Tax Bar 2011 Coverage

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2011 BAR COVERAGE FOR TAXATION

I. General Principles of Taxation

A. Definition and Concept of Taxation

Taxation is the inherent power of the state, acting through the

legislature, to impose and collect revenues to support the government

and its recognized objects. Simply stated, taxation is the power of the

State to collect revenues for public purpose.

Taxation concept Inherent power of the State, through the

legislative body, to raise revenues for the purpose of defraying

the expenses of government

B. Nature of Taxation

1. Legislative- This power can only be exercised by the law making body

(Congress) not the executive or the judicial branch of the government,

except when delegated by the national legislative body to a local

legislative body or to the executive branch, subject to limitations as

may be provided by law;

2. Inherent in sovereignty - The power exists as an incident or attribute of

sovereignty, as it is essential to the existence of every government.

The power can therefore be exercised even without the constitution or

any law expressly conferring such power.

C. Characteristics of Taxation

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a. Taxes are proportional in character, since taxes are based on ones

ability to pay.

b. Taxes are levied by authority of law.

c. The power to impose taxes is a legislative power; it cannot be

imposed by the executive department nor by the courts.

d. Taxes are for the support of the government and all its public

needs.

D. Power of Taxation Compared With Other Powers

1. POLICE POWER

a. As to purpose Taxation is to raise revenue; Police Power is to

promote public welfare.

b. As to amount Taxation has no limit; Police Power is limited to

the cost of regulation, issuance of license or surveillance

c. As to benefits Taxation offers no special or direct benefit other

than benefit to the general public; Police Power is to promote a

healthy economic standard.

d. As to applicability of non-impairment of contracts clause It

applies in taxation; It does not apply in police power, EXCEPT if

the grant of franchise was for a valuable consideration.

e. As to transfer of property rights Taxation involves transfer of

public funds or money; Police Power does not contemplate a

transfer but merely restraint on property taken or destroyed.

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2. POWER OF EMINENT DOMAIN

a. As to nature Taxation is the power to raise revenue; Eminent

Domain is the taking of property for public use.

b. As to compensation Compensation for taxation takes the form

of a general benefit to the public; in eminent domain, there must

be just compensation.

c. As to applicability of non-impairment of contracts clause It

applies in taxation; it does not apply in eminent domain.

d. As to persons affected Taxation affects all subject to the

States jurisdiction; eminent domain affects only the particular

property.

e. As to authority Taxation is exercised by the government;

Eminent Domain may be exercised by private entities exercising

public functions.

E. Purpose of Taxation

1. Revenue raising (Primary Purpose) - To provide funds or

property with which the government discharges its appropriate

functions for the protection and general welfare of the its

citizens.

2. Non Revenue Objectives (Sumptuary Purpose of Taxation ) Non-

revenue raising purpose of taxation refers to regulatory purpose.

a. Aside from purely financing government operational

expenditures, taxation is also utilized as a tool to carry

out the national objective of social and economic

development.

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b. to strengthen anemic enterprises by granting them tax

exemptions or other conditions or incentives for growth;

c. to protect local industries against foreign competition by

increasing local import taxes;

d. as a bargaining tool in trade negotiations with other

countries;

e. to counter the effects of inflation or depression;

f. to reduce inequalities in the distribution of wealth;

g. to promote science and invention, finance educational

activities or maintain and improve the efficiency of local

police forces;

h. to implement police power and promote general welfare.

F. Principles of Sound Tax System

a. Fiscal Adequacy - The sources (proceeds) of tax revenue should

coincide with and approximate needs of government

expenditures. The sources of revenue should be sufficient and

elastic to meet the demands of public expenditures.

b. Theoretical Justice - The tax system should be fair to the average

taxpayer and based upon his ability to pay.

c. Administrative Feasibility - The tax system should be capable of

being properly and efficiently administered by the government

and enforced with the least inconvenience to the taxpayer.

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G. Theory and Basis of Taxation

1. Lifeblood Theory - Provides that the existence of government is a

necessity; that government cannot continue without means to pay its

expenses; and that for these means it has a right to compel its citizens

and property within its limits to contribute

2. Necessity Theory- The government is necessary since the exercise

of governmental functions redounds to the benefit of society; this canonly be achieved by raising revenues

3. Benefits-Protection Theory (Symbiotic Relationship) -Government

needs revenues to defray expenses; the public benefit from

government; Symbiotic relationship between State and tax-paying

public

4. Jurisdiction over subject and objects - State has jurisdiction over the

taxpayer

H. Doctrines in Taxation

1. Prospectivity of tax laws - Tax laws are prospective in character and

in application.

Exceptions:

a. The retroactive application is necessarily implied from

the language used

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b. It involves income tax

c. The retroactive application is clearly the intent of the

congress.

2. Imprescriptibility-Taxes are imprescriptible unless the law itself

provides for prescription

3. Double taxation - taxing the object/subject within the territorial

jurisdiction twice, by the same taxing authority for the same period,

purpose and involving the same kind of tax

a. Strict sense - In its strict sense, referred to as direct duplicate

taxation, double taxation means:

1. taxing twice;

2. by the same taxing authority;

3. within the same jurisdiction or taxing district;

4. for the same purpose;

5. in the same year or taxing period;

6. some of the property in the territory.

b. Broad sense - In its broad sense, referred to as indirect double

taxation, double taxation is taxation other than direct duplicate

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taxation. It extends to all cases in which there is a burden of two or

more impositions.

c. Constitutionality of double taxation - Unlike the United States

Constitution, our Constitution does not prohibit double

taxation. However, while it is not forbidden, it is something not

favored. Such taxation should, whenever possible, be avoided and

prevented. In addition, where there is direct double taxation, there

may be a violation of the constitutional precepts of equal protection

and uniformity in taxation.

The argument against double taxation may not be invoked

where one tax is imposed by the State and the other is imposed by the

city, it being widely recognized that there is nothing inherently

obnoxious in the requirement that license fees or taxes be exacted

with respect to the same occupation, calling, or activity by both the

State and a political subdivision thereof. And where the statute or

ordinance in questions applies equally to all persons, firms and

corporations placed in a similar situation, there is no infringement of

the rule on equality. [City of Baguio v. De Leon, 25 SCRA 938]

At any rate, there is no constitutional prohibition against double

taxation in the Philippines. It is something not favored but is

permissible, provided that some other constitutional requirement is not

thereby violated.

d. Modes of eliminating double taxation

To eliminate double taxation, a tax treaty resorts to several

methods. First, it sets out the respective rights to tax of the state of

source or situs and of the state of residence with regard to certain

classes of income or capital. In some cases, an exclusive right to tax is

conferred on one of the contracting states; however, for other items of

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income or capital, both states are given the right to tax, although the

amount of tax that may be imposed by the state of source is limited.

The second method for the elimination of double taxation

applies whenever the state of source is given a full or limited right to

tax together with the state of residence. In this case, the treaties make

it incumbent upon the state of residence to allow relief on order to

avoid double taxation.

4. Escape from taxation

1. Shifting of tax burden - the process of transferring the tax burden

from the statutory taxpayer to another without violating the law.

Ex :VAT

1. Ways of shifting the tax burden

2. Taxes that can be shifted

3. Meaning of impact and incidence of taxation

2. Tax avoidance- (also referred to as tax minimization scheme) It is

the reduction or totally escaping payment of taxes through legally

permissible means, that are not prohibited and therefore are not

subject to penalties.

3. Tax Evasion- (also referred to as Tax dogging) It is resorting to acts

and devices that illegally reduces or totally escape the payment of

taxes that are due to the taxpayers. They are prohibited and

therefore are subject of civil and or criminal penalties,

5. Exemption from taxation

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a. Meaning of exemption from taxation- It is an immunity , privilege or

freedom from the payment of a charge or burden to which others are

obliged to pay.

b. Nature of tax exemption

1. It is a mere personal privilege of the grantee.

2. It is generally revocable by the government unless the

exemption is founded on a contract which is protected

from impairment.

3. It implies a waiver on the part of the government of its

right to collect what otherwise would be due to it,

and so is prejudicial thereto.

4. It is not necessarily discriminatory so long as the

exemption has a reasonable foundation or rational basis.

c. Kinds of tax exemption

1) Express - When certain persons, property or transactions are,

by express provision, exempted from all or certain taxes, either

entirely or in part.

2) Implied - When a tax is levied on certain classes of persons,

properties, or transactions without mentioning the other classes.

3) Contractual

d. Rationale/grounds for exemption

1) May be based on a contract

2) It may based on grounds of public policy

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3) It may be based on some grounds to foster charitable and

other benevolent institutions

4) It may be created under a treaty on grounds of reciprocity

5) It may be created to lessen the rigors of international double

or multiple taxation

e. Revocation of tax exemption tax exemptions are revocable except

when granted under a valid contract

6. Compensation and Set-off

General rule: A tax delinquency cannot be extinguished by legal

compensation. This is so because the government and the tax

delinquent are not mutually creditors and debtors. Neither is a tax

obligation an ordinary debt. Moreover, the collection of a tax cannot

await the results of a lawsuit against the government. Finally, taxes

are not in the nature of contracts but grow out of a duty to, and are the

positive acts of the, government to the making and enforcing of which

the personal consent of the taxpayer is not required

Exception: SC allowed set off in the case of Domingo v. Garlitos [8

SCRA 443] re. claim for payment of unpaid services of a government

employee vis-a-vis the estate taxes due from his estate. The fact that

the court having jurisdiction of the estate had found that the claim of

the estate against the government has been appropriated for the

purpose by a corresponding law shows that both the claim of the

government for inheritance taxes and the claim of the intestate for

services rendered have already become overdue and demandable as

well as fully liquidated. Compensation therefore takes place by

operation of law.

7. Compromise

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REQUISITES:

a) The taxpayer have a tax liability

b) There must be an offer (by the taxpayer of an amount to be paid

by the taxpayer)

c) There must be an acceptance (by the Commissioner or the

taxpayer as the case may be) of the offer in the settlement of

the original claim

8. Tax amnesty

a. Definition- It is a general pardon or intentional overlooking by the

state of its authority to impose penalties on persons otherwise guilty of

tax evasion or violation of a tax law

b. Distinguished from tax exemption Tax emption requires no

payment of tax while tax amnesty requires the payment of certain

percentage of unpaid taxes, the former is prospective in application

while the latter is retroactive in application.

9. Construction and Interpretation of:

1. Tax Laws

a. General Rule- tax statute will not be construed as imposing a

tax unless it does so clearly , expressly and unambiguously.

It is construed most strongly against the government and

liberally in II. National Internal Revenue Code of 1997 as

amended (NIRC) Tax laws favour of the citizen because

burdens are not to be imposed beyond what the statutes

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expressly and clearly import. ( CIR v. La Tondena, Inc. July

31, 1962)

Hornbook Doctrine- In the interpretation of tax laws, a tax

cannot be imposed without clear and express words for that

purpose and the provisions of a taxing act are not to be

extended by implication

b. Tax exemption and exclusion

1) General Rule - Tax exemptions are limited to those

granted by law

2) Exception - Law granting tax exemption may be

passed with the concurrence of a majority of all the

members of the Congress.

c. Tax rules and regulations

1) General rule only

The Secretary of Finance, upon recommendation of

the Commissioner of Internal Revenue, shall promulgate

needful rules and regulations for the effective

enforcement of the provisions of the NIRC.

This is without prejudice to the power of the

Commissioner of Internal Revenue to make rulings or

opinions in connection with the implementation of the

provisions of the Internal Revenue laws, including rulings

on the classification of articles for sales tax and similar

purposes.

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Purpose of rules and regulations

1. To properly enforce and execute the laws.

2. To clarify and explain the law

3. To carry into effect the laws general provisions by

providing details of administration and procedure.

Requisites for validity of rules and regulations

1. They must not be contrary to law and the

Constitution.

They must be published in the Official Gazette or a

newspaper of general circulation

d. Penal provisions of tax laws

e. Non-retroactive application to taxpayers

1) Exceptions

I. Scope and Limitation of Taxation

It is comprehensive, unlimited, supreme and plenary, but

subject to constitutional and inherent limitations.

1. Inherent Limitations - restrictions to the power to tax attached to its

nature.

a. Public Purpose -Taxes may be levied only for public purpose

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b. Inherently Legislative - Non-delegation. The power to tax

being legislative in nature may not be delegated.

Exceptions:

a) Delegation to local governments - The power of

local government units to impose taxes and fees is always

subject to the limitations which Congress may provide, the

former having no inherent power to tax. [Basco v. PAGCOR]

Municipal corporations are mere creatures of Congress

which has the power to create and abolish municipal

corporations. Congress therefore has power of control over local

government units. If Congress can grant to a municipal

corporation the power to tax certain matters, it can also provide

for exemptions or even to take back the power.

b) Delegation to the President- Congress may authorize,

by law, the President to fix, within specified limits and subject to

such limitations and restrictions as it may impose:

1. Tariff rates;

2. Import and export quotas;

3. Tonnage and wharfage dues; and

4. Other duties or imposts within the national

development program of the government.

This authorization is embodied in Section

401 of the Tariff and Customs Code which is also

called the flexible tariff clause.

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c) Delegation to administrative agencies - Certain aspects

of the taxing process that are not really legislative in nature are

vested in administrative agencies. In these cases, there really is

no delegation, to wit:

i. Power to and value property;

ii. Power to assess and collect taxes;

iii. Power to perform details of computation, appraisal, or

adjustment; among others.

c. Territorial - The State may tax persons and properties under its

jurisdiction

1) Situs of Taxation

a) Meaning - literally means the place of taxation, or the

country that has jurisdiction to levy a particular tax on

persons, property, rights or business.

b) Situs of Income Tax

a. citizenship, or the country of which he is a citizen

b. legal residence

c. place where the income is derived.

1) From sources within the Philippines

2) From sources without the Philippines

3) Income partly within and partly without the

Philippines

c) Situs of Property Taxes

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(1) Taxes on Real Property- location of the property

pursuant to the principle of lex rei sitae.

(2) Taxes on Personal Property

a. Tangible personal property- location of

the property

b. Intangible personal property-

General rule: Situs is the domicile of the owner

pursuant to the principle of mobilia sequuntur

personam. This rule is based on the fact that such

property does not admit of any actual location and

that such property receives the protection and

benefits of the law where they are located.

Exceptions:

1. When it is inconsistent with the express

provisions of the statute

2. When the property has acquired a

business situs in another jurisdiction

d) Situs of Excise Tax

(1) Estate Tax - residence of the decedent at the time

of his death

(2) Donors Tax - residence of the donor at the time

of donation

e) Situs of Business Tax

(1) Sale of Real Property

(2) Sale of Personal Property

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(3) VAT

d. International Comity - The property of a foreign State may not betaxed by another.

e. Exemption of Government Entities, Agencies, and Instrumentalities -

Government agencies performing governmental functions are exempt

from taxation

2. Constitutional Limitations - Those provided for in the constitution

or implied from its provisions.

a. Provisions Directly Affecting Taxation

1) Prohibition against imprisonment for non-payment of

poll - No imprisonment for non-payment of poll tax (sec.

20, Art III) A person cannot be imprisoned for non-

payment of community tax, but may be imprisoned for

other violations of the community tax law, such as

falsification of the community tax certificate, or for failure

to pay other taxes.

2) Uniformity and equality of taxation - Rule of uniformity

and equity in taxation (sec 28(1)Art VI) All taxable articles

or properties of the same class shall be taxed at the same

rate. Uniformity implies equality in burden not in amount.

Equity requires that the apportionment of the tax burden

be more or less just in the light of the taxpayers ability to

bear the tax burden.

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3) Grant by Congress of authority to the President to

impose

tariff rates

4) Prohibition against taxation of religious, charitable

entities,

and educational entities

5) Prohibition against taxation of non-stock, non-profit

institutions - exemption of all revenues and assets of non-

stock, non-profit educational institutions used actually,

directly, and exclusively for educational purposes from

income, property and donors taxes and custom duties

(sec. 4 (3 and 4) art. XIV.

6) Majority vote of Congress for grant of tax exemption -

Concurrence by a majority of all members of Congress in

the passage of a law granting tax exemptions. Sec. 28 (4)

Art. VI.

7) Prohibition on use of tax levied for special purpose

8) Presidents veto power on appropriation, revenue, tariff

bills

9) Non-impairment of jurisdiction of the Supreme Court -

Congress may not deprive the Supreme Court of its

jurisdiction to review, revise, reverse, modify or affirm onappeal or certiorari, final judgments and orders of lower

courts in all cases involving the legality of any tax,

impost, assessment or any penalty imposed in the

relation thereto.

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10) Grant of power to the local government units to

create its

own sources of revenue

11) Flexible tariff clause

12) Exemption from real property taxes

13) No appropriation or use of public money for religious

Prohibition against appropriations for religious

purposes, sec 29, (2) Art. VI, Congress cannot appropriate

funds for a private purpose, or for the benefit of anypriest, preacher or minister or for the support of any sect,

church except when such priest, preacher, is assigned to

the armed forces or to any penal institutions, orphanage

or leprosarium.

b. Provisions Indirectly Affecting Taxation

1) Due process Observance of due process of law and

equal protection of the laws. (sec, 1, Art. 3) Any deprivation of

life , liberty or property is with due process if it is done under the

authority of a valid law and after compliance with fair and

reasonable methods or procedure prescribed. The power to tax,

can be exercised only for a constitutionally valid public purpose

and the subject of taxation must be within the taxing jurisdiction

of the state. The government may not utilize any form of

assessment or review which is arbitrary, unjust and which deniesthe taxpayer a fair opportunity to assert his rights before a

competent tribunal. All persons subject to legislation shall be

treated alike under like circumstances and conditions, both in

the privileges conferred in liabilities imposed. Persons and

properties to be taxed shall be group, and all the same class

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shall be subject to the same rate and the tax shall be

administered impartially upon them.

2) Equal Protection- All persons subject to legislation shallbe treated alike under similar circumstances and conditions both

in privilege conferred and liabilities imposed.

The doctrine does not require that persons or properties

different in fact be treated in law as though they were the same.

What it prohibits is class legislation which discriminates against

some and favors others. As long as there are rational or

reasonable grounds for so doing, Congress may group personsor properties to be taxed and it is sufficient if all members of the

same class are subject to the same rate and the tax is

administered impartially upon them.

3) Religious freedom Prohibition against infringement of

religious freedom Sec 5, Art III, it has been said that the

constitutional guarantee of the free exercise and enjoyment of

religious profession and worship, which carries the right todisseminate religious belief and information, is violated by the

imposition of a license fee on the distribution and sale of bibles

and other religious literatures not for profit by a non-stock, non-

profit religious corporation.

4) Non-impairment of obligations of contracts - Non-

impairment of obligations and contracts, sec 10, Art III . the

obligation of a contract is impaired when its terms and

conditions are changed by law or by a party without the consent

of the other, thereby weakening the position or the rights of the

latter. IF a tax exemption granted by law and of the nature of a

contract between the taxpayer and the government is revoked

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by a later taxing law, the said law shall not be valid, because it

will impair the obligation of contract.

J. Stages of Taxation

1. Levy

2. Assessment and Collection

3. Payment

4. Refund

K. Definition, Nature, and Characteristics of Taxes

Taxes are enforced proportional contributions from persons and

property levied by the lawmaking body of the state by virtue of its

sovereignty for the support of the government and all public needs.

Tax in a general sense, is any contribution imposed by thegovernment upon individuals for the use and service of the state,

whether under the name of toll, tribute, impost, duty, custom, excise,

subsidy, aid, supply or other name. Tax, in its essential characteristics ,

is not a debt.

Essential characteristics of tax.

1. it is an enforced contribution

2. it is generally payable in money.

3. It is proportionate in character, usually based on the ability to pay

4. it is levied on persons and property within the jurisdiction of the

state

5. it is levied pursuant to legislative authority, the power to tax can

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only be exercised by the law making body or congress

6. it is levied for public purpose

7. it is commonly required to be paid a regular intervals

L. Requisites of a valid tax

M.Tax as distinguished from other forms of exactions

1. Tariff- The term tariff and duties are used interchangeably in the Tariff

and Customs Code (PD No. 1464).

Customs duties or simply duties, are taxes imposed on goods

exported from or imported into a country. Customs duties are really

taxes but the latter term is broader in scope.

On the other hand, tariff may used in any of the three senses:

1) A book of rates drawn usually in alphabetical order

containing the names of several kinds of merchandise with

the corresponding duties to be paid for the same; or

2) The duties payable on goods imported or exported; or

3) The system or principle of imposing duties on the importation

or exportation of goods.

2. Toll - Toll is a sum of money for the use of something, generally applied

to the consideration which is paid for the use of a road, bridge or the

like, of a public nature.

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A toll is a demand of proprietorship, is paid for the use of

anothers property and may be imposed by the government or private

individuals or entities; while a tax is a demand of sovereignty, is paid

for the support of the government and may be imposed only by the

State.

3. License fee -Permit or License Fee is a charge imposed under the police

power for purposes or regulation.

License fee is imposed for regulation and involves the exercise

of police power while tax is levied forrevenue and involves the exercise

of the taxing power. Failure to pay a license gee makes an act or a

business illegal, while failure to pay a tax does not necessarily make

an act or a business illegal.

4. Special assessment Special Assessment is an enforced proportional

contribution from owners of lands for special benefits resulting from

public improvements.

Special Assessment is levied only on land, is not a personal

liability of the person assessed, is based wholly on benefits and is

exceptional both as to time and place. Tax is levied on persons,

property, or exercise of privilege, which may be made a personal

liability of the person assessed, is based on necessity and is of general

application.

5. Debt - Debt is generally based on contract, is assignable and may be

paid in kind while a tax is based on law, cannot generally be assigned

and is generally payable in money.

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A person cannot be imprisoned for non-payment of debt while

he can be for non-payment of tax except poll tax. A tax is considered a

debt for purposes of remedies for its enforcement

N. Kinds of Taxes

1. As to object

A. Personal, poll or capitation- tax of a fixed amount on

individuals residing within a specified territory, without regard to

their property, occupation or business. Ex. Community tax

(basic)

B. Property- imposed on property, real or personal, in proportion

to its value, or in accordance with some reasonable method or

apportionment. Ex. Real estate Tax

C. Excise/ privilege- imposed upon the performance of an act,

the enjoyment of a privilege, or the engaging in an occupation,

profession or business. Ex. Income tax, VAT, Estate Tax, Donors

Tax

2. As to burden or incidence

a. Direct- the tax is imposed on the person who also bears the

burden thereof

Ex. Income tax, community tax, estate tax

b. Indirect imposed on the taxpayer who shifts the burden of

the tax to another, Ex. VAT, customs duties.

3. As to tax rates

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a. Specific imposed and based on a physical unit of

measurement as by head number, weight, length or volume. Ex.

Tax on distilled spirits, fermented liquors, cigars

b. Ad Valorem of a fixed proportion of the value of the property

with respect to which the tax is assessed. Ex. Real estate tax,

excise tax on cars, non essential goods.

c. Mixed

4. As to purposes

A. general, fiscal, or revenue- imposed for the general purpose

of supporting the government. Ex. Income tax, percentage tax

B. special, regulatory or sumptuary- imposed for a special

purpose, to achieve some social or economic objective. Ex.

Protective tariffs or custom duties on imported goods intended

to protect local industries

5. As to scope or authority to impose

a. national- imposed by the national government ex. NIRC,

custom duties

b. municipal or local- imposed by municipal corporations or local

governments ex. Real estate tax,

6. As to graduation

a. Proportional- based on a fixed percentage of the amount of

the property, receipts or on other basis to be taxed ex. Real

estate tax, VAT

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b. Progressive and Graduated- the rate of the tax increases as

the tax base or bracket increases ex. Income tax, estate tax,

donors tax

c. Regressive- the rate of tax decreases as the tax base orbracket increases.

d. Degressive- increase of rate is not proportionate to the

increase of tax base.

II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

1. Income Tax Systems

a. Global Tax System- Is one where the taxpayer is required to

report all income earned during a taxable period in one

income tax return, which income shall be taxed under the

same rule of income taxation

b. Schedular Tax System- Is one that requires a separate return

for each type of income and the tax is computed on a per

return or per schedule basis and it provides for different tax

treatment of different types of income.

c. Semi schedular or semi-global tax system- Under this

system, the compensation income, business or professional

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income, capital gain and passive income not subject to final

tax and other income are added together to arrive at the

gross income and after deducting the sum of allowable

deductions is subjected to one set of graduated tax rates.

2. Features of the Philippine Income Tax Law

a. Direct tax

b. Progressive- It is progressive and ideally based

on the Ability to Pay principle

c. Comprehensive- it has adopted the most

comprehensive tax situs

d. Semi schedular or semi-global tax system- Our

country follows the semi scheduler/semi-global

tax system

3. Criteria in Imposing Philippine Income Tax

a. Citizenship Principle - The country of citizenship is the

situs of taxation. This is so because a citizen is given protection

by his country no matter where he is found or no matter where

he earns his income.

b. Residence Principle - The location where the income

earner resides is the situs of taxation. This is where he is given

protection, hence, he must support it.

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c. Source Principle - The country which is the source of

the income or where the activity that produced the income is

the situs of taxation.

4. Types of Philippine Income Tax

5. Taxable Period

a. Calendar Period - January 1 to December 31

b. Fiscal Period - an accounting period of twelve (12) months

ending on the last day of any month other than December

c. Short Period

6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens

Engaged in trade or business or profession

entitled to deductions on his business

income and personal and additional

exemptions

Purely compensation income earners not

entitled to deductions; only personal and

additional exemptions

b) Non-resident citizens

2) Aliens

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a) Resident aliens

b) Non-resident aliens

(1)Engaged in trade or business

A non-resident alien individual who

shall come to the Philippines and stay

therein for an aggregate period of more than

one hundred and eighty (180) days during

any calendar year shall be deemed a non-

resident alien doing business in the

Philippines, [Sec. 25 (A) (1), NIRC].

(2)Not engaged in trade or business

3) Special Class of Individual Employees

a) Minimum wage earner

b. Corporations

1) Domestic corporations

2) Foreign corporations

(1)Resident foreign corporations

(2)Non-resident foreign corporations

c. Partnerships - An ordinary business partnership is

considered as a corporation and is thus subject to

tax as such.

d. General Professional Partnerships partnerships

formed by persons for the sole purpose of

exercising their common profession; exempt from

income tax but must still file an income tax return -

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the partners are the ones liable for income tax

based on their respective distributive shares

e. Estates and Trusts- Estates and trusts are

treated as individual taxpayers

f. Co-ownerships - Co-ownership is considered a

separate taxable entity like estates and trusts. The

co-owners are subject to income tax on their

individual distributive share only. However, if the

co-owners, after partition of property invest the

income of co-ownership in any income-producing

properties, this constitutes an unregistered

partnership and subject to income tax as a

corporation. But if it is merely an isolated

transaction, then it cannot be said that a

partnership has been formed.

7. Income Taxation

a. Definition - Income tax has been defined as a tax on all yearly profits

arising from property, profession, trade or business, or as a tax on

persons income, emoluments, profits and the like.

b. Nature It is self- assessing, a national tax, generally regarded as an

excise tax, a direct tax and it is not covered by the principle of

Territoriality.

c. General principles

1. A citizen of the Philippines residing therein is taxable on all

income derived from sources within and without the Philippines.

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2. A non-resident citizen is taxable only on income derived from

sources within the Philippines.

3. An individual citizen of the Philippines who is working and

deriving income from abroad as an overseas contract worker, is

taxable only on income derived from sources within the

Philippines. Provided, that a seaman who is a citizen of the

Philippines and who receives compensation for services

rendered abroad as a member of the complement of a vessel

engaged exclusively in international trade shall be treated as an

overseas contract worker.

4. An alien individual, whether or not a resident of the Philippines,

is taxable only on income derived from sources within the

Philippines.

5. A domestic corporation is taxable on all income derived from

sources within and without the Philippines.

6. A foreign corporation, whether engaged or not in trade or

business in the Philippines, is taxable only on income derived

from sources within the Philippines.

8. Income

a. Definition It is the amount of money coming to a person orcorporation within a specified time whether as payment for

services, interests, or profits from investment.

b. Nature-

c. When income is taxable

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1. Existence of income- there must be a gain or

profit, whether in cash or in kind, the gain must

be realized or received constructively or actually

or physically transferred to a person and it must

not be excluded or exempt by law or treaty from

income taxation.

2. Realization of income

a) Tests of Realization

1. Severance test

2. Substantial alteration of interest

test

3. Flow of wealth test

b) Actual vis--vis Constructive receipt Actual

receipt refers to physical possession of income

actually received while constructive receipt Income

which is credited to the account of set apart for a

taxpayer which may be drawn upon by him at any

time is subject to tax for the year during which so

credited or set apart, although not then actually

reduced to possessiont. To constitute receipt in

such a case, the income must be credited to the

taxpayer without any substantial limitation or

restriction as to the time or manner of payment of

condition upon which payment is to be made

3) Recognition of income

4) Methods of accounting

a) Cash method vis--vis Accrual method

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Gains, profits and income are to be

included in the gross income for the taxable

year in which they are received by the

taxpayer, unless they are included when

they accrue to him in accordance with the

approved method of accounting followed by

him.

b) Installment payment vis--vis Deferred

payment vis--vis Percentage completion (in long

term contracts)

d. Tests in determining whether income is earned for tax

purposes

1) Realization test

2) Claim of right doctrine or Doctrine of ownership,

command, or control A taxable gain is conditioned upon the

presence of a claim or right to the alleged gain and the absence

of a definite unconditional obligation to return or repay that

which would otherwise constitute a gain. The person who

receives it has no restriction as to its disposition.

3) Economic benefit test, Doctrine of proprietary interest

where shares of stocks, options or other assets are transferred

by an employer to an employee to secure better services they

are plainly compensation which is taxable income.

4) Severance test (Also referred to as the theory of

separability) Under this theory , in order that income may exist

there must be a separation of capital and gain.

9. Gross Income

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a. Definition - All income, gain or profit subject to tax, whether the

same is realized from legal or illegal activities. Unless exempt under

the Constitution, tax treaty or statute, or considered mere return of

capital.

b. Concept of income from whatever source derived - All income not

expressly excluded or exempted from the class of taxable income,

irrespective of the voluntary or involuntary action of the taxpayer in

producing the said income, and regardless of the source of the income,

is taxable.

c. Gross Income vis--vis Net Income vis--vis Taxable Income

d. Classification of Income as to Source

1) Gross income and taxable income from sources within the

Philippines

2) Gross income and taxable income from sources without thePhilippines

3) Income partly within or partly without the Philippines gains,

profits and income from transportation or other services

rendered partly within and partly outside the country; sale of

personal property produced within and sold outside or vice-

versa.

e. Sources of income subject to tax

1) Compensation Income all kinds of compensation for services

rendered as a result of an employer-employee relationship. They

include- salaries, wages, fees, commissions, honoraria, bonuses,

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tips allowances for transportation representation and

entertainment

2) Fringe Benefits

a) Special treatment of fringe benefits

b) Definition Any good, service, or other benefit

furnished or granted by an employer, in cash or in kind, in

addition to the basic salaries, to an individual employee

occupying a managerial or supervisory position.

c) Taxable and non-taxable fringe benefits

3) Professional Income - fees received by professionals from

practice of profession; no employer-employee relationship

- distinguish from compensation income: deductions are allowed

in professional income

- in the nature of a business

4) Income from Business - Generally comes from sales of goods,

properties or services;

5) Income from Dealings in Property

a) Types of Properties

(1) Ordinary assets

(2) Capital assets

b) Types of Gains from dealings in property

(1) Ordinary income vis--vis Capital gain

Capital gains are gains or income from the

sale or exchange of capital assets. These include:

Income from dealing in shares of stock of domestic

corporations whether or not done through the stock

exchange, Income from dealings in real property

located in the Philippines, Income from dealing in

other capital assets other that of the previous,

While Ordinary gains are gains or income from the

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sale or exchange of property which are not capital

assets.

(2) Actual gain vis--vis Presumed gain

income tax is imposed only if there is gain;

but the law presumes there is gain whenever there

is sale or exchange of property, even if the seller

actually incurred a loss

(3) Long term capital gain vis--vis Short term

capital gain

(4) Net capital gain, Net capital loss

The term "net capital gain" means the

excess of the gains from sales or exchanges of

capital assets over the losses from such sales or

exchanges. The term "net capital loss" means the

excess of the losses from sales or exchanges of

capital assets over the gains from such sales or

exchanges.

(5) Computation of the amount of gain or loss - The

gain from the sale or other disposition of property

shall be the excess of the amount realized

therefrom over the basis or adjusted basis for

determining gain, and the loss shall be the excess

of the basis or adjusted basis for determining loss

over the amount realized. The amount realized

from the sale or other disposition of property shall

be the sum of money received plus the fair market

value of the property (other than money) received;

(a) Cost or basis of the property sold - The basis of

property shall be -

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(1) The cost thereof in the case of property

acquired on or after March 1, 1913, if such property

was acquired by purchase; or

(2) The fair market price or value as of thedate of acquisition, if the same was acquired by

inheritance; or

(3) If the property was acquired by gift, the

basis shall be the same as if it would be in the

hands of the donor or the last preceding owner by

whom it was not acquired by gift, except that if

such basis is greater than the fair market value of

the property at the time of the gift then, for the

purpose of determining loss, the basis shall be such

fair market value; or

(4) If the property was acquired for less than

an adequate consideration in money or money's

worth, the basis of such property is the amount

paid by the transferee for the property; or

(5) The basis as defined in paragraph (C)(5)

of this Section, if the property was acquired in a

transaction where gain or loss is not recognized

under paragraph (C)(2) of this Section.

(b) Cost or basis of the property exchanged in

corporate readjustment[1] Merger

[2] Consolidation

[3] Transfer to a controlled corporation (tax-

free exchanges)

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(c) Recognition of gain or loss in exchange of

property

[1] General rule -Except as herein provided,

upon the sale or exchange or property, the entire

amount of the gain or loss, as the case may be,

shall be recognized.

[a] Where no gain or loss shall be recognized

[2] Exceptions -No gain or loss shall be

recognized if in pursuance of a plan of

merger or consolidation -

(a) A corporation, which is a party to a

merger or consolidation, exchanges propertysolely for stock in a corporation, which is a

party to the merger or consolidation; or

(b) A shareholder exchanges stock in a corporation,

which is a party to the merger or consolidation,

solely for the stock of another corporation also a

party to the merger or consolidation; or

(c) A security holder of a corporation, which is a

party to the merger or consolidation, exchanges his

securities in such corporation, solely for stock or

securities in such corporation, a party to the merger

or consolidation.

No gain or loss shall also be recognized if

property is transferred to a corporation by a person

in exchange for stock or unit of participation in such

a corporation of which as a result of such exchange

said person, alone or together with others, not

exceeding four (4) persons, gains control of said

corporation: Provided, That stocks issued for

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services shall not be considered as issued in return

for property.

[a] Meaning of merger, consolidation,control securities

Mergers or consolidations shall be

understood to mean the (a) ordinary merger

or consolidation of (b) the acquisition by one

corporation of all or substantially all the

properties of another corporation solely for

stock.

Such merger or consolidation must be

undertaken for a bona fidebusiness purpose

and note solely for the purpose of escaping

the burden of taxation.

[b] Transfer of a controlled

corporation

(6) Income tax treatment of capital loss

(a) Capital loss limitation rule (applicable to both

corporations and individuals)

(b) Net loss carry-over rule (applicable only to

individuals)

(7) Dealings in real property situated in the Philippines

(8) Dealings in shares of stock of Philippine corporations

(a) Shares listed and traded in the stock exchange

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(b) Shares not listed and traded in the stock

exchange

(9) Sale of principal residence

6) Passive Investment Income - Passive investment incomes subject to final

withholding tax are taxed on the gross amount, without any deduction of cost

and expenses of sale

a) Interest Income - Sources of interest income

1. Interest on bank deposit/deposit substitutes/trust fund and

similar arrangement

2. Interest from lending/interest income from bonds

3. Interest on uncollected salary

4. Interest on foreign bonds/government bonds

5. Interest on treasury bills

6. Interest earned from deposits maintained under the foreign

currency deposit system

7. Interest income of pawnshop operators

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Interest income shall be exempt only when used

directly and exclusively for educational purposes. To

substantiate this claim, the institution must submit an annual

information return and duly audited financial statement. A

certification of actual utilization and the Board resolution on the

proposed project to be funded out of the money deposited in

banks must also be submitted. [Department of Finance Order

149-95]

RULES ON INTEREST INCOME

1. If it is an interest on foreign currency deposit system, it is

exempt. If the recipient is non-resident individual (NRC, NRA-

ETB, NRA-NETB).

2. If the recipient is a resident individual (RC, RA), that is

subject to 7.5%

3. Interest income is also exempt if it is an interest income on a

long-term deposit or long-term investment (this must have a

term of not less than 5 years).

b) Dividend Income Dividends means any distribution made by

a corporation to its shareholders out of its earnings on profits

and payable to its shareholders, whether in money or in other

property.

Dividends received from a Domestic Corporation

This is exempt from tax if the recipient is a foreign

government, financing institution, regional financing institution,

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international financing institution established by a foreign

government. Sec. 32 B7a

It is also exempt if the recipient of such dividend is

another domestic corporation or resident foreign corporation,

Sec. 28 A7d

(1) Cash dividend - disbursement to the stockholder of the

accumulated earnings of a corporation; subject to income tax

(2) Stock dividend - As a rule stock dividends are not taxable.

This Is so, because there is no income here. It merely represents

the transfer of surplus accounts to the capital account.

Exception to the rule: Stock dividend may be

subject to tax under the following exceptional cases:

i. If there is a change in the stockholders interest in the net

assets of the corporation;

ii. If it is one issued by another corporation. This is called

dividend stock.

Stock dividend vs. Dividend stock: Stock

dividend is not taxable, while dividend stock is taxable.

iii. Redemption of stock dividend;

If the corporation had issued to a stockholder 2 different

classes of shares of stock, any stock dividend that may be

issued to such stockholder shall be taxable

(3) Property dividend - Dividends paid in securities or other

property, in which the earnings of a corporation have been

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invested, are income to the recipients to the amount of the full

market value of such property when receivable by individual

stockholders.

(4) Liquidating dividend - Where a corporation distributes all its

assets in complete liquidation or dissolution, the gain realized or

loss sustained by the stockholder, whether individual or

corporation, is a taxable income or deductible loss, as the case

may be.

c) Royalty Income

1) Royalty Paid by a Domestic Corporation

a. To a C, RA, NRA engaged, DC, RFC: 20%

final withholding tax, except royalty on

books, other literary works and musical

compositions which are subject to 10%

finaltax

b. To a NRA not engaged: 25% final

withholding tax, unless a lower tax rate is

allowed

c. To a NRFC: 32% final withholding tax,

unless a lower rate is allowed

(2) Royalty Paid by a Foreign Corporation

a. To a RC, DC: graduated rates of tax

ranging from 5% to 32% (RC) or at 32% (DC)

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b. To a NRC, A, FC: exempt

d) Rental Income - passive income and subject to normal income

tax

- rental income from lease of property is treated as business

income of the lessor and entitles him to allowable deductions

(1) Lease of personal property

(2) Lease of real property

(3) Tax treatment of

(a) Leasehold improvements by lessee

There are two methods used at the option of the

taxpayer:

(1) Outright Method taxed at the time of

completion, based on the market value of the

construction; and (2) Spread-Out Method spread

over the life of the lease the estimated depreciated

value of the construction at termination of the

lease and report as income for each year of the

lease an aliquot part thereof. This applies when a

building is erected by a lessee in the leased

premises in the pursuance of an agreement with

the lessor that the building becomes the property

of the lessor at the end of the lease.

ESTIMATED DEPRECIATED VALUE (book value) =

cost accumulated depreciation

ACCUMULATED DEPRECIATION = cost / estimated

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useful life

(b) VAT added to rental/paid by the lessee

(c) Advance rental/long term lease

If in the nature of the prepaid rentals without

restriction on the use of the of the amount, it is

taxable. If it is in the nature of security deposit, it is

taxable rent income if there is a violation of the term of

the lease. If it is in the nature of a loan to the lessor, it is

not taxable.

7) Annuities, Proceeds from life insurance or other types of insurance

Including insurance policies any excess of the return of

premiums is taxable, return of insurance premiums are not taxable

because they are considered as return of capital and not income

Annuities payments to the annuitant after a certain period

(maturity) has lapsed

8) Prizes and awards

Prizes less than P10,000 are not subject to 20% final withholding tax

but only to normal income tax winnings, regardless of amount, are

subject to 20% final withholding tax, EXCEPT PCSO and lotto winnings

2 KINDS (excluded):

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1. In recognition of religious, charitable, scientific, educational,

artistic, literary, or civic achievement but only if: a) the

recipient was selected without any action on his part to enter

the contest or proceeding; and b) the recipient is not

required to render substantial future service as a condition to

receiving the prize or award

2. In sports competition granted to athletes in local and

international sports competitions and tournaments whether

held in the Philippines or abroad and sanctioned by their

national sports association (accredited by the Philippine

Olympic Committee)

9) Pensions, retirement benefit, or separation pay

Any amount received by an official or employee or by his

heirs from the employer due to death, sickness or other physical

disability or for any cause beyond the control of the said official of

employee is excluded form gross income.

10) Income from any source whatever

a) Forgiveness of indebtedness

Purely out of liberality of the creditor, then it is in the nature of

a gift and subject to donors tax not income tax

- If actually made because of some service performed, then it is

compensation for service

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b) Recovery of accounts previously written off

c) Receipt of tax refunds or credit

Under the Tax Benefit Rule, if there is a tax benefit (i.e.,

the tax liability of the taxpayer is reduced), then the tax refund

shall form part of the gross income in the year that it is received

d) Income from any source whatever

All income not expressly exempted within the class of taxable

income under our laws, irrespective of the voluntary or involuntary

action of the taxpayer in producing the gains

e) Source rules in determining income from within and without

1) Interests

2) Dividends

3) Services

4) Rentals

5) Royalties

6) Sale of real property

7) Sale of personal property

8) Shares of stock of domestic corporation

f) Situs of Income Taxation (See page 2 under Inherent

Limitations, Territorial)

g) Exclusions from Gross Income

1) Rationale for the exclusions

2) Taxpayers who may avail of the exclusions

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3) Exclusions distinguished from deductions and tax credit

4) Under the Constitution

a) Income derived by the government or its political

subdivisions from the exercise of any essential

governmental function

5) Under the Tax Code

a) Proceeds of life insurance policies

b) Return of premium paid

c) Amounts received under life insurance, endowment or

annuity contracts

d) Value of property acquired by gift, bequest, devise or

descent

e) Amount received through accident or health insurance

f) Income exempt under tax treaty

g) Retirement benefits, pensions, gratuities, etc.

h) Winnings, prizes, and awards, including those in sports

competition

6) Under a Tax Treaty

Reason for the Exclusion: Treaty has obligatory force of

contract.

Exception: As may be provided for in the treaty.

7) Under Special Laws

h). Deductions from Gross Income

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1) General rule A taxpayer can only deduct an item or amount

from gross income if there is a law authorizing such deduction.

In the absence of a law the expense of the taxpayer whether

business/professional-related, reasonable, equitable or ordinary

or necessary, cannot be deducted from gross income.

a) Deductions must be paid or incurred in connection with

the taxpayers trade, business or profession

b) Deductions must be supported by adequate receipts or

invoices (except standard deduction)

2) Return of capital (cost of sales or services)

a) Sale of inventory of goods by manufacturers and

dealers

of properties

b) Sale of stock in trade by a real estate dealer and dealer

in

securities

c) Sale of services

3) Itemized deductions

a) Expenses

(1) Requisites for deductibility

1. The expense must be ordinary and necessary.

2. It must by paid or incurred during the taxable year.

3. It must be paid or incurred in carrying on any trade

or business or profession.

4. It must be reasonable in amount

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5. It must be substantiated by sufficient evidence

such as official receipts and other official records.

6. It must not be against the law, morals, public policy

or public order.

(a) Nature: Ordinary and necessary

An expense is ordinary when it is commonly

incurred in the trade or business of the taxpayer as

distinguished from capital expenditures. The

payments, however, need not be normal or habitual

in the sense that the taxpayer will have to make

them often. The payment may be unique or non-

recurring to the particular taxpayer affected.

An expense is necessary when it is

appropriate and helpful to the taxpayers business

or if it is intended to realize a profit or to minimize

a loss.

(b) Paid and incurred during taxable year

(2) Salaries, wages and other forms of compensation for

personal services actually rendered, including the

grossed-up monetary value of the fringe benefit subjected

to fringe benefit tax which tax should have been paid -

1. The payments are reasonable.

2. They are, in fact, payments for personal services

actually rendered. [Section 70, Revenue

Regulation 2]

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(3) Traveling/Transportation expenses

Requisites for deductibility of travel expenses

1. The expenses must be reasonable and necessary.

2. They must be incurred or paid while away from

home.

3. They must be paid or incurred in the conduct of

trade or business.

(4) Cost of materials

(5) Rentals and/or other payments for use or possession

of property

(6) Repairs and maintenance

Expenses for repairs are deductible if such repairs

are incidental or ordinary, that is, made to keep the

property used in the trade or business of the

taxpayer in an ordinarily efficient operating

condition.

Repairs in the nature of replacement to the extent

that they arrest deterioration and prolong the life of

the property are capital expenditures and should

be debited against the corresponding allowance for

depreciation. [Section 68, Revenue Regulations 2]

(7) Expenses under lease agreements

(8) Expenses for professionals

(9) Entertainment expenses

1. Reasonable in amount

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2. Incurred during the taxable period

3. Directly connected to the development,

management, and operation of the trade, business,

or profession of the taxpayer, or that are directly

related to or in furtherance of the conduct of his or

its trade, business or profession

4. Not to exceed such ceilings as the Secretary of

Finance may, by rules and regulations, prescribe

5. Any expense incurred for entertainment,

amusement or recreation which is contrary to law,

morals, public policy, or public order shall in no

case be allowed as a deduction

(10) Political campaign expenses

(11) Training expenses

b) Interest


(2) Non-deductible interest expense

(3) Interest subject to special rules

(a) Interest paid in advance

(b) Interest periodically amortized

(c) Interest expense incurred to acquire property

for

use in trade/business/profession

c) Taxes - As a general rule, all taxes, national or local, paid or

incurred with the taxable year in connection with the taxpayers

trade, business or profession are deductible from gross income.

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Taxes means taxes proper and, therefore, no deductions

are allowed for amounts representing interest, surcharges and

fines or penalties incident to delinquency.


1. This must be paid or incurred during the taxable

year.

2. This must be taxes paid or incurred in connection

with the trade, business or profession of the

taxpayer.

(2) Non-deductible taxes

3

.

Taxes which are NOT CONNECTED WITH THE TRADE,

BUSINESS OR PROFESSION OF THE TAXPAYER.

d) Losses


1. The loss must be incurred in the trade, business or

profession of the taxpayer.

1. SPECIAL ASSESSMENT tax imposed on the improvement of a

parcel of land

53

2. INCOME TAX This includes foreign income tax. In this regard, the s

called foreign income tax may be claimed as a deduction from gro

income or this may be claimed as tax credit against Phil. income tax.

the event that he claims that as tax credit, he can no longer claim t

same as deduction.


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2. It must be actually sustained and charged off within

the taxable year.

3. It must be evidenced by a closed and completed

transaction

(2) Other types of losses

(a) Capital losses

(b) Securities becoming worthless

(c) Losses on wash sales of stocks or securities

A wash sale occurs where it appears

that within a period beginning thirty (30)

days before the date of the sale or

disposition of shares of stock or securities

and ending thirty (30) days after such date,

the taxpayer has acquired (by purchase or

exchange) or has entered into a contract or

option to so acquire, substantially identical

stock or securities.

(d) Wagering losses

Losses from wagering shall be allowed only

to the extent of gains form such transactions. The

amount that is deductible must not exceed the

gains

(e) NOLCO Net capital loss sustained in a taxable

year in an amount not in excess of the net income

before exemptions for such year may be deducted

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as a short term capital loss (100%) from the net

capital gains of the next or succeeding taxable year

but not beyond such period..

e) Bad debts


1. There must be a valid and subsisting

debt.

2. The debt must be actually ascertained

to be worthless and uncollectible

during the taxable year.

3. The debt must be charged off during

the taxable year.

4. The debt must be connected with the

trade, business or profession of the

taxpayer, and not sustained in a

transaction entered into between

related taxpayers.

f) Depreciation


a. The allowance for depreciation must be reasonable.

b. It must be for property used in the trade, business, or

profession.

c. It must be charged off during the taxable year.

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d. A statement of the allowance should be attached to the

return.

(2) Methods of computing depreciation

allowance

1. (a) Straight-line method - Equal depreciation per unit of

time, regardless of use or production output of the

property.

2. (b) Declining-balance method - Amount of depreciation is

subtracted annually from the cost of the property and the

rate then only applied to the resulting balance.

3. (c) Sum-of-the-years-digit method - application of a

changing fraction to the taxpayers cost basis for the

property, reduced by the estimated residual salvage

value.

g) Charitable and other contributions


1. The contribution must actually be paid, or made

payable to the Philippine government or any

political subdivision thereof, or any domestic

corporation or association specified by the NIRC.

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2. The pension plan is reasonable and sound.

3. it must be funded by the employer.

4. the amount contributed must no longer be subject to the

control or disposition of the employer.

5. the payment has not been allowed as deduction.

6. the deduction is apportioned in equal parts over a period

of ten (10) consecutive years beginning with the year in

which the transfer or payment was made.

4) Optional standard deduction

a) Individuals, except non-resident aliens

b) Corporations, except non-resident foreign corporations

5) Personal and additional exemption (Republic Act 9504

Minimum Wage Earner Law)

a) Basic personal exemptions

a. single or legally separated without dependent;Php50,000.00

b. head of the family;Php50,000.00

b) Additional exemptions for taxpayer with dependents

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- This only applies to qualified dependent child

and children such as legitimate and illegitimate

children.

Php25,000.00 for

every qualified

dependent child but

not to exceed 4

c) Status-at-the-end-of-the-year rule

Marital status is decided based on a persons marital status at year

end (December 31st). If a couple is married on December 31st of the taxable

year, the couple can file a joint return for the year

6) Items not deductible

a) General rules -There shall be allowed as deduction fromgross income all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on or which are

directly attributable to, the development, management,

operation and/or conduct of the trade, business or exercise of a

profession

b) Personal, living or family expenses

c) Amount paid for new buildings or for permanent

improvements (capital expenditures)

d) Amount expended in restoring property (major repairs)

e) Premiums paid on life insurance policy covering life or any

other officer or employee financially interested

f) Interest expense, bad debts, and losses from sales of property

between related parties

g) Losses from sales or exchange or property

h) Non-deductible interest

i) Non deductible taxes

j) Non-deductible losses

k) Losses from wash sales of stock or securities

i) Exempt Corporations

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10. Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens

a. General rule: Resident citizens Taxable on income from all

sources within and without the Philippines

b. Taxation on Compensation Income

1) Inclusions

a) Monetary compensation

(1) Regular salary/wage

(2) Separation pay/retirement benefit not otherwise

exempt

(3) Bonuses, 13th month pay, and other benefits not

exempt

(4) Directors fees

b) Non-monetary compensation

(1) Fringe benefit not subject tax

1. Fringe benefits which are authorized and

exempted from tax under special laws.

2. Contributions of the employer for the benefit

of the employee to retirement, insurance and

hospitalization benefit plans.

3. Benefits given to the rank and file

employees, whether granted under a

vollective bargaining agreement or not.

4. De minimis benefits

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5. Fringe benefit is required by the nature of, or

necessary to the trade, business or

profession of the employer.

6. It is for the convenience or advantage of the

employer.

(2) Exclusions

a) Fringe benefit subject to tax

A final tax of 32% effective 01 January

2000 is imposed on the grossed-up

monetary value of fringe benefit

furnished or granted to the employee,

except rank and file, by the employer,

whether an individual or a corporation.

The fringe benefit tax is paid by the

employer.

Grossed-up monetary value is acquired

by dividing the actual monetary value of

the fringe benefit by 68% effective 01

January 2000.

b) De minimis benefits

These are facilities or privileges furnished

or offered by an employer to his

employees that are of relatively small

value and are offered or furnished by the

employer merely as a means of

promoting the health, goodwill,

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contentment, or efficiency of his

employee.

c) 13th month pay and other benefits and

payments specifically excluded from taxable

compensation income

(3) Deductions

a) Personal exemptions and additional

exemptions

b) Health and hospitalization insurance

c) Taxation of compensation income of a

minimum wage earner

Employers of minimum wage earners

are not required to deduct and withhold

taxes for wages/salaries of persons covered

by the exemption.

Minimum wage earners are exempt

from the payment of income tax on their

taxable income. They are not covered by the

rules regarding the withholding of taxes.

They are also exempt from filing an income

tax return.

(1) Definition of Statutory Minimum

Wage - The term statutory minimum

wage earner shall refer to a worker in the

private sector paid the statutory minimum

wage, or to an employee in the public sector

with compensation income of not more than

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the statutory minimum wage in the non-

agricultural sector where he/she is assigned.

(2) Definition of Minimum Wage Earner

(3) Income also subject to tax

exemption: holiday pay, overtime pay,

night shift differential, and hazard pay

Holiday pay, overtime pay,

night shift differential pay and hazard

pay received by minimum wage

earners shall also be exempt from

income tax.

c. Taxation of Business Income/Income from Practice of

Profession

d. Taxation of Passive Income

1) Passive income subject to final tax

a) Interest income

b) Royalties - 20%

c) Dividends from domestic corporation

d) Prizes and other winnings

2) Passive income not subject to final tax

e. Taxation of capital gains

1) Income from sale of shares of stock of a

Philippine corporation

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a) Shares traded and listed in the stock

exchange - this is not subject to income tax

but subject to percentage tax of of 1% of

the gross selling price.

b) Shares not listed and traded in the stock

exchange this is the one subject to income

tax.

Not over P100,000.00 5%

Amount over P100,000.00 10%

If the share of stock is not listed and traded through local stock

exchange, the basis of the tax is net capital gain. So, you should first

deduct the capital loss.

If listed and traded through local exchange, there is no deduction

allowed because the basis of the tax rate of of 1% of the gross

selling price.

The above-mentioned tax rates apply to all individual taxpayers.

Distribution of TREASURY STOCKS should be considered taxable since

the stocks are not sourced from the unissued shares of the corporation

and there being no transfer from surplus to capital.

2) Income from the sale of real property situated in

the Philippines

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3) Income from the sale, exchange, or other

disposition of other capital assets

The real property involved must be

considered CAPITAL ASSET.

A capital asset is property held by the

taxpayer whether or not connected in his

trade or business except:

1. Stock in trade or other property of

any kind which would be included

in the inventory of the taxpayer if

on hand at the end of the taxable

year.

2. Property primarily held for sale to

customers in the ordinary course of

trade or business.

3. Property used in trade or business

subject to depreciation.

4. Real property used in trade or

business.

General rule: A final tax of six percent

(6%) is imposed on the gross selling price

or current fair market value, whichever is

higher, for every sale or exchange of real

property.

11. Taxation of Non-resident Aliens Engaged in Trade or Business

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a. General rules - A non-resident alien engaged in trade or

business shall be subject to the same income tax rates as

a citizen and a resident alien.

b. Cash and/or property dividends - Cash and/or property

dividends received by a non-resident alien Individual shall

be subject to a final tax of 20% for citizens and resident

aliens, the rate is 10% since year 2000.

c. Capital gains - 6% of GSP or FMV, whichever is higher.

12. Exclude Non-resident Aliens Not Engaged in Trade or Business - A non-

resident alien individual not engaged in trade or business shall pay a tax

equivalent to 25% on all items of income, except, for gain on sale of shares

of stock in any domestic corporation and real property which shall be subject

to the same rate applied to other individual taxpayers.

13. Individual Taxpayers Exempt from Income Tax

a. Senior citizens

b. Exemptions granted under international agreements

14. Taxation of Domestic Corporations

a. Tax payable

1) Regular tax

2) Minimum corporate income tax (MCIT)

a) Imposition of MCIT - A minimum corporate

income tax of 2% of the gross income as of the end of the

taxable year is hereby imposed on a corporation subject

to income tax beginning on the fourth taxable year

immediately following the year in which such corporation

commenced its business operations, when the minimum

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income tax is greater than the regular corporate income

tax for the taxable year.

b) Carry forward of excess minimum tax - Any

excess of the minimum corporate income tax over the

normal income tax shall be carried forward and credited

against the normal income tax payable for the next three

years immediately succeeding the taxable year in which

the minimum corporate income tax was paid.

c) Relief from the MCIT under certain conditions -

The Sec. of Finance may suspend the imposition of the

minimum corporate income tax on any corporation which

suffers losses on account of :

1. Prolonged labor dispute;

2. force majeure;

3. or because of legitimate business reverses.

d) Corporations exempt from the MCIT

Newly established corporations or firms

which are on their first 3 years of operations are

not covered by the MCIT

e) Applicability of the MCIT where a corporation is

governed both under the regular tax system and a special

income tax system

b. Allowable deductions

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1) Itemized deductions

There shall be allowed as deduction from gross

income all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on or whichare directly attributable to, the development,

management, operation and/or conduct of the trade,

business or exercise of a profession including a

reasonable allowance for salaries, travel, rental and

entertainment expenses.

Itemized deduction includes also interest, taxes,

losses, bad debts, depreciation, depletion, charitable and

other contributions, research and development, pension

trust, premium payments on health and/or hospitalization

insurance.

2) Optional standard deduction

A maximum of 10% of their gross income shall be

allowed as deduction in lieu of the itemized deduction.

This type of deduction shall not be allowed for non-

resident aliens engaged in trade or business. A taxpayer

who opts to avail of this deduction need not submit the

Account Information Return (AIF)/Financial Statements.

c. Taxation of Passive Income

1) Passive income subject to tax

a) Interest from deposits and yield or any other monetary

benefit from deposit substitutes and from trust funds

and similar arrangements and royalties

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b) Capital gains from the sale of shares of stock not

traded in the stock exchange

c) Income derived under the expanded foreign currency

deposit system

d) Intercorporate dividends

e) Capital gains realized from the sale, exchange, or

disposition of lands and/or buildings

2) Passive income not subject to tax

d. Taxation of Capital Gains

1) Income from sale of shares of stock

2) Income from the sale of real property situated in the

Philippine

3) Income from the sale, exchange, or other disposition of other

capital assets

e. Tax on proprietary educational institutions and hospitals

f. Tax on government-owned or controlled corporations, agencies or

instrumentalities

15. Taxation of Resident Foreign Corporations

a. General rule A resident foreign corporation is one organized,

authorized, or existing under the laws of any foreign country,

engaged in the trade or business within the Philippines.

In order that a foreign corporation may be regarded

as doing business within a state, there must be continuity

of conduct and intention to establish a continuous

business, such as the appointment of a local agent, and

not one of temporary character.

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b. With respect to their income from sources within the

Philippines

c. Minimum corporate income tax

d. Tax on certain income

(1) Interest from deposits and yield or any other monetary

benefit from deposit substitutes, trust funds and similar

arrangements and royalties

(2) Income derived under the expanded foreign currency

deposit system

(3) Capital gain from sale of shares of stock not traded in

the stock exchange

(4) Intercorporate dividends

e. Exclude:

1. (1) International carrier - 2 of Gross Philippine

Billings

2. (2)Offshore banking units - !0% of income derived

from foreign currency transactions with local

commercial banks, including branches of foreign banks

that may be authorized by the BSP to transact

business with offshore banking units, including any

interest income derived from foreign currency loans

granted to residents

Any income of non-residents, whether

individuals or corporations, from transactions with said

offshore banking units shall be exempt from income

tax.

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3. (3)Branch profits remittances - 15% of total profits

applied or earmarked for remittance without deduction

for the tax component thereof.

4. (4) Regional or area headquarters and Regional

operating headquarters of multinational companies -

Regional or area headquarters shall not be subject to

income tax. Regional operating headquarters shall be

subject to a tax of 10% of their taxable income.

16. Taxation of Non-resident Foreign Corporations

a. General rule

Except as otherwise provided in this Code, a foreign

corporation not engaged in trade or business in the Philippines

shall pay a tax equal to thirty-five percent (32%) of the gross

income received during each taxable year from all sources

within the Philippines

b. Tax on certain income

(1) Interest on foreign loans

A final withholding tax at the rate of twenty percent (20%)

is hereby imposed on the amount of interest on foreign loans

contracted on or after August 1, 1996;

(2) Intercorporate dividends

A final withholding tax at the rate of fifteen percent (15%)

is hereby imposed on the amount of cash and/or property

dividends received from a domestic corporation which shall be

collected and paid

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(3)Capital gains from sale of shares of stock not traded in the

stock exchange

A final tax at the rates prescribed below is hereby

imposed upon the net capital gains realized during the taxable

year from the sale, barter, exchange or other disposition of

shares of stock in a domestic corporation, except shares sold, or

disposed sold,

Tax Bar 2011 Coverage

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