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PM Reyes Notes On Taxation 1 - Income Tax (Updated 14 January 2013)
PM Reyes Notes On Taxation 1 - Income Tax (Updated 14 January 2013)
This reviewer is a compilation of personal notes in Taxation One and notes and lectures from Atty. Gruba and Atty. Montero. References have
also been made to the following books: DE LEON & DE LEON, JR. THE FUNDAMENTALS OF TAXATION (2012); DE LEON & DE LEON, JR.
COMPREHENSIVE REVIEW OF TAXATION (2010); VITUG & ACOSTA. TAX LAW AND JURISPRUDENCE (2006); DOMONDON, TAXATION VOLUME II: INCOME
TAX (2009); CO-UNTIAN, JR. TAX DIGEST (2009); MAMALATEO, PHILIPPINE INCOME TAX (2010); MAMALATEO, REVIEWER ON TAXATION (2008). This
reviewer is best used with SACADALAN-CASASOLA, NIRC AND OTHER LAWS (2012).
Possessors are granted the right to reproduce and distribute this reviewer as well as the right to convert the work to any medium for the
purpose of preservation and/or continued distribution provided that the author’s name remains clearly associated with the work and that no
alterations of the form and content are made.
Stock dividends cannot comply with the requirement of “wherewithal” (i.e.
The holder of stock dividend was not any the capacity to pay. — By taxing stock dividends, it is like asking the
poorer or richer when he received stock stockholder to sell his stock dividends to the BIR.
dividends (realization). There is also the
idea of severance from capital which was PM REYES NOTES ON TAXATION I:
been modified by Helvering v. Bruun. INCOME TAX
unrealized gain and cannot be subjected to income Q3.3. What is the constructive receipt
tax until that gain has been realized. doctrine?
You have to
be liquid to
As explained by the Supreme Court in FISHER V. The constructive receipt doctrine provides than an
be taxed.
You can’t TRINIDAD [OCTOBER 30, 1922], when a corporation item is treated as income when it is credited to the
pay stocks/ issues stock dividends, it shows that the corporation’s account of the, or made unconditionally available to
chickens to accumulated profits have been capitalized, instead of the taxpayer; no physical possession is required.
the BIR. distributed to the stockholders or retained as surplus
This is why available for distribution. The stockholder receives Income is received not only when it is actually
realization is nothing out of the corporate assets for his separate handed to a taxpayer but also when it is merely
a requisite use and benefit but a representation of his increased constructively received by him. In LIMPAN INVESTMENT
for income. interest in the capital of the corporation. The capital V. CIR [JULY 26, 1966], the lessees opted to deposit
WHEN YOU still belongs to the corporation as there is no their payments when the lessor refused to accept the
REALIZE it separation of interest.Receipt of stock dividends does not same in 1957. The lessor did not report these
is a different give rise to income payments in his 1957 income tax return. The
question. However, stock dividends constitute as income if a Supreme Court held that the failure to report the said
corporation redeems stock issued so as to make a rental income is unjustified as, when the payments
4
distribution. This is essentially equivalent to the were deposited, the lessor was deemed to have
distribution of a taxable dividend the amount so constructive received such rentals.
distributed in the redemption considered as taxable
income. (see COMMISSIONER VS. M ANNING [AUGUST 7,
Overview of the Philippine Income Tax
1975])
System
Q3.2. Are money received as damages
Segues into Q4.What are the features of the Philippine tax
income?
the 3rd system?
requisite.
There may Yes. In COMMISSIONER V. GLENSHAW GLASS CO. [348
be an U.S. 426], Glenshaw Co was engaged in a proracted The Philippine tax system is:
5
instance litigation with Hartford-Empire Co where the former 1. Direct
6
whereby demanded exemplary damages for fraud and treble 2. Progressive
those not damages for injury to its business by reason of the 3. Semi-schedular, semi-global
considered latter’s violation of federal antitrust laws. The parties
as income settled. Glenshaw did not report the money received Q4.1. What are the kinds of income tax
will be such as damages from the settlement in its income tax systems?
because the return. The Commissioner assessed Glenshaw for
law says the deficiency. Glenshaw contended that punitive The types of income tax systems adopted are as
they are. damages, as windfalls flowing from culpable conduct follows:
of third parties are not taxable income. The US
Tax Benefit Supreme Court held that money received as 1. Global Tax System – where the taxpayer is
Rule - if damages must be reported as they constitute required to lump up all items of income earned
unable to income. The mere fact that such payments were during a taxable period and pay under a single
collect, you extracted from wrongdoers cannot detract from their set of income tax rates on these different items of
may report it character as taxable income. The Court also stated income. (Simply put, varying taxes are imposed
as loss. But
that punitive damages cannot be classified as gifts. on passive income)
if after such
report, you
In MURPHY V. IRS [493 F.3d 170], the US Court of 2. Schedular Tax System – where there are
receive
payment for Appeals (District of Columbia), held that the amount different tax treatments of different types of
the debt, it received as compensatory damages for emotional income so that a separate tax return is required
becomes distress and loss of reputation constitutes taxable to be filed for each type of income and the tax is
income in income. computed on a per return or per schedule basis.
your hands.
In contrast, 5
if you Direct taxes are those taxes wherein both the tax liability as well
4
The exception to the rule that stock dividends do not constitute as the impact or burden of the tax falls on the same person
receive it income shall be discussed more extensively later. Knowing that 6
Progressive taxes are those taxes imposed where the tax rate
before loss there is an exception exists will suffice for now. increases as the tax base increases
report, its
neutral.
PIERRE MARTIN DE LEON REYES 2
PM REYES NOTES ON TAXATION I:
INCOME TAX
(Simply put, one rate for all types of gross 6. Capital gains tax on sale or exchange of real
income). property located in the Philippines and classified
as a capital asset
3. Semi-Schedular or Semi-Global Tax System – 7. Final withholding tax on certain passive
where the tax system is either (a) global (e.g. investment incomes
taxpayer with compensation income not subject 8. Fringe benefit tax
to final withholding tax or business or 9. Branch profit remittance tax; and
professional income or mixed income – 10. Tax on improperly accumulated earnings.
compensation and business or professional
income) or (b) schedular (e.g. taxpayer with Definition of Terms
compensation, capital gains, passive income, or
other income subject to final withholding tax) or
Q5.Define the following terms:
(c) both global and schedular may be applied
depending on the nature of the income realized
by the taxpayer during the year. In Section 22(A) to (I), (Z), (GG), and (HH), Tax
Code:
Q4.2. How do you distinguish
Person An individual, a trust, estate or
“schedular treatment from “global corporation
treatment” as used in income Corporation Includes partnerships, no matter
taxation? how created or organized, joint-
stock companies, joint accounts,
Under the schedular tax system, the various types of associations, or insurance
income (i.e. compensation; business/professional companies but does not include
income) are classified accordingly and are accorded general professional
different tax treatments, in accordance with partnerships and a joint venture
schedules characterized by graduated tax rates. or consortium formed for the
Since these types of income are treated separately, purpose of undertaking
the allowable deductions shall likewise vary for each construction projects or
type of income. engaging in petroleum and other
energy operations pursuant to
On the other hand, under the global tax system, all an operating agreement under a
income received by the taxpayer are grouped service contract with the
together, without any distinction as to type or nature Government
of the income, and after deducting therefrom General Partnerships formed by persons
expenses and other allowable deductions, are Professional for the sole purpose of
subjected to tax at a graduated or fixed rate (see TAN Partnerships exercising their common
VS. DEL ROSARIO [OCTOBER 3, 1994]). (GPPs) profession, no part of the income
of which is derived from
Q4.3. What are the types of Philippine engaging in any trade or
Income Tax (under Title II of the business
NIRC)? Domestic When applied to a corporation,
(Corporation) means created or organized in
The types of Income tax under Title II of the NIRC the Philippines or under its laws
are: Foreign When applied to a corporation,
1. Graduated income tax on individuals (Corporation) means a corporation which is
2. Normal corporate income tax on corporations not domestic
3. Minimum corporate income tax on corporations Nonresident The term means a citizen of the
4. Special income tax on certain corporations (e.g. citizen Philippines:
private educational institutions, FCDUs, and 1. who establishes to the
international carriers) satisfaction of the
5. Capital gains tax on sale or exchange of unlisted Commissioner the fact of his
shares of stock of a domestic corporation physical presence abroad
classified as a capital asset with intention to reside
therein
7
which defines what capital assets are and those which are not.
Q13.9. Explain the use of inventories to The term “exclusions” refers to items that are not
determine the income of a included in the determination of gross income
taxpayer. because:
For certain businesses, the use of inventories may be 1. They represent return of capital or are not
deemed necessary in order to determine clearly the income, gain or profit (e.g. life insurance)
2. They are subject to another kind of internal
21
If, however, a creditor merely desires to benefit a debtor and revenue tax (e.g. gifts, bequests, devices)
without any consideration therefor cancels the debt, the amount of 3. They are income, gain or profits that are
the debt is a gift. If a corporation to which a stockholder is indebted expressly exempt from income tax under the
forgives the debt, the transaction has the effect of the payment of a
dividend.
22 23
The enumeration of taxes not allowable as deductions will be The CIR shall not exercise this authority more often than every 3
provided later. years.
The Tax Credit is 5% of the tax due from you which is substracted. So if the
tax due from you (imposed on the net income) is 90k, and the tax credit rate
PIERRE MARTIN DE LEON REYES 15
is 5%, then the tax due would only be 85k
PM REYES NOTES ON TAXATION I:
INCOME TAX
Philippines Interests The source of an interest payment is
[By definition of a non-resident the place of residence of the person
citizen, this applies to an obligated to make that payment
overseas contract worker (a (residence-of-the-obligor rule).
citizen working and deriving
income from abroad)] It is income within the Philippines if
Alien Alien (whether taxable only on income derived the residence of the obligor is in the
whether resident or from sources within the Philippines.
engaged in non-resident) Philippines
trade and Domestic taxable on all income derived It is income without the Philippines if
business in corporation from sources within and outside the residence of the obligor is
the PH or the Philippines abroad.
not. Foreign taxable only on income derived
corporation from sources within the
Philippines Dividends Generally, a dividend has its source
Whether resident or (This applies whether the foreign in the country where the corporation
non-resident foreign corporation is engaged or not in paying the dividend is incorporated.
corporation trade or business in the
Philippines) Thus, if the dividend is received from
a domestic corporation, it is income
Simply put, only resident citizens and domestic within the Philippines. If the dividend
corporations are taxable on their worldwide income is from the foreign corporation, it is
while the other types of individual and corporate income without the Philippines.
taxpayers are taxable only on income derived from
sources within the Philippines. The exception to the general rule
that dividends paid by a foreign
Additionally, it must be noted that only a non- corporation are from sources without
resident alien not engaged in trade or business in the Philippines is when a foreign
the Philippines and non-resident foreign corporation derives 50 percent of its
corporations are taxed on gross income while all gross income from sources within
other types of taxpayers are subject to tax on net the Philippines for a three-year
income (i.e. may claim deductions). period ending with the close of its
taxable year preceding the
Source of Income Rules38 declaration of its dividends
intellectual The answer is both yes and no. The answer is yes
property with regard to those services performed in the
Thus, it is income within the
(construct the Philippines. The answer is, however, no with regard
Philippines if it is used in the
design) here, Philippines and the unauthorized
to those services rendered in Japan. Such services
then you have to were rendered outside the taxing jurisdiction and thus
use of such intangible property is
pay taxes here. constitute as income without the Philippines.
protected by Philippine law.
Marubeni, being a foreign corporation, is taxable only
Sale of Income from the sale of real
on income within the Philippines and, hence, income
Real property is sourced in the country
from services rendered in the Philippines.
Property where the real property is located.
41
It is a resident foreign corporation. In order that a foreign
corporation may be regarded as doing business within a State,
there must be continuity of conduct and intention to establish a
39
This is the generally accepted rule. continuous business, such as the appointment of a local agent,
40
In the US, the rule is that income from sale of personal property and not one of a temporary character. ABC maintained a general
is sourced in the country where the seller is resident (residence- sales agent and it was engaged in selling or issuing tickets, which
of-the-seller rule) is considered the main lifeblood of an airline.
Q21.2.1. ABC Corp failed to claim Q21.4.1. Name some special laws
expenses for professional which provide for deductible
services that accrued in past business expenses.
years. May ABC Corp still
claim these expenses as 1. Republic Act 10028 (Expanded Breastfeeding
deductions? Promotion Act)
No. In COMMISSIONER OF INTERNAL REVENUE VS. The law provides that the expenses incurred by a
ISABELA CULTURAL CORPORATION (FEBRUARY 12, private health and non-health facility, establishment
2007), Isabela Corp failed to claim the expenses for or institution, in complying with the provisions of this
professional services that accrued in 1984 and 1985 Act, shall be deductible expenses for income tax
during the said years. Instead, it sought to claim them purposes up to twice the actual amount incurred
as deductions during the taxable year of 1986. The provided:
Supreme Court held that one of the requisites for the
deductibility of a business expenses is that it must 1. That the deduction shall apply for the taxable
have been paid or incurred during the taxable year. period when the expenses were incurred
Hence, the professional fees should have been 2. That all health and non-health facilities,
claimed as deductions during the years where they establishments and institutions shall comply
were paid or incurred. with the provisions of this Act within six (6)
months after its approval
Q21.3. What are the types of business 3. That such facilities, establishments or
expenses specifically included in institutions shall secure a "Working Mother-
the Tax Code as deductions? Baby-Friendly Certificate" from the
Department of Health to be filed with the
As provided in Section 34(A)(1)(a), these are: Bureau of Internal Revenue, before they can
Donations to avail of the incentive.
Yolanda are
1. Reasonable allowance for salaries or other
deductible 2. Republic Act 8502 (Jewelry Industry
compensation for personal services
actually rendered to the taxpayer Development Act)
2. Reasonable allowance for travel expenses
in the pursuit of trade, business or profession 51
In the latter case, he may claim depreciation allowance
It depends on the nature of the advertising expense. No. As held in ATLAS CONSOLIDATED MINING &
In COMMISSIONER OF INTERNAL REVENUE VS. GENERAL DEVELOPMENT CORPORATION VS. COMMISSIONER OF
FOODS (PHILS.) INC. [APRIL 24, 2003], General Foods INTERNAL REVENUE (JANUARY 27, 1981), litigation
claimed as deductions its advertising expenses for its expenses incurred in defense or protection of title are
product “Tang.” The CIR disallowed the deduction capital in nature and not deductible.
Interest shall refer to the payment for the use or Yes. RR 13-2000 [NOVEMBER 20, 2000] provides
forbearance or detention of money, regardless of the three more, namely:
name it is called or denominated. It includes the
amount paid for the borrower’s use of money during 1. the interest payment arrangement must not be
the term of the loan, as well as for his detention of between related taxpayers
money after the due date for its repayment. 2. the interest must not be incurred to finance
petroleum operations
Q23. What is indebtedness? 3. in case of interest incurred to acquire property
used in trade, business, or exercise of profession, the
Indebtedness is something owned by one who is same was not treated as a capital expenditure
unconditionally obligated or bound to pay
The RR also provides for a limitation in that the
Q24. What are the requisites for the amount of interest expense paid or incurred by a
deductibility of interest expenses from taxpayer in connection with his trade, business, or
gross income? exercise of a profession from an existing
indebtedness shall be reduced by an amount equal to
The requisites are: 38% of the interest income earned which had been
52
Loan agreement 1. There must be indebtedness subject to final withholding taxes.
provides an 2. The indebtedness must be connected with
interest between the taxpayer’s trade, business or exercise of Q24.3. What are the rules on the
X and Y (corps). profession deductibility of Interest
Is the interest
3. The interest must be legally due expenses?
deductible?
4. The interest expense must have been paid or
Depends. If X
and Y are incurred during the taxable year. The general rule is that the amount of interest
individuals, it is 5. The interest must have been stipulated in expense paid or incurred within a taxable year on
deductible. writing indebtedness in connection with the taxpayer’s trade,
Lender has to be + (6) not related parties and (7) interest arbitrage business or exercise of profession shall be allowed
an individual and Q24.1. Do tax obligations constitute as a deduction from the taxpayer’s gross income
must own at least indebtedness? provided that the taxpayer’s otherwise allowable
50% of the deduction for interest expense shall be reduced by
entities. Yes. In COMMISSIONER OF INTERNAL REVENUE VS. VDA. 38% of the interest income subject to final tax.
DE PRIETO [SEPTEMBER 30, 1960], Vda. de Prieto
conveyed real property by way of gifts to her four The exceptions (where interest expense is not
children. She was assessed for donor’s gift taxes deductible from gross income) are:
including interests due thereon. She claimed as
deduction the total interest on account of the 1. If within the taxable year an individual
delinquency. She contends that the interests due reporting income on the cash basis incurs an
from her tax obligations are deductible from gross indebtedness on which an interest is paid in
income. advance through discount or otherwise.
Such interest shall be allowed as a deduction
The Supreme Court held that although interest in the year the indebtedness is paid. If the
payment for delinquent taxes is not deductible as tax
under Section 34(C) of the Tax Code, the taxpayer is 52
This will be further discussed under tax arbitrage.
Both depletion and depreciation are predicated on Q37. What are the conditions for deductibility
the same basic premise of avoiding a tax on capital. of charitable contributions?
The allowance for depletion is based on the theory
that the extraction of minerals gradually exhausts the The requisites are:
capital investment in the mineral deposit. The 1. Actually paid or made to the Philippine
purpose of the depletion deduction is to permit the Government or any political subdivision
owner of a capital interest in mineral in place to make thereof, or any of the domestic corporation or
a tax-free recovery of that depleting capital asset. A association specified in the Tax Code
depletion is based upon the concept of the 2. Made within the taxable year
exhaustion of a natural resource whereas 3. Not exceeding 10% (individuals) or 5%
depreciation is based upon the concept of the (corporations) of the taxpayer’s taxable
exhaustion of the property, not otherwise a natural income before charitable contributions
resource, used in a trade or business or held for the 4. Evidenced by adequate receipts or records
production of income. Thus, depletion and
depreciation are made applicable to different types of
assets. And a taxpayer may not deduct that which the
Code allows as a deduction of another.
The limitations are 10% of net income for individual The rule does not apply to:
taxpayers and 5% of net income for corporate
taxpayers. 1. Any expenditure for the acquisition or
improvement of land, or for the improvement
Q37.3. What is a non-government of property to be used in connection with
research and development of a character
organization?
which is subject to depreciation and depletion
2. Any expenditure paid or incurred for the
A non-government organization shall refer to a
purpose of ascertaining the existence,
non-stock, non-profit domestic corporation
location, extent, quality of any deposit of ore
organized and operated exclusively for scientific,
or other mineral, including oil or gas.
research, educational, character-building and
youth and sports development, health, social
In 3M PHILIPPINES, INC. VS. COMMISSIONER OF
welfare, cultural or charitable purposes or a 59
INTERNAL REVENUE [SEPTEMBER 26, 1988], 3M
combination thereof, no part of the net income of
Philippines, a subsidiary of 3M (nonresident foreign
which inures to the benefit of any private individual.
corporation based in the US), claimed as deductions
the entire amount paid by 3M Philippines to 3M for
Q37.3.1. Is an international NGO royalties and technical services. The Supreme Court
qualified to be granted ruled that the entire amount is not deductible.
accreditation? Improper payments of royalty are not deductible as
legitimate business expenses. Proper reference must
be given to CB Circular 393 which provides that
58 59
NGOs are accredited by the PCNC (Philippine Council for NGO Note, however, that during this time, there was a 5% threshold
Certification) for royalty payments.
Q42. What items are not deductible from Section 119-122, RR 2 reiterates the enumeration
gross income? provided above.
No deduction shall in any case be allowed in respect Q42.1. Are margin fees deductible
to: business expenses?
61
1. Personal, living or family expenses No. In ESSO STANDARD EASTERN, INC. VS.
COMMISSIONER OF INTERNAL REVENUE [JULY 7, 1989],
2. Any amount paid out for new buildings or Esso made profit remittances to its New York Head
for permanent improvements or Office. Esso claims that the margin fees it paid to the
betterments made to increase the value of Central Bank on the remittances are ordinary and
any property or estate. (Capital necessary expenses and should be deducted from its
expenditures) gross income.
61
The Supreme Court held that margin fees are not
They are not deductible because the taxpayer is already given a necessary and ordinary expenses. The margin fees
personal exemption of P50,000 regardless of status and gender,
plus an additional exemption of P25,000 foe each dependent, not are not expenses in connection with the production or
exceeding 4, as defined by law earning of petitioner's incomes in the Philippines..
62
The next three parts will be on Individuals, Corporations, and
Withholding Tax. This part provides the key terms and an overview
of how net income tax payable for individuals and corporations are
63
determined. Simply multiply it with the corporate income tax rate.
Q47. Differentiate ordinary income from Q47.2. What is the income tax rate
passive income. imposed on passive income?
Ordinary income is income other than capital gain Passive incomes are subject to different final taxes.
and those incomes which fall under the category of
passive income. As stated earlier, since they are already subject to
different rates and taxed finally at source, they are no
On the other hand, if the income is generated in the longer included in the computation of gross income,
active pursuit and performance of the corporation’s which determines taxable income.
primary purposes, the same is not passive income.
Generally, passive income is income generated by Q47.3. What are the incomes subject to
the taxpayer’s assets. These assets can be in the final tax rates?
form of real properties that return rental income,
shares of stock in a corporation that earn dividends As a general rule, income, gain or profit derived by
or interest income received from savings. an individual during the taxable year shall be subject
to the graduated income tax rates.
Q47.1. What is the income tax rate
As exceptions, certain incomes subject to tax are
imposed on ordinary income?
not subject to the graduated tax rates and are instead
subject to final tax rates. They are:
It shall be subject to the graduated income tax with
64
rates from 5% to 32%. 1. Tax on certain passive income under
Section 24(B)
In relation to Section 23 of the NIRC, the taxable a. Interests, royalties, prizes and other
income derived for each taxable year: winnings under Section 24(B)(1)
b. Cash and/or property dividends under
1. From all sources within and without the Section 24(B)(2)
Philippines by resident citizens; 2. Capital gains from sale of shares of stock not
2. From all sources within the Philippines only traded in the Stock exchange under Section
by a non-resident citizen including overseas 24(C)
contract workers; 3. Capital gains from sale of real property under
3. From all sources within the Philippines only, Section 24(D)
by a resident alien or a non-resident alien 4. Compensation income of alien and Filipino
engaged in trade or business in the employees of
65
Philippines; a. Regional or area headquarters and
regional operating headquarters of MNCs
shall be subject to the graduated income tax in under Section 25(C)
accordance with the following schedule provided b. Offshore Banking Units under Section
under Section 24 (see Tax Rates Table annexed to 25(D)
this reviewer) c. Foreign petroleum service contractors
and sub-contractors under Section 25(E)
Q47.1.1. Is the income of minimum
wage earners be subject to the
Q47.3.1. What is the proper tax
graduated income tax rates?
treatment on individual
taxpayers of income derived
No. Minimum wage earners shall be exempt from the
from royalties, prizes and
payment of income tax on their taxable income.
other winnings?
64
For ordinary income over P10,000 but not over P30,000 and
Royalties (except books, literary works, musical
upper brackets, a fixed amount is added to the taxable amount
subject to the graduated income tax rate. compositions), prizes amount to more than P10,000
65
Only difference really is the source of income and other winnings (except PCSO and Lotto)
In case of non-resident aliens not engaged in trade or As provided in RR 14-2012 [NOVEMBER 7, 2012]:
business, the amount received shall form part of their
gross income subject to a flat 25%. (see Section 1. Interest from Philippine currency bank 1- 4 are
25(B)) deposits and yield from deposit substitute derived from
and from trust funds or similar dealings with
Exceptions: arrangements banks not
interest
1. For royalties from books, literary works, musical Final tax in case of citizens, resident aliens and non- income
compositions, the final tax is 10%. resident aliens engaged in trade or business is derived by
20%.
66 banks.
2. Prizes amounting to P10,000 or less shall form
part of ordinary taxable income and, subject, to the In case of non-resident aliens not engaged in trade or
graduated income tax rates. business, the amount received shall form part of their
67
gross income subject to flat 25% income tax.
3. PCSO and Lotto Winnings are tax-exempt.
2. Interest income derived from government
Q47.3.2. What is the proper tax debt instruments and securities
treatment on individual
68
taxpayers of income derived They are considered “deposit substitutes.” The
from dividends? same tax treatment as above is applied.
Dividends from domestic corporations and shares in 3. Interest derived from long long-term
net profits of taxable partnerships received by deposits or investments
citizens (whether resident or nonresident) or resident
aliens are subject to 10%. They are exempt from tax, provided the following
requisites are met:
In the case of non-resident aliens engaged in trade or
business, it is 20%. a. Depositor is an individual citizen (resident or
non-resident), a resident alien or a
As for non-resident aliens not engaged in trade or nonresident alien engaged in trade or
business, it shall form part of their taxable gross business in the Philippines;
income subject to flat rate of 25%. b. The long-term deposit or investment
certificates under name of the individual;
Q47.3.3. What are deposit substitutes? c. The long-term deposits or investments must
be in the form of savings, common or
Deposit An alternative form of obtaining individual trust funds, deposit substitutes, etc
substitutes funds from the public (the term evidences by certificates in the BSP-
public means borrowing from 20 or prescribed form
more individual or corporate d. The long-term deposits or investments must
lenders at any one time), other be issued by banks only;
than deposits, through the e. The long-term deposits or investments must
issuance, endorsement, or have a maturity period of not less than 5
acceptance of debt instruments for years
the borrower’s own account for
purposes of re-lending or
purchasing receivables and other
similar obligations, or financing 66
Same rate applies to domestic and resident foreign corporations.
67
their own needs or the needs of 68
A non-resident foreign corporation is subject to a FWT of 30%.
their agent or dealer Irrespective of the number of lenders at the time of origination if
such debt instrument and securities are to be traded or exchanged
in the secondary market.
Q49.1. If the asset sold is not a capital Capital gains tax shall be imposed upon the net
asset, what tax will be imposed? capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares
of stock in a domestic corporation except shares,
If the asset is an ordinary asset, any gain from the
sold or disposed through the stock exchange.
sale thereof shall form part of the ordinary income
which shall be subject either to graduated income tax
The final tax imposed shall be:
rates (if individual) or corporate income tax (if
corporation).
71
Note that any corporate taxpayer, domestic or foreign as well as
all other taxpayers may be subjected to pay capital gains tax on
stock or real property transactions
The tax base shall only be the gain on the sale and Q51.4. What is the effect of non-payment
such sale will always be subject to capital gains tax of capital gains tax on stock
without any exemption. transactions?
The capital gains tax must be paid within 30 days
As provided in Section 11 of RR 06-2008, no sale,
following each sale or disposition. In case of
exchange, transfer or similar transaction intended to
installment sale, the return shall be filed within 30
convey ownership of, or title to any share of stock
days following the receipt of the first down payment
shall be registered in the books of the corporation
and within 30 days following the subsequent
unless the receipts of payment of the tax herein
installment payments.
imposed is filed with and recorded by the stock
transfer agent or secretary of the corporation.
(See RR 06-2008 [APRIL 22, 2008])
RMC 37-2012 [AUGUST 3, 2012] clarified RR 06-2008
Q51.1. If the share of stock is traded in stating that a Certificate Authorizing Registration
through the stock exchange, what [CAR] is still necessary before any transfer of shares
tax is applicable? of stock not traded in the Stock Exchange may be
transferred in the books of a corporation.
A percentage tax of ½ of 1% is imposed on the gross
selling price of shares of stock if they are listed and
Capital Gains Tax with respect to
sold, exchanged or transferred through the facilities
of the local stock exchange.(see Section 127(A) and disposition of real property For there to
RR 06-2008 [APRIL 22, 2008]) be capital
Q52. What is the rule on capital gains from gains tax, the
However, even if trade through the stock exchange, a dispositions of real property? property
sale of shares by companies not complying with the “PRESUMED GAIN” — you always assume they sell for gain should be a
10% minimum public float shall be subject to capital The rate of 6% shall be imposed on capital gains capital asset
gain tax (see RR 16-2012 [November 7, 2012]) presumed to have been realized by the seller from (property not
used in the
the sale, exchange, or other disposition of real
business &
properties located in the Philippines classified as
not principal
Q51.2. What are exempted from capital capital assets, including pacto de retro sales and residence)
gains tax on stock transactions? other forms of conditional sales based on the gross
selling price or fair market value as determined by the
1. Gains derived by dealers in securities CIR, whichever is higher.
2. Gains from sales of stock to the extent invested
in new shares of stocks in banks, financial The tax base shall be the entire selling price.
intermediaries, and corporations organized
primarily to hold equities in banks The capital gains tax must be paid within 30 days
3. All other gains which hare specifically exempt following each sale or disposition. In case of
from income tax under existing investment installment sale, the return shall be filed within 30
incentives and other special laws. days following the receipt of the first down payment
and within 30 days following the subsequent
Q51.3. Is an assignment of deposits on installment payments.
stock subscriptions subject to
capital gains tax? Q52.1. What is the special rule for
disposition of real property made
YES. The assignment of the deposits on stock by an individual to the
subscriptions results in a net gain. A tax on the profit government?
of sale on net capital gain is the very essence of the
net capital gains tax law. To hold otherwise will As provided in RR 8-98, in case of disposition of
ineluctably deprive the government of its due and real property made by an individual to the
unduly set free from tax liability persons who profited
deficiency capital gains tax. The escrow shall be no capital gains tax shall be imposed because no
73
applied in payment of this. capital gains has been derived by the mortgagor and
8. If there is no full utilization of the proceeds of no sale or transfer of real property was realized. If the
sale, exchange or disposition of his old principal mortgagor does not exercise his right of redemption,
residence, he shall be liable for deficiency capital
gains tax, inclusive of 20% interest per annum, 74
The buyer has more interest in having the capital gains tax paid
immediately since this is a pre-requisite to the issuance of a new
Torrens title in his name.
72 75
RR 14-2000 added the escrow agreement requirement and Note Section 47 of the General Banking Act, judicial persons
conditions relating thereto. whose property is being sold pursuant to an extrajudicial
73
If the same is insufficient to cover the entire amount assessed, foreclosure shall have the right to redeem the property until, but
he shall remain liable for the remaining balance of the assessment. not after, the registration of the certificate of foreclosure sale with
The excess of the deposit in escrow, if any, shall be returned to the Register of Deeds which in no case shall be more than 3
him. months after foreclosure
Q58. What are the additional exemptions Q58.2. What is the rule for spouses and
allowed to individual taxpayers? legally separated spouses?
There shall be allowed an additional exemption of The additional exemption for dependents can be
80
P25,000 for each dependent not exceeding four. claimed by only one of the spouses. In the case of
legally separated spouses, additional exemptions
Q58.1. Who is a “dependent” under the may be claimed only by the spouse who has custody
Living — Tax Code? of the child or children.
those who
are living A dependent means a legitimate, illegitimate, or
81 Q59. What is the “status-at-the-end-of-the-
away by legally adopted child chiefly dependent upon and year” rule or the “change-of-status”
“force”, are living with the taxpayer if such dependent is not more rule with respect to personal and
still entitled than 21 years of age, unmarried and not gainfully additional exemptions?
to claim employed or if such dependent, regardless of age, is
exemptions. incapable of self-support because of mental or This means that whatever is the status of the
physical defect. taxpayer at the end of the calendar year shall be
used for purposes of determining his personal and
Q54.1.2. Are illegitimate children additional exemptions.
considered for additional
exemptions? As held in PANSACOLA V. CIR [NOVEMBER 16, 2006],
what the law should consider for the purpose of
Yes. By express wording of the law, a dependent determining the tax due from an individual taxpayer is
includes an illegitimate child. his status and qualified dependents at the close of
the taxable year and not at the time the return is filed
and the tax due thereon is paid.
Q54.1.3. May parents and siblings be
considered as additional A change of status of the taxpayer during the taxable
82
exemptions? year generally benefits, but does not prejudice him.
No. parents and siblings are considered dependents In the following cases, the rule is applied as follows:
only for purposes of qualifying an individual to
become head of a family but not for purposes of 1. If the taxpayer marries or should have additional
additional exemptions. dependents during the taxable year, he may
R.A. No. claim the corresponding additional exemption in
9504 — Q54.1.4. Are senior citizens supported full for such year.
there are no and living with a taxpayer 2. If the taxpayer dies during the taxable year, his
longer heads considered as additional tax estate may still claim the personal and additional
of families. exemptions? exemptions for himself and his dependents as if
he died at the close of such year.
No. The word “dependent” does not include senior 3. If the spouse or any of the dependents dies or if
citizens. any such dependent marries, becomes 21 years
old or becomes gainfully employed during the
Q54.1.5. Is a foster child considered a taxable year, the taxpayer may still claim the
dependent? same exemptions as if the spouse or any oth e
dependents died, or if such dependents married,
80
Previously, the amount was P8,000.
81
Note that Illegitimate children are included in the definition of
82
dependents and in the entitlement for additional exemption. The rule of thumb is that which will be beneficial to the taxpayer.
83
Previously, we have said that a partnership is liable for income
tax as the term “corporations” includes partnerships no matter how
84
created or organized except GPPs. In this, GPPs will be discussed Note that it was 35% effective November 1, 2005 but on January
instead. 1, 2009, the effective rate is now 30%.
For non-resident foreign corporations, the dividend is Q69. Is the assignment and delivery of the
subject to: developed units to joint owners in a
Build-To-Own (BTO) scheme subject to
1. Tax treaty rate, if applicable capital gains tax?
2. 15% if no tax treaty but satisfies the tax-sparing
provision In a BTO, the developer makes it appear that it
3. 30% if no tax treaty and does not comply with the merely manages the construction of the condominium
tax-sparing provision project, and that the funds as contributed by the
individual investors are pooled in a bank with the
2. If the dividends are from a foreign corporation: developer, as project manager, receiving a project
management fee, In that scheme, it is claimed that
The income shall form part of the gross income of the the assignment and delivery to the individual
corporation but the situs of the income becomes investors of the developed units is not taxable as it is
material except for a domestic corporation which is merely a transfer of property held in trust by the
taxed on worldwide income. Trustee for the individual trustors. Previous BIR
rulings have exempted the assignment from capital
Q68.2. What is the tax treatment on gains tax. In In BIR RULING DA-455-07 [AUGUST 17,
corporations of interest income 2007], the conveyance of the condominium units by
from Deposits and Yield or any the trustee to the individual trustors pursuant to the
other Monetary Benefit from terms of the BTO contract and without consideration
Deposit Substitutes and from was held not subject to capital gains tax. However, in
RMC NO. 055-10 [JUNE 28, 2010], the CIR nullified all
Trust Funds and Similar
BIR Rulings exempting the scheme from capital gains
Arrangements and Royalties? tax. Thus, the present rule is that the assignment and
delivery in BTO schemes are subject to capital gains
If the tax 1. Domestic and resident foreign corporations are tax.
rate for subject to a final tax of 20%. Semi-global aspect of taxation —
something 2. Subject to a final withholding tax of 30% if
is not
Resident Foreign Corporations Section 24(A) — because it just
received by a foreign nonresident corporation, states all the income that are
specifically unless the interest income is from foreign loans You dont need to be taxable and provides a fixed tax
stated, it contracted on or before August 1, 1986, in which In general registered as long as you rate.
does not case it is subject to a FWT of 20% are “engaged in business”
mean it is Q70. What is the difference between a branch
exempt. Q68.3. What is the tax treatment on and a subsidiary?
Rather, it
will form
corporations of income derived
For purposes of taxation, a subsidiary is considered a
part of your under the EFCDS? domestic corporation while a branch is a resident
regular foreign corporation.
income 1. Domestic and resident foreign corporations are
subject to subject to a final tax of 7.5%. Any income of non- Domestic v. Resident Foreign Corp. differ in treatment of the ff:
30% tax residents, whether individuals or corporations, — Royalties, capital gains on disposition of property, prizes, dividends
shall be tax-exempt. 86
Same rates and rules as in the case of individual taxpayers.
Refer to that discussion in the reviewer.
Domestic v. Resident Foreign Corp.
Q: Sells at a price lower than acquisition
PIERRE MARTIN DE LEON REYES A: D would be taxed under presumed gain. RFC 50
would not be taxed since “no gain” would reflect in
their taxable income.
R.A. No. 10378 — the airline would be
exempt from tax if the PH has a counterpart in
their jurisdiction which enjoys similar
PM REYES NOTES ON TAXATION I:exemption.
— This affects the UA v. CIR decision,
INCOME TAX although not the focus.
Q71. What resident foreign corporations are taxed on the income they derive from Philippine
subject to preferential tax rates? sources.
As a general rule, all resident foreign corporations For an international air carrier, Gross Philippine
are subject to the RCIT. As exceptions, certain Billings refers to the amount of gross revenue derived
resident foreign corporations are subject to final from carriage of persons, excess baggage, cargo and
rates. They are: mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of
1. Regional or area headquarters (RHQ) (a branch sale or issue and the place of payment of the ticket or
established in the Philippines by MNCs and passage document.
which does not earn or derive income from the
87
Philippines and whose role is supervisory) For International Shipping, Gross Philippine Billings
2. Representative office (a branch in the Philippines means gross revenue whether for passenger, cargo
of a MNC whose activities are limited to or mail originating from the Philippines up to final
information dissemination, product promotion) destination, regardless of the place of sale or
88
3. International carriers by air or water payments of the passage or freight documents
89
4. Offshore Banking Units
5. Foreign Currency deposit Unit (FCDU) in the Q73.1. ABC Shipping is a foreign
90
Philippines of a foreign bank corporation. XYZ chartered one of
91
6. Regional Operating Headquarters (ROHQ) ABC’s ships to load raw sugar in
7. Branch of foreign corporation with respect to the Philippines. Upon arriving at
profit remittances to head office.
the port, the vessel found no sugar
8. Branch of foreign corporations registered with
PEZA, SBMA, CDA, CDJHA. for loading. The ship sailed back
9. Qualified service contractor or subcontractor without carrying any sugar. Is ABC
engaged in petroleum operations in the Shipping liable for gross
Philippines Philippine billings tax?
No. A resident foreign corporation engaged in the
International Carrier
transport of cargo is liable for taxes depending on the
Just because amount of income it derives from sources within the
you have Q72. For purposes of income taxation, what Philippines. ABC derived no receipt from its charter
landing rights is an international carrier? agreement with XYZ. The vessel arrived in the port
does not on but found no raw sugar to load and returned
mean you areAn International carrier shall refer to a foreign airline
without any cargo laden on board (see CIR vs.
“engaged in corporation doing business in the Philippines having
Tokyo Shipping [M AY 26, 1995])
business”
been granted landing rights in any Philippine port to
perform international air transportation Q73.2. What is the tax treatment of an
If you sell
services/activities or flight operations anywhere in the international air carrier with flights
tickets in the
PH world (see RR NO. 15-2002) originating from Philippine ports?
automatically
make you Q73. What is Gross Philippine Billings? RR No. 15-2002 provides that such an international
engaged in air carrier, irrespective of the place where passage
business. The 2.5% tax on gross Philippine billings is an documents are sold or issued, is subject to the Gross
income tax levied on the presumed gain of the airline Philippine Billings tax unless subject to a different tax
and shipping companies. It ensures that they are rate under the applicable tax treaty to which the
Philippines is a signatory.
87
They are tax-exempt.
88
An international carrier doing business in the Philippines shall Q73.3. What is the tax treatment of
pay a tax of 2.5% on its Gross Philippine Billings
89
Income derived by OBUs from foreign currency transactions with foreign airline companies who do
nonresidents, other OBUs, and local commercial banks are tax- not have flights from or passing
exempt.If the foreign currency transactions are with residents other through any point in the
than OBUs and local commercial banks, the interest income shall
be subject to 10% Philippines but have a branch
90
See Q68.3.
91
They shall pay a tax of 10% of their taxable income
Yes, such Filipinos employed by RHQs and ROHQs Q76. XYZ Corporation is a domestic
in a managerial or technical position shall have the corporation which entered into a
option to be taxed at either 15% of gross income or at license agreement with ABC
the regular rate on their taxable income in Corporation, a non-resident foreign
accordance with the Tax Code if the RHQ or ROHQ corporation based in the US pursuant to
93
is governed by Book III of E.O. 226, as amended by which the former was granted the right
R.A. No. 8756. (see RR 11-2010 [October 26, 2010]) to use trademark, patents and
technology owned by the latter. For
Q75.2.2. If the Filipino is not a such use, XYZ paid royalties to ABC
managerial or technical and subjected the same to the 25%
employee, can he avail of the withholding tax on royalty payments.
15% final income tax rate? XYZ claimed for a refund and argues
that the withholding tax should only be
No. As clarified by RR 11-2010 [October 26, 2010], 10% pursuant to the most-favoured
all other employees other than those in managerial or
nation clause of the RP-US Tax Treaty
technical positions are considered as regular
employees who are subject to the regular income tax in relation to the RP-West Germany Tax
rate on their taxable compensation income. Treaty. Is XYZ’s contention correct?
Q75.2.3. What are the requirements in No. In CIR V. S.C. JOHNSON AND SONS, INC. [JUNE 25,
order for a Filipino to be 1999], the Supreme Court held that the concessional
THREE-FOLD TEST applicable to deemed occupying a tax rate of 10% provided for in the RP-Germany Tax
FIlipinos managerial or technical Treaty could not apply to taxes imposed upon
1. Function position the same as that of an royalties in the RP-US Tax Treaty since the two taxes
2. Compensation alien employed in an ROHQs imposed under the two tax treaties are not paid under
3. Exclusivity or RHQ? similar circumstances and do not contain similar
provisions on tax crediting. It is not proved that the
1. Position and Function Test — The employee RP-US Tax Treaty grants similar tax reliefs to
must occupy a managerial position or technical residents of the US in respect of the taxes imposable
position AND must actually be exercising such upon royalties earned from sources within the
managerial or technical functions pertaining to Philippines as those allowed to their German
said position; counterparts. Further, the RP-Germany Tax Treaty
2. Compensation Threshold Test — In order to be allows for crediting against German income and
considered a managerial or technical employee 94
for income tax purposes, the employee must If there is a change in compensation as a consequence of which,
such employee subsequently receiving less than the compensation
have received, or is due to receive under a threshold, the employee shall be subject to the regular income tax
contract of employment, a gross annual taxable rate for the calendar year when the change becomes effective.
95
Beginning December 31, 2013 and on December 31 every three
93
Book III of EO 226 (or the Omnibus Investments Code) refers to years thereafter, the compensation threshold shall be adjusted to
Incentives to MNCs establishing RHQs and ROHQs in the its present value using the Philippine Consumer Price Index (CPI),
Philippines as published by the National Statistics Office.
Q80.1. What is the tax treatment on Q80.2.2. Illustrate the application of the
interest income on foreign loans tax-sparing provision by
101
from a non-resident foreign providing an example.
corporation?
1. "X" Foreign Corp. Tax Liability with no preferential
rates
If the foreign loan is contracted on or after August 1,
1986, it shall be subject to a FWT at the rate of 20%. "X" Foreign Corporation income 400
102
Foreign Tax rate (50%) 200
Q80.2. What is the tax treatment on RP Tax Rate (30%)
103
120
dividends received from a Foreign Tax Credit 120
104
domestic corporation by a non- "X" tax payable to Foreign 80
resident foreign corporation? "X" tax payable to RP 120
For non-resident foreign corporations, the dividend is Here, the total tax payable of the foreign corporation
subject to: is 200.
1. Tax treaty rate, if applicable 2. "X" Foreign Corp. Tax Liability with Preferential
2. 15% if no tax treaty but satisfies the tax-sparing Rate and without Tax Sparing
provision
3. 30% if no tax treaty and does not comply with the "X" Foreign Corporation income 400
tax-sparing provision Foreign Tax rate (50%) 200
RP Tax Rate (15%) 60
Q80.2.1. What is a tax-sparing Foreign Tax Credit 60
provision? "X" tax payable to Foreign 140
"X" tax payable to RP 60
As explained in the case of CIR V. PROCTER &
GAMBLE PHILIPPINES [DECEMBER 2, 1999]: A more Here, the total tax payable of the foreign corporation
general way of mitigating the impact of double is still the same at 200.
taxation is to recognize the foreign tax as a tax credit.
However, the principal defect of the tax credit system
is when low tax rates or special tax concessions are 100
Note that previously, it was 20% which represents the
granted in a country for the obvious reason of difference between the RCIT of 35% and the 15% tax on
encouraging foreign investments. For instance, if the dividends.
usual tax rate is 35 percent but a concession rate 101
The example provided in the case of CIR v. Procter & Gamble
accrues to the country of the investor rather than to uses the old rates. This example modifies the example provided in
99 the case and uses the current rates effective January 1, 2009.
the investor himself. To obviate this, a tax sparing Note that the foreign tax rate and the foreign corporation income
provision may be stipulated. With tax sparing, taxes are hypothetical.
102
Income (400) x Foreign Tax Rate (50%) = 200
99 103
This means that, at the end of the day, the foreign investor Income (400) x RP Tax Rate (30%) = 120
104
would be paying the same total amount of taxes due to the foreign [Income (400) x Foreign Tax Rate (50%)] – Foreign Tax Credit
country and the Philippines. (120) = 80
105 106
The additional 60 will be considered as tax deemed paid or also Now, 15% effective January 1, 2009.
107
known as the “phantom tax.” It is the foreign jurisdiction that will This is subject to debate. This case implies that the benefit is
allow the “deemed paid” tax credit. automatic without need for a TTRA.
However, under RMO 01-2000, it is provided that the Withholding Tax Withholding tax is a direct tax. However, if the
availment of a tax treaty provision must be preceded agent is the one who shoulders the penalties in
by an application for a tax treaty relief with its In general case of non-payment, isn’t it an indirect tax?
International Tax Affairs Division (ITAD). A foreign
corporation wishing to avail of the benefits of the tax
Q81. What is the withholding tax system?
treaty should invoke the provisions of the tax treaty
and prove that indeed the provisions of the tax treaty The withholding tax system is a procedure through
applies to it, before the benefits may be extended to which taxes (including income taxes) are collected.
such corporation.The CTA noted that Mirant did not
make such application. Thus, the CTA finally held Q81.1. Who is the withholding agent?
that the income payments of Mirant to VHL and WES,
which are both non-resident foreign corporations, are The withholding agent is the one who has control,
108109
subject to the final tax of 32%. custody, or receipt of the funds that is subject to
income tax and to be withheld and remitted to the
Q80.4. What is the meaning of most- BIR. The withholding agent holds the amount
favoured nation (MFN) and how is withheld from the income of another person in trust
it applied to applications for tax for the government until paid.
treaty reliefs?
The duty to withhold is different from the duty to pay
108
Note that the applicable tax rate is now 30%. income tax. The obligation to withhold is imposed
109
Note, however, that in INTERPUBLIC GROUP OF COMPANIES, INC. upon the buyer-payor of income but the burden of tax
VS. COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. 7796 is really upon the seller-income earner.
DATED FEBRUARY 21, 2011], the CTA, by way of obiter, stated that,
even with respect to the applicability of the 20% FWT under the
RP-US Tax Treaty, a tax treaty relief application “is not made a The obligation to withhold is compulsory as it makes
condition precedent by law.” such withholding agent personally liable for payment
1. Agents or employees of withholding agents Q81.5. Is the withholding agent who filed
2. Persons having control of the payment and the claim for tax refund obliged to
claiming the expense remit the same to the taxpayer?
3. Payor having control of the payment where
payment is made thru brokers Yes. In CIR V. SMART COMMUNICATIONS
[AUGUST 25, 2010], the Supreme Court ruled
If you’re Q81.3. When does the obligation to that while the withholding agent has the right to
already withhold arise? recover the taxes erroneously or illegally
recognizing Ex: debt was due on Feb. 17, but was paid 15th.
the paid
collected, he nevertheless has the obligation to
Either when: When is the tax due? 15th since it was paid then, remit the same to the principal taxpayer under
amount as a but if it wasn’t paid on the 15th nor 17th, then tax
deduction in the principle of unjust enrichment.
1. It is paid is due by the 17th.
your books,
2. It becomes payable (i.e. it is legally due,
you will have Q81.6. What are the three categories of
to withhold demandable, or enforceable)
3. It is accrued as an asset or expense income subject to withholding
such at the tax?
end of the In F ILIPINAS SYNTHETIC FIBER CORPORATION V. CA
quarter. [OCTOBER 12, 1999], the Supreme Court stated that
the Tax Code is silent as to when the duty to withhold Under Section 57 of the Tax Code, the types of
taxes arises. In this case, to determine when the duty income subject to withholding tax are divided into
to withhold the taxes arose, the Court inquired into three categories:
the nature of accrual method of accounting, the
procedure used by the taxpayer, and to the modus 1. withholding of final tax on certain incomes;
vivendi of withholding tax at source come. It noted 2. withholding of creditable tax at source and
that under the accrual basis method of accounting, 3. tax-free covenant bonds.
income is reportable when all the events have
occurred that fix the taxpayer’s right to receive the Q81.7. What are the three types of
income and the amount can be determined with withholding tax?
reasonable accuracy. Such method is allowed by law
in reporting incomes. 1. Final withholding tax (FWT)
2. Creditable Withholding Tax (WT)
Q81.4. May a withholding agent file a 3. Withholding Tax on Wages
claim for tax refund?
Q82. Differentiate final withholding tax (FWT)
Generally, the person entitled to claim a tax refund is from creditable withholding tax (CWT).
the taxpayer. However, if the taxpayer does not file
the claim, the withholding agent may file the same. In The differences are as follows:
CIR V. SMART COMMUNICATIONS [AUGUST 25, 2010], it
was submitted that rule allowing the withholding FWT CWT
agent to file the claim is applicable only when the The amount of income Taxes withheld on certain
withholding agent and the taxpayer are related tax withheld by the income payments are
parties. The Supreme Court disagreed and stated withholding agent is intended to equal or at
that such relationship is not required. A withholding constituted as a full and least approximate the tax
agent has a legal right to file a claim for refund. First, final payment of the due of the payee on said
he is considered a taxpayer under the Tax Code as income tax due from the income.
he is personally liable for the withholding tax as well payee on the said
as for deficiency assessments, surcharges, and income.
penalties, should the amount withheld be finally found The liability for payment Payee of income is
1. He shall furnish the recipient of the income a Every employer making payment of wages shall
written statement showing the income or other deduct and withhold upon such wages the applicable
110
payments made by him during such quarter or tax except in the case of minimum wage earners.
year, and the amount of the tax deducted and (see Section 79(A), Tax Code)
withheld therefrom.
2. He shall submit an annual information return The return shall be filed and the payment made
containing the list of payees and income within 25 days from the close of each calendar
payments, amount of taxes withheld for each quarter (see Section 81, Tax Code)
payee and other pertinent information. (see
Section 58(B) and (C), Tax Code) However, if the employer is the Government or any
political subdivision, agency, or instrumentality, the
Q85.2. Since CWT is but an return of the amount deducted and withheld upon any
approximation, what happens if wage shall be made:
there is excess payment or
1. by the officer or employee having control over the
deficiency in payment? payment of such wage, or
The excess of the amount of tax so withheld over the 2. by any officer duly designated for the purpose
tax due on his return shall be refunded. (see Section 82, Tax Code)
If the income tax collected at source is less than the Q87.1. What are the other obligations of
tax due on his return, the difference shall be paid. the employer with respect to the
(see Section 58(D), Tax Code) withholding of tax on wages?
Q85.3. What is the effect of non-payment 1. Every employer shall furnish to each such
of CWT to the transfer of real employee a written statement confirming wages
property? paid by the employer during the calendar year
and the amount of tax deducted and withheld
No registration of any document transferring real
property shall be effected by the Register of Deeds 2. Every employer shall submit to the CIR an annual
unless the CIR or his duly authorized representative information return containing a list of employees,
has certified that such transfer has been reported and the total amount of compensation income of each
the capital gains or CWT, if any, has been paid. (see employee, the total amount of taxes,
Section 58(E), Tax Code) accompanied by copies of the written statements,
and other information as may be deemed
Withholding on Wages necessary.
Q87.4. What is the rule when there is an Yes. Backwages, allowances, and benefits awarded
overpayment of tax withheld on in a labor dispute constitute remunerations for
wages by the employer? services that would have been performed by the
employee in the year when actually received, or
If the overpayment was not deduced and withheld by during the period of his dismissal from the service
the employer, he shall be given a refund or credit. which was subsequently ruled to be illegal. The said
back wages, allowances and benefits are subject to
If the overpayment was deducted and withheld by the withholding tax on wages. (see RMC 39-2012
employer, the employee shall be allowed a credit. [August 3, 2012])
Q87.5. How can employees avail of Q88.1. Who should withhold the tax due
personal and additional thereon?
exemptions given that their The employers are mandated to withhold taxes on
compensation is subjected to wages and this includes those backwages,
withholding? allowances, and benefits awarded in a labor dispute.
Yes. If apart from deriving income from these core Improperly Accumulated Earnings Tax
business activities there are other items of gross (IAET)
income realized or earned by the taxpayer during the
taxable period which are subject to the normal
Q91. What is an improperly accumulated
corporate income tax, the same items must be
included as part of the taxpayer's gross income for
earnings tax?
113
computing MCIT.
This is the income tax imposed on a corporation if its
earnings and profits are accumulated (undistributed)
Q90.5. Explain the carrying forward of
instead of being divided and distributed to its
excess MCIT against normal stockholders.
income tax.
An improperly accumulated earnings tax (IAET) equal
Any excess MCIT against the normal income tax is to 10% is imposed for each taxable year on the
creditable within the next three (3) years from
payment thereof. To illustrate:
114
Year RCIT MCIT Excess This is the tax to be paid because MCIT > RCIT
115
This Is the tax to be paid because MICT < RCIT
MCIT 116
Defined as losses arising from a strike staged by the employees
against which lasted for more than six (6) months within a taxable period
RCIT and which has caused the temporary shutdown of business
operations.
112 117
This only shows that deductions are not taken into account in It means a cause due to an irresistible force as by "Act of God"
MCIT. like lightning, earthquake, storm, flood and the like. This term shall
113
This means that the term "gross income" will also include all also include armed conflicts like war or insurgency.
118
items of gross income enumerated under Section 32(A) of the Tax It shall include substantial losses sustained due to fire, robbery,
Code, as amended, except income exempt from income tax and theft or embezzlement, or for other economic reason as
income subject to final withholding tax determined by the Secretary of Finance.
Q91.6. What is the “Immediacy Test?” Q91.7. In determining if profits are
reasonably accumulated for
The Immediacy Test is used to determine the business needs, the intention of
In order to “reasonable needs” of business” in order to justify an
escape IAET, accumulation of earnings. Under this test, the term
the taxpayer is reckoned at what
dividends time?
"reasonable needs of the business" are hereby
must be
construed to mean the immediate needs of the It is reckoned at the time of accumulation. In M ANILA
declared
business, including reasonably anticipated needs. WINE MERCHANTS V. CIR [FEBRUARY 20, 1984], one of
within 1yr
from the closeThe corporation should be able to prove an the contentions of MWM was that it held on to said
of the fiscal immediate need for the accumulation of the earnings bonds for several years to wait for 60% of its stock to
year. and profits, or the direct correlation of anticipated be owned by Filipinos so it can purchase its own lot
Otherwise, needs to such accumulation of profits. Otherwise, and building. The Supreme Court stated that to
you will have such accumulation would be deemed to be not for the determine if profits are reasonably accumulated for
to justify the reasonable needs of the business, and the penalty business needs, the controlling intention is that
accumulation tax would apply. manifested at the time of accumulation and not later
ones. The second reason given by MWM was too
In M ANILA WINE MERCHANTS V. CIR [FEBRUARY 20, indefinite and was a mere afterthought.
1984], Manila Wine Merchants (MWM) invested in
several companies and bought shares in Wack Wack Q91.8. Are there ways by which to avoid
Golf and Country Club and likewise acquired US
liability from IAET?
Treasury Bills. CIR found that MWM had
unreasonably accumulated a surplus. On appeal, the
CTA ruled that the purchase of shares were Yes, when the accumulation is justified by
harmless. However, the CTA also ruled that the reasonable needs of the business such as:
purchase of US Treasury Bills was in no way related
to the business of importing and selling wines and 1. Accumulation up to 100% of the paid-up capital
Fringe Benefit Tax As a general rule, the income recipient is the person
liable to pay the income tax. In order to improve
Q92. What is a fringe benefit tax? collection of income on the compensation income of
employees, the State requires the employer to
withhold the tax upon payment of the compensation
The State imposes a final tax of 32% effective
income. However, it has been observed that many of
January 1, 2000 on the grossed-up monetary value
the fringe benefits paid by the employer to his
of fringe benefit furnished or granted to the
employees are not subjected to income tax and
employee except rank and file employees by the
withholding tax on compensation. To plug this
employer, whether an individual, professional
loophole, RA 8424 was passed. It imposed a fringe
partnership or a corporation regardless of whether
benefits tax on the fringe benefits received by
Note, however, that if the REIT (1) fails to maintain its 3. Property used in trade or business of a
status as a public company as defined in the Act; (2) character that is subject to allowance for
fails to maintain the listed status of the investor depreciation
securities on the Exchange; and (3) fails to distribute
at least 90% of its distributable income, the income 4. Real property used in trade or business of
tax shall be imposed on taxable net income not as the taxpayer
defined in the Act but as defined in the Tax Code.
(see Section 39 Tax Code, and Section 132, RR 2)
(see RR 13-2011 [JULY 25, 2011])
Q97.1.1. A inherited from his father an
Capital Gains and Losses agricultural land. He had the
land surveyed and subdivided
If the gain is into lots. Improvements, such
not covered Q97. What is the importance of knowing if an as good roads, concrete
by a specific asset/income is capital or ordinary gutters, drainage and lighting
final tax, such system, were introduced to
gain or loss The tax treatment will vary depend on the nature of make the lots saleable. Soon
will constitute the asset. For example, if real property is a capital after, the lots were sold to the
part of your asset, the gain from the sale thereof shall be subject public at a profit. The Revenue
gross income to the final capital gains tax of 6%. If it is an ordinary examiner adjudged A as
subject to asset, any gain from the sale thereof shall form part engaged in business as real
income tax. of the ordinary income which shall be subject either estate dealers and required
to graduated income tax rates (if an individual) or him to pay the real estate
corporate income tax (if a corporation). dealer’s tax and assessed a
deficiency income tax on
profits derived from the sale of
the lots based on the rates for
CAPITAL LOSS CARRY-OVER — When you sell an asset below its value or ordinary income and not as
the value your acquired it, it is considered a loss which can be carried over for capital gains at capital gain
the next 3 years. rates. Is the Revenue
Examiner correct?
Yes. In this case, the properties should be regarded Yes. As ruled by the Supreme Court in CHINABANK V.
as ordinary assets. When Y obtained by inheritance CA [JULY 19, 2000], an equity investment is a capital,
the parcels in question, transferred to him was not not ordinary, asset of the investor the sale or
merely the duty to respect the terms of any contract exchange of which results in either a capital gain or a
thereon, but as well the correlative right to receive capital loss.
and enjoy the fruits of the business and property
which the decedent had established and maintained.
Under the circumstances, Y’s sales of the several lots 142
This ruling also stated that registration with the HLURB or
forming part of his rental business cannot be HUDCC shall be sufficient for a seller/transferor to be considered
characterized as other than sales of ordinary assets. as habitually engaged in the real estate business. If the
seller/transferor is not registered with HLURB or HUDCC, he/it
The sales concluded on installment basis of the may prove that he/it is engaged in the real estate business by
subdivided lots comprising the last lot do not deserve offering other satisfactory evidence
Q97.7. What is the allowable extent of The loss shall be the excess of the basis or adjusted
losses from sales or exchanges of basis for determining loss over the amount realized.
capitals assets?
Q98.1. Define “amount realized”
Losses from sales of exchanges of capital assets
shall be allowed to be deducted only to the extent of Amount the sum of the money received
the gains from such sales or exchanges. realized plus the fair market value of te
property (other than money
In CHINABANK V. CA [JULY 19, 2000], Chinabank received).
made a 53% equity investment in the First CBC
Capital (Asia) Ltd, a Hong Kong subsidiary. First CBC Q98.2. When is gain or loss realized?
became insolvent. With BSP approval, Chinabank
wrote-off the investment in its ITR as a bad debt or as Gain or loss arising from the acquisition and
an ordinary loss deductible from its gross income. subsequent disposition of property is realized only
The BIR disallowed the deduction on the basis that when as the result of a transaction between the
the debt was not worthless. The Supreme Court ruled owner and another person the property is converted
that the equity investment is not indebtedness in the into other property that:
first place but rather capital, not an ordinary, asset.
Shares of stock would be ordinary assets only to 1. is essentially different from the property disposed
of, and
143
The holding period is material only if the capital asset is sold by
2. has a market value.
an individual. This does not apply to corporations.
146
Note that in this BIR Ruling, there were 6 transferors,
Q101.12. A owns all the stock of ABC No. This is an exception to the general rule that
Corp. ABC Corp. had 1,000 losses from sales or exchanges of stock or securities
shares of XYZ Corp. A formed are deductible as losses from sales or exchange of
a new corporation called DEF property.
Corp. A had ABC transfer all
This will not apply to a loss incurred by a dealer in
1,000 XYZ shares to DEF. She securities. A loss incurred by a dealer in securities
then dissolved DEF and with respect to a transaction made in the ordinary
liquidated the assets (the XYZ course of the business of such dealer is deductible.
shares). A then sold the XYZ
(see Section 38, Tax Code and Section 131, RR 2) Hybrid Method
Q102. What are accounting methods that No. The rule is that a taxpayer may use any one
method of accounting but not a combination of two or
may be used by taxpayers?
more methods of accounting for each type of
business during the taxable year. The use of a hybrid
The methods are:
method of accounting is not allowed (see
CONSOLIDATED MINES VS. CTA [AUGUST 29, 1974])
1. Cash Method – a method of accounting
whereby all items of gross income received
during the year shall be accounted for in Percentage of Completion Method
such taxable year and that only expenses
actually paid shall be claimed as deductions Q102.2. Can gross income be instead
during the year reported when the long term
contract is finally completed?
2. Accrual Method – method of accounting for
income in the period it is earned, regardless Yes. Section, 44, RR 2 provides that gross income
of whether it has been received or not. may be reported in the taxable year in which the
Expenses are accounted for in the period contract is finally completed and accepted if the
they are incurred and not in the period they taxpayer elects as a consistent practice to so treat
are paid. such income, provided such method clearly reflects
the net income. If this method is adopted there
3. Installment Method – method of accounting should be deducted from gross income all
considered appropriate when collections of expenditures during the life of the contract which are
the proceeds of sales and incomes extend properly allocated thereto, taking into consideration
over relatively long periods of time and there any material and supplies charged to the work under
is strong possibility that full collection will not the contract but remaining on hand at the time of the
be paid. As customers make installment completion.
payments, the seller recognizes the gross
profit on sale in proportion to the cash Installment Basis
collected during the year. (see Section 49,
Tax Code) The law expressly
Q102.3. A sold lots to ABC Corp and was
excludes paid less than 25%, the balance
4. Percentage of Completion Method – Evidence Of was covered by 4 checks. On the
method of accounting applicable in the case Indebtedness same day, the checks were
of a building, installation or construction from the
discounted (exchange for cash
contract covering a period in excess of one compuation of
year, whereby gross income derived from whether < 25% at an amount lower than face
such contract may be reported upon the has been"Discount" paid. value) also ABC Corp. A reported
-- you "buy" the checks for a lower
amount than what the check stands for.
Whatever you get from discounted sales is no
PIERRE MARTIN DE LEON REYES longer part of the real estate. The tax on
82it is not
tied to the sale of real property.
PM REYES NOTES ON TAXATION I:
INCOME TAX
as income for the year of the sale Yes, but this applies only to corporate taxpayers. If
for the year of the sale only the the corporate taxpayer wishes to change his
cash amount received from sale accounting period from fiscal to calendar year, from
and excluded the amount calendar year to fiscal year, or from one fiscal year to
another, the net income shall, with the approval of the
received from the discounted
CIR, be computed on the basis of such new
checks. The balance was accounting period. (see Section 46, Tax Code)
reported as income only in the
next four years. A argues that The corporation must file the corresponding final or
initial payment excludes adjustment return (see Section 47, Tax Code)
evidence of indebtedness. Is A’s
contention correct? Allocation of Income and Deductions
Yes. As held in BANAS V. CA [FEBRUARY 10, 2000], Q103.3. When are items of gross income
The transaction remains to be an instalment (not included?
cash) sale as the law expressly excludes evidence of
indebtedness in the determination of how much was The amount of all items of gross income shall be
paid for the year. However, even if the proceeds of included in the gross income for the taxable year in
discounted note is not considered as part of the initial which received by the taxpayer unless under the
payment, the income realized from the discounting accounting method such amounts are to be properly
itself is still a separate taxable income in the year it accounted for as for a different period. (see Section
was converted into cash because it was at this year 44, Tax Code)
that there was actual gain on the discounted notes.
Q103.4. When is the period for which
Accounting Period deductions and credits are
taken?
Q103. What is the general rule for computing
the taxpayer’s taxable income? The deductions shall be taken for the taxable year in
which paid or accrued or paid or incurred
The taxable income shall be computed upon the dependent upon the accounting method used unless
basis of the taxpayer’s annual accounting period – in order to clearly reflect the income the deductions
fiscal year or calendar year as the case may be. should be taken as of a different period. (see Section
45, Tax Code)
Q103.1. What is the difference between
fiscal year and calendar year? Q103.5. When is the CIR authorized to
allocate income and deductions?
Calendar year is an accounting period which starts (Transfer pricing)
from January 1 and ends on December 31 while
Fiscal year is an accounting period of 12 months CIR to authorized to distribute, apportion, allocate,
ending on the last day of any month other than and shift income and expenses between related
December 31. taxpayers to reflect their true taxable income or to
prevent evasion of taxes.
Income tax returns, whether individuals or for
corporations, are required to be made and their Returns and Payments of Taxes
income computed for each calendar year. However,
corporations may with the approval of the CIR, file Q104. Enumerate the BIR forms used in
their returns and compute their income on the basis income tax filing.
of a fiscal year. (see Section 43, Tax Code)
1. BIR Form 1700: Annual ITR for Individuals
Change of Accounting Period Earning Purely Compensation Income
2. BIR Form 1702: Annual ITR for Self-
Q103.2. Can a taxpayer change his Employed Individuals, Estates and Trusts;
accounting period? 3. BIR Form 1702: Annual ITR for Corporation,
Partnership and Other Non-Individual
Annual Income Tax Return: seeks to capture bank
deposits which are subject to 20% final
withholding, but the issue is that it does not
PIERRE MARTIN DE LEON REYES comply with secrecy of bank deposits. 83
PM REYES NOTES ON TAXATION I:
INCOME TAX
Taxpayer. (see RR 019-11 [DECEMBER 9,
2011]) 3. An individual whose sole income has been
subjected to final withholding tax
Individual Return
4. An individual who is exempt from income
Who are required to pay tax
Q105. Who are required to file an income tax 5. Minimum wage workers
6. Senior
return? citizen
Where to file
The following individuals are required to file an
income tax return: Q107. Where will the income tax return be
filed?
1. Resident citizen
2. Nonresident citizen, on his income from The return shall be filed with the
sources within the Philippines
3. Resident alien, on income derived from 1. authorized agent bank
sources within the Philippines 2. Revenue District Officer
4. Nonresident alien engaged in trade or 3. Collection Agent
business or in the exercise of profession in 4. duly authorized Treasurer of the city or
the Philippines (see Section 51, Tax Code) municipality in which such person has his legal
residence or principal place of business in the
Those not required to pay Philippines
5. if there be no legal residence or place of
Q106. Who are not required to file an income business in the Philippines, with the Office of the
tax return? Commissioner. (see Section 51, Tax Code).
147
Nonresident citizens, with respect to income without the
Final Adjustment Return
Philippines and nonresident aliens not engaged in trade or
business, are not required to make a declaration.
148
Q113. What are the options available to the
Consists of earnings derived by the individual from the practice
of profession or conduct of trade or business carried on by him as
corporation when the sum of the
a sole proprietor or by a partnership of which he is a member. quarterly tax payments made during
you earned
What you're liable for is equal to what
you earned
PIERRE MARTIN DE LEON REYES 85
What you're lianle for is lower than whay
PM REYES NOTES ON TAXATION I:
INCOME TAX
the taxable year is not equal to the “Prior Year’s Excess Credits” in
total tax due on the entire taxable the Final Adjustment Return?
income of that year?
As held in PHILAM ASSET M ANAGEMENT V. CIR
The corporation shall either [DECEMBER 14, 2005], the fact that the corporation
filled out the portion “prior year’s excess credits” in
1. Pay the balance of tax still due the Final Adjustment Return means that it
2. Carry-over the excess credit categorically availed itself of the carry-over option. If
3. Be credited or refunded with the excess an application for tax refund has been or will be filed,
amount paid that portion should necessarily be blank.
No. As held in PHILAM ASSET M ANAGEMENT V. CIR The corporate quarterly declaration shall be filed
[DECEMBER 14, 2005], failure to indicate a choice will within 60 days following the close of each of the first
not bar a valid request for a refund, should this option here quarters of the taxable year.
be chosen by the taxpayer later on.
The final adjustment return shall be filed on or before
th th
Q113.3.
Ability to carryWhat
it overisis the irrevocability rule? April 15, or on on or before the 15 day of the 4
perpetual month following the close of the fiscal year, as the
No. Once the option to carry-over the excess and case may be.
apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding When to pay
taxable years has been made, such option shall be
considered irrevocable for that taxable period and no
Q116. When should the income tax due be
application for cash refund or issuance of a tax credit
certificate shall be allowed. (see Section 76, Tax paid?
Code and SYSTRA PHILIPPINES V. CIR [SEPTEMBER 21,
The income due on the corporate quarterly returns
2007]) and final adjustment income tax returns shall be paid
Q113.4. What is the implication when a at the time the declaration or return is filed.
corporation fills out the portion
Q117. When should the return for capital Q119. Is a GPP required to file a return?
gains on shares of stock be filed?
Yes. Although a GPP is not a taxable entity, it is
Every corporation deriving capital gains from the sale required to file a return of its income setting forth the
or exchange of shares of stock not traded thru a local items of gross income and deductions, and the
stock exchange shall file a return within 30 days after names, taxpayer identification numbers (TIN),
each transaction and a final consolidated return of all addresses and shares of each of the partners. (see
transactions during the taxable year on or before the SECTION 55, Tax Code).
th th
15 day of the 4 month following the close of the Return of Receivers, Trustees in
taxable year. Bankruptcy or Assignees
Return of corporations contemplating Q120. Who shall make the return if the
dissolution/reorganization property or business of a corporation
is being operated by receivers,
Q118. If a corporation plans to dissolve or trustees or assignees?
reorganize, what are its obligations
with respect to returns and payments If receivers, trustees in bankruptcy or assignees are
of taxes? operating the corporation, such receivers, trustees
or assignees shall make the returns of net income
Yes. RR 2 provides that all corporations, as and for such corporation and the tax due shall be
contemplating dissolution or retiring from business assessed and collected in the same manner as if
without formal dissolution shall, within 30 days after assessed directly against the corporation.
the approval of such resolution authorizing their
dissolution, and within the same period after their Others not captured
retirement from business, file their income tax returns
covering the profit earned or business done by them Q121. How shall the tax upon gains, profits,
from the beginning of the year up to the date of such and income not falling and not
dissolution or retirement and pay the corresponding returned and paid under the
income tax due thereon upon demand by the CIR.
provisions on returns and payment of
In BPI V. CIR [CA-G.R. SP. NO. 38304, APRIL 14, tax be assessed?
2000], by virtue of a merger, BPI became the They shall be assessed by personal return. The rule
successor-in-interest of FEBTC on July 1, 1985. On is that all gains, profits, and income of a taxable
April 10, 1986, FEBTC filed its final income tax return class, shall be charged and assessed with the
with the BIR showing, among others, a refundable corresponding tax and the said tax shall be paid by
amount of P174,065.77. BPI filed a claim for refund the owners of such gain, profits or income or the
of this amount. The BIR and CTA stated that the proper person having receipt, custody, or control or
claim for refund has already prescribed because the disposal of the same
return should have been filed by FEBTC within 30
days from SEC's approval of the Articles of Merger.
BPI contended that the said return should have been Other income tax requirements
filed on the 15th day of the 4th month following the
close of FBTC's taxable year. The CA agreed with Q122. Enumerate the other income tax
the BIR and CTA. Section 78 of the Tax Code and requirements under Section 67-72 of
Section 224 of RR 2 required FEBTC as a dissolving the Tax Code
corporation to file its income tax return within 30 days
after the cessation of its business or 30 days after the 1. All persons, corporations, duly registered general
approval of the merger on July 1, 1985 or up to July co-partnerships undertaking for profit or
31, 1985. Thus, the claim for refund has already otherwise the collection of foreign payments of
prescribed. interests or dividends shall obtain a license from
the CIR. (see Section 67, Tax Code)
149
RA 10021 or the Exchange of Information on Tax Matters Act of
2009 provides that income tax returns of specific taxpayers subject
of a request for exchange of information by a foreign tax authority
pursuant to an international convention or agreement on tax
matters to which the Philippines is a signatory or a party of, shall
be open to inspection upon order of the President
150
This provision does not apply to statement or returns made or to
be made in good faith regarding annual depreciation of oil or gas
wells and mines