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Tax 301
Tax 301
Introduction
This module introduces the fundamentals principles of income taxation and theories that
underlie our system of taxation in the Philippines. The main topics that will be covered include:
general principles of taxation, inherent power of the state, purposes of taxation, theory and basis
of taxation, scope of the power of taxation, essential elements of a tax, aspects of taxation, nature
and characteristics of the state’s power to tax, classification of taxes, elements of sound tax
system, limitation on the State’s power to tax, situs of taxation, tax distinguished from other
terms or imposts, double taxation, means of avoiding or minimizing the burden taxation,
principles governing tax exemptions, sources of tax laws and application of tax laws. This will
provide students a clear perspective of the tax domain in our country using TRAIN Law.
Taxation Defined
Taxation is the process or means by which the sovereign (independent state), through its
law making body (the legislature), imposes burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenues to carry out the legitimate objects of the
government. In simple terms, it is an act of levying a tax to apportion the cost of government
among those who, in some measure, are privileged to enjoy its benefits and must therefore bear
its burdens. It is a power inherent in every sovereign state being essential to the existence of
every government. Hence, even if not mentioned in the constitution, the state can still exercise
the power. Therefore, any constitutional provision regarding the state’s power to tax should not
be interpreted as a “grant of power”, but merely a limitation on the state’s power to tax. Taxes,
on the other hand, are the enforced proportional contributions or charges from persons and
property levied by the law-making body of the state by virtue of its sovereignty for the support of
the government and all public needs.
The Three (3) Inherent Powers of the State
1. Police Power. It is the power of the state promoting public welfare by restraining and
regulating the use of liberty and property. It may be exercised only by the government.
The property taken in the exercise of this power is destroyed because it is noxious or
intended for noxious purposes.
2. Power of taxation. It is the power by which the State raises revenue to defray the
necessary expenses of the government.
3. Power of Eminent Domain. It is the power of the state to acquire private property for the
public purpose upon payment of just compensation.
Table 1
Distinctions Among the Three (3) Inherent Powers
Taxation Police Power Eminent Domain
3. Purpose For the support of the Promotion of general The taking of private
government welfare through property for public
regulation use.
PURPOSES OF TAXATION
1. Primary: Revenue or Fiscal Purpose
- to provide funds or property with which to promote general welfare and protection of its
citizens
ASPECTS OF TAXATION
a) Levying or imposition of tax
b) Assessment or determination of the correct amount
c) Collection of tax
CLASSIFICATION OF TAXES
1. As to scope:
● National- imposed by the national government
● Local – imposed by the local government
2. As to subject matter or object:
● Personal, poll, or capitation – tax of a fixed amount imposed upon individuals residing
within a specified territory.
● Property – tax imposed on property in proportion to its value
● Excise – tax on certain rights and privileges (sin products or imported goods)
3. As to who bears the burden:
● Direct – taxpayer cannot shift to another
● Indirect – indemnify himself at the expense of another
4. As to determination of fixed amount:
● Specific- tax of fixed amount by number, standard of weight, or measurement
● Ad valorem – tax of fixed proportion of the value of the property
5. As to purpose:
● Primary, Fiscal, or Revenue Purpose
● Secondary, Regulatory, Special, or Sumptuary Purpose
6. As to graduation or rate:
● Proportional – tax based on fixed percentages of amount
● Progressive – tax the rate of which increases as the tax base or bracket increases
● Regressive - tax the rate of which decreases as the tax base or bracket increases
7. As to taxing authority:
● National – imposed under National Internal Revenue Code, collected by Bureau of
Internal Revenue
● Local – imposed by LGU’s
SITUS OF TAXATION
Literally, the situs of taxation means “place of taxation”. It is the state or political unit
which has jurisdiction to impose a particular tax. The state where the subject to be taxed has a
situs may rightfully levy and collect the tax. The situs is necessarily in the state which has
jurisdiction or which exercises dominion over the subject in question.
Draw interest when stipulated or when of Does NOT draw interest except only when
prescription default delinquent
DOUBLE TAXATION
In its strict sense, double taxation referred to is direct duplicate taxation. In its broad
sense, double taxation is referred to as indirect double taxation. It extends to all cases in which
there is a burden of two or more impositions.
DIRECT DOUBLE TAXATION means taxing twice:
1. By the same taxing authority, jurisdiction or taxing district
2. For the same purpose
3. In the same year or taxing period
4. Same subject or object
5. Same kind or character of the tax
Multiple Choice
Definition, Purpose, Theory and Basis
1. Which of the following statements is incorrect?
a. Taxes are the revenues raised in the exercise of the police power of the State.
b. One of the special characteristics of tax is it is unlimited in amount.
c. The three fundamental powers of the State are inherent in the State and may be
exercised without the need of any constitutional grant.
d. All of the above.
2. The State having sovereignty can enforce contributions (tax) upon its citizens even
without a specific provision in the Constitution authorizing it. Which of the following
will justify the foregoing statement?
a. It is so because the State has the supreme power to command and enforce
obedience to its will from the people within its jurisdiction.
b. Any provision in the Constitution regarding taxation does not create rights for the
sovereignty to have the power to tax but it merely constitutes limitations upon the
supremacy of tax power.
c. Both a and b
d. Neither a nor b
3. Statement 1: The distinction of a tax from permit or license fee is that a tax is imposed for
regulation.
a. Statement 2: Non-payment of tax does not necessarily render a business illegal.
b. Only statement 1 is correct.
c. Only statement 2 is correct.
d. Both statements are correct.
e. Both statements are incorrect.
4. 4.The primary purpose of taxation is to raise revenue for the support of the government.
However, taxation is often employed as a device for regulation by means of which,
certain effects or conditions envisioned by the government may be achieved such as:
a. Taxation may be used to provide incentive to greater production through grant of
tax exemptions.
b. Taxation can strengthen weak enterprises by creating conditions conducive to
their growth through grant of tax exemptions.
c. Tax may be increased in periods of prosperity to curb spending power and halt
inflation or lowered in periods of slump to expand business and ward off
depression.
d. All of the above.
6. Which theory in taxation states that without taxes, a government would be paralyzed for
lack of power to activate and operate it, resulting in its destruction?
a. Power to destroy theory
b. Lifeblood theory
c. Sumptuary theory
d. Symbiotic doctrine
9. The actual effort exerted by the government to effect the exaction of what is due from the
taxpayer is known as
a. Assessment
a. Levy
b. Payment
c. collection
10. Statement 1: Symbiotic relation is the reason why the government would impose taxes on
the income of resident citizens derived from sources outside the Philippines.
a. Statement 2: Jurisdiction is the reason why citizens must provide support to the
state so the latter could continue to give protection.
b. Only Statement 1 is correct.
c. Only Statement 2 is correct.
d. Both statements are correct.
e. Both statements are incorrect.
11. A law was passed by Congress which granted tax amnesty to those who have not paid
income taxes for a certain year and at the same time providing for the refund of taxes to
those who have already paid them. The law is
a. Valid because there is a valid classification.
b. Not valid because those who did not pay their taxes are favored over those who
have paid their taxes.
c. Valid because it was Congress that passed the law and it did not improperly
delegate the power to tax.
d. Not valid because only the President with the approval of Congress may grant
amnesty.
12. Congress passed a new law imposing taxes on income earned out of particular activity
that was not previously taxed. The law, however, taxed incomes already earned within
the fiscal year when the law took effect. Is the law valid?
a. No, because the laws are intended to be prospective not retroactive.
b. No, the law is arbitrary in that it taxes income that has been already spent.
c. Yes, since the tax laws are the lifeblood of the government.
d. Yes, tax laws are an exception; they can be given retroactive effect.
13. Being a legislative in nature, the power to tax may not be delegated except
a. To local governments or political subdivisions
b. When allowed by constitution
c. When delegation related merely to administrative implementation that may call
for some degree of discretionary powers under a set of sufficient standards
expressed by law or implied from the policy and purpose of the act.
d. All of the above
19. The following are the characteristics of the State’s power to tax except
a. The strongest of all inherent powers of the State
b. Involves power to destroy
c. Both a and b
d. Neither a nor b
21. Where does taxing power of provinces, municipalities and cities precede from?
a. Constitutional grant
b. Legislative enactment
c. Presidential decree or executive act
d. Local legislation
22. Statement 1: Eminent domain may raise money for the government.
Statement 2: Barrios, barangays, municipalities/cities and provinces may collect taxes
from its inhabitants.
a. Statements 1&2 are false.
b. Statement 1 is true but statement 2 is false.
c. Statement 1 is false but statement 2 is true.
d. Statements 1&2 are true.
25. There can be no tax unless there is a law imposing the tax is consistent with the doctrine
of
a. Uniformity in taxation
b. Due process of law
c. Non-delegation of the power of tax
d. All of the above
26. The tax should be based on the taxpayer's ability to pay. In relation to this, which of the
following is not correct?
a. No person shall be imprisoned for non-payment of tax.
b. A graduated tax table is in consonance with this statement.
c. As a theory of taxation, ability to pay theory.
d. As a basic principle of taxation, this is called “theoretical justice”
29. One of the characteristics of our internal revenue law is that they are
a. Political in nature
b. Penal in nature
c. Generally prospective in operation although the tax statute may nevertheless
operate retrospectively provided it is clearly the legislative intent.
d. Criminal in nature
1.
30. Which of the following distinguishes tax from license fee?
a. Non-payment does not necessarily render the business illegal
b. A regulatory measure
c. Imposed in the exercise of police power
d. Limited to cover cost of regulation
34. Tax of a fix amount imposed among all persons residing within a specified territory
without regards to their property or occupation they may be engaged
a. Personal, poll or capitation tax
b. Property
c. Excise
d. regressive tax
35. Tax of fixed proportion of the amount or value of property with respect to which the tax
assessed
a. Ad valorem
b. Specific
c. Excise
d. Revenue
36. Tax base on a fix percentage of the amount of property, income or other basis to be taxed
a. Progressive
b. Proportional
c. regressive tax
d. Indirect
37. Which of the following is a characteristic of taxation which distinguishes it from police
power and eminent domain?
a. For public purposes
b. Legislative in nature
c. Generally payable in money
d. Inferior to non-impairment clause in the Constitution
39. The sources of revenue should be sufficient to meet the demands of public expenditures.
This refers to
a. Equality or theoretical justice
b. Fiscal adequacy
c. Administrative feasibility
d. Rule of apportionment
40. The tax should be imposed proportionate to the taxpayer’s ability to pay
a. Equality or theoretical justice
b. Fiscal adequacy
c. Administrative feasibility
d. Rule of apportionment
41. The tax law must be capable of convenient just and effective administration
a. Equality or theoretical justice
b. Fiscal adequacy
c. Administrative feasibility
d. Rule of apportionment
Inherent and Constitutional Limitations
42. Equality in taxation means
I. Progressive system of taxation shall be applied.
II. The tax laws and their application must be fair, just, reasonable and proportionate to
one’s ability to pay.
III. The tax laws shall give emphasis on direct rather than indirect taxes or on the
ability-to-pay principle of taxation.
a. I only
b. II only
c. III only
d. I, II & III only
43. Which of the following restrictions on the power of taxation recognizes that the country’s
tax laws shall not be applied to the property of foreign governments?
a. Taxation is inherently a legislative function
b. Exercise of taxation is subject to international comity
c. Due process of law
d. Equal protection of law
47. Statement 1: Tax exemption applies only to government entities that exercise proprietary
functions.
Statement 2: All government entities regardless of their functions are exempted from
taxes because it would be impractical for the government to be taxing itself.
a. Statements 1&2 are false.
b. Statement 1 is true but statement 2 is false.
c. Statement 1 is false but statement 2 is true.
d. Statements 1&2 are true.
Tax Avoidance/Double Taxation
48. Which of the following is to be regarded as tax minimization through legal means?
a. Not declaring all taxable income
b. Padding of expenses for deduction from income
c. Opting to transfer the property through sale rather than through donation where
tax liability is higher
d. All of the above
50. Double taxation in its general sense means taxing the same subject twice during the same
taxing period. In this sense, double taxation
a. Violates substantive due process.
b. Does not violate substantive due process.
c. Violates the right to equal protection.
d. Does not violate the right to equal protection
Reference:
Tabag, E.D., Garcia, E.J. (2019) Income Taxation with Special Topics in Taxation based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
MODULE 2
Individual Taxpayers
INTRODUCTION
This module introduces the relevant laws governing individual income taxation. Topics
include classification of individual taxpayers under Tax Code of the Philippines, applicable taxes
and tax rates, graduated rates under TRAIN Law 2018-2022, final withholding tax, capital gains,
requisites of tax exemption, format in computing taxable income, benefits of senior citizens and
person with disability, minimum wage earner (MWE), filing of income tax returns, manner and
place of filing income tax return, persons required to file income tax returns, persons not
required to file income tax returns and substituted filing of income tax returns.
DEFINITION
INDIVIDUAL TAXPAYERS are natural persons with income derived from within the territorial
jurisdiction of taxing authority. They are classified as:
1. Resident Citizens(RC)
2. Nonresident Citizens (NRC)
3. Resident Aliens (RA)
4. Nonresident Aliens (NRA)
● Engaged in trade/business (NRA-ETB)
● Non-resident alien not engaged in trade or business (NRA-NETB
Importance of classification:
They differ as to:
● Situs of income
● Manner of computing tax
● Treatment of certain passive incomes
● Allowable deductions
● References in the tax choice
ILLUSTRATION 1
Pedro left the Philippines on July 1, 2018 to go abroad and work there for two years. The
following data were provided for 2018 taxable year (assume 40% of gross income and
business expenses presented below were derived from abroad:
Question 2: Assuming he arrived from abroad on July 1, 2018 to permanently resettle in the
Philippines, his taxable income for 2018 is:
Answer: ₱ 472,000
Gross Income, Jan.-June @60% ₱ 360,000
Gross Income, July-December 400,000
Business Expenses, Jan-June @60% (168,000)
Business Expenses, July-December @60% (120,000)
Taxable Income ₱ 472,000
A seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in international
trade shall be treated as an overseas contract worker.
A Filipino citizen who was previously a nonresident citizen and who arrives and resides
permanently in the Philippines at any time during the taxable year shall likewise be treated as a
nonresident citizen for the same taxable year with respect to his income derived from sources
abroad until the date of his arrival to the Philippines.
● Section 22(F) of the Tax Code defines RESIDENT ALIENS as an individual whose
residence is within the Philippines and who is not a citizen thereof.
● The term NONRESIDENT ALIEN under Section 22(G) of the Tax Code means an
individual whose residence is not in the Philippines and who is not a citizen thereof.
● Under Section 22(S) of the Tax Code, “trade or business” includes performance of the
functions of a public service or performance of personal service in the Philippines.
● A nonresident alien not engaged in trade or business is subject to 25% income tax based
on gross profit from all sources within the Philippines.
ILLUSTRATION
Determine the correct classification of the taxpayer from the independent cases provided below:
Case 1:
Allan is a natural born Filipino citizen. His family migrated to the U.S. fifteen years ago. For
personal reasons, he decided to return and reside permanently in the Philippines on March 1,
2018.
Answer: From Jan.-Feb. 2018: Allan is classified as NRC
From March 1, 2018 onwards: Allan is classified as RC
Case 2:
G.I. Joe is an American information technology expert. He was signed by Noypi Telecom (a
local telecommunication company) from January to March 2018 to improve its internet services.
Due to the anticipated entry of competitors from other countries, Noypi decided to extend
indefinitely the services of G.I.Joe.
Answer: He is a resident alien.
An alien who comes to the Philippines for the purpose that requires extended stay for its
accomplishment, so he makes his home temporarily in the Philippines, is a resident,
regardless of his intention to return to his residence abroad.
Case 3:
Greg Popovich, head coach of San Antonio Spurs in the NBA is in the Philippines for a
month-long NBA promotional tour. He also expressed his intention to regularly visit the
Philippines.
Answer: Greg Popovich is classified as NRA-NETB.
Case 4:
Using the same data in Case 3, assume that Greg Popovich invested in shares of stock of various
domestic corporations during his recent stay in the Philippines.
Answer: Greg Popovich is NRA-NETB.
Passive income such as dividend income is not considered income derived from trade and
business.
Case 5:
Mika “The Iceman” Immonen, a Finnish cue artist and former world billiard champion is a
resident of Finland. He won the world 9-ball championships in 2005 in the Philippines. He is
also the owner of one of the disco pubs in Malate since then.
Answer: NRA-NETB
He is engaged in actual trade and business in the Philippines but is non-resident.
APPLICABLE TAXES AND TAX RATES
The applicable taxes for individuals depend on several factors such as but not limited to:
❖ Classification of taxpayer
❖ Source of income
❖ Type of income
CLASSIFICATION OF TAXPAYER
It is important to properly classify the individual taxpayers because resident citizens are
taxable on their income derived from sources within and without the Philippines while other
taxpayers are taxable only on their income derived from the Philippine sources. Moreover,
individual taxpayers classified as non-resident aliens not engaged in trade and business
(NRA-NETB) are taxable based on the gross income while others are taxable based on their net
income.
SOURCES OF INCOME
It is important to know the source of income for tax purposes (income derived from
within and without the Philippines) because as a resident citizens are taxable based on their
worldwide income while others are taxable only on their income derived from sources within the
Philippines.
ILLUSTRATION
Use the following data for Cases A-E
An individual taxpayer provided the following information for 2018:
Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000
Case F:
The income and expenses of a Filipino citizen for 2018 were provided as follows:
July to December
Case G: Assume the same data in Case F except that the taxpayer is a non-resident who returned
and resided permanently in the country in July of the current year. His taxable income before
personal exemptions is
❖ Answer: ₱5,800,000
Solution:
Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross income, Canada (Jan-June) 2,000,000
Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Allowable deductions, Canada (Jan-June) (1,200,000)
Taxable income ₱5,800,000
2. Determine the income tax due assuming the taxable compensation income for 2018 is
₱300,000.
❖ Answer: ₱10,000
Solution: tax on first ₱250,000 ₱0
In excess of ₱250,000 10,000
50,000 x 20%
Tax due ₱10,000
3. Determine the income tax due assuming the net taxable compensation income for 2018 is
₱1,850,000.
❖ Answer: ₱445,000
Solution: tax on first ₱800,000 ₱130,000
In excess of ₱800,000 315,000
1,050,000 x 30%
Tax due ₱445,000
Self Employed – is defined as a sole proprietor or an independent contractor who reports income
earned from self employment. He or she controls who he/she works for. It includes professionals
whose income is derived purely from the practice of profession and not under an
employer-employee relationship”
Professional- is a “person formally certified by a professional body belonging to a specific
profession by virtue of having completed a required course of studies and/or practice, whose
competence can usually be measured against an established set of standards. It also refers tto a
person engaged in some art or sport of money.
2. Using the data below, calculate the income tax due for 2018:
Gross sales ₱2,800,000
Cost of sales (1,500,000)
Operating expenses ( 750,000 )
Net income ₱550,000
➔ answer : ₱67,500
First ₱400,000 income 30,000
Excess of 400,000 37,500
150,000 x 25% ₱67,500
PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-operating income
exceeds the VAT threshold of ₱3,000,000 during the year.
Pedro signified his intention to be taxed at 8% income tax rate on gross sales in his 1st quarter
income tax return. However, his gross sales during the year exceeded the VAT threshold of ₱3M
as follows:
Q1 Q2 Q3 Q4/Annual
8% 8% 8% Graduated
Mixed Earner whose gross sales/ receipts and other non-operating income does not exceed the
VAT threshold of ₱3,000,000
Assume the following data for 2018:
Compensation income ₱900,000
Gross sales 2,800,000
Cost of sales (1,500,000)
operating expenses (750,000)
Total taxable net income ₱1,450,000
Determine the correct income tax due:
❖ Answer: ₱325,000
Tax on first ₱800,000 ₱130,000
Excess of 800,000 (650,000 x 30%) 195,000
Tax due ₱325,000
Assume the SEP opted to avail the 8% tax under the TRAIN LAW, determine the tax due.
❖ Answer: ₱384,000
On his compensation income:
First ₱800,000 ₱130,000
In excess of 400,000 30,000 ₱160,000
₱100,000 x 30,000
Mixed income earner whose gross sales/receipts and other non-operating income exceeds the
VAT threshold of ₱3,000,000.
Determine the income tax due assuming the following data for 2018:
Compensation income ₱900,000
Gross sales 5,000,000
Cost of sales (2,250,000)
operating expenses (1,250,000)
Total taxable net income ₱2,400,000
❖ Answer: ₱618,000
Tax on first ₱2,000,000 income ₱490,000
In excess of 2M income (400,000 x 32%) 128,000
Tax due ₱618,000
FINAL WITHHOLDING TAX is a kind of tax, which is prescribed on “certain income”
derived from the Philippine sources.
Passive Income
Passive income is an income earned from allowing others to use one’s right, or game of chance
or investment, which the taxpayers merely waits for the income to come in. The law subjects
passive income to final tax. Once subjected to a final tax, it is no longer included in the taxable
income subject to normal (tabular) tax. Deductions and exemptions do not apply to items subject
to final tax.
Passive income is classified as follows:
a. Interest, prizes, royalties, etc.,
b. Cash or property dividends,
The applicable rates for passive income are shown in the Table above.
ILLUSTRATION
A resident citizen taxpayer provided the following information for 2018:
RR- 14-2012 defines DEPOSIT SUBSTITUTES as an alternative form of obtaining funds from
the public other than deposits.
PRINCIPAL RESIDENCE is the family home of the individual taxpayer which refers to his
dwelling house including his family.
➔ The term “statutory minimum wage earner (SMW)” or “minimum wage earner (MWE)”
under RA 9504 shall refer to a worker in the private sector paid the statutory minimum
wage. The rate is fixed by the Regional Tripartite Wage and Productivity Board as
defined by the Bureau of Labor and Employment Statistics.
The individual taxpayer is required to file a quarterly tax return ( May 15, Aug 15, Nov 15, and
April 15)
FINAL WITHHOLDING TAX ON PASSIVE INCOME
Prior to 2018 - January to November – 10th day of the month
December – January 15
2018 – not later than the last day of the month
MANNER OF FILING
a. Manual Filing
b. Electronic Filing and Payment System (EFPS)
c. eBIR Forms
CHAPTER EXERCISES
Determination of Applicable Tax
Final Withholding tax on passive income, basic income tax, exempt
Write the following in the tax type column:
➢ FWTx-if the income described is subject to final withholding tax on passive income. In
addition, if such income is subject to FWT, provide the correct FWT rate in the tax rate
column.
➢ BTx-if the income described is subject to basic income tax
➢ Exempt- if the income described is exempted from income tax
1. Pedro is a resident citizen, earning purely compensation income as follows fro 2018 taxable
year:
a. P200,000
b. P250,000
c. P800,000
d. P2,800,000
2. Juan is a resident citizen, earning purely business income for 2018 taxable year:
Gross Sales P2,800,000
Cost of Sales 1,200,000
Operating expenses 650,000
Creditable withholding taxes 80,000
3. Use the same data in #2 but assume that Juan opted to be taxed using 8% income tax rate.
4. Juan us a resident citizen earning purely business income for 2018 taxable year:
Gross Sales P2,800,000
Cost of Sales 1,200,000
Operating expenses 650,000
Rental income (net of CWT) 380,000
Creditable withholding taxes 80,000
5. Can Juan choose to be taxed at 8% instead of the graduated income tax rate in #4? If yes, how
much is his income tax payable for the year?
6. Ana is a practicing professional with the following data for 2018 taxable year:
Gross receipts P4,000,000
Cost of direct services 1,800,000
Other operating expenses 825,000
7. Can Ana choose to be taxed at 8% instead of the graduated income tax rate in #6? If yes, how
much is her income tax payable for the year?
8. Lorna is a resident citizen, earning compensation and business income for 2018 as follows:
Compensation income P1,400,000
Gross sales 2,800,000
Cost of sales 1,200,000
Operating expenses 650,000
Withholding tax on compensation income 310.000
Other creditable withholding taxes 80,000
9. Can Lorna choose to be taxed at 8% instead of the graduated income tax rate in #8? If yes,
how much is her total income tax payable for the year?
Computation of Basic Income Tax on Passive Income and Capital Gains Tax
1. CJ, single, had the following data for 2018 taxable year:
Gross business income, Philippines P1,000,000
Gross business income, USA 500,000
Business expenses, Philippines 700,000
Business expenses, USA 430,000
Compensation income, Philippines 600,000
Dividend income from a domestic corporation 50,000
Dividend income from a foreign corporation 40,000
Interest income from peso bank deposit- Philippines 20,000
Interest income from bank deposits abroad 30,000
Interest income from FCDS deposits 40,000
Royalty income from composition 25,000
Raffle draw winnings 10,000
PCSO winnings 200,000
Creditable withholding taxes on business income 125,000
10. Determine the following assuming the taxpayer is a resident citizen:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
13. Determine the following assuming that taxpayer is nonresident alien engaged in trade or
business:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
14. Determine the total income taxes if the taxpayer assuming the taxpayer is a nonresident alien
not engaged in trade or business (ignore business income, business expense, and creditable
withholding taxes on business income in the Philippines
A practicing professional, single, with his parents living and dependent upon him, revealed the
following data for 2018 taxable year:
Income From
Philippines Abroad
Income from employment P180,000 P280,000
Business income 850,000 960,000
Deductible business expenses 610,000 730,000
Interest income on personal loans 6,000 3,000
Interest income on bank deposits 10,800 4,200
Interest income on money market placements 7,500 1,600
Dividend income from domestic corp. 5,700 -
Dividend income from foreign corp. 6,800 2,000
Royalty income 90,000 50,000
Winnings/prizes from lotteries, raffle draws 45,000 16,900
Prizes from singing contest 5,600 -
Lotto winnings 150,000 50,000
Royalty income from sale of books 68,000 -
ADDITIONAL DATA:
• In February, the taxpayer bought a lot deemed as capital asset. The acquisition cost was
P840,000. He later sold the house in December for P1,060,000.
• In September, the taxpayer sold his 560 shares of stock of Ayala Investment Corporation
held by him as capital asset, thru a local stock exchange. The cost was P36,900 whereas the sale
price was P154,000.
• In October, the taxpayer sold for P820,000 his house and lot located at Makati, held as
capital asset (not his principal residence). The fair market value on the date of the sale was
P950,000 and the acquisition cost was P475,000,
Daniel, married to Kat, is a citizen and resident of the Philippines. The parents of the couple are
also living with the spouses for chief support. They had the following data for 2018 taxable year:
DANIELKATDANIEL & KAT
Gross income from business P600,000 - -
Gross income from profession, net of P40,000 - P360,000 -
CWTx
Rental income, net P190,000
Dividend income:
From domestic corporation 40,000 - -
From resident corporation - 20,000 -
From nonresident corporation 10,000
Interest income on notes receivable 6,000 4,000 2,000
Interest on Philippine bank deposit, net 3,200 2,400 8,000
Interest on Phil. Bank deposit under FCDU 4,000 4,000 2,000
Interest on bank deposit abroad 5,000 5,000 5,000
Interest income on long term bank deposit 20,000
Investment on government bonds - 10,000 -
Royalty income-literary works 10,000 - -
Royalty income (other than literary works) - - 12,000
Capital gain on sale directly to buyer at P550,000 of 150,000 - -
shares of domestic corporation
Capital gain on sale directly to a buyer of land held as - - 500,000
investment in Quezon City, SP=P5M
Capital gain on sale of land held as investment abroad - - 500,000
Gain on sale thru New York Stock Exchange at - - 30,000
P100,000 of shares of domestic corp.
Loss on sale thru Philippine Stock Exchange at - - 10,000
P100,000 of shares of domestic corp. SP=100,000
Expenses – business/profession 350,000 200,000 75,000
The following cumulative balances during the year on income and expenses were provided by
Juan Dela Cruz, a resident citizen:
CASE A: Assume the taxable year is 2017, determine the income tax due if the taxpayer is:
CASE A: Assume the taxable year is 2018, determine the income tax due if the taxpayer is:
a) The taxpayer is an alien employed by ROHQ holding a managerial and technical
position.
b) The taxpayer is a Filipino citizen employed by ROHQ holding managerial and technical
position
c) The taxpayer is a Filipino citizen employed by an Offshore Bank Unit holding
managerial and technical position
d) The taxpayer is a Filipino citizen employed by a Petroleum Contractor holding
managerial and technical position
1. A resident citizen taxpayer sold a vacant lot (held as investment) in the Philippines. Other
data regarding the sale are as follows:
Selling price P5,500,000
Fair market value 6,000,000
Zonal value 5,850,000
Expenses on the sale 275,000
Required: compute the capital gain tax.
2. A resident citizen taxpayer sold a vacant lot (held as investment) in the Philippines. Other
data regarding the sale are as follows:
Gain on sale P500,000
Zonal value 2,200,000
Cost 2,000,000
Expenses on the sale 150,000
Required: Compute the capital gain tax.
3. A resident citizen taxpayer sold a residential lot (principal residence) in the Philippines.
Other data regarding the sale are as follows:
Selling price P5,000,000
Fair market value 6,000,000
Zonal value 5,500,000
Expenses on the sale 275,000
Required: Determine the capital gains tax assuming the taxpayer purchased a new principal
residence worth P5,580,000 within eighteen months from disposal of the principal residence. The
BIR was properly informed about the sale.
4. Using the same data in the preceding number, determine the capital gains tax assuming
the taxpayer utilized only 80% of the proceeds in acquiring his new principal residence.
Reference:
Tabag, E.D., Garcia, E.J. (2019) Income Taxation with Special Topics in Taxation based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
MODULE 3
Fringe Benefits Tax and De Minimis Benefits
INTRODUCTION
This module introduces the students to the fringe benefit tax and its de minimis benefits.
Topics included in this module are definition of fringe benefits, scope of fringe benefits, items of
fringe benefits subject to tax, fringe benefits tax base and rate, de minimis benefits, fixed or
variable allowances, business related expenses, representation and transportation allowances,
special rules in computing the monetary value of housing benefits, rules in computing the
monetary value of motor vehicles and special rules in computing monetary value. These topics
will give students knowledge and understanding about the fringe benefits in accordance with the
TRAIN Law.
The only forms of employee income that were effectively taxed were those which were
given in cash. This was because an income tax was automatically withheld and collected at
source by the government. Additional compensation which was given in the forms of perks and
other non-cash benefits were virtually untaxed giving rise to inequity in the distribution of the
tax burden. The Fringe Benefits Tax(FBT) was proposed to enhance the progressivity of the
income tax and to broaden the tax base.
DEFINITION
Fringe Benefit Tax (FBT) is a monetary burden imposed by the sovereignty on any good,
service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to
basic salaries, to an individual employee, other than a rank and file employee.
The FBT is a final withholding tax on the grossed-up monetary value of the fringe benefit
granted by the employer to an employee who holds a managerial or supervisory position. This
tax is effective regardless of whether the employer is an individual, professional partnership or a
corporation (regardless of whether the corporation is taxable or not).
The FBT Tax Regulations cover only those fringe benefits given or furnished to
managerial or supervisory employees. The Regulations do not cover those benefits which are
part of compensation income, because these are subject to withholding tax on compensation in
accordance with RR No.2-98.
FRINGE BENEFIT
1) Housing
2) Expense account
5) Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted
6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs and similar organizations
10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
Ana was hired by Earl to be the latter’s secretary and personal assistant. To enable her to perform
her duties well, Earl provided a condo unit (adjacent to his) unit which Ana could use as her
temporary residence. Is the fair market value of the use of the condo by Ana a “fringe benefits”
that is subject to fringe benefit tax imposed under section 33 of the National Internal Revenue
Code?
►Answer: No.
Ana is neither a managerial nor a supervisory employee. Only fringe benefits granted to
managerial and supervisory employees are subject to the fringe benefits tax.
The following fringe benefits shall not be subject to basic tax or fringe benefit tax:
1. Fringe benefits which are authorized and exempted from income tax under any
special law such as :
❖ Contributions required under SSS law
❖ Contributions required under GSIS law
❖ Similar contributions under an existing law
❖ Premium for group insurance of employees
2. If the grant of fringe benefits to the employee is required by the nature of, or
necessary to the trade, business or profession of the employer.
ILLUSTRATION 2:
“Outstation Allowance (covers meals and trip-related expenses)” are granted to the managerial
and supervisory employees of Philippine Gaming Management Corporation (PGMC) who will
be away from the office site for at least 8 hours to visit lotto franchise holders for repairs and/or
inspection of equipment leased by PGMC from Philippines Charity Sweepstakes Office (PCSO).
Should the aforementioned allowance be subjected to tax?
►Answer: No.
The allowance is required by the nature of or necessary to the trade or business of
PGMC, hence , not subject to the fringe benefits tax prescribed in Section 33(A) of the Tax
Code. Consequently, it is not subject to Income Tax and to withholding tax . By the same
token, the aforestate allowance which may be incurred or expected to be incurred by the
managerial and supervisory employees in the performance of their duties cannot be
considered as part of compensation subject to withholding tax even if the employees fail to
account/liquidate the same considering that said expenses are pre- computed on a daily
basis and are paid to employees while on an assignment or duty (BIR Ruling No. 013-2002
dated April 5,2002).
3. De minimis benefits
4. If the grant of benefits is for the convenience or advantage of the employer.
ILLUSTRATION 3:
CASE A. Use the same data in illustration #1.
Question 1:
Is the fair market value of the use of the condo unit by Ana a “compensation income” that
is subject to basic tax under Section 24A of the Tax Code and consequently to creditable
withholding tax on compensation income?
►Answer: No.
The condo unit is provided for the convenience of the employer, hence does not constitute a
taxable fringe benefit. Being his personal secretary, it is necessary for Ana to be accessible to
Earl anytime.
Question 2:
Assuming Ana is a managerial or supervisory employee, is the fair market value of the use of the
condo by Ana a “fringe benefit” subject to FTB?
►Answer: No.
As explained in question #1, if the grant of benefits is for the convenience or advantage of
the employer, irrespective of the employee’s rank , the benefit shall not be subject to fringe
benefit tax and basic tax on compensation income.
FBT Rates
The rate of fringe benefit tax varies depending on how the employees are taxed.
ILLUSTRATION 4:
Determine the grossed-up monetary value and the fringe benefit tax of the following (if
applicable) for 2018 taxable year:
1) P39 grocery allowance for the personal consumption of an executive of ABC
Corporation.
2) P40,800 expenses paid by an executive of ABC Corporation duly received in the name of
ABC Corporation and is not in the nature of personal expense.
3) P40,800 expenses incurred by an executive of ABC Corporation in connection with
attending a business meeting or convention.
4) P40,800 grocery allowance for the personal consumption of one of ABC Corporation’s
rank and file employees.
►Answers:
➔ GUMV=P39k/65%=P60,000; FBT=P39k/65% x 35%=P21,000
➔ GUMV=P40,800**; FBT=P0
**The expenditure is not in the nature of personal expense of the company’s executive,
hence, it is not a fringe benefit taxable to the employee. It is an ordinary business
expenditure of ABC Corporation.
➔ GUMV=P40,800; FBT=P0; same explanation with #2
➔ GUMV=P40,800 same with monetary value FBT=P0**; subject to basic tax
ILLUSTRATION 5: Assume an employer furnished cash fringe benefit subject to fringe benefit
tax amounting to P975,000
Question 1:
What should be the appropriate journal entry in the books of the employer?
►Answer:
Fringe benefit expense (monetary value) P975,000
Fringe benefit tax expense 525,000
(P975,000/65%)x35%
Cash (GUMV)***(P975,000/65%) P1, 500,000
***The P1,500,000 grossed-up monetary value is composed of P975,000 paid to the employee
and P525,000 paid/remitted to the BIR.
Question 2: Assume that the cash fringe benefit is not subject to fringe benefit tax, what
should be the appropriate journal entry of the employer?
►Answer:
Fringe benefit expense P975,000
(Compensation expense)
Cash P975,000
DE MINIMIS BENEFITS
The following shall be considered de minimis benefit not subject to income tax as well as
withholding tax on compensation income of both managerial and rank and file employees:
a. Monetized unused vacation leave credits of private employees not exceeding “10 days”
during the year.
Payment of monetized unused “vacation”leave credits exceeding 1 0 days as well as
payment of “sick” leave, regardless of number of days shall be added to “other benefits”
with a P90,000 ceiling.
b. Monetary value of vacation and sick leave credits paid to government officials and
employees.
Compared to employees in the private sector, payment of monetized unused “vacation
and sick” leave credits to government officials/employees regardless of the number of
days shall be exempt from tax on compensation income.
c. Medical cash allowance to dependents of employees not exceeding P1,500 per semester
or P250 a month.
d. Rice subsidy of not more than P2,000 per month or 1 sack (50kg.) rice per month.
e. Uniforms given to employees by the employer not exceeding P6,000 per annum (as
amended by RR 8-2012)
f. Actual medical assistance given not exceeding P10,000 per annum such as medical
allowance to cover medical and health care needs, annual medical/executive check-up,
maternity assistance and routine consultations.
i. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000per employee per annum.
j. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of
age on a per region basis provided such benefits is given on account
the basic minimum w
of overtime work or if given to employees on night/graveyard shift.
k. RR 1-2015 dated January 5,2015 includes as non-taxable “de minimis benefits” the
following ; benefits received by an employee by virtue of a collective bargaining
agreement (CBA); and Productivity incentive schemes. Provided that the total annual
monetary value received from the two (2) items above combined, do not exceed
P10,000.00 per employee per taxable year.
All other benefits given by employers which are not included in the enumeration of de
minimis benefits shall not be considered de minimis benefits but should fall under the
classification of “other benefits” and is therefore subject to the P90,000 ceiling. The excess of
the benefits over the P90,000 limit would form part of an individual’s gross income and would
be subject to income tax and application creditable withholding taxes.
Further, RR 3-2015 emphasized that this exclusion from gross income is not applicable to:
❖ Self-employed individuals; and
❖ Income generated from business
Fixed or Variable allowances
Generally speaking, fixed or variable allowances received by a public officer or
employee or employee of a private entity in addition to the regular compensation fixed for his
position or office are subject to income tax and consequently creditable withholding tax on
compensation income. Examples of fixed or variable allowances are transportation allowance,
representation allowance, communication allowance, living away from home allowance ,
(LAFHA), and the like.
Reasonable amounts of reimbursements/advances for travelling and entertainment
expenses which are pre- computed on a daily basis and are paid to an employee while he is on an
assignment or duty need not be subject to the requirement of substantiation and to withholding.
Communication Allowance
Communication allowance granted to employees are not subject to fringe benefit tax and tax
on compensation on the basis that communication allowance is deemed required by the nature of
the job of the employees and deemed necessary to business and redounds to the convenience and
benefit.
SPECIAL RULES IN COMPUTING THE MONETARY VALUE OF HOUSING
BENEFITS
Monthly Monetary Value
● Employer leases a residential property for the Monthly rental paid x 50%
use of the employee
● Employer owns a residential property for the The higher between F MV in the
use of the employee Real property declaration OR the
zonal value x 5% x 50%**
● Employer purchases residential property and Acquisition cost or zonal value as
transfers ownership to employee determined by CIR whichever is
higher.
● Employer purchases residential property and The higher between FMV in the
transfers ownership to employee on a lesser real property declaration or Zonal
amount as determined by CIR less cost to
the employee
**Annual Benefit=FMV or Zonal whichever is higher x 5%
Monetary value of the benefit=FMV or Zonal whichever is higher x 5% x 50%
***Annual benefit=acquisition cost exclusive of interest x 5%
Monetary value of the benefit=acquisition cost exclusive of interest x 5% x 50%
a. Employer owns and maintains a fleet of motor Acquisition cost of vehicles not
vehicles for the use of business and employees. normally used for business divided
by 5 years x 50%
►Answer:
Question 1: P78,000
Question 2: P120,000
Question 3: P42,000
Question 4: P198,000
Solution:
Rental payment P156,000
X 50%
Monetary value P 78,000
Divided by 65%
GUMV P120,000
X fringe benefit tax rate 35%
Monthly fringe benefit tax expense P 42,000
Add: rentals paid 156,000
Total deductible expense P198,000
2. Temporary housing for a stay in the housing unit for three (3 months) or less.
4. Interest on loan at less than market rate to the extent of the difference a the market rate
and actual rate granted. The benchmark is 12% unit revised. The taxable fringe benefit
is:
a. Interest foregone by the employer or
b. The difference of the interest assumed by the employee and the rate of 12%.
5. Membership dues or fees of employees borne by employer in social and athletic clubs or
other similar organizations
6. Life or health insurance and other non-life insurance premiums are treated as taxable
benefits.
7. The following shall not be treated as taxable fringe benefits:
a. Fringe benefits which are authorized and exempted from income tax under the
Tax Code or under any special law
b. The fringe benefit is required by the nature of or necessary to the trade, business
or profession of the employer
c. When the fringe benefit is for the convenience or advantage of the employer
d. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans.
e. Benefits given to rank and file employees.
f. Non-taxable housing benefits
g. Other non-taxable benefits discussed in this chapter.
Filing of Returns
10th day of the month following the end of the calendar quarter in which the fringe benefits
were granted to the recipient
Reference: Tabag, E.D., Garcia, E.J. (2019) Income Taxation with Special Topics in Taxation
based on NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act
(TRAIN Law)
CHAPTER EXERCISES
1. Determine the following incomes are subject to basic tax , fringe benefit tax or exempt
from tax by putting a check mark in the column provided below . If the value of the
benefit is provided, indicate the correct amount.
INTRODUCTION
This module discusses what co-ownership is and the difference between estates and trust.
It also includes topics such as income tax of an estate, deduction from estate’s gross income,
termination of judicial/extrajudicial settlement, taxation of trusts, classification of trust and filing
of income tax returns. These topics will give students knowledge and understanding about
co-ownership, estates and trusts.
CO-OWNERSHIP
There is no co-ownership when two or more heirs or beneficiaries inherit an undivided
property from a decedent, or when a donor makes a gift of an undivided property in favor of two
or more donees. Inheritance is subject to “Estate Tax” while Donation is subject to “Donor’s
Tax”. Both taxes are not income taxes but classified as “Transfer Taxes” which are discussed in
Volume 2 (Transfer and Business Taxation). Nonetheless, incomes from such properties are
subject to income tax.
Co-Owners are taxed individually on their distributive share in the income of the
co-ownership. Meaning, co-ownership itself is not taxable for the reason that the activities of
co-ownership are generally limited to the preservation of the common property and the collection
of the income therefrom.
Inherited property remained undivided for more than (10) years and no attempt was ever
made to divide the same among the co-heirs, nor was the property under administration
proceedings nor held in trust, the property should be considered as owned by an unregistered
partnership, consequently, taxable as corporation.
ILLUSTRATION 1
CASE A:
Ana, Lorna and Fe “bought” a parcel of land for the purpose of improving the same
before leasing it out to interested tenants.
Question 1: Is a co-ownership created?
❖ Answer: No.
❖ Though the property may be undivided, it was acquired by the owners not through
gratuitous (inheritance or donation) but by purchase. Ana, Lorna and Fe formed a
partnership, instead of co-ownership. Partnership is generally taxable as a
corporation. Consequently, Ana, Lorna and Fe shall be considered “shareholders”
for income tax purposes. Income tax of a partnership as well as the partners are
discussed in Chapter 6.
CASE B:
On January 1, 2017, Noy, a resident taxpayer died leaving an undivided parcel of land to
his heirs Allan, Mar and Pacquito valued at P60,000,000. The property is an income producing
property primarily through rentals. In 2018, the property earned gross rentals amounting to
P15,000,000 while expenditures necessary to carry out the operations was P3,000,000.
On the other hand, the heirs, who are all engaged in businesses in their own individual
capacity, provided the following data for 2018 taxable year.
Allan Mar Pacquito
Gross business income P6,000,000 P5,000,000 P8,000,000
Business expenses 3,000,000 2,500,000 6,000,000
Income subject to final taxes (net) 200,000 320,000 500,000
Question 2: Assuming Noy was able to secure a partition and three separate land titles were
issued by the government before his death, naming his heirs as the rightful owners in his last will
and testament, is a co-ownership created?
❖ Answer. No.
➔ The property involved is not an undivided property.
Question 3: What is the applicable tax for the gratuitous transfer (inheritance)of the property
from Noy to his heirs?
❖ Answer: Estate Tax
TRANSFER TAX
A tax on gratuitous transfer of property either through gift/donation (subject to donor’s
tax) or through inheritance (subject to estate tax). A transfer tax is not an income tax because
there is no taxable income realized from the passage of property to the heirs upon the death of
the decedent.
● The properties to be received by his lawful heirs upon his death are not part of their gross
income for purposes of computing the heirs’ taxable income because it does not come
within the definition of income.
The estate of a decedent may be settled judicially or extrajudicial. Judicial settlement
pertains to settlement of an estate in a court proceeding while in extrajudicial settlement, the
heirs or beneficiaries settle for themselves the distribution of the estate or their inheritance.
Estates no under judicial administration heirs and beneficiaries file the ITR
of the estate and pay the tax due thereon
APPLICABLE TAX
The taxable income of the estate is computed in the same as an individual taxpayer.
Consequently. The tax due is therefore computed using the graduated income tax rates for
individuals under Section 24(A) of the Tax Code (as amended under RA 10963 otherwise known
as the “TRAIN LAW”).
GRADUATED TAX RATE FOR INDIVIDUAL, ESTATES AND TRUSTS TAX
RATE for individuals, Estates and Trusts
Over P P 125,000 +
500,000 32% in
excess of P
500,000
ILLUSTRATION 3
On November 1, 2017, Juan Dela Cruz died leaving various property worth P30,000,000.
The properties are income producing properties deriving rental income. The net income from
rentals for 2017 amounted to P2,500,000. A “last will and testament” was executed by the
decedent prior to his death assigning GJ as the executor. In 2018, (while under administration),
the estate earned P4,750,000 (net of 5% creditable withholding tax on rent) and incurred
operating expenses of P2,000,000.
Question 1: How much is the taxable income of the Estate of Juan Dela Cruz in 2017?
● Answer: NONE
❏ Under the Tax Code, when an individual taxpayer dies during the year, it shall be
assumed that as if he died at the close of such year (Chapter 1). Consequently, the
taxpayer identified in the income tax return for 2017 taxable year shall still be
“Juan Dela Cruz”, instead of “Estate of Juan Dela Cruz”.
Question 2: How much is income tax payable of the Estate of Juan Dela Cruz in 2018?
● Answer: P560,000
Solution:
“Gross rental (4.75M/95%) P5,000,000
Allowable deductions (2,000,000)
Taxable income P3,000,000
ILLUSTRATION 4:
On November 1, 2017, Juan Dela Cruz died leaving various properties worth
P30,000,000 to his heirs: Pedro, Ana and Lorna. The properties are income producing properties
deriving rental income. The net income from rentals for 2017 amounted to P2,500,000. A “last
will and testament” was executed by the decedent prior to his death assigning GJ as the executor.
In 2018, (while under administration), the estate earned P4,750,000 (net of 5% creditable
withholding tax on rent) and incurred operating expenses of P2,000,000.
During 2018, Pedro (one of the lawful heirs) received P200,000from the income of the
estate. Pedro’s other income and expenses were as follows:
Compensation income P800,000
Business income 1,500,000
Business expenses 600,000
Question 1: Assume that the estate is still under administration, how much is the taxable income
of the estate in 2018?
❖ Answer: P2,800,000
Solution:
“Gross” rental income (4.7M + 25M) P5,000,000
Allowable business expenses 1,500,000
Distribution of income to Pedro (heir) (200,000)
Taxable income P2,800,000
PARTIES to a TRUST:
❖ Trustor- Person who establishes a trust.
❖ Trustee- One in whom confidence is reposed as regards property for the benefit of
another person.
❖ Beneficiary- Person for whose benefit trust is created.
❖ Fiduciary- any person or corporation that holds in trust an estate of another person or
persons. A fiduciary may exist only if legal trust is created.
Special Deductions:
1. Distribution of the year’s income to an heir or beneficiary; and
2. Amount collected by a guardian of an infant which is to be held or distributed as the court
may direct.
Computation of Taxable Income
The trust’s taxable income is likewise computed in the same manner as an individual
taxpayer, except that the basic personal exemption allowed is limited only to P20,000 (Section
62-NIRC). The tax due is also based on the graduated rates provided under Section 24(A) of the
Tax Code as shown in Table 2-2 of Chapter 2. Moreover, the calendar period shall be used as an
accounting period for tax purposes. A trust is required to adopt the calendar year as its
accounting period.
Shown below is the pro-forma computation of the taxable income of a trust and a
beneficiary:
Taxable income of the Trust
Gross income Pxxx
Less: deductions
Business expenses Pxxx
Special Deduction:
Distribution of trust’s income to beneficiaries xxx
Taxable income of the trust Pxxx
Tax due (graduated tax rate) Pxxx
CLASSIFICATION OF TRUST
1. Ordinary Trust- the income and corpus of the trust do not revert to the grantor. The trust
income is accumulated and held for distribution to the beneficiaries. Under the Tax Code,
ordinary trust is any of the following trusts:
➔ A trust where the income is accumulated or held for future distribution under the
terms of a will trust.
➔ A trust where the income is to be distributed currently by the fiduciary to the
beneficiaries.
➔ A trust where the income is accumulated for the benefit of unborn or
unascertained person or persons with contingent interest.
➔ A trust where the income collected by a guardian of a infants held or distributed
as the court may direct; and
➔ A trust where the income, is at the discretion of fiduciary may be either
distributed to the beneficiaries or accumulated.
2. Revocable Trust (Section 63-NIRC)- a trust where at the any time, the power to revest in
the grantor, title to any part of the corpus of the trust is vested:
❖ In the grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus of the
income therefrom; or
❖ In any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom.
3. Employee’s Trust- income tax shall not apply to employees' trust which forms part of
pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all
his employees [Section 60(B)-NIRC].
2. Such proportion of sold tax shall be assessed and collected from each trustee which the
taxable income of the trust administered by him bears to the consolidated income of the
several trusts. Each trust shall pay an income tax still due or payable computed as
follows:
Income Tax apportioned to a trust Pxxx
Less: Income Tax already paid (xxx)
Income Tax Payable Pxxx
ILLUSTRATION 5:
In 2018, George created three (3) trusts for his minor daughter. The following data were
furnished by the trusts during 2018:
Trust Gross Income Expenses Net Income Income Tax Paid
1 P5,000,000 P2,500,000 P2,500,000 P500,000
2 10,000,000 5,000,000 5,000,000 1,200,000
3 15,000,000 7,500,000 7,500,000 2,000,000
In case of two or more joint fiduciaries, return filed by one of them shall be a sufficient
compliance with the requirements of the Tax Code. The return may be filed in
● Authorized agent banks;
● Revenue District Officer;
● Collection agent;
● Duly authorized city or municipal Treasurer in which the taxpayer has his legal residence
or principal place of business.
Exercises
1. It arises when two or more heirs or beneficiaries inherit an undivided property from
decedent, or when a donor makes a gift of an undivided property in favor of two or more
donees.
a. Partnership
b. Trust
c. Joint account
d. Co-ownership
Use the following data for the next three (3) questions:
Ana, Lorna and Fe, are the heirs of Pedro who died on Nov. 1, 2017. The properties of Pedro
comprised solely of real property valued at P50,000,000 at the time of his death. The property is
primarily deriving rental income. In 2018, the property remained undivided and it derived a net
rental income of P15,000,000.
3. For income tax purposes, the heirs will be tax on net rental income from the inherited
property for the year 2018 as:
a. Partners in a commercial partnership
b. Partners in a general professional partnership
c. Partners in an unregistered co-partnership
d. Co-owners
4. What amount should be reported as taxable income of the co-ownership?
a. P 50,000,000
b. P 15,000,000
c. P14,980,000
d. Nil
5. What amount should each heir report in their individual returns as their share in the net
rental income of the property they inherit.
a. P50,000,000
b. P15,000,000
c. P10,000,000
d. P5,000,000
9. It is composed of all the property, rights, and obligations of a deceased person which are
not extinguished by his death, including those which have accrued thereto since the
opening of succession.
a. Estate
b. Devisee
c. Legatee
d. Testator
10. Income received by the estate during the period of administration or settlement of the
estate, for tax purposes is known as
a. Income of the estate
b. Income of the heirs
c. Income of the trustee
d. Income of the testator
11. Statement 1: For taxation purposes, the taxable income of the estate shall be
determined in the same manner and basis as in the case of individual taxpayers.
Statement 2: The income from the estate is no longer allowed to deduct personal
exemption of P20,000 upon effectively of RA10963.
a. Statements 1 & 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statement 1 and 2 are true
12. When an individual taxpayer dies, future income on his property will be taxed to
a. Those who inherit the property after they received the property
b. The estate itself, after the heirs have received the property
c. The individual himself
d. None of the above
13. Statement 1: The income of the estate distributed to the beneficiaries during the year is
subject to final withholding tax of 15%.
Statement 2: Withholding tax on the income distributed to the beneficiary is creditable
against the total tax liability of the beneficiary.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statement 1 and 2 are true
15. Assume that Francis, head of the family, also earned net income of P500,000 for his
trading business. What amount should Francis report as his taxable income for 2018?
a. P 620,000
b. P 570,000
c. P 500,000
d. P 450,000
16. An agreement created by will or an agreement under which title to property is passed to
another for conservation or investment with the income therefrom and ultimately the
corpus to be distributed in accordance with directive of creator as expressed in the
governing instrument.
a. Estate
b. Trust
c. Fiduciary
d. Beneficiary
20. The income distributed to the beneficiaries of estates and trusts, except income subject
to final withholding tax and income exempt from tax is subject to
a. Creditable withholding tax of 10%
b. Creditable withholding of 15%
c. Final withholding of 20%
d. Neither final nor creditable withholding tax
On January 1, 2018, Francis established a trust found for the benefit of his daughter, Princess.
Francis appointed Atty. Lo Yer as the trustee the property transferred to the trust is a piece of lot
with a dormitory earning rental income during the year the trust earned P10,000,000 revenues
and incurred expenses of P2,000,000 out of the trust’s income, Atty Lo yer gave Princess
P1,500,000. In the same year, Princess earned compensation income of P1,850,000, net of
withholding tax of P650,000.
Use the following data for the next three (3) questions:
In 2018, Mr. Mapagbigay created two (2) trust for his minor son, Lucky. During the year, the
two-trust earned net income as follows
Trust 1 P4,000,000
Trust 2 P6,000,000
Each trust filed their own income tax return and paid the corresponding income tax due as
computed in their separate returns.
I. A revocable trust exist when the grantor reserves the right to revoke his power to
change at any time any part of the terms of the trust
II. The income of the revocable trust is taxable against the grantor
a. I only
b. II only
c. Both I and II
d. Neither I or II
Module 5
Income Taxes for Corporations
Introduction
In the Philippines, domestic and foreign companies are liable to pay corporate income tax (CIT).
The tax liability for a corporation is determined by its residency status and is based on the net
income it obtains while carrying out its business activity, normally during one business year.
Beyond Corporate Income Tax, companies should also understand withholding tax and some
other taxes. Business owners who frequently study the country's corporate taxes and work with
their local advisors find it easier to stay compliant and exploit any beneficial changes, such as
rate reductions or incentives.
Learning Objectives
1. Define corporation.
2. Discuss concepts and procedures necessary for joint ventures or consortium
3. Identify tax exempt corporations
4. Enumerate different types of corporations
5. Identifying the tax rates and basis in computing the tax due
6. Explain the applicability of the minimum corporate income tax
7. Compute gross income of corporations
8. Compute minimum corporate income tax
9. Discuss the proper treatment of excess minimum corporate income tax or the MCIT
carry over
10. Apply the final taxes on passive income
11. Apply income tax rates applicable to special corporations
12. Explain rationalization of income tax for international carriers
13. Differentiate Regional Operating Headquarters(ROHQ) and Regional Headquarters
(RHQ)
14. Explain the manner of filing income tax returns for corporations
Corporation Defined
They are not subject to any formality and may be privately contracted orally or in writing. The
term “associations” includes all organizations which have substantially the salient features of a
corporation to be taxable as a “corporation”.
Under Section 30 of the Tax Code, t he following organizations shall not be taxed in
respect to income received by them as such:
Types of Corporations
The applicable income tax of a corporation depends on the type of the corporation and the
income subject to tax.
Certain passive incomes derived from Philippine Final withholding taxes (refer to Table 5-2)
sources
Capital gains on sale of shares of non-listed capital gains tax (refer to Table 5-3)
domestic corporations and sale of real properties
located in the Philippines classified as capital asset
Domestic corporations taxable on their income derived from all sources (within and without the
Philippines)
The tax due should be the higher between the RCIT and MCIT.
Foreign corporations taxable on their income derived from sources within the Philippines only
Resident foreign Subject to 30% normal or regular corporate income tax (NCIT or RCIT)
corporations based on “net income” during the taxable year.
The tax due should be the higher between the RCIT and MCIT.
Nonresident foreign 30% of “gross” income from all sources in the Philippines such as
corporation not interests, rents, premiums (except reinsurance premiums), annuities,
engaged in trade or emoluments, or other fixed or determinable annuities, periodic or
business in the casual gains, profits and income and capital gains, except income
Philippines subject to capital gains tax.
Corporations created taxed based on the provisions of the special law or charter creating
by special laws or them or applicable to them, supplemented by the provisions of the Tax
charters Code, insofar as they are applicable.
DC RFC NRFC
1.) RCIT
• Tax Rate 30% Net Income 30% Net Income 30% Gross Income
• Basis within & without within only within only
OR
** Starting on the 4th year of operations immediately following the taxable year in which such
corporation commenced its business (RR 2-98 as amended by RR 12-2007). The tax dues is
the higher between the RCIT and MCIT. *** Refer to discussions in ___.
ILLUSTRATION 1:
Assume the following data for Hananiah Corporation for the current year:
Gross Income, Philippines P 975,000
Expenses, Philippines 750,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 630,000
Interest on bank deposit 25,000
Determine the income tax due assuming the corporation is:
COMPUTATION OF MCIT
SELLER OF GOODS:
Gross Sales P xx
Sales Discounts (xx)
Sales Returns and allowances (xx)
Cost of Sales** (xx)
Gross Income xx
Add: Other income subject to Normal or Regular Corporate tax xx
Gross Income for MCIT Purposes xx
MCIT rate 2%
MCIT P xx
SELLER OF SERVICE:
Gross Receipts P xx
Sales Discounts (xx)
Sales Returns and allowances (xx)
Direct Cost of Services *** (xx)
Gross Income xx
Add: Other income subject to Normal or Regular Corporate tax xx
Gross Income for MCIT Purposes xx
MCIT rate 2%
MCIT P xx
ILLUSTRATION 1:
Assume the following data for Hananiah Corporation for the current year (6th
year of business operations):
Gross Income, Philippines P 975,000
Expenses, Philippines 950,000
Gross Income, Malaysia 700,000
Expenses, Malaysia 720,000
Interest on bank deposit 25,000
Determine the income tax due assuming the corporation is:
Versus
M CIT
Gross Income, Phils. & Malaysia P 1,675,000
MCIT Rate 2%
MCIT P
33,500
CIT
M
Gross Income, Philippines P 975,000
MCIT Rate 2%
MCIT P
19,500
Any excess of the minimum corporate income tax over the normal corporate
income tax shall be carried forward and credited (deducted) against the regular income
tax for the three succeeding taxable years, provided, that the normal tax should be
higher than the minimum corporate tax in the year to which the excess MCIT is
forwarded.
ILLUSTRATION 3:
A domestic corporation which commenced operations in 2012 provided the following data:
Determine the Income tax payable for 2016, 2017 and 2018
Answers:
2016: P 200,000
RCIT or Basic tax (P 500,000 x 30%) P 150,000
MCIT (P 10 M x 2%) 200,000
Tax Due/ payable (Higher amount) P 200,000
Excess MCIT 2016 P 50,000
2017: P 240,000
RCIT or Basic tax (P 500,000 x 30%) P 0
MCIT (P 12 M x 2%) 240,000
Tax Due/ payable (Higher amount) P 240,000
Excess MCIT 2017 P 240,000
❖ The excess MCIT for 2016 was not carried over or deducted in 2017 tax due because
MCIT in 2017 was higher than the RCIT. As a rule, MCIT can be carried over only if, at
the time the excess MCIT is claimed, RCIT is higher than MCIT.
2018: P 10,000
Gross income 2018 P 14,000,000
Allowable deductions 2018 12,800,000
Net income P 1,200,000
Less: 2017 NOLCO *** (200,000)
Taxable income 2018 P 1,000,000
RCIT rate 30%
RCIT or Basic Tax P 300,000
❖ *** Net Operating Loss during the year may be carried over as part of deductible
expenses of a corporation for the next three succeeding years following the year the
loss was incurred. Such loss is known as Net Operating Loss Carry-Over (NOLCO).
❖ RCIT and MCIT were not amended under RA 10963 (TRAIN Law)
The computation and the payment of MCIT shall likewise apply at the time of filing the
“quarterly” corporate income tax as prescribed under Section 75 and Section 77 of the Tax
Code, as amended. Thus, in the computation of the tax due for the taxable quarter, if the
computed quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid
for such taxable quarter at the time of filing the quarterly corporate income tax return shall be
the MCIT which is two percent (2%) of the gross income as of the end of the taxable quarter.
In the payment of said “quarterly” MCIT, excess MCIT from the previous taxable year(s)
e allowed to be credited. However, the expanded withholding tax and quarterly
shall not b
corporate income tax payments under the normal income tax and the MCIT paid in the previous
taxable quarter(s) are allowed to be applied against the quarterly MCIT due.
CASE A:
A corporation’s computed Regular Corporate Income Tax (RCIT), MCIT and Income taxes
withheld from 1st to 4th quarters including excess MCIT and Excess withholding taxes from
proper year(s) are as follows:
Quarter RCIT MCIT Taxes withheld Excess MCIT Excess
during the year Prior Year Withholding
tax of Prior
Year
1st P 200,000 160,000 40,000 60,000 20,000
2nd 240,000 500,000 60,000 - -
3rd 500,000 200,000 80,000 - -
4th 400,000 200,000 70,000 - -
ANSWERS/ SOLUTIONS
● ** The carry-over of excess MCIT from previous year is not allowed if the tax
due for the quarter is based on MCIT.
● The P 660,000 quarterly tax due was computed by adding the MCIT of the 1st
and 2nd quarter. The amount is higher compared to the total of the RCIT for the
1st and 2nd quarter.
The computation of the taxes paid for the first three quarters (680,000) is the same with
the computations made in Illustration No. 4
Substantial losses form a “prolonged labor dispute” means losses arising from a strike
staged by the employees that lasted for more than six (6) months within a taxable period and
the strike resulted to temporary shutdown of business operations.
The President, upon the recommendation of the Secretary of Finance, may, effective
January 1, 2000, allow domestic and resident foreign corporations to be subjected to optional
corporation tax of 15% based on gross income.
REQUISITES
All of the following conditions shall have to be satisfied in the allowance of
optional corporate tax:
1. A tax effort ration of 20% of Gross National Product (GNP);
2. A ratio of 40% of income tax collection of total tax revenue;
3. A VAT effort of 4% of GNP; and
4. A 0.9 ratio of the Consolidated Public Sector Financial Position to GNP
5. The option to be taxed based on gross income shall be available only to
firms whose ratio of cost of sales to gross sales or receipts from all sources
does not exceed 55%.
The election of the gross income option by the corporation shall be irrevocable
for the three (3) consecutive taxable years during which the corporation qualified
under the scheme. Presented below is a sample computation of income tax
payable based on 15% gross income tax.
Sales/ Revenues P xx
Cost of Sales/ Cost of direct services** (xx)
Gross Income xx
Gross income tax rate 15%
Income tax due P xx
Less: Taxes withheld (xx)
Taxes paid - previous quarters (xx)
Foreign tax credits (xx)
Income tax payable P xx
For purposes of the gross income tax, “Gross Income” derived from the business shall
be equivalent to Gross Sales less sales returns, discounts and allowances and cost of goods
sold. “Cost of Goods Sold” shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location. For trading concern, Cost of Goods Sold
shall include the invoice cost of the goods sold, plus import duties, freight in transporting the
goods to the place where the goods are actually sold including insurance while goods are in
transit.
3) Yield/ monetary benefit from trust fund and other 20% 20% 30%
similar arrangements
5) Interest income derived from depository bank under 15% 7.5% Exemp
expanded foreign currency deposit system (Beginning t
Jan. 1, 2018)
DC RFC NRFC
* With tax sparing; 15% - If the country where the NRFC is domiciled allows a credit against
the tax due from the NRFC representing deemed paid in the Philippines equivalent to 15%.
* Without tax sparing; 30%
** The Higher between FMV as provided by City/ Provincial Assessors and Zonal Value
*** NC (No Changes); apply the old rates; 5% on the 1st P 100k gain + 10% in excessof P 100k
gain
TAble 5-4:
Tax Treatment of Co-Venturer’s share in the net income of a Joint Venture
Taxable Joint The respective share in the The respective share in the joint
Venture joint venture profit is venture profit is considered as
considered as dividend income dividend income received by an
received by a domestic individual taxpayer from a domestic
corporation from a domestic corporation
corporation. Hence, it shall be
treated as inter-corporate
dividend w hich is tax exempt
(Refer to Table 5-2)
Tax-Exempt Joint The respective share in the The respective share in the joint
Venture joint venture profit shall be venture profit shall be subject to
included in the computation of basic tax. Consequently, the same
the corporate venturer’s shall be included in the computation
taxable income subject to of the individual taxpayer’s taxable
normal corporate income tax of income.
30%
Interest income from loans Interest income from foreign currency loans
granted to residents other than granted by such depository banks under said expanded
OBUs or other depository banks system to residents other tan offshore banking units in
the Philippines or other depository banks under the
expanded system shall be subject to a final tax at the
rate of ten percent (10%)
Tax Treatment of Interest Income Derived from Government Debt Instruments and Securities
As discussed in Chapter 2, the Tax Code, as amended, defined “Deposit Substitutes” as
an alternative form of obtaining funds “from the public” other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for
the purpose of re-lending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer.
“Public” is defined as borrowing from twenty (20) or more individual or corporate lenders
at any one time. Interest income derived therefrom is subject to final tax payable upon the
original issuance of the deposit substitutes. Government Debt Instruments and Securities,
including Bureau of Treasury (BTr) issued instruments and securities such as Treasury bonds
(T-bonds), Treasury bills (T-bills) and Treasury notes, shall be considered as deposit substitutes
irrespective of the number of lenders at the time of origination if such debt instruments and
securities are to be traded or exchanged in the secondary market. The mere issuance of
government debt instruments and securities is deemed as falling within the coverage of
depository substitutes irrespective of the number of lenders at the time of origination and
therefore interest income derived therefrom shall be subject to the applicable final withholding
tax rate imposed on deposit substitutes as prescribed under the Tax Code.
For purposes of branch profit remittance, income items which are not effectively
connected with the conduct of its trade or business in the Philippines are not considered branch
profits. To be “effectively connected”, i t is not necessary that the income be derived from the
actual operation of the branch’s trade or business. It is sufficient that the income arises from the
business activity in which the branch is engaged. The 15% final tax should exclude profits on
activities registered with Philippine Economic Zone Authority (PEZA).
ILLUSTRATION 5
CHEN Corporation (domestic corporation ) provides the following data during 2018
taxable year:
Gross income from
Sale of merchandise P 10,000,000
Rent income (gross of 5% withholding tax) 2,000,000
Miscellaneous income 3,000,000
Operating expenses 7,000,000
Interest income from savings deposit 100,000
Interest income from government bonds 100,000
Interest income on FCDU bank deposits 150,000
Dividend income from a domestic corporation 125,000
Dividend income from a foreign corporation 50,000
Gain on sale of shares of a domestic corporation sold 125,000
directly to a buyer
Gain on sale of real property in the Philippines held as 200,000
investment. The property was acquired at a cost of P
2,000,000
Gain on sale of real property abroad held as investment. 250,000
The property was acquired at a cost of P 3,000,000
Withholding tax on rent income 100,000
Income tax paid for the first 3 quarters of the year 100,000
SPECIAL CORPORATIONS
Under the Tax Code, certain corporations are subject to lower tax rates on their regular
income i nstead of the normal or regular corporate tax of 30%. These corporations are classified
as special corporations. However, certain passive incomes and capital gains on sale of shares
of closely held domestic corporations and real properties situated in the Philippines are still
subject to applicable final withholding taxes and capital gains tax, as the case may be.
DOMESTIC CORPORATIONS:
RMC 4-2013 provides that Proprietary educational institutions and hospital which are
non-profit are subject to ten percent (10%) income tax based on net income from sources within
and without the Philippines. However, if the gross income from unrelated trade, business, or
other activity exceeds 50% o f the total gross income derived from all sources, such educational
institution or non-profit hospital will be subject to normal corporate income tax rate of 30% on its
net taxable income.
“Proprietary educational institution” is any private school maintained and administered by
private individuals or groups with an issued permit to operate from the Department of Education
(DepEd), or the Commission on Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in accordance with existing laws
and regulations.
ILLUSTRATION 7:
Assume the same data in Illustration 6, Case A. Assume further that during the taxable year,
Infotech constructed an additional school facility at a cost of P 1,500,000 with a useful life of
five (5) years.
Case A:
For tax purposes, Infotech decided to capitalize and depreciate the school facility. Determine
the income tax due of Infotech for the year.
● Answer: P 320,000
○ (5M - 1.5 M - 300,000 ***) x 10%
○ *** depreciation expense = P 1.5M/5
Case B:
Determine the income tax due of Infotech for the year if it opted to claim or deduct outright the
entire construction cost of the school facility.
● Answer: P 200,000 (5M - 1.5M - 1.5M) x 10%
Government educational ● Exempt under Section 30, NIRC - the FWT CGT
institutions following shall not be taxed in respect
to income received by them as such:
(I) Government educational
institution;
and
● As provided for in the law or charter
creating the GEI
A nonstock nonprofit hospital that is operated for charitable and social welfare purposes
is exempt from income tax under Section 30 of the Tax Code. However, as provided in the case
of St. Luke’s Medical Center, INc. (SLMCI) vs. Commissioner of Internal Revenue (CIR) in a
CTA Case No. 7857 date June 3, 2011, the nonstock-nonprofit hospital must satisfy the
following requisites in order to be entitled to the exemption from income tax:
● It is a non-stock corporation
● It is operated exclusively for charitable purposes; and
● No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
CIR assessed SLMCI for deficiency income tax mainly due to the finding of the former that petitioner is
allegedly a non-profit hospital that is liable to pay ten percent (10%) tax on its net income pursuant to
Section 27 (B) of the National Internal RevenueCode (NIRC) of 1997. SMLCI, on the other hand,
maintains that it is exempt from income tax as provided for under Section 30 of the Tax Code.
The Court provides that to qualify for exemption under Section 30 of the Tax Code, the
following requirements must be complied with:
1. It must be a non-stock corporation or association;
2. Organized exclusively for charitable purposes;
3. Operated exclusively for charitable purposes; and
4. No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
The Court further provides that though “there is no dispute that St. Luke’s is organized
as a non-stock and non-profit charitable institution, this does not automatically exempt St.
Luke’s from paying taxes. This only refers to the organization of St. Luke’s. Even if St. Luke’s
meets the test of charity, a charitable institution is not ipso facto tax exempt.
“St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt form all its income. However, it remains a proprietary non-profit hospital
under section 27(8) of the NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its
for-profit activities.
International carriers
International carriers (resident foreign corporations) are subject to income tax rate of
2.5% on its Gross Philippne Billings (GPB) unless it subject to a preferential rate (a tax rate
lower than2.5%) or exempt on the basis of applicable tax treaty to which the Philippines is a
signatory or on the basis of reciprocity, such that an international carrier, whose home country
grants income tax exemption to Philippine carriers, shall likewise be exempt from income tax
imposed under the tax code (RA 10378; RR 15-2013).
Reciprocity may be invoked by an international carrier as basis for “Gross Philippine
Billings Tax exemption” when its Home Country grants income tax exemption to Philippine
carriers. The domestic law of the Home Country granting exemption shall cover income taxes
and shall not refer to other types of taxes that may be imposed by the relevant taxing
jurisdiction. The fact that the tax laws of the Home Country provide for exemption from business
tax, such as gross sales tax, in respect of the operations of Philippne carriers shall not be
considered as valid and sufficient basis for exempting an international carrier from Philippine
income tax on account of reciprocity. Reciprocity requires that Philippine carriers operating in
the Home Country of an international carrier are actually enjoying the income tax exemption.
In computing for “Gross Philippine Billings” of international air carriers, there shall be
included the total amount of gross revenue derived from passage of persons, excess baggage,
cargo and/or mail, originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the passage documents.
The gross revenue for passengers whose tickets are sold in the Philippines shall be the actual
amount derived for transportation services, for a first class, business class, or economu class
passage, as the case may be, on its continuous and uninterrupted flight from any port or point in
the Philippines to its final destination in any port or point of a foreign country”, as reflected in the
remittance area of the tax coupon forming an integral part of the plane ticket. For this purpose,
the Gross Philippine Billings shall be determined by computing the monthly average net fare of
all the tax coupons of plane tickets issued for the month per point of final destination, per class
of passage (i.e., first class, business class, or economy class) and per classification of
passenger (i.e., adult, child or infant), and multiplied by the corresponding total number of
passengers flown for the month as declared in the flight manifest.
The gross revenue for passengers whose tickets sold outside the Philippines, the gross
revenue for passengers for first class, business class or economy class passage, as the case
may be, on a continuous and uninterrupted flight form any port orpoint in the Philippines to final
destination in any port or point of a foreign country shall be determined using the locally
available net fares applicable to such flight taking into consideration the seasonal fare rate
established at the time of the flight, the class of passage, the classification of passenger, the
date of embarkation, and the place of final destination.
Non-revenue passengers as well as refunded tickets shall not be included in the
computation of Gross Philippine Billings.
The gross revenue on excess baggage which originated from any port or point in the
Philippines and destined for any part of a foreign country shall be computed based on the actual
revenue derived, as appearing on the official receipt or any similar document for the said
transaction.
The gross revenue for freight or cargo and mail shall be determined based on the
revenue realized from the carriage thereof.
a) The amount realized for freight or cargo shall be based on the amount appearing on
the airway bill after deducting the amount of discounts granted, which shall be
validated using the following:
● Monthly cargo sales reports generated by the IATA Cargo Accounts Settlement
System (IATA CASS) for airway bills issued through cargo agents; or
● Monthly reports prepared by the airline themselves or by their general sales
agents for direct issues made.
b) The amount realized for mail shall, on the other hand, be determined based on the
amount reflected in the cargo manifest of the carrier
In case of the passenger’s passage documents or flights from any port or point in the
Philippines and back, that portion of revenue pertaining to the return trip to the Philippines shall
not be included as part of GPB.
In case of a flight that originates from the Philippines, but transshipment of passenger,
excess baggage, cargo and/or mail takes place elsewhere in another aircraft belonging to a
different airline company, the GPB shall be determined based on that portion of the revenue
corresponding to the leg flown from any point in the Philippines to the point of transshipment.
In cases where a flight is interrupted by force majeure resulting in the transshipment of
the passengers, their excess baggage, freight, cargo and/or mail to another airplane operated
by another airline company and transshipment takes place in another country, the GPB shall be
determined based on that portion of flight from the Philippines up to the point of said
transshipment.
The policy behind the rationalization of taxes on international carriers as provided for in
RA 10378 and RR 15-2013 is to improve the competitiveness of the Philippine Tourism Industry
by encouraging more international carriers to maintain flight and shipping operations in the
country and by the eventual reduction of international plane and ship fares. There are intended
to facilitate the movement of goods and services and to attract more foreign tourists and
investments.
ILLUSTRATION 8:
CASE A
Dubai Air, an international air carrier provided the following data for the current year:
Question 2: How much is the income tax due assuming the international carrier is subject to a
preferential tax rate of 1.5% on gross Philippine billings under an existing tax treaty or
international agreement?
❖ Answer: 225,000 (P 15M x 1.5%)
Question 3: How much is the income tax due assuming the international carrier is exempt
from income tax based on reciprocity?
❖ Answer: nil
CASE B
Air Jordan, an international air carrier provided the following data for the current year:
CASE C
The following data were provided by Air Jordan, an international air carrier doing business in
the Philippines
Gross ticket sales in the Philippines P 10,000,000
(Manila - Macau flight)
Gross ticket sales in China (Manila - Beijing flight) 5,000,000
Gross ticket sales in China (Beijing - Manila flight) 5,000,000
Gross ticket sales in Japan (Tokyo - Manila flight) 3,000,000
Gross ticket sales in the Philippines (Manila - L.A.)
● Passengers were transhipped in Tokyo to L.A.
by another airline 8,000,000
● Estimated hours during the flight
○ Manila to Tokyo - 5 hrs;
○ Tokyo to L.A. - 15 hrs.
Gross ticket sales in L.a., USA (Manila - L.A.) 8,000,000
● Passengers were transhipped in Tokyo to L.A.
by a different plane of same airline company 8,000,000
● Estimated hours during the flight
○ Manila to Tokyo - 5 hrs;
○ Tokyo to L.A. - 15 hrs.
Expenses, Philippines 5,000,000
Question: How much is the income tax due of Air Jordan?
Answer: P 625,000 computed as follows:
Gross ticket sales in the Philippines P 10,000,000
(Manila - Macau flight)
Gross ticket sales in China (Manila - Beijing flight) 5,000,000
Gross ticket sales in the Philippines (Manila - L.A. flight);
Manila to Tokyo only (P8M x 5/20) 2,000,000
Gross ticket sales in USA (Manila - L.A. flight) 8,000,000
Total Gross “Philippine” Billings P 25,000,000
Income Tax Rate 2.5%
Income Tax Due P 625,000
OBUs are allowed to provide all traditional banking services to non-residents in any
currency other than Philippine national currency. Banking transactions to residents are limited
and restricted.
❖ Income Subject to 10% Final Tax: Interest income derived from foreign currency loans
granted to residents other than OBUs or local commercial banks.
ROHQ vs RHQ
Income tax rate of ROHQ is 10% of net income. ROHQ is a branch established in the
Philippines which is engaged in any of the following qualifying services:
● General administration and planning
● Business planning, coordination and business development
● Sourcing/ procurement of raw materials and components
● Corporate finance advisory services
● Marketing control and sales promotion
● Training and personnel management
● Logistic services
● Research and development services and project development
● Technical support and maintenance
● Data processing and communication
RHQ is defined in Section 22 (DD) of the Tax Code as a branch established in the
Philippines by a multinational company, which branch does not earn or derived income from the
Philippines and which acts as a supervisory, communications, and coordinating center for its
affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets. RHQ is
a tax exempt entity. However, an RHQ is constituted as a withholding agent of the government if
it acts as an employer and its employees receive compensation income subject to withholding
tax, or if it makes income payments to individuals or corporations subject to the expanded
withholding tax (EWT).
Objective: To force corporations to distribute dividends to shareholders in order that related tax
in dividends will be collected.
The rationale is that if the earnings and profits were distributed, the shareholders would
then be liable to income tax thereon, whereas if the distribution were not made to them, they
would incur no tax in respect to the undistributed earnings and profits of the corporation.
Improperly accumulated earnings tax is being imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings
distributed to them by the corporation (RR 2-2001 as amended by RMC 35-2011).
The test of the liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends is due to some other
causes, such as the use of undistributed earnings and profits for the reasonable needs of the
business, such purpose would not generally make the accumulated or undistributed earnings
subject to the tax. However, if there is a determination that a corporation has accumulated
income beyond the reasonable needs of the business, the 10% improperly accumulated
earnings tax shall be imposed
Closely-held corporations
The ownership of a corporation for the purpose of determining whether it is a closely
held corporation or a publicly held corporation is ultimately traced to the individual shareholders
of the parent company. Where at least 50% of the outstanding capital stock or at least 50% of
the total combined voting power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than 21 or more individuals, the corporation is a publicly held
corporation. Domestic corporations not falling under the aforementioned definition are,
therefore, closely-held corporations (BIR Ruling 025-02)
The IAET is not computed and applied by the corporation on itself in its income tax
return for a taxable year. The BIR makes the computation on its allegation of improper
accumulation of profits by the corporation. The BIR makes a computation a year or years after
the improper accumulation shall have taken place.
The net operating loss carry over (NOLCO) shown in the formula refers to the negative
results of the operations (net operating loss) for the previous taxable year(s) allowed as part of
deductions from the gross income of the current year. Since NOLCO refers to a previous
taxable year(s) but were allowed as deduction in computing the taxable income of the “current
year”, the aforementioned item should be added back to the gross income for purposes of
computing the improperly accumulated earnings for the current taxable year.
ILLUSTRATION 10
The record of a closely-held corporation shows for following calendar years:
2017
Gross income P 5,000,000
Expenses: 3,000,000
Other income:
Rent, net of 5% withholding tax P 475,000
Interest on money market placement, net 80,000
Inter-corporate dividends 500,000
Additional information:
Dividends paid 1,500,000
Payments, 1st to 3rd quarter 50,000
Ordinary shares P 700,000
Share Premium 200,000
2016
Gross income P 3,000,000
Expenses: 2,800,000
Net income: 200,000
Retained Earnings 500,000
Add:
INCOME SUBJECT TO FINAL TAX 100,000
INCOME EXEMPT FROM TAX 500,000 600,000
Total P 3,100,000
Less:
TAX DUE FOR THE YEAR
Corporate tax (NCIT > MCIT) 750,000
NCIT = 2.5M x 30%; MCIT = 5.5 M x 2%
Final tax - money market placement 20,000
DIVIDENDS PAID 1,500,000 (2,270,000)
Total 830,000
Retained earnings prior years (2016) 500,000
Retained earnings Dec. 31, 2017 1,330,000
Less: AMOUNT THAT MAY BE RETAINED (Par value) (700,000)
Excess Earnings (Improperly accumulated) 630,000
x Tax rate 10%
IMPROPERLY ACCUMULATED EARNINGS TAX P 63,000
The filing of income tax shall be made by the President, Vice-President or other principal
officers in behalf the company. The return shall be sworn to by the above officer and by the
Treasurer or Assistant Treasurer. Declaration of quarterly corporate income tax on a cumulative
basis is required manually, through Electronic Filing and Payment System (EFPS), or through
electronic BIR forms.
Every corporation subject to tax shall render, in duplicate a true and accurate quarterly
return and final or adjustment return except corporations not engaged in trade or business in the
Philippines (NRFC). For manual filing, the filing of quarterly return should be made not later than
60 days from the close of each of the first three quarters of the taxable year, whether, calendar
or fiscal year summarized as follows:
· Final adjusted (annual) return 15th day of the 4th month following the end of the
taxable year (i.e.; Ap. 15 applying calendar year)
The tax so computed shall be decreased by the amount of tax previously paid or
assessed during the preceding quarters. Final adjustment Return covers the total taxable
income for the preceding calendar/fiscal year filed on or before 15th day of the 4th month
following the close of the taxable year (April 15 of the following year using calendar period). If
the sum of the quarterly tax payments made during the taxable year is not equal to the total tax
due on the entire taxable income of that year, the corporation shall either pay the balance of tax
still due, or carry over the excess credit, or be credited or refunded with the excess amount
paid. In case the corporation is entitled to tax refund or credit of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the succeeding taxable years. Once the option to carry-over has been
made, such option shall be considered irrevocable for that taxable period.
The quarterly income tax declaration and the final adjustment shall be filed with (1)
Authorized agent banks, or (2) Revenue District Office, or Collection Agent, or Duly authorized
Treasurer of the city or municipality having jurisdiction over the location of the principal office of
the corporation filing the return or place where the main books of accounts and other data from
which the return is prepared are kept.
RR 9-2001 defines EFPS as the system developed and maintained by the BIR for
electronically filing tax returns, including attachments, if any, and paying taxes due thereon,
specifically through the internet. Upon filing, a “Filing Reference Number” is issued by the EFPS
as a control number to acknowledge that a tax return, including attachments, has been
successfully filed electronically. This shall serve as evidence of filing and the date of filing of the
return.
Upon payment of the tax due to an Authorized Agent Bank (AAB) under EFPS, the ABB
shall issue “Acknowledgment Number” as a control number to the BIR to confirm that tax
payment has been credited to the account of the government or recognized as revenue (internal
revenue tax collection) by the Bureau of Treasury. Likewise, a “Confirmation Number” shall be
issued by the AAB as a control number to the tax payer and BIR to acknowledge that the
taxpayer’s account has been successfully debited electronically in payment of his tax liability.
This shall serve as evidence of the fact of payment of the taxpayer’s liability to the extent of the
amount reflected in the Confirmation Number, and the date of payment by the taxpayer.
a) Taxpayer Account Management Program (TAMP) Taxpayers (RR No. 10-2014)
b) Accredited Importer and Prospective Importer required to secure the BIR-ICC & BIR-BCC
(RR No. 10-2014)
c) National Government Agencies (NGAs) (RR No. 1-2013)
d) All licensed Local contractors (RR No. 10-2012)
e) Enterprise Enjoying Fiscal Incentives 9PEZA, BOI, Various Zone Authorities, Etc.) (RR No.
1-2010)
f) Top 5,000 Individuals Taxpayers (RR No. 6-2009)
g) Corporations with Paid-Up Capital Stock of P 10 million pesos and above (RR No. 10-2007)
h) Corporations with complete computerized Accounting System (CAS) (RR No. 10-2007)
i) Procuring Government Agencies with respect to withholding of VAT and percentage taxes
(RR No. 3-2005)
j) Government Bidders (RR No. 3-2005)
k) Insurance companies and Stock brokers (RMC No. 71-2004)
l) Top 20,000 Private Corporation (RR No. 2-98, as amended
m) Large Taxpayers (RR No. 2-2002, as amended under RR 17-2010)
A. LARGE TAXPAYERS
v As to tax payments:
Percentage tax P200,000 per quarter
VAT P200,000 per quarter
Excise Tax P 1,000,000 per year
Income Tax P 1,000,000 per year
Documentary Stamp Tax P 1,000,000 per year
Withholding Tax (all type) P 1,000,000 per year
Large taxpayers who will e-pay shall enroll with any EFPS ABB authorized to
serve them and who are capable to accept e-payments. E-payments shall be made
within the day the return was electronically filed following the “pay-as-you-file system”.
Unless otherwise notified by the Commissioner of Internal Revenue (CIR), for all returns
that will be filed starting August 1, 2002, e-payment of taxes due thereon thru EFPS
shall become mandatory (RR No. 9-2002)
B. NON-LARGE TAXPAYERS
For Non-large Taxpayers who intend to e-pay, electronic payment shall be made through
the internet banking facilities of any AAB. The volunteering two hundred (200) or more
Non-Large Taxpayers previously identified by the BIR to have availed of the option to file their
return under EFPS shall nevertheless continue to file their return under such method. (RR No.
10-2007). However, upon their receipt of a notification letter duly signed by the Commissioner of
Internal Revenue, it becomes mandatory for them, including their branches located in the
computerized revenue district officers, to file their returns and pay their taxes thru EFPS (RR
No. 10-2007). The filing of the return ahead of the payment of the tax due thereon is still in
accordance with “pay-as-you-file-system” as long as the payment of the tax is made on or
before the due date of the applicable tax.
Non-large taxpayers shall have the option to file consolidated return in the head office
following the procedures in RR No. 1-98 or to file returns on a per branch or facility basis.
Provided, however, that they shall update their registration with the affected or concerned
revenue district officersby filing BIR Registration Update Form (BIR Form 1905) before they
change their manner of filing returns.
C. Other Taxpayers:
D. Enterprises enjoying fiscal incentives granted by other government agencies such as those
registered with:
Failure to comply with the provisions on e-filing and e-payment shall be penalized under Section
275 of the Tax Code. However, only the first and second offenses may be compromised. For
the third and subsequent offenses, no compromise shall be entertained or allowed.
The eBIR Forms, as provided in RR 6-2014 and RMC 61-2012, was developed to
provide taxpayers particularly the non-eFPS filers with accessible and convenient service
through easy preparation of tax returns. According to the aforementioned revenue regulations,
the use if eBIR Forms will improve the BIR’s tax return data capture and storage therby
enhancing efficiency and accuracy in the filing of tax returns.
eBIR Forms refer to the (2) types of electronic services provided by the BIR relative to
the preparation, generation and submission of tax returns, which are the:
a) e
BIR Forms System for Online Filing; and
b) e
BIR Forms Package to fill-up forms offline
The “eBIR Forms” Package can be downloaded through the BIR website or a copy of the
software package may be requested from the taxpayer’s registered RDO particularly in the
designated BIR 3-lounge.
“eBIR FORMS SOFTWARE PACKAGE” (also known as Offline eBIR Forms Package) is
a tax preparation software that allows the taxpayer and Accredited Tax Agent (ATA) to
accomplish or fill-up tax forms offline. It is an alternative mode of preparing tax returns which
deviates from the conventional manual process of filing-up tax returns on pre-printed forms that
is highly susceptible to human error. Taxpayers/ATAs can directly encode data, validate, edit,
save, delete, view and print the tax returns. The form package has automatic computations and
has the capability to validate information inputted by the taxpayers/ATAs.
“Online e BIRForms System” is a filing infrastructure that accepts tax returns submitted
online and automatically computes penalties for tax return submitted beyond due date. The
System creates secured user accounts thru enrollment for use of the online System, and allows
ATAs to file on behalf of their clients. The System also has a facility for Tax Software Providers
(TSPs) to test and certify the data generated by their tax preparation software (certification is by
form). It is capable of accepting returns data file using certified TSP’s tax preparation software.
Only those non-EFPS filers are covered by RR 6-2014 (as amended by RR 9-2016), particularly
the following:
Per RR 11-2015 dated March 27, 2015, “client-taxpayers” shall mean those taxpayers
who are otherwise authorizing their tax agents/practitioners to file on their behalf. Thus, client
taxpayers whose tax agents/practitioners only sign the audit certificate but have no authority to
file the returns in their behalf are not covered under this provision. The linking module of
authorization of authorization by the client-practitioner to his/her tax agent/practitioner is
available online via eBIRFORMS. It shall be noted, however, that the taxpayer may cancel
anytime his/her authorization prior to the termination of their client-agent relationship.
b) A
ccredited Printers of Principal and Supplementary Receipts/Invoices
d) T
hose who shall file a “No payment” Return
Under RR 12-2015, however, the following taxpayers may file manually “no payment returns” to
the Revenue District office (RDO) where registered using officially printed forms/photocopied or
electronic/computer-generated returns:
❖ Senior Citizen (SC) or Persons with Disability (PWD) filing for their own returns;
❖ Employees deriving purely compensation income and the income tax of which has been
withheld correctly showing tax due is equal to the tax withheld whether single or
multiple employees (with two or more employers concurrently and successively at
anytime during the taxable year);
❖ Employees qualified for substituted filing under RR 2-98 Sec. 2.83.4, as amended, but
opted to file for an Income Tax Return (ITR) and are filing for purposes of promotion
(PNP/AFP), loans, scholarships, foreign travel requirements, etc.
The above taxpayers are encouraged to use offline eBIRForms for ease
and convenience in the preparation, validation, computation rules and efficiency
check for completeness and correctness of taxpayer input. However, they are
encouraged as much as possible to file their returns electronically to avoid the
crowd and long lines.
e) G
overnment-Owned or Controlled Corporations (GOCCs)
f) L
ocal Government Units (LGUs), except barangays; and
g) Cooperatives registered with National Electrification Administration (NEA) and Local E Water
Utilities Administration (LWUA)
Taxpayers who are not covered by the regulation may opt to file their returns using the manual
filing or eBIR Forms.
a) Validate automatically the registration information indicated on the tax returns submitted by
the taxpayers in the Integrated Tax System (ITS) database of the BIR.
b) Prompt concerned revenue officials or employees on any discrepancies between the
c) Encourage concerned taxpayers to update their registration information with the BIR upon
validation of tax returns submitted.
OTHER TERMS:
❖ Accredited Printers are duly constituted agents of the BIR in the printing of principal and
supplementary receipts/invoices and included in the List of Accredited Printers of
Principal and Supplementary Receipts/Invoices published in the BIR website.
❖ Accredited Tax Agents (ATAs) are also known as accredited tax practitioners, who are
engaged in tax practice included in the List of Accredited tax Practitioners as published
in the BIR website. The designation of ATA by the taxpayer may at any time be
cancelled or revoked upon execution of “Removal of Tax Agent” within the online eBIR
Forms System and the aforementioned action shall be completed upon submission of a
duly notarized Notice of Termination to the taxpayer’s registered RDO.
❖ Offline- is a technical term generally used when the user’s workstation is not connected
to the internet.
❖ Online is the most common technical term used wherein the user connects his
workstation to the internet to access various information through the worldwide web.
❖ No payment Returns refers to the tax return that is not accompanied by any payment
where the same is filed with any authorized BIR receiving office (e/g. breakeven, no
transaction, refundable or second installment tax return).
Exercises
1. Hananiah Corp., a corporation engaged in business in the Philippines and abroad has
the following data for the current year:
Use the following data for the next three (3) questions:
2. A depository bank under foreign currency deposit system has the following income from
foreign currency transactions (exchange rate $1=P45);
From non-residents $5,000
From residents $3,000
From Philippine national bank $2,000
How much is the final withholding tax applicable on the above income?
a. P22,500
b. P13,500
c. P9,000
d. 45,000
3. Philippine Air, a domestic corporation engage in local and international operations has
the following data for the current year:
Gross and expenses from international operations, P10,000,000 and P4,000,000,
respectively. The income tax due of the corporation is
a. P 150,000
b. P 250,000
c. P 1,800,000
d. P 3,000,000
4. Which of the following income is not from a related trade, business or activity of a
domestic proprietary education institutions?
a. Income from the hospital where medical graduates are trained for residency
b. Income from the canteen situated with in the school campus
c. Income from bookstore situated within the school campus
d. Income from rent of available office spaces
5. A private educational institution duly recognized by CHED has the following data for
the fiscal year ending March 30, 2018:
Tuition and other fees P5,000,000
Rent income from canteen and bookstore P 47,500
Concessionaire, net of withholding tax
Dividend from domestic corporation P 500,000
Interest of Bank deposit, net of tax P 16,000
Operating expenses P 1,000,000
During the year, the school construct a 2-storey school building costing P2,000,000. It is
the school’s policy to deduct this cost in full during the taxable year. The income tax due
up payable is:
a. P152,500
b. P496,000
c. P205,000
d. P500,000
6. The minimum corporate income tax (MCIT) does not apply to a corporation, if
a. Imposition was suspended by the secretary of finance due to a corporation’s
heavy losses are rising from prolonged labor dispute;
b. Corporation is in initial year of its operation;
c. Corporation is exempt from income tax by virtue of tax holidays granted to it by
the court of investment;
d. All of the above
Use the following data for the next eight (8) questions:
A domestic corporation started operation in year 2004. The following data on income taxes
during the years 2008 tom 2015 were made available:
The next fourteen (14) questions are based on the following data:
Hananiah Corporation provided the following data for calendar year ending December 31, 2018:
($1-50)
Philippines Abroad
Gross Income P4,000,000 $40,000
Deduction P2,500,000 $15,000
Income tax paid $3,000
19. If it is a non-resident cinematography film owner/ lessor, its income tax is:
a. P 1,000,000
b. P 100,000
c. P 300,000
d. P 128,000
21. If it is a non-resident lessor of aircraft, machineries and equipment, its income tax is:
a. P 100,000
b. P 180,000
c. P 300,000
d. P 128,000
22. If it is a domestic corporation but its total expenses is P5,800,000 (disregard original
data on expenses), its income tax is:
a. P 730,000
b. P 60,000
c. P 120,000
d. P 85,000
23. If under the preceding number, but the domestic corporation is a non profit hospital,
(disregard tax paid abroad) its income tax is:
a. P 20,000
b. P 60,000
c. P 10,909
d. P 120,000
24. If the corporation is a non-stock educational institution which uses all its revenues or
income for educational and charitable purpose, its income tax is:
a. P 0
b. P 730,000
c. P 120,000
d. P 64,000
Introduction
This module tackles the general concepts about the accounting for income taxes for
partnerships. This also includes the discussion about the classification of partnerships
according to payment of taxes. Illustrations in identifying and computing the income
taxes for partnerships will be given.
Learning Objectives
Discussion:
Taxation of Partnerships
Partnership
Classification of Partnership
1. General Professional Partnership (GPP)
2. General Co-Partnership (GCP)
1. The partners in a general professional partnership shall be liable for income tax
only in their separate and individual capacities.
2. Each partner shall report his distributive share, actually or constructively received
in the net income of the partnership as gross income. The share of a partners
shall be subject to 10% creditable withholding tax.
If the income payments to the partner for the current year exceeds P720,000, the
withholding tax is 15%.
4. For purposes of computing the distributive share of the partners, the net income
of the partnership shall be computed in the same manner as that of a
corporation.
Illustration 1
Atty. Liu is one of the partners of B&J Partnership. The partnership is engaged in
rendering professional services (the sole source of income of the partnership) with a net
income before tax of P200,000. Atty. Liu has 60% shares on the profit or loss of the
partnership. The other income of Atty. Liu is a buy and sell business with a gross
income of P200,000 and related expenses of P80,000.
Compute the following:
Answers:
1. How much is the income tax of B&J?
B&J Partnership’s income is tax-exempt because it is engaged in purely
professional services.
2. How much is the net income tax payable of Atty. Liu if the partnership withheld a
10% withholding income tax?
Atty. Liu, being engaged in business, is liable for income tax only in his separate
and individual capacity and should not in any way change the tax status of B&J
partnership as a general professional partnership.
Illustration 2
Atty. Liu is one of the partners of B&J Partnership. The partnership is engaged in
rendering professional services (the sole source of income of the partnership) with a net
income before tax of P200,000. Atty. Liu has 60% shares on the profit or loss of the
partnership. The other income of Atty. Liu is a buy and sell business with a gross
income of P200,000 and related expenses of P80,000.
Answers:
Notes:
1. The Tax Code (RA 8424) provides that the partner’s distributive share from the
net income of the general professional partnership be included as a part of
individual taxpayer’s gross income.
2. P.D. 1773 allows OSD if the reported income of the individual partner as share
form the general professional partnership is not previously reduced by the
partnership’s business expenses.
J and B are partners of JB’s Enterprises, sharing 60% and 40% profit and loss,
respectively. The partnerships net income before tax during the year amounts to
P2,000,000.
Answers:
1. Income tax due of JB’s Enterprises.
Net income P2,000,000
Multiplied by corporate normal tax rate 30%
Income tax Due P600,000
To be nontaxable, a GPP should be for the sole purpose of exercising the partners’
common profession.
If the GPP is engaged in trade or business other than the practice of the partners’
common profession GPP becomes taxable as a corporation.
A taxable partnership is subject to regular corporate income tax ( 30% based on the net
taxable income) or minimum corporate income tax (2% based on the gross income)
starting from the 4 the year of its business operation.
Illustration 4
Answer: JB partnership is liable to pay income tax, because it earned business income.
It is a clear indication that the partnership is engaged in activities other than
professional services. Hence, it is considered and treated as a corporation which is
liable to corporate income tax of 30% or MCIT.
Revenues
Professional fee P100,000
Business income – trading 200,000 P300,000
Expenses:
Professional 60,000
Business – trading 120,000 180,000
Net taxable income 120,000
Multiplied by corporate income tax rate 30%
Assume that the partners agreed to divide the net income equally, the tax pertinent to
the shares of James and Benjie would be:
Module 7
Gross Income
Week 15
Introduction
This module tackles the concept of gross income that is considered in computing the
income tax. It discusses how we should identify gross. income as taxable or not. This
also includes the classification of income based on the concept of taxation.
Learning Objectives
Discussion:
Gross Income
Income Defined. Gross income (also known as gross taxable income) means total
income of a taxpayer subject to tax. It means, in its broad sense, all income from
whatever source, derived within or outside the Philippines, legal or illegal. The tax code
does not distinguish legal and illegal income. Proceeds of embezzlement or swindling,
for instance, are income because embezzler or windler already has complete dominion
over them and can use such for his economic benefit.
Income means all wealth which flows into the taxpayer, other than return of capital. It
imports something distinct from principal or capital. On the other hand, “capital”
constitutes the investment which is the source of income. Therefore, capital is fund
while income is the flow. Capital is wealth, while income is the service of wealth.
Form of income
Income may be realized in any form, whether in money, property, services, or indirect
economic benefit. Items indirectly benefiting taxpayers are excluded from gross income.
Income includes the forms of income specifically described as gains derived from sale
or other disposition of capital.
Valuation of income.
The amount of income recognized is generally the value received or which the taxpayer
has a right to receive. If the services were rendered at a stipulated price, in the absence
of any evidence to the contrary, such price shall be presumed to be the fair market
value of the compensation received. Transfer of land made by a person the another in
payment of services rendered in the form of attorneys fees shall be considered as part
of gross income of the latter value at either the fair market value or zonal valuation,
whichever is higher. In the taxable year received.
Classification of Income
1. Income as to source
a. Compensation income
b. Professional income
c. Business income
d. Other income
2. Income as to territorial source
a. Income within the Philippines
b. Mixed income (partly within and outside)
3. As to taxability
a. Taxable income
1. ordinary or regular income subject to basic or normal tax scheduler
tax under Section 24(A) of the tax code.
2. Passive income subject to final tax
3. Capital gains subject to capital gains taxes
4. Special income subject to special rates
b. Tax exempt income
1. By constitutional mandate
2. By statute (general or special)
3. By international comity
Taxable income
Taxable income means the pertinent items of gross income specified in the Tax Code,
less the deductions and/or personal and additional exemptions, if any, authorized for
such types of income by the tax codes or other special laws.. It does not include income
excluded by law, or which are exempt from income tax as well as income subject to final
taxes. Hence it pertains to all income subject to basic and creditable withholding taxes.
It includes the gains, profits and income derived from whatever sources, whether legal
or illegal.
Under the Global System, all income received by the taxpayer are grouped together,
without any distinction as to the type or nature of the income and after deducting
therefrom expense and other allowable deductions, are after deducting, are subjected to
tax.
Scheduler vs Global Tax System
Scheduler Global
3. It has retained more scheduler than global features with respect to individual
taxpayers but has maintained a more global treatment of corporations.
Gross income may be derived entirely from sources within the Philippines, entirely from
sources outside the Philippines. For income tax purposes, “sources” refers to the
activity, or property, or labor that gave rise or produced the income. Sources, therefore,
is the origin of the income. Situs means the place of taxation of the income or the
country which the jurisdiction to impose the tax. The state where the subject to be taxed
has a situs may rightfully levy and collect the tax. The situs is necessarily in the state
which has jurisdiction or which exercises dominion over the subject in question.
7. Mining
- Place where mine is located
8. Farming
- Place where farm is located
9. Manufacturing Business
Source of income
- Produced and sold within Within
- Produced and sold outside Outside
- Produced in whole/ part within and sold outside Partly within and outside.
- Produced in whole/ part outside and sold within Partly within and outside.
Assessments
Answer the following requirements:
1. Define Income in general for tax purposes.
2. Describe Gross income as used in income taxation.
3. Identify the sources of income.
4. Give the characteristics of income.
5. Identify the requisites for an income to be taxable
6. Explain the constructive receipt of income.
7. Expound the source of income from within and outside the Philippines.
Module 8
Inclusions and Exclusions from the Gross Income
Week 16 - 17
Introduction
This module tackles the identification of the inclusions and exclusions from the gross
income to compute for the taxable income. This discusses the items considered as
gross income by Section 32(A) of the Tax Code. This also demonstrates those items
which are not considered part of the gross income for the purpose of computing the
taxpayers’ taxable income due.
Learning Objectives
Discussion:
Inclusions
Section 32(A) of , the Tax Code provides that unless specifically excluded under the
code, gross income includes but not limited to the following:
1. Compensation for services, "in whatever form paid", including but not limited to
fees, salaries, wages, commissions and similar item
2. Gross income derived fróm the conduct of trade or business or the exercise of
profession (business income)
3. Gains derived from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner's distributive share from the net income of the general. professional
partnerships
COMPENSATION INCOME
The basis upon which the remuneration is paid is immaterial in determining whether the
remuneration constitutes compensation. Thus, it may be paid on the basis of
piece-work, or a percentage of profits, and may be paid hourly, daily, weekly, monthly or
annually.
The rules on compensation income are applicable only to individual taxpayers, except
nonresident aliens not engaged in trade or business. Corporations, estate, and trusts
are not also covered by the on compensation due to lack of employer-employee
relationship.
Any amount given by the employer as benefits to its employees, whether classified as
de minimis benefits or fringe benefits shall constitute as deductible expense upon such
employer
Tips or gratuities paid directly to an employee by a customer of the employer that are
not accounted for by the employee to the employer are considered as taxable income
subject to basic. tax. However, the same shall not be subject to withholding for the
reason that tips are not accounted for by the employee to the employer (RR 2-98).
Vacation and sick leave allowances are amounts of "vacation allowances or sick leave
credits" which are paid to an employee treated as compensation income. Thus, the
salary of an employee on vacation or on sick leave, which are paid notwithstanding his
absence from work, constitutes compensation. However, the monetized value of
unutilized vacation leave credits of ten (10) days or less' which were paid to the
employee during the year, being de minimis benefits are not subject to income tax and
to withholding tax.
The stipends received by resident physicians during their intensive training in the
residency program of a hospital are subject to creditable withholding tax (CWT),
imposed at the rate of 15% if the gross income of the resident physicians for the current
year exceeds P720,000, and 10%if otherwise pursuant to Section 2.57.2 (A)(1) of RR
2-98. Under Section 2.57.2 (AX1) of RR 2-98, income payments derived by individuals
engaged in the practice of profession or calling like doctors of medicine are subject to
10% or 15% CWT. The amount subject to CWT shall include not only fees, but also per
diems, allowances, and any other form of income payments not subject to withholding
tax on compensation [BIR Ruling No. DA (C-004)024-2010, February 4, 2010].
To distinguish between compensation for service and royalty payments, the taxpayer
must inquire on whether the payee has proprietary interest, in the property that gave
rise to the income. If the payee has none, the payment constitutes compensation for
personal services.If the payee has proprietary interest, the payment constitutes royalty
income, (B|IR Ruling No. DAITAD 139-05 dated November 15, 2005, citing Philippine
Refining Company v. CIR, CTA Case No. 2872 dated January 15, 1986).
COLA of minimum wage earners is exempt from income tax. The COLA forms part of
the new wage rates or statutory minimum wage Hence, it is covered by the income tax
exemption of MWES under RA 9504, as implemented by Revenue Regulations No.
10-08, which covers the statutory minimum wage (inclusive of COLA under NCR Wage
Order No. NCR-16), including holiday pay, overtime pay, night shift differential pay and
hazard pay.
2. BUSINESS INCOME
Gross income derived from the conduct of trade or business or the exercise of
profession is known as business income. They may arise from the sale of products or
'services. For example, fees received by a professional person are considered business
income. Rents received by a person in the real estate business are business income.
Business income is taxed at progresSIve rates on net business income, or income from
the practice of a profession (net income after deduction of certain specified expenses
and any excess of personal and additional exemptions over compensation income). In
the case of manufacturing, merchandising, or mining business, "gross income" means
total sales, less the cost of goods sold plus any income from investments and from
incidental or outside operations or sources.
Subsequent recovery of a bad debt previously written off in the books is a taxable
income provided that the write-off of the account resulted in a lower taxable income at
the time of write-off. This rule is known as "Tax Benefit Rule. The aforementioned rule
states that the taxpayer is obliged to declare as taxable income is subsequent recovery
of bad debts in the year they were collected to the extent of the tax benefit enjoyed by
the taxpayer when the bad debts were written-off and claimed as a deduction from
income. Thus, if the taxpayer realizes a reduction of the income tax due him on account
of a deduction for bad debts, his subsequent recovery of the same from the debtor shall
be treated as a receipt of taxable income. However, if the taxpayer did not benefit from
the deduction of the said bad debt written off because it did not result in any reduction of
his income tax in the year of such deduction, the subsequent recovery shall not be
treated as receipt of realized taxable income but a mere recovery or return of capital
which is not taxable.
TAX REFUND
The Tax Benefit Rule" also applies with respect to refund or credit for taxes. Thus, tax
refunds are taxable if the tax, when paid, was deducted from gross income (i.e., local
taxes and fringe benefit tax). Taxes which were not previously allowed as deductions
from the gross income should not form part of taxable income when refunded. The
following tax refunds are not taxable:
1. Income.tax (except fringe benefit tax)
2. Estate Tax
3. Donor's.tax
4. Special assessment
5. Stock transaction tax
6. Income tax paid to a foreign country if the taxpayer.claimed.a credit for such tax
in the year it was paid.
Tax refunds shall be reported as income in the year.it was received if the accounting
method employed by the taxpayer is the cash method Otherwise, if the accounting
method used is the accrual basis, the tax refund must be reported in the year the refund
was ordered.
Income can come in many forms, including the cancellation or condonation of debts.
The following tax rules shall be observed with respect to cancellation/condonation of
debts:
Subject to basic income tax lf services were rendered by the debtor, in consideration
of which the indebtedness was cancelled by the
creditor.
Subject to Donor's tax If the creditor, Without receiving any consideration from
the debtor, and purely as an act of liberality, cancels the
indebtedness.
4. INTEREST INCOME
Generally, interests are taxable income, unless exempted by law, whether or not
usurious. Gross income derived from interest should only refer to such interest as
arising from indebtedness (whether business or non-business, legal or illegal), that is,
Compensation for the loan or forbearance of money, goods, or credits For instance,
interest derived from lending money, goods, or credits from one person to another or
interest earned in the normal conduct Or trade or business are subject to basic tax.
On the other hand, interest income on deposits made in banking institutions as well as
interest income on deposit substitutes are passive Income subject to 20% final
withholding tax. Interest income derived from investments in 9overnment securities are
also subject to 20% final tax.
5. RENTAL INCOME
Section 32(A)5) of the Tax Code provides that "rent" paid by the lessee for the use or
lease of property is taxable income to the lessor. Rent is the amount paid for the use or
enjoyment of a thing (real or personal) or right
NON-TAXABLE RENT:
Advance rentals representing option money for the property as well as security deposits
to insure faithful performance of certain obligations of the lessee are not considered as
income on the part of the lessor.
LEASEHOLD IMPROVEMENT
PRETERMINATION OF LEASE
If for any reason other than a bona lide purchase from the lessee by the lessor, the
lease is terminated, the lessor realizes additional income for the year to the extent that
the value of such improvement exceeds the amount already reported as income on
account of such improvement.
6. ROYALTY INCOME
Royalty was not defined under the Tax Code, nonetheless, Webster Dictionary defined
the same as a share of the earnings as from invention, book or play, paid to the
inventor, writer, etc. for the right to make, use or publish the same.
Subject to 10% final tax Royalties on books, other literary works and musical
compositions from sources within the Philippines received
by individual taxpayers other than NRA-NETBS
Subject to 20% final tax Royalties derived from sources within the Philippines other
than royalties subject to 10% final tax
7. DIVIDEND INCOME
Pensions, like retirement benefits, are generally taxable unless exempt under the law.
INFORMER'S AWARD
Exclusions from the gross income refer to flow of wealth to the taxpayers which are not
considered part of gross income for purposes of computing the taxpayers' taxable
income due to the following:
1. It is exempted by the fundamental law or by statute
2. It does not come within the definition of income
The exclusion of income should not be confused with the reduction of gross income by
the application of allowable deductions. Exclusions are not taken into account in
determining gross income, however, deductions are subtracted from the gross income.
Nature of Exemptions from Taxation
Income of any kind, to the extent required by treaty. obligations binding upon the
Government of the Philippines, shall be exempt from income tax. This exclusion IS
based on the principle of international comity
A tak amnesty is a general pardon or intentional overlooking by the State of its authority
to impose penalties on persons otherwise guilty of evasion or violation of a revenue or
tax law/partakes of an absolute forgiveness or waiver by the Government of its right to
collect what otherwise would be due it and, in this sense, prejudicial thereto, particularly
to tax evaders who wish to relent and are willing to reform are given a chance to do so
and therefore become a part of the society with a clean slate [Republic v. Intermediate
Appellate Court, 196 SCRA 335].
Like a tax exemption, a tax amnesty is never favored nor presumed in law, and is
granted by statute. The terms of the amnesty must be strictly construed against the
taxpayer and liberally in favor of the government. Unlike a tax exemption, however, a
tax amnesty has limited applicability as to cover a particular taxing period or transaction
only. On the other hand, there is tax condonation or remission when the State desists or
refrains from exacting, inflicting or enforcing something as well as to restore what has
already been taken. The condonation of a tax liability is equivalent to and is in the
nature of a tax exemption. Thus, it should be sustained only when expressed in the law.
[Surigao Consolidated Mining V. Commissioner of Internal Revenue, 9 SCRA 728]
National government
It is inherent in the exercise of the power to tax that the sovereign state be free to select
the subjects of taxation and to grant exemptions therefrom. Unless restricted by the
Constitution, the legislative power to exempt is as broad as its power to tax.
Local governments
Municipal corporations are clothed with no inherent power to tax or to grant tax
exemptions. But the moment the power to impose a particular tax is granted, they also
have the power to grant exemption therefrom unless forbidden by some provision of the
Constitution or the law. The legislature may delegate its power to grant tax exemptions
to the same extent that it may exercise the power to exempt. In the case of Basco v.
PAGCOR (196 SCRA 52), the Supreme Court held that: "The power to tax municipal
corporations must always yield to a legislative act which is superior, having been
passed by the State itself. Municipal corporations are mere creatures of Congress which
has the power to create and abolish municipal corporations due to its general legislative
powers. Congress can grant the power to tax, it can also provide for exemptions or
even take back the power.
Under Section 32(B) of the Tax Code as amended under RR 10963 (TRAIN Law; RR
&-2018), the following are exclusions from the gross income:
1. Life Insurance - tne proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single Sum or
otherwise, but if such amounts are held by the insure under an agreement to pay
interest thereon, the interest payments shall be included in gross income.
2. 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.
3. Value of property acquired by gratuitous transfer (gifts, bequests, and devises)
but not the income from such property. The value of the 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 transters of dividend interest, shall be included in the gross income.
4. Compensation for Injuries or sickness. Amounts received, through ACCIdent or
Health Insurance or under Workmen's Compensation ACIs, 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.
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Miscellaneous items
a. Income derived by foreign governments
b. Income derived by the government political subdivisions
c. Prizes and awards
d. Prizes and awards in sports competition
e. 13 month pay and other benefits./Gross benefits received by officials and
officials of public and private entities; provided, however.that the exclusion
under this item shall not exceed P90,009 (beginning January 1, 2018 or
upon the effectivity of TRAINLaw) which shall cover
1. Benefits received by officials and employees of the national and
local government pursuant to RA 6686 (An Act Authorizing Annual
Christmas Bonus to National and Local Government Officials and
Employees);
2. Benefits received by employees pursuant to PD 851 (13 Month Pay
Law) as amended by Memorandum Order No. 28 dated August 13,
1986
3. Benefits received by officials and employees not covered by PD
851 as amended by Memorandum Order No. 28 dated August 13,
1986;
4. Other benefits such as productivity and incentives and Christmas
bonus
Assessments
Juan Dela Cruz presented to you the following income for 2018:
Business income:
Cash dividend:
Proceeds from the life insurance coverage of his deceased father 300,000
References
Tabag, Enrico D and Garcia, Earl Jimson R. Income Taxation with Special Topics in
Taxation. 2019
https://www.aseanbriefing.com/news/corporate-taxes-philippines/