taxation one ingles

8/11/2019 Taxation One Ingles

1/109

+amdg

Taxation One: Outline with Codals

Course OutlineTax I

Based on Atty. Monteros outline, with integrated notes from Atty. Salvadors review class,Reyes, some Mamalateo, and the various reviewers in school.

A. In General........................................................................................................... 1B. General Principles............................................................................................... 1C. Income Tax on Individuals.................................................................................. 2D. Definitions........................................................................................................ 17E. Income Tax ates............................................................................................. 1!". Proprietar# Educational Institutions and $ospitals........................................... 1%G. G&CCs............................................................................................................... 2'$. Passive Income................................................................................................. 21I. (inimum Corporate Income Tax )(CIT*............................................................ 2+,. Income Tax on esident "orei-n Corporations.................................................. 2/. Income Tax on 0on resident "orei-n Corporations........................................... 2!

. Improperl# Accumulated Earnin-s Tax )IAET*.................................................. +2(. Tax exempt Corporations................................................................................. +0. Taxa3le Income................................................................................................ +!P. "rin-e Benefits Tax )"BT4 56ut up4*................................................................. 7

. Deductions........................................................................................................ 81

. Capital Gains and osses )9ale or Exc6an-e of Propert#*................................. 7+9. Determination of Gain or oss from 9ale or Transfer of Propert#...................... 77T. 9itus of Taxation............................................................................................... !2:. Accountin- Periods and (et6ods...................................................................... !7;. Estates and Trusts...................................................................................... ...... %15. eturns and Pa#ment of Taxes......................................................................... %5. 5it66oldin- Tax............................................................................................... %%

A. In General

Taxable Income The essential difference between capital and income is that capital is a fund; andincome is a flow. Capital is wealth, while income is the service of wealth.

ropert! is a tree, income is the fruit. "abor is a tree, income is the fruit. Capital is atree, income the fruit.

Income means profits or gains. #$adrigal v %affert!& Income ma! be defined as the amount of mone! coming to a person or corporation

within a specified time, whether as pa!ment for services, interest or profit frominvestment.

o ' mere advance in the value of propert! of a person or a corporation in nosense constitutes the (income) specified in the law. *uch advance constitutesand can be treated merel! as an increase in capital. # isher v Trinidad&

Cash dividends is taxed as income because it has been reali ed-received, while stocdividends is not taxed as income because it is merel! inchoate as it is a mereanticipation of income #it becomes income once !ou sell it&.

o One is an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of a corporation. # isher v Trinidad&

When dealing with money or property, the questions you should as are!o "s this capital or is this income# o $as it %een reali&ed'received or is it merely inchoate#

$ic e! Ingles'teneo "aw /01/'tt!. $ontero and some stuff from 'tt!. *alvador #"ast updated: $a! 12, /01/ 3 $ic e!&

1


2/109

+amdg


B. General Principles*4C. /2. 5eneral rinciples of Income Taxation in the hilippines. 6 4xcept when otherwise provided in this Code:#'& ' citi en of the hilippines residing therein is taxable on all income derived from sources within and without the

hilippines;#7& ' nonresident citi en is taxable onl! on income derived from sources within the hilippines;#C& 'n individual citi en of the hilippines who is wor ing and deriving income from abroad as an overseas contractwor er is taxable onl! on income derived from sources within the hilippines: rovided, That a seaman who is a

citi en of the hilippines and who receives compensation for services rendered abroad as a member of thecomplement of a vessel engaged exclusivel! in international trade shall be treated as an overseas contract wor er;#8& 'n alien individual, whether a resident or not of the hilippines, is taxable onl! on income derived from sourceswithin the hilippines;#4& ' domestic corporation is taxable on all income derived from sources within and without the hilippines; and# & ' foreign corporation, whether engaged or not in trade or business in the hilippines, is taxable onl! on incomederived from sources within the hilippines.

9ho are taxable on income derived from all sources, whether within or outside thehilippines Taxed worldwide

1. %esident citi ens./. 8omestic corporations.

The other inds of taxpa!ers are suboOverseas Contract 9or er =es >o%esident 'lien =es >o>on6resident 'lien =es >o8omestic Corp =es =es

oreign Corp =es >o

C. Income Tax on Individuals(efinitions%esident citi ens and resident aliens*ection // # & The term ?resident alien? means an individual whose residence is within the hilippines and who isnot a citi en thereof. %esident alien is an individual:

1. 9hose residence is within the hilippines/. 9ho is not a citi en

$ere ph!sical or bod! presence is enough. >ot intention to ma e the countr! one)sabode. #5arrison v C'&

'n alien actuall! present in the hilippines who is not a mere transient or so


3/109

+amdg


be his intention at all times to return to his domicile abroad when thepurpose for which he came has been consummated or abandoned. #%% /&

>on6resident citi ens*ec // #4&. The term ?nonresident citi en? means:#1& ' citi en of the hilippines who establishes to the satisfaction of the Commissioner the fact of his ph!sicalpresence abroad with a definite intention to reside therein.#/& ' citi en of the hilippines who leaves the hilippines during the taxable !ear to reside abroad, either as animmigrant or for emplo!ment on a permanent basis.#2& ' citi en of the hilippines who wor s and derives income from abroad and whose emplo!ment thereat re@uireshim to be ph!sicall! present abroad most of the time during the taxable !ear.#A& ' citi en who has been previousl! considered as nonresident citi en and who arrives in the hilippines at an!time during the taxable !ear to reside permanentl! in the hilippines shall li ewise be treated as a nonresidentciti en for the taxable !ear in which he arrives in the hilippines with respect to his income derived from sourcesabroad until the date of his arrival in the hilippines.#B& The taxpa!er shall submit proof to the Commissioner to show his intention of leaving the hilippines to residepermanentl! abroad or to return to and reside in the hilippines as the case ma! be for purpose of this *ection. $eaning of non6resident citi en:

1. Citi en who establishes to the satisfaction of the Commissioner the fact of hisph!sical presence abroad with a definite intention to reside therein

/. Citi en who leaves the hilippines during the taxable !ear to reside abroad, eitheras an immigrant or for emplo!ment on a permanent basis

2. Citi en who wor s and derives from abroad and whose emplo!ment thereatre@uires him to be ph!sicall! present abroad most of the time during the taxable!ear

A. Citi en who has been previousl! considered as nonresident citi en and whoarrives in the hilippines at an! time during the taxable !ear to residepermanentl! in the hilippines shall li ewise be treated as a nonresident citi enfor the taxable !ear in which he arrives in the hilippines with respect to hisincome derived from sources abroad until the date of his arrival in the hilippines.

9ho are non6resident citi ens #%% 16 D&1. Immigrant 3 one who leaves the hilippines to reside abroad as an immigrant for

which a foreign visa has been secured

/. ermanent emplo!ee 3 one who leaves the hilippines to reside abroad foremplo!ment on a more or less permanent basis2. Contract wor er 3 one who leaves the hilippines on account of a contract of

emplo!ment which is renewed from time to time under such circumstance as tore@uire him to be ph!sicall! present abroad most of the time #not less than 1E2da!s&

>on6resident citi ens who are exempt from tax with respect to income derived fromsources outside the hilippines shall no longer be re@uired to file information returnsfrom sources outside the hilippines beginning /001. #%% B6/001&

The phrase Fmost of the timeG shall mean that the said citi en shall have sta!ed abroadfor at least 1E2 da!s in a taxable !ear. The same exemption applies to an OC9 but as such wor er, the time spent abroad is

not material for tax exemption purposes all that is re@uired is for the wor er)semplo!ement contract to pass through and be registered with the O4'. #7I% %uling226/000&.

>on6resident aliens engaged in business in the hilippines*ec //. #5& The term ?nonresident alien? means an individual whose residence is not within the hilippines andwho is not a citi en thereof.

9ho are non6resident aliens1. 'n individual whose residence is not within the hilippines


2


4/109

+amdg


/. >ot a citi en of the hilippineso 8etermination is b! his intention with regard to the length and nature of his sta!.

#*ec B, %% /& "oss of residence b! alien

o 'n alien who has ac@uired residence in the hilippines retains his status until heabandons the same and actuall! departs from the hilippines.

o ' mere intention to change his residence does not change his status. 'n alien whohas ac@uired a residence is taxable as a resident for the remainder of his sta! in the

hilippines. #*ec. H, %% /& $inimum wage earner*ec //. #55& The term (statutor! minimum wage) earner shall refer to rate fixed b! the %egional Tripartite 9ageand roductivit! 7oard, as defined b! the 7ureau of "abor and 4mplo!ment *tatistics #7"4*& of the 8O"4.

# & The term (minimum wage earner) shall refer to a wor er in the private sector paid the statutor! minimumwage; or to an emplo!ee in the public sector with compensation income of not more than the statutor! minimumwage in the non6agricultural sector where he-she is assigned.

ixed b! the %egional Tripartite 9age and roductivit! 7oard.

$inimum wage earner:o rivate sector 3 paid the statutor! minimum wageo ublic sector 3 not more than the statutor! minimum wage in the non6agricultural

sector where he-she is assigned

8ependent*ec 2B. #7& or purposes of this *ubsection, a ?dependent? means a legitimate, illegitimate or legall! adopted childchiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!6one #/1& !ears of age, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self6supportbecause of mental or ph!sical defect.

8ependent is aJo "egitimate, illegitimate or legall! adopted child and living with the taxpa!ero 9ho must be:

>ot more than /1,Knmarried, and>ot gainfull! emplo!ed, O%8ependent, regardless of age, is incapable of self6support because of mental or ph!sical defect.

To summari e, individual taxpa!ers are classified into:1. Citi ens, who are divided into:

o %esident citi ens 3 those citi ens whose residence is within the hilippines; ando >on6resident citi ens 3 those citi ens whose resident is not within the hilippines.

/. 'liens, who are divided into:o %esident aliens 3 those individuals whose residence is within the hilippines and

are not citi ens thereof; ando >on6resident aliens 3 those individuals whose residence is not within the

hilippines but temporaril! in the countr! and are not citi ens thereof. The! are:Those engaged in trade or business within the hilippines; andThose who are not so engaged. #see *ec /26/B&

)inds of income and income ta* of individualsTax formula


A


5/109

+amdg


*4C. /A. Income Tax %ates. 6#'& %ates of Income Tax on Individual Citi en and Individual %esident 'lien of the hilippines.#1& 'n income tax is hereb! imposed:#a& On the taxable income defined in *ection 21 of this Code, other than income sub


6/109

+amdg


e@uall! between them for the purpose of determining their respective taxableincome.

$inimum wage earners are exempt from the pa!ment of income tax on their taxableincome. olida! pa!, overtime pa!, night shift differential pa!, and ha ard pa! receivedb! them are li ewise exempt from income tax.

' non6resident alien individual engaged in trade or business in the hilippines is sub


7/109

+amdg


#C& Capital 5ains from *ale of *hares of *toc not Traded in the *toc 4xchange. 6 The provisions of *ection 2D#7&notwithstanding, a final tax at the rates prescribed below is hereb! imposed upon the net capital gains reali edduring the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc in a domesticcorporation, except shares sold, or disposed of through the stoc exchange.>ot over 100,000JJJJJJJJJJJ........ BLOn an! amount in excess of 100,000JJJJ 10L

#8& Capital 5ains from *ale of %eal ropert!. 6#1& In 5eneral. 6 The provisions of *ection 2D#7& notwithstanding, a final tax of six percent #HL& based on thegross selling price or current fair mar et value as determined in accordance with *ection H#4& of this Code,whichever is higher, is hereb! imposed upon capital gains presumed to have been reali ed from the sale, exchange,or other disposition of real propert! located in the hilippines, classified as capital assets, including pacto de retrosales and other forms of conditional sales, b! individuals, including estates and trusts: rovided, That the taxliabilit!, if an!, on gains from sales or other dispositions of real propert! to the government or an! of its politicalsubdivisions or agencies or to government6owned or controlled corporations shall be determined either under*ection /A #'& or under this *ubsection, at the option of the taxpa!er.#/& 4xception. 6 The provisions of paragraph #1& of this *ubsection to the contrar! notwithstanding, capital gainspresumed to have been reali ed from the sale or disposition of their principal residence b! natural persons, theproceeds of which is full! utili ed in ac@uiring or constructing a new principal residence within eighteen #1E&calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this*ubsection: rovided, That the historical cost or ad


8/109


9/109

+amdg


ot6er Disposition of 96ares of 9toc? ) @ 2''!*If shares of stoc are listed and traded through the localstoc exchange

P of 1L #or .00BL& of thegross selling price or grossvalue in mone! of theshares of stoc

If shares not traded through the local stoc exchangeo Capital gains not over 100,000o Capital gains in excess of 100,000

BL of the net capital gains10L of the net capital gains

9ho are liable1. Individual taxpa!er, whether citi en or alien;/. Corporate taxpa!er, whether domestic or foreign;2. Other taxpa!ers not falling under #1& and #/& above, such as estate, trust, trust

funds and pension funds, among others.

9ho are exempt1. 8ealers in securities/. Investors in shares of stoc in a mutual fund compan!, as defined in *ec // #77&,

and *ection /#s& of these %egulations, in ocnnection with the gains reali ed b! saidinvestor upon redemption of said shares of stoc in a mutual fund compan!l and2. 'll other persons, whether natural or Exc6an-es> or Transfers or ealProperties Classified as Capital Assets ) ! %!*

*ale of real propert! in the hilippines HL of the gross sellingprice, or the currentmar et value at the timeof sale, whichever ishigher

If sale was made to the government or to 5OCCs 4ither HL of the grossselling price-currentmar et value or underthe normal income tax


D


10/109

+amdg


rate, taxpa!er)s option

Credita3le 5it66oldin- Tax on 9ales> Exc6an-es orTransfers of eal Properties classified as &rdinar# Assets) ! %!*1. If the seller is ha%itually engaged in the real estate business

o *elling price is less than B00,000o *elling price is B00,000 to /mo *elling price is above /m

1.BL2L

BL of gross sellingprice-current mar etvalue, whichever is

higher/. If the seller is not habituall! engaged in the real estatebusiness

.BL of gross sellingprice-current mar etvalue, whichever ishigher

2. If the seller is exempt from creditable withholding tax as per%% /6DE

Exempt

Conditions to 3e exempt from capital -ains tax of @ on t6e sale> exc6an-e> ordisposition of a principal residence ) 1+ %%*1. The proceeds from the sale, exchange, or disposition of his principal residence must

be full! utili ed in ac@uiring or construing a new principal residence within 1Emonths. There must be proof.

/. This can onl! be availed of O>"= O>C4 ever! 10 !ears2. The historical cost of his old principal residence shall be carried over to the cost basis

of his new residenceA. If there is no full utili ation, he shall be liable for the deficienc! capital gains tax of

the utili ed portionB. If the principal residence is disposed in exchange for a condo, and if it is used as his

new residence, then he is exempt

H. The HL capital gains tax otherwise due must be deposited in escrow with anauthori ed agent ban , and can onl! be released when sufficient proof is shown thatthe proceeds have been full! utili ed within 1E months.

9hat is the principal residence an!wa! # 1 2'''*o It is the dwelling house, where the husband or wife or unmarried individual

resides; actual occupanc! is not interrupted or abandoned b! temporar! absencedue to travel, studies, or wor abroad

o If the ownership of the land and the dwelling house belong to different persons,onl! the dwelling house shall be treated as principal residence

a!ment of capital gains tax on foreclosure of mortgaged propert! # %%*o If the mortgagor exercises his right of redemption within 1 !ear 3 no capital gains

tax because none has been derived and no transfer of propert! was reali ed

In case of non6redemption, the capital gains will be due based on the bid price of thehighest bidder

ersonal and 'dditional 4xemptions

9EC. +8. Allowance of Personal Exemption for Individual Taxpayer. -

)A* In General . 6 or purposes of determining the tax provided in *ection /A #'& of this Title, there shall beallowed a basic personal exemption amounting to B0,000 for each individual taxpa!er.


10


11/109

+amdg


In the case of married individuals where onl! one of the spouses is deriving gross income, onl! such spouse shallbe allowed the personal exemption.)B* Additional Exemption for Dependents . 6 There shall be allowed an additional exemption of twent! fivethousand pesos # /B,000& for each dependent not exceeding four #A&.

The additional exemption for dependent shall be claimed b! onl! one of the spouses in the case of marriedindividuals.

In the case of legall! separated spouses, additional exemptions ma! be claimed onl! b! the spouse whohas custod! of the child or children: rovided, That the total amount of additional exemptions that ma! be claimedb! both shall not exceed the maximum additional exemptions herein allowed.

or purposes of this *ubsection, a ?dependent? means a legitimate, illegitimate or legall! adopted childchiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!6one #/1& !ears of age, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self6supportbecause of mental or ph!sical defect. #'mended b! %' DB0A&

Personal and additional exemption for individual taxpa#er7asic personal exemption for each individual taxpa!er

o If married and onl! one of the spouses is deriving gross income,onl! such spouse shall be allowed the personal exemption.

B0,000

'dditional exemption for each dependent, not exceeding four #A&o Claimed b! onl! one spouse in case of married individualso If legall! separated, additional exemptions claimed onl! b!

spouse who has custod!; should not exceed maximumadditional exemptions allowed

/B,000 perdependent

4xemption statutes are not retroactive. # ensacola v CI%& 8iscounts for senior citi ens is now treated as tax deductions, as per %' D/B . This

suc s for the taxpa!er because he doesn)t get the Fpeso for pesoG benefit which hewould have gotten if it were considered a tax credit as before. #$.4. oldings Corp v CI%

CT'& *enior Citi ens are

o %esident citi enso 't least H0 !ears old

The! are not exempt from income taxes unless the! are consideredminimum wage earners. #%' DDDA, which also too out the previous

H0,000 re@uirement&

Change of status9ec +8. )C* C6an-e of 9tatus. 6 If the taxpa!er marries or should have additional dependent#s& as defined aboveduring the taxable !ear, the taxpa!er ma! claim the corresponding additional exemption, as the case ma! be, infull for such !ear.

If the taxpa!er dies during the taxable !ear, his estate ma! still claim the personal and additionalexemptions for himself and his dependent#s& as if he died at the close of such !ear.

If the spouse or an! of the dependents dies or if an! of such dependents marries, becomes twent!6one#/1& !ears old or becomes gainfull! emplo!ed during the taxable !ear, the taxpa!er ma! still claim the sameexemptions as if the spouse or an! of the dependents died, or as if such dependents married, became twent!6one#/1& !ears old or became gainfull! emplo!ed at the close of such !ear.

ersonal exemption allowable to nonresident alien individuals9ec. +8 )D* Personal Exemption Allo a3le to 0onresident Alien Individual . 6 ' nonresident alien individualengaged in trade, business or in the exercise of a profession in the hilippines shall be entitled to a personalexemption in the amount e@ual to the exemptions allowed in the income tax law in the countr! of which he is asub


12/109

+amdg


Personal Exemptions allo a3le tononresident alien individualsIf engaged in trade, business or in the exercise of a profession

4ntitled to a personal exemption in theamount e@ual to the exemptionsallowed in the income tax law of his

countr! for ilipinos, but it shouldn)texceed the amount fixed here forexemptions

If not engaged in trade, business or in the exerciseof a profession

>one, because *ec /B #7& states thathe will be taxed upon his entireincome.

8e "eon states that nonresident aliens are not entitled to additional e*emptions fordependents. # . 12B, undamentals of Taxation /00D&

Optional *tandard 8eduction9ec. + ) * &ptional 9tandard Deduction. 6 In lieu of the deductions allowed under the preceding *ubsections,an individual sub


13/109

+amdg


receipts shall be determined in accordance with the said acceptable method of accounting.

4xample:o *uppose a retailer of goods, an individual, whose accounting method is under the

accrual basis has a gross sales of 1m with a cost of sales amounting to E00 .

the computation of the O*8 shall be determined as follows:5ross *ales 1,000,0005ess! 6o7S 888888888888887asis of the O*8 1,000,000

* 3S( Rate 1ma*2 .A0O*8 'mount A00,000

If the taxpa!er opts to use the O*8 in lieu of the itemi ed deductions allowedunder *ec 2A of the Tax Code, his net taxable income shall be as follows:5ross *ales 1,000,0005ess! 6o7S 8888888888885ross *ales-5ross Inome 1,000,0005ess! 3S( 1ma*2 A00,000>et Income H00,000

remium pa!ments on health and-or hospitali ation insurance9ec. + )(* Premium Payments on Health and or Hospitali!ation Insurance of an Individual Taxpayer .8 The amount of premiums not to exceed Two thousand four hundred pesos # /,A00& per famil! or Two hundredpesos # /00& a month paid during the taxable !ear for health and-or hospitali ation insurance ta en b! thetaxpa!er for himself, including his famil!, shall be allowed as a deduction from his gross income: +rovided, Thatsaid famil! has a gross income of not more than Two hundred fift! thousand pesos # /B0,000& for the taxable!ear: +rovided, finally , That in the case of married taxpa!ers, onl! the spouse claiming the additional exemption fordependents shall be entitled to this deduction.

The taxpa!er is allowed a deduction of /,A00-famil! or /00-month for health and-or

hospitali ation insurance premiums, provided:o *aid famil!)s gross income is not more than /B0,000 for the taxable !ear.

If married, onl! the spouse claiming the additional exemption for dependents can availof this.

4xclusions and deductions #discussion from 8e "eon)s boo , see also *ec H16HA of %% /& 4xclusions are incomes that are exempt from the tax. The! are not to be included in the

tax return unless information regarding it is specificall! called for.o 4xamples:

"ife insurance proceeds paid to beneficiaries upon the death of theinsured.Qalue of the propert! ac@uired b! inheritance or donation, because it is

sub


14/109

+amdg


5ains from the sale or retirement of bonds or other certificates of indebtedness with a maturit! of more than B !ears.

8eductions are items or amounts which the law allows to be deducted under certainconditions from the gross income of a taxpa!er in order to arrive at the taxable income.

7oth reduce actual gross income although exclusions are not included in the income taxreturn.

*ome general principals governing deductions include:o The taxpa!er see ing a deduction must point to some specific provision of the

statute authori ing the deduction; ando e must be able to prove that he is entitled to the deduction authori ed or

allowed. The! are allowed onl! where there is a clear provision in the statute for the

deduction claimed. Taxable gross income is affected b! exclusions because the latter are omitted from the

former and are not reported on the income tax return but is not affected b! deductionsbecause the! are subtracted after gross income is determined and are reported on thereturn.

Rinds of deductions:

1. 8eductions from compensation income./. 8eductions from business-professional income.2. 8eductions from corporate income.A. *pecial deductionsB. 8eductions allowed b! special laws.

Tax on non6resident aliens>on6resident aliens engaged in business in the hilippines9EC. 28. Tax on "onresident Alien Individual. 8)A* "onresident Alien En#a#ed in trade or $usiness %ithin the Philippines. 8

#1& "n 7eneral . 6 ' nonresident alien individual engaged in trade or business in the hilippines shall be sub


15/109

+amdg


0 Three #2& !ears to less than four #A& !ears 6 1/L; and0 "ess than three #2& !ears 6 /0L.#2& 6apital 7ains . 6 Capital gains reali ed from sale, barter or exchange of shares of stoc in domestic corporationsnot traded through the local stoc exchange, and real properties shall be sub Business or Exercisin- a Profession

"inal Tax

1. Interest under the expanded foreign currenc! deposit s!stem exempt/. %o!alt! from boo s, literar! wor s, musical compositions 10L2. %o!alt! other than above /0LA. Interest on an! current ban deposit, !ield or other monetar! benefitsfrom deposit substitute, trust fund similar arrangement

/0L

B. ri e exceeding 10,000 /0LH. Other winnings, except hil Charit! *weepsta es "otto /0L

. 8ividend from a domestic corp, or from a on6resident aliens not engaged in business in the hilippines9ec. 28 )B* "onresident Alien Individual "ot En#a#ed in Trade or $usiness %ithin the Philippines. 8There shall be levied, collected and paid for each taxable !ear upon the entire income received from all sourceswithin the hilippines b! ever! nonresident alien individual not engaged in trade or business within the hilippinesas interest, cash and-or propert! dividends, rents, salaries, wages, premiums, annuities, compensation,remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income,and capital gains, a tax e@ual to twent!6five percent #/BL& of such income. Capital gains reali ed b! a nonresidentalien individual not engaged in trade or business in the hilippines from the sale of shares of stoc in an! domesticcorporation and real propert! shall be sub


16/109

+amdg


*ection /A.

>onresident aliens not engaged in business are taxed /BL of their entire income withinthe hilippines.

That means the! have no deductions Their capital gains are the same with nonresident aliens engaged in business #see table

above &

*pecial aliens9ec. 28 )C* Alien Individual Employed &y 'e#ional or Area Head(uarters and 'e#ional )peratin#Head(uarters of *ultinational +ompanies . 6 There shall be levied, collected and paid for each taxable !earupon the gross income received b! ever! alien individual emplo!ed b! regional or area head@uarters and regionaloperating head@uarters established in the hilippines b! multinational companies as salaries, wages, annuities,compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or areahead@uarters and regional operating head@uarters, a tax e@ual to fifteen percent #1BL& of such gross income:+rovided, however , That the same tax treatment shall appl! to ilipinos emplo!ed and occup!ing the same positionas those of aliens emplo!ed b! these multinational companies. or purposes of this Chapter, the term Nmultinationalcompan!N means a foreign firm or entit! engaged in international trade with affiliates or subsidiaries or branchoffices in the 'sia6 acific %egion and other foreign mar ets.

#8& Alien "ndividual 9mployed %y 3ffshore Ban ing :nits . 6 There shall be levied, collected and paid for eachtaxable !ear upon the gross income received b! ever! alien individual emplo!ed b! offshore ban ing unitsestablished in the hilippines as salaries, wages, annuities, compensation, remuneration and other emoluments,such as honoraria and allowances, from such off6shore ban ing units, a tax e@ual to fifteen percent #1BL& of suchgross income: +rovided, however, That the same tax treatment shall appl! to ilipinos emplo!ed and occup!ing thesame positions as those of aliens emplo!ed b! these offshore ban ing units.

#4& Alien "ndividual 9mployed %y +etroleum Service 6ontractor and Su%contractor. 6 'n 'lien individual who is apermanent resident of a foreign countr! but who is emplo!ed and assigned in the hilippines b! a foreign servicecontractor or b! a foreign service subcontractor engaged in petroleum operations in the hilippines shall be liable toa tax of fifteen percent #1BL& of the salaries, wages, annuities, compensation, remuneration and otheremoluments, such as honoraria and allowances, received from such contractor or subcontractor: +rovided,however, That the same tax treatment shall appl! to a ilipino emplo!ed and occup!ing the same position as analien emplo!ed b! petroleum service contractor and subcontractor.

'n! income earned from all other sources within the hilippines b! the alien emplo!ees referred to under*ubsections #C&, #8& and #4& hereof shall be sub


17/109

+amdg


1. Is this income If not, then it)s not reall! a income tax problem./. 9ho)s the taxpa!er 'nd what)s the source %efer to *ec /22. 9hat)s the specific rate *ee sec /A6/B

or example, what is the tax rate of on income derived from dividends from foreigncorporations for 1. Citi ens /. %esident aliens and 2. >onresident aliens engaged in trade or

business

1. Citi ensa. =es, it)s income.b. The source is outside the hilippines. 're the! liable for sources from outside

the hilippines =es Citi ens are taxed worldwidec. 9hat)s the specific tax rate mmJ since it)s not in an! of the charts, but

the! still have to be taxed, then the income the! derive from dividends fromforeign corporations will be considered in computing the tax rate based on thetax calendar of *ec /A#a&

/. %esident aliensa. =es, it)s income.b. The source is outside the hilippines. 're the! liable for sources from outside

the hilippines >o The! aren)t taxed worldwide.2. >onresident aliens engaged in trade or business

a. =es, m! dear, it)s income.b. The source is outside the hilippines. 're the! liable for source from outside

the hilippines >o The! aren)t taxed worldwide either.

D. Definitions *ection //, Tax Code

8efinition of corporations9ec 22 )B* The term ?corporation? shall include partnerships, no matter how created or organi ed,


18/109

+amdg

Taxation One: Outline with Codals The moment inheritance shares are used as part of the common assets to be used in

ma ing profits, it is considered part of the taxable income of an unregisteredpartnership. #Ona v CI%&

%e@uisites of a MQ:1. Contribution b! each part!/. rofits are shared among the parties

2. There is ; and#A& ' 0.D percent #0.DL& ratio of the Consolidated ublic *ector inancial osition #C * & to 5> .

The option to be taxed based on gross income shall be available onl! to firms whose ratio of cost of salesto gross sales or receipts from all sources does not exceed fift!6five percent #BBL&.

The election of the gross income tax option b! the corporation shall be irrevocable for three #2&consecutive taxable !ears during which the corporation is @ualified under the scheme.

or purposes of this *ection, the term Ngross incomeN derived from business shall be e@uivalent to grosssales less sales returns, discounts and allowances and cost of goods sold. ?Cost of goods sold? shall include allbusiness expenses directl! incurred to produce the merchandise to bring them to their present location and use.

or a trading or merchandising concern, ?cost of goods? sold shall include the invoice cost of the goodssold, plus import duties, freight in transporting the goods to the place where the goods are actuall! sold, includinginsurance while the goods are in transit.

or a manufacturing concern, ?cost of goods manufactured and sold? shall include all costs of productionof finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurancepremiums and other costs incurred to bring the raw materials to the factor! or warehouse.

In the case of taxpa!ers engaged in the sale of service, Ngross incomeN means gross receipts less salesreturns, allowances and discounts.

Tax rate of 8omestic Corporations 20L of taxable income from all sources within andoutside the hilippines, or /L of gross income if $CIT applies, or 1BL of gross income if the following conditionsare met:

1. tax effort ratio of /0L of 5>


1E


19/109

+amdg


/. ratio of A0L of income tax collection tototal tax revenues

2. Q'T tax effort of AL of 5> ; andA. .DL ratio of the Consolidated ublic *ector

inancial osition #C * & to 5> #this lastone has !et to be implemented&

Option to be taxed based on gross income shall be available onl! to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed BBL

4lection of the gross income tax option b! the corporation shall be irrevocable for2 consecutive taxable !ears

8omestic corporations are subormal tax $inimum corporate income tax #$CIT& 5ross income tax #5IT& Improperl! accumulated earnings tax #I'4T&

Gross Income Computation5ross *ales"ess: *ales %eturns 8iscounts 'llowances Co5* #all business expenses directl! incurred to produce the merchandise and bringthem to their present location or use&Total 5ross Income

CoG9 for a Tradin- or (erc6andise ConcernInvoice cost of goods soldImport duties

reight in transporting the goods to the place where the goods are actuall! sold

Insurance while the goods are in transit

CoG9 for a (anufacturin- Concern'll costs of production of finished goods such as raw materials, direct labor manufacturingoverhead

reight costInsurance premiumsOther costs incurred to bring the raw materials to the factor! or warehouse

Gross Income Computation for a 9ervice Concern5ross *ales"ess: *ales %eturns

8iscounts 'llowances Cost of *ervices #all direct costs expenses necessaril! incurred to provide theservices re@uired b! the customers clients including:

*alaries emplo!ee benefits of personnel, consultants specialistsdirectl! rendering the service

Cost of facilities directl! utili ed in providing the service such asdepreciation or rental of e@uipment use cost of supplies

If it)s a ban , interest expense is included


1D


20/109

+amdg


Total 5ross income of a service concern

". Proprietar# Educational Institutions and $ospitals#7& roprietar! 4ducational Institutions and ospitals. 6 roprietar! educational institutions and hospitals which arenonprofit shall pa! a tax of ten percent #10L& on their taxable income except those covered b! *ubsection #8&hereof: rovided, that if the gross income from unrelated trade, business or other activit! exceeds fift! percent#B0L& of the total gross income derived b! such educational institutions or hospitals from all sources, the taxprescribed in *ubsection #'& hereof shall be imposed on the entire taxable income. or purposes of this *ubsection,the term Nunrelated trade, business or other activit!N means an! trade, business or other activit!, the conduct of which is not substantiall! related to the exercise or performance b! such educational institution or hospital of itsprimar! purpose or function. ' ? roprietar! educational institution? is an! private school maintained andadministered b! private individuals or groups with an issued permit to operate from the 8epartment of 4ducation,Culture and *ports #84C*&, or the Commission on igher 4ducation #C 48&, or the Technical 4ducation and * ills8evelopment 'uthorit! #T4*8'&, as the case ma! be, in accordance with existing laws and regulations. roprietar! educational institution is:

o 'n! private school maintained administered b! private individuals or groupso 9ith an issued permit to operate from the 84C* or C 48 or T4*8'

Tax rate of proprietar! educationalinstitutions and hospitals

10L on their taxable income #except for passiveincome&, or

20L on their entire taxable income if the grossincome from unrelated trade, business or otheractivit! exceeds B0L of the total gross income of the institution

Knrelated trade, business or other activit! meanso 'n! trade, business or other activit!o The conduct of which is not su%stantially related to the exercise or performance

b! such its institution of its primar! purpose or function. or non6stoc , non6profit educational institutions, all revenues use actuall!, directl! and

exclusivel! for educational purposes are exempt.o Their exemption refers onl! to revenues derived from assets used actuall!,

directl! and exclusivel! for educational purposes.o Income from cafeterias, canteens boo stores are also exempt if the! are

owned operated b! the educational institution and are located within the schoolpremises.

o owever, the! shall be sub


21/109

+amdg

Taxation One: Outline with Codalso Their ban deposits and foreign currenc! deposits are exempt from withholding

taxes but the! must show proof that such income is used to fund proposedpro


22/109

+amdg


Code, whichever is higher, of such lands and-or buildings.

Tax ate on Passive Income of Domestic Corporations "inal Tax1. Interest under the expanded foreign currenc! deposit s!stem .BL/. %o!alt! of all t!pes within the hilippines

o %o!alt! from abroad 4nters the taxable income 20L tax rate/0L

2. Interest on an! current ban deposit, !ield or other monetar! benefitsfrom deposit substitute, trust fund similar arrangement

/0L

A. 8ividend from domestic corporations #inter6corporate dividend& exempt

Tax ate on Capital Gains )same as individuals*2. On sale of shares of stoc of a domestic corporation 034

listed and 034 traded thru a local stoc exchange held asa capital asset ,o Capital gains not over 100,000o Capital gains in excess of 100,000


/. On sale of real propert! in the hilippines held as a capital asset HL of the gross selling

price, or the current mar etvalue at the time of sale,whichever is higher

Tax ate of BA0/9 on Income Derived under t6e Expanded "CD9#stem

"inal Tax

1. Income derived b! a depositor! 7'>R from foreign currenc!transactions with non6residents, O7Ks, etc

exempt

/. Interest income from foreign currenc! loans granted b! a ban toresidents other than O7Ks

10L

Income of non6residents #individuals or corporations& from transactions with depositor!

ban under the expanded C8 s!stem are exempt.

9hat are deposit substitutes#=& The term ?deposit substitutes? shall mean an alternative from of obtaining funds from the public #the termNpublicN means borrowing from twent! #/0& or more individual or corporate lenders at an! one time& other thandeposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account,for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or theneeds of their agent or dealer. These instruments ma! include, but need not be limited to ban ersN acceptances,promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b! and betweenthe 7ang o *entral ng ilipinas #7* & and an! authori ed agent ban , certificates of assignment or participationand similar instruments with recourse: rovided, however, That debt instruments issued for interban call loanswith maturit! of not more than five #B& da!s to cover deficienc! in reserves against deposit liabilities, includingthose between or among ban s and @uasi6ban s, shall not be considered as deposit substitute debt instruments. ' deposit substitute is a means of borrowing mone! from the public #/0 or more

individual or corporate lenders& other than b! wa! of deposit with ban s through theissuance of debt instruments.

*ale of sharesTax ate on Income from 9ale> Barter> Exc6an-e orot6er Disposition of 96ares of 9toc? ) @ 2''!*If shares of stoc are listed and traded through the localstoc exchange

P of 1L #or .00BL& of thegross selling price or grossvalue in mone! of the


//


23/109

+amdg


shares of stocIf shares not traded through the local stoc exchange

o Capital gains not over 100,000o Capital gains in excess of 100,000


C8K Income of non6residents #individuals or corporations& from transactions with depositor!

ban under the expanded C8 s!stem are exempt.

Intercorporate dividends 8ividends received b! a domestic corporation from another domestic corporation shall

not be sub Exc6an-es> or Transfers or eal

Properties Classified as Capital Assets ) ! %!**ale of real propert! in the hilippines HL of the gross selling

price, or the currentmar et value at the timeof sale, whichever ishigher

If sale was made to the government or to 5OCCs 4ither HL of the grossselling price-currentmar et value or underthe normal income taxrate, taxpa!er)s option

Credita3le 5it66oldin- Tax on 9ales> Exc6an-es orTransfers of eal Properties classified as &rdinar# Assets) ! %!*1. If the seller is ha%itually engaged in the real estate business

o *elling price is less than B00,000o *elling price is B00,000 to /mo *elling price is above /m

1.BL2L

BL of gross sellingprice-current mar etvalue, whichever is

higher/. If the seller is not habituall! engaged in the real estatebusiness

.BL of gross sellingprice-current mar etvalue, whichever is

higher2. If the seller is exempt from creditable withholding tax as per%% /6DE

Exempt

If the mortgagor exercises his right of redemption within 1 !ear, no capital gains tax. In case of non6redemption, the capital gains will be due based on the bid price of the

highest bidder. #%% A6DD&

I. (inimum Corporate Income Tax )(CIT*9ec 27 )E* *inimum +orporate Income Tax on Domestic +orporations .


/2


24/109

+amdg


#1& "mposition of 4a*. 6 ' minimum corporate income tax of two percent #/L0 of the gross income as of the end of the taxable !ear, as defined herein, is hereb! imposed on a corporation taxable under this Title, beginning on thefourth taxable !ear immediatel! following the !ear in which such corporation commenced its business operations,when the minimum income tax is greater than the tax computed under *ubsection #'& of this *ection for thetaxable !ear.#/& 6arry -orward of 9*cess Minimum 4a* . 6 'n! excess of the minimum corporate income tax over the normalincome tax as computed under *ubsection #'& of this *ection shall be carried forward and credited against thenormal income tax for the three #2& immediatel! succeeding taxable !ears.#2& Relief from the Minimum 6orporate "ncome 4a* :nder 6ertain 6onditions . 6 The *ecretar! of inance is hereb!authori ed to suspend the imposition of the minimum corporate income tax on an! corporation which suffers losseson account of prolonged labor dispute, or because of force ma


25/109

+amdg

Taxation One: Outline with Codalso %esident foreign corporations engaged in business as international carriers #see

below for more discussion&o %esident foreign corporations engaged in business as offshore ban ing unitso %esident foreign corporations engaged in business as regional operating

head@uarterso irms that are taxed under a special income tax regime #li e those under 4S' or

other economic ones&

,. Income Tax on esident "orei-n Corporations9ec 2!)A* Tax on 'esident orei#n +orporations.

#1& "n 7eneral . 6 4xcept as otherwise provided in this Code, a corporation organi ed, authori ed, or existing underthe laws of an! foreign countr!, engaged in trade or business within the hilippines, shall be sub


26/109

+amdg


Tax ate on Capital GainsA. On sale of shares of stoc of a domestic corporation 034


BL of the net capital gains

10L of the net capital gains/. On sale of real propert! in the hilippines 0o provision for capital

gains for sale of realty. Atty. Montero says that youapply it to the normal corporate ta* of >?@

International Carrier*ec /E #'& "nternational 6arrier . 6 'n international carrier doing business in the hilippines shall pa! a tax of two and one6half percent #/ 1-/L& on its /7ross +hilippine Billings/ as defined hereunder:#a& "nternational Air 6arrier. 8 /7ross +hilippine Billings/ refers to the amount of gross revenue derived fromcarriage of persons, excess baggage, cargo and mail originating from the hilippines in a continuous anduninterrupted flight, irrespective of the place of sale or issue and the place of pa!ment of the tic et or passagedocument: +rovided, That tic ets revalidated, exchanged and-or indorsed to another international airline form partof the 5ross hilippine 7illings if the passenger boards a plane in a port or point in the hilippines: +rovided,further , That for a flight which originates from the hilippines, but transshipment of passenger ta es place at an!port outside the hilippines on another airline, onl! the ali@uot portion of the cost of the tic et corresponding to theleg flown from the hilippines to the point of transshipment shall form part of 5ross hilippine 7illings.#b& "nternational Shipping . 6 /7ross +hilippine Billings/ means gross revenue whether for passenger, cargo or mailoriginating from the hilippines up to final destination, regardless of the place of sale or pa!ments of the passageor freight documents.

Tax rate for international carriers is /.BL of 5ross hilippine 7illings 5ross hilippine 7illings refers to

o 5ross revenue derived from carriage of persons, excess baggage, cargo and mailo 3riginating from the +hilippines in a continuous and uninterrupted flighto

"rrespective of the place of sale or issue and the place of pa!ment of the tic et orpassage document In CI% v 7O'C, 7ritish Overseas 'irwa!s did not have an! landing rights here nor did

the! have license to operate here. The! also did not carr! passengers or cargo to orfrom the hilippines. The! did, however, have a general sales agent which sold 7O'Ctic ets. The! were taxed for the sale of the tic ets #because of the situs of taxationprinciple&, even if the service to be rendered was outside the hilippines. The! weren)tliable for carrier)s tax though.

o 8oing business has no specific criterion. 's long as there was a continuit! of conduct and intention to establish a continuous business and not one of atemporar! character, then !ou are doing business in the hilippines. #%emember!our corp &

'n offline airline which has a branch-agent in the hilippines and sells passagedocuments to cover offline flights of its principal or other airlines is >OT consideredengaged in business as an international air carrier in the countr! and is >OT sub


27/109

+amdg


flights to and from the hilippines but nonetheless earn income from other activities inthe countr! will be taxed at the rate of 2/L #now 20L& of such income. #*outh 'frican'irwa!s, eb 1H, /010&

9hat is included in computing the 5 7o 5ross revenue from passage of persons #actual amount as reflected in the tax

coupon part of the plane tic et&o 4xcess baggageo Cargo and mail originating from the hilippines in a continuous and uninterrupted

flight To compute the 5 7: #monthl! average net fare of all the tax coupons of plane tic ets

per point of final destination, per class of passage, per classification of passenger&$K"TI "I48 b! the #total number of passengers flown for the month as declared in theflight manifest&

In case of passengers) flights from an! point in the hilippines and bac , that portion of revenue pertaining to the return trip to the hilippines is >OT included as part of the5 7. # 18 2''2*

Offshore 7an ing Knits

#A&3ffshore Ban ing :nits. 6 The provisions of an! law to the contrar! notwithstanding, income derived b! offshoreban ing units authori ed b! the 7ang o *entral ng ilipinas #7* & to t ransact business with offshore ban ing units,including an! interest income derived from foreign currenc! loans granted to residents, shall be sub


28/109

+amdg


resident foreign corporation from C8 withholding tax

7ranch rofit %emittance Tax#B&4a* on Branch +rofits Remittances . 6 'n! profit remitted b! a branch to its head office shall be sub


29/109

+amdg

Taxation One: Outline with Codalso 5eneral admin and planningo 7usiness planning and coordination;o *ourcing and procurement of raw materials and components;o Corporate finance advisor! services;o $ar eting control and sales promotion;o Training and personnel management;o "ogistic services;o %esearch and development services and product development;o Technical support and maintenance;o 8ata processing and communications; ando 7usiness development.

The! are taxed 10L on taxable income.

/. Income Tax on 0on resident "orei-n CorporationsIn general#7& Tax on >onresident oreign Corporation. 6#1& "n 7eneral . 6 4xcept as otherwise provided in this Code, a foreign corporation not engaged in trade or businessin the hilippines shall pa! a tax e@ual to thirt!6five percent #2BL& of the gross income received during eachtaxable !ear from all sources within the hilippines, such as interests, dividends, rents, ro!alties, salaries,premiums #except reinsurance premiums&, annuities, emoluments or other fixed or determinable annual, periodicor casual gains, profits and income, and capital gains, except capital gains subon6resident foreign corporations are subon6resident cinematographic filmowner, lessor, or distributor

/BL 5ross income from the hil

>on6resident lessor of aircraft,machiner! and other e@uipment

.BL 5ross rentals, charges andother fees from hil sources

roprietar! educational institution and 10L Taxable income from all


/D


30/109

+amdg


non6profit hospital sources%esident international carrier /.BL 5ross hilippine billings%egional operating head@uarters of multinational corporation

10L hilippine Taxable income

There)s no $CIT for special corporations

Tax rate on certain incomes of non6resident foreign corporations#B&4a* on 6ertain "ncomes Received %y a 0onresident -oreign 6orporation. 8#a& "nterest on -oreign 5oans . 6 ' final withholding tax at the rate of twent! percent #/0L& is hereb! imposed onthe amount of interest on foreign loans contracted on or after 'ugust 1, 1DEH;#b& "ntercorporate (ividends. 6 ' final withholding tax at the rate of fifteen percent #1BL& is hereb! imposed onthe amount of cash and-or propert! dividends received from a domestic corporation, which shall be collected andpaid as provided in *ection B #'& of this Code, sub>C2#c& 9*change. 8 ' final tax at the rates prescribed below is hereb! imposed upon the net capital gains reali edduring the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc in a domestic

corporation, except shares sold, or disposed of through the stoc exchange:>ot over 100,000JJJJ..JJJJJJ..........BL On an! amount in excess of 100,000JJJJ 10L

Tax ate on Passive Income of "orei-n 0on esidentCorporations

"inal Tax

1. Interest on foreign loans0on8resident lends to a domestic corporation

/0L

/. 8ividend from domestic corporations #inter6corporate dividend& 4his is su%Dect to the condition that the country in which the non8

resident foreign corporation is domiciled allows a credit against the ta* due from the non8resident foreign corp ta*es deemed tohave %een paid in the +hilippines equivalent to EF@. "f they dont,the dividends will %e ta*ed at >?@.

1BL

Tax ate on Capital Gains )same as forei-n residentcorporations*B. On sale of shares of stoc of a domestic corporation 034



/. On sale of real propert! in the hilippines 0o provision for capital gains for sale of realty.

Atty. Montero says that youapply it to the normal

corporate ta* of >?@On inter6corporate dividends #CI% v rocter and 5amble hilippine $anufacturing, 1DD1&

The ordinar! 2BL #now 20L& tax rate applicable to dividend remittances to non6resident corporate stoc holders of a hilippine corporation, goes down to 1BL if thecountr! of domicile of the foreign stoc holder corporation Fshall allowG such foreigncorporation a tax credit for Ftaxes deemed paid in the hilippinesG, applicable againstthe tax pa!able to the domiciliar! countr! b! the foreign stoc holder corporation.


20


31/109

+amdg

Taxation One: Outline with Codals In CI% v 5 # $C& #1DD1&, rocter and 5amble hilippines declared dividends to its

parent compan!, 56K*'. It deducted 2BL withholding tax, but now claimed for arefund, stating that the reduced 1BL dividend tax rate should appl!.

o The *C said that the reduced 1BL dividend tax rate is applicable if the K*' Fshall allowG to 56K*' a tax credit for Ftaxes deemed paid in the

hilippinesG applicable against the K* taxes of 56K*'.o The >I%C specifies that such tax credit for Ftaxes deemed paid in the

hilippinesG must, as a minimum, reach an amount e@uivalent to /0L #now1BL& which represents the difference between the regular 2BL # now >?@ &dividend tax rate and the preferred 1BL dividend tax rate. It is important tonote that *ec. /A#b&1 # now Sec. GH 1B2 1F2 1%2 of the >I%C does not re@uirethat the K* must give a Fdeemed paidG tax credit for the dividend tax #/0Lpoints& waived b! the hilippines in ma ing applicable the preferred dividendtax rate of 1BL.

o In other words, our >I%C does not re@uire that the K* tax law deem theparent6corporation to have paid the /0L points of dividend tax waived b! the

hilippines. The >I%C onl! re@uires that the K* Fshall allowG 56K*' a Fdeemed paidG tax credit in an amount e@uivalent to the /0L points waived

b! the hilippines. CI% v 9ander hilippines had the same facts as CI% v 5 $C. 7ut in 9ander, thecountr! at issue was *wit erland and it did not even impose an! income tax on thedividends received b! *wiss corporations from foreign corporations.

o T 4 *C said that the condition of Ftaxes deemed paidG was alread! compliedwith since no income tax was imposed on the dividends in the first place.

In both cases, the taxpa!ers were entitled to a refund.

Income covered b! tax treaties In negotiating tax treaties, the underl!ing rationale for reducing the tax rate is that the

hilippines will give up a part of the tax in the expectation that the tax given up for thisparticular investment is not taxed b! the other countr!. There would be some incentiveson the part of the foreigners to invest in the hilippines because the rates of tax arelowered and at the same time, the! are credited against the domestic tax abroad afigure higher than what was collected in the hilippines.

o Thus, if the rates of tax are lowered here, there should be a concomitantcommitment on the part of the state of residence #of the foreign corp& to grantsome form of tax relief, whether this be in the form of a tax credit or exemption.Otherwise, the tax which would have been collected here will simpl! be collectedb! another state, defeating the ob


32/109


33/109

+amdg


#2& Income subon6taxable C%4'*48 7=:

Income exempt from taxIncome excluded from gross incomeIncome subO"CO&


22


34/109

+amdg


848KCT48 7=:8ividends actuall! or constructivel! paidIncome tax paid for the taxable !ear

Amount reserved for reasona%le needs of the %usinessemanating from the covered years ta*a%le income 1 from%e!es, p. 1&

4UK'"*:Improperl! accumulated taxable income

10L #I'4T&9hat !ou have to pa!

F%easonable needsG means the immediate needs of the business. If the corporation cannot prove this, then it is not an immediate need. In order to determine whether profitsare accumulated for the reasonable needs of the business as to avoid the surtax uponshareholders, the controlling intention of the taxpa!er is that which is manifested at thetime of accumulation, not subse@uentl! declared intentions which are merel! the productof afterthought. #$anila 9ine $erchants v CI%&

o This is the immediac! test in 2 '1.%easonable needs means the immediate needs of the business includingreasonabl! anticipated needs. The burden of proof is with the corporation.

The touchstone of liabilit! is the purpose behind the accumulation of the income and notthe conse@uences of the accumulation. *o, if the failure to pa! dividends were for thepurpose of using the undistributed earnings and profits for the reasonable needs of thebusiness, that purpose would not fall within the interdiction of the statute. #CI% vTuason&

The tax on improper accumulation of surplus is essentiall! a penalt! tax designed tocompel corporations to distribute earnings so that the said earnings b! shareholders,could, in turn, be taxed. 9hen corporations do not declare dividends, income taxes arenot paid on the undeclared dividends received b! the shareholders. #C!anamid v CT'&

9hat are considered reasonablea. 'llowance for the increase of accumulated earnings up to 100L of the paid6up

capital3. 4arnings reserved for building, plant, or e@uipment ac@uisitions as approved b!

the 7oard of 8irectors #expansion, improvement, and repairs&c. 4arnings reserved for compliance with an! loan or obligation established under a

legitimate business agreement #debt retirement&d. In case of subsidiaries of foreign corporations in the hilippines, all undistributed

earnings intended or reserved for investments in the hilippinese. 4arnings re@uired b! law to be retained # 2 '1*f. 'nticipated losses or reverses in business #%e!es, p. 0&

(. Tax exempt Corporations*4C. 20. 4xemptions from Tax on Corporations. 6 The following organi ations shall not be taxed under this Title inrespect to income received b! them as such:#'& "abor, agricultural or horticultural organi ation not organi ed principall! for profit;#7& $utual savings ban not having a capital stoc represented b! shares, and cooperative ban without capitalstoc organi ed and operated for mutual purposes and without profit;#C& ' beneficiar! societ!, order or association, operating fort he exclusive benefit of the members such as afraternal organi ation operating under the lodge s!stem, or mutual aid association or a nonstoc corporationorgani ed b! emplo!ees providing for the pa!ment of life, sic ness, accident, or other benefits exclusivel! to themembers of such societ!, order, or association, or nonstoc corporation or their dependents;#8& Cemeter! compan! owned and operated exclusivel! for the benefit of its members;


2A


35/109

+amdg


#4& >onstoc corporation or association organi ed and operated exclusivel! for religious, charitable, scientific,athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong toor inures to the benefit of an! member, organi er, officer or an! specific person;# & 7usiness league chamber of commerce, or board of trade, not organi ed for profit and no part of the netincome of which inures to the benefit of an! private stoc 6holder, or individual;#5& Civic league or organi ation not organi ed for profit but operated exclusivel! for the promotion of socialwelfare;# & ' nonstoc and nonprofit educational institution;#I& 5overnment educational institution;#M& armersN or other mutual t!phoon or fire insurance compan!, mutual ditch or irrigation compan!, mutual orcooperative telephone compan!, or li e organi ation of a purel! local character, the income of which consists solel!of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and#R& armersN, fruit growersN, or li e association organi ed and operated as a sales agent for the purpose of mar eting the products of its members and turning bac to them the proceeds of sales, less the necessar! sellingexpenses on the basis of the @uantit! of produce finished b! them;>otwithstanding the provisions in the preceding paragraphs, the income of whatever ind and character of theforegoing organi ations from an! of their properties, real or personal, or from an! of their activities conducted forprofit regardless of the disposition made of such income, shall be sub


36/109

+amdg


or newl! registered firms 3 full! exempt from income taxes4xtension of tax exemption for more than 1 !ear:

If the proOT entitled to additional deduction for incremental laborexpense

This incentive cannot be extended be!ond 2 !earso 'dditional deduction for labor expense

or the first B !ears from registration, a registered enterprise is allowed anadditional deduction of B0L of the wages corresponding to the incrementin the number of 8I%4CT labor for s illed and uns illed labors if thepro


37/109

+amdg


>o taxes #local national& shall be imposed on businesses operatingwithin the 4COSO>4sIn lieu of taxes, BL of the gross income shall be remitted to the nationalgovernment

o 'pplicable national taxes'll income derived b! persons and all services establishments in the4COSO>4 are subote: %' DA00 has restored tax privileges to Clar 'ir 7ase, Camp Mohn a!, orooint and $orong *pecial 4co Sone

In Mohn a! v "im, the *C said that Camp Mohn a! was not afforded taxprivilegs. 7ut %' DA00 has restored it.

*ome stuff from the Mewelr! Industr! 8evelopment 'ct of 1DDE # A !8'2 & and %% 16DDo Uualified


38/109

+amdg

Taxation One: Outline with Codals 7ut the other part! not exempt has to pa! the 8*T

'nnual registration fee of B00 under *ec /2H #7&o If it deals with members and outsiders, see footnote. A

o >ote: 'll income of the cooperative not related to its main-principal business-esshall be subOT exempt fromfinal taxes on deposits, interest income and capital gains tax,8*T if dealing with nonmembers and cooperative exceeding 10m,Q'T billed on certain purchases B

o The exemption of the cooperatives does not extend to their individual members.Thus, members of cooperatives are liable to pa! all the necessar! internalrevenue taxes under the >ational Internal %evenue Code, including the tax onearnings derived from their capital contribution.

rovided, however, that interests received b! members of a cooperativewith accumulated reserves and undivided net savings greater than Ten$illion esos # 10,000,000.00&, after the lapse of the ten6!ear exemption,shall no longer be taxable in the hands of such members.

*ome stuff from the 7aranga! $icro 7usiness 4nterprises #7$74s& # A %17! and Dept&rder 17 ' *

o 7$74s H are exempt from income tax.

A or cooperatives with accumulated reserves and undivided net savings of not more than Ten $illion esos# 10,000,000.00&a. 4xemption from all national internal revenue taxes for which the! aredirectl! liable, as enumerated under *ec.2.1 of these %egulations.II. or cooperatives with accumulated reserves and undivided net savings of more than Ten $illion esos# 10,000,000.00& Wa. 4xemption from income tax for a period of ten #10& !ears from the dateof registration with the C8', provided,that at least twent!6five percent#/BL& of the net income of the cooperative is returned to the membersin the formof interest and-or patronage refund.

or cooperatives whose exemptions were removed b! 4xecutive Order >o. D2, the ten6!ear period shall berec oned from $arch 10, 1DE #meaning, tax exemption is valid onl! until $arch 10, 1DD &.'fter the lapse of the above ten6!ear period, the! shall be subo. HD , as amended b! %epublic 'ct >o. E/ED


2E


39/109

+amdg


7ut not from final taxes on deposits, interest income, capital gains tax,ro!alties, etc

*ome stuff from the Tourism 'ct of /00D # A %8%+ and its I &o Income tax holida!

>ew enterprises in 5reenfield and 7rownfield Tourism Sones 3 H !earsfrom start of business operations4xisting enterprises in 7rownfield Tourism Sones 3 H !ears from time of completion of expansion or upgradeThe income tax holida! can be extended but note more than H !earsprovided the facilities are upgraded to at least B0L of the originalinvestment*pecial >O"CO rule: carried over for the next H consecutive !ears from!ear of loss, provided loss has not been previousl! offset as a deduction

o 5ross income taxation: BL gross income tax, in lieu of all national internalrevenue taxes and local taxes, impost, assessments, fees and licenses

0. Taxa3le Income9EC. +1. Taxa&le Income Defined. The term taxable income means the pertinent items of gross income

specified in this Code, less the deductions and-or personal and additional exemptions, if an!, authori ed for sucht!pes of income b! this Code or other special laws.

5ross Income"ess: deductions"ess: ersonal exemptionsTaxable income

&. Gross Income*4C. 2/. 5ross Income. 6#'& 5eneral 8efinition. 6 4xcept when otherwise provided in this Title, gross income means all income derived fromwhatever source, including #but not limited to& the following items:#1& Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,commissions, and similar items;#/& 5ross income derived from the conduct of trade or business or the exercise of a profession;#2& 5ains derived from dealings in propert!;#A& Interests;#B& %ents;#H& %o!alties;# & 8ividends;#E& 'nnuities;#D& ri es and winnings;#10& ensions; and#11& artnerNs distributive share from the net income of the general professional partnership. 5ross income means '"" I>CO$4 derived from 9 'T4Q4% *OK%C4. This includes, but

is not limited to, the enumeration in the codal. In answering problems, the first thing !ou should as is FIs this gross income G, and

then !ou as Fis this excludible G #that)s the thought process to follow &

Compensation Compensation for services in whatever form paid, including, but not limited to:

o fees,o salaries,o wages,o commissions,o and similar items.

Compensation earners are not allowed to deduct an! other deductions from their salar!


2D


40/109

+amdg

Taxation One: Outline with Codalso but the! ma! have deductions applied to income earned from other sources.

igh6ran ing executive was given an apartment where he would host parties for theclients of his compan!. e would also travel abroad with his wife to go on meetings. 'rethese rental allowances and travel allowances part of the gross income

o >O.o Convenience of the emplo!er rule: >o part of these redounded to the executive)s

personal benefit, nor were such amounts retained b! him. These bills were paiddirectl! b! the emplo!er6corporation. These expenses are CO$ '>= 4 4>*4*,not income b! emplo!ees which are sub8I%4CT"= b! the sameinterests, the CI% is authori ed to distribute, apportion or allocate gross income ordeductions between or among such orgs, trades or businesses, if the CI% determinesthat such is necessar! in order to prevent tax evasion. # 9ec 8'> 0I C*

o This is called Ftransfer pricingG or Fimputed interestG o The standard to determine the fairness of related part! transactions is the arm)s

length standard.It means that there should be no intimac! between the two.It means that the corporation should deal with the related corporation inthe same manner it would with an uncontrolled taxpa!er.

o If a member of a group of controlled entities ma es a loan or advances directl! orindirectl! to another member of such group and does >OT charge an! interest orcharges interest not e@ual to an arm)s length, the CI% ma! ma e appropriateallocations to reflect arm)s length interest rate. #meaning the CI% can come inand impose an interest on the transaction&

? ersonal 4@uit! and %etirement 'ccount # 4%'&? refers to the voluntar! retirement account established b! andfor the exclusive use and benefit of the Contributor for the purpose of being invested solel! in 4%' investmentproducts in the hilippines. The Contributor shall retain the ownership, whether legal or beneficial, of funds placedtherein, including all earnings of such funds.


A0


41/109


42/109

+amdg

Taxation One: Outline with Codalso 9hen the corporation receives dividends which are tax6fee #li e intercorporate

dividends&, it becomes taxable as dividends when it distributes the same to itsshareholders.

o 9hen the dividend is paid b! a domestic corporation to a non6resident foreigncorporation, it is taxable in full. #*ec /E #Bb& of >I%C&

5eneral rule: Cash and propert! dividends are taxable. *toc dividends are not taxable. ropert! dividends #or securities other than its own stoc & # 9ection 281> 2*

o These are considered income in the amount of the full mar et value as whenreceived b! the stoc holder.

o The! are taxed 10L. #or /0L if >%'47&o If it was paid in stoc of another corporation, it is not considered a stoc

dividend.o The valuation is the mar et value at the time the dividend becomes pa!able. # or

shares of stoc of another corporation given as dividends, it is the mar et valuewhen the shares of stoc are received&

*toc dividendso The! are not taxable.

4 C4 T when the stoc dividend causes change in the corporate identit!

or a change in the nature of the shares issued whereb! the proportionalinterest of the stoc holders after the distribution is essentiall! differentfrom his former interest. )9ection 282> 2*

' stoc dividend constitutes income if it gives the shareholder aninterest different from that which his former stoc represented.

9hen a stoc holder receives a stoc dividend which is taxableincome, the measure of income is the fair mar et value of theshares of stoc received.

*ale of stoc received as dividends # 9ection 28+> 2*o Once the recipient sells the stoc dividend, he ma! reali e gain or loss. This gain

or loss is treated as arising form the sale or exchange of a capital asset.o Computation of gain or loss #the new basis per share is used in computing an!

gain or loss upon an! subse@uent sale of the shares&:9hen stoc dividend is the same character as the stoc upon which it ispaid:

Cost: Old *hares - #total number of old and new shares& 9hen stoc dividend materiall! differs from stoc upon which it is paid:

Cost: Cost of shares of 1 class - number of shares inthat class

9hen stoc was purchased at different times and at different prices sothat the identit! cannot be determined:

Cost: resumed to be from stoc issued with respect to earliestpurchased stoc

*toc declaration and subse@uent redemptiono

If after the stoc dividend declaration, a corporation cancels or redeems the samein such time and manner as to ma e the distribution-redemption essentiall!e@uivalent to a distribution of a taxable dividend, the amount received shall beconsidered as a taxable dividend #10L final tax for individuals&. # 9ection 28 >

2*9h! do corporations do this

*o that the shareholder will avoid pa!ing tax. %emember, stocdividends are not taxable, but cash dividends are sub


43/109

+amdg


*o corporations declare stoc dividends, and then redeem them#b! giving their shareholders cash& to go around the tax. 7utbecause of the law, their subse@uent redemptions are now taxable.

The issuance of stoc dividends and its subse@uent redemptionmust be separate, distinct, and not related, for the redemption tobe considered a legitimate tax scheme.

o 8epending on each case, the exempting provision of *ecE2#b& of the 1D2D Code #now, *ec /BA, %%/&, ma! not beapplicable if the redeemed shares were issued with %onafide business purpose, which is


44/109

+amdg

Taxation One: Outline with Codals or a trading compan! that is in the process of li@uidation, and whose stoc holders are

to receive li@uidating dividends in excess of their investment, the gain is taxable becausethe shareholders will reali e capital gain or loss.

o *uch gain is the difference between the fair mar et value of the li@uidatingdividends and the ad


45/109

+amdg

Taxation One: Outline with Codals 'c@uisition b! the 5overnment of private properties expropriation, said properties being

MK*T"= compensated, is embraced within the meaning of the term ?sale? ?disposition of propert!?, and the proceeds should be included in the gross compensation. #5utierre vCollector, 101 hil A2&

%efunds Tax Creditso Taxes which were previousl! claimed and allowed as deductions but subse@uentl!

was refunded or granted as tax credit should be declared as part of the grossincome of that !ear. The purpose of this is put !ou bac in e@uilibrium 3 to bring!our gross income bac up.

o 4 C4 T:4state and donor)s taxIncome, war6profit and excess profit taxes imposed b! a foreign countr!4state and gift taxesTaxes assessed against local benefits of a ind tending to increase thevalue of the propert! assessed*toc transaction tax4nerg! taxTaxes which are not allowable as deductions under the law

9hen refunded, the! are not declarable as gross income becausethe! are not allowable as deductions.

*pecial tax creditso *ales, compensating and specific taxes paid on supplies and raw materials

imported b! a registered export producer That)s given as tax credit.o 9hen a registered 7OI Tourism enterprise assumes pa!ment of taxes withheld

due from the foreign lender on interest pa!ments on foreign loans, that)s givenas a tax credit too. # (C 1+ !'*

o 9hen a 4%' Contributor contributes, he is given a tax credit of BL of the total4%' contribution. #%' DB0B& E

4xclusions9ection +2 )B* Exclusions from Gross Income. 6 The following items shall not be included in gross income andshall be exempt from taxation under this title:#1& "ife Insurance. 6 The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of theinsured, whether in a single sum or otherwise, but if such amounts are held b! the insurer under an agreement topa! interest thereon, the interest pa!ments shall be included in gross income.#/& 'mount %eceived b! Insured as %eturn of remium. 6 The amount received b! the insured, as a return of premiums paid b! him under life insurance, endowment, or annuit! contracts, either during the term or at thematurit! of the term mentioned in the contract or upon surrender of the contract.#2& 5ifts, 7e@uests, and 8evises. 6 The value of propert! ac@uired b! gift, be@uest, devise, or descent: rovided,however, That income from such propert!, as well as gift, be@uest, devise or descent of income from an! propert!,in cases of transfers of divided interest, shall be included in gross income.#A& Compensation for In


46/109

+amdg


the emplo!er: rovided, That the retiring official or emplo!ee has been in the service of the same emplo!er for atleast ten #10& !ears and is not less than fift! #B0& !ears of age at the time of his retirement: rovided, further, Thatthe benefits granted under this subparagraph shall be availed of b! an official or emplo!ee onl! once. or purposesof this *ubsection, the term Nreasonable private benefit planN means a pension, gratuit!, stoc bonus or profit6sharing plan maintained b! an emplo!er for the benefit of some or all of his officials or emplo!ees, whereincontributions are made b! such emplo!er for the officials or emplo!ees, or both, for the purpose of distributing tosuch officials and emplo!ees the earnings and principal of the fund thus accumulated, and wherein its is provided insaid plan that at no time shall an! part of the corpus or income of the fund be used for, or be diverted to, an!purpose other than for the exclusive benefit of the said officials and emplo!ees.#b& 'n! amount received b! an official or emplo!ee or b! his heirs from the emplo!er as a conse@uence of separation of such official or emplo!ee from the service of the emplo!er because of death sic ness or otherph!sical disabilit! or for an! cause be!ond the control of the said official or emplo!ee.#c& The provisions of an! existing law to the contrar! notwithstanding, social securit! benefits, retirementgratuities, pensions and other similar benefits received b! resident or nonresident citi ens of the hilippines oraliens who come to reside permanentl! in the hilippines from foreign government agencies and other institutions,private or public.#d& a!ments of benefits due or to become due to an! person residing in the hilippines under the laws of theKnited *tates administered b! the Knited *tates Qeterans 'dministration.#e& 7enefits received from or eno. E/D1, including retirement gratuit! received b!government officials and emplo!ees.# & $iscellaneous Items. 6

#a& Income 8erived b! oreign 5overnment. 6 Income derived from investments in the hilippines in loans, stoc s,bonds or other domestic securities, or from interest on deposits in ban s in the hilippines b!#i& foreign governments, #ii& financing institutions owned, controlled, or eno.HHEH;#ii& 7enefits received b! emplo!ees pursuant to residential 8ecree >o. EB1, as amended b! $emorandum Order>o. /E, dated 'ugust 12, 1DEH;#iii& 7enefits received b! officials and emplo!ees not covered b! residential decree >o. EB1, as amended b!$emorandum Order >o. /E, dated 'ugust 12, 1DEH; and#iv& Other benefits such as productivit! incentives and Christmas bonus: rovided, further, That the ceiling of Thirt! thousand pesos # 20,000& ma! be increased through rules and regulations issued b! the *ecretar! of

inance, upon recommendation of the Commissioner, after considering among others, the effect on the same of theinflation rate at the end of the taxable !ear.#f& 5*I*, ***, $edicare and Other Contributions. 6 5*I*, ***, $edicare and ag6ibig contributions, and uniondues of individuals.#g& 5ains from the *ale of 7onds, 8ebentures or other Certificate of Indebtedness. 6 5ains reali ed from the sameor exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturit! of more thanfive #B& !ears.#h& 5ains from %edemption of *hares in $utual und. 6 5ains reali ed b! the investor upon redemption of sharesof stoc in a mutual fund compan! as defined in *ection // #77& of this Code. The following are tax6exempt and are >OT included in gross income:

1. "ife insurance #except if the proceeds are held b! the insurer under an agreement topa! interest thereon. The interest pa!ments onl! are included in the gross income&

2. 'mount received b! insured as return of premium+. 5ifts, be@uests, devises or descents #but the income from such propert! ac@uired b!

these which shall be included

taxation one ingles

Documents