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XAVIER’S POISON REV

10. Scope of Taxing Power

a. It extends to:

i. Person, property or occupation.

ii. The amount or rate of tax.

iii. The purpose for which taxes shall be levied provided they

are public purposes.

iv. The kind of tax to be collected.v. The situs of taxation.

vi. The method of collection.

11. Is the power to tax the power to destroy?

a. The rule that the power to tax involves the power to destroy is

pertinent only when there is no power to tax a particular subject

and has no relation to a case where such right to tax exist.

b. While tax is said to be the power to destroy, it is by no means

unlimited. As long as it does not destroy the right to perform the

act or to use the property subject to tax. It is subject to inherent

and constitutional limitations.12. Power of Judicial Review in Taxation

a. GR: Courts cannot inquire into the wisdom of a taxing act.

Courts cannot review the wisdom or advisability of a tax. As

long as the legislature, in imposing a tax, does not violate

applicable constitutional limitations or restrictions, the courts

have no concern with the wisdom or policy of the exaction,

political or other collateral motives behind it, the amount to be

raised, or the persons, property or other privilege to be taxed.

b. Exception: It may interfere only to the application and

interpretation of the law.

13. Aspects of Taxationa. Levy or imposition of tax on persons, property or excises.

b. Collection of the taxes already levied.

14. Basic principles of a sound tax system

a. Fiscal Adequacy – sufficient to meet government expend

and other public needs.

b. Administrative Feasibility – Taxes should be capable of

effectively enforced.

c. Theoretical Justice – Taxes must be based on the taxp

ability to pay.

15. Tax v. other impositionsa. Toll – a demand of ownership. An amount charged for the

and maintenance of the property used. Tax is a dema

sovereignty for the purpose of raising public revenue.

b. Penalty – Penalty is punishment for the commission of a c

Tax is a civil liability.

c. Compromise – Amount collected as a compromise in

involving violations of the Tax Code. It cannot be l

imposed without consent from the taxpayer.

d. Special Assessment – It is levied only on land unlike tax w

is imposed on person, property and excises. It is based won benefit.

e. License Fee – Emanates from the police power of the state

f. Margin Fee – Only a currency measure designed to stabiliz

currency such as the exaction of certain fee.

g. Debt – An obligation created by contract. Tax is an oblig

created by law. Taxes are not debts. Taxes and debts cann

the subject of compensation because the government an

taxpayer are not mutually creditors and debtors of each oth

Debts are due to the Government in its corporate cap

Taxes are due to the Government in its sovereign capacity

h. Subsidy – Is a legislative grant of money in aid of a penterprise deemed to promote public welfare. It is not a tax

i. Custom duties and fees – These are duties charged

commodities on their being imported into or exported fr

country. Custom duties are taxes.




j. Revenue – Includes not only taxes but income from other

sources as well.

k. Tribute – Synonymous with tax.

l. Impost – It signifies any tax, tribute or duty.

16. Taxes classified

a. Personal Tax – a.k.a capitation or poll tax. Taxes of fixed

amount upon all persons of a certain class within the jurisdictionof taxing power.

b. Property Tax – Taxes assessed on all property or all property of

a certain class within the jurisdiction of the taxing power.

c. Direct Tax – Taxes wherein both the incidence of or liability for

the payment of the tax as well as the impact or burden of the tax

falls on the same person. The burden cannot be shifted to

another person.

d. Indirect Tax – Taxes wherein the incidence of or liability for the

payment of the tax falls on one person but can be shifted or

passed to another person.

e. Excise Tax – Laid upon the manufacture, sale, or consumption

of commodities within the country,

f. General Tax – Taxes levied for the general or ordinary purposes

of the Government.

g. Special Tax – Taxes levies for special purpose.

h. Ad Valorem Tax – A tax upon the value of the article or thing

subject to taxation.

i. Custom Duties – duties charged upon the commodities on their

being imported into or exported from a country.

j. National Tax – Taxes levied by the National Government.

k. Local Tax – Taxes levied by the Local Government.17.Taxpayer‟s Suit

a. In order to justify a taxpayer‟s suits, it is necessary that public

funds should be involved. Thus, a taxpayer‟s suit would fail if

what are alleged to be illegally disposed of are objects

were acquired from private sources.

LIMITATIONS ON THE TAXING POWER

1. Inherent Limitations on the Taxing Power

a. They are called inherent limitations because they proceed

the very nature of the taxing power itself.i. Public purpose of taxes

1. Test for determining the public purpose in a t

a. Whether the thing to be furthered b

appropriation of public revenue

something which is the duty of the sta

a government, to provide.

b. Whether the proceeds of the tax will d

promote the welfare of the commun

equal measure.

ii. Non-delegability of taxing power1. GR: Taxing power cannot be delegated

2. EXCP:

a. Under the Constitution, the Congress

expressly authorize the president

within the specified limits, and subje

such limitations and restrictions as it

impose, tariff rates, import and e

quotas, tonnage and wharfage dues

other duties or imposts within

framework of the national develop

program of the government.

b. In case of Local Taxing Power, “Each

government unit shall have the pow

create its own sources of revenue a

levy taxes, fees and charges subje




such guidelines and limitations as the

congress may provide, consistent with the

basic policy of local autonomy.

iii. Territoriality or situs of taxation

1. Taxing power is limited only to persons, property

or businesses within its jurisdiction.

a. Protection is a basic consideration that justifies the situs of taxation. The Person or

property must be within the protection of the

taxing state.

b. Mobilia Sequuntur Personam – (Movables

follow the person). According to this maxim,

the situs of personal property is the

domicile of the owner.

c. Legislative Power to fix situs – check!

iv. Tax Exemption of the government

1. GR: Income derived from any public utility or from

the exercise of any essential government function

accruing to the government or any political

subdivision is exempt from income tax. Moreover,

under the LGC, real property owned by the

Government or any of its political subdivisions is

exempt from real property tax.

a. EXCP: Unless, the beneficial use thereof is

granted for consideration or otherwise to a

taxable person.

v. International Comity

1. You know this!2. Constitutional Limitations

a. Due process clause, whether it be substantive or procedural.

b. Equal protection of the laws.

c. Freedom of speech and of the press.

d. Non-infringement of religious freedom and worship.

e. Non-impairment of contracts.

f. Non-imprisonment for debt or non-payment of poll tax.

g. Rule requiring that Appropriations, Revenue and Tariff bills

originate exclusively from the HR.

h. Uniformity, Equitability and Progressivity of taxation.

i. Limitations on the congressional power to delegate tpresident the authority to fix tariff rates, import and e

quotas, etc.

j. Tax exemptions of properties, AED used for religious, char

and educational purposes.

k. Voting requirement in connection with the legislative grant

exemption.

l. Non-impairment of the jurisdiction of the SC in Tax cases.

m. Exemption from taxes of the revenues and assets of educa

institutions, including grants, endowments, donations

contributions.

DOUBLE TAXATION AND TAX EXEMPTIONS

3. Double Taxation is defined as taxing the same property twice w

should be taxed but once. It is also defined as taxing the same p

twice by the same jurisdiction over the same thing.

a. There is no prohibition against double taxation

i. It is something not favored but is neverth

permissible. Double taxation is not forbidden b

Constitution.

b. Kinds of Double Taxation (Duplicate)

i. Direct Double Taxation – The same property is

twice when it should be taxed only once; both taxe

imposed on the same property or subject matter fo

same purpose by the same state, government or t

authority within the same jurisdiction or taxing d




during the same taxing period and covering the same

kind or character of tax. (Legally Objectionable)

ii. Indirect Double Taxation – (Allowed)

c. Means employed to avoid double taxation

i. Tax Reliefs (Tax Deductions and Tax Credits)

ii. Foreign Tax Credit Method

d. Tax Exemptionsi. A grant of immunity, express or implied, to particular

persons or corporations from the obligation to pay taxes.

1. Kinds:

a. Constitutional Exemptions

i. Those which originate from the

Constitution.

b. Statutory Exemptions

i. Those which emanate from

legislation

1. Express Exemptions – when

they are expressly granted by

organic or statute law.

2. Implied Exemptions – When

they fall outside the scope of

the taxing provision itself.

ii. Principles governing Tax Exemption

1. Exemptions from taxation are highly disfavored in

law, and he who claims an exemption must be

able to justify his claim by the clearest grant of

organic or statute law. An exemption from the

common burden cannot be permitted to exist uponvague implications.

2. He who claims an exemption from his share of the

common burden in taxation must justify his claim

by showing that the legislature intended to ex

him by words too plain to be mistaken.

3. He who claims exemptions should prov

convincing proof that he is exempted.

4. Tax exemptions must be strictly construed

that the exemption will not be held conf

unless the terms under which it is granted cand distinctly show that such was the intent

the parties.

5. Constitutional grants of tax exemption are

executing.

iii. Tax Avoidance, Tax Evasion, Tax Fraud

1. Tax Avoidance – Is the minimization o

liabilities through legal means.

2. Tax Evasion – Is the minimization of tax liab

through illegal means.

3. Tax Fraud – Use of deceit to evade tax.

TAX LAWS AND REGULATIONS

4. Tax laws are civil in nature, not political.

a. Tax laws, not being penal in character, the rule in

Constitution against the passage of ex post facto laws c

be invoked.

5. Interpretation of Tax Laws

a. Tax Laws are construed in favor of the government.

b. In case of doubt, tax laws are strictly construed agains

Government and liberally in favor of the citizen bec

burdens are not to be imposed beyond what the sta

expressly and clearly import.

6. Sources of Tax Laws

a. Constitution

b. Tax Code such as the NIRC, Tariff and Custom Code, and




c. Statutes

d. PD‟s

e. EO‟s

f. Court Decisions

g. RR‟s promulgated by the Department of Finance

h. Administrative Issuances of the BIR like RMC‟s.

i. BIR Rulings j. Local Tax Ordinances

k. Tax Treaties and Convention with foreign countries.

7. Publication Requirement

a. Not all sources of Tax Laws require publication in the OG as

provided in Art. 2 of the CC.

b. In Tañada v. Tuvera, “Interpretative regulations and those which

are merely internal in nature (i.e those which regulate only the

personnel of the admin agency and not the public, need not be

published.”

i. RMO, RMC, RAO and BIR Rulings do not require

publication.

8. Tax Law is a special law and prevails over a general law such as the

CC.

9. Tax Regulations are promulgated by the Secretary of Finance in order

to implement the provisions of the Tax Code.

a. Well settled is the rule that Admin Regulations must be in

harmony with the provisions of law. In case of discrepancy, the

basic law prevails.

10. Tax Rulings – Are the best guess of the moment and incidentally often

contain such well-considered and sound law.

11. Power of the CIR to interpret tax laws and to decide tax cases.a. The power to interpret the provisions of the tax code and other

tax laws shall be under the exclusive and original jurisdiction of

the Commissioner, subject to review by the Secretary of

Finance.

b. The power to decide disputed assessments, refunds of in

revenue taxes, fees or other charges, penalties impos

relation thereto or other matters arising under the NIRC or

laws or portions thereof administered by the BIR is vested

the Commissioner, subject to the exclusive appellate jurisd

of the CTA.

12. Non-Retroactivity of Rulingsa. GR: Rulings are not retroactive if they are prejudicial t

taxpayer.

b. EXCP:

i. Where the taxpayer deliberately misstates or

material facts from his return or any document requi

him by the BIR.

ii. Where the facts subsequently gathered by the B

materially different from the facts on which the rul

based.

iii. Where the taxpayer acted in bad faith.

I. Importance of Tax Remedies

1. Tax remedies play an important role in taxation whether it be

the standpoint of tax collection or for the purpose of enforc

taxpayer‟s right under the law.

2. Tax remedies exist to enhance the government‟s tax coll

efforts. It also safeguards against arbitrary action.

II. Rule on “No Injunction to restrain Tax Collection”

1. Injunction will not lie to restrain tax collection.2. Under the NIRC, No court shall have the authority to

injunction to restrain the collection of any national internal rev

tax, fee or charge imposed.

a. The rationale behind is that it opposes to the due pr

and equal protection clauses of the constitution.




b. The exception to this rule is when the decision of CIR is

appealed to CTA and the appellate court is in opinion that

the collection of tax would jeopardize the interest of the

government and or the taxpayer, the court may suspend or

restrain the collection of tax.

III. Remedies of the Government

1. Tax Lien

a. It arises from the time tax became due and demandable.

2. Compromises

a. Cases when compromise is proper

i. When there is a reasonable doubt as to the validity of its

claim against the taxpayer.

ii. The financial position of the taxpayer demonstrates a

clear inability to pay the assessed tax.

b. Compromise v. Abatement

i. Compromise involves the reduction of the taxpayer‟sliability while Abatement is cancellation of taxpayer‟s

entire liability.

1. Abatement is proper

a. When the tax or portion thereof appears to

be unjustly or excessively assessed.

b. When the administration and collection

costs involved do not justify the collection of

the amount due.

c. Delegation of the power to compromise

i. GR: The power to compromise or abate shall not be

delegated by the CIR.

ii. EXC: It maybe delegated to a regional evaluation board if

the assessment issued by regional offices involves taxes

of less than 500k and minor criminal violations (To be

determined by Sec. of Finance).

d. May a case still be compromised even after Final Judgmen

i. No. When there is a final judgment, the governmen

already acquired vested right.

e. Compromise of Criminal Violations

i. All criminal violations may be compromised, exce

Those already filed in court and 2. Those involving f

f. Nature of Compromise penaltyi. It is a certain amount of money which the taxpayer

to compromise a tax violation. This is paid in li

criminal prosecution. Being voluntary in character,

only be collected if the taxpayer is willing to pay.

3. Distraint and Levy

a. Distraint is a remedy whereby the collection of taxes is enf

on the goods, chattels or effects and other personal prope

whatever character of a taxpayer, including stocks and

securities, debts, credits, bank accounts and interests in

rights to personal property.

i. Actual v. Constructive Distraint

1. Actual distraint is resorted when ther

delinquency in the payment.

2. Constructive Distraint is one where no a

delinquency is necessary.

b. Levy, the collection enforcement is effected on the real pro

and interests in or rights to real property of delinquent taxpa

4. Civil Action

a. Collection in cases where the assessment is final

unappealable

i. People v. Ledesma (Taxpayer‟s failure to disputassessment effectively by complying with the cond

laid down by the BIR.




ii. Marcos II v. CA (Failure to file on time the required estate

tax returns and failure to question the assessment served

on them.

b. Collection cases where the BIR‟s decision is final, executory

and demandable

i. Failure to appeal the decision to the CTA.

c. Defenses precluded by final and executory assessment.i. Once the tax becomes collectible either because of

failure to protes or failure to appeal, the taxpayer is

precluded from interposing the following defense: 1.

Validity or legality of assessment, 2. Prescription of the

government‟s right to assess.

d. Collection thru the filing of the BIR‟s answer in the CTA

i. Aside from the filing of an ordinary civil action, taxes may

also be collected by the government through the filing of

an answer to the taxpayer‟s petition for review in cases

where the taxpayer‟s appeals to the CTA.

e. Collection thru application of a disputed tax against a refundable

tax.

i. Even if a tax being collected by the CIR is being

contested by the taxpayer, the same can be enforced by

set off or by applying it against the refundable tax that

may be due the taxpayer.

5. Criminal Action

a. As a collection remedy, is authorized under the NIRC. The

judgment shall not only impose the penalty but shall also order

payment of taxes subject of the criminal case as finally decided

by the CIR.b. The assessment is not necessary before a criminal charge can

be filed. The charge need only to prove the failure to file the

required tax return.

c. Req: No criminal action shall not be instituted withou

approval of the CIR.

IV. Statute of Limitations

1. Prescription of Governments Right to assess taxes.

a. Internal revenue taxes shall be assessed within three

after the last day prescribed by law for the filing of return.i. If the return is filed late, the 3 year period is counted

the date of actual filing.

2. When is a tax assessment deemed made?

a. A tax assessment is deemed made when a demand not

letter is released, mailed or sent to the taxpayer.

i. There is assessment when it contains not only

computation of tax liabilities, but also a deman

payment within a prescribed period.

3. Release of assessment notice or demand before the lapse of the

prescriptive period.a. As long as the release is effected before the prescriptio

assessment is deemed made on time even though the sa

actually received by the taxpayer after the expiration o

prescriptive period. The law does not require that the not

demand be received within the prescriptive period.

4. Important considerations on the prescription of the government‟s

to assess taxes.

a. Date of filing of tax return

i. The date of filing of tax return is important for purpo

determining whether or not the tax is assessed with

prescriptive period.

b. Effect of filing an amended return

i. If the amended return is substantially different fro

original return, the right of the BIR to assess the

counted from the filing of the amended return.




ii. The prescriptive period starts to run from the filing of the

original return if the same is sufficient to enable the CIR

to determine the proper tax to be assessed.

c. Effect of filing a wrong return

i. In case the taxpayer files a wrong return, the 10 year

prescriptive period for cases where return is not filed

applies. It is as if no return was filed.d. Period applicable when the law does not require the filing of any

return

i. The CIR may, by appropriate regulations, require the

filing of necessary returns.

ii. In any event, with or without such regulations, it is to the

interest of the taxpayer to file said return if he/she wishes

to avail of the benefits of three year prescriptive period.

e. Applicable period if the taxpayer fails to file a return

i. The CIR may assess the tax anytime within 10 years

after the discovery of the omission.

f. Prescriptive period when there is fraud

i. When there is fraudulent filing of tax returns, the ten year

period applies, counted from the discovery of the fraud,

not from the filing of the fraudulent return.

5. Prescription of government‟s right to collect taxes

a. The government may collect taxes (by distraint or levy or by a

proceeding in court) within 5 years from the assessment of the

tax.

6. Principle of Equitable Recoupment IRT Tax collection

a. A principle invoke by the taxing authority by setting-off the

prescribed tax against a tax refund to which the taxpayer maybe entitled. This is not allowed in our jurisdiction for it would

encourage negligence on the part of the collecting officer who

would feel secure despite prescription in the thought that they

could always collect the prescribed tax through the expedie

set-off.

7. Interruption of the prescriptive period.

a. CTTWT

8. Rule of prescription in criminal cases

a. All violations of tax code shall prescribe after five years and

shall begin to run from the day of the commission of theviolation of the law, or from the discovery.

b. The defense of prescription can be raised by the accused e

if the case had already been decided by the lower court bu

appeal.

V. Taxpayers Remedies

1. Administrative protest (a.k.a protest against assessment) – Is a

remedy before payment. It differs from tax refund or credit becaus

can only be availed after he/she has paid the tax.

a. Procedures (R-R No. 12 – 99)b. Effect of taxpayers failure to file an administrative protest o

appeal BIR‟s decision to the CTA

i. Under the tax code, if the taxpayer fails to file an

administrative protest within the reglementary 30 da

period from the receipt of the assessment notice, the

assessment becomes final. It can no longer be dispu

either administratively or judicially through an appea

the CTA.

2. Refund or recovery of erroneously or illegally collected taxes

a. There must be a claim for refund or credit filed with the CIR

before maintaining a suit or proceeding for the recovery of

national internal revenue tax. The suit or proceeding shall b

filed after the expiration of two years from the date of paym

of tax or penalty.

b. A claim for refund is strictly construed against the claimant




c. Tax Refund v. Tax Credit

i. Tax refund takes place when there is actually a

reimbursement of the tax. Tax Credit takes place when

the government issues a tax certificate or tax credit

memo covering the amount determined to be

reimbursable.

d. Is payment under protest necessary in claims for refund?i. In the case of Internal Revenue Taxes, payment under

protest is not necessary in order that tax recoveries may

be obtained.

e. Principle of Equitable Recoupment IRT Tax refunds

i. The principle of equitable recoupment allows the

taxpayer whose claim for a refund has been barred due

to prescription (lapse of more than two years from the

date of payment) to recover said tax by setting off the

prescribed refund against a tax that may be due and

collectible from him. This rule is not applicable in our

jurisdiction is not applicable it puts a premium on the

taxpayers neglect to enforce or assert his rights under

the law.

f. Legal capacity of withholding agents to claim tax refund

i. Corporate withholding agents in the Philippines of non-

resident foreign corporations are entitled to claim the

refund of excess withholding tax paid on the income of

said corporation in the Philippines.

ii. In one case, a withholding agent should be allowed to

claim this particular tax refund because under the law,

said agent is the one who is held liable for any violationof withholding tax law. In another case, A withholding

agent is merely a tax collector, not a taxpayer. His liability

is independent from the taxpayer.

Court of Tax Appeals

1. Salient Features

a. CTA is a judicial body. It is a regular court vested with exc

appellate jurisdiction over cases decided by Commission

Internal Revenue and Commissioner of Customs.

b. It is a court of special jurisdiction and as such it can only

cognizance of such matters as are clearly within its jurisdic

c. It is not strictly governed by the technical rules of evidence

2. Powers of the Court of Tax Appeals

a. To administer oaths

b. To receive evidence

c. To summon witnesses by subpoena and require the prod

of documents by subpoena duces tecum subject in all res

to the same restrictions and qualifications as apply in ju

proceedings of a similar nature.

d. To punish for contempt for the same cases under the

procedure and with the same penalties provided in the RuCourt.

e. To prescribe the form of writs and other processes.

f. To promulgate rules and regulations for the conduct

business,

3. Jurisdiction of the Court of Tax Appeals

a. Under RA 1125 Section 7, CTA exercise exclusive app

jurisdiction to review by appeals the:

i. Decisions of the CIR in cases involving dis

assessments, refunds of internal revenue taxes, fe

other charges, penalties imposed in relation thereother matters arising under the NIRC or other la

parts of laws administered by the BIR.

ii. Decisions of the Commissioner of Customs in c

involving liability of custom duties, fees or other m




charges; seizure, detention or release of property

affected; fines, forfeitures or other penalties imposed in

relation thereto; or other matters arising under the

Custom law or other laws or parts of laws administered

by the BOC.

b. CTA also exercise ancillary jurisdiction such as the power to

issue writs of prohibition and injunction. This is onlysupplementary to its appellate jurisdiction.

4. Whose decisions are appealable?

a. Decisions of the CIR

b. Decisions of COC.

c. Decisions of Regional Director of BIR (RR No. 12 – 85)

5. What decisions are appealable?

a. Final decisions of the Commissioner

i. As held in one case, “The appealable decision is that the

letter of denial where the Commissioner not only

demanded payment of the amount assessed but wherein

he also gave the warning that in the event the taxpayer

failed to pay the same, the Commissioner would be

constrained to enforce the collection thereof by means of

the remedies prescribed by law.

1. The period to appeal should be counted from the

date of receipt of the taxpayer of the letter of

denial.

6. Thirty day prescriptive period to appeal (Jurisdictional purpose).

a. The thirty day prescriptive period under the law starts to run

from the date the taxpayer receives the appealable decision of

the Commissioner.i. If the taxpayer‟s request for reconsideration (e.g protest)

is denied or the original assessment is maintained, the

appealable decision is the decision denying the request

for reconsideration.

ii. The running of the prescriptive period is not interr

by a request for reconsideration if the request doe

advance new grounds not previously alleged.

7. Administrative Actions tantamount to appealable decisions.

a. The action of the Commissioner in collecting the ta

summary remedies during the pendency of the protest d

constitute a decision for lack of finality and that the appedecision was the subsequent action taken by the BIR w

filed a civil action for collection.

b. Provided that the commissioner advised the taxpayer to a

it to CTA.

c. Interlocutory orders are not appealable.

Local Taxation

8. Nature and Source of Local Taxing Power

a. The 1987 Constitution, Article X Section 5 provides that:

i. “Each local government unit shall have the powcreate its own sources of revenue and to levy taxes,

and charges subject to such guidelines and limitatio

the Congress may provide consistent with the pol

Local Autonomy. Such taxes, fees and charges

accrue exclusively to the local governments”

9. Grant of Local taxing power under existing law

a. The grant of taxing power to local government units is emb

in Section 129 of RA 7160 (Local Gov‟t Code of 1991)

substantially provides that:

i. “Each local government unit shall exercise its pow

create its own sources of revenue and to levy taxes,and charges subject to the provisions herein, cons

with the basic policy of local autonomy.”

10. Power to grant Local tax exemption




a. Yes, Local Government Units can also grant tax exemptions,

RA 7160 substantially provides that:

i. “Local Government Units may, through ordinances duly

approved, grant tax exemptions, incentives or reliefs

under such terms and conditions as they may deem

necessary.”

1. Condonation is also in the nature of taxexemption. Ergo, LGU‟s may also grant.

11. Residual taxing powers of Local Governments

a. Although the LGC enumerates what specific types of taxes local

government units may impose, the same Code also grants

residual taxing powers to them.

i. This means that local governments can also impose

those taxes, fees and charges which do not fall within the

scope of taxes which are enumerated under the LGC, as

well as those which are levied on subjects or bases

which are not taxed under the NIRC or other applicable

laws. This residual taxing power is also subject to

constitutional limitation, other limitations provided under

the LGC, and the principle of preemption.

12. Principle of Preemption or the Exclusionary Rule

a. It refers to an instance wherein the National Government elects

to tax a particular area, impliedly withholds from the Local

Government the delegated power to tax the same field.

i. If the congress allow municipal corporations to cover

fields of taxation it already occupies then the doctrine of

preemption will not apply.

13. Fundamental Principles of Local taxing Powera. Taxation shall be uniform in each local government unit.

b. Taxes fees, charges and other impositions shall:

i. Be equitable (based on taxpayer‟s ability to pay)

ii. Be levied and collected for public purpose.

iii. Not be unjust, excessive, oppressive or confiscatory

iv. Not be contrary to law, public policy, national eco

policy, or in restraint of trade.

c. The collection of local taxes, fees, charges and

impositions shall in no case be let to any private person.

d. The revenue collected shall inure solely to the benefit of a

subject to disposition by the local government unit levyintax, fee, charge or other imposition unless otherwise provid

the LGC.

e. Each local government unit shall, as far as practicable, ev

progressive system of taxation.

14. Common Limitations on Local Taxing Power

a. LGU‟s cannot impose the following:

i. Income tax, except when levied on banks and

financial institutions

ii. Documentary stamp tax

iii. Taxes on estate, inheritance, gifts, legacies and

acquisitions mortis causa except as otherwise provid

the LGC.

iv. Custom duties, registration fees of vessels and wha

on wharves, tonnage dues and all other kinds of cu

fees, charges and dues except wharfage on wh

constructed and maintained by the local governmen

concerned.

v. Taxes, fees, charges and other impositions upon g

carried into or out of passing through, the ter

jurisdictions of local government units in the gu

charges for wharfage, tolls for bridges or otherwisother taxes, fees, or charges in any form whats

upon such goods or merchandise.

vi. Taxes, fees or charges on agricultural or aq

products when sold by marginal farmers or fisherme






a. All Local Taxes, Fees and Charges shall be collected by the

provincial, city, municipal or barangay treasurer or their duly

authorized deputies.

b. The tax period of all local taxes shall be the calendar year.

c. All local taxes, fees and charges shall accrue on the first day of

January of each year, unless otherwise provided by the LGC.

d. All local taxes, fees and charges shall be paid within the firsttwenty days of January or of each of subsequent quarter as the

case may be.

i. The sanggunian concerned may extend the time of

payment if there is a justifiable reason.

e. Civil Remedies for the collection of taxes and revenues

i. Local Government Lien

ii. Civil Remedies

1. By administrative action through distraint of goods

and other personal property and by levy upon real

property and interest or rights to real property.

2. By Judicial Action.

a. All of these remedies may be pursued

concurrently or simultaneously at the

discretion of the LGU concerned.

18. Remedies of the taxpayer in Local taxation

a. Protest by means of appeal to the Secretary of Justice

i. Any question on the constitutionality or legality of a tax

ordinance or revenue measures may be raised on appeal

within 30 days from the effectivity thereof to the Secretary

of Justice.

b. Protest against the assessmenti. Through Local Treasurer.

c. Claim for refund or tax credit

Real Property Taxation

19. Nature and scope of local taxing power in real property taxation

a. Real Property Tax

i. A direct tax on the ownership of lands and buildin

other improvements thereon not specifically exem

and is payable regardless of whether the property is

or not.

b. The taxing power of local governments in real property tais a delegated power.

c. Municipalities and barangays are devoid of the power to ta

property. (Within Metro Manila)

20. Extent of Local Taxing Power

a. It extends not only to the imposition of the basic real pro

tax but also includes the imposition of the special levies.

21. Fundamental principles governing real property taxation

a. Real property shall be appraised at its current and fair m

value.

b. Real property shall be classified for assessment purpose o

basis of actual use.

c. Real property shall be assessed on the basis of a un

classification within each local government unit.

d. The appraisal, assessment, levy and collection of real pro

tax shall not be let to any private person.

e. The appraisal and assessment of real property sha

equitable.

22. Properties exempt from tax

a. Real properties owned by the government or any of its po

subdivisions except when its use is granted to a taxable pe

b. Real properties actually, directly and exclusively usereligious, charitable or educational purposes.

c. All machineries and equipment that are actually, directl

exclusively used by local water utilities and GOCC‟s engag




the supply and distribution of water and or transmission of

electric power.

d. All real property owned by duly registered cooperatives.

e. Machineries used for environmental protection.

23. Administration of Real Property Tax

a. The primary responsibility for the proper, efficient and effective

administration of the real property tax is entrusted to theprovinces and cities, including the Municipalities within the

Metro Manila Area.

b. Basic Considerations relating to the administration of the real

estate tax

i. Administrative Requirements

1. Declaration of Real property by the owner or

administrator or in case of refusal, the provincial,

city or municipal assessor.

a. In case of transfer of real property

ownership, the owner must notify the

assessor within 60 days from the date of itstransfer.

2. The Local Government Code also provides for

other requirements to insure accurate assessment

such as statutory directives to the Registrar of

Deeds to report to the assessor the list of property

registered in the name of the owner.

ii. Listing of properties for assessment purposes

(Assessment Roll)

c. Real Property Tax Assessment in General

i. All real property, whether taxable or tax exempt, shall beappraised at the current and fair market value prevailing

in the locality where such property is situated.

ii. The provincial, city or municipal assessor shall undertake

a general revision of real property assessment within two

years after the effectivity of the LGC or three

thereafter.

1. Steps for the mandatory conduct of ge

revision of real property assessment:

a. The preparation of schedule of fair m

values

b. The enactment of ordinances (levyinannual ad valorem tax on real property

iii. Classes of Real Property for assessment purposes:

1. Residential, Agricultural, Commercial, Indu

Mineral, Timberland, Special

24. Remedies in Real Property Taxation

a. Remedies of Local Government

i. Tax Lien

ii. Administrative remedy in the collection of tax

1. A warrant of levy is issued by the PCM Trea

stating the delinquent owner‟s name or the p

having legal interest in the property.2. The sale or auction is advertised by post

notice at of bulletin board.

a. The proceeds of the sale shall be us

satisfy the government‟s claim. The e

will be returned to the owner.

3. The owner is given one year from the date

sale to redeem the property.

4. Civil Action for the collection of real property

b. Remedies of Taxpayer

i. Remedy against the assessment1. Appeal to the Local Board of Assessment Ap

a. The appeal must be made within 60

from the date of the receipt of the w

notice of assessment.




2. Appeal to the Central Board of Assessment

Appeals

a. The appeal must be made within 30 days

after the receipt of the decision of the

LBAA.

ii. Administrative protest

1. By filing protest with the local treasurer. Thetaxpayer must pay first the tax.

2. The protest must be made within 30 days from the

payment of tax.

iii. Tax Refund or Credit

1. The claim for refund must be made within 2 years

from the date the taxpayer is entitled to such

reduction or adjustment.

25. Condonation of Real Property Taxes

a. In case of general failure of crops or substantial decrease in the

price of agricultural or agri-based products or calamity in any

province, city or municipality, the sanggunian concerned, byordinance duly approved, may condone or reduce wholly or

partially the taxes and interest for the succeeding years.

b. The President may also condone or reduce real property tax

and interest for any year in any province or city or a municipality

only when public interest so requires.

26. GROSS INCOME

a. General Statutory Definition

i. Section 32 of the NIRC defines Gross Income as all

income derived from whatever source, including but notlimited 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 tra

business or the exercise of a profession.

3. Gains derived from all dealings in property.

4. Interests

5. Rents

6. Royalties

7. Dividends8. Annuities

9. Prizes and Winnings

10. Pensions

11.Partner‟s distributive share from the net inco

the general professional partnership.

b. Gross Income taxation means the tax base is the total

income of an individual during the taxable year withou

deduction allowed.

c. Gross Income Taxation v. Net Income Taxation

i. Advantages of income tax based on gross income

one based on net income1. The procedure for the computation of the tax

simpler than in the case of taxation based o

income.

2. Less discretion will be allowed to the

examiners thereby minimizing graft.

3. Examination and/or investigation of tax retur

be made faster.

4. If coupled with an effective withholding tax s

would provide more returns to the governmen

ii. Disadvantages1. A taxpayer may derive gross income but suf

net loss.

2. The rule of taxation may not be equitable.




3. If gross income were the basis, it may serve as a

disincentive to further employment.

d. Exclusions from Gross Income

i. Income received or earned but is not taxable as income

because it is exempted by law or by treaty. Receipts

which are not in fact income are also excluded from

Gross Income.

ii. Reasons for exclusion

1. They

a. Represent return of capital;

b. Are not income, gain or profit;

c. Are subject to another kind of internal

revenue tax;

d. Are income, gain or profits that are

expressly exempt from income tax.

iii. Taxpayers who may avail of the exclusions

1. All kinds of taxpayers - individuals, estates, trusts

and corporations, whether citizens, aliens, whetherresidents or non-residents.

iv. Exclusions

1. Proceeds of life insurance policies

a. Paid to the heirs or beneficiaries upon the

death of the insured, whether in a single

sum or otherwise.

b. Reason for exclusion: The contract of

insurance is a contract of indemnity, hence,

the proceeds thereof are considered

indemnity rather than a gain or profits.c. Instances when proceeds from insurance

are taxable:

i. Where proceeds are held by the

insurer under an agreement to pay

interest. The interest is includ

determination of gross income.

ii. Where the transfer is for va

consideration.

2. Amount received as return of premium

a. Paid by the insured under life insur

endowment, or annuity contracts,

during the term or at the maturity o

term of the contract or upon surrender

b. Reason for the exclusion: The retu

premium is a mere return of c

However, where the included in the

amount received exceed the aggr

premiums paid, the excess shall be inc

3. Value of property acquired by gift, bequest, d

or descent

a. The income from such property, as w

gift, bequest, devise, or descent of infrom property, in cases of transfe

divided interest, shall be included in

income.

b. The estate of the testator or the deced

subject to estate tax, while the he

beneficiary/ies are not required to

donee‟s tax as the same was a

abolished. The value of the bequest a

the devise received by the heir

beneficiary/ies is not included incomputation of their gross income

gifts, bequest and devises are exc

from gross income.

4. Compensation for injuries or sickness




a. As compensation for personal injuries or

sickness, plus the amounts of any damages

received, whether by suit or agreement, on

the account of such injuries or sickness.

b. Example of damages recovered from

personal injuries: Moral damages for

personal injuries.

c. If the award of damages is to compensate

loss of property or an award of damages to

compensate loss of income / profits, such is

subject to tax.

5. Income exempt under Tax Treaty

a. Income of any kind, to the extent required

by any treaty obligation binding upon the

Government of the Philippines.

6. Retirement benefits, pensions, gratuities, etc.

a. Retirements benefits received under RA

7641 (Reasonable Private and BenefitPlan) and those received by officials and

employees of private firms in accordance

with reasonable private benefit plan.

b. Any amount received by an official or

employees or by his heirs from the

employer as a “consequence of separation

from service due to death, sickness or other

physical disability beyond the control of the

said official or employer.

c. Veterans Benefit, Benefits under SSS,Benefits received from GSIS.

7. Miscellaneous Items

a. Income derived by foreign government

(from investment in Philippines in loans,

stocks, bonds, or other dom

securities.)

i. Refers only to passive income.

foreign government engage

trade, income is taxable.

b. Income derived by the government

political subdivisions.

i. Income should accrue to

government. If the income is ret

by the Public Utility, it is not ex

The test is by looking at its ch

whether its income accrues t

government or not.

c. Prizes and awards in sports compe

sanctioned by the National S

Association, whether held in Phil or ab

i. This contemplates a par

competition, not a cumuachievement. E.g Sportsman o

year award does not qualif

exemption.

d. Prizes and awards

i. In recognition of Reli

Charitable, Scientific, Educa

Artistic, Literary or

Achievement but only if:

1. The recipient was se

without action on his part2. Recipient was not requi

render substantial

services as a conditio

receiving the prize or aw




e. 13th month pay and other benefits (i.e

productivity incentives and xmas bonus).

The total exclusion shall not greater than

30,000.00.

f. GSIS, SSS medicare and other contribution

(PAG-IBIG, Union dues)

g. Gains from the sale of bonds, debentures

or other certificate of indebtedness with a

maturity of more than 5 years.

h. Gains from redemption of shares in mutual

fund.

INDIVIDUAL INCOME TAXATION

1. Classification of Individual Taxpayer

a. Resident Citizen

b. Non-Resident Citizen

c. Non-Resident Alien

d. Non-Resident Alien not engaged in Trade or Business.

2. General Principles of Income Taxation

a. A citizen of the Philippines residing therein is taxable on all

income derived from sources within and without the Philippines.

b. A non-resident 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 amember 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 Philip

is taxable only on income derived from sources withi

Philippines.

e. A domestic corporation is taxable on all income derived

sources within and without the Philippines.

f. A foreign corporation, whether engaged or not in tra

business in the Philippines, is taxable only on income de

from sources within the Philippines.

3. Categories of Income (Types of Income taxed)

a. Capital gain - are gains or income from the sale or exchangcapital assets. These include:

i. Income from dealings in shares of stock of domesticcorporation whether or not through the stock exchan

ii. Income from dealings in real property located in thePhilippines; and

iii. Income from dealings in other capital assets other thand (ii).

b. Ordinary gain - are gains or income from the sale or excha

of property which are not capital assets.i. Business income

ii. Compensation income

iii. Passive income

iv. Other income from whatever source derived i.e.

treasure.

c. The enumeration under Section 32 of the NIRC ca

simplified into five (5) categories:

i. Compensation Income - income derived from rend

of services under an employer-employee relationshi

ii. Professional Income - fees derived from engagingendeavor requiring special training as professiona

means of livelihood, which includes, but not limited t

fees of CPAs, lawyers, engineers and the like.




iii. Business Income - gains or profits derived from rendering

services, selling merchandise, manufacturing products,

farming and long-term contracts.

iv. Passive Income - income in which the taxpayer merely

waits for the amount to come in, which includes, but not

limited to interest income, royalty income, dividend

income, prizes and winnings.

v. Gains from Dealings in Property – It includes all income

derived from the disposition of property whether real,

personal or mixed.

;or

d. General (part of gross income, subject to 5-32%)e. Compensation Incomef. Income from Businessg. Income from Exercise of Profession

4. Compensation Income

a. All remuneration for services performed by an employee for hisemployer, including the cash value of all remuneration paid in

any medium other than cash. It includes all remuneration for

services rendered by an employee for his employer unless

specifically excluded under the NIRC.

b. Forms of Compensation

i. Money

ii. in kind

c. Requisites for taxability

i. There must be an employer-employee relationship

ii. There must be payment of compensation or wages

d. Basis/Test

i. Existence of Employer-Employee relationship

1. Indicia or indication of or characteristic of

Employer-Employee relationship:

a. SEPADICO

5. FRINGE BENEFIT

a. Fringe benefit means any good, service or other benefitfurnished or granted in cash or in kind by an employer to anindividual employee, except rank and file employees, such but not limited to, the following:

i. Housing;

ii. Expense account;iii. Vehicle of any kind;iv. Household personnel, such as maid, driver and othev. Interest on loan at less than market rate to the exten

the difference between the market rate and actual ragranted;

vi. Membership fees, dues and other expenses borne bemployer for the employee in social and athletic clubother similar organizations;

vii. Expenses for foreign travel;viii. Holiday and vacation expenses;ix. Educational assistance to the employee or his

dependents; andx. Life or health insurance and other non-life insurance

premiums or similar amounts in excess of what the lallows.

b. Fringe Benefits Tax is a final withholding tax imposed o

grossed-up monetary value of fringe benefits furnished, gr

or paid by the employer to an employee. The Fringe bene

shall be treated as final tax of income of the employees.

i. It is determined by:

1. Valuation of the benefits granted

2. Determination of the proportion or percenta

the benefit which is subject to the FBT.

c. Benefits not subject to FBT

i. Fringe benefits which are authorized and exempted

tax under special laws.




ii. Contributions of the employer for the benefit of the

employee to retirement, insurance and hospitalization

benefit plans.

iii. Benefits given to the rank and file employees, whether

granted under a collective bargaining agreement or not.

iv. De minimis benefits.

1. These are facilities or privileges furnished or

offered by an employer to his employees that are

of relatively small value and are offered or

furnished by the employer merely as a means of

promoting the health, goodwill, contentment, or

efficiency of his employee.

v. Fringe benefit is required by the nature of, or necessary

to the trade, business or profession of the employer.

vi. It is for the convenience or advantage of the employer.

1. Under this rule, allowances furnished to the

employee for, and as a necessary incident to, the

performance of his duties are not taxable.d. Benefits which are considered necessary to the business of the

employer or are granted for the convenience of the employer.

i. When a fringe benefit is given solely for the convenience

of the employer, the fringe benefit is exempt from FBT

because the employee does not recognize income from

the benefit.

1. Ex. Expenditure on housing of engineer within

factory premises is not subject to FBT

a. General Rule: If housing is located outside,

it is subject to FBT.b. Exception: If the nature of the Er‟s business

is hazardous to health of Ee, housing can

be located outside the factory without being

subject to FBT.

2. If employee is given housing allowance in

this will constitute compensation of the emp

(income from whatever source). However

qualifies as a Fringe Benefit, then it will be su

to FBT and the burden is shifted to Er (Tax o

Burden on Er)

e. Nature of Fringe Benefits Tax

i. Final tax imposed on the grossed-up monetary va

fringe benefit furnished/granted to the EE by the

whether an individual or corp. (payable by the emplo

f. Purpose of Fringe Benefits Tax

i. To shift the burden to Er (Tax on Ee, Burden on Er).

g. Who should pay the FBT?

i. Employer, whether an individual, professional partne

or corporation (Whether taxable or exempt, governm

or not) granting fringe benefits is subject to FBT, u

exempted.

h. Why is FBT collected from the employer?i. By express provision of law, The FBT is payable b

employer which shall be paid in the same mann

provided for under the NIRC.

i. FBT is not an additional tax on the employer.

j. Benefits subject to FBT.

i. Housing Privileges

1. Lease of residential property for the use o

employee as his usual place of residence.

2. Residential Property owned by employer

assigned to employee as his usual plaresidence.

3. Residential property purchased by employ

installment basis for the use of employer a

usual place of residence.




4. Residential property purchased by ER and

ownership is transferred to EE as his usual place

of residence.

5. Residential property transferred to employee at

less than employer‟s acquisition cost.

ii. Household Expenses – refer to expenses of the

employee paid by the employer for household personnel

or other personal expenses, which shall include:

1. salaries of household helper

2. personal driver of the employee

3. payment for homeowner assoc., etc.

iii. Interest on loan at less than market rate

iv. Expenses for Foreign Travel

1. General rule:

a. Expenses for foreign travel insured by the

employee and/or family members of the

employee borne by the employer shall be

treated as taxable fringe benefits of theemployee.

i. Except:

1. Where the expenses for

foreign travel paid by the

employer for the employee

are for the purpose of

attending business meeting or

convention. The exemption

covers only the following

expenses:a. Inland travel expenses

except lodging cost in

hotel averaging US$

300 or less per

and

b. Cost of econom

business class

ticket.

v. Membership fees, dues and other expenses borne

employer for his employee, in social or athletic clu

other similar organizations.

vi. Life or Health Insurance

1. General rule:

a. The cost of life or health insurance

other non – life insurance premium

similar amounts in excess of what th

allows borne by the employer fo

employees shall be treated as ta

fringe benefits.

i. Except:

1. Contribution of the empfor the benefits of

employee pursuant to ex

laws.

2. The cost of premium bor

the employer for the

insurance of his employe

vii. Holidays and Vacation Expense

viii. Motor Vehicle

1. Motor vehicle purchased by employer in na

employee.2. “Cash for the purchased provided by

employer, the ownership is placed in the na

the employee




3. Purchase on “Installment” basis, the ownership is

placed in the name of the employee.

4. “Portion” of purchased price shouldered by

employer

5. Fleet of motor vehicle “leased” by the employer

6. Fleet of Motor vehicles owned and maintained by

employer.

ix. Expense Account

1. Expenses incurred by the employee but paid by

his employer.

2. Expenses paid by the employee but reimbursed by

his employer.

a. Expense account not subject to FBT.

i. expenses duly receipted for in the

name of the employer and

ii. The expenditures do not partake the

nature of personal expenses

attributable to the employee.b.

x. Educational Assistance

1. General Rule: The cost of the educational

assistance to the employee or his dependents

which are borne by the employer shall be treated

as Taxable Fringe Benefits.

2. Exception:

a. Education granted to employee

i. Requisites:

1. Educational grant wherebythe study is directly connected

with the trade, business or

profession of the ER.

2. And there is a written co

obligating the EE to re

under the employment

certain period.

b. Educational Assistance granted to

dependents of the employee in the n

of educational assistance to

dependents of the employee throu

competitive scheme under a schola

program of the company.

k. MSR‟s

i. Managerial Employees – Is one who is vested

powers and prerogatives to lay down and ex

management policies and/or to hire, transfer, sus

layoff, recall, discharge, assign and /or disc

employees.

ii. Supervisory Employees – are those who, in the in

of the employer, effectively recommend such manaactions if the exercise of authority is not merely rou

or clerical in nature but require the use of indepe

judgment.

iii. Rank and File Employees – shall mean employees

are holding neither managerial nor supervisory po

as defined under the Labor Code of the Philippines.

6. Allowable deduction from gross income

a. Defined as: Items or amounts which the law allows t

deducted from gross income in order to arrive at the ta

income.i. Because deductions are strictly construed agains

taxpayer, one seeking a deduction must point to

specific provisions of the statute in which that dedu




is authorized & must be able to prove that he is entitled to

the deduction which the law allows.

b. The following deductions are allowed to individual taxpayers:

i. Personal Exemption

1. Personal exemptions are arbitrary amounts

allowed, in the nature of a deduction from taxable

income, for personal, living or family expenses of

an individual taxpayer. They are considered to be

the equivalent of the minimum of subsistence of

the taxpayer.

a. Who are allowed personal exceptions?

i. Citizens

ii. Resident aliens

iii. Non-resident aliens engaged in trade

or business in the Philippines under

certain conditions

iv. Estates and trusts, which are treated

for purposes of personal exemptions,as a single individual

ii. Additional Exemption

1. A married person or a head of a family may claim

an additional exemption of P8,000 for each

dependent, not exceeding four (4).

2. The additional exemption shall be claimed by only

one of the spouses in the case of married

individuals.

3. In the case of legally separated spouses, it may be

claimed only by the spouse who has custody ofthe child or children.

a. Dependent

i. Refers only to the legiti

illegitimate or legally adopted ch

the taxpayer who is:

1. living with the taxpayer;

2. chiefly dependent upon

taxpayer for support;

3. not more than 21 yea

age;

4. not married; and

5. not gainfully employed

even though over 21

old, incapable of self-su

because of mental or ph

defect.

b. Memo: Personal and additional exem

are available only to business incom

compensation income earners.

iii. Premium payments on health and/or hospitaliinsurance.

1. Premium payments should not exceed P2,40

family or P200 a month for a taxable year.

2. Family has a gross income of not more

P250,000 for the taxable year.

3. In the case of married taxpayers, only the s

claiming the additional exemption for depen

shall be entitled to this deduction.

7. Business/Trade/Professional Income

a. Income coveredi. Income from trading, merchandising, manufacturi

mining

ii. Income from practice of profession




1. Memo: The term “trade or business” includes the

performance of the functions of a public office.

[Section 22(S), NIRC]

b. Interest Income (A passive income subject to final tax)

i. An earning derived from depositing or lending of money,

goods or credits.

1. General rule: Interest received by a taxpayer,

whether usurious or not, is subject to income tax.

2. Except: When interest income is exempted by law

from income tax.

ii. Interest income derived by a resident individual from a

depositary bank under the expanded Foreign Service

deposit system – 7.5%.

1. Non-resident citizen not included.

iii. Interest income from long term deposit or investment

evidenced by certificates prescribed by BSP:

1. Exempt, if investment is held for more than 5years

2. If investment is pre-terminated, interest income on

such investment shall be subject to the following

rates:

a. 20% - If pre-terminated in less than 3 years

b. 12% - If pre-terminated after 3 years to less

than 4 years

c. 5% - If pre-terminated after 4 years to less

than 5 years.

c. Rental Income

i. Earnings derived from leasing of real estate as well as

personal property. It includes all other obligations

assumed to be paid by the lessee to the third pa

behalf of the lessor.

1. Lease of personal property

2. Lease of real property

a. Taxes paid by the tenant (lessee) to o

lessor for a business property are add

rent and constitute income taxable t

lessor.

d. Dividend Income

i. Dividends means any distributions made by a

corporation to its stockholders (SHs)) out of its ear

or profits and payable to its SHs in money or

property.

1. Cash Dividend

a. A dividend paid in cash and is taxa

the extent of the cash received.

2. Stock Dividend

a. A transfer of a portion of retained eato capital stock by action of stockhold

simply means the capitalization of ret

earnings.

i. General rule: A mere issuan

stock dividends is not subje

income tax, because it m

represents capital and it doe

constitute income to its rec

Before disposition thereof,

dividends are nothing burepresentation of interest in

corporate entity.

ii. Exceptions: When stock divid

are subject to tax;*



’




2. To deduct allowance for

depreciation thereof.

ii. VAT Exempted (Only to

transactions)

1. Under Section 109(m),

Educational services rendered

by private educational

institutions, duly accredited by

the Department of Education,

Culture and Sports (DECS)

and the Commission on

Higher Education (CHED),

and those rendered by

government educational

institutions are VAT

Exempted.

b. Non-Profit Hospital

i. VAT Exempted under Section109(m), “Medical, dental, hospital

and veterinary services subject to

the provisions of Section 17 of

Republic Act No. 7716, as amended”

c. Proprietary educational institutions and

hospitals which are nonprofit shall pay a tax

of ten percent (10%) on their taxable

income except those covered by

Subsection (D) hereof: Provided, that if the

gross income from unrelated trade,business or other activity exceeds fifty

percent (50%) of the total gross income

derived by such educational institutions or

hospitals from all sources, the tax

prescribed in Subsection (A) hereof sh

imposed on the entire taxable income.

i. the term 'unrelated trade, bus

or other activity' means any

business or other activity,

conduct of which is not substa

related to the exercise

performance by such educa

institution or hospital of its pr

purpose or function. A "Propr

educational institution" is any p

school maintained and adminis

by private individuals or groups

an issued permit to operate fro

Department of Education, C

and Sports (DECS), or

Commission on Higher Edu

(CHED), or the Technical Educand Skills Development Aut

(TESDA), as the case may b

accordance with existing laws

regulations.

b. Resident Foreign Corporation

i. Corporations which are not domestic.

1. Special Resident Foreign Corporation

a. Taxable from all sources within

Philippines.

i. International Carriers*1. Taxable based on

Philippine Billings.







Not over P100,000………………………......… 5% On any amount in excess of P100,000……. 10% (d) Intercorporate Dividends. - Dividends received by a resident foreigncorporation from a domestic corporation liable to tax under this Code shall notbe subject to tax under this Title.

c. Non-Resident Foreign Corporationi. Special Non-Resident Foreign Corporation

1. GR: - Under Section 28(B), a foreign corporationnot engaged in trade or business in the Philippinesshall pay a tax equal to thirty-five percent (35%) ofthe gross income received during each taxableyear from all sources within the Philippines, suchas interests, dividends, rents, royalties, salaries,premiums (except reinsurance premiums),annuities, emoluments or other fixed ordeterminable annual, periodic or casual gains,profits and income, and capital gains, exceptcapital gains subject to tax

a. Non-Resident Lessor of CinematographicFilm

i. A cinematographic film owner,lessor, or distributor shall pay a taxof twenty-five percent (25%) of itsgross income from all sources withinthe Philippines.

b. Non-Resident Lessor of vessels charteredby Philippine Nationals

i. A nonresident owner or lessor ofvessels shall be subject to a tax offour and one-half percent (4 1/2%) ofgross rentals, lease or charter feesfrom leases or charters to Filipinocitizens or corporations, as approvedby the Maritime Industry Authority.

c. Non-Resident Lessor of Aircraft, Machineryand Equipment

i. Rentals, charters and other derived by a nonresident lessaircraft, machineries and equipment shall be subject to of seven and one-half perce1/2%) of gross rentals or fees.

3. Minimum Corporate Income Tax (MCIT)a. A tax at the rate of 2% based on gross income impos

domestic and resident foreign corporations not covered special income tax system, beginning the 4 th taxable yewhich such corporation commenced its business operatiois imposed whenever such corporation has (a) zero or negnet taxable income; or (b) the amount of minimum corpincome tax is greater than the normal income tax due fromcorporation.

b. Rationale of MCITi. This is designed to prevent corporations from esc

being taxed by including frivolous expenses in statement of income (Ex. Over statement of deprecexpense)

c. Nature of MCITd. MCIT is not an additional tax to the regular or normal income. Coverage of MCIT

i. Domestic Corp, Resident Foreign Corporation.f. When does a corporation start to be covered by the MCIT?

i. (When to begin or apply MCIT?) Beginning on thtaxable year immediately following the year in whichcorporation commenced its business operation

1. (Commencement of Business Operation: Issuance of BIR Certificate of Registration)

g. Suspension of the payment of MCITi. The Secretary of Finance is hereby authorize

suspend the imposition of the minimum corporate intax on any corporation which suffers losses on accoprolonged labor dispute, or because of force majeubecause of legitimate business reverses.




XAVIER S POISON REV

ii. The Secretary of Finance is hereby authorized topromulgate, upon recommendation of the Commissioner,the necessary rules and regulation that shall define theterms and conditions under which he may suspend theimposition of the minimum corporate income tax in ameritorious case.

h. How is MCIT computed?i. MCIT Rate = 2% of gross income (GI)

1. Example: for 2006 calendar yearGI = P500,000 2% of GI =

P10,000TI = P27,000 35% of TI =

P9,4502006 IT = P10,000

i. When is MCIT reported and paid? j. Can the company claim the MCIT it paid as a deduction from

gross income?i. Yes

1. If regular income tax (35% of taxable income) isgreater than MCIT (2% of GI) Pay Regular IncomeTax.

a. You can deduct MCIT Carry Forward only ifRegular Income Tax is greater than MCITY

2. If regular income tax is less than MCIT.k. What is the carry forward provision under the MCIT?

i. Under Section (E) (2) of the NIRC, Any excess of theminimum corporate income tax over the normal incometax shall be carried forward and credited against thenormal income tax payable for the next three yearsimmediately succeeding the taxable year in which the

minimum corporate income tax was paid. (3 succeedingyears).

4. Improperly Accumulated Earnings Tax (IAET)a. The term 'improperly accumulated taxable income' means

taxable income' adjusted by:

i. Income exempt from tax;ii. Income excluded from gross income;iii. Income subject to final tax; andiv. The amount of net operating loss carry-over deducte

And reduced by the sum of:(1) Dividends actually or constructively paid; and(2) Income tax paid for the taxable year.

Provided, however , That for corporations using the calendar

basis, the accumulated earnings under tax shall not appimproperly accumulated income as of December 31, 1997. In theof corporations adopting the fiscal year accounting periodimproperly accumulated income not subject to this tax, shareckoned, as of the end of the month comprising the twelve (12)-mperiod of fiscal year 1997-1998.

b. Rationalei. If the earnings and profits were distributed

shareholders would then be liable for income tax; distribution were not made to them, they would inctax in respect to the undistributed earnings and pro

the corporation. It is a tax in the nature of a penalty corporation for the improper accumulation of its earand a deterrent to the avoidance of tax shareholders who are supposed to pay dividends.

c. What is the touchstone of liability?i. Section 29 of the NIRC provides that, There is im

for each taxable year, in addition to other taxes, equal to 10% of the improperly accumulated taincome of domestic and closely-held corporations

1. Only domestic and closely-held corporationliable for IAET.

d. Determination of reasonable needs of the businessi. The reasonable needs of the business is determined

1. Immediacy Testa. It states that the “reasonable needs

business” are the 1) immediate nee




XAVIER S POISON REV

the business; and 2) reasonably anticipatedneeds (Ex.Expansion)

2. How to prove the “reasonable needs of thebusiness” : The corporation should prove that thereis 1) an immediate need for the accumulation ofthe earnings and profits; or 2) a direct correlationof anticipated needs to such accumulation ofprofits.

e. What constitute accumulation of earnings for the reasonableneeds of the business?

i. The following constitute accumulation of earnings for thereasonable needs of the business:

1. Allowance for the increase in the accumulation ofearnings up to 100% of the paid-up capital of thecorporation as of Balance Sheet date, inclusive ofaccumulations taken from other years;

2. Earnings reserved for definite corporate expansionprojects or programs requiring considerable capitalexpenditure as approved by the Board of Directorsor equivalent body;

3. Earnings reserved for building, plants orequipment acquisition as approved by the Boardof Directors or equivalent body;

4. Earnings reserved for compliance with any loancovenant or pre-existing obligation establishedunder a legitimate business agreement;

5. Earnings required by law or applicable regulationsto be retained by the corporation or in respect ofwhich there is legal prohibition against itsdistribution;

6. In the case of subsidiaries of foreign corporationsin the Philippines, all undistributed earningsintended or reserved for investments within thePhilippines as can be proven by corporate recordsand/or relevant documentary evidence.

f. Coverage of IAET

i. The improperly accumulated earnings tax shall apevery corporation formed or availed for the purpoavoiding the income tax with respect to shareholdethe shareholders of any other corporation, by permearnings and profits to accumulate instead of divided or distributed. (E.g Holding Company)

1. Closely-held corporations are those:a. at least 50% in value of the outsta

capital stock; orb. at least 50% of the total combined

power of all classes of stock entitled tois owned directly or indirectly by or fomore than 20 individuals. Domcorporations not falling under the afodefinition are, therefore, publiclycorporations.

g. Corporations not subject to IAETi. The IAET shall not apply to the following corporation

1. Banks and other non-bank financial intermed2. Insurance companies

3. Publicly-held corporations4. Taxable partnerships;5. General professional partnerships6. Non- taxable joint ventures7. Enterprises that are registered:

a. With the Philippine Economic Authority (PEZA) under R.A. 7916

b. Pursuant to the Bases ConversionDevelopment Act of 1992 under R.A. 7

c. Under special economic zones declarlaw which enjoy payment of special taon their registered operations or activitlieu of other taxes, national or local.

h. Prima facie instances of accumulation of profits beyonreasonable needs of a business and indicative of purpoavoid income tax upon shareholders.




i. Investment of substantial earnings and profits of thecorporation in unrelated business or in stock or securitiesof unrelated business;

ii. Investment in bonds and other long-term securities; andiii. Accumulation of earnings in excess of 100% of paid-up

capital, not otherwise intended for the reasonable needsof the business. The controlling intention of the taxpayeris that which is manifested at the time of accumulation. A

speculative and indefinite purpose will not suffice. Themere recognition of a future problem or the discussion ofpossible and alternative solutions is not sufficient.Definiteness of plan/s coupled with action/s takentowards its consummation is essential.

5. Partnerships Taxed as Corporationsa. Partnership

i. Partnership is a contract whereby two or more personsbind themselves to contribute money, property, orindustry to a common fund with the intention of dividingthe profits among themselves.

b. Taxable Partnership

i. An ordinary business partnership is considered as acorporation and is thus subject to tax as such. Partnersare considered stockholders and, therefore, profitsdistributed to them by the partnership are considered asdividends.

ii. GR: Partnerships, no matter how created or organized,including joint ventures or consortiums, are taxable.

1. The term "corporation" shall include partnerships,no matter how created or organized, joint-stockcompanies, joint accounts (cuentas enparticipacion), association, or insurancecompanies, but does not include generalprofessional partnerships and a joint venture orconsortium formed for the purpose of undertakingconstruction projects or engaging in petroleum,coal, geothermal and other energy operations

pursuant to an operating consortium agreeunder a service contract with the Governmen

c. Exempt Partnershipi. GPP

1. General professional partnerships are not tabut partners are taxed on their sharpartnership profits actually or constructivelyduring the year. (Not subject to income tax)

a. Taxable as an entity - ordinary corpincome tax.

b. For purposes of computing distributive share of the partners, thincome of the GPP shall be computthe same manner as a corporation.

d. Elements constitutive of taxable partnershipi. The essential elements of a partnership are: (

agreement to contribute money, property, or industrcommon fund; and (2) an intent to divide the pamong the contracting parties.

e. Example of unregistered partnership taxable as corporation

i. Gatchalian v. Collector, 102 Phil 1401. Plaintiffs contributed money to buy a sweeps

ticket which subsequently won. The SupCourt held that they formed an unregispartnership. Plaintiffs formed a partnershipcivil nature since each of them contributed mto a common fund for the sole purpose of divequally the prize which they win.

f. Rules on Co-Ownershipi. If the activities of co-owners are limited to

preservation of the property and the collection oincome therefrom, in which case, each co-owner is individually on his distributive share in the income co-ownership.

ii. If the co-owners invest the income in business for they would be constituting themselves into a partnetaxable as a corporation.




g. General Professional Partnership v. General/OrdinaryPartnership

GPP GPGeneral professional partnerships arepartnerships formed by persons forthe sole purpose of exercising theircommon profession, no part of theincome of which is derived from

engaging in any trade or business.[Section 22(B), NIRC]

All other partnerships no matter howcreatedor organized.

Persons engaging in business aspartners in a general professionalpartnership shall be liable for incometax only in their separate andindividual capacities. [Section 26,NIRC]

Taxable as an entity - ordinarycorporateincome tax.

Each partner shall report as grossincome his distributive share, actuallyor constructively received, in the netincome of the partnership. [Section26, NIRC]

Partners are considered stockholdersand, therefore, profits distributed tothem by the partnership areconsidered as dividends.

h. Joint Venturei. A joint venture is created when two corporations, while

registered and operating separately, were placed underone sole management which operated the businessaffairs of said companies as though they constituted asingle entity thereby obtaining substantial economy andprofits in the operation.

ii. A joint venture is not taxed as a corporation, just like ageneral professional partnership.1. Joint ventures are not taxable as corporations

when its purpose if a) undertaking constructionprojects; b) engaged in petroleum, coal and other

energy operation under a service contract wigovernment.

i. Other Corporate Tax Ratesi. Rates on sale of shares of stocks

1. Capital gains from sale of shares of stoctraded in the stock exchange (Whether RC, RA, NRAETB, NRANETB, DC, RFC, NRFC)

a. Not over P100,000 – 5% of the net c

gains realized during the taxable yearb. Over P100,000 – 10%

2. Gross Income Taxa. The term 'gross income' derived

business shall be equivalent to gross less sales returns, discounts allowances and cost of goods sold.

b. An income tax of thirty-five percent (35hereby imposed upon the taxable inderived during each taxable year frosources within and without the Philipby every corporation, as defined in S

22(B) of this Code and taxable undeTitle as a corporation, organized existing under the laws of the PhilipProvided , That effective January 1, the rate of income tax shall be thirtpercent (34%); effective January 1, the rate shall be thirty-three percent (and effective January 1, 2000 thereafter, the rate shall be thirpercent (32%).

c. In the case of corporations adoptinfiscal-year accounting period, the ta

income shall be computed without regthe specific date when specific spurchases and other transactions oTheir income and expenses for the year shall be deemed to have been e




and spent equally for each month of theperiod.

3. Branch Profit Remittance Taxa. Shall be imposed on any profit remitted by

a branch to its head office.b. Branch will be subjected to ordinary

corporate tax as a resident foreigncorporation (35%). Afterwards, the profits

for remittance shall then be subject to 15%BPRT.

6. Tax-Sparing Credit Rulea. Tax reduced by the Philippines should be fully applied or

credited to the tax on dividend income received by the non-resident foreign corporation imposed by the country of itsdomicile. This serves as an incentive by reducing their taxliability in the Philippines and in their residence countries.

i. Ex. Domestic corporation paid cash dividend to non-resident foreign corporation (NRFC) organized in Brazil.This shall form part of NRFC‟s income therefore taxablealso in Brazil. The dividend received shall only be taxed

at 15% in the Phils (instead of 35%) if Brazil willreduce/credit at least 20% of the tax imposed in the Phils.from its tax imposed in Brazil. [See Section 28(5)(b)]

ii. If Brazil will credit/reduce less than 20% or will not creditany amount, then the Phils will tax the dividend at 35%(ordinary income tax).

iii. Phils. cannot give more than 15% tax credit because thelaw only allows such.

7. Tax-Exempt Corporations under the NIRCa. General Professional Partnershipsb. Joint ventures under a service contract with the governmentc. Government owned or controlled corporations

i. Government Service Insurance System (GSIS)ii. Social Security System (SSS)iii. Philippine Health Insurance Corporation (PHIC)iv. Philippine Charity Sweepstakes Office (PCSO)

v. Philippine Amusement and Gaming Corpo(PAGCOR)

d. Under Section 30 of the NIRC:i. Exemptions from Tax on Corporations.

1. Labor, agricultural or horticultural organizatioorganized principally for profit;

2. Mutual savings bank not having a capital represented by shares, and cooperative

without capital stock organized and operatemutual purposes and without profit;

3. A beneficiary society, order or associoperating fort the exclusive benefit of the memsuch as a fraternal organization operating the lodge system, or mutual aid associationnonstock corporation organized by emploproviding for the payment of life, sickaccident, or other benefits exclusively tomembers of such society, order, or associatinonstock corporation or their dependents;

4. Cemetery company owned and ope

exclusively for the benefit of its members;5. Nonstock corporation or association orga

and operated exclusively for religious, charscientific, athletic, or cultural purposes, or forehabilitation of veterans, no part of its net inor asset shall belong to or inures to the benany member, organizer, officer or any spperson;

6. Business league chamber of commerce, or of trade, not organized for profit and no part net income of which inures to the benefit oprivate stock-holder, or individual;

7. Civic league or organization not organizeprofit but operated exclusively for the promotsocial welfare;

8. A nonstock and nonprofit educational instituti9. Government educational institution;




10. Farmers' or other mutual typhoon or fire insurancecompany, mutual ditch or irrigation company,mutual or cooperative telephone company, or likeorganization of a purely local character, theincome of which consists solely of assessments,dues, and fees collected from members for thesole purpose of meeting its expenses; and

11. Farmers', fruit growers', or like association

organized and operated as a sales agent for thepurpose of marketing the products of its membersand turning back to them the proceeds of sales,less the necessary selling expenses on the basisof the quantity of produce finished by them;

12. Notwithstanding the provisions in the precedingparagraphs, the income of whatever kind andcharacter of the foregoing organizations from anyof their properties, real or personal, or from any oftheir activities conducted for profit regardless ofthe disposition made of such income, shall besubject to tax imposed under this Code.

ALLOWABLE DEDUCTIONS FROM GROSS INCOME

1. Basic Principles

a. Deductions from gross income refer to items or amounts

authorized by law to be subtracted from pertinent items of gross

income to arrive at the taxable income.

b. The following are the conditions in order the taxpayer can claim

deductions:

i. Point to some specific provisions of the statute

authorizing the deduction

ii. Able to prove that he is entitled to the deductionauthorized or allowed;

iii. Any amount paid or payable which is otherwise

deductible from, or taken into account in computing gross

income or for which depreciation/amortization ma

allowed, shall be allowed as deduction only if it is s

that the tax required to be deducted and wit

therefrom has been paid to the BIR; (Sec. 34, NIRC

iv. Deductions for income tax purposes partake of the n

of tax exemptions hence, if tax exemptions are

strictly construed, then it follows that deductions

also be strictly construed.c. The following are the rules in claiming deductions:

i. Deductions must be paid or incurred in connection

the taxpayer‟s trade, business or profession

ii. Deductions must be supported by adequate recei

invoices (except standard deduction)

d. The following are not allowed to claim deductions:

i. NRA-ETB and NRFC since their tax base is

income.

ii. A RC, NRC, and RA whose income is p

compensation income are also not entitled to deduction except to premium payments on health a

hospitalization insurance.

2. The COHAN Rule Principle

a. Under this principle, taxpayers may use estimates when

can show that there is some factual foundation on which to

a reasonable approximation of the expense, they can prov

they had made a deductible expenditure but just cannot

how much that expenditure was. (Cohan v. Commissioner

(2d) 540)

i. It is the use of estimates or approximations of the am

of cash and other assets where the taxpayer

adequate records.

ii. If there is showing that expenses have been incurre

the exact amount thereof cannot be ascertained d




the absence of receipts and vouchers of the expenditures

involved, the BIR will make an estimate of deduction that

may be allowable in computing the taxpayer's taxable

income bearing heavily against the taxpayer whose

inexactitude is of his own making. That disallowance of

50% of the taxpayer‟s claimed deduction is valid. (RMC

23-2000)

3. Deduction v. Exclusiona. Exclusion refers to a flow of wealth which does not form part of

the gross income because 1. It is exempted by the fundamental

law or by a statute and 2. It does not come within the definition

of income. Deduction (Allowable) refers to amounts which the

law allows as deductions from gross income in order to arrive at

net income or taxable income.

b. Exclusion is material to arrive at gross income while Deduction

is necessary to arrive at net or taxable income.

c. Exclusion refers to something that is earned and received which

do not form part of the gross income while Deduction is refers tosomething that is paid or incurred in earning or gross income.

4. Allowable Deduction v. Personal Exemptions

a. As to its nature

i. Allowable deduction is in the nature of business

expenses while Personal exemption is in the nature of

personal, living or family expenses.

b. As to its purpose

i. Allowable deduction‟s purpose is to recover or recoup the

cost of doing business while Personal exemption‟s

purpose is to recover the personal, living and family

expenses paid or incurred during the taxable year.

c. As to claimant

i. In Allowable deduction, it may be claimed by indi

and corporate taxpayers, except NRA-NETB and N

In Personal exemption, it may only be claimed b

individual taxpayer, except NRA-NETB.

d. As to amount

i. In Allowable deduction, the actual expenses pa

incurred in the conduct of trade, business or profes

In Personal exemption, arbitrary amounts grantapproximate the personal expenses that may be inc

by individual taxpayer.

5. Deductions allowed under the NIRC

a. Optional Standard Deduction

i. It is a scheme whereby a taxpayer is given the opt

deduct from his gross revenue or gross income a

sum equivalent to a percentage of such gross reven

gross income for purposes of computing the net ta

income on which the income tax rate will be applied

ii. The optional standard deduction is an amounexceeding:

1. 40% of the gross sales or gross receipts

qualified individual taxpayer; or

2. 40% of the gross income of a qu

corporation. (Sec. 34 [L], NIRC)

iii. Itemized deduction vs OSD

1. Itemized Deduction must be substantiate

receipts while OSD requires no proof of exp

incurred because the allowable deduction is

of gross sales or receipts or gross income a

case may be.

b. What are personal exemptions?




i. These are arbitrary amounts allowed as deductions from

gross income of an individual representing personal,

living and family expenses of the taxpayer.

1. Basic Personal Exemption – the amount

subtracted from gross income which is allowed for

the theoretical personal, family, and living

expenses of an individual taxpayer regardless of

status, whether single or married individual judicially decreed as legally separated with no

qualified dependents or head of the family.

c. What are additional exemptions?

i. These are exemptions in addition to the basic personal

exemptions that are granted to certain individual who

have dependents that qualify them for this exemption.

d. Extraordinary (Special) Deductions

i. These are deductions usually allowed only for particular

business or enterprises and not to others, or may be

allowed for all but are not provided for under theprovisions of the NIRC but under special laws.

ii. The following are special deductions allowed under the

NIRC

1. Insurance Companies (They can deduct the..)

(Sec 37 of NIRC)

a. Non-Life:

i. Net additions, if any, required by law

to be made within the year to reserve

funds;

ii. Sum paid on the policy within the

year and annuity contracts other

than dividends provided that the

released reserve be treated as

income for the year of release.

3[A], NIRC)

b. Mutual Marine Insurance

i. Amounts repaid to policy holde

account of premiums previously

by them;

ii. Interest paid upon those am

between the date of ascertainand the date of its payment. (S

[B], NIRC)

c. Mutual insurance – mutual fire and m

employer‟s liability and mutual workm

compensation and mutual ca

insurance

i. Portion of the premium de

returned to the policy holders;

ii. Portion of the premium de

retained for the payment of loexpenses and reinsurance res

(Sec. 37[C], NIRC)

d. Assessment Insurance

i. Amount actually deposited

officers of the Government o

Philippines pursuant to law

addition to guarantee or re

funds. (Sec. 37[D], NIRC)

2. Estates and Trust

a. Amount of income paid, credite

distributed to the heirs/ beneficiaries; a

b. Amount applied for the benefit o

grantor. (Sec. 61, NIRC)

3. Losses from wash sales of stocks or securitie




a. What is wash sales?

i. It is a sale or other disposition of

stock or securities where

substantially identical securities are

acquired or purchased within 61-day

period, beginning 30 days before the

sale and ending 30 days after the

sale.b. It is not deductible when:

i. A taxpayer who is not a dealer of

stocks in trade has disposed shares

and

ii. Within the period of 60(sixty) days

beginning 30 days before the date of

such sale and ending 30 days after

such date, the taxpayer has acquired

substantially identical stocks or

securities.1. General rule: not deductible

(since it is considered as

artificial loss) unless claim is

made by a dealer in

stock/securities & made in

ordinary course of business.

4. Certain capital losses but only from capital gains

a. Capital Lossesi. Losses from sale or exchange of

capital assets. Deductible to the

extent of capital gains only.b. Deductions allowed only to the extent of the

gains from such sales or exchanges of

capital assets (does not apply to banks and

trust companies).

i. Losses from sale or exchan

capital assets.

ii. Losses resulting f rom secu

becoming worthless and whic

capital assets.

iii. Losses from short sales of prop

iv. Losses due to failure to exe

privilege or option to buy oproperty.

5. Deductions allowed to private educa

institution

a. In addition to the expenses allowe

deduction, it has the option to trea

amount utilized for the acquisitio

depreciable assets for expansion of s

facilities as:

i. Outright expense (the entire amis deducted from gross income)

ii. Capital asset and deduct only

the gross income an am

equivalent to its depreciation

year. (Sec. 34 A [2], NIRC)

b. In addition to the expenses allowab

deductions, a private educational insti

has the option to elect either:

i. To deduct as expense

otherwise considered as c

outlays of depreciable assets f

expansion of school facilities.

ii. To capitalize asset & d

allowance for depreciation.




ITEMIZED DEDUCTIONS

Who can claim itemized deductions?

o Corporations, whether domestic or (resident) foreign

o General Professional Partnerships

o Individuals engaged in trade, profession or business (citizen,

resident alien, non-resident alien doing business in the

Philippines)o Estates and trusts engaged in trade or business

o Proprietary educational institutions and hospitals (non-profit)

o Government-owned or controlled corporations

o Only individuals, except non-resident aliens, can elect between

itemized deductions and optional standard deduction.

6. Business Expense (Sec 34A)

a. Expenditure related to the business that is deductible in the year

incurred, in the same taxable year.

b. Requisites for deductibility

i. It must be ordinary and necessary

ii. It must be paid or incurred during the taxable yeariii. It must be paid or incurred in carrying on or which are

directly attributable to the development, management,

operation and/or conduct of the trade, business or

exercise of a profession.

iv. The amount must be reasonable

v. It must be substantiated with sufficient evidence, such as

official receipts or other adequate records, showing:

1. The amount of the expense being deducted, and

2. The direct connection or relation of the expense

being deducted to the development, management,operation and/or conduct of the trade, business

or profession of the taxpayer

vi. It is not contrary to law, public policy or morals.

vii. The tax required to be withheld on the amount p

payable must have been paid to the BIR by the tax

who is constituted as a withholding agent o

government.

c. Kinds of Business Expense

i. Compensation for personal service

1. Salaries, wages and other forms of compen

for personal services actually rendered, inclthe grossed-up monetary value of the

benefit subjected to fringe benefit tax whic

should have been paid.

2. Condition for its deductibility:

a. Services actually rendered;

b. Compensation is for such se

rendered; and

c. Reasonable.

ii. Travelling expenses

1. For travel expenses, here and abroad, whilefrom home, in the pursuit of trade, busine

profession.

2. Include meals and lodging, here and/or abroa

3. While away from home means away from pri

place of business

4. If the trip is undertaken for purposes othe

business or exercise of profession,

transportation expenses are personal exp

and the meals and lodging are living exp

and are not deductible.

5. Transportation expenses of an employee froresidence to his office and back are

deductible. They are personal expe

However, transportation expenses from his




to his customer‟s place of business and back are

deductible. They are business expenses.

6. Requisites for deductibility of Travel expenses

a. Reasonable and necessary expenses;

b. Incurred or paid while Away from home;

and

c. In Pursuit of trade or business

iii. Representation and Entertainment Expenses1. Include “representation expenses and/or

depreciation or rental expense relating to

entertainment facilities.” (1st par., Sec. 2, Rev.

Regs. 110-2002)

2. Requisites for deductibility:

a. Substantiated with sufficient evidence;

b. Paid or incurred in the Pursuit of trade or

business ;

c. Not contrary to laws, morals and public

policy or public order;d. Paid or incurred During the taxable year;

e. Reasonable; and

f. Does not constitute Bribe, kickback or other

similar payments.

3. “Representation expenses” shall refer to expenses

incurred by a taxpayer in connection with the

conduct of his trade, business or exercise of

profession, in entertaining, providing amusement

and recreation to, or meeting with, a guest or

guests at a dining place, place of amusement,

country club, theater, concert, play, sporting eventand similar events or places.

4. “Entertainment facilities” shall refer to a yacht,

vacation home or condominium; and any other

similar item of real or personal property us

the taxpayer primarily for the entertain

amusement, or recreation of guests or emplo

(Sec. 2, RR 10-2002)

iv. Advertising and Promotional Expenses

1. Requisites for deductibility:

a. Substantiated with sufficient evidence;

b. All payments for the purchasepromotional giveaways, contest priz

similar material must be properly rece

and

c. All payments for services such as radi

TV time, print ads, talent fees, adver

expense or know-how must be subjec

withholding tax.

v. Rent Expense

1. Required as a condition for the continued u

possession, for purposes of the trade, busineprofession, of property to which the taxpaye

not taken or is not taking title or in which he h

equity other than that of a lessee, us

possessor.

2. Requisites for deductibility

a. Payment was made as a condition

continuous use of or possession o

property;

b. Taxpayer has not taken or is not takin

to the property or has no equity other

that of a lessee, user or possessor;c. Property must be used in the trad

business; and




d. Subject to withholding tax (5%) if business

property the rental must be at least P500 in

case of non-business or residential property

the rental is at least P10,000 subject to 5%

tax.

vi. Cost of Materials and Supplies

1. Materials and supplies are deductible only to the

amount actually consumed or used in theoperation during the taxable year.

vii. Repairs

1. Repairs are allowed as deduction when it is minor

and ordinary. Major and extraordinary repairs are

capitalized and included in determining

depreciation expense.

a. Extraordinary repairs - those in the nature

of replacements, alteration, and expansion

to the extent that they arrest deterioration

and prolong the life of the property.

b. Ordinary repairs - those made to keep the

property ordinarily efficient working

condition and do not materially add to the

value of the property.

7. INTEREST

a. The amount of interest paid or incurred within a taxable year on

indebtedness in connection with the taxpayer's profession,

trade or business shall be allowed as deduction from gross

income. (Sec. 34, B (1)).

b. Requisites for deductibility:

i. There must be a valid and existing indebtedness.ii. The indebtedness must be that of the taxpayer.

iii. The interest must be legally due and stipulated in writing.

iv. The interest expense must be paid or incurred durin

taxable year.

v. The indebtedness must be connected with the taxp

trade, business or exercise of profession.

vi. The interest payment arrangement must not be be

related taxpayers.

vii. The interest is not expressly disallowed by law

deducted from the taxpayer‟s gross income. viii. The amount of interest deducted from gross income

not exceed the limit set forth in the law.

c. Deductible Interest Expense

i. Interest on taxes, such as those paid for deficien

delinquency, since taxes are considered indebted

(provided that the tax is a deductible tax, except

case of income tax). However, fines, penalties

surcharges on account of taxes are not deductibleinterest on unpaid business tax shall not be subjec

the limitation on deduction.

ii. Interest paid by a corporation on scrip dividends.

iii. Interest on deposits paid by authorized banks of the

to depositors, if it is shown that the tax on such in

was withheld.

iv. Interest paid by a corporate taxpayer who is liable

mortgage upon real property of which the

corporation is the legal or equitable owner, even tho

is not directly liable for the indebtedness.

d. Non-Deductible Interest Expense

i. Interest paid in advance through discount or otherw

case of cash basis taxpayer)

1. Allowed as deduction in the year the debt is p




2. If indebtedness is payable in periodicamortizations, int. is deducted in proportion of theamt. of the principal paid.

ii. Payments made:1. Between members of a family (include only

brothers & sisters, spouse, ancestors, & linealdescendants).

2. Between an individual & a corp. more than

50% in value of outstanding stock is owned bysuch individual (except in case of distributionsin liquidation).

3. Between 2 corps. more than 50% in value ofoutstanding stock owned by same individual, ifeither one is a personal holding co. or a foreignholding co. during the taxable yr. preceding thedate of sale/exchange.

4. Between grantor & fiduciary of any trust.5. Between Fiduciary of a trust & the fiduciary of

another if same person is a grantor to eachtrust.

6. Between Fiduciary & a beneficiary of a trust.7. Indebtedness is incurred by a service

contractor to finance petroleum corp.8. Interest on preferred stock which in reality is

dividend.9. Interest on unpaid salaries and bonuses.10. Interest calculated for cost keeping on account

of capital or surplus invested in business whichdoes not represent charges arising underinterest-bearing obligation.

11. Interest paid when there is no stipulat ion forthe payment thereof

8. TAXESa. Nature and Scope

i. The word „taxes‟ means taxes proper and nodeduction should be allowed for amounts representing

interest, surcharge, or penalties incident to delinqu(Sec. 80, RR-2)

ii. The term “taxes” refers to national and local taxesmeans TAXES PROPER, hence, no deductionallowed for:

1. Interests2. Surcharges3. Penalties or fines incident to delinquency (se

Rev. Reg. 2)b. Requisites for deductibility:

i. It must be paid or incurred within the taxable year.ii. It must be paid or incurred in connection wi

taxpayer‟s trade, profession or business. iii. It must be imposed directly on the taxpayer.iv. It must not be specifically excluded by law

being deducted from the taxpayer‟s gross income.

c. Tax Deduction v. Tax Crediti. In Tax Deduction, the tax is deducted from gross in

while in Tax Credit, the tax is deducted from PhilIncome Tax.

ii. In Tax Deduction, only foreign income taxes maclaimed as credits; In Tax Credit, all taxes are allowbe deducted with the exception of the taxes expexcluded.

9. LOSSESa. Losses actually sustained during the taxable year an

compensated for by insurance or other forms of indemnity.b. Requisites for deductibility:

i. Loss belongs to the Taxpayer;ii. Actually sustained and charged off during the ta

year;iii. Evidenced by a closed and completed transaction;iv. Not compensated by Insurance or other form

indemnity;




v. Not claimed as a deduction for Estate tax purposes incase of individual taxpayers; and

vi. If it is Casualty loss, it is evidenced by a declaration ofloss file within 45 days with the BIR.

c. Kinds of Lossesi. Ordinary Losses

1. Incurred in trade or business, or practice ofprofession;

2. Of property connected with trade, business orprofession, if the loss arises from storms,shipwreck, fires or other casualties, or fromrobbery, theft or embezzlement. (Casualty loss)

a. Total Destruction – the basis of the loss isthe net book value immediately precedingthe casualty to be reduced by the amount ofinsurance or compensation received;

b. Partial Destruction – the replacement costto restore the property to its normaloperating condition, but in no case shall thedeductible loss be more than the net book

value of the property as a whole,immediately before casualty. The excessover the net book value immediately beforethe casualty should be capitalized, subjectto depreciation over the remaining usefullife of the property.

ii. Net Operating Loss Carry-Over1. It is the excess of allowable deductions over gross

income of business for any taxable year which hadnot been previously offset as deduction from grossincome.

2. It shall be carried over as deduction from gross

income for the next 3 consecutive years followingthe year of such loss. Provided that:

a. The taxpayer was not exempt from incometax in the year of such net operating loss;and

b. There has been no substantial chanthe ownership of the business or enter

iii. Capital Losses – losses from sale or exchange of cassets. Deductible to the extent of capital gains only

d. Special Kinds of Lossesi. Wagering losses – deductible only to the extent of g

winnings deemed to only apply to individuals (Sec.[6], NIRC)

ii. Losses on wash sales of stocks – not deductible these are considered as artificial lossiii. Abandonment losses in petroleum operation

accumulated exploration and development expendpertaining thereto shall be allowed as a deduction

iv. Abandonment losses in producing well – the unamocost thereof, as well as the undepreciated coequipment directly used therein, shall be allowededuction in the year the well, equipment or faciabandoned

v. Losses due to voluntary removal of building incidrenewal or replacements – deductible expense

gross incomevi. Losses from sales or exchanges of property be

related taxpayers – losses are not deductible but are taxable.

vii. Losses of farmers – If incurred in the operation ofbusiness, it is deductible

viii. Loss in shrinkage in value of stock – If the stock corporation becomes worthless (not mere mfluctuations,) the cost or other basis may be deductthe owner in the taxable year in which the stock becworthless.

e. Non-deductible losses

i. Loss:1. In dealings between related taxpayers.2. From wash sales of stocks.3. Due to removal of buildings purchased

existing and not incident to renewal)


10 BAD DEBTS b R i it f d d tibilit



10. BAD DEBTSa. Bad debts refer to debts resulting from the worthlessness or

uncollectibility, in whole or in part, of amount due to the taxpayerby others, arising from money lent or from uncollectible amountsof income from goods sold or services rendered. (Sec. 2, RR 5-99.

b. These are debts due to the taxpayer actually ascertained to beworthless and charged off in the books of the taxpayer within

the taxable year except those:i. Not connected with trade, business or profession; andii. Between related taxpayers

c. Requisites for deductibility:i. The debts are Uncollectible despite diligent effort exerted

by the taxpayer;ii. Existing indebtedness Subsisting due to the taxpayer

which must be valid and legally demandable;iii. Connected with the taxpayer‟s Trade, business or

practice of profession;iv. Actually Charged off in the books of accounts of the

taxpayer as of the end of the taxable year;

v. Actually Ascertained to be worthless and uncollectible asof the end of the taxable year; and

vi. Must not be sustained in a transaction entered intobetween Related parties.

d. Measure of Bad Debts deductiblei. The debtor has no property nor visible income;ii. The debtor has been adjudged bankrupt or insolvent;iii. There are numerous debtors with small amounts of debts

and further action on the accounts would entail expensesexceeding the amounts sought to be collected;

iv. The debt can no longer be collected even in the future;and

v. Collateral shares have become worthless.11. DEPRECIATION

a. Depreciation is the gradual diminution in the useful (service)value of tangible property used in trade, profession or businessresulting from exhaustion, wear and tear and obsolescence.

b. Requisites for deductibility:i. Reasonable;ii. Property Used in trade, business, or exercise

profession;iii. The allowance must be Charged off within the ta

year; andiv. Schedule on the allowance must be attached t

return.

12. DEPLETION OF OIL, GAS, WELLS AND MINESa. It is the exhaustion of natural resources like mines and ogas wells as a result of production or severance from mines or wells.

b. Theory and purpose of depletion allowancec. Who are entitled?

i. Annual depletion deductions are allowed only to mentities which own an economic interest in mdeposits. (Sec. 3, RR 5-76)

13. CHARITABLE AND OTHER CONTRIBUTIONSa. Requisites for deductibility

i. The contribution or gift must be Actually paid;

ii. It must be paid Within the taxable year;iii. It must be given to the organization Specified by lawiv. It must be Evidenced by adequate receipts or rec

andv. The amount of charitable contribution of property

than money shall be based on the Acquisition cost oproperty.

b. Kindsi. Ordinary or those which are subject to limitations

the amount deductible from gross income.ii. Special or those which are deductible in full from

income.

c. Donations/Contributions deductible in fulli. Donations to the Philippine government or to any of

political subdivisions according to a national priority determined by NEDA.


ii Donations to foreign institutions or international i Revenue Expenditure it will be wholly deducte



ii. Donations to foreign institutions or internationalorganizations which are fully deductible in pursuance ofor in compliance with agreements, treaties orcommitments entered into by the Philippines or inpursuance of special laws.

iii. Donation to accredited non-governmental organization.iv. Donations of prizes and awards to Athletes (Sec. 1, RA

7549)

d. Contributions subject to limitationi. Donations that are not in accordance with the priority

plan.ii. Donations whose conditions are not complied with.iii. Donations to the Government of the Philippines or

political subdivision exclusive for public purposes.iv. Donations to domestic corporations organized

exclusively for:1. Scientific2. Educational3. Cultural4. Charitable

5. Religious6. Rehabilitation of veteran7. Social Welfare

e. Deductible under special laws (in full)i. Donations of prizes and awards to Athletes (Sec. 1, RA

7549) 14. RESEARCH AND DEVELOPMENT EXPENDITURES

a. A taxpayer may treat research or development expenditureswhich are paid or incurred by him during the taxable year inconnection with his trade, business or profession as ordinaryand necessary expenses which are not chargeable to capitalaccount. The expenditures so treated shall be allowed asdeduction during the taxable year when paid or incurred.

b. Taxpayer may either treat it as:

i. Revenue Expenditure – it will be wholly deducteordinary and necessary expense in the year it is pincurred

ii. Deferred Expense – allowed as deduction rdistributed over a period of at least 60 months stfrom the month benefits are received from expenditure. (Sec. 34 I [1 and 2], NIRC)

c. Requisites for taxability:i. Paid or incurred during the taxable yearii. Ordinary and necessary expenses in connection

trade business or professioniii. Not chargeable to capital account

d. Limitations on Deductioni. Not applicable to, EXCLUSIONS:

1. Any expenditure for the acquisitionimprovement of land, or for the important of to be used in connection w/ R&D of a chasubject to depreciation & depletion

2. Any expenditure paid/ incurred for the purpo

ascertaining the existence, location, extenquality of any deposit of ore or other miincluding oil or gas (exploration exp.)

15. PENSION TRUST CONTRIBUTIONa. Pension Trust Contributions – a deduction applicable only

employer on account of its contribution to a private pensionfor the benefit of its employee. This deduction is purely busin character.

b. Requisites for deductibility:i. The employer must have established a pensio

retirement plan to provide for the payment of reasopensions to his employees;

ii. The pension plan is reasonable and actuarially souniii. It must be funded by the employer;iv. The amount contributed must be no longer subject

control and disposition of the employer;


v The payment has not yet been allowed as a deduction; 2 Report income received from all other so



v. The payment has not yet been allowed as a deduction;and

vi. The deduction is apportioned in equal parts over a periodof 10 consecutive years beginning with the year in whichthe transfer of payment is made.

c. Treatment of Income from Pension Plan & Deductible paymentto Pension Trust

i. Summary rules on Retirement Benefits Plan/ Pension

Trust1. EXEMPT FROM INCOME TAX – employees‟ trustunder Sec. 60(B)

2. EXCLUSION FROM GROSS INCOME – amountreceived by the employee from the fund uponcompliance of certain conditions under Sec.32(B)(6)

3. DEDUCTION FROM GROSS INCOME – a. amounts contributed by the employer

during the taxable year into the pensionplan to cover the pension liability accruingduring the year – considered as ordinary

and necessary expenses under Sec.34(A)(1).b. 1/10 of the reasonable amount paid by the

employer to cover pension liabilityapplicable to the years prior to the taxableyear, or so paid to place the trust in a soundfinancial basis – deductible under Sec. 34(J).

d. Special Deduction allowed to Insurance Companiesi. Special deductions: net additions required by law to

reserve funds & the sums other than dividends paid w/inthe yr. on policy & annuity contracts; released reserve

treated as income for the yr. of release.ii. Mutual Insurance Companies

1. Shall not report as income premium depositsreturned to policyholder

2. Report income received from all other soplus such portion of premium deposits retainthe companies for purposes other than paymlosses & expenses & reinsurance reserves.

iii. Mutual Marine Insurance Companies 1. Include in gross income, gross premiums col

& received by them less amounts paireinsurance; include as deductions am

repaid to policyholders on account of prempreviously paid by them & interest paid upon amounts between the ascertainment & paythereof.

16. ITEMS NOT DEDUCTIBLEa. In computing net income, no deduction shall in any ca

allowed in respect to:i. Personal, living or family expenses – these are per

expenses and not related to the conduct of tradbusiness

ii. Any amount paid out for new buildings of for permimprovements, or betterments made to increas

value of any property or estate – these are cexpenditures added to the cost of the property anperiodic depreciation is the amount that is considerdeductible expense

1. Note: Shall not apply to intangible drillingdevelopment costs incurred in petrooperations which are deductible under Subse(G) (1) of Sec. 34 of the NIRC

iii. Any amount expended in restoring property or in mgood the exhaustion thereof for which an allowancehas been made

iv. Premiums paid on any life insurance policy coverin

life of any officer or employee, or of any pfinancially interested in any trade or business carriby the taxpayer, individual or corporate, whentaxpayer is directly or indirectly a beneficiary underpolicy (Sec. 36 [A], NIRC)


v Losses from sales or exchanges of property between iii Distribution to the heirs during the taxable year of



v. Losses from sales or exchanges of property betweenrelated parties (Sec. 36 [B], NIRC)

vi. Interest expense, bad debts, and losses from sales ofproperty between related parties

vii. Non-deductible interestviii. Non-deductible taxesix. Non-deductible lossesx. Losses form wash sales of stock or securities.

ESTATES AND TRUST

1. Estate

a. The mass of property, rights and obligations left behind by the

decedent upon his death.

i. Two classification of Estate

1. Estates not under judicial settlement - are subject

to income tax generally as mere co-ownership.

a. The tax liability on income of the co-

ownership levied directly on the co-owners.

Thus, the heirs shall include in theirrespective returns their distributive shares

of the net income of the estate.

2. Estates under judicial settlement - are subject to

income tax in the same manner as individual.

a. Income received during the settlement of

the estate is taxable to the fiduciary

(guardian, executor, trustee, and

administrator).

b. GR: Subject to income tax in the same manner as individuals.

c. EXCP:

i. Personal exemption is limited to only P20,000.

ii. No additional exemption is allowed.

iii. Distribution to the heirs during the taxable year of

income is deductible from the taxable income o

estate. (BIR Ruling 233-86)

2. Trust

a. An arrangement created by will or co-agreement under

title to property is passed to another for conservatio

investment with the income therefrom and ultimately the c

to be distributed in accordance with the directions of the cras expressed in the governing instrument.

b. Two (2) Kinds of Trust :

i. Irrevocable Trust - is considered as a separate taxp

ii. Revocable Trust - is one where at any time the pow

revest the title to any part of the corpus of the tr

vested:

iii. SEPARATE TAXABLE ENTITIES Sec. 60 (A):

1. Estates of deceased persons under administ

or settlement;

2. Trusts where the income is to be accumula

held for future distribution by the fiduciary;

3. Trusts where the income may be

accumulated or distributed at the discretion

fiduciary, and

4. Trusts where the income which is to be distr

currently by the fiduciary or is collected

guardian of an infant to be held or distribute

the court may direct.

iv. Rules on taxability

1. GR: Subject to income tax in the same mann

individuals. (Sec. 60 [A], NIRC)2. EXCP:

a. Personal exemption is limited to

P20,000. (Sec. 62, NIRC)


b No additional exemption is allowed i Income received by estate



b. No additional exemption is allowed.

c. Distribution to the beneficiaries during the

taxable year of trust income is deductible

from the taxable income of the trust.

Deduction is allowed only when the

distribution is made during the taxable year

when the income is earned. (Sec. 61 [A],

NIRC)v. REQUISITIES FOR THE TAXABILITY OF TRUST:

1. It should be an irrevocable trust;

2. Tax must be imposed on the income of the trust,

3. The trust retains the income

c. Computation of Tax on estate and Trust

i. Computed in same manner & on the same basis as in the

case of an „individual‟.

1. Except:

a. Deduction allowed: amount of income of the

estate/trust for the taxable yr. w/c is to be

distributed currently by the fiduciary to the

beneficiaries & the amt. of the income

collected by a guardian of an infant w/c is to

be held./distributed as the court may direct:

i. Amt. allowed as deduction is

included as TI of the beneficiaries,

whether distributed or not

ii. Amt. allowed as deduction under this

subsection will not be allowed as

deduction under (b) hereof.

b. Additional deduction: amt. of the income ofthe estate/trust for its taxable yr., properly

paid/credited during such yr. to any legatee,

heir or beneficiary applies to cases of :

i. Income received by estate

deceased person during the p

of administration or settlement

estate

ii. Income w/c, in the discretion

fiduciary, may be either distribu

the beneficiary or accumulated

iii. Amt. deducted is included in TI legatee, heir or beneficiary.

ii. For trust administered in a foreign country: deductio

a) and b) not allowed provided, the amt. of in

included in the return of said trust shall not be includ

computing the income of the beneficiaries.

CAPITAL TRANSACTION

3. Capital Asset

a. The term "capital assets" means property held by the tax

(whether or not connected with his trade or business), butnot include stock in trade of the taxpayer or other property

kind which would properly be included in the inventory o

taxpayer if on hand at the close of the taxable year, or pro

held by the taxpayer primarily for sale to customers i

ordinary course of his trade or business, or property used

trade or business, of a character which is subject t

allowance for depreciation, or real property used in tra

business of the taxpayer.

i. Ordinary Asset

1. Properties held by the taxpayer in the purs

his profession, trade or business.

b. The term capital asset is defined by an exclusion of all or

assets. Thus, those properties not specifically excluded

statutory definition constitutes capital assets, the prof


losses on the sale or the exchange of which are treated as capital asset sold for a year or less, the whole



g

capital gains or capital losses. Conversely, all those properties

specifically excluded are considered as ordinary assets and the

profits or losses realized must have to be treated as ordinary

gains or ordinary losses.

i. Accordingly, "Capital assets" includes property held by

the taxpayer whether or not connected with his trade or

business, but the term does not include any of thefollowing, which are consequently considered as

"ordinary assets":

1. Stock in trade of the taxpayer or other property of

a kind which would properly be included in the

inventory of the taxpayer if on hand at the close of

the taxable year

2. Property held by the taxpayer primarily for sale to

customers in the Ordinary course of trade or

business

3. Property Used in the trade or business of a

character which is subject to the allowance for

depreciation provided in the NIRC

4. Real property used in trade or business of the

taxpayer

c. Construction and Interpretation of Capital Assets

i. The statutory definition of "capital assets" practically

excludes from its scope, all property held by the taxpayer

if used in connection with his trade or business.

d. Special Rules on capital transactions

i. Holding period rule

1. Where the capital asset sold has been held by thetaxpayer for more than 12 months, the gain

derived therefrom is taxable only to the extent of

50%. Consequently, if the taxpayer held the

p y ,

shall be taxable. It is a form of tax avoidance

the taxpayer can exploit it in order to reduc

tax due. (Sec. 39 [B], NIRC)

ii. Capital and loss limitation rule

1. Under this rule, capital loss is deductible o

the extent of capital gain. This means that yo

only deduct capital loss from capital gain. If tno capital gain, no deduction is allowed bec

you cannot deduct capital loss from ordinary

iii. Net capital loss carry over (NELCO)

1. If any taxpayer, other than a corporation, su

in any taxable year a net capital loss, such lo

an amount not in excess of the net incom

such year) shall be treated in the succe

taxable year as a loss from the sale or exch

of a capital asset held for not more tha

months. (Sec. 39 (D), NIRC)

e. NELCO v. NOLCO

i. NELCO Arises from capital transactions me

involving capital asset; NOLCO Arises from ord

transactions meaning involving ordinary asset

f. Rule on disposition of principal residence

i. Sale or disposition of principal residence by an indi

is exempt from CGT provided the following requisite

present:

1. Sale or disposition of the old actual pri

residence;

2. By a citizen or resident alien;3. Proceeds from which is utilized in acquiri

constructing a new principal residence with


calendar months from the date of sale or i. The gross selling price; or



disposition;

4. Notify the CIR within 30 days from the date of sale

or disposition through a prescribed return of his

intention to avail the tax exemption;

5. Can be availed of once every 10 years;

6. The historical cost or adjusted basis of his old

principal residence shall be carried over to thecost basis of his new principal residence;

7. If there is no full utilization, the portion of the gains

presumed to have been realized shall be subject

to capital gains tax; and

8. The 6% capital gains tax due shall be deposited

with an authorized agent bank subject to release

upon certification by the RDO that the proceeds of

the sale have been utilized. (RR No. 14-00)

a. The old residence should first be sold

before acquiring or constructing new

residence.

ii. Principal Resdience refers to the dwelling house,

including the land on which it is situated, where the

individual and members of his family reside, and

whenever absent, the said individual intends to return.

Actual occupancy is not considered interrupted or

abandoned by reason of temporary absence due to travel

or studies or work abroad or such other similar

circumstances.

INCOME TAX RULES ON DEALINGS IN PROPERTY4. Capital gains from sale or disposition of Real Property

a. A final tax of 6% shall be imposed based on the higher amount

between:

g g p

ii. Whichever is higher between the current fair m

value as determined by:

1. Zonal Value – prescribed zonal value o

properties as determined by the CIR; or

2. Assessed Value – the fair market value as s

in the schedule of values of the Provincial an

assessors (Sec. 24 D [1], NIRC)5. Gains and losses from dealings in property

a. From Sale of Stocks of Corporations –

i. Stocks Traded in the Stock Exchange – subject to

transaction tax of ½ of 1% on its gross selling price

ii. Stocks Not Traded in the Stock Exchange – subj

capital gains tax

b. From Sale of Real Properties in the Philippines – capita

derived is subject to capital gains tax but no loss is recog

because gain is presumed.

c. From Sale of Other Capital Assets - the rules on capital

and losses apply in the determination of the amount

included in gross income and not subject to capital gains ta

TAXPAYERS REQUIRED TO FILE INCOME TAX RETURN

6. Income Tax Returns

a. It is a report made by the taxpayer to the BIR on all g

income received during the taxable year, the allow

deduction including exemptions, the net taxable income

income tax rate, the income tax due, the income tax withh

any, and the income tax still to be paid or refundable.

7. Kinds of Income Tax Returna. Individual Income Tax Returns

b. Corporate Income Tax Returns

c. Capital Gains Tax Returns


d. Withholding Tax Returns b. Every corporation subject to the tax under the code, e



e. Returns of General Professional Partnership

f. Fiduciary Returns

g. Information Returns

h. Electronically Filed Returns.

8. Individuals required to file a return

a. Every Filipino citizen residing in the Philippines

b. Every Filipino citizen residing outside the Philippines, on hisincome from sources within the Philippines

c. Every alien residing in the Philippines, on income derived from

sources within the Philippines

d. Every non-resident alien engaged in trade or business or in the

exercise of a profession in the Philippines

9. Substituted filing of Income Tax Return

a. It is when the employer„s annual return may be considered as

the ―substitute Income Tax Return (ITR) of an employee

inasmuch as the information provided in his income tax return

would exactly be the same information contained in the

employer„s annual return.

b. Conditions for the filing of substituted filing of the ITR

i. Employee receives purely compensation income,

regardless of amount, during the taxable year;

ii. He receives the income only from one employer;

iii. Income tax withheld is equal to income tax due;

iv. Employer filed information return showing the income tax

withheld on employees compensation income. (RR No.

3-2002)

10. Corporate Income Tax Return

a. GR: Every corporation subject to tax under the NIRC shall file acorporate tax return.

i. XPN: Foreign corporations not engaged in trade or

business in the Philippines (Sec. 52, NIRC)

foreign corporation not engaged in trade or business,

render, induplicate, a true and accurate quarterly incom

return and final or adjustment return. The returns shall be

by the president, vice-president or other principal officer

shall be sworn to by such officer and by the treasur

assistant treasurer. (Sec. 52, NIRC)

Documents

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