TAXATION 1. Section 30 to 83 Explanatory Notes Section 30 - Exemption from Tax on Corporations.

The corporations covered by this section are exempted from income tax because it is generally organized not for profit but exclusively for the benefit of their respective members. So that no income inuring to the benefit of the individual members but for the benefit of the organization as a whole. However, a corporation is not simply exempted from tax because it is not organized and operated for profit, it is still subjected to income tax no matter how these corporation are created. Hence, if they will have income of whatever kind and character from any of their properties real or personal or from any of their activities conducted for profit regardless of the disposition made of such income, they will be liable for income tax. For instance a non-profit corporation will sell their property and derive income therein, that income would be subjected to income tax. The rule that regardless of their disposition made of such income do not apply to non-profit educational institution, because under the constitution all revenues and assets of these institutions it actually, directly and exclusively used for educational purposes will make these institution exempted from all taxes. Thus, if Xavier University, for example, who is a non-stock, non-profit educational institution will use their rental income from the gym for education purposes, the same is not subject to income tax. However, if the gym rental is used for charitable purposes it would already be subjected to income tax because what the constitution provides is only to educational purposes. READ : CIR vs. Court of Appeals, 298 SCRA 83 Section 31 - Taxable Income means Gross Income, less deductions and/or personal and additional exemptions. The following are the deductions under the tax code: 1. Business deduction (Sec. 34, par. A J and M): available to corporations or individual taxpayer who are taxed on taxable income derived from business, trade, or exercise of profession. 2. Optional standard deduction (Sec. 34, par. L); available to corporations or individual taxpayer who are taxed on taxable income derived from business, trade, or exercise of profession. 3. Personal exemptions (Sec. 35): only individuals allowed who are also taxable based on taxable income. 4. Premium on health insurance / Hospitalization insurance: only individuals allowed who are also taxable based on taxable income.

Section 32 - Gross Income (A) General Definition the term all income derived from whatever source means from legal or illegal sources. The enumeration of items of income from no. 1 to 11 is not exclusive. Meaning that incomes that are not mentioned in the enumeration are also included as part of gross income. Sources of income might be from the following activity: 1. 2. 3. 4. 5. 6. Exercise of profession; Services rendered; Rentals; Profits from sale or exchange of asset; Business or trade; And from other sources such as interest in bank deposits, dividends, and royalties.

What is income? Income is an amount of money coming to a person within a specified time, whether as payment of services, interests or profits from investments. Presumed Gain is also income. Gain is synonymous with income. Gain may be derived from capital, labor or both. Income in taxation does not only mean profit. Hence, SP may be considered an income if provided by law. But capital is never treated as Income. Profits or gain may also derive through sale or conversion of an asset. There is no statutory definition of income under the tax code. However, under Section 36 of the Revenue Regulation No. 2, income is defined that in its broad sense, means all wealth which flows into the taxpayer, other than as a mere return of capital. An income to be considered as taxable must be: 1. Actually or constructively received; 2. It must be realized. There are three (3) tests to determine the realization of income.

1. Severance test as capital or investment is not income subject to tax, the gain or profit derived from the exchange or transaction of said capital by the taxpayer for his separate use benefit or disposed income subject to tax. 2. Substantial alteration of interest lost income to be returnable for taxation must be fully and completely realized. When there is no separation of gain or profit, or separation of the increase in value from capital, there is no income subject to tax. 3. Flow of wealth test anything/implying existence of capital a) b) c) d) Capital is fund income is the flow; Capital is wealth income service of wealth; Property is tree income is fruit; Labor is tree income is fruit.

READ : Madrigal vs. Rafferty , 38 Phil. 414 The tax code did not indicate the source of income (Blinds Sources). What it enumerates are specific items of income. Are the following items considered income? 1. Found treasure other forms of gain; 2. Punitive damages/damages for breach of promise or alienation of affection; 3. Recovery of bad debts; 4. Tax refund; 5. Non-cash benefits; 6. Income from illegal sources; 7. Prizes, scholarship, fellowship; 8. Forgiveness of debt. In the case of Commissioner vs. Tours Specialist, 183 SCRA 402, the Supreme Court stated that taxable income, however, does not include items received which do not add to the taxpayers net worth or redound to his benefit such as amounts merely deposited or entrusted to him. (B) Exclusion from Gross Income an income can be exempted from taxes based on the following reasons: 1. Exemption by the fundamental law of the land; 2. Exempted by the statute; 3. It does not come within the definition of income such as stock dividend or increase in the appraisal of the FMV of the property. Some Principles: A tax free income is different from a tax free organization.
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Doctrine of Constructive Receipt of Income means that it was already set aside, without limitations, restrictions or conditions for its withdrawal. Example share of the partner in a general partnership. Doctrine of Cash Equivalent in Transaction means that if a property is exchanged with another property the difference of a Fair Market Value (FMV) would be considered income. The Material Benefit rule (CIR vs. Javier, 199 SCRA 824), means that under the solutio indebiti rule, if the holder of the property has the obligation to return it and instead use it for his own benefit, the amount to be returned would be considered an income. Exclusions from Gross Income simply means that these incomes are not subject to income tax: There are only instances an item of income would not be subjected to income tax: 1. If it is exempted by the Constitution. 2. If it is exempted by the statute or law. 3. When it does not come within the definition of income. Example: increase of appraisal value of the property 1. Life Insurance proceeds of life insurance being only an indemnity of life lost is not subject to income tax. However, it can be subjected to estate tax if the rules of the estate taxes will apply. If it is an accident insurance and it includes coverage of life insurance the proceeds would not be subjected to income tax. 2. Return of Premium not subject to income tax because it is just a mere return of capital. 3. Gifts, Bequests, and Devises not subject to income tax but subject to estate tax or donors tax. 4. Compensation for Injuries or Sickness includes physical, moral and psychological injuries. Lost profits recovered are subject to income tax. 5. Income Exempt under Treaty would not be subject to tax because of the treaty (International Comity) entered into by the government with other countries. 6. Retirement Benefits covered by a private benefit plan maintained by the employer would be exempted from income tax if the following conditions will be present: (1) The retiring employee is in the service of the same employer for at least ten (10) years; (2) He is not less than fifty (50) years of age at the time of retirement. (3) You retired under the private benefit plan of the employer.
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The aforestated conditions would be applicable if there is a reasonable private benefit plan of the employers. Retiring person which has no private retirement plan by the employer: A. Private Employee - labor code will govern. Requirements are the following:

(1) At least sixty (60) years old but not more than sixty-five (65) years old. (2) Has served at least five (5) years of service with the same employer. (3) Entitled retirement salary for every year of service but not less than one month salary. If it is a government employee, retirement will be governed either by the retirement plan of the government agency or by the GSIS. B. Pseudo retirement, or involuntary retirement, or compulsory retirement.

Involuntary retirement is present if the employee did not ask, did not initiate, and it is not of his own choice that he is retired. The reasons may be because of the death, sickness or other physical disability, or for any cause beyond the control of the said special or employee. Some other grounds like retrenchment, redundancy, closure of business, are also other forms of involuntary retirement. The retirement benefits received from involuntary retirement not subject to income tax. BIR Ruling No. 071-95, April 11, 1995 retirement under CBA is taxable for being voluntary. If the company has no BIR approved retirement plan an employee who is separated against his will but who signed a CBA, the retirement benefits under the CBA is taxable because by signing the CBA it will make his separation voluntary. C. Foreign retirement benefits or domestic benefit retirement gratuitously received by a resident or non-resident citizen of the Philippines or alien who come to reside permanently in the Philippines are exempted from income tax. D. Benefits given to persons residing in the Philippines whether alien or citizen by the USVA exempted from income tax. SSS and GSIS benefits are exempted from income tax. 7. Miscellaneous Items (READ : CIR vs. Mitsubishi, G.R. No. 54908, Jan. 22, 1990). a) Income Derived from Foreign Government are exempt because of reciprocity between countries, if there is a treaty or law that exempts it. Take note of the source of income. Income Derived by the Government or its Political subdivisions not subject to tax because it is an inherent limitation provided that the government is performing governmental function. Prizes and Awards conditions would be exempt from income tax: I. The award is primarily:
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b)

c)

(1) (2) (3) (4) (5) (6) (7)

.

religious; Charitable; Scientific; Educational; Artistic; Literary; Or civic achievement;

II. There was involuntary participation by the recipient III. The award is unconditional meaning he is not required to render substantial future service as a condition to receiving the prize or award. All the three (3) conditions must be present to be exempted from income tax. Mnemonics to remember : R E L A C C S E. 13th Month Pay and Other Benefits Gross benefits received by officials and employees of public and private entities: Provided, however, that the total exclusion under this subparagraph shall not exceed P30,000.00. 13th month pay are exempted if received by public or private entities. The first P30,000.00 would be exempted, the excess would be subjected to income tax. The term other benefits includes Christmas bonus, monthly bonus, quarterly bonus, and all others such as the different MWSS bonus. Nota Bene take note of the tax provisions for minimum wage earners which exempt compensation and other benefits. F. GSIS, SSS, Medicare, Pag-IBIG contributions (which are employers share) are exempted from income tax including union dues but not including contributions made by employers which are not enumerated in par. F to be exempt. G. H. Self-explanatory. Self-explanatory.

Section 33 - Fringe Benefit this tax is imposed to the employee but payable by the employer under the withholding tax system. Rank and file employees are exempt from Fringe Benefit Tax (FBT) Only supervisory or managerial employee are liable to pay FBT, except if: 1) The FB is required by the nature of the employment; 2) Necessary to the trade, business or profession of the employer; 3) FB is for the convenience and advantage of the employer. The tax base is grossed up monetary value of the FB.
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FB given to employees which are non-residents alien individual not engaged in trade or business within the Philippines including the special alien individuals under Section 25 shall not be subject to FBT but the regular rates imposed under Section 25. Memorize definition of FB under Sec. 33. FB means employees benefits supplementary to a money wage or salary. Example of FB - see par. B, Section 33, no. 1-10 FB that are not taxable refer to par. C, Section 33. (memorize) If the FB is already subjected to FBT it is no longer subject to tax as compensation income. So that if the FB is exempted from FBT it would still be subject to compensation income tax unless if the employee is also exempted from the income tax. De minimis benefits (benefits of small value) is exempted both from FBT and compensation income tax. Examples of De minimis benefits: 1) monetized unused vacation leave not exceeding ten (10) days for private employees; for public employees no limit. 2) Medical cash allowance to dependents not exceeding P700.00/semester or P125.00/month; 3) Rice subsidy P1,000.00/month or less; 4) Uniform allowance P3,000.00/annum; 5) Medical benefits P1,000.00/annum; 6) Laundry allowance P300.00/month. CHAPTER VII. Allowable Deductions. There are four groups as stated earlier: A. Business Expenses comprises of: (Sec. 34 A) I. Ordinary and Necessary Trade, business or Professional Expenses. Requisites: 1. 2. 3. 4. 5. 6. Ordinary and necessary Paid or incurred during the taxable year (fiscal or calendar year) Connected and related of the taxpayers business Substantiated by receipts or invoices (par b(1)A) To be deducted in the category it belongs (e.g. taxes cannot be deducted as losses) Reasonable expense

Bribes, kickbacks and other similar payments NOT ALLOWED as expense.

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Private Educational Institutions (Proprietary) is given the option to deduct the expenditures which are capital outlay for expansion of school facilities either: 1. 2. Deduct the entire amount of expenditures during the taxable year, or Deduct as depreciation expense

II. Itemized Deductions (the same requisites with the ordinary but with additional conditions): 1. Interest Expense (4 requisites) - there must be an indebtedness - proceeds of the loan is utilized in the business - there must be a legal liability to pay interest - indebtedness must be that of the taxpayer - Tax Arbitrage Scheme the amount of interest of loans will be deducted from business income net of the interest income received by the taxpayer from his bank deposits subject to Final Tax Example: Interest Expense Less : Bank deposit interest income P50,000 x 38% (effective Jan. 1, 2000) Deductible interest expense P 60,000 P 19,000 P 41,000

- Different treatment if the taxpayer used the CASH METHOD and the interest on loans was prepaid interest expense. The entire prepaid interest expense will not be deducted on the year the loan was incurred. The interest to be deducted must be prorated with the payment of the principal loan. - Sec. 36(b). interest expense on loans obtained from related persons [Sec. 36(b)] NOT DEDUCTIBLE. - Interest on indebtedness incurred to finance petroleum exploration NOT DEDUCTIBLE. - Optional treatment of Interest Expense when loans are incurred to acquire property to be used in business: 1. 2. 2. Taxes The following cannot be deducted:
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Deduct the interest as outrightly; or Treat the interest as capital expenditures. To be deducted through depreciation.

1. 2. 3. 4. 5.

Income Tax Foreign Income Tax (if Foreign Tax credit is utilized) Estate and Donors Taxes Transfer Tax on sale of shares of stocks (Sec. 127d) Special Assessments

Taxes that are not enumerated above are deductible from business income provided it is connected. Foreign Tax Credit is a portion of foreign income tax which can be used as a deduction from the Philippine Income Tax due. Example: 1. Gross Income (within and without) Less : Deductions (including Foreign Income Tax) Taxable income 2. Gross Income (within and without) Less : Deductions (not including Foreign Income Tax) Taxable income Phil. Income Tax Due Less : Foreign Tax Credit (FTC) Tax still due Pxxx Pxxx Pxxx Pxxx Pxxx Pxxx Pxxx Pxxx Pxxx

FTC will only arise if the taxpayer is taxable in the Philippines of income derived within and without the Philippines FTC to determine it there is a Formula. The entire foreign tax paid cannot be used as FTC. 3. Losses Kinds of Losses A. Ordinary losses operation of the business - NOLCO will apply - connected with business B. Casualty losses - properties used in business - loss arises from fires, storms, shipwreck, or other casualties, robbery, theft or embezzlement. - to be reported to the BIR not less than 30 days and not more than 90 days. - not used as a losses deduction for estate tax purposes - proof of loss (par. 2 of par. D). study carefully.

- should not be compensated by insurance to be deductible. C. Capital losses - (to be discussed with Capital Gains) D. Losses from Wash Sales - (to be discussed in Sec. 38) E. Wagering losses (gambling) to be deducted only if there is a gambling gains F. Abandonment losses read 4. Bad Debts (A/R that cannot be collected) READ : Pareo vs. Sandigan. 256 SCRA 242 - Connected to business - Actual bad debts or write-offs, not the estimated bad debts - If recovered later after it was deducted, then the recovered bad debts to be included as part of gross income in the taxable year it was recovered. This is the Tax Benefit Rule. Depreciation - property, plant and equipment are normally usable for a number of years. A point will be reached when such property may not be useful anymore in the business die to exhaustion, wear and tear. - the owner will be able to recover the cost of the property because it will gradually or periodically deducted from his gross income as deduction called depreciation. - depreciation will only apply to extraordinary expenditures or capital expenditures.

5.

Depreciation for income tax purposes, depreciation means the reduction in service value or property used in business or trade arising from exhaustion, wear and tear, and obsolescence. (Sec. 195, Rev. Reg. No. 2) Depreciation commences with the acquisition of the property or with its erection. Depreciation of properties used in petroleum operations is allowable. Requisites for claiming depreciation deductible are as follows: (a) (b) (c) (d) It must be charged off Must be deducted directly from the book value of the assets Must be reasonable allowance Property must be used or employed in business or trade or must be determined if its not being used.

The proper allowance for depreciation of any property used in trade or business, or out of its not being used, is that sum which should be set aside for the taxable year in
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accordance with a reasonable consistent plan whereby the aggregate of the sums so set aside, plus salvage value, will, at the end of the useful life of the property, suffice to provide an amount equal to the original cost. (Sec. 195, Rev. Regs. No. 2) Depreciation a deduction from gross income for depreciation is allowed but limits the recovery to the capital invested in the asset being depreciated. The law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges not matters of right. They are not created by implication but upon clear expression of the law. (Basilan Estates, Inc. vs. Commissioner, G.R. No. L-22492, Sept. 5, 1967) Goodwill, trademarks, formulas. (1) Business and income producing property other than land, generally depreciates or loses its usefulness and value with the passage of time. A deduction for such depreciation is allowed in computing taxable income. As such, your opinion that the assigned cost on the plant as determined at the time of purchase can be depreciated for tax purposes is hereby confirmed. (2) Goodwill, including trademarks, trade names, and trade brands, are not such property as are subject to exhaustion. Accordingly, the value assigned on the trademarks which is computed on the basis of future sales cannot be discounted to its present value at the time of acquisition and cannot be amortized for tax purposes over the average remaining lives of the different trademarks purchased. (3) Right to receive royalties over a given term is depreciable. Accordingly, your opinion that discounted or present value at the time of acquisition and that it is acceptable for tax purposes to amortize the said present values and royalties to be paid on the basis of future sales may be discounted, to determine the present values and may be paid at said price (i.e., the cash price as discounted) over the agreed period (say 5 to 8 years) when royalties will have to be paid is hereby confirmed. Moreover, said royalty payment is subject to the 20% final withholding tax. (4) Formulas are not subject to annual depreciation. If, however, after acquisition, a formula is found to be worthless, its cost may be deducted in full as a loss for the year in which the formula is abandoned as being worthless. Accordingly, the cost of the different formulas cannot be amortized over the (a) remaining life of the trademarks purchased or (b) the expected period within which your client proposes to continue manufacturing said products using the said formulas. (5) Amounts paid for an agreement not to compete in a trade or business, where the taxpayer can prove the existence of such an agreement, are capital expenditures and subject to allowances for depreciation ratably spread over the period mentioned in
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the agreement but only where the elimination of competition is for a definite and limited term may the cost be exhausted over such a term. Accordingly, your opinion that the value agreed between your client and seller may not compete in the same line of business that was sold to your client is hereby confirmed. (6) Goodwill is not such property as is subject to exhaustion. Accordingly, your opinion that any amount of goodwill paid for by your client may not be deducted for tax purposes unless the same business or the assets related to the said goodwill is sold by your clo9ent is hereby confirmed. (BIR Ruling No. 88-206) Patents, copyrights, etc. Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents, copyrights and franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance provided the facts are fully shown in the return or prior thereto the satisfaction of the Commissioner of Internal Revenue. (Sec. 107, Income Tax Regulations) Such being the case, the value assigned on the trademarks which is computed on the basis of future sales can be discounted to its present value at the time of acquisition and can be amortized for tax purposes over the average remaining lives of the different trademarks purchased. Moreover, the cost of the different formulae can be amortized over the (a) remaining life of the trademarks purchased or (b) the expected period within which your client proposes to continue manufacturing said products using the said formulae. Methods 1. 2. 3. 6. Straightline method Cost Salvage Value Life (years)

Declining balance method Sum of the years digit method. Read very well par. 4 (petroleum operations) and par. 6. Depletion - it is the exhaustion of natural resources, such as mines and oil and gas wells, as a result of severance of production. Only persons having an economic interest in a mineral land or oil gas wells are entitled to a depletion allowance (which should not be more than the capital invested). To acquire an economic interest, the taxpayer

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must have a capital investment in the property and not a mere economic advantage. 7. Charitable and Other Contributions (par. H) Two kinds 1) Deductible in Full (see par 2(a), (b), (c), and (d) 2) Deductible subject to limitation on the following: 1. Public purpose 2. Religious, charitable, scientific, youth, sports development, cultural or educational purposes

Individual donor not in excess of 10% of taxable income without including the charitable contribution as a deduction; Corporate donor the same rule above except the rate is 5% In both cases (full or with limitation) the contribution is given to a juridical person.

8. 9.

Research and Development self-explanatory (read) Pension Trust Requisites: 1. Employer provides pension trust for the payment of reasonable pension for employees.

10. Optional Standard Deduction (OSD) - in lieu of the business deductions - non-resident alien cannot claim OSD - NRFC not allowed OSD - election of OSD is irrevocable for the taxable year for which the return was made - deduction rate is 40% of Gross Income - there is no need to support the deduction with receipts If the taxpayer failed to elect the kind of deduction in his income tax return, he shall be considered as having availed himself of the itemized deduction. Deduction elected for one taxable year is irrevocable for that year. If the taxpayer elected both deductions in one taxable year, the optional standard deduction will be disregarded. It must be emphasized that for one taxable year, a taxpayer must elect only one kind of deduction.
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11. Premium Payments on Health and/or Hospitalization insurance - only individuals (except NRA not doing business) can claim as deduction if taxable under the schedular rates. Query: (1) How much is the amount deductible? (2) What is the ceiling of gross income to be allowed? (3) Who can claim if the taxpayers are married? 12. Personal Exemptions - For individuals only on their TAXABLE INCOME - Regardless of STATUS BASIC P50,000.00 - Additional Exemptions for Dependent P25,000.00 for each but not more than four (4) Additional Exemptions for Dependents. There shall be allowed an additional exemption of P25,000.00 for each dependent not exceeding four (4). The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. For purposes of this subsection, a dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. Dependent (to be qualified to the claim of P25,000) - refers only to children who are legitimate, illegitimate or legally adopted - chiefly dependent upon: more than 50% support - living with: does not mean residing in the same house or roof or the same place - not more than 21 years old and unmarried - not gainfully employed - regardless of age: incapable of self-support because of mental/physical defect

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Change of Status If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes 21 years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became 21 years old or became gainfully employed at the close of such year. Example: Jan. 1, 2010 X is single; June 2, 2010 X got married; December 1, 2010 X became a widower. How much basic exemption for the 2010? Personal Exemption Allowable to Nonresident Alien Individual a nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject or citizen, to citizens of the Philippines not residing in such country not to exceed the amount fixed in this Section as exemption for citizens or residents of the Philippines. Provided, that said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title. Rules to observe 1. Reciprocity Rule 2. Whichever is lower rule 3. Can avail only basic personal exemption Senior Citizen - those 60 years old and above - Exemption from the payment of individual income tax provided that their annual taxable income does not exceed the poverty level of P60,000.00 or such amount as may be determined by the NEDA for a certain taxable year. Taxability of senior citizen to other internal revenue taxes. a. A senior citizen whose annual taxable income exceeds the poverty level of P60,000 or such amount as may thereafter be determined by the NEDA for a certain taxable year shall be liable to the individual income tax in the full amount thereof on his taxable income net of allowable deductions.
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b.

c.

d. e.

Regardless of the amount of taxable income, a senior citizen who derives income from self-employment, business and practice of profession shall be subject to other internal revenue taxes which include but are not limited to the value-added tax, caterers tax, documentary stamp tax, overseas communications tax, excise taxes, and other percentage taxes. He shall, therefore, file the corresponding business tax returns in accordance with existing laws, rules and regulations. He shall be subject to the 20% final withholding tax on interest income from Philippine Currency bank deposit, yield and other monetary benefit from deposit substitutes, trust fund and similar arrangements; royalties, prizes (except prizes amounting to P3,000 or less which shall be subject to income tax at the rates prescribed under Section 21, par. (a) or (f), NIRC) as the case may be, and winnings (except Philippine Charity Sweepstakes winnings). Capital gains from sales of shares of stock (Sec. 21(d), [now Sec. 24], NIRC) Capital gains from sales of real property (Sec. 21(e), [now Sec. 24], NIRC)

Basic personal exemption only for benefactor a qualified senior citizen living with and taken cared of by a benefactor whether related to him or not, shall be treated as a dependent and his benefactor shall be entitled to the basic personal exemption of P20,000 as head of the family, as defined in Section 2(e) of these regulations. For purposes of claiming personal exemption as head of the family with dependent senior citizen, the identification card number issued by the OSCA shall be indicated in the ITR to be filed by the benefactor. The senior citizen shall indicate in a certification to be submitted to the RDO and the OSCA his benefactor who will be granted the exclusive right to claim him as dependent for income tax purposes. Caring for a dependent senior citizen shall not, however, entitle the benefactor to claim the additional exemption allowable to a married individual or head of family with qualified dependent children under Sec. 29(1) (2) (now 34) of the NIRC, as amended. Section 36. - Items not deductible 1. 2. 3. 4. Absorb by personal exemptions Capital expenditures absorb by depreciation Extraordinary repairs. To be deducted through depreciation. The cost of repair added to the value of the property to be depreciated. Not allowed if the taxpayer is the beneficiary of the life insurance. If the beneficiary is not the employer the premium is a deductible business expense.

Query: A lawyer, exercising his profession, paid premium for his own life insurance. If he dies the proceeds will go to his estate. Premium is deductible? How about if the beneficiary is his GF and he is married?

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5.

Not allowed in order to avoid evasion and collusion. The prohibition is on losses. It includes also interests on loans. See notes on interest expenses.

Why? (Sec. 36B) 1. Between members of the family. Take note of the degree of relationship. No. 2-6 -- considered one (1) personality in the eyes of the law. Section 38 Losses from Wash Sales (WS) - WS is a taxpayer scheme to recognize a deductible loss in his tax return by selling shares at a loss when the shares sold are substantially identical stock or securities of that which were purchased or acquired beginning 30 days before the date of sale and ending 30 days after the sale. - wash sales losses are not deductible from gains derived from wash sales transactions - this rule applies only to securities (e.g., bonds) which are capital assets. Not on the stocks because of the capital gains on sale of stocks rule on taxation. - wash sales gains are to be reported and recognized as income - this rule of nondeduction does not apply if the dealers transaction of stocks and securities is made in the ordinary course of business. - loss of WS is disallowed to prevent the taxpayer from manipulating a pretended or engineered loss purely to establish a tax deduction - WS gains are taxable under schedular rates (individual) and regular corporate tax (corporation). READ: Calasanz vs. CIR, 144 SCRA 664 Section 39 Taxation of Capital Gains and Losses on Capital Assets - the rules do not apply to sale of capital assets (real property) of an individual and sale of capital assets (land or buildings) of corporations, which are subject to Final Taxes. This rule will not also apply to capital gains on sale of shares of stocks, because subject also to final taxes (5% or 10% rates). - if the capital gain/net capital gain arise the applicable tax rates would be schedular rates (individual) and the regular corporate tax (corporation) - memorize the following: 1. Ordinary Assets (four groups) a. Stock in Trade and Inventories for sale in the regular conduct of business. b. Properties primarily held for sale in trade or business. c. Property used in trade or business subject to depreciation. d. Real property used in business.
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2. 3. 4.

Net Capital Gain (NCG) Net Capital Loss (NCL) Net Capital Loss Carry Over (NCLCO) Individual Applicable Corporation Applicable

- Rules 1. A capital loss is only deductible from a capital gain 2. Percentage of gain or loss to be recognized - 100% Gain/Loss recognition if held not more than one (1) year - 50% Gain/Loss recognition if Held more than one (1) year 3. Net Capital Loss Carry Over - Difference NOLCO - arise from business operation

-do-do-

Not Applicable -do-

NCLCO arise from capital transaction

assets

- has a carry over of 3 years following the year of such loss Ex. Business operating losses in 2010 Can be carried over to 2011, 2012, and 2013.

to be carried over only once, following the year the NCLCO was sustained. Ex. Net capital loss in 2010 can be deducted from the net capital gain in 2011. If after the deduction there is still a balance of the 2010 net capital loss, it can no longer be carried over to 2012.

- the entire Net operating loss can be carried over

subject to limitation. What can be carried over is not more than the ordinary net income of that year the net capital loss was sustained (2010) or the actual net capital loss, whichever is lower, that can be carried over to the following taxable year and will be a deduction from the net capital

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gains of that year it was carried over (2011) - applies to corporate and individual applies only to individual

Section 39 (F) Gains and Losses from Short Sales Short Sales (SS) is the taxpayers advanced sale of shares of stocks to another person even before the seller actually owns the said shares. A SS can be at the same time a WS whenever the selling and the subsequent buying (to meet the commitment to sell) happens within the 30 day period rule of WS. Any loss from SS is deductible from the gain of SS except it is a WS. (Not applicable under the present tax laws) SS a typical capital asset transaction in the stock market. Short Sale For income tax purposes, a short sale is not deemed to be consummated until the delivery of property to cover the short sale. If the short sale is made through a broker and the broker borrows property to make delivery, the short sale is not deemed to be consummated until the obligation of the seller created by the short sale is finally discharged by delivery of the property to the broker to replace the property borrowed by such broker.

Section 40. (A) (B) (C) Query: How is the gain or loss computed? What includes the amount of gain or loss to be realized? What are the basis? - No gain or loss to be recognized if its a merger or consolidation. Merger/Consolidation are forms of business combinations for corporations (corporations as defined by the Corporation Code) Merger two corporations combined and one of the name survived. two corporations combined and a new name emerged. Consolidation Forms of a. b. c.

exchange which are exceptions (par. c(2), Sec. 40) Property vs. Stock Stock vs. Stock Securities (bonds or debentures) vs. Stocks/Securities

Reason : They became one entity after the combination. (3) Exchanges not solely in kind
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- Exchanges where it not only involves property (stocks/securities) but also cash and/or properties (which are not stocks/securities), the gains will be recognized but not the losses. The gain to be recognized is in an amount not in excess of the cash and the FMV of such properties (e.g., tangible properties, lands or buildings) Memorize the terms in par. 6 (Definitions) Section 42. TAX TREATMENT (A) Gross Income (GI) from sources within the Philippines. - this provision enumerates certain kinds of income that would be considered derived within the Philippines. Example: 1. X is an American residing in Canada but he has bank deposits in the Philippines. His interest income from the bank deposits will be considered derived within the Philippines. this is an application of the territoriality rule as source of income. 2. Supposing X is also a stockholder of SMC. The dividend he will receive is also taxable in the Philippines. 3. If the dividend is from a FC Corporation (doing business in the Philippines) (1) General rule: considered derived within the Philippines; (2) Pro-rata rule: if less that 50% of the FC gross income was derived in the Philippines for the three (3) year period preceding the declaration of the dividend. Example: In the 2010 FC declared dividend. The accumulated gross income FC derived in the Philippines for the years 2007, 2008 and 2009 was P1 Million. FC total gross income (2007, 2008 and 2009) within and without the Philippines was P3 Million. The dividend declared would be prorated to get the portion taxable within the Phils. Thus: P1 million Dividend declared x P3 million b. c.
.

Services read par. 3 Rentals and Royalties read par. 4 Sale of Real Property read par. 5 Sale of Personal Property (PP) - PP is bought within the Phil., then sold outside the Phil. OR PP is bought outside of the Phil. then sold within the Phil. = Gains or profits derived will be considered DERIVED within the Phil.
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d. e.

f.

- Gain from the sale of SS of a domestic corporation always treated derived within the Phil. even if it is sold outside the Phil. Rationale : Protection/benefit rule. Taxable Income within the Philippines General Rule: The deductions/business expenses must be connected/related to the income derived within the Philippines.

Hence, Gross Income within the Philippines (trade, business or profession) shall only be deducted by expenses incurred within the Philippines. Application of the connected/related rule on expenses. Except : Interest paid on loans abroad, the proceeds of the loans is actually used in connection with the conduct or operation of the business in the Philippines. (B) GI from sources without the Philippines. self-explanatory (par. C of Sec. 42) Taxable income means GI without the Philippines less expenses without the Philippines. Sources Partly within and Partly without the Philippines Allocation rule will apply on gross income and expenses. GI Partly within Example: GI partly within and without x GI within and without same computation for expenses

(C)

Section 43 50. - Accounting Periods and Methods of Accounting - Method and Accounting Period (Fiscal or Calendar) as basis of computing taxable income and the method of accounting, it is the taxpayer who will choose. If no period or method is used or the method used do not clearly reflect the income, the CIR will compute using the method in the opinion of the CIR clearly reflects the income. - No uniform method of accounting can be prescribed for all taxpayers. METHODS OF ACCOUNTING There are two main methods generally followed by taxpayers. They are (a) the cash method, and (b) the accrual method. Cash method is nearly used by individuals. All items of taxable income whether cash, property, or services actually or constructively received are classed as receipts. Only amounts actually paid for deductible expenses are classed as disbursements. Business expenses must be paid within the taxable year. There is no such thing as constructive payment. CASH METHOD in Accounting is different from CASH METHOD for Taxation. Under the cash method for taxation purposes, there is constructive receipt of income to be reported but no constructive payment of expenses to be reported.

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Accrual method is used mostly by business concerns. Under this system, net income is measured, in a broad sense, by the excess of income over expenditures. Cash, property, or services earned during the taxable year, though not received have accrued to the taxpayer, and are classed as income. In the same way, expenses incurred during the taxable year are usually deductible even if they are not received during that year. TAXABLE PERIOD the rule is that the taxable period of a taxpayer covers a period of 12 months. The exceptions are as follows: (a) (b) (c) (d) (e) (f) In case of dissolution of a corporation. In case of change of accounting period. In case of corporation newly established. Final return of decedent. Return for the decedents estate. In case the Commissioner of Internal Revenue terminates the tax period of a taxpayer.

Other accounting periods. (a) Percentage of completion basis is a method available in the case of building, installation or construction contracts covering a period in excess of one year, where there should be deducted from gross income all expenditures made during the taxable year on account of the contract, account being taken of the materials and supplies on hand at the beginning and end of the taxable period for use in connection with the work done under the contract but not yet so applied. (b) Completion of contract basis is a method available to contractors for building, installation or construction covering a period more than one year where income is reported in case the contract is finally completed and accepted. (c) Crop year basis is a method where a farmer engaged in producing crops which take more than a year from the time of planting to the process of gathering and dispositions, the law allows expenses deducted to be determined upon such basis and such deductions must be taken in the year in which the gross income from the crop has been realized. (d) Installment plan or method is a method which is available to sales by dealers of personal property on the installment basis, where the returnable income in the taxable year which the gross profit realized or to be realized when payment is completed bears to the total contract price expressed in the following formula: Gross profit times installments received divided by total contract price equals returnable income.
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The method applies also to sales of realty where the initial payment does not exceed 25% of the selling price; if the initial payment of the selling price exceeds 25% thereof, then the income shall be reported in full. This applies further to casual sales of personalty (other than property includible in the taxpayers inventory) for a price exceeding P1,000 and where the initial payment does not exceed 25% of the selling price. Methods of determining taxable income. (a) Percentage method (b) Net-worth expenditure method (c) Excess cash expenditure method (d) Bank deposits Requirements for use of net-worth method (a) That the taxpayers books do not clearly reflect the income, or the taxpayer has no books, or if he has books, he refuses to produce them. (b) (c) That there is evidence of a possible source or sources of income to account for the increases in the networth or for expenditures. That there is a fixed starting point or opening networth, a date beginning with the taxable year or prior to it at which the taxpayers financial condition can be affirmatively established, with same definiteness; and That the circumstances are such that the method does clearly reflect the taxpayers income with reasonable accuracy and certainty, and proper and just additions of personal expenses and other non-deductible expenditures were made, and correct, fair and equitable credit adjustments were given by way of eliminating non-taxable items.

(d)

- Period for which deductions and credits taken = apply as paid or incurred rule Section 51-59. Returns and Payment of Taxes Individuals A. Required to file Income Tax Return 1. RC within and without income 2. NRC within income 3. RA within income 4. NRA within income B. NOT REQUIRED

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1. 2. 3. 4.

If the gross income does not exceed his personal or additional exemptions. But this rule does not apply if engaged in trade, business or exercise of profession. Compensation earners purely derived in the Phil. and the income tax correctly withheld. This rule does not apply if deriving compensation income from two (2) employers within the taxable year. Those whose sole income is subject to the final withholding taxes. Minimum wage earner Question: 1. How many copies of tax return will be filed? 2. Where to file the income tax returns? 3. When to file? 4. If both H and W are working, who will file? 5. If the child is a minor, but has income, who will file his return? How about persons under disability?

Financial Statements Attached to the Income Tax Returns upon Filing The financial statements required to be attached with the income tax returns: 1. Statement of Net Worth and Operations. This statement is to be attached with the income tax return of individual taxpayers if the gross sales, receipts or output from business does not exceed P50,000 in any one quarter. 2. Balance Sheet and Profit and Loss Statements. These statements are to be attached with the income tax return of individual taxpayers if the gross sales, earnings, receipt or output from business in any one quarter exceed P150,000. a. Balance Sheet and Profit and Loss Statement certified by an independent Certified Public Accountant. b. Comparative profit and Loss Statements for the current and preceding taxable years. c. Schedule of income producing properties and corresponding income therefrom. The said taxpayers books of accounts shall be audited and examined yearly by an independent Certified Public Accountant and their income tax returns accompanied with a duly accomplished Account Information lifter from certified balance sheets, profit and loss statements, schedules listing income producing properties and the corresponding income therefrom and other relevant statements. Annual Declaration and Quarterly Payments of Income tax for Individual Taxpayers.(Applies only to those who are engage in trade, business or exercise of their profession).

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1. On or before April 15 of the following year for the taxable income of the previous year. 2. April 15 of the same taxable year for the estimated income of the current year. In general, except as otherwise provided by the law, every individual subject to income tax under Sections 24 and 25 (A) of the National Internal Revenue Code who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of estimated income for the current taxable year on or before April 15 of the same taxable year. 3. Return and Payments of Individuals Estimated Income tax. FILING OF DECLARATIONS AND PAYMENTS First Second Third Fourth DATES April 15 of the current taxable year August 15 of the current taxable year November 15 of the current taxable year April 15 of the following calendar year When final adjusted income tax return Is due for filing.

B. Corporation/Partnership Read Sec. 52 56. Self-explanatory CORPORATE RETURNS Section 52 (A) of the National Internal Revenue Code provides that every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return. The return shall be filed by the president, vice president or other principal officers and shall be sworn to by such officer and by the treasurer or assistant treasurer. Taxable Year of Corporation A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return. A corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the prohibitions of Section 47 of the Tax Code.
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Rules in filing and payment of corporate income tax: 1. The corporate quarterly return shall be filed within sixty (60) days following the close of each of the first three quarters of the taxable year. (three times) Example: Calendar Year Jan., Feb., Mar. = File in the months of April and May Fiscal Year June, July, Aug. = file in the months of Sept. and Oct. 2. The income tax due on the corporate quarterly returns and the final adjusted income tax returns computed in accordance with Section 75 and 76 shall be paid at the time the declaration or return is filed. (Pay as you file system) 3. The final adjustment return shall be filed on or before the 15th day of April, or on before the 15th day of the fourth month following the close of the fiscal year, as the case may be. Note : Corporate Returns are filed four (4) times a year. Three quarterly and one final adjustment return CORPORATE QUARTERLY TAX To ease the burden of paying taxes for a lump-sum amount, income tax expense of a corporation may be paid in an aggregate quarterly periodic payment. Rules: 1. A corporation files a quarterly income tax return within 60 days after the end of each first three quarters of the taxable year. 2. A final income tax return covering the total taxable income of the taxable year should be filed on or before April 15 of the following year. The amount of total income tax computed thereof shall be reduced by income taxes paid during the first three quarters of the taxable year. 3. The amount of tax previously paid for the preceding quarters should reduce the amount of tax computed on the cumulative taxable income. 4. If the total quarterly tax paid during the taxable year is more than the tax due on the final return the corporation may claim tax credit carry over or refunded with the excess amount. Section 57 to 59. Withholding Taxes Withholding of taxes is a systematic way of collecting taxes at source. It is an indispensable method for collecting taxes in order that the government can obtain adequate revenue. The withholding tax agent who is usually an employer or a person from whom the income is derived does this process through withholding the appropriate amount of taxes from taxpayers. It is designed to ensure the collection at source of income taxes.

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If withholding tax is not withheld from income payments, there will be a disallowance of deductible business expenses claimed by the withholding agent in this income tax return or a penalty shall be imposed on withholding tax agent for failure to withhold the tax. Withholding Tax at Source A taxation at source is that part of tax system which collects through withholding agents or employers the appropriate income taxes due as they are earned and before earnings are paid to the employees. The income paid to the employees is the net amount after deducting the taxes withheld which is based on the taxable income after adjustments with respect to personal, additional exemptions and or other adjustments allowed by the law, if any. The primary objective of the system is to ensure accurate payment of taxes and to be able to use taxes collected at an earlier time to finance the operations and projects of the government. Classification of Withholding Tax at Source Withholding tax may be classified into two categories such as 1) Final Withholding Tax, and 2) Creditable Withholding Tax Final Withholding Tax (FWT) Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for the payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of failure to withhold or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income, the final tax on which has been withheld. The finality of the withholding tax is limited only to the payee or recipients income tax liability on the particular income. It does not extend to the payees other tax liability on said income, such as when the said income is further subject to a percentage tax. Creditable Withholding Tax (CWT) Under the creditable withholding tax system, taxes withheld on certain payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file his income tax return as prescribed in the Section 51 of the NIRC, either to report the income and/or pay the difference between the tax withheld and the tax due on the income. A tax withheld in income payments covering the expanded withholding tax from compensation income is creditable in nature.

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Diferrence between FWT and CWT - in FWT no more tax liability if properly withheld. In CWT it may or may not result to a balance of tax liability. Taxes withheld on compensation is an example of CWT. Section 60 to 66. - Estates and Trusts TAX ON INCOME OF ESTATE The estate is composed of all properties, rights and obligations including those properties, earnings or obligations that have accrued thereto since the opening of the succession. The estate is to be transferred from the decedent to his successors. During the period when the title to the properties is not yet finally transferred to the successors, there may be earnings generated from the estate. These earning are subject to income tax. Estates or Trusts Taxable Income and Tax For taxation purposes, the taxable income of the estate/trust shall be determined in the same manner and basis as in the case of individual taxpayers. The items composing the taxable income and tax of the income from estates/trusts are as follows: Treated as Individual Taxpayers 1. Gross Income The items of gross income of the estate are the same items with the items of gross income of individual taxpayers. 2. Deduction Deductions from the gross income of the estates/trusts are the same with the items of deduction allowed to individual taxpayer. 3. Special Deduction In addition to the allowable deductions under Section 34 of the Tax Code, the estate is also allowed to deduct the amount of income of the estate during the taxable year that is paid or credited to the legatee, heir or beneficiary, subject to a creditable withholding tax of fifteen percent (15%) However, the amount so allowed as a deduction shall be a part of the taxable income of the legatee, heir or beneficiary. It is to be noted that any portion of the gross estate paid to the heir is not deductible from the gross income of the estate. 4. Exemption Generally, the income from estate/trusts is allowed for an exemption of P20,000. 5. Tax Rate
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The tax rate applicable is the tax rate prescribed for individual taxpayers. TAX ON INCOME OF TRUSTS A trust is an obligation imposed or a right to administer over a property given to a person for a benefit of another. This is a legal institution used to administer funds in behalf of individuals or organizations. Trust device is used frequently to transfer property from one generation to another. Illustration. Suppose Juan wants his wife to have the income from his estate as long as she lives. Juan may place his property in a trust, the income of which would go to his wife for life; the trust might be dissolved at her death and the property distributed to the children. The trust is assigned to be administered by Attorney Nilo, a trustee. Under this arrangement, the trustee is required by law to manage the trust strictly in accordance with the terms of the trust instrument. When a trust is created, a new entity comes into being, for which returns must be filed and taxes paid. Income accumulated in trust and/or to be distributed to beneficiary are subject to income tax. A trust created by a written instrument other than a will is known as a trust intervivos, if created by will is known as a testamentary trust. Income Derived from Trusts. Tax imposed upon individual taxpayers shall apply to the income of any property held in trust, including: 1. Income accumulated in trust for the benefit of unborn or unascertained person/s with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; 2. Income that is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant that is to be held or distributed as the court may direct; and 3. Income that, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. The trust, or the beneficiaries or the grantor may pay the tax on income derived from trusts. Computation of Trusts Income Tax
29

The computation of the net taxable income of trust shall be in the same manner with the net taxable income of estate. The net taxable income shall be taxed by using the scheduler tax of an individual taxpayer based on Sec. 24 A of the Tax Code. Two or More Trusts In the case of two or more trusts created by the same person, for the same beneficiary, the taxable income of all trusts shall be consolidated and the tax shall be computed based on the consolidated income. The proportionate amount of the tax computed based on the consolidated income shall be assessed and collected from each trustee which should be equal to the proportion of the taxable income of the trust administered by the trustee to the consolidated income of the several trusts. REVOCABLE TRUSTS Generally, revocable trusts exist when the trustor (grantor) reserves the power to change at any time any part of the terms of the trust. For tax purposes, the rule is that the grantor is liable for the income of a revocable trust (because the revocable trust by itself is not subject to income tax except if the trust is irrevocable (because irrevocable trust is subject to income tax, so that the grantor is already exempted from income tax on the income derived from the irrevocable trust). Illustration: Mrs. Caduda Duda created a trust naming his eldest son as revocable beneficiary who will receive the income of the trust. If the eldest son could not abide with the rules provided in the trust instrument, Mrs. Duda could change outright the terms of the trust. For the year, the trust earned a total income of P200,000. How much would be the taxable income of the trust? There is no taxable income of the trust because it is a revocable trust. The income should be reported as taxable income of the grantor, Mrs. Caduda Duda. Trusts, explained. These are taxable entities created by will or trust deeds where the transfer of property to such trusts is irrevocable and the income of which is tot be accumulated for designated beneficiaries other than the grantor. Estates and trusts are subject to the rates of income tax applicable to individuals. Income of estate or trust includes the following: (a) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust. (b) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct.

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(c) Income received by estates of deceased persons during the period of administration or settlement of the estate; and (d) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. Trusts not subject to tax. (a) Revocable trusts the income of which is held or distributed for the benefit of the grantor (b) Employees pension trusts. The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual. However, when it comes to allowable deductions, the guidelines in Section 61 of the Tax Code, should be followed. Exemption allowed to estates and trusts. (a) P20,000.00 is allowed as an exemption. Revocable trusts. Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (a) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (b) in any person not having a substantial adverse interes in the disposition of such part of the trust shall be included in computing the net income of the grantor. Income for the benefit of grantor. Where any part of the ncome of a trust (a) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor; (b) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; (c) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor; such part of the income of the trust shall be included in computing the net income of the grantor. Requisites for exemption of employees pension trust. (a) The employees trust must be part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees; (b) Contributions are made to the trust by such employer, such employees, or both;

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(c) Such contributions are made for the purpose of distributing to such employees both the earning and principal of the fund accumulated by the trust; (d) The fund is accumulated by the trust in accordance with the plan of which the trust is a part; (e) The trust instrument makes it impossible for any part of the trust corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit of such employees. It may be noted that under Republic Act No. 4917, retirement benefits received by officials and employees of private firms under a reasonable private benefit plan maintained by the employer are exempt from all taxes. Section 78 to 83. Withholding on Wages INCOME TAX COLLECTED AT SOURCE ON COMPENSATION INCOME Basic Rules on Withholding Taxes As a general rule, all salaries earned by persons as government or non-government employees are subject to withholding tax, except of the following items: 1. 2. 3. 4. 5. Commissions paid by an insurance agent to his sub-agents. Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization. Remuneration for causal labor not in the course of employers trade or business. Remuneration for private service performed by maids, cooks, gardeners, family drivers and the like. Remuneration paid to agricultural labor and paid entirely in products of the farm.

Requirement of Withholding Tax Due Every employer muyst withhold taxes from compensation paid arising from employer employee relationship. However, no withholding of tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage of P5,000.00 monthly or P60,000.00 a year, whichever is higher. It is to be noted that employees whose total annual compensation does not exceed P60,000.00 in a year shall be given two options with which to pay his income tax due as follows: 1. 2. His compensation shall be subjected to withholding tax, but he shall not be required to file the income tax return, or His compensation income shall not be subject to a withholding tax but he shall file his annual income tax return and pay the tax due thereon, annually.
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Where the employee has opted to have his compensation income subjected to withholding so as to be relieved of the obligation of filing an annual income tax return and paying his tax due on a lump sum basis, he shall execute a waiver in a prescribed BIR form of his exemption form withholding which shall constitute the authority for the employer to apply the withholding tax table provided under these Regulations. The employee who opts to file the Income Tax Return shall file the same not later than April 15 of the year immediately following the taxable year. Cumulative Average Method This method is used if the compensation of a particular employee is exempt from withholding because the amount thereof is below the compensation level, but supplementary compensation is paid during the year; or the supplementary compensation is equal to or more than the regular compensation to be paid; or the employee was newly hired and had a previous employer(s) within the calendar year, other than the present employer doing this cumulative computation, the present employer shall determine the tax to be deducted and withheld in accordance with the cumulative average method. The cumulative average method, once applicable to a particular employee at any time during the calendar year shall be the same method to be consistently used for the remaining payroll periods of the same calendar year. Annualized Withholding Tax Method This method is used when an employer employee relationship is terminated before the end of the calendar year and when computing for the year-end adjustment the employer shall determine the amount to be withheld from the compensation on the last month of employment or in December of the current calendar year in accordance with the following procedures. PERSONS REQUIRED TO DEDUCT AND WITHHOLD Section 2.57.3 enumerated the following persons who are hereby constituted as withholding agents for purposes of the creditable taxes that are required to be withheld in income payments enumerated in Section 2.57.2: 1. 2. In general, any juridical person, whether or not engaged in business or trade; An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments.
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3.

Time of Withholding The obligation of the payor to deduct and withhold the tax under Section 25.7 of these regulations arises at the time an income is paid or payable, whichever comes first. The term payable refers to the date the obligation becomes due, demandable or legally enforceable. Exemption from Withholding The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: 1. 2. The National government and its instrumentalities, including provincial, city or municipal governments; Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special such as but not limited to the following: a. Sales of real property by a corporation which is registered and certified by the Housing and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed P180,000.00 in Metro Manila and other highly urbanized areas and P150,000.00 in other areas or such adjusted amount of selling price for socialized housing as may later be determined and adopted by the HLURB, as provided under Republic Act No. 7279 and its implementing regulations. b. Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by R.A. No. 7916 and the Omnibus Investment Code of 1987. c. Corporations which are exempt from the income tax under Section 10 of NIRC, to wit: The GSIS, the SSS, the Phil. Health Insurance Corp., the PCSO and the PAGCOR; However, the income payments arising from any activity is conducted for profit or income derived from real or personal property shall be subjected to a withholding tax as prescribed in these regulations. Where to File Creditable and final withholding taxes deducted and withheld by the withholding agent shall be paid upon filing a return in duplicate with the authorized agent banks located within the Revenue District Office (RDO) having jurisdiction over the residence or principal place of business of the withholding agent. In places where there is no authorized agent banks, the return shall be filed directed with the Revenue District Officer, Collection Officer or the duly authorized Treasurer of the city or municipality where the withholding agents residence or principal place of business is located, or

34

where the withholding agent is a corporation, where the principal office is located except in cases where the Commissioner otherwise permits. When to file The withholding tax return, whether creditable or final shall be filed and payments should be made within 10 days after the end of each month except for taxes withheld for December, which shall be filed on or before January 25 of the following year. For large taxpayers, the filing of the return and the payment of tax shall be made within 25 days after the end of each month. The return for final withholding taxes on interest from any currency bank deposit and yield, or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements shall be filed and the payment made within 25 days from the close of each calendar quarter. Withholding Tax Statement Every payer required to deduct and withhold taxes under there regulations shall furnish each payee, whether individual or corporate, with a withholding tax statement, using the prescribed form (BIR Form 2307) showing the income payments made and the amount of taxes withheld there from, for every month of the quarter within 20 days following the close of the taxable quarter employed by the payee in filing his/its quarterly income tax return. Upon request of the payee, simultaneously with the income payment. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year. Annual Information Return for Income Tax Withheld The payor is required to file to the Commissioner, Revenue Regional Director, Revenue District Officer, Collection Agent in the city or municipality where the payor has his legal residence or principal place of business, where the government office is located in the case of a government agency, on or before January 31 of the following year in which payments were made, and Annual Information Return of Income Tax Withheld at Source (Form No. 1604), showing among others the following information: 1. 2. Name, address and taxpayers identification number (TIN); Nature of income payments, gross amount and amount of tax withheld from each payee and such other information as may be required by the Commissioner.

If the payor is the Government of the Philippines or any political subdivision or agency thereof, or any government-owned or controlled corporation, the return shallb e made by the officer or employee having control of the payments or by any designated officer or employee. DUE DATES
35

Due dates refer to the last day for filing return and payment of tax. The following are the due date prescribed by laws for filing of return and payment of taxes.
Events 1. 2. Income tax (taxpayer is individual) Income tax (taxpayer is individual, in Business/practice of profession) a. First quarter (Jan-March) . b. Second quarter (April-June) c. Third quarter (Jul-Sept) d. Annual (final return) Income tax (corporate taxpayers) a. First quarter b. Second quarter . c. Third quarter .. d. Final/adjustment return Estate tax a. Notice of death .. b. Estate tax return Donors tax Value-added tax: a. On sale of goods, services or property (1) Monthly declaration . (2) Quarterly return b. On importation .. Other percentage taxes (quarterly return) Capital gains tax on sale of shares of stock (not traded through local stock exchange) a. Per transaction return .. b. Final/consolidated return ... Capital gains tax on sale of real property (capital asset) by individual a. Cash sale .. b. Installment sale Remittance of tax withheld a. In general January to November . December . b. Large taxpayers Due Date April 15 succeeding year

April 15 same year (new) August 15 same year November 15 same year April 15 succeeding year 60 day after end of quarter th 60 day after end of quarter th 60 day after end of quarter th th 15 day of the 4 month after close of taxable year 2 months after death 6 months after death 30 day after each donation
th th

3.

4.

5. 6.

25 day after months end th 25 day after quarters end Before release from Customs 25 day after quarters end
th

th

7. 8.

30 day after sale th th 15 day of 4 month after close of taxable year

th

9.

30 day after sale th 30 day after receipt of installment On or before 10 day of the which withholding was made Not later than January 25 of the succeeding year On or before 25 day of the month following the month in which withholding was made
th th

th

10.

Nota Bene A withholding agent (WA) is a taxpayer but not a statutory taxpayer. WA can claim a tax refund if there is overpayment.
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Take note of the following: Meaning of : 1. 2. 3. 4. Employee (Sec. 78(a)) Employer (Sec. 78(d)) Husband and Wife (Sec. 79 F) Sec. 80b

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