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Taxation Review Lecture
Taxation Review Lecture
REVIEW
Jisryl H. Raz, CPA
PHILIPPINE TAXATION
SYSTEM Protection
CONFLICT
GOVERN ------------
PEOPLE
MENT REMEDIE
S
- Assessment
- File and Paytaxes
- Collection
- Protest the
assessment
EMINENT
POLICE TAXATION
POWER DOMAIN
POWER
POWER
Comparisons
POLICE TAXATION EMINENT DOMAIN
Plenary, comprehensive,
Merely to take private
Broader in application and supreme BUT NOT
property
ABSOLUTE
Property is taken or
Money is taken to support Property is taken for public
destroyed to promote
the government use
general welfare
Cannot be delegated, if
delegated, it should be to
Can be expressly Can be expressly
the legislative department
delegated delegated
of the LGU (e.g. to make
ordinances)
Comparisons
POLICE TAXATION EMINENT DOMAIN
Limited to the cost of Generally, NO limit on No imposition as to
regulation, license amount amount, instead, it is the
and other necessary Government which is to
expense compensate the property
taken.
Relatively FREE from Subject to Superior to and may
Constitutional Constitutional and override Constitutional
limitations Inherent limitations impairment provision
Superior to Non- Inferior to Non-
Impairment Clause Impairment Clause
General Principles
1. Principles or Canons of a Sound Taxation System (FEA)
1.Tax Credits
2.Tax Refund
3.Specific provisions of the NIRC which
allows tax minimization like vanishing
deductions, input taxes, etc.
General Principles
Theories of Taxation
1.Necessity Theory (Theory of
Taxation) – the power to tax is an
attribute of sovereignty emanating from
necessity (national defense, health,
education, public facilities, etc.).
General Principles
3. As to purpose
a. General tax – levied for the general or
ordinary purposes of the government
Tabular
Gratuitous Onerous
(Individual)
Mortis
Corporate
Causa VAT
CGT
Excise
Documentary Stamp
Tax
For INDIVIDUALS whose gross income solely includes
compensation, allowances and other remunerations
arising from the employer-employee relationship, passive
income and capital gains not subjected to final tax and
CGT:
Compensation income xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Gross Income xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
For INDIVIDUALS with business or professional income:
Gross receipts/sales xx
Less: Cost of service/sale (xx)
Gross income from business or profession xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net income from business or profession xx
Less:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
For INDIVIDUALS whose income includes both compensation, business
income and passive incomes not subjected to final tax:
Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Total Gross Income before compensation income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net Income from Business or Profession xx
Add: Compensation Income xx
Total Income xx
Less: PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
For CORPORATIONS, including business partnerships,
domestic corporations, resident foreign corporations,
joint ventures, and associations, except non-resident
foreign corporations (which is taxable at gross income):
Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Incomes, not subjected to final tax xx
Capital Gains, not subjected to CGT xx
Total Gross Income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
Net Operating Loss Carry-Over (NOLCO) (xx)
Taxable Income xx
57
Income Taxation: Individual –
Exclusions from Gross Income
1. Holiday pay, Overtime pay, Night shift differential,
and Hazard pay (HONsHa) earned by MWE (non-
taxable).
65
Example:
A, married to M had the following during the taxable year:
Gross Income
From the Practice of profession P 700,000
Rental Income of their conjugal property 300,000
Allowable Deductions
For the practice of profession 520,000
For the property rented to tenants 140,000
67
Passive Income:
Individual Taxpayers
a. Interest on currency bank deposits, yield and
other monetary benefit from deposit substitute,
trust and similar arrangement; Royalty from
patents and franchises, prizes exceeding
P10,000 and winnings regardless of the amount:
20% final tax
70
Example:
Taxpayer received the following income in
Rent, Philippines 2009: P10,000
Rent, Hongkong 20,000
Interest, peso deposit, PNB 10,000
Interest, US$ deposit, PNB ($1,000 x P56) 56,000
Interest, deposit in Hongkong 7,000
(HK$1,000 x P7)
Prize (cash) won in a local contest 8,000
Prize (TV) won in a local lottery valued at 15,000
Prize won in contest in US 30,000
Lotto winning in US 10,000
Dividend, domestic company 60,000
Gross Income: Passive
Income
Not Subject to Final Withholding Tax –
those which are not subjected to final tax like
those which are earned abroad, prizes not
exceeding P10,000, and interest from loans,
trade and accounts receivables and those
incomes earned outside the Philippines shall
be included in the computation of gross
income.
72
Example:
Maximo received the following income in
2009:
Business income, Philippines P300,000
c. All other capital gains, which are not subject to CGT, are
subject to normal tax (5-32%), subject to the pertinent
rules in property.
74
Ordinary Assets vs. Capital Assets
a Capital Assets
a. Inventories, stocks in trade held by
dealers, other property or in kind
a. Other than those enumerated as
included in inventory of the
ordinary assets
taxpayer (e.g. work in process
b. All properties not used in business
inventory and finished goods
c. investment whether or not
inventory, stocks)
connected with taxpayers trade are
b. Property held for sale to customers
capital assets (e.g. investment in
in the ordinary course of business
equity securities and investment in
(real estate developer)
subsidiary)
c. Properties used in business which
d. Residential house and lot
is subject to depreciation or
e. Family car
amortization (factory, office
f. Receivables arising from sale of
building, patents)
inventory
d. Real property used in business
(land which the factory stands)
Example:
1. Accounts Receivable
2. Securities Held as an investment
3. Inventories of raw materials, work-in process and
finished goods
4. Office Equipment
5. Land used in Business
6. Land held for investment purposes
7. Land for sale by a real estate dealer
8. Residential House
9. Business of sole proprietorship sold to a corporation
10. Interest of a partner in a partnership
11. Car used partly for business and partly for personal
purposes
Ordinary Assets vs. Capital Assets
Subject to CGT Subject to Normal Tax
a. Sale of stocks not listed and
a. Other than those listed as
not traded in local stock
Major Capital Assets (stocks not
exchange (5%- 10% of capital
traded and listed, and real
gains)
properties subject to 6% CGT),
b. Sale of real capital properties
all other capital gains are subject
NOT used in business (6% CGT
to normal tax (added in the gross
based on FMV or SP, whichever
income)
is higher).
b. HOLDING PERIOD is
c. NO HOLDING PERIOD since
applicable ONLY to individual
the capital gains tax is a final tax
taxpayers
on the date of sale.
c. NO HOLDING period for
d. GAINS or LOSSES are no corporations.
longer reportable since the sale d. Gains are reportable in full
77
was already subjected to final subject to holding period clause.
Ordinary Gains and
Losses
Gains and losses derived from sale or exchange
of the ordinary assets are ORDINARY GAINS
and LOSSES which are included in determining
ordinary income subject to tax.
Required: Compute the taxable income of the taxpayer for each year.
Net Capital Loss Carry-Over
(NCLCO)
The net capital loss of one year
may be carried over to the
succeeding year, but not
exceeding the taxable income
of the year when such net
capital loss was sustained.
Example:
Mr. N, a citizen of the Philippines, single had the following
data:
2010 2011
Net income from business P 80,000 P 90,000
Interest from notes of clients 4,000 2,000
Capital gain on shares of foreign
corporation held for 3 years 50,000
Capital gains on jewelry held for
10 months 70,000
Capital loss on bonds, held for
4 months 120,000
Solution:
2010 2011
Net Income from Business P 80,000 P 90,000
Interest income 4,000 2,000
Ordinary net income 84,000 92,000
Capital Gain (50%) P25,000
Capital Gain (100%) P70,000
Capital Loss (100%) (120,000)
Net Capital Loss ( 95,000)
NCLCO (34,000)
Net Capital Gain 36,000
Total 128,000
Less: Basic personal exemption (50,000) (50,000)
Taxable Income 34,000 78,000
Note:
Required: Compute the taxable income of the taxpayer for each year.
CAPITAL GAIN TAX
EXEMPTION: Requirements
To be exempted from Capital Gains Tax, especially in
the sale of residential dwellings (house and lot), the
following shall be observed:
1. The capital asset sold was a principal residence;
2. The taxpayer is a citizen of the Philippines or
resident alien;
3. The proceeds of the sale was invested in acquiring a
new principal residence;
4. Notice to make such utilization was given to the BIR
within 30 days from the date of sale;
CAPITAL GAIN TAX
EXEMPTION: Requirements
5. Utilization of the proceeds of the sale was made
within eighteen (18) months from the date of sale;
6. A cash deposit is made with an accredited bank for
an amount equal to the capital gain tax, and answerable
for the capital gain tax should the conditions for the
exemption be not satisfied;
7. The exemption shall be availed of once only every
ten years.
CAPITAL GAIN TAX
EXEMPTION: Requirements
94
Example:
Oliver, a resident citizen, has the following
transactions of not listed and traded shares
of stocks of a domestic corporation:
Date of Sale Date of Cost Selling
Acquisition Price
February 13, January 18, 2007 P 80,000 P135,000
2009
April 5, 2009 November 30, 256,000 360,000
2008
July 20, 2009 September 3, 2007 175,000 115,000
1. A taxpayer seeking a
deduction must point to some
specific provisions of the
statute authorizing the
deduction.
2. Tax exemptions as well as
deductions are generally
disfavored by the law.
(strictissimi juris)
Allowable Deductions:
LESSEE LESSOR
ACCRUAL Rent is deductible when Rent is taxable when
BASIS INCURRED. RECEIVED.
CASH BASIS Rent is deductible when Rent is taxable when
INCURRED and PAID.* RECEIVED.**
109
Representation: entertainment, amusement and
recreation (EAR)
Subject to a limit of ½% of net sales if the taxpayer is
engaged in selling of goods; and 1% of the net
revenue if the taxpayer is engaged in selling services.
116
Example:
Taxes paid by a corporation within a year were:
National Income Taxes:
Normal tax P 500,000
Improperly Accumulated Profit Tax 300,000
Capital Gain Tax 740,000
Final tax 50,000
Community Tax 10,500
Value-Added Tax 89,000
Local taxes and licenses 10,000
Interest for late payment of national and
local taxes 40,000
Surcharges for late payment of national
and local taxes 60,000
The deduction for taxes is:
Losses
The following losses may be claimed as
deduction:
Casualty losses
Net Operating Loss Carry-Over (NOLCO)
Capital losses and securities becoming
worthless
Special losses:
Losses from wash sales of stock or securities
Wagering losses
Abandonment losses
118
Requisites:
1.The loss arises from fires, storms,
shipwreck, or other casualties, or from
robbery, theft or embezzlement;
2.The property lost is connected with the
trade business or practice of profession.
3.Actually sustained during the taxable
year;
4.Not compensated for by insurance or
other forms of idemnity;
Requisites:
5. Incurred in trade, profession or
business;
6. Reported with the BIR within forty-
five days from the time of loss; and
7. Not claimed as deduction for estate
tax purposes.
Example: (if Capital Asset)
Cost or adjusted basis P 18,000
Value of property before casualty 15,000
Value of property after casualty 10,000
Insurance recovered 3,000
Example: (if Ordinary
Asset – Total Destruction)
Acquisition Cost P 10,000
Accumulated Depreciation 4,000
Insurance Recovered 2,500
122
Example: (if Ordinary Asset
– Partial Destruction)
Acquisition Cost P 100,000
Accumulated Depreciation 90,000
Replacement Cost to restore the
property back to its operating condition 20,000
Insurance Recovered 5,000
Estimated remaining useful life 5 years
123
Example:
A taxpayer engaged in business incurred a partial loss of property as
follows:
Asset 1 Asset 2
Book Value of the asset at the time of loss P 200,000 P 200,000
Cost to restore the property back
to its normal operating condition 120,000 300,000
Insurance recovery 50,000 None
Salvage None 40,000
124
NOLCO
Net operating loss means the excess of allowable
deductions over gross income of the business in a
taxable year.
125
NOLCO
Provided, that for mines other than oil and
gas wells, any net operating loss incurred in
any of the first ten (10) years may be carried
over as deduction from taxable income for the
next five (5) years immediately following such
year when the loss is incurred.
NOLCO vs. NCLCO
1. NOLCO occurs when the deductions claimed
exceeds the gross income, while NCLCO
occurs when, in case of individual taxpayers,
capital loss exceeds capital gains.
2. NOLCO is available to both individual and
corporate taxpayers, whereas, NCLCO is
available only to individual taxpayers.
Example:
A Corporation taxpayer had the following:
Y5 Y6 Y7 Y8 Y9
Gross Income 900,000 900,000 880,000 840,000 980,000
Allowable
Deductions 980,000 880,000 900,000 830,000 900,000
The income tax due of the corporation for the fiscal year is if it opts to claim
depreciation expense from the new building is:
Exploration and Development Expenditures:
INTANGIBLE exploration, drilling and development
allowed as deduction in computing taxable income
during the year shall not be considered in computing
the adjusted cost basis.
Exploration and development costs, OTHER than the
intangible exploration, drilling and development may
be:
Computed as part of the adjusted basis for depletion (COST
OF GOODS SOLD); or
Deduction to compute taxable income from mining operations
(OPERATING EXPENSE)
135
If the taxpayer choose the second option, it shall
be subject to the following limits:
Amount claimed as deduction for the year shall NOT
exceed 25% of the net income from mining operations
without the benefit of any tax incentives under existing
laws.
The total actual amount of exploration and
development costs less the 25% limit above shall be
carried through succeeding years until fully deducted.
Contributions: Maybe subjected to limitations or deducted at full:
Charitable contributions made by an individual shall be subject
to a limit of 10% of his taxable income before deducting the
contributions.
Charitable contributions made by a corporation shall be subject
to a limit of 5% of its taxable income before deducting the
contributions.
Charitable contributions made by either of the two taxpayers
above to the government for the use of its priority program
shall be deductible at full. Priority programs are: education,
health, youth and sports development, human settlements,
science and culture and economic development.
Example:
Pio, married, with five minor children and Pia, single, with 2 legally adopted children
are partners, sharing profits and losses into 4:6. The following data pertain to the
partnership account and the accounts of the individual partners in their own business.
Partnership Pio Pia
Gross Income P 570,000 P 280,000 P 190,000
Allowable Deductions 250,000 150,000 70,000
Drawing Accounts 30,000 20,000 10,000
Other Income 20,000 10,000
Charitable partnership contribution: (not included above)
To: UP P 20,000
To: Malate Church 50,000
139
Example:
ABC put up a qualified retirement plan approved by the
BIR. It appointed B Corporation to administer the plan
which called for the payment of P200,000 to cover for the
retirement of employees for past services rendered and a
yearly contribution. The following amounts were paid for
the first three years of the plan’s operation:
Contribution for Services
Past Years Current Years
First Year P 100,000 P 50,000
Second Year 60,000 50,000
Third Year 40,000 50,000
The pension expense each year is ______________.
CLASSIFICATIONS
OF TAXPAYERS
AND PERSONAL
EXEMPTIONS
141
Classification of
Individual Taxpayers
1. Resident Citizen
2. Non-Resident Citizen
3. Resident Alien
4. Non-Resident Alien Engaged in Trade or
Business
5. Non-Resident Alien Engaged in Trade or
Business
6. Special Taxpayers
Classification of
Individual Taxpayers
1. Resident Citizen (RC) – taxable globally (within and
outside)
2. Non-resident Citizen (NRC) – taxable for incomes
derived within the Philippines only
Who establishes to the satisfaction of the CIR the fact of their
physical presence abroad with a definite intention to reside
therein;
Who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a
permanent basis;
Who stays outside the Philippines for more than 183 days
Classification of
Individual Taxpayers
A citizen who has been previously considered as non-
resident citizen and who arrives in the Philippines shall
likewise be treated as a nonresident citizen for the taxable
year in which he arrives in the Philippines with respect to
his income derived from sources abroad until the date of
his arrival in the Philippines.
Overseas Contract Workers (OCWs). They are Filipino
citizens employed in foreign countries who are physically
present in a foreign country as a consequence of their
employment thereat. To be considered as an OCW or
OFW, he or she must be duly registered as such with
the Philippine Overseas Employment Administration
(POEA) with a valid Overseas Employment Certificate
(OEC).
Classification of
Individual Taxpayers
3. Resident Alien (RA) – taxable for incomes derived within the
Philippines only
We generally consider as residents those whose length of assignments
are indefinite or exceeding two (2) years (BIR Rulings Nos. 051-81 and
052-81).
4. Non-resident Alien Engaged in Trade or Business (NRAETB) –
taxable for incomes derived within the Philippines only.
The term trade or business shall not include performance of services
by the taxpayer as an employee.
A nonresident alien individual who shall come in the Philippines and
stay herein for an aggregate period of more than 180 days during any
calendar year shall be deemed as doing business in the Philippines
Classification of
Individual Taxpayers
5. Non-resident Alien Not Engaged in Trade or Business
(NRANETB) – taxable for incomes derived within the Philippines
only
Supervisory Employee
Those who, in the interest of the employer, effectively
recommend such managerial actions if the exercise of
such authority is not merely routinary or clerical in
nature but require use of independent judgment. (Labor
Code of The Philippines)
Rank-and-File
Those who are not managerial and supervisory employees.
De Minimis Benefits
Whether rank-and-file or managerial/supervisory employee,
the following de minimis benefits shall be non-taxable:
1.Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year;
2.Monetized value of vacation and sick leave credits paid
to government officials and employees;
3.Medical cash allowance to dependents of employees not
exceeding P750 per employee per semester or P 125 per
month;
4.Rice subsidy of P 1,500 or one (1) sack of 50-kg. rice per
month amounting to not more than P 1,500;
5.Uniform and clothing allowance not exceeding P 5,000
per annum;
6.Actual yearly medical benefits not exceeding P 10,000
per annum;
De Minimis Benefits
7. Laundry allowance not exceeding P 300 per month;
8. Employees achievement awards which must be in the
form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P
10,000 received by the employee under an established
written plan which does not discriminate in favor of highly
paid employees;
9. Gifts given during Christmas and major anniversary
celebrations not exceeding P 5,000 per employee per
annum;
10. Daily meal allowance for overtime work not exceeding
twenty-five percent (25%) of the basic minimum wage.
De Minimis Benefits
All other benefits given by the employers which
are not included in the above enumeration
shall not be considered as “de minimis”
benefits, and hence, shall be subject to
income tax as well as withholding tax on
compensation.
Example:
A, during the 2015, received the following benefits:
Medical benefits P 25,000 per year
Monetized leave credits:
Vacation (13 days) 13,000
Sick Leave (15 days) 15,000
Rice Subsidy, Sinandomeng 2,300 per month
Laundry Allowance 270 per month
Christmas cash gift 12,000
Performance-Based Bonus 20,000
Employee Achievement Awards, cash 12, 000
Uniform Allowance 6,000
13th Month Pay 50,000
Fringe Benefits
If given to rank-and-file employee, fringe benefits shall
constitute gross income subject to tabular tax rate (5-32%)
and PhP 82,000 limit. Moreover, it shall be claimed as a
deductible expense INCLUDED in the salaries expense on
the part of the employer.
Entry:
Fringe Benefits Expense xx
Cash (or fair value of property) xx
168
Fringe Benefits
If given to an employee holding a managerial or
supervisory position, it shall be subject to fringe benefit
tax, as follows:
1.RC, NRC, RA, NRAETB 32%
2.NRANETB 25%
3.Special Taxpayer
a. OBUs 15%
b. ROH and RAH of a 15%
multinational company
c. Petroleum contractors and 15%
subcontractors
Fringe Benefit Tax
If given to managerial or supervisory employee, such fringe
benefits will be subject to fringe benefit tax, computed as
follows:
Gross Monetary Value = Monetary Value
(100% - Applicable rate)
179
INCOME TAXATION
ON CORPORATE
TAXPAYERS
180
Overview:
The term ‘corporation’ includes partnerships, no
matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not
include
1. general professional partnerships (GPPs) and
2. joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum operation, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the Government.
Pro-Forma Computation
Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Incomes, not subjected to final tax xx
Capital Gains, not subjected to CGT xx
Total Gross Income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
Net Operating Loss Carry-Over (NOLCO) (xx)
Taxable Income xx
*NCLCO is not applicable since the holding period is also not
applicable.
Note:
In the computation of GROSS INCOME, the same rule
shall be observed as in the case of an individual
taxpayer, except that a corporation has no compensation
income and does not have winnings and prizes.
In the computation of ALLOWABLE DEDUCTIONS, the
same ruling shall be observed as in the case of an
individual, except those specific items which has a
different statutory ceilings such as the charitable
contributions (5%).
No Personal exemptions.
Example: NIRC vs. GAAP
ABC is a domestic corporation engaged in merchandising business. For the
calendar year 2014, it had a net income per books of P500,000, after
considering among others, the following:
a.Dividend received from a domestic corporation P 30,000
b.Provision of doubtful accounts 10,000
c.Dividend received from foreign corporation 20,000
d.Portion of P150,000 advance rental already earned 100,000
e.Recovery of receivables previously written off (included
As part of the net income above):
Allowed by the BIR as deduction 10,000
Disallowed by the BIR as deduction 30,000
g. Refund of taxes (included as part of net income above):
Allowed by the BIR as deduction 25,000
Disallowed by the BIR as deduction 15,000
h. Bank interest income
a. Philippine Bank 80,000
b. USA Bank 100,000
Classification of Corporate
Taxpayers
1. Domestic corporations are taxed on worldwide income,
at 30% of the taxable income.
2. Resident foreign corporations are taxed on incomes from
the Philippines only, at 30% of the taxable income.
3. Non- Resident foreign corporations are taxed on incomes
from the Philippines only, at 30% of the gross income.
Note:
GPPs are partnerships formed by persons for the sole
purpose of exercising their common profession, no part
of the income of which is derived from engaging in any
trade or business
185
Corporate Taxes
1. Gross Income Tax (GIT)
2. Normal Corporate Income Tax (NCIT)
3. Minimum Corporate Income Tax
(MCIT)
4. Improperly Accumulated Earnings
Tax (IAET)
1. Gross Income Tax (GIT)
It is an optional income tax given to corporate
earners equivalent to 15% of its gross income
instead of the 30% net income tax.
Only domestic corporations and resident
foreign corporations may avail such GIT.
Requirements:
A tax ratio of 20% of Gross National Products
A ratio of 40% income tax collection of total tax
revenues
1. Gross Income Tax (GIT)
A VAT tax effort of 4% of GNP
A 0.9% ratio of consolidated public sector financial
position to GNP
Available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources is 55%.
The election shall be irrevocable for three (3)
consecutive year
Recommendation from the Secretary of Finance
Subject to approval of the Office of the President
2. Normal Corporate Income
Tax (NCIT)
1998 34%
1999 33%
January 1 , 2000 to October 31, 2005 32%
November 1, 2005 to December 31, 2008 35%
January 1, 2009 and onwards 30%
Example:
ABC Corp. a domestic corporation, in its fifth year of operation in 2014, which
had a tax refundable of P10,000 for the preceding year for which there is a
certificate of tax credit, had the following cumulative data:
Q1 Q2 Q3 Q4
Gross profit from sale P800,000 P1,600,000 P2,400,000 P3,100,000
Capital gain on sale
Directly to buyer of shares
Of a domestic Corporation 50,000 50,000 50,000 50,000
Dividend from Domestic
corporation 10,000 10,000 20,000 20,000
Interest on Peso Deposit 5,000 10,000 15,000 20,000
Business Expenses 600,000 1,200,000 1,700,000 2,100,000
Income tax withheld 15,000 35,000 65,000 115,000
191
3. Minimum Corporate Income
Tax
The MCIT shall be carried over and credited against
the normal tax for the next three (3) years following
the taxable year where the corporation is taxed at MCIT.
Provided, that if the corporation is still taxed at MCIT
following such year, the previous MCIT shall be
DEFERRED and cannot be credited against the
year’s MCIT.
The three-year carry-over provision shall be counted
continually regardless whether the corporation pays
MCIT or NCIT.
Example: Annual Filing
A domestic corporation organized in 1998 provided the following information:
2006 2007 2008 2009 2010
Net Sales P4,000,000 P5,000,000 P6,000,000 P7,000,000 P9,000,000
Cost of Sales 2,000,000 3,500,000 4,200,000 5,000,000 5,200,000
Business
Expenses 1,900,000 1,550,000 1,820,000 2,100,000 2,300,000
Exception:
Unless the taxpayer’s mainline of business is
transport operations or lease of transportation
equipment and the vehicles purchased are used
in the said operations.
This regulation shall take effect immediately.
(Published in October 17, 2012)
6. Clarifying the Taxability of Clubs Organized and Operated
Exclusively for Pleasure, Recreation and Other Non-Profit
Purposes
1. Testamentary Succession
2. Intestate Succession
3. Mixed Succession
Testamentary Succession
It results from the designation of an heir,
made in a will executed in the form prescribed
by the law.
Illegitimate child
Born outside marriage (spurious, bastard)
Natural child (child before born before actual marriage)
Testamentary Succession
Compulsory heirs are:
1.Legitimate children and their descendants, which
include legally adopted children
2.In the absence of legitimate children and their
descendants, the legitimate parents or ascendants.
3.Surviving spouse
4.Illegitimate child, both natural and spurious
Testamentary Succession
In the absence of compulsory heirs, the
successors would be:
Relatives up to 5th degree of consanguinity
If there were no relatives, the government shall
inherit the whole estate.
If there is a will, the decedent may name other
persons to inherit the free portion of the net
distributable estate
Example:
A died leaving the following surviving relatives:
B Wife L Sister
C Only Son M L’s granddaughter
D Only Daughter N M’s Son
E Mother O E’s Mother
F Father
G C’s daughter
H D’s son
I Brother
J Nephew (I’s Son)
K J’s son
Testamentary Succession
Under testamentary succession, properties left by the
decedent are classified into:
230
General Rules:
If there is a legitimate child, his share is usually one-half
of the total distributable estate.
If there are legitimate children, their share (in aggregate)
will equal to one-half of the total distributable estate.
The share of the surviving spouse if there is a legitimate
child is one-fourth, while if there several legitimate
children, the share of the surviving spouse is normally
equal to the share of one legitimate child.
General Rules:
No share shall be given to the parents
or their ascendants, if there is a
legitimate child, unless the will of the
testator provides that the free portion
shall be given to the parents or their
ascendants.
Illegitimate children has a share but only
to the extent of one-half of the share of
legitimate child.
Example:
If the hereditary estate of the testator is P
12,000,000 and the surviving heirs or relatives
are: mother, spouse, four legitimate children, one
legally adopted son, one illegitimate child, and a
brother and in his will, the testator is giving all
free portion equally to the surviving heirs. The
share of the surviving spouse, four legitimate
children and one illegitimate child shall be:
________, _________ and ________.
Intestate Succession
It transmission of properties where there is no will, or if
there is a will, such is void or lost its validity, or nobody
succeeds the will.
In the intestate succession, the entire estate of the decedent is
distributed to the heirs. The compulsory heirs in testamentary
succession are also the heirs in intestate succession. However,
intestate heirs include brothers and sisters, collateral relatives
within the fifth degree of consanguinity and the state.
Administrator (administratrix) is the person
appointed by the court, in accordance with the
governing statute, to administer and settle intestate
estate and such testate estate as no competent
executor designated by the testator.
Intestate Succession
1. No free portion under intestate succession, hence
the 100% shall be given to the child, the surviving
spouse and illegitimate child (if there is any).
2. f child only, 100%
3. If there are several children, 100% divided equally by
them.
4. If children and spouse, the share of the spouse is
equivalent to the share of one child (unit).
5. If there is a child, no share for parents.
6. The share of illegitimate child is equal to one half of
the share of the legitimate child.
Example:
The net distributable estate of Mr.
Geronimo who died intestate is P
5,000,000. The surviving relatives are
the spouse and the 4 children, and the
mother of the deceased. How much
would be the inheritance of the spouse?
____________
Mixed Succession
It is a transmission of properties,
which is effected partly by will
and partly by operation of law
237
Example:
The hereditary estate is P3,000,000.
The surviving relatives are the parents,
the spouse and the 4 children. The
testator is giving 20% of the free
portion to his sister-in-law. How much
could be designated to the sister-in-law?
_____________
Example:
If the hereditary estate is P 15, 000, 000 and
the surviving heirs are three legitimate children,
a surviving spouse, and a brother, the share of
the surviving spouse shall be :
239
Gratuitous Transfer
The classification of taxpayers as to
situs in estate tax and donor’s tax is
the SAME. (Residents and
Citizens are taxable globally; Non-
resident aliens are taxable within
the Philippines only)
240
Computation of Estate Tax
For single decedents
Gross estate xx
Less: Ordinary Deductions (xx)
Special Deductions (xx)
Net Taxable Estate xx
Per Book
Total Assets P 90,000,000
Total Liabilities 36,000,000
Shareholders’ Equity 54,000,000
Common shares (par value of P10;
1,000,000 shares outstanding)
Preferred shares (par value of P20;
100,000 shares outstanding)
Gross Estate Valuation:
Shares of Stocks
Continuation...
All of XYZ’s assets and liabilities are stated as fair market value with the exception
of its land and building stated at P30,000,000 book value. The following are the fair
market values of the real property of XYZ Corporation:
BV AV ZV Independent
Land P 10 M P 15 M P 20 M P 18 M
Building 20 M 12 M 15 M 16 M
P 30 M P 27 M P 35 M P 34 M
Preferred Common
Adjusted net asset values P 60,000,000 P 60,000,000
Allocation using par value ____2/12 10/12___
Adjusted net asset values
per class of stocks P 10,000,000 P 50,000,000
Divided by number of shares
outstanding 100,000 1,000,000
Adjusted Net Asset value
per Share P 100 P 50
Gross Estate Valuation:
Shares of Stocks
Lastly,
2. Others
1. Decedent’s interest accrued at the date of death
2. Usufruct right transferrable to the decedent’s heirs
3. Claims against insolvent person
4. Amount received by the heirs under RA 4917 (DISCUSSED
EXHAUSTIVELY UNDER DEDUCTIONS)
Additions to Gross Estate:
In Contemplation of Death
Death must be contemplated and the thought of
death must be the impelling cause of transfer
1. Where a donation was made concurrently with the
execution of the will
2. Where donation was made due to the decedent’s
age and/or the decedent’s known serious illness at
the time of gift
3. Where the time between the making of a gift and the
death of the donor was relatively close
Example:
On November 10, 2015, due to severe
prostate cancer (terminal stage), C donated
his land to X, his paramour. A week after, C
died. The land, although already in the
hands of X, shall be included in the
computation of gross estate of C.
Additions to Gross Estate:
Revocable Transfers
Transfer of property with retention or reservation
of rights over the property by the donor (decedent)
while he still lives
By gift where the donor has reserved the power to alter,
amend and revoke donation.
The donor retains the option to relinquish such power
in contemplation of death
Conditional transfers where attached conditions are
not completed by the donee prior to the donor’s death
Example:
On June 1, 2015, B gave his car to D,
younger brother who’s going to take the
CPA board exam on October 2015, with a
condition that when B should fail to become
a CPA within two years, the car shall be
taken back by him (D). D, however, died
on September 30, 2015. The transfer is
revocable, thus included in the gross estate
of D.
Additions to Gross Estate:
Transfer under GPA
“General Power of Appointment” means that
the decedent must have a power
exercisable in favor of himself, his estate or
creditors of his estate.
A power is “special” if it is expressly not
exercisable in favor of the decedent, his
estate or creditors of his estate.
Example:
P died leaving his residential house to his
only son (M), with a will, giving the latter a
condition that should he die (son), he can
only choose from J, H and R as the next
successor of the residential house. In this
case, the power is special, thus, the
residential shall not be included in the
computation of gross estate of the son.
Additions to Gross Estate:
Sale or Transfer for Inadequate Consideration
278
Additions to Gross Estate:
Proceeds of Life Insurance
1. If the beneficiary is any third person other than
the estate, executor or administrator and the
designation is REVOCABLE, included in the
gross estate.
2. If the beneficiary is any third person other than
the estate, executor or administrator and the
designation is IRREVOCABLE, excluded in
the gross estate.
279
Additions to Gross Estate:
Proceeds of Life Insurance
If the beneficiary is the estate, executor
or administrator, regardless whether
the designation is revocable or
irrevocable, included in the gross
estate.
Exclusions from Gross Estate
What are excluded from gross estate?
1.Proceeds of life insurance taken by the decedent
on his own life if the beneficiary is any third person
and the designation is irrevocable. If the
beneficiary is the estate, administrator or executor,
the proceeds of life insurance is included in the
gross estate, whether revocable or irrevocable. If
the beneficiary is any third person but the
designation is revocable, the same shall be
included in the gross estate.
Exclusions from Gross Estate
Under Section 85 and 86 of NIRC
a. Capital or exclusive property of the
surviving spouse
b. Properties outside the Philippines of a
non-resident alien decedent
c. Intangible personal property of a non-
resident alien in the Philippines when the
rule of reciprocity applies.
Exclusions from Gross Estate
Under Section 87 of NIRC
a. Merger of usufruct in the owner of the
naked title
b. Transmission or delivery of the
inheritance or legacy of the fiduciary heir
or legatee to the fideicommissary
c. Transmission from the first heir, legatee
or donee in favor of another beneficiary,
in accordance with the will of the
predecessor
Example: Merger of
Usufruct in the Naked Title
Jojo died in 2015 leaving his only
property, house and lot, to Nancy and Mar,
his daughter and son, with the stipulation
that Nancy shall inherit the title of
ownership while Mar will benefit the use
of property (usufruct).
Example: Merger of
Usufruct in the Naked Title
If Nancy died after the father (Jojo) and there
was no heir other than her brother Mar, there
would a merger of usufruct in the owner of the
naked title (Mar), hence, non-taxable.
Example: Merger of
Usufruct in the Naked Title
If Mar died before Nancy and there
was no heir other than Nancy, the
latter will inherit the property.
However, this time it would be
subject to estate tax.
Exclusions from Gross Estate
All bequests, devices, legacies or transfers to
social welfare , cultural and charitable
institutions, provided:
a. No part of the net income of said institution
inure to the benefit of any individual;
b. Not more than 30% of such transfers shall be
used for administration purposes.
Exclusions from Gross
Estate
Under Special Laws
a. Proceeds of life insurance and benefits received by
members of the GSIS (RA 728)
b. Benefits received by members from SSS by reason of
death (RA 1792)
c. Amounts received from Philippine and United States
governments for war damages
d. Amounts received from United States Veterans
Administration
Exclusions from Gross Estate
Retirement benefits of officials/employees of a
private firm (RA 4917), provided they are
included in the gross estate.
Payments from the Philippines and US
governments to the legal heirs of deceased of
World War II Veterans and deceased civilian for
supplies/services furnished to the US and
Philippine Army (RA 136)
Example:
Ben, a non resident alien, died on September 21, 2008,
leaving the following properties to his heirs.
Shares of stocks, Meralco P 250, 000
Shares of stock, foreign Corp. 85 % of its
business conducted in Phils. 400, 000
Dollar deposit accnt. – HSBC. Phil. 800, 000
Car – Manila 550, 000
Assuming the “ rule of reciprocity “ is applicable to Ben,
the taxable gross estate shall be :
Rules in determining the property of
relationship
291
Property Relations
Conjugal Absolute
Partnership Community
I. Property acquired BEFORE Marriage
a. Gratuitous Exclusive Communal
b. Onerous Exclusive Communal
c. Where the spouse has a legitimate descendant Exclusive Exclusive
from a previous marriage
II. Property acquired DURING marriage
a. Gratuitous title Exclusive Exclusive
b. Onerous Title Conjugal Communal
c. In exchange of EXCLUSIVE property Exclusive Exclusive
d. In exchange of conjugal/ communal property Conjugal Communal
2. Under the same problem, how much is the gross estate under Absolute
Community of Property?
295
Example:
A decedent left the following properties:
Land in Italy (with P 750,000 unpaid mortgage) P 2,000,000
Land in Laguna, Philippines 500,000
Franchise in USA 100,000
Receivable from debtor in Philippines 70,000
Receivable from debtor in USA 100,000
Bank deposits in USA 80,000
Shares of Stocks of PLDT, Philippines 75,000
Shares of stock of ABC, foreign corporation 75%
of the business in the Philippines 125,000
Other personal properties in the Philippines 300,000
Zonal value of the Land in Laguna 750,000
If the decedent is a nonresident citizen, his gross estate is
296
Example:
A citizen of Malaysia residing in Vietnam, with properties in the
Malaysia and the Philippines, had the following data on properties and
rights at the time of death and values.
Real estate, Malaysia P 1, 000, 000
Real estate, Philippines 2, 000, 000
Shares of stock of a domestic corporation 200, 000
Shares of stock of a Malaysian corporation 300, 000
Shares of stock of an Indonesian corporation
Doing business in the Philippines only 100, 000
Philippine peso deposit in BDO bank 500, 000
Receivable under a life insurance with an insurance
Company doing business in Malaysia 250, 000
The gross estate that should be reported in the Philippines is
297
ALLOWABLE
DEDUCTIONS
298
Allowable Deductions
ALLOWABLE DEDUCTIONS Residents NRA
or Citizens
O
R 1. ELITE
D a. Funeral expenses Yes Yes (PGE/WE)
b. Judicial expenses Yes Yes X
I
c. Claims against the estate Yes Yes
N WORLD
d. Claims against insolvent Yes Yes
A person Yes Yes ELITE
R e. Unpaid mortgages and Yes
Y indebtedness Yes Yes
f. Taxes Yes Yes
g. Losses
2. Transfer for Public Use Yes Yes
3. Vanishing Deduction Yes Yes
Allowable Deductions
ALLOWABLE DEDUCTIONS Residents or NRA
Citizens
2. Nonresident Aliens:
ELITE + PP + VD + Share of the Surviving
Spouse
Allowable Deductions
Expenses, losses, indebtedness and taxes (please see discussions
below).
If decedent was a citizen or resident alien, deduct all ELITE.
If decedent was a non-resident alien, prorate ELITE as follows:
310
Example:
Properties in the Philippines - P500,000;
Properties outside the Philippines - P300,000;
Actual funeral expenses in the Philippines -
P20,000; Actual funeral expenses outside the
Philippines - P10,000.
If the decedent was a non-resident, not citizen of
the Philippines, the deductible funeral expenses is:
311
Ordinary Deductions
b. Judicial Expense: No limit as to amount,
however, the expense must only be relating to
settlement of the estate. Any expense incurred by
the heir to establish his claim cannot be claimed
as judicial expense. Expenses allowed in this
category are:
Expenses incurred in inventory-taking of assets
comprising the gross estate
Administration
Expenses incurred in the distribution of the estate.
312
Ordinary Deductions
c. Claims against the Estate: Personal
obligation of the deceased existing at the
time of death, contracted in good faith and
for full and adequate consideration, which is
valid and enforceable in court and that must
not have been condoned by the creditor or
the action to collect must not have been
prescribed.
Ordinary Deductions
d. Claims against Insolvent Person: the
amount thereof must have been initially
included as part of the estate and the
incapacity of the debtor to pay his
obligation must have been proven. If only a
portion is uncollectible, then only such
portion may be claimed as deductible.
Ordinary Deductions
e. Unpaid Mortgages: a verification as to the beneficiary
of proceeds must be made. In case of accommodation
only, the amount must also be claimed as receivable
included in the gross estate.
317
Ordinary Deductions
2. Transfer for Public Use: the disposition must
be in the last will and testament which shall take
effect after death in favor of the Philippine
Government and for exclusive public purpose.
Bequest, legacies and other charitable disposition
of the estate in favor of social, cultural, and other
charitable institutions can be claimed as transfer
for public use, provided, that not more than 30%
of the said bequest or legacies is used for
administrative purpose.
Ordinary Deductions
Transfer for Public Use:
- are donations and contributions, by virtue of death,
to:
1.Government or its political subdivisions;
2.Non-government organizations (accredited)
3.Charitable and religious institutions
NEW INITIAL
VALUE
XELITE plus Transfer = deductible
Divide: for Public Use amount from NIV
TOTAL GROSS
ESTATE
Deductible
NEW INITIAL
VALUE -
amount from
NIV
=
NEW INITIAL
VALUE
The following information is provided by the
executor of a married decedent:
a. Exclusive property (fair market value of P145,000 when
inherited 3 ½ years ago and was subjected to a
mortgage of P45,600 at that time) P130,000.
b. Conjugal properties of the decedent husband and
surviving wife, P170,000
c. Unpaid mortgage on inherited property, P15,600
d. Judicial expenses incurred after the death in connection
with the estate settlement, P12,000
e. Other obligations, P17,500
335
Example:
B died leaving his only property, residential house and lot,
to his wife, S. The following information were given:
Lot acquired by B during marriage
thru gift from Father of B P 500,000
House constructed using conjugal funds
Construction Cost (10 years ago) 1,500,000
Assessed Value per tax declaration 1,200,000
Solution:
Lot (EXCLUSIVE) P 500,000
House (CONJUGAL)
Assessed Value:
1,200,000/2 600,000
P 1,100,000
LIMIT P 1,000,000
Special Deductions
6. Medical Expense: must be incurred within one year
prior to the death of the decedent and shall not exceed
P500,000. Any amount in excess of the ceiling shall not
be allowed as creditable as indebtedness.
349
COMPLIANCE
REQUIREMENTS
350
Compliance Requirements
Notice of death shall be given when the value of
the gross estate exceeds P 20,000
354
Example:
A died on January 31, 2010 leaving a
house and lot, which have a gross value
of P3,800,000, to B. When shall be the
last day to file the estate tax return if the
Commissioner grants an extension of
filing due to hardship in valuation the
estate?
355
Example:
A died on January 31, 2010 leaving a house
and lot, which have a gross value of
P3,800,000, to B. The executor of A filed the
estate tax return on June 30, 2010. However,
he failed to pay the estate tax due to liquidity
problems. If the estate is settled judicially,
when shall be the last day for the BIR to
collect the estate tax?
356
Example:
A died on January 31, 2010 leaving a house
and lot, which have a gross value of
P3,800,000, to B. The executor of A filed the
estate tax return on June 30, 2010.
However, he failed to pay the estate tax due
to liquidity problems. If the estate is settled
extra-judicially, when shall be the last day
for the BIR to collect the estate tax?
357
Example:
Taxpayer died February 2, 2010. No
judicial proceedings were instituted for the
settlement of his estate. Return was filed
and tax of P 20,000 was paid November 2,
2010. The estate tax due, including
increments, as of November 2, 2010 is:
________________
358
Example:
Mr. Joacquin Gamboa died on April 23, 2009 leaving a
total net taxable estate of P 1,250,000. The executor filed
the estate tax return on August 8, 2009. However, due to
undue hardship, the executor asked for the extension of
payment of estate tax which was granted by the
Commissioner of Internal Revenue. When will the last day
of payment of estate tax if the CIR grants the maximum
period and the estate is settled judicially?
359
Example:
360
Example:
Ms. Laureen McDonald, a citizen and resident of Brisbane, Australia,
died leaving properties and obligations in Australia and in the
Philippines:
Properties in Australia (inherited within
the year of which P1000,000 is family home) P 3,000,000
Properties in the Philippines 1,000,000
Investment in stocks of San Miguel Beer, Inc. 550,000
Investment in Foreign Corporation 400,000
Funeral Expenses in Australia 250,000
Unpaid obligations in Australia, duly notarized 700,000
Medical expenses in the Philippines 200,000
361
Question: If the decedent is a
Filipino, how much would be the
estate tax payable?
_____________________
362
ESTATE TAX TABLE
0 - 200,000 Exempt
200,000 - 500,000 0 + 5%
500,000 - 2,000,000 15,000 + 8%
2,000,000 - 5,000,000 135,000 + 11%
5,000,000 - 10,000,000 465,000 + 15%
10,000,000 - above 1,215,000 + 20%
DONOR’S TAX
Overview
Nature of Donor’s Tax – a tax on the privilege of
the donor to give; it is not a property tax but is a
tax imposed on the transfer of property by way of
gift during the life time of the donor. The donor’s
tax shall not apply unless and until there is a
completed gift.
It is an excise tax imposed upon the right of a
person to transfer property gratuitously during his
lifetime.
Overview
Donation takes place only when there is a concurrence of
the following:
1.Capacity of the donor
2.Donative intent
3.Delivery of the gift - completed
4.Acceptance by the donee - perfected
Note:
The composition and valuation of gross gift is the same as
the composition and valuation of gross estate.
Elements of Donation:
Capacity of the Donor
• The donor must be capacitated at the
time of the donation:
– he has the right to transfer or dispose the
property (ownership)
– he is mentally capable of entering into
donation, being a real contract (COCD)
– he does not deprive his legal heirs.
Required: Compute the donor’s tax due and payable on the donation.
393
Political Contributions
(Omnibus Election Code (OEC) and Repulic Act No. 7166)
394
Political Contributions
(Omnibus Election Code (OEC) and Repulic Act No. 7166)
402
Example:
Mr. and Mrs. K, made the following donations of conjugal
funds and properties in 2014 (unless stated otherwise) as
follows:
February 14: To L, a legitimate son, a piece of land with a
FMV of P 400,000 on account of L’s graduation
from college.
October 14: To P, the honest and good looking driver of Mrs. K who
accompanied Mrs. K on her trip to USA, a diamond ring worth P 500,000.
Determine the donor’s tax due on each donation for each spouse.
Example:
MAX, after winning the Jackpot prize of Mega Lotto, made the following donations
during the current calendar year:
February 14, 2015 - To City of Manila, Cash for the construction
of boxing gym P 1,000,000
September 21, 2015 - To the national library, for the acquisition of latest
books on science and mathematics 450,000
- To Deo, his only brother, on account of his
marriage on December 1, 2015, a new car 850,000
Example: (continuation)
On September 30, 2015 the car was totally
damaged by fire in a freak accident inMakati
City while Deo was on a date with his girlfriend.
The donor has not yet filed te donor’s tax
return on the September 21, 2015 donation.
406
COMPLIANCE
REQUIREMENTS
FOR DONATION
Filing and Payment of
Donor’s Tax
The deadline for the filing of donor’s tax return (BIR Form
1800) will be 30 days after the donation was made.
The payment for donor’s tax shall be the same day as of
that the day the return was filed (Pay-as-You-File System)
When the Commissioner gives an extension, the payment
of the tax due may be made on such day as extended by
the CIR, but not to exceed six (6) months.
Filing and Payment of
Donor’s Tax
The filing of returns for donor’s tax is with the Revenue
District Office or duly authorized collection (e.g. City
Treasurer) in which the donor resided at the time of transfer.
If there is no legal residence in the Philippines, filing should
be made with the Office of the Commissioner on Internal
Revenue.
Attachments to the Donor’s
Tax Return
Based on the BIR Form 1800, the following documents shall be
attached:
1. Sworn statement of the relationship of the donor to the donee;
2. Proof of tax claimed tax credit, if applicable;
3. Certified true copy of the Original/Transfer/Condominium
Certificate of Title (OCT, TCT, CCT) of the donated property (for
real properties);
4. Certified true copy of the latest Tax Declaration of lot and/or
improvement, if applicable (for market value purposes);
5. Certificate of No Improvement issued by the Assessor’s Office
where the donated real property/ies have not declared
improvements, if applicable;
Attachments to the Donor’s
Tax Return
1. Proof of valuation of shares of stock at the time of
donation, if applicable;
1. For listed stocks – newspaper clippings/certification issued by
the Stock Exchange as to the value of per share
2. For unlisted stocks – latest audited Financial Statements of the
issuing corporation with the computation of the book value per
share.
2. Proof of valuation of other types of personal properties,
if applicable;
3. Proof of claimed deductions, if applicable; and
4. Proof of the Tax Debit Memo used as payment.
BUSINESS
TAXES
Concept of Business
A business is described as “trade or
commercial activities” which are regularly
engaged in as means of livelihood or with a
viewpoint of obtaining profit.
The sales of goods and services related to
trade, profession or business in the
Philippines are generally subject to business
taxes, except when exempted as provided by
law.
Characteristics of Taxable
Business Transactions
1. Regular Transactions;
2. Incidental transactions;
3. Transactions for profit or for non-for-profit;
4. Transactions consummated within the Philippines;
and
5. Lawful transactions
1. Regular Transactions
A business is generally characterized as performing habitual
systematic, continuous, and regular income generating
activities such as selling of goods or services tp customers or
clients.
It is not a performance of a single disconnected act or transacton
to obtain a gain.
The rule of regularity generally determines whether or not an
economic transaction is subject to business tax.
Exceptions:
a. Sale of services by a non-resident foreign person; and
b. Sale of goods by a non-resident foreign person
417
4. Transactions Consummated
within the Philippines
Business tax is imposed on transactions involving the use
or the consumption of goods or services. The imposition of
business tax follows the consumption or destination
principle. The place of sale is presumed to be the place of
consumption.
In addition, the “Doctrine of Cross Border” provides that
no business tax (particularly VAT) shall be imposed on
sales of products or services destined for the consumption
outside of the territorial border if the taxing authority. (RMC
No.74-99)
5. Lawful Transactions
Legally registered. Non-reregistration of business
makes the business illegal; however, non-registration is
not a valid excuse to absolve the business from the
imposition of income and business tax.
Engaged in activities not contrary to law, morals,
good customs, public order or public policy.
As a rule, anything sold in the course of business must be
within the commerce of men and therefore, subject to
business tax. Taxpayers engaged in unlawful or illegal
transactions are not absolved income and business tax
plus corresponding surcharges and penalties.
Business:
1. Regular Transactions;
2. Incidental transactions;
3. Transactions for profit or Subject to Business Taxes:
for non-for-profit; 1. VAT (12% and 0%)
4. Transactions consummated 2. Other Percentage Taxes
within the Philippines; and 3. Excise Taxes
5. Lawful transactions
BUSINESSES
Not Subject to Business
Taxes:
Non-Business: 1. Exempt commercial
1. Sale of Goods of a transactions within;
non-residentsforeign person 2. Subsistence or livelihood
(individual and corporation) activities;
2. Sale of services of a 3. Privilege stores;
non-resident foreign person 4. Casual sales other than
(individual and corporation) ordinary assets;
5. Compensation and other
benefits from employment
Concept of Business Taxes
Example:
APPLE Trading is registered under non-VAT
business in 2015. in year, 2016, it generated P 2,000,000
sales. What are the implications to APPLE Trading
regarding its subsequent renewal of registration?
442
On Sale of Goods or Properties On Importation On Sale of
Services or Lease
of Properties
Gross Selling Price of the goods Landed value or cost Gross Receipts
or Properties sold, exchanged plus excise taxes, derived from the
or bartered, which may be: custom duties, and sale or exchange
a. Real properties held for sale other charges paid by of services,
b. Right to use patent, copyright, the importer prior to including the use or
OUTPUT design or model the release of goods lease of properties
VAT c. Radio, television, satellite from customs custody
transmission, etc.
STANDARD
(to Government) EXPORTS
445
OUTPUT VAT: 12% VAT
The Output VAT on sale of goods or properties
shall be computed at 12% of the gross
selling price of the following:
a.All tangible and intangible objects
b.Real properties held primarily for sale;
c.Right or privilege to use patent, copyright, design or
model, plan secret formula or process, goodwill,
trademark, trade brand or other like property or right;
d.Right to use motion picture films, tapes, and discs;
e.Radio, television, satellite transmission and cable
television time
OUTPUT VAT: 12% VAT
The term ‘gross selling price’ means the total
amount of money or its equivalent which the
purchaser pays or obligated to pay to the seller in
consideration of the sale, barter or exchange, excluding
VAT.
Sales returns and allowances are deductible from gross sales
or receipts if a proper credit or refund was made during the
month/quarter.
Sales discounts may only be deducted if (1) it was granted at
the time of sale, (2) expressly indicated in the invoice, and (3) the
granting of the discount does not depend on the happening of a
future event.
OUTPUT VAT: 12% VAT
Importation
All importations are subject to VAT of 12%, except
those exempt under Sec. 4 of RR No. 6-97.
Importations made by a tax-exempt taxpayer shall,
likewise, be exempt from VAT. However, the
subsequent purchaser, transferee or recepient who are
not tax-exempt shall pay the VAT on the imported
goods as if he was the importer.
The tax base of imported good for VAT purposes
include total value of importation or its landed cost plus
excise and ad valorem tax and other charges on
importation.
OUTPUT VAT: 12% VAT
IMPORTED GOODS TREATMENT
1. Importation of Non-VAT Exempt Subject to Output VAT
Goods by a VAT person for business
use Can Claim Input VAT
2. Importation of Non-VAT Exempt Subject to Output VAT
Goods by a VAT person for personal
use No Input VAT
3. Importation of Non-VAT Exempt Subject to Output VAT
Goods by a Non- VAT person for
business use No Input VAT
4. Importation of Non-VAT Exempt Subject to Output VAT
Goods by a Non- VAT person for
personal use No Input VAT
Example:
An importer wishes to withdraw his importation
from the Bureau of Customs. The imported
goods were subjected to a 10% customs duty
in the amount of P12,500 and to other charges
in the amount of P9,500. The value-added tax
due is:
450
VAT- Exempt Transactions
a. Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of a kind generally used as,
or yielding or producing, foods for human consumption; and
breeding stock and genetic materials;
b. Sale or importation of fertilizers, seeds, seedlings and fingerlings,
fish, prawn, livestock and poultry feeds, including ingredients,
whether locally produced or imported, used in the manufacture of
finished feeds (except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other animals generally
considered as pets);
c. Importation of personal and household effects belonging to
residents of the Philippines returning from abroad and non-resident
citizens coming to resettle in the Philippines; provided, that such
goods are exempt from customs duties;
VAT- Exempt Transactions
d. Importation of professional instruments and
implements, wearing apparel, domestic animals, and
personal household effects (except any vehicle, vessel,
aircraft, machinery and other goods for use in the
manufacture and merchandise of any kind in commercial
quantity) belonging to persons coming to settle in the
Philippines, for their own use and not for sale, barter or
exchange, accompanying such persons, or arriving within
ninety (90) days before or after their arrival, upon the
production of evidence satisfactory to the Commissioner of
Internal Revenue, that such persons are actually coming
to settle in the Philippines and that the change of
residence is bona fide
VAT- Exempt Transactions
e. Services subject to percentage taxes
f. Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into
raw sugar.
459
OUTPUT VAT: 12% VAT
Transactions not Deemed Sales
• Change of corporate control (Parent-
Subsidiary)
• Change in the trade or corporate name of
the business
• merger or consolidation of corporations
OUTPUT VAT: 12% VAT
Sale of Scrap Materials
1. Sale of scrap such as empty drums, plastic
bags, cartons, and wood crates; obsolete
inventories and fully depreciated fixed assets
at a minimal prices or lower than the purchase
price are subject to VAT.
2. Ordinary assets, other than inventories held
for sale, which are originally subject to
depreciation are are likwise subject to VAT,
when sold.
Example:
JD, a trader, is VAT taxpayer having the following
information regarding his sales during the month of
September 2014, exclusive of VAT:
Cash sales P 200,000
Open Account Sales 500,000
Installment Sales 100,000
Note: Collection during the month for this sale 30,000
Consignment sales (net of VAT):
0-30 days old (on which there were remittances
from consignees of P200,000) 600,000
31 to 60 days old 700,000
61 days old and above 900,000
How much is the taxable
sales?______________________
OUTPUT VAT: 12% VAT
Sale of Properties
Sale of real property classified as capital asset is not
subject to VAT. Such transaction is subject to capital gains
tax of 6% based on sales price or FMV, whichever is higher.
In general, sale of real property primarily held in the
normal course of business (inventory/ordinary asset) is
subject to VAT, except:
Residential lot with selling price of P 1,919,500 and below; and
Sale of house and lot and other residential dwellings with selling
price at P 3,199,200 and below.
463
Illustration
Capital Assets Capitals Gains
(Real Properties) Taxes 6%
Capital Assets
Normal Tax
(Personal Properties)
Regardless of the
Commercial Lots
price, VAT
490
Sources of Input VAT
Purchase of services on which a value-added tax has
been actually paid
496
Sources of Input VAT
Transitional Input VAT (TIV)
•A person who becomes liable to VAT or any
person who elects to be a VAT-registered person
shall be allowed input tax on his beginning
inventory of goods, materials and supplies
which is equivalent to 2% of such inventory or the
actual VAT paid on such goods, materials and
supplies, whichever is HIGHER.
Sources of Input VAT
• In computing the TIV, do not include those
beginning inventories (goods, materials and
supplies) which are exempt from VAT.
499
Example:
Virgin is a producer of cooking oil from coconut and corn. Previously exempt
from the value-added tax, he became subject to the value-added tax on
January 1, 2010. For January 2010, with sales, value-added tax not included,
of P700,000, he had the following other data for the month:
Inventory, January 1, 2010: NRV Cost
Corn and coconut purchased
from farmers P120,000 P100,000
Packaging materials purchased
from VAT suppliers 24,640 22,400
Supplies purchased from VAT
suppliers 11,200 13,440
Purchases during the month of coconut
and corn from farmers 330,000
Purchases during the month from VAT suppliers:
Packaging materials 56,000
Supplies 16,800
The value-added tax payable for the month is:
Sources of Input VAT
Standard Input VAT (Sale to Government)
The sale to Government or its political subdivision by VAT-
registered person shall be subject to 12% VAT, provided that:
The government shall withhold 5% final withholding
VAT upon payment to the VAT registered person;
The VAT-registered person may claim a Standard Input
VAT of 7% against its output VAT from the sale to
government. The Actual Input VAT attributable to sales of
goods and services to the government shall not be
credited against the Output VAT arising from sales to
non-government entities.
501
Example:
A taxpayer, engaged in processing and selling of sardines and mackerel, is
registered under the VAT system of January 1, 2014. His records during the
month show:
Value of inventory as of December 31, 2013,
Purchased from VAT-registered persons P 370,000
VAT paid on inventory as of December 31, 2013 7,500
Value of inventory as of December 31, 2013
Purchased from non-VAT persons 200,000
Gross Cash Sales, net of VAT 340,000
Gross Credit Sales, inclusive of VAT 250,000
Export Sales of Sardines 500,000
Purchases of Raw sardines and mackerel used in the process 150,000
Imported Equipment from Germany on January 5, 2014
Cost, exclusive of VAT 1,100,000
Excise Taxes and Custom Duties 70,000
Useful Years 5 and a half year
Purchases of VAT-exempt goods 120,000
OTHER
PERCENTAGE
TAXES
Overview
To compliment the imposition of VAT, percentage taxes are
imposed:
1. If the gross sales or receipts of a non-VAT taxpayer
engaged in selling goods and services does not exceed
P 1,919,500, and
2. If the taxpayer does not register himself under VAT
system
3. If the same non-VAT taxpayer breached the limit, he
shall be taxed at 12% even if not registered under VAT
system.
518
Example:
As franchisee, it had the following data on revenues and receivables, taxes
not included:
Receivables
Quarter ended 3/31/2009 operations: Revenues Beginning End
Covered by the franchise P 2,000,000 P 300,000 P 400,000
Not covered by the franchise 600,000 80,000
The business taxes, before any tax credit, if generating and selling electricity:
_______________
The business taxes, before any tax credit, if generating and selling gas and
water utilities: _____________
519
Example:
Marino is an owner of a small variety store. His gross
sales in any one year do not exceed P1,500,000. He is
not VAT-registered. The following data are taken from the
books of the variety store for the quarter ending March 31,
2009:
Merchandise inventory,
December 31, 2008 P 10,000
Gross sales 45,000
Purchases from VAT-registered supplier 38,500
520
COMMUNITY
TAX
521
Overview
Amount Applicable:
• Basic Tax - P500.00
• Additional Tax:
– P2.00 for every every P5,000.00 worth of real property in the
Philippines owned by it during the preceding year based on
the valuation used for the payment of the real property tax
under existing laws, found in the assessment rolls of the city
or municipality where the real property is situated.
– The LGU described tha basis for additional community for real
property owned as the valuation used for the payment of real
property tax found in the assessment rolls of the municipality or
city where the real property is situated.
•
Community Tax: Corporate
• P2.00 for every P5,000 of gross receipts or earnings
derived by it from its business in the Philippines during
the preceding year.
537
Surcharges
1. Simple Neglect (25%)
Failure to file any return and pay the tax due thereon.
If the return is not filed with the proper internal revenue
officer.
Failure to pay on time the deficiency tax shown in the
notice of assessment.
Failure to pay the full or part of the amount of tax shown on
any return required to be filed, or the full amount of tax due
for which no return is required to be filed, on or before the
date prescribed for its payment.
538
Surcharges
2. Willful Neglect (50%)
Willful neglect to file the return on time.
False or fraudulent return is willfully filed (failure to report
sales, receipts or income in an amount exceeding 30% of
that declared per return, and a claim of deductions in an
amount exceeding 30% of actual deductions, shall render
the taxpayer liable for substantial under-declaration of
sales, receipts or income or for substantial overstatement
of deductions, thus making the return filed false or
fraudulent).
Example:
Miramar’s income tax for 2010 was P75, 000,
as shown in her income tax return (ITR). She
filed her return only on July 15, 2012 and paid
the total amount upon filing the return. The total
amount payable assuming there was fraud
should be:
Example:
Mirant Corporation filed its final adjustment income tax return for
calendar year 2007 with a taxable income of P500,000. At the
applicable income tax rate of 35% for the year 2007, its income tax
amounted to P175,000. However, upon investigation, it was disclosed
that its income tax return was false or fraudulent because it did not
report a taxable income amounting to another P500,000. On its taxable
income of P1,000,000, per investigation, the income tax due is
P350,000. Deducting its payment per return filed, the deficiency,
excluding penalties, amounted to P175,000. It was duly informed of this
finding through a Preliminary Assessment Notice. Failing to protest on
time against the preliminary assessment notice, a formal letter of
demand and assessment notice was issued on May 31, 2009 calling
for payment of the deficiency income tax on or before June 30, 2009.
The total amount due per the assessment notice is:
541
TAX
REMEDIES
542
Overview
The basic purpose of remedies is to maintain
equilibrium between the interest of the state and the
taxpayer.
Remedies can be either administrative or judicial.
Administrative remedies involves assessment and
collection, protest and refund.
Judicial remedies may either be a civil suit or
criminal suit, appeal to CTA, injunction/ temporary
restraining order, or criminal suit against erring BIR
officials.
Overview
Remedies to the Common Remedies Remedies to the
State Taxpayer
1. ADMINISTRATIVE LEVEL (BIR)
Assessment Compromise Protest
Collection Abatement Refund
2. JUDICIAL LEVEL
Civil Suit/Action Appeal to CTA
Criminal Suit/ TRO/ Injunction
Action
Criminal Suit
against erring BIR
officials
Remedies to the State: Administrative
Level – Assessment
It is a finding by the taxing authority that the taxpayer has
not paid the correct taxes.
An assessment contains not only a computation of tax
liabilities but also a demand for payment within a
prescribed period. It also signals the time when penalties
and interests begin to accrue against the taxpayer.
Time of assessment (statute of limitation or prescriptive
period) – national internal revenue taxes shall be
assessed within 3 years:
After the due date for the filing of the return (a return filed before
the due date shall be considered as filed on such due date);
From the day the return was filed, where the return is filed beyond
the due date; and
From the filing of the amended return, if the return was amended
substantially.
Remedies to the State:
Administrative Level – Assessment
EXCEPTIONS - The 3-year prescriptive period of assessment
is extended if:
False or fraudulent return with intent to evade the tax was filed - the
assessment may be made within 10 years from the discovery of
the falsity or fraud;
No return is filed - assessment may be made within 10 years after
the discovery of the failure or omission to file the return; and
Before the expiration of the 3-year prescriptive period for assessment
of the tax, both the taxpayer and the CIR have agreed in writing
(waiver) to its assessment after such time, the tax may be
assessed within the period agreed upon. The period so agreed upon
may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.
Remedies to the State:
Administrative Level – Assessment
If the government tries to assess a tax beyond
the prescriptive periods, the taxpayer may claim
defense of prescription of the right of the
government to assess. The defense of prescription,
however, is not jurisdictional and must be
raised seasonably, otherwise it is deemed waived.
If the return is not false nor
fraudulent:
Collection by Judicial proceedings only
3 years
3 years 5 years
551
If the return is false or fraudulent:
10 years
552
If the return is false or fraudulent:
Assessment followed by Collection by Summary or
Judicial proceeding
Date return was filed, or the last day required by law for
filing, if filed before the last day.
10 years 5 years
555
Pre-Assessment Notice
The PAN is not required in the following cases:
a. When the deficiency tax is a result of mathematical errors in the
computations appearing on the face of the return;
b. When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding
agent;
c. When a taxpayer who opted to claim tax refund or credit of
excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the
same amount against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable years;
d. When the excise tax due on excisable articles has not been paid;
e. When an article locally purchased or imported by an exempt
person has been sold, traded or transferred to non-exempt
persons.
556
Remedies to the State:
Administrative Level – Assessment
How are tax audits/investigations initiated?
1. Issuance of Electronic Letter of Authority (eLA), Tax Verfication
Notice (TVN) and/or Letter of Notice (LN) is considered as a
“notice of audit or investigation” that prohibits amendment to
any return covering period referred to in the eLA, TVN and/or
LN
2. RMO No. 62 – 2010 discontinued the manual issuance of Letter
of Authority (LA) and TVNs
3. There must be a grant of authority before any revenue officer
can conduct an examination or issue an assessment. Thus, the
BIR cannot extend its examination or assessment beyond the
period covered by the Letter of Authority (LA).
LA should cover a taxable period not exceeding one taxable
year. The practice of issuing an LA covering audit of
“unverified prior year’s” is prohibited.
Remedies to the State:
Administrative Level – Assessment
Place of Examination
1. The primary place of examination is the
taxpayer’s place of business.
2. The secondary place of examination is at
the Office of the BIR
submitted
581
Example:
Date assessment was received - January 2, 2009.
Petition for reconsideration was filed with the
Bureau of Internal Revenue - January 12, 2009.
Documents supporting the petition for
reconsideration was filed with the Bureau of
Internal Revenue - January 22, 2009. No decision
on the protest by July 12, 2009. Last day to
appeal to the Court of Tax Appeals:
582
Example:
On January 20, 2008, a taxpayer filed a protest on/request
for reconsideration of an assessment of a tax. He received
a final decision of the Bureau of Internal Revenue on the
protest on April 30, 2008. He failed to appeal to the
decision to the Court of Tax Appeals. The Bureau of
Internal Revenue was collecting the tax by summary
proceedings on June 20, 2013. The taxpayer was
opposing the collection of the tax on the ground of
prescription of the government to collect. When shall be
the last day to collect?
583
Remedies to the Taxpayer:
Administrative – Refund
A taxpayer may file for tax refund in case
of excessive or erroneous payment of a
tax with the BIR:
a. Tax is collected erroneously or illegally.
b. Penalty is collected without authority.
c. Sum collected is excessive
584
Remedies to the Taxpayer:
Administrative – Refund
The claims must be in writing.
It must be filed with the CIR within 2
years after the payment of the tax or
penalty.
There must be a proof of payment.
Remedies to the Taxpayer:
Administrative – Refund
Tax credit or refund
a. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the CIR a claim for
credit or refund within 2 years after the payment of the tax
or penalty.
b. A return filed showing an overpayment shall be
considered as a written claim for credit or refund.
c. A Tax Credit Certificate (TCC) validly issued under the
provisions of the Tax Code may be applied against any
internal revenue tax (except withholding taxes) for which
the taxpayer is directly liable.
Refund for Tax Illegally or Erroneously Collected
(Illustrative Summary)
Case 1:
Date of Claim for refund Denial Last to appeal to CTA
Payment filed with BIR received
30
days
2 years
Refund for Tax Illegally or Erroneously Collected
(Illustrative Summary)
Case 2:
Date of Claim for refund
Denial
Payment filed with BIR
received
30 days
590
Forfeiture of Refund or Tax
Credit
Forfeiture of refund - a refund check or warrant, which
shall remain unclaimed or uncashed within 5 years from
the date the said check or warrant was mailed or
delivered, shall be forfeited in favor of the government and
the amount shall revert to the General Fund.
Forfeiture of tax credit - a tax credit issued in accordance
with the provisions of the Tax Code, which shall remain
unutilized after 5 years from the date of issue shall,
unless revalidated, be considered invalid, and shall not
be allowed as payment for internal revenue tax liabilities of
the taxpayer, and the amount covered by the certificate
shall revert to the General Fund.
591
Remedies to the State: Judicial
Remedies – Civil and Criminal
Action
1. Civil action is resorted to when a tax liability becomes collectible,
that is, the assessment becomes final and unappealable, or the
decision of the CIR has become final, executory, and demandable.
2. Criminal action, like civil action, cannot be instituted without the
approval of the CIR. It is resorted to not only for collection of taxes
but also for enforcement of statutory penalties of all sorts. The
judgment in the criminal case shall not only impose the penalty but
shall also order the payment of the taxes.
3. The extinction of a taxpayer’s criminal liability does not necessarily
result in the extinguishment of his civil liability. Conversely, the
subsequent satisfaction of a tax liability will not operate to
extinguish the criminal liability.
Remedies to the Taxpayer: Judicial
Remedies – Civil Action