TAXATION NOV. 13, 2021
Judge: The item that we were not able to take up under allowable deductions, is the optional deduction.
What is the optional standard deduction? What is the rate?
Optional Standard Deduction (OSD) – A maximum of 40% of their gross sales or gross
receipts shall be allowed as deduction in lieu of the itemized deduction. This type of deduction shall
not be allowed for non-resident aliens engaged in trade or business.
Is it the same rate for individuals and corporate taxpayers?
Corporate taxpayers can avail themselves of the optional standard deduction computed at 40% of
gross income. The optional standard deduction is in lieu of the itemized operating expenses.
https://efps.bir.gov.ph/efps-war/EFPSWeb_war/help/help1701_v2.html
Optional standard deduction, it is in lieu of the itemized deduction for individuals except for nonresident
aliens. We can elect standard deduction, not exceeding 40% of gross sales or gross receipts, and for
corporations except for non-resident foreign corporations, they can elect standard deduction not
exceeding 40% of their gross income.
Judge: So there's a big difference, so gross sales for individual, gross income for corporate.
Can purely compensation income earners avail of the OSD?
For compensation earners ma'am no ma'am, they cannot avail Optional standard deductions.
What about itemized?
Yes, ma'am, for itemized deductions they can avail for itemized deductions.
Should be income tax payer opting OSD Still file a return?
They can no longer avail for all estimate if they elect to choose for itemized deductions.
What's the difference Between itemized and OSD?
One for OSD it is to 40% for individuals. 40% of their gross sales and gross receipts but for itemized
deduction of it is the enumerated deductions stated under the law.
So common sense will tell you which of these two will file a return.
The one who elect for the itemized deduction.
OK, so are you changing your answer that when a taxpayer is choosing OSD, he's no longer required to
file income tax return? Why not?
For OSD, there is no need to substantiate the deductions, since it is it is already 40% of the gross sales or
receipts
You just need to multiply that's all. If you have the BIR, what would you look for then? If you are auditing
the financial statements of the taxpayer who opted to choose OSD? What account are you going to
audit?
Gross income or gross sales.
Is the choice of the taxpaying here revocable or irrevocable?
Irrevocable for that year.
Does it mean that for the following year he can change to another type of manner on how to compute
his gross income? Can he choose between itemized and abandon OSD?
For the next taxable year. The election, they can claim for that OSD and with the first quarter of the taxable
year, so for that taxable year it is irrevocable for. But for the succeeding year, they can choose between
OSD and the itemized deduction.
So you should get a copy of your TRAIN, and of course 11534, so we are done with the allowable
deductions. Remember the important Matters that you should know before you take the bar with respect
to allowable deductions. Recovery of bad debts. Regarding depreciation. Assets that are subject to
depreciation are those capital assets that are used in the business.
Straight line method, declining method, double declining method, sum of years digits. Percentage
method is the same as sum of years digits.
If the property is peg at useful years what you do is you add all the number of years. So 10 + 9 + 8 + 7 but
up to one and then for the first year, the amount of depreciation will be an 9/10, then 8 / 10, then until it
reaches the 10th year. You will have no more book value if that you did not provide for a scrap value.
Usually there is a scrap value now. So in a in a motor vehicle, maybe by the time that the useful years in
is exhausted the scrap value would be say, 1000 pesos. So that's the amount that you can sell it at the end
of its useful year. Uh, the point is there is that there is no additional capitalization added to the asset, but
if there is capitalization added to that asset, usually the capitalized amount will be added to the cost to
the to the value of the property to be depreciated with the remaining years, or it can happen that the
number of years may be extended.
So example like a condominium or oh, by the way, I recall there was any question that I gave last time
regarding the apartment used in business. That is a capital asset.
That is a capital asset used in business now if it is subject to depreciation.
If it is sold by the owner of the property by the owner of the apartment, there is a capital gains tax of 6%
+ 1.5% documentary stamp tax.
It is a capital asset used for business, not an ordinary asset. It is subject also to depreciation.
OK, so the only asset that is not subject to depreciation is land.
In fact, instead of depreciating, it appreciates as time goes by, especially if the land is situated in
industrialized area, or urban area. It appreciates in value. And that's one source of big income.
That's section 34
CHAPTER VII
ALLOWABLE DEDUCTIONS
SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation
income arising from personal services rendered under an employer-employee
relationship where no deductions shall be allowed under this Section, in computing
taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B), and
(C); and 28(A)(1), there shall be allowed the following deductions from gross income:
Deductions are termed allowable meaning they are not matters or they are not items that are given to
those taxpayer as a matter of right. So you have to substantiate to defend your right to deduct it from
your income tax from your gross income from your income. If ever you deduct items from your gross
income, it is only because the law allows it. It's not a matter of pride on the part of the taxpayer.
Now, not all deductions therefore, not all expenses, not all money paid are allowed as deduction. OK and
therefore any doubt in the interpretation of whether an item is allowed as a deduction will be resolved in
favor of the government, in favor of the taxing power and against the one who is claiming deduction?.
And what more can be said in defending your allowable deductions, except when to present receipts.
In other words, if there are no receipts to be shown you cannot just be allowed to present the IT cannot
just be allowed to deduct from your gross income. And there are Ceilings, maximum amounts that can be
allowed as deduction
For example, is the donations to charitable institutions. These donations are sometimes deducted most
of the time.
They're not deducted from their corporate tax payer, usually corporation. As a way of reducing income
tax, if you come to think of it is a valid form of tax avoidance. Only that It is being abused, so what they
do is Sell painting at a very large amount. 10 million, fifteen million. And then, if you look at the financial
statements of the corporation, there is an allowable there is a deduction their donation.
Charitable institution donations to cultural associations 10 million. The law gives a ceiling to that. So there
is a ceiling allowed for that.
There is a computation there. What is the computation then?
Not exceeding 10% of the taxable income.
But of course, the taxable income meaning after you have deducted all the itemized deduction, you arrive
at the amount not exceeding 10% of that amount.
Uh, as I said, uh deductions are not Matter of right?
It cannot be used. It cannot be abused to diminish the amount of Taxes to be paid to the government.
CHAPTER 8, MAMALATEO
A global tax system.
Optional 8% flat rate refers to the rate of tax.
More 250,000, that's the threshold amount below 250, NO INCOME TAX FOR INDIVIDUALS.
But for cooperate, it's a flat 25% - 11534
There are privileged/preferential taxes for certain types of taxpayers.
Gross Philippine Billing this refers to international bank carriers then offshore bank.
Ordinary asset and capital asset.
Examples of capital assets.
Land which is not or used in ordinary trade or business of a taxpayer.
A building where the building itself is big capital asset on the building is being rented.
Land, building and other properties which are not used for you which are not using the ordinary trade or
business of a taxpayer.
OK, what about stocks? Which are capital assets, which are ordinary assets?
When is a tax, corporate shares of stock? When is it capital asset and when is it an ordinary asset?
A stock is considered as a capital asset when it is held by an individual and is not traded in stock exchange
and it is an ordinary asset when it is traded in the Stock Exchange.
What is it as an asset to the taxpayer if it is a capital asset?
It is some capital asset when it is held by the taxpayer for investment.
You said a capital asset is like an investment. So what about an ordinary asset?
Considered as an inventory. Part of the inventory.
OK, so it's part of inventory. It can be sold anytime, anywhere, no, and for profit or loss.
It’s like An inventory of your grocery store. You have several boxes of Ginebra ready to be sold.
That's inventory.
OK, but if you use the money to invest in in stocks, no. that's investment, and that's capital assets now.
Now, uh, when you say it is Listed in the Stock Exchange. What is the intent?
Is this the intent for the tax payers to trade?
So he in fact he is a dealer. He buys and sells his tax so it is a capital asset because it forms part of the
inventory.
OK, before we leave capital gains and the capital.What is this?Uh, wash sales?
What is your understanding of the term wash losses from wash sales?
I'm sorry that I haven’t read that part po. Sorry po.
J - OK, aside from. Now when you say capital gains. how will you compete for the tax of capital assets?
S - the tax base will be based on the selling price, zonal value or the fair market values whichever is
higher. And the tax based will be 6%.
J - Yes, yeah. Is it multiplied directly with the Fair Market value acquisition costs or zonal value, whichever
is higher. So what do we what do? You understand the term net capital gains?Why do we have that in the
law?
S – you are in a trading. These are capital assets that are not subject to capital gains.
J - OK, so how do you how Do you arrive then at the next capital gain?
S – yung selling price and acquisition cost or the cost of the purchase of the property will be deducted
from the selling price to arrive at the net capital loss or net capital gain.
J - OK, now.How, uh, what are the basis of valuation of the capital asset we mentioned awhile ago.
S – Fair Market Value, Zonal Value, Acquisition costs
J - What is fair market value?
S - Fair market value judge,
It is found in the tax declaration of the property.This is usually from appraisers.
J - In the in the market world.What is fair market value?
J – When the Price of the market of the property in the market.
So it's the value or the amount that the seller is willing to sell and the buyer is willing to buy. That's fair
market value OK? Now is that the same as the selling price?
S - Not necessarily. The selling price cannot always equal to fair market value. The fair market value is
yung regular na seller and buyer ang mag aagrre sa fair market value. While the selling price meron pong
under conditions na napag agreehan ni buyer and seller.
J - OK. Can it happen that the selling price is way below than fair market value?
S – Yes Mam
J - Especially when the when the sale is between relatives no. So I'll give it to you at a 50% discounted
rate. What about zonal value? What is zonal valuation?
S – Zonal Validation judge is given by the bir.
J - And how does the BIR arrive at zonal valuation?
S - There is a list of all.For uh, amount for residential, commercial or beside the road.
J - Are you with the BIR?
S – Yes. Pero Im from finance division po.
J - OK, never mind. So how does the BIRS arrive at the zonal value?
S – naghahanap po ng appraisers and then sila po ang nagvavalue para sa land.
J - OK, is that a public hearing?There should be in the is OK based on the rules now, so the BIR cannot just
peg of any amount because for a particular land let us say along bonifacio St in Tuguegarao which we all
know is a highly commercial commercialized area. if you just peg the value of the land at 50,000 pesos per
square meter, why not make it 52k?Why not make it 55? Why not make it 60k so it's not just any other
amount. That is why there is a hearing.Uh, for the BIR to hold in order to arrive at the zonal valuation,
how many years? Is the BIR are supposed to update its zonal valuation?
S - Yes, every three years?
J - OK, that'll do.
J - Let's go to. Mr. xxx What do you understand of the term wash sales and what is this losses in wash
sales?
S – wash sales is Illegal buying and selling of securities.A real case of ownership dictation.
J - OK, there is no real ownership change of ownership and what is prevented by the tax law?
S – tax law prevents the abuse his tax payers of selling this securities at a very very, so that they can avail
the some deductions and later on they can buy this securities.
J – pano nga? Ano yung iaavail na deduction? Yeah yeah, yeah, yes, you're on the right track.
It prevents the taxpayers from claiming deduction. In what form? OK, what is the taxpayer claiming as
deduction? Para mabawasan ang tax nya?
S – the losses Mam
J - Yes, loss. so you are buying and selling identical stocks. The governments being fooled by the taxpayer.
OK, So what is the period to to record here? What is the period to remember? 30 days before you sell, 30
days after you buy. The same identical stocks. So within 30 days from the sale, you acquire the property.
You acquire the stocks. So let us say January t January 1 to January 31. That's a 30 day period. Uh, prior to
February 1, let us say that the sale was done. February 1 OK. So before you sell, of course you have to buy.
there is nothing to sell if you don't have the stocks.So January 1 to January 31. New by stocks you acquired
stocks. Let us say 1000 shares at 10 pesos. That's how much 10,000 pesos you bought. On the day of sale,
February 1. You sold it up 8000 pesos. Is there a loss?Yes, yes. Less than 2000. You sold it way below the
amount for which you bought it.OK, and you bought it within 30 days prior to sale. I repeat sale is February
1.You acquire the property. Uh, between the period January 1 to 31 say you you bought the property
January 15. Isang date lng naman ang Acquisition mo. Or pwedeng paiba ibang date until and then you
sell them at a bulk noh. You sell them at a bulk on February 1, so in January 15 within 30 days and prior.
OK, now you sold it at 8000. So may lost 2000. Anong gagawin mo sa lost? You declared it as allowable
deduction. The more costs, the more deduction, the more deduction, the lesser income tax, the lesser
gross income and the less therefore the lesser income tax.
And then after that. Uh, 30 days after the sale you acquire it again. noh so there is acquisition, noh. So
you may acquire the property at 10,000. Binenta mo para magkaroon ka ng lost pero kukunin mo ulit.
The reason there is because you want to claim allowable deduction. If you look at it, it can be allowed,
but the law says no OK and that is wash sales. OK, that's the idea of wash sales.
We mentioned a while ago about fair market value what do you understand by the word the acquisition
cost?
S - The value you bought the property.
J - OK, so there was a purchase prior to the sale OK? So if the property was bought. Example, the taxpayer
bought or purchase a building within one year. He purchased it 2M on January 15. By the end of that year,
December 15, he was able to sell it. It’s a capital asset not ordinary asset. He was able to sell it 2.5M. so is
there a gain?
S – yes mam. A gain of 500k
J – is that a capital gain?
S – yes
J – so what should be the tax for the capital gains tax? Is it 2.5M or the 500k only?
S – based on the law, Whichever is higher, between the acquisition costs and the and the purchase price
you sold it. And the price you sold it and that will be the basis of the tax rate.
J - OK. So in that situation, what is the basis Of the tax rate of 6%.
S - 2.5.
J - So 2.5 OK now, why does the law tax the entire amount of 2.5 when it is not the gain? The gain is only
500,000.
S - There is already presumption
J - OK, is that presumption?Uh, applicable in my example.
S – No Mam
J – why?
S - Because there is an actual gain.
J - Yes, there is an acquisition costs and it is sold within a period of one year. So again, what is the capital
gain? What is the tax base Gross capital gain or a net capital gain?
S – It will be the fair market value of the property. Whichever is higher.
J – is that applicable? So that's why I'm asking you what is the use of section 39 then?
S – It would be the actual gain of 500k. that will be the basis of the tax.
J – that’s in section 39 letter B. Letter A, capital asset yan. So you have there net capital gain excess of
gains from sales of changes of capital assets over losses. Well, you have that gain of 500k. Then, uh, it is
sold within one year, so 100% if the capital asset has been held for not more than 12 months, right? So if
more than 12 months, 50%. So what is the basis if the property was not acquired by purchased. Let's say
it was acquired by inheritance. What will be the basis of the capital gains? Dyan na papasok yung
presumption. Why? Because there is no acquisition cost. Its inheritance eh. What is the reckoning period
there? The period of sale na. you are selling now the property. There is no acquisition cost. there was no
money that the taxpayer used to purchase the property.Now he's telling the same property. So what value
will be the basis? there are several values mentioned a while ago.You choose among those values that we
have discussed. Whichever is higher between the fair market value and the zonal value.
OK, that's why it's important to know what, what is fair market value? What is zonal value? What is the
assessed value? What is the acquisition value or acquisition cost? You should know the difference one
from the other in order to know the tax base. OK, so when you compute the capital gains which is
whichever is higher or highest among these values. Assessed value you can see that at the back of the Tax
declaration, fair market value with the current prevailing what the buyer is willing to part the part of the
thing that he's buying and the seller is willing to accept as the selling price that’s fair market value, zonal
value punta ka sa bir nandyan yan. whichever value is the highest that will be the Basis for the capital
gains tax. OK, that will do.
*BREAK*
J - OK, before we leave capital gains and the capital loss, The idea there is for a particular year, when the
Taxpayer has a lot of capital assets to sell, probably because he's retiring from business or for whatever
reason he's selling his capital assets now. Uh, every time that the capital asset is sold. There is a return.
There is a return that is filed by the seller.It's the seller who will find the return now and pay the tax.
And, uh, within a year, if there are several assets to be sold. Uh, it should be consolidated. And then
Compute the taxes for that year. And a there is such a thing as carry lost a net loss carryover so it can be
carried over to the ensuing years. Hey, that's a letter and section 39 letter D. Ah well, what am I trying to
say? Suppose you have several investments in stocks. So and and these are not ordinary assets. Now these
are capital assets, so you sold the a bulk of stocks. In January. You sold the property in February and then
you solve other investments tax in March. Mayaman ka. Marami kang Investment, noh, so within the year
you sold a number of capital assets. So every time that you sell. You will file the return and then you will
have a consolidated return at the end of the year and the computation here is what cumulative cumulative
so, Uh, it will result to the same anyway at the end of the year, so You will have one to turn at the end.
Now let's go to. Now remember also the. Uh, different values? Uh, you should know the meaning of the
different values. Section 40 letter C was amended by RA 11534. Now a section 40 is determination of
amount and recognition of gain loss. And this one refers to capital assets. No Amendment as to Section
A. I mean paragraph A. And this Refers to the computation. So you see, the computation that is gain from
sale. Or other disposition of property. Ah, the gain from sale shall be the excess of the amount realized.
Other from over the basis or adjusted basis for determining gain, and the law shall be the excess of the
basis or adjusted basis over the amount realized and the amount realized from sale or other disposition
shall be the sum of money received, plus The fair market value. Uh, other other than money received. OK,
so the the law itself. We'll give you what is the basis. From which to multiply the capital gains. Tax rate,
which is 6% now. So you have a different values there, as I said.
fair market value. Uh, if the properties acquired by inheritance. Now if the property is acquired by gift, A
value in the hands of the donor. For which acquired the property, not by gift so if the donor, the one who
giveThe property. Bought it or purchases that purchase Price will be the value. So if the purchase price Of
the donor. Uh, if the purchase price is say 1,000,000 or the the property donated is a building.
The donor bought purchased it for 1,000,000 and then he donated it. So the transfer is subject to Capital
gains tax. How much did he transfer that the building form? Kasi donation yan e. Walang value sa
pagdodonate. So what value will be the basis? Of the BIR in computing the capital gains tax. So the value
of 1,000,000 for which he purchased the property. But if there is loss But for purposes of determining
laws, the basis shall be the fair market value. Yeah, OK, so at the Time of donation the fair market value
should be determined. Suppose the property was purchased by the donor, the one yung nagbigay. the
donor purchased it for 2,000,000 OK. And that it was Just say five years ago After five years, he donated
it to the done, Of course. Anong value ang ilalagay mo? 2,000,000 ba? Or yung fair market value at the
time of donation, of course, the fair market value at the time of donation, but if the fair market value is
lesser than two million. The basis will not be the fair market value, but the two million purchase price of
thedonation of the donnor. Syempre, whichever is higher. because it says for purposes. Except that if the
basis is greater than the fair market value of the property At the time of the gift. Then, for purposes of
the the determining the loss, the basics shall be the fair market Value wait wait nalito ako run. If the
property was acquired by gift the basis shall be the same as if it would be in the hands of the donor or
the last preceding on normal for who it was not acquired by gifts. So 2 million. Except that if such bases,
if 2,000,000 is greater than the fair market value Of the property at the time of the year. For the purpose
of determining the loss, then the basis shall be the fair market value for determining the loss. Kasi lesser
ang fair market value.Ah, this one is included in the determination of recognition of gate.
The basis is the lesser amount. Hindi mo magulangan ang BIR. If we are reporting it as a loss. Lesser
amount, but if you are reporting it as again the higher amount. Ito ngayon ang masalimuot, exchange of
property OK. Who can explain this? You explain it very well, huh? This one is , amended by 11534. And
the amendment is quite significant. There is an introduction of a new word. Reorganization which you do
not find in train, so you create law. It created a new Plan, it is an all encompassing meaning. The word
reorganization refers. to both merger or consolidation. OK anyone? Let me call. Miss Flores Edna. Explain
what is this? Exchange of property. remember the title of the section of the termination of the amount
and recognition of gain and loss. We are discussing the basis of the facts. So in case of exchange property,
what is the Basis of the tax? That's the question. First of all, uh, what is murger and what is consolidation?
OK, don't worry, I will guide you huh? OK, what do you understand of merger?
S – A merger is when 2 or more companies combined or when one company takes over or absorbs another
company.
J - OK, so there is surviving corporation and there is A dissolved corporation OK?
Is merger and consolidation the same?
S - Ah no, no judge.
J – So what is basically the difference basic difference?
S - Uh consolidation Two or more companies for combined To form a union.
J - To form what? to form a new company or one of the companies will survive? Are you taking up
corporation law?
S – not yet po judge
J - OK, next second sem. Now uh merger 2 corporations combine. One will absorb the other, one will
survive. OK, So Corporation A, corporation B. corporation A will absorb corporation B. OK, so for example,
Allied Bank and PNB. Ang natira, PNB, wala na Allied Bank. PNB acquired all the asset of Allied Bank. The
idea there is two or more corporations merge and one corporation will survive. OK now in consolidation.
Two corporations combined to form one new corporation. OK, the law says law on taxation says. Let's go
to if you have the copy, go to 40, section 40. And then letter C. And number 1. Except as herein provided
upon the sale or exchange property, the entire amount of gain or loss as the case may be shall be
recognized. That's the general rule. So when when there is transfer of property from one corporation to
another? OK, let's say Bank Bank A to Bank B. Is that subject to tax?
If there is transfer of property. Transfer of property from bank to Bank B general rule is that subject to
tax?
S - Yes
J - yes yes OK? Because there is transfer. That is one of the uh, that is one of the transactions with respect
to transfer of property. There is transfer of ownership OK? Uh, so Class there is a Transfer of property
therefor There is change of ownership, one of the requirements there is there must be a bonafede, a
transfer of ownership.OK now, uh. Since there is transfer of ownership, there is a transaction. Where
income maybe Obtain or acquire why? If the property Is valued, let us say One of the properties sold by
Corporation A to Corporation B is stocks. Shares of stocks of the corporation itself. So Corp A Invested in
the stocks of corporation B. Kasi si corporation B It's a good company to invest in. So sabi ni Corporation
A, I will buy shares of stocks from You Corporation B. So bumili ng 2% worth of shares of stocks of
Corporation B is that that sale. Uh, is that sale? Subject to tax? Yes, sale of Capital asset if it is In the form
of investment or ordinary asset is it is. Uh, ordinary tax, meaning they scheduled activities and ordinary
asset. OK, that's the general rule. The exceptions are provided under #2 section 40. Paragraph C. what
are the exceptions? When is the exception? What does this mean? There is transfer of property but there
is no tax implication. OK, no tax. These are in Cases of merger and consolidation, question why Is there no
tax incident if there is If there is merger consolidation? But in merger and consolidation there is transfer
of property? Because in merger or consolidation, it's not the ordinary transfer that we all know, there is
change of ownership, No. Because in merger, siya rin ang isa sa mga magiging may ari. OK, so you are not
transferring it to another person, you are transferring it to a corporation that you yourself owns. So, pag
imerge mo sa corporation, sino bang may ari dyan? Ikaw din at yung imemerge mong corporation. Or kung
sa consolidation? Sino ang may ari ng corporation? Ikaw din na corporation kasama nung mga bago. So
there is really not transfer of ownership. Now, In order to avoid or in order to prevent tax avoidance,
because most of the corporations would be merging Or consolidating kasi nga mga family corporation,
mga magkakaibigan corporation, with the new corporation code now, one person can form a corporation,
one person compilation. And then one corporation will transfer property to the next. OK, or they will form
a merger or consolidation to avoid taxation of three different establishments. Para isa nalang satin ang
magtatax, sabi. And then they will merge in that case. Uh, if there is bonafede, a merger or consolidation,
then it is not something that the transfer is not subject to tax. OK, what is important here is there is
controlled by the one who acquires the property control means 50% of the shares of stocks and 51%. 51%
of the shares of stock.
Now in that case, uh, there is no Gain or loss. Why? Because you transferred nearly the property to the
new. Uh, you you merely transfer the property to the, transferee you don't even call it a new new
corporation or new owner because you yourself. Remains to be the owner. Transferee lang ang tawag
doon. Pero in transferee there is no income or loss OK. However, if that sale property will be sold later.
And in that sale that his income acquired. That is the only time that there is TAX incident, OK? Merger
consolidation no tax, kasi not transfer of ownership. Tax on the capital gains capital gains. Now in order
for merger or consolidation to exist, there must be control of 51% of the ownership or shares of stocks of
the acquired corporation or the newly or the members of the newly formed Corporation in a
consolidation. OK, you will understand more of that when you take corporation law. But but basically,
that's what very easy lang naman, merger and consolidation. Ngayon, The amendment, introduced by RA
11543, is with the word reorganization. so No gain or loss. Section 40 C, number 2. READ IT.
Yang word na reorganization you don't find that in the train you find merger or consolidation. So to
whatever arrangement is made by these corporations, as long as there is the reorganization then. Paso
yan sa Exception OK. The important consideration there is control Over the newly created corporation or
the merging the surviving corporation in a merger. you know there are so many things that can be done
in reorganization. you are practically forming a new corporation. nothing will nothing can stop him from
creating a new corporation. A new corporation is formed by the.By three corporations now and then
Dagdagan mo ng Capitalization authorized capital. OK, so And that is where the pyramiding happens. The
leader, of course, of the AMLAC task force is Banco Central and Filipinas, and Maybe because I'm also an
accountant They included me as a member of the task force. So all those cases regarding fraud, massive
fraud. Siphoning off money from banks.Ah, that's the work of the AMLAC. In one of the cases that We
investigated 1 taxpayer a family.It's a family business, but the leader of that family. Created 57
corporations. Para hindi mo matrace kung saan napupunta yung pera. but the flagship corporation.The
one that is created to Incorporated in order to start the Fraudulent a practice is The corporation that
bought shares of stocks of rural banks.
*NAG EXAMPLE SYA HERE*
OK. So that's it.that's that that's the simplest explanation of control. We are only discussing about the
word control in the section.OK, so these are exchanges of property.That are not subject to capital gains
tax exceptions, but remember the general rule as long as there is sale of capital I asset. There is gain on
sale of capital assets that is subject to income tax.The section 40 determination of amount and recognition
of gain. Section 41 is inventories. Yes, these are are ordinary assets.So method of taking inventory. Uh,
usually done at the end of the year, so. How many cans of sardines are left at the end of the year. Section
42 income from sources within the Philippines of corporations ito ha. And then Now you should make a
distinction of the corporations that are resident corporations and foreign corporations. So kung foreign
and resident, Only those income derived from sources within the Philippines, the question there is. OK,
let me ask you. Lets go back to Miss Taguinod.
OK, miss Taguinod, let us say that the the corporation is Not a domestic corporation. It is a foreign
corporation, meaning it was created under the laws of another country, but, it has a business here in the
Philippines. A branch or a branch office. The business of the corporation is an IT BUSINESS.IT service. Now,
that that foreign corporation was able to get a deal. Well, it's services to its client for the installation of
And internet of a computer network of its client in the Philippines. Did you Get the facts of the case? IT
service within the building, so the client is located in the Philippines, But the contract was done in
hongkong. Nagkita sila dun. Question, Is that foreign corporation subject to income tax?
S – Yes.
J – the contract was done in Hong Kong. The money was given in Hong Kong. Is the corporation subject to
income tax?
S – Yes po judge. Because the business is in the Philippines.
J - OK, even if the even if the contract was done in outside the Philippines? It's a even if the contract was
done outside the Philippines. What will be the basis of taxation?
S - The location Of the business.
J - With which the client or the taxpayer? The taxpayer is the one who provides the services.
S – the taxpayer judge.
J - You are not sure. What is the basis? Where was the market given? Where was the contract entered in
two or perfected and where are the services rendered? So which one will prevail? Which one will prevail
in order to determine whether the foreign Corporation is subject to income tax? You are on the right track.
S - The services rendered.
J - Yes, not the place of the business. OK, so where the services will be rendered if the service says? It's
rendered in the Philippines. The one who renders the services is subject to income tax. Well, suppose it's
goods. The one who is selling the goods make the deal With the buyer outside the Philippines. But the
goods are in the Philippines and they are to be brought to The Hong Kong. The deal was Made in Hong
Kong, the contract was affected in Hong Kong. The goods will be shipped to Hong Kong. And of course, in
the sale of goods that is income. Is the seller subject to income tax in the Philippines?
S - No judge.
J - Why not?
S Wrong sya
J - diba basis natin sa services where the services are rendered? It's a sale of goods. Ano ang basis natin
Where does goods are shipped or where the Sale is made? That is the principle of tax situs principle. OK,
usually it is asking the bar. Explain the situs of tax principal.So those are the matters that you have to
remember. sale of services is tax if the service is done in the Philippines. Sale of goods from the Philippines.
Going outside that this one, what do you call that kind of sale? Exporting, palabas. Import, papasok. So
yeah, OK, so there are tax implications there, not only on income. But also on vat.So kung selling outside
the Philippines is the seller subject to income tax? Goulding outside the Philippines in shorts export sales.
Question, Subject income to income tax?
S – Yes judge
J - Yes, yes import. Import products subject to income tax?
S – No judge.
J - OK, so Section 42 enumerates what are the income, that should be recognized by the corporation from
sources within. OK, this is not exclusive, meaning any other amount that may be considered as income is
still included is includible in the gross income so interest dividends. From other corporations and then uh
services. Amounts received for services. Labor or personal services then rentals and royalties. now look
at the description for rentals and royalties. Rentals of properties located in the Philippines. Syempre yung
rent doon income within. Use of Philippines of any copyright always in the Philippines. So if the Philippines
and then supply of technoscientific technical industrial and the supply of equipment. All of this should be
Of properties located in the Philippines. Now use or the right to use motion picture films. OK. So the
corporation. Uses motion picture films that are uh list from abroad.
or purchase from From outside the Philippines, but the uses in the Philippines still subject to income tax,
so these are sources within the Philippines. And then chain of real property of a sale of real property
located in the Philippines and sale of personal property. Uh, as determined by section E and what is section
E? For those partly within and partly without so, uh, read that, because in letter E it speaks not only of
those, uh sold to going outside. But also those, uh, coming into The Philippines OK. So gross income from
sources without the interest from interest, dividends, compensation for the labor performed outside the
Philippines, OK, and then rentals, royalties, games.
Now you read letter E. Uh, items gross income other than those in A and C shall be allocated or
apportioned to sources within or without. OK, so that is where personal property comes in. Now, where
items of gross income are separately allocated to sources within the expenses, The expenses loses a
portion or are allocated there two and rateable other expenses. which cannot definitely be allocated to
some other items or class of gross income. This happens when, it is different when they when it is difficult
for the taxpayer to trace The source of income, whether it's within or without. but you know with the
technology that we have, you can easily trace it. Uh, for items that are brought into the Philippines, no
problem. Dadaan lahat sa BOC, compared to those that are acquired in the Philippines and sold also in the
Philippines. Traded in the Philippines. That’s is for corporation. Next meeting we have 33 more. OK let me
just explain to you this. I'll just call some students. Accounting methods and periods madali lang yan. cash
basis accrual basis, installment method percentage of completion method and crop year basis. So these
are accounting periods for the taxpayer. Cash basis Income is recorded when the money is received.
Expense is recorded when money is paid out, so it does not Matter when the income was earned. The
basis is the cash. Sample, lending business. Cash is the business itself. Ang income mo is the interest
income. Now, the most prevalent method in recording income and expenses, the accrual method, and it
is this method that is encourage or even a mandated by the BIR. Now all events tests is a principle Applying
the accrual method of accounting all events. Meaning, An expense is deductible for the year in which all
events occurred, which determines the fact of liability and the amount there off could be determined with
reasonable accuracy. So you can apportion the expenses that are incurred in one year. So I think I there
was one who made an explanation here and also for income you record income only when they are
earned. If you receive the money, but you did not get render the service. There is no income there yet. In
fact it is even a liability. So for accountants they will call that as unearned income and an unearned income
Is a liability. Kasi hindi mo pa binibigay yung serbisyo. So nag advance na sila sayo ng pera, hindi pa
binibigay yung serbisyo. Utang pa tlga yun. OK, and you should not record that as an income. OK, well the
same is true an expense. An expense binayaran mo na, pero hindi mo pa nakukuha. So meron ka pang
receivable in fact. That is an asset. If the taxpayer already earned the income but he has not yet received
the money, that is an receivable OK, but there is already unearned income you record that for the year it
was earned. OK, that's accrual method.So the net income is being measured by the excess of the income
earned during the period. And then you get the, gross income. There are transactions. Where the best
method is installment method.
Uh, this is true for say A real state uh business. So it involves a huge amounts of money so the taxpayer
sells house and lot. 5 house and lot For one year low, so for that year or one taxable year, he was able to
sell the fight, but to installment. So let us say that for the whole year, he was able to sell the five. Each
happened that sells for 10 million.Maganda nay an na bahay. 5 costumers, Nabenta mo lahat Within the
year. But the problem is All of these were sold on installment question, Should you pay the income tax for
all 5 transactions for that year? You were not able to collect All of the amounts. Kasi installments. let us
say that the amount that you, uh, then receive as installment, 20% downpayment? Within the year, so
how much Did you receive? 10M * 20% = 2M x 5 = 10M. So you receive 10 million out of the five. So you
have a cash of 10 million. Should you pay income tax for the 10M or for the 50M? dun ka nalang sa 10M.
But When you receive the other installment on the following year, you will also pay your taxes The
following OK, so installment method and that is usually the case. And you can defend that to the BIR. You
will tell them I have a problem with liquidity. Besides, I did not yet received the amount So I will pay my
income tax on What I have collected. The others is percentage of completion. Para sa mga construction
yan. Lets say you only completed 60% of project. So you were able to collect 60% of the contract pric,
So pay the income tax for the portion completed. So how much is the income tax for the 60% completed
construction. crap year basis para sa mga agriculture yan. Of course kung maliit lng na farmer And the
gross income does not exceed the 250,000 a year, wag ka na magfile kasi exempt ka naman na. This one
refers to big farmers. Example you you have a farmer. How long will it take for, say, a plantation of
pineapple to harvest? Let's say you planted in the month of month 5 hectares pineapple.
Ah, so you can harvest only the following year. Let us say in March. For the following year. On the year
that you planted the pineapple 5 hectares plantation. May income ka ba? Wala. Expense? Yes. Seedlings,
patubig, labor, fertilizer ganon ang ezpenses. So you are already spending money. For this year, let's say
that here is 2018. Wala kang income. Now, what are you going to to declare as income tax in 2018? None.
But you cannot also demand the refund. Kasi you wait for your sales. So the following year when the
farmer was able to harvest and he was able to harvest, say a 100 million worth of a pineapple.Ayun may
income na. Can he deduct the expenses in the preceding year, of cours, because it's directly related to
the trade or business, so the expenses for 2018. As long as it refers to the crap year, can be deducted
from the income that will be obtained the following year, which is 2019. The harvest here. OK, so that's
the crop year basis. You can relate. And that is allowed as a method of accounting. The moment that you
choose An accounting method for the year you're not supposed to change that. But if you want to change
that, you need the permission of the CIR. OK then the last withholding tax before We proceed to remedies
Next Saturday, withholding tax are Uh, simply lang, uh, what is the essence of withholding tax? Why does
the law allow or even mandate Withholding tax?
S - Judge withholding tax is the method of collecting tax. Or the expenses quality in the advance of the
expenses of the taxable income so.
J - OK, in in in any transaction there are two parties to a transaction. one who is selling the goods or
service one is buying the Goods or services. OK now, If the one who is selling. The Item have people final
tax let us say uh interest income sa banko. Sino ang may interest income? The bank or the depositor?
S – the depositor Judge
J – Okay. Magdeposit ka ng pera para magkaroon ka ng interest. Who will pay the interest? The bank. The
income of the depositor is the expense of the bank. Now, the losses before an expense before can be
allowed as a deduction, the taxes should be paid and should be withheld. So who withholds the tax for
this interest income? The depositor or the bank? The bank. OK, so What is the relationship of the bank to
the government?
S - The withholding agent is the bank.
J – So kanino mapupunta yung pera? Sa gobyerno diba? So what should the bank do with that money that
was withheld? Should it remit the money to the government?
S – the bank should remit the money came from the depositor.
J – so what is relationship of the bank with the government? Legal relationship? A legal relationship arises
when the bank withheld the money? What? It is beneficiary and trustee. The bank is the trustee of the
money, he is holding the money in trust over the government. The withholding agent is the money that
entrust with the government. Question, supposed the bank did not withhold the tax from the depositor,
should the bank be held liable by the government or should it be the depositor that will be held liable by
the government? Example amount of deposit 2M. for 1st quarter, the interest income is 20k. so dapat
mayroon syang withholding tax na 20%, so 4k. So yung 20k nay un, only 16k should go the depositor as
interest income. The 4k should be remitted to the government. But the bank, kasi yung accountant ng
bank, tanga, hindi sya nag withhold. So yung buong 20k binigay nya sa depositor. Ngayon sabi ng BIR, oh
magbayad ka na ng final tax, 20%. Eh di nabulabog si accountant. My question, who under the law, is liable
to pay 4k? the depositor? The bank? The accountant? Or the manager?
S - The bank will be primary held liable for the non withholding of the 4k.
J - And is there a liability of the accountant or the manager?
S - The accountant will be held liable.
J – can the bir go after the depositor to pay the 4k? She was able to collect the whole 20k. It should be
16k by him but she was able to collect 20k. is it not the depositor should pay the 4k?
S – the bir can go after the depositor who received 20k but supposed to be 16k.
J – so the depositor be liable?
S – also yes judge
J – supposed the depositor does not paying the 4k, can you compel him? Can you go to court and compel
him?
S – I think judge, Yes.
J – Hmmmm hmmm and what is the. Now supposed you are the lawyer of the taxpayer, how will you
defend your client who does not wish to pay 4k?
S – sumagot sya pero mali.
J – bahala na kayo. Hahaha. See you on Saturday. Read remedies. Start with jurisdiction. What is the
jurisdiction of RTC, CTA, SC. NO MORE MIDTERMS. WAG NALANG SABIHIN KAY ELSA OR DEAN.