SPECIAL EMPLOYEES GR: employed Alien individual (EXPATS), occupying managerial, technical and supervisory positions; considered as Special employee therefore, subjected to 15%. EXC: employed Filipino, 2 conditions must concur:

1. Occupying managerial OR technical positions. 2. No other alien can occupy such position (other than the Filipino)

The employed Filipino has the option to be taxed at either: 1. fifteen percent (15%) of their gross income or 2. at the regular income tax rate on taxable compensation income in accordance with the Tax Code.

Multinational company - a foreign firm or entity engaged in international trade with its affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. Technical position - as being limited only to positions that are highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired. THREE TEST FOR ELIGIBILITY TO THE 15% PREFERENTIAL TAX RATE Filipinos exercising the option to be taxed at fifteen percent (15%) preferential rate for occupying the same managerial OR technical position as that of an alien employed in an ROHQ or RHQ must meet all the following requirements: 1) Position and Function Test. - The employee must occupy a managerial position or technical position AND must actually be exercising such managerial or technical functions pertaining to said position; 2) Compensation Threshold Test - In order to be considered a managerial or technical employee for income tax purposes, the employee must have received, or is due to receive under a contract of employment, a gross annual taxable compensation of at least PhP 975,000.00 (whether or not this is actually received);

To determine the compensation received or is due to be received by the employee, you look at the employment contract of such employee.

o EXAMPLE: An employed Filipino is paid P100,000 per month x 12 months = P1.2 million. Thats already above the threshold of P975,000. This Filipino employee can now exercise the option of paying the 15% preferential tax rate.

Provided that, a change in compensation as a consequence of which, such employee subsequently receiving less than the compensation threshold stated in this section shall, for the calendar year when the change becomes effective, result in the employee being subject to the regular income tax rate.

For purposes of determining the compensation threshold under this regulation, gross compensation shall not include 1. retirement and/or separation pay/benefits (whether or not taxable) 2. de minimis benefits.

3) Exclusivity Test The Filipino managerial or technical employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual personnel. Exclusivity means having just one employer at a time.

Must not be a mixed employee, i.e., you should not be earning other income e.g. from you own business. There is no employer-employee relationship in consultancy.

Take Note:

1) Its the employee, not the employer, who exercises the option to be taxed at either 15% of gross income or at the regular rate on their taxable income in accordance with the Tax Code.

2) This revenue regulation (No. 11-2010) only mentions Filipinos working in an ROHQ or RHQ. The presumption is, this regulation does not apply to Filipinos employed in Offshore Banking Units or Petroleum Service Contractors.

Manner of Computation of Tax At the start of the year or at the start of the employees employment, as the case may be, it is important to determine whether the employee shall receive, or is due to receive under a contract of employment, a gross annual compensation equivalent to or above the compensation threshold stated in Section 3(b) of these regulations. The determination should, as far as practicable, include both regular taxable compensation income and supplementary compensation income. Gross compensation includes regular compensation and supplemental compensation. At the beginning of the year, the expected gross annual taxable compensation which the employee would receive for such

calendar year should be submitted to BIR . 1. Otherwise, you cannot claim the 15% preferential tax rate. Rather, you are subject to the normal income tax rate of

5%-32%.

EXAMPLE 1: At the start of the year, Mr. A, a Filipino holding a managerial position in an RHQ, receives a monthly salary and cost of living allowance in the amount of PhP70,000.00 and PhP7,000.00 respectively. His employment contract also states that he may receive a performance bonus at the end of the year which amount is not presently determinable. Since Mr. A is due to receive, under an employment contract, a regular taxable compensation income of PhP994,000.00 composed of PhP840,000.00 (PhP70,000.00 x 12 months) basic pay, PhP70,000.00 13th month pay and PhP84,000.00 (PhP7,000.00 x 12 months) cost of living allowance, placing him above the compensation threshold of PhP975,000.00 Can Mr. A exercise his option to be taxed at the 15% preferential rate? Yes, he has the option to be taxed at the rate of 15% of his gross income or at the regular income tax rate. Since the employer knows that the annual gross compensation of the employee is above the compensation threshold of PhP975,000.00 at the start of the year, then the employer may, at the option of the employee, withhold income tax at the rate of 15% of gross income. It is immaterial that he may receive a bonus of an indeterminate amount because his regular compensation income already places him above the compensation threshold of PhP975,000.00.

EXAMPLE 2: At the start of the year, Mr. A, a Filipino employed by an ROHQ, receives a monthly salary and cost of living allowance in the amount of PhP65,000.00 and PhP5,000.00 respectively. His employment contract also states that he may receive a performance bonus at the end of the year which amount is not presently determinable. Since Mr. As regular compensation income of PhP905,000.00 composed of PhP780,000.00 (PhP65,000.00 x 12 months) basic pay, PhP65,000.00 13th month pay and Php60,000.00 (PhP5,000.00 x 12 months) cost of living allowance, is below the compensation threshold of PhP975,000.00 then his employer shall, on every pay period from the start of the year withhold from Mr. A income tax at the regular rate of withholding tax on compensation. However, if at the end of the year Mr. A receives a performance incentive bonus of PhP100,000.00, thus making his annual gross compensation income total PhP1,005,000.00 and he opts to be taxed at the rate of 15% of his gross income, his employer shall make the necessary adjustments to the income tax rate. More particularly: The employer shall refund to the employee the excess of the tax withheld at the regular rate of withholding tax on compensation over the tax required to be withheld at the rate of 15% of gross income;

EXAMPLE 3: Mr. A, a Filipino employed by a regional area headquarters in the Philippines begins his employment on June 1. His employment contract stipulates that he shall receive an annual compensation of PhP975,000.00 inclusive of 13th month pay. At the end of the year, he would have received only Php568,750.00, composed of PhP525,000.00 (PhP975,000.00/13 x 7 months) basic pay and PhP43,750.00 (PhP975,000.00/13 x 7/12 months) 13th month pay. However, since his employment contract states that he shall receive an annual compensation of PhP975,000.00, whether he actually receives this or not, then his employer shall, at the option of Mr. A, withhold income tax at the rate of 15% of actual gross compensation received.

o You can still avail of the 15% preferential tax rate even if you started working in the middle of the year for as long as the amount of annual compensation that you will receive in your employment contract is above the threshold of P975,000

EXAMPLE 5: What if during the year the ROHQ sustained losses such that the salary of the Filipino employee is decreased. Can he still avail of the 15% preferential tax rate? Mr. A, a Filipino employed by a regional area headquarters in the Philippines begins his employment at the start of the year. His contract stipulates that he shall receive an annual compensation of PhP988,000.00. Since this amount is above the compensation threshold criteria, his employer shall, at the option of Mr. A, withhold income tax at the rate of 15% of gross income. However, at the end of June, for one reason or another (e.g. reduction of compensation due to business reverses), Mr. As compensation is reduced such that his annual compensation will be reduced to an amount that is less than the compensation threshold. In this case, while the final withholding tax rate was applied to Mr. A during the year, an adjustment should be made at the end of the year subjecting the entire annual compensation of Mr. A to the regular income tax rates.

Refer to Revenue Regulation No. 11-2010 for more examples. V. FRINGE BENEFITS

Definition Any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Atty A: For examination purposes, we will stick to the enumeration. Kinds of Fringe Benefits [HEVHIMEHEL] a. Housing

CASE ANNUAL VALUE of BENEFIT

Monetary Value of Benefit (Monthly)

Employer leases residential property for use of the employee

50% X Monthly rental paid by the employer - The 50% is given under the regulation

as a sign that there is no transfer of ownership from the ER to EE

- If there is transfer of ownership, then the entire amount is taxable as fringe benefit

Employer owns residential property which was assigned to an officer for his use as residence (no transfer of ownership)

5% of FMV of land improvements

50% x Monthly Value of the benefit *Monthly Value = Annual Value /12 mos.

Employer purchases residential property on installment basis and allows the employee to use the same as his residence

5% of acquisition cost excluding interest

50% x Monthly Value of Benefit

Purchases residential property and transfers the ownership to the employee

Acquisition cost of FMV whichever is higher

Purchases residential property and transfers ownership thereof to his employee for the latters residential use at a price less than the employers acquisition cost

FMV of CIR and FMV of Assessor, whichever is higher minus the cost of the employee

Atty A: Please familiarize the Monetary Value of Benefit for each case. *Exceptions:

I. Housing privilege of officials of AFP, Philippine Navy and Philippine Air Force; - Take note walaI Philippine National Police ha..

II. A housing unit which is situated inside or within the maximum of fifty (50) meters from the perimeter of the business premises or factory.

- Exception: wherein the EE is still exempted of the housing privileged of up to 100 meters if ERs factory is hazardous. III. Temporary housing for an employee who stays in a housing unit for three (3) months or less.

- Applies to transient EE, like he is in Manila for training etc.

Atty A: take note that other than compensation income is what we call as fringe benefit. Compensation income is subject to 5% to 32% graduated income tax while the fringe benefit is given to managerial or supervisory EE subject to fringe benefit tax of 32%, which is a final tax. b. Expense account In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee. 1) Business expenses

1. Related to the business of the employer. 2. Common in law firms or auditing firms: Having a lunch meeting with clients. 3. GR: Not subject to the Fringe Benefits Tax, provided:

1. It is duly receipted. 2. The receipt is under the name of the employer.

EXC: Not duly receipted. 2) Personal expenses Purchases of groceries for the personal consumption of the employee and his family members paid for or reimbursed by the

employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer.

c. Vehicle of any kind Guidelines in valuation of Motor Vehicles:

CASE TRANSACTION MONETARY VALUE of Benefit

1 Purchase the motor vehicle in the name of the employee

Acquisition Cost

2 Provides the employee with cash for the purchase of a motor vehicle in the name of the employee

Amount of cash received by the employee

3 Shoulders a portion of the amount of the purchase price of a motor vehicle in the name of the employee

Amount shouldered by the employee

4 Purchase the car on install in the name of the employees

Acquisition cost (exclusive of interest) divided by 5 years

5 Owns and maintains a fleet of motor vehicles for the use of the business of the employees

Acquisition cost of all motor vehicles not normally used in business divided by 5 years x 50%ount of rental payment for motor vehicles not normally used in business x 50%

6 Leases and maintains a fleet of motor vehicles for the use of the business and the employees

Amount of rental payment for motor vehicles not normally used in business x 50%

7 The use of yacht whether owned and maintained or leased by the employer

Depreciation of yacht at an estimated useful life of 20 years

d. Household personnel Expenses of the employee which are borne by the employer for household personnel, such as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for homeowners association dues, garbage dues, etc.) shall be treated as taxable fringe benefits. GR: Subject to Fringe Benefit Tax EXC: Not subject to FBT when:

1. these household personnel are already included in the payroll or alphalist of the employer; or 2. provided for the convenience of the employer.

1. this seldom happens because the convenience of the employer rule usually applies to de minimis benefit. e. Interest on loan at less than market rate No revenue regulation coming from BIR adopting the 6% per annum as the legal interest. In the essay exams, use the 12%

interest per annum but kindly indicate that the legal interest has already been lowered to 6%. If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%), such interest

foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe benefit.

o Example: X obtains a loan from his employer B with an interest of 8%. The difference between the legal interest of 12% and the 8% interest paid by X, which is 4%, is subject to Fringe Benefits Tax.

The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation. This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%) starting January

1, 1998. Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs or other similar

organizations. These expenditures shall be treated as taxable fringe benefits of the employee in full. f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations

g. Expenses for foreign travel General rule: subject to fringe benefit tax Except: 1) reasonable business expense 2) inland travel expenses, excluding lodging cost in a hotel, amounting to $300 or less 3) the cost of economy and business class airplane ticket; 70% of the cost of first class airplane ticket. Requisites in order to be exempted from the fringe benefit tax: 1. Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of

attending business meetings or conventions shall not be treated as taxable fringe benefits. o The expenses should be supported by documents proving the actual occurrences of the meetings or conventions.

official invitation/communication letters from business associates abroad indicating its purpose. 2. Inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar

establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax.

Not subject to fringe benefit tax Subject to fringe benefit tax

Inland travel expenses such as: 1) Food 2) Beverages 3) Local transportation

Amounting to an average of $300 or less

1) Inland travel expenses such as: I. Food

II. Beverages III. Local transportation

In excess of $300 2) Lodging cost in a hotel

3. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the

cost of first class airplane ticket shall be subject to a fringe benefit tax. Travelling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee.

Not subject to fringe benefit tax Subject to fringe benefit tax

1) Cost of airplane ticket which are: i. economy class

ii. business class 2) 70% of the cost of first class airplane ticket

1) 30% of the cost of first class airplane ticket 2) Travelling expenses which are paid by the

employer for the travel of the family members of the employee

h. Holiday and vacation expenses i. Educational assistance to the employee or his dependents As to the employee: General rule: subject to fringe benefit Except: 1) if the education or study involved is

i. directly connected with the employer's trade, business or profession, and ii. there is a written contract between them that the employee is under obligation to remain in the employ of the

employer for period of time that they have mutually agreed upon. (return of service contract; lock-in service contract)

As to the dependents of the employee: General rule: subject to fringe benefit Except: when the assistance was provided through a competitive scheme under the scholarship program of the company.

there must be a qualification exam to identify who will be admitted to such scholarship program. dependent must be able maintain a certain grade.

j. Cost of life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows [applies only to managerial or supervisory employees] General rule: subject to fringe benefit Except: 1) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law:

SSS, GSIS or similar contributions arising from the provisions of any other existing law 2) the cost of premiums borne by the employer for the group insurance of his employees.

Atty A: Take note that premiums on life insurance are excluded from taxation. Do not confuse it with letter j, which contains a qualification in excess of what the law allows. 3. COMPUTATION OF FRINGE BENEFITS TAX

A final withholding tax paid by the employer.

Take note: Fringe Benefit Tax does not apply to rank and file employees. a. Burden of FBT: Employer b. Grossed Up Monetary Value for:

i. Special employees ii. NRA-NETB

c. Rate of FBT: i. 32% for ordinary managerial or supervisory employees.

ii. 15% for Filipino special employees. iii. 25% for NRA-NETB.

To compute for the Grossed Up Monetary Value: GMV = Value of the Fringe Benefit + Fringe Benefit Tax To compute for the Fringe Benefit Tax: 1) determine the GMV:

GMV = Value of the Fringe Benefit 68% (the goal here is to determine the 100% value of the benefit) 2) multiply the GMV with the FBT rate:

FBT = GMV x 32% Example 1: Employer R leases a residential property for the use of the employee E. (Monetary value of the benefit is 50% of the monthly rental paid by the R.). The monthly rental is P13,600. The monetary value of the fringe benefit is 50% of P6,800 which is P25, 000.

Compute first the grossed-up monetary value: GMV = P6,800 68% = P10,000 Now, compute for the fringe benefit tax: FBT = P10,000 x 32% = P3,200

Atty A: FBT is treated as a final tax, i.e., you will fill-up another BIR form. The tax withheld is constituted as the full and final payment, which means you no longer add this figure in getting your gross annual income. Example 2: Employer R purchases the vehicle in the name of the employee E. (Monetary value of the benefit is equivalent to the acquisition cost). The cost the car is P680,000. The monetary value of the fringe benefit is P680,000.

GMV = P680,000 68% = P1,000,000 FBT = P1,000,000 x 32% = P320,000

How much is the value of the total benefit received by E? Its the P1,000,000 because the P320,000 is paid by employer R. Example 3: Special employee E is receiving a fringe benefit of P850,000.

GMV = P850,000 85% = P1,000,000 FBT = P1,000,000 x 15% = P150,000

Who shoulders the FBT? The employer. Example 4: An NRA-NETB is receiving a fringe benefit of P750,000.

GMV = P750,000 75% = P1,000,000 FBT = P1,000,000 x 25% = P250,000

4. EXEMPTION FROM FRINGE BENEFIT TAX (Revenue Regulation No. 5- 2011) a. De Minimis Benefits These are facilities and privileges of relatively small value and are offered or furnished by the employer to his employees merely as means of promoting their, health, contentment or efficiency.

This falls under the Taxable 13th month pay and other benefits o If it does not fall under the regular compensation, it now falls under other benefits o Benefits always make the life of the employee easier.

Cellphone allowance Rice subsidy

Take note: The amount in excess of the limit stated below forms part of the P30k threshold. Any amount in excess of the P30k threshold is now subject to ordinary tax [5%-32%].)

The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees as long as it will not exceed the minimum amount set under this enumeration (the list is exclusive):

a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year;

does not include sick leave credits If you are a private rank and file employee and you avail of your monetized amount of your unused sick leave credits, are

you exempted from fringe benefit tax? Yes, because you a rank and file employee, not a managerial or supervisory employee. However, you will be subject to ordinary income tax.

b) Monetized value of vacation and sick leave credits paid to government officials and employees; c) Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month;

This pertains to dependents of employees. There are 2 semesters per year. Therefore, it is limited to:

o P1,500 per employee per year o P750 per employee per semester o P125 per employee per month

d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500; Rice subsidy not exceeding:

o P1,500 per month o P9,000 per semester o P18,000 per year

Example: Employee E is given a sack of Jasmin rice worth P3,000 by Employer R. The excess of P1,500 will be added to the P30k other benefits threshold.

e) Uniform and Clothing allowance not exceeding P5,000 per annum; P2,500 per semester. P416.67 per month.

f) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum;

This pertains to the employee himself. It must not exceed:

o P10,000 per year o P5,000 per semester o P833.33 per month.

Sample question: Medical cash allowance for employees in order to be considered de minimis benefit, and therefore exempt from fringe benefit tax is limited P750 per semester: False.

g) Laundry allowance not exceeding P300 per month; It must not exceed:

o P3600 per year o P1800 per semester o P300 per month.

h) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

If you were given cash or gift certificate, it is merely considered as a supplemental income and not a de minimis benefit. If you were given a gold ring worth P15,000, the excess of P5000 falls to the P30k threshold.

i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; j) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis;

To benefit the call center agents, nurses and other employees working on a graveyard shift. TAKE NOTE: All other benefits given by employers which are not included in the above enumeration shall not be considered as "de minimis" benefits, and hence, shall be subject to income tax as well as withholding tax on compensation income. Atty A: The old revenue regulation used to include Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc as de minimis benefit.

These do not form part of the P30k. What forms part of the P30k are the excesses of the items enumerated above. Now taxable as ordinary compensation.

Illustration: Employee E is given a sack of Jasmin rice worth P3,000 by Employer R. The excess of P1,500 will be added to the P30k other benefits threshold. (Any amount in excess of the P30k threshold is now subject to ordinary tax *5%-32%].) What you will prioritize in your P30k is the 13th month pay. For example, your monthly pay is P20,000, so your annual pay is P240,000. Your 13th pay - which is more or less equivalent to your 1 month salary provided you work from January to December P20,000 will now be added to the P30k along with the excess P1,500 rice subsidy. Since the sum does not exceed the P30k, it is not subject to the ordinary income tax.

Annual Income: P240,000 Monthly Income: P20,000 Annual rice allowance: P3,000 Amount exceeding: P1,500 13th month pay: P20,000 Total P21,500

Not subject to ordinary tax since the amount does not exceed the P30k threshold.

Annual Income: P360,000 Monthly Income: P30,000 Annual rice allowance: P3,000 Amount exceeding: P1,500 13th month pay: P30,000 Total P31,500

The excess of P1,500 will now be subject to ordinary tax. This will be added to your annual gross income.

To avoid confusion, add first the 13th month pay to the P30k threshold, then add the excess to the de minimis benefit. Once it

exceeds the P30k threshold, it will now be subject to ordinary income tax. b. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefits plan

Pertains to the group insurance, group retirement, or group hospitalization benefit plan.

Exempted from fringe benefit tax because there is no direct benefit given to the employee, rather its the group of employees who will benefit from it.

This is different from Section 32(b) Exclusions from Gross Income, where the employer takes a life insurance on the life of its key employee, e.g., the president.

o Take note of the two perspective: Premiums as income on the part of the employee and premiums as an expense on the part of the employer.

o If the beneficiary of the life insurance is the company itself, it is not considered as an income on the part of the employee. It follows that the employer cannot deduct it as an expense. However, if the beneficiary is the estate or administrator of the employee, its considered as an income on the part of the employer, and is deductible on the part of the employer.

o Take note: This is not applicable on Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefits plan because this pertains to group life insurance whereas Section 32(b) which pertains to specific life insurance.

C. Employers convenience rule For the benefit to be exempted from the FBT:

1) required by the nature of or necessary to the trade, business or profession of the employer; or 2) when the fringe benefit is for the convenience or advantage of the employer.

Example: Mr. X employs Mr. Y as his driver. Mr. Y is given P5,000 monthly wage, and board and lodging worth P3,000. Is the P3,000 taxable as fringe benefit? It depends. If the employer has his own trade or business, the P3000 is exempted from the FBT, under the

presumption that it is necessary and for the convenience of the employer. However, if the employer is not engage in any trade, business or profession, the P3,000 is taxable. d. FB which are authorized or exempted from tax under special laws 2. Business or Professional Income

If the individual taxpayer is also earning business income or professional income, he is allowed to make deductions for his expenses.

3. Passive Income There is no active participation on the part of income earner to generate the fund, like interest income on bank deposit. Subject to final tax and is withheld by the payor. Payor must at least be registered with the BIR.

o If the payor is from abroad, there is no more withholding. It will simply form part of the ordinary income of the individual taxpayer.

Types of Passive Income

This is usually an isolated or one-off transaction. 1. Interest from currency deposits, trust funds and deposit substitutes (20%) 2. Royalties (Special royalty: books as well as literary & musical composition) (10%) Royalties other than those mentioned above are generally subject to 20% final income tax. For Non-Resident Alien - Not Engaged in Trade or Business (NRA-NETB), they are subject to a flat rate of 25% of the gross

income derived from all sources within the Philippines. o Those who are transient or sojourners and they stay here FOR 180 DAYS OR LESS.

Payor of the royalty withholds the final tax (10% or 20%, depending on the source of the royalty). When you pass on some technical knowledge for the manufacture of this microchip or item, it will be subject to royalty fees.

This is usually an isolated or one-off transaction. o Example: X obtained technical knowledge from Y, a software developer. In consideration thereof, X paid royalty fees to

Y. X, as payor and as the withholding agent of the government, is obliged under the law to withhold 20% of the royalty fee. If X fails to withhold the amount of the final tax, he cannot claim deductions for royalties and expenses.

However, if the income-earner of a royalty e.g., Belgian Waffle, is really engaged in extending royalties, franchises and other intangible assets, then it is no longer passive. Its not inactivity. The business itself is extending franchises, it will not be considered as passive income, therefore no final taxes, therefore the one paying the royalty is not expected to withhold equivalent to at the end of the year, the payment simply forms part of business income of Belgian Waffle, subject to 5-32%.

When it comes to musical compositions, it would depend on whether the income earner is engaged in selling musical compositions for a living or it is simply an isolated transaction.

o One-time transaction: it is considered a passive income and the payor is obliged to withhold the final tax equivalent to 10%.

o Engaged in the business of selling musical: income forms part of his business income and the payor is not obliged to withhold the final tax.

Take note: that the passive income subject to final tax must be an income that is paid by one who can be considered a withholding agent in the Philippines. Payment in the Philippines, in short. If the one paying who is expected to withhold is not from here, is abroad, not registered with the BIR, e.g. an NRA-NETB, there can be no withholding. The government of the Philippines cannot compel this one to withhold. Even if passive income, no withholding because there is no withholding agent. What the domestic corporation or resident citizen will do is simply declare by itself the royalty fees as part of its ordinary income.

3. Prizes (exceeding P10,000) (20%) If the prize does exceed P10,000, it is not subject to final tax. However, it will form part of your gross income subject to 5%-32%

ordinary tax. If the price exceeds of P10,000, it is now subject to final withholding tax of 20%.

o Example: X won a prize worth P20,000 in a raffle draw and there no statement that it is inclusive of tax, then automatically 20% of the prize will be withheld by the organizer of the raffle draw as payment of your final tax, unless the prize came from PCSO or lotto which is exempted from final withholding tax.

Take note: These are not included under this category:

1) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:

i) The recipient was selected without any action on his part to enter the contest or proceeding; and ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.

2) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations.

4. Winnings (except from PCSO and lotto) (20%)

o Example: W won a car in a raffle draw and there is a statement that it is exclusive of tax, X will be obliged the organizer to pay 20% of the value of the car as final withholding tax for this passive income.

5. Interest Income of Foreign Currency Deposit (7.5%) This only applies to resident citizens and resident aliens.

o Does not apply to NRC (0%) and NRA (0%).

6. Cash and Property Dividends To Individuals from Domestic Corporations (10%)

o Applies only to resident citizens, non-resident citizen, and alien. o Non-resident aliens engaged in trade or business who receives these dividends are subject to 20%. o Non-resident aliens not engaged in trade or business who receives these dividends are subject to a flat rate of 25%

To Domestic Corporations from Another Domestic Corporations (0%) To Individuals from Foreign Corporations:

a. If the income derived from the Philippines is more than 85%, it is considered as a domestic corporation. You follow the rule on domestic corporation. (within)

b. If the income derived from the Philippines is more than 50%, its pro rata. Only the income coming from the Philippines will be subjected to passive income tax rate. (allocation)

c. If the income derived from the Philippines is 50% or less, it is not subject to passive income tax. However, if the earner is a RC, he will declare such dividend as part of his ordinary income. (without)

7. On capital gains presumed to have been realized from sale, exchange or other dispositions or real property (capital asset) (6%) 8. On capital gains for shares of stocks not traded in the stock exchange - Not over P100,000 (5%) - Any amount in excess of P100,000 (10%) 9. Interest Income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates (Exempt)

Termination after the fifth year: it is exempt from tax. o In our previous discussion we know that one of the items excluded form gross income are those gains derived

from or other certificate of indebtedness with a maturity of more than five (5) years. o This does not include corporate and treasury bonds because these two do not fall under the definition of long-

term deposit or investment certificate which refers to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments. (Sec 22 ff of the Tax Code)

Termination before the fifth year: it is subject to tax. Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof: Holding Period - Four (4) years to less than five (5) years (5%) - Three (3) years to less than four (4) years (12%) - Less than three (3) years (20%) Take note: the pre-termination rule above applies only to resident citizens, non-resident citizens, resident alien and non-resident alien engaged in trade or business. A non-resident alien not engaged in trade or business is subject to a flat rate of 25% tax regardless of whether or not there was pre-termination.

10. Shares/Dividends in Taxable Partnership, Joint Consortium, etc.

These are partnerships other than the general professional partnership Example: trading business or manufacturing but the business organization is not a corporation but a partnership.

General rule: taxed just the same as a corporation (30%) Shares of profit in this taxable partnership would be taxed similar to dividends received from a corporation.

o Resident citizens, non-resident citizens, and resident alien: 10% o Non-resident alien engaged in trade or business: 20% o Non-resident alien not engaged in trade or business: 25%

Summary:

RC w/in or w/o

NRC w/in

RA w/in

NRA-ETB w/in

NRA-NETB w/in

Royalties (on books as well as literary & musical composition)

10% 10% 10% 10% 25%

All other royalties (payee must not be normally engaged in the business of granting or extending royalties, franchise or other intangible assets)

20% 20% 20% 20% 25%

Prizes (in excess of P10,000) 20% 20% 20% 20% 25%

Winnings earned in the Philippines (except from PCSO and lotto)

20% 20% 20% 20% 25%

Regular Interest Income of Non-Foreign Currency Deposit

20% 20% 20% 20% 25%

Interest Income of Foreign Currency Deposit 7.5%

-- 7.5%

-- --

Interest Income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates. Upon pre-termination before the fifth year, it subject final tax rate of Holding Period of Four (4) years to less than five (5) years: Three (3) years to less than four (4) years: Less than three (3) years:

5% 12% 20%

5% 12% 20%

5% 12% 20%

5% 12% 20%

A non-resident alien not

engaged in trade or

business is subject to a flat rate of

25% tax regardless of

whether or not there was pre-termination.

Cash and Property Dividends (To Individuals from Domestic Corporations)

10%

10%

10%

20% 25%

Shares/Dividends in Taxable Partnership, Joint Consortium, etc.

10%

10%

10%

20% 25%

i. Taxation at Source - Withholding: refers to the means and method of collecting the income taxes. a) Final Withholding Tax is a kind of withholding tax which is prescribed on certain income payments and is not creditable

against the income tax due of the payee on other income subject to regular rates of tax for the taxable year. Income Tax withheld constitutes the full and final payment of the income tax due from the payee on the particular income subjected to final withholding tax.

The withholding agent is the payor, unless the payor is a non-resident alien not engaged in trade or business. In such cases, it will simply be declared as an ordinary income by the income-earner.

Not deducted from the income tax due. You will fill up a separate BIR Form. Example: Passive income like royalties.

b) Creditable Withholding Tax Usually deducted from the income tax due.

Deduct the total amount withheld from the income tax due. Ideally, the income tax due must be equal to the total creditable withholding tax which results in zero income tax payable.

o If the amount withheld is lesser than the income tax due, it will result in a positive income tax payable.

Withholding Tax on Compensation is the tax withheld from income payments to individuals arising from an employer-employee relationship.

Expanded Withholding Tax is a kind of withholding tax which is prescribed on certain income payments and is creditable against

the income tax due of the payee for the taxable quarter/year in which the particular income was earned. o Payments to MERALCO. o Rent payments.

Withholding Tax on Government Money Payments (GMP) Percentage Taxes is the tax withheld by National Government

Agencies (NGAs) and instrumentalities, including government-owned and controlled corporations (GOCCs) and local government units (LGUs) before making any payments to non-VAT registered taxpayers/suppliers/payees.

Withholding Tax on GMP Value Added Taxes (GVAT) is the tax withheld by National Government Agencies (NGAs) and instrumentalities, including government-owned and controlled corporations (GOCCs) and local government units (LGUs), before making any payments to VAT registered taxpayers/suppliers/payees on account of their purchases of goods and services.

ii. Transactions Subject to Final Withholding 4. Capital Gains

Final tax without a withholding agent because its actually the seller, not the buyer *payor], who files the tax return.

Instances where CGT may be collected: a. Sale of shares of stocks NOT listed and traded in the local exchange OR listed but NOT traded in the local exchange

5% for the 1st P100,000 (can only be availed of once in a taxable year.) 10% for the excess of the P100,000

Example: X is neither a real estate broker nor a dealer of securities. X transferred the shares over the counter and the shares are not listed. August 26, 2014:

X owns 10,000 shares at P100 par P1,000,000 X sells 10,000 shares at P150 par P1,500,000 You have a gain of P500,000

To compute for the CGT: 5% x P100,000 = P5,000 10% x P400,000 = P40,000 CGT P45,000

September 14, 2014:

X owns 10,000 shares at P100 par P1,000,000 X sells 10,000 shares at P200 par P2,000,000 You have a gain of P1,000,000

To compute for the CGT, X can no longer the consider the 5% because it has already been availed of: CGT 10% x P1,000,000 = P100,000

b. Sale of Real Property located in the Philippines

Subject to a CGT of 6% based on FMV or the selling price, whichever is higher. Not Subject to Capital Gains tax:

I. All real properties acquired by the real estate dealer shall be considered as ordinary assets II. All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition,

and all real properties which are held by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the tax payer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets.

III. All real properties of the real estate lessor whether land, building, and/or improvements, which are for lease/rent or being offered for lease/rent or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets

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IV. All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real property shall be considered as ordinary assets.

Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent. Note: Registration with HLURB and HUDCC as a real estate dealer, developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. Rules on Transactions involving Real Properties:

a. A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayers control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the property change its character previously established as a business property. [Sec 3-a-4 of RR 7-2003]

Example: youre engaged in the real estate business and you purchase a property to be used in your real estate business. Eventually your business incurred losses and you cease the operation of your business. You were not able to sell such property. Insofar as that property is concerned, it is considered an ordinary asset.

b. In the case of a taxpayer not engaged in the real estate business, real properties, whether land, building, or other improvements, which are used or being used or have been previously used in the trade or business of the taxpayer shall be considered as ordinary assets.

Example: youre into the merchandising business and you purchased a lot for your business and constructed a building to be used in your business. Insofar as the property and building is concerned, it is considered as an ordinary asset because real property used in trade or businesses are part of your ordinary asset. If you sell this properties, you are subject to ordinary tax.

c. In the case of a taxpayer who changed its real estate business to a non-real estate business, real properties held by these taxpayers shall remain to be treated as ordinary assets.

d. In the case of tax payers who originally registered to be engaged in the real estate business but failed to subsequently operate, all real properties acquired by them shall continue to be treated as ordinary asset.

e. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties.

f. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules:

Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee.

Real property received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipients even if the corporation which declared the real property dividend is engaged in real estate business.

The real property received in an exchange shall be treated as an ordinary asset in the hands of the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property in exchange.

In the case of involuntary transfers of real properties, including expropriation or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset, as the case may be.

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c. Conditionally Exempt from Payment of CGT insofar as the sale of your Principal Residence:

1. The proceeds of the sale of the Principal Residence have been fully utilized in acquiring or constructing new principal residence within 18 calendar months from the date of sale or disposition. [includes transferring to a condo unit.]

To prove such property is your principal residence, you may need to obtain a certification from your barangay chairwoman.

Take note: CGT of 6% FMV or selling price, whichever is higher. Cost is not deducted from the FMV or selling price when multiplied by the rate of 6% to get the CGT of the capital asset; cost is only deducted if it is classified as ordinary asset.

2. The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence built or acquired;

3. The Commissioner has been duly notified, through prescribed return, within 30 days from the date of sale or disposition of the persons intention to avail of the tax exemption

4. Exemption was availed only once every ten years; and 5. If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized

from the sale or disposition will be subject to CGT.

The portion not utilized will not subject to CGT.

Determine total proceeds of the sale and the cost of the new principal residence. 6. In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the

agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or managers check in interest-bearing account with an Authorized Agent Bank AAB under an Escrows Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferors new principal residence within 18 calendar months from the date of sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property.

Summary: For CGT to be applicable, the real property:

1. must be a capital asset and not an ordinary asset,

not for sale.

not used in trade or business. 2. must be located in the Philippines. 3. Exception:

sale of principal residence, provided:

proceeds of the sale of the principal residence have been fully utilized in acquiring the new principal residence within 18 calendar months from the date of sale.

a. If not fully utilized, the excess will be subjected to CGT.

Exemption is availed only once every ten years.

The Commissioner has been duly notified, through prescribed return, within 30 days from the date of sale or disposition of the persons intention to avail of the tax exemption.

The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence built or acquired;

Real property is located abroad.

Buyer is the government, or any of its political subdivisions, including GOCCs, provided the seller opts not to be subjected to CGT. (If the government is the buyer, the seller is given the option to choose either be subjected to the CGT or to the ordinary tax rate.)

To determine whether to opt for CGT or ordinary tax, you have to consider whether you have a gain or loss in the transaction.

o If you sell it at a loss, you might as well be subjected to an ordinary tax 5%-32%. o If you sell it at a gain, CGT might be a better option.

Example: Cost of the land is P1 million. Selling price is P2 million. You will have a gain of P1 million.

If you choose CGT, it will be based on the selling price or the FMV, whichever is higher. Assuming the FMV equals the selling price, P2 million will be subjected to 6% CGT. CGT = P2 million x 6% = P120,000

If you choose to be subjected to the ordinary tax rate: P125,000 + 32% of the excess over P500,000. Ordinary tax = P125,000 + (500,000 x 32%) = P285,000

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acerSticky Notehabitual residence of immediate family members

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d. Sale of other Capital Assets - May refer to personal or movable properties which are not considered as inventories or used in business. - holding period of other capital assets is material only for individual taxpayers

o HOLDING PERIOD RULE: *50% of capital gain is taxable if the other capital asset is held more than 12 months (long term capital gain) *100% of capital gain is taxable if held 12 months or less (short term capital gain)

Illustration: 1/1/2014 Mr. X purchased a car for 800K but instead of registering the car on his name, Mr. X gave it to his son, Y. 7/22/2014 Y purchased a new car and traded-in the old car valued at 900K. So, is there a capital gain? If yes, how much of the capital gain is taxable?

ANS: Yes, 100K. 900K - 800K = 100K is the capital gain. The capital gain is here short-term because the car was traded-in less than 12 months or 6 months after its purchase. Therefore, the 100% of the 100K is part of the income and is subject to the graduated income tax rate.

REMEMBER: Capital losses can be offset only against and to the extend of the capital. Capital loss is different from ordinary loss. Capital gain is different from ordinary gain.

e. Exempt entities from CGT

1. Dealer in Securities, regularly engaged in the buying and selling of securities 2. An entity exempt from the payment of income tax under existing investment incentives and other special laws 3. An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control 4. A government entity or GOCC selling real property 5. If the disposition of the real property is gratuitous in nature 6. Where the disposition is pursuant to the CARP Law 7. The proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing new

principal residence within 18 months from the date of sale or disposition; refer to requirements above

f. Certificate Authorizing Registration CAR is a certification issued by the Commissioner or his duly authorized representative attesting that the transfer and conveyance of land, building/improvements or shares of stock arising from sale, barter, or exchange have been reported and the taxes due inclusive of the documentary stamp tax have been fully paid.

When dealing or transferring with capital assets, the CGT should be paid within 30 calendar days from the date of transfer, e.g. if the Deed of Sale is dated August 1, then by August 30 you should have already paid your CGT, otherwise you will be subjected to penalties by the BIR.

Upon payment of CGT, a Certificate Authorizing Registration will be issued by the BIR in your favor. When you transfer a capital asset, you will also be paying the documentary stamp tax.

Summary: - Fringe Benefit Tax: final withholding tax; withholding agent: employer - Passive Income Tax: final withholding tax; withholding agent: GR payor EXC: payor is outside the jurisdiction of the PHI. - Capital Gains Tax: final tax; no withholding; you will file a separate form with the BIR.

5. Other Income a. Rent Income other than royalties

i. 5% final tax must be withheld by the payor. Example: X is renting a stall in a mall with a monthly rental of P100,000. X is obliged to withhold P5000 (5% of

P100,000). X will only remit P95,000 to the lessor. b. Interest income other than interest income on bank deposits c. Dividend income d. Income from other sources and this include:

i. Bad Debs recovered Definition: unpaid debt. What are the requirements to be able to deduct bad debts as an expense?

1. The indebtedness must be entirely worthless.

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2. The indebtedness must no longer be collectible after taking legal steps to recover it. (debtor declared insolvent)

When is the recovery of a bad debt considered a taxable income? If the bad debts, at the time that it was claimed as an expense/deduction, has benefited the taxpayer by

paying less due to the availment of the expense/deduction, the recovery of that will be considered as an income to offset the expense that you have claimed prior.

Income from other sources and this include:

1. BAD DEBTS RECOVERY: Definition: unpaid debt. Requirements to be able to deduct bad debts as an expense:

3. The indebtedness must be entirely worthless. 4. The indebtedness must no longer be collectible after taking legal steps to recover it. (debtor declared insolvent)

When is the recovery of a bad debt considered a taxable income?

If the bad debts, at the time that it was claimed as an expense/deduction, has benefited the taxpayer by paying less due to the availment of the expense/deduction, the recovery of that will be considered as an income to offset the expense that you have claimed prior.

- Bad debts recovered are considered as a TAXABLE income when there is a benefit on the recovery.

- There is a BENEFIT when the bad debts was previously declared as a DEDUCTION in your income tax return. This is because by doing so there will be a reduction to your income tax payable.

NOTE: Provided this causes a reduction to you tax payable, if you deducted it and there is no reduction in tax payable there is no benefit and therefore is not taxable. WATCH OUT: DOUBTFUL ACCOUNTS are not yet considered as bad debts for taxation purposes. TAX BENEFIT RULE: Doctrine: Bad Debts are taxable upon recovery when you have benefited from it previously. Ex. You have a collectible collect ka no payment file an action for small claim no reply from the other party no choice but declare the debt as bad debts expense let say 50K. Being an expense so you declare it as a deduction. 1st situation:

2014 2015

Net Income w/o BDE 500K Less: Bad Debt Expense (50K) Taxable Income 450K Recovered 50K 2014: you benefited from the bad debt expense to the extent of 50K. 2015: The 50K recovered is taxable because of the tax benefit rule. 2nd situation:

2014 2015 Net Income w/o BDE 50K Less: Bad Debt Expense (50K) Taxable Income -0- Recovered 50K 2015: the 50K is taxable income. Because you benefited for not paying taxes of the 50K in 2014.

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3rd situation:

2014 2015 Net Income w/o BDE 30K Less: Bad Debt Expense (50K) Taxable Income -0- Recovered 50K 2015: Part is taxable. Only the 30K is taxable not the entire 50k. it is because you were only able to avoid paying taxes of the 30k. 4th situation:

2014 2015 Net Loss w/o BDE (10K) Less: Bad Debt Expense (50K) Taxable Income -0- Recovered 50K 2015: its not anymore taxable because there was no benefit from the 2014 taxable income because there was no income but only loss. 2. LOSS FROM GAMBLING

- take note the law says that: o LOSS gambling are NOT DEDUCTIBLE but o GAINS AND INFLOW are considered INCOME because taxation is source blind.

3. TAX REFUNDS

- Tax benefit rule. The tax refund will not be considered an income if you have not previously benefited form it.

- So here if you were able to make a tax deduction from your previous income tax return.

2014 2015 Net Income w/o BDE 20K Less: Local Tax (5K) Taxable Income 15k Erroneous tax so refund 5K 2015: the 5k Refund is taxable because under the tax benefit rule you were able to declare the 5k as a deduction to the previous year. Had you not declared it there would have been a bigger taxable income.

- NOT ALL TAX REFUND are considered as income. Exception is if it pertains to: o DONORs TAX, o INCOME TAX, and o ESTATE TAX and o SPECIAL ASSESMENT. (DIES)

this is because this taxes are not made as deductions to your taxable income. 4. COMPENSATION for private property expropriated by the government for public use 5. DAMGES

6. CANCELLATION OF INDEBTEDNESS

- ascertain if there is consideration such as service it is considered as a taxable income

- But is consideration is PURE LIBERALITY or PURE LOVE it is taxable to DONORs tax.

7. TAX INFORMERs REWARD

8. LEASEHOLD IMPROVEMENTS

Involves the lessor and the lesse. Let say example you lease a parcel of land. The LESSEE introduces improvements to the lease of land like a building and there is an agreement that the building will go to the lessor at the end of the lease then it will be considered as income taxable on the side of the lessor.

TWO METHODS of recognizing the income in leashold: o OUTRIGHT METHOD

Upon the commencement of the lease period, it is stated in the lease agreement that any improvements will go to the lessor at the end of the lease period then outright method is considered as income in SAME TAXABLE year of the lessor when the improvement is transferred.

Based on the FMV @ the end of the lease term, so at the end of the lease term you add all the annual rental income less the FMV then automatically deduct it during that year. Outright deduction on the part of the lessor.

o SPREAD-OUT METHOD Here you will have to consider the depreciation of the improvements and spread it out over the period You have to take into consideration here the useful life vs the lease term then spread out to the

remaining.

Ex. THIS WILL NOT COME OUT IN THE BAR EXAM only for discussion purpose. o SPREAD-OUT METHOD- BUILDING:

FMV of IMPROVEMENT 1M COST 800k Useful Life 8 years Lease Term 5 years

1st Step: GET THE DEPRECIATION: which is COST divided by the USEFUL LIFE (COST/UL) o 800K/8yrs = 100k

2nd Step: VALUE of the improvement @ end of the lease: which FMV less the ACCUMULATED DEPRECIATION (total depreciation) for the entire LEASE TERM

o 100k x 5 yrs = 500k accumulated dep. For the lease term o so 1M(FMV) 500K(Accum. Dep) = 500k o VALUE @ end of lease term (VALET) = 500k

3rd Step: Spread-out the VALET: VALET divided by the remaining useful life (useful life less lease term)

o 500k divided by 3 yrs (8-5) = 166,667 o so the lessor will report an annual income of 166,667.

INCOME TAX COMPUTATION

Gross Income P

Less: allowable Deductions (Itemized or Optional) P

Net Income P

Less: Personal & Additional Exemptions P

Net Taxable Income P

Multiply by Tax Rate (5 to 32%) P

Income Tax Due: Tax Withheld (per BIR Form 2316/2304) P

Income Tax Payable P

PURE COMPENSATION EARNER NO ITEMIZED DEDUCTION. Only personal and additional income.

DO NOT MEMORIZE THE INCOME TAX TABLE unless you want to TOP the BAR then by all means do so.

the tax withheld stated is the Creditable Withholding Tax and NOT FINAL WITHOLDING TAX.

TAX ON NRA-NETB o GR: 25% on all his Gross Income

Except: Capital Gains because if real property 6% ; Shares of stock 5-10%

DEDUCTIONS

1. Pure Compensation Income Earner

1. Personal Exemption

For single individual or married individual judicially declared as legally separated with no qualified dependents

P50,000

For head of the family P50,000

For each married individual P50,000

The term HEAD OF THE FAMILY is NO LONGER APPLICABLE because is absorbed in the single individual

Regardless of status anyone can claim.

Note: in case of married individuals where only one of the spouse is deriving gross income, only such spouse will be allowed to claim the personal exemption.

2. Additional Exemption

For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4 qualified dependents.

SENIOR CITIZENS NOT considered as dependent even if chiefly dependent o Ex. A is living with parents; you are providing 60% income to the family. Can you declare them as your dependents?

NO. not a qualified DEPENDENT CHILD.

The individuals considered as Head of the Family supporting a qualified dependent: o Dependency Test (ASS-ERA)

1. Affiliation: Legitimate, Illegitimate or LEGALLY ADOPTED child of the taxpayer a. Can a Nephew be a dependent? Generally NO, unless LEGALLY ADOPTED

2. AGE: Not More than 21 years old (wala na apil ang tax code pag amend sa age of minority) a. EXCEPTION: cannot be capable of being employed due to PHYSICAL or MENTAL DEFECT.

3. STATUS of child: must not be married 4. EMPLOYMENT: must not be GAINFULLY EMPLOYED.

a. in one case, an annual gross income of not more than 50k is not yet considered as gainfully employed.

5. SUPPORT: taxpayer must be providing CHIEF SUPPORT TO THE DEPENDENT. a. a support of more than 50% for the sustenance of the needs of that child.

6. RESIDENCE: living and residing together with the taxpayer. a. take note: does not mean 24/7 living. It is okay for any temporary change of residence as long as

there is INTENTION to return and live again with the tax payer.

The additional Exemption can be claimed by the following:

if silent: The husband who is deemed the head of the family unless o he explicitly waives his right in favor of the wife

this is submitted to the employer of the husband and wife. o he is NOT GAINFULLY EMPLOYED, if husband is self-employed go back to the GR that husband claims. o in case of LEGAL SEPARATION the spouse who has LEGAL custody of the child or children in case of legally

separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed

the maximum additional exemptions allowed by the Tax Code.

SUMMARY of Personal and Additional Exemptions for:

RC NRC RA NRA

NRA-ETB NRA NETB

PERSONAL EXMEPTION

50,000

(subject to RECIPROCITY RULE)

ADDITIONAL EXEMPTION

25,000 up to first 4 QD

RECIPROCITY RULE:

o When a Filipino as a NRA in another country, when they are given exemption then residents of that foreign country will also be given a personal exemption.

o Whichever is lower of the two, but the maximum is 50K.

o Ex. 1st situation: Chinese go to Phil. Considered as NRA-ETB. Our personal exemption is 50K but in china Filipinos are given only personal exemption of 30K. so we give that Chinese only 30k as personal exemption.

o 2nd situation: Chinese go to Phil. Considered as NRA-ETB. Our personal exemption is 50K but in china Filipinos are given only personal exemption of 200K. so we give that Chinese only 50k as personal exemption.

Change of Status

o STATUS-AT-THE-END-OF-THE-YEAR RULE any change in the status of the tax payer within the year it will be interpreted favorably on the tax payer as if the

change of status happened at the end of the year. Most favorable to the taxpayer.

Ex.

Dependent Child died in the middle of the year. You can still claim him or her as a additional exemption at the end of the year. As if he or she died at the end of the year.

Dependent Child got married or got GAINFULLY employed in the middle of the year. You can still claim him or her as a additional exemption at the end of the year. As if he or she died at the end of the year.

Other way around, wife gives birth at the end of the year it is considered as an additional exemption considered as have been born for the entire year.

If child turn 21 during the year, still a dependent DURING THE YEAR. Considered as a dependent during the year and turned 21 at the end of the year and therefore cannot be claimed only in the NEXT YEAR.

3. Premiums on Health and/or Hospitalization Insurance

The maximum amount of P 2,400 premium (annual) payments on health and/or hospitalization insurance can be claimed PROVIDED: Immediate Family (single- parent & siblings; married spouse and children) gross income yearly should not be

more than P250,000

Take note the EE took this insurance and not the ER.

For Married individuals, the spouse claiming the additional exemptions for the qualified dependents shall be entitled to this deduction.

SUMMARY FOR PURE COMPENSATION EARNER DEDUCTIONS:

1. PERSONAL EXEMPTION 50K

2. ADDITIONAL EXEMPTION 25K per Q. Dependent up to 4.

3. PREMIUM ON HEALTH/HOSP. INSURANCE max 2400 vis-a-vi nmt 250K

2. Earning Business or Professional Income 1. Personal Exemption 2. Additional Exemption 3. Premiums on Health and/or Hospitalization Insurance 4. Itemized Deduction or Optional Standard Deduction

Itemized Deduction or Optional Standard Deduction

Itemized Deduction

Indicate one by one the items of your expenses in your FS supported by proofs.

Optional Standard Deduction

Standard available to individuals where you can make a deduction of 40% of the Gross Income, EXCEPT: NRA

It is advisable to use OSD if you have a little expenses let say only 20% might as well go with OSD because it will take out 40% instead of the 20%.

PURPOSE: generally to speed up the audit process because substantiation is not required.

In Business ITR, you file this quarterly. In default, BIR will use ITEMIZED so you have to indicate that you will be using OSD in your ITR.

Lets say that in the first 2 quarters you have opt to go with OSD. But in the 3rd quarter you realized that your expenses were more than 40%. Can you change to itemized in the middle of the taxable year? NO. Choosing either OSD or ITEMIZED is IRREVOCABLE for that taxable year.

RC NRC RA NRA

NRA-ETB NRA NETB

ITEMIZED DEDUCTION -need

to substantiate

OSD 40% -no need to substantiate

CORPORATIONS ESTATE

Personal Exemption 20,000

Additional Exemption

Premiums on Health and/or Hospitalization Insurance

Itemized Deduction or Optional Standard Deduction - not discussed for next semester-

VIII. INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN

1) An individual who is a minimum wage earner 2) An individual whose gross income does not exceed his total personal and additional exemptions

Ex. Single with 4 qualified dependent child (S4); PE- 50K; AE- 100K; TOTAL EXEMPTION: 150K

Common law couple the husband still deducts as a general rule. 3) An individual whose compensation income derived from one employer does not exceed P 60,000 and the income tax on

which has been correctly withheld

Income tax withheld = to income tax due 4) An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee

occupying the same position as that of the alien employee or regional headquarters and regional operating headquarters of multinational companies, petroleum service contractors and sub-contractors and offshore-banking units, non-resident aliens not engaged in trade or business)

You File here a different return. 5) Those who are qualified under substituted filing. However, substituted filing applies only if all of the following

requirements are present: 1. Receiving purely compensation income regardless of amount: 2. Working for only one employer in the Philippines for the calendar year 3. Tax has been withheld correctly by the employer (tax due equals tax withheld); 4. The employees spouse also complies with all three (3) conditions stated above 5. The employer files the annual information return(BIR Form No. 1604 CF) 6. The employer issues BIR Form No. 2316 to each employee.

IX. PROCEDURE FOR FILING OF ITR For with payment ITRs

(BIR FORM NOS. 1700/1701/1701Q/1702/1702Q/1704) File the return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB)of the place where taxpayer is registered or required to be registered.

In places where there are no AABs, the return will be filed directly with the Revenue Collection Officer or duly authorized treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines,

o or if there is none, filing of the return will be at the Office of the Commissioner.

(BIR FORM NOS. 1700/1701/1701Q/1702/1702Q/1704) o 1700 Individuals Earning Purely Compensation Income o 1701/1701Q(quarter) Self-Employed Individuals, Estates and Trusts o 1702/1702Q corporations, partnerships and other non-individual taxpayers SUBJECT ONLY to the

REGULAR income tax rate o 1702 EX for USE ONLY by corporations, partnerships and other non-individual taxpayers EXEMPT under

the tax code o 1702-MX for corporations, partnerships and other non-individuals with Mixed Income subject to

multiple income tax rates or with income subject to special/preferential rate o 1704 Improperly Accumulated Earnings Tax Return (IAET)

For no payment ITRsrefundable, break-even, exempt and no operation/transaction, including returns to be paid on 2nd instalment and returns paid through a Tax Debit Memo

File the return with the concerned Revenue District Office where the taxpayer is registered. However, no payment returns filed late shall be accepted by the RDO but instead shall be filed with and Authorized Agent Bank or Collection Officer/Deputized Municipal Treasurer (in places where there are no AABs), for payment of necessary penalties.