The classification is essential in determining the proper tax For the 3 months security deposit, this will not be considered
rates and treatment to be applied. taxable since this is not an income or a gain on his part. Hence,
no income tax.
In the hands of an individual, a capital asset, if a real property
shall be subject to 6% CGT based on the selling price or FMV, Under accrual method, income is recognized when it earned
whichever is higher. If it is an ordinary asset, the gain/loss is regardless of whether or not cash is received. In this case, only
determined by subtracting the cost from the selling price (SP- 2 months is earned and it would be taxable. The last month
cost), and such gain is treated as part of gross income, while was not rented out therefore not considered as gain.
the loss is treated as deduction.
Under cash method, income is recognized when cash is
If the individual however, is a dealer in property, real received regardless if there is performance or not. The whole 3
properties are usually held by such individual as inventory, months will be taxable immediately. But since there was a
cancellation, the previously recognized income must be If they will set-up a subsidiary, the foreign entity will be a non-
deducted for the amount of the rent for the last month. resident foreign corporation. The subsidiary will be treated as
a domestic corporation and it will be subject to corporate
3. income taxes provided in the law. Dividend payments by the
The architect is a non-resident, thus he will be only taxable for subsidiary to the foreign entity will be subject to treaty rates, if
income arising from sources within the PH. any, or 15% if there is sparing or 30% if no tax sparing. (The
tax sparing provision was basically to equalize the burden for
The tax code provides that for income arising from services, foreign entities who establishes branch or subsidiary in the PH.
the source of income is the country where the services were This happens when foreign country where the foreign entity
performed. So if the architect who is in Canada designs the came from allows tax credit for income earned in the PH.
plains in Canada, he will not be taxable in the PH for service
fees. For royalties, he will be subject to final tax of 20% if the 6. Tax Free Transaction
income will come from sources within the PH.
If an individual exchanges property to a corporation for
4. Requirements for business expense to be deductible shares of stock of such corporation, it will be exempt from
tax if he alone or together with others not exceeding four,
a. Must be in relation to trade, business, or profession of will gain control of the corporation and provided that it is
taxpayer for a legitimate business purpose and not merely to avoid
b. Ordinary and necessary expenses taxes.
c. Reasonable amount
d. Paid or incurred/accrued during the taxable year In this case, since property was exchanged for stock and he
e. Substantiated by sufficient evidence gained control, assuming it is for legitimate business
f. Not against law, morality, public order, public policy purpose, and then it is exempt from tax.
g. Withholding taxed paid to BIR
The subsequent sale will yield to a taxable gain. The cost
5. Branch v Subsidiary basis will remain to be the original cost and will not be
adjusted because the first transaction was not taxable.
If there will be a branch, the foreign entity will considered as a
resident foreign corporation and the income of the branch will 7. Improperly Accumulates Earnings Tax
be subjected to corporate income tax rates. Remittances made
by the branch to the head office will be subject to branch profit IAET is imposed to corporations that permit earnings and
remittance tax. Since it is a resident foreign corporation, the profit to accumulate instead of being divided or
income that will be taxable are those sourced from within the distributed. It is designed to compel corporations to
PH . BPRT is 15%. distribute earnings so that the said earnings by
shareholders could turn be taxed.
Applicable to: All domestic corporations which are If an individual is a non-resident alien not engaged in
classified as closely-held corporations: (1) at least 50% of business in the PH, his gross income will be subject to final
OCS or (2) 50% of the total combined voting power of all withholding tax of 25%, otherwise the rent income is not
classes of stock is owned directly/indirectly by not more subject to final tax since rent is not among the
than 20 individuals. enumerations provided by the Tax Code subject to final
tax. It will be subject to CWT if the source of income is a
Not applicable to: Publicly held corporations, banks, required withholding agent. The rent income will be
insurance companies, taxable partnerships, GPP, non- included in full in the computation of the income subject to
taxable joint ventures, entities registered with PEZA or the graduated tax rate. The taxes withheld may be claimed
other special economic zone as tax credit, which will be deducted to his income tax still
payable.
Amount that may be retained =100% of paid up capital +
reasonable needs If in the end, he finds out that he has no tax due, he may
ask for a refund or a tax credit from the BIR. For refund,
Prima facie evidence of IAE: Corporation is mere holding cash will be returned to him and for credit, it will be
company or investment company, permitted to accumulate deducted to future payments of tax.
beyond, unrelated business or in stock or securities of an
unrelated business, investment in bonds and other long 9. Filing of returns
term securities, in excess of 100% paid up capital.
Minimum wage earners are generally not required to file
Computation: ITR and for employees, the employers usually file for them
Taxable income through substituted filing. General rule is that individuals
Income Exempt from Tax who earn pure compensation income is not required to
Income Excluded from GI file. However, if an individual deriving compensation
Income Subject to Final Tax concurrently from two or more employers during taxable
NOLCO deducted year shall file income tax return.
Gross Income which could have been distributed
(Dividends actually or constructively paid) 10. Things to change in tax code
(Income Tax Paid) For fringe benefits tax, supervisory and managerial
(Amount reserved for reasonable needs of the business) employees are subject to fringe benefits tax to be paid by
Total the employer. The employee therefore need not include
Multiply by: IEAT rate of 10% the monetary value in his income tax return. But if fringe
IAET benefit is received by rank and file, it is not subject to
fringe benefit tax but the employee must include it in
8. Creditable Withholding Tax v Final Withholding Tax income tax return and subject it to tax. In short, the
supervisory and managerial will enjoy the full monetary
value of fringe benefits but rank and file will be subjected
to tax. Proper legislation is to be done to equalize the
treatment.