ssn po maDe ESS el e anenBet WiTH CODALS AND CAS swT) shall be based on which eee af the highest Bidder or ye, der Section 6(E). (R-R. 9-2012) the BIR. The CGT (oF is higher between the bi FMV or the zonal value Un spear soa tam Son Ba secant cred» fy ea, executed 2 mortgage fy railed to pay the loan, Generous Bank Se opt coat sion he aya nae arrested answer: No, Generous Bank isnot Habe © Bay capa! Sungested ano: necoste sale According tothe Supreme Pane there 1s no actual transfer of the mortgaged property unti Gout, here I oe ae nenyear redemption period. Likewise, tt agar ovals Hamer RCE the rales sal a cis tax shal be posed. Here, Hope redeem, then no ie Same of vecerption; hence, ere Was no Capers exe to canta gas tax Should be Iposed on ener Bonk Creditable withholding Tax on Real Properties (Ordinary Assets) ;thholding Tax on Sales, Exchanges or | Properties classified as Ordinary Assets (RR. 8-1996, 2s amended by RR, 11-2018) 1. Ifthe seller is habitualy engaged price is less than 1.5% © Selling price is P500,000 to 3% Pal 5% of gross selling price/current rice Is above P2M | market value, whichever is highet not habitually | 6% of ing price/current real estate| market value, wnicneverf igh 3 the ele exem Credle withoting ts a on knei990 a + Conditions tobe exemy exch Exempt ‘ange, or disposing rom capital gains tax of 6% on the Sale © The procee: nee alco his princga’ seciam™ the ‘sale, exchange, or disposition & fence must be fully utilized in acquiring INCOME TAX a construing a new principal residence within construing ane -e within 18 months, There. (0 This can only be availed of ONLY ONCE every 10 years; (© The 6% capital gains tax otherwise due must be deposited in escrow with an ai thin 18 months. (R.R. residence anyway? the ownership of the land and the dwelling house belong to ferent persons, only the dwelling house shall be treated as principal residence. (0 Itis not necessarily the “family home.” (R.R. 14-2000)55 TAXING sax MADE LESS TAXING caSES ” sa REVIEWER WITH CODALS tial nouse and (ot for P1,000,000, a residen Ys principal residence. te vers sa He used the property tninkng ch income 2% he woulg ra Tal value of the prope re prover Mea) per the t9x decloration 8 Brera market Yale Pog. emer e vate considerations wil YOU wnat mater ease epi eI on Mr. Belen can use ‘Section 25(0)(2) to exempt Suggested antupayment of capital gains (2x OF the sale of his famity ‘imsel om the fre proceeds of the sale was fully sascha ay maven eine wt Fr weenoaral lex exe pn hana ese he ae wr seis ers tg ehh pected into account in computing relevance of each of these vac i decd to sel the house and fot wherein he and his family tH ee oe past 10 years, moping f0 buy and move to 2 new nave ved forthe Past enldrens school. Concerned about the ae ar creer il be due on the sare of thelr Rouse, Mr. b oll gai ta et end for advice ts possible for the sale of ePernsuse tobe exempted fram capita gains tex and the conditions a ote toy with fo oval themseves of said exemption. How wily respond? (2015 Bar Exam) Suggested answer: I will tel Mr. H that he can get an exemption irom caprtal gains tax forthe sale of his family home. The proceeds {rom the sale must be used to buy 2 new residence within the next 18 months-—and he must prove this fact as well. He should also file 2 return showing his Intention to avail of the tax exemption. The ‘would-be capital gains tax must be deposited in escrow with a bank, {and will only be released upon sufficient proof that the proceeds ‘were used to buy 2 new family home. I will tell him also that he can ‘only avail of this exemption once every 10 years. Tax on nonresident aliens Nonresident aliens engaged in business in the Philippines ‘Sec. 25. Tax on Nonresident Allen Individual. — (A) Nonresident Alien E: Qoipemres Engaged in trade or Business Within the (A) In General. ~ & nonresde Business in the Philipines shall Sates ge ln ul engaged INCOME TAX than one hundred ef during any calendar yeor sna be cena nonresaore n_ doing business in the Philippines: sen loa bas the Philippines. Section 22(G) of this Code (2) Cash and/or Property Dividends trom 2 Domest {or Joint Stock Company, or Insurance or Mutuel Fond Conary ot Regional Operating Headauarters or Mutational Company, 6 Shore in the Distributable Net Income of a Partnership (Except a General frotessional Parnerhp), nt Acourt same Verne. Torale 25 9 Corporation or Associaton, Interests, Royale, Prizes, and ‘Gtner winnings. Cash and/or property vient from 2 domestic in the cetribtabl net income ater tx of 8 par final tax shall be imposed on {and withheld by the depository bank from the proceeds of the Tong-term deposit or investment certificate based on the remaining maturity thereof Four (4) years to less than five (5) years — 5% Less than three (3) years — 20% (3) Capital Gains, — Capital gains realized from sale, barter or Exchange of shares of stock In domestic corporations ‘not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (0) of 24. LSxn: rama LESS = ‘A REVIEWER WITH ‘CODALS AND CASES: cage te erent eae OMA c Phiipines ner rable income received fFOm all sours mn ed in trade, busi nonresident aliens Srippines. The only change would be on the pines for an aggregg deemed a nonresices income rates OF exercising Baeren ne se sere Sar eee copie ars ona Sec chron S$ ———————_ ——— Tax Rate on Certain Passive Income on Nonresident | Final Tax Aliens Enaaged i Tprafeasion 1. Interest under the expanded foreign currency deposit | exempt system 2, Royalties from books, iterary works, and musical | 10% compositions 3._ Royalties other than above 20% ‘4. Interest on any current bank depost, yield or other | 209% monetary benefits from deposit substitute, trust fund. and similar arrangement ‘5. Prize exceeding P10,000 20% Other winnings, except Phil. Charity Sweepstakes and | 20% Peaeanaeeae 7. Dividend from a domestic corpo from a joint stock ‘company, insurance or mutual fund company, and | 20% Fegional operating ‘headquarters of multinational | (compare We Years or more), pean ee aeons | aeeeeeaese ‘company or share in the distributive citise rercioee tnd vere es see sonemionneennnmee |e oa \come fror stographic films and simi 25% eee en ce | apr tnterest on long-term dost or investment in banks | exempt INCOME Tax ral Tax Rete on Capital Gains (same with residen Tesidents and nonresident allane not engaged in businase) ont Mmesifent Ty Onsale of shares of ck of omesic Corporton NOT traded trough ea Stoo exchange hed es Cope aes 15% of the net capital gains 2 On sale of, real_propery in the | 6% of me araaaaling Pppines held asa Capea asset "| pice ‘or the comat eae ‘alist ‘se-tine ofa, whichever is higher Nonresident aliens not engaged in business in the Philippines ‘Sec. 25. (8) Nonresident Allen Individual Nat Engage’ ‘or Business Within the Philippines, — There’ 3h fed and paid for ea Trade * Nonresident aliens not engaged in business are taxed 25% of their entire income within the Philippines. ‘That means they have no deductions, Jes are the same with nonresident ‘© Their capital gains tax ‘see table above). aliens engaged in busin: ‘Special aliens ‘Sec. 25. (C) Allen Individual Employed by Regional or Area ‘Regional Operating Headquarters ofXING: ‘Tax MADE LESS TA) ® [REVIEWER WITH CODAL LS AND CASES. 4 nos employed neecrots me Chap eet Tr et OP er anc oe 8 Ne emsoet by omore Banking Un or ra yes oy, paid for each taxable year (0) Alen ade ee a a ipnos employed one oe Sienfemployed by these flere banking uns. (6) Alien tndividval Employed by Petroleum Service Contractor Pe sbconeractor, an nizn intial whe fs 2 permanent Sent ofa foreign county But who Is employed and assigned in pines bys oratn dee contractor or by 8 for engget i petleum operons in the Pri Shale lable to tox of teen pecan (15%) ofthe salaries, wages, Stnutles: commpensaton remuneration ano. other” emoluments Such as honrane and alowances,reeved from auch eontrectore ‘Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (0) and (€) ‘hereof shall be subject tothe pertinent income tax, as the case may bbe, imposed under this Code, ‘Sec. 25. (F) The preferential tax treatment provided ©, ©), (of this Section shall not be applicable to regional "dana! operating headquarters. (ROMGS), and subcontractors registering Commission (SEC) after Janus Section 25 (F), but the Pres ident subsequently vetoed this addition) ert Reset subsequenty vetoed tis action) | + When the President ve confusion whether those: section 254F) of TRAIN, it ied to some RHQS, ROHQs, OBUS ese who had already been employed bY FRA would fogs 24 petroleum service contractors De i preferential status. INCOME Tax ” + In any case, the BIR has tax rate for these sp prejudice to preferen ted that the preferential income lens is no longer applicable, without rates under existing tax treaties. © So, as it stands, these special aliens are now subject to the regular income tax rate. (R.R. 8-2018) © Does this mean they aren't special anymore? Their feelings though. ‘Tips_on answering problems regarding taxable income of individuals Questions to ask yourself in answering problems: 1, Is this income? If not, then it's not really an income tax problem. 3, What's the specific rate? See Sections 24 to 25. What Is the tax rate on income derived from royalties from 1. Resident a. Yes, it is income, b. The source is outside the Philippines. Are they liable for sources from outside the Philippines? Yes, Resident citizens are taxed worldwide. c. What is the specific tax rate? Since it is not in any of the passive income charts, but they stil have to be taxed, then the income they derive from royalties from foreign sources will be considered in computing the tax rate based on the tax calendar of Section 24(A). 2. Resident aliens a. Yes, it is income. b. The source is outside the Pt sources from outside the Phi worldwide. 3. Nonresident aliens engaged In trade or business a. Yes, It Is Income. . The source is outside the Philippines. Are they Hable fr Fhe somes tie the Priippnes? No, they arent taxed worldwide either. pines. Are they liable for ines? No. They aren’t taxed(Gi aoe Less TAN vanes aT COOALS AND CASES Pea ae cepts Semen by tre Too ie eee What is the tax treatment 2) Aresidenectizen 3) nonresaent aan engaged in wader DUSIness | Oe eigent ten nat engaged in trade or business (2015 Sar Sam) suggested answer: oy coon avconde toa esident lien are subject t0 10% fra tax rresident alien engaged in trade or 2) cash dudends to a nonresient allen eng2g Basines re sutect to 20% fa 8x ¢ soens to 9 non-resident alen not engaged In trade or ia gers ie aepayers gross come WICH 5 Subject fo S5n tx on te etre come Tax Liability of Members of General Professional ’A general professional partnership as such shall re tax imposed under this Chapter. usiness as partners in 2 general professional ble for income tax only in their separate and report as gross income his distributive share, actualy or constvctvey received, inthe net Income of the For income tax purposes, there are two kinds of partnerships! © Partnerships NOT subject to income tax; these are + General fem)" Professional partnership (like your regular I#" INCOME Tax a }greement formed for the ‘+ Undertaking construction projects, or + engasing in petroleum, coal, geothermal and other energy operations * ae © Pursuant toan operating or consortium agreement Under a service contract with the government © Partnerships subject to tax Usually, those whose income is derived from trade or business (these are considered “corporations” under Section 22{8] of the Tax Code — more on this in the next Section) Differences NONTAXABLE Partnership | TAXABLE business partnership With regard to DISTRIBUTIVE SHARE Whether actually distributed rm part of partner's gross the TTR’ subject to the income tax rates cur 108 me payments do NOT exceed P720,000 for the current year) to be withheld and paid by the partnership to the BIR ‘With regard to PARTNER'S SHARE IN NET LOSS OF THE PARTNERSHIP May be claimed as a deductible | Not deductible since subject to final expense in his personal income tax | tax returnTAXING: TAX MADE LESS €s a2 ‘A REVIEWER WITH CODALS ‘AND CASI span reyard to HOW THE PARTNERSHIP if TAXED w fe see a he eso ane snes ete oe ts a oe - + fan ewes Gove ever case Ce te ee nana ers a eT as ie eee anon tes ce, when heirs use the inheritance or the Incomes derive © pen cfrom as_a common fund to produce profits for themselves, (her Reie are taxable as an unregistered partnership. (Ona, CIR, GR. No. L-19342, May 25, 1972) not allco-ownerships are unregistered partnerships. However, ° sntion to form a partnership, ‘There must bean unmistakeD! Hence, when father’ in. an i this @ mere co-ownership and not a taxable unregistered partnership. (Obillos v. CIR, G.R. No. L-68118, October 29, 1985) On joint ventures ‘= In order that a joint venture or consortium formed to undertake ‘a construction project not to be considered a taxable corporation, the joint venture should be: (© For the undertaking ofa construction project; (© Should involve joining oF pooling of resources by license local contracts (.e., those lcensed as general contract) the DTI): © The contractors are engaged in construction business; © The joint venture itself li Rae must be licensed under the PCAB: *+ When two corporations enter into a Joint Development agreemett verre nerein one wit cone over il contribute project. develoPt Services, the resting joint venture is, not toxable as 2 venture or he punese of undertaking construction prolec oe ceation of units between the corporations is likew® 3'Mo income is realized by either corporatio™ ine Contractors Accredtation Board ["PCAB') INCOME Tax 3 The allocation of units Between them is a mere return of their + Itis the resulting sale of the allocated units which will Give rise to a taxable event. (BIR Ruling 108-2010) ‘Special Rule on GPPs and the choice of deductions (itemized or OSD) AA GPP is nota taxable entity for ncome tax purposes because it Only acts as a"*pass-through entty where ts income is uimately passed to the partners. In computing a GPP's distributable taxable income, the GP avail of the following deductions: eee cae (© Itemized expenses; or © The 40% osD. ‘The GPP then distributes the net income to the partners, The share of each partner, actually or constructively received, is taxable Income of each partner. © The partners cannot claim further deductions from their distributive share, © The partners cannot avail of the 8% income tax rate either. + Why can’t the partners claim further deductions and use the 8% income tax rate? Because the distributive share from the GPP is already net of cost and expenses. + But if the partner also derives income from other ‘sources distinct from the share in the GPP, he or she ‘can claim either itemized deductions or OSD from the other source of income. (R.R. 8-2018) ‘Atty. Gambino is a partner in a general professional partnership. ‘The partnership. computes its gross revenues, claims deductions dllowed under the Tax Code, and distributes the net income to the partners, Including Atty. Gambino, in accordance with its articies of Partnership. In ling his own income tax return, Atty. Gambino claimed deductions that the partnership aid not claim, such as purchase of law books, entertainment expenses, car Insurance and car depreciation, The BIR disallowed the deductions. Was the BIR correct? (2013 Bar Exar) ‘Suggested answer: The BIR is right. Under current BIR rules, partners an no longer claim further deductions from their distributive share. (Note: the suggested answer has been updated to reflect TRAIN Smendments. 1's not like I went back in time to the 2043 Bar Exem, fol.)1g LESS TAXING: sax mal ‘AND CASES INCOME TAX 4 a REVIEWER WITH CODALS as G. cormosations Income Tax Rates of Domestic Corporations ni rations Definition of corp [ see. 27. rates of income tax on Domestic Corporations. — brea or ngeona ergy operations hoor sere contact eu ag Consort ogreement oe crane. cereal rtesiont rice cane ac wi pod by persons fr the Sle purpese Briers ae Paton protease, wo pat cf the income of which ra gaging mary trace or BUSINES. + Corporations include: Partnerships, no matter how created or organized; Joint-stock companies; Joint accounts; Associations; and Insurance companies + It does not include: © General professional partnerships; © Joint venture or consortium formed for the purpose o ‘undertaking construction projects, or engaging in petroleum, coal, geothermal and other energy operations pursuant t2 ‘an operating or consortium agreement under a servict contract with the government, (Note: The JV should NOT b® incorporated.) i are classified into the following: tc Corporations — those which are incorporated in ti 2. Foreign Corporations 3. Resident foreign corporations — brood but haves he gg tase which ae icorporated business in the Philippines . Nonresident foreign corporations Like our treatment definition of each kind of corres ts important. to. know te of co differs. Let’s start with domestic compensats® the tax liability of the taxable income of the corporation for the period, divided by twelve Provided, further, That the President, upon the recommen of the Secretary of Finance, may effective January 1, 2000, Corporations the option to be taxed at Ateen percent (15%) Income as defined herein, after the folowing conditions have been sat Hort ratio of twenty percent (20%) of Gross National fof forty percent (40%) of income tax collection to x revenues; 3) AVAT tax effort of four percent (4%) of GNP; and (4) 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. ‘The option to be ‘only to firms whose xed based on gross income shall be available ‘of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%). ‘The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme, For purposes of this Section, the term ‘gross Income’ derived be equivalent to gross sales less sales returns, 1ees and cost of goods sold. “Cost of goods sold” business expenses directly incurred to produce the ‘merchandise to bring them to thelr present location and use. ing oF merchandising concern, "cost of goods” sold shall voice cost of the goods sold, plus Import duties, freight For Include the in86 in transporting th A REVIEW MADE LESS Tika wit COON e goods 8 ‘rence wil In the case of taxpa) income’ means 9 discounts yers eng ross receipts 1255 AXING ALS AND CASES where the goods are actualy tne Pigoods are in trast. ie the goods Si ons ee rang en aged in the sale of Service, ‘gross Seles returns, allowances ang 1 2 3. 4. ‘and outs IT applies, or So nt are met: tax effort ratio of 20% of GNP ratio of 40% of income tax collection to total tax revenues VAT tax effort of 49% of GNP; and 0.996 rato of the Consolidated Public Sect (CPSFP) to GNP (this lst ‘one has yet to be implemented) ‘Option to be taxed based on gross income shall be available ony to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55% n of the gross income tax option by the corporation three consecutive taxable years Domestic corporations are subject to any or some of the following eo oc 000 Capital gains tax; Final tax on passive income; Normal tax; ‘Minimum corporate income tax (MCIT); Gross income tax ( Improperly accumulated earnings tax (IAET). INCOME TAX ” Gross Income Computation fcc ee Encore Com ptaiow rea ieeaaeaeaaret| Gross Sales Less: Sales Returns Discounts Se eee eee eee Allowances Cost of Goods Sold (CoGS) (ait business expenses direc Incurred to produce the merchanclse and bring them to ther present leauon of use) Total Gross Income CoGS for a Trading or Merchandise Concern Invoice cost of goods sold Import duties Freight in transporting the goods tothe place where the goods are actualy Insurance while the goods are in transit COGS for a Manufacturing Concern All costs of production of finished goods such as raw materials, direct labor and manufacturing overhead Freight cost Insurance premiums ‘Other costs incurred to bring the raw materials to the factory or warehouse ‘Gross Income Computation for a Service Concern Gross Receipts ‘Less: Sales Returns Discounts ‘Allowances Cost of Services (all direct costs and expenses necessari the services required by the customers and clients15S TAXING: TAX MADE LEED ALS AND CASES se a REVIEWER WITH COI special Rule on Proprietary Eaucation=l Institutions and Hospitals Special Rul na, pan — mea etn yo ease Seas NS foes cl Te mein Subsection al pe imposed on the entire taxable income, [A proprietary educational institution is: (© Any private school maintained and administered by private individuals oF groups (© With an issued permit to operate from the DECS or CHED of TESDA. ‘A proprietary hospital is also given a special tax rate. © Proprietary likewise means “private.” (CIR v. St. Luke’ Medical Center, Inc., G.R. No. 195909, September 26, 2012) © “Non-profit” means no net income or asset accrues to & benefits any member or specific person, with all the net income or asset devoted to the institution’s purposes 24 all its activities conducted not for profit. (CIR v. St. Lukes ‘Medical Center, Inc., G.R. No. 195909, September 26, 2012) Hospitals and educational institutions that fail to meet the abo Gefinition of “proprietary” and “non-profit” a regular coporaton ike Gearon Prone” shall be taxed INCOME Tax ea its aah tes Jia 2a 30% on ther entice ta ihe ges incon om on Business or other atvty the tal gros came fe + In computing this 3096 on the entice taxable income scenario, inclide: (© Income subject to tax © Income which are exempt * Unrelated trade, business or other activity means (© Any trade, business or other activity (© The conduct of which is not substantially related to the exercise or performance by such institution of its primary purpose or function, + The gross income from unrelated trade, business or activity should not exceed 50% of the total gross income, If it exceeds '50%, the pr rietary educational institution or hospital which Is. be taxed like a normal corporation, i.e., 30% of (© Its gross income from unrelated trade, business, or activity does not exceed 50% of its total gross income. (CIR v. DLSU, GR. No. 196596, November 9, 2016) It seems the SC is equating proprietary with stock educational institution be considered non-profit stock corporations are for-profit because of the give dividends)? because “non-profit” also means no part of it income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit. (RMC 51-14, ‘quoting CIR v. St. Luke's)90 TAXING: ax MADE LESS TAXING, ces “a evIEWER WITH CODA a private (stock) educat oroft and get the reduce Witinures for the benefits oh! + So, insti rate of 10% if no pro bers. . ae ming, no need to read this: This {Tax rant comings se Gnrase “for proft” ent at cr inn, qualifies Hospitals, POY Section 4[3]) wanted enstuon re 2, a tua nk reward propre py law, We value educat teat gue rwiraged to put Up schoo - money (ike 8 law sehodl an uct yu erat ear because rece pees al make Your school tose the 10% ta sete woul you be discouraged? I the seh Sve you Suidends, then youl Be. siting in te Some beat as nricentiied normal corporations The merpretanon goes against the spine of Constr. Whatever I could Be wrong] © However, income derived from trade, business or other © Their bank deposits and foreign currency deposits are exert from withholding taxes but they must show proof that suct income is used to fund proposed projects for their institutions improvement. © They shail also be the withholding agents for their employee’ Sempensaton income subject to withholding tax. (RMC 76 For nan-stack. non-profit educational institutions, all revenue (and assets) used actualy, directly and exclusively for education! Constitution) nt Ace XIV, Section 4[3], 1987 Philippl® © Income from cafeterias, ome nye 76-2003) canteens and bookstores are 2 d and operated by the educatind ‘d within the school premises. (R" INCOME Tax 1 © Note that the exemption of non-stock, non-profit educational institutions is granted by none. sther than the S967 Constitution, and not merely by lence, the profit of rnon-stock, non-profit education. the lease of properties (as stated in Section 30, tax-exempt if the profits are used actual nd exclisively for educational purposes. (ik LSU A. We 196596, November 9, 2016) ‘ ee 10n- proft institution generates profits doesn’t make it a for-profit institution. Tt ization, which means having . (La Salian Educational Innovators Foundation v CIR, G:R. No, 202782, February 27, ‘Segue to real property tax: assets used actually, directly, ‘and exclusively for educational purposes are’ likewise exempt. For non-steck. non-profit corporations who are exempt under ‘Section 30 (more on this later), they are stil liable for taxes on: © Income derived from re of their real properties (such as I payment from their building premises) ‘© Any activity conducted from profit regardless of disposition thereof (© Interest income from any bank deposits or yield on deposit substitutes (final tax of 20%) © Ifit's foreign currency deposit (FCD), final tax of 15% (TRAIN) (© They shall also be withholding agents for their employee's ‘compensation income subject to withholding tax (RMC 76- 2003) Special Rule on GOCCs, Agencies or Instrumentalities ‘Sec. 27. (C) Government-owned or -Controlied Corporations, this Section upon corporations or associations engaged in a similar business, industry, or activity.raKING: ‘TAX MADE LESS TATAND CASES = AREVIEWER ‘WITH COD! ities shall pay the same srumentalities: st i + coces, agentes ine pan COBEEtON, OF 250ctn opeged industry, ‘engaged in sirnilar : sis eso ger RA. 9337, PAGCOR was deleted from te As Par empt GOCCS. (Philippine Amusement ang 415, 2011) 1s PAGCOR's income derived from gaming operations Eubject to 5% franchise tax. For income derived fron the operation of other related services, it Is subject» normal corporate income tax. (PAGCOR v. BIR, GR, No. 215427, December 10, 2014) PAGCOR’s contractees and licensees are subject ty the same rule. (Bioomberry Resorts and Hotels, Inc v. BIR, G.R. No. 212530, August 10, 2016) Passive Income of Domestic Corporations ‘Sec. 27. (0) Rates of Tax on Certain Passive Incomes. — (2) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar lnder the expanded foreign to a fin rrency deposit system shall be subject Income tax at the rate of fifteen percent (15%) of such Sag te ede yr to diese eager ce shares 208 INCOME TAX. 93 Se eermaa Tremere ee nang ET (@) Tax an Income Derived under the F panded Foreign Currency Deposit System. — Income derives by a depostary Ban won Oe expanded foreign currency deposit system fr expended fa y, deposit system from foreign currency Beexemotiromalltaes, except nt income ram scentoneoctors oe thoy be speded bythe Secretary of France pon rsooene aot foreign currency loans granted by such ep expanded system to residents other than cffsore banking urs ie pines or other depositor Banks under te expanded system Shall be subject toa final fax at the tat often pores 05a) luals or corporations, Fy banks under the expanded system (4) Intercorporate Dividends. — Dividends received by a domestic corporation from another domestic corporation shall not be subject Position of lands. and/ the business of Is higher, of such lands and/or buildings. (As amended by TRAIN) ‘Tax Rate on Passive Income of Domestic Final Tax Corporations 1. Interest under the expanded foreign currency deposit | 15% system 2, Royalty of all types within te Philippines 20% © Royalty from abroad? Enters the taxable income 30% tax rate ‘3. Interest on any current bank deposit, yield or other | 20% ‘monetary benefits from deposit substitute, trust fund and similar arrangement “4. Dividend from domestic corporations (Intercorporate | exempt dividend)ING: TAX MADE LESS TASTING cases 94 [A REVIEWER WITH COI ex ‘a note on banks and income derived under the exPanded fog, INCOME Tax, 95 currency deposit system shares, not traded through the | 15% of the ‘stock exchange ‘net canal gains ‘Derived under the = BANKS on Income Tax Rate of Bavvended FCO System Toincome derived by a depository bank from foreion | exempe How to determine the tax Falr Market Value come eancoctione with nonresidents, OBUS, fF “currency loans grantes Tnterest income from foreign ‘2 bank to residents other than OBUS individuals or corporations) f, ngceldents inter der the expanded "et dby| 10% + Income of transactions with deposit system are exempt. Intercorporate dividends ration from a © Dividends received by @ domestic corporati nota ‘domestic corporation shall not be subject to tax. idends received will te vventually be taxed wher e use of the capital © Why? Law assume injected to the capital, the corporation gets income Capital gains ‘The capital gains treatment is similar to that of individuals. Rete. to the section on individuals for a more in-depth discussion. ‘Tax Rate on Capital Gains 1. On sale of shares of stock of | 1596 of the net capital gains 2. domestic corporation NOT traded through a local stock exchange held as a capital asset 2. On sale of real property in the | 696 of the grass selling price, or te ‘current market value at the timed! sale, whichever is higher Capital Gains on Sale or Disposition of Shares of Stock eee ee eee eee ee eee ‘Tax Rate on Income from Sale, Barter, Exchange or other Disposition of Shares of Stock (Rt. 62008, a6 amended) If shares of stock are tated an traded tnough the et ged | 6/10 of 1% (or 0.005%) ofthe base of disposition of stock (RR. 6-2008, as amended) Sales of stock listed and traded through the LSE Fev is the actual seling erica ‘Sales of stock sted but not traded through the LSE FMV is the clasing price on the ‘dav. when the shares were S01, transferred, or exchanged sale was made on that LSE, then the closing pri day’ nearest to the date of ‘ale, transfer, oF exchange of the sald shares) Sales of stock not listed and not traded through the LSE For common shares, the book transaction date. ‘The values no longer need to be Corporation. The latest AFS are fenough to determine the FMV of the shares. (RR. 20-2020) [excrange fot ne hares of stock [he oaracet emer96 Capital Gain: Classified as Final Tax Rae on Salsa sets (RR. 81998) 1a0e LESS TAXI sanevien aT CODALS AND CASES care, exchange, of Transfer of Real Proper, son Sale, Capital Assets res, or Transfers of Real Propertic, exchang ‘gross selling price, or zai property nthe Phiippnes [696 of the wa Sah apps 9 ands 284 a ) : + Payment of capital ° gains tax on foreclosure of mortgaged propery f redemption with mortgagor exercises his right of ee vean no capital gains tax shall be imposed because ng ing have been derived and no transfer of property In case of non-redemption, the buyer of the property i deemed to have withheld the CGT (or the CWT, as the case may be) and must remit the said tax to the BIR. The CGT (o the CWT) shall be based on whichever is higher between the bid price of the highest bidder or the FMV or the zonal value as determined by Section 6(E). (R.R. 9-2012) Tax Treatment of Sales, Exchanges, or Transfers of Real Properties Classified as Ordinary Assets ‘Creditable Withholding Tax on Sales, Exchanges or Transfers of ‘Real Properties classified as Ordinary Assets (R.R. 8-1938) 1.5% % Selling price is above P2M 5% of gross selling price/curren market value, whichever is higher 2. If the seller is not habitually engaged in the real estate 6% of selling price/currest | , whichever is higher INCOME TAX 3, If the seller is exempt from ‘ereditable withholding tax as per RR, 2-1998 Exempt Minimum Corporate Income Tax (MCIT) eee ‘Sec. 27. (E) Minimum Corporate rax on se ) mi porate Income Tax on Domestic (eg es — pinay art nee te ce at eg fm im income tex is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. — Any excess of the ‘minimum corporate Income tax over the, normal incorne tx os (3) Rellef from the Minimum Corporate Income Tax Under Certain Conditions. — The Secretary of Finance is hereby authorized 0 Suspend the imposition of the minimum corporate income tax on ‘any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses, The Secretary of Finance Is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and ‘egulation that shall define the terms and conditions under which he ‘may Suspend the imposition of the minimum corporate income tax in ‘2 meritorious case. Gross Income Defined. ~ For purposes For a trading or merchandising concern, “cost of goods sold" plus impor aut where the goods are In transporting the goods to th ‘oid including insurance while th For a manufacturing concern, cast of "goods manufactured and sold” ‘shall include all'costs of production of finished goods, such as raw labor and manufacturing overhead, freight ‘cost, insurance premiums and other costs incurred to bring the raw ‘materials to the factory or warehouse. eeING sax mane LESS A sexes a CODALS AND CASES the sale of service, "Q°0SS income” eng, allowances, discounts ang ‘and employee benefits of te directly rendering the service ized in providing the service such t used and cost of supplies, f equipment 1a oa of banks, “cost of services” sha include interest expense. Beginning with the fourth year of operations, 2 domestic Searing, wih ie eof etancb byw Is higher: © Normal tax of 30%, or (© Minimum corporate income tax of 2% The MCIT is 2% of grass Incame (compare with the normal tax which has taxable income as its tax base). ‘9 Gross income includes al items of gross income enumerated under Section 32(A), except those income exempt from income tax and income subject to final withholding tax. Is MCIT constitutional? ‘The MCIT is NOT a tax on capital. It is imposed 1g the capital spent by 2 corporati ‘of goods and other direct expenses from gross sales. Cleary the capital is not being taxed. Thus, MCIT is constitutional (Chamber of Real Estate and Builders’ Associations, Inc. ¥. Romulo, G.R. No. 160756, March 9, 2010) ‘Any excess of the MCIT over the normal tax of a year shall be ‘carried forward and credited against the normal tax for the thet immediately succeeding taxable years, © For the carry forward to apply, the normal tax should be higher than the minimum corporate income tax. © So, you usually compute both first; ther te then apply either MCIT or normal tax rate, whichever is higher, INCOME Tax 99 Example Year4 — YearS Year6 Year 7 crt 200 400 100 100 Normal 100 200 300 200 Tax Payable 200 400 0 200 Excess MCIT (100) (100) ° 0 (200) ° ° MCITis implemented on domestic and resident foreign corporations whenever they have zero or negative taxable income, or when the MCIT is greater than the normal income tax due. (R.R. 9-198) The following are exempted from the MCIT: Resident foreign corporations engaged in business as international carriers (see below for more discussion) Resident foreign corporations engaged in business as offshore banking units Resident foreign corporations engaged in business as regional operating headquarters Firms that are taxed under a special income tax regime (like those under PEZA or other economic zones) © Proprietary Education Institutions © Non-profit hospitals Depositary banks under the foreign currency deposit unit (FDU) REIT (Real Estate Investment Trusts) (R.A. 9856) ‘© Nonresident foreign corporations When can you apply for relief from the MCIT? Losses on account of protonged labor dispute Losses arising from a strike staged by employees which lasted for more than six months within a taxable period ‘and which has caused the temporary shutdown of business operations © Force majeure ‘Any cause due to an Irresistible force as by “act of God” © What about an irresistible force such as an act of love? No, the law does not talk of love. ° ° °TAX MADE LESS TAXING: te A REVIEWER WITH CODALS AND CASES: iso incudes armed conflict such as War Or insurgen, 0 Legitimate business reverses to fire, robbery, th, des substantial losses due Fea Includes sbsar por economie FeaSONs its Cerincate of Incorp x Corp. secured ts Coricate of nef 2) As Ms. J's supervisor, what will be your advice? b) What are the distinctions between regular corporate income tax ‘and minimum corporate income tax? (2015 Bar Exam) Suggested answer: year [KKK Corp. has nat yet reached the th year of Its operations. b)_MCIT is 2% of jon’s gross income and only applies beginning the 4th year of its operations. Regular corporate income tax is 30% ofa corporation’ taxable income and applies immediately Income Tax on Resident Foreign Corporations ‘Sec. 28. (A) Tax on Resident Foreign Corporations. — (3) In General. — except 06 otherwise provides in tis Code, 2 corporation organized, sng under the laws of INCOME Tax. granted the opt income und bbe ta» Provided, however, That a resident foreign the same conditions, as provided in Sect (2), Minimum Corporate Income Tax on Resident Foreign Co ="A minimum corporate income tax of two shall be 2t fitteen perce ‘* Aforeign corporation is one which is not organized or incorporated in the Philippines. (© It may be a resident or nonresident corporation. business in the Philippi Is a foreign corporation engaged in (© Aforeign corporation can engage in business in the Philippines the foreign corporation actually engages Philippines, then it will be considered a resident foreign corporation. ‘and had been allowed by, the ‘Tax Rate of Foreign Resident Corporations vita the 15% of gros thas yet to be implemented) Passive Income of Foreign Resident Corporations <_< —____cqg 28. (a) (7) Taxon Certain Incomes Recelved bya Resident Frc (0) Ciena) tmterest rom Deposits and Yield or ceding? Monetary Benett trom Onpost Substtutes, Trust Fakca'nnd Similar Arangements and Royalties ~ Interest rom nreurenty bank cepostiond eto any ‘monetary benefit [eee rer reer ert ee eee eee eee eed102 6 oe 55 TAXI sene nHt COOALS AND CASES in currency depost system ‘expanded foreign curency Cfo and ore Income tax at the such interest income. ranaact tints, including interest income by such depostory banks epost system to the rate often pecan (10%) 05 ‘ny income of nonresident, whether ind from nsactions with depository banks under exempt rom income tx shal be subject to a finay percent (7 1/2%) of pxpanded Foreign Currency spository bank under or corporations, ‘expanded system c) Captal ine trom Sale of Shares of Stock Not Traded in Serie ereeger™ aa tax at re rates prescribed below is hereby impose ‘capital gains realized during the taxable eer from the sale, barter, exchange or other disposition of shares Of stock ‘corporation except shares sold or disposed of through the stock exchange’ Not over P100,000 ‘On any amount in excess of P100,00¢ (4) Intercorporate Dividends. — Dividends foreign corporation from a domestic corporat this Code shall not be subject to tax under t 5% 10% ved by a resident le to tax under ‘Tax Rate on Passive Income of Foreign Resident | Final Tax ‘Corporations 1. Interest under anded foreign currency def system ign currency deposit | 7.5% 2. Royalty ofall types within the Phi 720% 3 Thlerest on any curert bank de mor nefits from deposit sut at td Snir snoop 7 biided fom domeste oxen Si erporatons(mtercorporare| exe INCOME Tax 103, gains tax on the sale of corporations by foreign corporations are ‘old 5%/ 10% of the net capital gains regime. es of domestic Capital gains ‘Tax Rate on Capital Gains subject to the 7. Onsale of shares of stock of a domestic ‘corporation NOT traded through a local stock exchange held as a capital asset, 2% On sale of real property in the Philippines corporate income tax rate ‘Special Rule on International Carriers ‘Sec. 28 (A) (3) International Carrier. — An international carrier doing business in the Philippines shall pay a tax of two and one-half percent ings’ as defined hereunder: + — ‘Gross Philippine Bi payment of the ticket or passage “That tickets revalidated, exchanged and/ Fevenue whether for passenge’, Cargo oF Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. LdBy ess one a net TH COONS 810 C8 Te doing business in the Philippi S cemption from the ti . re jonal cart herein ate . al ert om the carriage Of Persons ross reverie Jer Fy applicable tax treaty or land their excess international agreement fon the basis of reciproc baggage on Ihe the Philippines is 2 signatory or ann lt Seay ahh Paar ca ymended by R.A 10378) s (as ar ‘tox rate for international carriers Is 2.5% of Gross Philippine Billings (GPB) ' under RA, $0378, international Carles. dig © Note that unde opines may aval of a preferential ratee, exemption from tax based on ty or international agreement to which our belovee pines is a signatory, OF ‘The basis of reciprocity. Gross Philippine Billings refers to 0 Gross revenue derived from carriage of persons, excess baggage, cargo and mail © Originating from _the Philippines in a continuous and Uninterrupted flight © Irrespective of the place of sale or issue and the place o payment of the ticket or passage document [An off-line carrier refers to an international alr carrier having n¢ flight operations to and from the Philippines. (R.R. 15-2002) ‘An on-line carrier refers to an international air carrier having & ‘maintaining flight operations to and from the Philippines. (R® 415-2002) Off-line flights refer to flight operations between ports or points outs the terol jursdton ef we Phippines, wed touching a port of point situated in Philippiné t wine in distress or due to force majeure. eG eee eeetae (© What if it lands in the Spratlys? Remember the CIR v. BOAC (G.R. No. st emember -R. No. L-65773, April 30, 4! case! Gish Overseas Always di not have, avy tonding Ph nor did they have license to operat a assenges or cargotoor rom the Pipes hey sv, nove have a general sales agent which INCOME TAX 105 ets (because of the situs of taxation to be rendered was outside the pines. They were not liable for carrier's tax though. ‘0 Doing business has no specific criterion. As long as there was a continuity of conduct and intention to establish a continuous business and not one of a temporary character, then you are doing business in the Philippines. {An offline airline which has a branch/agent in the Philippines and sells passage documents to cover offline flights of its principal or other airlines is NOT considered engaged in business as an international air carrier in the country and is NOT subject to the GPB. has flights which originate from any point in the is subject to the 2.5% GPB tax unless it is subject ‘ax rate under a tax treaty to which the Philippines is a signatory. In a nutshell, if and from the Phil GPB while intern: and from the activities in th income tax rate of such income. (South African Airways v. CIR, G.R. No, 180356, February 16, 2010) What is included in computing the GPB for international air carriers? international air carrier maintains fights to it shall be taxed at the rate of 2.5% carriers that do not have flights to but nonetheless earn income from other Il be taxed at the normal corporate country © Gross revenue from passage of persons (actual amount as reflected in the tax coupon part of the plane ticket) 0 Excess baggage © Cargo and mail originating from the Philippines in a conti- nnuous and uninterrupted fight 0 To compute the GPB: (monthly average net fare of all the tax Coupons. of plane tickets per point of final destination, per lage of passage, per classification of passenger) MULTIPLIED by the (total aurber of passengers flown for the month as declared in the fight manifest) In case of passengers’ fights from am and back, that portion of revenue pert the Philippines is NOT included as part of the 'GPB, (R.R. 15-2002) For international shippers, demurrage and detention fees are not included in GPB.ae A REVIEWER WIT LESS TAXING: TAX MADE COALS AND CASES of rent for the use y 0 Demurrage fees are i" OO phiippines. Its consider property of the, corre sources and is subject to income fy income from PhiipE Me tne ather types of INCOME ofthe op under the reeuas ton of fternatonal SPIPPINg Lines, ng ine carrer, (sso 922239, nary 15 28) 4 other charges relating to outbouns Jes are in the nal © Detention fees an« tion of International Shipping ‘GR. No. 222239, January Phi Under the regular rate. (Associa Lines, Inc. v. Secretary of Finance, 15, 2020) ‘Special Rule for Offshore Banking Units Income, [Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. Tax rate of offshore banking units authorized by the BSP (including any interest income foreign currency loans granted to residents) is 10% final tax. Income of nonresidents (individuals or corporations) from transactions with OBUs shall be exempt from income tax. An offshore banking unit is a branch of a foreign bank which authorized by the BSP to transact offsnore banking business # the Philippines, A foreign currency deposit unit isa de Kor its a department of a focal ban in an existing local branch of a foreign bank which is authorize! y the operated un : deposit system. der the expanded foreign currenct Gross onshore income cov wed by the BSP cond nother offshore ba 10-1976) ers all income arising from transactions lucted by and between an offshore bank nk or with an FCDU or with a nonreside INCOME Tax 07 «The following are included in computing the gross onshore income of OBUs and FCDUs: (© Gross interest income arising from foreign currency loans and advances and investments with residents (© Fees, commissions and other charges which are integral parts of the income from foreign currency loan transactions. are EXEMPT. They are not to be included in computing the final tax. (RR. 14-1977) ‘Special Rule on Profits Remitted by a Branch (Branch Profit Remittance Tax [BPRT}) (5) Tax on Branch Profits Remittances. — Any proft remitted by a branch to its head office shall be subject to 5%) which shall be based on the total profits applied or earmarked Any profit remitted by a branch to its head office shall be subject to a tax of 15% of the total profits applied or earmarked for remittance without any deduction for the tax component (© Except those registered with PEZA (they have their own tax rules as incentives) What is the base for the BPRT? (© It is the total profits applied for remittance or earmarked for remittance without any deduction for the tax component, not the profit actually remitted abroad. (©The following are not treated as branch profits: terests Dividends Rents + Royalties + Payment for technical services + Salaries and wage premiums‘Tax MADE LESS TAXING: " A REVIEWER WITH CODALS AND CASES ‘annuities, emoluments, or other fixed Or determinay, «Profits, income and capital gains Ce its re nope 1 ee a sc : corporation Ts engaged or connected with the conduct of it, ikria, Inc, a Korean corporation engaged in the business of Inotufacturing electric vehicles, established @ branch office in the “Pniippines in 2010, The Philppine branch constructed a ‘manufacturing plant in Kebuyao, Laguna, three (3) years. Commercial operations in the Laguna in 2014. {In just two (2) years of operation, the Phillopine branch had remittable profits in an amount exceeding 175% of Its capital. However, the head office in Korea instructed the branch not to remit the profits to (IAET) for permitting its profits to accumulate beyond reasonable business needs. Is it subject to 15% branch proft remittance tax (BPRT)? (2018 Bar xem) ‘Suggested answer: No, its nat subject to BPRT, BPRT is imposed on any prot remize bythe branch tots head off. In tis case, the ‘profits were not remitted yet. Hence, BPRT may not be imposed yet. ‘Special Rule on Regional or Area Headquart ind Region ‘perating Headauarters (ROHS) ers (RAHQS) and Regt munications and coordinating centr for an alates subsares, or branches in the aaa-POCHe (EE) The term established in the onal operat repeating headquarters” shall mean a branch nes by multinational companies which a2 INCOME Tax. nd sales promation; Service eveleprent serves and pradut devcopment fand maintenance; data processing and commun development. i ae sn 28, (08) eat us adr Sse! tg etre tr be subject to income tax. ce eee: Regional operating headquarters as detned in Section 2: II pay a tax of ten percent (10° a Regional or Area Headquarters is a branch established in the Philippines by multi-nationals and which headquarters: (© Do NOT earn or derive income from the Philippines, and © Which act as supervisory, communications and coordinating center for their affiliates, subsidiaries or branches in the Asia- Pacific Regions. ‘They are EXEMPT from income tax. | Operating Headquarters is a branch established in the es by multi-nationals which are engaged in any of the lowing services: General admin and planning; Business planning and coordination; Sourcing and 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 product development; ‘Technical support and maintenance; Data processing and communications; and 0000000 coo O Business development. + They are taxed 10% on taxable income,6: ye LESS TAXIN fet sneer TH GDA AHO CASES tions Income Tax on Nonresident Foreign Corpora! Income Tax In General ‘and income, and ca under subparagraph 5(¢ rations are subject to 30% income tax ‘+ Nonresident foreign corporations are oe able year from a ‘sources within the Philippines only ‘0 Special corporations (discussed below) are subject to a different tax 1e foreign corporation transacts business in the independently of its branch in the country, the reign corporation and 76573, September 14, + Acasual activity in the not amount to engagin for income tax purposes. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. (N.V. Reederij "Amsterdam and Royal Inerocean Lines ¥. CIR, G.R. No, L~46029, June ‘Special nonresident foreign corporations INCOME TAK (4) Nonresident Owner or Lessor of Aircraft, Machineres Other Equipment. ~ Rental, charters and cine tas dened tg nonresident lessor of aircraft, machineries and other ea to a tax of seven and one-half percent reo 8 percent ( Tax rate on certain incomes of nonresident foreign corporations (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. — " (a) Interest on Foreign Loans. ~ A final withholding tax at the rate of twenty percent (20%) is hereby imposed Interest on foreign loans contracted on or after Augu (b) Intercorporate Dividends. — 4 final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of ‘ash and/or property dividends received from a domestic corporation, which shall be collected and paid as of (2) Nonresident Cinematographic Film Owner, Lessor of Distributor. — A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent all sources within the Pilppines, (25%) Of RS gross Income fom (3) Nonresident Owner or Lessor of Vessels Chartered bY Philippine Nationals. — & nonresident owner or lessor of vessels ‘Tax Rate on Passive Income of Foreign Nonresident | Final Tax Corporations 1. Interest on foreign loans (.e,, foreign nonresident | 20% Tends to a domestic corporation}