Tax 1

TAXATION 1 A.Y. 2014 - PART 3 (based on the syllabus and discussion of Atty.
Aranas)
By: RLB | DHB | TLD | RRM 1
I. TAXABLE INDIVIDUALS
2012 2013 2014 BUT: 2014
a) Resident citizen
→ Citizen
Arrival: Dec May
Article 4. Section 1. The following are citizens of the Philippines: Jul Dec 31
Jul 31 31
1) Those who are citizens of the Philippines at the time of the adoption y 2 31
of this Constitution;
2) Those whose fathers or mothers are citizens of the Philippines;
3) Those born before January 17, 1973, of Filipino mothers, who elect Stayed Abroad If whole period, Arrived on Jul 31 BUT if arrived on May 31
Philippine citizenship upon reaching the age of majority; and from July 2-‐ Dec he was abroad, and stayed here and stayed until Dec 31;
4) Those who are naturalized in accordance with law. 31: then NRC. So til Dec 31: since letter D applies.
Stayed outside taxable income less than 183 NRC from Jan 1-‐May30
→ Resident for 182 days only will be those days ka dire sa RC from May 31-‐Dec 31.
- most of the time for the calendar year, you are residing here in the thus considered derived within. Phil.,NRC ka. —HYBRID
RC so taxable Letter D will not PERSONALITY—
Philippines.
within and apply

without
b) Non-‐resident citizen [section22(E), NIRC]
i. a citizen of the Philippines who establishes to the satisfaction of the

commissioner the fact of his physical presence abroad with a definite
intention to reside therein *Nota Bene
→ to the satisfaction of the commissioner: you have to inform the BIR - The measure of 183 days or more is made applicable to both letters C and D.
that you are no longer residing in the Philippines, otherwise, your - Presumption in letters C and D is that the citizen resides abroad temporarily.
income within will be taxable. - The ‘183 days’ can either be continuous and aggregate.

ii. a citizen of the Philippines who leaves the Philippines during taxable year *Rationale of letter D:
to reside abroad, either as an immigrant or for employment on a - If there is no Letter D class, presumption is, for that year (2014) he is a resident citizen for
permanent basis having stayed in the Philippines more than 183 days. Thus income within and without, is
→ self-‐explanatory kay permanent basis; return to the Philippines will taxable. BUT since we have letter D, income within the Philippines for January 1 to May
probably for vacation purposes nalang. 30 2014 (refer above) will be taxable because he is deemed NRC.

iii. a citizen of the Philippines who works and derives income from abroad and v. the taxpayer shall submit proof to the commissioner to show his intention
whose employment thereat requires him to be physically present abroad of leaving the Philippines to reside permanently abroad or to return to and
most of the time during the taxable year reside in the Philippines as the case may be for purpose of this section.
→ most of the time: Under a BIR Regulation, it means that that particular → Implementation is difficult unlike corporations which submit records
citizen stays abroad for 183 days or more (not more than 183 days) to SEC.
during a calendar year.
NOTE: a Filipino employed as Philippine embassy/consulate service
iv. a citizen who has been previously condisered as a non-‐resident citizen and personnel o f the Philippine embassy/consulate is not treated as a non-‐
who arrives in the Philippines at any time during the year to reside resident citizen, hence his income is taxable.
permanently in the Philippines will likewise be treated as a non-‐resident → Overseas Contract Worker or Seafarer/Seamen: not considered
citizen during the taxable year in which he arrives in the Philippines with permanent employees rather—contractual.
respect to his income dereived from sources abroad until the date of his
arrival in the Philippines c) resident alien
→ previously considered as a non-‐resident citizen: → A person not a citizen of Philippines by resides in the Philippines
→ HYBRID PERSONALITY OR DUAL PERSONALITY OF A TAX PAYER → The test use to know if resident alien or not is not the length of time he stays
here but the fact of whether he is a mere transient or has a definite
purpose/intention of staying here in the Philippines. If with definite purpose of
staying here, resident alien.
→ One example: kind of visa applied for

TAXATION 1 A.Y. 2014 - PART 3 (based on the syllabus and discussion of Atty. Aranas)
d) non-‐resident alien • If you are an officer of a Multinational corporation, you are subject to a
1. NRA-‐Engaged in Trade or Business special tax rate of 15% only. IS this correct? NO. Must qualify-‐-‐officer of a
a. Most of the time, he has a transaction here in the Philippines. RAHQ or ROHQ of a multinational corporation.
b. TEST: stayed here for more than 180 days.
c. So, if non-‐resident alien stays here for more than 180 days for no definite On the gross income in the Philippines of aliens employed by regional
purpose, like vacation lang si manong, then NRA-‐ETB. headquarters 15% (RHQ) or area headquarters and regional operating
headquarters (ROH), offshore banking units(OBUs), petroleum service
2. NRA-‐Not Engaged in Trade or Business contractor and subcontractor
-‐ Not much of a difference between a Resident Alien and a Non-‐resident
Alien engaged in trade or business -‐-‐because they are both taxable only for
income earned within the Philippines. The difference would matter when f) Estate and T rusts
it comes to personal and additional exemptions. → Taxable as individuals on the INCOME of the estate and of a trust.
-‐ 180 days or more – either continuous or aggregate → Example:
On December 31, 2014, G died and left certain properties behind– for the
e) special employees entire year of 2014 G is considered as an individual taxpayer, resident
- called as such because they are subjected to a different rate, special rate of 15 citizen (classification). During the time/period of transferring the
%; and properties to the heirs, the law gives persona/personality to the estate
- Employed by special corporations (list is exclusive) and/or trust. The estate is treated as an individual prior to the distribution
i. Regional headquarters (RAHQ) of multination corporations, defined in sec. to the heirs of the estate. Being treated as an individual, if it earns an
22 income or a fruit then it will be subjected to income tax. But the estate
-‐ No operations in the Philippines, does not earn any income itself is subjected to estate tax.
-‐ Only for supervision, to oversee → Can avail of the personal exemption of P20,000 but not additional exemptions.
ii. Regional operating headquarters (ROHQ) of multinational corporations, → Why does it remained at P20,000?
defined in sec. 22 -‐ Before the tax code was amended, individuals can avail personal
-‐ Has operations in the Philippines; earns an income in the Philippines exemption of P20,000(single), P25,000(head of the family),
iii. Offshore banking units P32,000(married). The estate being treated as a single individual is given a
iv. Petroleum service contractors personal exemption at P20,000. But when RA 9504 is passed, this portion
tackling about estates and trusts was not amended so being a tax
• Are all Filipinos employed by these Special Corporations are considered exemption-‐-‐ it is strictly construed against the taxpayer and liberally in
special employees? favor of the government. Therefore it remained at P20,000.
-‐ GR: employed Alien individual (EXPATS), occupying managerial, → Who will report the income?
technical and supervisory positions; considered as Special employee -‐ Executor or administrator will have to file the return.
therefore, subjected to 15%.
-‐ EXC: employed Filipino, 2 conditions must concur: II. INCOME TAX RATES
1. Occupying managerial AND technical positions.
2. No other alien can occupy such position (other than the For individuals Earning Purely Compensation Income and Individuals Engaged in Business
Filipino) and practice of profession

• Why are they termed/called Special Corporations? Amount of net taxable RATE
-‐ They are registered here in the Philippines but they are subjected to income
different requirements than the usual procedure for incorporation in Over But not over
the Philippines. The special tax rate is termed as such because it is P10,000 5%
way lower than the usual 5%-‐32% graduated tax rate.
P10,000 P30,000 P500 + 10% of the excess over P10,000
• What are Multinational Corporations?
P30,000 P70,000 P2,500 + 15% of the excess over P30,000
-‐ Corporations which have operations internationally or in an
international level P70,000 P140,000 P8,500 + 20% of the excess over P70,000
P500,000 P125,000 + 32% of the excess over ! Commission
P500,000 in 200 and onward ! Profit sharing
! Monetized vacation and sick leave
Note: when the tax due exceeds P2,000.00, the taxpayer may elect to pay on two equal ! Fringe benefits received by rank & file employees
installments, the first installment to be paid at the time the return is filed and the second ! Hazard pay
th
installment 15 of the same year at on or before duly the authorized agent bank (AAB) ! Taxable 13 month pay and other benefits
within the jurisdiction of the revenue district office (RDO) where the taxpayer is ! Other remunerations received froma n employee-‐employer
registered. relationship

III. INCLUSIONS (GROSS INCOME FOR INDIVIDUALS) • Fringe benefit tax for managerial employees is not included as
1. Compensation income supplemental compensation because it is subject to final tax – Fringe
i. Definition Benefit Tax
-‐ Any amount or including the cash value of those you receive in kind under • Add the regular and the supplemental compensation and subject it to
an ER-‐EE relationship (determine ER-‐EE relationship: four-‐fold test) graduated tax rate (5%-‐32%) but withhold first the creditable withholding
-‐ in labor, compensation in kind is not allowed; in taxation (since nangwarta tax (gi-‐discuss daw before-‐means of collection and payment of
ang gobyerno) we still consider its cash value to be reported as income compensation income is through withholding….wako kasabot)
subject to income tax. • Exclusion – P30, 000, only the excess of the P30,000 (nag.mention pd xa
nga “except for overtime pay”-‐-‐-‐dili nako ma.gets if excluded pd ang
COMPENSATION in KIND: overtime pay) will form part of the supplemental income added to the
a. Stock Options – ER offers (ownership) shares of stock to EE regular compensation
GR: not taxable
EXC: if there is a difference between the actual consideration paid by the iii. Doctrine of cash equivalent
employee versus the FMV of the stocks – there is a gain - if you are paid in property or in kind, you determine the cash value of the
Ex: FMV – 100; EE is allowed to purchase it @ 10. The 90 difference is payment of that particular property or payment in kind and that value will
subject to income tax. be added to your total compensation subject to income tax

b. Properties iv. Mode of compensation income collection/payment
-‐ the cash equivalent of the properties is subject to income tax - Through withholding
-‐ use the cash equivalent doctrine - Pay the balance as you file the tax return, compute as follows:

c. Promissory Notes Income tax due P
GR: taxable at the amount equivalent to the face value of the PN Less: withholding tax
EXC: if it is discounted, the amount taxable is the Discounted Value. Net income tax due P
*discounted value – value lower than the face value e.i indorsing the note
Ex: Y is paid a PN @ P10,000, indorse it to X @ P9,000 (discounted). *income tax due – for the whole calendar year (January 1 – December
The actual amount received by Y is P9,000 – the discounted value – 31)
therefore Y is taxable @ P9,000 *withholding tax – for the whole year
*income tax due must be equal to the withholding tax so that net
d. Cancellation of Indebtedness income due will be zero (0). This only happens if the individual
-‐ taxable as income if debt is cancelled because a service is rendered by taxpayer is a pure compensation income earner with one employer.
the employee.
NOTE: Substituted filing if income tax return (“ITR”) is the manner by which
ii. Kinds: declaration of income of individuals receiving purely compensation income the
a. Regular compensation – includes basic salary, fixed allowances for taxes of which have been withheld correctly by their employer’s annual
representation, transportation and others paid to an employee information return (BIR form no. 1604-‐CF) duly stamped received by the BIR
may be considered as the “substitute” income tax return (ITR) of the employee.
b. Supplemental compensation – Includes payments to an example in However, said the employees may still file ate his/her option.
addition to the regular compensation such as but not limited to the - Income Tax Return (BIR Form no. 1700) – if the taxpayer files it
following: personally
! Overtime pay - Annual Information Return (BIR Form no. 1604) – if substituted filling
! Fees, including director’s fees by the employer
-‐ technically, rank and file employees do not receive any fringe
• Who can avail substituted filing? benefits because when we talk of fringe benefit, it is given on
- Employees who satisfies all of the following conditions: top of your compensation and the fringe benefits received by the
1) Receiving purely compensation income regardless of rank and file employees forms part of their compensation.
amount:
2) Working for only one employer in the Philippines for the • for managerial employees:
calendar year
3) Tax has been withheld correctly by the employer (tax due Subject to final tax
Fringe benefit (Fringe Benefit Tax)
equals tax withheld);
4) The employee’s spouse also complies with all three (3)
conditions stated above compensation
5) The employer files the annual information return(BIR Form Subject to graduated
income tax
No. 1604 – CF)
6) The employer issues BIR Form No. 2316 to each employee.

-‐ what if two (2) employers? Substituted filing is allowed, but at the end
of the year, you must file a consolidated ITR personally. • for rank and file employees:
-‐ if employer incorrectly withheld the amount due, employee will not
be guilty of tax evasion. You look into the reason why there was a Compensation
difference and BIR will just collect the deficiency. + Fringe Benefit
-‐ for married individuals, their ITR will be consolidated at the end of Total compensation income – Subject to graduated income tax
the year. Reason: one is for the additional deduction; the additional
deduction will only be claim once. Husband will claim, and wife will 2. Kinds of Fringe Benefits [HEVHIMEHEL}
also claim additional deduction – as a rule, only one can claim…. a. Housing
ma.alkansi si BIR☺
CASE ANNUAL VALUE Monetary Value of
v. Fringe Benefits of BENEFIT Benefit (Monthly)
1. Definition
Employer leases 50% X Monthly rental
NIRC, Section 33. (B) Fringe Benefit defined. -‐ For purposes of this Section,
residential property for paid by the employer
the term "fringe benefit" means any good, service or other benefit
use of the employee -‐ The 50% is given
furnished or granted in cash or in kind by an employer to an individual
under the regulation
employee (except rank and file employees as defined herein) such as, but
as a sign that there is
not limited to, the following:.
no transfer of
(1) Housing;
ownership from the
(2) Expense account;
ER to EE
(3) Vehicle of any kind;
-‐ If there is transfer of
(4) Household personnel, such as maid, driver and others;
ownership, then the
(5) Interest on loan at less than market rate to the extent of the
entire amount is
difference between the market rate and actual rate granted;
taxable as fringe
(6) Membership fees, dues and other expenses borne by the
benefit
employer for the employee in social and athletic clubs or other
Employer owns 5% of FMV of 50% x Monthly Value of
similar organizations;
(7) Expenses for foreign travel; residential property land the benefit
which was assigned to improvements
(8) Holiday and vacation expenses;
an officer for his use as *Monthly Value =
(9) Educational assistance to the employee or his dependents;
residence (no transfer Annual Value /12 mos.
and
(10) Life or health insurance and other non-‐life insurance of ownership)
premiums or similar amounts in excess of what the law allows. Employer purchases 5% of 50% x Monthly Value of
residential property on acquisition cost Benefit
installment basis and excluding
→ ” except rank and file employees as defined herein”
allows the employee to interest
use the same as his
residence Guidelines in valuation of Motor Vehicles:

CASE TRANSACTION MONETARY VALUE of Benefit
Purchases residential Acquisition cost of FMV
property and transfers whichever is higher 1 Purchase the motor vehicle in the Acquisition Cost
the ownership to the name of the employee
employee
Purchases residential FMV of CIR and FMV of 2 Provides the employee with cash for Amount of cash received by the employee
property and transfers Assessor, whichever is the purchase of a motor vehicle in
ownership thereof to higher minus the cost of the name of the employee
his employee for the the employee
latter’s residential use 3 Shoulders a portion of the amount of Amount shouldered by the employee
at a price less than the the purchase price of a motor
employer’s acquisition vehicle in the name of the employee
cost
4 Purchase the car on install in the Acquisition cost (exclusive of interest)
*Exceptions: name of the employees divided by 5 years
I. Housing privilege of officials of AFP, Philippine Navy and
Philippine Air Force;
-‐ Take note wala’I Philippine National Police ha.. 5 Owns and maintains a fleet of motor Acquisition cost of all motor vehicles not
vehicles for the use of the business normally used in business divided by 5
II. A housing unit which is situated inside or within the maximum of of the employees years x 50%ount of rental payment for
fifty (50) meters from the perimeter of the business premises or motor vehicles not normally used in
factory. business x 50%
-‐ Exception: wherein the EE is still exempted of the housing 6 Leases and maintains a fleet of Amount of rental payment for motor
privileged of up to 100 meters if ER’s factory is hazardous. motor vehicles for the use of the vehicles not normally used in business x
business and the employees 50%
III. Temporary housing for an employee who stays in a housing unit 7 The use of yacht whether owned and Depreciation of yacht at an estimated
for three (3) months or less. maintained or leased by the useful life of 20 years
-‐ Applies to transient EE, like he is in Manila for training etc. employer

Atty A: take note that other than compensation income is what we call as
fringe benefit. Compensation income is subject to 5% to 32% graduated d. Household personnel
income tax while the fringe benefit is given to managerial or supervisory e. Interest on loan at less than market rate
EE subject to fringe benefit tax of 32%, which is a final tax. f. Membership fees, dues and other expenses borne by the ER in social
athletic clubs or similar organizations
b. Expense account g. Expenses for foreign travel
-‐ Refers to the food, grocery or other representations h. Holiday and vacation expenses
i. Educational assistance to the EE or his dependents
c. Vehicle of any kind j. Life or health insurance and other non-‐life insurance premiums or
-‐ if there is transfer of ownership to the EE, 100% of the value is similar accounts in excess of the law allow
subject to fringe benefit tax
-‐ if no transfer of ownership, 50% of the value only is subject to
FBT
-‐ what you need to remember here is that you need to:
# determine first if the EE is managerial or supervisory: If he
is, automatic subject to FBT
# next you need to determine if ownership is transferred to
the EE: if it was transferred, then the entire value is subject
to FBT; if not transferred, only 50% thereof.

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TAXATION 1 A.Y. 2014 - PART 3 (based on the syllabus and discussion of Atty.

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