who
hold neither managerial nor supervisory
functions.
TYPES OF EMPLOYEES AS TO
TAXABILITY
1.Minimum wage earners-Employees
who are recipients of minimum wage
are exempt from income taxation.
2.Special aliens-Alien employees who
are subject to the 15% final income tax
on compensation income
3.Regular employees –Employees who
are subject to the regular progressive
income tax
Minimum Wage Earner
A minimum wage earner refers to a
worker in the private sector who is paid
the minimum wage or to an employee
in the public sector with compensation
income of not more than the statutory
minimum wage(i.e., those with salary
grade 1 to 3) in the non-agricultural
sector where he or she is assigned.
The statutory minimum wage refers to
rate fixed by the Regional Tripartite
Wage and Productivity Board of the
Department of Labor and Employment
or P5,000/month or P60,000/year,
whoever is higher.
To be considered as a minimum wage
earner, the employee must not have
other income aside from their minimum
wage and exempt benefits. A recipient
of a minimum wage but with other
taxable income is a regular employee.
Special alien
Special aliens refer to aliens holding
managerial or technical position in a:
a.Regional or area headquarters(RHQ)
or Regional operating headquarters
(ROHQ) of multinational companies.
b.Offshore banking units
c.Petroleum service
cotractors/subcontractors
An RHQ or an ROHQ is branch of a
multinational company or foreign form
or entity engaged in international trade,
with affiliates, subsidiaries, or branch
offices in the foreign markets, and is
governed by Book 3 of Executive Order
No. 226 as amended by RA 8756
An offshore banking unit is a division of
a foreign bank which is authorized to
transact business transactions in foreign
currencies in the Philippines
A petroleum service contractor is an
awardee of a petroleum service
contract under the Oil Exploration and
Development Act of 1972 either alone
or in consortium with others.
Taxation of special aliens
Special aliens are subject to 15% tax on
gross income received such as salaries,
wages, annuities, compensation,
remuneration, and other emoluments
such as honoraria and allowance except
those subject to fringe benefit tax.
Optional Final income tax for Filipino
employees
Filipinos who are occupying the same
positions as those held by special aliens
may opt to be taxed at 15% final income
tax on gross income or the regular
income tax. Hence, the term “special
alien” includes qualifying Filipino
employees who opted to be taxed at
15% of gross income.
Requirement to Filipinos to be
classified as Special Alien
To qualify as special alien employees,
Filipino employed by RHQs or ROHQs,
OBUs or petroleum service contractors
or subcontractors must meet all of the
following:
1.Position and function test-The Filipino
employee must be occupying and
actually exercising a managerial or
technical position.
2.Compensation threshold test-The
Filipino employee must have a gross
annual taxable income of at least
P975,000.
3.Exclusivity test-The Filipino employee
is not a consultant or contractual
personnel, and is solely employed by
the RHQ or ROHQ.
Special alien is not a general
classification
It must be noted that the “Special alien”
classification is not a general
classification but a special category that
exists only in tax law for purposes of
taxing compensation income.For
purposes of taxation of other income,
special aliens are classified according to
the appropriate general classification.
Illustration
Mr. Kuonoman is a non-resident
Japanese expert hired as a technical
employee of FilDrill, a petroelem
service contractor developing the
Malampaya Service Contract No.32.
Mr. Kuonoman shall be considered as
special alen with respect to his
compensation income from FillDrill. He
shall be considered a non-resident alien
on all other items of income from the
Philippines.
Illustration 2
Mr. Camacho, a resident Filipino, is
hired as operations manager of the
offshore banking unit of Eurobank in
the Philippines. He opted to be taxed to
the 15% final income tax.
Mr. Camacho shall be considered a
special alien with respect to his
compensation income from the OBU.
He shall be classified as a resident
citizen for all other items of income he
may derive outside the OBU.
Illustration 3
Mr.Escala, a resident Filipino, occupies a
managerial position in the ROHQ of
Cosmetics International. He derived an
annual income of P1,000,000 inclusive
of P300,000 annual part-time income
from outside employment.
Mr. Escala shall be treated as a regular
employee subject to the regular tax
since he failed both the compensation
threshold test and the exclusivity test.
Note that he has concurrent
employment and that he only derives
an annual income of
P800,000(P1,100,000-P300,000) from
the ROHQ.
THE TAX MODEL ON COMPENSATION
INCOME
Gross compensation income Pxxx,xx
Less:Non-taxable compensation xxx,xx
Gross taxable compensation income
Pxxx,xx
GROSS COMPENSATION INCOME
Gross compensation income generally
includes all remunerations received
under an employer-employee
relationship.
NON-TAXABLE OR EXEMPT
COMPENSATION
A.Benefits excluded and/or exempted
under the NIRC and special laws
B.Benefits exempt under treaty or
international agreements
C.Benefits necessary to the trade,
business, or conduct of profession of
the employer
D.Benefits for the convenience or
advantage of the employer
A.EXEMPT BENEFITS UNDER THE NIRC,
AS AMENDED, AND SPECIAL LAWS
1.Remunerations received as incidents
on employment
a.Exempt retirement benefits under
RA 7641 including exempt retirement
gratuities to government officials and
employees
b.Exempt termination bebefits
c.Benefits from the United States
Veterans Administration
d.Social security, retirement gratuities,
pensions, and similar benefits from
foreign government agencies and other
institutions, private or public
e.Benefits from SSS, under the SSS Act
of 1954, as amended
f.Benefits from GSIS under the GSIS Act
of 1937, as amended.
2.Employee mandatory contributions
to GSIS, SSS, PhilHealth, HDMF, and
union dues
3.Certain benefits of minimum wage
earners
4.13th month pay and other benefits
not exceeding P90,000
Exempt benefits of minimum wage
earners
1.Basic minimum wage
2.Holiday pay
3.Overtime pay
4.Night shift differential pay
5.Hazard pay
To be exempt from regular income tax,
a minimum wage earner must not have
other items of taxable income aside
from these employee benefits
De minimis benefits
De minimis benefits are facilities or
privileges such as entertainment,
medical services, or courtesy discounts
on purchases that are of relatively small
value and are furnished by the
employer merely as a means of
promoting the health, goodwill,
contentment, or efficiency of hid
employees. De minimis benefits are
petty fringe exempt from income tax.
As originally conceived, other petty
fringe benefits which fall within the
purview of de minimis even if not part
of the deminimis list are normally
treated as de minimis and are also
exempt from income tax.
However, the BIR and the Department
of Finance changed the rule under RR5-
2011 wherein the term “de minimis
benefits” was restricted to means only
the following:
1.Monetized unused vacation leave
credits of private employees not
exceeding 10 days during the year
2.Monetized unused vacation and sick
leave credits paid to government
officials and employees
3.Medical cash allowance to
dependents of employees not
exceeding per employee per semester
per month of P1500-250
4.Rice subsidy not exceeding 1 sack of
50-kg rice per month amounting to not
more than 2,000
5.Actual medical
assistance,e.g.,medical allowance to
cover medical and healthcare needs,
annual medical/executive check-up,
maternity assistance, and routine
consultations not exceeding P10,000
per annum.
6.Uniform and clothing allowance-not
exceeding P6,000 per annum (RR8-
2012)
7.Laundry allowance-not exceeding
P1,200
8.Emloyee achievement award-e.g., for
length of service or safety achievement,
which must be in the form of tangible
property other than cash or gift
certificates, with an annual monetary
value not exceeding P10,000 received
by the employee under an established
written plan which does not
discriminate in favor of highly paid
employees.
9.Gifts given during Christmas and
major anniversary celebrations not
exceeding P5,000 per employee per
annum (i.e., Christmas gifts and
anniversary gifts)
10. Daily meal allowance for overtime
work and night or graveyard shift not
exceeding 25% of the basic minimum
wage on a per region basis (i.e.,
overtime meal)
11.Benefits received by an employee
by virtue of a collective bargaining
agreement (CBA) and productivity
incentives schemes provided that the
total annual monetary value received
from both CBA and productivity
incentives schemes combined do not
exceed P10,000 per employee per
taxable year.(RA 10653, effective
January 1, 2015 under RR3-2015)
Taxable de minimis benefits
1. Excess de minimis over their
limits
2. Other benefits relatively small
value that are not included in
the list of de minimis benefits
Treatments of taxable de minimis
benefits
a.For rank and file employees-taxable
de minimis is treated as other
compensation income under the
category “13th month pay and other
benefits”
b. For managerial and supervisory
employees-taxable de minimis is
treated as fringe benefits subject to
final fringe benefit tax.(RR5-2011 and
RMC20-2011)
DETERMINATION OF EXCESS DE
MINIMIS BENEFITS
Illustration 1:De minimis limits
Alexander, a private employee who is
paid a P600 daily rate, receives the
following benefits during the year 2015:
Monetized unused vacation leave
credits 9 days
Monetized unused sick leave credits 9
days
Medical assistance P7,000
Rice subsidy(P2,000 per month) 24,000
Clothing allowance 8,000
Laundry allowance 6,000
Required:Determine the taxable
amount of de-minimis benefits
Solution:
Actual Limit
Excess
Monetized unused VL P5,400 P6,000 P0
Monetized unused SL 5,400 0 5,400
Medical assistance 7,000 10,000 0
Rice subsidy 24,000 18,000
6,000
Clothing allowance 8,000 5,000
3,000
Laundry allowance 6,000 3,600
2,400
Taxable de minimis as “other benefits”
P16,800
Note:Private employees
1.The actual value of the monetized
unused VL was computed as P600 x 9
while limit was P600 x10.
2.The 10-day rule applies only to
vacation leaves. Monetization of sick
leaves of private employees is taxable
(BIR Ruling No. 227-2013, June 20,
2013)
3. The rice subsidy and allowance were
likewise annualized by multiplying their
monthly limit by 12. The de minimis
benefits within the limits are exempt
from income tax.
Illustration 2
Giovanni, a government rank and file
employee, received the following
benefits:
Monetized unused vacation leave
credits (10 days) P6,000
Monetized unused sick leave credits (15
days) 9,000
Uniform allowance 5,000
Laundry allowance 4,800
Required:Determine the amount to be
included in other benefits.
Solution:
Actual Limit
Excess
Monetized unused VL P6,000 exempt
P0
Monetized unused SL 9,000 exempt 0
Uniform allowance 5,000 5,000 0
Laundry allowance 4,800 3,600
1,200
Taxable de minimis as “other benefits”
1,200 P1,200
Note: It is clear under RR5-2011 that
the vacation leave and sick leave of
government employees are not subject
to the 10-day limit rule
Illustration 3
Professor Radvic was one of the Hall of
Fame awardees of Youbee University.
He was granted P25,000 cash as loyalty
award for his 30 years of service. He
was also given P10,000 Christmas gift
and an additional P10,000 gift during
the institution’s Founding day
anniversary. Besides, he was also given
free lunch meals with a total value of
P15,000 during the same year.
Required:Compute the total taxable de-
minimis benefits as other benefits
Solution:
Actual Limit Excess
Loyalty or service award P25,000 P0
P25,000
Christmas and anniversary gift 20,000
5,000 15,000
Meals 15,000 0
15,000
Total taxable de minimis as “other
benefits” P55,000
Note:
1. The limit on loyalty or sevice
awards applies only if it is given
in kind
2. Only meals for overtime or
graveyard shifts are considered
de minimis. Other meal benefits
are no longer considered de
minimis
Note that in all three illustrations, if the
employee is a managerial or
supervisory employee, the entire excess
de minimis shall be considered as other
fringe benefits subject to fringe benefits
tax.
Commutation of accumulated leave
credits
The terminal leave pay or the
commutation of unused leave credits
due to involuntary separation from
employment of the employee is now
treated as de minimis benefits subject
to the 10-day leave credit limit and is no
longer exempt as part of exempt
termination benefits.
13th month pay and other benefits not
in excess of P82,000
The composition of the “13th month pay
and other benefits”will be discussed
later under taxable benefits
B.BENEFITS EXEMPT UNDER TREATY
OR INTERNATIONAL AGREEMENTS
Employee benefits of non-Filipino
nationals and/or non-permanent
residents of the Philippines from
foreign governments, embassies, or
diplomatic missions, and international
organizations are exempt from income
tax.
Exemption from withholding tax does
not mean income tax exemption
Foreign government embassies,
diplomatic missions and international
organizations are immune from income
tax including the obligation to withhold
income tax by virtue of international
comity as embodied in several
international agreements to which the
Philippines is a signatory.
However, this exemption from the
obligation to withhold tax does not
mean income tax exemption of their
Filipino employees. In fact, most of the
international agreements to which the
Philippines is a signatory limit
exemption only to non-Filipino
nationals and/or non-residents of the
Philippines.
Filipino employees of foreign
governments, international missions
and organizations are taxable as a rule
except only to employees of the
following organizations:
1.United Nations(UN)
2.Specialized Agencies of the United C.BENEFITS REQUIRED BY THE NATURE
Nations OF, OR NECESSARY TO, THE TRADE,
3.Australian Agency for International BUSINESS OR CONDUCT OF
Development (AUSAID) PROFESSION OF THE EMPLOYER
4.Food and Agriculture Benefits or allowances furnished by the
Organization(FAO) employer to the employees to enable
5.World Health Organization (WHO) them to appropriately and effectively
6.United Nations Development execute their duties as required by their
Programme(UNDP) employment are exempt from income
7.International Organization for tax. This is referred to as “necessity of
Migration(IOM) the employer rule”.
8.International Seabed Authority(ISA) Examples:
These organizations have exemption 1.Necessary travelling, representation,
provisions that extend even to their or entertainment expenses that are
Filipino employees. Other aid agencies subject to an accounting or liquidation
or international organizations may have in accordance with specific
tax free provisions in their articles of requirements of substitution of
agreement for Filipino employees. expense.
Confirmation of tax exemptions 2.Allowances which essentially
The exemption of Filipino employees is constitute reimbursement to
not automatic. Filipinos claiming government personnel for expenses
exemptions under the terms of they incurred in the performance of
international agreements or under their official duties, such as:
provisions of special laws granting a.Representation and transportation
privileges to international organizations allowance(RATA) of public officers and
shall file an application for confirmation employees under the General
of tax exemption with the BIR’s Appropriation Act
International Tax Affairs Division(ITAD). b.Personnel Economic Relief Allowance
The confirmation shall serve as proof of (PERA) (RR10-2008)
exemption. Without the confirmation 3.Reasonable amounts of
certificate, the employee is taxable. reimbursements or advances to
Employees of Philippine embassies or employees for travelling and
consulate offices representation which are pre-numbered
It should be recalled that employees only a daily basis and which are paid to
working in Philippine embassies or any employee while on assignment or
Philippine consulate offices are not duty.
considered non-resident citizens and These amounts given to the employee
are therefore subject to Philippine are not income but are expenses of the
income tax. trade, business or profession of the
Summary of rules employer that are incurred or paid
Foreign Philippin through the employee.These are not
embassy, e benefits since they are mere advances
missions, or embassy or replenishments of what are supposed
organizatio or to be direct cash outflows from the
n consulate employer; hence, they are not
office considered as compensation income.
In the Taxable* n/a D.BENEFITS FOR THE CONVENIENCE OR
Philippine Exempt N/A ADVANTAGE OF THE EMPLOYER
s Benefits or allowance which are
-Filipino intended for the furtherance of the
citizens interest of the employer’s business or
-Aliens to ensure its smooth operations are
Abroad Exempt Taxable likewise exempt from income tax. This is
-Filipino Exempt Exempt referred to as the “convenience of the
citizens employer rule.”
-Aliens Examples:
*Taxpayer must prove if there is an 1.Work-related mobile phone allowance
exemption grant under contract or and transportation allowance
special law. particularly to employees of call centers
which are operated on a 24-hour basis
where employees are required to be
available always for assignment and
consultation (BIR Ruling DA-233-07)
2.outstation allowance for employees
who will be out from office site at least
8 hours to visit lotto franchise holders
for repairs and/or inspection of
equipment leased by the employer (BIR
Ruling No. 013-02)
3.Grant of housing privilege to
employees working at distant or remote
facilities even if the dwelling is
distanced from the facility in
compliance to labor safety standardsd.
(BIR Ruling No. 055-99)
4. Car incentives to medical doctors on-
call who are required to report on duty
anytime.
5.Scholarship grants to employees
under contract to remain in service for
a specified period upon completion of
the study
6.Housing privilege of military officials
of the AFP located inside or near the
military camps.
These types of employer spending are
regarded as business expenses and are
not considered as employee reward
because they are not intended for the
free personal consumption or disposal
of the employees but as implements of
the employer’s business to ensure the
employer’s convenience.
However, if the expenses is
unreasonably excessive making it
depart from the nature of a reasonable
business expense such as when it is
deliberately granted to include a benefit
for the employee, the portion of the
expense representing provision or
privilege to the employee is considered
a taxable fringe benefit. These types of
expense are regarded as “hybrid
expenses” because they are partially
business expense and partially
employee benefits.
GROSS TAXABLE COMPENSATION
INCOME
Classification of gross taxable
compensation income
1. Regular compensation-This
pertains to the fixed
remunerations received by the
employee every payroll period.
2.Supplemental compensation-
This pertains to other
performance-based pays to
employees with or without
regard to the payroll period.
3.13th month pay and other
benefits-This is a residual
 category which generally
includes incentive pays and all
other taxable employee
benefits.
The amount of 13th month pay and
other benefits not exceeding P82,000 is
an exclusion from gross income. The
amount in excess of P82,000 is
considered as supplemental
compensation.
Illustration
An employee received P400,000 regular
compensation, P100,000 supplemental
compensation , and P90,000 13th month
pay and other benefits.
The gross taxable compensation income
shall be computed as follows:
Regular compensation P400,000
Supplemental compensation 100,000
13th month pay and other
benefits(P90,000-P82,000) 8,000
Gross taxable compensation income
P508,000
REGULAR COMPENSATION INCOME
The regular compensation includes
fixed remunerations due to be received
by an employee every period such as:
1.Basic salary
2.Fixed allowances such as cost-of-living
allowance, fixed housing allowance,
representation, transportation, and
other allowances paid to an employee
every payroll period.
Fixed allowances
Allowances which are fixed in amounts
and regularly received as part of the
basic, monthly, bi-weekly, weekly or
daily salaries or wages are part of
regular compensation. This applies even
if a portion of the allowances are
actually used in the employer’s
business.
Exception rule on the taxability of
allowances:
a.If the allowance is an ordinary and
necessary travelling, representation,or
entertainment expense of employee in
the pursuit of his trade, business or
profession.
b.The expense is subject to accounting
or liquidation
c.Any excess advances are returned to
the employer
Hence, variable and liquidated
allowances are not subject to tax.
However, amounts of allowances that
are retained by the employee for
himself shall be considered
compensation.
Paid vacation and sick leave allowances
The paid absences of an employee
applied against his vacation or sick
leave credits which are normally
received as part of the regular salary is
part of the regular compensation.
Non-compensation items
1.Fees
Retainer fees of consultants, talents,
and directors who have no
management function in the business
are professional income, not
compensation income of the recipient.
2.Commissions to non-employees such
as independent sales agents are
business income to the sales agents
3.Tips and gratuities
Tips and gratuities paid directly to an
employee by customers of the
employer which are not accounted for
by the employee to the employer are
not considered as compensation
income, but are to be reported as
“other income” in the income tax return
of the employee.
Valuation of compensation paid in kind
Compensation in kind is taxable at the
fair value of the consideration received.
If received in shares, the fair value of
the shares at the date of services were
provided is used.
Illustration 1
The following pertains to an employee
in 2015:
Gross salaries P400,000
Cost-of-living allowance 36,000
Fixed monthly transportation allowance
(P2KX12) 24,000
Deduction for withholding tax on
compensation 10,000
Deduction for employee share in SSS,
PHIC, and HDMF 32,000
The gross taxable compensation income
shall be computed as follows:
Gross salaries P400,000
Cost-of-living allowance 36,000
Fixed monthly transportation allowance
24,000
Gross compensation income
P460,000
Less:Non-taxable compensation 32,000
Gross taxable compensation income
P428,000
Illustration 2
An employee who was terminated in
2015 due to business closure of the
employer received the following:
Unpaid 2015 salaries P200,000
Unpaid 2014 salaries 20,000
Reimbursement for transportation
expenses 10,000
Termination pay 100,000
The gross taxable compensation shall
be computed as follows:
Gross compensation
income(P200K+P20K+P100K) P320K
Less:Non-taxable compensation
100,000
Gross taxable compensation income
P220,000
Note:
1.Reimbursement for transportation
expense is not an income to the
employee
2.The termination pay is included in
gross compensation income, but is also
deducted as non-taxable compensation
because the reason of termination is
beyond the employee’s control.
SUPPLEMENTARY COMPENSATION
Supplementary or additional
compensation includes performance-
based remunerations to an employee in
addition to the regular compensation
with or without regard to the payroll
period.
The following are the additional
compensation under current tax rules:
1.Overtime pay
2.Hazard pay
3.Night shift differential pay
4.Holiday pay
5.Commisions
6.Fees, including director’s fees(if
director is an employee)
7.Emoluments and honoraria
8.Taxable retirement and separation pay
9.Value of living quarters and separation
pay
10.Gains on exercise of stock
options(BIR ruling 119-2012)
11.Profit sharing and taxable bonuses
Overtime, holiday, and night shift
differential pay
These constitute additional to
compensation, except when derived by
a minimum wage earner.
Commissions, emoluments and
honoraria
Commissions are incentives intended to
stimulate sales. These may be given as a
profit sharing or performance bonus.
Emoluments pertain to any pay in
general while honoraria are additional
payments for attending to special tasks
or assigments.
Living quarters or meals
If an employee receives free living
quarters or meals in addition to salary
for services rendered, the value to the
employee of such living quarters or
meals is included in compensation
income. However, when the same was
furnished to an employee for the
convenience of the employer or out of
necessity of the employer’s business,
the value thereof is not compensation
income, but a business expense.
Stock option plans
Under various stock option plans,
employees are given the privilege to
buy shares at an agreed exercise price
after meeting stipulated vesting
conditions. The option will have value
when the stock of the employer
increases in value above the exercise
price at exercise date. The value of the
option is the discount at exercise date.
In the past, stock options were not
taxed at exercise date under the view
that the discount becomes realized only
when the stocks are disposed. Under
current tax rules, the discount (i.e.
market price-exercise price) at exercise
date is viewed as compensation in kind.
The gains from the exercise of stock
options constitute a taxable
compensation income, unless they
qualify as fringe benefits subject to final
tax.(RMC88-2012)
Illustration
Mr. Anthony met the vesting condition
of his employer’s stock option plan
where he is entitled to buy 10,000 of his
employer’s share at a strike price of
P100. Mr. Anthony exercised the option
when the share of his employer was
selling P150/share.
The discount of P500,000 computed as
[(P150-P100)X10,000), shall be reported
and treatment as additional
compensation income of Mr. Anthony.
Treatment of the subsequent sale of
the shares
If the employer is a:
1.Domestic corporation, and the sale of
the stocks is made:
a.through the PSE, the sale is subject
to a transaction tax ½ of 1% of the gross
selling price.
b.directly to buyer, the net gain on the
sale is subject to the 5%-10% capital
gains tax.
2.Foreign corporation, the net gain on
the sale is a capital gain subject to the
regular income tax
Profit sharing or taxable bonus
Profit sharing is a reward for churning
the business to post a profit. It is a
compensation for controlling all the
factors that influence profit such as
marketing and sales, productivity, and
administrative factors. It is a reward
which can be enjoyed by individual
employees such as salesmen, division
heads, key officers, or by all employees
collectively.
Bonuses are supplemental or additional
compensation. However, if they are
linked solely to productivity incentive
plan of the employer pursuant to RA
6971, they should be considered as de
minimis benefits.
Productivity incentive bonus
The productivity Act of 1990(RA 6971)
encourages private employers to set-up
productivity incentive programs.
A productivity incentive is linked to
improvements in productivity usually in
terms of cost savings through waste
reduction, efficient labor utilization, or
increase in volume of production.
Under the NIRC, productivity incentive
bonus is considered as part of “other
benefits” under “13th month pay and
other benefits”Under the revision of RA
10653, productivity incentive is now a
de minimis benefit.
Productivity incentive distinguished
from profit sharing bonus
Productivity incentive is anchored on
improvements in the factors of
production and is usually enjoyed
collectively by employees due to the
inherent difficulty of tracing
productivity to individual performance.
It is based upon cost savings, hence, it is
payable even if the business poses a
loss. Profit sharing is payable only when
the business post a profit.
13th month pay and other BENEFITS
“13TH Month pay and Other Benefits”
includes:
1.13th month pay
2.Other benefits
a.Christmas bonus of private
employees
b.Cash gifts other than Christmas or
anniversary gifs of private
employees(RR2-98 as amended by RR5-
2011)
C.Additional compensation
allowance(ACA) of government
personnel (RR8-2000)
D.14th month pay, 15th month pay, etc.
e.Other fringe benefits of rank and file
employees
Christmas bonus and Christmas gift
The Christmas bonus of government
employees is their 13th month pay. In
private companies, the term “Christmas
bonus “ may pertain to the 13th month
pay, a separate incentive pay, or to a
profit sharing.
Christmas bonus of private employees
which is a non-performance-based
incentive pay is part of other benefits.
Christmas bonus in the nature of profit
sharing should be treated as additional
compensation income, not as “other
benefits” The nature of the Christmas
bonus of private employees shall
determine its tax classification.
The Christmas gift of government
employees is specifically designated as
part of “13TH month pay and other
benefit” under Sec. 32 (B)(7)( e) (i) of
the NIRC. RR5-2011 includes Christmas
gift in the list of de minimis benefits.
But since revenue regulations cannot
amend the law they implement. RR5-
2011 should be interpreted to apply
only to Christmas gifts of private
employees.
Hence,
Governmen Private
t employees employee
s
th
Christma 13 month 13th
s bonus pay and month pay
other and other
benefits benefits
Christma 13 moth th
De
s gift pay and minimis
other
benefits
Bonus vs. Gift
Bonus is performance-based and is non-
discretionary to the employer while a
gift is a gratuity and is discretionary
upon the employer.
Other fringe benefits
Other fringe benefits include all other
taxable fringe benefits not specifically
included in compensation income as
regular, supplementary or 13th month
pay, and other benefits under current
tax rules such as:
1.Employee personal expenses
shouldered by the employer
2.Taxable de minimis benefits such as:
a.Excess de minimis
b.Benefits not included in the de
minimis list
Employee personal expenses
Employee personal expenses such as,
but not limited to, rental of residence,
grocery, association or club
membership dues or vacation expense
or tuition fees, when assumed or paid
by the employer, constitute fringe
benefits to the employee. This fact
holds true even if expense is receipted
in the name of the employer.
Taxable de minimis benefits
All other benefits of relatively small
value which are not included in the list
of de minimis benefits shall not be
considered as de minimis but as
ordinary fringe benefits. Corollary to
this rule, excess de minimis benefits
should be considered as taxable
ordinary fringe benefits.
Tax Treatment of other fringe benefits
a.For rank and file employees-treated
as compensation income as part of
“other benefits” under “13th month pay
and other benefits”
b. For managerial or supervisory
employee-treated as fringe benefits
subject to fringe benefits tax.
It must be emphasized than the “other
fringe benefits” of managerial or
supervisory employees are excluded
from their “13th month pay and other
benefits.”.
Illustration 1
The employer pays for the tuition fee of
the employee in addition to his regular
compensation.
The tuition fee paid is a fringe benefit
which will be treated as follows:
1.As a compensation income as part of
“other benefits” under “13th month pay
and other benefits”if the employee is a
rank and file employee.
2.As a fringe benefit subject to fringe
benefit tax if the employee is a
managerial or supervisory employee
3.As an exempt fringe benefit,
regardless of the type of employee, is
the same was given by the employer for
his convenience or business necessity
such as when the employee is required
to study to acquire expertise for the
future use of the employer’s business.
Illustration 2
An employee receives a monthly rice
allowance of P2,000 a month which is
P500 in excess of the P1,500 a month
de minimis limit for rice allowance.
The P500 monthly excess constitutes a
taxable de minimis benefit taxable as
compensation as part of “other
benefits” for a rank and file employee.
It is a fringe benefit subject to final
fringe benefit tax for a managerial or
supervisory employee.
TAX TREATMENT OF 13TH MONTH PAY
AND OTHER BENEFITS
RR2-98 provides that 13th month pay
and other benefits are exempt from
withholding on compensation provided
they do not exceed P82,000. It follows,
therefore, that the excess above
P90,000 is subject to the withholding
tax on compensation
RR3-98, the revenue regulation
implementing the fringe benefit tax,
also provides that it does not cover
benefits forming part of compensation
income subject to the withholding tax
on compensation.
Hence, the excess of 13th month pay
and other benefits”over P82,000 should
be treated as compensation income
subject to regular income tax.
Illustration 1
A government rank and file employee
received the following benefits aside
from the basic pay in 2015:
Christmas bonus P50,000
Cash gift 5,000
Additional compensation allowance
36,000
Personnel Economic Relief Allowance
(P2,000/month) 24,000
Monetized value of vacation leave and
sick leave(18 days) 9,000
Uniform and clothing allowance 5,000
Required: Determine the taxable “13th
month pay and other benefits”
Solution:
Christmas bonus(13th month pay of
gov’t employees) P50,000
Cash gift 5,000
Additional compensation allowance
36,000
Total 13th month pay and other benefits
P91,000
Less:Exclusion Threshold 82,000
Taxable 13th month pay and other
benefits P9,000
Note of government employees:
1.Personnel Economic Relief Allowance
is not subject to income tax and
withholding tax (Under RR8-2000,as
affirmed by RR10-2008)
2. The P5,000 Christmas gift of
government employees is designated by
the NIRC to be part of “13th month pay
and other benefits”; hence, it is not a
de minimis benefit.
3.Under RR5-2011, the monetization of
vacation leave and sick leave credits of
government officials is an exempt de
minimis benefit without regard to the
number of days
Illustration 2
A private rank and file employee
working in a remote tower station of
No-signal Telecom received the
following benefit during 2014:
13th month pay P67,000
Performance bonus 15,000
Christmas gift 22,000
Danger exposure allowance(hazard
pay) 6,000
Housing privilege 38,000
Uniform and clothing allowance 7,000
Laundry allowance 6,000
The housing privilege to the annual
value of the employee’s living quarters
furnished by the employer for staying
on-site.
Required:Compute the excess 13th
month pay and other benefits
Solution:
De minimis Limit Other
benefits
Christmas gift P22,000 P5,000 P17,000
Uniform and clothing allowance 7,000
5,000 2,000
Laundry allowance 6,000 3,600 2,400
Excess de minimis benefits(other fringe
benefits) P21,400
th
13 month pay 67,000
Total 13th month pay and other benefits
P89,400
Less:Exclusion threshold
82,000
Taxable 13th month pay and other
benefits P7,400
Note:
1.Performance bonus is a supplemental
or additional compensation.
2.The laundry allowance limit is
computed as P300x12=P3,600
3.Christmas gift is a de minimis benefit
for private employees under RR5-2011.
4.The housing privilege is exempt under
the convenience of the employer rule.
5.The “13th month pay and other
benefits” of rank and file employees
includes “other fringe benefits.”
Illustration 3
A managerial employee received the
following benefits in 2015:
13th month pay P75,000
Rental expense on condominium unit
18,000
Salary of personal body guard 12,000
Profit sharing 12,000
Rice allowance 21,600
Clothing allowance 6,000
Night shift differential pay 11,000
Productivity incentive bonus 8,000
Required:Determine the taxable “13th
month pay and other benefits”,
additional compensation, and the fringe
benefit subject to fringe benefit tax.
Solution:
De minimis Limit
Other benefits
Rice allowance P21,600 P18,000
P3,600
Clothing allowance 6,000 5,000 1,000 Uniform allowance P5,000 P5,000 – Daily transportation allowance
Productivity incentive bonus 8,000 Total P5,000 P79,000 16,000
10,000 0 P32,000 Total P40,000 P0
Excess de minimis P4,600 Exclusion threshold (up to P82,000) P309,000
Other fringe benefits: 32,000 -32,000 13th month pay and other benefits
Rent of residence paid by employer Taxable excess 13th month pay and 13th month pay P25,000
18,000 other benefits P0 0 Other benefits:
Salary of personal body guard 12,000 Gross taxable compensation income Vacation expense paid by employer
Total fringe benefit subject to fringe P307,000 Excess de minimis benefits:
benefit tax P34,600 Note: Rice subsidy P25,200 18,000 7,200
Profit sharing 1.The taxable regular compensation Monetized VL 10,000 10,000 -
P12,000 income is computed as(P324,000- Monetized SL 8,000 0 8,000
Night shift differential pay 11,000 P32,000) Productivity incentive 26,000
Total supplemental compensation 2.The excess of the P82,000 threshold 10,000 16,000
P23,000 over the actual 13th month pay and Uniform allowance 9,000 5,000
Total 13th month pay and other benefits other benefits is non-deductible to 4,000
P75,000 other items of compensation income. Total P78,200 P83,000 P84,200
Less:Exclusion threshold 82,000 (RR3-2015) P309,000
th
Taxable 13 month pay and other Presentation in the Income tax return Exclusion threshold 82,000 -82,000
benefits P0 of the employee: Total non-taxable benefits P165,000
INTEGRATIVE Gross compensation income(i.e., P2,200
ILLUSTRATIONS:COMPENSATION P352K+p66K) P418,000 Taxable 13th month pay and other
INCOME Less:Non-taxable income 111,000 benefits -2,200
Integrative Illustration 1 Gross taxable compensation income 2,200
A government rank and file employee P307,000 Gross taxable compensation income
had the following summary of his Integrative Illustration 2 P311,200
compensation and benefits in 2015: A private employee derived the Required:Determine the taxable “13th
Gross compensation income following remunerations and benefits in month pay and other benefits.”
P324,000 2015: Solution:
Less:Employee payroll deductions Basic compensation, net of P24,000 Christmas bonus(13th month pay of
Employee contributions to GSIS, SSS, PHIC, PhilHealth,HDMF, union gov’t employees) P50,000
PHIC;HDMF P32,000 dues, and P30,000 withholding tax Cash gift 5,000
Employee deduction for withholding P246,000 Additional compensation allowance
tax 34,000 66,000 Overtime pay 21,000 36,000
Net regular payroll P258,000 Productivity incentive 26,000 Total 13th month pay and other benefits
Representation and Transportation Vacation expenses of the employee P91,000
allowance 18,000 paid by employer 24,000 Less:Exclusion Threshold 82,000
th
Christmas bonus 27,000 Cost-of-living allowance(COLA) 12,000 Taxable 13 month pay and other
Personnel Economic Relief Allowance Pre-computed daily transportation benefits P9,000
24,000 allowance 16,000 Note on government employees:
Uniform allowance 5,000 Rice subsidy(12 cavans worth P2,100 1.Personnel Economic Relief Allowance
Christmas gift 5,000 each) 25,200 is not subject to income tax and
Honoraria 15,000 13th month pay 25,000 withholding tax(Under RR8-2000,as
Total compensation P352,000 Monetized unused leave credit(10VL affimed by RR10-2008)
The gross taxable compensation income and 8SL) 18,000 2.The P5,000 Christmas gift of
shall be computed as follows: Uniform allowance 9,000 government employees is designated by
De minimis Non-taxable Total compensation income P422,200 the NIRC to be part of “13th month pay
Other benefits Taxable Benefits The non-taxable compensation income and other benefits:;hence, not a
Regular and supplementary and the gross taxable compensation deminimis benefit.
compensation: income shall be computed as follows: 3.Under RR5-2011,the monetization of
Regular compensation P32,000 For a rank and file employee vacation leave and sick leave credits of
P292,000 De minimis Non-taxable Other government officials is an exempt de
Supplemental compensation benefits Taxable benefits minimis benefit wihout regard to the
Honoraria 15,000 Regular and supplementary number of days.
RATA 18,000 compensation: Illustration 2
PERA 24,000 Regular compensation P24,000 A private rank and file employee
Total P74,000 P0 P307,000 P276,000 working in a remote tower station of
13th month pay and other benefits: Supplementary compensation No-Signal Telecom received the
Christmas bonus P27,000 Overtime pay 21,000 following benefit during 2014:
Christmas gift 5,000 COLA 12,000 13th month pay P67,000
Excess De minimis: Performance bonus 15,000
Christmas gift 22,000
Danger exposure allowance(hazard
pay) 6,000
Housing privilege
38,000
Uniform and clothing allowance
7,000
Laundry allowance 6,000
The housing privilege pertains to the
annual value of the employees’ living
quarters furnished by the employer for
staying on-site.
Required:Compute the excess 13th
month pay and other benefits
Solution:
De minimis Limit Other
benefits
Christmas gift P22,000 P5,000
P17,000
Uniform and clothing allowance 7,000
5,000 2,000
Laundry allowance 6,000 3,600
2,400
Excess de minimis benefit(other fringe
benefits) P21,400
13th month pay and other benefits
P89,400
Less:Exclusion threshold 82,000
th
Taxable 13 month pay and other
benefits P7,400
Note:Private employees
1.Performance bonus is a supplemental
or additional compensation.
2.The laundry allowance limit is
computed as P300x12[P3,600
3.Christmas gift is a de minimis benefit
for private employees under the RR5-
2011.
4.The housing privilege is exempt under
the convenience of the employer rule.
5.The “13th month pay and other
benefits” of rank and file employees
includes “other fringe benefits.”
Illustration 3