Tax 301- INCOME TAXATION
Prepared by: Amor A. Ilagan, Eunize E. Magsino, Daniel John F. Falo
_________________________________________________________________________
MODULE 1
Fundamental Principles of Taxation
Introduction
This module introduces the fundamentals principles of income taxation and theories that
underlie our system of taxation in the Philippines. The main topics that will be covered include:
general principles of taxation, inherent power of the state, purposes of taxation, theory and basis
of taxation, scope of the power of taxation, essential elements of a tax, aspects of taxation, nature
and characteristics of the state’s power to tax, classification of taxes, elements of sound tax
system, limitation on the State’s power to tax, situs of taxation, tax distinguished from other
terms or imposts, double taxation, means of avoiding or minimizing the burden taxation,
principles governing tax exemptions, sources of tax laws and application of tax laws. This will
provide students a clear perspective of the tax domain in our country using TRAIN Law.
INTENDED LEARNING OUTCOMES
ILO 1 ​Demonstrate an extensive knowledge of the nature and concepts of income taxation using
TRAIN Law.
ILO 2 ​Explain the government’s inherent power to impose taxes and enforce collection thereof.
ILO 3​ Correctly demonstrates resolution of tax problems of individuals and corporate taxpayers.
ILO 4 ​Execute skills in resolving income tax problems of individuals and corporations.
Taxation Defined
1. A power by which an Independent state, through its lawmaking body, raises and
accumulates revenue from its inhabitants to pay the necessary expense of the
government. As a power, it refers to the inherent power of a state, coextensive with
sovereignty to demand contributions for public purposes to support the government.
2. A process or act of imposing a charge by governmental authority on property, individuals
or transactions to raise money for public purposes. As a process, it passes a legislative
undertaking through the enactment of tax laws by the congress which will be
implemented by the executive branch of the government through its Bureau of internal
Revenue (BIR) to raise revenue from the inhabitants in order to pay the necessary
expenses of the government.
3. A means by which the sovereign state through its law-making body demands for revenue
in order to support its existence and carry out its legitimate objectives. As a means, it is a
way of collecting and apportioning the cost of government among those who are
privileged to enjoy its benefits.
The Three (3) Inherent Powers of the State
1. Police Power. It is the power of the state promoting public welfare by restraining and
regulating the use of liberty and property. It may be exercised only by the government.
The property taken in the exercise of this power is destroyed because it is noxious or
intended for noxious purposes.
2. Power of taxation. It is the power by which the State raises revenue to defray the
necessary expenses of the government.
3. Power of Eminent Domain. It is the power of the state to acquire private property for the
public purpose upon payment of just compensation.
Similarities among the three (3) inherent powers
1. They are inherent in the state.
2. They exist independently of the constitution although the conditions for their exercise
may be prescribed by the constitution.
3. Ways by which the State interferes with private rights and property.
4. Legislative in nature and character.
5. Presuppose an equivalent compensation received, directly or indirectly, by the persons
affected.
Table 1
Distinctions Among the Three (3) Inherent Powers
Taxation
Police Power
Eminent Domain
1. Nature
Power to enforce
contributions to raise
government funds.
Power to make and
implement laws for
the general welfare.
Power to take private
property for public
use with just
compensation.
2. Authority
Government only
Government only
May be granted to
public service/utility
companies
3. Purpose
For the support of the
government
Promotion of general
welfare through
regulation
The taking of private
property for public
use.
4. Persons
affected
Community or a class
of individuals.
Applies to all
persons, property and
exercises that may be
subject thereto
Community or a class
of individuals.
Applies to all
persons, property and
exercises that may be
subject thereto
On all individuals as
the owner of the
personal property.
Only particular
property is
comprehended.
5. Scope
Plenary,
comprehensive,
supreme
Broader in
application. General
power to make and
implement law.
Merely to take a
private property for
public use.
6. Effect
Contribution becomes No transfer or title.
part of public fund
There may just be a
There is a transfer of
title to property.
restraint on the
injurious use of
property.
7. Benefits
received
In form of protection
and benefits received
from government
No direct and
Market value of
immediate benefit but property taken.
only such as may
arise from the
maintenance of a
healthy economic
standard society
8. Amount of
imposition
No limit
Sufficient to cover
cost of the license
and the necessary
expenses of police
surveillance and
regulation
No imposition. The
owner is paid
equivalent to the fair
value of his property.
PURPOSES OF TAXATION
1.
Primary: Revenue or Fiscal Purpose
to provide funds or property with which to promote general welfare and protection of its
citizens
2.
-
Secondary: Regulatory Purpose
employed as a device for regulation or control
Effects: ● Promotion of General Welfare
● Reduction of Social Inequality
● Economic Growth
THEORY and BASIS of TAXATION
1. Theory (Authority)
a. Necessity Theory
● to preserve the state’s sovereignty
● a means to give for protection and facilities
b. Lifeblood Theory
● used to continue to perform the government’s basic function of serving and protecting its
people
● give tangible and intangible benefits
2.
Basis of Taxation: BENEFITS RECEIVED OR RECIPROCITY THEORY
The basis is the reciprocal duties of protection and support between the state and its
inhabitants. The state collects taxes from the subjects of taxation in order that it may be able to
perform the functions of government. The citizens, on the other hand, pay taxes in order that they
may be secured in the enjoyment of the benefits of organized society.
MANIFESTATION OF LIFEBLOOD THEORY
1. Rule of “No Estoppel against the government”
2. Collection of taxes cannot be stopped by injunction
● Court of Tax Appeals – have the authority to grant injunction to restrain
collection of internal revenue tax, fee or charge
3. Taxes could not be the subject of compensation or set-off
● Tax is compulsory not bargain.
4. Right to select objects (subjects) of taxation
a. Subject or object to be taxed
b. Purpose of the tax (as long as it is a public purpose)
c. Amount or rate of the tax
d. Kind of tax
e. Apportionment of the tax
f. Situs (place) of taxation
g. Manner, means, and agencies of collection of the tax
5. A valid tax may result in the destruction of the taxpayer’s property.
● Lawful tax cannot be defeated.
● Bring out the insolvency of the taxpayer
● Forfeiture of property through police power
SCOPE OF THE POWER OF TAXATION
The power of taxation is the most absolute of all the powers of the government.
a) Comprehensive – covers all (persons, businesses, professions, right and privileges)
b) Unlimited – In the absence of limitations provided by the law or the constitution, the
power to tax is unlimited and comprehensive. Its force is so searching to the extent that
the courts scarcely venture to declare that it is subject to any restrictions.
c) Plenary – it is complete; BIR may avail of certain remedies to ensure collection of taxes.
d) Supreme – in so far as the selection of the subject of taxation
ESSENTIAL ELEMENTS OF TAX
a) It is an enforced contribution.
b) It is generally payable in money.
c) It is proportionate in character.
d) It is levied on persons, property or rights.
e) It is levied by the law-making body of the state.
f) It is levied for public purpose.
ASPECTS OF TAXATION
a) Levying or imposition of tax
b) Assessment or determination of the correct amount
c) Collection of tax
NATURE/CHARACTERISTICS of the State’s Power to Tax
1. It is inherent in sovereignty.
The state, having sovereignty can enforce contribution (tax) even in the absence of a
constitutional provision because the state has the supreme power to command and
enforce obedience to its will from the people within its jurisdiction.
2. It is legislative in character.
The power to tax (levying or imposition) is peculiarly and exclusively legislative in
nature. It cannot be exercised by the executive or judicial branches of the government.
EXCEPTIONS TO NON-DELEGATION RULE
a. Delegations as provided for in the 1987 Constitution such as “Delegation to the
President” under Section 28 Article VI stating that the Congress may authorize, by law,
the President to fix, within specified limits and subject to such limitations and restrictions
as it may impose:
● Tariff rates
● Import and export quotas
● Tonnage and wharfage dues
● Other duties or imposts within the framework of the national development
program of the government
b. Delegation to local government units as provided under Section 5, Article X of the
Constitution. The power of local government units to impose taxes and fees is always
subject to the limitations which Congress may provide, the former having no inherent
power to tax.
c. Delegation to administrative agencies
Certain aspects of the taxing process that are not really legislative in nature are vested in
administrative agencies such as:
● Power to value property
● Power to assess and collect taxes
● Power to perform details of computation, appraisement or adjustment
d. It is subject to Constitutional and inherent limitations
3. Exemptions of government entities, agencies and instrumentalities.
Immunity is necessary in order that governmental functions will not be impeded.
Otherwise, the government will be taxing itself to raise money for itself. The following rules
shall apply in determining whether or not government entities or agencies are subject to tax:
a. Agencies performing governmental function are tax exempt unless expressly
taxed
b. Agencies performing proprietary functions are subject to tax unless expressly
exempted
c. GOCCs performing proprietary functions are subject to tax, however the
following are granted tax exemptions:
● Government Service Insurance System (GSIS)
● Social Security System (SSS)
● Philippine Health Insurance Corporation (PHIC)
● Philippine Charity Sweepstakes Office (PCSO)
● Local Water Districts (RA 10026)
4. International Comity (Polite arrangements among nations)
5. Limitation of territorial jurisdiction
6. Strongest among the inherent powers of the state
CLASSIFICATION OF TAXES
Taxes are grouped according to the following classifications.
As to purpose:
❖ Revenue or Fiscal. These taxes are imposed solely for the purpose of raising revenue for
the government (e.g. Income tax, value added tax, and transfer tax).
❖ Regulatory, Special or Sumptuary. These taxes are imposed for the purpose of achieving
some social or economic goals having no relation to the raising revenue (e.g. customs
duties, Protective tariff on imports to control foreign trade and excise tax).
❖ Compensatory. Taxes may be imposed for the equitable distribution of wealth and
income in the society.
As to Object or Subject Matter:
❖ Personal, Poll or Capitalization. These taxes are fixed in amount and imposed on persons
residing within a specified territory regardless of the amount of their property on their
occupation or business (e.g. Community Tax);
❖ Property. These taxes are imposed on personal or real property based on its proportionate
value or in accordance with some reasonable method of apportionment. (e.g. Real Estate
Tax); and
❖ Excise. These taxes are imposed upon the performance of a right or act, the enjoyment of
a privilege or the engagement in an occupation (e.g. Professional tax, Income Tax, Estate
Tax, Donor’s tax and Value-Added Tax).
As to Determination of Amount
❖ Ad Valorem. These taxes are fixed amounts in proportion to the value of the property
with respect to which the tax is assessed. It requires the intervention of Assessors to
estimate the value of such property before the amount due from each taxpayer can be
determined (e.g. Real Estate Tax, Custom Duties and Excise Tax on fermented liquors,
cigars, cigarettes gasoline and automobiles).
❖ Specific. These taxes are fixed amounts imposed and based on some standard of weight
or measurement, head or number length or volume. It requires independent assessment
other than listing a classification of the subject taxed like excise taxes on distilled spirits,
wines, fireworks, and cinematographic films.
As to who Bears the Burden:
❖ Direct. These taxes are non-transferable. They are demanded from persons who are
bound by law to pay the tax. The liability for the payment of tax as well as the burden of
the tax falls on the same person (e.g. Community Tax, Income Tax, Transfer taxes
Traveler’s Tax and Corporate Income Tax).
❖ Indirect. These taxes are transferable. The liability for the payment of tax falls on one
person, but the burden thereof can be shifted or passed to another.
As to Scope or Authority Collecting Tax
● National. Those taxes collected by the National Government. Example of national taxes
are:
➢ Estate and Donor’s Taxes;
➢ Income Tax;
➢ Value – Added Tax;
➢ Excise Tax;
➢ Customs Duties; and
➢ Documentary stamp Taxes.
● Local or Municipal. Those taxes collected by the Municipal Governments. Examples of
local or municipal taxes are:
➢ Community tax;
➢ Municipal licenses taxes;
➢ Professional tax; and
➢ Real estate tax.
As to Rate or Graduation:
● Proportional or Flat Rate. The rate of the tax is based on a fixed percentage of the amount
of the property, receipt or other basis to be taxed (e.g. Real estate tax and VAT).
● Progressive or Graduated Rate. The rate of the tax increases as the tax base or bracket
increases (e.g. Income Taxes, Estate Taxes and Donor’s Taxes).
● Regressive Rate. The rate of tax decreases as the tax base or bracket increases. There is
no regressive tax in the Philippines.
● Digressive rate. A fixed rate is imposed on a certain amount but diminishes gradually on
sums below it. In digressive rate, the tax rate is arbitrary because the increase in tax rate
is not proportionate to the increase of tax base.
● Mixed Tax. It is a tax system that uses a combination of the different tax rates.
ELEMENTS OF SOUND TAX SYSTEM
a. Fiscal Adequacy – sources must be adequate
b. Theoretical Justice or Equity – tax should be proportionate
c. Administrative Feasibility – law must be capable of effective and efficient enforcement
SITUS OF TAXATION
Literally, the situs of taxation means “place of taxation”. It is the state or political unit
which has jurisdiction to impose a particular tax. The state where the subject to be taxed has a
situs may rightfully levy and collect the tax. The situs is necessarily in the state which has
jurisdiction or which exercises dominion over the subject in question.
FACTORS IN DETERMINING THE SITUS OF TAXATION
a. Subject matter ( person, property, or activity)
b. Nature of tax
c. Citizenship
d. Residence of the taxpayer
e. Source of Income
f. Place of excise, business or occupation being taxed
TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS
1. Tax versus TOLL
A toll is a sum of money for the use of something, generally applied to consideration
which is paid for the use of a road, bridge or the like of a public nature.
2. Tax versus PENALTY
Penalty is a sanction imposed as a punishment for a violation of law or acts deemed
injurious. The violation of tax may give right to imposition of penalty.
3. Tax versus SPECIAL ASSESSMENT
Special assessment is an enforced proportional contribution from owners of lands for
special benefits resulting from public improvements. In Republic v. Bacolod, a special
assessment is a levy on property which derives some special benefits from improvement.
Its purpose is to finance such improvements thus accruing only to the owners thereof,
who, after all pay the assessment.
It is not a tax measure intended to raise revenues for the government because the
proceeds thereof may be devoted to the specific purpose for which the assessment was
authorized.
Characteristics of Special Assessment
● Levied only on land
● Not a personal liability of the person assessed
● Based wholly on benefits (not necessary)
● Exceptional both as to time and place
4. Tax versus REVENUE
Revenue refers to all funds or income derived by the government, whether from tax or
any other source.
5. Tax versus SUBSIDY
Subsidy is a pecuniary aid directly granted the government to an individual or private
commercial enterprise deemed beneficial to the public. Subsidy is not a tax although tax
may have to be imposed to pay it.
6. Tax versus PERMIT OR LICENSE FEE
Permit or a license fee is a charge imposed under the police power for purposes of
regulation.
7. Tax versus DEBT
Debt
Tax
Based on contract
Based on law
May be paid in kind
Generally payable in money
assignable /maybe the subject of set-off or
compensation
Cannot generally be assignable/subject of
set-off or compensation
A person cannot be imprisoned for
Imprisonment is a sanction for
non-payment of debt (except when it
arises from crime)
non-payment of tax (except poll tax)
Draw interest when stipulated or when of
prescription default
Does NOT draw interest except only when
delinquent
8. Tax versus CUSTOM DUTIES
Custom duties are taxes imposed exported from or imported into a country.
9. Tax versus TARIFF
Tariff may be used in one of three (3) senses:
● A book of rates drawn usually in alphabetical order containing the names of
several kinds of merchandise with the corresponding duties to be paid for the
same; or
● The duties payable on goods imported or exported; or
● The system or principle of imposing duties on the importation or exportation of
goods.
DOUBLE TAXATION
In its strict sense, double taxation referred to is direct duplicate taxation. In its broad
sense, double taxation is referred to as indirect double taxation. It extends to all cases in which
there is a burden of two or more impositions.
DIRECT DOUBLE TAXATION means taxing twice:
1. By the same taxing authority, jurisdiction or taxing district
2. For the same purpose
3. In the same year or taxing period
4. Same subject or object
5. Same kind or character of the tax
MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION
1. Shifting – the transfer of the burden of tax by the original payer to someone else
2. Transformation – the producer pays the tax and endeavor to recoup himself by improving
his process of production
3. Evasion – the use of illegal means to defeat or lessen tax
4. Tax Avoidance – the exploitation of legally permissible alternative tax rates of assessing
taxable income to reduce tax liability
5. Exemption – the grant of immunity to particular persons of a particular class
GROUNDS FOR GRANTING TAX EXEMPTION
● May be based on contract
● May be based on some public policy
● May be on grounds of reciprocity or to lessen the rigors of international or
multiple taxation
Nature of power to grant tax exemption
● National government. The power to grant tax exemptions is an attribute of
sovereignty for the power to prescribe who or what persons or property shall be
tax implies the power to prescribe who or what persons or property shall not be
taxed.
● Local governments. Municipal corporations are clothed with no inherent power to
tax or to grants exemptions. But the moment the power to impose a particular tax
is granted, they also have the power to grant exemption therefrom unless
forbidden by some provision of the Constitution or law.
KINDS OF EXEMPTION
As to basis :
● Constitutional. Immunities from taxation which originate from the
Constitution
● Statutory. Immunities from taxation which emanates from
legislation
As to form:
● Express. Exemptions expressly granted by statute.
● Implied. When particular persons, property or rights are deemed
exempt as they fall outside the scope of the taxing provision itself.
As to extent:
● Total. Connotes absolute immunity.
● Partial. One where a collection of a part of the tax is dispensed
with.
Amnesty
It is the general or intentional overlooking by the State of its authority to impose penalties
on persons otherwise guilty of evasion or violation of revenue or tax law. It partakes of an
absolute forgiveness or waiver of the government of its right to collect. It is a way to give tax
evaders, who wish to relent or willing to reform a chance to do so.
Amnesty involves immunity from all criminal, civil and administrative liabilities from
non-payment of taxes.
6. Capitalization – the reduction in the selling price of income producing property by an
amount equal to the capitalized value
7. Avoidance – the tax saving device within the means sanctioned by the law
SOURCES OF TAX LAWS
1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances/ City or municipal tax codes
6. Tax treaties and international agreements
7. Special Laws
8. Decision of the Supreme Court and the Court of Tax Appeals
9. Revenue rules and regulations and administrative ruling and opinion
CHAPTER EXERCISES
True or False
1. The three fundamental powers of the state may be exercised only by the government.
2. Taxation is a process or means by which the sovereign, through its law making body
raises income to defray the expenses of the government.
3. Eminent domain may be exercised even by public service corporations and public
entities.
4. Police power regulates both liberty and property.
5. Taxes are raised to cover the cost of governance.
6. Toll is one of the taxes collected by the government.
7. License fees are imposed in the exercise of police power.
8. License fee is imposed to raise revenue.
9. Tax is generally unlimited because it is based on the needs of the State.
10. The amount imposed in the exercise of police power depends whether the activity is
useful or not.
11. The distinction of a tax from permit or license fee is that a tax is one in which there is
generally no limit on the amount that may be imposed.
12. debt , as distinguished from tax may be paid in kind.
13. Special assessment is a tax.
14. Special assessment is imposed on persons, property and property rights.
15. In the exercise of the power of taxation, the State can tax anything at any time.
Multiple Choice
Definition, Purpose, Theory and Basis
1. Which of the following statements is incorrect?
a. Taxes are the revenues raised in the exercise of the police power of the State.
b. One of the special characteristics of tax is it is unlimited in amount.
c. The three fundamental powers of the State are inherent in the State and may be
exercised without the need of any constitutional grant.
d. All of the above.
2. The State having sovereignty can enforce contributions (tax) upon its citizens even
without a specific provision in the Constitution authorizing it. Which of the following
will justify the foregoing statement?
a. It is so because the State has the supreme power to command and enforce
obedience to its will from the people within its jurisdiction.
b. Any provision in the Constitution regarding taxation does not create rights for the
sovereignty to have the power to tax but it merely constitutes limitations upon the
supremacy of tax power.
c. Both a and b
d. Neither a nor b
3. Statement 1: The distinction of a tax from permit or license fee is that a tax is imposed for
regulation.
a. Statement 2: Non-payment of tax does not necessarily render a business illegal.
b.
c.
d.
e.
Only statement 1 is correct.
Only statement 2 is correct.
Both statements are correct.
Both statements are incorrect.
4. 4.The primary purpose of taxation is to raise revenue for the support of the government.
However, taxation is often employed as a device for regulation by means of which,
certain effects or conditions envisioned by the government may be achieved such as:
a. Taxation may be used to provide incentive to greater production through grant of
tax exemptions.
b. Taxation can strengthen weak enterprises by creating conditions conducive to
their growth through grant of tax exemptions.
c. Tax may be increased in periods of prosperity to curb spending power and halt
inflation or lowered in periods of slump to expand business and ward off
depression.
d. All of the above.
5. Which of the following statements is correct?
a. The purpose of taxation may also be compensatory meaning it may be used to
make up for the benefit received.
b. Taxes may be imposed for the equitable distribution of wealth and income in
society.
c. Both a and b
d. Neither a nor b
6. Which theory in taxation states that without taxes, a government would be paralyzed for
lack of power to activate and operate it, resulting in its destruction?
a. Power to destroy theory
b. Lifeblood theory
c. Sumptuary theory
d. Symbiotic doctrine
7. On a theoretical basis of taxation, which of the following statements is true?
a. People pay taxes which their government uses to expand its powers and territorial
domination.
b. People demand from their government certain responsibilities and then provide
this government with the means to carry them out.
c. State needs taxation to exist, while people must support taxation because they
need the presence of the state.
d. B and c
8. Incidence of taxation means
a. Shifting of tax
b. Refunds of tax
c. Payment of tax
d. Imposition of tax
9. The actual effort exerted by the government to effect the exaction of what is due from the
taxpayer is known as
a. Assessment
a. Levy
b. Payment
c. collection
10. Statement 1: Symbiotic relation is the reason why the government would impose taxes on
the income of resident citizens derived from sources outside the Philippines.
a. Statement 2: Jurisdiction is the reason why citizens must provide support to the
state so the latter could continue to give protection.
b. Only Statement 1 is correct.
c. Only Statement 2 is correct.
d. Both statements are correct.
e. Both statements are incorrect.
11. Being a legislative in nature, the power to tax may not be delegated except
a. To local governments or political subdivisions
b. When allowed by constitution
c. When delegation related merely to administrative implementation that may call
for some degree of discretionary powers under a set of sufficient standards
expressed by law or implied from the policy and purpose of the act.
d. All of the above
Scope and Aspect of Taxation
12. Statement 1: The aspects of taxation are shared by the legislative and executive branches
of the government.
a. Statement 2: Taxes should be prospective and should not be given retroactive
effects because they are burdens.
b. Only Statement 1 is correct.
c. Only Statement 2 is correct.
d. Both statements are correct.
e. Both statements are incorrect.
13. The following are the aspects of taxation
I - Levy or imposition of the tax on persons, property or excises
II - Collection of taxes already levied
III - Sufficiency of government sources to satisfy its expenditure
a. I, II & III
b. I & II only
c. I & III only
d. II & III only
14. Which of the following is incorrect?
a.
b.
c.
d.
Selecting the kind of tax
Fixing amount of tax
Prescribing rules of taxation
Assessment of tax liability
Legislative
Yes
Yes
Yes
Yes
Administrative
No
No
No
No
Legislative
Yes
Yes
Yes
No
Administrative
Yes
No
No
Yes
15. Which of the following is correct?
a. Fixing of tax rates
b. Valuation of object of tax
c. Collection of tax
d. Assessment of tax liability
Inherent Powers of the State
16. Statement I: Inherent powers of the state exist independent of the constitution.
Statement II: The taxing power of the local government units precede from a
constitutional grant.
a. Statements I&II are false.
b. Statement I&II are true.
c. Statement I is true but Statement II is false.
d. Statement I is false but Statement II is true.
17. The following are the characteristics of the State’s power to tax except
a. The strongest of all inherent powers of the State
b. Involves power to destroy
c. Both a and b
d. Neither a nor b
18. Levying of local government taxes may be exercised by:
a. The local executive only
b. The legislative branch of the local government only
c. The local executive and the legislative branch of the local government unit
d. Neither the local executive nor the legislative branch of the local government can
exercise the power.
19. Where does taxing power of provinces, municipalities and cities precede from?
a. Constitutional grant
b. Legislative enactment
c. Presidential decree or executive act
d. Local legislation
20. Statement 1: Eminent domain may raise money for the government.
Statement 2: Barrios, barangays, municipalities/cities and provinces may collect taxes
from its inhabitants.
a. Statements 1&2 are false.
b. Statement 1 is true but statement 2 is false.
c. Statement 1 is false but statement 2 is true.
d. Statements 1&2 are true.
Nature , Characteristics and Construction of Tax Laws
21. The following are the nature of taxation except
a. Inherent and sovereignty
b. Essentially a legislative function
c. Subject to inherent and constitutional limitation
d. Subject to the approval of the people
22. The power to tax involves power to destroy means:
a. The power to tax is viewed as the power to destroy in the sense that a lawful tax
cannot be defeated just because its exercise would be destructive or would bring
about insolvency to a taxpayer.
b. The principle applies that an imposition of lawful regulatory taxes would be
destructive to the taxpayers and business establishments because the government
can compel payment of tax and forfeiture of property through the exercise of
police power.
c. Both a and b
d. Neither a nor b
23. There
of
a.
b.
c.
d.
can be no tax unless there is a law imposing the tax is consistent with the doctrine
Uniformity in taxation
Due process of law
Non-delegation of the power of tax
All of the above
24. The tax should be based on the taxpayer's ability to pay. In relation to this, which of the
following is not correct?
a. No person shall be imprisoned for non-payment of tax.
b. A graduated tax table is in consonance with this statement.
c. As a theory of taxation, ability to pay theory.
d. As a basic principle of taxation, this is called “theoretical justice”
25. Rule of “no estoppel against the government” means
a. Rule of law that in the performance of its governmental functions, the state cannot
be estopped by the neglect of its agents and officers.
b.
The government is not estopped by the mistakes or errors of its agents; erroneous
application and enforcement of law by public officers do not block the subsequent
correct application of statutes.
c. Both a and b
d. Neither a nor b
26. Progressivity of taxation is also mandated in the Constitution.
Statement 1: Our income tax system is one good example of such progressivity because it
is built on the principle of taxpayer’s ability to pay.
Statement 2: Taxation is progressive when their rates go up depending on the resources of
the person affected.
a. Statements 1&2 are false.
b. Statement 1 is true but statement 2 is false.
c. Statement 1 is false but statement 2 is true.
d. Statements 1&2 are true,
27. The least source of tax laws:
a. Statutes
b. Presidential Decrees
c. Revenue regulations
d. Tax treaties or conventions
28. In every case of doubt, tax statutes are construed
a. Strictly against the government and the taxpayer
b. Liberally in favor of the government and the taxpayer
c. Strictly against the government and liberally in favor of the taxpayer
d. Liberally in favor of the government and strictly against the taxpayer
29. In every case of doubt, tax exemption are construed
a. Strictly against the government and the taxpayer
b. Liberally in favor of the government and the taxpayer
c. Strictly against the government and liberally in favor of the taxpayer
d. Liberally in favor of the government and strictly against the taxpayer
30. Tax of a fix amount imposed among all persons residing within a specified territory
without regards to their property or occupation they may be engaged
a. Personal, poll or capitation tax
b. Property
c. Excise
d. regressive tax
31. Tax of fixed proportion of the amount or value of property with respect to which the tax
assessed
a. Ad valorem
b. Specific
c. Excise
d. Revenue
32. Tax base on a fix percentage of the amount of property, income or other basis to be taxed
a. Progressive
b. Proportional
c. regressive tax
d. Indirect
33. Which of the following is a characteristic of taxation which distinguishes it from police
power and eminent domain?
a. For public purposes
b. Legislative in nature
c. Generally payable in money
d. Inferior to non-impairment clause in the Constitution
Sound Tax System
34. The following are the basic principles of sound tax system
I. It should be capable of being effectively enforced.
II. It must be progressive
III. Sources of revenue must be sufficient to meet government expenditures and other
public needs.
IV. It should be exercised to promote public welfare.
a. I and II only
b. III and IV only
c. I, II and III only
d. All of the above
35. The sources of revenue should be sufficient to meet the demands of public expenditures.
This refers to
a. Equality or theoretical justice
b. Fiscal adequacy
c. Administrative feasibility
d. Rule of apportionment
36. The tax should be imposed proportionate to the taxpayer’s ability to pay
a. Equality or theoretical justice
b. Fiscal adequacy
c. Administrative feasibility
d. Rule of apportionment
37. The tax law must be capable of convenient just and effective administration
a. Equality or theoretical justice
b. Fiscal adequacy
c. Administrative feasibility
d. Rule of apportionment
Inherent and Constitutional Limitations
38. Equality in taxation means
I. Progressive system of taxation shall be applied.
II. The tax laws and their application must be fair, just, reasonable and proportionate to
one’s ability to pay.
III. The tax laws shall give emphasis on direct rather than indirect taxes or on the
ability-to-pay principle of taxation.
a. I only
b. II only
c. III only
d. I, II & III only
39. Which of the following restrictions on the power of taxation recognizes that the country’s
tax laws shall not be applied to the property of foreign governments?
a. Taxation is inherently a legislative function
b. Exercise of taxation is subject to international comity
c. Due process of law
d. Equal protection of law
40. This is an inherent limitation on the power of taxation.
a. The rule on taxation shall be uniform and equitable.
b. No law impairing the obligations and contracts shall be enacted
c. Charitable institutions, churches, personages or convents belonging thereto,
mosque and non-profits cemeteries and all kinds of lands, building and
improvements actually, directly and exclusively used for religious and charitable
purposes shall be exempt from taxation
d. The tax laws cannot apply to the property of foreign government
Exemption versus Amnesty
41. Exemption from tax is a privilege which is being looked upon by law with disfavor
because everyone should be sharing the burden of taxation. On account of this view,
exemption from tax is construed strictly against the taxpayer, except in certain situation
like:
a. Exemption is granted to the impoverished sector in certain situation
b. Exemption relates to a public official
c. Exemption refers to a public property
d. All of the above
42. Tax exemption is made different from tax amnesty:
a. It is a privilege or freedom from tax burden;
b. It allows immunity from all criminal, civil and administrative liabilities arising
from non-payment of taxes;
c. Amount foregone by the government is substantial;
d. It applies to past, present and future obligations.
43. Statement 1: Tax exemption applies only to government entities that exercise proprietary
functions.
Statement 2: All government entities regardless of their functions are exempted from
taxes because it would be impractical for the government to be taxing itself.
a. Statements 1&2 are false.
b. Statement 1 is true but statement 2 is false.
c. Statement 1 is false but statement 2 is true.
d. Statements 1&2 are true.
Tax Avoidance/Double Taxation
44. Which of the following is to be regarded as tax minimization through legal means?
a. Not declaring all taxable income
b. Padding of expenses for deduction from income
c. Opting to transfer the property through sale rather than through donation where
tax liability is higher
d. All of the above
45. Which of the following is correct?
a. Tax avoidance or tax minimization through legal means is not punishable by law.
b. Deliberate reduction of taxable income that has been received is an example of
tax avoidance.
c. Evasion of tax takes place only when there are no proceeds on the part of the
government
d. All of the above
46. Double taxation in its general sense means taxing the same subject twice during the same
taxing period. In this sense, double taxation
a. Violates substantive due process.
b. Does not violate substantive due process.
c. Violates the right to equal protection.
d. Does not violate the right to equal protection
References:
● Tabag, E.D., Garcia, E.J. (2019) Income Taxation with Special Topics in Taxation based
on NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act
(TRAIN Law)
● Banggawan, R. B. (2019) Income Taxation-Laws, Principles and Applications (An
Integrated Principle Based Approach)
● Ballada, W. (2019) Taxation Made Easy
● www.scribd.com
MODULE 2
Individual Taxpayers
INTRODUCTION
This module introduces the relevant laws governing individual income taxation. Topics
include classification of individual taxpayers under Tax Code of the Philippines, applicable taxes
and tax rates, graduated rates under TRAIN Law 2018-2022, final withholding tax, capital gains,
requisites of tax exemption, format in computing taxable income, benefits of senior citizens and
person with disability, minimum wage earner (MWE), filing of income tax returns, manner and
place of filing income tax return, persons required to file income tax returns, persons not
required to file income tax returns and substituted filing of income tax returns.
INTENDED LEARNING OUTCOMES
ILO 1 Define and discuss the different classifications of individual taxpayers.
ILO 2 ​Explain TRAIN LAW
2018-2022.
ILO 3 ​Execute skills in solving problems regarding individual taxation.
DEFINITION
INDIVIDUAL TAXPAYERS are natural persons with income derived from within the territorial
jurisdiction of taxing authority. They are classified as:
1.
Resident Citizens(RC)
2.
Nonresident Citizens (NRC)
3.
Resident Aliens (RA)
4.
Nonresident Aliens (NRA)
● Engaged in trade/business (NRA-ETB)
● Non-resident alien not engaged in trade or business (NRA-NETB
Importance of classification:
They differ as to:
● Situs of income
● Manner of computing tax
● Treatment of certain passive incomes
● Allowable deductions
● References in the tax choice
CITIZENS OF THE PHILIPPINES
1. Born with father and/or mother as Filipino citizens
2. Born before Jan. 17,1973 of Filipino mother who elects Philippine citizenship upon
reaching the age of maturity
3. Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine
Laws
NON-RESIDENT CITIZEN OF THE PHILIPPINES
1. Establishes to the satisfaction of the Commissioner of Internal Revenue, the fact of his
physical presence abroad with a definite intention to reside therein
2.
●
●
●
Leaves the Philippines during the taxable year to reside abroad:
As an immigrant
For employment on a permanent basis
For work and derives income that requires him to be physically abroad most of the time
during the taxable year
3. A citizen of the Philippines who shall have stayed outside the Philippines for one hundred
eighty-three days (183) or more by the end of the year.
● A non-resident citizen who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines shall be considered a
non-resident citizen for the taxable year in which he arrives in the Philippines
with respect to income derived from sources abroad until the date of his arrival in
the Philippines.
ILLUSTRATION 1
Pedro left the Philippines on July 1, 2018 to go abroad and work there for two years. The
following data were provided for 2018 taxable year (assume 40% of gross income and
business expenses presented below were derived from abroad:
Gross Income
January 1 to June 30
July 1 to December 31
Business Expenses
₱​ ​600,000
₱​ ​280,000
400,000
120,000
Question 1: His taxable income is
​Answer: P488,000
​Gross Income, Jan.-June
Gross Income, July-December @60%
Business Expenses, Jan-June
Business Expenses, July-December @60%
Taxable Income
​₱​ ​ 600,000
240,000
(280,000)
​( 72,000)
​ ​₱​ ​ 488,000
Question 2: Assuming he arrived from abroad on July 1, 2018 to permanently resettle in the
Philippines, his taxable income for 2018 is:
​Answer: ​₱​ ​472,000
​Gross Income, Jan.-June @60%
₱ 360,000
Gross Income, July-December
400,000
Business Expenses, Jan-June @60%
(168,000)
Business Expenses, July-December @60%
​(120,000​)
Taxable Income
​ ₱ 472,000
OVERSEAS CONTRACT WORKER (OCW)/OVERSEAS FILIPINO WORKER (OFW)
Revenue regulation 1-2011 defines OCWs as Filipino citizens employed in foreign
countries commonly referred to as OFWs, who are physically present in a foreign country as a
consequence of their employment. Their salaries and wages are paid by an employer abroad and
are not borne by entities or persons in the Philippines. Hence, OFWs are classified as
non-residents citizens for tax purposes.
A seaman shall be classified as an overseas contract worker since he receives
compensation for services rendered abroad as a member of the complement vessel exclusively
engaged in international trade and is a citizen of the Philippines.
A Filipino citizen who was previously a nonresident citizen and who arrives and resides
permanently in the Philippines at any time during the taxable year shall likewise be treated as a
nonresident citizen for the same taxable year with respect to his income derived from sources
abroad until the date of his arrival to the Philippines.
● A Filipino citizen taxpayer not classified as nonresident citizen is considered a
RESIDENT CITIZEN for tax purposes.
● An ALIEN is a foreign-born person who is not qualified to acquire Philippine citizenship
by birth of after birth.
● Section 22(F) of the Tax Code defines RESIDENT ALIENS as an individual whose
residence is within the Philippines and who is not a citizen thereof.
● The term NONRESIDENT ALIEN under Section 22(G) of the Tax Code means an
individual whose residence is not in the Philippines and who is not a citizen thereof.
● Under Section 22(S) of the Tax Code, “trade or business” includes performance of the
functions of a public service or performance of personal service in the Philippines.
● A nonresident alien not engaged in trade or business is subject to 25% income tax based
on gross profit from all sources within the Philippines.
ILLUSTRATION
Determine the correct classification of the taxpayer from the independent cases provided below:
Case 1:
Allan is a natural born Filipino citizen. His family migrated to the U.S. fifteen years ago. For
personal reasons, he decided to return and reside permanently in the Philippines on March 1,
2018.
Answer:
From Jan.-Feb. 2018: Allan is classified as NRC
From March 1, 2018 onwards: Allan is classified as RC
Case 2:
G.I. Joe is an American information technology expert. He was signed by Noypi Telecom (a
local telecommunication company) from January to March 2018 to improve its internet services.
Due to the anticipated entry of competitors from other countries, Noypi decided to extend
indefinitely the services of G.I.Joe.
Answer: He is a resident alien.
An alien who comes to the Philippines for the purpose that requires extended stay for its
accomplishment, so he makes his home temporarily in the Philippines, is a resident,
regardless of his intention to return to his residence abroad.
Case 3:
Greg Popovich, head coach of San Antonio Spurs in the NBA is in the Philippines for a
month-long NBA promotional tour. He also expressed his intention to regularly visit the
Philippines.
Answer:
Greg Popovich is classified as NRA-NETB.
Case 4:
Using the same data in Case 3, assume that Greg Popovich invested in shares of stock of various
domestic corporations during his recent stay in the Philippines.
Answer:
Greg Popovich is NRA-NETB.
Passive income such as dividend income is not considered income derived from trade and
business.
Case 5:
Mika “The Iceman” Immonen, a Finnish cue artist and former world billiard champion is a
resident of Finland. He won the world 9-ball championships in 2005 in the Philippines. He is
also the owner of one of the disco pubs in Malate since then.
Answer:
NRA-NETB
He is engaged in actual trade and business in the Philippines but is non-resident.
APPLICABLE TAXES AND TAX RATES
The applicable taxes for individuals depend on several factors such as but not limited to:
❖ Classification of taxpayer
❖ Source of income
❖ Type of income
CLASSIFICATION OF TAXPAYER
It is important to properly classify the individual taxpayers because resident citizens are
taxable on their income derived from sources within and without the Philippines while other
taxpayers are taxable only on their income derived from the Philippine sources. Moreover,
individual taxpayers classified as non-resident aliens not engaged in trade and business
(NRA-NETB) are taxable based on the gross income while others are taxable based on their net
income.
SOURCES OF INCOME
It is important to know the source of income for tax purposes (income derived from
within and without the Philippines) because as a resident citizens are taxable based on their
worldwide income while others are taxable only on their income derived from sources within the
Philippines.
Taxpayer
Tax Base
Source of taxable Income
RC
Net Income
Within and without
NRC, RA,NRA-ETB
Net Income
Within
NRA-NETB
Gross Income
Within
TYPES OF INCOME (APPLICABLE TAX)
a. Ordinary or regular income (GRADUATED RATE)
– refers to income such as compensation income, business income, and income from
practice of profession
b. Passive income (FINAL WITHHOLDING TAX)
– subject to final withholding taxes are certain passive incomes from sources within the
Philippines such as:
❖ Interest income
❖ Dividend Income
❖ Royalties
❖ Prizes
❖ Other winnings
c. Capital gains subject to gains tax (CAPITAL GAIN TAX)
➢ Capital gains from sale of shares of stocks of a domestic corporation
➢ Capital gains from sale of real property in the Philippines
Summary of Income and Applicable Income Tax
Type of Income
Applicable tax
Regular income
Graduated rate
Table 2-1
Passive income (Phils.)
Final withholding tax
Table 2-2
Capital gains subject to CGT
Capital gains tax
Table 2-3
ILLUSTRATION
Use the following data for Cases A-E
An individual taxpayer provided the following information for 2018:
Gross business income, Philippines
₱5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
Business expenses, Canada
Business expenses, Singapore
Determine the taxable income assuming:
Case A: The taxpayer is a resident citizen:
❖ Answer:
₱3,500,000
Solution:
Gross business income, Philippines
Gross business income, Canada
Gross business income, Singapore
Business expenses, Philippines
Business expenses, Canada
Business expenses, Singapore
Taxable income
3,000,000
1,000,000
500,000
₱5,000,000
2,000,000
1,000,000
(3,000,000)
(1,000,000)
​ (500,000)
₱3,500,000
Case B: The taxpayer is a non-resident citizen.
❖ Answer:
₱2,000,000
Solution:
Gross income, Philippines
Business expenses Philippines
Taxable income
₱5,000,000
​(3,000,000)
₱2,000,000
Case C: The taxpayer is an alien.
❖ Answer:
₱2,000,000
Solution:
Gross income, Philippines
Business expenses Philippines
Taxable income
₱5,000,000
(3,000,000)
₱2,000,000
Case D: The taxpayer is a non-resident alien engaged in trade or business.
❖ Answer:
₱2,000,000
Solution:
Gross income, Philippines
₱5,000,000
Business expenses Philippines
​(3,000,000)
Taxable income
₱2,000,000
Case E: The taxpayer is a non-resident alien not engaged in trade or business.
❖ Answer:
₱5,000,000
❏ NRA-NETB are taxable on their gross income
Case F:
The income and expenses of a Filipino citizen for 2018 were provided as follows:
January to June
Philippines
Gross Income
Canada
₱5,000,000
₱2,000,000
2,000,000
1,000,000
Gross Income
2,000,000
3,000,000
Allowable Deductions
1,000,000
1,200,000
Allowable Deductions
July to December
Assume that the taxpayer is a resident who left the country in July of the current year to reside
permanently in Canada, how much is his taxable income?
❖ Answer:
₱5,000,000
Solution:
Gross income, Philippines (Jan-Dec)
₱7,000,000
Gross income, Canada (Jan-June)
2,000,000
Allowable deductions, Philippines (Jan-Dec)
(3,000,000)
Allowable deductions, Canada (Jan-June)
(1,000,000)
Taxable income
₱5,000,000
Case G: Assume the same data in Case F except that the taxpayer is a non-resident who returned
and resided permanently in the country in July of the current year. His taxable income before
personal exemptions is
❖ Answer:
₱5,800,000
Solution:
Gross income, Philippines (Jan-Dec)
₱7,000,000
Gross income, Canada (Jan-June)
2,000,000
Allowable deductions, Philippines (Jan-Dec)
(3,000,000)
Allowable deductions, Canada (Jan-June)
(1,200,000)
Taxable income
₱5,800,000
Table 2-1: GRADUATED TAX RATE
Income
Tax (TRAIN Law 2018-2022)
2023 ONWARDS
Below 250,000
Exempt
Exempt
250,000-400,000
20% excess of 250,000
15% excess of 250,000
400,000-800,000
30,000 + 25% excess of 400,000
22,500 + 20% excess of
400,000
800,000-2,000,000
130,000 + 30% excess of 800,000
102,500 + 25% excess of
800,000
2,000,000-8,000,000
490,000 + 32%excess of 2,000,000
402,500 + 30% excess of
2,000,000
Above 8,000,000
2,410,000 + 35% excess of
8,000,000
2,202,500 + 35% excess of
8,000,000
ILLUSTRATION - COMPUTATION OF BASIC INCOME TAX DUE
Purely Compensation Income Earner
1. Determine the income tax due assuming the taxable compensation income for 2018 is
₱240,000.
❖ Answer: ₱0, tax exempt
2. Determine the income tax due assuming the taxable compensation income for 2018 is
₱300,000.
❖ Answer: ₱10,000
Solution: tax on first ₱250,000
₱0
In excess of ₱250,000
10,000
50,000 x 20%
Tax due
₱10,000
3. Determine the income tax due assuming the net taxable compensation income for 2018 is
₱1,850,000.
❖ Answer: ₱445,000
Solution: tax on first ₱800,000
₱130,000
In excess of ₱800,000
315,000
1,050,000 x 30%
Tax due
₱445,000
SELF EMPLOYED AND/OR PROFESSIONALS (SEP)
Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for Acceleration and
Inclusion Law (TRAIN LAW) , regular income of Self- Employed and Professionals (SEP)
amounting to more than P250,000 in a taxable year but with a gross sales/receipts and other
non-operating income not exceeding the revised vat threshold of P3,000,000 shall have the
option to avail of 8% tax on gross sales/receipts and other operating income in excess of
P250,000 IN LIEU of the graduated income tax rate and business tax.
Self Employed – is defined as a sole proprietor or an independent contractor who reports income
earned from self employment. He or she controls who he/she works for. It includes professionals
whose income is derived purely from the practice of profession and not under an
employer-employee relationship”
Professional- is a “person formally certified by a professional body belonging to a specific
profession by virtue of having completed a required course of studies and/or practice, whose
competence can usually be measured against an established set of standards. It also refers to a
person engaged in some art or sport of money.
RULES OF SELF EMPLOYED AND/OR PROFESSIONALS (SEP)
Purely SEP with gross sales/receipts
₱3M and Below
Regular Income Tax OR 8% tax on Gross Sales/ Receipts and other operating income in excess
of 250,000 in LIEU of the graduated tax rate and SECTION 116
Above ₱3M-regular income tax
Mixed Income Earner
➔ Compensation - regular income tax
➔ Business Professional Income
₱3M and below
Regular Income Tax +Regular income tax OR 8% tax on Gross sales and other
operating income in LIEU of the graduated tax rate and Sec. 116
₱3M and above-regular income tax
ILLUSTRATION - SELF EMPLOYED AND/OR PROFESSIONALS (SEP)
Case A - PURELY SEP whose gross sales/receipts and other non-operating income does not
exceed the VAT threshold of ₱3,000,000.
1. Determine the income tax due assuming the gross sales/receipts and other non-operating
income for 2018 is ₱240,000.
❖ Answer: ₱0, exempt from income tax
2. Using the data below, calculate the income tax due for 2018:
Gross sales
₱2,800,000
Cost of sales
(1,500,000)
Operating expenses
( 750,000 )
Net income
₱550,000
➔ answer : ₱67,500
First ₱400,000 income
30,000
Excess of 400,000
37,500
150,000 x 25%
₱67,500
PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-operating income
exceeds the VAT threshold of ₱3,000,000 during the year.
Pedro signified his intention to be taxed at 8% income tax rate on gross sales in his 1st quarter
income tax return. However, his gross sales during the year exceeded the VAT threshold of ₱3M
as follows:
Q1
Q2
Q3
Q4/Annual
8%
8%
8%
Graduated
Sales
₱500,000
₱500,000
₱2,000,000
₱3,500,000
Cost of sales
(300,000)
(300,000)
(1,200,000)
(1,200,000)
200,000
200,000
800,000
2,300,000
Operating expenses
(120,000)
(120,000)
(480,000)
(720,000)
Net taxable income
₱80,000
₱80,000
₱320,000
₱1,580,000
Gross income
Question: ​How much is Pedro’s annual income tax payable?
❖ Answer: ₱289,200
➢ Solution:
Sales
₱6,500,000
Cost of sales
(3,000,000)
Gross income
3,500,000
Operating expenses
(1,440,000)
Net taxable income
₱2,060,000
Income tax due using graduated rate
Less: quarterly payments (Q1-Q3) based
on 8% tax rate (₱3M-₱250,000) x 8%
Annual income tax payable
₱509,200
(220,000)
₱289,200
Mixed Earner whose gross sales/ receipts and other non-operating income does not exceed the
VAT threshold of ₱3,000,000
Assume the following data for 2018:
Compensation income
₱900,000
Gross sales
2,800,000
Cost of sales
(1,500,000)
operating expenses
(750,000)
Total taxable net income
₱1,450,000
Determine the correct income tax due:
❖ Answer: ₱325,000
Tax on first ₱800,000
₱130,000
Excess of 800,000 (650,000 x 30%)
195,000
Tax due
₱325,000
Assume the SEP opted to avail the 8% tax under the TRAIN LAW, determine the tax due.
❖ Answer: ₱384,000
On his compensation income:
First ₱800,000
₱130,000
In excess of 400,000
​ 30,000
₱160,000
₱100,000 x 30,000
On his business income
₱2.8M x 8%
Total tax due
​ 224,000
₱384,000
Mixed income earner whose gross sales/receipts and other non-operating income exceeds the
VAT threshold of ₱3,000,000.
Determine the income tax due assuming the following data for 2018:
Compensation income
₱900,000
Gross sales
5,000,000
Cost of sales
(2,250,000)
operating expenses
(1,250,000)
Total taxable net income
₱2,400,000
❖ Answer: ₱618,000
Tax on first ₱2,000,000 income
₱490,000
In excess of 2M income (400,000 x 32%)
​ 128,000
Tax due
₱618,000
FINAL WITHHOLDING TAX is a kind of tax, which is prescribed on “certain income”
derived from the Philippine sources.
Passive Income
Passive income is an income earned from allowing others to use one’s right, or game of chance
or investment, which the taxpayers merely waits for the income to come in. The law subjects
passive income to final tax. Once subjected to a final tax, it is no longer included in the taxable
income subject to normal (tabular) tax. Deductions and exemptions do not apply to items subject
to final tax.
Passive income is classified as follows:
a. Interest, prizes, royalties, etc.,
b. Cash or property dividends,
The applicable rates for passive income are shown in the Table above.
ILLUSTRATION
A resident citizen taxpayer provided the following information for 2018:
Gross business income, Philippines
₱2,000,000
Gross business income, Canada
3,000,000
Business expenses, Philippines
1,400,000
Business expenses, Canada
2,050,000
Interest income, BDO Philippines
Interest income, BDO Canada
100,000
50,000
Dividend income from a domestic corporation
125,000
Dividend income-resident foreign corporation
75,000
Dividend income-non resident foreign corporation
102,000
Interest income received from a depository bank under FCDS,
Philippines
50,000
Philippine lotto winnings
10,000
Philippine Charity Sweepstakes winnings
500,000
Singapore Sweepstakes winnings
200,000
Other winnings, Philippines
Raffle draw winnings-Robinson’s Manila
50,000
8,000
Raffle draw winnings-SM Manila
20,000
Raffle draw-SM Shanghai China
30,000
Determine the following:
1. Taxable income- Answer ₱2,015,000
Computation:
Gross business income, Philippines
₱2,000,000
Gross business income, Canada
3,000,000
Business expenses, Philippines
(1,400,000)
Business expenses, Canada
(2,050,000)
Interest income, BDO Philippines
50,000
Dividend income from a domestic corporation
125,000
Dividend income-resident foreign corporation
75,000
Dividend income-non resident foreign corporation
102,000
Singapore sweepstakes winnings
200,000
Raffle draw - Robinson’s Manila
8,000
Raffle draw- SM Shanghai, China
30,000
RR- 14-2012 defines DEPOSIT SUBSTITUTES as an alternative form of obtaining funds from
the public other than deposits.
GAIN ON SALE OF ASSETS
Under tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind
2. Property used in trade or business subject to depreciation
3. Real property held by the taxpayer primarily for sale to customers in the ordinary course
of business
4. Real property used in trade of the taxpayer
CAPITAL GAINS TAX
CAPITAL GAINS may be:
Subject to CAPITAL GAINS TAX (CGT) pertain to sale of:
a. Shares of stock of a domestic corporation sold directly to a buyer
Prior to 2018 – 5% to 100,000 ; 10% to excess
2018 – 15% of capital gain
b. Sale of real properties located in the Philippines
CGT = 6% of the higher of GSP (gross selling price) and FMV (fair market value)
OTHER PERCENTAGE TAX is not an income tax but a business tax. The applicable tax for
this is known as “stock transaction tax.”
Prior to 2018 – ½ of 1% of GSP
2018 – 6/10 of 1% of GSP
Subject to Basic Tax – examples:
a. Sale of Share of foreign corporations
b. Sale of real properties located abroad
c. Sale of other personal assets other than share of stock of domestic corporations
PRINCIPAL RESIDENCE is the family home of the individual taxpayer which refers to his
dwelling house including his family.
REQUISITES OF TAX EXEMPTION
1. The proceeds are fully utilized in acquiring or constructing a new principal residence
within 18 calendar months from the date of disposition.
2. The historical cost or adjusted basis of the real property sold or disposed shall be carried
over to the new principal residence built or acquired.
3. The BIR shall have been duly notified by the taxpayer within 30 days from the date of
sale or disposition through a prescribed return of his intention to avail of the tax
exemption.
4. The tax exemption can only be availed of once every 10 years.
FORMAT IN COMPUTING TAXABLE INCOME
a. Pure Compensation Income Earner
b. Pure Business Income Earner
c. Mixed Income Earner
Benefits for Senior Citizen and PWDs:
❖ 20% discount and exemption from VAT on their purchase of specified goods and
services
❖ P500 monthly social pension, for indigent senior citizens
❖ Death benefit assistance
❖ 5% discount on utilities
❖ Income tax exemption for minimum wage earners of for SC/PWDs whose annual taxable
income is not more than 250,000
➔ The term “statutory minimum wage earner (SMW)” or “minimum wage earner (MWE)”
under RA 9504 shall refer to a worker in the private sector paid the statutory minimum
wage. The rate is fixed by the Regional Tripartite Wage and Productivity Board as
defined by the Bureau of Labor and Employment Statistics.
MWE are exempt from income tax on:
1. Minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay
FILING OF INCOME TAX RETURNS
BASIC TAX
➔ For Purely Compensation Income Earners
On or before April 15 of the succeeding year
➔ For Business Income Earners
The individual taxpayer is required to file a quarterly tax return ( May 15, Aug 15, Nov 15, and
April 15)
FINAL WITHHOLDING TAX ON PASSIVE INCOME
Prior to 2018 - January to November – 10th day of the month
December – January 15
2018 – not later than the last day of the month
CAPITAL GAINS TAX
a. Share of Stock
Ordinary Return – 30 days after each transaction
Final Consolidated Return – on or before April 15 of the
following year
b. Real Property – 30 days following each sale or other
disposition
MANNER OF FILING
a. Manual Filing
b. Electronic Filing and Payment System (EFPS)
c. eBIR Forms
1st installment: at the time of filing the annual ITR
2nd installment: on or before October 15 following the close of the calendar year
PLACE OF FILING INCOME TAX RETURN
1. Authorized Agent Banks
2. Revenue District Officer
3. Collection Agent
4. Duly Authorized City or Municipal Treasurer
PERSONS REQUIRED TO FILE INCOME TAX RETURN
1. Individuals engaged in business and/or practice of profession
2. Individuals deriving compensation from two or more employers concurrently at any time
during the taxable year
3. Employees deriving compensation income, the income tax of which has not been
withheld correctly
4. Individuals deriving other non-business, non-professional-related income in addition to
compensation income not otherwise subject to final tax
5. Individuals receiving purely compensation income from a single employer
6. Non-resident alien engaged in trade or business in the Philippines deriving purely
compensation income
PERSONS NOT REQUIRED TO FILE INCOME TAX RETURN
1. An individual earning purely compensation income whose taxable income does not
exceed 250,000.
2. An individual whose income tax has been correctly withheld by his employer
3. An individual whose sole income has been subjected to final withholding tax
4. Minimum wage earners, the Certificate of Withholding filed by the respective employers,
duly stamped “Received” by the Bureau
SUBSTITUTED FILING OF INCOME TAX RETURNS (ITR)
Under RA 9504 and RR 10-2008, individual taxpayers may no longer file income tax
return provided he has (all the requirements must be satisfied):
1. Receiving purely compensation income, regardless of amount
2. The amount of income tax withheld by the employer is correct (Tax due = Tax withheld)
3. Only one employer during taxable year
4. If married, the employee’s spouse also complies with all the three aforementioned
conditions, or otherwise receives no income.
CHAPTER EXERCISES
Determination of Applicable Tax
Final Withholding tax on passive income, basic income tax, exempt
Write the following in the tax type column:
➢ FWTx-if the income described is subject to final withholding tax on passive income. In
addition, if such income is subject to FWT, provide the correct FWT rate in the tax rate
column.
➢ BTx-if the income described is subject to basic income tax
➢ Exempt- if the income described is exempted from income tax
Assume that the taxpayer is a resident citizen.
TAX TYPE
1) Interest from peso bank deposit, BDO, Makati
2) Interest from US dollar bank deposit, BPI-Manila
3) Interest from a foreign currency deposit in Japan
4) Interest from money market placement, Philippines
5) Interest from a foreign currency deposit in Australia by
a nonresident citizen
6) Interest from overdue accounts receivable, Philippines
7) Compensation income, Philippines
8) Business income, Philippines
9) Gain from sale of car for personal use
10) Gain from sale of delivery truck
11) Royalties, in general, Davao City
12) Royalties, books published in Manila
13) Prices amounting to P30,000, Philippines
14) Prizes amounting to P10,000, Philippines
15) Prizes amounting to P40,000. USA
TAX RATE
16) P30,000 other winnings, Philippines
17) P10,000 other winnings, Philippines
18) P12,000 other winnings, Canada
19) P10,000 Phil. Lotto/PCSO winnings
20) P100,000 PCSO winning by a resident alien
21) Philippines Lotto/PCSO winning by a nonresident alien
not engage in trade or business
22) Lotto winnings in London
23) Interest income from long-term bank deposit by a
resident alien
24) Interest income from long-term bank deposit by a
non-resident alien not engage in trade or business
25) Interest income from a government issued bonds with
maturity of ten years
26) Interest income from bonds issued by PLDT with
maturity of ten years
27) Dividend income from a domestic corporation
28) Dividend income from a resident foreign corporation
29) Dividend income from a nonresident foreign corporation
30) Dividend income from a domestic corporation by a
nonresident alien engaged in trade or business
31) Dividend income from a domestic corporation by
nonresident alien not engaged in trade or business
32) Gain on sales of shares of stock of a domestic corporation
sold directly to buyer
33) Gain on sale of shares of stock of a domestic corporation
trade in the local stock exchange
34) Gain on sale of real properties used in business
35) Gain on sale of real properties classified as capital asset
located in Singapore
Determination of Income Tax Due/Payable
1. Pedro is a resident citizen, earning purely compensation income as follows fro 2018 taxable
year:
a. P200,000
b. P250,000
c. P800,000
d. P2,800,000
2. Juan is a resident citizen, earning purely business income for 2018 taxable year:
Gross Sales
P2,800,000
Cost of Sales
1,200,000
Operating expenses
650,000
Creditable withholding taxes
80,000
3. Use the same data in #2 but assume that Juan opted to be taxed using 8% income tax rate.
4. Juan us a resident citizen earning purely business income for 2018 taxable year:
Gross Sales
P2,800,000
Cost of Sales
1,200,000
Operating expenses
650,000
Rental income (net of CWT)
380,000
Creditable withholding taxes
80,000
5. Can Juan choose to be taxed at 8% instead of the graduated income tax rate in #4? If yes, how
much is his income tax payable for the year?
6. Ana is a practicing professional with the following data for 2018 taxable year:
Gross receipts
P4,000,000
Cost of direct services
1,800,000
Other operating expenses
825,000
7. Can Ana choose to be taxed at 8% instead of the graduated income tax rate in #6? If yes, how
much is her income tax payable for the year?
8. Lorna is a resident citizen, earning compensation and business income for 2018 as follows:
Compensation income
P1,400,000
Gross sales
2,800,000
Cost of sales
1,200,000
Operating expenses
650,000
Withholding tax on compensation income
310.000
Other creditable withholding taxes
80,000
9. Can Lorna choose to be taxed at 8% instead of the graduated income tax rate in #8? If yes,
how much is her total income tax payable for the year?
Computation of Basic Income Tax on Passive Income and Capital Gains Tax
1.
CJ, single, had the following data for 2018 taxable year:
Gross business income, Philippines
P1,000,000
Gross business income, USA
500,000
Business expenses, Philippines
700,000
Business expenses, USA
430,000
Compensation income, Philippines
600,000
Dividend income from a domestic corporation
50,000
Dividend income from a foreign corporation
40,000
Interest income from peso bank deposit- Philippines
20,000
Interest income from bank deposits abroad
30,000
Interest income from FCDS deposits
40,000
Royalty income from composition
25,000
Raffle draw winnings
10,000
PCSO winnings
200,000
Creditable withholding taxes on business income
125,000
10. Determine the following assuming the taxpayer is a resident citizen:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
11. Determine the following assuming the taxpayer is a nonresident citizen:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
12. Determine the following assuming that taxpayer is resident alien:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
13. Determine the following assuming that taxpayer is nonresident alien engaged in trade or
business:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
14. Determine the total income taxes if the taxpayer assuming the taxpayer is a nonresident alien
not engaged in trade or business (ignore business income, business expense, and creditable
withholding taxes on business income in the Philippines
A practicing professional, single, with his parents living and dependent upon him, revealed the
following data for 2018 taxable year:
​Income From
Philippines
Abroad
Income from employment
P180,000
P280,000
Business income
850,000
960,000
Deductible business expenses
610,000
730,000
Interest income on personal loans
6,000
3,000
Interest income on bank deposits
10,800
4,200
Interest income on money market placements
7,500
1,600
Dividend income from domestic corp.
5,700
Dividend income from foreign corp.
6,800
2,000
Royalty income
90,000
50,000
Winnings/prizes from lotteries, raffle draws
45,000
16,900
Prizes from singing contest
Lotto winnings
Royalty income from sale of books
5,600
150,000
68,000
50,000
-
ADDITIONAL DATA:
•
In February, the taxpayer bought a lot deemed as capital asset. The acquisition cost was
P840,000. He later sold the house in December for P1,060,000.
•
In September, the taxpayer sold his 560 shares of stock of Ayala Investment Corporation
held by him as capital asset, thru a local stock exchange. The cost was P36,900 whereas the sale
price was P154,000.
•
In October, the taxpayer sold for P820,000 his house and lot located at Makati, held as
capital asset (not his principal residence). The fair market value on the date of the sale was
P950,000 and the acquisition cost was P475,000,
1. Determine the following assuming the taxpayer is a resident citizen:
a. Taxable net income
b. Income tax payable
c. Final tax on passive income
d. Capital gains tax
2. Determine the following assuming the taxpayer is a nonresident citizen:
a. Taxable net income
b. Income tax payable
c. Final tax on passive income
d. Capital gains tax
3. Determine the following assuming the taxpayer is a NRA-ETB:
a. Taxable net income
b. Income tax payable
c. Final tax on passive income
d. Capital gains tax
Income Taxes of Spouses
Mr. and Mrs. De Leon, residents of Quezon City with three qualified dependent children,
provided the following data for 2018 taxable year:
Husband
•
Compensation income
•
Personal and family expenses
(including premium payment for
life and fire insurance of P2,000
each)
•
Premium payment for health or
hospitalization insurance
P850,000
30,000
WifeHusband &
Wife
P650,000
20,000
5,000
5,000
•
•
•
•
Income from practice of profession
Expenses – practice of profession
Income from trading business
Expenses from trading business
P800,000
320,000
a.
b.
c.
Determine the taxable income of Mr. De Leon
Determine the taxable income of Mrs. De Leon
Determine the consolidated income tax payable of Mr. and Mrs. De Leon
250,000
100,000
Daniel, married to Kat, is a citizen and resident of the Philippines. The parents of the couple are
also living with the spouses for chief support. They had the following data for 2018 taxable year:
DANIEL
KAT
DANIEL &
KAT
Gross income from business
P600,000
Gross income from profession, net of P40,000
- P360,000
CWTx
Rental income, net
P190,000
Dividend income:
From domestic corporation
40,000
From resident corporation
20,000
From nonresident corporation
10,000
Interest income on notes receivable
6,000
4,000
2,000
Interest on Philippine bank deposit, net
3,200
2,400
8,000
Interest on Phil. Bank deposit under FCDU
4,000
4,000
2,000
Interest on bank deposit abroad
5,000
5,000
5,000
Interest income on long term bank deposit
20,000
Investment on government bonds
10,000 Royalty income-literary works
10,000
Royalty income (other than literary works)
12,000
Capital gain on sale directly to buyer at P550,000 of 150,000
shares of domestic corporation
Capital gain on sale directly to a buyer of land held as
500,000
investment in Quezon City, SP=P5M
Capital gain on sale of land held as investment abroad
500,000
Gain on sale thru New York Stock Exchange at
30,000
P100,000 of shares of domestic corp.
Loss on sale thru Philippine Stock Exchange at
10,000
P100,000 of shares of domestic corp. SP=100,000
Expenses – business/profession
350,000 200,000 75,000
a.
b.
c.
d.
Determine the following:
Total capital gain taxes paid by the spouses
Total final taxes withheld on passive income of the spouses
Taxable income of Daniel
Taxable income of Kat
QUARTERLY INCOME TAX RETURN
The following cumulative balances during the year on income and expenses were provided by
Juan Dela Cruz, a resident citizen:
Gross Profit from Sales
Business expenses
Dividends-domestic corp.
Interest income from,
BPI
UCPB
Metro Bank
Capital gain on sale of Land:
Selling price: P600,000; Cost:
1st Q2nd Q3rd QYear
P300,000
P650,000 P910,000
120,000
262,000 405,890
20,000
20,000
30,000
4,000
8,000
5,000
150,000
P450,000
8,000
12,000
10,000
150,000
P1,200,000
426,000
30,000
12,000
16,000
15,000
150,000
16,000
18,000
30,000
150,000
REQUIRED: Using the above information, compute the following:
1.
Income tax payable, first quarter
2.
Income tax payable, second quarter
3.
Income tax payable, third quarter
4.
Income tax payable, fourth quarter
5.
Total final taxes (for the year) on passive income
6.
Total capital gain tax
SPECIAL EMPLOYEES (SAEs and SFEs)
A married taxpayer with two qualified dependent children provided the following data for the
taxable year:
Gross compensation income
750,000
Fixed allowances regularly received 100,000
CASE A: Assume the taxable year is 2017, determine the income tax due if the taxpayer is:
a)
The taxpayer is an alien employed by ROHQ holding a managerial and technical
position.
b)
The taxpayer is a Filipino citizen employed by ROHQ holding managerial and technical
position
c)
The taxpayer is a Filipino citizen employed by an Offshore Bank Unit holding
managerial and technical position
d)
The taxpayer is a Filipino citizen employed by a Petroleum Contractor holding
managerial and technical position
CASE A: Assume the taxable year is 2018, determine the income tax due if the taxpayer is:
a)
The taxpayer is an alien employed by ROHQ holding a managerial and technical
position.
b)
The taxpayer is a Filipino citizen employed by ROHQ holding managerial and technical
position
c)
The taxpayer is a Filipino citizen employed by an Offshore Bank Unit holding
managerial and technical position
d)
The taxpayer is a Filipino citizen employed by a Petroleum Contractor holding
managerial and technical position
CAPITAL GAINS TAX
1.
A resident citizen taxpayer sold a vacant lot (held as investment) in the Philippines. Other
data regarding the sale are as follows:
Selling price
P5,500,000
Fair market value
6,000,000
Zonal value
5,850,000
Expenses on the sale
275,000
Required: compute the capital gain tax.
2.
A resident citizen taxpayer sold a vacant lot (held as investment) in the Philippines. Other
data regarding the sale are as follows:
Gain on sale
P500,000
Zonal value
2,200,000
Cost
2,000,000
Expenses on the sale 150,000
Required: Compute the capital gain tax.
3.
A resident citizen taxpayer sold a residential lot (principal residence) in the Philippines.
Other data regarding the sale are as follows:
Selling price
P5,000,000
Fair market value
6,000,000
Zonal value
5,500,000
Expenses on the sale
275,000
Required: Determine the capital gains tax assuming the taxpayer purchased a new principal
residence worth P5,580,000 within eighteen months from disposal of the principal residence. The
BIR was properly informed about the sale.
4.
Using the same data in the preceding number, determine the capital gains tax assuming
the taxpayer utilized only 80% of the proceeds in acquiring his new principal residence.
Assume the following data:
Selling price of building no. 1
Selling price of building no. 2
Cost of building no.1
P15,000,000
20,000,000
10,000,000
Cost of building no. 2
30,000,000
Expenses on sale of building no. 1
200,000
Expenses on building no. 2
300,000
Fair market value of building no. 1
12,000,000
Fair market value of building no. 2
8,000,000
Required:
a)
Compute the capital gains tax on Building No. 1
b)
Compute the capital gains tax on Building No. 2
c)
Compute the capital gains tax on Building No. 2 assuming the building is situated abroad
The taxpayer is a resident citizen
Selling price at prevailing market value on a direct
sale to buyer of shares of stock of a domestic corp.
Cost of the shares sold
Required: Compute the capital gains tax.
The taxpayer is a resident alien:
Selling price on a direct sale to buyer of shares of
stock of a domestic corp.
Expenses on sale
Cost of shares sold
Required: Compute the capital gains tax.
The taxpayer is a nonresident alien engaged in trade of business:
Selling price on a direct sale to buyer of shares of
stock of a domestic corp.
Expenses on sale
Cost of shares sold
Required: Compute the capital gains tax.
P600,000
650,000
P310,000
10,000
200,000
P550,000
50,000
300,000
Reference:
● Tabag, E.D., Garcia, E.J. (2019) Income Taxation with Special Topics in Taxation based
on NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act
(TRAIN Law)
● Banggawan, R. B. (2019) Income Taxation-Laws, Principles and Applications (An
Integrated Principle Based Approach)
● Ballada, W. (2019) Taxation Made Easy
● www.scribd.com
MODULE 3
Fringe Benefits Tax and De Minimis Benefits
INTRODUCTION
This module introduces the students to the fringe benefit tax and its de minimis benefits.
Topics included in this module are definition of fringe benefits, scope of fringe benefits, items of
fringe benefits subject to tax, fringe benefits tax base and rate, de minimis benefits, fixed or
variable allowances, business related expenses, representation and transportation allowances,
special rules in computing the monetary value of housing benefits, rules in computing the
monetary value of motor vehicles and special rules in computing monetary value. These topics
will give students knowledge and understanding about the fringe benefits in accordance with the
TRAIN Law.
INTENDED LEARNING OUTCOMES
ILO 1 Define and discuss the fringe benefits tax and de minimis Benefits
ILO 2 ​Execute skills in solving problems regarding fringe benefits taxation.
FRINGE BENEFIT TAX
The only forms of employee income that were effectively taxed were those which were
given in cash. This was because an income tax was automatically withheld and collected at
source by the government. Additional compensation which was given in the forms of perks and
other non-cash benefits were virtually untaxed giving rise to inequity in the distribution of the
tax burden. The Fringe Benefits Tax(FBT) was proposed to enhance the progressivity of the
income tax and to broaden the tax base.
DEFINITION
Fringe Benefit Tax (FBT) is a ​monetary burden imposed by the sovereignty on any good,
service, or other benefit furnished or granted by an employer, in cash or in kind, ​in addition to
basic salaries, to an individual employee, ​other than a rank and file employee.​
The FBT is a final withholding tax on the grossed-up monetary value of the fringe benefit
granted by the employer to an employee who holds a managerial or supervisory position. This
tax is effective regardless of whether the employer is an individual, professional partnership or a
corporation (regardless of whether the corporation is taxable or not).
TAX TREATMENT OF FRINGE BENEFITS
Fringe Benefits given to:
Rank & file
Part of basic salaries or
taxable compensation
Subject to basic tax
and CWT on
compensation
Subject to FBT
YES
YES
NO
Supervisory /managerial
NO
NO
YES
SCOPE OF FBT
The FBT Tax Regulations cover only those fringe benefits given or furnished to
managerial or supervisory employees. The Regulations do not cover those benefits which are
part of compensation income, because these are subject to withholding tax on compensation in
accordance with RR No.2-98.
FRINGE BENEFIT
Any goods, service or other benefit furnished or granted by an employer in cash or in
kind, in addition to basic salaries to individual employees except rank and file employees.
Items of fringe benefits subject to final tax:
1) Housing
2) Expense account
3) Vehicle of any kind
4) Household personnel, such as maid, driver and others
5) Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted
6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs and similar organizations
7) Expenses for foreign travel
8) Holiday and vacation expenses
9) Educational assistance to the employee or his dependents
10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
ILLUSTRATION 1: Covered Employees
Ana was hired by Earl to be the latter’s secretary and personal assistant. To enable her to perform
her duties well, Earl provided a condo unit (adjacent to his) unit which Ana could use as her
temporary residence. Is the fair market value of the use of the condo by Ana a “fringe benefits”
that is subject to fringe benefit tax imposed under section 33 of the National Internal Revenue
Code?
►​Answer: No.
Ana is neither a managerial nor a supervisory employee. Only fringe benefits granted to
managerial and supervisory employees are subject to the fringe benefits tax.
Tax Exempt Fringe Benefits
The following fringe benefits shall not be subject to basic tax or fringe benefit tax:
1. Fringe benefits which are authorized and exempted from income tax under any
special law such as :
❖ Contributions required under SSS law
❖ Contributions required under GSIS law
❖ Similar contributions under an existing law
❖ Premium for group insurance of employees
2. If the grant of fringe benefits to the employee is required by the nature of, or
necessary to the trade, business or profession of the employer.
ILLUSTRATION 2:
CASE A. ​Use the same data in illustration #1.
Question 1:
Is the fair market value of the use of the condo unit by Ana a “compensation income” that
is subject to basic tax under Section 24A of the Tax Code and consequently to creditable
withholding tax on compensation income?
►​Answer: No.
The condo unit is provided ​for the convenience of the employer, hence does not constitute a
taxable fringe benefit. Being his personal secretary, it is necessary for Ana to be accessible to
Earl anytime.
Question 2:
Assuming Ana is a managerial or supervisory employee, is the fair market value of the use of the
condo by Ana a “fringe benefit” subject to FTB?
►​Answer: No.
As explained in question #1, if the grant of benefits is for the convenience or advantage of
the employer, irrespective of the employee’s rank , the benefit shall not be subject to fringe
benefit tax and basic tax on compensation income.
FBT Rates
The rate of fringe benefit tax varies depending on how the employees are taxed.
FRINGE BENEFIT TAX BASE AND RATE
Classification of taxpayers
Monetary value
CIT, RA, NRAET
₱xx
NRA-NETB
₱xx
SAE’s/SFE’s
₱xx
Divide by gross monetary
value factor
Grossed-up monetary value
x FBT rate
Fringe benefit tax
65%
₱xx
35%
₱xx
75%
₱xx
25%
₱xx
85%
₱xx
15%
₱xx
ILLUSTRATION 3:
Determine the grossed-up monetary value and the fringe benefit tax of the following (if
applicable) for 2018 taxable year:
1) P39 grocery allowance for the personal consumption of an executive of ABC
Corporation.
2) P40,800 expenses paid by an executive of ABC Corporation duly received in the name of
ABC Corporation and is not in the nature of personal expense.
3) P40,800 expenses incurred by an executive of ABC Corporation in connection with
attending a business meeting or convention.
4) P40,800 grocery allowance for the personal consumption of one of ABC Corporation’s
rank and file employees.
►Answers:
➔ GUMV=P39k/65%=P60,000; FBT=P39k/65% x 35%=P21,000
➔ GUMV=P40,800**; FBT=P0
**The expenditure is not in the nature of personal expense of the company’s executive,
hence, it is not a fringe benefit taxable to the employee. It is an ordinary business
expenditure of ABC Corporation.
➔ GUMV=P40,800; FBT=P0; same explanation with #2
➔ GUMV=P40,800 same with monetary value FBT=P0**; subject to basic tax
Valuation of Fringe benefits
❖ If granted in money, the value is the amount granted.
❖ If granted in property and ownership is transferred to the employee, the value is the fair
market value of the property.
❖ If granted in property but ownership is not transferred to the employee, the value is equal
to the depreciation value of the property
Deductible expense of the employer
If the fringe benefit is given to a rank and file employee, or to a supervisory or managerial
employee, but is not subject to fringe benefit tax ,the deduction for the employer is the monetary
value of the fringe benefit. On the other hand, if the fringe benefit is given to a supervisory or
managerial employee and is subject to fringe benefit tax, the deduction is the grossed-up
monetary value of the fringe benefit which compose of the fringe benefit expense and the fringe
benefit tax.
ILLUSTRATION 4: Assume an employer furnished cash fringe benefit subject to fringe benefit
tax amounting to P975,000
Question 1:
What should be the appropriate journal entry in the books of the employer?
►Answer:
Fringe benefit expense (monetary value)
P975,000
Fringe benefit tax expense
525,000
(P975,000/65%)x35%
Cash (GUMV)***(P975,000/65%)
P1, 500,000
***The P1,500,000 grossed-up monetary value is composed of P975,000 paid to the employee
and P525,000 paid/remitted to the BIR.
Question 2: Assume that the cash fringe benefit is not subject to fringe benefit tax, what
should be the appropriate journal entry of the employer?
►Answer:
Fringe benefit expense
P975,000
(Compensation expense)
Cash
P975,000
DE MINIMIS BENEFITS
The following shall be considered de minimis benefit not subject to income tax as well as
withholding tax on compensation income of both managerial and rank and file employees:
a. Monetized unused vacation leave credits of private employees not exceeding “10 days”
during the year.
Payment of monetized unused ​“vacation”leave credits ​exceeding 1​ 0 days as well as
payment of ​“sick” leave, regardless of number of days shall be added to “other benefits”
with a P90,000 ceiling.
b. Monetary value of ​vacation ​and ​sick leave credits paid to government officials and
employees.
Compared to employees in the private sector, payment of monetized unused ​“vacation
and sick” leave credits to government officials/employees regardless of the number of
days shall be ​exempt ​from tax on compensation income.
c. Medical cash allowance to dependents of employees not exceeding P1,500 per semester
or P250 a month.
d. Rice subsidy of not more than P2,000 per month or 1 sack (50kg.) rice per month.
e. Uniforms given to employees by the employer not exceeding P6,000 per annum (as
amended by RR 8-2012)
f. Actual medical assistance given not exceeding P10,000 per annum such as medical
allowance to cover medical and health care needs, annual medical/executive check-up,
maternity assistance and routine consultations.
g. Laundry allowance not exceeding P300 per month.
h. Employees achievement awards (example, for length of service or safety achievement
which must be in the form of tangible personal property other than cash or gift certificate
with an annual monetary value not exceeding P10,000 under an established written plan
which does not discriminate in favor of highly paid employees.)
i. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000per employee per annum.
j. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of
the basic ​minimum w
​ age on a per region basis provided such benefits is given on account
of overtime work or if given to employees on night/graveyard shift.
k. RR 1-2015 dated January 5,2015 includes as non-taxable “de minimis benefits” the
following ; benefits received by an employee by virtue of a collective bargaining
agreement (CBA); and Productivity incentive schemes. Provided that the total annual
monetary value received from the two (2) items above combined, do not exceed
P10,000.00 per employee per taxable year.
EXCESS OF DE MINIMIS BENEFITS OVER THEIR RESPECTIVE CEILINGS
The amount or de minimis benefits conforming to the ceiling of de minimis benefits shall
not be considered in determining the P90,000 ceiling of ​“other benefits” excluded from the gross
income under Section 32B(7)(e) of the Code as amended by RA10963-TRAIN Law (previously
P82,000 under RA10653; RR 3-2015). On the other hand, the excess of the de minimis benefits
over their respective ceilings prescribed under this regulation shall be considered as part of other
benefits subject to tax ​only​ on the excess over the P90,000 ceiling.
All other benefits given by employers which are not included in the enumeration of de
minimis benefits shall not be considered de minimis benefits but should fall under the
classification of “other benefits” and is therefore subject to the P90,000 ceiling. The excess of
the benefits over the P90,000 limit would form part of an individual’s gross income and would
be subject to income tax and application creditable withholding taxes.
P90,000 Ceiling for 13​th​ month pay/bonuses and “Other Benefits”
Section 32(B)(7)(E) of the Tax Code in relation to PD 851 as amended by RA10653
provides that 13​th month pay and other benefits received by officials and employees of public and
private entities are exempt from income tax and creditable withholding tax on compensation,
provided however, that beginning January 1, 2018, the total exclusion shall not exceed
P90,000(RA 10963-TRAIN Law). Otherwise, the excess would form part of an individual’s
gross income and would be subject to income tax and applicable creditable withholding taxes.
“Other Benefits” under these regulations include:
● Christmas bonus
● Productivity incentive bonus
● Loyalty awards
● Gifts in cash or in kind and other benefits of similar nature actually received by officials
and employees of both government and private offices.
Further, RR 3-2015 emphasized that this exclusion from gross income is not applicable to:
❖ Self-employed individuals; and
❖ Income generated from business
Fixed or Variable allowances
Generally speaking, fixed or variable allowances received by a public officer or
employee or employee of a private entity in addition to the regular compensation fixed for his
position or office are subject to income tax and consequently creditable withholding tax on
compensation income. Examples of fixed or variable allowances are transportation allowance,
representation allowance, communication allowance, living away from home allowance ,
(LAFHA), and the like.
Reasonable amounts of reimbursements/advances for travelling and entertainment
expenses which are pre- computed on a daily basis and are paid to an employee while he is on an
assignment or duty need not be subject to the requirement of substantiation and to withholding.
Business related expenses/ Allowances subject to liquidation
Any amount paid specifically, either as advances or reimbursement for traveling, representation
and other bona fide ordinary and necessary expenses incurred of his duties are not compensation
subject to withholding, if the following conditions are satisfied:
● It is for ordinary and necessary traveling and representation or entertainment expenses
paid or incurred by the employee in the pursuit of the trade, business are profession; and
● The employees are required to account/liquidate for the foregoing expenses in accordance
with the specific requirements of substantiation for each category of expenses pursuant to
Sec. 34 of the tax code.
Representation and Transportation Allowance
Representation and transportation allowances (RATA) granted under Section 34 of the
General Act to certain officials of employees ​of the government are considered reimbursement
for the expenses incurred in the performance of one's duties rather than as additional
compensation. However the excess RATA, if not returned to the employer constitutes taxable
compensation income of the employee.
Under several rulings issued by the BIR,the foregoing rule shall likewise apply to reasonable
amounts of reimbursements or advances for travelling and representation or private employees
which are pre- computed on a daily basis and which are paid to any employee while on
assignment or duty. Such allowance should not be considered compensation subject to
withholding tax. On the other hand, transportation and representation allowances which are fix in
amounts and are regularly received by the employees as part of their monthly compensation are
subject to basic tax.
Communication Allowance
Communication allowance granted to employees are not subject to fringe benefit tax and tax
on compensation on the basis that communication allowance is deemed required by the nature of
the job of the employees and deemed necessary to business and redounds to the convenience and
benefit.
SPECIAL RULES IN COMPUTING THE MONETARY VALUE OF HOUSING
BENEFITS
Monthly Monetary Value
● Employer ​leases a residential property for the
use of the employee
Monthly rental paid x 50%
● Employer ​owns a residential property for the
use of the employee
The higher between F
​ MV in the
Real property declaration ​OR ​the
zonal value ​x​ 5% ​x​ 50%**
● Employer ​purchases residential property in
installment for use employee
Acquisition cost, exclusive of
interest ​x​ 5% ​x​ 50%***
● Employer ​purchases residential property and
transfers ownership to employee
Acquisition cost ​or ​zonal value as
determined by CIR whichever is
higher.
Employer ​purchases residential property and
transfers ownership to employee on a lesser
amount
The higher between FMV in the
real property declaration or Zonal
as determined by CIR less cost to
the employee
●
**Annual Benefit=FMV or Zonal whichever is higher x 5%
Monetary value of the benefit=FMV or Zonal whichever is higher x 5% x 50%
***Annual benefit=acquisition cost exclusive of interest x 5%
Monetary value of the benefit=acquisition cost exclusive of interest x 5% x 50%
RULES IN COMPUTING THE MONETARY VALUE OF MOTOR VEHICLES
Monetary Value
a. Employers own and maintain a fleet of motor
vehicles for the use of business and employees.
Acquisition cost of vehicles not
normally used for business divided
by 5 years x 50%
b. Employer leases/maintains a fleet of motor
vehicles for the use of business and employees.
Amount of rental payments not
normally used for business
purposes x 50%
c. Employer purchased vehicle in the name of the Acquisition cost
employee
d. Employer provides employee with cash for the
purchase of the vehicle, and ownership is placed
in the name of the employee
Cash received
e. Employer purchases the vehicle on installment
and ownership is placed in the name of the
employee
Acquisition cost exclusive
interest divided by 5 years
f. Employer shoulders a portion of the amount of
the purchase price of the vehicle and ownership
is placed in the name of the employee
Amount shouldered by employer
of
ILLUSTRATION 6: (SPECIAL RULES IN COMPUTING MONETARY VALUE)
CASE A:
In 2018, a domestic corporation paid for the monthly rental of a residential house of its
branch manager, Mr. Juan Dela Cruz, amounting to P156,000. (Assume there is no transfer of
ownership)
Question 1: What is the monetary value of the benefit?
Question 2: What is the grossed-up monetary value of the benefit?
Question 3: How much is the fringe benefit tax?
Question 4: Total amount deductible by the employer from its gross income?
Question 5: What is the appropriate journal entry to record the provision of the benefit?
►​Answer:
Question 1: P78,000
Question 2: P120,000
Question 3: P42,000
Question 4: P198,000
Solution:
Rental payment
X
Monetary value
Divided by
GUMV
X fringe benefit tax rate
Monthly fringe benefit tax expense
Add: rentals paid
Total deductible expense
P156,000
50%
P 78,000
65%
P120,000
35%
P 42,000
156,000
P198,000
Non-taxable Housing Benefits
The following housing benefits shall not be considered taxable fringe benefits (Sec 33-tax code):
1. Housing unit inside or adjacent (within 50 meters) from the perimeter of the business
premises.
A housing unit which is situated “inside or adjacent” to the premises of a business shall
not be considered as a taxble fringe benefit. A housing unit is considered adjacent to the
premises of the business if it is located within the maximum of fifty (50) meters from the
perimeter of the business. A housing unit shall be considered to be for the “convenience
or advantage of the employer” if the same is within (50) meters from the perimeter of the
business premises and employees are required to be on-call due to the nature of the
employers’ operation (BIR Ruling no. DA-635-04, December 15,2004 issued to Foreign
Holiday Philippines, Inc. and BIR Ruling NO. DA-241-04, May , 2004 issued to Sohbi
Koghei (Phils.), Inc.)
2. Temporary housing for a stay in the housing unit for three (3 months) or less.
3. Housing privilege of military officials of the Armed Forces of the Philippines.
Other Fringe Benefits
Under this category, the value of the benefit representing the amount given or paid by the
employer should also be the "monetary" value of the benefit.
1. Expense account-may be taxable as fringe benefits or treated as compensation income
depending on the nature of the expense account provided to employees.
● Taxable as fringe benefits
❖ Expense accounts paid for or reimbursed by employer (such as personal expenses
like groceries) are taxable fringe benefits. However, if the expenses were received
in the name of the employer and do not partake in the nature of "personal
expenses attributable to employees, such expense accounts should not be taxable
as fringe benefits. It should neither be included in determination of the individual
taxpayers' taxable compensation income.
● Not treated as taxable fringe benefits
Representation and transportation allowance given regularly (Page 163) on a
monthly basis are not taxable fringe benefits but as compensation income subject to
basic tax under Sec 24(A) of the Tax Code.
2. Expenses for foreign travel
Expenses in connection with attending business meeting or convention (inland travel
expenses) such as food, beverages and transportation during foreign travel (except lodging
cost in a hotel) at an average of $300 per day are.considered reasonable expenses and shall
he subject to fringe benefit tax The cost of economy and business class airplane ticket shall
not be subject to fringe benefit tax. However of the cost of first class airplane ticket shall be
subject to fringe benefit tax in the absence of documentary evidence showing that the
employees travel abroad was in connection with business meeting or convention, the entire
cost of ticket, including cost of hotel accommodations and other expenses shouldered by
employer shall be treated as taxable fringe benefits.
Traveling expenses of family members of employees paid for by the employer shall be
treated as taxable fringe benefit.
3. Educational assistance to the employee or his dependents
In general, cost of educational assistance is treated as taxable fringe benefit except;
❖ When the study is directly connected with the employer's trade business or
profession and there is a written contract between the employee and employer that
the former is under obligation to remain in the employ of the employer for a
period of time
❖ When given to employee's dependents through a competitive scheme under
scholarship program of the company
4. Interest on loan at less than market rate to the extent of the difference a the market rate
and
actual rate granted. The benchmark is 12% unit revised. The taxable fringe benefit
is:
a. Interest foregone by the employer or
b. The difference of the interest assumed by the employee and the rate of 12%.
5. Membership dues or fees of employees borne by employer in social and athletic clubs or
other similar organizations
6. Life or health insurance and other non-life insurance premiums are treated as taxable
benefits.
7. The following shall not be treated as taxable fringe benefits:
a. Fringe benefits which are authorized and exempted from income tax under the
Tax Code or under any special law
b. The fringe benefit is required by the nature of or necessary to the trade, business
or profession of the employer
c. When the fringe benefit is for the convenience or advantage of the employer
d. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans.
e. Benefits given to rank and file employees.
f. Non-taxable housing benefits
g. Other non-taxable benefits discussed in this chapter.
Use of Aircraft and Helicopters
The Use of aircraft and helicopters owned and maintained by the employer is not a taxable
fringe benefit but treated as business expense of the employer.
Filing of Returns
10​th day of the month following the end of the calendar quarter in which the fringe benefits
were granted to the recipient
Reference:
● Tabag, E.D., Garcia, E.J. (2019) Income Taxation with Special Topics in Taxation based
on NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act
(TRAIN Law)
● Banggawan, R. B. (2019) Income Taxation-Laws, Principles and Applications (An
Integrated Principle Based Approach)
● Ballada, W. (2019) Taxation Made Easy
● www.scribd.com
CHAPTER EXERCISES
1. Determine the following incomes are subject to basic tax , fringe benefit tax or exempt
from tax by putting a check mark in the column provided below . If the value of the
benefit is provided, indicate the correct amount.
Amount
Subject to FBT
Subject to
Basic Tax
1. Officer’s expense account
not subject to liquidation.
120,000
2. Officer’s expense account
subject to liquidation.
80,000
Exempt
3. Personal expenses of the
company officers paid for or 50,000
reimbursed
by
the
company-employer.
4. Annual uniform allowances
granted to an executive.
5,000
5. Housing benefits of the
Philippine Army.
360,000
6. Housing benefits of officials
of a domestic corporation.
250,000
7. Housing unit furnished to an
employee, where said unit was 45,000
situated inside or adjacent to
the premises of the business
8. Monetized unused vacation
leave credits not exceeding 10 15,000
days
9. Household personal benefit
by an officer of a domestic 60,000
corporation.
10. Annual medical cash
allowance to dependents.
1,500
2. In 2018, Gracia Realty Corporation paid P325,000 to Wilderness Resort, representing
vacation expenses of Mike, and executive of Garcia Company. Answer the following.
a. Is this taxable fringe benefit?
b. How much is the tax base of the fringe benefit?
c. Should the taxable fringe benefit be included in the returnable income of Mike for the
year?
d. How much is the fringe benefit tax collected?
e. When is the fringe benefit tax remitted?
f. Assuming Mike is a rank and file employee, is the fringe benefit subject to a fringe
benefit tax?
3. LJ is a resident citizen employed by Chris Sports, Incorporated. He received the
following from his employer during 2018:
Basic Compensation Income
900,000
th​
13​ month pay
75,000
3,000 monthly transportation allowance
36,000
Productivity incentive pay
10,000
Christmas Bonus
25,000
Uniform allowance
15,000
Actual medical allowance
10,000
Rice subsidy
24,000
Required: Determine lJ’s net income
MODULE 4
Co-ownership, Estates and Trust
INTRODUCTION
This module discusses what co-ownership is and the difference between estates and trust.
It also includes topics such as income tax of an estate, deduction from estate’s gross income,
termination of judicial/extrajudicial settlement, taxation of trusts, classification of trust and filing
of income tax returns. These topics will give students knowledge and understanding about
co-ownership, estates and trusts.
ILO 1: Discuss the difference among co-ownership, estates and trust.
ILO 2: Explain and demonstrate examples of co-ownership, estates and trusts.
ILO 3: Analyze and solve problems regarding co-ownership, estates and trusts.
CO-OWNERSHIP
There is no co-ownership when two or more heirs or beneficiaries inherit an undivided
property from a decedent, or when a donor makes a gift of an undivided property in favor of two
or more donees. Inheritance is subject to “Estate Tax” while Donation is subject to “Donor’s
Tax”. Both taxes are not income taxes but classified as “Transfer Taxes” which are discussed in
Volume 2 (Transfer and Business Taxation). Nonetheless, incomes from such properties are
subject to income tax.
Co-Owners are taxed individually on their distributive share in the income of the
co-ownership. Meaning, co-ownership itself is not taxable for the reason that the activities of
co-ownership are generally limited to the preservation of the common property and the collection
of the income therefrom.
Inherited property remained undivided for more than (10) years and no attempt was ever
made to divide the same among the co-heirs, nor was the property under administration
proceedings nor held in trust, the property should be considered as owned by an unregistered
partnership, consequently, taxable as corporation.
ILLUSTRATION 1
CASE A:
Ana, Lorna and Fe “bought” a parcel of land for the purpose of improving the same
before leasing it out to interested tenants.
Question 1: Is a co-ownership created?
❖ Answer: No.
❖ Though the property may be undivided, it was acquired by the owners not through
gratuitous (inheritance or donation) but by purchase. Ana, Lorna and Fe formed a
partnership, instead of co-ownership. Partnership is generally taxable as a
corporation. Consequently, Ana, Lorna and Fe shall be considered “shareholders”
for income tax purposes. Income tax of a partnership as well as the partners are
discussed in Chapter 6.
CASE B:
On January 1, 2017, Noy, a resident taxpayer died leaving an undivided parcel of land to
his heirs Allan, Mar and Pacquito valued at P60,000,000. The property is an income producing
property primarily through rentals. In 2018, the property earned gross rentals amounting to
P15,000,000 while expenditures necessary to carry out the operations was P3,000,000.
On the other hand, the heirs, who are all engaged in businesses in their own individual
capacity, provided the following data for 2018 taxable year.
Allan
Mar
Pacquito
Gross business income
P6,000,000 P5,000,000
P8,000,000
Business expenses
3,000,000
2,500,000
6,000,000
Income subject to final taxes (net)
200,000
320,000
500,000
Question 1: Is a co-ownership created?
❖ Answer. Yes.
➔ Since the property is undivided, the heirs are considered co-owners
➔ The estate of Noy valued at P60M is not subject to income tax but to estate tax
Question 2: Assuming Noy was able to secure a partition and three separate land titles were
issued by the government before his death, naming his heirs as the rightful owners in his last will
and testament, is a co-ownership created?
❖ Answer. No.
➔ The property involved is not an undivided property.
Question 3: What is the applicable tax for the gratuitous transfer (inheritance)of the property
from Noy to his heirs?
❖ Answer: Estate Tax
Question 4: How much is the taxable income of the co-ownership?
❖ Answer: None
➔ A co-ownership is not a taxable person or entity. Its income, however, distributed
or shared by the heirs/donees, thus taxable to them in their individual capacity.
Question 5: How much is the taxable income of Allan in 2018?
Solution:
Gross income of Allan
P6,000,000
Allowable business expenses of Allan
(3,000,000)
Share in net income of the co-ownership
4,000,000
(P12M/3)
Taxable income
7,000,000
Question 6: How much is the income tax payable of Allan in 2018?
Answer: P2,090,000
Taxable income
P7,000,000
TAX DUE (using the graduated tax rates):
1st P2,000,000
P490,000
In excess of P2M; (P5M×32%)
​ 1,600,000
Income Tax Payable
P2,090,000
INCOME TAX OF AN ESTATE
Income tax of an estate refers to the tax on income received by the estate during the
period of administration or settlement. An “estate” is a mass of all the property, rights, and
obligations of a deceased person which are not extinguished by his death, including those which
have accrued thereto since the opening of succession. For instance, the parcel of land worth
P60,000,000 in illustration 1, CASE B above is the estate of Noy. The passage of his property to
his heirs upon his death is subject to Estate tax (Refer to Volume 2- Business and Transfer
Taxes).
TRANSFER TAX
A tax on gratuitous transfer of property either through gift/donation (subject to donor’s
tax) or through inheritance (subject to estate tax). A transfer tax is not an income tax because
there is no taxable income realized from the passage of property to the heirs upon the death of
the decedent.
ADMINISTRATION or SETTLEMENT PERIOD
Refers to the period when title to their properties left by a decedent is not yet finally
transferred to the heirs/beneficiaries. At this period, the executor named by the deceased in his
“last will or testament”, if any, or the administrator appointed by the court, as the case may be, is
temporarily in-charge of the administration of the estate until such time that the estate is finally
distributed to the rightful heirs. While under administration, the estate may earn income, thus, the
corresponding income tax should be paid.
ILLUSTRATION 2:
A decedent died leaving the following to his lawful heirs:
Cash
P5,000,000
House and Lot
15,000,000
Vacant parcel of land
5,000,000
Commercial building
30,000,000
Vehicles
5,000,000
Total (@ FMVs upon death) 60,000,000
● The properties to be received by his lawful heirs upon his death are not part of their gross
income for purposes of computing the heirs’ taxable income because it does not come
within the definition of income.
The estate of a decedent may be settled judicially or extrajudicial. Judicial settlement
pertains to settlement of an estate in a court proceeding while in extrajudicial settlement, the
heirs or beneficiaries settle for themselves the distribution of the estate or their inheritance.
Classification of Estates under settlement or administration
Estate under judicial administration
fiduciary/trustee
(administrator/executor) files the
ITR and pays the tax due thereon
Estates no under judicial administration
heirs and beneficiaries file the ITR
of the estate and pay the tax due thereon
APPLICABLE TAX
The taxable income of the estate is computed in the same as an individual taxpayer.
Consequently. The tax due is therefore computed using the graduated income tax rates for
individuals under Section 24(A) of the Tax Code (as amended under RA 10963 otherwise known
as the “TRAIN LAW”).
GRADUATED TAX RATE FOR INDIVIDUAL, ESTATES AND TRUSTS​ TAX
RATE for individuals, Estates and Trusts
PRIOR to 2018
TRAIN LAW- TAXABLE YEAR
2018-2022
2023 onwards
INCOME
TAX
INCOME
TAX
EXEMPT
Not over P
10,000
5%
Not over P
250,000
Exempt
Exempt
Over P
10,000 but
not over P
30,000
P 500 +10%
in excess of
P 10,000
Over P 250,000
but not over P
400,000
20% of excess
over P 250,000
15% of excess
over P 250,000
Over P
30,000 but
not over P
70,000
P 2,500
+15% in
excess of P
30,000
Over P 400,000
but not over P
800,00
P 30,000 + 25%
in excess of
P 400,000
P 22,500 + 20%
in excess of P
400,000
Over P
70,000 but
not over P
140,000
P 8,500
+20% in
excess of P
70,000
Over P 800,000
but not over P
2,000,000
P 130,000 +
30% in excess
of
P 800,000
P102,500 + 25%
I excess of P
800,000
Over P
140,000 but
not over P
250,000
P 22,500
+25% in
excess of P
140,000
Over P
2,000,000 but
not over P
8,000,000
P 490,000 +
32% in excess
of
P 2,000,000
P 402,500 + 30%
in excess of P
2,000,000
Over P
250,000 but
not over P
500,000
P 50,000
+30% in
excess of P
250,000
Over P
8,000,000
P 2,410,000
+35% in excess
of P 8,000,000
P 2,202,500 +
35% in excess of
P 8,000,000
Over P
500,000
P 125,000 +
32% in
excess of P
500,000
ILLUSTRATION 3
On November 1, 2017, Juan Dela Cruz died leaving various property worth P30,000,000.
The properties are income producing properties deriving rental income. The net income from
rentals for 2017 amounted to P2,500,000. A “last will and testament” was executed by the
decedent prior to his death assigning GJ as the executor. In 2018, (while under administration),
the estate earned P4,750,000 (net of 5% creditable withholding tax on rent) and incurred
operating expenses of P2,000,000.
Question 1: How much is the taxable income of the Estate of Juan Dela Cruz in 2017?
● Answer: NONE
❏ Under the Tax Code, when an individual taxpayer dies during the year, it shall be
assumed that as if he died at the close of such year (Chapter 1). Consequently, the
taxpayer identified in the income tax return for 2017 taxable year shall still be
“Juan Dela Cruz”, instead of “Estate of Juan Dela Cruz”.
Question 2: How much is income tax payable of the Estate of Juan Dela Cruz in 2018?
● Answer: P560,000
Solution:
“Gross rental (4.75M/95%)
P5,000,000
Allowable deductions
(2,000,000)
Taxable income
P3,000,000
TAX DUE (using the graduated tax rate)
1st P2,000,000
In excess of P1M @ 32%
Income Tax Due
Less: CWTax on rentals
Income Tax Payable
P490,000
​ 320,000
P810,000
​(250,000)
P560,000
DEDUCTION FROM ESTATE’S GROSS INCOME
Deduction from the estate’s gross income are the same items of deductions (business
expenses) allowed for individual taxpayers under Section 34 of the Tax Code. However, in
addition to the usual allowance business expenses, the amount of income of the estate for the
taxable year which is properly paid or credited during such year to any legatee, heir, or
determination of the estate’s taxable income. However, such amount of income distributed shall
be included in the determination of the taxable income of the legatee/heir/beneficiary.
Shown below is the pro-forma computation of the taxable income of the estate and the
heirs/beneficiaries.
Taxable income of the Estate
Gross income
Pxxx
Less: deductions
Business expenses
Pxxx
Special Deduction:
Distribution of estate’s income to beneficiaries
xxx
Taxable income of the estate
Tax due (graduated tax rate)
Taxable income of the Beneficiary
Compensation income, if any
Net income of the beneficiary from business and/or practice of profession
Add:
Amount received from the income of the estate
Taxable income
Tax due (graduated tax rate)
Pxxx
Pxxx
Pxxx
​xxx
xxx
Pxxx
ILLUSTRATION 4:
On November 1, 2017, Juan Dela Cruz died leaving various properties worth
P30,000,000 to his heirs: Pedro, Ana and Lorna. The properties are income producing properties
deriving rental income. The net income from rentals for 2017 amounted to P2,500,000. A “last
will and testament” was executed by the decedent prior to his death assigning GJ as the executor.
In 2018, (while under administration), the estate earned P4,750,000 (net of 5% creditable
withholding tax on rent) and incurred operating expenses of P2,000,000.
During 2018, Pedro (one of the lawful heirs) received P200,000from the income of the
estate. Pedro’s other income and expenses were as follows:
Compensation income
P800,000
Business income
1,500,000
Business expenses
600,000
Question 1: Assume that the estate is still under administration, how much is the taxable income
of the estate in 2018?
❖ Answer: P2,800,000
Solution:
“Gross” rental income (4.7M + 25M)
P5,000,000
Allowable business expenses
1,500,000
Distribution of income to Pedro (heir)
​(200,000)
Taxable income
P2,800,000
Question 2: How much is the taxable income of Pedro?
❖ Answer: P1,900,000 computed as follows:
Compensation income
P800,000
Business income
1,500,000
Business expenses
(600,000)
Amt. received from the income
​ 200,000
of the estate
Taxable income
P1,900,000
TERMINATION OF JUDICIAL/EXTRAJUDICIAL SETTLEMENT
After the termination of judicial/extrajudicial settlement of the estate where the heirs still
do not divide the property but instead contribute to the estate money, property, or industry with
intention to divide the profits between/among themselves, an unregistered partnership is created
and the estate becomes liable for the payment of corporate income tax.
TAXATION OF TRUSTS
Trust is a right on property, real or personal, held by one party for the benefit of another.
It may be arranged inter-vivos or created by will under which title to a property is passed to
another for conservation or investment with the income therefrom and ultimately the corpus
(principal) to be distributed in accordance with the directions of the creator as expressed in the
governing instrument.
PARTIES to a TRUST:
❖ Trustor- Person who establishes a trust.
❖ Trustee- One in whom confidence is reposed as regards property for the benefit of
another person.
❖ Beneficiary- Person for whose benefit trust is created.
❖ Fiduciary- any person or corporation that holds in trust an estate of another person or
persons. A fiduciary may exist only if legal trust is created.
TAXABILITY OF INCOME OF TRUSTS
The income of a trust may be taxable to the trustee, beneficiary or grantor, as the case
may be.
Taxable for the “Trustee” if:
The income of the trust is taxable to the “trustee” if the income is to be accumulated or
held for future distribution, whether ordinary income or gain from sale of assets included in the
corpus of the trust.
Taxable to the “Grantor/Trustor” if:
❖ Under the term of trust, the title to any part of the corpus or principal of the trust may be
revested to the grantor (Revocable Trust). The income of the corpus or principal that may
be revested to grantor shall be taxable to the grantor.
❖ The income of the trust may be held or distributed for the benefit of the grantor.
❖ Under the term of the trust, the income of the trust shall be applied for the benefit of the
grantor.
Taxable to the Beneficiaries
The income of the trust is taxable to the beneficiaries if the income is to be distributed to
the beneficiaries. In such a case, the beneficiaries include in their return their distributive share in
the net income of the trust. The distribution of the year’s income to an heir or beneficiary is a
special item of deduction for the trust. At the same time, the income distributed (actual or
constructive) shall be treated as a special item of income to the heir/beneficiary.
Special Deductions:
1. Distribution of the year’s income to an heir or beneficiary; and
2. Amount collected by a guardian of an infant which is to be held or distributed as the court
may direct.
Computation of Taxable Income
The trust’s taxable income is likewise computed in the same manner as an individual
taxpayer, except that the basic personal exemption allowed is limited only to P20,000 (Section
62-NIRC). The tax due is also based on the graduated rates provided under Section 24(A) of the
Tax Code as shown in Table 2-2 of Chapter 2. Moreover, the calendar period shall be used as an
accounting period for tax purposes. A trust is required to adopt the calendar year as its
accounting period.
Shown below is the pro-forma computation of the taxable income of a trust and a
beneficiary:
Taxable income of the Trust
Gross income
Pxxx
Less: deductions
Business expenses
Pxxx
Special Deduction:
Distribution of trust’s income to beneficiaries
xxx
Taxable income of the trust
Pxxx
Tax due (graduated tax rate)
Pxxx
Taxable income of the Beneficiary
Compensation income, if any
Net income of the beneficiary from business and/or practice of profession
Add:
Amount received from the income of the trust
Taxable income of the beneficiary
Tax due (graduated tax rate)
Pxxx
xxx
xxx
Pxxx
CLASSIFICATION OF TRUST
1. Ordinary Trust- the income and corpus of the trust do not revert to the grantor. The trust
income is accumulated and held for distribution to the beneficiaries. Under the Tax Code,
ordinary trust is any of the following trusts:
➔ A trust where the income is accumulated or held for future distribution under the
terms of a will trust.
➔ A trust where the income is to be distributed currently by the fiduciary to the
beneficiaries.
➔ A trust where the income is accumulated for the benefit of unborn or
unascertained person or persons with contingent interest.
➔ A trust where the income collected by a guardian of a infants held or distributed
as the court may direct; and
➔ A trust where the income, is at the discretion of fiduciary may be either
distributed to the beneficiaries or accumulated.
2. Revocable Trust (Section 63-NIRC)- a trust where at the any time, the power to revest in
the grantor, title to any part of the corpus of the trust is vested:
❖ In the grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus of the
income therefrom; or
❖ In any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom.
3. Employee’s Trust- income tax shall not apply to employees' trust which forms part of
pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all
his employees [Section 60(B)-NIRC].
Requisites or conditions for exemption of employees’ trust
❖ The employee’s trust must form part of a pension, stock bonus, or profit-sharing
plan of an employer for the benefit of some or all of his employees;
❖ Contributions are made to the trust by such employer, or employees, or both;
❖ The contributions are made for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust accordance with such
plan;
❖ Under the trust instrument, it is impossible at any time prior to the satisfaction of
all liabilities with respect to employees under the trust, for any part of the corpus
or income to be (within the taxable year or thereafter) used for, or diverted to,
purposes other than for the exclusive benefit of his employees.
CONSOLIDATED INCOME TAX RETURNS (TWO OR MORE TRUSTS)
Where two or more trusts is created by the same trustor or grantor and the beneficiary is
the same person, the following rules shall apply:
1. The taxable income of all the trusts shall be consolidated and the tax computed such
consolidated income. The tax computed on the consolidated income shall be apportioned
to the different trusts, such that each trust shall have a share in the income tax on
consolidated income.
The format of computation follows (Tax Apportionment):
Tax Apportioned
= ​Taxable income of the trust ​ × Consolidated
to a Trust
Taxable income of all trusts
income tax
2. Such proportion of sold tax shall be assessed and collected from each trustee which the
taxable income of the trust administered by him bears to the consolidated income of the
several trusts. Each trust shall pay an income tax still due or payable computed as
follows:
Income Tax apportioned to a trust
Pxxx
Less: Income Tax already paid
(xxx)
Income Tax Payable
Pxxx
ILLUSTRATION 5:
In 2018, George created three (3) trusts for his minor daughter. The following data were
furnished by the trusts during 2018:
Trust
Gross Income
Expenses
Net Income
Income Tax Paid
1
P5,000,000
P2,500,000
P2,500,000
P500,000
2
10,000,000
5,000,000
5,000,000
1,200,000
3
15,000,000
7,500,000
7,500,000
2,000,000
Required: Compute the income tax payable of Trust 1,2 and 3
● Consolidated Tax Due
Consolidated Gross Income
P30,000,000
Consolidated expenses
​(15,000,000)
Consolidated taxable income
P15,000,000
Tax Due [Section 24(A)]
On 1st P8,000,000
In excess over P8M @ 35%
Consolidated Income Tax Due
● Income Tax Still Due/Payable of Trust 1
Tax Apportionment to Trust 1
(2,500/15,000 × P4,860,000)
Less: Income tax already paid
Income tax still due/payable
● Income Tax Still Due/Payable of Trust 2
Tax Apportionment to Trust 2
(5,000/15,000 × P4,860,000)
Less: Income tax already paid
Income tax still due/payable
● Income Tax Still Due/Payable of Trust 3
Tax Apportionment to Trust 3
(7,500/15,000 × P4,860,000)
Less: Income tax already paid
Income tax still due/payable
P2,410,000
​ 4,450,000
P4,860,000
P810,000
(500,000)
P310,000
P1,620,000
​(1,200,000)
P420,000
P2,430,000
​(2,000,000)
P430,000
Filing of Income Tax Returns
The following persons acting in any fiduciary capacity shall file the income tax return for
an estate or trust (Section 65-NIRC):
●
●
●
●
●
●
Guardians
Trustees
Executors/administrators
Receivers
Conservators
All other persons or corporations acting in any fiduciary capacity
In case of two or more joint fiduciaries, return filed by one of them shall be a sufficient
compliance with the requirements of the Tax Code. The return may be filed in
● Authorized agent banks;
● Revenue District Officer;
● Collection agent;
● Duly authorized city or municipal Treasurer in which the taxpayer has his legal residence
or principal place of business.
Exercises
MULTIPLE CHOICE​. Choose the letter of the correct answer.
1. It arises when two or more heirs or beneficiaries inherit an undivided property from
decedent, or when a donor makes a gift of an undivided property in favor of two or more
donees.
a. Partnership
b. Trust
c. Joint account
d. Co-ownership
2. Which of the following shall quantify as co-ownership?
I. Succession by several heirs to an undivided estate, the estate is not under
administration;
II. Donation of property to two or more beneficiaries.
a. Both I and II
b. Neither I nor II
c. I only
d. II only
Use the following data for the next three (3) questions:
Ana, Lorna and Fe, are the heirs of Pedro who died on Nov. 1, 2017. The properties of Pedro
comprised solely of real property valued at P50,000,000 at the time of his death. The property is
primarily deriving rental income. In 2018, the property remained undivided and it derived a net
rental income of P15,000,000.
3. For income tax purposes, the heirs will be tax on net rental income from the inherited
property for the year 2018 as:
a. Partners in a commercial partnership
b. Partners in a general professional partnership
c. Partners in an unregistered co-partnership
d. Co-owners
4. What amount should be reported as taxable income of the co-ownership?
a. P 50,000,000
b. P 15,000,000
c. P14,980,000
d. Nil
5. What amount should each heir report in their individual returns as their share in the net
rental income of the property they inherit.
a. P50,000,000
b. P15,000,000
c. P10,000,000
d. P5,000,000
6. Question 1: Is a co-ownership taxable?
Question 2: Is the share of co-owner taxable?
Answer to Question 1: No, because the activities of the co-owners are limited to
the preservation of the property and the collection of income therefrom.
Answer to Question 2: Yes, because each co-owner is taxed individually on their
distributive share in the income of the co-ownership.
a. Answers to both questions are correct
b. Only the answer for Question 1 is wrong
c. Only the answer for Question 2 is wrong
d. Answer to both questions are wrong
7. Statement 1: Co-owners are taxed individually on their distributive share in the income of
the co-ownership.
Statement 2: If co-owners invest the income in a co-ownership in business for profit, they
would constitute themselves into a partnership and as such shall be taxable as
corporation.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
8. When will an inherited property be considered as owned by an unregistered partnership?
I. When the property remained undivided for more than ten (10) years
II. When no attempt was ever made to divide the same among the co-heirs, nor
was the property under administration proceedings nor held in trust
a. Only condition I is required
b. Only condition II is required
c. Condition I and II are required
d. None of the above
9. It is composed of all the property, rights, and obligations of a deceased person which are
not extinguished by his death, including those which have accrued thereto since the
opening of succession.
a. Estate
b. Devisee
c. Legatee
d. Testator
10. Income received by the estate during the period of administration or settlement of the
estate, for tax purposes is known as
a. Income of the estate
b. Income of the heirs
c. Income of the trustee
d. Income of the testator
11. Statement 1: For taxation purposes, the taxable income of the estate shall be
determined in the same manner and basis as in the case of individual taxpayers.
Statement 2: The income from the estate is no longer allowed to deduct personal
exemption of P20,000 upon effectively of RA10963.
a. Statements 1 & 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statement 1 and 2 are true
12. When an individual taxpayer dies, future income on his property will be taxed to
a. Those who inherit the property after they received the property
b. The estate itself, after the heirs have received the property
c. The individual himself
d. None of the above
13. Statement 1: The income of the estate distributed to the beneficiaries during the year is
subject to final withholding tax of 15%.
Statement 2: Withholding tax on the income distributed to the beneficiary is creditable
against the total tax liability of the beneficiary.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statement 1 and 2 are true
14. The taxable income of the estate is
a. P 480,000
b. P 450,000
c. P 310,000
d. P 330,000
15. Assume that Francis, head of the family, also earned net income of P500,000 for his
trading business. What amount should Francis report as his taxable income for 2018?
a. P 620,000
b. P 570,000
c. P 500,000
d. P 450,000
16. An agreement created by will or an agreement under which title to property is passed to
another for conservation or investment with the income therefrom and ultimately the
corpus to be distributed in accordance with directive of creator as expressed in the
governing instrument.
a. Estate
b. Trust
c. Fiduciary
d. Beneficiary
17. Estate and Trust are
a. Treated as separate taxable entities
b. The tabular rates of tax prescribed under section 24A for individuals shall be
used in computing the income tax of trust or estate
c. Personal exemption of P20,000 is no longer allowed beginning January 1, 2018
d. All of the above
18. Which of the following statements is not correct
a. An irrevocable trust is subject to income tax.
b. An irrevocable trust is taxed in the same manner as an individual taxpayer
c. Prior to 2018, a taxable trust is allowed to claim personal exemption of P20,000
d. An irrevocable trust is taxed at a rate of 30% of net taxable income.
19. Which statement is true? Pre-tax income by a trust
a. Is a taxed to the beneficiary if such income is retained by the trust.
b. Is a taxed to the trust if such income is distributed
c. Is taxed depending on who is in current possession of the income
d. All of the above
20. The income distributed to the beneficiaries of estates and trusts, except income subject
to final withholding tax and income exempt from tax is subject to
a. Creditable withholding tax of 10%
b. Creditable withholding of 15%
c. Final withholding of 20%
d. Neither final nor creditable withholding tax
Use the following data for the question:
On January 1, 2018, Francis established a trust found for the benefit of his daughter, Princess.
Francis appointed Atty. Lo Yer as the trustee the property transferred to the trust is a piece of lot
with a dormitory earning rental income during the year the trust earned P10,000,000 revenues
and incurred expenses of P2,000,000 out of the trust’s income, Atty Lo yer gave Princess
P1,500,000. In the same year, Princess earned compensation income of P1,850,000, net of
withholding tax of P650,000.
Determine the following.
21. Taxable income of the trust
a. P 5,000,000
b. P 6,500,000
c. P 8,000,000
d. P 10,000,000
Use the following data for the next three (3) questions:
In 2018, Mr. Mapagbigay created two (2) trust for his minor son, Lucky. During the year, the
two-trust earned net income as follows
Trust 1
P4,000,000
Trust 2
P6,000,000
Each trust filed their own income tax return and paid the corresponding income tax due as
computed in their separate returns.
22. Consolidated tax due of the trust
a. P 1,130,000
b. P 1,770,000
c. P 3,110,000
d. Nil
23. Additional income tax payable of trust 1
a. P
96,000
b. P 114,000
c. P 1,130,000
d. P 1,770,000
24. Additional income tax payable of trust 2
a. P
96,000
b. P 114,000
c. P 1,130,000
d. P 1,770,000
25. Which of the following statements is correct regarding revocable trust?
I. A revocable trust exist when the grantor reserves the right to revoke his power to
change at any time any part of the terms of the trust
II. The income of the revocable trust is taxable against the grantor
a. I only
b. II only
c. Both I and II
d. Neither I or II
Module 5
Income Taxes for Corporations
Introduction
In the Philippines, domestic and foreign companies are liable to pay corporate income tax (CIT).
The tax liability for a corporation is determined by its residency status and is based on the net
income it obtains while carrying out its business activity, normally during one business year.
Beyond Corporate Income Tax, companies should also understand withholding tax and some
other taxes. Business owners who frequently study the country's corporate taxes and work with
their local advisors find it easier to stay compliant and exploit any beneficial changes, such as
rate reductions or incentives.
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
Define corporation.
Discuss concepts and procedures necessary for joint ventures or consortium
Identify tax exempt corporations
Enumerate different types of corporations
Identifying the tax rates and basis in computing the tax due
Explain the applicability of the minimum corporate income tax
Compute gross income of corporations
Compute minimum corporate income tax
Discuss the proper treatment of excess minimum corporate income tax or the MCIT
carry over
10. Apply the final taxes on passive income
11. Apply income tax rates applicable to special corporations
12. Explain rationalization of income tax for international carriers
13. Differentiate Regional Operating Headquarters(ROHQ) and Regional Headquarters
(RHQ)
14. Explain the manner of filing income tax returns for corporations
Corporation Defined
●
●
As defined by the Corporation Code of the Philippines, “corporation” is an artificial being
created by operation of law, having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence.
However, for purposes of income taxation, the Tax Code provides that the term “corporation”
shall include the following:
●
○ partnerships, no matter how created or organized,
○ joint stock companies,
○ joint accounts (ceuntas en participacion),
○ associations, or insurance companies
○ mutual fund companies,
○ regional operating headquarters of multinational corporations, and
○ joint accounts
But, it does not include the following:
○ General professional partnership​. A partnership formed by persons for the sole
purpose of exercising their common profession. The salient features and applicable
taxes for general professional partnerships are discussed in Module 6.
○ Joint venture ​or ​consortium​:
■ Formed for the purpose of undertaking ​construction projects ​pursuant to
Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist local contractors
in achieving competitiveness with foreign contractors by pooling their resources
in undertaking big construction projects.
■ A joint venture or consortium for engaging in ​petroleum, coal, geothermal and
other energy operations ​pursuant to an operating consortium agreement under a
service contract with the government.
JOINT VENTURE OR CONSORTIUM
● a commercial undertaking by two or more persons, differing from a partnership in that it
relates to the disposition of a single lot of goods or the completion of a single project.
● taxable as corporation.
● However, there are two types of tax exempt joint ventures described in the preceding topic
as provided for under Section 3 of RR 10-2012. A joint venture or consortium formed for the
purpose of undertaking construction projects is not considered as corporation under Section
22 of the Tax Code provided:
a. The joint venture was formed for the purpose of undertaking a construction project; and
b. Should involve joining/ pooling of resources by licensed local contracts; that is, licensed as
general contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI)
c. The local contractors are engaged in construction business; and
d. The Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI)​.
● The tax-exempt joint venture shall not include those who are mere suppliers of goods,
services or capital to a construction.
●
●
●
If not all of the requirements are present, the joint venture or consortium formed for the
purpose of undertaking construction projects shall be considered as taxable corporations.
The members of a Joint Venture not taxable as a corporation shall each be responsible in
reporting and paying appropriate income taxes on their respective share to the joint ventures
profit.
Joint ventures involving foreign contractors may also be treated as a non-taxable
corporation provided:
○ The member foreign contractor is covered by a special licenses as contractor by the
PCAB.
○ The construction project is certified by the appropriate Tendering Agency (government
office) that the project is a foreign financed/ internationally-funded project and that
international bidding is allowed under the Bilateral Agreement entered into by and
between the Philippine Government and the foreign/ international financing institution
pursuant to the implementing rules and regulations of Republic Act No. 4566 otherwise
known as Contractor’s License Law.
JOINT STOCK COMPANIES and JOINT ACCOUNTS
Joint stock companies
● constituted when a group of individuals acting jointly, establish and operate business
enterprise under an artificial name, with an invested capital divided into transferable
shares, an elected board of directors, and other corporate characteristics, but operating
without formal government authority.
Joint accounts (cuentas en participacion)
● constituted when one interests himself in the business of another by contributing capital
thereto, and sharing in the profits or losses in the proportion agreed upon
They are not subject to any formality and may be privately contracted orally or in writing. The
term “​associations”​ includes all organizations which have substantially the salient features of a
corporation to be taxable as a “corporation”.
Tax Exempt Corporations
Under ​Section 30 of the Tax Code, t​ he following organizations shall not be taxed in
respect to income received by them as such:
a) Labor, agricultural or horticultural organizations not organized principally for profits.
b) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock, organized and operated for mutual purposes and without
profit.
c) A beneficiary, society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or a mutual
aid association or a non-stock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents.
d) Cemetery company owned and operated exclusively for the benefit of its members.
e) Non-stock corporation or association organized and operated ​exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no
part of its net income or asset shall belong or inure to the benefit of any member,
organizer, officer or any specific person.
f) business leagues, chambers of commerce, boards of trade not organized for profit and
no part of the net income of which inures to the benefit of any private stockholder or
individual
g) civic leagues or organization not organized for profit but operated exclusively for the
promotion of social welfare;
h) A non-stock and nonprofit educational institutions;
i) government educational institutions;
j)
farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation
companies, mutual or cooperative telephone companies, or like organizations of a purely
local character, the income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its expenses; and
k) farmers’, fruit growers, or like association organized and operated as a sales agent for
the purpose of marketing the products of its members and turning back them the
proceeds of sales, less the necessary selling on the basis of the quantity of produced
finished by them.
Notwithstanding the provision in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal or from any of their activities conducted for profit,
regardless of the disposition made of such income,shall be subject to tax
imposed under the Tax Code.
Types of Corporations
Corporations, for tax purposes, are classified as follows:
● Domestic corporations ​(DC) - corporations created or organized in the Philippines or
under its laws.
● Foreign corporations - ​a corporation which is not domestic, and may be
○ resident foreign corporations ​(RFC) - engaged in business in the Philippines, or
○ nonresident foreign corporations ​(NRFC) - not engaged in business in the
Philippines.
● Domestic and foreign corporations may also be classified as special corporations.
Income Tax Rate and Basis in Computing the Tax Due
The applicable income tax of a corporation depends on the ​type of the corporation and the
income subject to tax​.
Income subject to tax
Applicable income tax
Regular or ordinary income
Normal or Regular Corporate Income Tax
(RCIT) of 30% (refer to table 5-1)
Certain passive incomes derived from Philippine
sources
Final withholding taxes (refer to Table 5-2)
Capital gains on sale of shares of non-listed
domestic corporations and sale of real properties
located in the Philippines classified as capital asset
capital gains tax (refer to Table 5-3)
Type of Corporation
Applicable income tax
Domestic corporations
taxable on their income derived from all sources (within and without the
Philippines)
subject to 30% normal or regular corporate income tax (NCIT or RCIT)
based on “net income” during the taxable year.
A minimum corporate income tax (MCIT) of 2% on gross income is
impose on the fourth (4th) taxable year immediately following the
taxable year in which such corporation commenced its business
operations.
The tax due should be the higher between the RCIT and MCIT.
Foreign corporations
taxable on their income derived from sources within the Philippines only
Resident foreign
corporations
Subject to 30% normal or regular corporate income tax (NCIT or RCIT)
based on “net income” during the taxable year.
A minimum corporate income tax (MCIT) of 2% on gross income is
imposed on the fourth (4th) taxable year immediately following the
taxable year in which such corporation commenced its business
operations.
The tax due should be the higher between the RCIT and MCIT.
Nonresident foreign
corporation not
engaged in trade or
business in the
Philippines
30% of “gross” income from all sources in the Philippines such as
interests, rents, premiums (except reinsurance premiums), annuities,
emoluments, or other fixed or determinable annuities, periodic or
casual gains, profits and income and capital gains, except income
subject to capital gains tax.
Government Owned
and Controlled
Corporations
(GOCCs).
refer to all corporations, agencies, or instrumentalities owned or
controlled by the Government
Corporations created
by special laws or
charters
taxed based on the provisions of the special law or charter creating
them or applicable to them, supplemented by the provisions of the Tax
Code, insofar as they are applicable.
rate of tax on taxable income as are imposed upon corporations or
associations engaged in similar business, industry or activity, except
the following tax exempt GOCCs as provided by law:
● Government Service Insurance System (GSIS)
● Social Security System (SSS)
● Philippine Health Insurance Corporation (PHIC)
● Philippine Charity Sweepstakes Office (PCSO)
● Local Water Districts under RA10026
Section 27(C) of the Tax Code, as amended
TABLE 5-1 CORPORATE INCOME TAX RATES ON REGULAR INCOME
DC
1.)
RCIT
RFC
NRFC
• Tax Rate
• Basis
30% Net Income
within & without
30% Net Income
within only
30% Gross Income
within only
MCIT**
2% of Gross
Income within and
without
2% of Gross Income
within only
Not applicable
GIT (Optional)***
15%
15%
Not applicable
• Tax Rate
• Basis
Gross Income
within and without
Gross Income
within only
OR
2)
** Starting on the 4th year of operations ​immediately following the taxable year in which such
corporation commenced its business (RR 2-98 as amended by RR 12-2007). The tax dues is
the higher between the RCIT and MCIT. *** Refer to discussions in ___.
ILLUSTRATION 1:
Assume the following data for Hananiah Corporation for the current year:
Gross Income, Philippines
P 975,000
Expenses, Philippines
750,000
Gross Income, Malaysia
770,000
Expenses, Malaysia
630,000
Interest on bank deposit
25,000
​Determine the income tax due assuming the corporation is:
​Case A. ​The corporation is a domestic corporation
❖ Answer: P 109,500 computed as:
Gross Income, Philippines
P 975,000
Gross Income, Malaysia
770,000
Expenses, Philippines
(750,000)
Expenses, Malaysia
​ (630,000)
Taxable Income
Tax Rate
​Income Tax Due
365,000
30%
​ P 109,500
​
❖ Domestic corporations are subject to 30% income tax on their regular
net income from sources within and without the Philippines.
❖ The interest income on bank deposit is not a regular income. It is a
“passive income” subject to final tax of 20%. Final Taxes on certain
passive income are discussed in the succeeding topics of this
Chapter. Refer to Table 5-2 for the list of certain passive incomes
subject to final taxes.
Case B: ​The corporation is a resident corporation
❖ Answer: P 67,500 computed as:
Gross Income, Philippines
Expenses, Philippines
Taxable income
Tax Rate
​Income Tax Due
P 975,000
​ 750,000
225,000
​
30%
​ P 67,500
Case C: ​The corporation is a nonresident corporation
❖ Answer: P 300,000 computed as:
Gross Income, Philippines
P 975,000
Interest on bank deposit
​ 25,000
Total gross income
1,000,000
Tax Rate
​
30%
​Income Tax Due
​ P 300,000
❖ Nonresident foreign corporations are subject to 30% income tax on
their “gross” income from Philippine sources (except income subject
to CGT and tax exempt income).
MINIMUM CORPORATE INCOME TAX
Revenue regulations 2-98 as amended by 12-2007 provides that a “Minimum Corporate
Income Tax (MCIT)” of two percent (2%) of the gross income as of the end of the taxable year
(whether calendar or fiscal), depending on the accounting period employed is imposed upon
any domestic corporations and resident foreign corporations beginning on the fourth (4th)
taxable year ​immediately following the taxable year in which such corporation commenced its
business operations.​ The MCIT shall be imposed whenever:
● The corporation has zero taxable income; or
● The corporation has negative taxable income; or
● Whenever the amount of MCIT is greater than the regular corporate income tax (RCIT)
due from such corporation. Hence, MCIT is always computed and compared to RCIT
starting on the fourth year of operations. The higher amount should be the tax due for
the taxable period.
RULES FOR DETERMINING THE PERIOD WHEN A CORPORATION BECOMES SUBJECT
TO MCIT (RR 2-98 as amended under RR 9-98)
For purposes of MCIT, the taxable year in which the business operations commenced
shall be the year in which the corporation registered with the BIR. For example, a firm which
was registered in May 1998 shall be covered by the MCIT strating in 2002.
COMPUTATION OF GROSS INCOME:
As stated in RR 12-2007, ​gross income ​for purposes of MCIT,
● In case of sale of goods,
○ means gross sales less sales returns, discounts, allowances, and cost of goods
sold,
●
●
●
In case of sale of services
○ means gross receipts less sales returns, discounts, and allowances, and cost of
services/ direct cost
will also include all items of gross income enumerated under Section 32(A) of the tax
code or items subject to normal or regular corporate tax.
However, all income exempt form tax and income subject to final taxes shall be excluded
in the determination of gross income for MCIT purposes.
COMPUTATION OF MCIT
SELLER OF GOODS:
Gross Sales
P xx
Sales Discounts
(xx)
Sales Returns and allowances
(xx)
Cost of Sales**
(xx)
Gross Income
xx
Add: Other income subject to Normal or Regular Corporate tax
xx
Gross Income for MCIT Purposes
xx
MCIT rate
MCIT
2%
P xx
SELLER OF SERVICE:
Gross Receipts
P xx
Sales Discounts
(xx)
Sales Returns and allowances
(xx)
Direct Cost of Services ***
(xx)
Gross Income
xx
Add: Other income subject to Normal or Regular Corporate tax
xx
Gross Income for MCIT Purposes
xx
MCIT rate
MCIT
2%
P xx
**COST OF SALES (Seller of Goods):
Invoice Cost
P xx
Import duties
xx
Freight
xx
Insurance
xx
Total
P xx
** COST OF SALES (Manufacturer):
Raw materials used
P xx
Direct Labor
xx
Factory Overhead
xx
Freight Cost
xx
Insurance premiums
xx
Other production cost
xx
Total
P xx
***DIRECT COST OF SERVICES
Salaries and Employees benefits of personnel, consultants and
specialists directly rendering the service
P xx
Cost of facilities directly utilized in providing the service (e.g.
rentals and cost of supplies)
xx
Other direct costs and expenses necessarily incurred to provide
the services
xx
Total
P xx
ILLUSTRATION 1:
Assume the following data for Hananiah Corporation for the current year (6th
year of business operations):
Gross Income, Philippines
P 975,000
Expenses, Philippines
950,000
Gross Income, Malaysia
700,000
Expenses, Malaysia
720,000
Interest on bank deposit
25,000
​Determine the income tax due assuming the corporation is:
​Case A. ​The corporation is a domestic corporation
❖ Answer: P 33,500 computed as follows:
Gross Income, Phils. & Malaysia
P 1,675,000
Expenses, Phils. & Malaysia
​ (1,670,000)
Taxable Income
5,000
RCIT Rate
​
​30%
​RCIT/ Basic Tax
P
​ 109,500
Versus
M
​ CIT
Gross Income, Phils. & Malaysia
MCIT Rate
​MCIT
​
P 1,675,000
​2%
​P
​ 33,500
​Income Tax Due (Higher)
P 33,500
❖ As discussed in illustration # 1, the interest income on bank deposit is
a “passive income” subject to final tax of 20%. Rules on FinalTaxes
on certain passive income are applied regardless of whether the
corporation is subject to RCIT or MCIT because of the different
nature of income to which the taxes were based.
❖ If MCIT is higher than RCIT, the excess or difference (P 33,500 vs. P
1,500 = P 32,000) is known as ​“excess MCIT”​. Any excess of the
MCIT over RCIT shall be carried forward and credited (deducted)
agains the RCIT for the three succeeding taxable years, provided,
that the RCIT is higher than the MCIT in the year to which the excess
MCIT is forwarded. Refer to Illustration # 3 for a more detailed
discussion on carry-over of excess MCIT.
Case B: ​The corporation is a resident corporation
❖ Answer: ​P 19,500 ​computed as:
RCIT
Gross Income, Philippines
P 975,000
Expenses, Philippines
​(950,000)
Taxable Income
25,000
Tax Rate
​
​30%
​Income Tax Due
​P
7,500
M
​ CIT
Gross Income, Philippines
​MCIT Rate
​MCIT
​Income Tax Due (Higher)
P
​
975,000
2%
​P
​ 19,500
P 19,500
Case C: ​The corporation is nonresident corporation
❖ Answer: ​P 300,000.​ [P 975,000 + 25,000) x 30%]
MCIT is not applicable to nonresident corporation
EXCESS MCIT OR MCIT CARRY-OVER
Any excess of the minimum corporate income tax over the normal corporate
income tax shall be carried forward and credited (deducted) against the regular income
tax for the three succeeding taxable years, provided, that the normal tax should be
higher than the minimum corporate tax in the year to which the excess MCIT is
forwarded.
ILLUSTRATION 3:
A domestic corporation which commenced operations in 2012 provided the following data:
Gross income
Allowable deductions
Net income (loss)
​2016​
P 10,000,000
​ (9,500,000)
​P
500,000
​2017​
P 12,000,000
12,200,000
P (200,000)
​2018
P 14,000,000
12,800,000
P 1,200,000
Determine the Income tax payable for 2016, 2017 and 2018
Answers:
2016: P 200,000
​RCIT or Basic tax (P 500,000 x 30%)
MCIT (P 10 M x 2%)
​Tax Due/ payable (Higher amount)
​Excess MCIT 2016
P 150,000
200,000
P 200,000
P 50,000
2017: P 240,000
​RCIT or Basic tax (P 500,000 x 30%)
P
0
MCIT (P 12 M x 2%)
240,000
​Tax Due/ payable (Higher amount)
P 240,000
​Excess MCIT 2017
P 240,000
❖ The excess MCIT for 2016 was not carried over or deducted in 2017 tax due because
MCIT in 2017 was higher than the RCIT. As a rule, MCIT can be carried over only if, at
the time the excess MCIT is claimed, RCIT is higher than MCIT.
2018: P 10,000
Gross income 2018
Allowable deductions 2018
Net income
Less: ​2017 NOLCO ***
Taxable income 2018
RCIT rate
RCIT or Basic Tax
​MCIT ​(14M x 2%)
​Tax due (RCIT - higher amount)
Less: Excess MCIT
2016
2017
INCOME TAX PAYABLE 2018
P 14,000,000
​ 12,800,000
P 1,200,000
​​
(200,000)
P 1,000,000
​
30%
​P
300,000
P
P
280,000
300,000
(50,000)
​
(240,000)
​
P
10,000
❖ *** Net Operating Loss during the year may be carried over as part of deductible
expenses of a corporation for the next three succeeding years following the year the
loss was incurred. Such loss is known as Net Operating Loss Carry-Over ​(NOLCO).
❖ RCIT and MCIT were not amended under RA 10963 (TRAIN Law)
QUARTERLY AND ANNUAL CORPORATE TAX DUE
Carry-Over of Excess MCIT from p
​ revious​ taxable year
The computation and the payment of MCIT shall likewise apply at the time of filing the
“quarterly” corporate income tax as prescribed under Section 75 and Section 77 of the Tax
Code, as amended. Thus, in the computation of the tax due for the taxable quarter, if the
computed quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid
for such taxable quarter at the time of filing the quarterly corporate income tax return shall be
the MCIT which is two percent (2%) of the gross income as of the end of the taxable quarter.
In the payment of said “quarterly” MCIT, excess MCIT from the ​previous ​taxable year(s)
shall ​not b
​ e allowed to be credited. However, the expanded withholding tax and quarterly
corporate income tax payments under the normal income tax and the MCIT paid in the previous
taxable quarter(s) are allowed to be applied against the quarterly MCIT due.
ILLUSTRATION 4: (Based on illustrations from RR 12-2007)
CASE A:
A corporation’s computed Regular Corporate Income Tax (RCIT), MCIT and Income taxes
withheld from 1st to 4th quarters including excess MCIT and Excess withholding taxes from
proper year(s) are as follows:
Quarter
RCIT
MCIT
Taxes withheld Excess ​MCIT
during the year Prior Year
Excess
Withholding
tax of ​Prior
Year
1st
P 200,000
160,000
40,000
60,000
20,000
2nd
240,000
500,000
60,000
-
-
3rd
500,000
200,000
80,000
-
-
4th
400,000
200,000
70,000
-
-
Determine the following:
1) Income tax payable for the first quarter
2) Income tax payable for the second quarter
3) Income tax payable for the third quarter
4) Annual income tax payable
ANSWERS/ SOLUTIONS
Question #1: P 80,000 ​computed as follows:
Quarterly tax due (Higher - ​RCIT​)
Less:
Excess withholding tax - previous year
P 200,000
(20,000)
Taxes withheld - this quarter
(40,000)
** Excess MCIT - previous year
​ (60,000)
Income tax paid/payable
​P 80,000
** The carry-over of excess MCIT from ​previous year ​is allowed if the tax due for
the quarter is based on RCIT.
Question #2: P 460,000 ​computed as follows:
Quarterly tax due (Higher - ​MCIT​)
Less:
Excess withholding tax - previous year
Taxes withheld - 1st and 2nd quarters
Income tax paid - 1st quarter
** Excess MCIT - previous year
Income tax paid/payable
●
●
P 660,000
(20,000)
(100,000)
(80,000)
​
​P 460,000
** The carry-over of excess MCIT from previous year is not allowed if the tax
due for the quarter is based on MCIT.
The P 660,000 quarterly tax due was computed by adding the MCIT of the 1st
and 2nd quarter. The amount is higher compared to the total of the RCIT for the
1st and 2nd quarter.
Question #3: P 140,000 ​computed as follows:
Quarterly tax due (Higher - ​RCIT​)
Less:
Excess withholding tax - previous year
Taxes withheld - 1st and 2nd and 3rd quarters
Income tax paid - 1st and 2nd quarters
** Excess MCIT - previous year
Income tax payable
● ** Refer to the explanation in question # 1.
Question #4: P 330,000 ​computed as follows:
Quarterly tax due (Higher - ​RCIT​)
Less:
Excess withholding tax - previous year
Taxes withheld for the year (total)
Income tax paid - 1st, 2nd and 3rd quarters
** Excess MCIT - previous year
Income tax payable
P 940,000
(20,000)
(180,000)
(540,000)
​ (60,000)
​P 140,000
P 1,340,000
(20,000)
(250,000)
(680,000)
​
(60,000)
​P 330,000
CASE B: (MCIT at Year-end is higher than RCIT):
Assume the following data:
Quarter
RCIT
MCIT
Taxes withheld Excess ​MCIT
Excess
during the year
Prior Year
Withholding
tax of ​Prior
Year
1st
P 200,000
160,000
40,000
60,000
20,000
2nd
240,000
500,000
60,000
-
-
3rd
500,000
200,000
80,000
-
-
4th
100,000
240,000
70,000
-
-
Determine the income tax payable at year-end
ANSWERS/ SOLUTIONS
❖ P 150,000
Annual tax due (Higher - ​MCIT​)
Less:
Excess withholding tax - previous year
Taxes withheld - for the entire year
Income tax paid - for the first 3 quarters
** Excess MCIT - previous year ​(not allowed)​
Income tax paid/ payable
P 1,100,000
(20,000)
(250,000)
(680,000)
​
​P 150,000
The computation of the taxes paid for the first three quarters (680,000) is the same with
the computations made in Illustration No. 4
RELIEF FROM MCIT
The Secretary of Finance is authorized to suspend the imposition of minimum corporate
income tax on any corporation due to:
1. Losses on account of prolonged labor disputes
2. Force majeure
3. Legitimate business reverses.
Substantial losses form a “prolonged labor dispute” means losses arising from a strike
staged by the employees that lasted for more than six (6) months within a taxable period and
the strike resulted to temporary shutdown of business operations.
CORPORATIONS EXEMPT FROM MCIT
The following corporations shall not be subject to MCIT:
1) Domestic Corporations
a) Proprietary educational institutions
b) Non-profit hospitals
c) Domestic corporations engaged in depository banks under the expanded foreign
currency deposit unit (FCDUs) on their income from foreign currency transactions
with local commercial banks and other depository banks under the foreign
currency deposit system.
2) Resident Foreign Corporations
a) International carriers
b) Offshore banking units (OBUs)
c) Regional operating headquarters (ROHQs)
3) Corporations registered under Philippine Economic Zone Authority (PEZA) and
Bases Conversion Development Authority (BCDA)
OPTIONAL CORPORATE INCOME TAX (15% Gross Income Tax)
The President, upon the recommendation of the Secretary of Finance, may, effective
January 1, 2000, allow domestic and resident foreign corporations to be subjected to optional
corporation tax of 15% based on gross income.
REQUISITES
All of the following conditions shall have to be satisfied in the allowance of
optional corporate tax:
1. A tax effort ration of 20% of Gross National Product (GNP);
2. A ratio of 40% of income tax collection of total tax revenue;
3. A VAT effort of 4% of GNP; and
4. A 0.9 ratio of the Consolidated Public Sector Financial Position to GNP
5. The option to be taxed based on gross income shall be available only to
firms whose ratio of cost of sales to gross sales or receipts from all sources
does not exceed 55%.
The election of the gross income option by the corporation shall be irrevocable
for the three (3) consecutive taxable years during which the corporation qualified
under the scheme. Presented below is a sample computation of income tax
payable based on 15% gross income tax.
Sales/ Revenues
P xx
Cost of Sales/ Cost of direct services**
(xx)
Gross Income
xx
Gross income tax rate
15%
Income tax due
P xx
Less: Taxes withheld
(xx)
Taxes paid - previous quarters
(xx)
Foreign tax credits
(xx)
Income tax payable
P xx
For purposes of the gross income tax, “Gross Income” derived from the business shall
be equivalent to Gross Sales less sales returns, discounts and allowances and cost of goods
sold. “Cost of Goods Sold” shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location. For ​trading concern, ​Cost of Goods Sold
shall include the invoice cost of the goods sold, plus import duties, freight in transporting the
goods to the place where the goods are actually sold including insurance while goods are in
transit.
FINAL TAXES on Passive Income and Capital Gains Tax
In addition to regular corporate income tax or minimum corporate income tax, a
corporation may be subjected to:
1) Final tax on passive income;
2) Capital gains tax (CGT); and
3) Improperly accumulated earnings tax (IAET)
TABLE 5.2: CERTAIN INCOMES SUBJECT TO FINAL TAXES
A. Certain PASSIVE Income Derived From
Philippine Sources subject to Final Tax
DC
RFC
NRFC
1) Interest in any currency bank deposit
20%
20%
30%
2) Yield/ monetary benefit from deposit substitute
20%
20%
30%
3) Yield/ monetary benefit from trust fund and other
similar arrangements
20%
20%
30%
4) Royalties
20%
20%
30%
5) Interest income derived from depository bank under
expanded foreign currency deposit system (Beginning
Jan. 1, 2018)
15%
7.5%
Exemp
t
6) Inter-corporate dividends received from domestic
corporation received by
Exempt Exemp
t
Income derived under expanded foreign currency deposit system ​BY
DEPOSITORY BANKs
● From foreign currency transactions with nonresidents,
OBUs in the Philippines, local commercial bank
including branches of foreign banks
Exempt
● From foreign currency loans granted to residents
other than OBUs in the Philippines and other
depository bank
10%
*15%/
30%
TABLE 5.3: Capital Gains subject to CAPITAL GAINS TAX (CGT)
1) CAPITAL gains from sale of shares of stock
not traded in the local stock exchange
DC
RFC
NRFC
15%
NC***
NC***
First P 100,000 capital gain
5%
5%
5%
Amount in excess of P 100,000 capital gain
10%
10%
10%
6%
NA
NA
UNDER TRAIN LAW, beginning Jan. 1, 2018
Tax Base: Net Capital gain
Tax Rate:
Prior to Jan. 1, 2018
2) CAPITAL gains realized from sale or exchange or
disposition of Land or buildings (Basis: Selling
Price or Fair Market Value**, whichever is higher)
* With tax sparing; 15% - ​If the country where the NRFC is domiciled allows a credit against
the tax due from the NRFC representing deemed paid in the Philippines equivalent to 15%.
* ​Without tax sparing; 30%
** The Higher between FMV as provided by City/ Provincial Assessors and Zonal Value
*** ​NC (No Changes); ​apply the old rates; 5% on the 1st P 100k gain + 10% in excessof P 100k
gain
TAble 5-4:
Tax Treatment of Co-Venturer’s share in the net income of a Joint Venture
Joint Venture
By a Corporate Co-Venturer
By an Individual Co-Venturer
Taxable Joint
Venture
The respective share in the
joint venture profit is
considered as dividend income
received by a domestic
corporation from a domestic
corporation. Hence, it shall be
treated as ​inter-corporate
dividend w
​ hich is tax exempt
(Refer to Table 5-2)
The respective share in the joint
venture profit is considered as
dividend income received by an
individual taxpayer from a domestic
corporation
Tax-Exempt Joint
Venture
The respective share in the
joint venture profit shall be
included in the computation of
The respective share in the joint
venture profit shall be subject to
basic tax. Consequently, the same
the corporate venturer’s
taxable income subject to
normal corporate income tax of
30%
shall be included in the computation
of the individual taxpayer’s taxable
income.
Tax Treatment of Income derived ​by a d
​ epository bank
currency deposit system.
​under expanded foreign
Transactions with:
❖
❖
❖
❖
Nonresidents
OBUs in the Philippines
Local commercial banks
Branches of foreign banks
As a rule, income derived by a depository bank
under FCDU from foreign currency transactions with
nonresidents, OBUs in the Philippines, local commercial
bank including branches of foreign banks that may be
authorized by the BSP to transact business with foreign
currency deposit system units and other depository
banks under the expanded FCDS ​shall be exempt ​from
all taxes, ​except ​net income from such transactions as
may be specified by the Secretary of the Department of
Finance, upon recommendation by the Monetary Board
to be subject to the regular income tax payable by banks.
Interest income from loans
Interest income from foreign currency loans
granted to residents other than granted by such depository banks under said expanded
OBUs or other depository banks
system to residents other tan offshore banking units in
the Philippines or other depository banks under the
expanded system shall be subject to a final tax at the
rate of ten percent ​(10%)
Tax Treatment of Interest Income Derived from Government Debt Instruments and Securities
As discussed in Chapter 2, the Tax Code, as amended, defined “​Deposit Substitutes” ​as
an alternative form of obtaining funds ​“from the public” other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for
the purpose of re-lending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer.
“Public” is defined as borrowing from twenty (20) or more individual or corporate lenders
at any one time. Interest income derived therefrom is subject to final tax payable upon the
original issuance of the deposit substitutes. Government Debt Instruments and Securities,
including Bureau of Treasury (BTr) issued instruments and securities such as Treasury bonds
(T-bonds), Treasury bills (T-bills) and Treasury notes, shall be considered as deposit substitutes
irrespective of the number of lenders at the time of origination if such debt instruments and
securities are to be traded or exchanged in the secondary market. The mere issuance of
government debt instruments and securities is deemed as falling within the coverage of
depository substitutes irrespective of the number of lenders at the time of origination and
therefore interest income derived therefrom shall be subject to the applicable final withholding
tax rate imposed on deposit substitutes as prescribed under the Tax Code.
Tax on Branch Profit Remittance
Any profit remitted by a branch office of a multinational corporation to its head office is
subject to 15% final tax based on total profits applied or earmarked for remittance without
deduction for the tax component. A branch is classified as a resident foreign corporation. As
such, it is subject to income tax at the rate of 30% on its net income derived within the
Philippines. Such income items include interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits, income and capital gains
received during each taxable year from all sources within the Philippines.
For purposes of branch profit remittance, income items which are not effectively
connected with the conduct of its trade or business in the Philippines are not considered branch
profits. To be ​“effectively connected”, i​ t is not necessary that the income be derived from the
actual operation of the branch’s trade or business. It is sufficient that the income arises from the
business activity in which the branch is engaged. The 15% final tax should exclude profits on
activities registered with Philippine Economic Zone Authority (PEZA).
ILLUSTRATION 5
CHEN Corporation (domestic corporation ) provides the following data during 2018
taxable year:
Gross income from
Sale of merchandise
P 10,000,000
Rent income (gross of 5% withholding tax)
2,000,000
Miscellaneous income
3,000,000
Operating expenses
7,000,000
Interest income from savings deposit
100,000
Interest income from government bonds
100,000
Interest income on FCDU bank deposits
150,000
Dividend income from a domestic corporation
125,000
Dividend income from a foreign corporation
50,000
Gain on sale of shares of a domestic corporation sold
directly to a buyer
125,000
Gain on sale of real property in the Philippines held as
investment. The property was acquired at a cost of P
2,000,000
200,000
Gain on sale of real property abroad held as investment.
The property was acquired at a cost of P 3,000,000
250,000
Withholding tax on rent income
100,000
Income tax paid for the first 3 quarters of the year
100,000
Question 1: ​Determine the corporation’s regular corporate income tax payable
Answer: P 2,290,000
Solution:
Gross income from:
Sale of merchandise
P 10,000,000
Rent Income (gross of 5% withholding tax)
2,000,000
Miscellaneous income
3,000,000
Dividend income ​from a foreign ​corporation
50,000
Gain on ​sale of real property abroad ​held as investment 250,000
Operating expenses
​ (7,000,000)
Net taxable income
P 8,300,000
Basic Tax Rate
​
30%
Tax Due
P 2,490,000
Less:
Tax withheld on rent income
(100,000)
Quarterly income tax payments
​
(100,000)
Income Tax Payable
​P 2,290,000
●
●
●
●
●
●
●
Prior to 2018, Gain ​ on sale of shares of a domestic corporation sold
directly to a buyer is subject to capital gains tax of 5% on the first P
100,000. Any amount of gain “in excess” of P 100,000 is subject to 10%
capital gains tax. However, beginning Jan. 1, 2018 (TRAIN Law), CGT on
shares shall not be 15% of capital gains.
Sale of shares of a domestic corporation sold to a local stock exchange is
subject to transaction tax or other percentage tax of 15% (TRAIN Law) of
gross selling price. Stock Transaction tax is a business tax, not an income
tax.
Sale of real property ​in the Philippines​, held as investment are “capital
assets” subject to capital gains tax of 6% of the higher amount between
gross selling price and fair market value.
Sale of real property ​ in the Philippines, ​ held as “ordinary asset” is subject
to basic tax of 30% ​based on the income ​from such sale.
Sale of real property ​abroad, ​ regardless of classification (capital or
ordinary asset) is subject to basic tax of ​30% based on the income f​ rom
such sale.
Dividend income from a domestic corporation is exempt from income tax
Dividend income from a foreign corporation is subject to 30% basic tax.
Question 2:​ Determine the corporation’s final tax on passive income
​Answer: P 62,500 ​computed as follows:
Interest from savings deposit (100,000 x 20%)
P 20,000
Interest from gov’t bonds(100,000 x 20%)
Interest from FCDU deposits (150,000 x 15%)
​Total final tax on passive income ​
​
20,000
22,500
​ 62,500
P
Question 3: ​Determine the corporation’s total capital gains tax
​Answer: P 150,750 ​computed as follows:
Gain on sale of shares of a domestic corporation
sold directly to a buyer (capital asset):
P 125,000 x 15%
P 18,750
Sale of real property in the Philippines “held as
Investment” (capital asset)
6% of Gross selling price or Fair market
Value, whichever is higher.
(SP = Cost + Gain)
(SP = P 2M + 200,000 = P 2.2. M)
132,000
Capital Gains Tax (6% of 2.2. M)
Total capital gains tax (final tax)
_________
​P 150,750
Question 4: ​Determine the corporation’s total final taxes
​Answer: P 213,250 ​(Add the answers in questions 2 and 3)
SPECIAL CORPORATIONS
Under the Tax Code, certain corporations are subject to lower tax rates ​on their regular
income i​ nstead of the normal or regular corporate tax of 30%. These corporations are classified
as special corporations. However, certain passive incomes and capital gains on sale of shares
of closely held domestic corporations and real properties situated in the Philippines are still
subject to applicable final withholding taxes and capital gains tax, as the case may be.
The following are classified as Special Corporations:
TABLE 4-4: INCOME TAX RATES OF SPECIAL CORPORATIONS
DOMESTIC CORPORATIONS:
●
Proprietary educational institutions; and
10%
●
Non-proft hospitals
10%
RESIDENT FOREIGN CORPORATIONS
●
International carriers
●
Regional operating headquarters (ROHQ) of multinational
corporations
**2.5%
10%
NONRESIDENT FOREIGN CORPORATIONS
●
Nonresident owner or lessor of vessel
4.5%
●
Nonresident cinematographic film owner, lessor or distributor
25%
●
Nonresident lessor of aircraft, machinery and other equipment
7.5%
**may also be subject to a preferential income tax rate (lower than 2.5%) or
exempt from ​income t​ ax based on a tax treaty or reciprocity (RA 10378 and RR
15-2013)
Proprietary Educational Institutions (PEIs) and Hospitals which are non-profit
RMC 4-2013 provides that Proprietary educational institutions and hospital which are
non-profit are subject to ten percent (10%) income tax based on net income from sources within
and without the Philippines. However, if the gross income from unrelated trade, business, or
other activity ​exceeds 50% o
​ f the ​total gross income derived from all sources, such educational
institution or non-profit hospital will be subject to normal corporate income tax rate of 30% on its
net taxable income.
“​Proprietary educational institution” ​is any private school maintained and administered by
private individuals or groups with an issued permit to operate from the Department of Education
(DepEd), or the Commission on Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in accordance with existing laws
and regulations.
“Unrelated trade, business or other activity” is an activity which is not substantially
related to the exercise or performance of the school or hospital’s primary purpose or function
such as but not limited to rental income from available school spaces or facilities.
Examples of Related Income of PEIs (RMC 4-2013)
1)
2)
3)
4)
Income from tuition fees and miscellaneous school fees
Income from hospital where medical graduates are trained for residency
Income from canteen situated within the school campus
Income from bookstore situated within the school campus
ILLUSTRATION 6:
Case A (Related income > Unrelated income):
Infotech College is a private educational institution. It owns a six (6) storey building
where the first 3 floors are being used for its operations and the other 3 floors are
being rented by other entities. During the taxable year, its income and expenses are
as follows:
Gross income from
Tuition fees
P 4,000,000
Rental Income
1,000,000
Operating expenses
1,500,000
Determine the income tax due of Infotech
●
​Answer: P 350,000 (​ 5M - 1.5M) x ​10%
Case B (Related INcome < Unrelated Income):
Using the same data in Case A except that the rental income for the year amounted
to P 7,500,000. Determine the income tax due of Infotech.
● Answer: P 3,000,000
○ (4M +7.5M - 1.5M) x 30%
○ The related income < unrelated income. Consequently, the
educational institution is subject to normal corporate tax of 30%
based on net income.
Special rules on Capital Expenditures of Proprietary Educational Institutions
The taxable income of a proprietary educational institution is computed in the same
manner as an ordinary domestic corporation. However, in addition to allowable business
expenses under the tax code, a private educational institution, may, ​at its option ​elect either:
● To deduct expenditures otherwise considered as capital outlays of depreciable assets
incurred during the taxable year such as capital expenditures for the expansion of school
facilities; or
● To capitalize such expenditure and claim deduction from gross income for an allowance
for depreciation thereof.
ILLUSTRATION 7:
Assume the same data in Illustration 6, Case A. Assume further that during the taxable year,
Infotech constructed an additional school facility at a cost of P 1,500,000 with a useful life of
five (5) years.
Case A:
For tax purposes, Infotech decided to capitalize and depreciate the school facility. Determine
the income tax due of Infotech for the year.
●
Answer: P 320,000
○ (5M - 1.5 M - 300,000 ***) x 10%
○ *** depreciation expense = P 1.5M/5
Case B:
Determine the income tax due of Infotech for the year if it opted to claim or deduct outright the
entire construction cost of the school facility.
● Answer: P 200,000 (5M - 1.5M - 1.5M) x 10%
Applicable Income Tax of Educational Institutions in the Philippines
EDUCATIONAL
INSTITUTION
ORDINARY INCOME
PASSIVE
INCOME
CAPITAL
GAINS
FWT
CGT****
Proprietary educational
institutions (PEIs) ***
Generally 10% of net income;
30% if unrelated income > related income
Non-stock non-profit
educational institutions
(NSEIs)
● Philippine Constitution, Art. XIV, Sec. 4(3):
ALL REVENUES and ASSETS of non-stock, non-profit educational
institutions used ​actually, directly and exclusively​ for educational
purposes shall be exempt from taxes and duties; ​and
● Exempt under Section 30, NIRC:
The following shall not be taxed in respect
to income received by them as such :
(H) A non-stock non-profit educational
institution
Government educational
institutions
●
●
Exempt under Section 30,​ NIRC - the
following shall not be taxed ​in respect
to income received by them as such:
(I) Government educational
institution;
and
As provided for in the law or charter
creating the GEI
FWT
CGT****
FWT
CGT
* On certain passive income derived from Philippne sources.
** On sale of shares of stock of non-listed domestic corporation and real properties located in
the Philippines classified as capital assets.
*** Only PEIs are classified as special corporations unless its Unrelated Income (UI) is higher
than Related Income (RI). Hence, the discussions regarding PEIs in the preceding pages shall
not be applied to NSEIs and GEIs.
**** Section 234 of the Local Government Code (LGC) - The following are exempted from
payment of the ​real property tax: ​(b) Charitable institutions, churches, pesonages or covenants
appurtenant thereto, mosques, nonprofit or religious cemeteries and ​all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or ​educational
purposes.
NON-STOCK NON-PROFIT HOSPITALS
A nonstock nonprofit hospital that is operated for charitable and social welfare purposes
is exempt from income tax under Section 30 of the Tax Code. However, as provided in the case
of St. Luke’s Medical Center, INc. (SLMCI) vs. Commissioner of Internal Revenue (CIR) in a
CTA Case No. 7857 date June 3, 2011, the nonstock-nonprofit hospital must satisfy the
following requisites ​in order to be entitled to the exemption ​from income tax:
● It is a non-stock corporation
● It is operated exclusively for charitable purposes; and
● No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
“Non-profit”means no net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institutions” and all its activities
conducted not for profit. “Non-profit” does not necessarily mean “charitable”. The Court defined
“charity” in the case of Lung Center of the Philippines vs. Quezon City as a “gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion, by assisting them to
establish themselves in life or by otherwise lessening the burden of government”. In other
words, charitable institutions provide for free goods and services to the public which would
otherwise fall on the shoulders of the government. Charitable institutions, however, are not ​ipso
facto ​entitled to tax exemption. The requirements for a tax exemption are strictly construed
against the taxpayer because an exemption restricts the collection of taxes necessary for the
existence of the government.
SLMCI vs. CIR
“Petitioner” is a non-stock, non-profit corporation duly organized and existing under and by virtue of the
laws of the Republic of the Philippines. “Respondent” is the duly appointed Commissioner of the Bureau
of Internal Revenue (CIR) vested with authority to exercise the functions of said office, including, inter
alia, the power to abate or cancel a tax liability when the tax or any portion thereof appears to be unjustly
or excessively assessed.
CIR assessed SLMCI for deficiency income tax mainly due to the finding of the former that petitioner is
allegedly a non-profit hospital that is liable to pay ten percent (10%) tax on its net income pursuant to
Section 27 (B) of the National Internal RevenueCode (NIRC) of 1997. SMLCI, on the other hand,
maintains that it is exempt from income tax as provided for under Section 30 of the Tax Code.
The Court provides that to qualify for exemption under Section 30 of the Tax Code, the
following requirements must be complied with:
1. It must be a non-stock corporation or association;
2. Organized exclusively for charitable purposes;
3. Operated exclusively for charitable purposes; and
4. No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
The Court further provides that though “there is no dispute that St. Luke’s is organized
as a non-stock and non-profit charitable institution, this does not automatically exempt St.
Luke’s from paying taxes. This only refers to the organization of St. Luke’s. Even if St. Luke’s
meets the test of charity, a charitable institution is not ​ipso facto ​ tax exempt.
“St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt form all its income. However, it remains a proprietary non-profit hospital
under section 27(8) of the NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its
for-profit activities.
Applicable Income Tax of Hospitals in the Philippines
HOSPITAL
ORDINARY INCOME
PASSIVE
INCOME*
CAPITAL
GAINS**
Proprietary Hospital
(higher): 30% RCIT; 2% MCIT
FWT
CGT
Non-stock Non-profit
Hospitals (Special Corp.) ***
10% of net income, however, 30% if
unrelated income> related income
FWT
CGT****
Non-stock Non-profit
Hospitals
May be exempt if all the requirements
for exemptions as provided for under
the law as in the case of St. Luke’s
Medical Center vs. CIR are complied
FWT
CGT****
* On certain passive income derived from Philippine sources.
** On sale of shares of stock of a non-listed domestic corporation and real properties located in the
Philippines classified as capital assets.
*** Generally, non-stock non-profit hospitals are classified as special corporations. Therefore, generally
taxable at 10% unless its Unrelated Income (UI) is higher than Related INcome (RI).
**** Under Section 234 of the Local Government Code (LGC) - The following are exempted from payment
of the ​real property tax: ​(b) ​Charitable Institutions, ​churches, parsonages, or covenants appurtenant
thereto, mosques, nonprofit or religious cemeteries and ​all lands, buildings, and improvements actually,
directly, and exclusively used for religious, ​charitable o
​ r educational purposes
International carriers
International carriers (resident foreign corporations) are subject to income tax rate of
2.5% on its Gross Philippne Billings (GPB) unless it subject to a preferential rate (a tax rate
lower than2.5%) or exempt on the basis of applicable tax treaty to which the Philippines is a
signatory or on the basis of reciprocity, such that an international carrier, whose home country
grants income tax exemption to Philippine carriers, shall likewise be exempt from income tax
imposed under the tax code (RA 10378; RR 15-2013).
Reciprocity may be invoked by an international carrier as basis for “Gross Philippine
Billings Tax exemption” when its Home Country grants income tax exemption to Philippine
carriers. The domestic law of the Home Country granting exemption shall cover income taxes
and shall not refer to other types of taxes that may be imposed by the relevant taxing
jurisdiction. The fact that the tax laws of the Home Country provide for exemption from business
tax, such as gross sales tax, in respect of the operations of Philippne carriers shall not be
considered as valid and sufficient basis for exempting an international carrier from Philippine
income tax on account of reciprocity. Reciprocity requires that Philippine carriers operating in
the Home Country of an international carrier are actually enjoying the income tax exemption.
Gross Philippine Billings of International Air Carriers
In computing for “Gross Philippine Billings” of international air carriers, there shall be
included the total amount of gross revenue derived from passage of persons, excess baggage,
cargo and/or mail, originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the passage documents.
The gross revenue for passengers whose tickets are sold in the Philippines shall be the actual
amount derived for transportation services, for a first class, business class, or economu class
passage, as the case may be, on its continuous and uninterrupted flight from any port or point in
the Philippines to its final destination in any port or point of a foreign country”, as reflected in the
remittance area of the tax coupon forming an integral part of the plane ticket. For this purpose,
the Gross Philippine Billings shall be determined by computing the monthly average net fare of
all the tax coupons of plane tickets issued for the month per point of final destination, per class
of passage (i.e., first class, business class, or economy class) and per classification of
passenger (i.e., adult, child or infant), and multiplied by the corresponding total number of
passengers flown for the month as declared in the flight manifest.
The gross revenue for passengers whose tickets sold outside the Philippines, the gross
revenue for passengers for first class, business class or economy class passage, as the case
may be, on a continuous and uninterrupted flight form any port orpoint in the Philippines to final
destination in any port or point of a foreign country shall be determined using the locally
available net fares applicable to such flight taking into consideration the seasonal fare rate
established at the time of the flight, the class of passage, the classification of passenger, the
date of embarkation, and the place of final destination.
Non-revenue passengers as well as refunded tickets shall not be included in the
computation of Gross Philippine Billings.
Gross Philippine Billings of International Sea Carriers
In computing for “Gross Philippine Billings” of international sea carriers, there shall be
included the total amount of gross revenue whether for passenger, cargo, and/or mail
originating from the Philippines u
​ p to final destination, regardless of the place of sale or
payments of the passage or freight documents.
“ORIGINATING FROM THE PHILIPPINES” ​shall include the following:
a) Where passengers, their excess baggage, cargo and/or mail originally commence their
flight or voyage from any Philippine port to any other port or point outside the Philippines
b) Chartered flights or voyages of passengers, their excess baggage, cargo and/or mail
originally commencing their flights or voyages from any foreign port and whose stay in
the Philippines is for more than forty-eight (48) hours prior to embarkation, save in cases
where the flight of the airplane belonging to the same airline company or the voyage of
the vessel belonging to the same international sea carrier failed to depart within 48 hours
by reason of force majeure;
c) Chartered flights of passengers, their excess baggage, cargo and/or mail originally
commencing their flights or voyages from any Philippine port to any foreign port; and
d) Where a passenger, his excess baggage, cargo and/or mail originally commencing his
flight or voyage from a foreign port alights or is discharged in any Philippine port and
thereafter boards or is loaded on another airplane owned by the same airline company
or vessel owned by the same international sea carrier, the flight or voyage from the
Philippines to any foreign port shall not be considered originating from the Philippines,
unless the time intervening between arrival and departure of said passenger, his excess
baggage, cargo and/or mail from the Philippines exceeds 48 hours, except, however,
when the failure to depart within 48 hours is due to reasons beyond his control, such as,
when the only next available flight or voyage leaves beyond 48 hours or by force
majeure. Provided, however, that if the second aircraft belongs to a different airline
company, or the second vessel belongs to a different international sea carrier, the flight
or voyage from the Philippines to any foreign port shall be considered originating from
the Philippines regardless of the intervening period between the arrival and departure
from the Philippines by said passenger, his excess baggage, cargo and/or mail.
Passage documents or tickets revalidated, exchanged and/or endorsed to another
on-line international airline shall be included in the taxable base of the carrying airline and shall
be subject to GPB tax if the passenger is lifted/boarded on an aircraft from any port or point in
the Philippines towards a foreign destination.
The gross revenue on excess baggage which originated from any port or point in the
Philippines and destined for any part of a foreign country shall be computed based on the actual
revenue derived, as appearing on the official receipt or any similar document for the said
transaction.
The gross revenue for freight or cargo and mail shall be determined based on the
revenue realized from the carriage thereof.
a) The amount realized for freight or cargo shall be based on the amount appearing on
the airway bill after deducting the amount of discounts granted, which shall be
validated using the following:
● Monthly cargo sales reports generated by the IATA Cargo Accounts Settlement
System (IATA CASS) for airway bills issued through cargo agents; or
● Monthly reports prepared by the airline themselves or by their general sales
agents for direct issues made.
b) The amount realized for mail shall, on the other hand, be determined based on the
amount reflected in the cargo manifest of the carrier
Return trip and transshipment
In case of the passenger’s passage documents or flights from any port or point in the
Philippines and back, that portion of revenue pertaining to the return trip to the Philippines shall
not be included as part of GPB.
In case of a flight that originates from the Philippines, but transshipment of passenger,
excess baggage, cargo and/or mail takes place elsewhere in another aircraft belonging to a
different airline company, the GPB shall be determined based on that portion of the revenue
corresponding to the leg flown from any point in the Philippines to the point of transshipment.
In cases where a flight is interrupted by force majeure resulting in the transshipment of
the passengers, their excess baggage, freight, cargo and/or mail to another airplane operated
by another airline company and transshipment takes place in another country, the GPB shall be
determined based on that portion of flight from the Philippines up to the point of said
transshipment.
RATIONALIZATION OF TAXES ON INTERNATIONAL CARRIERS
The policy behind the rationalization of taxes on international carriers as provided for in
RA 10378 and RR 15-2013 is to improve the competitiveness of the Philippine Tourism Industry
by encouraging more international carriers to maintain flight and shipping operations in the
country and by the eventual reduction of international plane and ship fares. There are intended
to facilitate the movement of goods and services and to attract more foreign tourists and
investments.
ILLUSTRATION 8:
CASE A
Dubai Air, an international air carrier provided the following data for the current year:
Gross receipts - transport of passengers
Gross receipts - transport of cargoes
Operating expenses
P 10,000,000
5,000,000
6,000,000
Question 1: How much is the income tax due?
❖ Answer: ​P 375,000 ​(P 15M x 2.5%)
International carriers are subject to 2.5% income tax based on gross Philippine billings
unless ​it is ​subject to a preferential rate​ or ​exemption ​on the basis of an applicable tax
treaty/ international agreement to which the Philippines is a signatory or on the basis
of reciprocity.
Question 2: How much is the income tax due assuming the international carrier is subject to a
preferential tax rate of 1.5% on gross Philippine billings under an existing tax treaty or
international agreement?
❖ Answer: ​225,000 ​(P 15M x 1.5%)
Question 3: How much is the income tax due assuming the international carrier is exempt
from income tax based on reciprocity?
❖ Answer: nil
CASE B
Air Jordan, an international air carrier provided the following data for the current year:
Gross receipts - transport of passengers
Gross receipts - transport of cargoes
P 12,000,000
4,000,000
Other income (Demurrage and other
inbound/outbound charges)
Operating expenses
Question 1: How much is the income tax due of Air Jordan?
❖ Answer: ​P 1,000,000
Gross receipts - passengers & cargoes (P 16M x 2.5%)
Other income (P 2M x 30%)
Total income tax due
2,000,000
6,000,000
P 400,000
​
600,000
​P 1,000,000
CASE C
The following data were provided by Air Jordan, an international air carrier doing business in
the Philippines
Gross ticket sales in the Philippines
P 10,000,000
(Manila - Macau flight)
Gross ticket sales in China (Manila - Beijing flight)
5,000,000
Gross ticket sales in China (Beijing - Manila flight)
5,000,000
Gross ticket sales in Japan (Tokyo - Manila flight)
3,000,000
Gross ticket sales in the Philippines (Manila - L.A.)
●
Passengers were transhipped in Tokyo to L.A.
by another airline
8,000,000
●
Estimated hours during the flight
○ Manila to Tokyo - 5 hrs;
○ Tokyo to L.A. - 15 hrs.
Gross ticket sales in L.a., USA (Manila - L.A.)
8,000,000
●
Passengers were transhipped in Tokyo to L.A.
by a different plane of same airline company
8,000,000
●
Estimated hours during the flight
○ Manila to Tokyo - 5 hrs;
○ Tokyo to L.A. - 15 hrs.
Expenses, Philippines
5,000,000
Question: ​ ​How much is the income tax due of Air Jordan?
Answer: P 625,000 ​ computed as follows:
Gross ticket sales in the Philippines
P 10,000,000
(Manila - Macau flight)
Gross ticket sales in China (Manila - Beijing flight)
5,000,000
Gross ticket sales in the Philippines (Manila - L.A. flight);
Manila to Tokyo only (P8M x 5/20)
2,000,000
Gross ticket sales in USA (Manila - L.A. flight)
8,000,000
Total Gross “Philippine” Billings
P 25,000,000
Income Tax Rate
2.5%
Income Tax Due
P 625,000
Applicable Income Tax of Common Carriers (Summary)
Common Carrier
ORDINARY INCOME
PASSIVE
INCOME*
CAPITAL
GAINS**
Domestic Common Carriers
(local companies)
(Higher): 30% RCIT or 2% MCIT
FWT
CGT
International Carriers (RFCs)
GR​: 2.5% GPB; ​or
FWT
CGT***
Preferential % or Exempt on the basis
of a treaty or reciprocity
*** Generally, non-stock non-profit hospitals are classified as special corporations. Therefore,
generally taxable at 10% unless its Unrelated Income (UI) is higher than Related Income (RI).
Offshore Banking Units (OBUs)
“Offshore Banking Unit (OBU)” is a branch, subsidiary or affiliate or a foreign banking
corporation located in an Offshore Financial Center (OFC) which is duly authorized by the BSP
to transact offshore banking business in the Philippines in accordance with the provisions of
P.D. 1034 as implemented by BSP Circular No. 1389. They do foreign-currency banking
transactions primarily with foreign banks, non-residents, other OBUs and corporate and
institutional clients. They can lend to resident importers and exporters as long as the funds are
remitted from abroad through the banking system.
The following are examples of reported OBUs in the Philippines:
1) BNP Paribas with office address at Philamlife Tower, Makati City; and
2) Taiwan Cooperative Bank with office address at Citi Bank Tower, Makati City
3) JP Morgan International Finance, Ltd. (formerly located at Zuellig Building, Makati City)
- has stopped its operations as an offshore banking unit in the Philippines. The
BSP noted the cessation of operations on February 22, 2018.
OBUs are allowed to provide all traditional banking services to non-residents in any
currency other than Philippine national currency. Banking transactions to residents are limited
and restricted.
❖ Income Subject to 10% Final Tax: ​Interest income derived from foreign currency loans
granted to residents other than OBUs or local commercial banks.
ROHQ vs RHQ
Income tax rate of ROHQ is 10% of net income. ROHQ is a branch established in the
Philippines which is ​engaged​ in any of the following qualifying services:
● General administration and planning
● Business planning, coordination and business development
● Sourcing/ procurement of raw materials and components
● Corporate finance advisory services
● Marketing control and sales promotion
● Training and personnel management
● Logistic services
● Research and development services and project development
● Technical support and maintenance
● Data processing and communication
RHQ is defined in Section 22 (DD) of the Tax Code as a branch established in the
Philippines by a multinational company, which branch does not earn or derived income from the
Philippines and which acts as a supervisory, communications, and coordinating center for its
affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets. RHQ is
a tax exempt entity. However, an RHQ is constituted as a withholding agent of the government if
it acts as an employer and its employees receive compensation income subject to withholding
tax, or if it makes income payments to individuals or corporations subject to the expanded
withholding tax (EWT).
What constitute an RHQ and an ROHQ?
An RHQ is an office whose purpose is to act as an administrative branch of a
multinational company engaged in international trade which principally serves as a supervision,
communications and coordination center for its subsidiaries, branches, or affiliates in the
Asia-Pacific Region and other foreign markets, and which does not earn or derive income in the
Philippines. An ROHQ refers to a foreign business entity which is allowed to derive income in
the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the
Philippines, in the Asia-Pacific Region and in other foreign markets. Such services are general
administration and planning, business planning and coordination, sourcing and procurement of
raw materials and components, corporate governance advisory services, marketing control and
sales promotion, training and personnel management, logistic services, research and
development services and product development, technical support and maintenance, data
processing and communication, and business development.
IMPROPERLY ACCUMULATED EARNINGS TAX
(For Closely held Corporations)
Objective: To force corporations to distribute dividends to shareholders in order that related tax
in dividends will be collected.
In addition to other taxes, a tax of 10% is imposed on the improperly accumulated
taxable income of corporations formed or availed of for the purpose of avoiding the income tax
with respect to its shareholders or the shareholders of any other corporation, by permitting the
earnings and profits of the corporation to accumulate instead of dividing them among or
distributing them to the shareholders (Section 29 NIRC).
The rationale is that if the earnings and profits were distributed, the shareholders would
then be liable to income tax thereon, whereas if the distribution were not made to them, they
would incur no tax in respect to the undistributed earnings and profits of the corporation.
Nature of Improperly accumulated earnings tax
Improperly accumulated earnings tax is being imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings
distributed to them by the corporation (RR 2-2001 as amended by RMC 35-2011).
The test of the liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends is due to some other
causes, such as the use of undistributed earnings and profits for the reasonable needs of the
business, such purpose would not generally make the accumulated or undistributed earnings
subject to the tax. However, if there is a determination that a corporation has accumulated
income beyond the reasonable needs of the business, the 10% improperly accumulated
earnings tax shall be imposed
Improperly accumulated earnings tax (IAET) is imposed on improperly accumulated
taxable income earned starting January 1, 1998 by domestic corporations as defined under the
Tax Code and which are classified as “​closely held corporations”.
IAET shall ​not​ apply to:
● Publicly held corporation;
● Banks and other non-bank financial intermediaries
● Insurance companies
● Taxable partnerships;
● General professional partnerships
● Non-taxable joint venture
● Enterprises registered with PEZA and under Bases Conversion and Development
Act (BCDA) and special economic zones.
Closely-held corporations
The ownership of a corporation for the purpose of determining whether it is a closely
held corporation or a publicly held corporation is ultimately traced to the individual shareholders
of the parent company. Where at least 50% of the outstanding capital stock or at least 50% of
the total combined voting power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than 21 or more individuals, the corporation is a publicly held
corporation. Domestic corporations not falling under the aforementioned definition are,
therefore, closely-held corporations (BIR Ruling 025-02)
Rules in determining whether or not a corporation is a closely held corporation:
❖ Stock not owned by individuals:
Stock owned directly or indirectly by or for a corporation, partnership,estate or trust shall
be considered as being owned proportionately by its shareholders, partners, or
beneficiaries.
❖ Family and Partnership ownership
An individual shall be considered as owning the stock owned, directly or indirectly, by or
for his family, or by or for his partner. “​Family of an individual” i​ ncludes his brothers or
sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants.
❖ Option to acquire stocks
If any person has an option to acquire stock, such stock shall be considered as owned
by such person.
Circumstances indicating improper accumulation of profits:
❖ Substantial changes to corporate officers who are stockholders at the same
time/Personal loans.
❖ Radical change in the nature of business after a considerable surplus has been
accumulated.
❖ Investment is unrelated business or activity.
❖ Substantial expenditures of corporations for the personal benefit of stockholder only.
PRESUMPTIONS of Improper Accumulation
❖ The fact that a ​corporation ​is a ​mere holding company or investment company s​ hall be
prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
“Holding or Investment Company” shall refer to a corporation having practically no
activities except holding property, and collecting the income therefrom or investing the
same.
❖ The fact that the earnings or profits of a corporation are permitted to accumulate beyond
the “reasonable needs” of a business shall be determinable of the purpose to avoid the
tax upon its shareholders or members, unless the corporation, by clear preponderance
of evidence, shall prove to the contrary. Accumulation of profit is considered
“unreasonable” if it is not required for ​legitimate ​business purposes, considering, all
circumstances of the case.
REASONABLE NEEDs of the Business
Reasonable needs of the business include the reasonably anticipated needs of the
business. The Supreme Court held that “if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for the reasonable
needs of the business and the penalty tax (IAET) would apply (Cyanamid Philippines, Inc. v.
Court of Appeals, et. al., G.R. No. 108067). Section 3 of Revenue regulations No. 2-2001
provides that the following shall constitute accumulation of earnings for “reasonable needs” of
the business:
a) Allowance for the increase in the accumulation of earnings up to 100% of the
paid-up capital of the corporation as of Balance Sheet date, inclusive of
accumulations taken from other years. Under RMC 35-2011, paid up capital shall
refer to the par value of the shares.
b) Earnings reserved for definite corporate expansion projects or programs requiring
considerable capital expenditure as approved by the Board of Directors or
equivalent body;
c) Earnings reserved for building, plants or equipment acquisition as approved by
the Board of Directors or equivalent body;
d) Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
e) Earnings required by law or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its distribution;
f) In the case of subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved for investments within the Philippines
as can be proven by corporate records and/or relevant documentary evidence.
Effect of Improperly accumulated earnings tax (IAET)
Once the profit has been subjected to IAET, the same shall no longer be subjected to
IAET in later years, even if not declared as dividends. Notwithstanding the imposition of the
IAET, profits which have been subjected to IAET, when finally declared as dividends, shall
nevertheless be subject to tax on dividends under the Tax Code, except in those circumstances
where the recipient is not subject thereto.
PROFORMA COMPUTATION OF IMPROPERLY ACCUMULATED INCOME
(REVISED UNDER RMC 35-2011)
Taxable Income for the year
Add:
Income exempt from tax
P xxx
P xxx
Income excluded from gross income
xxx
Income subject to final taxes
xxx
Net Operating loss carry over (NOLCO)
xxx
Less: Dividends (actually or constructively paid)
*Income tax paid/payable for the whole year
Total
(xxx)
(xxx)
(xxx)
P xxx
ADD: Retained earnings prior years
xxx
Accumulated earnings as of the ​end ​of the current year
xxx
LESS: AMOUNT THAT MAY BE RETAINED
(100% of paid up capital as of year-end)
EXCESS is considered Improperly accumulated earnings
x IAET rate
Improperly accumulated earnings tax (IAET)
(xxx)
xxx
10%
P xxx
Amount that may be retained for Reasonable Needs **
For purpose of RMC 35-2011 (revised), the amount that may be retained, taking into
consideration the accumulated earnings within the “reasonable needs of the business” as
determined under Section 3 of the said RR, shall be 100% of the paid-up capital or the amount
contributed to the corporation representing the par value of the shares of stock. Hence, any
excess capital over and above the par shall be excluded which is in contrast with the principle of
“immediacy test” derived from one of the decisions of the Supreme Court (Cyanamid
Philippines, INc. v. Court of Appeals, et al., G.R. No. 108067).
The IAET is not computed and applied by the corporation on itself in its income tax
return for a taxable year. The BIR makes the computation on its allegation of improper
accumulation of profits by the corporation. The BIR makes a computation a year or years after
the improper accumulation shall have taken place.
The net operating loss carry over (NOLCO) shown in the formula refers to the negative
results of the operations (net operating loss) for the previous taxable year(s) allowed as part of
deductions from the gross income of the current year. Since NOLCO refers to a previous
taxable year(s) but were allowed as deduction in computing the taxable income of the “current
year”, the aforementioned item should be added back to the gross income for purposes of
computing the improperly accumulated earnings for the current taxable year.
ILLUSTRATION 10
The record of a closely-held corporation shows for following calendar years:
2017
Gross income
P 5,000,000
Expenses:
3,000,000
Other income:
Rent, net of 5% withholding tax
P 475,000
Interest on money market placement, ​net
80,000
Inter-corporate dividends
500,000
Additional information:
Dividends paid
1,500,000
Payments, 1st to 3rd quarter
50,000
Ordinary shares
P 700,000
Share Premium
200,000
2016
Gross income
P 3,000,000
Expenses:
2,800,000
Net income​:
200,000
Retained Earnings
500,000
Question: H
​ ow much is the improperly accumulated earnings tax in ​2017​?
❖ Answer: P 63,000
Solution:
Gross income
Other income - rent income (gross)
P 5,000,000
500,000
P 5,500,000
Less: expenses
(3,000,000)
Taxable income
P 2,500,000
Add:
INCOME SUBJECT TO FINAL TAX
100,000
INCOME EXEMPT FROM TAX
500,000
Total
600,000
P 3,100,000
Less:
TAX DUE FOR THE YEAR
Corporate tax (NCIT > MCIT)
750,000
NCIT = 2.5M x 30%; MCIT = 5.5 M x 2%
Final tax - money market placement
20,000
DIVIDENDS PAID
1,500,000
(2,270,000)
Total
830,000
Retained earnings prior years (2016)
500,000
Retained earnings Dec. 31, 2017
1,330,000
Less: AMOUNT THAT MAY BE RETAINED (Par value)
(700,000)
Excess Earnings (Improperly accumulated)
x Tax rate
630,000
10%
IMPROPERLY ACCUMULATED EARNINGS TAX
P 63,000
FILING OF INCOME TAX RETURNS
The filing of income tax shall be made by the President, Vice-President or other principal
officers in behalf the company. The return shall be sworn to by the above officer and by the
Treasurer or Assistant Treasurer. Declaration of quarterly corporate income tax on a cumulative
basis is required manually, through Electronic Filing and Payment System (EFPS), or through
electronic BIR forms.
1.) Manual Filing
Every corporation subject to tax shall render, in duplicate a true and accurate quarterly
return and final or adjustment return except corporations not engaged in trade or business in the
Philippines (NRFC). For manual filing, the filing of quarterly return should be made not later than
60 days from the close of each of the first three quarters of the taxable year, whether, calendar
or fiscal year summarized as follows:
Manual Filing of Quarterly Income Tax Return
·​
​Quarterly
·​
​Final
return
60 days after end of the quarter
adjusted (annual) return
15​th day of the 4​th month following the end of the
taxable year (i.e.; Ap. 15 applying calendar year)
The tax so computed shall be decreased by the amount of tax previously paid or
assessed during the preceding quarters. Final adjustment Return covers the total taxable
income for the preceding calendar/fiscal year filed on or before 15​th day of the 4​th month
following the close of the taxable year (April 15 of the following year using calendar period). If
the sum of the quarterly tax payments made during the taxable year is not equal to the total tax
due on the entire taxable income of that year, the corporation shall either pay the balance of tax
still due, or carry over the excess credit, or be credited or refunded with the excess amount
paid. In case the corporation is entitled to tax refund or credit of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the succeeding taxable years. Once the option to carry-over has been
made, such option shall be considered irrevocable for that taxable period.
The quarterly income tax declaration and the final adjustment shall be filed with (1)
Authorized agent banks, or (2) Revenue District Office, or Collection Agent, or Duly authorized
Treasurer of the city or municipality having jurisdiction over the location of the principal office of
the corporation filing the return or place where the main books of accounts and other data from
which the return is prepared are kept.
2.) Electronic Filing and Payment System (EFPS)
RR 9-2001 defines EFPS as the system developed and maintained by the BIR for
electronically filing tax returns, including attachments, if any, and paying taxes due thereon,
specifically through the internet. Upon filing, a “Filing Reference Number” is issued by the EFPS
as a control number to acknowledge that a tax return, including attachments, has been
successfully filed electronically. This shall serve as evidence of filing and the date of filing of the
return.
Upon payment of the tax due to an Authorized Agent Bank (AAB) under EFPS, the ABB
shall issue “Acknowledgment Number” as a control number to the BIR to confirm that tax
payment has been credited to the account of the government or recognized as revenue (internal
revenue tax collection) by the Bureau of Treasury. Likewise, a “Confirmation Number” shall be
issued by the AAB as a control number to the tax payer and BIR to acknowledge that the
taxpayer’s account has been successfully debited electronically in payment of his tax liability.
This shall serve as evidence of the fact of payment of the taxpayer’s liability to the extent of the
amount reflected in the Confirmation Number, and the date of payment by the taxpayer.
PERSONS REQUIRED TO FILE AND PAY UNDER EFPS
a)​ ​Taxpayer Account Management Program (TAMP) Taxpayers (RR No. 10-2014)
b) ​Accredited Importer and Prospective Importer required to secure the BIR-ICC & BIR-BCC
(RR No. 10-2014)
c)​ ​National Government Agencies (NGAs) (RR No. 1-2013)
d)​ ​All licensed Local contractors (RR No. 10-2012)
e) ​Enterprise Enjoying Fiscal Incentives 9PEZA, BOI, Various Zone Authorities, Etc.) (RR No.
1-2010)
f)​ ​Top 5,000 Individuals Taxpayers (RR No. 6-2009)
g)​ ​Corporations with Paid-Up Capital Stock of P 10 million pesos and above (RR No. 10-2007)
h)​ ​Corporations with complete computerized Accounting System (CAS) (RR No. 10-2007)
i)
​Procuring Government Agencies with respect to withholding of VAT and percentage taxes
(RR No. 3-2005)
j)​
k)​
l)​
m)​
​Government
Bidders (RR No. 3-2005)
​Insurance companies and Stock brokers (RMC No. 71-2004)
​Top 20,000 Private Corporation (RR No. 2-98, as amended
​Large Taxpayers (RR No. 2-2002, as amended under RR 17-2010)
A. LARGE TAXPAYERS
v​ ​As to tax payments:
Percentage tax
VAT
Excise Tax
Income Tax
Documentary Stamp Tax
Withholding Tax (all type)
P200,000 per quarter
P200,000 per quarter
P 1,000,000 per year
P 1,000,000 per year
P 1,000,000 per year
P 1,000,000 per year
v​ ​As to financial condition:
Gross sales/receipts
Net worth
fiscal
P 1,000,000 per year
P300,000,000 at the close of each calendar or
year
Gross purchase
P800,000
Per S.E.C. list
the
Top corporations as listed and published by
Securities and exchange commission
Large taxpayers who will e-pay shall enroll with any EFPS ABB authorized to
serve them and who are capable to accept e-payments. E-payments shall be made
within the day the return was electronically filed following the “pay-as-you-file system”.
Unless otherwise notified by the Commissioner of Internal Revenue (CIR), for all returns
that will be filed starting August 1, 2002, e-payment of taxes due thereon thru EFPS
shall become mandatory (RR No. 9-2002)
B. NON-LARGE TAXPAYERS
❖ Volunteering 200 or more Non-large Taxpayers
❖ Top 20,0000 private corporations (starting April 2009)
For Non-large Taxpayers who intend to e-pay, electronic payment shall be made through
the internet banking facilities of any AAB. The volunteering two hundred (200) or more
Non-Large Taxpayers previously identified by the BIR to have availed of the option to file their
return under EFPS shall nevertheless continue to file their return under such method. (RR No.
10-2007). However, upon their receipt of a notification letter duly signed by the Commissioner of
Internal Revenue, it becomes mandatory for them, including their branches located in the
computerized revenue district officers, to file their returns and pay their taxes thru EFPS (RR
No. 10-2007). The filing of the return ahead of the payment of the tax due thereon is still in
accordance with “pay-as-you-file-system” as long as the payment of the tax is made on or
before the due date of the applicable tax.
Non-large taxpayers shall have the option to file consolidated return in the head office
following the procedures in RR No. 1-98 or to file returns on a per branch or facility basis.
Provided, however, that they shall update their registration with the affected or concerned
revenue district officersby filing BIR Registration Update Form (BIR Form 1905) before they
change their manner of filing returns.
C. Other Taxpayers:
❖ Corporations with paid-up capital of P10,000,000 and above
❖ Corporation with complete computerized system
❖ Taxpayers joining public bidding pursuant to E.O. No. 398 as implemented by RR
3-2005
D. Enterprises enjoying fiscal incentives granted by other government agencies such as those
registered with:
❖
❖
❖
❖
❖
❖
❖
Philippine Economic Zone Authority (PEZA)
Board of Investments (BOI)
Various zone authorities
Cagayan Special Economic Zone Authority
Export Development Council
Tourism Infrastructure and Enterprise Zone Authority; and
PHIVIDEC Industrial Authority.
Failure to comply with the provisions on e-filing and e-payment shall be penalized under Section
275 of the Tax Code. However, only the first and second offenses may be compromised. For
the third and subsequent offenses, no compromise shall be entertained or allowed.
3.) Use of Electronic BIR Forms
The eBIR Forms, as provided in RR 6-2014 and RMC 61-2012, was developed to
provide taxpayers particularly the non-eFPS filers with accessible and convenient service
through easy preparation of tax returns. According to the aforementioned revenue regulations,
the use if eBIR Forms will improve the BIR’s tax return data capture and storage therby
enhancing efficiency and accuracy in the filing of tax returns.
eBIR Forms refer to the (2) types of electronic services provided by the BIR relative to
the preparation, generation and submission of tax returns, which are the:
a)​ e
​ BIR Forms System for Online Filing; and
b)​ e
​ BIR Forms Package to fill-up forms offline
The “eBIR Forms” Package can be downloaded through the BIR website or a copy of the
software package may be requested from the taxpayer’s registered RDO particularly in the
designated BIR 3-lounge.
“eBIR FORMS SOFTWARE PACKAGE” (also known as Offline eBIR Forms Package) is
a tax preparation software that allows the taxpayer and Accredited Tax Agent (ATA) to
accomplish or fill-up tax forms offline. It is an alternative mode of preparing tax returns which
deviates from the conventional manual process of filing-up tax returns on pre-printed forms that
is highly susceptible to human error. Taxpayers/ATAs can directly encode data, validate, edit,
save, delete, view and print the tax returns. The form package has automatic computations and
has the capability to validate information inputted by the taxpayers/ATAs.
“Online e BIRForms System” is a filing infrastructure that accepts tax returns submitted
online and automatically computes penalties for tax return submitted beyond due date. The
System creates secured user accounts thru enrollment for use of the online System, and allows
ATAs to file on behalf of their clients. The System also has a facility for Tax Software Providers
(TSPs) to test and certify the data generated by their tax preparation software (certification is by
form). It is capable of accepting returns data file using certified TSP’s tax preparation software.
MANDATORY eBIR FORMS and MANDATORY e-FILING
Only those non-EFPS filers are covered by RR 6-2014 (as amended by RR 9-2016), particularly
the following:
a)​ A
​ ccredited Tax Agents/Practitioners and ​all its client-taxpayers
Per RR 11-2015 dated March 27, 2015, “client-taxpayers” shall mean those taxpayers
who are otherwise authorizing their tax agents/practitioners to file on their behalf. Thus, client
taxpayers whose tax agents/practitioners only sign the audit certificate but have no authority to
file the returns in their behalf are not covered under this provision. The linking module of
authorization of authorization by the client-practitioner to his/her tax agent/practitioner is
available online via eBIRFORMS. It shall be noted, however, that the taxpayer may cancel
anytime his/her authorization prior to the termination of their client-agent relationship.
b)​ A
​ ccredited Printers of Principal and Supplementary Receipts/Invoices
c) ​One-Time Transaction (ONETT) taxpayers who are classified as real estate
dealers/developers; those who are considered as habitually engaged in the sale of real property
and regular taxpayers already covered by eBIR Forms. Thus, Taxpayers who are filing BIR
Form No. 1706, 1707, 1800, 1801 and 200-OT (For BIR Form 1706 only) are excluded in the
mandatory coverage from using the eBIR Forms.
d)​ T
​ hose who shall file a “No payment” Return
Under RR 12-2015, however, the following taxpayers may file manually “no payment returns” to
the Revenue District office (RDO) where registered using officially printed forms/photocopied or
electronic/computer-generated returns:
❖ Senior Citizen (SC) or Persons with Disability (PWD) filing for their own returns;
❖ Employees deriving purely compensation income and the income tax of which has been
withheld correctly showing tax due is equal to the tax withheld whether single or
multiple employees (with two or more employers concurrently and successively at
anytime during the taxable year);
❖ Employees qualified for substituted filing under RR 2-98 Sec. 2.83.4, as amended, but
opted to file for an Income Tax Return (ITR) and are filing for purposes of promotion
(PNP/AFP), loans, scholarships, foreign travel requirements, etc.
The above taxpayers are encouraged to use offline eBIRForms for ease
and convenience in the preparation, validation, computation rules and efficiency
check for completeness and correctness of taxpayer input. However, they are
encouraged as much as possible to file their returns electronically to avoid the
crowd and long lines.
It is further clarified, under this revenue regulation, that all business
taxpayers with no payment returns mandated to use eBIRForms/EFPS must
electronically file return.
e)​ G
​ overnment-Owned or Controlled Corporations (GOCCs)
f)​ L
​ ocal Government Units (LGUs), except barangays; and
g) ​Cooperatives registered with National Electrification Administration (NEA) and Local E Water
Utilities Administration (LWUA)
Taxpayers who are not covered by the regulation may opt to file their returns using the manual
filing or eBIR Forms.
ADVANATAGES OF THE USE of eBIR FORMS (RMO 24-2013​)
a) ​Validate automatically the registration information indicated on the tax returns submitted by
the taxpayers in the Integrated Tax System (ITS) database of the BIR.
b)
​Prompt concerned revenue officials or employees on any discrepancies between the
registration information submitted by the taxpayer and its ITS database,
c) ​Encourage concerned taxpayers to update their registration information with the BIR upon
validation of tax returns submitted.
OTHER TERMS:
❖ Accredited Printers are duly constituted agents of the BIR in the printing of principal and
supplementary receipts/invoices and included in the List of Accredited Printers of
Principal and Supplementary Receipts/Invoices published in the BIR website.
❖ Accredited Tax Agents (ATAs) are also known as accredited tax practitioners, who are
engaged in tax practice included in the List of Accredited tax Practitioners as published
in the BIR website. The designation of ATA by the taxpayer may at any time be
cancelled or revoked upon execution of “Removal of Tax Agent” within the online eBIR
Forms System and the aforementioned action shall be completed upon submission of a
duly notarized Notice of Termination to the taxpayer’s registered RDO.
❖ Offline- is a technical term generally used when the user’s workstation is not connected
to the internet.
❖ Online is the most common technical term used wherein the user connects his
workstation to the internet to access various information through the worldwide web.
❖ No payment Returns refers to the tax return that is not accompanied by any payment
where the same is filed with any authorized BIR receiving office (e/g. breakeven, no
transaction, refundable or second installment tax return).
Exercises
1. Hananiah Corp., a corporation engaged in business in the Philippines and abroad has
the following data for the current year:
Gross Income, Philippines
Expenses, Philippines
Gross Income, Malaysia
Expenses, Malaysia
Interest on Bank Deposit
Determine the income tax due if the corporation is
Domestic
Res. Foreign
a. P116,800
P72,000
b. P109,500
P67,500
c. P312,000
P515,850
d. P109,500
P72,000
P975,000
P750,000
P770,000
P630,000
P25,000
Non-resident Foreign
P320,000
P300,000
P116,800
P300,000
Use the following data for the next three (3) questions:
A domestic corporation provided the following data for 2018
Gross profit from sale
P3,000,000
Business expenses
P1,800,000
Dividend from domestic corporation
P 100,000
Dividend income from a resident corporation
P 50,000
Dividend income from a non-resident
P 40,000
Capital gain on sale of land in the Philippines
P 500,000
(SP-P2M; FMD-1.8M; cost-P1.5M)
Capital gain on sale of land in china
P 200,000
(SP-P1.5M; FMV-1.8M; cost 1.2M)
Capital gain on shares of domestic corp
P 120,000
(direct sale to buyer)
Gain on sale of shares of a domestic corporation thru a local stock exchange
(SP-P200,000; cost P150,000)
Interest income from:
·​ ​Notes receivable
P20,000
·​ ​Bank deposit (peso account)
P30,000
·​ ​Bank deposit (foreign currencies)
P25,000
·​ ​Treasury Bills
P10,000
2. A depository bank under foreign currency deposit system has the following income from
foreign currency transactions (exchange rate $1=P45);
From non-residents
$5,000
From residents
$3,000
From Philippine national bank
$2,000
How much is the final withholding tax applicable on the above income?
a. P22,500
b. P13,500
c. P9,000
d. 45,000
3. Philippine Air, a domestic corporation engage in local and international operations has
the following data for the current year:
Gross and expenses from international operations, P10,000,000 and P4,000,000,
respectively. The income tax due of the corporation is
a. P 150,000
b. P 250,000
c. P 1,800,000
d. ​P 3,000,000
4. Which of the following income is not from a related trade, business or activity of a
domestic proprietary education institutions?
a. Income from the hospital where medical graduates are trained for residency
b. Income from the canteen situated with in the school campus
c. Income from bookstore situated within the school campus
d. Income from rent of available office spaces
5. A private educational institution duly recognized by CHED has the following data for
the fiscal year ending March 30, 2018:
Tuition and other fees
P5,000,000
Rent income from canteen and bookstore P
47,500
Concessionaire, net of withholding tax
Dividend from domestic corporation
P 500,000
Interest of Bank deposit, net of tax
P
16,000
Operating expenses
P 1,000,000
During the year, the school construct a 2-storey school building costing P2,000,000. It is
the school’s policy to deduct this cost in full during the taxable year. The income tax due
up payable is:
a. P152,500
b. P496,000
c. P205,000
d. P500,000
6. The minimum corporate income tax (MCIT) does not apply to a corporation, if
a. Imposition was suspended by the secretary of finance due to a corporation’s
heavy losses are rising from prolonged labor dispute;
b. Corporation is in initial year of its operation;
c. Corporation is exempt from income tax by virtue of tax holidays granted to it by
the court of investment;
d. All of the above
7. Legitimate “business reverses” shall include substantial losses sustained
a. Due to fire, rubbery, theft or embezzlement.
b. For the economic reasons as determined by the secretary if finance
c. Both of the above
d. None of the above
Use the following data for the next eight (8) questions:
A domestic corporation started operation in year 2004. The following data on income taxes
during the years 2008 tom 2015 were made available:
Year
Basic Tax
MCIT
2008
2009
2010
2011
2012
2013
2014
2015
25,000
130,000
200,000
100,000
150,000
8,000
1,000
100,000
150,000
190,000
300,000
50,000
60,000
40,000
50,000
DETERMINE THE FOLLOWING
8. Income tax payable for the year 2008
a. P 25,000
b. P 100,000
c. P 75,000
d. P
0
9. Income tax payable for the year 2009
a. P 130,000
b. P 150,000
c. P 20,000
d.
0
10. Income tax payable for the year 2010
a. P 200,000
b. P 190,000
c. P 105,000
d. P
0
11. Income tax payable for the year 2011
a. P 300,000
b. P 200,000
c. P 105,000
d. P
0
Excess of MCIT over
Normal Income Tax
75,000
20,000
300,000
32,000
49,000
12. Income tax payable for the year 2012
a. P 50,000
b. P 100,000
c. (P 105,000)
d. P
0
13. Income tax payable for the year 2013
a. P60,000
b. P150,000
c. P105,000
d. P0
14. Income tax payable for the year 2014
a. P8,000
b. P40,000
c. P32,000
d. P0
15. Income tax payable for the year 2015
a. P 150,000
b. P 50,000
c. P 118,000
d. P
0
The next fourteen (14) questions are based on the following data:
Hananiah Corporation provided the following data for calendar year ending December 31, 2018:
($1-50)
Philippines
Abroad
Gross Income
P4,000,000
$40,000
Deduction
P2,500,000
$15,000
Income tax paid
$3,000
16. If it is a resident corporation, its income tax is:
a. P 450,000
b. P 1,280,000
c. P 880,000
d. P 525,000
17. If it is a non-resident corporation, its income is:
a. P 1,200,000
b. P 1,280,000
c. P 880,000
d. P 1,400,000
18. If it is a resident international carrier, its income tax is:
a. P 100,000
b. P 10,000
c. P 37,000
d. P 125,000
19. If it is a non-resident cinematography film owner/ lessor, its income tax is:
a. P 1,000,000
b. P 100,000
c. P 300,000
d. P 128,000
20. If it is non-resident lessor of vessel, its income is:
a. P 100,000
b. P 180,000
c. P 300,000
d. P 128,000
21. If it is a non-resident lessor of aircraft, machineries and equipment, its income tax is:
a. P 100,000
b. P 180,000
c. P 300,000
d. P 128,000
22. If it is a domestic corporation but its total expenses is P5,800,000 (disregard original
data on expenses), its income tax is:
a. P 730,000
b. P 60,000
c. P 120,000
d. P 85,000
23. If under the preceding number, but the domestic corporation is a non profit hospital,
(disregard tax paid abroad) its income tax is:
a. P 20,000
b. P 60,000
c. P 10,909
d. P 120,000
24. If the corporation is a non-stock educational institution which uses all its revenues or
income for educational and charitable purpose, its income tax is:
a. P
0
b. P 730,000
c. P 120,000
d. P 64,000
25. If it is a domestic corporation, its income tax after tax credit is :
a. P675,000
b. P832,000
c. P880,000
d. P812,500
Module 6
Income Taxation for Partnerships
Week 13 - 14
Introduction
This module tackles the general concepts about the accounting for income taxes for
partnerships. This also includes the discussion about the classification of partnerships
according to payment of taxes. Illustrations in identifying and computing the income
taxes for partnerships will be given.
Learning Objectives
After studying this module, students should be able to:
1. Understand the concept of income taxation for partnership.
2. Analyze situations with regards to the computation of income taxes for
partnership.
Discussion:
Taxation of Partnerships
In general, partnerships are considered corporations and taxable as such at 30% on
taxable income.
The following are exempt from income tax:
1. General professional partnerships
2. Joint venture or consortium formed for undertaking construction projects
3. Joint venture or consortium engaged in petroleum, coal, geothermal and other
energy operations
Partnership
A partnership is defined as a contract whereby two or more persons bind themselves to
contribute money, property or industry to a common fund to engage in profitable
activities with the intention of dividing the profits among themselves.
Classification of Partnership
1. General Professional Partnership (GPP)
2. General Co-Partnership (GCP)
General Professional Partnership (GPP)
General Professional Partnership (GPP) A GPP is one formed by two or several
persons for the sole purpose of exercising their common profession of which no part of
income is derived from engaging in any trade or business. A GPP is exempt from
income tax but required to file a tax return.
Ex. CPA Firms, Law Firms, Medical Partnerships, etc..
Guidelines to be followed for GPP
1. The partners in a general professional partnership shall be liable for income tax
only in their separate and individual capacities.
2. Each partner shall report his distributive share, actually or constructively received
in the net income of the partnership as gross income. The share of a partners
shall be subject to 10% creditable withholding tax.
If the income payments to the partner for the current year exceeds P720,000, the
withholding tax is 15%.
3. The partner is deemed to have elected the itemized deductions unless he
declares his distributive share undiminished by his share of the itemized
deductions.
A forty percent (40%) OSD is deductible from the distributive share of the gross
income if such gross income was not previously reduced by the partnership's
itemized deduction.
4. For purposes of computing the distributive share of the partners, the net income
of the partnership shall be computed in the same manner as that of a
corporation.
Illustration 1
Atty. Liu is one of the partners of B&J Partnership. The partnership is engaged in
rendering professional services (the sole source of income of the partnership) with a net
income before tax of P200,000. Atty. Liu has 60% shares on the profit or loss of the
partnership. The other income of Atty. Liu is a buy and sell business with a gross
income of P200,000 and related expenses of P80,000.
Compute the following:
1. How much is the income tax of B&J?
2. How much is the net income tax payable of Atty. Liu if the partnership withheld a
10% withholding income tax.
Answers:
1. How much is the income tax of B&J?
B&J Partnership’s income is tax-exempt because it is engaged in purely
professional services.
2. How much is the net income tax payable of Atty. Liu if the partnership withheld a
10% withholding income tax?
Atty. Liu, being engaged in business, is liable for income tax only in his separate
and individual capacity and should not in any way change the tax status of B&J
partnership as a general professional partnership.
Illustration 2
Atty. Liu is one of the partners of B&J Partnership. The partnership is engaged in
rendering professional services (the sole source of income of the partnership) with a net
income before tax of P200,000. Atty. Liu has 60% shares on the profit or loss of the
partnership. The other income of Atty. Liu is a buy and sell business with a gross
income of P200,000 and related expenses of P80,000.
The income tax due of Atty. Liu would be:
Share from the gross income of professional partnership
Gross income from buy and sell business
___________
Less: Allowable deductions
___________
Income before personal exemptions
Less: Personal exemption – basic
Taxable Income
___________
___________
___________
___________
___________
Tax on P140,000
Tax on excess (P50,000 x ____)
Income tax due
Less: Tax withheld by the partnership (P120,000x____)
Income tax still due
___________
___________
___________
___________
___________
Answers:
The income tax due of Atty. Liu would be:
Share from the gross income of professional partnership
(P200,000 x 60%)
Gross income from buy and sell business
P 200,000
Less: Allowable deductions
​ 80,000​
Income before personal exemptions
Less: Personal exemption – basic
Taxable Income
Tax on P190,000
Tax on excess (P50,000 x 25%)
Income tax due
Less: Tax withheld by the partnership (P120,000x10%)
Income tax still due
P 120,000
​
120,000
P 240,000
​ 50,000
190.000
​
​
22,500
12,500
35,000_
(12,000​)
23,000
Notes:
1. The Tax Code (RA 8424) provides that the partner’s distributive share from the
net income of the general professional partnership be included as a part of
individual taxpayer’s gross income.
2. P.D. 1773 allows OSD if the reported income of the individual partner as share
form the general professional partnership is not previously reduced by the
partnership’s business expenses.
3. If the share received by an individual taxpayer from a professional partnership is
based on net income of the partnership (gross income minus allowable itemized
deductions), it shall no longer be allowed to deduct 40% OSD; otherwise, there
will be a double deduction.
General Co-Partnership GCP)
A GCP (compania-colectiva) is a partnership wherein part or all of its income is derived
from the conduct of trade or business.
For taxation purposes, the general co-partnership is considered as a corporation and
therefore liable to corporate tax of 30%. A general commercial partnership is also
subject to MICIT in the same manner as a corporation.
In a commercial partnership, the partners are considered as stockholders. The profits
distributed to them by the partnership are considered dividends and subject to a final
tax of 10%.
Illustration 3
J and B are partners of JB’s Enterprises, sharing 60% and 40% profit and loss,
respectively. The partnerships net income before tax during the year amounts to
P2,000,000.
Determine the following:
1. Income tax due of JB’s Enterprises
2. Final income taxes on the share of J and B partners.
Answers:
1. Income tax due of JB’s Enterprises.
Net income
Multiplied by corporate normal tax rate
Income tax Due
P2,000,000
​
30%
P600,000
2. Final income taxes on the share of J and B partners.
Net income after tax (P2,000,000-P600,000)
Distribution of net income
Multiplied by final tax rates
Final income taxes
P1,400,000
Partner A
P840,000(60%)
​
10%
​
P 84,000
General Professional Partnership Engaged in Commercial Activity
Partner B
P560,000 (40%)
​
10%
.
P56,000
To be nontaxable, a GPP should be for the sole purpose of exercising the partners’
common profession.
If the GPP is engaged in trade or business other than the practice of the partners’
common profession GPP becomes taxable as a corporation.
A taxable partnership is subject to regular corporate income tax ( 30% based on the net
taxable income) or minimum corporate income tax (2% based on the gross income)
starting from the 4 the year of its business operation.
Illustration 4
JB Partnership of James and Benjie reported the following earnings:
Professional fee
P100,000
Professional expenses
60,000
Business income – trading
200,000
Business expenses – trading
120,000
Question:
Will JB partnership be liable to income tax?
Answer: JB partnership is liable to pay income tax, because it earned business income.
It is a clear indication that the partnership is engaged in activities other than
professional services. Hence, it is considered and treated as a corporation which is
liable to corporate income tax of 30% or MCIT.
The income tax payable of JB Partnership would be:
Revenues
Professional fee
Business income – trading
Expenses:
Professional
Business – trading
Net taxable income
Multiplied by corporate income tax rate
​
P100,000
​ 200,000​
60,000
120,000​
P300,000
​ 80,000
1
120,000
30%
Assume that the partners agreed to divide the net income equally, the tax pertinent to
the shares of James and Benjie would be:
Net income before income taxes
Less: Income tax
Net Income for distribution
Profit distribution
Multiplied by tax for dividends
P120,000
​ 36,000
P 84,000
James
P42,000
​10%​
Benjie
P42,000
​ 10%
Final tax withheld by the partnership
4,200
4,200
It must be observed that the taxable income of the co-partnership , less corporate
income tax, shall be taxable to partners, whether actually distributed or
not.
Module 7
Gross Income
Week 15
Introduction
This module tackles the concept of gross income that is considered in computing the
income tax. It discusses how we should identify gross. income as taxable or not. This
also includes the classification of income based on the concept of taxation.
Learning Objectives
After studying this module, students should be able to:
1. Understand the concept of gross income in income taxation.
2. Identify the income that is taxable or not.
3. Analyze income based on Philippine Tax laws
Discussion:
Gross Income
Income Defined. ​Gross income (also known as gross taxable income) means total
income of a taxpayer subject to tax. It means, in its broad sense, all income from
whatever source, derived within or outside the Philippines, legal or illegal. The tax code
does not distinguish legal and illegal income. Proceeds of embezzlement or swindling,
for instance, are income because embezzler or windler already has complete dominion
over them and can use such for his economic benefit.
Income means all wealth which flows into the taxpayer, other than return of capital. It
imports something distinct from principal or capital. On the other hand, “capital”
constitutes the investment which is the source of income. Therefore, capital is fund
while income is the flow. Capital is wealth, while income is the service of wealth.
Form of income
Income may be realized in any form, whether in money, property, services, or indirect
economic benefit. Items indirectly benefiting taxpayers are excluded from gross income.
Income includes the forms of income specifically described as gains derived from sale
or other disposition of capital.
Valuation of income.
The amount of income recognized is generally the value received or which the taxpayer
has a right to receive. If the services were rendered at a stipulated price, in the absence
of any evidence to the contrary, such price shall be presumed to be the fair market
value of the compensation received. Transfer of land made by a person the another in
payment of services rendered in the form of attorneys fees shall be considered as part
of gross income of the latter value at either the fair market value or zonal valuation,
whichever is higher. In the taxable year received.
Classification of Income
1. Income as to source
a. Compensation income
b. Professional income
c. Business income
d. Other income
2. Income as to territorial source
a. Income within the Philippines
b. Mixed income (partly within and outside)
3. As to taxability
a. Taxable income
1. ordinary or regular income subject to basic or normal tax scheduler
tax under Section 24(A) of the tax code.
2. Passive income subject to final tax
3. Capital gains subject to capital gains taxes
4. Special income subject to special rates
b. Tax exempt income
1. By constitutional mandate
2. By statute (general or special)
3. By international comity
Taxable income
Taxable income means the pertinent items of gross income specified in the Tax Code,
less the deductions and/or personal and additional exemptions, if any, authorized for
such types of income by the tax codes or other special laws.. It does not include income
excluded by law, or which are exempt from income tax as well as income subject to final
taxes. Hence it pertains to all income subject to basic and creditable withholding taxes.
It includes the gains, profits and income derived from whatever sources, whether legal
or illegal.
Requisites for income to taxable
1. There must be gain
The gain need not be in cash derived from sale of assets. It may occur as a
result of exchange of property, payment, assumption, reduction or cancellation of
the taxpayer’s indebtedness or other profit realized from the completion of a
transaction.
2. The gain must be realized or received.
A mere increase in the value of property without actual realization, either through
sale or other disposition, is not taxable. The realization of income need not take
the form of actual receipt or property by the taxpayer as it may occur where there
is a constructive receipt of the income by the taxpayer.
3. The gain must not be excluded by law from taxation.
Incomes that are exempt from tax by law or treaty are not considered in
determining gross income. Income is recognized in the year it is actually or
constructively received in cash or cash equivalents.
Characteristics of Philippine Income Tax
1. National tax - imposed and collected by the National Government throughout the
country
2. General tax - levied with specific or predetermined purpose
3. Excise tax - imposed on the right or privilege of a person to receive or earn an
income
4. Direct tax - payable by the person upon whom it is directly imposed by law.
5. Progressive tax - based upon one’ ability to pay. The rate of income tax
increases as the tax base increases.
Income Tax System
1. Schedular tax system vs Global Tax System
Under a schedular system, the various types/items of income are classified accordingly
and are accorded different tax treatments, in accordance with schedules characterized
by graduated tax rate.
Under the Global System, all income received by the taxpayer are grouped together,
without any distinction as to the type or nature of the income and after deducting
therefrom expense and other allowable deductions, are after deducting, are subjected to
tax.
Scheduler vs Global Tax System
Scheduler
Global
Tax Treatment
Income tax rules varies
and made to depend on
the kind or category
Uniform tax treatment or
rules
Characteristics
Categorize or Classifies
Income
Does not generally
categorize or classify
income
Classification of income
Imposed different tax
treatment and rates
Imposes uniform reduce or
levels
Tax rates
Individual taxpayers
Imposes uniform taxes
Applicability
Individual taxpayers
NRFC, NRA-NETB
2. Gross income vs net income taxation.
Gross income vs net income taxation
Gross Income Taxation
Net Income Taxation
Deduction and
exemption
No deductions or exemptions
allowed
Allows deductions / exemptions
Example
Income subject to final taxes
Returnable income
Tax base
Gross income
Taxable income
Applicability
-
NRA-NETB
Nonresident corp.
-
Individual taxpayers except
Corporate taxpayers except
nonresident foreign corp.
Advantages
-
Minimizes source of graft
and corruption due to
-
Just, fair & responsible
Equitable relief (deductions
-
minimization of margin of
discretion exercised by
revenue district officers
Simplified tax system
-
and exemptions) to
taxpayers
More revenue to the
government
Minimizes tax evasion
(subject to counterchecking
by the BIR)
Basic Features of Philippine Income Taxation
1. It has adopted a comprehensive tax situs by using the nationality, residence, and
source rules. This makes citizens and resident aliens taxable on their income
derived from all sources while non-resident aliens are taxed only on their income
derived from within the Philippines.
2. The individual income tax system is mainly progressive in nature in that it
provides a graduated rate of income tax. Corporations in general are taxed at a
flat rate of income tax. Corporations in general are taxed at 30% of net income.
3. It has retained more scheduler than global features with respect to individual
taxpayers but has maintained a more global treatment of corporations.
Situs (Source / Place) of Income
Gross income may be derived entirely from sources within the Philippines, entirely from
sources outside the Philippines. For income tax purposes, “sources” refers to the
activity, or property, or labor that gave rise or produced the income. Sources, therefore,
is the origin of the income. Situs means the place of taxation of the income or the
country which the jurisdiction to impose the tax. The state where the subject to be taxed
has a situs may rightfully levy and collect the tax. The situs is necessarily in the state
which has jurisdiction or which exercises dominion over the subject in question.
Factors affecting Situs of income are as follows:
1. Residence or domicile
2. Nationality
3. Source of income
Rules in determining the situs of income
1. Interest
- residence of the debtor
2. Income from services
- Place or performance of the services rendered. When services are
performed partly within the Philippines and partly outside the Philippines,
the allocation should be based on the time rendered within and outside the
Philippines.
3. Rentals and royalties
- Location of the property or place where the intangible is used
4. Gain on sale of real property
- Location of the real property
5. Gain on sale of personal property
- Place of sale except sale of shares of stocks of a domestic corporation.
Gains, profits and income derived from the purchase of personal property
within and its sale outside the Philippines, or from purchase of personal
property outside and its sale within the Philippines shall be treated as
derived from sources within the country in which it is sold.
6. Dividend income
- Dividend income may be considered as purely income within or purely
income outside the Philippines or partly income within and outside. The
following rules shall be observed:
Situs of Dividend Income
Source of Dividend
Source of Income
Domestic Corporation
Income purely from Philippines
sources
Foreign Corporations
- Based on the ration of the
gross income (GI) of the
foreign corporation for the
preceding 3 years prior to
declaration of dividends
derived from Phiippine
Sources
- GI (Phil) / GI (World) x
Dividend
If ratio is:
- < 50%; income is treated as
entirely derived from
sources outside the
Philippines
- >= 50%: Income is derived
partly from sources within
and partly outside the
Philippines
7. Mining
- Place where mine is located
8. Farming
- Place where farm is located
9. Manufacturing Business
-
Produced and sold within
Produced and sold outside
Produced in whole/ part within and sold outside
Produced in whole/ part outside and sold within
Assessments
Source of income
Within
Outside
Partly within and outside.
Partly within and outside.
Answer the following requirements:
1. Define Income in general for tax purposes.
2. Describe Gross income as used in income taxation.
3. Identify the sources of income.
4. Give the characteristics of income.
5. Identify the requisites for an income to be taxable
6. Explain the constructive receipt of income.
7. Expound the source of income from within and outside the Philippines.
Module 8
Inclusions and Exclusions from the Gross Income
Week 16 - 17
Introduction
This module tackles the identification of the inclusions and exclusions from the gross
income to compute for the taxable income. This discusses the items considered as
gross income by Section 32(A) of the Tax Code. This also demonstrates those items
which are not considered part of the gross income for the purpose of computing the
taxpayers’ taxable income due.
Learning Objectives
After studying this module, students should be able to:
1. Analyze and identify the items that are considered part of the gross income for
the purpose of computing the taxable income.
2. Explain the items that are not considered part of the gross income for the
purpose of computing the taxable income.
Discussion:
Inclusions
Section 32(A) of , the Tax Code provides that unless specifically excluded under the
code, gross income includes but not limited to the following:
1. Compensation for services, "in whatever form paid", including but not limited to
fees, salaries, wages, commissions and similar item
2. Gross income derived fróm the conduct of trade or business or the exercise of
profession (business income)
3. Gains derived from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner's distributive share from the net income of the general. professional
partnerships
COMPENSATION INCOME
Compensation income is income arising out of an employer - employee relationship. It
encompassed all remuneration for services performed by an employee for his employer
whether paid in cash or in kind (RR2-98).
Compensation income includes salaries, honoraria, and wages, emoluments, taxable
bonuses, allowances (such as and transportation, entertainment, representation and the
like), fringe benefits, fees (including directors' fees if the director is at the same time an
employee of the employer), taxable pay, commission, compènsation for services on the
basis of a percentage of profits, commissions on insurance premiums, tips, marriage
fees, baptismal offerings, sums paid for saying masses for the dead, and other
contributions received by a clergyman, evangelists, or religious worker for services
rendered, and other income pensions and retirement of a similar nature.
The basis upon which the remuneration is paid is immaterial in determining whether the
remuneration constitutes compensation. Thus, it may be paid on the basis of
piece-work, or a percentage of profits, and may be paid hourly, daily, weekly, monthly or
annually.
FORMS / MEASUREMENT OF COMPENSATION
Compensation may be paid in money or in some medium other than money such as
stocks, bonds or other forms of property. If compensation is paid in.cash, the full
amount received is the measure of compensation income. If the services are paid in a
medium other than money, the fair market value of the thing taken in payment is the
amount of compensation. If compensation is paid in kind, such as stocks of the
employer, the fair market value of the stock at the time the services were rendered is
the measure of compensation. Likewise, income tax of the employee assumed or paid
by the employer in consideration of the latter's services is considered compensation
income of the latter.
RR 2-98 defined "employee" as an individual performing services under an
employer-employee relationship. An employer-employee relationship exists when the
person for whom the services were performed has the right to control and direct the
individual who performs the services, not only as to the result to be accomplished, but
also as to the details and means by which such results are accomplished. No distinction
is made between classes or grades of employees. Thus, superintendents, managers
and officers are considered as employees.
CLASSIFICATION OF COMPENSATION INCOME (RR 10-2008)
1. Regular compensation ​- includes basic salary, fixed allowances for
representation, transportation and others paid to an employee per payroll period
(RR 10-2008)
2. Supplemental compensation ​- includes payments to an employee in addition to
the regular compensation such as but not limited to the following: overtime pay,
fees, including director's fees, commission, profit sharing, monetized vacation
and sick leave, fringe benefits received by rank & file employees,'hazard pay,
taxable 13th month pay and other benefits, other remunerations received from an
employee-employer relationship, with or without regard to payroll period.
The rules on compensation income are applicable only to individual taxpayers, except
nonresident aliens not engaged in trade or business. Corporations, estate, and trusts
are not also covered by the on compensation due to lack of employer-employee
relationship.
COMPENSATION INCOME RECEIVED AFTER TERMINATION OF EMPLOYEEEMPLOYER RELATIONSHIP
Remuneration for services constitutes compensation income even if the relationship of
employer and employee does not exist any longer at the time when payment is made
between the person in whose employ the services had been performed and the
individual who performed them. Obviously, the related compensation income was
earned at the time the employer-employee relationship was not yet terminated. Hence,
the income was derived out of an employer-employee relationship.
FRINGE BENEFITS AND 13 MONTH PAY
A fringe benefit is any goods, service or other benefit furnished or granted by an
employer in cash or in kind, in addition to basic salaries, to individual employees. Fringe
benefits subject to fringe benefit tax cover only those fringe benefits given or furnished
to a managerial or supervisory employee. On the other hand, fringe benefits furnished
to rank and file employees are subject to basic tax and consequently to withholding tax
on compensation in accordance with RR 2-98 (as amended).
FIXED OR VARIABLE ALLOWANCES
In general, fixed or variable allowances which are received by a public officer or
employee or officer or employee of a private entity, in addition to the regular
compensation, fixed for his position or office, is compensation subject to income tax and
consequently, creditable withholding tax on compensation income [Section 2.78.1 (A) of
RR 2-98 as amended by RR 10-2008). Examples of fixed or variable allowances are
transportation allowance, representation_allowance, communication allowance.living
away from home allowance (LAFHA), and the like.
ADVANCES AND REIMBURSEMENTS FOR TRAVELING AND ENTERTAINMENT
EXPENSES
Reasonable amounts of reimbursements/advances for travelling ana entertainment
expenses which are pre-computed on a daily basis and are paid to an employee while
he is on an assignment or duty need not be subject to the requirement of substantiation
and to withholding. On the other hand, any amount paid specifically, either as advances
or reimbursements for travelling, representation and other bona fide ordinary and
necessary expenses incurred or reasonably expected to be incurred by the employee in
the performance of his duties are not compensation subject to withholding; if the
following conditions are satisfied:
1. It is tor ordinary and necessary travelling and representation or entertainment
expenses paid or incurred by the employee in hne pursuit of the trade, business
or profession; and
2. The employee is required to account/liquidate for the foregoing expenses in
accordance with the specific requirements of substantiation for each category of
expenses pursuant to Sec. 34 of the Tax Code.
PREMIUMS ON LIFE INSURANCE
Premiums on life insurance covering the.life.of.an employee paid by the employer is
taxable income to the employee, where the insured employee. directly or indirectly is
the beneficiary under the policy.
DEDUCTIBLE EXPENSE OF THE EMPLOYER
Any amount given by the employer as benefits to its employees, whether classified as
de minimis benefits or fringe benefits shall constitute as deductible expense upon such
employer
TIPS AND GRATUITIES
Tips or gratuities paid directly to an employee by a customer of the employer that are
not accounted for by the employee to the employer are considered as taxable income
subject to basic. tax. However, the same shall not be subject to withholding for the
reason that tips are not accounted for by the employee to the employer (RR 2-98).
VACATION AND SICK LEAVE ALLOWANCES
Vacation and sick leave allowances are amounts of "vacation allowances or sick leave
credits" which are paid to an employee treated as compensation income. Thus, the
salary of an employee on vacation or on sick leave, which are paid notwithstanding his
absence from work, constitutes compensation. However, the monetized value of
unutilized vacation leave credits of ten (10) days or less' which were paid to the
employee during the year, being de minimis benefits are not subject to income tax and
to withholding tax.
REPRESENTATION AND TRANSPORTATION ALLOWANCES (RATA)
Representation and Transportation Allowances (RATA) granted under Section 34 of the
General Appropriations Act to certain officials and employees of the government are
considered reimbursements for the expenses incurred in the performance of one's
duties rather than as additional compensation. However, the excess of RATA, if not
returned to the employer, constitutes taxable compensation income of the employee.
STIPENDS OF RESIDENT PHYSICIANS
The stipends received by resident physicians during their intensive training in the
residency program of a hospital are subject to creditable withholding tax (CWT),
imposed at the rate of 15% if the gross income of the resident physicians for the current
year exceeds P720,000, and 10%if otherwise pursuant to Section 2.57.2 (A)(1) of RR
2-98. Under Section 2.57.2 (AX1) of RR 2-98, income payments derived by individuals
engaged in the practice of profession or calling like doctors of medicine are subject to
10% or 15% CWT. The amount subject to CWT shall include not only fees, but also per
diems, allowances, and any other form of income payments not subject to withholding
tax on compensation [BIR Ruling No. DA (C-004)024-2010, February 4, 2010].
SERVICE FEES AND ROYALTIES, DISTINGUISHED
To distinguish between compensation for service and royalty payments, the taxpayer
must inquire on whether the payee has proprietary interest, in the property that gave
rise to the income. If the payee has none, the payment constitutes compensation for
personal services.If the payee has proprietary interest, the payment constitutes royalty
income, (B|IR Ruling No. DAITAD 139-05 dated November 15, 2005, citing Philippine
Refining Company v. CIR, CTA Case No. 2872 dated January 15, 1986).
COST OF LIVING ALLOWANCE (COLA)
COLA of minimum wage earners is exempt from income tax. The COLA forms part of
the new wage rates or statutory minimum wage Hence, it is covered by the income tax
exemption of MWES under RA 9504, as implemented by Revenue Regulations No.
10-08, which covers the statutory minimum wage (inclusive of COLA under NCR Wage
Order No. NCR-16), including holiday pay, overtime pay, night shift differential pay and
hazard pay.
INCOME OR GAIN FROM THE EXERCISE OF STOCK OPTION PLANS
The BIR-ruled under BIR Ruling 119-2012 dated February 22, 2012 that any income or
gain derived by an employee from the exercise or stock option is considered as
additional compensation subject to income tax and consequently, to withholding tax on
compensation (WTC).
2. BUSINESS INCOME
Gross income derived from the conduct of trade or business or the exercise of
profession is known as business income. They may arise from the sale of products or
'services. For example, fees received by a professional person are considered business
income. Rents received by a person in the real estate business are business income.
Business income is taxed at progresSIve rates on net business income, or income from
the practice of a profession (net income after deduction of certain specified expenses
and any excess of personal and additional exemptions over compensation income). In
the case of manufacturing, merchandising, or mining business, "gross income" means
total sales, less the cost of goods sold plus any income from investments and from
incidental or outside operations or sources.
BAD DEBT RECOVERY
Subsequent recovery of a bad debt previously written off in the books is a taxable
income provided that the write-off of the account resulted in a lower taxable income at
the time of write-off. This rule is known as "Tax Benefit Rule. The aforementioned rule
states that the taxpayer is obliged to declare as taxable income is subsequent recovery
of bad debts in the year they were collected to the extent of the tax benefit enjoyed by
the taxpayer when the bad debts were written-off and claimed as a deduction from
income. Thus, if the taxpayer realizes a reduction of the income tax due him on account
of a deduction for bad debts, his subsequent recovery of the same from the debtor shall
be treated as a receipt of taxable income. However, if the taxpayer did not benefit from
the deduction of the said bad debt written off because it did not result in any reduction of
his income tax in the year of such deduction, the subsequent recovery shall not be
treated as receipt of realized taxable income but a mere recovery or return of capital
which is not taxable.
TAX REFUND
The Tax Benefit Rule" also applies with respect to refund or credit for taxes. Thus, tax
refunds are taxable if the tax, when paid, was deducted from gross income (i.e., local
taxes and fringe benefit tax). Taxes which were not previously allowed as deductions
from the gross income should not form part of taxable income when refunded. The
following tax refunds are not taxable:
1. Income.tax (except fringe benefit tax)
2. Estate Tax
3. Donor's.tax
4. Special assessment
5. Stock transaction tax
6. Income tax paid to a foreign country if the taxpayer.claimed.a credit for such tax
in the year it was paid.
Tax refunds shall be reported as income in the year.it was received if the accounting
method employed by the taxpayer is the cash method Otherwise, if the accounting
method used is the accrual basis, the tax refund must be reported in the year the refund
was ordered.
CANCELLATION or CONDONATION of DEBTS
Income can come in many forms, including the cancellation or condonation of debts.
The following tax rules shall be observed with respect to cancellation/condonation of
debts:
TAX TREATMENT OF DEBTS CANCELLED or CONDONED
Applicable tax
Reason for Cancellation
Subject to basic income tax
lf services were rendered by the debtor, in consideration
of which the indebtedness was cancelled by the
creditor.
Subject to Donor's tax
If the creditor, Without receiving any consideration from
the debtor, and purely as an act of liberality, cancels the
indebtedness.
Subject to 10% final tax
If the debtor is a shareholder of a corporation that
cancels the indebtedness, such cancellation constitutes
indirect dividend.
3. GAINS DERIVED FROM DEALINGS IN PROPERTY
Gross income derived from dealings (sale, barter or exchange) in property includes all
income derived from the disposition of property (real or personal, for sale or in
exchange of other property, or both) which results in gain or loss The gain from the
transaction shall be taxable gain and the loss shall be deductible if incurred in trade,
profession, or business.
Gains arising from expropriation of properties or other dispositions of properties to the
government of real properties are taxable. It includes taking by the government through
condemnation proceedings (Gonzales v. Court of Tax Appeals. G.R. No. L-14532). The
transfer of property through condemnation proceedings, and the payment of just
compensation is a sale or exchange and profit from the transaction constitutes capital
gain".
4. INTEREST INCOME
Generally, interests are taxable income, unless exempted by law, whether or not
usurious. Gross income derived from interest should only refer to such interest as
arising from indebtedness (whether business or non-business, legal or illegal), that is,
Compensation for the loan or forbearance of money, goods, or credits For instance,
interest derived from lending money, goods, or credits from one person to another or
interest earned in the normal conduct Or trade or business are subject to basic tax.
On the other hand, interest income on deposits made in banking institutions as well as
interest income on deposit substitutes are passive Income subject to 20% final
withholding tax. Interest income derived from investments in 9overnment securities are
also subject to 20% final tax.
5. RENTAL INCOME
Section 32(A)5) of the Tax Code provides that "rent" paid by the lessee for the use or
lease of property is taxable income to the lessor. Rent is the amount paid for the use or
enjoyment of a thing (real or personal) or right
RENT INCOME may be in the FORM of:
1. Cash, at.stipulated price
2. Obligations of the lessor to third persons paid or assumed by the lessee in
consideration of the contract of lease such as real property taxes assumed by the
lessee on the property being leased, insurance or other fixed charges. Such
payments shall be considered rental payments to be reported by the lessor as
part of its taxable income.
3. Advance payment, which may be:
a. Prepaid rent
b. A security deposit that is applied to rental is a taxable income of the lessor
NON-TAXABLE RENT:
Advance rentals representing option money for the property as well as security deposits
to insure faithful performance of certain obligations of the lessee are not considered as
income on the part of the lessor.
LEASEHOLD IMPROVEMENT
A leasehold improvement is an improvement made to a leased asset. Buildings erected
or improvements made by the lessee on the leased premises are taxable only if the
same were made pursuant to an agreement with the lessor and the buildings erected or
improvements made are not subject to removal by the lessee. However, the lessor does
not realize taxable gain from leasehold improvements turned over by the lessee at the
end of the lease where leasehold improvements are considered fully depreciated and
where the condition of said property is such that necessary renovations and
extraordinary repairs have to be undertaken to restore the same to useful condition. On
the other hand, the lessee may claim depreciation of the improvements as deduction
from the lessee's gross income over the remaining term of the lease or the life of the
improvements, whichever is shorter.
PRETERMINATION OF LEASE
If for any reason other than a bona lide purchase from the lessee by the lessor, the
lease is terminated, the lessor realizes additional income for the year to the extent that
the value of such improvement exceeds the amount already reported as income on
account of such improvement.
6. ROYALTY INCOME
Royalty was not defined under the Tax Code, nonetheless, Webster Dictionary defined
the same as a share of the earnings as from invention, book or play, paid to the
inventor, writer, etc. for the right to make, use or publish the same.
Tax Treatment of Royalty Income
Subject to 10% final tax
Royalties on books, other literary works and musical
compositions from sources within the Philippines received
by individual taxpayers other than NRA-NETBS
Subject to 20% final tax
Royalties derived from sources within the Philippines other
than royalties subject to 10% final tax
Subject to basic tax
Royalties derived by resident citizens and domestic
corporations from sources without the Philippines
7. DIVIDEND INCOME
Dividends are payments made by a corporation to its shareholder members. It is the
portion of corporate profits paid out to stockholders, direct or indirect Direct dividend is
one where the paying corporation acknowledges the distribution of dividend through a
resolution of the Board of Directors declaring such distribution as distribution of
dividend. Indirect Dividend is a distribution of Profits disguised as payment of services,
properties, etc. Direct and indirect dividends are subject to tax.
8. PRIZES AND OTHER WINNINGS
A prize is an award to be given to a person or a group of people to recognize and
reward actions or achievements. Prizes are also given to publicize noteworthy or
exemplary behavior, añd to provide incentives for improved outcomes and competitive
efforts. Winnings, on the other hand, for tax purposes, should refer to rewards/income
by virtue of chance or bets. As a rule, prizes and winnings are taxable unless exempt.
9. Pensions & Partners' distributive shares from the income of a GPP
Pensions, like retirement benefits, are generally taxable unless exempt under the law.
10. ANNUITY INCOME
Annuity income refers to specified income payable at stated intervals for a fixed or a
contingent period, often for the recipient's life, in Consideration of a stipulated premium
paid either in prior installment paymentS or in a single payment Annuity payments
received by a taxpayer represent a part which is taxable and not taxable. The amount
received represențing return of premium is considered return of capital, hence, should
be excluded in the determination of taxable income.. In contrast, the annuity received
representing interest or amounts over the premiums paid are considered return on
capital, thus, should form part of the recipient's taxable income.
INFORMER'S AWARD
Income derived as an informer's reward to persons instrumental in the discovery of
violations of the NIRG and in the discovery and seizure of smuggled goods is subject to
10% final tax.
The following rewards shall be subject to a 10% final withholding tax:
1. Those given to persons, except an Internal Revenue official or employee, or
other public official or employee or his relative within the 6" degree of
consanguinity, who voluntarily give definite and sworn information not yet in the
possessIon of the BIR, leading to the discovery of frauds upon the internal
revenue laws or violations of any of the provisions thereof, thereby resulting in
the recovery of revenues, surcharges and fees and/or the conviction of the guilty
party and/or imposition of any fine or penalty.
2. Those given to an informer where the offender has offered to compromise the
violation of law committed by him and his offer has been accepted by the
Commissioner and collected from the offender
EXCLUSIONS from the Gross Income
Exclusions from the gross income refer to flow of wealth to the taxpayers which are not
considered part of gross income for purposes of computing the taxpayers' taxable
income due to the following:
1. It is exempted by the fundamental law or by statute
2. It does not come within the definition of income
The exclusion of income should not be confused with the reduction of gross income by
the application of allowable deductions. Exclusions are not taken into account in
determining gross income, however, deductions are subtracted from the gross income.
Nature of Exemptions from Taxation
Exemptions from taxation is a grant of immunity to particular persons or corporations or
to persons or corporations of a particular class from a tax which persons and
corporations generally within the same jurisdiction are obliged to pay It is an immunity or
a mere "privilege which may be revoked by the government unless the exemption is
founded on a contract which iS protected from impairment. It is freedom from a financial
charge or burden to which others are subjected.
The fundamental theory is that all taxable property should bear its share in the cost and
expense of the government. Consequently, he who claims exemption mụst be able to
justify his claim or right thereto by a grant express in terms "too plain to be mistaken and
too categorical to be misinterpreted." If not expressly mentioned in the law, it must be at
least within its purview by clear legislative intent. In the case of Davao Gulf v.
Commissioner, 293 SCRA 76 (1998), the Supreme Court held that: "A tax cannot be
imposed unless it is supported by the clear and express language of a statute; on the
other hand, once the tax is unquestionably imposed, a claim of exemption from tax
payments must be clearly shown and based on language in the law too plain to be
mistaken.
GROUNDS FOR GRANTING TAX EXEMPTIONS
1. Based on contract, law or treaty.
Based on Law
a. Tax exemptions granted to cooperatives registered under the Cooperative
Development Authority
b. Travel tax exemption as provided for by Presidential Decree (PD) 1183
Based on Treaty
a. Salaries of officials of the United Nations assigned in the Philippines.
b. Citizens of the United States working in consular offices in the Philippines
are exempt from payment of all taxes (national or local, salaries,
allowances, fees, or wages).
c. Salaries of diplomatic officials and agents
Income of any kind, to the extent required by treaty. obligations binding upon the
Government of the Philippines, shall be exempt from income tax. This exclusion IS
based on the principle of international comity
2. Based on some ground of public policy such as to encourage direct foreign
investments, encourage new industries, or foster charitable institutions, and the
like.
a. Tax holidays granted by the Bureau of Investments (BOI) to foreign
investors and pioneer companies in new industries
b. Tax exemptions granted to companies incurring heavy losses due to
legitimate business reverses such as exemption from MCIT
3. Based on grounds of reciprocity or to lessen the rigors of international double or
multiple taxation
a. Exemptions granted to nonresident aliens engaged in trade or business .
TAX EXEMPTION, TAX AMNESTY and TAX CONDONATION
Tax exemption, as discussed in the foregoing paragraphs, refers to a grant of immunity
to particular persons or corporations or to persons or corporations of a particular class
from a tax which persons and corporations generally within the same state or taxing
district are obliged to pay. Tax exemptions are not favored and are construed ​strictissimi
juris ​(strictly) against the taxpayer.
A tak amnesty is a general pardon or intentional overlooking by the State of its authority
to impose penalties on persons otherwise guilty of evasion or violation of a revenue or
tax law/partakes of an absolute forgiveness or waiver by the Government of its right to
collect what otherwise would be due it and, in this sense, prejudicial thereto, particularly
to tax evaders who wish to relent and are willing to reform are given a chance to do so
and therefore become a part of the society with a clean slate [Republic v. Intermediate
Appellate Court, 196 SCRA 335].
Like a tax exemption, a tax amnesty is never favored nor presumed in law, and is
granted by statute. The terms of the amnesty must be strictly construed against the
taxpayer and liberally in favor of the government. Unlike a tax exemption, however, a
tax amnesty has limited applicability as to cover a particular taxing period or transaction
only. On the other hand, there is tax condonation or remission when the State desists or
refrains from exacting, inflicting or enforcing something as well as to restore what has
already been taken. The condonation of a tax liability is equivalent to and is in the
nature of a tax exemption. Thus, it should be sustained only when expressed in the law.
[Surigao Consolidated Mining V. Commissioner of Internal Revenue, 9 SCRA 728]
National government
It is inherent in the exercise of the power to tax that the sovereign state be free to select
the subjects of taxation and to grant exemptions therefrom. Unless restricted by the
Constitution, the legislative power to exempt is as broad as its power to tax.
Local governments
Municipal corporations are clothed with no inherent power to tax or to grant tax
exemptions. But the moment the power to impose a particular tax is granted, they also
have the power to grant exemption therefrom unless forbidden by some provision of the
Constitution or the law. The legislature may delegate its power to grant tax exemptions
to the same extent that it may exercise the power to exempt. In the case of Basco v.
PAGCOR (196 SCRA 52), the Supreme Court held that: "The power to tax municipal
corporations must always yield to a legislative act which is superior, having been
passed by the State itself. Municipal corporations are mere creatures of Congress which
has the power to create and abolish municipal corporations due to its general legislative
powers. Congress can grant the power to tax, it can also provide for exemptions or
even take back the power.
ITEMS OF INCOME OR PROCEEDs EXCLUDED FROM THE GROSS INCOME:
Under Section 32(B) of the Tax Code as amended under RR 10963 (TRAIN Law; RR
&-2018), the following are exclusions from the gross income:
1. Life Insurance - tne proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single Sum or
2.
3.
4.
5.
6.
7.
otherwise, but if such amounts are held by the insure under an agreement to pay
interest thereon, the interest payments shall be included in gross income.
Amount received by the insured as a return of premium. The amount received by
the insured, as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the contract.
Value of property acquired by gratuitous transfer (gifts, bequests, and devises)
but not the income from such property. The value of the property acquired by gift,
bequest, devise, or descent: Provided, however, that income from such property,
as well as gift, bequest, devise or descent of income from any property, in cases
of transters of dividend interest, shall be included in the gross income.
Compensation for Injuries or sickness. Amounts received, through ACCIdent or
Health Insurance or under Workmen's Compensation ACIs, as compensation for
personal injuries or sickness, plus the amounts of any damages received,
whether by suit or agreement, on account of such injuries or sickness.
Income exempt under treaty
Retirement benefits, pensions, gratuities, etc.
Miscellaneous items
a. Income derived by foreign governments
b. Income derived by the government political subdivisions
c. Prizes and awards
d. Prizes and awards in sports competition
e. 13 month pay and other benefits./Gross benefits received by officials and
officials of public and private entities; provided, however.that the exclusion
under this item shall not exceed P90,009 (beginning January 1, 2018 or
upon the effectivity of TRAINLaw) which shall cover
1. Benefits received by officials and employees of the national and
local government pursuant to RA 6686 (An Act Authorizing Annual
Christmas Bonus to National and Local Government Officials and
Employees);
2. Benefits received by employees pursuant to PD 851 (13 Month Pay
Law) as amended by Memorandum Order No. 28 dated August 13,
1986
3. Benefits received by officials and employees not covered by PD
851 as amended by Memorandum Order No. 28 dated August 13,
1986;
4. Other benefits such as productivity and incentives and Christmas
bonus
f. GSIS, SSS, Medicare and Other contributions, and union dues of
individuals
The BIR held in Revenue Memorandum Circular (RMC}No.27-2011
(issued on July 1, 2011) that only the mandatory/compulsory contributions
made by employees to the GSIS, SSS, PHIC and HDMF are excludable
from the gross income of the taxpayer and therefore exempt from income
tax and withholding tax. Amounts in excess of mandatory/compulsory
contributions shall be subject to income tax.
g. Gains from sale of bonds debentures, and other certificates of
indebtedness with maturity of more than five (5) years; and
h. Gains from redemption of shares in mutual funds./Gains realized by the
investor upon redemption of shares of stock in a mutual fund company as
defined under Section 22(BB) of the Tax Code as follows.
Section 22(BB) NIRC The tem "mutual fund company' shall mean
an open-end and closed-end investment company as defined under the
Investment Company Act.
i. Statutory minimum wage earners
j. Income of nonresidents from transactions with offshore banking units and
depository banks under the expanded foreign currency depository system
k. Incomes and gains subject to final withholding taxes
Assessments
Juan Dela Cruz presented to you the following income for 2018:
Basic salary (net of withholding tax)
P 900,000
Withholding tax on basic salary
300,000
Directors fee
200,000
Business income:
1. Retail business
250,000
2. Apartment rental (net)
190,000
Business Expense
125,000
Cash dividend:
1. from a domestic corporation
50,000
2. from a domestic corporation
50,000
Stock dividend from a domestic corporation
25,000
Interest from savings deposit
20,000
Royalties from book publications 13 mónth pay
50,000
Prizes from contest won
50,000
PCSO winnings
13 mónth pay
50,000
100,000
Christmas bonus
30,000
Damages received from injuries and sickness Proceeds from the
life insurance coverage of his deceased father
85,000
Proceeds from the life insurance coverage of his deceased father
300,000
Determine the following
1. Gross income subject to graduated rate
2. Total final taxes on passive income
3. Total income subject to tax
4. Income tax dure.
References
Tabag, Enrico D and Garcia, Earl Jimson R. Income Taxation with Special Topics in
Taxation. 2019
https://www.aseanbriefing.com/news/corporate-taxes-philippines/