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TAX

TAXABLE INCOME Taxable or non-taxable Income from jueteng is taxable. The law imposes a tax on income from any source whatever which means that it includes income whether legal or illegal ( sec. 32 A, NIRC) Gain arising from expropriation of property is taxable. There is material gain, not excluded by law, realized out of a closed and completed transaction. Gains from dealings in property are part of gross income. ( Sec. 32 A (3), NIRC) Taxes paid and subsequently refunded is either taxable or non-taxable (it depends). Taxes paid which are allowed as a deduction from gross income are taxable when subsequently refunded but only to the extent of the income tax benefit of said deduction. (Sec. 34 C (1), NIRC. It follows that taxes paid which are not allowed as deduction from gross income ,i.e., income tax, donors tax and estate tax, are not taxable when refunded. Recovery of bad debts previously charged off is taxable to the extent of income tax benefit of said deduction. ( Sec. 34 E (1), NIRC Gain on the sale of a car used for personal purposes is taxable. This is a gain derived from dealings in property which is part of the taxpayers gross income. ( Sec. 32 A (3), NIRC. There is a material gain, not excluded by law, realized out of a closed and completed transaction.

Tax treatment , in the preparation of annual income tax returns

The proceeds of life insurance received by a child as irrevocable beneficiary are not to be reported in the annual income tax returns, because they are excluded from gross income. This kind of receipt does not fall within the definition of income -- any wealth which flows into the taxpayer other than a mere return of capital. Since insurance is compensatory in nature, the receipt is merely considered as a return of capital. (sec. 32 B (1), NIRC. 13th month pay is excluded from the gross income for income tax purposes to the extent of P 30,000. Any excess will be included in the gross income per income tax return as part of gross compensation income. ( Sec. 32 B (7e), NIRC.

De minimis benefits are non-taxable fringe benefits. They are not to be reported in the income tax return because they are tax exempt. They are also exempt from the imposition of the fringe benefits tax. ( Sec. 33 (c ), NIRC) Dividends received by a domestic corporation from another domestic corporation are not subject to income tax, hence should not be declared in the income tax return. (Sec. 27 D4), NIRC. Dividends received by a domestic corporation from a foreign corporation is subject to income tax and shall form part of the gross income. There is no law exempting this type of dividend from income tax. ( Sec. 32 (7), NIRC. Interest on deposit with BPI Family Bank is a passive income subject to a final withholding tax rate of 20%; the interest on deposit with a local offshore banking unit of a foreign bank is a passive income subject to a final withholding tax rate of 7.5%. ( Sec. 24 B (1), NIRC. Both interest incomes are not to be declared as part of gross income in the income tax return. Generally, income realized from the sale of capital assets are not to be reported in the income tax return as they are already subject to final taxes ( capital gains tax on real property and shares of stocks). What are to be reported in the annual income tax return are the capital gains derived from the disposition of capital assets other than real property or shares of stocks in domestic corporations which are not subject to final taxes. Income realized from the sake of ordinary assets is taxable and the said income shall be declared in the annual income tax return. The income constitutes either income derived from the conduct of trade or business or a gain derived from dealings in property. ( sec 32 A 2 and 3, NIRC.

Pension from GSIS Pension received from GSIS is exempt from income tax, but not on the interest income that might accrue on the pensions deposited with the bank, which are subject to final withholding tax. Consequently, the pensioners pension which accrues interest is already subject to the final withholding tax, he is not required anymore to file an income tax return. ( sec. 51 A2)

Taxable income taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any,

authorized for such types of income by the Tax Code or other special laws. (sec. 31, NIRC 1997)

Prizes If the Prizes and awards is in excess of P10,000, it is not includable in the gross income but is subject to a final tax of 20%. The Prize constitutes a taxable income because there was an action on his part to enter the contest. Otherwise it is tax exempt. Problem: is the prize of one million pesos awarded by Readers Digest subject to withholding of final tax? A: It depends. If the prize is considered as winnings derived from sources within the Philippines, it is subject to withholding of final tax ( Sec. 24 B in relation to sec. 57A of NIRC. But if derived from sources without the Philippines, it is not subject to withholding of final tax because the Philippine tax law and regulations could not reach out to foreign jurisdictions. Here, the tax shall be withheld by the Readers Digest or local agent who has control over the payment of the prize. Liabilities for failure to withhold: in addition to other penalties, is liable upon conviction to a penalty equal to the total amount of tax not withheld ( sec. 251 NIRC). In case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. Also in addition to other penalties provided by law, upon conviction, be punished by a FINE of not less than 10T and suffer IMPRISONMENT of not less than ONE YEAR but not more than 10 years ( 255 NIRC). ALTERNATIVE: the payor/withholding agent shall be liable to both civil and criminal penalties imposed by the Tax Code.

Income tax on retirement An employee retiring under a companys qualified and private retirement plan can only be exempt from income tax on his retirement benefits if the following requisites are met. ( RA 4917) meaning, retirement plan approved by BIR. 1. The retiring employee must have been in service of the same employer for at least 10 years 2. That he is not less than 50 years of age at the time of retirement 3. The benefit is availed of only once.

Under a company without any retirement plan ( RA 7641) 1. Those relieved under existing collective bargaining agreement and other agreements are exempt 2. In the absence of retirement plan or agreement providing for retirement benefits, the benefits are excluded from gross income and exempt from income tax if: o o The retiring employee must have served at least 5 years That he is not less than 60 years of age but not more than 65.

The benefits received under the BIR-approved retirement plan, upon meeting the service and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifies as an exclusion from gross income being in the nature of benefit received on account of separation due to causes beyond the employees control. ( sec. 32 B, NIRC). The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits excluded from gross income SC 1991 Relatedly, in the case above, some separated employees did not meet the required age and length of service, but they were given separation benefits: ( Answer): All the benefits received by them will also be exempt from income tax, hence not subject to withholding tax. These are benefits received on account of separation due to causes beyond the employees control, which are specifically excluded from gross income. ALTERNATIVE ANSWER: All the payments are not subject to income tax and should not also be subject to WT. The employees were laid off, hence separated for a cause beyond their control. Consequently, the amounts to be paid by reason of such involuntary separation are excluded from gross income, irrespective of whether the employee at the time of separation has rendered less than ten years of service and/or is below fifty years of age.