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2 Kinds of Taxpayers Does Schedular System Approach applies

1. Individual Taxpayer to all types of taxpayers? Not all instances.


2. Corporate Taxpayer It only applies individual taxpayers.
Corporate Taxpayers uses the global
*Estate & Trust Section 60-66 (Seldom system of approach.
asked in the BAR)
This is not considered as another type of 2. Global Tax Treatment
taxpayer because it was stated under the - It is a system where the tax
NIRC the rules on the individual taxpayer treatment view indifferently that tax
applies except under some conditions. base and generally treats in
common all categories of taxable
Section 63 was a surprise question in the income.
BAR 30 years ago. - It applies to corporate taxpayers.
What is a revocable trust?
3 Characteristics of Global Tax Treatment
RECIT PROPER 1. It has uniform tax rules.
2. It does not generally classify or
***Salient Features of the Philippine Taxing categories of taxable income.
System 3. The tax base is the final tax.

1. Schedular Tax Treatment Take Note: Train Law amended Section 35


- It is a system employed where the of the NIRC which tackles about the
income tax treatment varies and made to personal exemptions. (DELETED)
depend on the kind or categories of taxable
income of the taxpayer. 3. Gross Income Taxation
- It is a method or system that allows
What are the characteristics of a no deductions and the tax base or
schedular tax treatment? tax basis of the tax rate is Gross
1. Income is classified and Income.
categorized.
Legal Basis: Section 32 provides 3 Kinds of Corporate Taxpayers:
different classification of the income. 1. Domestic Corporation (Section 27)
` 2. It has different tax rules and 2. Resident Foreign Corporation
treatment. (Section 28-A)
Legal Basis: Section 24 and 25 3. Non Resident Foreign Corporation
provides for different tax rules and treatment (Section 28-B)
to different taxpayers. - These corporate taxpayers also
3. It has different tax base or tax provides for 30% Final Tax.
rate.
Legal Basis: Section 24 and 25 2 Characteristics of GIT:
provides different tax rates whether it can 1. There is no deductions.
be progressive and final tax rate. 2. The gross income is the tax base.
Kinds of Individual Taxpayers The law provides that it must be more than
1. Resident Citizen 180 days.
2. Non Resident Citizen
3. Resident Alien 2010 BAR
4. Non Resident Alien Engaged in - If there is specific dates, the Boxer
Trade or Business Rule will apply.
5. Non Resident Alien Non Engaged in
Trade or Business Who can claim deductions?
- DC and RFC (Taxable Income as tax
Section 22, E, F, G of the NIRC is base)
ambiguous.
No deductions in NRFC. (Gross Income as
Section 24 - RC, NRC, RA tax base)
Section 25(B) - NRA NETB
- GIT applies. 5. Creditable Withholding Tax System
NRFC - GIT also applies. - It is a system of collection of taxes
that operates as follows:
4. Net Income Taxation 1. The employers is the
- It is method or system that allows withholding agent, the
deduction and the tax base is the employee on the other hand
taxable income. is the recipient of the Income.
The government as the payor
2 Characteristics of NIT: will remit the same to the
1. It allows deduction. BIR.
2. The tax base is the taxable income. 2. The taxpayer can claim it as
a tax credit or may be
Is NIT applicable to all individual taxpayers? deducted from the income
No. It only applies to RC, NRC, NRA ETB. provided that it must be
Exclusion: NRA NETB. reported first to the BIR.
Therefore, he must report such
How to determine whether an alien is income before claiming such.
engaged or not engaged in trade or
business? 6. Final Withholding Tax System
TEST: He must stay for a period of more - It is a system of collection of taxes
than 180 days. It is cumulative not that operates as follows;
continuous. 1. The taxpayer is legally
obliged to deduct. The
Under the NIRC, what do you mean by the employer is the one legally
word “deemed”? - Regardless. obliged to pay the tax.
2. The taxpayer cannot claim
Is there a difference between 6 months or the tax withheld as tax credit
more than 180 days? Yes. Different. because the tax withheld
- 6 x 30 = 180 days. constitutes as a final and full
settlement of the tax liability 3. Royalties
on that income. - FINAL TAX RATE, 20%, 10% if it is
Therefore, he is not required to books, literary, works, etc.
report the Final Tax Withheld. - EXEMPTION, There is no provision.
4. Prizes
Distinctions between CWTS and FWTS: - FINAL TAX RATE, 20% if more than
*As to the nature 10,000. If less - graduated rates.
- CWTS, the tax base is the creditable - EXEMPTION,1.Scientific, charitable,
tax. religious, artistic, literary, education
- FWTS, the tax base is the final tax. and civic works. 2. Sports
*As to the reporting requirement Tournament Competition.
- CWTS, the taxpayer is required to 5. Winnings
report. - FINAL TAX RATE, 10%, 20% if NRA
- FWTS, he is not required to report. ETB.
- EXEMPTION, Lotto, PSCO
Classification of Gross Income (Section 32) 6. Dividend
1. Compensation Income - CWTS - FINAL TAX RATE, 1. IF individual,
2. Business Income - CWTS 2. If NRFC - 15% Section 28
3. Property Income - CWTS (B)(5)(b)
4. Interest - FWTS - EXEMPTION, 1. DC - Section
5. Rents - CWTS 27(D)(4) 2. RFC - Section
6. Royalties - FWTS 28(A)(7)(d) 3. Stock Dividends -
7. Dividend - FWTS Section 73(B 4. Liquidating
8. Annuities - CWTS dividends (Wise & Co. V. Meer &
9. Prizes - FWTS Collector, 78 Phil 655)
10. Pension - CWTS
11. Partner’s Share - CWTS Stock Dividends
- Just a transfer of surplus account to
Theses are the items subject to Final Tax capital account, there is no flow of
Rate: wealth, no gain to speak of.
1. Shares of a Partner Business
Partnership or joint Venture Requisites of Taxable Income (PNR)
- FINAL TAX RATE, 10%, 20%, 25% 1. There must be profit of gain.
provided under Section 24 (B)(2), 2. It must be not excluded by the Tax
Section 25 (A)(2) Code or other special laws.
- EXEMPTION, there is no such 3. It must be realized. Either Actual or
provision. Constructive.
2. Interest
- FINAL TAX RATE, 7.5% Recit proper
- EXEMPTION, 1. Bond Deposit, if
the depositor is NRA. Section 24 Enumerate all the 19 items included under
(B)(1) 2. Long Term Deposit - more the exclusions of gross income:
than 5 years. 3. Section 32 (B)(7)(a)
- Compensation for services in whatever 1. It is subject to donor’s tax.
form paid, including but not limited to fees, 2. Donee is not subjects to donor’s tax.
salaries, wages, commissions and similar 3. It is not subject to income tax.
items.
- Gross income derived from the conduct of Types of Donations under the NCC;
trade or business or the exercise of 1. Donation Mortis Causa
profession. 2. Donation Inter Vivos
- Gains derived from dealings in property.
- Interest Tax Implications of Donations Mortis Causa
- Rents 1. It is subject to estate tax.
- Royalties 2. The heirs is not subject to inheritance tax.
- Dividends 3. It is not subject to income tax.
- Annuities
- Prizes and Winnings 3. Compensation
- Pensions Are moral and exemplary damages taxable?
- Partner’s distributive share from the net No. You must correlate it with NCC.
income of the general professional It is not taxable because it is not qualify as
partnership. income. Moral and exemplary damages are
not taxable because the first requisites of
Which of the following does not qualify as taxability is absent. There is no gain or
an income? profit.

1. Life Insurance Proceeds, correlate it Grounds for moral damages (Article 2197)
with Section 85. Estate Tax. 1. Mental Anguish
Q: Whether or not life insurance proceeds 2. Serious Anxiety
should form part of the gross estate? 3. Wounded Feeling
It depends. 4. Besmirched Reputation
5. Physical Suffering
When is it excluded? 6. Social Humiliation
1. If the beneficiary is a 3rd person and the 7. Moral Schock
designation is irrevocable. 8. Fright
2. If the proceeds is based on a groups 9. Similar Injury
insurance policy.
Grounds for exemplary damages (Article
When it is included? 2229)
1. If the beneficiary is the 3rd person and 1. By way of example.
the designation is revocable. 2. As deterrent for the commission of similar
2. If the beneficiary is an heir, estate, offense.
executor, or administrator whether or not its
revocable or not. 4. Retirement Benefits
- Retirement benefits received by officials
2. Donations and employees duly approved by the BIR
What are the tax implications of Donations;
for exclusive benefit of the under the Labor Code)
member-employees. 2. Death
- Retirement Benefits paid to employees 3. Sickness
who have reached the age of 60 or more 4. Physical Disability
than 60 but not beyond 65 years with at
least 5 years of credited service. HYPO: There is an employee granted a
- Separation Benefits due to death, sickness separation pay based on her resignation,
or any other physical disability of for any taxable? Yes.
cause beyond the control of the said official
or employee. Please take note of the case of Zialcita
- Social Security Benefits, Retirement Cases wherein the employee was
Gratuities received by resident or non compulsory retired from services and
resident citizens or resident aliens from granted termination pay was considered an
foreign government agencies and other event that is beyond the control of the
private or public institutions. employer.
- Benefits received from US Veterans
Administration by veterans residing in the Separation Pay V. Retirement Benefits
Philippines. As to the requirement,
- Payment of Benefits under the SSS. - in Separation Pay, there is only one
- Benefits received from the GSIS under RA requirement and that is the cause must be
8291 including retirement gratuity. beyond the control of the employer.
- Retirement Benefits, there are 4 requisites.
Take note of RA 7641 which amended the As to the length of service,
age requirement to 60-65 years old with - In Separation Pay, there is no such
service of 5 years. requirement.
- In Retirement Pay, it must be at least 10
Requisites for exemption: years.
1. There must be a retirement plan. As to the Age Requirement,
2. 50 years of age. - In Separation Pay, there is no such
3. At least 10 years of service. requirement.
4. Availed only once. - In Retirement Benefits, it must be 50 years
of age.
HYPO. An employee who retired for his 1st
employment, then subsequently got CIR V. Mitsubishi Case
employed, and retires again and received Is the entries of the loan taxable? Yes.
retirement benefits. Is the subsequent Reasons:
retirement benefits taxable? Yes. It is now 1. Upon the perfection of the contract of
taxable. Exception: Government Employee loan, the borrower acquires ownership.
2. Japan was never made a party to the
When separation pay be exempt? It must be contract of loan. There is no clear and
based on these valid causes namely; convincing evidence to prove that Japan
1. Beyond the control of the employer. participated with the contract of loan.
(Take note of the valid causes of dismissal
4. The period of notice must be 30
days.
5. Prizes and Awards 5. It shall be only availed once every
Distinction between Par. C and Par. D 10 years.
Requisites of Paragraph C:
1. The price must be received in recognition What do you mean by WHATEVER
with SCRALEC. SOURCE DERIVED
2. There must be no action on his part to - it means that the source is immaterial.
enter the contest or proceedings. What does it connote?
3. There must be unconditional receipt of - it connotes that the enumeration is not
such price. ( The recipient is not required to exclusive.
render substantial future services as a -this is not only the sources of the income.
condition to receiving the prize or award.)
What are those not included under Section
Requisite of Paragraph D: 32 A?
- The recipient is exempt from income tax, 1. Treasure Found and punitive damages
thus it is excluded from gross income. representing profit lost.
2. Amount received by mistake.
6. Gains from the sale or exchange of 3. Cancellation of the taxpayers
retirement of bonds, debentures or other indebtedness.
certificate of indebtedness with a 4. Payment of usurious interest.
maturity of more than 5 years. 5. Illegal gains.
What are those items mentioned? 6. Tax Refund.
- Retirement of Bonds 7. Bad Debt Recovery.
- Debentures
- Other Certificate of Indebtedness When an income is taxable in payment by
mistake?
Interest on Income on bonds, exempted? As a general rule, it is not taxable. But as for
No. Taxable. the exception, it can be taxable under the
control, test as the basis.
7. Redemption of Shares in Mutual fund
Company Javier V commissioner.
- Section 24, 25.
North American Case
Capital Gains 6%, when exempted? Supposed it is received under trust, is such
Requisites: receipt subject to tax?
1. The proceeds of the sale shall be As a general rule, it is not.
used for purchase or construction of a new Exception: if the taxpayer received earnings
principal residences. under the claim of right without restrictions
2. It must be for a period of 18 as to
calendar months. It's disposition, he has received income
3. The BIR Notice must be given to even though it may still be claimed that he is
show the intent to be exempted. m entitled to retain the money and even
though he may still be adjudged liable to Requisites for Bad Debts Expense:
restore its equivalent. 1. There must be an existence of a valid
debt and subsisting debt.
When taxable? When will it arise? apply the 2. The debts. Use be actually ascertained to
control test. be worthless.
If there is such predisposition of such 3. The debt must be charged off within the
amount. year to be worthless.
4. The debt arises from business or trade.
Are illegal gains taxable? Yes.
What is your basis? Income derived from 4 non deductible taxes:
whatever source. 1. Donor tax
Jurisprudential case: Rutkin V US 2. Estate tax
3. Income Tax
Claim of right doctrine - illegal acquired 4. Special Assessment Tax
income constitutes realized gain.
Example of creditor taxpayer may possibly
When will such cancellation forgiveness recover tax:
amount to taxable income? When the debtors financial standing has
1. In the nature of compensation income in been improved.
consideration of the service rendered.
2. Taxable donation. When the obligation is CANCELLATION AS COMPENSATION
condoned, renounced by the employer INCOME
creditor and there is no consideration given. Basis: Derived from whatever source
3. Capital Transaction. When it considered
as an indirect dividends, which is subjected What is the test to determined won it falls
to progressive tax rates. under this item?
- payment must be made under EE ER
When tax refund will amount to taxable relationship.
income? Apply the tax benefit rule.
What is the other form of compensation
Tax Benefit Rule income?
- it is a rule that recognized the taxability of - payment of life insurance premium.
tax refund or bad debts provided that such
tax refund or bad debts are actually claimed Section 33 (B) 10
as a deduction in previous taxable year. Stated the tax treatment of payment of life
insurance premium paid by employer.
3 conditions for Tax refund: - please do considered the employee won it
1. Tax refund must be a deductible tax. is rank and file or managerial or supervisory
2. It must be claimed actually as a as the case may be.
deduction in previous taxable year.
3. The tax receiving must received taxable Distinction between Fringe Benefits and
benefit. Compensation Income:
As to the tax rate, FB is subject to Final Tax,
CI is subject to progressive rates. Capital Asset (Section 39 A 1) - it is by way
As to the tax base, The tax base of FB is of exclusion.
the grossed monetary value, the tax base of Ordinary Asset (Section 39 e 1) - It is by
CI is the gross compensation income. way of enumeration.
As to the method of collection, FB is FWTS,
in CI is the CWTS. Ordinary Asset - it refers to and is limited to
As to the taxpayers, FB it applies to the following:
managerial or supervisory employees, in CI 1. Stock in trade or business
is includes all employees and rank and file 2. Inventorial Asset such as raw materials,
employees. work in process and finished goods.
As to the reporting requirement, FB is not 3. Property primarily for trade or business.
required to report because it constitutes 4. Depreciable property in business such as
final and full settlement of tax liability, CI Is machinery.
subject to report it to the BIR. 5. Real property used in trade or business.
As to the application of substituted filing of
ITR, FB is not allowed to file for such, in CI, Common: It must be for trade or business. It
Compensation earned with only one is EXCLUSIVE.
employers is allowed to do such.
What is not ordinary is CAPITAL ASSET.
GAINS DERIVED FROM DEALING IN
PROPERTY Capital Asset is the pores held by the
Dealings - it refers to sale, exchange, or taxpayer whether or not connected with its
barter. trade or business except other then these 5
Please take note the meaning of sale under items, stock in trade, inventorial asset,
the NCC. property primarily for trade or business,
depreciable property used for trade or
Is lease covered? business and real property used for trade or
No. It falls under rents. correlate with business.
section 39, 40.
Examples of Capital Asset: 2 Intangible
What are the 4 exempt sales or exchanges. assets
( No gain no loss recognized) 1. Discounting of Accounts Receivable
1. Between corporation which are parties to 2. Gain in business or goodwill.
the merger or consolidation.
2. Between stockholder of a corporation Ordinary gain V capital gain
party to a merger or consolidation and the Ordinary Gain is the gain derived fro. The
other party corporation. sale or exchange or barter of poetry from
3. Between a security holder of a the 5 items namely;
corporation party to a merger or Capital Gain is the gains derived from the
consolidation and other party corporation. sale exchange or barter or property held by
4. Transfer or exchange of poverty for stock e taxpayer whether or not it is connected
resulting in acquisition of corporate control. with its trade or business except other than
the 5 items namely;
What is the reason?
Reason for knowing such: Justice Vitug: There is no prohibition to it.
Capital gain is subject to special rules.
3. Net capital loss deducted from capital
What are these rules? gains.
1. Holding period rule - it shall be treated in the succeeding
- 12 month period taxable year as loss from the sale or
exchange of capital asset held not more
50% - after the lapse of the 12 months than 12 months.
period. Up to what extend?
100% - before the lapse of the 12 month It must not be in excess of the taxable
period. income in the preceding year or the lower
amount between the net income and the
Is there a difference between one year and capital loss.
12 month period?
Yes. Under the NCC, Article 13 states that's Distinctions between NETCO V. NOLCO
when the law speaks of year, it must be 365 NETCO is Section 39 D, NOLCO is Section
days and of month, it is 30 days. 34 D 3.
As to the transaction, NETCO applies over
Short term capital gain - it is the gain capital transactions which necessarily
derived from sale or exchange of capital involves capital assets, NOLCO applies
asset if the period is not more than 12 over ordinary transaction which necessarily
months. The tax treatment is 100%. involves ordinary assets.
Long term capital gain - it is the gain derived As to the taxpayer, NETCO only applies to
from sale or exchange of capital asset terror individual taxpayers, NOLCO applies to
if more than 12 months. The tax treatment is individual taxpayers and corporate
50%. taxpayers.
As to the number of years allowed, NETCO
2. Capital Loss Limitation - It is when the only allows 1 year, NOLCO allows 3
capital losses are allowed only to the tent of succeeding years, or 5 years in case of
capital gains. mining companies.
RATIONALE: Capital losses cannot be
claimed as ordinary under the principle of Real property not in trade or business, can
matching of costs against revenues. we apply NETCO or NOLCO? No. Apply
rather Section 34 D 1.
Principle of matching costs against Shares of stock, can we apply NETCO or
revenues NOLCO? No. it is subjected to 15% final tax
- it is when the expense which may be as based on net capital gains.
deducted must be in connection with the
business or trade. Net Capital Gain = excess of capital gain
over capital loss.
Ordinary Loss can be claimed in capital
gain. Fringe Benefit
What are those 10 items? passed the competitive exam.
1. Housing
2. Expense Account Item 10: LIFE INSURANCE
3. Vehicle of any kind. 3 Tax exempt Life premium
4. Household Personnel 1. GSIS
5. Interest on loan at less than the market 2. SSS
rate. 3. Group Insurance Policy
6. Membership fees, dues and other
expenses bored by Ed employer for the Section 33 C (Additional Exemptions)
employee in social and social clubs and
other similar organizations. DE MINIMIS BENEFITS
7. Holiday and vacation expenses. - facilities or privileges furnished or offered
8. Expenses for foreign travel by an employer to his employees that are of
9. Educational Assistance to the Employee relatively small value and are offered or
or his dependents. furnished by the employer merely as a
10. Life or health insurance and other non means of promoting health, goodwill,
life insurance premiums and Silas aunts in contentment or efficiency of his employees.
excess of the law allows.
4 purposes of de MINIMIS benefits:
What are those TAX EXEMPT FRINGE 1. To promote health.
BENEFITS? ( RR 3-98) 2. to promote goodwill.
1. Housing unit in convenient to the 3. to promote contentment.
employer. 4. To promote efficiency.
- it must be situated within the premises.
- If situated outside the premises. It must Medical Cash benefit/Allowance given to the
within the 50 meters perimeter. dependent - Php 125
2. Temporary Housing Units Laundry Allowance - Php 300
- it must be for a period of 3 months or less. Rice Subsidy - Php 1500
3. Military Housing Uniform Allowance/ Christmas Gift/ Major
Reason: In order that the military personnel Anniversary - Php 5000 per annum
shale ready when they are in need. Medical benefit to the EE/ Employment
advertisement Award/ CBA Incentives - Php
Item 7: TRAVELING EXPENSES 10,000 per annum.
- in case of business conventions or Meal Allowance for overtime work - 25% of
meetings. the basic minimum wage.

Item 9: EDUCATIONAL ASSISTANCE FOR Monetized Vacation Leave or Sick Leave


THE EE OR HIS DEPENDENTS (Qualification)
- Scholarship to the employees provided Private Employees: VL- exempt for a period
that the employee shall remain in the of 10 days only, SL - Always taxable.
employ of the employer. Government Employees - always exempt.
- Scholarship to the dependent provided
that the dependents of the employee must Interest Income
What are those exempted?
1. Interest Income from bank deposit
provided that the receipts to must be the ff;
- Foreign Government
- Foreign Institutions controlled or finances
by the foreign government.
- Regional or international financial
institutions established by the foreign
government.
2. Interest Income on loan extended by any
of the three mentioned above.
3. Interest Income on Bonds, debentures,
and other certificates of indebtedness
received by any of the three.
4. Interest income on bond deposit
maintained under the expanded foreign
currency deposits system.
5. Interest income form the long term
investment or deposit.

Dividend Income
What are those exempted?
1. InterCorporate Dividends (Section 27 (D)
4)
- DC to DC
What if received by NRFC? It shall be
subjected to 15% final tax. (section 28)
Section 42 (A) 2 (b)
- 3 year and 50%
- It is received from a foreign corporation,
which does not categorically states whether
or not it is an Individual taxpayer or
corrected taxpayer, if income within the
Philippines - 15% worth of the income
coming from PH as long as it is with the 3
preceding taxable year.
2. InterCorporate Dividends (Section 28 (A)
7 (d) )
- Received by RFC from DC
3. Stock Dividends (Section 73 (B))