Tax Midterm Compiled

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TRANSCRIPTIONS Emery Tiu
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July 27, 2010 Tuesday L. Allowable Deductions
All Income Less: Exclusions from Gross Income / Exemption _________________________________________ Gross Income Less: Deductions _________________________________________ Taxable Income
Distinguish deduction from exemption and deduction from exclusion. Or are they the same? o First off, we have to know that all wealth which flows to our hands to know whether its an income or a capital. If its an income, you list down all your income but you exclude those which are listed as exclusions from gross income or any item which the law exempts from taxation to arrive at gross income because this is income. In order to arrive at a taxable income in which the income tax rate will be computed, we have to know the deductions allowed. She said that the difference between a exemption and deductions is that deductions are those items allowed by law to reduce the gross income in order to arrive at a taxable income. Exclusions are these items are already, off-hand, already identified by law as an exempt income whether it be included in the list of exclusions of gross income under Section 32b or in separate special laws. Diba what did we say about exemptions, these are immunities from future taxes to which you could have been liable had there been no law granting its exclusion. Now, if you identified all income, you exclude all the exclusions, this is the one which we were asked to memorize, the exclusions from gross income are those exemptions granted so that you will know which are covered by gross income. But not all gross income are subject because there are deductions allowed. Is deduction an income that is not taxable? The distinction there really is when you say exemption, its an income that is not taxable. There is an inflow towards you, but there is a law saying that that income which flew into your hands is not taxable. But deduction, although it reduces the income, in order to arrive at a taxable income, is not an income. Deduction is an expense. Its an outflow of your wealth. Thats why you are allowed to deduct expenses. When you engage in a business, you have income, you have proceeds but you are not entirely taxable on the proceeds, you are allowed to deduct expenses which you have incurred.
In the same way, that deduction is not the same as exclusion. Exclusions are just like exemptions, they are income or inflows to the tax payer. But because of the provision of the tax code, it is not subject to income see. Now, you will see that in order to arrive at a taxable income, you always deduct exclusions and exemptions. It is the act of deduction but it is not an expense, its an income. Now there are principles that you need to know to guide you whether you can deduct a certain item from your gross income. What are these? o The basic principles that would guide you in determining whether an item is allowed to be deducted is: 1. The taxpayer or you seeking for deduction must be able to pin point some specific provision of the law authorizing you to deduct and 2. Prove that you are entitled to the deduction authorized because you satisfy all the conditions required. 3. All deductions are always strictly construed against the tax payer. That is the 3 rd principle. 4. An additional requirement for the deductibility of an expense is not when a tax is required to be withheld by you, as the payer of the expense, you should have withheld the tax, otherwise, you cannot deduct the expense. Let me put it in simple terms. If you have a business and you rent a place, a boutique perhaps in ayala at Php100k per month, per space. The law requires you
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to withhold 5% oif your rental payments and remit it to the government. So you will only pay or give ayala Php 100k less 5% or less Php 5000. Where does the Php5000 go? To the government. Ayala will only receive 95%. If you failed to deduct even if you have given Ayala the full Php100k, you forgot to deduct the 5%, you will not be allowed to deduct entirely the Php100k rent expense. Thats what will happen if you wont satisfy the requirement of the deductibility of taxes on expenses. What are the deductions that may be allowed or what are the different kinds of deductions that may be allowed on the different kinds of tax payers? a. Personal and Additional Deductions/Exemptions Section 35 b. Itemized Deductions Section 34A K and 34M c. Optional Standard Deduction of 40% of the Gross income is the deduction which an individual other than a non-resident alien, or a corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be, on a corporation, in an amount not exceeding 40% of its gross income, in lieu of taking itemized deductions. Itemized deductions, these are expenses incurred in line with your business or profession. Optional standard deductions, which is in view of itemized deductions and number 3, that you can deduct in order to arrive at your taxable income is the personal and additional deductions. o o o I am not saying that for you as a taxpayer, everything will be applicable. But these are (shes saying about number 4, then does not continue here.)
SM
All Income Less: Exclusions from Gross Income / Exemption / Personal and Additional Exemptio _________________________________________ Gross Income
1. expense in lieu 2.
4.
Any of the deductions claimed by a deductions tax payer will fall under Standard any of these categories. It may be an Less: Deductions (itemized / Optional Deduction / Premiums onitemized deduction or expenses or in lieu of that an optional standard deduction at a fixed rate of 40% of your gross HIH Insurance income. Or you can claim, if you are an individual tax payer, you can also claim the personal and _________________________________________ additional exemptions Taxable Income in lieu of family and living expenses. o What are the personal and additional exemptions as mentioned before? Php 50,000 for Single, head of the family or married, the personal exemption. Php 25,000 additional exemption for every dependent child that you have, legitimate, illegitimate, acknowledged or legally adopted. So if you compute your income tax due, you may be able to claim anyone of these, but not all of these. Because optional standard deduction is only in lieu of itemized. We will discuss this fully in outline number 3 and 4. After we have the deductible expenses, you can now have your taxable income multiplied by your tax rate.
L. Non-deductible Items Would all your expenses incurred be deductible? If you engage in business and you had incurred expenses of Php1M but your sales proceeds is only Php500,000. Are you guaranteed that you can claim your Php1M expenses? There are non-deductible items identified by the Tax Code.
Sale Php 500,000.00 Expenses (Php 1,000,000.00)
2. 50,000
25,000 /child
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What are the non-deductible items? Not all expenses that you paid for or have incurred may be allowed as deduction in the computation of your taxable income. Let us identify what are the items that you have spent for but are totally non-deductible items. 1. Personal living or family expenses 2. Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate; 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; 4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy 5. Losses from sales or exchanges of property directly or indirectly a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants) b) Except in case of distributions in liquidation, between an individual and a corporation more than 50% in value of the outstanding stock of which is owned directly, by or for such an individual c) Except in case of distributions in liquidation, between 2 corporations more than 50% in value of the outstanding stock of each of which is owned directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company d) Between the grantor and a fiduciary of any trust e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust f) Between a fiduciary of trust and a beneficiary of such trust
(1) Personal living or family expenses o Why non-deductible? 1. Its not related to the business. It is personal and for the family. 2. The personal exemption of Php 50,000 for single and married individual and additional exemption for every child already child already approximates your personal and family living expenses for the entire year. That is why personal and family living expenses are non-deductible items.
(2) Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate; o o This simply means to say that when you spend for something as a property or estate for the business, it is not deductible in the year that you have spent for it or paid for it. Give me an example. Amount paid for new building or permanent improvements are nondeductible items period. Example, if you open up a business and you purchased a new building used to house your operations, is that expense not deductible from your income? It is not deductible in the year you spent for it.
If you spent Php100M in purchasing a building, you are not allowed to deduct the full Php100M in the year of purchase, or in the year of construction but it will deductible as an allowance over the years of its estimated time. So if a building is constructed costing PHp100M and it is expected to have a life, useful for another 100 years from the time that it is finished from construction, then it is just but proper and reasonable to spread out the value of Php100M over the useful years of 100. So it is deductible based on depreciating effect or the value of depreciation for years. So it will diminish its value, Php1M every year. Because after every year, its estimated life reduces by 1 year so the effect is to deduct it not 1 time but over the estimated life of that property or asset or even if its not a new building, so long as its a major improvement, a betterment, which increases the life of an existing asset, it will not be deductible outright but only deductible over its life.
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It is reasonable because if you deduct in the first year that you bought it, you deduct Php100M. And your sales is only PHp2M, you lose Php98M. Whereas, if you spread out the expense over 100 years, you will benefit each and every Php1M every year as an expense. If we will come across an exemption wherein non-stock, non-profit education institutions like San Carlos can actually deduct in the 1st year of purchasing building the entire Php1M. Why does the BIR allow this? Because schools are not taxable. Even if we deduct the entire Php100M of purchasing it, nothing will ever change. Even if we deduct it the next year. Schools are not, nonstock, non-profit educational institutions, are not taxable. So the effect is different. IN normal businesses and abnormal businesses.
(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made o No. 3 is it the same as No. 2? If you have a motor vehicle or delivery van in your business to deliver your items and you change the headlight or you change the mirror, can you deduct the expense outright or should you spread out the value of the repair? You can deduct outright. No. 3 are major repairs which extends the life of an existing asset which requires an apportionment of the expenses over the number of years that the assets life has been extended or the propertys life has been extended.
(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy o The company took out a life insurance policy over your life as its most important employee. Every year the company pays premiums amounting to PHp100,000 over the life insurance policy. Is the Php100,000 premium a deductible business expense? You are the president of the company. Lets have an illustration: Company A gets a life insurance policy over your life, Php100,000 premiums over a year. The Php100,000 premium is used to satisfy the requirement of the life insurance taken by the company over your life and it is paid to an insurance company, Company B. This is an expense of the company. The assets of the company is decreased by Php100,000 every year just to pay the premiums of your life insurance policy. Can we claim this as an expense deductible from income of Company A who spent for it?
Premium Php 100,000 Php 100,000
Beneficiary Company A Estate of U as employee
Deductible? X
If a company takes out an insurance policy over the life of its employees, take note of who the beneficiary is. Its only here that the one spending for the premium is the company itself, so its losing money because its paying for something. Can this be a deductible expense? So it can be a tax taxes, so the tax liability of Company A will be reduced, beneficiary is. Now if the company made itself as deductible because the law says it is not deductible if indirectly the beneficiary under the policy. o benefit in the payment of you have to know who the the beneficiary, it is not the taxpayer is directly or
Who is the taxpayer referred to in this section? Company A. The tax payer who took the life insurance policy is the beneficiary itself, not deductible.
The principle behind that because it is merely transferring money from Company A to the insurance company and go back to Company A when the employee dies. It is merely transfer of money but will revert back to the company upon the happening of the event insured. But if the beneficiary is another person other than the tax payer himself, it is deductible, because the proceeds will not revert to the coffers of the company.
But take note, the designation of the company may be direct designation or indirect. If its traceable then it is a indirect designation in favor of the company, still it is not taxable.
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5. Losses from sales or exchanges of property directly or indirectly First, we have to know whether losses are deductible expenses? Yes. Example, if you engage in the buy and sell of motor vehicles. If you have sold 10 motor vehicles in a year, 7 were sold at a profit, 3 were sold at a loss, the losses incurred by the 3 transactions can be offsetted against the gains out from the 7 transactions. So generally losses are deductible items. If the 7 motor vehicles were sold for Php7M, your capital was only Php4M, Php3M is taxable income. If the 3 other vehicles were sold for were sold for Php1M, and puhunan is Php3M, you lost Php2M, since you own this 1 business, you will only be liable for tax for Php 1M, losses are deductible expenses so long as it is incurred in relation to your business.
Example, if you are in the manufacture of milk or production of milk, along the way some will evaporate, losses are incurred. From the cows milk, if it directly spills. But losses are deductible except for losses found in Section 36, and it says losses from sales or exchanges of property between members of a family.
a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants), Example: This motor vehicle, you sold it to your sister. Puhunan is Php3M, but the 7 you sold it to your classmates, if you sold this to your sister, is the Php2M, deductible as an expense? No. Why are losses or exchanges of sales between you and your sister not deductible losses? Because transactions between family members are for the most part not entered into an honest transaction unlike entering into a transaction with a 3 rd person or 3rd party, you may sell this one for Php10 to someone else but you can actually dispose it to your sister for Php1M. So losses are not real in cases between family members. And even if it is real losses but because you entered it with a family member, it is not deductible.
b) Except in case of distributions in liquidation, between an individual and a corporation more than 50% in value of the outstanding stock of which is owned directly, by or for such an individual
Company A
Loss: Php 2M Deductible
Company A sold a parcel of land to you, selling price is Php1M, cost to the company is Php 3M, the company lost Php2M from the transaction entered with you. Is the transaction PHp2M deductible from the income of Company A? Yes. Because in this case there is no mention if you are a stockholder of the company and for what share.
60% U 10% V
10% W 10% X 10% Y
Company A
Loss: Php 2M Not Deductible
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Company A is owned by a 5 stockholders (Corporation must be atleast 5 stockholders). You are the owner of 60% of Company A. V, W, X, Y are owners of 10% of the shares. If you are an owner of Company A by 60%, can the company deduct the Php2M from its income? No. Why? Because if a company wishes to avoid paying taxes, it can actually enter into simulated losses or transactions by selling properties to any of its controlling stockholders. But in order for it to be a non-deductible sale class, the individual with whom the company entered into with a transaction must be a controlling stock holder, meaning he owns more than half or more than 50% of the business itself. If Company A sold the land for Php1M costing PHp3M to any of V, W, X and Y, it is still deductible loss. Why? Because these stockholders are not controlling stockholders. When the transaction that we are looking into is between a company and an individual, the requirement is that the individual must be a direct stockholder.
c) Except in case of distributions in liquidation, between 2 corporations more than 50% in value of the outstanding stock of each of which is owned directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company How about corporation to corporation? Give me an illustration for number 3. What does no. 3 prohibit? Transactions between corporations.
Company A
Loss: Php 2M Deductible
Company B
Corporation A sold a land for Php1M costing Php3M, suffering a loss of Php2M. To whom was it sold? Corporation B. Is the loss of Php2M deductible? As a rule, if you have no other fact, these are the only facts given the general rule is losses incurred are deductible losses.
But if we dig into the ownership, say for example:

60% U 10% V 10% W 10% X 10% Y 60% U 10% V 10% W 10% X 10% Y
Company A
Land GSP Cost Loss
Company B
Php 1,000,000 3,000,000 Php 2,000,000
***NOT DEDUCTIBLE
U, V, W, X and Y, and Company B is also owned by U, V, W, X and Y, and the shares are given as shown, still deductible? No. Because the ownership is more than 50%. The law provides that if for example that this transaction is entered into between 2 corporations whereby ownership is held directly or indirectly by more than 50% for the same individual is not deductible loss.
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So Company A is owned by more than 50% by U, Company B is owned more than 60% by the same individual, so the controlling interest in both corporations is U, the same individual, therefore, it is covered by non-deductible lsoses. Let me change the facts:
60% U 10% V 10% W 10% X 10% Y 10% U 10% V 10% W 10% X 60% Y
Company A
Land GSP Cost Loss ***DEDUCTIBLE
Company B
Php 1,000,000 3,000,000 Php 2,000,000
Deductible or not? U owns 60%, Y owns 60% on the other company. Is the loss deductible? Yes. In this case, it is not the same individual who is owning both corporations or controlling both corporations, the loss is deductible. Let me change again the facts:
60% U 10% V 10% W 10% X 10% Y 10% U 10% V 10% W 10% X 10% Y
Company A
Land GSP Cost Loss
Company B
Php 1,000,000 3,000,000 Php 2,000,000
50% Company Z 99.99% owned by U
***NON-DEDUCTIBLE
In this case, if I put in there are 5 owners, individual owners and the 6 th owner is Z Corporation, but Z Corporation is owned 100% by U, deductible or not? Okay, lets go to your first corporation, we retained ownership 60% controlled by U, Company B, the buyer of the land is owned by 10% by U, V, W, X, Y. The remaining 50% is owned by a corporation, Corporation Z. If a corporation owns a corporation, there is ultimately an individual owning it. You have to key in the ownership of all levels of the corporation. It so happened that Z corporation is 99.99% owned by U. Is the loss deductible or not? Is this covered by transactions which are not arms length? Arms length because the law says owned by individual directly or indirectly. This is a case of 2 corporations entering into a sale transaction of a real property but both corporations are owned by the same individual although indirectly. The other one indirectly. More than 50% is held by the same individual directly or indirectly. You say U owns this majority; its more than 50%. Is U owning or controlling this corporation? Yes, indirectly. How indirectly? U owns 10%. U owns the entire 50% through another corporation, therefore, Us ownership is: 10% + 50% = 60%. More than 50% of both corporations is owned by the same individual. Therefore, we can say that the transaction is not entered into an arms length.
Let me change the facts again:
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60% U
10% V
10% W 10% X 10% Y
10% U
10% V
10% W 10% X 10% Y
Company A
Land GSP Cost Loss ***DEDUCTIBLE
Company B
Php 1,000,000 3,000,000 Php 2,000,000
50% Company Z 60% owned by U 40% owned by A Therefore, Us share is: 60% of the 50% share= 30% Plus: share in Co. B = 10% 40%
Z Corporation owns 50% of Company is owned by U and A. 60% for U, 40% for A. IS the loss deductible? Does U control corporation B? No. But then U has more than 60% of Company Z? Diba this is a corporation owned by a corporation. But you know that this corporation is owned by other stockholders. So how much of the share does U own? 60% of 50% is 30% plus 10%, U owns only 40%. The ownership of U here is more than 50% direct control over Z Corporation. But in Company B, U only directly control Company B by 10%. U owns 10% directly and indirectly by 30% of Company B through owning B by 60%. 60% of 50% if 30%. So the 30% of Company B is owned by U through this corporation and another 10% that is a total of 40% Does it satisfy the requirement for non-deductibility? NO, therefore the loss is deductible. This is what you call a grandfather rule in determining ownership of the corporation. It is grandfather in a sense because you with start with Company A here and its owned by another Company C, owned by another Company C, to the extent that you determine the ownership, the vast ownership of the individual, that is the grandfather rule in Corporation Code.
If its family-owned, there are still distribution of interest and control. You still use the number of ownership that he has in his corporation. That is based on SEC because there is an annual report that needs to be submitted to the SEC, stating who the owners are and what percentages of the stocks they are holding.
o o o
d) Between the grantor and a fiduciary of any trust e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust f) Between a fiduciary of trust and a beneficiary of such trust The other non-deductible losses from sales or exchanges of property, the reason why it is non-deductible because it refers to one and the same, it simply a temporary transfer. The grantor of the trust and the fiduciary of the trust, these are second transfers so it refers to one and the same.
N. General Principles of Income Taxation in the Philippines Section 23. This is a very important provision for income tax. What are the general principles of income taxation? 1. A resident citizen is taxable on all income derived from sources within and without the Philippines. 2. A non-resident citizen is taxable only on income derived from sources within the Philippines. Sec. 22(E) enumerates who are non-resident citizens
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3. An overseas contract worker is taxable only on income from sources within the Philippines; a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker. 4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines 6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Individuals are classified into resident citizens, taxable for income within and without. Second classification, is non-resident citizen taxable only for income within. Third classification, they are taxable only for income derived within. For non-resident aliens engaged in trade or business, are taxable only for income within the Philippines. How about overseas contract workers? Taxable for income derived within the Philippines. o Why are they not taxable within and without? When they are non-residents for the year, they are only taxable within.
All of those taxpayers are taxable only from income within EXCEPT for 2 types which are taxable on their worldwide income. What are the 2 taxpayers which are taxable from income within and income without? Only resident citizens and domestic corporations are taxable on income within and income without, while all the rest are taxable only if they earn income having situs within the Philippines. So bottom line is determining the situs of the income important for all types of taxpayers? What is the purpose why do we have to determine the situs of the income? o Purpose: so that we will know if we have taxing jurisdiction over that income. Determining the situs of income is important because we would want to know if the income of those taxpayers that we have just mentioned are income within, and definitely, taxable in the Philippines. But not all taxpayers would the situs of income really matter. What type of taxpayer is situs irrelevant? Resident citizen and domestic corporation because they are taxable on income within and without. So, situs of income is not important in so far as domestic corporations and resident citizens are concerned, they are taxable wherever their income has situs. Therefore, if you have a question before you that says, the individual taxpayer is a resident citizen or a domestic corporation it is actually taxable on income within and without. So, situs is irrelevant unless we make it more complicated in applying exemptions in tax treaties. But as a rule, situs is only important in so far as determining whether the income of non-resident citizens, aliens and foreign corporations are concerned because these types of taxpayers are taxable on income within the Philippines.
Is an immigrant a resident citizen? What is his classification as a taxpayer, resident citizen or nonresident citizen? (not answered by Atty. Tiu) What are the general principles of income taxation in the Philippines? A resident citizen is taxable on all income derived from sources within and without the Philippines A non-resident citizen is taxable only on income derived from sources within the Philippines. An overseas contract worker is taxable only on income from sources within the Philippines; a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker. An alien individual whether a resident or not of the Philippines is taxable only on income derived from sources within the Philippines
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A domestic corporation is taxable on all income derived from sources within and without the Philippines A foreign corporation whether engaged or not in trade or business in the Philippines is taxable only on income derived from sources within the Philippines.
Individual Income Taxation Taxable Individuals A. Resident Citizen Who is a resident citizen? What is the taxability of a resident citizen? Resident citizens are citizens of the Philippines residing therein. They are subject to the schedular rates of 5%-32% tax on income derived from sources within and without the Philippines. Prime example: all of us are citizens here unless you claim otherwise.
B. Non-resident Citizen Who is a non-resident citizen? Assuming you are working and your company sent you off abroad under an assignment contract for 2 years. He left today, will he be considered a non-resident citizen for tax purposes? He is still a citizen, yes. His employer is a domestic corporation. He was sent to Korea for 2 years, he left this morning. Is he a resident citizen or non-resident citizen? When is a citizen considered a non-resident citizen? (Ms. Tiu said she wants the enumeration found in Sec. 22 of the Tax Code, she said that we have to memorize this Sec. re who are non-resident citizen) Sec. 22(E), the term nonresident citizen means: o (1) A citizen of the Phils. who establishes to the satisfaction of the Commissioner the fact of is physical presence abroad with a definite intention to reside therein (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. Illustration (1st scenario):
5 months and 4 days Less than 183 days WITHOUT SITUS ABROAD WITHOUT SITUS
o o o
o
o
WITHIN SITUS
WITHOUT SITUS
WITHIN SITUS
January 1, 2010
July 27, 2010
December 31, 2010
December 31, 2011
July 26, 2012
December 2012
HOMECOMING
2010 RESIDENT CITIZEN TAXABLE FOR BOTH
NON-RESIDENT EXEMPT
CONSIDERED NONRESIDENT
He does not qualify under No. 1 and No. 2.
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Let us go to No. 3. A citizen of the Phils. who works and derives income from abroad and whose employment requires him to be physically present abroad most of the time during the taxable year. Most of the time is interpreted to mean 183 days abroad or more physically present. Did he go abroad for employment? Yes but not on a permanent basis because his contract is fixed for 2 years, January 1, 2010. He left this morning, July 27, 2010. By December 31, 2010, he spent 5 months and 4 days, which is definitely less than 183 days. He is not abroad most of the time, so for 2010, he is considered a resident citizen. For December 31, 2011, he is abroad. He is a non-resident citizen. Now, this is established that he is a resident citizen for the entire 2010. Why? He was not abroad most of the time during year. So, his salary from January to July has situs within. His salary from July to December has situs without because he is abroad. Is this taxable for 2010? Yes, both income is taxable. As a resident citizen, regardless where your income is earned whether it has situs within or without, definitely, it is taxable in the Philippines. Now for 2011, he is a non-resident citizen because his employment requires him to be physically present most of the time during the year. Is this an income within or without? It is income without, hence, not taxable in the Philippines. A non-resident citizen is only taxable for income within, so, in this case, this is not taxable. How about 2012? He came back and continued employment with his local company, December 31, 2012. Is this income within or without? Is this taxable? He is considered non-resident, under category no. 4.
2nd scenario:
5 months and 4 days Less than 183 days WITHOUT SITUS
WITHIN SITUS
ABROAD WITHOUT SITUS
WITHOUT SITUS
WITHIN SITUS
January 1, 2010
July 27, 2010
December 31, 2010
December 31, 2011
June 26, 2012
December 2012
2010 RESIDENT CITIZEN TAXABLE FOR BOTH
NON-RESIDENT EXEMPT
LESS THAN 183 HOMECOMING days here CONSIDERED NONRESIDENT STILL
He is still considered non-resident citizen (from Dec. 31, 2011 to June 26, 2012). As a returning non-resident citizen, from the start of the year to the date of arrival, any income earned without or outside the Philippines is not taxable. Because for this period, he is considered as a non-resident citizen. This is where he is a considered as a hybrid non-resident citizen, half and half. You cannot consider him as entirely as non-resident nor as resident citizen for the entire year but the requirement there to apply the rules of hybrid personality, he must have returned as a non-resident the year before. If he is a resident citizen the year before. So, lets cut this short, wala ni nga year, what is the year immediately before this one, the rule will not apply because he must be a returning non-resident citizen. Diba the first type of non-resident is easymust be able to establish the fact of his physical presence abroad to the Commissioner of Internal Revenue and he has a definite intention to reside therein. No. 2 is also easyhe must be an immigrant or permanently employed abroad. No. 3 is much more complicated because his employment abroad requires him to be physically present most of the time during the year which requires 183 days or more.
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The 4th only applies to a citizen who was previously, the year before, is considered as non-resident whether 1st, 2nd, or 3rd category. Any of those 1st 3 categories nonresident citizen comes back to the Philippines to reside permanently here, then, he will have a portion of the year as non-resident citizen and, after the date of arrival, resident citizen. Any income during that time from without is already taxable. Remember the rules, this is important that he be considered non-resident here because all his income from abroad during this time will always be considered as non-taxable in the Philippines because his classification is a returning non-resident. But, from the day of arrival until Dec. 31, he is already classified as resident citizen, and if he has income in any day or any month during this period, he goes abroad to perform, to sing, or whatever, even if it is income without but he is already classified as resident citizen, it means to say that everything here is taxable. But on the other hand, only those income within is taxable. As a returning non-resident the year before, even if he returns January 3 here, not most of the time during the year, his income from January 1 to January 3 abroad is non-resident citizen, income without, therefore exempt. (Atty Tiu was asked what returning is?) His coming back, definitely, to reside in the Philippines. But for him to avail for the 4 th category of non-resident citizen taxfree, he must have been a non-resident the previous year or years. Say, if you have a relative who stayed abroad for many years, comes back to the Philippines as balikbayan and stayed here for 6 months, went back to the US for 1 month then came back again for the rest year. If you take the entire year he stayed here for more than 183 days, is he resident citizen because he stayed here most of the time? NO because he is not returning back to reside here, only on a vacation. So, it does not take his status as a non-resident for staying here most of the time. An immigrant is an immigrant, unless he decides to come back, he will not be considered as a resident citizen. (Q: asked what if the employee is asked to go abroad near the end of the taxable year) If you are required to go abroad on a 2 year contract, make sure that you leave the Philippines before June 30, so that you will be considered as non-resident citizen so that you income abroad will not be taxable. (Q: what is our measure of most of the time?) 183 days or more in a given year whether continuous, in succession, or in the aggregate. You add out the days. Basta, you have a definite purpose of going there but not for permanent stay. (Q: in the 1st category, when is the reckoning point?) for category 1 and 2, the day that you left. How about a seaman who is working in a vessel? Would all of them be considered as non-resident citizen? A seaman is not categorized as non-resident (1) although he is physically present abroad, he does not intend to reside in the vessel for his entire life; (2) he is not an immigrant and his employment is not permanent, its per contract basis. So, he is under category no. 3. In order that they be classified non-resident citizen under category no. 3, 2 requirements must be complied with, (1) they must stay abroad most of the time abroad during the year, meaning 183 days or more; and (2) the vessel within which they are working must be engaged exclusively in international trade. Otherwise, they do not qualify as non-resident citizen and their income, even if they earn it working in the vessel, it will be considered as taxable within and without as resident citizens. Why again? They dont qualify as immigrants or permanent employees abroad. All overseas contract workers including seaman, its contractual. Its not a permanent employment.
C. Resident Alien Who is a resident alien? A resident alien is an individual whose residence is here in the Philippines but is not a citizen of the Philippines.
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When can you be considered a resident? If you marry a Filipina? You will be considered a resident if you are not considered as a mere transient or if he lives in the Philippines and has no definite intention of his stay here. There is no number of days as a benchmark, or number of months, number of years to say whether an alien here in the Philippines is definitely considered as resident or not. Unlike in non-resident citizen, theres a number of days. Resident(?mao ni iyang giingon pero murag non-resident alien iyang pasabot. Check lang ) alien engaged in trade or not engaged in trade, you have 183 day rule but for an alien to be considered as resident, there is no exact measure or length of stay that he has to establish in the Philippines. So long as he is not a mere visitor, transient, or sojourner in the Philippines and so long as he has definite intention to reside here or his visit requires an extended stay in order to establish or satisfy a purpose for which he is coming to the Philippines, making the Philippines as a temporary home country, he will be considered as a resident alien. In some part of the discussions in the book, you will see there one year but that one year has not been established by any law. It is just a discussion of an opinion or ruling by a SC decision but in more cases than not, the SC does not really give a number of years for length of stay. It just says, so long as he has a definite purpose of staying in the Philippines, and making the Philippines as his home country, then, he can be considered a resident alien. In one case, it says that the length of stay is indicative of the intention of an alien. If he had stayed here in the Phils. for more than a year, he may already be considered as a resident alien.
D. Non-resident alien What about a non-resident alien? Definitely not a citizen, not even a resident alien. But for some purpose, he happens to be in the Philippines earning some form of money or income. Who is a nonresident alien? There are two classifications of non-resident alien: o o (1) one that is engaged in trade or business (2) one that is not engaged in trade of business
If there is an alien or foreigner, say, you went to Boracay alone and youve met a foreigner. During your conversation, you learn that he has been in Boracay for half of the year. He came to Boracay, January 1 and you met him yesterday (July 26; stayed around 204 days already in the Philippines, almost 7 months), can you consider him a non-resident alien not engaged in trade or business. So, his stay is more than half of the year. He did nothing in Boracay except surf and dive. Is he of the 1 st type or the 2nd type? During almost those 7 months, he earned a minimum amount in teaching how to scuba dive. Those non-resident aliens who stayed in the Philippines continuously or in the aggregate for more than 180 days regardless of what they are doing in the Philippines, they are considered as non-resident aliens engaged in trade or business. The number of days is used to classify whether the non-resident alien is engaged in trade or business or not. The reason why we have to qualify or distinguish them, although both of them have really no definite purpose in staying in the Philippines if you have a definite purpose of staying, you may already be categorized as resident alien, for those having no definite intention or purpose of staying here, you use the 180 day rule. And using the 180 day rule is for purposes of what? Why do we have to distinguish not engage or engage when both of them have are non-resident aliens with no intention for staying here? Why is there a need? o Both of them are taxable only on income within. Insofar as their income are earning, there is no difference. If Mr. A who stayed here 180 days and Mr. B who stayed here 179 days, they both earn the same income, they are both taxable on income earned within the Philippines. Why do we have distinguish them? They are subject to different tax rates. A resident citizen and a non-resident citizen, a resident alien and a nonresident alien engaged in trade or business, otherwise those staying more than 180 days in a given year, aggregate or continuous, would be taxed at the same rate of 5%-32%. Only non-resident aliens who have stayed 180 days or less will be taxed at a different rate of 25% and without the benefit of deductions because they are taxed on all incomes.
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So in our example before whenever a performing artist does a concert here in the Philippines for 1 night, the entire income that they earn is taxed at a fixed rate of 25% without the benefit of any deductions not even his plane ticket cost, but it is shouldered by the producer.
E.
Special Employees Who are special employees? Special employees are those employees employed in special corporations and special corporations are the following: o o o o (1) Regional Area Headquarters (RAHQ) of multinational corporations, defined in Sec. 22 (2) Regional Operating Headquarters (ROHQ) of Multinational Corporations, defined in Sec. 22 (3) Offshore banking units (4) Petroleum service contractors
What is the difference between the two, (1) and (2)? o RAHQ is established for the purpose of overseeing. They do not earn income. They do not operate to earn income while ROHQ may be performing services and activities in favor of the other corporations related to the multinational companies located within the Asia-Pacific region. For example, Chevron is related to Caltex. Chevron established a ROHQ wherein employees of that headquarters will perform services (accounting, auditing, financing, administration services) for and in behalf of all other Caltex located within the AsiaPacific region. Its operational and it is earning income but would all employees of Chevron be considered as special employees? What makes them special? Why are they called special employees? No, not all would be considered special employees. They are special because they are subject to a preferential tax rate of 15% on their salaries, honorarium, wages, emolument, remunerations and other similar income.
Can a Filipino be a special employee? The general rule is only alien employees occupying managerial, supervisory, technical positions can be special employees. Only in cases where no alien individual can fill up that requirement would a Filipino individual be allowed to become a special employee subject to the preferential, special tax rate of only 15%. That is so special because, normally, Filipino individuals or alien individuals employed in corporations not among those special corporations will be taxed at a rate of 5%-32%, and you know that managerial positions already demand a higher salary where you would be covered a bracket of 32%. Indeed, 15% is special. We have RAHQ, ROHQ of multinational corporations, offshore banking units in the Philippines and petroleum service contractors. These are the only corporations who can employ special employees.
If you are a special employee, you are a Filipino, and you have and income on the side, will all your income from employment and other income, say for example, from business be subject to the preferential rate of 15%? No. If you are a Filipino individual, the rule is special employees would only be allowed preferential treatment of salaries, honorarium, wages, emolument, remunerations, those entirely related to the employment of the special corporation. If he has earned income as an employee of a special corporation occupying managerial and technical position, then, any income which he earned from selling sandwiches, coffee etc. during break time will not be covered by the 15%, it will be taxed 5%-32%. But what is the special rule for Filipinos occupying technical/ managerial positions in these special corporations? Do they have the option to be taxed at 5%-32% instead of 15%?
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A circular (Revenue Memorandum 41-2009) has been issued by the BIR, if in case we talk about of Filipinos employed in these special corporations availing of the special rate of 15%, their positions must be managerial and highly technical position, not OR, in order for them to be entitle to 15% or at a regular rates of 5%-32%. While normally we employ expatriate employees, these are alien individuals employed in managerial confidential or highly technical positions.
o F.
Estates and Trusts Is an estate an individual? Why is it included in taxable individuals? When a natural person dies, how many taxable persons do we have? Diba, persons, it can be juridical or natural? At the point of death, if you are the BIR, how many taxable persons do you see? There are twothe dead person or his income during his lifetime, during the calendar year. If a person dies today, he is supposed to have income January 1 until yesterday. From today, he will have estate as a taxable individual. You have two separate taxable persons at the time of death.
Income-producing properties- subject to individual income tax (5%-32%) based on the net income; applies to judicial settlements only. If extrajudicial settlement, taxed as an unregistered partnership. Estate Estate tax- a transfer tax is imposed on the gross value of the estate at the time of death; does not consider income earned from the properties thereafter There are deductions allowed including exemptions. Mr. X died Sept. 15, 2012. In 2012, there are two taxpayers. 1. Jan 1- Sept 15- income tax at 5-32%. BPE-50K AE-25K each 2. Sept 15- Dec 31- estate INCOME tax at 5-32%. BPE- 20K AE- 0 Income tax on estate will be imposed until the estate has been finally settled. Undistributed income of the estate- estate income tax. Distributed income of the estate- income tax in the hands of the estate. No distribution of the estate can be made if the estate tax has not been paid. If there is no partition in the income, there will be co-ownership or an unregistered partnership if used for profit or there is substantial improvement, therefore, taxed at 30% corporate income tax. Trusts Income from trust generally same as estate except in 2. Example: Retirement funds- a trust in favor of the employees. Fiduciary- trusting bank To be exempt: a. contributions are made to the trusts by Er or Ees, or both; b. Consolidation of income of two or more trusts to prevent claim of basic personal exemption twice. August 3, 2010 1. Alien individuals employed in multinational corporations are subject to the preferential rate of 15% on compensation income so long as they are occupying managerial and technical positions. True or False? False. Multinational Corporation is generic. Multinational Corporation is simply a foreign corporation or entity engaged in international trade. When you say regional operating headquarters, regional area headquarters of a multinational corporation, thats what makes an employee a special employee given a preferential rate of 15%. We said that there are only four corporations who can hire special employees subject to the special rate of 15% and they are regional operating headquarters of multinational corporations, regional area headquarters of multinational corporations, petroleum service contractors and subcontractors and lastly, the offshore banking units. If we simply say alien individuals employed in a multinational corporation, its
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as if they are simply employed in a resident foreign corporation engaged in international trade or as simple as that. To become a regional area headquarter or regional operating headquarter, it requires a special registration. 2. 3. How about estates, trusts, are they considered as individual tax payers for tax purposes? Yes. If youre saying that they shall be treated the same as individuals, so what are the tax rates applicable to these estates and trusts? How about the estate itself? Is it subject to income tax? This is not the cemetery. Mr. X died, he left an estate, a set of property. While the property is under judicial settlement, it will bear income or fruits. To which amount, is it the estate or the fruits that the estate is subject to income tax? It is the fruits that are subject to income tax. Okay, only the outer layer is subject to estate income tax. What about the estate itself left by the decedent, is it subject to income tax? No. Why? Because its not an income, it is a capital and subject to estate tax. There is a difference between the estate tax of 5-20% and estate income tax of 5-32%. Income tax as we have learned is always subject to an income. Only one instance is income tax subject to capital and what is that again? On the capital gains or rather the presumed gains on a sale of a capital asset which is a real property located in the Philippines. So do not tax the estate left by the decedent, simply tax the income generated by the estate during settlement. Whenever a person dies, there are two persons subjected to tax: (1) the decedent himself his income from January up to his income is subject to income tax. Upon death and until the settlement is finished, it will be the income generated unless distributed is subject to estate income tax. Is the estate allowed personal exemption? Say for example this is 2010, Mr. X died August 3, today, can the income tax return of Mr. X claim the personal exemption? How about the estate? Can the estate claim during the same year personal exemption? The individual person can claim the personal exemption on his income from January until the point of death. The estate under settlement from the point of death until the end of the same year is another personality, distinct from the person himself who died. Therefore, personal exemption is as well allowed to the estate. But of course, the following year, if the estate is not yet settled, still under judicial settlement, the following year, you dont speak of Mr. X anymore. His personality has ceased at the time of death. He could no longer earn income, only the estate will be considered as a tax payer, the year after death and years after that.
4.
Illustration: DIED ON: August 3, 2010 X X X JANUARY DEATH Subject to Income Tax as an individual
X X X ESTATE PER SE: Subject to Estate Tax FRUITS: Subject to Income Tax
MR. X
Estate of Mr. X. X X X
CAN CLAIM PERSONAL EXEMPTIONS? Yes, for both. PHP 50,000 during time alive an estate 5. 6. Personal exemption is how much? P50,000 Php 20,000 as
Can the estate claim additional exemption for a dependent amounting to P25,000 the additional exemption? The P25,000 is only in reference to a dependent child or children. Exemption is P50,000 basic class, I think I placed there last page of this outline, estates and trusts number 3, exemption allowed to estate and trust fifty (P50,000) right? But the problem is that when I looked into the tax code, that section 62 using RA 8424, its only P20,000 because in 1998 when 8424 took effect, personal exemption was only P20,000. When was it raised again to P50,000? Only in 2008, RA 9504, remember the illustration I gave you in retroactive application? Its just that, that same law, RA 9504 did not amend section 62 which is the personal exemption allowed to estates and trusts. So, I think since this is an exemption and strictly construed against the estate tax payer, we still retain the P20,000 exemption although it is not
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reconcilable. Still, we maintain the P20,000 not the P50,000 which replaces this. Again, for the reason that Section 62 of the tax code has not been specifically amended by RA 9504 which increase the personal exemption from P20,000 to P50,000. Lets go to different types or categories of income that individual taxpayer may earn. 7. What is compensation income? (Cant hear Ms. Tans voice) Based on Dimaampaos book, it is defined as all remuneration for services rendered by an employee for his employer unless specifically excluded under the Tax Code. When is there employee-employer relationship? Apply the four-fold test For tax purposes, can a compensation in kind be subject to income tax? Or is it always compensation in cash? Or does the labor code allow compensation to be given in kind? Under the labor code its not allowed but for tax purposes class, compensation may be given in cash or in kind. Lifeblood doctrine, the government does not only look at cash compensation to be taxed but in any form that the person employee is benefited from his employment or services that he has rendered. Everything will be taxable as a rule.
8. 9.
10. Give me an example of a compensation in kind. Promissory notes. How can an employee have a promissory note as an income? Even if its not in cash yet, it can be considered as realized on the part of the employee as he has already rendered services, then it will be subject to tax. What else? Stocks. What about stocks? What is a Stock option? Instead of giving salary, they are given with stocks, shares of stocks. What do you think why the company would give an employee a share of stock? What would that make the employee if he gets hold of stocks of the company? In some cases, companies in order to build loyalty and in order to retain the employees in its employ would be offering stock options to its employees. Now, if the offer of the stock option is not more favorable than that offered to third persons not employees to the company, so if its offered at 100 and sold to outsiders at 100 as well, theres no income to speak of. The only time that the employee will be subjected to income tax is when the stock option is more favorable than 3 rd person. Say for example, the fair market value per share of the company is 1000 and it is sold to the employee at 100. The 900 difference is simply an income which can be connected to the services that has been rendered by the employee to the employer. What other compensation in kind do we have? Cancellation of indebtedness weve discussed that already before. What else? Tax liability of the employee paid by the employer. Can you illustrate? Lets say for example, you were hired P10,000 a month. Do you expect to get P10,000 a month? No. because this P10,000 is entirely subject to income tax because its her income. In the example that she has given, tax liability of the employee being shouldered or payed by the employer is when the example is when the employer promised to give her clean P10,000 without any tax deduction. It may so happens that she may get P10,000 without any deduction, the employer is actually shouldering the tax of the entire income. So, the tax of the entire income is somewhere, let say, P2,500 to the BIR, P10,000 to the pocket of the employee. The employee does not concern himself with how much the employer will be paying so long as he gets free of tax. You will learn later how to gross this tax, how to compute the tax. Anyway, so long as the employer promises the employee of a salary that is already free of tax, the employer is actually shouldering the tax, its as if the portion shouldered by the employer is still net income of the employee. In fact, in this case, how much is really the compensation of the employee? Is it P10,000 or P12,500? Its P12,500. Its just that P2,500 went directly to the tax authority. And I think we
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have also in our outline, premiums paid by the employer to life insurance policy of the employee weve discussed this, right? (Class: yes) Illustration:
TAX PHP 2,500.00
SALARY: PHP 10,000.00
ACTUAL COMPENSATION: Php 12,500.00

11. If a property is given to the employee, what is the taxable base? If you are given a parcel of land by your employer class, the basis for taxation is the fair market value of the property given. 12. Now, what is the doctrine of cash equivalent? How is this related to what we have discussed a while ago? For tax purposes class, were looking at the fixed amount on which the tax will be imposed. If the income goes to the tax payer or employee in the form of property or any other kind other than the standard of measure of value which is cash, then there must be equivalent to every property that is given. For every value received by the tax payer or employee as a benefit for being hired or as compensation for service rendered, there will be an equivalent tax on that income, even if it is received in kind. So, the equivalent value of the property of the property or benefit received will be taxable as a rule. Thats as a rule because we will encounter some exceptions to the rule. 13. Now if youre an employee Ms. Gingoyon and you are allowed to stay in the condominium units, for which you actually dont get housing allowance in cash. You only have free stay in that condominium unit. Is that an income? Yes. If you will be allowed to stay free of charge in a particular, like residential place, apartment, etc. Regardless whether you received something in cash or not for that stay, it will be taxable because you are benefited. In your own person, you dont need to shell out money in order to stay in that place. Therefore, how will it be taxed if your stay in the condominium unit which is a value of P50,000 the leasing rate which is per month, then the P50,000 value will be subject to tax, regardless of your status in the company whether you are the janitor or president of the company, it will be subject to tax. But, who pays is something else. You mentioned of fringe benefit, what is it? Fringe benefit is any good or services or benefits given by the employer to the employee, except for rank and file employees. So, bottom line, who gets fringe benefits? Say for example, this is ABC Corporation, everyone of us here are employees of ABC Corporation, rank-and-file and not rank-and-file. Everyone is given a chance to stay in the condominium unit, 1 unit each. Is everybody earning income here? Yes. It is settled class that everyone is actually earning income in some form. Although it is not in cash, it is the free stay valued at P50,000/month had they stayed in another area. My question is since it is settled that everyone is earning income in some form, would we, all of us, be subject to tax on the income that we have earned in kind? Yes Non rank-and file that side and rank-and file, P50,000/month in kind - free stay, P15,000/month in kind. If you want to ask how much is the cash compensation, P10,000 lang in cash because youre rank and file. P100,000 in cash because youre not rank-and-file. Now this is taxable, taxable. Is this taxable? This will be given, the cash from the cash compensation will be given through you ATM account or in cash, net of your taxes. But how will this be regulated? So, youre saying this is taxable for the rank-andfiles here, if the tax of this amount is P10,000, you will receive nothing na, because the P10,000 will be collected from you, agree? This level, the cash that is received both rank-and-file and not rank-file is considered as salary. This level naman beyond your salary, we call that benefit in kind. Some benefits are in cash if youre given Christmas bonuses. But benefits in kind are treated differently if received by a rank-and-file and benefit by a not rank-and-file, this is specifically called fringe benefit.
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These are ordinary benefits. Both are income, differently termed, these are benefits received by the rank-and-file employee. These are specifically called fringed benefits received by non rank-and-file employees. Now, usually you couldnt imagine rank-and-file, getting of these, di ba? But for illustration purpose, lets say they are also given that kind of benefit. Now, will this be subject to tax? Doctrine of cash equivalent, will it be subject to tax? Yes. This salary will be subject to tax of which we call as withholding tax on wages, salary or compensation. Its the ordinary tax on the salary. This one will be subject to the ordinary tax on salary as well but how about this? Is this subject to ordinary tax on the salary? No. Subject to what? Fringe benfits tax. And fringe benefits tax is what? Final tax. What is the effect if its a final tax? Ms. Cuevas answers. Fringe benefits tax works this way. Ill show how this is really unfair to this line. Fringe benefits are perks given to those given occupying managerial and supervisory positions. And for that whatever benefit is given to them which is usually not available to rank-and-file, it is subject to final tax which we call as the tax on fringe benefit. Being subject to final tax, the word final means that the benefit itself is already taxed with finality. And if it is taxed with finality, it is no longer considered in the income of the non rank-and-file to be subjected to the ordinary withholding tax on salaries. So, this is separately taxed. But because its a perk or benefit to those occupying higher positions, it is the employer who shoulders the tax. Whatever benefit is given to the employee, a corresponding is paid by the employer to the government. How about those given to rank-and-file? Sige its an apartment lang at P5,000 not a condominium unit, is this a fringe benefit? No. there will never be a fringe benefit if the recipient is a rank-and-file employee. They dont receive perks. Not being a fringe benefit, it is not subject to the final tax which we call as fringe benefits tax. Not being subject to tax with finality, it simply means that the compensation in kind given to rank-andfile will be considered in his salary it will be considered as a part of the salary of the rank-of-file subject to the ordinary withholding tax on wage. So, in this case class, P15,000 will be subject to withholding tax instead of the P10,000 because the employees as well receiving P5,000 in kind. In this case naman, the basic only is subject to tax by the will be shouldered by the employee while the P50,000 perk will be covered by the employer. The tax at P15,000 is higher than the taxed at P10,000. The non rank-and-file is actually enjoying this kind of benefit free from tax. It is really best to be a non rank-and-file employee. You can receive different kinds of fringe benefit. Illustration:
RANK AND FILE EMPLOYEE SALARY BENEFIT TAXABLE? Subject to WTW/C/S Subject to WTW/C/S Amount Cash Php 10,000 Kind Php 50,000
NON-RANK AND FILE EMPLOYEE Amount Cash Php 100,000 Kind Php 50,000 TAXABLE? Subject to WTW/C/S Subject to FBT
ORDINARY BENEFIT FRINGE BENEFIT

14. What are the different kinds of fringe benefits? Housing, expense account, vehicle of any kind, household personnel, interest on loan at less than market rate, membership fees, dues and other expenses borne by the employer in social and athletic clubs or other similar organizations, expenses for foreign travel, holiday and vacation expenses, educational assistance to the employee or his dependents, and life or health insurance and other non-life insurance premiums or similar accounts in excess of the law allows. 15. If you are an employee, non rank-and-file and you are allowed to stay at a staff house within the company premises. Example in Ormoc, is it Ormoc wherein theres Californian Energy Plant the powerplant. Theres an administration building, dispensed in territory there are staff house. If you are allowed to stay in of the staff houses, is it considered as fringe benefits subject to fringe benefits tax? Housing benefits as a rule is subject to fringe benefits tax if the recipient is a non rank-and-file employee but there are exceptions: 1. If the housing allowance or benefit is for the convenience of the employer. Example, if youre a doctor and your work is 24hrs. call of duty. You hired a driver which you housed, you dont want him to stay inside your house. You simply rented out the place beside your house. Is that for the convenience of the employer? Yes. But the driver is not a rank-and-file but it is just for illustration. 2. When your place rented out is within 50meters from company premises. Now, if your place of stay is within 50meters from company premises, then it is exempt from fringe benefits tax. So, if ever you get
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3.
to be an employer years from now and you want to give housing allowances or housing benefits of your staff or manager, make sure that you get something that is near. If its 50meters whether it is for convenience or not. For the convenience, no meters required or no standards. But the 50meter whether or not for the convenience but bottom line its usually for the convenience why he is required to stay near the premises. But there is an exemption to that by virtue of the BIR Ruling the taxpayer requested an exemption from fringe benefits tax despite the distance longer than 50meters is when the place is hazardous to health of the employees, so it can be 100meters. Youre on travel and you are allowed or given housing benefit for 3 months or less in the area wherein you are assigned.
16. Now, the listings here Ms. Cuevas, is it exclusive or are there other benefits that can be subject to fringe benefits tax not listed in this enumeration? Yes. Primarily because it says but not limited to the following. Although there are two views class, there are some discussions which says these are their only benefits subject to fringe benefits tax but there has already been a BIR Ruling saying that the stock options given by Globe Telecom to its officers are subject to fringe benefits tax to the extent of the difference between the fair market value of the stocks and the offer price to its officers. 17. Give me an example wherein you will be subject to fringe benefits tax on a vehicle assistance or motor vehicle in relation to motor vehicle benefits. For example if the manager lives away from the workplace, for example Lapu-Lapu and then the place of work is in Minglanilla. So, the employer has given the employee or issued the employee a vehicle for the benefit of the employee so that it would be easy for the employee to travel. 18. In that case, is that subject to fringe benefits tax? Yes. In that case, it will be subject to fringe benefit tax. 19. Is it necessary that the ownership of the vehicle be given to the employee so that there will be fringe benefits tax due on the assistance given. I think it is not necessary that the ownership is given to his employee as long as the employee is having or is enjoying the benefit of that vehicle which can be subject o fringe benefits tax. Okay. There are many types of benefits in so far as vehicle is concerned. The company may give the employee directly a motor vehicle is entirely fringe benefits. Sometimes, the company may subsidize 50% of the purchase price of the vehicle and 50% is the fringe benefit. In some case, the company allows only not transfer of ownership, only allows the employee to use the vehicle exclusively still it is subject to fringe benefits tax. How will it be computed? Of course the monthly amortization or the monthly depreciation value of the vehicles or in case where there may be fringe benefits in the vehicle assistance where the employer leases or rents out the motor vehicle for the use of the employee himself, for his own. Exception to that rule even if he is using the motor vehicle of your employer, it is not subject to fringe benefits tax, if you use it for car pooling or you allow others to use it as well. So what you have to do class, if ever you will be assigned a motor vehicle, as if lang others may use it. If it is for the use as if for everyone, its for the convenience for the employer necessary for the business. Ang shifting lang for this one to this one is the status of the employee. How do they declare such.. that its for own use lang or departments use? Through the policy of the company, so long as you have documentation of the company that this is for the everyone, that would suffice. The BIR will not be following your car around if its park outside your house at night, etc. How about the gasoline? It is still subject to fringe benefits tax under the expense account. If youre given transportation allowance as a president, gasoline allowance, cellular phone allowances, etc. it will fall under expense account unless class, you are required to liquidate that by submitting receipts at the end of the year. A cellular would require the listing of the calls that you made whether its for business and personal. Ang gasoline naman I dont know lang how will you make charges that this is personal, this is business. Probably, the best way is 50% is business, 50% is taxable nalang. But I know you can secure receipts from your friends. For expenses usually you are given by your employer transporation allowances, gasoline allowance, call allowances, representation and meal allowances like P100,000 a month. Now it will be taxable except if: 1. You will be required to liquidate the amount by submitting receipts, issued in the name of the company, not in your name.
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20. What about household personnel subject to fringe benefits tax?. So apart from given a free stay in the condominium unit, a free motor vehicle will be given, a driver, a helper. The amount paid to those helpers, drivers, etc. will be subject to fringe benefits tax. Youre being given a good life, its a perk. But if the drivers, the maid, if the driver example falls under the payroll of the company itself na, the amount given is not subject to fringe benefit tax because his salary is already subject to withholding tax. Whatever you get from the company, the BIR can always says its taxable. 21. If the company grants you a loan at 0% interest, now the 12% will be assumed by the BIR as the legal not charged by the company to you, 12% of the loan value of the principal will be subject to fringe benefits even if you did receive nothing. If the rate is lower than 12%, say perhaps at 2%, is there fringe benefit? Yes. If theres a difference in the interest rate granted to the employer against the legal rate of 12%, it has not been changed - the 12% for tax purposes remains the same. So the difference between the 12% and the 2% granted lowered 2% granted by your company, the 10% even if it is theoretical interest will be subject to fringe benefits tax. Say for example, you made a loan, a loan from the company so that you can buy a motor vehicle, 50% of the motor vehicle has been subsidized by the company. There are actually 2 kinds of benefits there, the fringe benefit on the subsidized portion of the vehicle and the fringe benefit on the interest for gone by your company granting you 0% loan or a loan at a lower interest. 22. If the company, youre the manager of the company and the company enrolled you in a masteral class Ateneo, will the tuition fee paid by the company be subject to fringe benefits tax? It was in your favor, you were the one enrolled. As a rule, the assistance granted by the employer to the employee will be subject to fringe benefits tax if the employee is not rank-and-file. But there are exceptions, if it is in relation or in line with the position held by the employee himself or would actually redound to the benefit of the employer and it has to be supported by a contract wherein the employee will stay in the company for a number of years, its what you call as lock in contract. I have experienced this before when I was in SGV and I gave them the idea that I will be studying while working, they offered to shoulder the expenses for schooling but on the condition that I will stay in the company for 7 years after graduation - 7 years in Cebu or 4 years in Manila. SO if thats the case, when you will still be required by the employer to stay with the company and the assistance really education is in support of the.. is in favor of the company because it is in line of the position you are holding, its not subject to fringe benefits tax. 23. But what about like schools are granting the teachers or professors free education for their children, the dependents of the employees, up to lets say three children, okay lang if San Carlos, but what if Cebu International School, tuition fee is this much, is it subject to fringe benefit tax? Remember that the burden on taxes of fringe benefits falls on the employer class not employee. The employees, non rank-and-file, receiving actually a benefit free of tax. In order for them to avoid paying fringe benefits tax on educational assistance granted to the dependents, not the employees: 1. Getting the assistance must be competitive in nature so it should not be given arbitrary to all dependents of the non-rank-and-file employees. It must go through stages, competition between the dependents. 2. The dependents must actually maintain a grade required by the corporation employer otherwise if those two conditions does not existence in an educational assistance granted to dependents, it will be subject to fringe benefits tax. In our quiz, which of the benefits are subject to fringe benefits tax: a.) group health insurance taken by the employer in favor of the employees. Is it subject to fringe benefit tax? Life or health insurance? All group life insurances, all hospitalization insurance will not give rise to fringe benefit tax nor ordinary tax on rank and file employees because for the reason that these group life insurance or health insurances are never directed specifically to one employee. The insurance is for free for all to those who will become covered by the insurance because when given like a disability etc. And we have other kinds of benefit as well: Membership fees in a golf club, etc. those in social, health or athletic clubs as well as foreign travels and vacation expenses. 24. How will we compute the fringe benefits tax? For illustration I found in some reviewers they put emphasis on grossed up monetary value. Did you happen to chance upon what grossed up monetary value is? In ordinary salaries or compensation or wage that you received, whatever is stated in the employment contract thats your salary, you dont expect to get everything because the component of
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that is for taxes based actually on the 5 to 32 percent tax that youre paying. SO this is your basic salary.
32% of GMV of Fringe Benefit 32% of ___________________
If youre given a fringe benefit as a non rank and file employee, the fringe benefit that you received is already net of the tax. Why? Because it will be the employer who will shoulder the tax. So your entire benefit, if ever a fringe benefit is given you, is not only that which you have received but as well the value of the tax that is shouldered by your employer.
Its just like your salary, your salarys 100,000 a month, you get 85,000 net, 15,000 goes to the BIR. How much is really your salary? Your benefit? 100,000. The same with fringe benefit. If you received 50,000 and youre no longer required to pay tax on the 50,000, your benefit is something bigger than the 50,000. And that is fringe benefits plus the tax shouldered by the employer equals your entire benefit or entire compensation or perk that you received.
Salary Php 100,000.00 LESS Tax (5%-32%) = Net Pay Fringe Benefit 50,000.00 tax at 32% of GMV of Php 50,000 (net pay is Php 50,000)
25. So how would the employer compute the fringe benefits tax? The fringe benefits tax is a 32 percent tax on the grossed up monetary value of your fringe benefit. So applying this formula to this fringe benefit, it will be 32 percent on the grossed up value of 50,000. Your grossed up value is simply fringe benefit plus tax. So grossed up value.
Again. So if you get hired and under your contract you will be paid 100,000 a month salary, it will be reduced of tax on the 100,000 computed at 5-32 % based on your agreed compensation. You will only get net. So if youre already covered by the highest bracket of 32% so now you will only get 70,000 a month. But if youre given a fringe benefit of free stay in a condominium unit valued at 50,000 per month, you will not be taxed at 50,000. You will not be subjected to tax on the 50,000 with the BIR deducting 32% of 30 days stay. The BIR cannot get tax in kind, its always monetary. So whatever the benefit youre receiving as fringe benefit, its entirely net na. so this is net already. This is the reverse.
26. So how does the employer compute for the tax on the 50,000 by grossing it up. Grossing it up means to say that the net is brought to the gross. Simply the net pay brought to the gross by adding the tax. So how is grossing up done?
There is already a formula. 50,000 divided by 68% equals grossed up monetary value times 32% fringe benefit equals your fringe benefit tax. The 50,000 free stay is already free of tax on your part. But someone else is paying for that tax. How will theS employer pay the tax? The employer will simply compute the fringe benefits tax at the rate of 32%, not 5-32 %. 32% because you are already
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assumed to be occupying the highest bracket being a manager or supervisor. Automatically it is 32 % of the grossed up value. So if you are receiving net and you want to gross it up, simply divide by 68% , which is the gross less the tax . Its as if, if you divide a value at the amount by 68%, its as if that value is only 68 percent (???). You will arrive at 100%.
How to compute Gross Marked Up Value: Above) GMV Formula : Php 50,000 68% _________ GMV X 32% ________ FBT
Example, you have a deposit of 1million. In the passbook, you saw that there is an interest of 1000 for one month. Youre given interest income. Then beside there is tax of 20% which is 200. How much did you receive? 800 only. 800 is 80 % after the tax has been deducted. If you want to gross up the 800 net interest, how do you do the grossing up? Simply divide it by 80%. What did you receive in percentage, its 80% so divide it by 80%.
(Example
In this example, when you receive a fringe benefit, its only 68% so in order to get the full 100% value of what youre receiving including the tax that has been shouldered by your employer, divide it by 68%. Its as if 50.000 is only 60% of the whole picture. How much if you divide 50,000 by 68%? (I dont know the answer)You get the full value. How much will your employer pay to the BIR? 32% of the grossed up value.
27. Ill illustrate that in simpler terms. If youre given a household helper, to live with you in the condominium unit, and the company is paying the household helper for 6,800 a month, how much is your fringe benefit?
GMV Formula
Php 6,800 68% _________ Php 10,000 (Fringe Benefit plus Tax) X 32% (Fringe Benefit Tax) ________ Php 3,200.00
How much did you really get: Php 6,800 + 3,200 _________ Php 10,000
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What is your fringe benefit is the 6800 net. How will the employer pay the tax? Will the employer simply compute the 32% directly on the 6800? No, because this is net. You gross it up by dividing it by 68%. 6800 is only 68% of the entire value of the benefit you are getting. So if you gross it up, it is 10,000. So you received this benefit plus the tax. This is what you are really getting from the company. 6800 worth of services per month plus the tax that the BIR is collecting from the employer.
Since fringe benefit is computed at 32%, how much is the tax paid to the government every month? 32% of the GMV? 3,200. Double check, how much benefit did you really get from the employer? 6800, the presence of your maid plus the tax that is paid , total of 10,000. Its simple algebra (??). This is really more burdensome. Why? Its computed by grossing up. What you received is grossed up.
Question: Are we going to compute in the exam? Tiu: If therell be computation, it is for illustration lang.
28. The reason why its 32% is because the highest rate that is imposed on employees is 32%. What happens if the employee is a special alien employee subject to 15%? And that special employee is given a housing benefit of 85,000 rates per month? Do we use the 32% fringe benefits tax on a special employee?
NO. for special employees, income derived by special employees, what is used is 15%.
If its a special employee, the fringe benefits tax is 15% of the GMV. For ordinary mortals just like us, our fringe benefit will be computed at 32% of the GMV by our employer. But if we belong to special employees, since your special, get special rate. 15%. Special employees are subject to 15% preferential rate on their income. Only insofar as its related to their employment, not other income. But because they are subject to special rate of 15%, the FBT on their benefits is also computed at 15%, not the 32%.
29. Therefore, if the special employee is getting a monthly housing benefit, free stay in a 10 bedroom unit, what is the GMV of 85,000 for special employee? How do you gross it up?
SPECIAL EMPLOYEE: FBT 15% of GMV GMV Formula : Php 85,000 Housing Benefit 85% __________ Php 100,000 X 15% __________ Php 15,000
True Value: Php Stay) (FBT)
85,000 (Net Free + 15,000
_________ Php 100,000
85,000 times 85%. 85% because the 15% there is the fringe benefit tax. The GMV is 100,000. How much will the government pay? If youre a special employee, the FB that youll be receiving is only subject to a lower rate of 15%.if you want to know what is the true value of the benefit received, you have to gross it up by adding the tax component of the benefit. You should use 85%, not 68%. 68% is the difference between the full benefit minus the tax. This is only 85% of what youre getting because 15% is the tax. Therefore you gross it up by 85%, youll get the full benefit of 100,000 which is actually the 15% tax plus the free stay in the condominium unit.
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30. That is not all. There is another alien individual subject to special rate to a flat rate of 25%. Who are these individuals?
Non resident aliens who are not engaged in business or trade are subject to a flat rate of 25%. Who are non resident aliens who are not engaged? Those who are transient or sojourners and they stay here for 180 days or less. I love days, so in the exam, you should know 180 days or less.
Non resident aliens not engaged in trade or business, their FBT is not 32%, not 15%, but 25% of the GMV. If youre computing for the grossed up of a non resident alien not engaged in trade or business, what is your divisor? 75% here. And 25% here.
NON-RESIDENT ALIEN: FBT 25% of GMV GMV Formula : Php 75,000 Housing Benefit 75% __________ Php 100,000 X 25% __________ Php 25,000
True Value: Php Stay) (FBT)
75,000 (Net Free + 25,000
_________ Php 100,000
Whenever you are given a benefit that qualifies as FB, never mind the tax. Its the employer who computes for the tax. You will not be concerned of being deducted of any tax, not even your basic salary will be deducted of FBT. But for bar purposes and this class, you should know whos liable and whos not. When you should liable for the payment of tax, etc, and who are these concerned people.
31. Now, not all benefits are taxable. There are benefits which are exempt from tax. What are these?
Rank and file employees benefits Why are these not subject to FBT? For rank and file, it will be included in their computation of their ordinary income. FBT applies only to non rank and file employees.
32. de minimis benefits What are de minimis benefits? They are those benefits that are small amount/value and given to promote goodwill. Example. Rice allowance. Clothing allowance. If youre Rice as De Minimis Benefit without limit, for Prada clothing brand, is that de minimis? Not anymore, given a clothing allowance, does not fall within the definition that it should be in small amount. When you say de minimis, these are benefitsPhp of relatively value. So you will know that when you are given a rice allowance, its 2,000small (Value of the Rice) your basic need. But if the rice given to you is jasmine rice, its no longer exempt, because its no Less 1,500 (Allowed De Minimis longer a small value. What is de minimis in so far as rice allowance is concerned? only 1500 in value, Note if excess is taxable: Benefit) whether given in cash or kind. Only to the extent of 1500. Clothing allowance, de minimis would If NRF: subject to fringe benefit tax only Php 500 (Taxable) be up to the extent of 4000 per year. You dont expect to change wardrobe everyto month. If RF: subject ordinary income tax
Take Note can still use exclusions on benefits worth at least Php 30,000: Example: Php 10,000 Php 30,000 = Php 20,000 13th Month Pay Exclusions allowed (So include the Php 500 under this exclusion to be exempted)
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Example, rice allowance per month is 2000. What is considered de minimis is only 1500 per month. So the 500 per month is actually taxable, not the entire 2000. But you remember in exclusions from gross income, wherein it says there , 13th month pay and other benefits not exceeding 30,000 during the entire year, will be exempt. So if your salary is only 10,000, your 13 th month pay is 10,000. Usually thats how its computed, if its 20,000 thats the 14 th month. So if your 13th month pay is 10,000, the free space is 20,000 - to use for exemption- for other allowances which does not qualify under de minimis.
If a rank and file employee receives this benefit, he has to pay the tax on the excess. If the employee who receives is non rank and file, it is the company who will shoulder the tax by grossing this up.
When you say de minimis, its defined as benefits of small value. Benefits of relatively small value it has already been put into writing. So if its rice allowance, its 1500 per month. If its uniform, 4000 per annum. Laundry allowance, 300 per month. Medical allowance to the dependents of the employees, its 1500 per year in cash. Dependents. But medical benefits to the employee himself which should not be in cash is 10,000 per annum, to be de minimis. See the disparity. If its the dependent, medical allowance its 1500 per year, if its the employee its 10,000 per year in kind. He has to submit official receipts for medicines and it does not include vitamins. Christmas bonus of 5000 per annum is exempt and it is not included in the 30,000 package. Achievement, loyalty awards may be exempt to the extent of 10,000 so long as its given in kind. What youll have to do is if you are to be awarded for not being late the entire year- no tardiness award- 10,000 because the maximum is 10,000, if its given in cash to you, its taxable. If rank and file- taxable, youll receive only around 7000. If youre non rank and file, you may get the 10,000, the company will gross it up and pay FBT. What youll have to do is to not receive it in 10,000 cash. Negotiate with the employer that you want this item from a store, valued at 10,000, let the company buy it for you and give it to you as an award. The law says tangible property, not including tax.
Benefits given to non rank and file are exempt fringe benefits. Theyre exempt from FBT, but it does not mean that its not subject to the ordinary tax on rank and file employees. Because the nature of the exemption in number one is the recipient, the type of tax. The tax is still there but it cannot be FBT because their status is non rank and file. But for de minimis benefits, the exemption goes into the benefit itself, whoever the recipient is. So its exempt whether received by rank and file or non rank and file employees. It depends on the exemption.
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33. Another exempt fringe benefit : Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefits plan- So what is this really? Does it include the premiums paid by the employer on a life insurance policy on the life of its president?
No.
What does it refer to? What type of plans?
We have mentioned before, whenever a company takes out a life insurance policy over the life of its president or key personnel, we have to know who the beneficiary is for purposes of knowing whether it becomes income on the part of the insured.
Probably youll remember this. Two sides of the spectrum. Premiums as income and premiums as exempt. Same type of privilege. Two insurance policies taken out by one company over the same person. But the first company beneficiary is the company itself. In the second one the administrator of the estate. 100K premiums per year (first insurance), 50K premiums per year (second insurance). How much was paid every year? 150,000 as premiums. Premiums may or may not be considered as income on whose part? The employee. Can it be considered as an expense or not an expense on whose part? The employer.
Number one, is the 100K premium paid by the employer an income on the part of the employee if the beneficiary is the company itself? Simple recall. Theres always logic in the principle behind why its subject to tax. The company took out two insurance companies. Beneficiaries different, two premium payments. This same premium is something to the employee and something to the employer. This is a benefit to the one who was insured and an expense because it is an outflow for the one who insured it. Question, is it deductible expense on the employer and is it a taxable income on employee? This was discussed in Section 32 B, life insurance proceeds in section 36, non-deductible. Since the employee was insured, but it was the company who was the beneficiary, is it really an income on the employee that is taxable? No, because it will redound to the company itself.
If the beneficiary is the administrator, it is taxable income on the part of the employee.
BEN = Company = BEN = Employee or Administrator = year
Php 100,000 / year Php 50,000 /
PREMIU M
Benefit of
INCOME Employee Amount Php 100,000 Php 100,000 Taxable? Not Taxable Taxable
EXPENSE Employer Amount Php 100,000 Php 100,000 TAXABLE? Not deductible Deductible
COMPANY EMPLOYEE / ADMINISTRATOR
Is this what is meant by the 3rd exemption on fringe benefit? NO. This is not meant by the 3rd Exemption in the outline under fringe benefit. What is meant by the 3rd exemption is the exemption on the group insurance.
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There were outflows of cash, 150,000, is it deductible expense on the part of the company if the beneficiary is the company itself? 100,000 is not deductible. Why? It is the return of capital. If the beneficiary is the administrator, can the company deduct the premiums as expense? Yes, deductible. If its not an income that is taxable on the part of the employee, it is not an expense deductible on the part of the employer. If it is taxable as income on the part of the employee, it is deductible on the part of the employer. In relation to exempt fringe benefits, this is what we are looking. Premium payments are income to the employee- If the beneficiary is the employee himself. Is this the one that is exempt in our outline? Premium contributions by the employer for the benefit of the employee in a life insurance policy? Is it exempt? Taxable. Not the one referred to.
Our discussion before did not really distinguish what type of tax will be collected by the BIR if this taxable. Now we know, If he is non rank and file, he is subjected to FBT. But if he is rank and file, subjected to ordinary tax rates. So this is exempt. What is exempt is, this was in the quiz, contributions made by the employer on insurance policies, whether for retirement, insurance, health, hospitalization for the group of employees. The reason is why it is not taxable the outflows of the employer does not (Student: does not directly benefit the specific employee) There is no specific benefit received by the employee because the policy taken is a group retirement, group insurance or health or group hospitalization insurance.
34. Next item. Employers convenience rule. Exempt because it is required by the nature of the trade, business or profession of the company or employer. It is for the convenience of the employer, it just part of the expenses of the company. Therefore it is not really redounding to the benefit of the employee- rank and file or non rank and file.
35. And there is another item, FB which are authorized or exempted from tax under special laws. The catch all provision. (Student): there is a law which specifies that such benefit may not be subject to FBT.
Were done with fringe benefits.
36. Expenses for foreign travel becomes subject to FBT only if it is not for business purposes. And for you to be able to prove that its for business purposes and for the company to avoid the FBT, the company should present a letter of invitation from abroad. Its the requirement under the regulations, a letter of invitation. So that if you have an employee and he wants to go abroad for vacation, just make sure he makes some side trip for business purposes. The airfare, allowances are exempt. The round trip tickets for abroad is not really that cheap, its expensive if not Asia. Its entirely exempt from FBT if its for business purposes, unless the flight taken is first class. So even if its for business purpose, if the flight is first class, its taxable to the extent of 30%. Why? You dont really travel first class for business.
Were done with the first category, compensation income. We said that all types of compensation for service rendered whether given in cash or in kind are as a rule subject to tax, unless if it is exempt.
37. Second type is Business/Professional Income.
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So, if an employee can earn compensation from working, an employee can also earn business or professional income from an activity and it is also subject to 5-32%. It is not really interesting it will become interesting when we come to corporate taxation.
BUSINESS TAX: 5% 32%
38. Lets go to the third. What is the third of income that can be earned by an individual? Passive income. What is passive income?
Whats opposite of passive? Active. Is this active income? (Compensation income) Yes. Is this active income? (Professional income) Yes.
What is passive income as opposed to active income? When you come across an income wherein there is no active participation on the part of income earner to generate the fund, like interest income on bank deposit, thats passive income. You put the money there and you let it grow. You dont really engage in a business, trade or profession and you dont get employed to get that interest. That is an example of a passive income. There are many kinds of passive income. Opposite of course is active, those that you really venture into regular activities to come up with the money.
We said that compensation income and business income is subject to the regular rates of 5-32% applicable to individuals as a rule. Is passive income covered by the 5-32% rate? Passive income is not covered by the same rate. What is the method of taxing a passive income? Passive income, is subjected to final tax.
Passive incomes are subjected to final taxes. What is a final tax? Sometimes its called final withholding tax, sometimes final income tax. There is always the word final. Final is always attached to the word (tax?) PASSIVE. What is final income tax? Final income tax is a (Final tax is a particular tax made separately from the income tax) you have no idea? Next question.
39. Give me a passive income. Royalties. Give me an example of a royalty that derives royalty income. Software. When you purchase a software that is not off-shelf but rather customized and there is a transfer of technical know-how or technical knowledge, it will require the payment of royalty fees. If you pass on some technical knowledge for the manufacture of this microchip or item, it will be subject to royalty fees. Being a royalty fee, royalty income that is passive income, just pass on the knowledge and it will generate royalty fee. Its a passive income subject to final tax.
Now, how will it be taxed?
Witholds
iPUD
Technical Knowledge (TKH) You pay ROYALTY FEES
HE
Earns Income Royalty Income
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This is U. This is HE. HE transferred technical know-how. You are to pay royalty fees for the knowledge he transferred to you where you can generate iPud. Who is earning income here? HE. He has royalty income. Its a passive income. After he transferred the knowledge, he generates funds royalty fees based on a certain percentage of the sales you generated from selling it.
Who will pay the tax?
What did we say of passive incomes? Passive incomes are subject to final tax. And final tax is remember taxation at source? There are two types of taxation at source. Creditable withholding tax and final withholding tax. Final withholding tax is only imposed on passive incomes. Now, there is what we call as withholding mechanism. The income earner is no longer required to reflect the passive income as part of his income at the end of the year, because it has already been subjected with finality through the final tax withheld by the who will withhold the tax?
Passive incomes are those incomes generated from inactivity, those you dont venture into as a business, etc. passive incomes are incomes which are not considered as part of your business at the end of the year or as part of compensation income. Whenever a passive income is generated and earned by U, it is expected that it will be withheld of final tax by the payor. When the final tax is withheld by the payor, example, royalty is subject to 20% if the income earner is RC, NRC, RA. When a passive income has been withheld of tax, the effect is it is already taxed with finality. The tax withheld is constituted as the full and final payment , forget about the income after it is earned. You dont have to consider it as part of the other income and recomputed the tax again. Its not part of the income at the end of the year, not part of your withholding tax of your income tax return. Because it is taxed at every time the income is earned. Remember pay as you earn system, remember taxation at source? The source of the income itself at the time it is earned, is subject to tax.
40. You sought for a franchise of Julies bakeshop. You pay a franchise fee, just like royalty fees based on the sales that you generate for selling. The fee payments that you made on a regular basis to Julies bakeshop for the franchise that you got- is it subject to withholding tax as a passive income?
No.
Sought for Julies Bakeshop Franchise
You pay FRANCHISE FEES
HE
Instead NOT SUBJECT TO ROYALTY TAX! Not all realties are subject to passive income tax.
HE Reports such income as income subject to 5% 32% income tax.
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Why not? Is Julies bakeshop engaged in a business extending franchises? Yes. Therefore, if any royalties are paid to Julies is that a royalty income that is passive on the part of Julies or active income? Active income. Being an active income, will it be subject to the final tax of 20%? No. Are you required to withhold the tax? No. so what will Julies do with the payments that you made? It will form part of the 5-32% tax of Julies. Point is, not all royalties are passive income. If the income earner of a royalty is really engaged in extending royalties, franchises and other intangible assets, then it is no longer passive. Its not inactivity. The business itself is extending franchises, it will not be considered as passive income, therefore no final taxes, therefore the one paying the royalty is not expected to withhold equivalent to at the end of the year, the payment simply forms part of business income subject to 5-32%.
41. This is a royalty payment that you are making for a technical know-how. Really passive. But you are a NRA. You obtain 1 million in royalties every year. Passive income. Is it subject to 20% final tax?
Non resident foreign corporation-NETB, you got technical know-how from a domestic corporation. Is it subject to the final withholding tax of 20%? Youre engaged in business abroad but you are classified in the Philippines as not engaged in trade and business. Is your payment to the domestic corporation subject to 20% withholding tax?
NRFC
Technical Knowledge Royaltee Fees
Domestic Corp.
iPUD
HE
Instead NOT SUBJECT TO ROYALTY TAX! Not an income within for the Non-Resident Foreign Corp.
Domestic Corp. declares it as income subject to income tax.
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A. Can you really do the withholding from abroad? If the one paying who is expected to withhold is not from here, is abroad, not registered with the BIR, there can be no withholding. The government of the Philippines cannot compel this one to withhold. Even if passive income, no withholding because there is no withholding agent. What the domestic corporation will do is simply declare by itself the income and be subjected to (rates).
So it simply means that the passive income subject to final tax must be an income that is paid by one who can be considered a withholding agent in the Philippines. Payment in the Philippines, in short. AUG. 10, 2010 Tuesday Situation: Mr. X is a legal consultant of A corporation. He was given as part of his compensation package housing allowance. Is that subject to fringe benefits tax (FBT)? o NO, since FBT would only be applicable to fringe benefits granted to managerial or supervisory employees. o Can FBT arise in a non-employer-employee relationship? FBT can only arise in a fringe benefit which is granted in an ER-EE relationship. If no ER-EE relationship exists, no FBT would be due but whatever is the benefit received by that independent contractor would be taxable on the part of the contractor by declaring it as part of his gross income. How do we compute FBT? o 32% final tax of the grossed-up monetary value (GMV) o And how is GMV derived? Refer to last-meetings discussion Is FBT a final tax? o YES. o What is a final tax? Is there a relation between a final tax and passive income? YES, since passive income is subject to final tax. Is fringe benefit subject to FBT, which is a final tax? YES. Therefore, fringe benefit is a passive income? Fringe benefit is not a passive income because its earned through continuous activity or services rendered by the employee, who is a non-rank-and-file employee Passive income is an income derived from an activity in which the taxpayer does not materially participate or an income from inactivity and passive income is subject to final tax. As we have said also, a final tax constitutes as the full and final settlement or payment of the tax due from the payee on such particular income. So whenever a passive income is earned by the person, whom we call as payee of that passive income, any final tax that has been imposed already on that income is considered as the full and final settlement. No need for that payee-taxpayer to declare that passive income as part of his gross income at the end of the year in filing the ITR (income tax return) because its already paid of final taxes. How is the final tax collected by the government on a passive income? o By a withholding agent final tax is withheld o Is final tax the same as final withholding tax?
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Final income tax is the tax itself that is imposed on a passive income. But when you say that its a final withholding tax, it is the mode and manner of collecting the taxes. Whose obligation is it to withhold the taxes? The payor is the one obligated to withhold the final tax on the passive income that is paid to the payee. Payee is the one who is going to receive the passive income So the obligation to withhold the tax, the one constituted as the withholding agent by the government, is the payor and in case he fails to withhold the taxes, who has a liability to the government? Against whom can the government run after? o Example: If there is A and B. B is the one earning the passive income and A is the withholding agent. A paid 100K royalties to B. Whose obligation is it to withhold? A. But the income-earner is? B. In case no withholding is made, the 20% is not withheld on the gross, (Remember: the final tax is imposed based on the gross amount without benefit of any deduction for personal exemption, even if B is an individual no deduction for passive income). Now in case A forgets to withhold the 20% final tax on the royalty payments to B, from whom can the BIR seek collection of taxes, surcharges, penalties?
as withhold ing agent
Royalties Php 100,000
Passive Income Earner
If A failed to withhold 20% of the royalty, A will pay: 20% + 25% surcharge+20% interest per annum
Under the Tax Code, every person paying a passive income that needs to be withheld of tax is designated as a withholding agent by the government and is imposed with personal liability for the payment of taxes in cases of non-withholding. So the consequences for nonwithholding is that the withholding agent becomes liable for surcharge and interests and liable for conviction to a penalty equal to the amount of taxes not withheld. So in this case, if Mr. A failed to withhold the 20% final tax on the 100K, how much is A liable to the government? 20% of 100K, which is 20K plus surcharge of 25% plus interest running from the date he should have withheld the tax until the date he settles it with the BIR. So if its
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like 3 years from now, 3 years of 20% interest per annum. When does the obligation to withhold the tax arise? At the point when the income is earned Example: Based on the royalty contract, the 100K is payable on Dec. 31, 2010. But effectivity of the contract and the transfer of technical knowledge started Aug. 10, 2010. But the 100K is actually paid on January 31, 2011, when should Mr. A, the payor, withhold the tax and remit it to the government? When is it earned? When is the withholding tax due? If the contract be terminated tomorrow and you have remitted the tax already, do you think BIR will refund you for that? o Withholding of final taxes on passive income shall be made at the time the passive income is paid or payable whichever comes first. o When you say payable, it must be due and demandable.
1 Year: Payable on December 31, 2010 Effective: August 10, 2010 Paid: January 31, 2011
as withhold ing agent
Royalties Php 100,000
Passive Income Earner
Therefore, it must be paid on December 31, What is taxation at source?2010 What are the 2 types of taxation at source?
o o
Taxation at source is taxing it from the source of income from the point it is earned 2 types of taxation at source or manners of collecting taxes: Final withholding tax (FWT) Creditable withholding tax (CWT) Both are withholding taxes, the payor, who pays the income to the payee, has the obligation to withhold. Difference: o 1. Its just that if its a FWT, the income that must be withheld of tax is passive income while a CWT, its ordinary income ordinary in the sense that its part of business, trade or profession. o 2. In a FWT, the amount of tax withheld is constituted as the full and final payment of tax so that the passive income will never form part of the gross income of the taxpayer at the end of the year. (Remember: In passive income, you simply forget about it right after it has been withheld of tax because it has been fully paid and finally paid of taxes; no longer part of the gross income at the end of the year; final settlement of taxes happen at the point where income is paid or payable, whichever comes first). While in CWT, whatever taxes withheld under the CWT system is a tax which equals or approximates the tax due on the ordinary income earned by the payee. Example: Whenever a deduction is required to be withheld of tax, the payor should withhold, otherwise, he is not allowed to claim it as a deduction, such as rent expense. Rent expense should be withheld of 5% CWT. So the rent expense of the payor is the rent income of the payee and the rent income of the payee is simply an ordinary income. Is an ordinary income of rent by the payee part of his gross income at the end of the year? YES. Is he liable for tax to 5-32% as an individual at the end of the year? YES. But can the BIR wait at the end of the year for the payee to declare the tax and pay the tax? NO.
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CWT and FWT are simply collection schemes or the manner of how the BIR collects the taxes. In CWT, it simply means to say that the BIR is advancing the collection of taxes from the ordinary income for which the final settlement of taxes will happen at the end of the year. In FWT, the full and final settlement of the taxes happened at the point where the income is paid or payable, whichever comes first. At the end of the year, the tax, which has been withheld under the CWT system applicable to ordinary income, will simply be off-setted against the total tax due. Example: 100K monthly rent. His income at the end of the year is 1.2M. Assuming, the tax due is 350K. How much was withheld under the CWT mechanism of 5% per month? 5% of 100K is 5,000 over a period of 12 months, which is 60K. The BIR already got 60K through the CWT mechanism. Every month, 5,000. But the word creditable means it will be credited against the tax due at the end of the year, which is 60K. So, you only have to pay 290K at the end of the year. However, in passive income, this type of income, do not include them in your ordinary income because its already collected fully and its already finally settled at the time that the income is paid or payable. In the FWT system, there is no need to include the passive income as part of the ITR of the taxpayer and no need to pay taxes at the end of the year. Whatever was withheld is already the final taxes. No other approximation or computation at the end of the year.
Taxation At Source 2 Kinds: Final Withholding Tax Creditable Withholding Tax 1. Passive Income 2. Full and Final Settlement 3. No longer part of gross income 1. Ordinary Income 2. Tax which equals or approximates with the ordinary income 3. Part of Gross Income End of the Year, the tax withheld will simply be offsetted against the total tax due. Example shown below Computation of Tax Withheld: Rent Income per month 100,000.00 Php Example: Rent Income per month Php 100,000 x 12
5% of 100,000 (amount withheld) 5,000.00 1,200,000.00 X 12 months x 12 Tax Due In CWT system, the withholding agent is still liable in case of failure to withhold taxes since he is Amount Withheld Yearly 350,000.00 statutory taxpayer. However, the ordinary income earner declare it at the end of the year. If the 60,000.00 Less: will Tax Withheld withholding agent can prove to the BIR that the ordinary income earner fully declared the income and 60,000.00
paid the tax without deducting any withholding tax (because there was really no credits no withholding made), the withholding agent can escape paying the basic withholding tax that he failed to 290,000.00 withhold. What he only needs to pay is the interest. Why interest? Because the BIR failed to get hold the money on the monthly basis. Tax payment was only made by the ordinary income earner at the end of the year, which is different from FWT system since a passive income earner is not required to file an ITR and make a part of his gross income the passive income. The CWT system is much tedious
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since you have to get the records of the ordinary income earner just so to prove that he actually and fully paid the taxes thereon. Question: If the rent payment is 100K, how much must the payee declare in his gross income? The full 100K or the 95K net already of the 5% withholding tax? o Another distinction between CWT and FWT is that any income earned by an ordinary income earner has to declare it as part of his gross income at the end of the year when he files his ITR. o Must he declare the full income of 100K or the net after tax withheld, meaning 100K or 95K only after the 5% had been withheld of tax? In all cases, an ordinary income earner must declare the full amount, whether there has been withholding or not because the BIR has to determine the correct tax at the end of the year. The question will be did he have any credits for which a CWT has been withheld. Is your salary or compensation subject to FWT or CWT? o It is still a form of CWT since as you earn income monthly, the taxes that have been withheld would be accumulated and considered as part of annualizing your total income for the calendar year.
PASSIVE INCOME Royalties o Are all royalties subject to final tax of 20%? What is covered by royalties subject to final tax? Royalties is subject to 20% final tax except in the case of literary works, books and musical compositions, which are subject to 10% final tax. Lets say there is a royalty income earned by Mr. A. It did not arise from literary works nor books and musical compositions. Is it automatically subject to 20% final tax? Criteria is: o 1. It must not be among those special royalties earned (literary works, books and musical compositions) o 2. It must be a passive income o 3. It must be derived from sources within the Philippines Otherwise, if royalty income, is derived from sources abroad, regardless of who the payee is, the Philippines has no control over the withholding agent, thus, it is not covered by the FWT. So the first thing we have to look into is that: Is the royalty income a passive income? We can only say its passive income if the income-earner or payee is not in the business of extending royalties. o Example of a business in the habit of extending royalties: JULIES BAKESHOP you pay franchise fee upfront but your sales will be covered by royalty payments, a certain percentage of your sales you will have to pay it to JULIES or even MCDONALDS or JOLLIBEE. They are in the habit of extending franchises, therefore, it becomes an ordinary income for their part. We dont have to withhold the final tax since JOLLIBEE, MCDONALDS and JULIES BAKESHOP will simply declare it as part of its gross income at the end of the year subject to the ordinary income tax rates. Second thing to consider is that passive income of royalties must be derived from sources within the Philippines, which it has jurisdiction over the withholding agent. o REASON: If there is no jurisdiction over the withholding agent, the Philippines cannot enforce him to withhold the tax and cannot run after him in case of non-withholding. o If that happens, even if the royalty income is categorized as a passive income, if the withholding agent is from outside and the income earner is a resident citizen (Remember: a resident citizen as income earner is taxable from sources within and without), so if its a resident citizen who is the one earning the royalty income but it so happens that the payor is NRA-NETB, a person over which the Philippines has no jurisdiction, then no need for that NRA to withhold the FWT. Simply, the taxpayer will have to declare as part of his income. NOTE: A RA is taxed similarly as a RC while a NRA-ETB is taxed similarly as a RC and as a RA. You will see that they have the same withholding tax rates if these persons (RA and NRA-ETB) earn the royalty income within the Philippines.
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NOTE: NRA-NETB is subject to a flat rate of 25% on all its income except: o Gain on sale of shares of stock in any domestic corporation o Gain on sale of real property located in the Philippines (Sec. 25) RC (within or without) 20% 10% 20% 20% 20% 7.5% 10% 10% NRC (within) 20% 10% 20% 20% 20% 10% 10% RA (within) 20% 10% 20% 20% 20% 7.5% 10% 10% NRA-ETB (within) 20% 10% 20% 20% 20% 20% 20% NRA-NETB (within) 25% 25% 25% 25% 25% 25% 25% 25%
Royalties, all others Royalties, LW, B, MC Prizes Winnings, exc PCSO and Lotto Interest, Regular Interest, FCDU Interest, LT, TF, DS Dividends Shares in a TP Prizes o
Are prizes passive income? REMEMBER: In exclusions from gross income, we have two types of prizes and awards: 1. Those given in recognition of education, literary, civic, religious, charitable achievements so long as you did not actively participate and that no future services that have to be rendered 2. Those given in sports competitions duly sanctioned by the National Sports Association of the Philippines and the Philippine Olympic Committee o These are exclusions from gross income and becomes only taxable if you do not satisfy all the requisites and if you do not satisfy all the requisites, you fall under this passive income while you are not in a habit of joining contests unless you make it a business. Example: You joined Mr. Pogi in USC. You won 20K, subject to final tax? Is that passive income? YES Subject to final tax? YES If your prize is only 10K? Not subject to final tax but subject to income tax If your prize is exceeding 10K, it will be subject to final tax of 20%, whoever the payor is will withhold the tax. So that SM, if you win 100K, you only expect to receive 80K because it will be withheld of 20% final tax. But for smaller prizes, 10K and below, no tax shall be withheld but since it still an income, an inflow of wealth, you have to consider this as part of your gross income at the end of the year computed of the 5-32% tax. You do not say that it is not taxable since everything is taxable as prizes and awards unless it falls under the exclusions from gross income.
20% Final Withholding Tax Php 10,000 5% - 32% Income Tax
Winnings o Situation: You won 1M abroad, subject to final tax? Not subject to final tax. So long as prizes and winning are not given on account of services rendered (future or past; since it is already considered as compensation income where situs is where the services are rendered), it will be considered as having situs in the place where it is given. If its given in the US, it will have situs abroad. If youre the recipient and a resident citizen, it is taxable actually but since the withholding agent is not within the Philippines, the income is derived from sources outside the Philippines, there is no final tax to be withheld. It would only be subject to the ordinary tax in the Philippines. It will form part of the gross income of the taxpayer at the end of the year, not final tax. Are all winnings having situs in the Philippines subject to final tax? NO, since winnings from PCSO and Lotto are not subject to any tax
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If you win super lotto, 100M, you will be free of taxes.
Interests o If you have a bank deposit in Sweden and it is earning interest, is it subject to final tax in the Philippines? NO since only sources from within the Philippines interest having situs in the Philippines. We have what we call interest income coming from the expanded foreign currency deposit unit system (FCD) in foreign currency. Is it subject to the same rate as 20% and 25% for NRA-NETB? NO. Foreign currency deposit unit system (FCDU), example: You invest and you deposit in dollars under the FCDU system (RA 8424). RC and RA will be subjected to FWT of 7.5% but for those non-residents, whether citizen or aliens, will be considered as exempt because the expanded foreign currency deposit unit system is considered as an extension from outside. Interest from long-term deposits, trust funds and deposit substitutes Since its long term, it will be exempt. (Remember: In exclusions from gross income, when it has a maturity period of 5 years or more, it will not be subject to any withholding tax by the financial institution) but this will be taxable if preterminated time deposits. o Example: If 5-year time deposit. Youre not going to be withheld of the 20% final tax no tax. Whatever promise of interest, you will get in full. But once you preterminate it along the way before it matures 5 years, you will be withheld of tax. Correspondingly, if its less than 3 years at the time you preterminated it, it will be subject to 20% FWT, just like a regular withholding tax. If you preterminate it 3 years to less than 4 years, 12%. If you preterminate it more than 4 years but less than 5 years, only 5%. RC (within or without) NRC (within) RA (within) NRA-ETB (within) NRA-NETB (within) 25%
Interest, LT, TF, DS
If Preterminated:
4 less than 5 years: 5% 3 less than 4 years: 12% Less than 3 years: 20%
Dividends o Example: There is a company who is going to declare the profits to its stockholders 5 stockholders of different status. Is the dividend going to be declared by Company B subject to final tax? Would all dividends declared by a corporation, cash or property, be subject to final tax in the Philippines? YES, but the corporation or Company B must be a domestic corporation since the dividends will have Philippine situs and will have a Philippine withholding agent. Why can we not subject to final tax the dividends declared by a foreign corporation as a rule? What dividends will be subject to final tax? 1. Dividends declared by a domestic corporation since domestic corporations declaring dividends, the dividends will have Philippine situs and will have a Philippines withholding agent. 2. Taxable partnerships which are domestic 3. Joint stock companies, joint consortiums which are considered as corporations and domestic o You do not restrict yourself to looking at domestic corporations only but you have as well taxable partnerships, other corporations, associations, which declare dividends so long as it is domestic, the dividend having situs in the Philippines will be subject to Philippine final tax.
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Having situs in the Philippines and having a domestic Philippine withholding agent, is the dividends of the 5 stockholders subject to final tax? YES. NRA-NETB is subject to 25% final tax on all income derived from sources within the Philippines except capital gains from sale of shares of stock in a domestic corporation and capital gains from sale of real property located in the Philippines. NRA-ETB is subject to 20% final tax Dividends paid by a domestic corporation is subject to final tax in the Philippines. How about dividends paid by a foreign corporation? Is that subject to Philippine final tax? Remember: Situs of income taxation as regards dividends As a rule, dividends given by a foreign corporation, if its really foreign (not operational in the Philippines), will not be covered by Philippine final tax. But if the foreign corporations operations is more than 85% in the Philippines, it is considered as a domestic corporation. If more than 50%, partly taxable in the Philippines. If it is less than 50%, situs is abroad, therefore, not covered of 1 Resident Corporation: Philippine final tax. 10%
Company B Must be a domestic Corporation

5 Resident Alien: 10 %
2 Non- Resident Citizen 10%
4 Non-Resident Alien Not Engaged in Trade or Business: 25%
3 Non-Resident Alien Engaged in Trade or Business: 20% 1 Resident Corporation
5 Resident Alien
Comp. B Now a foreign corp. Follow the rule on situs on dividend income
4 Non- Resident Alien Not Engaged in Trade or Business
2 Non- Resident Citizen
3 Non- Resident Alien Engaged in Trade or Business
Share in a Partnership o Is the partnership obligated to withhold final tax? Any income that will be distributed or to be distributed by a partnership other than a general professional partnership, it will be treated as a profit distributed by a corporation. For tax purposes, a taxable partnership is taxed similarly as a corporation so any profit distribution by the partnership will be taxed similarly as a corporation. Taxable partnership does not include general professional partnership. Therefore, the share in a taxable partnership will be considered as dividend, thus, such partnership is considered a corporate taxpayer.
CAPITAL GAINS Is a capital gains tax a final tax?
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o o
Capital gains derived from sale of shares of stock and capital gains derived from the sale of real property are subject to capital gains tax (CGT). You do not call it withholding tax. What are the 3 types of capital assets? 1. Sale of shares of stock subject to CGT 2. Sale of real property not used in trade or business subject to CGT 3. All others which are not considered as ordinary assets subject to ordinary tax Is capital gains an ordinary income, meaning, is that an income derived from an ordinary activity? NO, so that CGT is a final tax. Every time that it is collected by the government, no withholding involved just like fringe benefits. But its a final tax in the sense that the capital gains from the shares of stock sold and real property sold is an activity that is not made often. Its capital asset its not in relation to any business. Example: Corporation B. You are a stockholder. You have 1K shares, which you bought at 1.00/share. The total value of the shares is 1K. You sold it to your seatmate for 2.00/share. Did you earn income? YES, 1K, and such income is called capital gains. Is it subject to CGT? YES. What if the corporation issuing the shares is a foreign corporation? Sec. 24 (c) of the Tax Code. Since it does not come within the ambit of capital gains tax all shares issued by a domestic corporation, thus, shares of stock in a foreign corporation will not be covered by the 5% CGT in the first 100K nor 10% on any excess but will still be considered an income because its an inflow of wealth, it will be taxable at the end of the year using the ordinary tax rate of 5-32%. So automatically, every time its not an exclusion from gross income, such income is always taxable. The question will be is it final tax, CGT, or ordinary tax. Lets say Corporation B is a domestic corporation. For the 5% CGT and 10% CGT to apply, it must be shares sold by a stockholder to another person and the shares must be issued by a domestic corporation. The manner of selling is also important. The share must not be listed through local stock exchange and must not be traded through local stock exchange (local stock exchange Philippine stock exchange). If both exist, listed in the stock exchange and traded in the stock exchange, it will be covered by Sec. 127 on the stock transaction tax (STT) of of 1% of the gross selling price. For the 5% or 10% to apply, the stocks sold must not be listed and traded in the stock exchange because if it is listed and traded, it will be covered by another provision of the Tax Code, which is Sec. 127 on stock transaction tax. What happens if the stocks that you sold to your seatmate is listed in the stock exchange but you did not sell it in the stock exchange, instead, you sold it personally to her? Is it covered by STT or CGT? Listed but not sold through the stock exchange? CGT. STT of of 1% of the gross selling price is very restrictive. It will only apply if it is both listed and traded in the stock exchange. If its listed but not traded in the stock exchange (over-the-counter sale), automatically, the CGT of 5% or 10% will apply. In CGT, if no gains derived, no tax. However, in STT, whether or not you derived a gain/profit, since the basis is the gross selling price, it will be subject to STT.
Stockholder 1000 @ 1.00/share= 2.00/share= Company B Domestic Corporation Gains
Php 1,000.00 2,000.00 ___________ Php 1,000.00 Capital
- If both traded and listed through the local stock exchange, follow Section 127 STT: of 1% of GSP. - If listed but sold personally (meaning not either listed or traded), follow the rule on capital gains. AFTER BREAK
The provision of 5 and 10% CGT is different from STT. The of 1% STT on the gross selling price would only apply if the shares being sold by you as the stockholder to another person is both listed and traded in stock exchange. Absent any of the requirements of listed and traded, even if its listed but not traded or totally not listed in the stock exchange, meaning its not a public corporation, with more reason not traded in the stock exchange, you apply the 5% and 10%. Corporation means domestic corporation. No foreign corporation. 5% if the CG is 100K or less and 10% if more than 100K
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When you say capital gain, that is only the gain after you deduct the cost of the shares that you have sold. Example: 1M shares at 1.00/share so you actually bought it at 1M and you sold it to your seatmate at 2.00/share so you have 2M gross selling price, not listed, not traded. How much is the CG? 1M. How much is the tax due to the government? o The law provides that the CG of 100K or less is subject to 5% CGT. Any excess over 100K CG is subject to 10%. Therefore, first 100K (5%) 5K. The excess of 900K (10%) 90K. Thus, the tax due is 95K. o You dont categorize your income automatically to 10% if the CG is more than 100K. Always, its 5% for the first 100K.
Stockholder 1,000,000 @ 1.00/share= Php 1,000,000.00 Cost 2.00/share= 2,000,000.00 Sold it to Company B seatmate Domestic ______________ Corporation Php 1,000,000.00 Capital Gains Tax Due on Php 1,000,000: Rule on Capital Gains: 1st Php 100,000 = Php 5% (100,000 or less Capital 5,000 Gains) Excess Php 900,000 = Php 90,000 10% (Over 100,000 Capital Tax Due Gains) Php 95,000.00
-
Now, change of facts. You own 200K shares. You bought it at 1.00/share. Cost is 200K. You sold it at 2.00/share so youre gross selling price if 400K. So that the CG is 200K. How much is the tax due? o First 100K (5%) 5K plus excess of 100K (10%) 10K = a total of 15K
Stockholder 200,000 @ 1.00/share= Php 200,000.00 Cost ON AUGUST 10, 2010: You 2.00/share= 400,000.00 Gross traded: Selling Price Company B ______________ Stockholder 200,000 @ 1.00/share= Php 200,000.00 Cost Domestic Php 200,000.00 Capital 2.00/share= 400,000.00 Gross Corporation Gains Selling Price Company B Tax ______________ Due on Php 200,000: Domestic Php100,000 200,000.00 Capital 1st Php = Php Corporation Gains 5,000 Excess Php 100,000 = Php 10,000 Tax Due on Php 200,000: Tax Due st 1Php Php 100,000 = Php You sold the preceding transaction today, Aug. 10. Tomorrow, Aug. 11, you had another transaction. 15,000.00 You sold 300K shares at 1.00 each. So cost is 300K. 5,000 You sold it at 2.00 so the gross selling price is 600K, not listed, not traded. CG is 300K. What is Excess your liability to the government? This is your Php 100,000 = Php 10,000 transaction no. 2 during the calendar year. Tax Due o The 5%-10% rule is made to apply to all capital transaction on sale of shares of stock Phpgains 15,000.00
during the calendar year by.. So he can only avail one time of the first 5% on the first 100K. Any subsequent sales, if its already beyond the 100K, automatically 10%. But you dont have Then, ON AUGUST 11, 2010: You to tell the BIR that that istraded your second transaction. again: o The point is, during the calendar year, avail of the 5%-10% only one time. If your first transaction has only 50K CG, automatically 5%. 2nd transaction, you still have free 50K for 5% and the rest is Stockholder 10% until the end of the @ year. 1.00/share= Php 300,000.00 300,000 Cost
2.00/share=
600,000.00
Gross
Company B Domestic Corporation
Selling Price Gains
______________ Php 300,000.00
Capital
Tax Due on Php 300,000: Total Php 300,000 = Php 300,000 X 10% Tax Due
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If youre a broker of shares, will you be covered by 5 and 10%? o NO, since a broker is engaging in business of trading shares of stock, therefore, his taxability would be covered by ordinary tax rates of 5-32% o If you are in the business of selling shares of stock, its no longer passive income, its no longer capital income because it becomes youre ordinary transaction subject to the ordinary tax rates of 5-32% as an individual. What if Corporation B issuing the shares as a foreign corporation, will it be subject to Philippine tax of 5 and 10%? o NO since it is not a domestic corporation. Not being a domestic corporation, foreign corporations have situs outside the Philippines and only resident citizens are taxable within and without. Therefore, resident citizens receiving gains from sale of shares of stock issued by a foreign corporation would be taxable at the rate, not 5 and 10%, but 5-32%. All others, RA, NRA-ETB, NRA-NETB, no tax on shares sold by a foreign corporation because situs is without, as a rule.
Capital gains on sales of real property
Capital Gains on Real Property Considered as

Would all sale of real property be subject to the CGT of 6%? o NO, since if the sale of real property is part of his real estate business then it will never be subject to CGT since a person or corporation engaged in real estate business is ordinarily engaged in real estate transactions, therefore, their real properties shall be considered as ordinary assets not subject to CGT. What is subject to CGT is only capital gains from capital assets. If you are in a manufacturing business and you sell your parcel of land in which you utilized it for manufacturing plant or factory, is it subject to CGT of 6% or is it subject to the ordinary rate of 5-32%? o The subject parcel of land is an ordinary asset. Being an ordinary asset, it does not satisfy the requirement that for 6% CGT to apply, it must be imposed on the sale of real property
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considered as capital asset. Capital assets are those which are not ordinary assets. Real properties used in business are considered as ordinary assets. Therefore, the sale of the subject parcel of land is subject to the ordinary rate of 5-32%. Example of real property, that is considered as a capital asset subject to the 6% CGT o Residential lot is a capital asset. If he decides to sell it, it will be subject to the 6% CGT on the gross selling price or the zonal value, whichever is higher. o Zonal value can be derived by the (found in Sec. 6 of the Tax Code) BIR or Local Assessor o There are 3 choices, whichever is higher: 1. Gross selling price as decided by the parties 2. Fair market value (FMV), may be the zonal value by the Local Assessor 3. FMV by the BIR Commissioner Whichever is higher of these three, it will be the basis of the 6% CGT, regardless of any income earned, meaning, even if you sell your capital asset of real property at a loss, because the basis is the gross selling price or FMV, whichever is higher. There is at all times a basis on which the tax will be imposed on. There could be no 0 gross selling price or no 0 FMV, otherwise, it becomes a donation if its 0 gross selling price. o The FMV the price at which the seller is not obligated to sell and the buyer is not obligated to buy. This type of FMW is not part of the choices.
Basis of Capital Gains Tax: Gross Selling Price parties Fair Market Value Fair Market Value Fair Market Value
-
Decided by the Local Assessor Section 6 Local Assessor
6% Capital Gains Tax
This is the price you are not obligated to sell and not obligated to buy
Situation: You have a residential lot in the US. You also have a principal residence with a house (home) in the Philippines. You sold both properties. Will you be subject to the 6% CGT on both properties? o Residence assumes that you have a family inside. (home) Requirements to be exempt from CGT on sale of principal residence: 1. Proceeds are fully utilized in acquiring or constructing a new principal residence within 18 months from the date of sale or disposition o What happens if you dont utilize the entire proceeds from the sale of the residential home to construct another house? If the proceeds of the sale of your principal residence is not fully utilized to construct or acquire another principal residence within 18 months, the difference or the excess will be subject to the CGT. 2. Historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired o This simply means that whatever the value of the principal residence that you sold, it will still be the value of the new house constructed. So subsequently, your new house that you constructed, the cost is the old cost or the historical cost of your new house. It will have a bearing because if you sell it subsequently, the cost will still be way below because its based on the old property. 3. Notice to the Commissioner of Internal Revenue shall be given within 30 days from the date of sale or disposition 4. This exemption can only be availed of once every 10 years 5. If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to CGT o If you intend to sell your principal residence, it will be exempted from the 6% CGT on the following conditions: 1. Your principal residence is certified to as your principal residence by the barangay in your area
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2. It must be located in the Philippines 3. The proceeds derived in the sale must be used to acquire or construct a new principal residence within 18 months. 4. Notify the Bureau within 30 days that you are availing of the exemption Reasonable because in every capital gains sale of real property or shares of stock, you have to file the CGT return within 30 days 5. Historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired 6. Availed of only once every 10 years How about the residential lot sold abroad? Subject to 6% CGT or 5-32% ordinary tax rates? Subject to the ordinary tax rates of 5-32% For 6% CGT to apply: 1. It must be a real property 2. The real property must be classified as a capital asset (not used in trade or business; not primarily sold) 3. It must be located in the Philippines Anything that is located abroad and is sold, even if its a real property considered as a capital asset, will be subject to 5-32% if the seller is a RC. But if the residential lot is located abroad and the seller is NRA, not subject to any Philippine tax since he is only taxed from sources within. What if its a RA selling residential lot located in his home country? NO, since situs of real property is where such property is located so if its a real property located abroad, only resident citizens will be taxable for its sale. All other taxpayers, who are only taxable for sources within the Philippines, would not be taxable on a residential lot sold and located abroad. GR: All real properties considered as capital assets located in the Philippines is subject to 6% CGT on the gross selling price or FMV, whichever is higher. E: 1. Sale involves principal residence provided the requisites are complied with 2. Property is located abroad 3. If the buyer of the real property is the government, political subdivisions or GOCCs, in which case, the seller will have the option of being taxed at 6% or the graduated rates of 5-32% as an individual taxpayer. Which do you prefer? Based on the 6% CGT of gross selling price or FMV or graduated rates of 5-32%? Example: Gross selling price or FMV is 10M. Cost is 9M. You have 1M profit. Do you want to be taxed at 6% or 5-32% if you are given an option when the buyer is the government? If you are selling at a loss, then go to 5-32% because such tax rate is based on the profit (net taxable income) But if you are selling at a higher gain, go for 6% CGT. But if youre gain is just minimal, you compute. 6% of 1M, you are expected to pay 600K. 5-32% of 1M, you are expected to pay 285K.
FMV = Php 10,000,000.00 Cost = 9,000,000.00 Php 1,000,000.00
If based on the CGT of 6%: 10,000,000 @ 6% = 600,000 If Based on the graduated rate: Php FIRST 500,000 @ 32% = 160,000 EXCESS OF 500,000 @ 25% = 125,000
Categories of income that an individual taxpayer may earn: 285,000 o 1. Compensation income for services rendered o 2. Income from business, trade or profession o 3. Passive income due to material inactivity of the taxpayer o 4. Capital gains on sales of shares of stock which is not listed in the local stock exchange or even if listed, so long as its not traded through the local stock exchange
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o o
5. Capital gains on sales of real property considered as capital assets and located in the Philippines 6. Other income a. Rent income other than royalties b. Interest income other than interest income on bank deposit c. Dividend income d. Income from other sources and this may include: d.1. Bad debts recovered d.2. Illegal gains derived from gambling d.3. Tax refunds d.4. Compensation for private property expropriated by the government for public use d.5. Damages d.6. cancellation of indebtedness
Cancellation of indebtedness o If it must be without rendition for services, past or future, it may be considered as a donation or gifts subjected to donors tax, thus excluded from gross income, thus, not subject to income tax. o If service will be rendered, it will be considered as a compensation and subject to income tax Bad debts recovered and tax refunds o They may be subject to income tax. o If the bad debts, at the time that it was claimed as an expense, has benefited the taxpayer by paying less due to the availment of the expense, the recovery of that will be considered as an income to offset the expense that you have claimed prior. o If at the time of claiming the bad debts as an expense did not benefit tax wise the taxpayer, when it is subsequently recovered, the bad debts will not be taxable. o BAD DEBTS unpaid debts o Example: Lets say that youre Mr. A. You have extended a loan of 100K to Mr. B. Mr. B failed to pay. You are in the business of selling cosmetics. Mr. B was judicially declared insolvent so that Mr. A could no longer collect. In 2009, you had 1M net income before deducting the credit that you have extended to Mr. A. Cosmetics you delivered to Mr. B to sell, he failed to pay. So you considered bad debts as an expense. If you 100K as an expense, you actually will be paying tax only on the 900K. But your tax was reduced to the extent of the tax on the 100K expense for the unpaid debts. In 2011, Mr. B won the lotto so that he paid you 100K. You receive 100K. Is that 100K that you recovered from Mr. B taxable or not? Taxable because at the time you decided that you can no longer collect the 100K, you deducted it as an expense benefiting you from being taxed on the 100K. Instead of being taxed of 1M, it is only 900K because you claimed the 100K as an expense. When the bad debts was recovered, it will be considered as taxable because it benefited you at the time you deducted the expense. What are the requirements to be able to deduct bad debts as an expense? 1. The indebtedness must be entirely worthless. 2. The indebtedness must no longer be collectible after taking legal steps to MR. A recover it. MR. B (Declared
Insolvent)
Php 100,000.00
Failed to pay
2009: Mr. A decided to deduct it as bad debt: Net Income Php 1,000,000 Bad Debt Deduction (100,000) 900,000 X 5% - 32% TAX DUE
2011: MR. B PAID: Paid 100,000 Php
THIS IS TAXABLE!
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If you have only 100K net income, then you deducted the bad debts of 100K as an expense, will the subsequent recovery of the bad debts be taxable? YES, since you benefited. Youre net income before the bad debts is 100K but because you deducted the bad debts of 100K, you did not pay any tax. Instead of paying tax on the 100K net income, you deducted the 100K bad debts, you did not pay any tax. You were benefited to the extent of the tax on the 100K, therefore, any subsequent recovery is taxable.
Next Scenario: Same as Mr. A as creditor and Mr. B as declared insolvent: 2009: Mr. A decided to deduct it as bad debt: Net Income Php 100,000 Bad Debt Deduction (100,000) --- 0 --X 5% - 32% NO TAX DUE
o
SUBSEQUENT RECOVERY IS TAXABLE!
But if you are actually operating at a negative loss, you will deduct the bad debts which was worthless and uncollectible. Will the subsequent recovery be taxable? NO, since you were not benefited. Whether or not you deducted the 100K bad debts, still you will not be paying any tax because you were at a loss prior to you availing the expense deduction on bad debts. A subsequently recovered bad debts can only be made taxable at the time of recovery if such bad debts benefited the individual at the time of payment as an expense.
Next Scenario: Same as Mr. A as creditor and Mr. B as declared insolvent: 2009: Mr. A decided to deduct it as bad debt: Net Income Php (100,000) Bad Debt Deduction (100,000) --- 0 --X 5% - 32% NO TAX DUE
o
SUBSEQUENT RECOVERY IS NOT TAXABLE!
Say for example: Your net income is 50K. At this time, you decided to deduct the bad debts because its already worthless and uncollectible. Will the subsequent recovery of 100K be taxable? YES, but only partial because the benefit was also partial. You wipe out only 50K for the year so youll onlyA be taxable 50K when its recovered. Next Scenario: Same as Mr. as creditor and Mr. B as declared
insolvent:
2009: Mr. A decided to deduct it as bad debt: Net Income Php 50,000 Bad Debt Deduction (100,000) --- 0 --X 5% - 32% NO TAX DUE
FIRST Php 500,000:
2nd Php 500,000:
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Entitlement to deductions Taxpayers, the 4 of them (RC, NRC, RA, NRA-ETB), they are all allowed to claim deductions. The NRA-NETB is subject to the flat rate of 25% on gross income without the benefit of any deductions. How about special employees? o Special employees are subject to the flat rate of 15% - no business income, otherwise, if they have business income, they will still be covered to the 5-32% or the 25% flat rate. What are the deductions allowed to the individuals if an individual is simply working without earning business income, employed? o Personal and additional exemptions o Kinds of personal exemption: 1. Basic personal exemption 50K What status do you have to be if you want to claim 50K personal exemption? Is it regardless of being single or married? YES. Do we still have head of the family? NO. Every individual taxpayer, whether hes actually working as an employee or engaged in business, every one of us is entitled to basic personal exemption of 50K, regardless of our status whether single or married. 2. Additional exemption 25K for every qualified dependent, but not to exceed 4 Who is allowed to claim additional exemption? Those taxpayers who have qualified dependents but not to exceed 4 Qualified dependents refers only to the legitimate, illegitimate or legally adopted children of the taxpayer o The child is: i. living with the taxpayer ii. Chiefly dependent upon the taxpayer for support iii. Not more than 21 years of age iv. Not married v. not gainfully employed or, even though over 21 years old, incapable of self support because of mental or physical defect If you are 21 years of age, is there by any chance he be considered as a qualified dependent? o YES if you are incapable of self-support because of mental or physical defect. Every person having a qualified dependent is allowed to claim additional exemption of 25K up to the maximum of 4. A qualified dependent is a child, whether legitimate, illegitimate or legally adopted, who must not be more than 21 years of age, living with the taxpayer claiming the exemption, chiefly dependent on the latter for support, not gainfully employed (he can be employed but if its not gainful employment, he can still qualify as a dependent), not married. If you lack any of the above requirements, you will be taken out from the list of qualified dependents. Can a senior citizen being taken cared of by a taxpayer be considered a dependent? o Senior citizen someone who is at least 60 years old and earning along the poverty line of not more than 60K. o Senior citizens cannot be treated as a qualified dependent since dependents only pertain to children. So additional exemption would only refer to children. o SEE TABLE: refer to outline RC Basic Personal Additional Exemption Children) (Only to NRC RA NRA-ETB NRA-NETB
X X
Only these 3 are allowed to claim additional exemption!
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A NRA-ETB can only claim basic personal exemption of 50K if his home country allows Filipinos not residing in that home country to also claim personal exemption. But in so far as the amount of exemption is concerned, how much will the NRA-ETB be allowed? o Lifeblood doctrine. If the home country of the NRA-ETB grants similar personal exemptions to Filipinos not residing in that home country in an amount of not more than 50K, lets say for example 20K only for Filipinos there, then the NRA-ETB can only claim 20K as personal exemption. If the Filipino can claim 100K, then the NRA-ETB can only claim 50K. All in favor of the government. Situation: You have a child who was born on January 1, 1989. If you file your ITR for 2010, can you claim your child as a qualified dependent? o Here the child is almost 22 by the end of December 2010. Taking into consideration your income from Jan. 1 to Dec. 31, 2010, can you claim your child as 25K additional exemption? YES. Status-at-the-end-of-the-year rule. Whatever changes in the status of the child at the end of the year, whether it be a death, a birth or marriage, everything in favor of the taxpayer will have to be construed. Everything is made as if he was born earlier or later.
You have a child born on: January 1, 1989 Can claim on 2010? Note: By the end of December 2010 almost 22 years old. January 1 ------------------------- December 31, 2010 Covered as Additional Dependent
o If such child got married on Dec. 31, 2010, can you still claim for the additional exemption? YES. There wouldnt be any difference. All in favor of the taxpayer. But the subsequent year 2011, automatically, such child is no longer part of the qualified dependent since he is more than 21 and hes already married.
January 1 ------------------------- December 31, 2010 (Your child got Married on Dec. 31, 2010) Covered as Additional Dependent
NOTE: The requirement for you to be able to claim as qualified dependent, he must be living with you, not necessarily everyday in your house. He may stay away during the course of studying law, for example. You are still considered as living with your parents. AND chiefly dependent so that your allowances would have to come from them. o So if there is a slight deviation such as when youre living with them but chiefly dependent from someone else, then you will not be covered by the qualified dependents. Who can claim the deduction of 25K? Both spouses? o The default for claiming the deduction is the husband in case both are working. o But if only one is working, automatically claiming the additional exemption belongs to the working spouse. o But can the husband waive his right to claim the additional exemption in case both are working? YES Is it automatic waiver? Or what are the requirements for waiving? For a husband to relinquish his right in claiming the additional exemption against his gross income, the husband must explicitly put into writing his
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waiver and inform the BIR and his employer and the wifes employer in order for the wife to validly claim the additional exemption. What is the other deduction allowed to a purely employed individual? o Premiums on health and hospital insurance o Here, who took the insurance? Employee, not employer For the premium payments deductible, the insurance should be taken by the employee himself. So if youre the employee right now, you have an insurance policy on health and hospitalization. You took it out on your own. Inform your employer that you will deduct 2,400 so long as your family income is not more than 250K. o Can all individuals claim as deduction the premium payments on health and hospital insurance? o So I am an employee and I take out a health and hospital insurance for which I am paying 100K annual premiums, can I deduct it from my gross compensation income in USC? NO, since we must have to consider the limitations: i. premium payments deducted must not be more than 2,400 a year (i.e. 200 a month) ii. The immediate family of the taxpayer must have an income of not more than 250K a year o This refers to minimum wage income earners o If you have still your father, mother and youre single, and your father is earning 100K a year, your mother is earning 100K a year, and youre earning 100K a year, thats a total of 300K. You can no longer qualify deducting the 2,400 premiums a year iii. The claimant must be the spouse claiming the additional exemption o What spouse? In default, the husband if both are working but if only one is working, the employee-spouse. If husband validly waives, then its the wife. The deductions of personal and additional exemptions plus the premiums on health and hospital insurance are deductible from the compensation income of an individual who is purely employed o What if he engages in business having purely business income and/or engaged in business and still employed (mixed income), can he avail of the said deductions? Personal and additional exemptions Premiums on health and hospital insurance Itemized deductions Say for example youre a businesswoman. You have a sole proprietorship. What deductions can you avail of? Personal and additional exemptions Premiums on health and hospital insurance Itemized deductions those expenses incurred in relation to trade, business or profession o Is the itemized deductions available to all types of classes of individual taxpayers engaged in business? So long as the individual is engaged in trade or business, he can claim itemized deductions but only to the extent of the expenses incurred in relation to trade, business or profession and incurred in the Philippines for those taxable of income from sources within. If your taxable as a RC on global income, then it is rightful that you also claim the global expense as well. But if youre a RA or a NRA-ETB, who is taxable from income only within, then only the expenses incurred within the Philippines is offsettable against such income. Exceptions to claiming itemized deductions: Individual taxpayers earning purely compensation income since personal and family living expenses are non-deductible items NRA-NETB since they are taxed on their gross income without benefit of deduction
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Aliens employed by Regional Area HQs, Regional Operating HQs, Offshore Banking Units, Petroleum Service Contractors & Subcontractors because they are only taxable on their compensation income except when they are engaged in business
What is optional standard deduction (OSD)? o A standard deduction available to individuals except NRA, in an amount not exceeding 40% of the gross income, in lieu of itemized deductions. o It is a fixed percentage at 40% allowed as a deduction against the gross income of certain taxpayers without any regard of whether actually expenses have been incurred or not. Its arbitrary rate of 40%. o Proof of substantiation for such expense of 40% deduction is not necessary. So automatically, 40% of your gross income is deductible if you opt for OSD. o If you are a taxpayer having a business, sole proprietorship. You opted for OSD in filing your 1 st quarter ITR. You realized 2nd quarter or 3rd quarter or annual, when you try to consolidate everything, that your actual expenses supported by official receipts and invoices is way higher than the 40% OSD. Can you choose itemized deduction at the end of the year?
1st 40% OSD
2nd
3rd Revocable?
4th
NO. The OSD of 40%, once you opt to go for OSD during the 1 st quarter, it becomes irrevocable during the entire year, regardless of whether you actually incurred expenses at the end of the year 90% of your gross income, you can no longer change your option. Although, the default is always itemized deduction. Without indicating that you choose OSD of 40%, automatically the BIR will go for itemized deduction. Who are allowed to claim OSD? RC, NRC and RA. NRA are not allowed to claim OSD. RC NRC RA NRA-ETB X NRA-NETB X X
Itemized Deduction Optional Standard Deduction
Corporations, can they claim OSD? YES, except non-resident corporations

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TAXATION

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July 27, 2010 Tuesday L. Allowable Deductions

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Sale Php 500,000.00 Expenses (Php 1,000,000.00)

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Premium Php 100,000 Php 100,000

Beneficiary Company A Estate of U as employee

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10% W 10% X 10% Y

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But if we dig into the ownership, say for example:

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50% Company Z 99.99% owned by U

Let me change the facts again:

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10% W 10% X 10% Y

10% W 10% X 10% Y

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July 27, 2010

December 31, 2010

December 31, 2011

July 26, 2012

2010 RESIDENT CITIZEN TAXABLE FOR BOTH

He does not qualify under No. 1 and No. 2.

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ABROAD WITHOUT SITUS

July 27, 2010

December 31, 2010

December 31, 2011

June 26, 2012

2010 RESIDENT CITIZEN TAXABLE FOR BOTH

LESS THAN 183 HOMECOMING days here CONSIDERED NONRESIDENT STILL

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TAX PHP 2,500.00

SALARY: PHP 10,000.00

ACTUAL COMPENSATION: Php 12,500.00

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ORDINARY BENEFIT FRINGE BENEFIT

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32% of GMV of Fringe Benefit 32% of ___________________

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True Value: Php Stay) (FBT)

85,000 (Net Free + 15,000

_________ Php 100,000

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True Value: Php Stay) (FBT)

75,000 (Net Free + 25,000

_________ Php 100,000

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What does it refer to? What type of plans?

BEN = Company = BEN = Employee or Administrator = year