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Taxation: General Principles, Theories, and Limitations
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GENERAL PRINCIPLES INTRO Citizen (Taxpayer) → revenue/income (taxes) Sovereign/State PH Government (Congress/Legislative) free education infrastructure national defense health ⇓ PUBLIC PURPOSE PURPOSE 1. PRIMARY to raise revenue 2. SECONDARY regulatory compensatory regulate/control sin tax aka sumptuary reduction of social inequality 1. NECESSITY THEORY THEORY AND BASIS OF TAXATION existence of government is necessary existence of taxation is necessary 2. LIFEBLOOD THEORY/DOCTRINE without taxation, the government cannot exist 3. BENEFITS-PROTECTION THEORY reciprocal duties symbiotic relationship CHARACTERISTICS OF TAX 1. Forced contribution 2. Generally payable in money 3. Levied for public purpose 4. Exclusively levied by legislature 5. Levied within territorial and legal jurisdiction of the state 6. Proportionate in character 1. INHERENT POWER OF THE STATE a. TAXATION b. EMINENT DOMAIN for the benefit of the public law making body/congress ex. VAT. Mas tumataas ang base mas tumataas ang tax na binabayaran mo NATURE OF TAXATION levying or imposition of tax (strongest power) power to raise revenue (FOOD) strongest of all inherent powers taking of private property for public purpose upon payment of just compensation broader in application c. POLICE POWER 2. LEGISLATIVE IN CHARACTER Branches of Government enactment of laws Promote public welfare (sovereignty) Safety, Protection Roles: a. LEGISLATIVE (Inherent Power) Imposition/enactment of tax laws vested exclusively in the congress/legislature 2 Houses: 1. SENATE (Upper house) 2. HOUSE OF REPRESENTATIVE (Lower house) Paano ba nagkakaroon ng tax laws? 1. Congressman will offer a bill 2. Sa HOR magkakaroon ng series of deliberation, magkakaron ng house version 3. Yung house version dadalhin sa senate 4. Magkakaron din ng series of deliberation, then magiging senate version 5. Bicam - magkakaron kapag merong conflict. This is to reconcile 6. Final is kay President na. pwedeng iveto or i-okay. Once na pirmahan, magiging batas na yan. b. EXECUTIVE (Delegated Power) Composed of: 1. PRESIDENT appoints cabinet members 2. VICE PRESIDENT c. JUDICIARY interpretations of tax laws Composed of: 1. HIGHEST COURT 2. LOWER COURTS 3. SUBJECT TO INHERENT & CONSTITUTIONAL LIMITATIONS administrative function assessment collection Supreme Court a. CTA b. Court of Appeals c. RTC d. MTC the power of taxation is not absolute ASPECTS OF TAXATION 1. Levying or Imposition 2. Assessment and Collection 1. FISCAL ADEQUACY PRINCIPLE OF A SOUND TAX SYSTEM (FAT) should be sufficient revenue > expenses 2. ADMINISTRATIVE FEASIBILITY capable of convenient, just and effective administration (taxes are not excessive, not too little) clear tax laws 3. THEORETICAL JUSTICE based on ability to pay of the taxpayers evidence by the progressive tax system INHERENT LIMITATIONS (PENIS) 1. Public purpose hindi pwedeng gamitin for private interest GSIS, SSS, Philhealth, Local Water Districts- because 2. Exemption of the government they are already for the public purpose 3. Non-delegability of the taxing power Exception: a. Administrative Function like BIR b. Delegations to LGUs c. Delegations to the President to fix Tariff Rates 4. International comity you cannot tax another state 5. Situs of taxation (Territoriality) place of taxation Subject Matter Persons Real property Tangible personal property Intangible personal property Income Business Situs Residence of the taxpayer Location Location Domicile of the owner Residence, citizenship, source of income Place of business CONSTITUTIONAL LIMITATIONS 1. Due process of law person/properties with same condition and circumstances will be 2. Equal protection of law taxed the same person/properties with same territory and jurisdiction will be taxed 3. Uniformity in taxation the same 4. Progressive system 5. Non-imprisonment for non-payment of poll tax this is cedula/community tax 6. Non-impairment of obligations and contracts 7. Free worship clause 8. Exemption of religious, charitable, non-profit cemeteries and churches and mosque from property taxes 9. Exemptions from taxes of the revenues and assets of non-profit, non-stock educational institutions Ex. State Colleges and Universities Note: for items #8 and #9, Before you actually be exempted to tax , your properties and revenues must be ACTUALLY, DIRECTLY, EXCLUSIVELY used for REC 10. Non-appropriation of public funds or property for the benefit of any church, sect, religion 11. No money shall be paid out of Treasury except in pursuance of an appropriation 12. Concurrence of majority of all the members of the Congress for the passage of law granting tax exemption 13. Non-diversification of tax collections 14. Non-impairment of the jurisdiction of the Supreme Pag si SC na ang nagdecide- it's final and irrevocable, Court to review tax cases and executory 15. Appropriation, revenue, tariff bills must originate from House of Representatives but the Senate may propose or concur with amendments 16. The President shall have the power to veto any particular item(s) in an appropriation, revenue or tariff 17. LGUs can create its own sources of revenues (delegation of taxing power to LGUs) OTHER CHARGES AND FEES 1. Toll 2. Penalty 3. Special assessment 4. License fee 5. Customs duty/tariff 6. Debt 7. Subsidy 1. AS TO SUBJECT MATTER 2. AS TO BURDEN 3. AS TO TAXING AUTHORITY/JURISDICTION 4. AS TO DETERMINATION OF AMOUNT 5. AS TO GRADUATION OR RATES expressways levied on land import and export government aid (ayuda) Excise CLASSIFICATION OF TAXES imposed on individuals imposed on properties a. personal b. real imposed on rights and priveleges Direct liable and sya din yung nagbayad Indirect liable but di sya din yung nagbayad National imposed by congress Local imposed by LGU Personal Property Specific Ad Valorem Proportionate/Flat Progressive/Graduated Tax Regressive Mixed PDIVES: a. income b. donor's c. estate d. VAT a. Income tax b. donor's c. estate a. Business Taxes (VAT and OPT) 1. P ercentage Tax 2. D onor's Tax 3. I ncome Tax 4. V AT 5. E state Tax 6. Doc S tamp per unit basis, per meter, per kilogram, per piece according to value/fixed proportion based on fixed percentage tax rate ⇑ as tax base ⇑ residual definition combination of theses taxes 1. DIRECT DOUBLE TAXATION DOUBLE TAXATION highly discouraged because unconstitutional 2. INDIRECT DOUBLE TAXATION no violation Primary Element: Secondary Elements: Same Object Same Taxing Authority Same Tax Period Same Tax Type Direct? Indirect? / / / Ex. Community Tax P5/Head Ex. % of selling price Ex. VAT Ex. Income Tax walang ganito sa PH ESCAPE FROM TAXATION THOSE THAT WILL RESULT TO LOSS 1. Tax Evasion 2. Tax minimization or avoidance 3. Tax Exemption illegal legal immunity from tax THOSE THAT WILL NOT RESULT TO LOSS 1. Shifting 2. Capitalization 3. Transformation transfer of burden (VAT, OPT) legal seller will ⇓ the price provided tax will be shouldered by the buyer manufacturer will absorbs taxes without passing to buyer (⇑ production, ⇓ unit cost) SOURCES OF TAX LAWS 1. Constitution Local Government Code 2. Tax Code NIRC, TRAIN, CREATE 3. Presidential Decrees/Statutes/Executive Orders (EOs) 4. Tax Treaties (DTA) 5. Court Decisions (Supreme Court) 6. Bir rulings 7. Revenue Issuances (Interpretations, Guides) a. Revenue Regulations (RRs) b. Revenue Memorandum Ordes (RMOs) c. Revenue Memorandum Circulars (RMCs) 8. Local Tax Ordinances Issued by the President Guidance Orders/Directives Information for new laws BIR ORGANIZATIONAL STRUCTURE ⇓ Operations Group ⇓ Revenue Regional Offices (19) ⇓ Revenue District Offices (124) ⇓ Legal Group CIR ⇓ Info Syst Group ⇓ Resource Mgmt Assessment and Collections POWERS OF THE COMMISIONER 1. To interpret the provisions of the NIRC, subject to review by the Secretary of Finance 2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals 3. To obtain information and to summon, examine and take testimony of persons to effect tax collection (subpoena) 4. To make assessment and prescribe additional requirements for tax administration and enforcement 5. To examine tax returns and determine tax due thereon 6. To conduct inventory taking or surveillance 7. To prescribe presumptive gross sales and receipts for a taxpayer when: a. The taxpayer failed to issue receipts b. The CIR believes that the books or other records of the taxpayer do not correctly reflect the declaration in the return 8. To terminate tax period when the taxpayer is a. Retiring from business b. Intending to leave the Philippines c. Intending to remove, hide, or conceal his property d. Intending to perform any act tending to obstruct the proceedings for the collection of the tax or render the same ineffective 9. To prescribe real property values 10. To compromise tax liabilities of taxpayers 11. To inquire into bank deposits, only under the following instances: a. Determination of the gross estate of a decedent b. To substantiate the taxpayer's claim of financial incapacity to pay tax in an application for tax compromise 12. To accredit and register tax agents 13. To refund or credit internal revenue taxes 14. To abate or cancel tax liabilities in certain cases 15. To prescribe additional procedures or documentary requirements 16. To delegate his powers to any subordinate officer with a rank equivalent to a division chief of an office INDIVIDUALS INTRO TYPES OF INDIVIDUALS } 1. Employed 2. OFW 3. Businessman 4. Professional 5. Investments Income Called employment income business income professional income passive income Where Income Taxable? Philippines Abroad (within) (without) CONSIDERATIONS 1. Classification of Taxpayers Resident Citizen Non Resident Citizen Resident Alien Non Resident Alien ETB NETB 2. Type of Income 3. Amount of Income 1. RESIDENT CITIZEN (RC) 2. NON RESIDENT CITIZEN (NRC) CLASSIFICATION OF INDIVIDUAL TAXPAYERS Filipino citizen residing in the Philippines Natural Born Naturalized Physical presence abroad with definite intention to reside therein Immigrant or for employment on a permanent basis (OFW, Seaman) Employment; most of the time (≥ 183 days) Dating matagal na sa abroad tapos let's say nag retire na and bumalik na sa Philippines for good 1/1/2023 NRC 3. RESIDENT ALIEN (RA) Not a Filipino Citizen Not a transient or sojourner Definite purpose ; extended stay No definite intention as to his stay 4. NON RESIDENT ALIEN (NRA) a. Engaged in Trade or Business (ETB) b. Not Engaged in Trade or Business (NETB) 4/1/2023 DATE OF ARRIVAL RC 12/31/2023 actually engaged in trade or business in the PH aggregate period of > 180 days (not necessarily tuloy tuloy. Basta on a taxable year, yung lahat ng days na inistay nya here in the PH) residual definition definite purpose; promptly accomplished NOTE: if you stay in the PH for ≥ 2 years , you will acquire residence status SITUS SUBJECT MATTER Persons Real property Tangible personal property Intangible personal property Business Service Shares of stocks SITUS Residence of the taxpayer Location Location Domicile (residence) of the owner (Examples: bank deposits, insurance policies, franchises, copyrights, receivables) Place of business Place of performance Nationality of the issuing corporation DEFINITION Classification of Taxpayer RC (Tax table) NRC (Tax table) RA (Tax table) NRAETB (Tax table) NRANETB (25% FWT based on Gross Income) BASIC INCOME TAX (GRADUATED INCOME TAX) applies to active income Source/ Type of Income Compensation Tax Table Self-employed/ Professionals Add: Non Operating Income Gross Sales/Receipts xx xx xx Total ≤ 3M Tax Table OR 8% income tax option (in excess of 250K) Mixed Compensation > 3M Tax Table Tax Table Bus/Profession Gross Sales/Receipts xx xx xx Add: Non Operating Income Total ≤ 3M Tax Table OR 8% income tax option (DO NOT deduct 250K) NOTE: > 3M Tax Table a. In taxation, the meaning of Gross Sales are NET of Sales Returns, Allowances, and Discounts (Gross Sales in Taxation = Net Sales in Accounting) b. 8% option- in lieu of the graduated tax rate & 3% percentage tax (this is 1% from July 1, 2020 to June 30, 2023- CREATE LAW) Qualifications to be subjected to 8%: 1. You must be subject to 3% or 1% OPT 2. Your business must be non vat registered 3. The business is not engaged in vat exempt transactions 4. The business is not subjected to OTHER % taxes c. If you opted to be taxed at 8%, you must signify it on your 1st quarter ITR and it will be irrevocable for the rest of the year (But kahit nagsignify, icheck mo muna yung treshhold na 3M) NOTE: Income taxes paid abroad can be claimed as Tax Credit by Resident Citizens subject to limit Actual Tax Paid VS Limit: Taxable Income Abroad Taxable Income World WHICHEVER IS ⇓ DEFINITION FINAL TAX applies to certain passive income withheld at source paid by the payor/withholding agent no longer part of taxable income x Tax Due SUBJECT TO PREDOMINANCE TEST *assuming it passed the predominance test (earned inside the Philippines) If the ratio of Philippine gross income over the world gross income in the 3-year period preceding the year of declaration is: a. At least 50%, the entire dividend corresponding to the Philippine gross income ratio is earned INSIDE the Philippines; hence, taxable in the Philippines b. Less than 50%, the entire dividend received is earned OUTSIDE the Philippines; hence not taxable in the Philippines **assuming it did not pass the predominance test (earned outside the Philippines) NATURE CREDITABLE WITHHOLDING TAXES Can be deducted from Basic Income Tax Income subject to CWT is part of Taxable Income TYPES 1. Withholding Tax on Compensation (CWT) estimated income tax payments. All paid WT on Compensation will be deducted on the annual ITR 2. Expanded Withholding Tax a. Professional Fees, Talent Fees, etc. for services rendered Individuals Annual income not exceeding Php3M Annual income exceeding Php3M TAX RATE 5% 10% Corporations Annual income not exceeding P720k Annual income exceeding P720k 10% 15% b. Rentals c. Payments to certain contractors General engineering constructions, general building contractors, specialty contractors, other contractors d. Income payments to beneficiary of the Estate and Trust e. Income payments to partners of GPP Annual income not exceeding Php3M Annual income exceeding Php3M 5% 2% Gross Rental Gross Paymts 2% Income Dist. 10% 15% CAPITAL GAINS TAX DEFINITION sale of Capital Assets TYPES 1. Sale of Domestic Stocks DIRECTLY to buyer must be unlisted Can be: a. Sale b. Exchange c. Other Disposition Selling Price Cost Selling Expenses Net Gain xx (xx) (xx) xx TAX RATE 15% Commission Expense Doc Stamp, assumed by seller! * NOTE: if listed/through the PSE - Stock Transaction Tax 2. Sale of Real Property GSP FMV Assessed Value Zonal Value (BIR) 3. OTHERS (Dealings in Properties) Net gain* } 60% of 1% GSP whichever is ⇑ 6% RIT NOTE : These CGT are appliicable to all types of Individuals DEFINITION MINIMUM WAGE EARNERS Earning not > the statutory minimum wages Sectors: Private Sector paid the statutory minimum wage compensation ≤ statutory minimum wage in the non-agricultural Public Sector sector NOTE: the minimum wage is set by National Wages & Productivity Commision (NWPC) this is under DOLE for MWE, they are exempt from income tax and HHON: Holiday Pay Overtime Pay Hazard Pay Nightshift Differential CORPORATIONS CLASSIFICATION OF CORPORATE TAXPAYERS 1. DOMESTIC CORPORATION (DC) 2. RESIDENT FOREIGN CORPORATION (RFC) 3. NON RESIDENT FOREIGN CORPORATION (NRFC) created and organized under Philippine Laws Example: BDO, BPI, PLDT, Globe, JFC, Cebu Pac, Ayala, etc. created and organized under Foreign Laws but they have operations here in the Philippines Example: McDonalds, Uniliver, Nestle, Coca-cola, Toyota, etc. created and organized under Foreign Laws and no operations here in the Philippines 1. DOMESTIC CORPORATION (DC) Net Taxable Income ≤ 5M Exemption to the rule Where Income Taxable? Philippines Abroad (within) (without) COMPARISONS TAX RATES 25% effectivity date: July 1, 2020 AND TAX BASE Net Taxable Income 20% Total Assets ≤ 100M excluding land usually they are the Micro-Small Medium Enterprises 2. RESIDENT FOREIGN CORPORATION (RFC) 3. NON RESIDENT FOREIGN CORPORATION (NRFC) 25% effectivity date: July 1, 2020 Net Taxable Income 25% (FWT) effectivity date: January 1, 2020 Gross Income BASIC INCOME TAX RCIT Base: NTI 25%/20% NOTE: MCIT Base: GI 2%/1% NOTE: this 20% is applicable only to DOMESTIC CORPORATIONS TYPES NOTE: whichever is ⇑ between the two, ayun ang ibabayad mo kay BIR 1. this 1% is applicable only from JULY 1, 2020 to JUNE 30, 2023 for the purpose na makarecover ang mga businesses during pandemic. Back to 2% after June 30, 2023 2. applicable only to DC and RFC 3. effective beginning the 4th taxable year following the commencement of business operations (+ 4 ka lang lagi) IF SILENT ANG PROBLEM, COMPUTIN MO YAN. 4. excess MCIT (MCIT > RCIT) can be: carried over for 3 years credited against RCIT if RCIT > MCIT (before considering the excess MCIT) 5. Computed quarterly and annually FORMAT Gross Income Less: Allow. Deduction Net Taxable Income Tax Rate Tax Due WHAT IS GROSS INCOME IN: Sale of Goods Gross Sales Less: SR, A, D Gross Income xx (xx) xx % xx Sale of Services Gross Receipt Less: A, D Gross Income Excludes income subject to FIT and CGT WHAT KIND: Itemized Deductions these are actual expenses Optional Standard Deductions (OSD) estimated 40% of Gross Income NOTE: the type of deduction you will avail must be signified on the first quarter of your ITR, if not- then itemized ( silent). kung ano yung pinili mo nung quarter 1, irrevocable na sya for the rest of the year WHO CAN AVAIL THE 40% OSD? INDIVIDUAL YES? RC NRC RA NRA NRANETB NET OF DISC & ALLOW Gross Sales/Receipts x 40% OSD kasi nga hindi naman sila tax table Gross Sales/Receipts Less: COGS/COS Gross Income CORPORATIONS DC RFC GPP Other Entities on which rules on DC applies NRFC xx (xx) xx Gross Income x 40% OSD NOTE: In taxation, the meaning of Gross Sales are NET of Sales Returns, Allowances, and Discounts (Gross Sales in Taxation = Net Sales in Accounting) DEFINITION FINAL WITHHOLDING TAX applies to certain passive income withheld at source paid by the payor/withholding agent no longer part of taxable income xx (xx) xx xx (xx) xx *assuming it passed the predominance test (earned inside the Philippines) If the ratio of Philippine gross income over the world gross income in the 3-year period preceding the year of declaration is: a. At least 50%, the entire dividend corresponding to the Philippine gross income ratio is earned INSIDE the Philippines; hence, taxable in the Philippines b. Less than 50%, the entire dividend received is earned OUTSIDE the Philippines; hence not taxable in the Philippines **assuming it did not pass the predominance test (earned outside the Philippines) *** requisites for exemption: dapat ma-meet ito lahat 1. Funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation in the Philippines. 2. Reinvestment should be made within the next taxable year from the time foreign-sourced dividends where received. 3. Reinvestment is limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure project. 4. The DC holds directly at least 20% of the outstanding shares of the foreign corporation. 5. It has held the shareholdings for a minimum of 2 years at the time of dividend distribution. ****15% if with tax sparing; 25% if without tax sparing CAPITAL GAINS TAX DEFINITION sale of Capital Assets TYPES 1. Sale of Domestic Stocks DIRECTLY to buyer must be unlisted Can be: a. Sale b. Exchange c. Other Disposition Selling Price Cost Selling Expenses Net Gain xx (xx) (xx) xx TAX RATE 15% Commission Expense Doc Stamp, assumed by seller! * NOTE: if listed/through the PSE - Stock Transaction Tax 2. Sale of Real Property GSP FMV Net gain* } Assessed Value Zonal Value (BIR) 60% of 1% GSP whichever is ⇑ 3. OTHERS (Dealings in Properties) 6% RIT NOTE : CGT for Real Property is not appliicable to RFC and NRFC. Because they are prohibited to own land here in the PH except through inheritance SPECIAL CORPORATIONS DEFINITION INTRO they are subject to preferential tax rates TYPES 1.a PROPRIETARY EDUCATION INSTITUTION CAN BE: Classification: DOMESTIC 1% from July 1, 2020 to June 30, 2023 10% back to 10% after Tax Base is NTI DepED CHED primary and secondary tertiary and post grads is GI related is > GI unrelated? subject to predominance test YES 1% or 10% NO treated as REG CORP TAX RATE RCIT 25%/20% a. Private Schools b. Gov't/Public Schools c. Non Stock non Profit ex. UST, DLSU etc ex. UP, PUP, etc. ex. Mga school foundations 1.b NON PROFIT HOSPITALS CAN BE: Classification: same rules above a. Private Hospitals (for Profit) b. Gov't/Public Hospitals c. Non Profit Hospitals ex. Makati Medical Hosp ex. Phil. Heart Center ex. St. Lukes Medical Center MCIT 1%/2% applies preferential tax above EXEMPT from Income Tax! EXEMPT from Income Tax! But they are still subject to FIT and CGT! treated as regular corporations EXEMPT from Income Tax! applies preferential tax above RCIT 25%/20% MCIT 1%/2% But they are still subject to FIT and CGT! DOMESTIC 2. NON STOCK NON PROFIT EDUCATIONAL INSTITUTIONS & AND OTHER NON PROFIT ORG CAN BE: Classification: DOMESTIC all assets and revenues used actually, directly, and exclusively for educational purposes a. Charitable b. Religious ex. Gawad Kalinga, Bantay Bata ex. Catholic Church, INC 3. INCOME FROM INTERNATIONAL CARRIERS Classification: RFC on their gross philippine billings HINDI SILA YUNG PAL, OR CEB PAC WHAT IS GPB? this is the gross revenue derived from EXEMPT from Income Tax and RPT! EXEMPT from Income Tax and RPT! TAX RATE 2.5% Passenger Cargo Mail NONSTOP: PH CONNECTING: PH FLIGHT 4. NON RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR, OR DISTRIBUTOR 5. NON RESIDENT LESSOR OF AIRCRAFT, MACHINERIES, AND OTHER EQPT 6. NON RESIDENT LESSOR OF VESSELS CHARTERED BY PH NATIONALS 7. REGIONAL OPERATING HEADQUARTERS EARNING INCOME FROM PH (ROHQ) MERON SILANG OPERATIONS IN THE PHILIPPINES 8. REGIONAL OR AREA HEADQUARTERS WALA SILANG OPERATIONS SA PHILIPPINES; NO INCOME DERIVED WITHIN Classification: ex. Marvel Studios NRFC But they are still subject to FIT and CGT! from PH in a continous and uninterrupted flight meaning OUTGOING FLIGHT! JAPAN HK is same carrier? YES NO USA EXEMPT! TAX RATE 25% Classification: NRFC TAX RATE ex. si PAL and CebPac, nilelease lang nila 7.5% yung mga planes nila FROM: SMBC (Japan) yung binayabad sa kanila ni PAL and CebPac, masusubject sa 7.5% AVALON (Ireland) tax rate Classification: ex. Maerks Company NRFC TAX RATE 4.5% Classification: RFC TAX RATE ex. BPOs like Accenture, 25% Teleperformance, etc. Kaya nag boom yung call center before kasi mababa ang tax sa PH Classification: RFC AIR 7.5% SEA 4.5% now subject to 25% RCIT and 2% MCIT (taxable as regular RFC) dating 10% FT taxable based on NTI MAGIGING REG CORP SYA JANUARY 1, 2022!! TAX RATE EXEMPT from Income Tax and RPT! 9. INCOME OF OBUs AND FCDUs OBU: FCDU: 10 BRANCH PROFIT REMITTANCE Classification: RFC TAX RATE 25% Division of a foreign bank (ex. CitiBank) engaged sa local currency transactions Division of a local bank (ex. BDO) engaged sa foreign currency Classification: RFC TAX RATE 15% ACCENTURE PH (Branch) now subject to 25% RCIT and 2% MCIT (taxable as regular RFC) dating exempt or 10% FT IMMEDIATELY UPON EFFECTIVITY OF CREATE LAW! (April 11, 2021) this is based on total profit applied or earmarked to BSP ACCENTURE IRELAND Remit (Head Office) (SUBJECT TO 15%) Note that the subject to 15% is NOT the actual remittance but the EXEMPT GOCCs INTRO WHY? they are for public purpose 1. Government Service and Insurance System (GSIS) 2. Social Security System (SSS) 3. Home Development Mutual Fund (HDMF) / PAG-IBIG 4. Philippine Health Insurance Corporation (Philhealth) 5. Local water districts EXEMPT CORPORATION CRITERIA as long as hindi for profit 1. not for profit 2. without profit 3. exlusive benefit for members 4. exclusively for religious, educational, charitable no part of its income enure to the benefit of member, officer, organizer, or any specific person 5. not organized for profit 6. non stock and non profit educational institution 7. government educational institution 8. sole purpose of meetng its expenses 9. purpose of marketing the products of its members and turning back to them PARTNERSHIP, CO-OWNERSHIP, AND JOINT VENTURE PARTNERSHIP RCIT/MCIT ORDINARY PARTNERSHIP (General/Commercial/Business/Partnership in Trade) taxed as Regular Corporation TYPES FWT CGT ( Includes income subject to FWT & CGT) ⇑ in capital of the partners OP RCIT (20%/25%) MCIT (1%/2%) B C Distibutive Share Dividends (10% FWT) A (Partners but treated as shareholders) ITR ITR ITR yung share nila from the partnership will not form part of the ITR GENERAL PROFESSIONAL PARTNERSHIP exempt on Income Taxation ( Includes income subject to FWT & CGT) ⇑ in capital of the partners GPP EXEMPT on Income Tax Distibutive Share (actually or contructively received) A B C (Partners but treated as shareholders) ITR ITR ITR yung share nila from the partnership will form part of the ITR ( excludes income subject to FWT & CGT) NOTES FOR GPP: 1. GPP and the partners may claim itemized deductions or OSD 2. Kapag yung partners nag opted to use OSD, ang basis mo is Gross Sales/Receipt and then wag mo isasama doon yung share mo sa NI ng partnership. After mo macompute yung OSD mo, don mo palang i-aadd yung share mo sa NI ng partnership. Gross Sales/Receipts less: 40% OSD Share in NI of Partnership Net Taxable Income 3. 8% option is not allowed to the partners xx (xx) xx xx ≤ 720k RATE 10% > 720K 15% 4. Actual distribution is subject to CWT DEFINITION CO-OWNERSHIP When two or more heirs inherit an undivided property from a decedent or a donor. Makes a gift of undivided property in favor of two or more persons or donees. Inheritance (Estate Tax) A&B received a property (ex. Farm/Land) SUBJECT: Farm/Land Gift (Donor's Tax) mere preservation of property (ex. fertilizing, pest control) General Rule: EXEMPT from Income Tax!!! colletion of income (ex. harvest) EXEMPT EXEMPT on Income Tax Distibutive Share (actually or contructively received) Exception to the rule: A B ITR ITR TAXABLE as a regular Corporation (Co-owners but treated as shareholders) beyond mere preservation (ex. Nireinvest mo, or from original 200 mangoes nagdagdag ka ginawa mong 300 mangoes, intent to make profits) the property remained undivided for 10 years TAXABLE RCIT (20%/25%) MCIT (1%/2%) Dividends (10% FWT) A B ITR ITR (Co-owners but treated as shareholders) NOTE: ang pagbebenta ng property is still not beyond mere preservation. Sa madaling salita, co-ownership pa din DEFINITION JOINT VENTURE combination of two or more parties that seek the development of a single enterprise or project for profit, sharing the risks associated with its development. General Rule: All JV are TAXABLE as a regular corporation RCIT MCIT RCIT (20%/25%) TAXABLE JV MCIT (1%/2%) A B ITR ITR (Co-venturers but treated as shareholders) Unlike in Partnership and Co-ownership-- in JV, the co-venturers can be: Natural (Individual) Dividends (10% FWT) Juridical (Corporation) For Taxable JV: so kapag ang coventurers ay Corporation, kapag nagdeclare ng dividend si JV, edi Exempt ang co-venturer JOINT VENTURE Gross Income Less: AD Net Taxable Income Tax Due 25% Less: CWT (if any) IT Payable/Still Due CO-VENTURERS Gross Income (personal) Less: AD Net Taxable Income Tax Due (TT or 25%) Less: CWT (if any) IT Payable/Still Due xx (xx) xx xx (xx) xx xx (xx) xx xx (xx) xx JVs undertaking construction projects Exception to the rule: EXEMPT from Income Tax!!! JVs engage in energy agreement with the government (ex. Malampaya Project) EXEMPT JV EXEMPT on Income Tax Distibutive Share (actually or contructively received) A B ITR ITR (Co-venturers but treated as shareholders) Natural (Individual) Unlike in Partnership and Co-ownership-- in JV, the co-venturers can be: Juridical (Corporation) JOINT VENTURE Gross Income Less: AD Net Income xx (xx) xx CO-VENTURERS Gross Income (personal) Add: Share Total Gross Income Less: AD Net Taxable Income Tax Due (TT or 25%) Less: CWT (if any) IT Payable/Still Due xx xx xx (xx) xx xx (xx) xx ESTATE DEFINITION INTRO Properties, Rights, and Obligations Illustration: Mr. X (Father) - died; DECEDENT Estate A Property HEIRS B Earns income (ex. Rental Income, Interest Income, etc) let's say they are twins tapos 10y/o palang (underage) so mag eengage sila ng Trustee/Fiduciary 1-Jan 1-Jul 1-Dec Mr. X Died WHO IS THE TAXPAYER? Mr. X ??? It depends Under Judicial Settlement (with administration . There is a last will and testament) Under Extra-Judicial Settlement ( no last will and testament left) NOT Taxable as a separate entity. Meaning: the income of the estate is to be declared by the beneficiaries Rules of Co-ownership applies Heirs/Beneficiaries files the ITR on behalf of the estate (liable in their separate capacity) Taxable as if: INDIVIDUAL Fiduciary/Trustee files the ITR on behalf of the estate ESTATE JUDICIAL SETTLEMENT share (distribution) Taxable as Indiviual !! share (distribution) A ITR B ITR xx (xx) (xx) xx xx xx Additional (special) Deduction sa ITR ni HEIR Ordinary Income must be out of current year income subject to 15% CWT flat rate!! Unlike sa GPP, may threshhold, dito wala. ESTATE Gross Income Less: Expenses Less: Distribution Net Taxable Income tax table Tax Due sa ITR ni ESTATE x 15% CWT HEIR/BENEFICIARY Gross Income xx Less: Expenses (xx) Add: Distribution xx Net Taxable Income xx tax table xx Tax Due xx Less: CWT (xx) Tax Still Due/Payable xx ESTATE EXTRA-JUDICIAL SETTLEMENT EXEMPT!!! share (distribution) share (distribution) A ITR B ITR ESTATE Gross Income Less: Expenses Net Income Tax Due xx (xx) xx EXEMPT! Paghahatian ng Beneficiaries/Heir, irereport nila on their separate capacity NOTE: Walang distribution kapag Extra-Judicial HEIR/BENEFICIARY Gross Income xx Less: Expenses (xx) Add: Share in Net Income xx Net Taxable Income xx tax table xx Tax Due xx NOTE: Walang CWT since walang distribution kay Estate TRUST DEFINITION INTRO a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Illustration: Kris Aquino - GRANTOR/ TRUSTOR buhay pa Trust Fund Josh Usually, Cash BENEFICIARIES Bimby mayroon 3rd party na nagmamanage, called: TRUSTEE/FIDUCIARY RULES: IRREVOCABLE (permanent na. meaning, tinatransfer na ni Kris yung control to Josh and Bimby) Taxable as SEPARATE ENTITY Taxable as if: INDIVIDUAL Not part of Gross Estate ni Kris kapag namatay sya in the future REVOCABLE (anytime, pwedeng bawiin ni Kris. Meaning, sya pa din ang may-ari.) The taxpayer is the GRANTOR (Kris Aquino, since sa kanya pa din naman at buhay pa sya) Part of Gross Estate ni Kris kapag namatay sya TRUST IRREVOCABLE share (distribution) Taxable as Indiviual !! share (distribution) sa ITR ni TRUST Ordinary Income subject to 15% CWT flat rate!! Unlike sa GPP, may threshhold, dito wala. sa ITR ni BENEFICIARY Josh ITR Bimby ITR TRUST REVOCABLE share (distribution) EXEMPT!!! share (distribution) Josh ITR Bimby ITR Additional (special) Deduction Ang taxable dito ay si Grantor! GROSS INCOME INTRO FORMAT Gross Income Less: Allowable Deductions Net Taxable Income xx (xx) xx Individual Taxtable/8% Corporation RCIT/MCIT DEFINITION gain derived from labor, capital, and sale of assets excludes items that are exempt, and subject to FWT and CGT ordinary income/returnable income (ITR) Inclusions retun ON capital Exclusions retun OF capital DISCUSSION 1. COMPENSATION INCOME INCLUSIONS arises from employer-employee relationship Salaries Add: OT Pay Add: Allowances Add: 13th Month Pay Add: Other Benefits Total Less: Mandatory Deductions Taxable Compensation Income subject to 90,000 limit ceiling 2. BUSINESS INCOME xx xx xx xx xx xx (xx) xx Trading Sales Less: COGS Gross Profit xx (xx) xx Manufacturing 3. SERVICE/PROFESSIONAL INCOME 4. GAINS DERIVED FROM DEALINGS IN PROPERTIES Gross Revenue/Receipts Less: Cost of Services Gross Profit Capital Assets CGT Ordinary Assets used in business 5. RENT INCOME xx (xx) xx arises from lessor-lessee relationship use of property Landlord Tenant rent payment Rentals Composition Monthly Advanced Deposit Refundable Applied to the last month of the lease Any obligations of the lessor assumed by the lessee Insurance RPT Leasehold improvements recognize income by the lessor in two ways : 1. Outright 100% irerecognize mo agad. This is = to FMV 2. Spread Out SL method over the lease term Compute the BV, at the end of LT Step: Cost Accum Dep'n BV, end of LI xx (xx) xx Divide by LT LHI per year x years xx remaining LT over UL Note: Dep'n is based on UL Cost UL x remaining LT Example: 6. INTEREST INCOME other than those in FWT Composition Bank Deposit Bank Deposit (Aboroad) Notes Receivable 7. ROYALTIES other than those in FWT Composition Within the PH Outside the PH 8. DIVIDEND INCOME FWT FWT other than those in FWT (see dicussion in Individual and Corporation sheet) Composition FWT Exempt Taxable OI Types of Dividends Cash Property Liquidating Dividens Stock TAXABLE? / not taxable up to the cost of investment generally not taxable. Exception to the rule: if the payment of stock / dividends results to ∆ in ownership 9. ANNUITIES this is a series of payments, common in retirements Example: Bibili ka ngayon for 1,000,000 then babayaran ka yearly until you die (10 years to pay) y0 paid 1M y1 to y10 babayaran ka 100K each year for 10 years RETURN OF y11 onwards RETURN ON 10. PRIZES AND WINNINGS Within the PH Composition Outside the PH Prizes Winnings Individual ≤ 10K Corporation regardless of amount kapag corporation 11. PENSION when failed to meet the exclusion criteria 12. PARTNER'S DISTRIBUTIVE SHARE IN NET INCOME OF GPP & EXEMPT JV 13. BAD DEBT RECOVERY POV ni BIR: Direct Write Off method lang Tax Benefit Rule: if in the year of write off, there was a reduction in Taxable Income, then the BD recovery will be part of the Taxable Income 14. TAX REFUNDS If wala dito sa listahan below, then magiging part ng Gross Income a. Income Tax b. Estate Tax c. Donor's Tax d. Income tax paid to foreign country if claimed as tax credit e. STT (6/10 of 1%) d. VAT Non Taxable (major topics) 15. CANCELLATION OF DEBT rendered services Scenario 1: Debtor Creditor Compensation Income Creditor Gift (Donor's Tax) Company Dividend Income cancelled debt Scenario 2: Debtor cancelled debt - Scenario 2: SH cancelled debt 16. DAMAGE RECOVERY Compensatory Damages (Hospital, Moral, etc) Recovery of lost of Profits (Salary lost, etc.) Types 17. Gross Income in LTCC FWT EXEMPT OI OI of Mr. X? % of Completion Method/Cost to Cost Method EXCLUSIONS hindi magiging part ng ITR, so no need to report 1. PROCEEDS OF LIFE INSURANCE know that life is not measurable by money. This is a compensation of life pays premium ABC Co. Sunlife proceeds Premiums Deductions kay ABC Co. Beneficiary Mr. X (wife, kids) Proceeds ABC Co. Part of TI ni Mr. X? OI of Mr. X? Premiums Not deductions kay ABC Co. Proceeds 2. AMOUNTS RECEIVED BY THE INSURED AS RETURN OF PREMIUM 3. GIFTS, BEQUESTS, & DEVICES WHY? Part of TI ni ABC? self explanatory because it is not realized. But the income from them is other term for inheritance, subject to Estate Tax subject to Donor's Tax 4. COMPENSATION FOR INJURIES AND SICKNESS health is not measurable by money 5. INCOME EXEMPT UNDER TREATY 6. RETIREMENT BENEFITS, PENSIONS, GARTUITIES, ETC. "Advanced age/old" For Employers with Retirement Plan (RA 4917) Requirement for Exemption: 1, 10, 50 + reasonable BPP a. maintains reasonable private benefit plan b. service in same employer for at least 10 years Types c. retiring employee ≥ 50 years old at the time of retirement d. first time availment retire claim Commulative Continous why? Ex. Kasi girls, gives birth For Employers without Retirement Plan (RA 7641) Requirement for Exemption: 60, 5 a. retiring employee ≥ 60 years old at the time of retirement b. must have served the company at least 5 years NOTE: Private employees retiring between June 5, 2020 to December 31, 2020 are Excluded in GI (Bayanihan Act to Heal as One) 6. SEPARATION OR TERMINATION beyond the control of the employee Example: Sickness, Death, Physical Disability, Redundancy, Closure of the Business 7. ANY EMPLOYMENT BENEFITS COMING FROM ABROAD 9. UNITED STATES VETERANS ADMINISTRATION 8. SEPARATION OR TERMINATION administered benefits 10. GSIS, SSS even nung kinakaltas palang sila sa sweldo mo. Because they are merely sustenance 11. INCOME OF PH GOV'T derived from: a. Foreign Government b. Financing Institutions owned, controlled or enjoying financing from foreign gov't c. International/Regional Financial Institutions established by foreign government 12. INCOME BY THE GOV'T AND ITS POLITICAL SUBDIVISION from: 13. PRIZES AND AWARDS a. Religious b. Charitable c. Scientific d. Educational e. Artistic d. Literary, or civic achievement in recognition of: 14. PRIZES & AWARDS IN SPORTS COMPETITIONS GRANTED TO ATHLETES 15. 13TH MONTH PAY & OTHER BENEFITS a. Any public utilities b. Exercise or essential function of the government NOTE: Recipient was selected: 1. without any action 2. not required to render substantial future services a. Local or International competitions or tournaments b. Held in PH or abroad c. Sanctioned by their National Sports Associations not to exceed P90,000 ceiling 16. CONTRIBUTIONS TO SSS, GSIS, PH, HDMF & UNION DUES those that are mandatory only. Voluntary is taxable 18. GAINS FROM SALE OF BONDS, DEBENTURES OR OTHER CERTIFICATE OF INDEBTEDNESS with maturity of more than 5 years 19. GAINS REALIZED FROM REDEMPTION OF SHARES IN MUTUAL FUNDS BY INVESTORS 20. CERTAIN BENEFITS OF MWE Basic Pay + HHON Holiday Hazard Overtime Nightshift Differential 21. INCOME DERIVED FROM THE SALE OF GOLD PURSUANT TO RA 7076 (yung maliliit lang na nagmimina) 22. INCOME EXEMPT UNDER SPECIAL LAWS OR SUBJECT TO SPECIAL TAX RULES 23. INCOME UNDER BAYANIHAN ACT II (RA 11494) a. Income from BMBE b. Income of BOI-registered entities under ITH Example: PEZA, 5% in GI (no local, no national tax) a. Retirement benefits received by officials and employees of private firms, whether individual or corporate, from June 5, 2020 to December 31, 2020 b. COVID-19 Special Risk Allowance given to public and private health workers c. Actual Hazard Duty Pay given to Human Resources for Health (serving in the front line) d. Compensation paid to private and public health workers who have contracted COVID-19 in the line of duty or dies while fighting COVID-19: P1million in case of death P100,000 in case of severe or critical sickness P15,000 in case of mild or moderate sickness 24. BENEFITS RECEIVED BY GOV'T OFFICIAL AND EMPLOYEES ARE NOT SUBJECT TO INCOME TAX & WITHHOLDING TAX ON COMPENSATION a. Fringe benefits which are subject to fringe benefits tax under Section 33 of the Tax Code b. Representation and Transportation Allowance or RATA granted to public officers and employees under the General Appropriations Act c. Personnel Economic Relief Allowance or PERA granted to government personnel d. The monetized value of leave credits paid to government officials and employees e. Mandatory/compulsory GSIS, Medicare and Pag-IBIG contributions f. Union of individual employees g. Compensation income of employees in the public sector with compensation income of not more than the Statutory Minimum Wage in the non-agricultural sector applicable to the place where he/she is assigned h. Benefits received from GSIS Act of 1937, as amended, and the retirement gratuity/benefits received by government officials and employees under pertinent retirement laws DEDUCTION INTRO FORMAT Gross Income Less: Allowable Deductions Net Taxable Income GENERAL PRINCIPLES xx (xx) xx Itemized OSD 1. must be Ordinary and necessary 2. Paid or incurred within the taxable year 3. Connected with trade, business or practice of profession 4. Substantiated with official receipts or other adequate records 5. Not against the law, morals, public policy or public order 6. If subject to withholding taxes, proof of payment to BIR (must have been withheld and paid to the BIR) removed under EOPTA OPTIONAL STANDARD DEDUCTIONS (OSD) INDIVIDUAL YES? RC Gross Sales/Receipts NRC x 40% RA OSD NRA NRANETB kasi nga hindi naman sila tax table WHO CAN AVAIL THE 40% OSD? Gross Sales/Receipts Less: COGS/COS Gross Income CORPORATIONS DC RFC GPP Other Entities on which rules on DC applies NRFC 1. LOSSES Gross Income x 40% OSD ITEMIZED DEDUCTIONS a. CASUALTY LOSS Requisites: i. Actually sustained during the taxable year ii. Connected with the trade, business or profession iii. Evidenced by a close and completed transaction iv. Not compensated for by insurance or other form of indemnity v. Not claimed as a deduction for the estate tax purposes vi. Notice of loss must be filed with the BIR within 45 days from the date of discovery of loss Scenario 1: TOTAL LOSS Building Cost Accum Depn Loss xx (xx) xx Scenario 2: TOTAL LOSS Building but with Insurance 4,000,000 Income Recovery (Insurance) 1,000,000 Book Value 3,000,000 Loss Scenario 3: PARTIAL LOSS Building but with Insurance 2,000,000 Cost to restore 2,500,000 3,000,000 Book Value 3,000,000 1,000,000 Income Recovery (Insurance) 1,000,000 Loss 1,500,000 b. NET OPERATING LOSS CARRY OVER (NOLCO) happens when AD > Gross Income Requisites: i. At the time of incurring net loss, the taxpayer must not be exempt from income tax ii. no substantial change in the ownership of the business or enterprise in that: a. Not less than 75% in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons b. Not less than 75% of the paid-up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons Gen. Rule: Excpn: APPLIES TO can be carried over for 3 years if loss incurred during pandemic (2020 to 2021) then it can be carried out for 5 years Individuals (including estates and trusts) Domestic Corporations Resident Foreign Corporations Corporations subject to preferential tax rates (propriety educational institutions, hospitals, etc.) c. OTHERS Requisites: i. Losses form ordinary assets ii. Wagering losses (sugal) rule: deductible only up to the extent of gains/winnings iii. Losses on wash sales of stocks (feigned sales/FAKE) rule: a. 61 days rules. Just look if they still have the same shares b. same type of securities c. applies only to Capital Assets (meaning, hindi ka dealer) d. Does not applies to Dealers in Securities (meaning, deductible sa mga dealer) e. Remember: FIFO ng cost kapag nagbebenta 2. CHARITABLE AND OTHER CONTRIBUTIONS basically, ito yung mga donations Requisites: i. must be actually paid ii. must be given to the organizations specified in the Code iii. The net income of the institution must not inure to the benefit of any private stockholder or individual iv. The donee must be a domestic institution v. The donee must issue a Certificate of Donation (BIR Form 2322) Deductible in FULL P-T-A-S TYPES Priority activities of Government Education, Health, Youth & Sport Development, Human Settlements, Science and Culture, Economic Development Treaty/International Organization Accredited NGO DSWD, DOST, PSC, NCCA, CHED Special Laws 1 Integrated Bar of the Philippines 2 International Rice Research Institute 3 Development Academy of the Philippines 4 University of the Philippines and other state colleges 5 Cultural Center of the Philippines 6 Artesian Well Fund 7 Ramon Magsaysay Award Foundation 8 Task Force on Human Settlement 9 Donations to the National Museum, Library and Archives 10 National Commission on Culture 11 Humanitarian Science Foundation 12 National Social Action Council Subject to LIMITATION Government = Non Priority NGO = Non Accredited Individual Corporation 10% 5% Net Income before contribution expense NOTE: 1. sasabihin dapat ni examiner if priority or not Gross Income - RIT xx 2. >50,000 required of Notice of Donation , and Less: Other Deductions (xx) Certificate of Donation Net Income b4 Cont. Exp. xx 3. Covid 19 Donations Public Health Emergency No need for Notice of Doantion State of Calamity 4. Donations to Government Deed of Donation NGO Certificate of Donation 5. The NGO makes utilization of the contribution not later than 15 days of the 3rd month after the close of its taxable year 6. Member of the boards must not receive remunerations 7. Administrative expenses of the NGO do not exceed 30% of its actual expenses 8. In the event of liquidation, the asset of the NGO will be distributed to another nonprofit domestic corporation orgnanized for similar purpose 3. PENSIONS POV ni employer Requisites: i. Employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to his employees ii. The actuarial assumptions used by the fund must be sound and reasonable iii. It must be funded by the employer iv. The fund assets must be independent from and not subject to the control or disposal of the employer v. Contribution for current service cost is deductible in full vi. Contribution for past service cost is amortized over a period of 10 years AMOUNT DEDUCTIBLE NOT FUNDED out of pocket no 3rd party involved FUNDED merong pension trust actual amount paid upon retirement TYPES CSC PSC 100% deductible amount is divided by 10 Past Service Cost Current Service Cost 200,000.00 800,000.00/year CSC PSP (200,000 / 10) 800,000.00 NOTE: idededuct mo yearly yung PSC 20,000.00 820,000.00 4. RESEARCH AND DEVELOPMENT Research discovery of new knowledge Development application of research Requisites: i. Paid or incurred during the taxable year ii. Ordinary and necesary expenses in connection with trade and business or exercise of profession TYPES 5. TAXES CAPITALIZABLE (equipment, building) Capitalize and Depreciate OTHERS (supplies or other costs) Option of Taxpayer Outright Deduction (100%) NON DEDUCTIBLE TAXES (major topics) a. Philippine income tax b. Income tax paid to a foreign country if claimed as credit c. Estate tax d. Donor's tax e. Special assessment f. VAT g. Stock transaction tax h. Interest, Surcharges, penalties on delinquent taxes i. Final taxes Amortize over a period of not less than 60 months (60 months or UL whichever is longer) DEDUCTIBLE TAXES (minor topics) a. Foreign income tax claimed as deduction (not claimed as credit) b. Percentage tax c. Excise tax d. Documentary stamp tax e. Fringe benefits tax f. Local taxes g. Community tax h. Municipal tax NOTE: Interest here is non deductible as to taxes but it is deductible as to Interest Expense . Yung Surcharges, Penalties, never magiging deductible 6. INTEREST EXPENSE Requisites: i. There must be indebtedness ii. Interest expense must have been paid or incurred during the taxable year iii. Indebtedness must be that of the taxpayer (hindi pwedeng binayaran mo yung utang ng kaibigan mo) iv. Indebtedness must be connected with the taxpayer's trade, business or exercise of profession v. There must be legal liability to pay interest Interest Expense Less: Interest Income Deductible Interest Expense xx (xx) xx OLD: 33% 30% - 20% 30% CREATE: 20% 25% - 20% 25% NOTE: Hindi nag-aapply ang limit sa MSME kung ano yung actual interest expense nila, ayun na yung deductible interest expense nila . 20% na kasi mismo yung tax rate nila. MSME has ≤ 100M Total assets excluding land , and ≤ 5M Net Taxable Income NOTE: NON DEDUCTIBE INTEREST EXPENSE 7. BAD DEBT EXPENSE 8. DEPRECIATION/ AMORTIZATION/ DEPLETION ALLOWED METHODS 1. Interest from Financing Petroleum Operations 2. Interest paid to related tax payers 3. Interest paid on preferred stocks (dividends) deductibe expense sya sa year kung kailan nagkaroon ng actual write off Requisites: i. Existing indebtedness due to the taxpayer which must be valid and legally demandable ii. Connected with the taxpayer's trade, business or practice of profession iii. Must not be sustained in a transaction entered into between related parties iv. Actually worthless and uncollectible as of the end of the taxable year v. Actually charged off in the books of accounts of taxpayer as of the end of the taxable year Requisites: i. must be reasonable ii. used in the trade, business or practice of profession iii. must be charged off within the taxable year iv. Schedule on the allowance must be attached to the return Straight Line Declining Balance (Double Declining, 150%) SYD Others prescribed by Secretary of Finance recommended by CIR SL Used in Productions DD Property used in Petroleum Operations NOT used in Productions Check first the UL if: ≤ 10 years SPECIAL CASES UL SL only 10 years Actual UL Whichever is shorter UL is always 5 years use actual useful life Property used in Mining Operations > 10 years Incurred for: Non producing wells/mines Property used in Depletion Producing wells/mines use between 5 years and useful life Outright Expense (100%) Option: Outright Expense (100%) Capitalized and Depreciate 9. ENTERTAINMENT, AMUSEMENT AND RECREATION EXPENSE (E.A.R) representation expenses (client-related expenses) Example: para makuha mo yung client, nilibre mo pa ng (subject to limit) dinner, nag golf pa kayo, etc. Requisites: i. paid or incurred during the taxable year ii. directly connected to the development, management and operation of the trade, business or profession iii. not be contrary to law, morals, good customs, public policy or public order iv. duly substantiated with adequate proof Sale of Goods 1/2 of 1% of Net Sales Sale of Services 1% of Revenue LIMIT versus ACTUAL whichever is LOWER NOTE: this is per item 10. DISCOUNT TO SR. CITIZEN AND PWD POV nila: they are exempt from VAT and also they are entitled to 20% discount Example: 11. LABOR TRAINING EXPENSE (this is new upon CREATE LAW) deductible expense natin Selling Price VAT SP Ex VAT Discount Total 1,120.00 (120.00) 1,000.00 (200.00) 800.00 related to internships, OJT is to encourage companies to hire OJT, Trainees, Apprentriceship, then ito yung cost na magagastos GOAL: sa pagtrain sa kanila additional one-half (1/2) of the value of labor training expenses incurred for skills development of enterprisebased Example: Nag OJT ka sa SGV, ang total na binayad sayo for the whole duration is 10,000. So: Salary 10,000.00 1/2 5,000.00 15,000.00 Deductible Expense Requisites: i. shall not be more than ten percent (10%) of the Direct Labor Wage (LIMIT) LIMIT ACTUAL Direct Labor x 10% vs xxx whichever is lower ii. incurred for skills development of enterprise-based trainees iii. Trainees are enrolled in public senior high school, public higher education institutions, or public technical and vocational institutions for the taxable year in which the labor training expenses are claimed (puro public applicable) iv. Training is covered by an apprenticeship agreement under Presidential Decree (PD) No. 442 or the Labor Code of the Philippines (maximum of 6 months and payment shall not be less than 75% of MW ) v. The company claiming the additional deduction is granted an authority to offer a training program for skills development as certified by the Department of Education (DepED), Technical Education and Skills Development Authority (TESDA), or the Commission on Higher Education (CHED), as applicable. 12. OTHER EXPENSES no specific provisions Examples: i. Advertising expense ii. Utilities expense iii. Rent expense iv. Salaries expense v. Insurance expense vi. Repairs and maintenance expense vii. Supplies expense viii. Miscellaneous expense NON-DEDUCTIBLE EXPENSES 1. Personal, living or family expenses 2. Any amount paid out for new buildings or permanent improvements, or betterments made to increase the value of any property or estate 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made 4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy 5. Interest, losses and bad debts between related taxpayers: a. Between members of the family b. Except in the case of distributions in liquidation: i. Between an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual ii. Between two corporations more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual iii. Between the grantor and a fiduciary of any trust c. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust d. Between a fiduciary of a trust and a beneficiary of such trust 6. Bribes, kickbacks and other similar payments CAPITAL ASSET INTRO residual definition of ordinary asset DEFINITION 1. Stock in trade of the taxpayer (inventory) 2. Property held by the taxpayer primarily for sale (condo units) 3. Property used in trade or business subject to depreciation (PPE) 4. Real property used in trade or business (land, buildings) TYPES OF ASSETS Ordinary Assets if: SP > Cost SP < Cost Ordinary Gain Ordinary Loss ASSET GI AD Sale of Real Property TAX RATE 6% Sale of Unlisted Shares 15% Others RIT CGT Capital Assets CAPITAL ASSETS 1. SALE OF REAL PROPERTY Requisites: Requisites for exemption to CGT: 1. 6% CGT based on: FMV whicever is ⇑ GSP 2. must be located in the PH 3. taxed whether gain/loss (presumed gain) 4. withheld at source by the buyer (SP less CGT) 5. computed on a per transaction basis 6. not part of gross inncome 1. CA sold was a principal residence 2. Taxpayer- citizen of the PH or RA RC NRC RA 3. Proceeds- invested in acquiring a new principal residence 4. Notice was given to the BIR within 30 days from the date of sale 5. Reacquisition of the new residence must be within 18 months from date of sale 6. A cash deposit is made with an accredited bank under an Escrow Agreement for an amount equal to the capital gains tax and answerable for the capital gains tax if the conditions for the exemption be not satisfied 7. The exemption must be availed of once only every 10 years is there an unsued porion? 2. SALE OF UNLISTED SHARES Requisites: 3. OTHER CAPITAL ASSETS IF: GSP or FV @ Date of Sale (whichever is ⇑ ) X Unutilized Porion GSP X 6% 1. must not traded or listed (if so, then STT tax will apply - 6/10 of 1%) 2. 15% CGT based on Net Capital Gain 3. the sale must result to a gain 4. not part of the GI 5. with year end consolidation SP > Cost SP < Cost Net Capital Gain? forms part of GI Net Capital Loss? not part of AD Capital Gain Capital Loss RULES ON CAPITAL GAINS Corporation always at 100% Holding Period Deductible Capital Losses only to the extent of capital gains Net Capital Loss Carry Over not available Individual 100% if held for < than 12 months ST CG or CL 50% if held for > than 12 months LT CG or CL only to the extent of capital gains available (pwedeng i-carry over only for Limit1: NTI on Yr1 Limit1: NCG on Yr2 the following year ) BASIS FOR DETERMINING GAIN OR LOSS OF PROPERTY Manner of Acquisition 1. Purchase 2. Inheritance 3. Donation 4. If acquired by less than full or adequate consideration Basis Cost FMV at the time of inheritance Same as it would be in the hands of the donor (as if si Donor yung nagbenta) or the last preceding owner by whom it was not acquired by gift Exception : FMV at the time of donation if lower than the amount above, for the purpose of determining the loss (why? Kasi gusto ni BIR mas mababa ang loss, para mas mababa yung deductible expense mo.) Amount paid by the transferee BASIS FOR DETERMINING GAIN OR LOSS OF PROPERTY 1. Retirement of bonds, debentures, notes or certificates and other evidence of indebtedness meaning magbaborrow ka ng shares then ibebenta mo, tapos kapag 2. Short sale of properties bumaba ibubuyback mo ulit. Saka mo ibabalik sa pinaghiraman mo. Doon, kikita ka 3. Failure to exercise a privilege or option to buy or sell property that is a capital asset 4. Security becoming worthless 5. Receipt of a liquidating dividends 6. Redemption of shares for cancellation or retirement 7. Voluntary buy-back of shares CONCEPT TAX FREE CHARGES: CORPORATE RE-ADJUSTMENT non earning transaction (No Gain) 1. Initial Acquisition of Corporate Control (Any Property) nagpasok ka ng property sa corporation with higher FV, hindi matatax yun dahil hindi ka naman Example: nagbenta 2. Share-for-share swap in pursuant to a plan of MERGER or CONSOLIDATION merged A Corp B Corp You you will surrender your share to A NOTE: check if there is other asset included than it will be subject to tax yung B share mo, papalitan ng A share Cost Add: Other property given Less: Return of Capital Cost xx xx (xx) xx B share INSTALLMENT REPORTING INTRO TECHNIQUES TO MEASURE NET INCOME Principle 1: Advance income Goods Principle 2: is taxable upon receipt (this is applicable in service income) upon delivery/passing of title Pre-payments are non deductible Accrual Net Income Less: Advance Income, beg. Add: Advance Income, end. Accrual Net Income xx (xx) xx xx Cash Basis Net Income Less: Prepaid Expense, beg. Add: Prepaid Expense, end. Cash Basis Net Income xx (xx) xx xx METHODS a. Cash basis b. Accrual Basis c. Hybrid 1. PRINCIPAL METHOD 2. DEFERRED PAYMENT SALES combination of both a. Installment Method Requisites: 1. Sale of Personal Property by dealer (Installment is always available, 25% of IP will not apply) 2. Casual sale of PP where: a. SP > P1,000 b. Initial Pay ≤ 25% of SP buyer issued evidence of obligations (notes) alternative when installment method is not available (100% recognition at its cash equivalent) b. Deferred Payment Basis Down Payment Add: Balance xx xx xx (xx) xx Cost Gain DEALER NON DEALER (CASUAL) MOVABLE always allowed!!! with limit ≤ 25% of SP IMMOVABLE with limit ≤ 25% of SP with limit ≤ 25% of SP 3. LONG TERM CONSTRUCTION CONTRACTS 4. FARMING INCOME (SP-DP) x FV equivalent sample 75% a. Percentage of Completion b. Completed Contract Basis crop year basis 5. LEASEHOLD IMPROVEMENT a. Outright Method b. Spread-out Method completion over the lease term INSTALLMENT METHOD ILLUSTRATIONS sold land for 6M A sold land for 10M B C paid 6M BDO 6.5M loan proceeds 10,000,000 x 6% 600,000 CGT Scenario 1 10,000,000.00 6,000,000.00 - Scenario 1 10,000,000.00 6,000,000.00 1,000,000.00 Down Payment 1st 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 500,000.00 2nd 3rd 4,000,000.00 4,000,000.00 3,500,000.00 3,500,000.00 1,000,000.00 1,000,000.00 1M 1M 2M 1M 1M 2M 1M 500K 500K 2M Selling Price Cost Mortgage Terms Year 1: 500,000 excess Scenario 1 10,000,000.00 6,000,000.00 6,500,000.00 Year 2: STEPS: 1. COMPUTE FOR INTIAL PAYMENTS (eto yung lahat ng nagreceive mo at the year of sale) DP + 1st IP 2. CHECK IF QUALIFIED FOR INSTALLMENT (IP divided by SP) 2,000.00 10,000.00 20% 3. COMPUTE FOR CONTRACT PRICE (eto yung mga nareceived and SP receivables mo) 4. COMPUTE THE TAX PAYABLE (IP divided by CP) x CGT Year 1: 2M 10M 10M 600K CGT 2,000.00 10,000.00 600K CGT 480,000 SP - Mortgage 2M 9M 120,000 Year 2: 8M 10M 20% 10M (1M) 9M 600K CGT if Mort > Cost 2,000.00 10,000.00 600K CGT 466,667 SP - Mortgage + Excess 2M 4M 133,333 7M 9M 20% 10M (6.5M) 500K 4M 600K CGT 300,000 2M 4M 600K CGT 300,000 FRINGE BENEFITS DEFINITION INTRO special form of benefits given to the employees expense ni employee na si employer ang nagbabayad Managers GIVEN TO FBT 35% based on grossed up MV of the FB if Citizen/RA 25% based on grossed up MV of the FB if NRA-NETB withheld by the employer excluded from compensation income RIT part of compensation income 90,000 ceiling Supervisors Rank and File EXAMPLE OF FRINGE BENEFITS MONETARY VALUE AND USEFUL LIFE Housng and Vehicles with transfer of ownership 100% without transfer of ownership 50% MONETARY VALUE Others 100% GENERAL RULES Real Property (Housing) 20 years Movable Property (Vehicles) 5 years Depreciation Value USEFUL LIFE NOTE: 1. In getting the monetary value if given to Rank and File, we don't apply the 50% rule since they are not subject to FBT 2. Nagdedepreciate lang tayo ng Housing and Vehicles kapag yung ownership ay kay company De Minimis NOTE: Excess Deminimis of M/S is treated the same way as Rank and File. Added to 90k then excess will be subject to RIT DONOR'S TAX INTRO Gratuitious Transfer (free) between living person (inter-vivos) subject to Donor's Tax DEFINITION 6% based on total gifts in excess of 250,000 Excise Tax (because this is a privilege) REQUISITES 1. Capacity of the donor to transfer property (legal capacity) 2. Donative intent (intention) 3. Delivery of the gift Actual Real Contract Constructive (Ex. Traditio Symbolica) 4. Acceptance by the donee required only in direct donation When perfected? from the moment the Donor knows the acceptance of the Donee NOTE: 1. Completion of Donation is done on the delivery 2. Perfection is done on acceptance 3. If ever donation is revocable / conditional then there is no donation yet to speak of. no full intent CLASSIFICATION OF DONOR'S TAX 1. Proportional Tax 2. Excise Tax 3. Direct Tax 4. Ad Valorem Tax 5. National Tax 6. General Tax 7. Annual Tax suspensive (the value of donation is determined when fulfilled) fixed percentage (6%) privelege to transfer properties paid by statutory taxpayer (Donor) imposed based according to value levied and collection by national government fiscal or revenue purpose, not specific imposed upon yearly donation NOTE: you will file and pay Donor Tax 30 days after its completion . But know that you will consolidate it at the end of year Formula: Gross Gift Less: Mortgage assumed by Donee (if any) Add: Prior Gift Net Gift Less: Exempt amount Taxable Gift Tax Rate Due Less: Prior Payments Still Due SHARE OF STOCKS MEASUREMENT AND REQUIRED FORMS Measurement Amount ≤ 5000 Current Price or FMV > 5,000 Assessed Value whichever is any amount Appraised Value ⇑ Zonal Value If Traded: Ave. of High Low Price If NOT: BV Method (dating adjusted USUFRUCT ETC. TRANSFER FOR INSUFFICIENT CONSIDERATION Present Value based on life SP < FMV (Except, RP subject to CGT) MOVABLE (PERSONAL) IMMOVABLE (REAL) Net Asset method) Excess between SP and FMV xx (xx) xx xx (250,000) xx 6% xx (xx) xx Forms oral or written written public instrument/document (Deed of Donation) CLASSIFICATION OF TAXPAYERS WITHIN WITHOUT RESIDENT OR CITIZEN (RC, NRC, RA) General Rules NON RESIDENT ALIEN (EBT, NETB) except with Reciprocity Intangible Properties Accounting Patent, Franchise, Copyright, Trademark Financial Assets AR, Bank Deposits, Stocks, Bonds What are the Intangible Properties? TAXABLE DONATIONS Land 1. DIRECT DONATION A 2. DONATION THROUGH IRREVOCABLE TRUST 3. CONDONATION OF DEBT B Condo Unit A Trust B basically forgiveness of debt 4. TRANSFER FOR INSUFFICIENT CONSIDERATION SP < FMV Applicable to: Personal Property Real Property (not subject to CGT) Example: 5. SPECIFIC RENUNCIATION OF INHERITANCE FMV SP Cost meaning Ordinary Assets and other Capital Assets 1,000,000 subject to Donor's Tax 3,000,000 2,000,000 1,500,000 500,000 subject to Income Tax unless there is only two heirs Example: Mr. X (Decedent) Estate is 3M SPECIFIC 1M+1M = 2M A 1M B 1M-1M = 0 C C specifically gave his mana to A SUBJECT TO DONOR'S TAX!! GENERAL A B C 1M+500 = 1.5M 1M+500 = 1.5M 1M-1M = 0 NOT!! 6. RENUNCIATION BY SURVIVING SPOUSE OF HIS/HER SHARE IN THE CONJUGAL OR COMMUNITY PROPERTY Example: Mr. X (Decedent) Estate is 3M SPECIFIC 1M+1M = 2M A 1M B 1M-1M = 0 Mrs. X Mrs. X specifically gave his mana to A Specific: General: GENERAL 500K A 500K B 1.5M +500K=2M Mrs. X Whether Specific or General, SUBJECT TO DONOR'S TAX!!! EXEMPT DONATIONS 1. Gifts to National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. (kahit donation sa Local is exempt) 2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philantropic organization or research institution or organization: Provided, however, that no more than 30% of said gifts shall be used by such donee for administration purposes. Under Special Laws: 1. Archives of the National Historical Institute 2. Development Academy of the Philippines 3. Integrated Bar of the Philippines 4. International Rice Research Institute 5. Intramuros Administration 6. Musuem of Philippine Costumes 7. National Library 8. National Museum 9. National Commission for Culture and the Arts 10. Philippine Red Cross 11. Philippine Normal University 12. Ramon Magsaysay Foundation 13. University of the Philippines Political Contributions (Omnibus Election Code (OEC) and Repulic Act No. 7166) As a rule, any contributions given to candidates, political parties or coalition of parties are not subject to donor’s tax as long as the following conditions are met: 1. The contribution is for campaign purposes; and 2. The donation is duly reported to the Commission on Election (COMELEC) NOTE: The campaign contribution is subject to donor’s tax on the part of the donor, if such contributions are not reported to the COMELEC. VOID DONATIONS 1. Donations between spouses, except minor gifts 2. Donations between persons who were guilty of adultery or concubinage at the time of donation 3. Donations between persons found guilty of the same criminal offense, in consideration thereof 4. Donations to a public officer or his wife, descendants or ascendants by reason of his office (think of it as Bribery) 5. Donations to incapacitated persons (because they cannot give consent unless they are guided by their guardians) 6. Donations of future property RULES TO OBSERVE 1. As a rule, the value of the property/right donated shall be the fair market value existing when the gift was made (as of the time of donation). 2. The time to value is the moment when the donation has been completed and perfected (delivered and accepted). 3. When the donation is subject to a suspensive condition, the value of the gift is to be determined only at the time when the stipulated condition is fulfilled, subject to the time of delivery and acceptance of the gift. ESTATE TAX INTRO Gratuitious Transfer (free) between living and dead person (mortis-causa) subject to Estate Tax 6% DEFINITION unlike in Donor's Tax, hindi ka magdededuct ng 250K dito Excise Tax (because this is a privilege) Taxpayer: Estate NOTE: The estate of the decedent is required to submit a statement cer fied by a CPA for estates exceeding ₱5,000,000 Illustration: Mr. X died (descedent) A, B, C (heirs/succesors) personal property, rights, obligations (estate) NOTE: minamana din ang obligations but up to the extent ng estate lang , estate ang magbabayad dito not the heirs MANAGED BY: Administrator/Executor settlement personally liable to file and pay Heirs TYPES OF HEIRS 1. Compulsary entitled to legitime: 1. Legitimate Children 2. Illegitimate Childern 3. Surviving Spouse Counting: Legitimate Surviving Spouse Illegitimate SUCCESSION 2. Voluntary entitled to free portion Testimentary with last will and testament Intestate/Legal without last will and testament by operation of law stated in last will and testament Mixed Formula: Gross Estate Less: Allowable Deductions Net Taxable Estate Tax Rate Estate Tax Due 1 share 1 share 1/2 share of legitimate xx (xx) xx 6% xx Inclusions Exclusions CLASSIFICATION OF TAXPAYERS WITHIN WITHOUT RESIDENT OR CITIZEN (RC, NRC, RA) NON RESIDENT ALIEN (EBT, NETB) except with Reciprocity Intangible Properties General Rule Accounting Patent, Franchise, Copyright, Trademark Financial Assets AR, Bank Deposits, Stocks, Bonds What are the Intangible Properties? 1. REAL PROPERTY immovables 2. PERSONAL PROPERTY tangible intangible INCLUSIONS FROM GROSS ESTATE example: House and Lot example: Car, Furniture, Equipment example: Intangible Assets, Financial Assets i. Franchise which must be exercised in the Philippines ii. Shares, obligations or bonds issued by a domestic corporation iii. Shares, obligations or bonds issued by a foreign corporation 85% of the business of which is located in the Philippines iv. Shares, obligations or bonds issued by a foreign corporation, if such have acquired a business situs in the Philippines v. Shares or rights in any partnership, business or industry in the Philippines 3. TRANSFER IN CONTEMPLATION OF DEATH 4. REVOCABLE TRANSFER transferred during his lifetime in anticipation of death with retention/reservation of right 5. TRANSFER UNDER GENERAL POWER OF APPOINTMENT dito wala pa kasing transfer of ownership na nangyayari Appointment: GPA SPA included excluded GPA bahala si Mr. X kung kanino nya ibigay. GPA kasi as if sa kanya na yung property SPA dinesignate na ni Mr. Y kung kanino dapat ibigay ni Mr. X Illustration: Mr. Y Mr. X car (with a right to designate a person who will receive the property) 6. TRANSFER FOR INSUFFICIENT CONSIDERATION disposed for less than its adequate & full consideration Included in GE is the difference of FMV and SP Example: FMV is 800K, received 500K. Then what is included in GE is 300K Applicable in: TICOD Revocable Transfer Transfer under GPA 7. PROCEEDS OF LIFE INSURANCE Types: Revocable Irrevocable Except: a. Proceeds of life insurance and benefits received by members of the GSIS (RA 728) b. Benefits received by members from SSS by reason of death (RA 1792) c. Retirement benefits of officials or employees of a private firm (RA 4917), provided they are included in the gross estate. d. Payments from the Philippines and US governments to the legal heirs of deceased of World War II Veterans and deceased civilian for supplies or services furnished to the US and Philippine Army (RA 136) e. Amounts received from Philippine and United States governments for war damages f. Amounts received from United States Veterans Administration Example: Mr. X Sunlife (if silent) Beneficiary Estate, Administrator, Executor (extention of the descedent) included excluded Revocable Irrevocable included included included excluded Others BUT if we are computing for the Net Distributable Estate , the proceeds with beneficiary to others is included regardless if Revocable or Irrevocable included 8. CLAIMS AGAINST INSOLVENT PERSON included basically merong receivable ang descedent from a person full amount of AR will be included in GE uncollectible amount will be included in deductions (think of it na parang AR and ADA sa accounting) EXCLUSIONS/EXEMPTIONS 1. MERGER OF USUFRUCT IN THE OWNER OF THE NAKED TITLE Example: Mr. X died leaving land with coconut trees A has legal title (naked) B rights of fruits (usufructuary) Not subject to Estate Tax Subject to Estate Tax NOTE: 1. If B died, A will become the absolute owner and it will not be subject to Estate tax 2. but nung pinamana ni Mr. X kay A and B, subject to Estate Tax yun 2. TRANSMISSION OR DELIVERY OF THE INHERITANCE OR LEGACY BY THE FIDUCIARY HEIR OR LEGATEE TO THE FIDEICOMISSARY Example: land land (after 4 years) Mr. X A preserve the land for 4 years Grandson Fiduciary Heir B Great Grandson Fidei Comissary NOT Subject to Estate Tax 3. TRANSMISSION FROM THE 1ST HEIR, LEGATEE, OR DONEE IN FAVOR OF ANOTHER BENEFICIARY IN ACCORDANCE WITH THE LAST WILL OF THE PREDECESSOR Example: land Mr. X if B passes the CPALE, A will give the land to B land A First Heir Subject to Estate Tax B Second Heir NOT 4. ALL BEQUESTS, DEVICES, LEGACIES, OR TRANSFER TO SOCIAL, CHARITABLE, CULTURAL- NO PART OF NET INCOME WHICH ENURES TO BENEFIT OF ANY INDIVIDUAL Provided, that no more than thirty percent (30%) of which will be used by such institutions for administrative purposes DEDUCTIONS 1. ORDINARY DEDUCTIONS a. Losses Requisites: 1. Casualty 2. Not compensated by insurance 3. Not claimed as deductions from income tax of the estate 4. *Occurred during the settlement of the estate 5. *Occurred not later than the last day for the payment of estate tax 1-Jan 31-Dec loss happened here deductible died b. Claims against the Estate these are the liabilities of the descedent c. Claims against Insolvent Person this is the uncollectible portion 1. full amount is part of the GE 2. incapacity of the debtor is proven Requisites: 31-Dec (year 2) loss happened here 2 years settlement not deductible one year after death (last day of payment) d. Unpaid Mortgages/Indebtedness Requisites: 1. full amount is part of the GE 2. unpaid mortgage yung nasa deduction mo Except: accomodation loan e. Taxes Except: accrued prior to the death of the descedent 1. Any income tax upon income received after death 2. Property taxes not accrued before death 3. Estate tax from the transmission of his estate The decedent may have taken out this loan to help someone else, with the expectation that the beneficiary of the loan would be responsible for repaying it. kasi nangyari lahat ito after death died deductible not deductible f. Transfer for Public Use Requisites: donation to the government whether national or local, magtetake effect yung donation once mamatay 1. included in GE 2. contracted in the last will and testament g. Vanishing Deduction property may change hand within a short period of time transfer tax (donor's/estate) is imposed on each transfer relief to the taxpayer to minimize the effect of double tax Requisites: 1. The present decedent died within 5 years from receipt of the property from a prior decedent or donor 2. The property must be part of the taxable estate of the prior decedent, or of the taxable gift of the donor 3. The estate tax on the prior succession or the donor's tax on the gift had been finally determined and paid 4. The property on which vanishing deduction is claimed can be identified as the one received from a prior decedent, or from the donor, or something acquired in exchange for it 5. No vanishing deduction on the property was allowable to the estate of the prior decedent Example: land land Mr. X died B died is Vanishing Deduction applicable? N/A How to Compute? 1. Determine the FMV 3 years land C died 4 years land D died 2 years land E died F died 6 years Prior Estate FMV of the property whicever is lower Current Estate 2. Determine the Initial Basis Lower FMV - paid assumed mortgage 3. Determine the Final Basis Initial Basis - (Initial Basis / GE) x Other Ord. Deductions LIT TPU Unpaid Mortgage 4. Determine the Value (%) of Vanishing Deductions More than Not more than Percentage 1 year 100% 1 year 2 years 80% 2 years 3 years 60% 3 years 4 years 40% 4 years 5 years 20% 5 years 0% 2. SPECIAL DEDUCTIONS a. Family Home Requisites: Final Basis x Rate dwelling/residential house of the descedent The descedent is married or head of the family provides chief support to the dependents (brother, sister, children) ≤ 21 years old un married not gainfully employed requisites: The family home must be the actual residential home of the decedent and his family at the time of his death Certified by the barangay captain of the locality the family home is situated Located in the Philippines The value of the family home is included in the gross estate How much? b. Standard Deductions FMW or 10,000,000 whichever Is lower 5,000,000 c. RA 4917 Requisites: this is retirement benefits received by employees of private companies Included in GE kung anong amount yung nasa GE mo, ayung din yung nasa deduction mo Included in deductions How? as a consequence of death deductible 1-Jan died nareceived because namatay sya not deductible not from death 1-Jan 1-Jul retired died nareceived nya muna before sya namatay d. Share of Surviving Spouse before marriage, couple shall agree on marriage settlement/pre nuptial agreement Property Regime: Complete Separation of Property (CSP) kanya kanya kayo (bakit nag asawa pa kayo? Hahaha) separate separate Date of Marriage Conjugal Partnership of Gains (CPG) prospective in application separate fruits/gains: conjugal Date of Marriage Absolute Community of Property (ACP) (effective August 3, 1988) common/conjugal retrospective in application common/conjugal Date of Marriage NOTE: 1. If no agrreement , check the date of marriage Conjugal Partnership of Gains Absolute Community of Property 8/3/1988 CPG I. Property acquired BEFORE Marriage a. Gratuitous b. Onerous c. Where the spouse has a legitimate descendant from a previous marriage ACP Exclusive Exclusive Community Community Exclusive Exclusive II. Property acquired DURING marriage a. Gratuitous title b. Onerous title c. In exchange of exclusive property d. In exchange of conjugal/community property e. Fruits or income from exclusive property f. Fruits or income from conjugal/ community property Exclusive Conjugal Exclusive Conjugal Conjugal Conjugal Exclusive Community Exclusive Community Exclusive Community III. Property for personal and exclusive use of either spouse Exclusive Exclusive NOTE: if jewelry , community under ACP; N/A to CPG NOTE: 1. LIT , idededuct mo sya sa common amounts na, unless sinabi na exclusive. 2. Special Deductions , ideduct mo always sa combined exclusive and common amounts SUMMARY ORDINARY DEDUCTIONS Claims against the Estate Claims against Insolvent Person Unpaid Mortgage Unpaid Taxes Losses Transfer for Public Use Vanishing Deductions Resident or Citizen Allowed Allowed Allowed Allowed Allowed Allowed Allowed SPECIAL DEDUCTIONS Family Home Standard Deductions RA 4917 Share of Surviving Spouse up to 10,000,000 5,000,000 Allowed Allowed KEY POINTS POINT TO REMEMBER NET TAXABLE ESTATE computed based on the tax code for computation of estate tax purposes exluded yung proceeds of life insurance if beneficiary is 3rd person and irrevocable exempt yung benefits received like SSS not included in deduction yung mga expenses like funeral, judicial, and medical DEFINITION OF TERMS: 1. Holographic Will VS NRA Pro-rata PH World x LIT Allowed Allowed None 500,000 None Allowed NET DISTRIBUTABLE ESTATE eto yung actual na marereceive ng heirs/govt regardless if revocable or irrevocable kasama, since marereceive talaga ito idededuct since makakabawas ito sa matatanggap ng heirs estate tax is deducted written will dated and signed by the hand of the testator himself. Subject to other form and may be made in or out the Philippines and need not be witnessed. 2. Codicil 3. Legatee (think of it as legacy) 4. Devisee VALUATION METHOD supplement/addition to the will ang nainherit mo ay Personal Property ang nainherit mo ay Real Property Real properties - higher between fair market value and zonal value Personal properties - fair market value Shares of stocks are valued at: i. If traded – average of high and low price ii. If not traded – using the Book Value method VALUE ADDED TAX INTRO a consumption tax on goods and services levied at each stage of the supply chain where value is added Income Tax seller is liable VAT passed on to the buyer (indirect tax) DEFINITION Format: Output Vat Input Vat VAT Payable xx (xx) xx Seller POV Buyer POV sources OUTPUT VAT person who in the ordinary course of business that Sells Barter Exchange Leases Imports Renders Services DEFINITION (POV ni Seller) SOURCES OF OUTPUT VAT 1. Sale of Goods Tax Base: Goods or Properties Gross Selling Price Formula: Gross Sales Less: SR, SD, SA Net Sales Add: Excise Tax (if any) Gross Selling Price VAT rate Output Vat 2. Sale of Services LESSOR OF RESIDENTIAL UNITS Rent Tax Base: Gross Receipt Monthly ≤ 15K > 15K > 15K Annual regardless ≤ 3M > 3M xx (xx) xx xx xx 12% xx Actually Constructively VAT OPT (3%) (or 1% from 7/1/2020 - 6/30/2023) NOTE: If Commercial Units , regardless of the monthly rent, an annual treshhold of 3M will apply TRANSPORTATION SERVICES (Domestic) TRANSPORTATION SERVICES (International) Goods and Cargos Land Air Sea VAT VAT VAT Passenger Land Air Sea OPT VAT VAT EXEMPT 3. Sale of Properties TYPES: Capital Assets Ordinary Assets Tax Base: SP FMV ZV (determined by CIR) FMV (real property declaration) 4. Deemed Sale Transactions as if sold TYPES 1. Transfer, use or consumption, intended for sale Nagbebenta ka ng LPG, then let's say na yung isa don instead na ibenta mo ay ginamit mo. Ayun Example: vatable yun. 2. Distribution or transfer of inventory to shareholders for their shares in the profits (Dividend in Kind) 3. Distribution or transfer of inventory to creditors in payment of debt (Dacion en Pago) 4. Consignment of goods if actual sale is not made within sixty (60) days 5. Retirement from or cessation of business with respect to ending inventories Nagliquidate na tayo ng business tapos may natira pang inventory na hindi nabenta, deemed sold Example: na yon. Vatable na yun 5. Zero-rated Sales/Services TYPES: 1. Export Sales 2. Export of Services 3. Transport of goods, passengers, services from Philippines to Foreign Countries 4. Sale of power or fuel generated through renewable sources of energy Effectively zero-rated sales (under International Agreements or 1. Sale to Asian Development Bank (ADB) Special Laws): 2. Sale to International Rice Research Institute (IRRI) 3. Sale to duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) 4. Sale to duly registered and accredited enterprises with Philippine Economic Zone Authority (PEZA) NOTE: Difference of 0% rated vs Exempt WHEN ARE YOU LIABLE TO VAT? ZERO RATED Output VAT Input VAT (100) VAT Payable (100) refundable Special Economic Zone, as if nagbebenta ka abroad EXEMPT Output VAT Input VAT VAT Payable - VAT REGISTERED VAT REGISTRABLE Mandatory 1. Gross Sales/Receipt >3M In past 12 months Next 12 months VAT REGISTRATION 2. Radio and/or Television Companies >10M in the preceeding year Optional PENALTY: Pays Output Tax without claiming Input Tax (Output Tax = VAT Payable) 1. Gross Sales/Receipt <3M cannot cancel for 3 years (locked in) 2. VAT Exempt 2. Radio and/or Television Companies <10M irrevocable NOTE: if VAT registered ka, kahit sinong bentahan mo Output VAT yon. Unlike sa Input VAT na may dapat both kayo ng seller registered DEFINITION (POV ni Buyer) INPUT VAT the buyer and seller must be both VAT registered (if not then hindi ka pwedeng makapag claim ng input vat) SOURCES OF INPUT VAT 1. Purchase of Goods Sale (Inventory) Conversion (RM ⇒ FG) Supplies (used in Business) merchandising manufacturing 2. Importation Know that you always pay VAT whether or not used in business Tax Base: Customs and Tariff Duties Based on quantity or volume (Specific) LANDED COST Formula: Invoice Amount + Customs Duties (PP+Other Inland Cost+Excise)*given rate in the prob. + Freight, Insurance, Brokerage Fee Landed Cost + Excise Tax (if any) Tax Base x 12% VAT Based on value of imported goods (Ad Valorem) DUTIABLE VALUE Formula: Dutiable Value (determined by BOC) + Customs Duties (PP+Other Inland Cost+Excise)*given rate in the prob. + Freight, Insurance, Brokerage Fee + Excise Tax (if any) Tax Base x 12% VAT Can claim Input VAT? TYPES: Used in Business Personal NOTE: 1. When is it considered imported? Supplies (US) BOC (PH) Mr. X (Place of Business) considered lang sya na imported na kapag nakalabas na ng customs VAT Excise Tax Customs Duties Other Expense Kasi prior to removal sa customs, Mr. X has to pay: 2. There is also called TAX FREE-IMPORTER kung kanino nya subsequently ibebenta, example si Mr. X binenta nya kay Mr. Y. Si Mr. Y ang liable ngayon sa VAT (as if si Mr. Y ang nag import) 3. Purchase of Capital Goods aggregate monthly acquisition cost (exclusive of VAT) ≤1M >1M Amount of Input VAT to claim 100% Outright allocate UL allocate 60 months NOTE: Effective January 1, 2022 , all input tax (100%) on purchases on Capital Goods shall already be allowed upon purchase/payment and shall no longer be deferred. 4. Presumptive Input VAT 4% WHO CAN AVAIL? Processor of Sardines, Macarel, Milk (SaMaMi) Manufacturer of Refined Sugar, Cooking Oil, and Packed Noodle based instant meal (ReCoPa) NOTE: Applicable only to Agricultural Products, not applicable to Marine Products. (Gray Area) Why meron silang special treatment? Kasi yung binibili nila is in original state tsaka lang nila pinaprocess at minamanufacture, so lugi sila if meron sila Output VAT tapos hindi sila makakapag claim ng Input VAT. Gets? Taxbase: Kung magkano yung binayad mo which are used as inputs to the production 5. Transitional Input VAT 2% APPLIES TO: Liable to VAT for the first time Opted to be VAT registered Taxbase: Beg. Invty (goods, materials, supplies) x 2% NOTE: whether or not purchased from a VAT registered Compared to Actual VAT paid on Beg. Invty 6. Standard Input VAT 7% applies to sale to government actual input VAT Supplier P100.00 Seller P95.00 Output VAT Input VAT VAT Payable Government (withheld 5%) 12% 7% vs Actual ⇒ COGS/Expense 5% Actual vs. SIV charged to expense/COGS NOTE: 1. This is only applicable before January 1, 2021 2. January 1, 2021 onwards - From Final WHT magiging Creditable WHT na sya (No more SIV), meaning Input VAT is based on Actual Purchases Output VAT Input VAT VAT WH by Govt VAT Payable SCENARIOS xx (xx) (xx) xx EXCESS OUTPUT OR INPUT VAT Output > Input VAT payable Example: 1 Purchases 100,000 Input VAT 12,000 Cash 112,000 3 Output VAT 2 Cash 224,000 Sales Output VAT 200,000 24,000 24,000 Input VAT VAT payable 12,000 12,000 Output < Input stay in the books as input vat (prepaid asset) Example: Let's say, Input VAT is 30,000 and Output VAT is 24,000 Output VAT EXCESS INPUT VAT 24,000 Input VAT What kind of VAT registered are you? 12% (sells Domestic/Local) 24,000 you will only recognize input up to the extent of output carried on the next month or quarter 3 options: 1. carry over and offset to output vat of local/domestic sales 2. refund (within 2 years) 3. Tax Credit Certificate: may be used in paying other internal revenue taxes (within 2 years) 0% (Export) EXEMPT TRANSACTIONS read sir Brad's TAX spreadsheet INVOICING REQUIREMENTS read sir Brad's TAX spreadsheet KEYPOINTS TO REMEMBER 1. If mix business, (VAT and Non-VAT), lahat ng joint input VAT shall be allocated using sales excluding VAT 2. Installment reporting is also applicable here in VAT. Requisites: IP ≤ 25% of SP OTHER PERCENTAGE TAXES INTRO Section 116 to 127 1. PERSON EXEMPT FROM VAT Section 116 Annual Gross Sales ≤ 3M > 3M TAX RATE: 7/1/2020 3% NOTE: Exempt Persons: TYPES OPT (unless VAT registered) - Optional/Voluntary (irrevocable for 3 years) - Mandatory VAT 6/30/2023 1% 3% 1. Cooperatives 2. Availing 8% option 5% Income Tax 3% OPT 3. Marginal Income Earners (≤ 100k/year) 4. VAT-registered 2. DOMESTIC CARRIERS & KEEPERS OF GARRAGES Section 117 Examples: Buses, Taxis, Jeep, Grab, FX, Car for Rent Examples: Motor Vehicles (Repair Shops, Gasoline Stations, Towing Companies, Parking Spaces) LIABLE: TAX RATE: Operator, Lessor, Contractor 3% Common Carriers Tax (CCT) NOTE: whether VAT registered or hindi, meron kang babayaran na 3% CCT, iba ito sa section 116 NOTE: Exempt Persons: 1. Owner of Bancas 2. Owner of Kalesa Land Domestic (D ⇒ D) ROUTE: Air Sea International (D ⇒ I) Air Sea Passengers 3% Common Carriers Tax (CCT) (regardless of the Threshhold) Goods/Cargos/Mail Passengers Goods/Cargos/Mail Passengers Goods/Cargos/Mail VAT or OPT (check the GS/GR ceiling) Passengers Goods/Cargos/Mail PH to Abroad Abroad to PH 3. INTERNATIONAL AIR & SHIPPING CARRIERS Section 118 RFCs & Transport P/G/C/M Originating from the Philippines Examples of Int'l Air: Air Asia, Jetstar, Qatar Air, Korean Air Examples of Shipping Carriers: DOLE PH (Pineapple Company) TAX RATE: 3% CCT (Business Tax) + 2.5% GPB (Income Tax) LIABLE: International Air Carriers, International Shipping Carriers PH to Abroad Passenger Goods/Cargos/Mail EXEMPT 3% Common Carriers Tax (CCT) Abroad to PH Passenger Goods/Cargos/Mail EXEMPT ROUTE: 0% VAT EXEMPT 4. FRANCHISE GRANTEES Section 119 TYPES: Congressional / Legislative Franchise Gas & Water Radio & Television Annual Gross Receipt > 10M ≤ 10M 2% Franchise Tax VAT OPT 3% Franchise Tax (unless VAT-registered) examples: ABS, GMA, TV5 5. OVERSEAS DISPATCH, MESSAGE OR CONVERSATION ORIGINATING FROM PH Section 120 Overseas telephone calls TAX RATE: 10% Overseas Communication Tax (OCT) LIABLE: The user of the facility PH to PH PH to Abroad Abroad to PH LINES: VAT 10% OCT EXEMPT NOTE: Exempt Persons: D-I-N-G kaya dati hindi tayo tumatawag kay papa nung nasa abroad sya kasi mahal 1. D iplomatic Services 2. I nternational Organizations 3. N ews Agencies or Services 4. G overnments 6. BANKS & NON-BANK FINANCIAL INTERMEDIARIES PERFORMING QUASI-BANKING FUNCTIONS Section 121 Examples of Banks: BDO, BPI, Metro Bank Examples of Non-Banks: Investment Banks borrowing funds from 20 or more persons Examples of Quasi-Banking Functions: or corporate lenders at any one time issuance of bonds Subject to Gross Receipts Tax (GRT) IN-DI-RORE-NET ≤ 5 years > 5 years Interest → maturity period 5% 1% 0% 7% 7% Dividends Royalties, Rentals Net Trading Gains Kapag NET GAIN , doon ka lang magkakaroon ng tax Example: Net Loss ka ng Nov, then Dec may Net Gain ka, pwede mong i-offset yon 7. OTHER NON-BANK FINANCIAL INTERMEDIARIES / INSTITUTIONS Section 122 Pawnshops, money changers Subject to GRT Interest 8. LIFE INSURANCE PAYMENTS Section 123 TAX RATE: TYPES: ≤ 5 years > 5 years Examples: Pawnshops, Money Changer (Cebuana) 5% 1% Collected by Insurance Companies (Sunlife, Philam Life) whether such premiums are paid in money, notes, credits, or any substitute for money 2% Life Non-Life (Accident, Health, Disability) (Car, Buildings, Fire) 2% 12% VAT NOTE: Exempt Premiums: 1. Premiums refund within six (6) months after payment on account of rejection of risk or returned for other reasons 2. Reinsurance premiums 3. Premiums from life insurance of non-residents received from abroad by branches of domestic corporation, firm or association doing business outside the Philippines 4. Excess of premiums on variable contracts in excess of the amounts necessary to insure the lives of the variable contract owners 5. Premium collected by a purely cooperative company or association 9. AGENTS OF FOREIGN INSURANCE COMPANIES Section 124 Premiums by agents of foreign insurance companies Non-life (fire/marine/miscellaneous) Pag nagbayad sa: 10. AMUSEMENT TAXES Section 125 LIABLE: Agents Owners of Property 4% 5% The user of the facility Example of Liable: TYPES: a. Boxing b. Professional Basketball c. Cockpits, Cabarets, Night & Day Clubs 10% or Exempt* Gross Receipts 15% Gross Receipts 18% d. Jai-Alai & Racetracks Gross Receipts e. Philippine Gaming Offshore Operators (POGO) Gross Sales Gross Receipts Smart Araneta Colosseum MOA Arena, PH Arena Pegasus, Palace Pool Club, World Slasher Cup 30% Batangas Racing Circuit 5% gaming tax (in lieu of all other direct and indirect internal revenue taxes and local taxes, with respect to gaming income) * Requisites for Exemption: 1. World or oriental championship is at stake 2. One of the contenders is a citizen of the Philippines (hindi kailangan na pareho) 3. Promoted by citizens of the Philippines or by a corporation or association at least 60% of the capital of which is owned by such citizen 11. WINNINGS Section 126 LIABLE: Horseracing Who won? Owner Bettor 1. Owner of the winning horse 2. Bettor in a horse race or jai-alai 10% on gross winnings 10% Net winnings = Gross Winnings - Cost of Ticket 4% Ordinary Special Ordinary Win Place (1st) (1st, 2nd, 3rd) Special Double Forecast Quinella Trifecta 2 consecutive races (1st) 2 numbers in a selected race (1st & 2nd) 2 numbers, 2 races (1st, 2nd or 2nd, 1st, any order) 3 numbers, 1 race (1st, 2nd, 3rd) 12. STOCK TRANSACTIONS TAX & INITIAL PUBLIC OFFERING (IPO) TAX Section 127 TYPES: LIABLE: STAGES OF IPO Already listed & traded STT of 6/10 of 1% based on SP IPO of a closely held corporation (>50% of the OS is owned by not more than 20 individuals) NOTE: Repealed under Bayanihan Act II starting Sept. 15, 2020 1. Primary Offering Formula: Primary Offering: Issuing Corporation new issuance total shares + new shares 2. Secondary Offering Formula: Secondary Offering: Seller 1. Primary Offering 2. Secondary Offering current shares of SH total shares + new shares 1st public offering (unlisted share) existing SH sell their shares % % Up to 25% During IPO 25% to 33.33% > 33.33% 3. Follow-on / Follow through Offerings after IPO not subject to IPO tax subject to STT 4% 2% 1%
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