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When it comes to foreign taxes, there are two options which the taxpayer may avail of either as tax deduction or tax credit. Who arethese taxpayers? Again, this pertains only to taxpayers who are taxable for income within and without RC, C, members of !""s andbene#ciaries of estates and trusts. Conse$uently, they can also deduct expenses incurred within and without.

Q: When can foreign taxes be claimed as deductions?A:When it has not been claimed as tax credit and vice versa i.e. it can be claimed as tax credit, if not claimed as tax deduction. %&W, theyare mutually exclusive.

o %f it's claimed as credit, you are going to deduct it from the "hilippine income tax.

o %f it's deduction, you are going to deduct it from gross income to arrive at your taxable income.

d. Limitations on credit

T/N:%f (R)Cs, no need to apply the limitations since they cannot claim foreign taxes paid abroad as deductions in their gross incomebecause that they are only taxable for income within. Conse$uently, they can only deduct expenses incurred from within.

*he amount of the credit ta+en shall be subect to the following limitations-

i. Per Countr Limitation the amount of the credit in respect to the tax paid or incurred to any country shall not exceedthe same proportion of the tax against which such credit is ta+en, which the taxpayer's taxable income from sources withinsuch country bears to his entire taxable income for the same taxable year.

Formula- (et income per foreign country *otal net income x "hilippine income tax

ii. !lobal Limitation the total amount of the credit shall not exceed the same proportion of the tax against which suchcredit is ta+en, which the taxpayer's taxable income from sources without /outside0 the "hilippines taxable under this *itlebears to his entire taxable income for the same taxable year.

Formula:Total net income from abroad Total net income worldwide x Philippine income tax

"ules:

1. *he amount to be claimed as tax credit is the lowest amount among /10 the actual foreign tax paid, /20 per country limitationand /30 global limitation.

2. Apply both limitations if there are two or more foreign countries involved.3. Apply only limitation 2 /global limitation0 if there is only one foreign country involved.

Illustration 1: #ne foreign countr in$ol$ed % use Limitation & 'global limitation( onl

Philippines US Total

Gross Income P1million P1million P2million

Expenses P500,000 P500,000 P1million

Taxes paid P150,000 P160,000

!ross income 4 "2million5ess- 6xpenses 4 "1million

"1million

*ax payable 4 "377,777 /"1m x 378 tax rate05ess- *axes paid in 9:4 "1;7,777 /???0)inal tax payable 4 ???

Q: Can you deduct the whole P1!"!!! #rom your income tax due$%:Take note of the limitations

Phili))ines *+ Total

!ross ,ncome "1million "1million "2million-x)enses "

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5ess- *axes paid in 9: 4 "1

*otal net income abroad4 "

4 *otal net income from abroad *otal net income worldwide x "hilippine income tax4 " "17>0

:ummary-

1. %dentify the classi#cation of the taxpayer W&( it can claim foreign income tax as deduction2. Claim either as tax deduction or tax credit3. %f tax credit, apply the limitations %f only 1 foreign country, use global limitation but if 2 or more then apply both limitations. Compare the actual amount paid as taxes and the amount pertaining to limit 1 and limit 2

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i. *he total amount of income from sources without the "hilippinesBii. *he amount of income derived from each country, the tax paid or incurred to which is claimed as a creditB andiii. All other information necessary for the veri#cation and computation of such credits.

f. Tax subse5uentl refunded or credited

*axes preciously allowed as deductions, when refunded or credited, shall be included as part of gross income in the year of receipt to theextent of the income tax bene#t of said deduction.

T&':For taxes subseuentl! refunded or credited, we still follow the Tax "ene#t $ule% &f declared as deduction in the pre'ioustaxable !ear and subseuentl! reco'ered in the followin( taxable !ear, then that is taxable because of the tax bene#t deri'edtherefrom% "ut if not deducted in the pre'ious taxable !ear because it is not deductible, e%(% if it)s *+T or transfer tax, and in the

followin( !ear, there is a tax refund, then it is not taxable because there is not bene#t there% This is the same principle when itcomes to bad debts expense bad debts reco'ered is not taxable if there is no bene#t in the pre'ious !ear it is reco(ni-ed asexpense% "ut if there is a bene#t therefrom in the pre'ious !ear, then it is taxable to the extent of such bene#t so as to maketaxable income -ero%

6. Losses

a.( Classi7cation of Losses

i. #rdinar losses %losses sustained in the course of trade, business or profession of the taxpayer

.hat is deductible under the &temi-ed deductions from (ross income are the ordinar! losses which are incurred in the normalda! to da! operations of the taxpa!er)s business, trade or profession% &f that loss is incurred in relation to a capital transaction,then it is a capital loss%

Q: (hen can you say that it is a capital transaction$

%:&f it in'ol'es capital assets% &f what !ou)re sellin( is classi#ed as an ordinar! asset then that)s an ordinar! transaction%/onseuentl!, !ou earn an ordinar! income therefrom% &f !our expenses is (reater than !our income, then there will be ordinar!losses% &f what !ou)re sellin( is a capital asset and the cost thereof is hi(her than its sellin( price, then !ou incur what we call ascapital loss%

Net #)erating Loss the excess of allowable deduction over gross income of the business in a taxable year.

$emember

alesess /ost of ales3ross &ncomeess 4xpensesTaxable &ncome

T&':3ross income is alwa!s positi'e% For example, if !ou bake a cake and the cost of bakin( that cake is P200, !ou

don)t sell it at P100 but for a hi(her amount e%(% P250 or P00% o technicall! (ross income should be positi'e since theamount of sales should alwa!s be hi(her than the cost of sales% owe'er, there are instances when !our operatin(expenses are hi(her than !our (ross income% For example, for expenses incurred as wa(es of !our emplo!ees% uppose

!our emplo!ees do not reall! work hard that !our production turns out low% 7aturall!, !our operatin( expenses will behi(her than !our (ross income thus !ou incur ordinar! loss% &s that ordinar! loss deductible8 9es%

G): :eductions must be incurred durin( the taxable !ear%

E*C: '+,C+ if in this !ear, !ou incurred a loss, !ou can deduct it the followin( !ear pro'ided that !ou earn income inthat !ear% "ut if !ou still incur a loss in the followin( !ear then naturall!, !ou don)t deduct it because it would beuseless% &s that deduction incurred in the current !ear8 7o it)s incurred in the pre'ious !ear% That)s wh! we said that7;/; is an exception to the rule that deductions must be incurred durin( the taxable !ear%

Net #)erating Loss Carr #$er 'N#LC#(shall be carried over as a deduction from the gross income for the next 3consecutive taxable years immediately following the year of loss. :uch loss shall be allowed as a deduction. %t had not been beepreviously oset as deduction from gross income. Dowever, any net loss incurred in a taxable year during which the taxpayer

was exempt from income tax shall not be allowed as a deduction. (&5C& shall be allowed only if there has been no substantialchange in the ownership of the business or enterprise.

$euisites for applicabilit! of 7;/;

1- The taxpayer must .e earnin/ income durin/ the #ollowin/ taxa.le year i%e% the taxpa!er must not beincurrin( losses%

0- The taxpayer must not .e lia.le to pay the CIT-o 7&T of taxable income

o ?/&T

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There are some corporations which enAo! tax holida!s e%(% P4B+Cre(istered corporations% The! ha'e what we call asPioneer 4nterprise and 7onCpioneer 4nterprise%

1% Pioneer Enterprise (i'en a tax holida! of 6 !ears as incenti'e for introducin( a particular product in thecountr!%

2% 'onpioneer Enterprise (i'en a tax holida! of D !ears%

For example, !ou are 7onCpioneer 4nterprise (i'en a tax holida! of D !ears so !ou don)t pa! taxes within such period%For that D !ears, !ou incurred losses% /ome the 5th!ear, !ou earned income% /an !ou carr! o'er the losses !ou)'eincurred from the 1st!ear up to the Dth!ear in the 5th!ear when !ou)'e alread! earned income8 7o because !ou)realread! enAo!in( a tax exemption durin( the D !ear period in the form of a tax holida!%

Example:

&24& &248 &246 &241 &249

!ross ,ncome "

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a% 7ot less than G5> or more= in nominal 'alue of outstandin( issued shares, if the business is in the name of acorporation, is held b! or on behalf of the same persons@ or

b% 7ot less than G5> or more= of the paid up capital of the corporation, if the business sis in the name of acorporation, is held b! or on behalf of the same person

tated otherwise, there is substantial chan(e if the chan(e in ownership of the same person is more than 25> in bothcorporations%

Q: (hen can you apply this condition on su.stantial chan/e$%:.hen two corporations enter into a mer(er where there will be chan(e in ownership%

Q: (hat is the purpose o# mer/er or consolidation$%: For one corporation to absorb the losses or liabilities of another%

Q: (hat/ K 5>: K 5>4 K 5>F K5>

" /orporation continuousl! earned pro#ts from 2010 to 2105 thus it has hi(her taxable income% /onseuentl!, it has a hi(hertax pa!able%hareholders

? K N0>7 K 5>; K 5>P K 5>OK 5>

&n this case, the common shareholder is ?% uppose + /orp and " /orp enters into a mer(er%

Q: (hat is the implication o# such mer/er$%:;ne wa! of a'oidin( tax is b! enterin( into a mer(er% &n this case, " /orp% is the sur'i'in( corporation% The ad'anta(e of suchmer(er is that " /orp% will absorb the losses of + /orp% thus if it will report such losses, it will be liable for a lesser tax pa!able%Take note, that the losses here pertains to operatin( losses thus the! can be carried o'er for the next consecuti'e taxable

!ears%

Q: Can > Corp- still a3ail o# the .ene?t o# '+,C+$%:9es because there is no substantial chan(e in the ownership of the corporation since ? still owns the controllin( shares of thesur'i'in( corporation eui'alent to N0> or not less than G5> of the shareholdin(s%

Q: (hat i# owns 1!5 o# % Corp-" can > Corp- still a3ail o# '+,C+ i# it mer/es with % Corp$%:7ot an!more because there will alread! be substantial chan(e in the ownership of the corporation%

Q: (hat i# owns @;5 o# the shares in % Corp-" can > Corp-" the sur3i3in/ corporation still a3ail o# '+,C+$

%: " /orp% can still a'ail of 7;/; because there is substantial chan(e onl! if it is less than G5> so if it)s G5> or more thus thereis still no substantial chan(e in this case%

T&':&f there is no mer(er, then appl! onl! the #rst four conditions, no need to appl! the 5th%

ii. Ca)ital Losses governed by rules on loss from the sale or exchange of capital assets. 5osses from sales or exchanges of capitalassets shall be allowed only to the extent of the gains from such sales or exchanges.

This pertains to capital transactions in'ol'in( capital assets%

Net Ca)ital Loss the excess of capital loss over capital gains.

Net Ca)ital Loss Carr #$er 'NCLC#0 not available to corporate taxpayers.

Q: (hy do we call it net capital loss$

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%: "ecause !ou compare !our capital loss with !our capital (ains% &f capital loss is (reater than net capital (ain, then there is anet capital loss% &f !ou carr! it o'er, then that)s what we call as net capital loss carr!Co'er

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don)t bother takin( into consideration whether the transaction occurred 0 da!s before or 0 da!s after% &n an! cases,losses from the sales of shares of stocks can be deducted%

iii. Wagering or gambling losses the amount that is deductible must not exceed the gains.

+s a rule, wa(erin( or (amblin( losses cannot be deducted but the least that !ou can do is to oHset whate'er losses !ou incurfrom !our winnin(s in that particular (amblin( acti'it!%

o &f the winnin(s is hi(her than the losses report it as taxable income

o &f the losses is hi(her than the winnin(s not deductible

i$. Casualt losses include losses from #re, storm, shipwrec+, other casualty losses, robbery, embeIIlement and theft.

Q: (hat

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iv. 5awyer may send a demand letter to the debtorB and*=(- emand letter is usually a #nal one

v. %f the debtor still fails to pay the same, #le an action in court for collection.

L+(in( of accounts recei'ableM CC mentioned but not de#ned

For example, the creditor wanted to collect pa!ment from the debtor but the debtor sa!s that he is alread! insol'ent that hecannot an!more pa! the creditor% &s that alread! a (round for the creditor to declare it as bad debts expense8 7o% +lthou(hinsol'enc! is a (round to declare unpaid debts as bad debts expense@ howe'er, it must be a Audiciall! declared insol'enc!% Thedebtor cannot Aust unilaterall! declare that he is insol'ent% There should be proper insol'enc! proceedin(s in court%

Q: (hen can you say that an indi3idual is insol3ent$

%:&f his liabilities exceed his assets% &f liabilities are still eual with the assets, then he is still sol'ent% The indi'idual has to #lethe appropriate insol'enc! proceedin(s in court% 4ither !ou #le directl! insol'enc! or resort #rst to rehabilitation% &f rehabilitationis not possible, then that)s the time when there will be a declaration of insol'enc!%

TI7 &f the debtor cannot an!more be located, then it could alread! be a (round to declare it as bad debts expense%

Q: I# the de.tor dies" is it a /round to declare unpaid de.ts as .ad de.ts expense$%:7o because monetar! obli(ations sur'i'e the death of the debtor% 9ou can still collect it from the estate or if the estate isalread! distributed, then !ou collect from the heirs in which case, the! cannot be held liable for more than the amount of whatthe! recei'ed from the distribution% This is actuall! an / decided case i%e% death of the debtor is not a (round for !ou to declareunpaid debt as bad debt expense%

c.( ad debts charged o< subse5uentl collected follow the *ax Kene#t Rule

o %f the recovery of bad debts, resulted in a tax bene#t to the taxpayer, that is taxable.

o %f it did not result in any tax bene#t to the taxpayer, that is not taxable.

9. Charitable and #ther Contributions

a.( =inds of charitable contributions

i. #rdinar %those subect to limitations as to the amount deductible form gross income /

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b. And satisfying the following conditions

1. *he donation must be utiliIed not later than the

1

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o Amount spent for the ac$uisition or improvements of land or for the improvement or development of natural resources.

$eason for nonCdeductibilit! These amounts usuall! form part of the cost of the land which woul will record as anasset%

o Amount paid or incurred for the purpose of ascertaining the existence, location, extent or $uality of any natural resources li+e

deposits of ore or other minerals including oil or gas.$eason for nonCdeductibilit! &t)s considered as capital loss speci#call! abandonment loss%

Q: I# it

0!12 contri.ution P1,000,000 1I10 of P1million or P100,000

Total P1,100,000

Q: (hat will happen to the remainin/ B&1!$%:The remainin( I10 will be apportioned o'er the next !ears until the amount has been full! remitted% o another 1I10 orP100,000 will be deducted in 2015, in 2016 and so on%

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D. Premiums on Eealth and/or Eos)italiation ,nsurance/applies to individual taxpayer0 Refer to previousoutline

42. ;e)reciation

*he gradual diminution of the useful value of the property used in trade, business or profession of the taxpayer, arising from wear and tearor natural obsolescence. *he term is also applied to amortiIation of the value of intangible assets, the use of which in trade or business isde#nitely limited in duration.

Similarity o# depreciation" depletion and amortiation

The! pertain to capital expenses, the bene#t of which lasts for a lon(er period of time% 9ou need to capitali-e theseexpenses meanin( !ou are (oin( to record them as assets but these capital expenses ha'e what !ou call as LusefullifeM which pertains to the number of !ears !ou can utili-e them or when the! will bene#t !ou% .hat are !ou (oin( to doto record these expenses per !ear that !ou are usin( these assets8 9ou are (oin( to is them as depreciation,amorti-ation or depletion%

6i=erence .etween depreciation" depletion and amortiation

1% 6epreciation pertains to Ldepreciable assetsM which (raduall! loses their 'alue due to normal wear and tear or assetsthat become obsolete%

4xamples machineries, cars, computers

2% 6epletion pertains to Lwastin( assetsM or assets or resources that cannot an!more be replaced% +s distin(uished fromdepreciation, the latter pertains to assets that althou(h are depreciable but replaceable% To match the cost of extractin(these assets, !ou reco(ni-e them as depletion expenses%

4xample minin( deposits@ petroleum

% %mortiation still pertains to capital expenses reco(ni-ed !earl! but it is more applicable to Lintan(ible assets%M

4xample (oodwill must be externall! (enerated i%e% it pertains to a purchased (oodwill in order to be amorti-ed% Forexample, !ou set up a restaurant business and !ou purchased an alread! established restaurant in order to deri'ebene#t from its customers, (ood name, etc% &ncluded in the purchase is the (ood will of the business% The transactionwill not bene#t !ou for onl! one taxable !ear but for se'eral !ears% 9ou reco(ni-e the cost of purchasin( that (oodwillas amorti-ation expense% &;., !ou amorti-e it% 9ou do not depreciate it nor reco(ni-e it as depletion expense%

;ther examples ro!alties, franchise, patents

T&'::epreciation, depletion and amorti-ation expenses are what we call as LnonCcash expensesM meanin( there is no outQow ofcash but if !ou record them as expenses, there will be a tax shield or bene#t% o in this case, there is no need of receipts as

proof of such expenses% .hat is reuired is to pro'e the reasonabilit! of incurrin( such expenses% The tendenc! is that theseexpenses tend to be o'erstated or bloated%

a .( "e5uisites for deductibilit of de)reciation

i. *he property must be used in trade, business or profession of the taxpayerBii . *here must be depreciable propertiesBiii. *he allowance for depreciation must be reasonableiv. *his must be charged o during the taxable yearBv. A statement on the allowance must be attached to the returnB andvi. *he method in computing the allowance for depreciation must be in accordance with the method prescribed by the

:ecretary of )inance upon the recommendation of the K%R Commissioner.*hese prescribed methods include

Fethod of ;e)reciation

=ind @ormula

1. :traightGline method cost salvage valueestimated life

2. eclining balance method cost depreciation x Rate estimated life

3. :um of the years digits /:M0 method nth period x /cost salvage0 :M

. Any other method as may be prescribed by

the :ecretary of )inance upon the

recommendation of the K%R Commissioner

Q: (hy is it that we ha3e to use di=erent methods$%:"ecause the method that !ou will use depends upon the nature of the asset% There are some assets which ha'e a lon( useful life butbefore the end thereof, the! become obsolete as the! are replaced b! another% o naturall!, !ou will ha'e to record a (reater expenseearlier in its useful li fe and (raduall! record the remainin( towards the end of its useful l ife% .hat are some examples of these assets8Personal computers, laptops and other (ad(ets% 7ormall!, their useful life spans for 5 !ears but at the end of the rd!ear, !ou alread! askfor replacement because of newer and better models comin( out of the market%

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T&':&f the depreciation method is silent, the default method is the strai(htCline method%

4xample trai(htCline method

al'a(eIscrap 'alue the last 'alue that !ou will recei'e if !ou are (oin( to sell it at the end of its useful life%/ost K P1,000,000al'a(e 'alue K P100,000Rseful life K 10 !ears

cost sal'a(e 'alue K P1,000,000 P100,000 K P00,000 KP0,000I!earestimated life 10 !ears 10 !ears

Q: (hat

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%n computing a depreciation allowance in the case of a patent or copyright, the capital sum to be replaced is the cost or other basis of thepatent or copyright. *he allowance should be computed by an apportionment of the cost ac$uisition by the taxpayer, or since Jarch 1,113, as the case may be.

44. ;e)letion

epletion is the exhaustion of natural resources li+e mines and oil and gas well as a result of production or severance from such mines orwells. *hese are nonGreplaceable assets.

a.( "e5uisites for deductibilit of de)letion

:ame as that of depreciation, except that the properties involved are natural resources.

;e)letion $s. ;e)reciation

epletion and depreciation are predicated on the same basic premise of avoiding a tax on capital. epletion is based upon theconcept of the exhaustion of a natural resource whereas depreciation is based upon the concept of production income. *hus,depletion and depreciation are made applicable to dierent types of assets.

b.( ;etermination of amount of de)letion cost

6ssential factors-

i. *he basis of the propertyBii. *he estimated total recoverable units in the propertyB andiii. *he number of units recovered during the taxable year.

*here is no #xed method in determining the amount of depletion cost. %t's case to case basis depending on the turn out of your production.

6xample- Mou are engaged in the extraction of petroleum

6stimated total recoverable petroleum 4 17,777 liters

Mear 1

Cost 4 "17,777,777

Actual recovered petroleum 4 3,777 liters

epletion cost4 3,777 5 x "17,777,777

17,777 5

Mear 2

Cost 4 "17,777,777

Actual recovered petroleum 4

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A- &n 271 thus

2717 (%*

2711 (%*

2712 (%*

2713 (%*

271 onwards (%* vs. JC%*, whichever is higher

- What is the purpose of JC%*?A- *o prevent the corporation from continuously reporting a loss. Kefore JC%*, there were cases where a corporation is already operatingfor 17 years but it continuously reports a loss in its tax return because it overstated or bloated its operating and other expenses. Whathappens is that the taxable income either becomes Iero or negative. Dow come the corporation survived for 17 years when it continuouslyincurs losses? *o remedy this situation, the JC%* is devised where the corporation is exempted in its #rst four years of operation frombeing liable to pay the JC%* because understandably, it still starting its operations. *he moment it reaches its fourth year, it may now besubected to JC%* because it is expected that it will already earn income.

- What is considered as Sstart of operation of the businessT?

A- As a rule, the start of operation of the business is the moment that the corporation registers with the K%R. :o the corporation is subectto JC%* on the thyear from its registration with the K%R.

Kasic steps in registration of a corporation

1. %ncorporate

2. Register with :6C3. !et business permit from 5!9. Register with K%R

Remember, the taxpayer can only avail of (&5C& if it is not liable for JC%*

"remise- *he corporation started its operations in 17

Mear 271

!% 4 "1,777,777

5ess- 6xpenses 4 "