6A 7aw 80.9. 43, +3:5; ' first attempt to restructure tax system, tax administration 8(AI70<; 2NI 2 8+33-; ' another attempt at restructuring
A. Nature of Income ax
Income tax is generally regarded as an excise tax. It is not le!ied upon persons, property, funds or profits but upon the "I#$ of a person to recei!e income or profits.
o"rces1
%ackground
of
&hil.
1. United tates Re!en"e Act of 1#1$ 0xtended to the &hils. w)c was then a territorial possession of the 12 administered & enforced by internal re!enue officers of the &hil. #o!ernment -. Re!en"e Act of 1#1%& War Re!en"e Act of 1#1' amended "e!enue Act of +3+4 $. Act No. ()$$ enacted by the &hil. legislature under authority conferred by +3+5 Act *. CA No. *%% + Nationa, Interna, Re!en"e Code of 1#$# re!ised, amended & codified into a single tax code all the internal re!enue laws embodied in the +343 NI"/ & amendatory laws & decrees was amended se!eral times .. /D 11.) + NIRC of 1#''-
Income in the broad sense * all wealth w)c flows into the taxpayer other than as a mere return of capital, includes the forms of income specifically described as gains & profits, including gains deri!ed fr. the sale or other disposition of capital assets. #ross Income * income 8 in the broad sense; less income w)c is by statutory pro!ision or otherwise exempt fr. the tax imposed by law. Net Income * gross income less statutory deductions Income means * accession to wealth gain flow of wealth
consolidated & codified into a single tax code all the internal re!enue laws embodied in the NI"/ & amendatory laws & decrees
Con3i !s. CTA (1$ CRA )$ 4acts5 &ets., (ilipino citizens & employees of &&#, were assigned to work abroad in +35= & +35+, during w)c they were paid 12 > as compensation. ?hen they filed their I " in +35= & +35+, they computed the tax due by applying the >*& con!ersion based on the floating rate ordained under %I" "uling No. 5=*=-5. In +354 howe!er, they filed amended I "s for @5= & @5+ using the par !alue of the peso as prescribed in "A A -BC. hey thus claim tax refunds or tax credits, w)c was denied by / A. It is to be noted that &ets. did not remit any portion of their income into the &hils. during their stints abroad. Iss"e5 ?9N income of &ets. were still taxable in the absence of remittances or acceptance of their salaries into the country 6e,d5 Des the foreign earnings are taxable. Income may be defined as an amount of money coming to a person or corporation w)in a specified time, whether as payment for ser!ices, interest or profit fr. in!estment. he > earnings of &ets. are the fruit of their labors in the foreign subsidiaries of &&#. It was a 1
APP
CIR !s. 7OAC 1*# CRA $#. 4acts5 %ritish 9!erseas Airways /orp. is a +==E %ritish*owned corp. organized & existing under the laws of the 1F. It had no landing rights in the &hil. & had no /&/N . Although it did not carry passengers &)or cargo to or fr. the &hil., it maintained a general sales agent , ?arner %arnes & /o. 7td. & later Gantas Airways w)c was responsible for selling %9A/ tickets co!ering passengers & cargoes. /I" assessed deficiency taxes w)c was protested by %9A/. Iss"e5 ?9N the re!enue deri!ed by %9A/ fr. sales of tickets in the &hil. for air transportation, while ha!ing no landing rights here, constitute income fr. &hil. sources & accordingly taxable 6e,d5 Income means H cash recei!ed or its e.ui!alentI. It is the amount of money coming to a person w)in a specific time. It is distinct fr. capital, for while the latter is a fund, income is a flow. As used in our laws, income is a flow of wealth. he source of an income is the property, acti!ity or ser!ice that produced the income. (or the source of income to be considered as coming fr. the &hil., it is sufficient that income is deri!ed fr. acti!ity w)in the &hils. In %9A/s case, the sale of tickets in the &hils. is the acti!ity that produces the income. he tickets exchanged hands here & payments were made in &hil currency. hus, the flow of wealth should share the burden of supporting the go!ernment. Madri0a, !s. Raffert8 $) /9i, *1* 4acts5 In Jadrigals I ", he declared his total net income to be & -3B . 2ubse.uently, he submitted a claim that said amount was the income of the conKugal partnership existing between himself & his wife, & that in computing & assessing the additional income tax pro!ided by act of /ongress, the income declared should be di!ided into two e.ual parts. Iss"e5 ?9N additional income tax should be assessed by di!iding income into two e.ual parts, bec. of the conKugal partnership existing between the Jadrigal spouses
Commissioner !s. 7OAC& s";ra 6e,d5 he source of income is the property, acti!ity or ser!ice that produced the income. (or the source of income to be considered as coming fr. the &hil., it is sufficient that the income is deri!ed fr. acti!ity w)in the &hil. In the case of %9A/, the sale of tickets in the &hil. is the acti!ity that produces the income. he tickets exchanged hands here & payments for fares were also made in &hil. currency. he site of the source of income is the &hil. & the flow of wealth proceeded fr., & occurred w)in &hil. territory, enKoying the protection accorded by the &hil. go!ernment. hus, said flow of wealth should share the burden of supporting the go!ernment. 2
APP
ORDINARD <AIN is gain deri!ed fr. the sale or exchange of an asset w)c is not capital. 8see 2-=8z; supra;
EC. $#. Capital Gains and Losses. 8A; <efinitions. * As used in this itle * 8+; /apital Assets. * the term Ncapital assetsN means property held by the taxpayer 8whether or not connected with his trade or business;, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subKect to the allowance for depreciation pro!ided in 2ubsection 8(; of 2ection 4L, or real property used in trade or business of the taxpayer. 8-; Net /apital #ain. * he term Nnet capital gainN means the excess of the gains from sales or exchanges of capital assets o!er the losses from such sales or exchanges. 84; Net /apital 7oss. * he term Nnet capital lossN means the excess of the losses from sales or exchanges of capital assets o!er the gains from such sales or exchanges. 8%; &ercentage aken into Account. * In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income' 8+;9ne hundred percent 8+==E; if the capital asset has been held for not more than twel!e 8+-; months, and 8-;(ifty percent 8C=E; if the capital asset has been held for more than twel!e 8+-; months, 8/; 7imitation on /apital 7osses. * 7osses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the &hilippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other e!idence of indebtedness issued by any corporation 8including one issued by a go!ernment or political subdi!ision thereof;, with interest coupons or in registered form, any loss resulting from such sale shall not be subKect to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. 8<; Net /apital 7oss /arry*o!er. * If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss 8in an amount not in excess of the net income for such year; shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twel!e 8+-; months. 80; "etirement of %onds, 0tc. * (or purposes of this itle, amounts recei!ed by the holder upon the retirement of bonds, debentures, notes or certificates or other e!idences of indebtedness issued by any corporation 8including those issued by a go!ernment or political subdi!ision thereof; with interest coupons or in registered form, shall be considered as amounts recei!ed in exchange therefor. 8(; #ains or losses from 2hort 2ales, 0tc. * (or purposes of this itle * 8+; #ains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets, and 8-; #ains or losses attributable to the failure to
he words used in the law disclose a legislati!e policy to include all income not expressly exempted w)in the class of taxable income under our laws, irrespecti!e of the !oluntary or in!oluntary action of the taxpayer in producing the gains, & whether deri!ed fr. legal or illegal sources. Income tax is source blind.
:"eries5 ?hy is income tax source blindM Are the ff. items incomeM +. found treasure -. puniti!e damages)damages for breach of promise or alienation of affection 4. worthless bad debts subse.uently collected L. tax refund C. non*cash benefits B. income fr. illegal sources 5. psychological benefits of work :. gi!e*away prizes)scholarships)fellowships
+. &assi!e Income
refers to those items of gross income earned by the taxpayer w)o his acti!e)direct participation in the earning process. 0x. di!idends, royalties, prizes & winnings
ec. ((+A-& RA )*(* he term Bordinar8 incomeB includes any gain from the sale or exchange of property which is not a capital asset or property described in 2ection 438A;8+;. Any gain from the sale or exchange of property which is treated or considered, under other pro!isions of this itle, as Nordinary incomeN shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in 2ection 438A;8+;. he term Bordinar8 ,ossB includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other pro!isions of this itle, as Nordinary lossN shall be treated as loss from the sale or exchange of property which is not a capital asset.
APP
CRA 1'E
4acts5 In +3L:, pet. inherited - parcels of land, w)c he subdi!ided into -3 lots & leased -:. In +3C=, he sold the lots on an installment basis to their occupants. 7ot -3 was subse.uently subdi!ided & pa!ed, & were also sold on a += yr. annual amortization basis. $e reported his income fr. the sale of the lots as long*term capital gain. In +3C5, he treated his income fr. the sale of the small lots as capital gains & included only +)- as taxable income. $e deducted the real estate dealers tax he paid in +3C5 due to the rentals fr. his -: lots & other properties. %I" charged him w) deficiency income, considering the sale as ordinary gains & not capital. Iss"e5 ?9N properties inherited by petitioner should be regarded as capital assets 6e,d5 N9. ?hen pet. inherited the properties, he got not only the duty to respect any contract thereon but also the correlati!e right to recei!e & enKoy the fruits of the business & the property w)c the decedent had established. Also, pet. owned other properties w)c he rented out, fr. w)c he periodically deri!ed a substantial income, & for w)c he had to pay the real estate dealers tax, w)c he used to deduct fr. his gross income. 1nder the circumstances, pets sale of the lots forming part of his rental business cannot be characterized as other than sales of non* capital, or ordinary assets. 8remember exceptions in 244;. Ca,asanA !s. Com. 1** CRA %**
a; A taxpayer cannot deduct any loss claimed to ha!e been sustained fr. the sale of stock or securities, if, w)in a period beginning thirty days before the date of such sale or disposition & ending thirty days after such date he has ac.uired, or has entered into a contract to ac.uire, substantially identical stock or securities. $owe!er, this prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of stock or securities is made in the ordinary course of business of such dealer OOO ec. 1$(& Re!. Re0. ( !efinition of capital assets . he law pro!ides that the term capital assets shall be held to mean property held by the taxpayer 8?9N connected w) his trade or business; . . . Same as Sec. 33, NIRC. he term capital asset includes all classes of property not specifically excluded by 24= 8a;. he exclusion fr. the term Hcapital assetsI by property used in the trade or business of the taxpayer of a character w)c is subKect to the allowance for depreciation in 24= 8f; NI"/ * is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange 8&;
4acts5 &etitioner inherited fr. her father an agricultural land in "izal. In order to li.uidate her inheritance, she had the land sur!eyed, introduced impro!ements thereon & sold the lots at a profit. In their Koint I ", they disclosed a profit of & 4+,=B= fr. the sale of the subdi!ided lots, & reported C=E thereof as taxable capital gains. "e!enue examiner adKudged pets. as engaged in business as real estate dealers, re.uired them to pay real estate dealers tax & assessed a deficiency 4
APP
4acts5 0xpropriation proceedings were conducted on property owned by petitioners, w)c they inherited fr. their mother. 1pon the amounts recei!ed fr. the go!ernment, the pets. were ascertained to ha!e made a capital gain of & -+4,4-:.:- & each of them to ha!e recei!ed the amount of & :3 as share in the interest. &etitioners were each credited the amount of & :B as payment of their income tax. 2ubse.uently, pets. asked for a refund of the amount of & -L saying that the & :3 they recei!ed as share in the interest would ha!e been computed as capital gain & not ordinary gain. Iss"e5 ?9N & :3 recei!ed as interest on the !alue of the land expropriated is taxable as ordinary income 6e,d5 D02. he ac.uisition by the go!t. of pri!ate prop. through the exercise of eminent domain is embraced w)in the meaning of the term HsaleI or Hdisposition of propertyI & the definition of gross income in 2 -3. he transfer of property through condemnation proceedings is a sale or exchange & the profit fr. the txn constitutes capital gain. $owe!er, for income tax purposes, interest does not form part of the price paid by the go!t. & thus not part of capital gain. Interest is the compensation for the delay in the return of such capital. <. axable Income
EC. *$. <enera, R",e . * he taxable income shall be computed upon the basis of the taxpayerNs annual accounting period 8fiscal year or calendar year, as the case may be; in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the /ommissioner clearly reflects the income. If the taxpayerNs annual accounting period is other than a fiscal year, as defined in 2ection --8G;, or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an indi!idual, the taxable income shall be computed on the basis of the calendar year. EC. **. /eriod in 39ic9 Items of <ross Income Inc,"ded . * he amount of all items of gross income shall be included in the gross income for the taxable year in which recei!ed by the taxpayer, unless, under methods of accounting permitted under 2ection L4, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. ec. .1& Re!. Re0. No. ( "hen income is to be reported . #ains, profits, & income are to be included in the gross income for the taxable year in w)c they are recei!ed by the taxpayer, 1N7022 they are included when they accrue to him in accordance w) the appro!ed method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, & money or property is recei!ed on a Kudgment therefor in a later year, income is realized in
APP
CRA 'E$
Income w)c is credited to the account of, or set apart for a taxpayer & w)c is drawn upon him at any time is subKect to tax for the D0A" <1"IN# ?$I/$ 29 /"0<I 0< 9" 20 A&A" , although not actually reduced to possession. o constitute receipt in such a case, the income must be credited to the taxpayer w)o any substantial limitation or restriction as to the * time or manner of payment or condition upon w)c payment is to be made.
4acts5 7impan In!estment /o., a corp. engaged in leasing real properties, filed its I "s for +3CB & +3C5. After an in!estigation, the %I" found that pet. had underdeclared its rental incomes & had claimed excessi!e depreciation of its buildings. hus deficiency income taxes & surcharges were demanded against them. &et. argues that the rents in .uestion were not recei!ed in +3C5, but were turned o!er by the president to the company only in +3C3 & that the rates of depreciation applied by the %I" were unfair & inaccurate. Iss"e5 ?9N the assessment deficiency taxes were accurate of
A %99F 0N "D, if made, should indicate an absolute transfer fr. one account to another. If the income is credited but is set apart, such income must be un.ualifiedly subKect to the demand of the taxpayer. ?hen a corporation contingently credits 0es w) bonus stock, %1 the stock is not a!ailable to such 0es until some future date, the mere crediting on the books of the corporation does N9 constitute receipt. ec. .$& Re!. Re0. No. ( Exam;,es of constr"cti!e recei;t 8+; Interest /oupons. ?hen interest coupons * ha!e matured & are payable,
6e,d5 he assessment was !alid. &et.s denial & explanation of the non*receipt of the remaining unreported income for +3C5 was not substantiated by the president nor by his +3C5 personal income tax return in order to establish that the rental income w)c he allegedly collected & recei!ed in +3C5 were reported therein. he w)drawal in +3C: of the deposits in court pertaining to the +3C5 rental income is no sufficient Kustification for the non* declaration of said income in +3C5, since the deposit was resorted to due to the refusal of pet, to accept the same, & was not the fault of its tenants. &et. is thus deemed to ha!e constructi!ely recei!ed such rentals in +3C5. Re;">,ic !s. de ,a Rama 1) CRA )%1
but ha!e not been cashed, such interest payment, though not collected when due & payable, * is ne!ertheless a!ailable for the taxpayer & should therefore be included in his gross income for the D0A" <1"IN# ?$I/$ 21/$ /91&9N2 JA 1"0<.
his is true if the coupons are exchanged for other property instead of e!entually being cashed. <efaulted coupons are income for the year in w)c paid. 8-; 2hare of profits. he distributi!e share of the profits of a partner in a gen. partnership duly registered is regarded as recei!ed by him, although not distributed. 84; Interest on bank deposits. Interest credited on sa!ings bank deposits, e!en though the bank nominally has a rule, seldom or ne!er enforced, that it may re.uire so many days notice in ad!ance of cashing depositors checks, is IN/9J0 9 $0 <0&92I 9" ?$0N /"0<I 0<. 8L; /redit to shareholders of building & loan. An amount credited to shareholders of a bldg. & loan assoc., when such credit passes w)o restriction to the shareholder, has a taxable status as IN/9J0 (9" $0 D0A" 9( $0 /"0<I . ?here the amount of such accumulations has not become a!ailable to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is IN/9J0 (9" $0 D0A" 9( $0 JA 1"I D 9( $0 2$A"0.
4acts5 In +3C+, the estate of the late 0steban de la "ama filed its I " for the year +3C=. 7ater, %I" claims that the estate had recei!ed in +3C= cash di!idends fr. the <e 7a "ama 2teamship /o. Inc. w)c was not declared in the I ". %I" claims that the cash di!idends were applied in the deceaseds account w) the former & this constituted constructi!e receipt by the estate or heirs. Iss"e5 ?9N there was constructi!e payment & thus constructi!e receipt by the estate 6e,d5 here was no constructi!e receipt of the di!idends. Income tax is assessed on income that has been recei!ed. In this case, income was not recei!ed due to failure to deli!er, either actually or constructi!ely. he debts to w)c they were applied were not pro!en to ha!e existed. he first debt was not pro!en to exist & the second debt was due fr. $iKos de I. de la "ama, an entity separate & distinct fr. the principal owner thereof. /onstructi!e deli!ery occurs only when it is shown that the debts to w)c the di!idends were applied actually existed, were legally demandable & chargeable to the deceased. a. ?hen is income realizedM 6
APP
b. ests to determine realization of income +C"?>an& ;;. **-*% 2e!erance test 2ubstantial alteration of interest test (low of wealth test
the present global treatment on taxable corporations. his classification is neither arbitrary nor inappropriate. (urther, the due process clause may be correctly in!oked only when there is a clear contra!ention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is e!ident in the /A%. b. %ases of income tax
of
taxable i. #ross income) receipts) meaning in taxation) in financial accounting net taxable taxation) in
+. /apital gain 8sale of capital asset; -. 9rdinary gain 4. %usiness income' 2er!ice concern) Janufacturing)Jerchandising L. Income fr. trade or practice of profession C. &assi!e income B. 9ther forms of gain' ex. found treasure
APP
&ro!ided, howe!er, hat the tax on di!idends shall apply only on income earned on or after Ranuary +, +33:. Income forming part of retained earnings as of <ecember 4+, +335 shall not, e!en if declared or distributed on or after Ranuary +, +33:, be subKect to this tax. 8/; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * he pro!isions of 2ection 438%; notwithstanding, 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 of through the stock exchange. Not o!er &+==,===PPPPPPPPPPP.. CE 9n any amount in excess of &+==,===PPPP +=E 8<; /apital #ains from 2ale of "eal &roperty. * 8+; In #eneral. * he pro!isions of 2ection 438%; notwithstanding, a final tax of six percent 8BE; based on the gross selling price or current fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, is hereby imposed upon capital gains presumed to ha!e been realized from the sale, exchange, or other disposition of real property located in the &hilippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by indi!iduals, including estates and trusts' &ro!ided, hat the tax liability, if any, on gains from sales or other dispositions of real property to the go!ernment or any of its political subdi!isions or
APP
"
APP
APP
1$
8A; ax on "esident (oreign /orporations. T 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the &hilippines, shall be subKect to an income tax e.ui!alent to thirty*fi!e percent 84CE; of the taxable income deri!ed in the preceding taxable year from all sources within the &hilippines' pro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty*four percent 84LE;, effecti!e Ranuary +, +333, the
APP
11
APP
12
And reduced by the sum of' 8+; <i!idends actually or constructi!ely paid, and 8-; Income tax paid for the taxable year. &ro!ided, howe!er, hat for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of <ecember 4+, +335. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subKect to this tax, shall be reckoned, as of the end of the month comprising the twel!e 8+-;*month period of fiscal year +335*+33:.
EC. $1. Taxa>,e Income Defined. - he term taxable income means the pertinent items of gross income specified in this /ode, less the deductions and)or personal and additional exemptions, if any, authorized for such types of income by this /ode or other special laws.
IN<I6I<1A7'
citizens' resident 8N0 )?9"7<?I<0; non resident 8N0 ) ?I $IN; 9/? 8N0 )?I $IN; alien' resident 8N0 )?I $IN;
APP
13
L. Accounting periods & methods of accounting for taxable income & deductible expenses a. /alendar year) fiscal year
Accounting period, he accounting period is the taxable year. It is a fixed period of time, consisting of +- months, upon the basis of w)c the taxable income is computed & the income tax imposed.
ec. ((. !efinitions . F 8&; he term Btaxa>,e 8earB means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this itle. N axable yearN includes, in the case of a return made for a fractional part of a year under the pro!isions of this itle or under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the commissioner, the period for which such return is made. 8G; he term Bfisca, 8earB means an accounting period of twel!e 8+-; months ending on the last day of any month other than <ecember. 8"; he terms B;aid or inc"rredB and Npaid or accruedN shall be construed according to the method of accounting upon the basis of which the net income is computed under this itle. C6A/TER VIII - ACCOUNTIN< /ERIOD MET6OD O4 ACCOUNTIN< AND
EC. *$. <enera, R",e . * he taxable income shall be computed upon the basis of the taxpayerNs annual accounting period 8fiscal year or calendar year, as the case may be; in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the /ommissioner clearly reflects the
APP
14
Income w)c is credited to the account of, or set apart for a taxpayer & w)c is drawn upon him at any time is subKect to tax for the D0A" <1"IN# ?$I/$ 29 /"0<I 0< 9" 20 A&A" , although not actually reduced to possession. o constitute receipt in such a case, the income must be credited to the taxpayer w)o any substantial limitation or restriction as to the * time or manner of payment or condition upon w)c payment is to be made.
A %99F 0N "D, if made, should indicate an absolute transfer fr. one account to another. If the income is credited but is set apart, such income must be un.ualifiedly subKect to the demand of the taxpayer. ?hen a corporation contingently credits 0es w) bonus stock, %1 the stock is not a!ailable to such 0es until some future date, the mere crediting on the books of the corporation does N9 constitute receipt. ec. .$& Re!. Re0. No. ( Exam;,es of constr"cti!e recei;t 8+; Interest /oupons. ?hen interest coupons * ha!e matured & are payable,
but ha!e not been cashed, such interest payment, though not collected when due & payable, * is ne!ertheless a!ailable for the taxpayer & should therefore be included in his gross income for the D0A" <1"IN# ?$I/$ 21/$ /91&9N2 JA 1"0<.
his is true if the coupons are exchanged for other property instead of e!entually being cashed. <efaulted coupons are income for the year in w)c paid. 8-; 2hare of profits. he distributi!e share of the profits of a partner in a gen. partnership duly registered is regarded as recei!ed by him, although not distributed.
APP
15
APP
16
c. "ecording income Feeping of books i. ii. iii. i!. /omputing income Allocating expense
&
expense)
gross) income
net &
Jatching principle) cash method) accrual) mixed Acctg. method w)c clearly reflects income
ec. (( +R-& NIRC. he terms B;aid or inc"rredB and Npaid or accruedN shall be construed according to the method of accounting upon the basis of which the net income is computed under this itle.
!.
iii.
ermination of leasehold
RR G (. ec. *#. #mprovements by lessees ---?hen buildings are erected or impro!ements made by a lessee in pursuance of an agreement w) the lessor & such buildings or impro!ements are not subKect to remo!al by the lessee, the lessor may at his option report the income therefr. upon either of the following bases' 8a; he lessor may report as income at the time when such buildings or impro!ements are completed the fair
INCOME AND
ec. $1. (axable income !efined . F he term Htaxable incomeI means the pertinent items of gross income specified in this /ode, less the deductions, and) or personal and additional exemptions if any, authorized by such types of income by this /ode or other special laws.
APP
17
he recipient was selected without any action on his part to enter the contest or proceeding, and
8ii; he recipient is not re.uired to render substantial future ser!ices as a condition to recei!ing the prize or award. 8d; &rizes and Awards in sports /ompetition. * All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the &hilippines or abroad and sanctioned by their national sports associations. 8e; +4th Jonth &ay and 9ther %enefits. * #ross benefits recei!ed by officials and employees of public and pri!ate entities' &ro!ided, howe!er, hat the total exclusion under this subparagraph shall not exceed hirty thousand pesos 8&4=,===; which shall co!er' 8i; %enefits recei!ed by officials and employees of the national and local go!ernment pursuant to "epublic Act No. BB:B,
APP
1"
If payment is made in cash, the full amount recei!ed is subKect to tax. If ser!ices are paid for w) something other than money, the (J6 of the thing taken in payment is the amount to be included as income. If the ser!ices were rendered at a stipulated price, in the absence of e!idence to the contrary, such price shall be presumed to be the (J6 of the compensation recei!ed. 0xamples of compensation in kind' +. /ompensation paid in company stocks is to be treated as if the company had sold the stock for its (J6 & paid the 00 in cash. -. ?here li!ing .uarters are furnished in addition to a cash salary, the rental !alue should be reported as income. 4. ?hen meals are gi!en an 00, the !alue thereof constitutes income subKect to tax. L. &romissory notes &)or other e!idences of indebtedness constitute income according to the amount of their (J6.
8h; #ains from "edemption of 2hares in Jutual (und. * #ains realized by the in!estor upon redemption of shares of stock in a mutual fund company as defined in 2ection -- 8%%; of this /ode.
a. (actors recognition' i.
to
consider
in
income
A. Income fr. whate!er source deri!ed +. Income tax is source blind. -. reatment of special items' a. b.
+ ec. .E RR (-
following
c. d.
(ringe benefits to managerial & super!isory 0es 0O/71<0< (". /9J&0N2A I9N IN/9J0) taxed separately.
4. Items of gross income A. /ompensation for ser!ices, including fees, commission & similar items +. axable compensation income
EC. $$.
De Ceon5
/ompensation for personal ser!ices is usually made in money but it may also be paid for in kind, or both in money & kind
+A- Im;osition of Tax .- A final tax of thirty*four percent 84LE; effecti!e Ranuary +, +33:, thirty*three percent 844E; effecti!e Ranuary +, +333, and thirty*two percent 84-E; effecti!e Ranuary +, -=== and thereafter, is hereby imposed on the grossed*up monetary !alue of fringe benefit furnished or granted to the employee 8except rank and file employees as defined herein; by the employer, whether an indi!idual or a corporation 8unless the fringe benefit is re.uired by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the con!enience or ad!antage of the employer;. he tax herein imposed is payable by the employer which tax shall be paid in the same manner as pro!ided for under 2ection C5 8A; of this /ode. he grossed*up monetary !alue of the fringe benefit shall be determined by di!iding the actual monetary !alue of the fringe benefit by sixty*six percent 8BBE; effecti!e Ranuary +, +33:, sixty*se!en percent 8B5E; effecti!e Ranuary +, +333, and sixty*eight percent 8B:E; effecti!e Ranuary +, -=== and thereafter' &ro!ided, howe!er, hat fringe benefit furnished to employees and taxable under 2ubsections 8%;, 8/;, 8<; and 80; of
APP
1#
&
li!ing
+. Non*cash benefits' free use of facilities -. Jeals & lodging) li!ing .uarters 4. Imputed rent) use of household durable
APP
2$
9nly ind. taxpayers earn comp. income Applicable rates' /itizens, "es Alien & Non*"es. engaged in trade or business'
EC. (*. Income Tax Rates. 8A; "ates of Income ax on Indi!idual /itizen and Indi!idual "esident Alien of the &hilippines. 8+; An income tax is hereby imposed' 8a; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within and without the &hilippines be e!ery indi!idual citizen of the &hilippines residing therein, 8b; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual citizen of the &hilippines who is residing outside of the &hilippines including o!erseas contract workers referred to in 2ubsection8/; of 2ection -4 hereof, and 8c; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8b;, 8/; and 8<; of this 2ection, deri!ed for
Alien
APP
21
CE * 4LE 8+33:; 44E 8+333; 4-E 8-===;) modified gross Non-resident A,ien NET7 (.I gross compensation income 8no deductions) exemption allowed; )ote' special cases' alien employed by regional $G of multination, offshore banking units) petroleum ser!ice contractor +CE final tax
i.
(inal tax on fringe benefit 8N9N*"ANF and (I70; at the ff. rates'
4LE +33:, 44E +333, 4-E -=== based on the grossed up monetary !alue of fringe benefit. he (INA7 AO w)held & pd. by 0es at ff. rates' +. "es. /it & "es. Aliens T 4LE +33:, 44E +333, 4-E -===. -. Aliens employed by regional $G of a multinational corp. +CE 4. Non*res. alien N9 engaged in trade or business' -CE AO %A20' benefits grossed up monetary !alue of fringe
Note( he grossed up monetary !alue of the fringe benefit shall be determined by di!iding the actual monetary !alue of the fringe benefit by the tax rate.
/,ease read5 Re!. Re0. $-#) -. 0xclusions fr. gross income a. /ompensation sickness for inKuries or
APP
22
conferred under the pro!isions of the 1N /harters. E*(-#1 +Marc9 1$& 1##14acts5 he /onsuelo Uobel Alger (oundation 8/UA(;, a 1.2. corporation not engaged in business in the &hilippines, re.uested for confirmation of its opinion to the effect that the gross amount of interest deri!ed by it fr. its &hilippine currency bank deposits in the &hilippines is subKect to a +CE w)holding tax. 6e,d5 &ursuant to 2ec. -C8b;8+;, NI"/, foreign corporations not engaged in trade or business in the &hilippines shall pay a tax e.ual to 4CE of gross income recei!ed during each taxable year fr. all sources w)in the &hilippines such as interest, di!idends, rents, royalties, etc. $owe!er, Art. +-8-; of the "&*12 ax reaty pro!ides that Hinterest deri!ed by a resident of one of the contracting 2tates fr. sources w)in the other contracting 2tate shall not be taxed by the other contracting 2tate at a rate in excess of +CE of the gross amount of such interest.I 2uch being the case, the /UA(s interest income deri!ed fr. its &hilippine currency bank deposits is subKect to a +CE tax rate pursuant to Art. +-8-; of the "&*12 ax reaty. "ead at least one tax treaty. c. +4th month pay & other benefits
<arrison !s. CA 6e,d5 he exemption granted to the petitioners by the Jilitary %ases Agreement fr. payment of income tax is not absolute. %y the explicit terms of the J%A, it exists only as regards income deri!ed fr. their employment Hin the &hilippines in connection w) the construction, maintenance, operation or defense of the basesI, it does not exist in respect of other income, i.e. obtained or proceeding fr. &hilippine sources or sources other than 1.2. sources. 9b!iously, w) respect to the latter form of income, the petitioners & all other American nationals who are residents of the &hilippines are legally bound to pay the tax thereon.
7IR R",in0s5
E$1-#1 +4e>. (.& 1##14acts5 he "efugee 2er!ices &hilippines, Inc. 8"2&;, through Rosefina Jendoza, re.uested for tax exemption fr. the %I" on the ground that it is a non*stock, non*profit organization implementing proKects for the 1nited Nations $igh /ommissioner for "efugees 81N$/";. 6e,d5 ax exemption denied. Art. +: of the /on!ention on the &ri!ileges & Immunities of the 1nited Nations is specific as to who are the employees or officials entitled to tax exemption. 9nly officials of the 1nited Nations & of the specialized agencies of the 1N whose names are included in the list of officials w)c shall fr. time to time be communicated & made known to the go!ernments of the member*nations are exempt fr. the payment of income tax. In this case, there is no showing that the "2& & its employees had been included in such list. he amounts that "2& recei!es fr. the 1N represent the consideration for the ser!ices it renders under a contract w) it. 2uch being the case, "2&s relationship w) 1N$/" is by !irtue of a contract, & not as
ec. $( +7& '& e-. 12th *onth Pay and 3ther 4enefits. * #ross benefits recei!ed by officials and employees of public and pri!ate entities' &ro!ided, howe!er, hat the total exclusion under this subparagraph shall not exceed hirty thousand pesos 8&4=,===; which shall co!er' 8i; %enefits recei!ed by officials and employees of the national and local go!ernment pursuant to "epublic Act No. BB:B, 8ii; %enefits recei!ed by employees pursuant to &residential <ecree No. :C+, as amended by Jemorandum 9rder No. -:, dated August +4, +3:B, 8iii; %enefits recei!ed by officials and employees not co!ered by &residential decree No. :C+, as amended by Jemorandum 9rder No. -:, dated August +4, +3:B, and 8i!; 9ther benefits such as producti!ity incenti!es and /hristmas bonus' Pro)i'e', *+rt,er, hat the ceiling of hirty thousand pesos 8&4=,===; may be increased through rules and regulations issued by the 2ecretary of (inance, upon recommendation of the /ommissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.
i.
APP
-. 0xclusions
ec. $( +7&%& 1-f-. 'etirement 4enefits5 Pensions5 Gratuities5 etc.8a; "etirement benefits recei!ed under "epublic Act No. 5BL+ and those recei!ed by officials and employees of pri!ate firms, whether indi!idual or corporate, in accordance with a reasonable pri!ate benefit plan maintained by the employer' &ro!ided, hat the retiring official or employee has been in the ser!ice of the same employer for at least ten 8+=; years and is not less than fifty 8C=; years of age at the time of his retirement' &ro!ided, further, hat the benefits granted under this subparagraph shall be a!ailed of by an official or employee only once. (or purposes of this 2ubsection, the term Nreasonable pri!ate benefit planN means a pension, gratuity, stock bonus or profit* sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is pro!ided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be di!erted to, any purpose other than for the exclusi!e benefit of the said officials and employees. 8b; Any amount recei!ed by an official or employee or by his heirs from the employer as a conse.uence of separation of such official or employee from the ser!ice of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. 8c; he pro!isions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits recei!ed by resident or nonresident citizens of the &hilippines or aliens who come to reside permanently in the &hilippines from foreign go!ernment agencies and other institutions, pri!ate or public. 8d; &ayments of benefits due or to become due to any person residing in the &hilippines under the laws of the 1nited 2tates administered by the 1nited 2tates 6eterans Administration. 8e; %enefits recei!ed from or enKoyed under the 2ocial 2ecurity 2ystem in accordance with the pro!isions of "epublic Act No. :-:-. 8f; %enefits recei!ed from the #2I2 under "epublic Act No. :-3+, including retirement gratuity recei!ed by go!ernment officials and employees. ec. (.').1 +7& 1-1(- RR (-#)
Em;,o8ees Tr"sts
he tax imposed on estates & trusts does not apply to income of an 00s trust pro!ided the ff. conditions are satisfied' +. he 00s trust forms part of a
a. "etirement benefits under "A 5BL+ and "etirement benefits recei!ed by officials & 0es of p!t. firms fr. a reasonable plan.
of the 0" 8/orp. or business partnership; for the benefit of some or all of its 00s -. /ontributions made to the trust by such 0", 00 or both for the purpose of distributing to such 00s the earnings & principal of the fund accumulated by the trust in accordance w) such plan,
APP
24
Jia,cita case 4acts' 9n Aug. -4, +33=, a resolution of the ct. en banc was issued regarding the amounts claimed by Atty. Uialcita on the occasion of his retirement. H he terminal lea!e pay of Atty. Uialcita recei!ed by !irtue of his compulsory retirement can ne!er be considered a part of his salary subKect to the payment of income tax but falls under the phrase Hother similar benefits recei!ed by retiring 0es & workers... & thus exempt fr. the payment of I . H he dispositi!e portion of the "es. pro!ides that Atty. U is to be refunded the amt. w)c was deducted fr. his terminal lea!e pay & the ct. declared that Hhenceforth, no w)holding tax shall be deducted by any office of this /ourt fr. the terminal lea!e pay benefits of all retirees similarly situated...I /I" filed a motion for clarification &)or reconsideration. 6e,d5 erminal lea!e pay is exempt fr. I . ?)in the pur!iew of the NI"/ pro!isions, compulsory retirement may be considered as a Hcause beyond the control of said official or 0e.I /onse.uently, the amt. he recei!ed by way of commutation of his accumulated lea!e credits fall w)in 2ec. -: 8b, 5b; NI"/. 9r it may likewise be !iewed as a Hretirement gratuity recei!ed by go!t officials & 0esI w)c is another exclusion fr. gross income under 2ec. -:8b,5f;.
1. 7IR R",in0 G E1*-#1 H E(#-#1& E).-#1& H E(E-#1 1nder 2ec. -:8b; 85; 8%; of the NI"/, any amt. recei!ed by an official or employee by his heirs fr. his employer as a conse.uence of separation of such official or 00 fr. the 0"s ser!ice due to death, sickness, or other physical disability or for any cause beyond the control of the said official or 0e is exempt fr. taxes regardless of age or length of ser!ice. he phrase Hfor any cause beyond the control of the said official or 0eI connotes in!oluntariness on the part of the official or 00. he separation fr. the ser!ice of the official or 00 must not be asked for or initiated by him. (. 7IR R",in0 G E(1-#1 Amounts paid specifically either as ad!ance or reimbursements for transportation, representation & other bona fide ordinary & necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not
/. &A22I60 IN/9J0 +. Interest income 82ec. 4- A, L; a. i. axable interest income 2ources of interest income
+. interest on bank deposit)deposit substitute) fr. trust fund & similar arrangement -. interest on lending)interest income fr. bonds 4. interest on uncollected salary L. Int. on foreign bonds) go!t. bonds C. in on *bills B. int. earned fr. deposit maintained under (/< system
Re!. Re0. 1E-#)5 operators interest income of pawnshop
ii.
ec. (( +V- NIRC. he term B>an?B means e!ery banking institution, as defined in 2ection - of "A No. 445, as amended, otherwise known as the #eneral banking Act. A bank may either be a commercial bank, a thrift bank, a de!elopment bank, a rural bank or specialized go!ernment bank. 8D; he term Bde;osit s">stit"tesB shall mean an alternati!e from of obtaining funds from the public 8the term NpublicN means borrowing from twenty 8-=; or more indi!idual or corporate lenders at any one time; other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of recei!ables and other obligations, or financing their own needs or the needs of their agent or dealer. hese instruments may include, but need not be limited to bankersN acceptances, promissory notes, repurchase agreements, including re!erse repurchase agreements entered into by and between the %angko 2entral ng &ilipinas 8%2&; and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse' &ro!ided, howe!er, hat debt instruments issued for interbank call loans with maturity of not more than fi!e 8C; days to co!er deficiency in reser!es against deposit liabilities, including those between or among banks and .uasi* banks, shall not be considered as deposit substitute debt instruments.
APP
25
(rom trust fund & similar arrangement 8&029* deposit; T ?ithin -=E 8(INA7 AO; w)held by payer*bank /itizen) resident alien -CE 8(INA7; Nonresident alien N0 % -=E 8(INA7; corp.
ii.
i!.
b.
0xclusions
ec. $( +>&'- NIRC. *iscellaneous #tems. 6 8a; Income <eri!ed by (oreign #o!ernment. * Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments.
interest income fr. long term deposit or in!estment in the form of sa!ings, common ind. trust fund, deposit substitutes, in!estment management accounts & other in!estment e!idenced by certificates in such form prescribed by the %2& shall be exempt fr. tax imposed under this 2ubsection. Y <enomination &+=,=== issued by banks 9N7D
Com. !s. Mits">is9i Meta, 4acts' Atlas /onsolidated borrowed fr. Jitsubishi Jetal the amount of >-= J. Atlas, in turn, undertook to sell Jitsubishi all the copper concentrates produced fr. said machine for a period of +C years. Jitsubishi then borrowed fr. the 0xport*Import %ank of Rapan. Atlas paid interest to Jitsubishi totaling &+4,3BB.53 for the years @5L to @5C. /I" imposed a +CE tax thereon. Jitsubishi is now applying for a tax credit on the ground that it was merely a financing institution owned, controlled & financed by the Rapanese #o!t. 6e,d' he loan agreement is strictly between Jitsubishi as creditor & Atlas as seller of copper concentrates. he terms & the reciprocal nature of their obligations make it implausible that Jitsubishi was a mere agent of 0ximbank. he loan & sales contract bet. Jitsu & Atlas does not contain any direct or inferential reference to 0ximbank whatsoe!er. herefore, the interest income fr. the loans extended to Atlas by Jitsu is N9 excludable fr. gross income taxation, is not exempt fr. w)holding tax. cc. Applicable tax rate
ec. (( +44-& NIRC. he term B,on0-term de;osit or in!estment certificatesB shall refer to certificate of time deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments with a maturity period of not less than fi!e 8C; years, the form of which shall be prescribed by the %angko 2entral ng &ilipinas 8%2&; and issued by banks only 8not by nonbank financial intermediaries and finance companies; to indi!iduals in denominations of en thousand pesos 8&+=,===; and other denominations as may be prescribed by the %2&. ec. (* +7&1-. 'ate of (ax on Certain Passive #ncome. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one*half percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long*term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this
APP
26
iii.
4inance De;t. Order 1$'-)' 0duc. inst. means a non*stock, non*profit corporation association duly registered under &hil. law, & operated exclusi!ely for educational purposes, maintained & administered by pri!ate indi!idual or group offering formal education issued permit to operate by the <0/2. "e!enues deri!ed fr. & assets used in the operation of cafeterias)canteens, dormitories, bookstores are exempt fr. taxation pro!ided they are owned & operated by the educational institution as ancillary acti!ities & the same are located w)in the school premises. De;t. of 4inance Order 1*#-#. Re5 Exem;tion of Non-stoc? Non-/rofit Ed"cationa, Entities Amendin0 4inance de;artment Order 1$'-)' Non*stock, non*profit educational institutions are exempt fr. taxes on all their re!enues & assets used actually, directly & exclusi!ely for educational purposes. $owe!er, they shall be subKect to internal re!enue tax on such educational institution of its educational purposes or function. Interest income shall be exempt fr. taxation only when used directly, exclusi!ely for educational purposes. o substantiate this claim, the institution must submit an annual information return & duly audited financial statement. A certification of actual utilization & the %oard resolution on the proposed proKect to be funded out of the money deposited in banks.
i!.
interest fr. lending 8business; T regular tax rate interest income fr. bonds T final tax rate interest on uncollected salary T regular rate interest on foreign bonds T regular if taxable interest on go!ernment bonds T -=E final interest on *bills T -=E final int. earned fr. deposit maintained under (/< 8foreign currency; system T 5 Z E int. on foreign loan contracted by a nonresident foreign corp. on or after Aug. +, +3:B T -=E (inal tax.82ec. -: %, C*a; NI"/.
Note5 0xemption applies only to ind. &s except nonresident alien N0 %. hey are taxed at 4CE. (or corporate taxpayers, no exemption. &re*termination will subKect the interest to tax) tax rate based on the remaining maturity.
Re!. Re0",ation No. 1#-)% ec. (.E111 3perating lease5 defined .*** An Hoperating leaseI is a contract under w)c the asset is not wholly amortized during the primary period of the lease, & where the lessor <902 N9 rely solely on the rentals during the primary period for his profits, but
APP
27
b. c.
7ease of real property ax treatment of i. ii. iii. Ad!ance rental) long*term lease axes & other obligations assumed by the lessee 7easehold impro!ements by the lessee
i!.
APP
ec. ()& +7-& NIRC. (ax on )onresident +oreign Corporation. 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a foreign corporation not engaged in trade or business in the &hilippines shall pay a tax e.ual to thirty*fi!e percent 84CE; of the gross income recei!ed during each taxable year from all sources within the &hilippines, such as interests, di!idends, rents, royalties, salaries, premiums 8except reinsurance premiums;, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subKect to tax under subparagraphs 8/; and 8d;' &ro!ided, hat effecti!e +, +33:, the rate of income tax shall be thirty*four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty*three percent 844E;, and, effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty*two percent 84-E;. 8-; Nonresident /inematographic (ilm 9wner, 7essor or <istributor. * A cinematographic film owner, lessor, or distributor shall pay a tax of twenty*fi!e percent 8-CE; of its gross income from all sources within the &hilippines. 84; Nonresident 9wner or 7essor of 6essels /hartered by &hilippine Nationals. * A nonresident owner or lessor of !essels shall be subKect to a tax of four and one*half percent 8L +)-E; of gross rentals, lease or charter fees from leases or charters to (ilipino citizens or corporations, as appro!ed by the Jaritime Industry Authority. 8L; Nonresident 9wner or 7essor of Aircraft, Jachineries and 9ther 0.uipment. * "entals, charters and other fees deri!ed by a nonresident lessor of aircraft, machineries and other e.uipment shall be subKect to a tax of se!en and one*half percent 85 +)-E; of gross rentals or fees. 8C; ax on /ertain Incomes "ecei!ed by a Nonresident (oreign /orporation. *
Nonresident cinematographic film owner 70229" or distributor -CE of gross income Nonres owner or lessor of !essels chartered by &hil. nationals L ZE of gross rentals Nonres owner) lessor of aircraft, machinery & other e.uipmt. 5 Z E gross rentals or fees.
4. "oyalties a. ?hat are royaltiesM b. $ow are royalties earnedM c. Applicable rates' Indi!idual taxpayers
ec. (* +7&1- NIRC. 8%; "ate of ax on /ertain &assi!e Income. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one*half percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long*term
APP
2#
+=E
ec. (' +D&1-. 'ates of (ax on Certain Passive #ncomes. 8+; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes and from rust (unds and 2imilar Arrangements, and "oyalties. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements recei!ed by domestic corporations, and royalties, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income deri!ed by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one*half percent 85 +)-E; of such interest income. ec. () +'&a- (ax on Certain #ncomes 'eceived by a 'esident +oreign Corporation. 6 8a; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes, rust (unds and 2imilar Arrangements and "oyalties. * Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties deri!ed from sources within the &hilippines shall be subKect to a final income tax at the rate of twenty percent 8-=E; of such interest' &ro!ided, howe!er, hat interest income deri!ed by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one*half percent 85 +)-E; of such interest income.
L. <i!idends a. ?hat is di!idend incomeM i. ii. $ow is di!idend income earned Finds of di!idend income a. /ash di!idend b. 2tock di!idend) stock rights c. &roperty di!idends d. 7i.uidating di!idends b. <isguised di!idend) payments e.ui!alent to di!idend distribution 3$
i. ii.
all royalties -=E (INA7 tax except' royalties on books, as well as other literary works &
APP
ec. '$ +C-& NIRC. Di!idends Distri>"ted are Deemed Made from Most Recent,8 Acc"m",ated /rofits. * Any distribution made to the shareholders or members of a corporation shall be deemed to ha!e been made form the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which recei!ed. +DNet Income of a /artners9i; Deemed Constr"cti!e,8 Recei!ed >8 /artners. * he taxable income declared by a partnership for a taxable year which is subKect to tax under 2ection -5 8A; of this /ode, after deducting the corporate income tax imposed therein, shall be deemed to ha!e been actually or constructi!ely recei!ed by the partners in the same taxable year and shall be taxed to them in their indi!idual capacity, whether actually distributed or not. Re!. Re0. (& ecs. (.E-(.$
he /ollector of I" wrote a letter -)-3)CB to Jrs. 7ourdes de la "ama *9smena informing her of the assessment & asking payment thereof. 9n 4)+4)CB, the latters counsel contended that the assessment should be sent to 7eonor de la "ama who was appointed as administratrix of the estate. /I" sent the assessment to 7eonor asking for payment. he assessment not being paid, the <ep. /omm. of I" again sent a letter to 7ourdes & again it said that they should assess 7eonor. he </I" demanded 7eonor to pay the tax but still was not paid. hence, the "ep. filed w) /(I a complaint !s. the heirs of 0steban seeking to collect fr. each heir the proportionate share in the I liability of the estate. 6e,d5 ?here the di!idends were not recei!ed by the estate or the heirs, neither of them is liable for the payment of income tax therefor. here would be constructi!e receipt of the di!idends if the debts to w)c they were applied really exist. In /A%, no constructi!e receipt as the first debt was contested, & the second debt was due fr. H$iKos de la "amaI an entity separate & distinct fr. 0steban.
he distinction between a stock di!idend w)c does not, & one w)c does , constitute income taxable to the shareholder is the distinction between a stock di!idend w)c works no change in the corporate entity, the same interest in the same corp. being represented after the distribution by more shares of precisely the same character, & a stock di!idend where there either has been a change of corporate identity or a change in the nature of the shares issued as di!idends whereby the proportional interest of the shareholders after the distribution is essentially different fr. his former interest. A stock di!idend constitutes income if it gi!es the shareholder an interest different fr. that w)c his former stock holdings represented. A stock di!idend does not constitute income if the new shares confer no different rights or interest than did the old * the new certificates Q the old representing the same proportionate interest in the net assets of the corp. as did the old. A true stock di!idend is not subKect to tax on its receipt in the hands of the recipient. Ne!ertheless, if a corporation after the distribution of a stock di!idend, proceeds to cancel or redeem its stock at such time & in such manner as to make the distribution & cancellation or redemption essentially e.ui!alent to the distribution of a taxable di!idend, the amount recei!ed in redemption or cancellation of the stock shall be treated as a taxable di!idend.
Commissioner !s. Mannin0 4acts' JAN "A2/9 has authorized capital stock di!idend into -C,=== common shares, -L,5== owned by "eese, & the rest at +== shares owned by Janning, Jc<onald, & 2immons. &ursuant to a rust Agreement, after "eese died, the -L,5== shares were reac.uired by Jantrasco. /onse.uently, the same shares were distributed e.ually to J, J & 2 while payment to the estate of "eese fr. the companies profit was gradually made fr. +3C4* B4. 6e,d5 ?here corporate earnings are used to purchase outstanding stock treated as treasury stock as a technical but prohibited de!ice to a!oid effects of income taxation, distribution of said corporate earnings in the form of stock di!idends will subKect stockholders recei!ing them to income tax. ?hen the company parted w) a portion of their earnings Hto buyI the corporate holdings of "eese, they were in ultimate effect & result making a distribution of such earnings to J, J & 2.
Note' <istribution of partners share in the net income of a taxable partnership is e.ui!alent to distribution of di!idends in a corp.
Re;">,ic !s. De,a Rama 4acts' he estate of the late 0steban de la "ama was the subKect of 2pecial &roceedings of the /(I of Iloilo. he exec*administrator, $er!as, filed on Jarch +-, +3C+ income tax returns of the estate corresponding to tax yr. +3C= declaring a net income of &--, 53B.C3. &4,3+3.== was assessed & paid as income tax. he %I" later claimed that it had found out that there had been recei!ed by the estate in +3C= fr. the <ela "ama 2teamship /o. cash di!idends amounting to &:B,:== & was not declared in the I ". he %I" then made an assessment as deficiency I !s. the estate &CB,=4-.C= 8454CC.== as deficiency & +:,B55.C= as C=E surcharge;.
APP
ec. $( +7& '& a-& NIRC. #ncome !erived by +oreign Government. * Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments.
iii.
ec. $(. 7. 8=% Compensation for #n>uries or &ic ness . * amounts recei!ed, through Accident or $ealth Insurance or under ?orkmenNs /ompensation Acts, as compensation for personal inKuries or sickness, plus the amounts of any damages recei!ed, whether by suit or agreement, on account of such inKuries or sickness. 2ec. B4 "" -.
B. &rizes & winnings) Awards) "ewards a. axable items i. gambling winnings)contests)raffle prizes small town lottery winnings
ii.
iii. rewards under 2ec. -:NI"/) informers reward +=E (INA7 w)holding tax
ec. $( +a& #- NIRC. Gross income. $a% General definition. * #ross income means all income fr. whate!er source deri!ed, including 8 but not limited to ; the following items' 83; &rizes & winnings
ec. $( +>&1- NIRC. Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 8+; 7ife Insurance. * he proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. ec. %( Re!. Re0. (. &roceeds of life insurance are excluded fr. gross income bec. they partake more of indemnity or compensation rather than gain to the recipient. In case of a transfer for a !aluable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract or any interest therein only the actual !alue of such consideration & the amount of the premiums & other sums subse.uently paid by the transferee shall be tax* exempt.
b. 0xclusions) 0xemptions i.
ec. (*. #ncome.
8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one*half percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long*term deposit or in!estment in the form of sa!ings, common
APP
32
:. 9ther types of passi!e income a. (ound treasure T regular rate b. "efund of tax or reco!ery of bad debt pre!iously deducted T regular tax rate c. <amages /. #ains deri!ed from dealings in property
ii.
EC. $#. Ca;ita, <ains and Cosses. 8A; <efinitions. * As used in this itle * 8+; /apital Assets. * the term Ncapital assetsN means property held by the taxpayer 8whether or not connected with his trade or business;, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subKect to the allowance for depreciation pro!ided in 2ubsection 8(; of 2ection 4L, or real property used in trade or business of the taxpayer. 8-; Net /apital #ain. * he term Nnet capital gainN means the excess of the gains from sales or exchanges of capital assets o!er the losses from such sales or exchanges. 84; Net /apital 7oss. * he term Nnet capital lossN means the excess of the losses from sales or exchanges of capital assets o!er the gains from such sales or exchanges. 8%; &ercentage aken into Account. * In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income' 8+;9ne hundred percent 8+==E; if the capital asset has been held for not more than twel!e 8+-; months, and 8-;(ifty percent 8C=E; if the capital asset has been held for more than twel!e 8+-; months, 8/; 7imitation on /apital 7osses. * 7osses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the &hilippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other e!idence of indebtedness issued by any corporation 8including one issued by a go!ernment or political subdi!ision thereof;, with interest coupons or in registered form, any loss resulting from such sale shall not be subKect to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. 8<; Net /apital 7oss /arry*o!er. * If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss 8in an amount not in excess of the net income for such year; shall be treated in the succeeding taxable year as a loss from the sale or
ec. $( +>& 'd- NIRC. Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 85; Misce,,aneo"s items5 8d; /riAes and A3ards in s;orts Com;etition . * All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the &hilippines or abroad and sanctioned by their national sports associations.
iii.
5. #ifts)%e.uests)<e!ises
ax treatment of remunerati!e donation 0xtended) but income from such property taxable
ec. $( +7& $- NIRC. 4. #ifts, %e.uests, and <e!ises. X he !alue of property ac.uired by gift, be.uest, de!ise, or descent' &ro!ided,
APP
33
+. a.
c.
b.
+I can=t find ec. 1% +e- in t9e CTRA and ec. (( +J- is repetition? its coming bac to me? repetition? the only thing # can see? 3biter *aster@% ec. 1((& Re!. Re0. ( Losses fr. sales or exchanges of property. No deduction is allowed in respect of losses fr. sales of exchanges of property, directly or indirectly,* 5. %etween members of a family 8whole or half siblings, spouse, ancestors & lineal descendants;, :. %etween an indi!idual & a corporation more than C=E in !alue of the outstanding stock of w)c is owned, directly or indirectly by or for such indi!idual except in the case of distributions in li.uidation, 3. %etween two corporations more than C=E in !alue of the outstanding stock of each of w)c is owned, directly or indirectly, by or for the same indi!idual, if either one of the corps. w) respect to the taxable year of the corp. preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign
+1- Ca;ita, Assets . * the term Ncapital assetsN means property held by the taxpayer 8whether or not connected with his trade or business;, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subKect to the allowance for depreciation pro!ided in 2ubsection 8(; of 2ection 4L, or real property used in trade or business of the taxpayer. +(- Net Ca;ita, <ain . * he term Nnet capital gainN means the excess of the gains from sales or exchanges of capital assets o!er the losses from such sales or exchanges. +$- Net Ca;ita, Coss . * he term Nnet capital lossN means the excess of the losses from sales or exchanges of capital assets o!er the gains from such sales or exchanges.
APP
34
4acts5 &etitioner inherited fr. her father an agricultural land in "izal. In order to li.uidate her inheritance, she had the land sur!eyed, introduced impro!ements thereon & sold the lots at a profit. In their Koint I ", they disclosed a profit of & 4+,=B= fr. the sale of the subdi!ided lots, & reported C=E thereof as taxable capital gains. "e!enue examiner adKudged pets. as engaged in business as real estate dealers, re.uired them to pay real estate dealers tax & assessed a deficiency income tax on profits deri!ed fr. the sale based on the rates for ordinary income. Iss"e5 ?9N pets. are real estate dealers liable for real estate dealers tax ?9N gains realized fr. the sale of the lots are taxable as ordinary income 6e,d5 D02 in both . he acti!ities of pet. are no different fr. those in!ariably employed by one engaged in the business of selling real estate. here was extensi!e de!elopment such that pets. did not sell the land in the condition in w)c they ac.uired it. A considerable amount was expended to co!er
APP
35
APP
36
gain)loss
in
ec. $# +C-. Cimitation on Ca;ita, Cosses . * 7osses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the &hilippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other e!idence of indebtedness issued by any corporation 8including one issued by a go!ernment or political subdi!ision thereof;, with interest coupons or in registered form, any loss resulting from such sale shall not be subKect to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. ec. 1$% RR (.
ii.
of prop. corporate
ec. *E+C& (- Exce;tion . * No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation* 8a; A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation, or 8b; 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 8c; 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 8L; persons, gains control of said corporation' &ro!ided, hat stocks issued for ser!ices shall not be considered as issued in return for property.
8a; he basis of the stock or securities recei!ed by the transferor upon the exchange specified in the abo!e exception shall be the same as the basis of the property, stock or securities exchanged, decreased by 8+; the money recei!ed, and 8-; the fair market !alue of the other property recei!ed, and increased by 8a; the amount treated as di!idend of the shareholder and 8b; the amount of any gain that was recognized on the exchange' &ro!ided, hat the property recei!ed as NbootN shall ha!e as basis its fair market !alue' &ro!ided, further, hat if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or ac.uires form the latter property subKect to a liability, such assumption or ac.uisition 8in the amount of the liability; shall, for purposes of this paragraph, be treated as money recei!ed by the transferor on the exchange' &ro!ided, finally, hat if the transferor recei!es se!eral kinds of stock or securities, the /ommissioner is hereby authorized to allocate the basis among the se!eral classes of stocks or securities.
ec. *E +C& %- Definitions. 8a; he term NsecuritiesN means bonds and debentures but not NnotesS of whate!er class or duration.
APP
37
Co,,ector !s. 7ina,>a0an Estate 4acts' %inalbagan & Isabela 2ugar /o. proposed to J0"#0 their assets to form a N0? /9"&., %I2/9J, w) a capital stock of L== hous Non &ar !alue shares. he assets of both merging companies were assessed & the market !alue of %inalbagans tangible assets was fixed as &-,CL+,+4L.B3, & the sugar .uota at &C)picul or &+,L:-,B-3.-:. 9n the basis of such, the merger was realized w) %inalbagan being allocated -+B,=== shares in exchange for its tangible assets & sugar .uota. In +3L:, %inalbagans e.uity was reduced to +5B,3LC when it ga!e away -3,=CC shares to 4 small sugar centrals. In +3C+, these shares were sold for &B.+ J payable in installments*** 8&+.C in @C+, &4C= hous Q interest in @C-, A total of &+C thou for @C4;. he income tax was paid. (or +3C+, %inalbagan deducted the book !alue of its tangible assets at &:-L,CC3.3+ fr. the initial payment of &+.C J. C=E of the remainder was reported as income or gain fr. the sale of capital assets. In @CL, /I" assessed deficiency income tax for @C+, @C-, & @C4. 6e,d' ?here - corporations merged their assets to form a new corporation, each recei!ing non par !alue shares corresponding to their assets contributed, it is held that the basis in computing the taxable gain fr. the sale of its shares of stock in the new corporation is the fair market !alue of its assets gi!en in exchange for said shares at the time of said exchange. Re!en"e Memo Order (%-#( 9n <ec. -B, @3+ & Ran. 4, @3-, "e!enue "eg. No. +*3- & "e!. Jem. /irc. No. +*3- were respecti!ely issued by this 9ffice clarifying that the increased basic personal & additional exemptions under the amendatory pro!isions of "A 5+B5 shall apply to earnings)income of indi!idual taxpayers starting taxable year @38& N9 @3+; w)c shall be declared for income tax purposes in their tax returns to be filed on or before April +C, @34. 7ikewise, "e!. "eg. No. +*3- shall take effect on compensation income earned or recei!ed fr. Ran. +, @3-. $owe!er, in a decision in the consolidated cases of "eynaldo 6. 1mali !s. $on. Resus &. 0stanislao, 2ec. of (inance & $on. Resus 1. 9ng, /I" & "ene %. #orospe, et al, !s. /I", promulgated Jay -3, @3-, the 2upreme /ourt held that*** H?$0"0(9"0, 2ecs. +, 4 & C of "e!. "eg. No. +*3- w)c pro!ide that the regulations shall take effect on compensation income earned or recei!ed fr. + Ran. @3- are hereby 20 A2I<0. hey should take effect on compensation income earned or recei!ed fr. + Ran. @3+. 3"
Commissioner !s. R"fino 4acts' here are two corporations in this case***both are named 0astern heatrical /o. ?e will call them 0+ for the old corporation & 0- for the new corpo. In a special meeting of stockholders of 0+, a resolution was passed authorizing 0+ to J0"#0 w) 0- by transferring its business, assets, goodwill, & liabilities to the latter. In exchange, 0- would issue & distribute to the shareholders of 0+ one share for each share held by them in the said corpo. he merger was necessary to continue the exhibition of mo!ing pictures at the 7yric & /apitol heaters e!en after the corporate existence of 0+, in !iew of its pending booking contracts & /%A w) its 0es. he /I" declared that the merger was not undertaken for a bona fide business purpose but merely 9 A69I< 7IA%I7I D for the capital gains tax on the exchange of the old for the new shares of stock. /I" then imposed deficiency assessments on capital gains taxes on the stocks recei!ed by the shareholders of 0+. 6e,d' No taxable gain was deri!ed by the shareholders fr. the transaction. here was a !alid merger although the actual transfer of the properties subKect of the <eed of Assignment was not made on the date of the merger. he merger in .uestion in!ol!ed a pooling of resources aimed at the continuation & expansion of business & so came under the letter & intendment of the NI"/, as amended, 0O0J& IN# fr. the capital gains tax exchanges of property effected under lawful corporate combinations. he fact is that the merger merely deferred the claim for taxes w)c may be asserted by the go!t later, when gains are "0A7IU0< & benefits are distributed among the stockholders as a result of the merger.
APP
8A; In the case of any loss claimed to ha!e been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty 84=; days before the date of such sale or disposition and ending thirty 84=; days after such date, the taxpayer has ac.uired 8by purchase or by exchange upon which the entire amount of gain or loss was recognized by law;, or has entered into a contact or option so to ac.uire, substantially identical stock or securities, then no deduction for the loss shall be allowed under 2ection 4L unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. 8%; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire; is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. 8/; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire which; resulted in the non*deductibility of the loss, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner.
iii.
0xception' ?here gain is recognized but not the loss aa. 0xchange not solely in kind
ec. $# +C& $- NIRC Exchange )ot &olely in Aind. 8a; If, in connection with an exchange described in the abo!e exceptions, an indi!idual, a shareholder, a security holder or a corporation recei!es not only stock or securities permitted to be recei!ed without the recognition of gain or loss, but also money and)or property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair market !alue of such other property recei!ed' &ro!ided, hat as to the shareholder, if the money and)or other property recei!ed has the effect of a distribution of a taxable di!idend, there shall be taxed as di!idend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation, the remainder, if any, of the gain recognized shall be treated as a capital gain. 8b; If, in connection with the exchange described in the abo!e exceptions, the transferor corporation recei!es not only stock permitted to be recei!ed without the recognition of gain or loss but also money and)or other property, then 8i; if the corporation recei!ing such money and)or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but 8ii; if the corporation recei!ing such other property and)or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and the fair market !alue of such other property so recei!ed, which is not distributed.
bb. 9ther transactions where gain is recognized but not the loss
APP
3#
i!.
#ains & losses attributable 8to; taxpayers failure to exercise pri!ileges or options to buy)sell prop.
d. 0xclusions' #ains deri!ed fr. buying & selling shares of stock listed & traded through the local exchange
excluded) exempt from income tax but subKect to percentage tax
EC. 1('. (ax on &ale5 4arter or Exchange of &hares of &toc Listed 0 (raded through the Local &toc Exchange or through initial Public 3ffering-! .a/ o* Sale, Barter or 0/c,ange o* S,ares o* Stock 1iste' 2 .ra'e' .,ro+g, t,e 1ocal Stock 0/c,ange here shall be le!ied, assessed & collected on e!ery sale, barter, exchange or other disposition of shares of stock listed & traded through the local stock exchange other than the sale by a dealer in securities, +)- of +E of the gross selling price or gross !alue in money of the shares of stock sold, bartered, exchanged or otherwise disposed
(or purposes of determining whether the corporation is a closely held corporation insofar as such determination is based on stock ownership, the following rules shall be applied' 8+; Stock No4 34ne' %5 In'i)i'+als T 2tock owned directly or indirectly
by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.
8-; 6amil5 2 Partners,ip 34ners,ip T An indi!idual shall be considered as owning the stock owned, directly or indirectly,
the @fami,8 of an indi!id"a,= includes only his brothers & sisters 8whether by whole or half*blood;, spouse, ancestors & lineal descendants.
w)c shall be paid by the seller or transferor. B! .a/ on S,ares o* Stock Sol' or 0/c,ange' t,ro+g, Initial P+%lic 3**ering & here shall be le!ied, assessed & collected on e!ery sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates pro!ided hereunder based on the gross selling price or gross !alue in money of the shares of stock sold bartered, exchanged or otherwise disposed in accordance w) the proportion of shares of stock sold, bartered, exchanged or otherwise disposed
84; 3ptions * If any person has an option to ac.uire stock, such stock shall be considered as owned by such person. (or purposes of this paragraph, an option to ac.uire such an option & each one of a series of options shall be considered as an option to ac.uire such stock. 8L; Constr+cti)e 34ners,ip as -ct+al 34ners,ip * 2tock constructi!ely owned by reason of the application of paragraph 8+; or 84; hereof shall,
for purposes of applying paragraph 8+; or 8-;, be treated as actually owned by such person, but stock constructi!ely owned by the indi!idual by reason of the application of paragraph 8-; hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructi!e owner of such stock.
to the total outstanding shares of stock after the listing in the local stock exchange' 1p to -CE ' LE 9!er -CE but not o!er 44 +)4E ' -E 9!er 44 +)4E ' +E he tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering.
8/; Ret+rn on Capital 7ains Reali8e' *r. Sale o* S,ares o* Stocks * 8+! Ret+rn on Capital 7ains Reali8e' *r. Sale o* S,ares o* Stock 1iste' 2 .ra'e' in t,e 1ocal Stock 0/c,ange T It shall be the duty of e!ery stock broker who effected the sale
subKect to the tax imposed herein to collect the tax & remit the same to the %ureau of Internal "e!enue w)in fi!e 8C; banking days fr. the date of collection thereof & to submit on Jondays of each week
APP
4$
8-; Ret+rn o* P+%lic 3**ering o* S,ares o* Stock T In case of primary offering, the corporate issuer shall file the return & pay the corresponding tax w)in thirty 84=; days fr. the date of listing of the shares of stock in the local stock exchange. In the case of secondary offering,
the pro!ision of 2ubsection 8/;8+; of this 2ection shall apply as to the time & manner of the payment of the tax.
8<; Common Pro)isions T Any gain deri!ed fr. the sale, barter, exchange or other disposition of shares of stock under this 2ection shall be exempt fr. the tax imposed in 2ections -L8/;, -58<;8-;, -:8A;8:;8c;, & -:8%;8C;8c; of this /ode & fr. the regular indi!idual or corporate income tax.
ax paid under this 2ection shall not be deductible for income tax purposes .
APP
41
&ro!ided, howe!er, hat the tax on di!idends shall apply only on income earned on or after Ranuary +, +33:. Income forming part of retained earnings as of <ecember 4+, +335 shall not, e!en if declared or distributed on or after Ranuary +, +33:, be subKect to this tax. 8/; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * he pro!isions of 2ection 438%; notwithstanding, 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 of through the stock exchange. Not o!er &+==,===PPPPPPPPPPP.. CE 9n any amount in excess of &+==,===PPPP +=E 8<; /apital #ains from 2ale of "eal &roperty. * 8+; In #eneral. * he pro!isions of 2ection 438%; notwithstanding, a final tax of six percent 8BE; based on the gross selling price or current fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, is hereby imposed upon capital gains presumed to ha!e been realized from the sale, exchange, or other disposition of real property located in the &hilippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by indi!iduals, including estates and trusts' &ro!ided, hat the tax liability, if any, on gains from sales or other dispositions of real property to the go!ernment or any of its political subdi!isions or agencies or to go!ernment*owned or controlled corporations shall be determined either under 2ection -L 8A; or under this 2ubsection, at the option of the taxpayer. 8-; 0xception. * he pro!isions of paragraph 8+; of this 2ubsection to the contrary notwithstanding, capital gains presumed to ha!e been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in ac.uiring or constructing a new principal residence within eighteen 8+:; calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this 2ubsection' &ro!ided, hat the historical cost or adKusted basis of the real property sold or disposed shall be carried o!er to the new principal residence built or ac.uired' &ro!ided, further, hat the /ommissioner shall ha!e been duly notified by the taxpayer within thirty 84=; days from the date of sale or disposition through a prescribed return of his intention to a!ail of the tax exemption herein mentioned' &ro!ided, still further, hat the said tax exemption can only be a!ailed of once e!ery ten 8+=; years' &ro!ided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to ha!e been realized from the sale or disposition shall be subKect to capital gains tax. (or this purpose, the gross selling price or fair market !alue at the time of sale, whiche!er is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph 8+; of this 2ubsection shall be imposed thereon.
84; /apital #ains. * /apital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subKect to the tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. 8%; Nonresident Alien Indi!idual Not 0ngaged in rade or %usiness ?ithin the &hilippines. * here shall be le!ied, collected and paid for each taxable year upon the
APP
42
APP
43
8+; Imposition of ax. * A minimum corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimum ax. * Any excess of the minimum corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimum /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. 8L; #ross Income <efined. * (or purposes of applying the minimum corporate income tax pro!ided under
APP
44
APP
45
i.
2pecial rates'
2tock transactions T sale of domestic shares classified as capital assets but not traded and listed in the &hil. 2tock 0xch. CE * +=E 2ale of real prop classified as capital asset T BE (INA7 AO based on gross selling price or zonal !alue whiche!er is higher 2ale of land and building by a corp. BE (INA7 AO based on gross selling price or zonal !alue whiche!er is higher
ii.
/A&I A7
<. #ross income deri!ed from the /onduct of rade or %usiness or the 0xercise of a &rofession, +. /omputation of taxable income fr. business) conduct of trade or profession.
ec. *$& Re!. Re0. (. Gross income fr. business . T In the case of a a; manufacturing, b; merchandising, or c; mining business, Hgross incomeI means the total sales, less the cost of goods sold, plus any income fr. in!estments & fr. incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses
APP
46
a. Jerchandising
#ross 2ales less returns and discounts less /ost of 2ales less 0xpenses [ N0 IN/9J0
b. Janufacturing
#ross sales less returns and discounts less cost of goods manufactured and sold less expenses [ N0 IN/9J0
d. &ractice of &rofession
#ross professional fees less expenses [ N0 IN/9J0
b. Income deri!ed by the go!t. or its political subd. fr. the exercise of any essential go!t. function.
ec. $( +7 '- NIRC +'- Misce,,aneo"s Items. +a- Income Deri!ed >8 4orei0n <o!ernment. Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments. 8b; Income <eri!ed by the #o!ernment or its &olitical 2ubdi!isions. * Income deri!ed from any public utility or from the exercise of any essential go!ernmental function accruing to the #o!ernment of the &hilippines or to any political subdi!ision thereof.
APP
47
those appro!ed by the &resident upon the recommendation of the (iscal Incenti!es "e!iew %oard.
re!enue generation effort, 4; he nature of the acti!ity in w)c the corporation is engaged in, or L; In general, the greater national interest to be ser!ed. EC. $. he Jinistry of (inance shall promulgate the necessary rules & regulations to effecti!ely implement the pro!isions of this <ecree. /D 1#.. ECTION 1. he pro!isions of special or general law to the contrary notw)standing, all exemptions fr. or any preferential treatment in the payment of duties, taxes, fees, imposts & other charges heretofore granted to pri!ate business enterprise &)or persons engaged in any economic acti!ity are hereby w)drawn, except those enKoyed by the following' 8a; hose registered by the %oard of In!estments under &< No. +5:3, as amended by %& %lg. 43+, & those registered by the 0xport &rocessing Uone Authority under &< No. BB, as amended by &< Nos. +LL3, +55B, +55B*A, & +5:B, 8b; he copper mining industry in accordance w) the pro!isions of 79I +L+B, 8c; hose co!ered by international agreements to w)c the &hilippines is a signatory, 8d; hose co!ered by the non*impairment clause of the /onstitution, & 8e; hose that will be appro!ed by the &resident of the &hilippines upon the recommendation of the Jinister of (inance. E.O. #$ ECTION 1. he pro!isions of any general or special law to the contrary notw)standing, all tax & duty incenti!es granted to the go!ernment & pri!ate entities are hereby w)drawn, except' a; those co!ered by the non*impairment clause of the /onstitution, b; those conferred by effecti!e international agreements to w)c the #o!t. of the "ep. of the &hil. is a signatory, c; those enKoyed by enterprises registered w)' 8i; 8ii; 8iii; the %oard of In!estments pursuant to &< No. +5:3, as amended, the 0xport &rocessing Uone Authority pursuant to &< No. BB, as amended, the &hil 6eterans In!estment <e!elopment /orporation Industrial Authority pursuant to &< 4C: as amended,
EC. (. he (iscal Incenti!es "e!iew %oard, created under &< No. 55B, as amended, is hereby authorized to' a; restore tax &)or duty exemptions w)drawn hereunder in whole or in part, b; re!ise the scope & co!erage of tax &)or duty exemption, c; impose conditions for the restoration of tax &)or duty exemption, d; prescribe the date or period of effecti!ity of the restoration of tax &)or duty exemption, e; formulate & submit to the &resident for appro!al, a complete system for the grant of subsidies to deser!ing beneficiaries, in lieu of or in combination w) the restoration of tax & duty exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries & the terms & conditions for the grant thereof taking into consideration the international commitments of the &hilippines & the necessary precautions such that the grant of subsidies does not become the basis for counter!ailing action. ec. * +$-& Art XIV& Constit"tion **All re!enues & assets of non*stock, non*profit educational institutions used actually, directly & exclusi!e for educational purposes shall be exempt fr. taxes & duties. 1pon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner pro!ided by law. ec. * +*-& Art. XIV& Constit"tion ** 2ubKect to conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly, & exclusi!ely for educational purposes shall be exempt fr. tax. ec. () +$-& Art. VI& Constit"tion **/haritable institutions, churches & parsonages or con!ents appurtenant thereto, mos.ues, non*profit cemeteries, & all lands, buildings, & impro!ements, actually, directly & exclusi!ely used for religious, charitable or educational purposes shall be exempt fr. taxation. 4inance De;t. Order 1$'-)' 0duc. inst. means a non*stock, non*profit corporation association duly registered under &hil. law, & operated exclusi!ely for educational purposes, maintained & administered by pri!ate indi!idual or group offering formal education issued permit to operate by the <0/2. "e!enues deri!ed fr. & assets used in the operation of cafeterias)canteens, dormitories, bookstores are exempt fr. taxation pro!ided they are owned & operated by the educational institution as ancillary acti!ities & the same are located w)in the school premises. De;t. of 4inance Order 1*#-#. Re5 Exem;tion of Non-stoc? Non-/rofit Ed"cationa, Entities
APP
4"
+=. &artners distributi!e share of the gross income of gen. professional partnership
?hat is a gen. prof. partnershipM HP exercising their common profession, no part of the income is deri!ed from engaging in any trade or business.I
ec. ((. 8%; he term Bcor;orationB shall include partnerships, no matter how created or organized, Koint* stock companies, Koint accounts 8cuentas en participacion;, association, or insurance companies, but does not include general professional partnerships and a Koint !enture or consortium formed for the purpose of undertaking construction proKects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a ser!ice contract with the #o!ernment . B<enera, ;rofessiona, ;artners9i;sB are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is deri!ed from engaging in any trade or business.
8d; he supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enKoyment of, any such property or right as is mentioned in paragraph 8a;, any such e.uipment as is mentioned in paragraph 8b; or any such knowledge or information as is mentioned in paragraph 8c;, 8e; he supply of ser!ices by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person, 8f; echnical ad!ice, assistance or ser!ices rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, !enture, proKect or scheme, and 8g; he use of or the right to use' 8i; 8ii; 8iii; Jotion picture films, (ilms or !ideo tapes for use in connection with tele!ision, and apes for use in connection with radio broadcasting.
IV.
A.
+.- a,e of Rea, /ro;ert8. * gains, profits and income from the sale of real property located in the &hilippines, and +%- a,e of /ersona, /ro;ert8. * gains, profits and income from the sale of personal property, as determined in 2ubsection 80; of this 2ection. +7- Taxa>,e Income 4rom o"rces Wit9in t9e /9i,i;;ines. +1- <enera, R",e . * (rom the items of gross income specified in 2ubsection 8A; of this 2ection, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effecti!ely connected with the business or trade conducted exclusi!ely within the &hilippines which cannot definitely be allocated to some items or class of gross income' &ro!ided, hat such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. he remainder, if any, shall be treated in full as taxable income from sources within the &hilippines. +(- Exce;tion . * No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection 8A; unless indebtedness was actually incurred to pro!ide funds
from
&ources
"ithin
the
+A- <ross Income 4rom o"rces Wit9in t9e /9i,i;;ines . * he following items of gross income shall be treated as gross income from sources within the &hilippines' +1- Interests . * Interests deri!ed from sources within the &hilippines, and interests on bonds, notes or other interest*bearing obligation of residents, corporate or otherwise, +(- Di!idends . * he amount recei!ed as di!idends'
8a; from a domestic corporation, and 8b; from a foreign corporation, unless less than fifty percent 8C=E; of the gross income of such foreign corporation for the three*year period ending with the close of its taxable year preceding the declaration of
APP
4#
8L; "entals or royalties from property located without the &hilippines or from any interest in such property including rentals or royalties for the use of or for the pri!ilege of using without the &hilippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties, and 8C; #ains, profits and income from the sale of real property located without the &hilippines. +D- Taxa>,e Income 4rom o"rces Wit9o"t t9e /9i,i;;ines . * (rom the items of gross income specified in 2ubsection 8/; of this 2ection there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. he remainder, if any, shall be treated in full as taxable income from sources without the &hilippines. +E- Income 4rom o"rces /art,8 Wit9in and /art,8 Wit9o"t t9e /9i,i;;ines .* Items of gross income, expenses, losses and deductions, other than those specified in 2ubsections 8A; and 8/; of this 2ection, shall be allocated or apportioned to sources within or without the &hilippines, under the rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. ?here items of gross income are separately allocated to sources within the &hilippines, there shall be deducted 8for the purpose of computing the taxable income therefrom; the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. he remainder, if any, shall be included in full as taxable income from sources within the &hilippines. In the case of gross income deri!ed from sources partly within and partly without the &hilippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income, and the portion of such taxable income attributable to sources within the &hilippines may be determined by processes or formulas of general apportionment prescribed by the 2ecretary of (inance. #ains, profits and income from the sale of personal property produced 8in whole or in part; by the taxpayer within and sold without the &hilippines, or produced 8in whole or in part; by the taxpayer without and sold within the &hilippines, shall be treated as deri!ed partly from sources within and partly from sources without the &hilippines. #ains, profits and income deri!ed from the purchase of personal property within and its sale without the
a.
ec. *(. $4% (axable #ncome +rom &ources "ithin the Philippines. 8+; #eneral "ule. * (rom the items of gross income specified in 2ubsection 8A; of this 2ection, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effecti!ely connected with the business or trade conducted exclusi!ely within the &hilippines which cannot definitely be allocated to some items or class of gross income' &ro!ided, hat such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. he remainder, if any, shall be treated in full as taxable income from sources within the &hilippines. 8-; 0xception. * No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection 8A; unless indebtedness was actually incurred to pro!ide funds for use in connection with the conduct or operation of trade or business in the &hilippines.
Commissioner !s. NAC& s";ra Com. !s. 7OAC & s";ra NDC !s. Com. 4acts' N</ made +L promissory notes for the balance of the purchase price of +- !essels it had contracted a okyo firm to build. 2aid balance & interests were timely remitted in okyo. N</ w)held no tax. he /I" assessed it liable for interest tax. he / A affirmed. N</ now contends no tax was due as all the related acts. in the transxn. were done in okyo. 6e,d5 Income fr. sources w)in the &hils. include interest & other interest*bearing obligations of residents, corporate or otherwise. he law speaks of HsourceI w)c, in 5$
APP
ec. *(. +C- <ross Income 4rom o"rces Wit9o"t t9e /9i,i;;ines . * he following items of gross income shall be treated as income from sources without the &hilippines' 8+; Interests other than those deri!ed from sources within the &hilippines as pro!ided in paragraph 8+; of 2ubsection 8A; of this 2ection, 8-; <i!idends other than those deri!ed from sources within the &hilippines as pro!ided in paragraph 8-; of 2ubsection 8A; of this 2ection, 84; /ompensation for labor or personal performed without the &hilippines, ser!ices
8L; "entals or royalties from property located without the &hilippines or from any interest in such property including rentals or royalties for the use of or for the pri!ilege of using without the &hilippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties, and 8L; #ains, profits and income from the sale of real property located without the &hilippines. ec. (*. $!% (axable #ncome +rom &ources "ithout the Philippines . * (rom the items of gross income specified in 2ubsection 8/; of this 2ection there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. he remainder, if any, shall be treated in full as taxable income from sources without the &hilippines.
-. #eneral principles of income taxation in the &hilippines and situs of sources of income
EC. ($. General Principles of #ncome (axation in the Philippines . * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker, 8<; An alien indi!idual, whether a resident or not of the &hilippines, is taxable only on income deri!ed from sources within the &hilippines, 80; A domestic corporation is taxable on all income deri!ed from sources within and without the &hilippines, and
APP
51
CIR !s. 7OAC AND T6E CTA 4ECICIANO& N. dissentin0 ' ?hether the foreign corporate taxpayer is doing business in the &hilippines & therefore a resident foreign corporation, or not doing business in the &hilippines & therefore a non resident foreign corporation, I I2 7IA%70 9 IN/9J0 AO 9N7D 9 $0 0O 0N $A I <0"I60< IN/9J0 ("9J 291"/02 ?I $IN $0 &$I7I&&IN02. 291"/0 9( IN/9J0 "07A 0 9 $0 &"9&0" D, A/ I6I D 9" 20"6I/0 ?$I/$ &"9<1/0< $0 IN/9J0, not to the flow of money or site of payment ?here income taxation of ser!ices in in!ol!ed, the income is sources in the &7A/0 ?$0"0 $0 20"6I/0 I2 "0N<0"0<. . Income fr. transportation or other ser!ices done outside the &hilippine must be treated as deri!ed entirely fr. sources outside the &hilippines . Income of a foreign airline for carriage of passengers & cargo between points located outside the &hilippines is not an income fr. sources w)in the &hilippines although the tickets are sold here, such tickets being merely e!idence of the contract of carriage. 1nder &.<. +4CC, international carriers issuing passage documentation in the &hilippines for uplifts between points outside the &hilippine are not charged any &hilippine income tax on their &hilippine billings. In place thereof, a -.CE excise tax on billings in respect of passengers & cargoes originating fr. the &hilippine regardless of embarkation or debarkation is imposed.
V.
A.
&EC. 2=. !eductions from Gross #ncome. * 0xcept for taxpayers earning compensation income arising from personal ser!ices rendered under an employer* employee relationship where no deductions shall be allowed under this 2ection other than under subsection 8J; hereof, in computing taxable income subKect to income tax under 2ections -L 8A;, -C 8A;, -B, -5 8A;, 8%; and 8/;, and -: 8A; 8+;, there shall be allowed the following deductions from gross income, +A- Ex;enses . *
APP
52
APP
53
APP
54
APP
55
APP
56
8ii;
An amount set aside for a specific proKect which comes within one or more purposes of the accredited nongo!ernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongo!ernment organization has established to the satisfaction of the /ommissioner that the amount will be paid for the specific proKect within a period to be prescribed in rules and regulations to be promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner, but not to exceed fi!e 8C; years, and the proKect is one which can be better accomplished by setting aside such amount than by immediate payment of funds. +$- Va,"ation. * he amount of any charitable contribution of property other than money shall be based on the ac.uisition cost of said property. +*- /roof of Ded"ctions. * /ontributions or gifts shall be allowable as deductions only if !erified under the rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. +I- Researc9 and De!e,o;ment.+1- In <enera,. * a taxpayer may treat research or de!elopment expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. he expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. +(- AmortiAation of Certain Researc9 and De!e,o;ment Ex;endit"res . * At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, the following research and de!elopment expenditures may be treated as deferred expenses' 8a; &aid or incurred by the taxpayer in connection with his trade, business or profession, 8b; Not treated as expenses under paragraph 3+; hereof, and 8c; /hargeable to capital account but not chargeable to property of a character which is subKect to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed o!er a period of not less than sixty 8B=; months as may be elected by the taxpayer 8beginning with the month in which the taxpayer first realizes benefits from such expenditures;. he election pro!ided by paragraph 8-; hereof may be made for any taxable year beginning after the effecti!ity of this /ode, but only if made not later than the time prescribed by law for filing the return for such taxable year. he method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subse.uent
8a; Any expenditure for the ac.uisition or impro!ement of land, or for the impro!ement of property to be used in connection with research and de!elopment of a character which is subKect to depreciation and depletion, and 8b; Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or .uality of any deposit of ore or other mineral, including oil or gas. +N- /ension Tr"sts. * An employer establishing or maintaining a pension trust to pro!ide for the payment of reasonable pensions to his employees shall be allowed as a deduction 8in addition to the contributions to such trust during the taxable year to co!er the pension liability accruing during the year, allowed as a deduction under 2ubsection 8A; 8+; of this 2ection ; a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount 8+;has not theretofore been allowed as a deduction, and 8-; is apportioned in e.ual parts o!er a period of ten 8+=; consecuti!e years beginning with the year in which the transfer or payment is made. +2- Additiona, ReK"irements for Ded"cti>i,it8 of Certain /a8ments . * Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this 2ection, shall be allowed as a deduction only if it is shown that the tax re.uired to be deducted and withheld therefrom has been paid to the %ureau of Internal "e!enue in accordance with this 2ection C: and :+ of this /ode. +C- O;tiona, tandard Ded"ction. * In lieu of the deductions allowed under the preceding 2ubsections, an indi!idual subKect to tax under 2ection -L, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent 8+=E; of his gross income. 1nless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as ha!ing a!ailed himself of the deductions allowed in the preceding 2ubsections. 2uch election when made in the return shall be irre!ocable for the taxable year for which the return is made' &ro!ided, hat an indi!idual who is entitled to and claimed for the optional standard deduction shall not be re.uired to submit with his tax return such financial statements otherwise re.uired under this /ode' &ro!ided, further, hat except when the /ommissioner otherwise permits, the said indi!idual shall keep such records pertaining to his gross income during the taxable year, as may be re.uired by the rules and regulations promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner. +M/remi"m /a8ments on 6ea,t9 and1or 6os;ita,iAation Ins"rance of an Indi!id"a, Tax;a8er . * the amount of premiums not to exceed wo thousand four hundred pesos 8&-,L==; per family or wo hundred pesos 8&-==; a month paid during the taxable year for health and)or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income' &ro!ided, hat said family has a gross income of not more than wo hundred fifty thousand pesos
APP
57
of certain real properties & claimed dedns w)c were not allowed. U appealed to the 2/ arguing the / A erred when it 8+; disallowed &+=,L5:.C= as promotion expenses incurred by wife for promoting hotel & pharmacy 8+)- of alleged &-=,3C5 bus. expense;,8-; disallowed 4.CE per annum rate of depreciation ,84; disregarded the price in deed of sale, as costs of Jla. prop. for det. alleged cap. gains, & 8L; applied the %allantyne 2cale of 6alues in det. the cost of said prop. 6e,d5 &"9J9 I9N 0O&0N202 constitute one of the deductions in conducting a business & shld. satisfy the re.uirements of the ax /ode 2ec.4= w)c pro!ides the in computing net inc. there shall be allowed as dedns all the ord. & nec. expenses paid or incurred during the taxable year in carrying on any trade or business)c must be substantiated by records. Jrs. U went abroad on a combined business & medical trip. Not all of her expenses came under the ord. & nec. expenses. 89nly half of it are deductible;. he 2/ upheld the / A when it based its decision on the 12 +3CC &$ (ederal axes &ar.+L +B=*F w)c is based on scientific studies & obser!ations for a long period regarding the useful life of a hotel bldg. he sale of the properties in R&N notes partly realized a capital gain when con!erted to &$& &eso. 4. i. ii. iii. L. Finds 9f <eductions Itemized T indi!idual) corps. 9ptional 2tandard taxpayer only 2pecial deductions 7imitations Imposed %y 7aw T ind.
+.
DE4INITION . <eductions are items or amounts w)c the law allows to be deducted fr. gross income in order to arri!e at taxable income.
-.
#o!erning
he taxpayer seeking a deduction must point to some specific pro!isions of the statute authorizing the deduction. deductions are allowed only when there is a clear pro!ision in the statute for the deduction claimed. $e must be able to pro!e that he is entitled to the deduction authorized or allowed. As a rule, if the taxpayer does not w)in any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot deduct them form the income o the next or any succeeding year. 7U INE EX/EN E V . CA/ITAC EX/EN E %usiness expenses deductible fr. gross income are the ordinary & necessary expenses paid or incurred during the taxable year in carrying on the taxpayers trade, profession or business. /apital expenses are expenses that result in obtaining benefits of a permanent nature such as lands, buildings, & machinery. DI44ERENTIATED 4ROM EXEM/TION 1 EXCCU ION ' basically the taxpayer does not ha!e to pay at all for items excluded)exempt fr. tax ("9J AO /"0<I ' it is the taxpayers rt. to deduct fr. income tax due the amt. of tax he has paid to a foreign country subKect to limitations.
Exam;,e5
&ec. 2= $9% Charitable and 3ther Contributions. $1% #n General. * /ontributions or gifts actually paid or made within the taxable year to, or for the use of the #o!ernment of the &hilippines or any of its agencies or any political subdi!ision thereof exclusi!ely for public purposes, or to accredited domestic corporation or associations organized and operated exclusi!ely for religious, charitable, scientific, youth and sports de!elopment, cultural or educational purposes or for the rehabilitation of !eterans, or to social welfare institutions, or to non*go!ernment organizations, in accordance with rules and regulations promulgated by the 2ecretary of finance, upon recommendation of the /ommissioner, no part of the net income of which inures to the benefit of any pri!ate stockholder or indi!idual in an amount not in excess of ten percent 8+=E; in the case of an indi!idual, and fi!e percent 8E; in the case of a corporation, of the taxpayerNs taxable income deri!ed from trade, business or profession as computed without the benefit of this and the following subparagraphs.
Jamora Vs. Co,,ector 4acts5 Uamora, owner of %ay 6iew $otel & (armacia Uamora filed his I " for @C+ & @C-. he /ollector found that he failed to file his return of the capital gains deri!ed fr. the sale
APP
5"
ec. $* +1&>- &ubstantiation 'e:uirements . - No deduction from gross income shall be allowed under 2ubsection 8A; hereof unless the taxpayer shall substantiate with sufficient e!idence, such as official receipts or other ade.uate records' 8i; the amount of the expense being deducted, and 8ii; the direct connection or relation of the expense being deducted to the de!elopment, management, operation and)or conduct of the trade, business or profession of the taxpayer.
B. Allocation deductions
of
expenses
and
EC. .E. Allocation of #ncome and !eductions . * In the case of two or more organizations, trades or businesses 8whether or not incorporated and whether or not organized in the &hilippines; owned or controlled directly or indirectly by the same interests, the /ommissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to pre!ent e!asion of taxes or clearly to reflect the income of any such organization, trade or business.
Among the ordinary & necessary expenses paid for incurred in carrying on any trade or business maybe included a reasonable allowance for salaries or other compensation for personal ser!ices actually rendered. he test of deductibility in the area of compensation payments is whether they T Are reasonable & Are, in fact, purely for ser!ice. his test & its practical application may be further stated & illustrated as follows' Any amount paid in the form of compensation, but not in fact as the purchase price ser!ices, is not deductible. An ostensible salary paid by a corporation may be distribution of di!idend on stock. his is likely to occur in the case of a corporation ha!ing few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar ser!ices, & the excessi!e payments corresponds or bear a close holding to the relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for ser!ices rendered, but that excessi!e payments are a distribution of earnings upon the stock. An ostensible salary may be in part payment for property. his may occur, for example, where a partnership sells our a corporation, the farmer partners agreeing to continue in the ser!ice of the corporation. In such a case it may be found that the salaries of the farmer partners are not merely for ser!ices, but in part constitute payment of the transfer of the business. he form of method of fixing compensation is not decisi!e as to deductibility. ?hile any form of contingent compensation in!ites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different fr. that applying to compensation at a flat rate. #enerally speaking, if contingent compensation is paid pursuant to a free bargain between the employer & the indi!idual made before the ser!ices are rendered, not influenced by any consideration on the part of the employer other than that a securing on fair & ad!antageous terms the ser!ices of the indi!idual, it should be allowed as a deduction e!en though in the actual working out of the contract it may pro!e to be greater than the amount w)c would ordinarily be paid.
%.
Allowable deduction from business income) trade or practice of profession +. 9rdinary) 0xpenses Necessary %usiness
EC. $*. Ded"ctions from <ross Income. * 0xcept for taxpayers earning compensation income arising from personal ser!ices rendered under an employer* employee relationship where no deductions shall be allowed under this 2ection other than under subsection 8J; hereof, in computing taxable income subKect to income tax under 2ections -L 8A;, -C 8A;, -B, -5 8A;, 8%; and 8/;, and -: 8A; 8+;, there shall be allowed the following deductions from gross income, +A- Ex;enses . * +1- Ordinar8 and Necessar8 Trade& 7"siness or /rofessiona, Ex;enses .* 8a; In #eneral. * here 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 which are directly attributable to, the de!elopment, management, operation and)or conduct of the trade, business or exercise of a profession, including'
A.
In any e!ent the allowance for compensation paid may not exceed what is reasonable under the circumstances. It is in general Kust to assume the
APP
5#
C.M. 6O 2IN
V . COMMI
IONER
4acts5 $ was the chairman of the %d. of <irs. of the corp. w)c bears his name. $e owns 33.BE of the capital stock. $e was also a salesman*broker for his co. recei!ing C=E share on the sales commission earned by the co. besides his monthly salary for a total annual compensation of &LC,=== plus annual salary bonus of &L=,=== & free use of the co. car & receipt of other allowances & benefits. $e also recei!ed the addl D of &33,355.3+ as his C=E share of the super!isors fee recei!ed by the co. as managing agent of a real estate proKect. 6e,d5 As a general rule bonuses to 0es are deductible as such as addl compensation for the ser!ices actually rendered by the 0es when such payments when added to the stipulated salaries do not exceed a reasonable compensation for the ser!ices rendered. In /A%, the petitioner fails the tests of reasonableness. 2UENJCE V . COMMI IONER
ection '$. Pensions5 compensations for in>uries. 6 Amounts paid T for pensions to retired employees or to their families or others dependent upon them or on account of inKuries recei!ed by employees & lump*sum amounts paid or accrued as compensations for inKuries, are proper deductions as ordinary & necessary expenses 2uch deductions are limited to the amount not compensated for by insurance or otherwise. ?hen the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs in recognition of the ser!ices rendered by the indi!idual, such payments may be deducted. 2alaries paid by 0" to employees T who are absent in the military, na!al, or other ser!ice of the go!ernment but who intent to return at the conclusion of such ser!ice, are allowable deductions. 8relati!e to pension trust.;
4acts5 /omm. assessed F deficiency D tax on the grd. that the bonuses paid to the 0es were not reasonable. 6e,d5 Not reasonable. In arri!ing at the conclusion, the / . ga!e due consideration to all the material factors 8200 0N1J0"A I9N A%960;that to decide accordingly. &olicy of gi!ing bonuses in not unreasonable but net loss resulting fr. it is. A<UINACDO IND. V . COMMI IONER
4acts' &et. was engaged in - businesses' fishnet mfg. & furniture mfg. It bought a pc. of land in Junti. for the fishnet industry & then sold it to mo!e to another location in Jka. hey cited bonuses gi!en to officers of &et. as their share of the profit realized fr. the sale was a deductible expense.
APP
6$
ec. $*.& see a>o!e na lang please. ec. %). Re!. Re0. No. (. 'epairs. he cost of incidental repairs w)c neither T materially add to the !alue of the property nor appreciably prolong its life but keep condition it in an ordinary)efficient operating
"A607 0O&0N202
here and abroad while away from home in the pursuit of trade, business or profession
may be deducted as an expense, pro!ided the plans or property account is not increased by the amount of such expenditure. "epairs in the nature of replacement, to the extent that they arrest deterioration, & appreciably prolong the life of the property
ec. $*. +A& 1& a-. 8ii; A reasonable allowance for tra!el expenses, here and abroad, while away from home in the pursuit of trade, business or profession, ec. %%. Re!. No. ( (raveling expenses .
ra!eling expenses as ordinarily understood, include transportation expenses & meals & lodging. If the trip is undertaken for other than business purposes, * the transportation expenses are personal expense, & the meals & lodgings are li!ing expenses, & therefore, not deductible. If the trip solely on business, the reasonable & necessary tra!eling expenses, including transportation expenses, meals & lodging, becomes business instead of personal expenses. If then, an indi!idual whose business re.uires him to tra!el, * recei!es a salary as full compensation for his ser!ices w)o reimbursement for tra!eling expenses, or is employed on a commission basis w) no expenses allowance, his tra!eling expenses, including the entire amount expended for meals & lodging are deductible fr. gross income. If an indi!idual recei!es a salary & is also repaid his actual tra!eling expenses,
Commissioner Vs.
oriano
6e,d5 0xpenditures for replacements, alterations & impro!s.)additions w)c either prolong the life of the property or increase its !alue are capital in nature & are not deductible. <UTIERREJ V . COCCECTOR 4acts5 # was primarily engaged in the business of leasing property for w)c he paid real estate brokers pri!ilege tax. $e claimed dedns for electrical supplies, paint, labor, cement, tiles, gra!el, masonry & labor used to repair the taxpayers rental apartments did not increase the !alue nor prolong its life, but merely kept the apartments in an ordinary operating condition, hence necessary expenditures for the maintenance of his business. 6e,d5 0xpenses for watching o!er laborers in construction work are not deductible. he acti!ity is more akin to construction work than running a business. /onstruction costs are capital expenditure. d. "0N A72)70A20 and)or other payments which are re.uired as a condition for the continued use or possession
he shall include in gross income, the amount so repaid & may deduct such expenses. If an indi!idual T recei!es a salary & also an allowance for meals & lodging, xxx the amount of the allowance should be included in gross income & the cost of such meals & lodging may be deducted therefr.. Oxx
c.
"epairs
for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or
APP
61
1. Incurred during the taxable year, (. <irectly connected to the de!elopment, 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 trade, business or exercise of a profession, $. Not to exceed such ceilings as the 2ec of (in may, by rules & regs prescribe, upon recommendation of the /ommissioner, taking into acct the needs as well as the special circumstances, nature & character of the industry, trade, business or profession of the taxpayer. *. Any expense incurred for entertainment, amusement or recreation that is contrary to law, morals, public policy or public order shall in no case be allowed as a deduction.
ROXA
!s. CTA
the amount of the tax being deductible by the latter. he cost borne by the lessee in T erecting buildings or making permanent impro!ements
on ground of w)c he is lessee is held to be capital in!estment & not deductible as a business expense. In order to return such taxpayer to his in!estment of capital, an annual deduction may be made fr. gross income of an amount e.ual to the cost of such impro!ements di!ided by the number of years remaining of the terms of the lease, & such deduction shall be in lieu of deduction for depreciation. If the remainder of the term of the lease is greater that the probable life of the buildings erected or of the impro!ements made, his deduction shall take the form of an allowance for depreciation. Re!. Re0. 1#-)%O 3a,a a?on0 ?o;8a e9.
4acts5 "oxas D /ia. a partnership formed to manage the prop. left by <o &edro "oxas deducted fr. its gross D &L= for tickets to a ban.uet in honor of <on 2ergio 9smena & &-: for beer gi!en as gifts to !arious persons, claimed as representation expenses. 6e,d5 "epresentation expenses are deductible fr. gross D as expenditures incurred in carrying on a business or trade under the ax /ode , pro!ided the taxpayer pro!es that they are reasonable in amt., nec., incurred in connection w) the bus. Not pro!en in this case. f. 0xpenses 9f (armers) 0ngaged In Agribusiness hose
ec. $*. A. 1. a. +i!- A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the de!elopment, 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 exercise of a profession not to exceed such ceilings as the 2ecretary of (inance may, by rules and regulations prescribe, upon recommendation of the /ommissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer' &ro!ided, hat any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction.
A farmer who operates a farm for profit is entitled to deduct amounts actually expended in carrying on the business. <eductible' /ost of 8+; tools of short life or small cost & 8-;of feeding & raising li!estock in so far as it represents actual outlay but not including the !alue of the farm produce grown upon the farm & 84; of gasoline or fuel, repairs & upkeep of the transportation e.pt. N9 deductible' 8+; costs of farm machinery, e.pt & farm bldgs. & 8-; amts. expended in the de!t. of farm orchards & ranches, prior to the time when the producti!e state is reached. 2uch are regarded as in!estments of capital or capital expenditures & may be depreciated.
<ANCADCO V . COCCECTOR 4acts5 <eficiency D taxes le!ied. #ancayco claims farming expenses are deductible 8for the de!t. & culti!ation of his prop;. 6e,d5 No e!id. presented as to the nature of the farming expenses, other than #s statement. /ollector claims that the expense was for clearing & de!t., nec. to place it in a 62
APP
Treatment of t9e ff.5 +. Ad!ertising expense -. &romotional expense 4. 7itigation expense L. /apitalization) reorganization expense
a. "0G1I2I 02 (9" <0<1/ I9N. i. paid or incurred during the taxable year,
h.
ii. 9n indebtedness in connection w) the taxpayers profession, trade or business howe!er iii. 2ubKect to limitation'
Interest paid on back*to*back loan shall be reduced by an amount [ to the ff. percentages of the in. income subK. to final tax' (orty*one percent 8L+E; beginning Ranuary +, +33:, hirty*nine percent 843E; beginning Ranuary +, +333, and hirty*eight percent 84:E; beginning Ranuary +, -===,
ec. $*. A. +(-. Ex;enses A,,o3a>,e to /ri!ate Ed"cationa, Instit"tions . * In addition to the expenses allowable as deductions under this /hapter, a pri!ate educational institution, referred to under 2ection -5 8%; of this /ode, may at its option elect either' 8a; to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or 8b; to deduct allowance for depreciation thereof under 2ubsection 8(; hereof.
-. IN 0"02 0O&0N20
ec. $*. +7- Interest.+1- In <enera, . * he amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayerNs profession, trade or business shall be allowed as deduction from gross income' &ro!ided, howe!er, hat the taxpayerNs otherwise allowable deduction for interest expense shall be reduced by an amount e.ual to the following percentages of the interest income subKected to final tax' (orty*one percent 8L+E; beginning Ranuary +, +33:, hirty*nine percent 843E; beginning Ranuary +, +333, and hirty*eight percent 84:E; beginning Ranuary +, -===, +(- Exce;tions . * No deduction shall be allowed in respect of interest under the succeeding subparagraphs' 8a; If within the taxable year an indi!idual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in ad!ance through discount or otherwise' &ro!ided, hat such interest shall be allowed a deduction in the year the indebtedness is paid' &ro!ided, further, hat if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year, 8b;If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under 2ection 4B 8%;, or 8c;If the indebtedness is incurred to finance petroleum exploration.
b. N9N*<0<1/ I%70 IN 0"02 c. IN 0"02 &AI< IN A<6AN/0) IN 0"02 &0"I9<I/A77D AJ9" IU0<.
ec. $*. +(- Exce;tions . * No deduction shall be allowed in respect of interest under the succeeding subparagraphs' 8a; If within the taxable year an indi!idual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in ad!ance through discount or otherwise' &ro!ided, hat such interest shall be allowed a deduction in the year the indebtedness is paid' &ro!ided, further, hat if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year, 8b;If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under 2ection 4B 8%;, or 8c;If the indebtedness is incurred to finance petroleum exploration.
4.
AO02 63
APP
COMMI
IONER V . /ACANCA
4acts5 &alanca donated shares of stock to his son. $e was assessed a gift tax, surcharge & interest for failure to file a return. $e claimed a dedn for interest paid on the donees gift tax. he %I" then considered the transfer as made in contemplation of death & was assessed inheritance & estate taxes. 6e,d5 Although taxes already due ha!e not the same concept as debts strictly speaking, they are obligations w)c may be considered as such. In /I" !s. &rieto, it was held that the distinction bet. taxes & debts is recognized in this Kurisdiction, the !ariance in their legal conception does not extend to the interest paid on them. "e.uisites are 8+; to 8L; gi!en abo!e. Indebtedness, as used in the ax /ode, is the unconditional & legally enforceable oblign. for the payment of money. As 2uch, a tax may be deemed as an indebtedness.
COMMI
IONER V . /RIETO
APP
64
d. 7imitations on <eductions
Nonresident alien) resident foreign corp. connected w) income fr. sources w)in the &hils.
e.
ax /"0<I .
ec. $*. C. +$- Credit Against (ax for (axes of +oreign Countries . * If the taxpayer signifies in his return his desire to ha!e the benefits of this paragraph, the tax imposed by this itle shall be credited with' 8a; /itizen and <omestic /orporation. * In the case of a citizen of the &hilippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country, and 8b; &artnerships and 0states. * In the case of any such indi!idual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributi!e share of the income of such partnership or trust is reported for taxation under this itle. An alien indi!idual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. +*- Cimitations on Credit . * he amount of the credit taken under this 2ection shall be subKect to each of the following limitations' 8a; he amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources within such country under this itle bears to his entire taxable income for the same taxable year, and 8b; he total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources without the &hilippines taxable under this itle bears to his entire taxable income for the same taxable year. +.- Ad@"stments on /a8ment of Inc"rred Taxes . * If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the /ommissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the /ommissioner, or the amount of tax o!erpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the /ommissioner as a condition precedent to the allowance of this credit may re.uire the taxpayer to gi!e a bond with sureties satisfactory to and to be appro!ed by the /ommissioner in such sum as he may re.uire, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. he bond herein prescribed shall contain such further conditions as the /ommissioner may re.uire. +%- Dear in W9ic9 Credit Ta?en . * he credits pro!ided for in 2ubsection 8/;84; of this 2ection may, at the option of the taxpayer and irrespecti!e of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign
b. N9 <0<1/ I%70' i. &hil. income tax ii. Income taxes imposed by authority of any foreign country, but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to ha!e to any extent the benefits of tax credit. iii. 0state and donors taxes, and i!. axes assessed !s. local benefits of a kind tending to increase the !alue of the property assessed.
c.
reatment of tax deducted and subse.uently credited or refunded shall be included as part of gross income in the year of receipt.
APP
65
!.
9ther re.uirements.
!i. !ii.
i. ii. iii.
ax credit !. tax deduction axpayers entitled to tax credit axes allowed as credit.
ecs. )E-)$ Re!. Re0. ( ec. )E. RR No. (. (axes in General .* As a general rule, taxes are deductible w) the exception of those w) respect to w)c the law does not permit deduction. $owe!er, in the case of a nonresident alien indi!idual & a foreign corporation, deduction is allowed only if & to the extent that the taxes for w)c deduction is claimed are connected w) the income fr. sources w)in "&. Import duties paid to the proper customs officers, & business occupation, license pri!ilege, excise & stamp taxes & any other taxes of e!ery name & nature paid directly to the #o!ernment of the "& or to any political sub. thereof, are deductible. he word ;ta/es< means ta/es. Proper 2 no 'e'+ction s,o+l' %e allo4e' *or amo+nts representing interest, s+rc,arge or penalties inci'ent to 'elin=+enc5.. &ostage is not a tax. Automobile registration fees are considered taxes. Htaxes are deductible as such only by the person upon whom they are imposed.I hus the merchants sales tax imposed by law upon sales is not deductible by the indi!idual purchaser e!en though the tax may be billed to him as a separate item. In computing the net income of an indi!idual, no deduction is allowed for the tax is imposed upon his interest as a shareholder of a bank or other corporation. w)c are paid by the corporation w)o reimbursements fr. the taxpayer. he amount s paid should not be included in the income of the shareholder. In the case of corporate bonds or other obligations containing a tax*free co!enant clause, the corporation paying the tax or any part of it, for someone else, pursuant to its agreement is not entitled to deduct such payment fr. gross income on any ground. ec. )1. RR. No. (. #ncome tax imposed by the government.- he law does not permit the deduction of the income tax paid or accrued in fa!or of the go!ernment & in no case may the taxpayer a!ail of such deduction. ec. )(. RR No. ( #ncome5 war-profits 0 excess profits taxes imposed by the au t9orit8 of a forei0n co"ntr8. T Income, war*profits & excess* profits taxes imposed by the authority of a foreign country are allowed as deductions only if the taxpayer does not signify in his return his desire to ha!e to any extent the benefits of the pro!isions of law allowing credits against the tax for taxes of foreign countries. ec. )$. RR No. ( Estate inheritance 0 gift taxesF taxes as sessed a0ainst ,oca, >enefits.-Estate& in9eritance H 0ift taxes are not ded"cti>,e. 2o*called taxes, property assessments paid for local benefits such as street, sidewalk & other impro!ements imposed bec. of & measured by some benefit inuring directly to the property against w)c the assessment is to be le!ied, do not constitute an allowable deduction fr. gross income tax. A tax is
&ec. 2=. C. $=% Limitations on Credit . * he amount of the credit taken under this 2ection shall be subKect to each of the following limitations' 8a; he amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources within such country under this itle bears to his entire taxable income for the same taxable year, and 8b; he total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources without the &hilippines taxable under this itle bears to his entire taxable income for the same taxable year.
APP
66
COMMI
IONER V . CEDNIC2D
4acts5 he 7ednicky spouses are American citizens li!ing in the &hils. & ha!e deri!ed all their D fr. &hil. sources for the taxable year in .uestion. In their amended I " for @CB they claimed a deduction of &-=C,343 as paid in +3CB to the 12 #o!t. as federal D tax for said year. "e.uested for refund of &++-,L45. 6e,d5 No deduction nor tax credit allowed. Alien residents who deri!e their income fr. sources w)in the &hils. solely may not deduct fr. gross D the D tax paid to his home country for the taxable year. 2uch rt. is gi!en only as an alternati!e to his rt. to claim a tax credit for such foreign D taxes, such that unless he has a right to claim such a credit if he chooses, he is precluded fr. such deduction. o allow a resident alien to deduct fr. his taxes whate!er he pays to his go!t amounts to conferring upon him the power to reduce the tax due to the &hil go!t simply by increasing the tax rates on the alien resident. C. 792202.
ec. $*. +D- Cosses. F +1- #n General .* 7osses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions' 8a; If incurred in trade, profession or business, 8b; 9f property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. he 2ecretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, howe!er, hat the time limit to be so prescribed in the rules and regulations shall not be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss. 8c; No loss shall be allowed as a deduction under this 2ubsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. 8-; &roof of 7oss. * In the case of a nonresident alien indi!idual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the &hilippines, when such losses are not compensated for by insurance or other forms of indemnity. he secretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner
APP
67
B.
he taxpayer must pro!e the elements of the loss claimed, such as the actual nature & occurrence of the e!ent & amount of the loss, & 5. he loss must be connected w) the trade or business of the taxpayer. A casualty loss is not deductible e!en though the abo!e re.uisites are present, if it has been claimed as a deduction for estate tax purposes in the estate tax return. + ec. #$ RR(C,osed H com;,eted transaction + ec. #% RR (he law re.uires that the loss should be sustained during the taxable year. A loss is actually sustained when it is e!idenced by a closed & completed transaction. here should be an identifiable e!ent w)c Kustifies the loss, such as when there is a complete destruction of property or when insurance proceedings are finally settled & the loss not reco!erable therein is finally ascertained.
a. <efinition
ec. $*. D. +1- #n General .* 7osses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions' 8a; If incurred in trade, profession or business, 8b; 9f property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.
i.
/A21A7 D 7922
b.
+. 7osses fr. wash sales of stock or securities, -. 7osses due to in!oluntary remo!al of buildings, machinery, etc. incident to renewal or replacement, 4. 7osses of the useful !alue of capital assets due to some change in business conditions, & L. Abandonment losses in petroleum operations.
ecs. #* F 1EE 1 1E* of re!. Re0. No. ( are incorporated in the following topics'
iii.
APP
6"
taxpayer would then be properly reportable as income of the taxpayer in the year it is recei!ed. In the meantime, it may properly be claimed as loss in his tax return pursuant to 2ec. -3 d,L,b or 2ec. -3, e 8%ad debts;. !.
ec. $*. D. +.- Cosses 4rom Was9 a,es of toc? or ec"rities . * 7osses from Nwash salesN of stock or securities as pro!ided in 2ection 4:. +%- Wa0erin0 Cosses . * 7osses from wagering transactions shall b allowed only to the extent of the gains from such transactions. +'- A>andonment Cosses . * 8a; In the e!ent a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and de!elopment expenditures pertaining thereto shall be allowed as a deduction' &ro!ided, hat accumulated expenditures incurred in that area prior to Ranuary +, +353 shall be allowed as a deduction only from any income deri!ed from the same contract area. In all cases, notices of abandonment shall be filed with the /ommissioner. 8b; In case a producing well is subse.uently abandoned, the unamortized costs thereof, as well as the undepreciated costs of e.uipment directly used therein , shall be allowed as a deduction in the year such well, e.uipment or facility is abandoned by the contractor' &ro!ided, hat if such abandoned well is reentered and production is resumed, or if such e.uipment or facility is restored into ser!ice, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.
i!.
/A&I A7 7922.
7osses fr. wash sales of stock or securities wagering losses abandonment losses 8petroleum operations.;
ec. $*. D. $=% Capital Losses. 8a; 7imitation. * 7oss from sales or 0xchanges of capital assets shall be allowed only to the extent pro!ided in 2ection 43. 8b; 2ecurities %ecoming worthless. * If securities as defined in 2ection -- 8 ; become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this itle, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.
/,aride,
"ret8 V. Co,,ector of IR
4acts5 he /ollector of Internal "e!enue disallowed a 7922 deduction by the petitioner, said deduction was for the payment of a performance bond w)c &laridel pre!iously issued on behalf of certain debtor)principals who defaulted on their obligation. 6e,d5 he /ourt upheld the /I" in disallowing the deduction bec. the loss sustained by &laridel 2urety was compensated for 8by insurance or; otherwise &, therefore, it has not in fact & in law suffered any loss. he alleged deductible loss was co!ered by a Kudicially enforceable right based on a contract T an indemnity agreement signed by the debtor)principals in fa!or of the 2urety /o., w)c had not yet exhausted all its a!ailable remedies under the indemnity agreement. CU UNNIEN< !. 7oard of Tax A;;ea,s 6#
4ERNANDEJ 6ERMANO
!. COMM.
In this case, the 2/ held that there was ade.uate basis for allowance of the writing off as worthless securities the stock of a lumber company, it appearing that it had closed operations although it still had its sawmill & e.uipment of some !alue, for e!en assuming that the company would later somehow realize some proceeds fr. its sawmill & e.uipment & such proceeds would later be distributed to its stockholders, the amount so recei!ed by the
APP
a. ?hat are bad debtsM b. ?ho are related taxpayersM c. "e.uisites for deduction.
+. -. 4. L. C. <ebts due taxpayer Actually ascertained to be worthless /harged off w)in the taxable year /onnected w) profession, trade or business Not those sustained in a transaction entered into bet. related parties.
d.
included as part of the gross income in the year of reco!ery to the extent of the income tax benefit of said deduction.
APP
7$
faith & reasonable ascertainment of collection. Among the accounts disallowed as deductions were the ff.' +. "emoblas store & /J 6ariety store T not a single document was offered to show that the stores were indeed burned, e!en Kust a police report. &"/ did not e!en send demand letters. -. Aboitiz 2hipping /orp. T no proof was gi!en of &"/ policy that gi!es rebates to clients in case of loss arising fr. fortuitous e!ents, w)c it now passes off as uncollectible debts, 4. A(&/02 T the mere fact that A(&/02 is a go!t. agency does not preclude & fr. filing suit since the agency was discharging proprietary functions. he taxpayer must be able to demonstrate that the debt is not only uncollectible as of the taxable year but also at any time in the future. 2o when the reco!ery is merely doubtful, the deduction is not allowed. 1sually the ff. steps are re.uired' +. 2ending of statements of accounts, -. 2ending of collection letters, 4. #i!ing the account collection, & to a lawyer for
4ERNANDEJ 6ERMANO
!. COMM
4acts5 ($ Inc., ga!e ad!ances to a subsidiary mining company w)c the latter could not repay due to its difficulties. ($ Inc., wrote off said ad!ances w)c were disallowed by the /I" & sustained by the /ourt. 6e,d5 1nder the memorandum agreement, the mining company was to pay ($ Inc., +CE of its net income, the ad!ances were not loans but in!estments of ($ Inc., w)c ga!e the ad!ances w)o actually expecting repayment as debts. he loss cannot be written off bec. there is no !alid & subsisting debt.
Ascertainment of 3ort9,essness.
%efore a debt can be ascertained to be worthless, the creditor must take reasonable steps to collect the debt w)in the period of prescription. he duty of ascertainment re.uires proof of two facts'
hat the taxpayer did in fact ascertain the debt to be worthless in the year for w)c deduction was sought, & hat in doing so acted in good faith.
COCCECTOR !. <OODRIC6 4acts5 #oodrich claimed deductions on se!eral bad debts. Jost of the debtors were merely sent demand letters. 2ome debtors mad partial payments, others later paid the debt in full. he /I" disallowed these as deductions. 6e,d5 he claimed deductions should be reKected. he re.uirement of ascertainment needs proof of two facts 8see abo!e discussion;. #ood faith on the part of the taxpayer is not enough. $e must show also that he had reasonably in!estigated the rele!ant facts & had drawn a reasonable inference fr. the information thus obtained by him. "espondent herein has not ade.uately made such showing. he payments made, some in full, after the accounts had been characterized as bad debts, merely stresses the undue haste w) w)c the same had been written off. /RC !. CA 4acts5 &hil. "efining /ompany protested the disallowance by the /I" of bad debts & interest expenses w)c the former listed as deductions in its return. 6e,d' hese particular bad debts were not allowable deductions bec. they do not meet the re.uirements stated in the #oodrich case. here was lack of proof or e!idence of good
5. <0&"0/IA I9N
ec.$* +f- NIRC !epreciation. 8+; #eneral "ule. * here shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear 8including reasonable allowance for obsolescence; of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent pro!isions of the instrument creating the trust, or in the absence of such pro!isions, on the basis of the trust income allowable to each. 8-; 1se of /ertain Jethods and "ates. * he term Nreasonable allowanceN as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, under any of the following methods' 8a; he straight*line method,
APP
71
what is
(or the exhaustion, wear and tear 8including reasonable allowance for obsolescence; of property
Definition5
+7asi,an Estates Inc.& !. Comm H ecs. 11E F 11. RR (De;reciation - the gradual diminution in the useful !alue of tangible property used in the trade or business resulting fr. exhaustion, wear & tear, & normal obsolescence he term is also applied to amortization of the !alue of intangible assets the use of w)c in the trade or business is definitely limited in duration. he necessity for depreciation allowance arises fr. the fact that certain property used in the business gradually approaches a point where its usefulness is exhausted. %y using the property, a gradual sale is made of it, & the depreciation charged is the measure of the cost w)c has been sold. ?hen then the property is disposed of after years of use, it is no longer the whole thing originally used.
deduct
depreciation
APP
72
d. /9J&1 A I9N ) methods allowed. CIM/AN INC.& !. COMM. 4acts5 7impan is the owner of se!eral apartment units. /I" assessed deficiency taxes & reduced depreciation expense at the rate stated in the petitioners return bec. these were excessi!e. &etitioners witness tried to establish that some of its buildings were old & out of style, hence they were entitled to higher rates of depreciation. 6e,d5 (indings of the /I" & the / A should be upheld, the deductions claimed by 7impan were excessi!e. <epreciation is a .uestion of fact & is not measured by theoretical yardstick but should be determined by a consideration of actual facts. 7A ICAN ENTER/RI E INC.& !. COMM.
&C,===
YY No depreciation will be allowed in the case of property w)c has been amortized to its scrap !alue & is no longer in use. 82ec. +=:, "" -;
/ro;ert8 not s">@ect to de;reciation F +.In!entories or stock in trade, -.7and, apart fr. the impro!ements or physical de!elopment added to it, 4.%odies of minerals w)c through the process of remo!al suffer depletion already subK. to depletion allowance;, L.Automobiles solely for personal purposes, C.Intangibles, the use of w)c in business or trade is not of limited duration, & B.Incidental repairs w)c neither materially add up to the !alue or prolong the life, but keep it in an ordinary efficient operating condition. &roperty kept in repair may ne!ertheless, be subKect of a depreciation allowance.
4acts' %0I claimed deductions for the depreciation of its assets up to +3L3 on the basis of their ac.uisition cost. As of Ran. +3C=, it changed the depreciable !alue of said assets by increasing it to conform w) the increase in cost for their replacement. Accdgly, for its +3C= T +3C4 returns, it deducted fr. gross income, the !alue of depreciations computed on the reappraised !alue. 6e,d5 he income tax law does not authorize the depreciation of an asset beyond its ac.uisition cost. $ence a deduction o!er & abo!e such cost cannot be claimed or allowed. he reason is that deductions fr. gross income are pri!ileges, not matters of right. hey are not created by implication but upon clear expression in the law. Joreo!er, the reco!ery, free of income tax , of an amount, more than the in!ested capital in an asset, will transgress the underlying purpose of depreciation allowance. (or then, what the taxpayer would reco!er would be, not only the ac.uisition cost, but also some profit. "eco!ery in due time through depreciation of in!estment made is the philosophy behind depreciation, the idea of profit on the in!estment made has ne!er been the underlying reason for the allowance of a deduction for depreciation.
as to life of
iii. <epreciation of properties used by nonresident aliens engaged in trade or business or resident foreign corps. :. <0&70 I9N
<epletion is the exhaustion of natural resources like mines & oil & gas wells as a result of production or se!erance fr. such mines or wells.
ec. $*. $G% !epletion of 3il and Gas "ells and *ines. 8+; In #eneral. * In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost*depletion method shall be granted under rules and regulations to be prescribed by the 2ecretary of finance, upon recommendation of the /ommissioner. &ro!ided, hat when the allowance for depletion shall e.ual the capital in!ested no further allowance shall be granted' &ro!ided, further, hat after production in commercial .uantities has commenced, certain intangible exploration and de!elopment drilling costs' 8a; shall be deductible in the year incurred if such expenditures
I,,"stration5
A machine w) a cost of &C=,C== w)c has an estimated useful life of += years & sal!age !alue of &C== after its useful life should ha!e an annual depreciation of &C,=== computed as follows' /92 &C=,C== 7ess T 2al!age 6alue 8C==;
APP
73
a. b. I.
<epletion of oil and gas wells and mines Jethod <0&70 I9N allowed' /92
?hen depletion shall e.ual the capital in!ested) no more deduction reatment of intangible costs in petroleum products
II. c.
d.
Persons entitled to claim depletion allowance $&ec. 25 'ev. 'eg. C-ED% Allowed only to mining entities w)c own an economic interest in mineral deposits Economic interest T the taxpayer has ac.uired by in!estment any interest in mineral & secures it, by any form of legal relationship, such as but not limited to, operating agreement & ser!ice contract agreement, income deri!ed fr. the extraction of mineral, to w)c it must look for the return of its capital A corporation w)c has no capital in!estment in the mineral deposit does not possess an economic interest merely bec. through a contractual relation it possesses a mere pecuniary ad!antage deri!ed fr. production. A resident foreign corporation is entitled only to deduct depreciation allowance for oil & gas wells located w)in the &hilippines.
Conso,idated Mines V. CTA 4acts5 /onsolidated is a domestic mining corp. w)c claimed deductions for depletion, the rates of w)c petr & the /I" disagreed on. 6e,d5 he ax /ode pro!ides in case of mines for a deduction on depletion * a reasonable allowance not to exceed the market !alue of the product thereof w)c has been mined & sold during the year for w)c the return was made. he formula for computing the rate of depletion is' Cost of mine ;ro;ert8 0stimated ore deposit [ "ate depletion per unit of product mined & sold Cost of mine ;ro;ert8 5 +. Jine cost 74 of
APP
d.
i.
ec. $*. $#% 'esearch and !evelopment.8+; In #eneral. * a taxpayer may treat research or de!elopment expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. he expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. 8-; Amortization of /ertain "esearch and <e!elopment 0xpenditures. * At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, the following research and de!elopment expenditures may be treated as deferred expenses' 8a; &aid or incurred by the taxpayer in connection with his trade, business or profession, 8b; Not treated as expenses under paragraph 3+; hereof, and 8c; /hargeable to capital account but not chargeable to property of a character which is subKect to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed o!er a period of not less than sixty 8B=; months as may be elected by the taxpayer 8beginning with the month in which the taxpayer first realizes benefits from such expenditures;. he election pro!ided by paragraph 8-; hereof may be made for any taxable year beginning after the effecti!ity of this /ode, but only if made not later than the time prescribed by law for filing the return for such taxable year. he method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subse.uent taxable years unless with the appro!al of the /ommissioner, a change to a different method is authorized with respect to a part or all of such expenditures. he election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. 84; 7imitations on deduction. * his 2ubsection shall not apply to' 8a; Any expenditure for the ac.uisition or impro!ement of land, or for the impro!ement of property to be used in connection with research and de!elopment of a character which is subKect to depreciation and depletion, and 8b; Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or .uality of any deposit of ore or other mineral, including oil or gas.
ii.
Any expenditure for the ac.uisition or impro!ement of land, or for the impro!ement of property to be used in connection with research and de!elopment of a character which is subKect to depreciation and depletion, and Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or .uality of any deposit of ore or other mineral, including oil or gas.
AN<
9 $0"
ec. $*. $9% Charitable and 3ther Contributions. 8+; In #eneral. * /ontributions or gifts actually paid or made within the taxable year to, or for the use of the #o!ernment of the &hilippines or any of its agencies or any political subdi!ision thereof exclusi!ely for public purposes, or to accredited domestic corporation or associations organized and operated exclusi!ely for religious, charitable, scientific, youth and sports de!elopment, cultural or educational purposes or for the rehabilitation of !eterans, or to social welfare institutions, or to non*go!ernment organizations, in accordance with rules and regulations promulgated by the 2ecretary of finance, upon recommendation of the /ommissioner, no part of the net income of which inures to the benefit of any pri!ate stockholder or indi!idual in an amount not in excess of ten percent 8+=E; in the case of an indi!idual, and fi!e percent 8E; in the case of a corporation, of the taxpayerNs taxable income deri!ed from trade, business or profession as computed without the benefit of this and the following subparagraphs. 8-; /ontributions <eductible in (ull. * Notwithstanding the pro!isions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full, 8a; <onations to the #o!ernment. * <onations to the #o!ernment of the &hilippines or to any of its agencies or political subdi!isions, including fully*owned go!ernment corporations, exclusi!ely to finance, to pro!ide for, or to be used in undertaking priority acti!ities in education, health, youth and sports de!elopment, human settlements, science and culture, and in economic de!elopment according to a National &riority &lan determined by the National 0conomic and <e!elopment Authority 8N0<A;, In consultation with appropriate go!ernment agencies, including its regional de!elopment councils and pri!ate philantrophic persons and institutions' &ro!ided, hat any donation which is made to the #o!ernment or to any of its agencies or political subdi!isions not in accordance with the said annual priority plan shall be
APP
75
or
gifts
are
b. <eduction with limitation c. /ontributions deductible in full. d. i. ii. reatment of the ff. donations' <onations to the go!t. <onations to certain foreign institutions or intl organizations <onations to accredited non*go!t. organizations
8+; 9rganized and operated exclusi!ely for scientific, research, educational, character*building and youth and sports de!elopment, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any pri!ate indi!idual, 8-; ?hich, not later than the +C th day of the third month after the close of the accredited nongo!ernment organizations taxable year in which contributions are recei!ed, makes utilization directly for the acti!e conduct of the acti!ities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the 2ecretary of (inance in accordance with the rules and regulations to be promulgated, upon recommendation of the /ommissioner, 84; he le!el of administrati!e expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, but in no case to exceed thirty percent 84=E; of the total expenses, and 8L; he assets of which, in the e!en of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the Kudgment of said court shall best accomplish the general purpose for which the dissol!ed organization was organized. 2ubKect to such terms and conditions as may be prescribed by the 2ecretary of (inance, the term NutilizationN means' 8i; Any amount in cash or in kind 8including administrati!e expenses; paid or utilized to accomplish one or more purposes for which the accredited nongo!ernment organization was created or organized. 8ii; Any amount paid to ac.uire an asset used 8or held for use; directly in carrying out one or more purposes for which the accredited nongo!ernment organization was created or organized.
iii.
e. !aluation of donation f. &roof of donation for tax deduction purposes Roxas V. CTA 4acts' 2upra 6e,d5 /ontributions to the /hristmas (und of the &asay /ity &olice & (iremen & the %aguio /ity &olice are not deductible for the reason that /hristmas (unds were not spent for public purposes but as gifts to the families of the members of said entities. 1nder the ax /ode, a contribution to a go!t. entity is deductible when used exclusi!ely for public purposes. /ontributions to the &hil. $eralds fund for Janilas neediest families were disallowed on the ground that &$ is not a corporation or assn. /ontemplated in the ax /ode. It should be noted howe!er, that the contributions were not made to the &$ but to a group of ci!ic* spirited citizens organized by the &$ solely for charitable purposes. ++./9N "I%1 I9N 9 A &0N2I9N "12
&ec. 2=. $8% Pension (rusts. * An employer establishing or maintaining a pension trust to pro!ide for the payment of reasonable pensions to his employees shall be allowed as a deduction 8in addition to the contributions to such trust during the taxable year to co!er the pension liability accruing during the year, allowed as a deduction under 2ubsection 8A; 8+; of this 2ection ; a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount 8+;has not theretofore been allowed as a deduction, and 8-; is apportioned in e.ual parts o!er a period of ten 8+=; consecuti!e years beginning with the year in which the transfer or payment is made.
An amount set aside for a specific proKect which comes within one or more purposes of the accredited nongo!ernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongo!ernment organization has established to the satisfaction of the /ommissioner that the amount will be paid for the specific proKect within a period to be prescribed in rules and regulations to be promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner, but not to exceed fi!e 8C; years, and the proKect is one which can be better accomplished by setting aside such amount than by immediate payment of funds.
APP
76
/.
EC. $%. #tems not !eductible.$A% General 'ule . & In computing net income, no deduction shall in any case be allowed in respect to 8+; &ersonal, li!ing or family expenses, 8-; Any amount paid out for new buildings or for permanent impro!ements, or betterments made to increase the !alue of any property or estate, his 2ubsection shall not apply to intangible drilling and de!elopment costs incurred in petroleum operations which are deductible under 2ubsection 8#; 8+; of 2ection 4L of this /ode. 84; Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made, or 8L; &remiums paid on any life insurance policy co!ering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, indi!idual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. 8%; 7osses from 2ales or 0xchanges of &roperty. * In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly * 8+; %etween members of a family. (or purposes of this paragraph, the family of an indi!idual shall include only his brothers and sisters 8whether by the whole or half*blood;, spouse, ancestors, and lineal descendants, or 8-; 0xcept in the case of distributions in li.uidation, between an indi!idual and corporation more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for such indi!idual, or 84; 0xcept in the case of distributions in li.uidation, between two corporations more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for the same indi!idual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, 8L; %etween the grantor and a fiduciary of any trust, or 8C; %etween the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust, or
no part of the rent is deductible as a business expense. If, howe!er, he uses part of the house for his office, such portion of the rent as is properly attributed to such office is deductible. ?here the father is legally entitled to the ser!ices of his minor children, any allowances w)c he gi!es them whether said to be in consideration of ser!ices or otherwise, are not allowable salary deductions in his returns of income. Alimony & an allowance paid under a separation agreement are not deductible fr. gross income.
COCCECTOR V . NAMIR 4acts' Ramir claimed as dedn the salary of his dri!er. he /I" assessed the tax due. / A allowed 4)Ls of the salary to be deducted. 6e,d5 It appears that the dri!er was used for personal & business purposes. he 2/ is not inclined to disturb the finding of the court the Ramir used the car Hmore for business than for personal purposesI. -. /apital 0xpenditure i. Ac.uisition of asset ii. "epairs that prolong life and add !alue iii. Addition) impro!ement on an existing asset i!. /ompare) differentiate ordinary expense
ec. 1(E Re!. Re0. (. Capital expenditure No deduction fr. gross income may be made T (or any amounts made for the new buildings or for permanent impro!ements or betterments made to increase the !alue of the taxpayers property, or (or any amount expended in restoring property or in making good the exhaustion thereof for w)c an allowance of depreciation expended for securing a copyright & plates, w)c remain the property of the person making the payments, are in!estment of capital.
with
+.
ec. 11# Re!. Re0. ( /ersona,& ,i!in0& H fami,8 ex;enses are not deductible. 8+; Insurance paid on a dwelling owned & occupied by a taxpayer is a personal expense & not deductible.
he cost of defending of perfecting title of property, constitutes a part of the cost on the property & is not a deductible expense. he amount expended for architects ser!ices is part of the cost of the building. /ommissions paid in purchasing securities are an offset against the selling price. 0xpenses of the administration of an 0state, such as T court costs attorneys fee & executors commissions are chargeable against the HcorpusI of the estate & are not allowable deductions.
APP
77
are in!estments of capital an not deductible for any purpose in return of income. In the case of a corporation, e/penses *or organi8ations, s+c, as & incorporation fees attorneys fees accountants charges, are ordinary capital expenditures, but where such expenditures are limited to purely incidental expenses, a taxpayer may be charge such item against income in the year in w)c they are incurred. A holding company w)c guarantees di!idend at a specified rate on the stock of the subsidiary corporation for the purpose of T securing new capital for the subsidiary & increasing the !alue of its stockholdings in the subsidiary
may not deduct amounts paid in carrying out this guarantee in computing its net income, but such payments may be added to the cost of its stock in the subsidiary.
C.
Commissioner Vs.
oriano
&EC. 2G. Losses from "ash &ales of &toc or &ecurities. * 8A; In the case of any loss claimed to ha!e been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty 84=; days before the date of such sale or disposition and ending thirty 84=; days after such date, the taxpayer has ac.uired 8by purchase or by exchange upon which the entire amount of gain or loss was recognized by law;, or has entered into a contact or option so to ac.uire, substantially identical stock or securities, then no deduction for the loss shall be allowed under 2ection 4L unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. 8%; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire; is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. 8/; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire which; resulted in the non*deductibility of the loss, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. ec. 1E1 Re!. Re0. (. Capital losses on wash sales of stoc or securities 7osses on sale or exchange of capital assets are allowed to the extent pro!ided in 2ec 4L of the /ode. If any securities w)c are capital assets become worthless during the taxable year, the loss resulting, therefr. shall be considered as a low fr. the sale or exchange on the last day of such taxable year, of capital losses
4acts5 he taxpayer had a piece of land in Jla. o carry out a proKect, it hired an architect as a contractor for pile*dri!ing lumber into the grd. he taxpayer sold the prop. & later claimed as deductible the amt. paid to the architect & ser!ice fee for pile* dri!ing. 6e,d5 0xpenses constitute capital expenditure w)c the owner)taxpayer was entitled to consider as part of the total cost of its property in det. the amt. of profit it realized fr. the sale. 0xpenditures for replacements, alterations & impro!ements)additions w)c either prolong the life of the prop. or increase its !alue are capital in nature & therefore are part of the cost. Not deductible. 4. Insurance premium payment
L.
ec. $%. +4% Losses from &ales or Exchanges of Property. * In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly * 8+; %etween members of a family. (or purposes of this paragraph, the family of an indi!idual shall include only his brothers and sisters 8whether by the whole or
APP
7"
B.
Illegal expense
Ca,anoc Vs. Co,,ector 4acts5 %y authority of a solicitors permit, /alanoc financed & promoted a boxing match to solicit contributions for orphans & destitute children. Included in the expenditures was an amt. for police protection. 6e,d5 he expenditure is disallowed as it is illegal. It is a consideration gi!en for the performance of the police of functions re.uired of them to be rendered under the law.
ec. $*. 1. $c% 4ribes5 Aic bac s and 3ther &imilar Payments. * No deduction from gross income shall be allowed under 2ubsection 8A; hereof for any payment made, directly or indirectly, to an official or employee of the national go!ernment, or to an official or employee of any local go!ernment unit, or to an official or employee of a go!ernment*owned or *controlled corporation, or to an official or employee or representati!e of a foreign go!ernment, or to a pri!ate corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback.
OT6ER 5
i. &rotection money ii. "ansom paid to kidnappers for the release of a corporate officer iii. "e!olutionary tax paid to N&A <. <0<1/ I9N2 A779?0< (9" 2&0/IA7 /9"&9"A I9N2
EC. $'. &pecial Provisions 'egarding #ncome and !eductions of #nsurance Companies5 "hether !omestic or +oreign. +A;ecia, Ded"ction A,,o3ed to Ins"rance Com;anies. * In the case of insurance companies, whether domestic or foreign doing business in the &hilippines, the net additions, if any, re.uired by law to be made within the year to reser!e funds and the sums other than di!idends paid within the year on policy and annuity contracts may be deducted from their gross income' &ro!ided, howe!er, hat the released reser!e be treated as income for the year of release. +7- M"t"a, Ins"rance Com;anies . * In the case of mutual fire and mutual employersN liability and mutual workmenNs compensation and mutual casualty insurance companies re.uiring their members to make premium deposits to pro!ide for losses and expenses, said companies shall not return as income any portion
in lieu of itemized deductions not exceeding +=E of his gross income ?hat is gross incomeM
ec. ('. E. $=% Gross #ncome !efined. * (or purposes of applying the minimum corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
APP
7#
a.
for
b. (.
?ho is entitledM
&EC. 2C. Allowance of Personal Exemption for #ndividual (axpayer. 8A; In #eneral. * (or purposes of determining the tax pro!ided in 2ection -L 8A; of this itle, there shall be allowed a basic personal exemption as follows' (or single indi!idual or married indi!idual Kudicially decreed as legally separated with no .ualified dependents &-=,=== (or $ead of (amily &-C,=== (or each married Indi!idual &4-,===
APP
"$
9(
IN/9J0
&EC. B2. General Principles of #ncome (axation in the Philippines . * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker, 8<; An alien indi!idual, whether a resident or not of the &hilippines, is taxable only on income deri!ed from sources within the &hilippines, 80; A domestic corporation is taxable on all income deri!ed from sources within and without the &hilippines, and 8(; A foreign corporation, whether engaged or not in trade or business in the &hilippines, is taxable only on income deri!ed from sources within the &hilippines.
a. b.
dependents
are
?ho are the .ualified dependentsM Are senior citizens .ualified dependentsM Are spurious children co!eredM
<ependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and li!ing with the taxpayer if such dependent is not more than -+ years of age, unmarried & not gainfully employed or if such dependent, regardless of age, is incapable of self*support because of mental or physical defect.
c. d.
Amount allowed &:,=== each max of L dependents ?ho may claim the additional exemptionM Jaya single parent claim the deductionM taxpayer
ec. ((. 8%; he term Bcor;orationB shall include partnerships, no matter how created or organized, Koint*stock companies, Koint accounts 8cuentas en participacion;, association, or insurance companies, but does not include general professional partnerships and a Koint !enture or consortium formed for the purpose of undertaking construction proKects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a ser!ice contract with the #o!ernment. B<enera, ;rofessiona, ;artners9i;sB are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is deri!ed from engaging in any trade or business.
/ARTNER 6I/ ' includes gen. partnerships & limited partnerships, whether registered or not, %1 not gen. professional partnerships NOINT TOC2 COM/ANIE 5 constituted when one a group of indi!iduals, acting Kointly, establish & operate a business enterprise under an artificial name, w) an in!ested capital di!ided into transferable shares, an elected board of directors, & other corporate characteristics, %1 w)out formal go!ernmental authority. NOINT ACCOUNT +CUENTA EN /ARTICI/ACION-5 constituted when one interests himself in the business of another by contributing
to
VI.
O4
INCOME
APP
"1
an entity put up by the contracting parties solely for that !enture. 0mpire will recei!e 4=E of the profits of the 6enture while 1niphil will recei!e 5=E. 0mpire argues that the respecti!e shares of 1niphil & 0mpire in the net profits is not subKect to income tax, the same ha!ing been taxes in the hands of 6enture o.w. the same income would be subKected to 4CE tax each in the hands of 6enture, 1niphil & 0mpire or a total tax of 5=E I UE5 ?hat is the tax status of 6entureM Is it considered a Koint !enture 8R6; & therefore taxable as a domestic corp.M ?hat is the tax treatment of the distributi!e shares of 1niphil & 0mpire in the respecti!e amount of 5=E & 4=EM RUCIN<' o constitute a R6, certain factors are essential' each party must make a contribution, not necessarily of capital, but by way of ser!ices, skill, knowledge, material or money profits must be shared amount the parties, there must be a R9IN &"9&"I0 A"D IN 0"02 , & the right of mutual control o!er the subKect matter of the enterprise, usually there is a single business ON rather than a general or continuous ON 7ikewise, a R6 was created when corps. while registered & operating separately where placed under one sole management w)c operated the business affairs of said co.Ns as though they constituted as single entity thereby obtaining substantial economy & profits in the operation. 8/ollector !s. % /; hus the 6enture w)c has been constituted as a single entity whereby 0mpire & 1niphil agreed to pool their resources for the de!Nt of a parcel of land, is a R6 w)c is subKect to the 4CE under 2ec. -L of the ax /ode. $owe!er, the shares of 1niphil & 0mpire from the profits of the R6 are N9 21%R0/ to income tax since said profits are in the nature of di!idends w)c are not subKect to tax under 2ec. -L8e;. -. 9rdinary partnership as a corporate taxpayer a. est whether an entity is a taxable partnership
7IR r",in0 (.*-#1& (%-11-1##1 0mpire 2tateland & "esources, IN/ 80mpire;, a domestic corp. entered into a business tie*up w) 1niphil Jarketing 81niphil; another domestic corp., whereby both firms agreed to pool their resources together for the purpose of de!eloping & constructing condominium units & selling them to the public. 1niphil was to contribute the lot, materials & labor, while 0mpire was to supply labor & materials. he de!elopment & construction of the units & the e!entual sale thereof was to be undertaken & managed by 1niphil 0mpire 6enture 86enture;,
APP
/asc"a, !s. Com. 4acts5 &ascual & <ragon bought a total of fi!e lots in - sales. hey then sold these lots. (rom these sales they earned profits. hey paid capital gains tax but the /om. demanded they pay corp. income tax for being an unregistered partnershipM 6e,d5 In the present case, there is no e!idence that petitioners entered into an agreement to contribute money, property or industry to a common fund, & that they intended to di!ide the profits among themsel!es. "espondent commissioner &) or his representati!e Kust assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land & became co*owners thereof. In 0!angelista, there was a series of transactions where petitioners purchased twenty*four 8-L; lots showing that the purpose was not limited to the conser!ation or preser!ation of the common fund or e!en the properties ac.uired by them. he character of habituality peculiar to business transactions "3
APP
Re!en"e Re0. 1 - )#. 0xcept as herein otherwise pro!ided, there shall be w)held a creditable income tax at the rates herein specified for each class of payee from the ff. items of income payments to persons residing in the &hils. Any amount paid or payable periodically or at the end of the taxable year by a gen. professional partnership to the partners, such as* drawings ad!ances sharings allowances stipends, etc.
+CE, 0O/0& the amount paid to a partner who is a non* resident alien whether or not engaged in trade or business in the &hils. w)c shall be subKect to a final w)holding tax of 4=&. EC. (%. Tax Cia>i,it8 of Mem>ers of <enera, /rofessiona, /artners9i;s . * A general professional partnership as such shall not be subKect to the income tax imposed under this /hapter. &ersons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and indi!idual capacities. (or purposes of computing the distributi!e share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. 0ach partner shall report as gross income his distributi!e share, actually or constructi!ely recei!ed, in the net income of the partnership. ec. '$ +D-& supra.
APP
"4
:"eries5 $ow is a R6 createdM ?hat is the tax treatment of a R6 for the purposes of income taxationM
A. In <enera,. * 0xcept as otherwise pro!ided in this /ode, an income tax of thirty*fi!e percent 84CE; is hereby imposed upon the taxable income deri!ed during each taxable year from all sources within and without the &hilippines by e!ery corporation, as defined in 2ection --8%; of this /ode and taxable under this itle as a corporation, organized in, or existing under the laws of the &hilippines' &ro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty*four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty*three percent 844E;, and effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty*two percent 84-E;. In the case of corporations adopting the fiscal*year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. heir income and expenses for the fiscal year shall be deemed to ha!e been earned and spent e.ually for each month of the period. he reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months co!ered by the new rates within the fiscal year by the taxable income of the corporation for the period, di!ided by twel!e. &ro!ided, further, hat the &resident, upon the recommendation of the 2ecretary of (inance, may effecti!e Ranuary +, -===, allow corporations the option to be taxed at fifteen percent 8+CE; of gross income as defined herein, after the following conditions ha!e been satisfied' +. A tax effort ratio of twenty percent 8-=E; of #ross National &roduct 8#N&;, -. A ratio of forty percent 8L=E; of income tax collection to total tax re!enues, 4. A 6A tax effort of four percent 8LE; of #N&, and L. A =.3 percent 8=.3E; ratio of the /onsolidated &ublic 2ector (inancial &osition 8/&2(&; to #N&.
he option to be taxed based on gross income shall be a!ailable only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty*fi!e percent 8CCE;. he election of the gross income tax option by the corporation shall be irre!ocable for three 84; consecuti!e taxable years during which the corporation is .ualified under the scheme. (or purposes of this 2ection, the term Ngross incomeN deri!ed from business shall be e.ui!alent to gross
APP
"5
b. (oreign
ec. 8<; he term Bforei0n&B when applied to a corporation, means a corporation which is not domestic. EC. (.. (ax on )onresident Alien #ndividual. 6 8A; Nonresident Alien 0ngaged in trade or %usiness ?ithin the &hilippines. * 8+; In #eneral. * A nonresident alien indi!idual engaged in trade or business in the &hilippines shall be subKect to an income tax in the same manner as an indi!idual citizen and a resident alien indi!idual, on taxable income recei!ed from all sources within the &hilippines. A nonresident alien indi!idual who shall come to the &hilippines and stay therein for an aggregate period of more than one hundred eighty 8+:=; days during any calendar year shall be deemed a Nnonresident alien doing business in the &hilippinesN. 2ection -- 8#; of this /ode notwithstanding. 8-; /ash and)or &roperty <i!idends from a <omestic /orporation or Roint 2tock /ompany, or Insurance or Jutual (und /ompany or "egional 9perating $ead.uarter or Jultinational /ompany, or 2hare in the <istributable Net Income of a &artnership 80xcept a #eneral &rofessional &artnership;, Roint Account, Roint 6enture axable as a /orporation or Association., Interests, "oyalties, &rizes, and 9ther ?innings. * /ash and)or property di!idends from a domestic corporation, or from a Koint stock company, or from an insurance or mutual fund company or from a regional operating head.uarter of multinational company, or the share of a nonresident alien indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or the share of a nonresident alien indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture taxable as a corporation of which he is a member or a co*!enturer, interests, royalties 8in any form;, and prizes 8except
8+; Imposition of ax. * A minimum corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimum ax. * Any excess of the minimum corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimum /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.
APP
"6
i.
(". 291"/02
ec. (( +9-. he term Hresident foreign corporation,I applies to a foreign corporation engaged in trade or business w)in the &hilippines.
Com. !s. 7OAC 4acts5 2upra 6e,d5 In order that a foreign corp. may be regarded as doing business w)in a state, there must be continuity of conduct & intention to establish a continuous business, such as the appointment of a local agent & not one of a temporary character. %9A/, although it does not operate any airplane in the &hils., is a resident foreign corp. It maintains a general sales agent in the country w)c is engaged in selling & issuing tickets, recei!ing fare, etc.* acti!ities in the exercise of the functions normally incident to, & are in progressi!e pursuit of, the purpose & obKect of its organization as an international carrier. ii. Non*resident 8#"922 291"/02 ?)IN 9N7D; (".
ec. (( +I-. he term Hnon*resident foreign corp.I applies to a foreign corporation N9 engaged in trade or business w)in the &hilippines.
APP
"7
4acts5 &&#* &hil. declared di!idends in fa!or of &&# 12A, w)c was subKected to the 4CE tax in +35C. In +355, &E# &hil. sought a refund of -=E in!oking the tax sparing credit pro!ision under 2ec. -L8b; of NI"/. 6e,d' &&# &hils is not entitled to the refund. It is merely a w)holding agent of the go!t. the real party to file the claim should ha!e been &&# 12A. &&# &hil. also failed to meet certain re.ts in order that the di!idends recei!ed by its non*resident for. com. may be subK. to preferential tax rate of +CE. +. It did not show actual amount credited to &&# 12A by 12 go!t against the income tax due on the di!idends recei!ed by it fr. the &hils. -. (ailed to present I " of mother co. when di!idends were recei!ed. 4. (ailed to submit a duly authenticated doc. showing that the 12 go!t credited the &&# 12A the -=E tax deemed paid in the &hils. Wander /9i,i;;ines 4acts5 ?ander &hils is a domestic corp. organized under &hil. laws. It is wholly owned subsidiary of the #laro 2A ltd, a 2wiss /orp. not engaged in trade or business in the &hils. It claimed a preferential tax rate on di!idends remitted to #laro. 1nder 2wiss law, no tax is imposed on di!idends recei!ed by the 2wiss /orp. fr. corp. domiciled in foreign countries. 6e,d5 ?hile it is true that the claims for refund are construed strictly against the claimant, ne!ertheless, the fact that 2witzerland did not impose any tax on the di!idends recei!ed by #laro should be considered as a full satisfaction of the gi!en condition.
<omestic sources w)in sources w)o
4acts5 &&# &hils declared di!idends payable to its parent company & sole stockholder, &&# 12A, fr. w)c the 4CE w)holding tax at source was deducted. &&# &hils claimed a refund based on -L8b; 8+; allowing a reduced rate at +CE if the country of the domicile of the foreign stockholder corporation Hshall allowI such corp. a tax credit for taxes deemed paid in the &hils. 6e,d5 2ec. -L8b;8+; does not re.uire that the 12 must gi!e a deem paid tax credit for the di!idend tax wai!ed by the &hil. to make the
APP
""
+. /itizens a. b. "esident 8N0 from 291"/02 ?I $IN AN< ?I $91 ; Non*resident citizen 8N0 from sources ?I $IN 9N7D;
c. %ranch & 2ubsidiary of a (oreign /orporation for income tax purposes Mar">eni !. Commissioner 4acts5 Jarubeni is a foreign corp. organized under the laws of Rapan. It in!ested in a construction business in the &hils. in A#&&. A#&& remitted the profits to Jarubeni w)holding the +CE profit remittance tax. he /I" ruled that the profit remitted to Jarubeni shld. not be subKect to the +CE profit remittance tax bec. only profits remitted abroad to its head office w)c are effecti!ely connected w) its trade or business in the &hils. are subK. to the tax. Jarubeni is now claiming a refund of the +CE tax paid. 6e,d' Jarubeni is not liable to pay the +CE profit remittance tax bec. the profits remitted to it were not income effecti!ely connected w) its business in Rapan. 8 Note' J/ was liable to pay other kind of tax, as it deri!ed income fr. source w)in the &hils. but not a profit remittance tax;. /. IN<I6I<1A7 AO&AD0"2
&EC. B2. General Principles of #ncome (axation in the Philippines. * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who
ec. ($ +7-. A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, Re!en"e Re0. 1-'#. Re0",ations <o!ernin0 t9e taxation of non-resident citiAens ec. (. "ho are considered as non resident citi<ens. he term Hnon*resident citizenI* means one who establishes to the satisfaction of the /I" the fact of his physical presence abroad w) the definite intention to reside therein & shall include any (ilipino who lea!es the country during the taxable year as '
1. Immi0rant
one who lea!es the &hils. to reside abroad as an immigrant for w)c a foreign !isa as such has been secured. one who lea!es the &hils. to reside abroad for employment on a more or less permanent basis. one who lea!es the &hils. on account of a contract of
APP
"#
c.
ec. ($. 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker,
-. Aliens 8not (ilipino citizens; a. "esident alien 8N0 291"/02 ?I $IN 9N7D; from
ec. ((. 8(; he term Bresident a,ienB means an indi!idual whose residence is within the &hilippines and who is not a citizen thereof.
+E >B= plus -E if excess o!er >B=== >4L= plus 4E of excess o!er >-=,===
b.
Non*resident alien
ec. ((. 8#; he term Bnonresident a,ienB means an indi!idual whose residence is not within the &hilippines and who is not a citizen thereof.
84; /omputation of gross income #ross income less' &ersonal exemptions 8>-=== if single or married but legally separated; total amt. of national income tax actually paid to the national go!t of the foreign country of his residence. [ #"922 A<R12 0< IN/9J0
i.
Con3i !s. IAC 4acts5 &etitioners are employees of &rocter & #amble*&hils. & were assigned to other subsidiaries of & & # in other countries. he .uestion is ' what exchange rate should be used. /ir' pre!ailing free market exchange rate. &ets' par !alue of the peso as per /% circular' 6e,d5 (or the proper enforcement of the NI"/, the 2ec. of (inance is empowered to promulgate all needful rules & regulations to effecti!ely enforce its pro!isions. &ursuant to this authority, "J/ 5*5+ & L+*5+ were issued to pro!ide a uniform rate of exchange for > & &hp for internal tax re!enue purposes. &ets. argue that since there were no remittances & acceptances of their salaries & wages in > into &hils. they are exempt from the co!erage of such circulars. &ets. forge that they are citizens of the &hils. & their income, w)in or w)o & in this case wholly w)o, are subKect to income tax.
ii.
iii.
2pecial Aliens #$
employed by'
APP
<. (iduciary axpayers' 0states & rusts +. <efinition of taxable estate & trust) exception
ec. ((. 8R; he term Bfid"ciar8B means a guardian, trustee, executor, administrator, recei!er, conser!ator or any person acting in any fiduciary capacity for any person. &EC. DH. #mposition of (ax. 8A; Application of ax. * he tax imposed by this itle upon indi!iduals shall apply to the income of estates or of any kind of property held in trust, including' 8+; Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust, 8-; Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct, 84; Income recei!ed by estates of deceased persons during the period of administration or settlement of the estate, and 8L; Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. 8%; 0xception. * he tax imposed by this itle shall not apply to employeeNs trust which forms part of a pension, stock bonus or profit*sharing plan of an employer for the benefit of some or all of his employees 8+; if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and 8-; if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be 8within the taxable year or thereafter; used for, or di!erted to, purposes other than for the exclusi!e benefit of his employees' &ro!ided, hat any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. 8/; /omputation and &ayment. * 8+; In #eneral. * he tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as pro!ided in 2ection B4 8relating to re!ocable trusts; and 2ection BL 8relating to income for the benefit of the grantor;. 8-; /onsolidation of Income of wo or Jore rusts. * ?here, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax pro!ided in this 2ection computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the se!eral trusts.
-.
of
fiduciary
4.
&EC. DH. #mposition of (ax. 8%; 0xception. * he tax imposed by this itle shall not apply to employeeNs trust which forms part of a pension, stock bonus or profit*sharing plan of an employer for the benefit of some or all of his employees 8+; if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and 8-; if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be 8within the taxable year or thereafter; used for, or di!erted to, purposes other than for the exclusi!e benefit of his employees' &ro!ided, hat any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.
Commissioner !. CA 4acts5 /astaneda retired fr. the go!t ser!ice in +3:-. $e recei!ed benefits including #1
APP
ec. ($% +A- 'e:uirements. 0!ery person subKect to any internal re!enue tax shall register once w) the appropriate "e!. <ist. 9fficer' 1. ?ithin += days fr. date of employment, or (. 9n or before the commencement of the business, or $. %efore payment of any tax due, or *. 1pon filing of a return, statement or declaration as re.uired in this /ode. he registration shall contain the taxpayers name, style, place of residence, business, and such other information as may be re.uired by the commissioner in the form prescribed therefor. A person maintaining the head office, branch or facility shall register w) the "<9 ha!ing Kurisdiction o!er the head office, branch or facility. (or purposes of this 2ection, the term faci,it8 may include but not be limited to sales outlets, places of production, warehouses or storage places. ec. ($% +N-. &upplying of (#). Any person re.uired under the authority of this /ode to make, render or file a return, statement or other document shall be supplied with or assigned a IN which shall indicate in such return, statement or doc filed w) the %I" for his proper identification for tax purposes, and w)c shall indicate in certain docs, such as, but not ltd. to, the ff.' 1. (. $. *. .. %. '. ). sugar .uedans, refined sugar release order or similar instruments, domestic bills of lading, docs to be registered w) the "egister of <eeds or Assessors office, registration cert. of transportation e.uipment by land, sea or air, docs to be registered w) the 20/, bldg. construction permits, application for loan w) banks, financial institutions, or other financial intermediaries, application for mayors permit,
L. <eductions allowed
EC. %(. Exemption Allowed to Estates and (rusts . & (or the purpose of the tax pro!ided for in this itle, there shall be allowed an exemption of wenty thousand pesos 8&-=,===; from the income of the estate or trust.
C. "e!ocable trust
EC. %$. 'evocable trusts . * ?here at any time the power to re!est in the grantor title to any part of the corpus of the trust is !ested 8+; in the grantor either alone or in conKunction with any person not ha!ing a substantial ad!erse interest in the disposition of such part of the corpus or the income therefrom, or 8-; in any person not ha!ing a substantial ad!erse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor.
#. application for business license w) the < I, & 1E. such other docs w)c may hereafter be re.uired under rules and regs to be promulgated by the 2ec. of (inance, upon recommendation of the /ommissioner. In cases where a registered taxpayer dies, the administrator or executor shall register the estate of the decedent in accordance w) subsection A hereof & a new IN shall be supplied in accordance w) the pro!ision of this 2ec. In the case of a nonresident decedent, the exec or admin of the estate shall register the estate w) the "<9 where he is registered, Pro)i'e', ,o4e)er, hat in case such exec or admin is not registered, registration of the estate shall be made w) P & the IN supplied by the "<9 ha!ing Kurisdiction o!er his legal residence. 9nly one IN shall be assigned to a taxpayer. Any person who shall secure more than one IN shall be criminally liable x x x. Re!. Memo. Circ",ar %$-#1. #ssuance of the new (#) to taxpayers and its use on documents and receipts. Use of ne3 TIN. 9nly persons re.uired to make, render, or file a return, statement or document w) the
APP
#2
herefore, only the IN shall be reflected on all documents, papers, &)or records that pre!iously re.uired the indication)reflection of any of the aforementioned numbers.
REVIEW5 EXEM/TION
6II.
AN<
A&&7I/A%70
AO
AO*0O0J& /9"&2.
EC. $E. Exemptions from (ax on Corporations. he following organizations shall not be taxed under this itle in respect to income recei!ed by them as such' 8A; 7abor, agricultural or horticultural organization not organized principally for profit, 8%; Jutual sa!ings bank not ha!ing a capital stock represented by shares, and cooperati!e bank without capital stock organized and operated for mutual purposes and without profit, 8/; A beneficiary society, order or association, operating fort he exclusi!e benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees pro!iding for the payment of life, sickness, accident, or other benefits exclusi!ely to the members of such society, order, or association, or nonstock corporation or their dependents, 8<; /emetery company owned and operated exclusi!ely for the benefit of its members, 80; Nonstock corporation or association organized and operated exclusi!ely for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of !eterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person, 8(; %usiness league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any pri!ate stock*holder, or indi!idual, 8#; /i!ic league or organization not organized for profit but operated exclusi!ely for the promotion of social welfare, 8$; A nonstock and nonprofit educational institution, 8I; #o!ernment educational institution, 8R; (armersN or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperati!e telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses, and
2ec. -: 84; Art. 6I . /haritable institutions, churches, & parsonages or con!ents appurtenant thereto, mos.ues, non*profit cemeteries & all lands, buildings & impro!ements actually, directly & exclusi!ely used for religious, charitable or educational purposes shall be exempt form taxation. 2ec. L 84,L; Art. OI6. All re!enues & assets of non*stock non*profit educ. institutions used A,<,0 for educ. purposes shall be exempt fr. taxes & duties. O O O &roprietary educ. institutions including those cooperati!ely owned may be entitled to such exemptions subKect to the limitations pro!ided by lawP 2ubKect to conditions prescribed by law, all grants, endowments, donations or contributions used A,<, 0, for educ, purposes shall be exempt fr. tax. 7IR RUCIN< 8+54 T ::; Non*stock non*profit educ. institutions, they are exempted fr. internal re!enue taxes & customs duties, in appropriate cases imposed by natl. go!t. on all re!enues & assets used A,<,0, for educational purposes. 0/empt *r. ta/ T tuition, matriculation & other similar fees, income fr. bank deposit interests & money market placement incident to school operations, canteen owned & operated by the school as ancillary acti!ity & located w)in the school premises, !alue* added tax on sale of books, school supplies, uniform, & other school related items & sale of misc. school items like car stickers. Not e/empt *r. ta/ T income fr. trade, business or other acti!ity not related to the exercise of its educational purpose or function 8i.e. school canteen operated by a concessionaire; 8+5+ T :: ; A technical)!ocational school accepting Kobs fr. the public in order to fully utilize its machines, income deri!ed is not exempt fr. tax. 8+=C T 3+; he National obacco Admin., an attached agency of the <ept of Agriculture is not exempted fr. paying income tax on gains to be deri!ed fr. the sale of its properties w)c are no longer needed for its operations. 8It is not among those specifically exempted by the ax /ode, 2ec. -B; As such it is liable to the CE creditable w)holding tax based on gross selling price or total amount of consideration or its e.ui!alent paid to the N A as seller, gross selling price being, sale price on the document, the fair market !alue, or zonal !alue w)ce!er is higher.
APP
#3
make an institution one established for profit or gain. +. Jinimum /orporate Income ax 9n <omestic & "esident (oreign /orps. 8J/I ;
ec. ('. $E% *inimum Corporate #ncome (ax on !omestic Corporations. 8+; Imposition of ax. * A minimum corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimum ax. * Any excess of the minimum corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimum /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. 8L; #ross Income <efined. * (or purposes of applying the minimum corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to pro!ide the ser!ices re.uired by the customers and clients including 8A; salaries and employee benefits of personnel, consultants and specialists directly rendering the ser!ice and 8%; cost of facilities directly utilized in pro!iding the ser!ice such as depreciation or rental of e.uipment used and cost of supplies' &ro!ided, howe!er, hat in the case of banks, Ncost of ser!icesN shall include interest expense.
6os;ita, de
4acts' &etr paid under protest electrical & inspection fees allegedly due the /ity by !irtue of an 9rdinance that was passed. he hospital claimed that as a charitable institution, it was exempt fr. the payment of the inspection fees pro!ided in the ordinances. %ut the Jayor refused to issue a building permit if the said fees were not paid. 6e,d5 he lower court erred in not considering the hospital as a charitable institution & thus exempt fr. the payment of the fees under 2ec. C of the said ordinance. he articles of incorporation of the hospital show that it has no capital stock & that no part of the net income inures to the benefit of any indi!idual. A ruling by the ?orkmens /ompensation /ommissioner said it is a charitable institution exempt fr. the scope of the Act. Also, the hospital cashier attested that it maintains free wards at B= beds each & B free beds at the pediatric ward. hus there is sufficient e!idence that the hospital doles out charity & should therefore be exempt. Note5 he fact that the hospital is charging fees for paying beds does not make it lose its character as a charitable institution if the same were used to partly finance the expenses of the free wards maintained by the hospital. he mere charging of medical & hospital fees fr. those who could afford to pay does not
APP
#4
8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the &hilippines, shall be subKect to an income tax e.ui!alent to thirty*fi!e percent 84CE; of the taxable income deri!ed in the preceding taxable year from all sources within the &hilippines' pro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty*four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty*three percent 844E;, and effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty*two percent 84-E;. In the case of corporations adopting the fiscal*year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. heir income and expenses for the fiscal year shall be deemed to ha!e been earned and spent e.ually for each month of the period. he reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months co!ered by the new rates within the fiscal year by the taxable income of the corporation for the period, di!ided by twel!e. &ro!ided, howe!er, hat a resident foreign corporation shall be granted the option to be taxed at fifteen percent 8+CE; on gross income under the same conditions, as pro!ided in 2ection -5 8A;. 8-; Jinimum /orporate Income ax on "esident (oreign /orporations. * A minimum corporate income tax of two percent 8-E; of gross income, as prescribed under 2ection -5 80; of this /ode, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph 8+; of this 2ubsection. 84; International /arrier. * An international carrier doing business in the &hilippines shall pay a tax of two and one*half percent 8- +)-E; on its N#ross &hilippine %illingsN as defined hereunder' 8a; International Air /arrier. * N#ross &hilippine %illingsN refers to the amount of gross re!enue deri!ed from carriage of persons, excess baggage, cargo and mail originating from the &hilippines in a continuous and uninterrupted flight, irrespecti!e of the place of sale or issue and the place of payment of the ticket or passage document' &ro!ided, hat tickets re!alidated, exchanged and)or indorsed to another international airline form part of the #ross &hilippine %illings if the passenger boards a plane in a port or point in the &hilippines' &ro!ided, further, hat for a flight which originates from the &hilippines, but transshipment of passenger takes place at any port outside the &hilippines on another airline, only the ali.uot portion of the cost of the ticket corresponding to the leg flown from the &hilippines to the point of transshipment shall form part of #ross &hilippine %illings. 8b; International 2hipping. * N#ross &hilippine %illingsN means gross re!enue whether for passenger, cargo or mail originating from the &hilippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. 8L; 9ffshore %anking 1nits. * he pro!isions of any law to the contrary notwithstanding, income deri!ed by offshore banking units authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with offshore banking units, including any interest income deri!ed from foreign currency loans granted to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income.
APP
#5
/onditions' beginning on the Lth taxable year immediately ff. the year in w)c such corp. commenced its business operations, when the min income tax is greater than the tax regular tax 2pecific rules'
ec. (.'' +E- +.- RR #-#).
?hen corp. suffers losses on account prolonged labor dispute, 9r because of force maKeure, 9r because of legit business re!erses.
of
e. 0xceptions'
ec. (.(' +E- +)- RR #-#) ec. (.() +A- +(- RR #-#)
b.
c. ?hen applicable
ec. (#. $4% (ax on Corporations &ub>ect to #mproperly Accumulated Earnings (ax. 8+; In #eneral. * he improperly accumulated earnings tax imposed in the preceding 2ection shall apply to e!ery corporation formed or a!ailed for the purpose of a!oiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being di!ided or distributed.
c. /arry forward of excess min tax T for the 4 immediately succeeding taxable years.
ec. (' E. $B% Carry +roward of Excess *inimum (ax. * Any excess of the minimum corporate income tax o!er the normal income tax as computed under
APP
#6
8d; 0xceptions.
&ublicly*held corps., %anks and other intermediaries, and Insurance companies.
nonbank
financial
-. 0xemptions granted under International Agreements and tax treaty purpose to a!oid Rea0an !. Com&5 s";ra Com. !. Ro>ertson 4acts5 he "obertsons are &hil. born 12 citizens working in the 12 bases in 2ubic. hey are claiming exemptions under the "& 12 Jil. %ases Agreement of +3L5 fr. income tax. he %I" ruled that the "obertsons are not entitled to the exemption as they are born in the &hils. 6e,d5 he "obertsons are exempt fr. taxation by !irtue of the treaty. In order to a!ail oneself of the tax exemption under the "& 12 mil. %ases Agreement' he must be a national of the 12 employed in connection w) the const., maintenance, operation or defense of the bases residing in the &hils. by reason of such employment & the income deri!ed is fr. the 12 #o!t. he obli. to fulfill in #( a treaty engagement re.uires that the stipulations be obser!ed in their spirit as well as accdg. to their letter & that what has been promised be performed w)o e!asion or subterfuge.
f. 0!idence to determine reasonable needs of business g. Improperly accumulated income means taxable adKusted by' taxable income
Income exempt fr. tax, Income excluded fr. gross income, Income subKect to final tax, & he amount of net operating loss carry*o!er deducted, And reduced by the sum of' <i!idends actually or constructi!ely paid, and Income tax paid for the taxable year.
(.
("9J
'A E=2B. &ec. C he go!t shall pro!ide the ff. assistance to those caring for & li!ing w) the senior citizen' a; the senior citizen shall be treated as dependents pro!ided in the NI"/ & as such, indi!idual taxVpayers caring for them, be they relati!es or not shall be accorded the pri!ileges granted by the /ode insofar as ha!ing dependents are concerned. b; Ind. or non*go!ernmental institutions establishing homes, residential communities or retirement !illages solely for the senior citizens shall be accorded the ff.' +. realty tax holiday for the first C years starting fr. the first year of operation, -. &riority in the bldg. &) or maintenance of pro!. or mun. roads leading to the aforesaid home, res. com. & retirement !illage. 'ev. 'eg. B-J= KE. A .ualified senior citizen li!ing w) & taken care of by a benefactor whether related to him
APP
#7
+. Indi!idual taxpayers
&EC. C1. #ndividual 'eturn. $A% 'e:uirements. 8+; 0xcept as pro!ided in paragraph 8-; of this 2ubsection, the following indi!iduals are re.uired to file an income tax return' 8a; 0!ery (ilipino citizen residing in the &hilippines, 8b; 0!ery (ilipino citizen residing outside the &hilippines, on his income from sources within the &hilippines, 8c; 0!ery alien residing in the &hilippines, on income deri!ed from sources within the &hilippines, and 8d; 0!ery nonresident alien engaged in trade or business or in the exercise of profession in the &hilippines. 8-; he following indi!iduals shall not be re.uired to file an income tax return, 8a; An indi!idual whose gross income does not exceed his total personal and additional exemptions for dependents under 2ection 4C' &ro!ided, hat a citizen of the &hilippines and any alien indi!idual engaged in business or practice of profession within the &hilippine shall file an income tax return, regardless of the amount of gross income, 8b; An indi!idual with respect to pure compensation income, as defined in 2ection 4- 8A;8+;, deri!ed from sources within the &hilippines, the income tax on which has been correctly withheld under the pro!isions of 2ection 53 of this /ode' &ro!ided, hat an indi!idual deri!ing compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return' &ro!ided, further, hat an indi!idual whose compensation income deri!ed from
APP
#"
a. "e.uired to file b. 0xempt fr. filing return -. (iling of return by husband & wife) consolidated but computing separately
ec. .1. $!% 9usband and "ife. * Jarried indi!iduals, whether citizens, resident or nonresident aliens, who do not deri!e income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the %ureau for purposes of !erification for the taxable year. ec. (.)$ +*E +C- RR (-#)
4. ?hen and where to file regular) special return) annual adKusted return) .uarterly returns
ec. .1. $4% "here to +ile . * 0xcept in cases where the /ommissioner otherwise permits, the return shall be filed with an authorized agent bank, "e!enue <istrict 9fficer, /ollection Agent or duly authorized reasurer of the city or municipality in which such person has his legal residence or principal place of business in the &hilippines, or if there be no legal residence or place of business in the &hilippines, with the 9ffice of the /ommissioner. 8/; ?hen to (ile. * 8+; he return of any indi!idual specified abo!e shall be filed on or before the fifteenth 8+Cth; day of April of each year co!ering income for the preceding taxable year. 8-; Indi!iduals subKect to tax on capital gains, 8a; (rom the sale or exchange of shares of stock not traded through a local stock exchange as prescribed under 2ection -L8c; shall file a return within thirty 84=; days after each transaction and a final consolidated return on or before April +C of each year co!ering all stock transactions of the preceding taxable year, and 8b; (rom the sale or disposition of real property under 2ection -L8<; shall file a return within thirty 84=; days following each sale or other disposition. EC. '*. !eclaration of #ncome (ax for #ndividuals. $A% #n General. * 0xcept as otherwise pro!ided in this 2ection, e!ery indi!idual subKect to income tax under 2ections -L and -C8A; of this itle, who is recei!ing self*employment income, whether it constitutes the sole source of his income or in combination with
'evenue 'egulation E-J2 'e, +iling of :uarterly return 0 payment of income tax :uarterly by self-employed taxpayers ec. 1 2elf*employment income refers to income from the practice of profession or conduct of trade or business carried on as a sole proprietor or by general partnership of which he is a member, taxable under 2NI 2. ec. ( A return of summary declaration of gross income and deductions for each of the first 4 .uarters of the calendar year, and a final or adKustment return shall be filed by the indi!idual. ec. $ his is lieu of the filing of a declaration of estimated income for the current taxable year and the payment of estimated tax under 2ec. B5 NI"/. .,e ta/ ret+rns s,all %e *ile' on or %e*ore( (irst .uarterly return ' Jay +C of the current year 2econd .uarterly return ' August +C of the current year hird .uarterly return ' No!. +C of the current year (inal return ' April +C of the following year
APP
##
L. Income of disabled
minor
children
and
ec. .1. $E% 'eturn of Parent to #nclude #ncome of Children. * he income of unmarried minors deri!ed from properly recei!ed from a li!ing parent shall be included in the return of the parent, except 8+; when the donorNs tax has been paid on such property, or 8-; when the transfer of such property is exempt from donorNs tax. 8(; &ersons 1nder <isability. * If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representati!e or by the guardian or other person charged with the care of his person or property, the principal and his representati!e or guardian assuming the responsibility of making the return and incurring penalties pro!ided for erroneous, false or fraudulent returns.
APP
1$$
&EC. CB. Corporation 'eturns. 8A; "e.uirements. * 0!ery corporation subKect to the tax herein imposed, except foreign corporations not engaged in trade or business in the &hilippines, shall
APP
1$1
-.
&EC. EE. Place and (ime of +iling and Payment of Luarterly Corporate #ncome (ax. 8A;&lace of (iling. *0xcept as the /ommissioner other wise permits, the .uarterly income tax declaration re.uired in 2ection 5C and the final adKustment return re.uired I 2ection 5B shall be filed with the authorized agent banks or "e!enue <istrict 9fficer or /ollection Agent or duly authorized reasurer of the city or municipality ha!ing Kurisdiction o!er the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept. 8%; ime of (iling the Income ax "eturn. * he corporate .uarterly declaration shall be filed within sixty 8B=; days following the close of each of the first three 84; .uarters of the taxable year. he final adKustment return shall be filed on or before the fifteenth 8+C th; day of April, or on or before the fifteenth 8+C th; day of the fourth 8Lth; month following the close of the fiscal year, as the case may be. 8/; ime of &ayment of the Income ax. * he income tax due on the corporate .uarterly returns and the final adKustment income tax returns computed in accordance with 2ections 5C and 5B shall be paid at the time the declaration or return is filed in a manner prescribed by the /ommissioner.
Com. !. TMX
a,es
4acts5 JO filed its .uarterly return in the first .uarter of +3:+ & paid the income tax due thereon. $owe!er, in its Annual Income ax filed for year ended <ec. 4+, +3:+, it declared a net loss. JO is now claiming a refund on the tax it paid during the first .uarter of +3:+. he /I" denied the same on the ground that the claim is now already barred considering that two years ha!e already elapsed between the time of payment, Jay, +C, +3:+ & the filing of the claim, Jarch +L, +3:L. 6e,d' the two year prescripti!e period commenced fr. the date of filing the final annual return on Apr. +C, +3:-, not fr. the filing on Jay +C, +3:+. he audit is to be conducted yearly, it is the final adKusted return where the figures of the gross receipts & 1$2
APP
APP
1$3
&EC. CJ. (ax on Profits Collectible from 3wner or 3ther Persons. - he tax imposed under this itle upon gains, profits, and income not falling under the foregoing and not returned and paid by !irtue of the foregoing or as otherwise pro!ided by law shall be assessed by personal return under rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. he intent and purpose of the itle is that all gains, profits and income of a taxable class, as defined in this itle, shall be charged and assessed with the corresponding tax prescribed by this itle, and said tax shall be paid by the owners of such gains, profits and income, or the proper person ha!ing the receipt, custody, control or disposal of the same. (or purposes of this itle, ownership of such gains, profits and income or liability to pay the tax shall be determined as of the year for which a return is re.uired to be rendered.
+.
EC. .'. "ithholding of (ax at &ource. - $A% "ithholding of +inal (ax on Certain #ncomes . * 2ubKect to rules and regulations the 2ecretary of (inance may promulgate, upon the recommendation of the /ommissioner, re.uiring the filing of income tax return by certain income payees, the tax imposed or prescribed by 2ections -L8%;8+;, -L8%;8-;, -L8/;, -L8<; 8+;, -C8A;8-;, -C8A;84;, -C8%;, -C8/;, -C8<;, -C80;, -58<;8];, -58<;8-;, -58<;84;, -58<;8C;, -: 8A;8L;, -:8A; 8C;, -:8A;85;8a;, -:8A;85;8b;, -:8A;85;8c;, -:8%;8+;, -:8%;8-;, -:8%;84;, -:8%;8L;, -:8%;8C;8a;, -:8%;8C;8b;, -:8%;8C;8c;, 44, and -:- of this /ode on specified items of income shall be withheld by payor*corporation and)or person and paid in the same manner and subKect to the same conditions as pro!ided in 2ection C: of this /ode. ec. (..'.1 RR (E#)
APP
1$4
4.
on
ec. '#. $9% Mear-end Ad>ustment . * 9n or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with 2ection -L8A;. he difference between the tax due from the employee for the entire year and the sum of taxes withheld from Ranuary to No!ember shall either be withheld from his salary in <ecember of the current calendar year or refunded to the employee not later than Ranuary -C of the succeeding year.
L.
C.
EC. '). Definitions . * As used in this /hapter' 8A- Wa0es . * he term NwagesN means all remuneration 8other than fees paid to a public official; for ser!ices performed by an employee for his employer, including the cash !alue of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid'
8-; (or domestic ser!ice in a pri!ate home, or 84; (or casual labor not in the course of the employerNs
trade or business, or
APP
1$5
APP
1$6