Japar Tax Part1_grupong Tapsi Notes_2007

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

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LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 1 J. Dimaampao Tax Part One

INCOME TAX (TITLE II- SECS. 22-83)

The law on Income Taxation is found in Title II of the NIRC, as amended by RA 8424, otherwise known as the 1997 Comprehensive Tax Reform Act. Only Sec 22 up to Sec 42 are the more important ones. Sec 43 to Sec 83 are seldom asked in the Bar Exams. This is a Bar subject which cannot be understood through self-study. I am here to guide you, to tell you the provisions which you should memorize and the related provisions so that all the probable questions may be covered once we discuss them. As far as taxation law is concerned, just concentrate on the 20 provisions Sec 22 42. Just read the subsequent provisions. I will mention some of them in this lecture and what you will hear will be sufficient and you need not to read Sec 43 83. Let me start with this 22 to 23. You check whether you have understood these sections or provisions and you never can tell it might be asked in the bar exams. You know this was asked: question 1 in the 1996 bar exams but if this will be asked again, Im sure the examiner will modify this question. There is really this instruction not to ask questions previously asked in the Bar Exams. But you can modify the questions and the answer will be the same. Sec 32A this was asked in the 1995 Bar Exams (Sec 28 under the old tax code). Define Gross Income. But the examiner may change the tenor. If you notice the title of 32A, General Definition of gross income, so the examiner may modify this as follows: State the general definition of gross income. The question asked in 1996 has something to do with the salient features of our present income tax system. So that can be answered under the old tax code. The examiner may modify as follows: What are the salient features of the NIRC, as

amended by RA 8424, otherwise known as the Comprehensive Tax Reform Act? There are actually 45 amendments introduced by RA 8424. So I advice you not to master all the suggested answers to the bar questions asked before 1998 because those questions which we answered before 1998 were based on provisions of the old tax code. In 2003, a question on tax benefit was asked. Last year, 2005, I told them that may not be the question. The examiner may modify that. You will recall that tax benefit rule applies to two cases tax refund, recovery of what is written off. I told them that may be the question. It came up. When you speak of features, this may include methods of income taxation, systems of income taxation, basic rules or principles.

I. SALIENT FEATURES OF OUR PRESENT INCOME TAX SYSTEM:

A. Schedular System of Taxation and Global System of Taxation

B. Income Tax Situs C. Determinative Test of Whether Income is

Taxable Doctrine of Constructive Receipt of Income

D. Basis of Taxable Income E. Net Income Taxation F. Gross Income Taxation G. Pay as you file H. Creditable Withholding Tax I. Final Withholding Tax J. Substituted Filing of Income Tax Return

A. SCHEDULAR SYSTEM OF TAXATION and GLOBAL SYSTEM OF TAXATION:

1. TAN vs DEL ROSARIO 237 SCRA 324 Landmark case that was asked twice

already in the Bar Exams

2005 2004 2003 2002 2001 2000 1999

I. Income Tax 13 5 8 5 12 7 10

II. Remedies (incl CTA) 9 7 2 17 3 8 6

III. General Principles 7 9 2 1 2 7 0

IV. Estate Tax 1 1 1 0 2 2 0

V. Donors Tax 0 1 2 1 1 1 1

VI. Local Tax 3 1 2 1 0 0 0

VII. Real Property Tax 0 0 1 2 1 0 0

VIII. Tariff and Customs 3 1 1 0 1 2 0

These notes are meant to be shared to all who may benefit from it, provided, that THE USER SHALL NOT IN ANY MANNER WHATSOEVER DELETE, DIMINISH, OR OTHERWISE REFUSE TO GIVE CREDIT TO THE PEOPLE WHO MADE THIS. Whoever does such ungrateful and dastardly acts shall most definitely suffer the consequences under the law of Karma and no amount of prayer can save them from its effects. This was made available through the collective efforts of the following UST bar examinees and friends:

Atty.LordV Atty.Julan Atty.Tracy Brian NickG. Atty.DennisM. Atty.Levie Atty.Rommel Atty.Dk

Edwin Atty.Claudette Bim Charm Deo Atty.Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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-------------- -------------- LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie

Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne



The two recognized systems of income taxation:

a. SCHEDULAR SYSTEM OF TAXATION

Is the system of taxation adopted in imposing taxes on the income of individual taxpayers.

SC: The Schedular System of Taxation is the system employed where income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer.

It is a system that provides for different tax rules or treatments.

By making it depend on the kind or category of taxable income, it means that it classifies or categorizes income.

1997 Bar: discuss the meaning of Schedular Tax System. Possible modification: How does the Tax Code impose tax on the income of individual TP?

These features are incorporated in the present tax code.

IMPORTANT CHARACTERISTICS OR FEATURES

i. Income is classified or categorized

Section 32A gives 11 categories of income (actually 13)

Sec.32. Gross Income- (A). General Definition- Except when otherwise provided in this title, gross income means all income derived from whatever 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;

2. Gross income derived from the conduct of trade or business, or the exercise of a profession;

3. Gains derived from dealings in property;

4. Interests; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities; 9. Prizes and Winnings; 10. Pensions; and 11. Partner's distributive share from

the income of the general professional partnership

ii. It provides for different tax rules or

treatment. 1. How are dividend income,

royalties, prizes and winnings taxed? Correlate with sec 24 and 25 where you will find the different

tax rules and tax treatments that may apply.

2. Do not memorize 24 and 25. Just try to read.

Sec 24

Sec 25

So, to answer the Question, How does the tax code impose tax on income of the individual taxpayer?, just state the 3 characteristics. The Answer therefore is: the income of the individual taxpayer is taxed under the schedular system of taxation. Under this system, it operates as follows or has these following characteristics:

1. the income of the taxpayer is categorized or classified;

2. it is subject to different tax rules or treatment; and

3. the tax code imposes different tax rates on these different categories of income

There are 3 basic rules/ formula that you should remember here:

A. Where income is derived from the performance of services, sec 35 applies. From gross compensation income is deducted personal and additional exemptions. Also to be deducted under sec 34(10) are premiums on hospitalization and health insurance (2001 Bar). After such deductions, you arrive at Taxable Compensation Income.

B. Where income of individual TP partakes

of the nature of business income, a different tax treatment applies. The formula is as follows: Gross Income from the conduct of trade or business or the exercise of profession less allowable deductions under Sec 34.

Personal and additional exemptions may not be deducted as these are allowable only in compensation income.

C. Where income is derived solely from income subject to final tax, as in dividends received from a domestic corporation, such is not included in gross income. The tax withheld will constitute a final settlement on the tax liability on that particular income.

Fringe benefit is subject to final tax under 33A. The individual TP is not required to report this as part of gross income because the tax withheld which is a final tax will serve or constitute a final settlement on the tax liability on that particular income.





Other income subject to final tax royalties, interest on bank deposits, prizes and winnings.

iii. It imposes different tax rates.

Sec 24 and 25 provide for different tax rates which are known as the progressive rates of income tax.

b. GLOBAL SYSTEM OF TAXATION

one adopted in imposing tax on income of corporate taxpayers

Try to recall this technical definition cited by the SC in the case of TAN vs. DEL ROSARIO. The SC said it is the system where the tax treatment views indifferently the tax base, and generally treats in common all categories of income of the taxpayer.

Indifferently views the tax base- means uniform tax rules or tax treatments

generally treats in common all categories of income of the taxpayer-means that it does not classify or categorize income

Global system is really the opposite of Schedular Tax System

Secs. 27 & 28 are the 2 important provisions as far as Corporate Taxpayers are concerned. These are classifications similar to 32 A.

in 32 A- it classifies income into 11 categories. Here in Secs. 27 & 28, the rules are uniform as far as Domestic Corporations are concerned, subject to certain exceptions. Also, the rules are uniform as far as Non Resident Foreign Corporations are concerned; and also uniform as applied to NRFC.

Sec 27

Sec 28

So, uniform corporate tax rules, subject to certain exceptions. No classification of income and also imposes a uniform or fixed corporate rate of 35%. The 32% has been amended to 35% by RA 9337 (EVAT LAW) which took effect on July 1, 2005 (RR-14-2005 implemented it on Nov. 01, 2005)

B. INCOME TAX SITUS: (Relevant provision is Sec. 23)

Sec. 23. General Principles of income taxation in

the Philippines.- Except when otherwise provided in this Code:

A. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

B. A nonresident citizen is taxable only on income derived from sources within the Philippines;

C. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

D. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

E. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

F. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines

1996 Bar: Basis on imposing income tax

(RPN): [Tan vs Del Rosario] 1. R- residence 2. P- place where the income was

derived; and 3. N- nationality or citizenship

Residence: Resident alien-can be taxed on his income

derived from sources within RFC- basis of the imposition of tax is the

doing/conduct of business in the Philippines Place: NRA- can only be taxed from its income

derived from sources within the Philippines NRFC-can only be taxed from its income

derived from sources within the Philippines Nationality:

the place is not the basis, it is the nationality. That's why even the income derived from sources without can be taxed

You know that Resident Citizen (RC) and Domestic Corporation (DC) can be taxed (Sec 23(A&E) on income derived from sources within and without the Philippines.

Please be reminded of the amendment because this has been the subject of misleading 2002 bar Q. #1 regarding NRC and NRA. Take note of the effectivity of RA 8424,Jan. 1,1998.

These rules in Sec.23 about NRC (that they can only be taxed on income derived from sources within, and so is with Resident Alien, took effect on Jan. 1,1998





therefore, if the income was derived in 1997, within and without, it is subject to tax

2002 Bar Q. #1- this has something to do with the

income derived from sources w/in and w/out of a seaman or NRCitizen. Several examinees answer the Q. under the new rule. This is not correct. What they have in mind is that the 1997 Comprehensive Tax Reform Act took effect in 1997. This is not correct. This RA8424, took effect only on January 1, 1998

Pls be reminded about this. That these 2

individual taxpayers (Nonresident Citizen and Resident Alien) have been the subject of the amendment introduced by RA 8424.

they could be taxed on their income derived from sources w/in and w/o in 1997, or before 1998. But starting 1998, they could only be taxed on their income derived from sources within.

The word used by the SC in describing the

present income tax situs, and this is also provided under the present tax code is COMPREHENSIVE. The SC said we have adopted a Comprehensive Income Tax situs xxx because we have practically adopted all the possible criteria in imposing tax on income (residence, nationality or citizenship, and place).

Q: Why is it that the Income derived by Resident

Citizen from sources w/in and w/o is subject to tax? What is the rationale behind this? What must be the basis for this?

CIR vs. Lednicky (re: Partnership Theory) -GRN L-18169 July 31, 1964:

Issue: Right of the Philippine

Government to tax the income of resident from outside the Philippines.

Held: The right of a government to tax income emanates from its partnership in the production of income, by providing the protection, resources, incentives, and proper climate for such production, the interpretation given by the respondents to the revenue law provision in question operates, in its application, to place a resident alien with only domestic sources of income in an equal, if not in a better, position than one who has both domestic and foreign sources of income, a situation which is manifestly unfair and short of logic.

NOTE: This case was decided during the OLD Tax Code.

Under the principle of Personal Jurisdiction, wherever you go, citizens of the Philippines, you are entitled to the protection of the Philippine Govt. This is in relation to Partnership Theory between the Taxpayer and the State---the State will provide protection but in return you have to pay taxes. The right of the Govt, therefore, to impose taxes on income must be based on its capacity to extend protection. In other words, if the Phil. Govt cannot provide protection, then it has no right to imposed taxes. As simple as that. This is the reason why the income derived by Resident citizen from sources without can be subject to Philippine income tax.

SUMMARY:

KIND OF TAXPAYER CRITERIA or INCOME TAX SITUS SOURCES of TAXABLE INCOME

RC Residence and Nationality Within and without

NRC Place Within

RA Residence

- They can claim personal and additional exemptions and as well as deductions

Within

NRA Place

- In certain cases, they are not allowed to claim deductions

Within

DC Nationality Within and without

RFC Residence Within

NRFC Place

- they are not allowed to claim deductions Within





C. DETERMINATIVE TEST OF WHETHER THE INCOME IS TAXABLE Doctrine of Constructive Receipt of income:

This is cited in the case of Filipinas Synthetic Fiber Corp. vs CIR. The SC said that it is not the actual

receipt of income but the right to receive that determines when to include an amount as income in the gross income. This is the most important pronouncement of the SC in this case which you should remember. This is consistent with the Doctrine of Constructive receipt of income.

FILIPINAS SYNTHETIC FIBER vs. CA 316 SCRA 480, GRN 118498 October 12, 1999

Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income whether the income is taxable.

In Title II, there are specific rules regarding Constructive Realized Cash or Property Dividends. The Rule is provided in Rev. Reg. #2 Sec.53. It gives us 2 requisites:

1. The income or the amount must be credited to the account of the taxpayer or set apart or set aside for the taxpayer; and

2. It must be unconditional; that is, not subject to any limitation or restriction. The right to

receive must not be subject to any contingent event

Examples: a.) Dividend income perceived to be received from Domestic Corporation it is not required

that the stockholder must actually receive the dividends before the 10% tax must be imposed. As long as it is set apart for the stockholder and the latter could demand the same w/o any limitation, the 10% tax may be imposed to the corporation

b.) As cited in Rev. Reg #2, the Partner's Share in the Income of the Partnershipit is not required that the share of such partner be actually received or distributed. As long as the partner could demand the same w/o any limitation or restriction, such share is already taxable.

Classic example using the word creditedInterest income on Money Deposit

if you have money deposit in the bank and it earns interest, such interest income is credited to your account. So, constructive receipt of income. An example of an income that is constructively in your hand, you have yet to receive the same, no actual receipt, but it is already subjected to 20% tax. The 20% Final Tax already applies because the 2 requisites are present (1) credited to your account and (2) you can withdraw the same anytime during the taxable year without any limitations or restrictions.

Case: Limpian Investment vs. CIR (17 SCRA 703) --- What is the income considered as constructively received here? it is the rentals deposited in court by the lessee as a result of the unjustified refusal of the lessor to accept the same. The rentals were consigned in court. The rentals deposited in court is considered as constructively received by the lessor because the lessor can withdraw the same without any restriction. So, take note of this constructive receipt of income.

D. BASIS FOR THE COMPUTATION OF TAXABLE INCOME:

If you have not read Sec.43, you cannot answer this.

Sec 43. General Rule - the taxable income shall be computed upon the basis of the taxpayer's annual accounting period ( fiscal year or calendar year, as the case maybe) x x x

if we try to analyze this, it uses the words basis, then taxable income, then computed. It shall be computed on the basis of what? Answer: your taxable income shall be based on either of these accounting periods: 1) fiscal year period or 2) calendar year period

1990 Bar: There was a Q. on the distinction between these 2 accounting periods. The importance of this Q. is that

it tells us that there is a basis in the computation of taxable income. These terms are defined in Sec.22 P & Q.





Sec 22. Definitions- (P) The term taxable year means the calendar year, or the fiscal year ending during such

calendar year, upon which the net income is computed under this Title. x xx (Q) the term fiscal year means an accounting period of twelve (12) months ending on the

last day of any month other than December.

You must know these terms because individual taxpayers can only adopt the calendar year period, starting January 1 and as defined under Sec 22 Q, Fiscal Year Period is that accounting period of 12 months ending on any month other than December. Therefore, Fiscal Year period can only be applied to Corporate TP. Corporate TP have the option either to adopt the calendar year period or the fiscal year period.

Correlate with Sec.77B, you'll find therein that Corporate taxpayers have the option to adopt calendar year period or fiscal year period. But in the case of individual taxpayers, there is no choice but to adopt the calendar year period. So the taxable period will cover only from Jan.1 up to Dec.31. You must master this so as to correlate with Sec. 229.

Under Sec. 229, and you are Familiar w/ this Doctrine-- the 2 year period for filing tax refund shall commence to run from the filing of the final adjustment corporate tax return (_________vs. CIR 205SCRA184). You ought to know whether the Corporation adopted the fiscal or calendar period.

Theres no problem if the corp. has adopted the calendar period because it is April 15. What if it adopted the fiscal year period? When can you apply this 2 year period? Sabe, the 2 year period of filing the tax refund shall commence to run from the filing of the final adjustment corporate tax return.

If the corporation has adopted the fiscal year period, then it is not April 15. Sec. 77B says on the 15

th day of the 4

th month following the end of the taxable period. So if the fiscal year

ended on June 30, you count 4 months---July,August, September & October. On the 15th

day of the 4th month following the end of the fiscal year period. So that would be on October

15 (2 yr. period starts from this date). So correlation

It is really very important to correlate because questions will be asked on the application of the 2 year period and the problem will state that the corporation has adopted the fiscal year period. Take note of Sec. 77B, it is not April 15.

E & F. NET INCOME TAXATION and GROSS INCOME TAXATION:

NET INCOME TAXATION (NIT) vs. GROSS INCOME TAXATION (GIT):

NIT- one generally adopted under the present tax code. Bases are Secs. 34 & 35 Under Sec. 34 (Deductions from Gross income), NIT allows deductions. It also grants

exemptions, basic and additional personal exemptions under Sec. 35.

GIT- can be applied or adopted under exceptional cases. It is not really correct to say that we have not adopted GIT Sec. 25 B, C, D, and E, speak of gross income Sec 25 B: the provision says the income tax is imposed on the entire income. That means

that the basis is the Gross income. The subsequent paragraphs (C, D, &E) consistently say or provide or use the word gross income.

Who are these individual taxpayers whose income shall be taxed at gross, and therefore the

method of taxation is GIT? NRA-NETB The income of these individual taxpayers is taxed at Gross, therefore, the method or system

that apply to them is GIT Who are those individual taxpayers who cannot claim any deductions/exemptions? NRA-NETB As regards Corporate taxpayers:

Sec. 28 B (1,2,3&4) provide for those corporations taxed under GIT Sec 28 B (1) - the 35% corporate income tax is imposed on Gross Income (NRFC-NETB)

(2) - The 25% corporate income tax shall be imposed on gross income on rentals(NR film owner) (3) - The 4.5% corporate income tax shall be imposed on gross income on rentals or charter fees (lessor of vessels) (4)- The 7.5 % corporate income tax shall be imposed on gross income on rentals or fees (lessor of aircraft, machineries)





Corporations covered by Sec. 28B (1,2,3,&4) are nonresident foreign corporations. So, corporate taxpayers who cannot claim deductions are NRFC. The method of taxation applied to these corporation is, no doubt, GIT.

Simply put, NIT is the Rule. GIT is the exception to the rule. Exception in the sense that it applies

only to these 2 kinds of taxpayer: 1. Individual -NRA-NETB; and 2. Corporate- Nonresident foreign corporation

1997 Bar: Explain NIT 2000 Q#10- Define Net or Taxable Income (the word 'taxation is not present here) 1983 Bar- Explain the meaning of GIT 1995 Q#1- Define Gross income the use of the word taxation' really matters

In 1995 Q#1- Define Gross income. 1 examinee answered: One where the tax is imposed at

gross. This is not really correct. This maybe partly correct if the Q. asked was that of 1983 Bar, because if we speak of GIT, that is really the method or system

If the Q. is the Definition of Gross Income, then you really have to enumerate the items under Sec. 32 A

GIT- is a method or system that allows no deduction; it grants no exemptions. In other words, the tax base

or the basis of the tax rate is Gross Income

NIT- not the same with Net Income or taxable income. Sec. 31 ( one sentence provision) defines Net or Taxable Income. Do not confuse this with the concept of NIT because the word 'taxation' connotes method or system.

Sec. 31-Taxable Income Defined- The term 'taxable income' means the pertinent items of gross income specified in the tax code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this code or other special laws

So what then is Net Income Taxation? How does it operate? ---NIT allows deductions and grant

exemptions. The basis of the tax rate is taxable/net income as defined under Sec.31 Probable Bar Q. here: What are the distinctions between GIT and NIT?

Answer: 1. As to the claim for deductions or exemptions: GIT-No exemption/deductions; NIT-allows

deductions and grants exemptions; 2. As to the basis of the tax rate: GIT-Gross income; NIT- Net/Taxable income; 3. As to the applicability under the tax code:

GIT applies to 2 taxpayers: 1) NRA-NETB(Sec.25 B,C,D,&E) and 2) NRFC (Sec.28 B(1,2,3,&4)) NIT applies to the following taxpayers: 1) RC; 2) NRC; 3) RA; 4) NRA-ETB; and Corporate:1) DC; 2) RFC

Q.: Are you in favor for the adoption of GIT? Congress is proposing a change from NIT to GIT

this may be a bonus Q. but your answer or opinion must be based on tax. Point out significant advantages. There's no such thing as perfect system because both have their own disadvantages.

As regards NIT, it allows deductions and grants exemptions. Therefore the tax paid is less. I

think, we can develop advantages on this. Try to recall these, as these are the characteristics or features of NIT:

1) To the taxpayers, they may consider this as fair, just and equitable system of taxation. One or two sentence will suffice and you have to explain that. Favorable/fair in the sense that taxpayers can claim those business connected expenses as deductions, and taxpayers can also claim exemptions;

2) This brings us to the next advantage, as cited in Sec. 2 (State Policy) of RA 8424. this is one of the underlying purposes of the amendments. It says that it provides for equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity. o Equitable relief may refer to those allowable deductions under Sec.34 and personal

exemptions under Sec.35. The effect of this is that it will increase the levels of their disposable income. If taxpayers can claim those business related expenses as





deductions, they may file their income tax return religiously and they may be encouraged to engage in income producing activities. This is the amplification of the provision under Sec. 2 of RA 8424 when it says increase economic activity. That will be the effect of that grant of deductions and exemptions

3) We can also cite as an advantage, that NIT minimizes fraud. In what sense? o Through this tax audit examination of the taxpayers' books of accounts. The

taxpayer can not just claim expenses not supported by receipts. BIR will check whether these expenses are indeed business connected or not. This is what we called counter checking. If you incurred expenses, make sure that it is supported by receipts or is connected to business otherwise the BIR will disallow the same. So it minimizes fraud in this context.

The result of this is that, if we have fair, just and equitable tax system, taxpayers will

religiously file their income tax returns and fraud will be minimized. This will generate more revenues to the Govt which is really the objective of every system of taxation

Q: if you are against NIT (in effect, you are for the adoption of GIT) what must be your reasons here? Take note of the 2 salient features of GIT:

a) No deductions are allowed and no exemptions may be granted; and b) The tax basis is the gross income. Have these in mind.

Reasons:

1) The complaint of showbiz people under the present system is that, according to them, we have a complicated system because there are so many requirements that must be complied with and they could not just determine their taxable income-services of CPAs are still needed. But here in GIT, since no deductions are allowed, this will simplify our income tax system. In what sense? You can easily compute your income tax due or payable. Just multiply your Gross income by the tax rate and that is the Income tax due. It dispenses with these several requirements on the claims for deductions. And this is consistent with or in harmony with the sound fundamental principle of ADMINISTRATIVE FEASIBILITY. GIT makes our system sound in the sense that it is capable of effective enforcement or implementation.

2) So what would be the effect of this? If we have a simplified income tax system which

can be easily understood by common citizens, more will be religiously filing their income tax returns because they can easily understand the system, they can easily file their tax returns w/o the assistance of a CPA or tax experts.

3) The most important about GIT, as cited by the sponsor of the proposed Bill is that it

minimizes (we cannot use the word eradicate because this is next to M I 3) it minimizes graft and corruption.

How do we explain this? The evil of NIT, is that there's that abuse of discretion; margin of discretion on the part of the BIR examiner. They abuse it by collaborating with the taxpayer and allow deductions not supported by receipts. This reduces the taxpayer's liability. Because of this margin of discretion, there's that measure to the effect that this should not be the source of graft and corruption. So, no more deductions and no more exemptions must be allowed so that the BIR cannot make use of the same. Here, it can no longer be the source of graft and corruption, so it minimizes the same.

The result of this GIT is that, it will generate more revenues to the Govt. which is really the

objective of every system of taxation.

NIT vs GIT (As regards the objective of generating more revenues): 1. In NIT, more revenues may be brought by these 3 factors:

a. favorable system b. system that provide for equitable relief c. minimizes fraud (by the taxpayer)

2. In GIT, more revenues may be brought by these 3 factors:

a. simplification b. easy to understand system c. minimization of graft and corruption (by the BIR Examiners)





You should also know the disadvantages of these 2 systems. In the case of NIT, #1 disadvantage is that it really is vulnerable to graft and corruption because of the margin of discretion (BIR can allow or disallow the grant of discretion). #2 is that it is a complex or complicated system. It is very complicated and there are so many requirements to be complied with. the effect of this graft and corruption is tax evasion

The disadvantage of GIT is that there's always tax evasion. In NIT, tax evasion may be brought about by graft and corruption. In GIT, it is the employment of fraudulent methods, schemes or devices to understate Gross income. Also, if you are a businessman who cannot claim those business expenses as deductions, you may find this system as unfair. In what sense? Even legitimate expenses cannot be classified as deductions.

Sec 24 A, you'll find 32% progressive rate in 2000. if we will formally adopt this GIT, do you think

this tax rate will be retained? If this will be retained, that would make the system unjust. These tax rates are quite high up to 32%. but it allows deductions, so there's a balancing feature. But once we formally adopt GIT, we cannot retain the same. We really have to reduce the rates to make this system just. In my view, it must not exceed 10%. Eliminate deductions, no more Sec. 34, but we have to reduce the rates.

In my view, it should be modified income tax system. I'm not really in favor of pure Net Income or pure Gross income taxation. It should be modified income tax system.

G. FILING OF INCOME TAX RETURN AND PAYMENT OF TAX:

The system that we have adopted is PAY AS YOU FILE. In the case of individual, Sec. 36 A (1) states that the tax shall be paid upon the filing of income

tax return

Sec. 36 A. Payment of tax (1) In General- the total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. X X X

In the case of Corporation, Sec. 77 C provides that corporate taxpayers shall pay their corporate income tax upon the filing of corporate income tax return

Sec. 77 C. Time of payment of Income Tax - the income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Secs. 75 and 76 shall be paid at the time of the declaration or the return is filed X X X

2001 Q#4. This will test your knowledge about the filing of tax return by a corporation. I will modify:

How often does a Domestic Corporation file its Income Tax Return for income earned during a single year. Explain the process. What must be the reason for such procedure? Answer: LIFEBLOOD DOCTRINE---Hehehehehe Refer to Secs. 75 and 76. Is it annually? No. How often, Once? No

o Sec. 75 explains the process. It says every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters, upon which the income tax, as provided in Title, shall be levied, collected and paid. X X X

So, four times. The word used is Quarterly. All Domestic Corporation file their income tax

quarterly. Quarterly, so 1st Quarter, 2

nd Quarter, 3rd Quarter and the final (4

th) quarter requires

the filing of Final Adjustment Return (Sec. 76) What are the words that you should say in your answer aside from Quarterly? You should say in

your answer, that under Sec.75, it requires the Quarterly declaration of gross income and deductions. As regards the 4

th Quarter, it requires the filing of final adjustment tax return.

Now, what do you think is the reason for the procedure? LIFEBLOOD, (hehehehe) If we allow the Corporation to file their income tax returns annually, what would be the effect? The effect is that the Govt would run out of funds before it can collect. That's the reasonthe timeliness of collection of corporate income tax...Medyo may Lifeblood pa rin Answer should be: The reason for this procedure is to ensure timeliness of collection of

corporate income tax because (lifeblood na) taxes are the lifeblood of the Govt...hehehehe. There should be no undue delay

What if it is an individual? How often does an individual taxpayer file his income tax return? 4X? Hehehe Only Once (Annually) (Sec. 56)





What is the reason why individual taxpayers are only required to file their ITR Annually? LIFEBLOOD na naman,hehehe...iba na cguro to. If we allow them to file their ITR Quarterly, sa tingin mo kaya the BIR can check compliance with such? Millions of individual taxpayers will be filing their ITR quarterly. The reason here is to make our system capable of effective implementation or enforcement consistent with the sound principle of Administrative Feasibility

This is modified by these 3 systems:

1. Creditable withholding tax system 2. Final Withholding tax system 3. Substituted filing of ITR

H & I. CREDITABLE WITHHOLDING TAX AND FINAL WITHHOLDING TAX SYSTEMS: medyo mahirap to. 1995 Bar- 5 Q. on these: Creditable Withholding tax system (CWTS) vs. Final

Withholding tax system (FWTS): the common feature with these withholding systems is that there's a withholding agent

authorized by the Govt to deduct and withhold the tax

1) As to income subject of the system: As regards CWTS, Sec. 78 enumerates those items subject to CWTS.

Classic example of this system is Compensation Income. The employer is the withholding agent, the employee is the recipient of the income. Under this system, the employer will deduct and withhold the tax on that compensation income. Remember that the employee is required to include the income in his gross compensation income

On the other hand, classic examples of income subject to FWTS are dividends received from

Domestic Corp., Royalties, Prizes more than 10,000, Winnings, and Interest income on bond deposit. If you are the recipient of these, you are no longer required to include these incomes in your gross income. The word 'final' connotes that the tax withheld will constitute as a final and full settlement

(FAFS for brevity) of the tax liability on that income.

2) As to whether or not the income should be reported as part of the gross income: According to CWTS, since the income will not constitute as a FAFS of the tax liability on that

income, the recipient should report the said income in his gross income. this is provided for in Rev. Reg. 2-98. it is said therein under Sec 2.54, that an income

subject to CWT must still be reported by the recipient as part of his gross income On the other hand, the said Rev. Reg. 2-98 also provides that in the case of FWTS the

recipient may not report said income as part of his gross income because the tax withheld will constitute as a FAFS of the tax liability

3) As to the effect of the tax withheld:

The tax withheld under the CWTS can be claimed as a tax credit or may be deducted from the income tax due or payable. if you are a compensation earner, and you have other sources of income. Let us

assume that your income tax due is 150,000. the tax withheld by your employer can be claimed as a tax credit. It may be credited against or deducted from your income tax due or payable. Say, if the tax withheld is 50,000, deduct this to your income tax due or payable of 150,000, the final income tax due is 100,000.

Again, Creditable implies that the tax withheld by the employer can be claimed as a tax credit or can be deducted from your income tax due or payable

On the other hand, in FWTS, the tax withheld cannot be claimed as a tax credit. The Final

Tax Withheld will constitute as a FAFS on the tax liability on said particular income For instance, the stockholder is not required to report as part of the gross income the

dividends received from a domestic corp. The reason is because the 10% tax withheld on the amount will constitute as a FAFS of the tax liability on the dividend income

Fringe Benefit under Sec. 33 A is subject to Final Tax, therefore this is also governed by FWTS. This is another example of income subject to FWT

2003 Bar: Who is legally obliged to pay Fringe Benefit Tax? This Q. is not about the definition of FB but requires your knowledge about withholding tax. Rev. Reg. 3- 98 Sec. 2(2) say that the employer is the one legally obliged to pay the tax

person legally obliged to pay the tax---is the one who in case of nonpayment may be legally demanded to pay the tax. If the Final tax on FB will not be paid, the BIR will not go after the employee but to the EmployER. This is the same in the case of interest on





bond deposit. In case of nonpayment, the BIR will not run after the stockholder but to the corporation. The Corporation being the withholding agent is the one legally obliged to pay the tax. The rule is that it is the withholding agent that is legally obliged to pay the tax

4) As to the Filing of Tax Return:

In the case of CWTS, the compensation earner reports the income received as part of his gross income. Necessarily , he has to file an ITR

Whereas if the only source of income is subject to Final tax, you need not file an ITR

These are the provisions on individual whose sole income is one that is subject to final tax (Sec. 51 A(2C)): 1. 25% final tax under Sec. 25 B-NRA-NETB 2. 15% final tax under Sec. 25 C, D, and E (Alien employed by Multinational Companies, offshore

banking unit and petroleum service contractor or sub contractor)

So they are NRA-NETB Bar Q: Why are NRA-NETB not required to file ITR? This can be answered by 1 sentence. It is

because their income is already taxed as a Final tax.

So as to the 2 Questions: 1) Who are these individual taxpayers who are not required to file ITR? NRA-NETB 2) Why are NRA-NETB not required to file ITR? Because they are subject to a final tax rate. Final

tax withheld will constitute as a FAFS of the tax liability

How about Corporate taxpayer? Sec. 52 A. it says 'except nonresident foreign corporation'. The rule is that corporate taxpayers

must file their ITR, except Nonresident foreign corporations Why? The reason is Sec. 28 B(1,2,3,4)

Sec. 28 B- Tax on Nonresident Foreign Corporation- 1. FC not engaged in trade or business- 35% FT; 2. Nonresident Cinematographic Film Owner- 25% FT; 3. Nonresident Owner or lessor of Vessel- 4.5% FT 4. Nonresident Owner or lessor of Aircraft, Machineries- 7.5% FT

these are all Nonresident Foreign Corporations. Apply the Rule that they are not required to file

ITR because the tax withheld constitutes as a FAFS of the tax liability

J. SUBSTITUTED FILING OF INCOME TAX RETURN : Rev. Reg. 3-2002 (1,2,3,4). the effect of this system is that you are no longer required to file ITR.

Requirements for one to avail of this system: 1. You must be a compensation earner, meaning that your income is derived solely on

compensation. If you have other sources of income such as business, trade or profession, you are still required to file an ITR;

2. You must have only 1 employer in the Philippines. So if you have 2 or more employers, you are not allowed to avail of this system;

3. The tax withheld by the employer must be the same or equal to the tax due or payable after applying the tax rate.

For example: tax due is 250,000. Make sure that the exact amount is withheld by the employer. Otherwise, you will be required to file ITR.

4 The employer must file an information return (BIR Form 1704) showing therein the income tax withheld on the compensation income.

Rev. Reg. 3-2002 declares that is tantamount to a substituted filing of ITR by the employees hence

they are no longer required to file ITR. Let us examine Sec. 51 A and B.

Rules laid down therein: 1. If your compensation income is not more than 60,000; 2. Only 1 Employer; and 3. Tax withheld is the same with the tax due,





Then you are no longer required to file ITR. But if your compensation income is more than 60,000 even if you satisfy requirements 2 & 3, you are still required to file ITR

these rules have been modified by Rev. Reg. 3-2002. Under 3-2002, it imposes no limitation as to the amount. What is important is that as long as the tax withheld is the same with the tax due, irrespective of the amount, this new system applies.

is this not an impermissible encroachment on administrative prerogative because it is a mere regulation? BIR has the power to promulgate regulations for the enforcement of rules as part of its administrative functions. Nobody questioned this.

II. GENERAL PRINCIPLES OF INCOME TAXATION:

This is precisely the title of Sec. 23 - General Principles of Income Taxation in the Philippines Sec 23. General Principles of income taxation in the Philippines.- Except when otherwise provided in

this Code: A. A citizen of the Philippines residing therein is taxable on all income derived from sources

within and without the Philippines; B. A nonresident citizen is taxable only on income derived from sources within the

Philippines; C. An individual citizen of the Philippines who is working and deriving income from abroad

as an overseas contract worker is taxable only on income from sources within the Philippines. Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

D. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

E. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

F. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines

Sec. 23 classifies taxpayers into two: individual and corporate Can only answer the Q: Can we tax the income derived from sources w/in and w/o? Sec 23 cannot

answer the Q. on whether the taxpayer can claim deductions, (which is also a general principle or basic rule). There's a need to supplement this particular provision. That's why under Secs. 24 & 25, there are provisions that apply to individual taxpayers that answer the Q. on whether they can claim deductions

As regards Corporate Taxpayers: Q. on whether they can claim deductions cannot also be answered

by Sec. 23. We really need to refer to Sec. 27 & 28 which give us the tax rates and the tax base

Bar Questions on General Principles: 2000 Bar Q#8, 2002 Q#1 & 1998 Q#2. Try to refer to these Q because these are really

questions on the general principles of income taxation

2000 Q#8- the tenor of the Q was: How will this individual taxpayer, a NRA-NETB be taxed on his income derived from sources w/in and w/o? In 2000 bar, our suggested answer includes not only these 2 sources: 1) whether income

from w/in and w/o can be taxed; and 2) regarding tax base; whether the taxpayer can claim deductions. 3) We also mentioned about the applicable tax rates

2002 Bar- the tenor of the Q has been changed: What is the Rule of Income Taxation with respect to the income of Mr. Sebastian, a NRC deriving income from sources w/in and w/o? 2002 Q#1 also requires these 3 basic principles

The answers to these Q are the same even if the examiner changed the tenor of the Q.

However, 1998 Q#2 can be squarely answered by Sec. 23 alone. This is a Q. on sources alone.

So when we speak of General Principles, these are not limited to sources alone under Sec. 23. These also include Rules on tax base as well as tax rates.

There are really different ways on how to ask Q on General Principles Provisions regarding General Principles : Sec. 23, 24, 25, 27 & 28

The tax code classifies the taxpayer as either individual or corporate. So, this General Principles may be broken into 2:

1. General Principles of Individual Income Taxation; and 2. General Principles of Corporate Income Taxation





1. General Principles of Individual Income Taxation:

RESIDENT CITIZEN:

How will the income of RC be taxed? RC can be taxed on his income w/in and w/o (Sec. 23 A)

Can a RC claim deductions? The income tax is imposed on the taxable income. That means that RC can claim as deductions those expenses paid or incurred w/in and w/o (Sec 24 A [1][a]

The taxable income of RC is subject to 5-32%. it is known as the Progressive tax rate schedule

NONRESIDENT CITIZEN:

Can only be taxed on his income from sources w/in (Sec.23 B, C). this has been the subject of an amendment . This is a new rule (took effect on Jan. 1,1998). So that if the income w/in and w/o was derived in 1997, that income could be taxed under the old tax code. But beginning 1998, we can only tax his income derived from sources w/in

Can he claim those expenses incurred within the period? Sec. 23 is not clear on this. This can be answered by Sec. 24 A(1, b). it says that the income tax is based on the taxable income under Sec. 31. Meaning, Gross income less allowable deductions. But the allowable deductions are only those expenses paid or incurred w/in the Philippines because he could only be taxed on his income derived from sources w/in.

this taxable income is subject to 5-32% progressive rate schedule

2002 Q#1: Mr. Sebastian, a seaman, received income in 1997 from sources w/in and w/o. What is the rule with regard to the income of Mr. Sebastian in 1997? o Some answered this Q. under the new rule. This is not really correct. This should be

answered under the old tax code because the present tax code took effect only on Jan.1, 1998.

RESIDENT ALIEN:

Could be taxed only on his income derived from sources w/in

Entitled to deductions (Sec. 24 A (1, C)) because you can see therein the word taxable income. But the allowable deductions are only those expenses paid or incurred w/in the Philippines

Subject to 5-32% progressive tax rate schedule

NONRESIDENT ALIEN ENGAGED IN TRADE or BUSINESS:

How do you know that a NRA is engaged in trade or business? Determinative test is Sec. 25 A(1)- He is considered engaged in trade or business if his aggregate stay in the Philippines is more that 180 days.

Sec. 25 A (1) X X X A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a nonresident alien doing business in the Philippines X X X

If it is exactly 180 days, then it is not engaged in trade or business because the law is very clear. This must be strictly construed because of the tax benefit that may accrue to this alien individual.

What is that tax benefit?

If the alien is engaged in trade or business, the tax benefit is that, he can claim deductions because the tax base is taxable income under Sec. 25A (1). On the other hand, if he is not engaged in trade or business, he is not entitled to this tax benefit because the tax base is Gross income under Sec. 25 B.

Refer to Sec 25 B, you will find therein the rule that NRA-ETB can claim basic personal exemption subject to reciprocity. This is another tax benefit that can be availed of by NRA-ETB to the exclusion of NRA-NETB.

2000 Q#8- Mr. Corpuz, A NRA was based in Hongkong. In 1999, he stayed in the Philippines for more than 180 days. Q: How will the income of Mr. Corpuz derived from sources within the Philippines and other countries, be taxed?

When it made mention about w/in and w/out, then refer to Sec. 23 D. NRA-ETB can only be taxed on his income derived from sources w/in the Philippines. The rule has not been changed. This is still the same under the old tax code





Q: can he claim deductions?

Yes. Sec 25A (2) - the income tax is imposed on the taxable income. Of course, only those expenses incurred w/in the Philippines could be deducted. The tax base is subject to 5-32% progressive rate

Authoritative answer: Youll know that the problem did not categorically state that he is engaged in trade or business. So you should start with this: Having stayed in the Philippines for more than 180 days, Mr. Corpuz is engaged in trade or business. Under the tax code (You need not cite the Provision), NRA-ETB shall be taxed under the following general rules/principles: a. Only his income derived from sources w/in the Philippines can be taxed. We cannot

tax the income derived from other countries; b. Indicate also the rule regarding deductions: Mr. Corpuz can also claim deductions

because the tax base is taxable income. These 2 will suffice. But you can add this c. the taxable income is subject to the progressive tax rate schedule of 5-32%.

Modifications: Supposed the examiner changed this to 9 months?

In answering this problem, Art. 13 of the NCC will come in handy one month is equal to 30 days, so multiply 9 (months) with 30 (days) = 270 days. Mr. Corpuz is a NRA ETB.

What if it is exactly 6 months?

the law says more than 180 days. This is strictly construed, so he is a NRA-NETB. The Rule says, he cannot claim deductions

How about if the problem is specific in that it indicates the Specific months, for example from April 15, 2004 to October 15, 2004?

Remember the boxer rule: April - 15 May - 31 June - 30 July - 31 August - 31 Sept - 30 Oct - 15 183 days = NRAETB

So, remember that the problem may categorically state more than 180 days; or will state the number of months; or will indicate specifics months. Remember the rules applicable in each of the situation

NONRESIDENT ALIEN NOT ENGAGED IN TRADE or BUSINESS:

Under Sec. 23 D, NRA-NETB can only be taxed on his income derived from sources w/in (same with the old tax code)

Can he claim deductions? No. Under Sec. 25 B, the basis is entire income, meaning Gross income. So, he cannot claim any deductions. This is the one that you should underscore.

As regards tax rate, it is not 5-32 %. the tax rate applicable to NRA-NETB is 25% FT. that means that this is subject to Final withholding tax, and the tax withheld constitute as a FAFS of the tax liability on the income

Questions regarding these 3 special NRA-NETB, have yet to be asked in the Bar:

Sec. 25 C, D, E: [C] Alien Individual Employed by Regional or Area Headquarters and Regional

Operating Headquarters of Multinational Companies [D] Alien Individual Employed by Offshore Banking Units. [E] Alien Individual Employed by Petroleum Service Contractor and Subcontractor.

they can only be taxed on their income derived from sources w/in; they cannot claim deductions because tax base is Gross income; and the tax rate has been reduced to 15%

Q: Mr. Corpuz stayed in the Philippines for more than 180 days. How will his income be taxed if he was employed by Regional Headquarters of Multinational Company? Would your answer be the same as in the previous bar exam Question?





You have to change only the tax rate. As to the sources and tax base, the rules are still the same

SUMMARY:

GENERAL PRINCIPLES OF INDIVIDUAL INCOME TAXATION

KINDS OF INDIVIDUAL TP

SOURCES OF INCOME (Sec. 23)

TAX BASE (Sec. 24 and 25)

TAX RATE (Sec. 24 and 25)

RC Within and without Sec. 24A 1 (a) TAXABLE INCOME.

Hence, can claim deductions expenses paid within and without.

Progressive rate 5-32%

NRC Within

(1 1 98)

Sec. 24A 1 (b) TAXABLE INCOME. Hence, can claim deductions expenses paid

within.


RA Within

(1 1 98)

Sec. 24A 1 (c) TAXABLE INCOME. Hence, can claim deductions expenses paid

within.


NRA ETB Within Sec. 25A 1 (a) TAXABLE INCOME.

Hence, can claim deductions expenses paid within


NRA NETB Within Sec. 25B GROSS INCOME. Hence, NO deductions or exemptions can be claimed.

25% FINAL TAX

Special NRA NETB:

1. Alien Individual Employed by Regional or Area HQ and Regional Operating HQ of Multinational Co. par.C

2. Alien Individual

Employed by Offshore Banking Units. par D3.

Alien Ind Employed

by Petroleum Service Contractor and Subcontractor par E

Within Sec. 25 C, D and E GROSS INCOME.

Hence, NO deductions or exemptions can be claimed.

15 % FINAL TAX

2. General Principles of Corporate Income Taxation:

DOMESTIC CORPORATION (SEC 23 E):

taxable on its income derived from sources w/in and w/o

as to the tax base, refer to Sec. 27 A. It says that the corporate rate is based on the taxable income. This means that expenses paid or incurred w/in and w/o are deductible.

the taxable income w/in and w/o is subject to 35 % ( effective July 1, 2005 implemented on Nov. 01, 2005))

RESIDENT FOREIGN CORPORATION (SEC 23 F):

Taxable on its income derived from sources w/in only

as to the tax base, refer to Sec. 28 A (1). It says that the corporate rate is based on the taxable income. This means that expenses paid or incurred w/in are deductible.

the taxable income w/in is subject to 35 % (effective July 1, 2005) NONRESIDENT FOREIGN CORPORATION (SEC 23 F):

Taxable on its income derived from sources w/in only

as to the tax base, refer to Sec. 28 B (1). It says that the corporate rate is based on Gross income. This means that expenses paid or incurred are nondeductible.

the taxable income w/in is subject to 35 % FT





Just like NRA-NETB, there are also special kinds of Corporate taxpayers, and this is yet to be asked in the Bar: [B][2] Nonresident Cinematographic Film Owner, Lessor or Distributor-25% FT [B][3] Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals-

4.5%FT [B][4] Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment-

7.5% FT

1994 Bar: The Secretary of Finance upon the Recommendation of the CIR issued BIR regulation using Gross Income as the tax base for Corporation doing business in the Philippines. Q: Is this BIR Regulation valid?

It is not a valid BIR Regulation for the simple reason that it runs counter to the provisions of the tax code. The SC, in one case held that the Requisites for the BIR Regulations to be valid are as follows ( CRUP): a. Consistent or in harmony with the provisions of the tax code or the law it seeks

to implement; b. Reasonable; c. Useful and Necessary; and d. Published in the OG or in a newspaper of general circulation

CASE: Misamis Oriental Association of Coconut Dealers vs. Sec. Of Finance

The SC made a pronouncement in this case that BIR Regulations are mere interpretative rules. Therefore, it cannot go beyond the scope of the provision of the tax code

Another case: Auto Products Incorporated vs CIR 240 SCRA 368

the SC said in this case that BIR Regulation is designed or intended to carry out the provisions of the tax code. It cannot supplant, modify, or alter the provisions laid down in the tax code.

You need not cite the name of the case. It is enough to use the following words: it has been held that' or settled is the rule that, or it is jurisprudentially settled that .... BIR Regulation is valid if it is in harmony or consistent with the provisions of the tax code. The BIR Regulation in question contravenes the provision of the tax code that the tax base for the corporation doing business in the Philippines is taxable income. It is a mere interpretative Rule intended to carry out the provisions of the tax code. It cannot alter, supplant, or modify the provisions of the tax code. The BIR Regulation in question therefore, constitutes an impermissible encroachment on legislative prerogative.

SUMMARY:

GENERAL PRINCIPLES OF CORPORATE INCOME TAXATION

KINDS OF CORPORATE TP

SOURCES OF INCOME (Sec. 23)

TAX BASE (Sec. 27 and 28)

TAX RATE (Sec. 27 and 28)

DC Within and without Sec. 27A TAXABLE INCOME. Hence,

can claim deductions expenses paid within and without.

35%

RFC Within Sec.28A(1) TAXABLE INCOME.

Hence, can claim deductions expenses paid within.

35%

NRFC NETB Within Sec. 28B(1) GROSS INCOME.

Hence, NO deductions or exemptions can be claimed.

35% FINAL TAX

Special NRFC NETB:

(Sec. 28B2,3, and 4) 1. Par. B2 Nonresident

Cinematographic Film Owner, Lessor or Distributor.

Within Sec. 28B(2) GROSS INCOME Hence,

NO deductions or exemptions can be claimed.

25 % FINAL TAX





2. Par. B3 Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals.

Within

Sec. 28B(3) GROSS RENTALS, LEASE or CHARTER FEES Hence, NO

deductions or exemptions can be claimed.

4.5% FINAL TAX

3. Par. B4 Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment.

Within

Sec. 28B(4) GROSS RENTALS, CHARTER FEES and OTHER FEES Hence, NO deductions or exemptions

can be claimed.

7.5% FINAL TAX

SPECIFIC RULES:

NRA-ETB vs. NRA-NETB:

NRA ETB NRA NETB

As to the TAX BASE - taxed on the basis of his taxable or

net income - taxed on the basis of his gross income

As to the right to claim deductions

- Can claim deductions - not allowed

As to the filing of the ITR - required to file his ITR - not required to file since he is subjected

to final tax see Sec. 51-A2(c) in relation to Sec. 25B, C, D and E

Q: When is a corporation considered as Doing Business? In Mentholatum vs. Mangiliman (72 Phil 324), the SC said that it implies continuity of

Commercial transactions. It was cited in BOAC vs. CIR. Doing business, engaging in business, conducting business must imply continuity of commercial transactions. There's OCT (Original Certificate of Title,hehehehe): O - The activity is done in connection with its ORDINARY business in the Philippines C - There is a CONTINUITY of commercial transactions or dealings (so, look at the intention) T - TRADE or business

It must engaged in a business here in the Philippines; it must be an ordinary one; and there must be continuity of the same

In the case of _____ vs CA, it is the intention to engage in a continued business in the Philippines; it is not the number; it is not the frequency; but the intention to engage in a continued business in the Philippines, that determines whether the Corporation is doing or engaging business.

If the corporation is not doing business, the tax effect is that it cannot claim any deductions because the tax base is Gross Income.

In the case of individual, it is easy because it is fixed, it says more than 180 days. But in the case of a corporation, the SC said that it depends upon the peculiar circumstances of the case. But in one case, the SC said that it is really the intention to engage in a continued business.

RFC vs NRFC:

RFC NRFC

As to the TAX BASE - taxed on the basis of his taxable or

net income - taxed on the basis of his gross

income

As to the right to claim deductions

- Can claim deductions - not allowed

As to the filing of the ITR - required to file its ITR - not required to file since it is

subjected to final tax see Sec. 52A in relation to Sec. 28B 1, 2, 3 and 4





III. GROSS INCOME:

Sec. 32 A must be memorized. There are 13 items here Keywords: PBC PRP WPD PARI

PBC Provincial Board of Canvassers PRP Peoples Reform Party WPD Police PARI Priest

Section 32A Except when otherwise provided, GI means all income derived from whatever 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;

2. Gross income derived from the conduct of trade or Business or the exercise of a Profession; (two items here);

3. Gains from dealings in Property; 4. Interest; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities; 9. Prizes and Winnings; (2 items also) 10. Pensions; 11. Partners distributive share from the net income of the general professional partnership;

1995 Q#1- Define Gross income for purposes of income tax? As modified in the next bar: State the

General Definition of Gross income

you can easily answer these questions by the keyword. But if you cannot recall all the enumeration, then answer in paragraph form

ENUMERATION UNDER Sec. 32A IS NOT EXCLUSIVE:

The following is likewise included in the taxpayers gross income: a. Treasure found or punitive damages representing profits lost b. Amount received by mistake c. Cancellation of the TPs indebtedness d. Payment of usurious interest e. Illegal gains f. Tax refund g. Bad Debt Recovery

ITEM # 1: COMPENSATION INCOME: Fringe Benefit is a form of compensation income. Under the old tax code, Fringe Benefit was taxed

as part of the Gross compensation income of the employEEs. But Sec. 33 modified or changed this rule FB is now subject to Final Tax.

Sec. 35, provides the rule that personal and additional exemptions are deductible from the Gross compensation income

1977 & 1978 Bar: Q was so basic: Define Compensation Income.

How do you answer this Q? Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions, and similar items---this is not really the answer to this Q.

the definition is found in Rev. Reg. 2-98. it defines compensation income in 1 sentence: All remuneration for services rendered by an employee for his employer under an EE-ER relationship unless specifically excluded under the Tax Code

The meaning of this is that, there are really tax exempt or excluded gross compensation income from gross income and you will find this in Sec. 32 B. This implies that not all compensation for services rendered may be subjected to tax, there are those that are tax exempt and should be excluded from gross income under Sec 32 B. Example: in the case of services performed by an independent contractor, in the absence of

EE-ER relationship, (actually there's really no EE-ER relationship), the income received by the independent contractor shall be recorded as trade or business income. Professional income should not be included in the gross compensation income in the absence of EE-ER relationship.





TEST WHETHER INCOME IS COMPENSATION INCOME: It is not the name of the remuneration upon which it is paid and the manner of payment, what is

important is that it is derived from E-E relationship.

TEST TO DETERMINE THE EXISTENCE OF E-E RELATIONSHIP: Keyword: AC-DC A Appointment or selection C Compensation or payment of wages D Dismissal C Control

2 Tax implications when the payment is made for services rendered: 1. as far as the ER is concerned, it may be claimed as deductible expense. Under Sec. 34

A (1, a), it says ...reasonable allowance for salaries.... the tax implication as far as the employer is concerned is that it can be claimed as a deductible expense.

2. It is an income to the employee

Requisites for Deductibility: a. it is a payment for services rendered; b. it must arise from EE-ER relationship; c. it must be reasonable, meaning that it represents the fair value of the services rendered

Example: ER pays 30,000 for the services rendered by his secretary. Assume that of the 30,000, only 20,000 represents the FV of the services rendered. The 10,000 is a manifestation of the love and affection of the ER to his EE being his Sexytary. Q: how much can be deducted on the part of the ER? Apply the Rule under Sec. 34 A [a][1], it must be reasonable. It is very clear, 20,000 can be

claimed as a deduction as it is the only amount that represents the FV of the service rendered.

Q: How much can be taxed as income on the part of the EE? To the employee, the entire 30,000 is taxable:

20,000 - Taxable as part of the compensation income 10,000 - Sec. 32 A, taxable as it is considered as derived from whatever source. So it forms part of the Gross Income.

LIFE INSURANCE PREMIUM:

As to taxability or nontaxability--- Consider Sec. 32 A(1), that is, in whatever form paid. This may be taxed as compensation income because the premium is maintained by the employer under ER-EE relationship. Also, under Sec.33 B(10), one of the taxable Fringe Benefits applies to Insurance Premiums. Here, it is subject to Final tax.

When you speak of taxability, that is the implication as far as the EE is concerned

As to deductibility (it is as far as the ER is concerned) ---Consider Sec. 34 A (1) (a,1)--- this is the basis for that. It says xxx reasonable payment for salaries, wages, and other forms of compensation for personal services rendered. Life Insurance premium is one of the other forms of compensation.

Sec 36A (4), says that this life insurance premium is nondeductible. So, let us summarize 4 provisions in the tax code relative to this Life insurance premium. You will see how technical the rules are. That is, you really have to group related provisions that apply to this item

Beneficiaries that may be designated: 1. The heirs, family, executor or administrator of the estate of the EE 2. Employer

Implications: To the employer, it may be treated as an expense; and to the employee, as income

Q: As to assumption that the beneficiary is the heirs, family, executor or administrator of the estate: Can the employer claim deductions? Under Sec. 34 A (1) (a,1), the provisions say other forms of compensation for personal

services rendered. So this includes Life Insurance premiums paid by the employer under ER-EE relationship. So, YES.

Is the amount taxable to the Employee? Qualify: Bear in mind that there is a new rule --- Sec. 33 B (10). So:

1. It is taxable FB and therefore subject to Final tax if the insured employee is a supervisor or managerial EE;

2. If the insured EE is a rank and file EE- that's the time to apply Sec. 32 A(1) when it says in whatever form paid. So, that may include Life insurance premium. The employee here must be rank and file





Simply put, it is taxable to the employee, but you should qualify: it is subject to FT (Sec.33B (10)) if the insured EE is a supervisor or manager; and

it is subject to compensation income subject to 5-32% progressive rate if the EE is a rank and file

As to second the assumption that the employer is the beneficiary: Can the employer claim it as a deductible expense? No. Why? Because upon the death of the EE, the proceeds will go to the ER, being the

beneficiary. Shall we allow him to deduct the premiums paid? No because it is just a mere return of capital. The Proceeds received by the ER is a mere return of capital (of the proceeds paid by him). That's the reason why in Sec. 36 A (4), whether the EE is directly or indirectly designated as beneficiary, Sec. 36 A(4) says, NONDEDUCTIBLE.

Is the amount taxable to the employee? This is not taxable to the employee for the simple reason that his family will receive no benefit. His estate will receive no benefit. The proceeds will go the employer. If there's no benefit received, there's nothing to tax. There's no basis for imposing the same

SUMMARY OF THE TAX TREATMENT ON THE LIFE INSURANCE PREMIUM:

BENEFICIARY EMPLOYER EMPLOYEE

The heirs, family, executor or administrator of the estate of the EE

The ER can deduct the amount of the premiums paid as a form of business expense Sec. 34A(i)

QUALIFY: if the employee is a: a. Managerial or supervisory EE - it is subject to FINAL

TAX (fringe benefit) b. Rank-and-File EE it is considered a

COMPENSATION INCOME and is therefore subject to the progressive rate of 5-32%

Employer

The ER cannot claim it as deductions or expenses because the insurance proceeds are but a mere return of capital. (Sec. 36A(4))

- NOT TAXABLE Since there was no benefit received by the EE or his family.

TAX IMPLICATION OF CANCELLATION, CONDONATION or FORGIVENESS OF

INDEBTEDNESS:

This is a favorite bar Q. on forms of Compensation income. If you try to read Secs. 32-83, you'll find no specific tax rules on this.

The amount condoned may be considered as compensation income or a donation or a capital transaction, depending on the circumstances of the case.

Sec. 32A says compensation in whatever form paid. We have already discussed one, that is Life insurance premiums. The next is cancellation or forgiveness of indebtedness.

3 Tax effects / implications / incidences: 1) Considered as Compensation Income to the EE/ Deductible to the ER:

Requisites: a. the cancellation or forgiveness must be in consideration or based on account of

services rendered; b. the creditor must be the ER, the debtor must be the EE; c. the ER condoned or canceled the debt of the EE in consideration of the services

rendered

Effects if these requisites are present: To the ER-Creditor, that may be claimed as a deductible expense because this

is really a form of compensation for services rendered (Sec. 34 A (1). To the EE-Debtor, it is a compensation income taxable (Sec.32A (1) in

whatever form paid.

2) As a Taxable Donation:

If no consideration was given; the obligation was simply condoned, renounced by the creditor-employer; then that may amount to a taxable donation. There is a donation in accordance with Art. 1270 of NCC: it says if it is gratuitous in character, it shall be governed by the rules on donation. Also, under Rev. Reg. 2---- it says if





the cancellation or forgiveness was made w/o any consideration, that may amount to donation

Effects: 1. If there's a donation, the creditor becomes the donor. The debtor becomes the

donee or the recipient of the liberality 2. The creditor-donor is subject to donor's tax 3. the debtor-donee is no longer subject to donee's or inheritance tax as the same

was abolished by PD 69 on Nov. 24,1972 4. It is not also subject to income tax because Sec 32 B(3) says that donations/gifts

shall be excluded from Gross income. So the debtor-donee is neither subject to donee's or income tax

1997 Bar- An insolvent company has an outstanding obligation to its creditor for 100,000. Since the debtor could not pay its obligation, the creditor agreed to accept through dacion en pago document, property valued at P30,000. Q1: What is the tax effect on the discharge of the unpaid balance on the debtor-corporation? Explain. The unpaid balance discharge here is 70,000; and the transaction referred to in

the Q is the condonation of the unpaid balance The creditor, having received no consideration as regards the 70,000 unpaid

balance, is liable to pay donor's tax as the transaction gives rise to a donation. The debtor becomes the donee, the recipient of the liberality. He is not subject to donee's tax as donee's tax was abolished by PD 69. Neither is he subject to income tax, as donation under Sec. 32 B (3) is excluded from Gross income

Q2: in so far as the creditor is concerned, tax-wise, how is it affected as a result of that transaction? The creditor becomes the donor--The one who canceled or renounced the

obligation without receiving any consideration. As donor, he is subject to donor's tax

3) The other tax implication is declared by Rev. Reg. #2 Sec. 50., that may amount to

capital transactions. This may take the form of INDIRECT DISTRIBUTION of dividends by a corporation. Hence, the creditor here must be a corporation and the debtor must be a stockholder. That must be the situation.

Under Sec. 43 of the Corporation Code (Provision on declared dividends)- Dividends that may be declared may be in the form of cash, property, stock, liquidated, script and indirect dividends.

Indirect dividends may arise when a corporation condoned or canceled the obligation of the stockholder. This is a form of indirect dividends in the sense that it is made through the

cancellation or forgiveness of stockholder's obligations.

On the part of the stockholder, such amount condoned or canceled is a taxable income subject to 10% FT.

On the part of the Corporation, this is considered as Interest on Capital.

Is this interest deductible? 1999 Bar #14- Q. on whether or not this Interest is deductible or not? De Leon is of the opinion that it depends upon the circumstances. He is of the

view that if the declaration of the dividends is dependent upon surplus profits, there is no obligation to speak of, so it is not a deductible interest. On the other hand, if the declaration is not dependent upon surplus profits, there is an obligation to speak of, in this case, it is a deductible interest.

In our suggested answer in the 1999 Bar, we did not qualify our answer because

interest on preferred shares of stock is considered as interest on capital. In your book, I did mention about this RMC 17-71, July 12, 1971, w/c enunciates the rule that interest on capital, and that may include interest on preferred shares of stock, is a non-deductible interest. So, we can apply this, that it may be treated as interest on capital. And it is now an absolute rule that interest on capital is a non deductible interest. So, the corporation cannot claim this as a deductible interest. Since it partakes the nature of a dividend, though indirect, and since dividend under the tax code if received by individual taxpayer is subject to 10%, 20% or 25% Final tax depending on the kind of the taxpayer receiving the same, said indirect dividend is therefore subject to the same rate as if it is a dividend





SUMMARY:

TAX IMPLICATION OR CONSEQUENCE OR INCIDENCE OR EFFECT of CONDONATION

COMPENSATION INCOME

Rev. Reg. 2, Sec. 50 must be made in consideration for services rendered on account of an E-E relationship. ER is the creditor and the EE is the debtor. ER can claim it as a deduction and the same is considered as a taxable

compensation income on the part of the EE.

TAXABLE DONATION

Article 1270 of the NCC if the creditor condones the obligation of the debtor without receiving any consideration. It is considered as a taxable donation because only the creditors liberality is the consideration involved.

Q: Does it mean that the donor and the donee will be made to pay donors tax? A: NO. PD 69 abolished donee's and inheritance tax which became effective on

Nov. 24, 1972. Q: Is the amount donated/condoned part of the donees gross income? A: NO. Sec. 32B(3) provides that donations are excluded from GI.

CAPITAL TRANSACTION

When the debtor is the corporation and the creditor becomes a stockholder in exchange of the condonation of the debtors obligation

-considered as indirect dividends The amount condoned is subject to 10% FINAL TAX if the corporation is a

DC. The corporation (

Documents

Japar Tax Part1_grupong Tapsi Notes_2007