Taxation One Complete Updated (Atty. Mickey Ingles)

7/22/2019 Taxation One Complete Updated (Atty. Mickey Ingles)

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Taxation One: Outline with Codals

Mickey Ingles

Ateneo Law 2012Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 Mickey)

1

Course Outline

Tax I

Based on Atty. Monteros outline, with integrated notes from Atty. Salvadors review class,

Reyes, some Mamalateo, some CoUntian and the various reviewers in school.

A. In General .......................................................................................................... 1B. General Principles .............................................................................................. 2

C. Income Tax on Individuals ................................................................................. 2

D. Definitions ........................................................................................................ 17E. Income Tax Rates ............................................................................................. 19

F. Proprietary Educational Institutions and Hospitals ........................................... 21

G. GOCCs .............................................................................................................. 22H. Passive Income ................................................................................................ 22

I. Minimum Corporate Income Tax (MCIT) ........................................................... 25

J. Income Tax on Resident Foreign Corporations .................................................. 26

K. Income Tax on Non-resident Foreign Corporations ........................................... 30

L. Improperly Accumulated Earnings Tax (IAET) .................................................. 33

M. Tax-exempt Corporations ................................................................................. 36

N. Taxable Income ................................................................................................ 40

P. Fringe Benefits Tax (FBT! Whut up!) ................................................................. 50Q. Deductions ....................................................................................................... 53

R. Capital Gains and Losses (Sale or Exchange of Property) ................................. 76

S. Determination of Gain or Loss from Sale or Transfer of Property ...................... 81T. Situs of Taxation ............................................................................................... 86

U. Accounting Periods and Methods ...................................................................... 91

V. Estates and Trusts ............................................................................................ 97W. Returns and Payment of Taxes ...................................................................... 101

W. Withholding Tax ............................................................................................ 107

A. In General

Taxable Income The essential difference between capital and income is that capital is a fund; and

income is a flow. Capital is wealth, while income is the service of wealth.

Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is atree, income the fruit.

Income means profits or gains. (Madrigal v Rafferty)

Income may be defined as the amount of money coming to a person or corporation

within a specified time, whether as payment for services, interest or profit from

investment.

o A mere advance in the value of property of a person or a corporation in no

sense constitutes the income specified in the law. Such advance constitutes

and can be treated merely as an increase in capital. (Fisher v Trinidad) Cash dividends is taxed as income because it has been realized/received, while stock

dividends is not taxed as income because it is merely inchoate as it is a mereanticipation of income (it becomes income once you sell it).

o One is an actual receipt of profits; the other is a receipt of a representation of

the increased value of the assets of a corporation. (Fisher v Trinidad)

When dealing with money or property, the questions you should ask are:o Is this capital or is this income?

o Has it been realized/received or is it merely inchoate?


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B. General PrinciplesSEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the

Philippines;(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contractworker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a

citizen of the Philippines and who receives compensation for services rendered abroad as a member of thecomplement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sourceswithin the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on incomederived from sources within the Philippines.

Who are taxable on income derived from all sources, whether within or outside the

Philippines? Taxed worldwide!

1. Resident citizens.

2. Domestic corporations.

The other kinds of taxpayers are subject to tax only on income derived from

Philippine sources.

Taxable Income Taxable Income

Citizenship & Residency Inside RP Outside RP

Resident Citizen Yes Yes

Non-resident Citizen Yes No

Overseas Contract Worker Yes No

Resident Alien Yes No

Non-resident Alien Yes No

Domestic Corp Yes Yes

Foreign Corp Yes No

C. Income Tax on IndividualsDefinitions

Resident citizens and resident aliensSection 22 (F) The term "resident alien" means an individual whose residence is within the Philippines and who isnot a citizen thereof.

Resident alien is an individual:

1. Whose residence is within the Philippineso Must be actually present in the Philippines for more than 12 months from his

arrival

2. Who is not a citizen Mere physical or body presence is enough. Not intention to make the country ones

abode. (Garrison v CA)

An alien actually present in the Philippines who is not a mere transient or sojourner is a

resident of the Philippines for purposes of the income tax. Whether he is a transient ornot is determined by his intentions with regard to the length and nature of his stay.

o A mere floating intention indefinite as to time, to return to another country is notsufficient to constitute him a transient.

o If he lives in the Philippines and has no definite intention as to his stay, he is aresident. One who comes to the Philippines for a definite purpose which in its

nature may be promptly accomplished is a transient.

! But if his purpose is of such a nature that an extended stay may benecessary for its accomplishment, and to that end the alien makes his


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home temporarily in the Philippines, he becomes a resident, though it may

be his intention at all times to return to his domicile abroad when the

purpose for which he came has been consummated or abandoned. (RR 2)

Non-resident citizensSec 22 (E). The term "nonresident citizen" means:

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physicalpresence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as animmigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires

him to be physically present abroad most of the time during the taxable year.(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any

time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresidentcitizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources

abroad until the date of his arrival in the Philippines.(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside

permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

Meaning of non-resident citizen:

1. Citizen who establishes to the satisfaction of the Commissioner the fact of his

physical presence abroad with a definite intention to reside therein

2.

Citizen who leaves the Philippines during the taxable year to reside abroad, eitheras an immigrant or for employment on a permanent basis

3. Citizen who works and derives from abroad and whose employment thereatrequires him to be physically present abroad most of the time during the taxable

year4. Citizen who has been previously considered as nonresident citizen and who

arrives in the Philippines at any time during the taxable year to reside

permanently in the Philippines shall likewise be treated as a nonresident citizen

for the taxable year in which he arrives in the Philippines with respect to his

income derived from sources abroad until the date of his arrival in the

Philippines. Who are non-resident citizens? (RR 1-79)

1. Immigrant one who leaves the Philippines to reside abroad as an immigrant for

which a foreign visa has been secured

2. Permanent employee one who leaves the Philippines to reside abroad for

employment on a more or less permanent basis3. Contract worker one who leaves the Philippines on account of a contract of

employment which is renewed from time to time under such circumstance as to

require him to be physically present abroad most of the time (not less than 183days)

Non-resident citizens who are exempt from tax with respect to income derived from

sources outside the Philippines shall no longer be required to file information returns

from sources outside the Philippines beginning 2001. (RR 5-2001)

The phrase most of the time shall mean that the said citizen shall have stayed abroad

for at least 183 days in a taxable year.

The same exemption applies to an OCW but as such worker, the time spent abroad isnot material for tax exemption purposes all that is required is for the workers

employement contract to pass through and be registered with the POEA. (BIR Ruling33-2000).

Non-resident aliens engaged in business in the PhilippinesSec 22. (G) The term "nonresident alien" means an individual whose residence is not within the Philippines and

who is not a citizen thereof.


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Who are non-resident aliens?

1. An individual whose residence is not within the Philippines

2. Not a citizen of the Philippines

o Determination is by his intention with regard to the length and nature of his stay.

(Sec 5, RR 2)

o Alien can either:

Be deriving income in the Philippines, or Stays in the Philippines for more than 180 days during any calendar year

(deemed to be a non-resident alien engaged in the Philippines)

Loss of residence by alien

o An alien who has acquired residence in the Philippines retains his status until he

abandons the same and actually departs from the Philippines.

o A mere intention to change his residence does not change his status. An alien who

has acquired a residence is taxable as a resident for the remainder of his stay in the

Philippines. (Sec. 6, RR 2)

Minimum wage earnerSec 22. (GG) The term statutory minimum wage earner shall refer to rate fixed by the Regional Tripartite Wage

and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE.

(HH) The term minimum wage earner shall refer to a worker in the private sector paid the statutory minimumwage; or to an employee in the public sector with compensation income of not more than the statutory minimum

wage in the non-agricultural sector where he/she is assigned.

Fixed by the Regional Tripartite Wage and Productivity Board.

Minimum wage earner:

o Private sector paid the statutory minimum wage

o Public sector not more than the statutory minimum wage in the non-

agricultural sector where he/she is assigned

DependentSec 35. (B) For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted childchiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of

age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-supportbecause of mental or physical defect.

Dependent is ao Legitimate, illegitimate or legally adopted child, living with the taxpayer, and

chiefly dependent upon the taxpayer

o Who must be:

! Not more than 21,

! Unmarried, and

! Not gainfully employed, OR

! Dependent, regardless of age, is incapable of self-support because of

mental or physical defect.

To summarize, individual taxpayers are classified into:

1. Citizens, who are divided into:o Resident citizens those citizens whose residence is within the Philippines; and

o Non-resident citizens those citizens whose resident is not within the Philippines.

2. Aliens, who are divided into:o Resident aliens those individuals whose residence is within the Philippines and

are not citizens thereof; and


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o Non-resident aliens those individuals whose residence is not within the

Philippines but temporarily in the country and are not citizens thereof. They are:

! Those engaged in trade or business within the Philippines; and

! Those who are not so engaged. (see Sec 23-25)

Kinds of income and income tax of individuals

Tax formulaSEC. 24. Income Tax Rates. -

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

(1) An income tax is hereby imposed:(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections

(B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines beevery individual citizen of the Philippines residing therein;

(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections(B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an

individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workersreferred to in Subsection(C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections(b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an

individual alien who is a resident of the Philippines.(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates

established in the following schedule: (just see chart below, its the same thing)

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall computeseparately their individual income tax based on their respective total taxable income: Provided, that if any income

cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses,the same shall be divided equally between the spouses for the purpose of determining their respective taxable

income."Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the

payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shiftdifferential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

Not over P10,000 5%

Over P10,000 but not over P30,000 P500 + 10% of the excess over

P10,000

Over P30,000 but not over P70,000 P2,500 + 15% of the excess overP30,000

Over P70,000 but not over P140,000 P8,500 + 20% of the excess over

P70,000


P140,000


P250,000

Over P500,000 P125,000 + 32% of the excess over

P500,000

Gross Income

Less: Deductions

Taxable IncomeTax Rate

Tax Due

Know the tax base and the tax rate!


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Only resident citizens and domestic corporations are taxed on income derived from

abroad. Worldwide taxable! The tax is imposed upon taxable compensation or employment income, business

income, and income derived from the practice of professions derived by citizens and

resident aliens. Married individuals shall compute separately their individual income tax based on their

respective total taxable income.o If any income cannot be definitely attributed to, or identified as income

exclusively earned or realized by either of the spouses, the same shall be divided

equally between them for the purpose of determining their respective taxable

income.

Minimum wage earners are exempt from the payment of income tax on their taxable

income. Holiday pay, overtime pay, night shift differential pay, and hazard pay received

by them are likewise exempt from income tax.

A non-resident alien individual engaged in trade or business in the Philippines is subject

to the income tax in the same manner as an individual citizen and a resident alien on

taxable income received from sources within the Philippines.

For non-resident aliens not so engaged, the tax iso 25% of the entire or gross income received from sources within the Philippines

and

o 15% of the gross income received as compensation, salaries, and otheremoluments by reason of his employment by:

! regional or area headquarters and regional operating headquarters of

multinational corporations;

! offshore banking units established by a foreign corporation in the

Philippines; or

! by foreign petroleum service contractor or subcontractors operating in the

Philippines. (Sec 25 (A-E))

Final income tax interests, royalties, awards, dividends, capital gains on sale of shares,

realty

Sec 24. (B) Rate of Tax on Certain Passive Income.(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is herebyimposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from

deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as otherliterary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except

prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) ofSection 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources

within the Philippines: Provided, however, That interest income received by an individual taxpayer (except anonresident individual) from a depository bank under the expanded foreign currency deposit system shall be

subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided,further, That interest income from long-term deposit or investment in the form of savings, common or individual

trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificatesin such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this

Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investmentbefore the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by

the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining

maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; andLess than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or

property dividends actually or constructively received by an individual from a domestic corporation or from a jointstock company, insurance or mutual fund companies and regional operating headquarters of multinational

companies, or on the share of an individual in the distributable net income after tax of a partnership (except ageneral professional partnership) of which he is a partner, or on the share of an individual in the net income after


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tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a

member or co-venturer:

Six percent (6%) beginning January 1, 1998;Eight percent (8%) beginning January 1, 1999; and

Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998.

Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on orafter January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B)notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized

during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domesticcorporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000........ 5%On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on thegross selling price or current fair market value as determined in accordance with Section 6(E) of this Code,

whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale,exchange, or other disposition of real property located in the Philippines, classified as capital assets, including

pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided,That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of

its political subdivisions or agencies or to government-owned or controlled corporations shall be determined eitherunder Section 24 (A) or under this Subsection, at the option of the taxpayer.

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gainspresumed to have been realized from the sale or disposition of their principal residence by natural persons, the

proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18)calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this

Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall becarried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have

been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribedreturn of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax

exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization ofthe proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or

disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at thetime of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross

selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of thisSubsection shall be imposed thereon.

Sec 22 (Y) The term "deposit substitutes"shall mean an alternative from of obtaining funds from the public (theterm 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other

than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers ownaccount, for the purpose of relending or purchasing of receivables and other obligations, or financing their own

needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers'

acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into byand between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or

participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbankcall loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities,

including those between or among banks and quasi-banks, shall not be considered as deposit substitute debtinstruments.

Tax Rate on Certain Passive Income on Citizens and ResidentAliens

Final Tax

1. Interest under the expanded foreign currency deposit system (see RR

10-98 below) Nonresident citizens: exempt

7.5% (vs exemptfor nonresident

aliens engaged in

trade/biz)2. Royalty from books, literary works, & musical compositions 10%

3. Royalty other than above 20%

4. Interest on any current bank deposit, yield or other monetary benefits 20%


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from deposit substitute, trust fund & similar arrangement

5. Prize exceeding P10,000 20%

6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%

7. Dividend from a domestic corp, or from a joint stock company,

insurance or mutual fund company, & regional operating headquarters of

multinational company or share in the distributive net income after tax o

a partnership (except a general professional partnership), joint stock orjoint venture or consortium taxable as a corporation

But what about dividends from foreign corporations for citizens

(not resident aliens)? Well, the income here enters into the

computation for Sec 24 (a) tax calendar. For resident aliens, theyare not taxed since its income derived from abroad.

10% (vs 20% fornon-resident aliens

engaged intrade/biz)

8. Interest on long-term deposit or investment in banks (with maturity of

5 years or more)

exempt

Prize the result of an effort (like a prize in a beauty contest)

Winning the result of a transaction where the outcome depends upon

chance (like betting)Deposit substitute a means of borrowing money from the public (20 or

more individual or corporate lenders) other than by way of deposit withbanks through the issuance of debt instruments (like bankers

acceptances, promissory notes, repurchase agreements, certificates of

assignment or participation)

The sources above are derived within the Philippines. Note the situs rules:

o For aliens, the royalties and stuff must come from within the Philippines since

they are only taxed here.o For resident citizens, the passive income that come from outside the Philippines

goes into their gross income.

Tax Rate on Interest Income from Foreign Currency Deposit (RR

10-98)

1. Interest income actually received by a resident citizen or resident alien

from FCD

7.5% final

withholding tax2. If it was deposited by an OCW or seaman or nonresident citizen Exempt

3. If it was in a bank account in the joint names of an OCW and his

spouse (who is a resident)

50% exempt/

50% final

withholding tax

of 7.5%

4. Interest income actually received by a domestic corporation orresident foreign corporation from FCD

7.5% finalwithholding tax

Interest income which is actually or constructively received by a resident citizen of thePhilippines or by a resident alien individual from a foreign currency bank deposit will be

subject to a final withholding tax of 7.5%. The depository bank will withhold and remit

the tax. If a bank account is jointly in the name of a non-resident citizen, 50% of theinterest income from such bank deposit will be treated as exempt while the other 50%

will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable

income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA

8424. In case of deposits which were made in 1997, only that portion of interest which

was actually or constructively received by a depositor starting January 1, 1998 is

taxable. (RR 10-98)

Tax Rate on Capital Gains


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1. On sale of shares of stock of a domestic corporation NOT

listed and NOT traded thru a local stock exchange held asa capital asset,

o Capital gains not over P100,000

o Capital gains in excess of P100,000 (see RR 6-2008below)

5% of the net capital gains


2. On sale of real property in the Philippines held as a capitalasset (see RR 8-98 below) 6% of the gross selling

price, or the current market

value at the time of sale,

whichever is higher

Tax Rate on Income from Sale, Barter, Exchange or

other Disposition of Shares of Stock (RR 6-2008)

If shares of stock are listed and traded through the local

stock exchange

!of 1% (or .005%) of the

gross selling price or gross

value in money of theshares of stock

If shares not tradedthrough the local stock exchangeo Capital gains not over P100,000

o Capital gains in excess of P100,000



Who are liable?1. Individual taxpayer, whether citizen or alien;

2. Corporate taxpayer, whether domestic or foreign;

3. Other taxpayers not falling under (1) and (2) above, such as estate, trust, trustfunds and pension funds, among others.

Who are exempt?

1. Dealers in securities

2. Investors in shares of stock in a mutual fund company, as defined in Sec 22 (BB),

and Section 2(s) of these Regulations, in ocnnection with the gains realized by saidinvestor upon redemption of said shares of stock in a mutual fund companyl and

3. All other persons, whether natural or juridical, who are specifically exempt fromnational internal revenue taxes under existing investment incentives and other

special laws.

How to determine the tax base of disposition

of stock (RR 6-2008)

Fair Market Value

Sales of stock listed and traded through the LSE FMV is the actual selling price

Sales of stock listed but not traded through the

LSE

FMV is the closing price on the day

when the shares were sold, transferred,

etc (if no sale was made on that day inthe LSE, then the closing price on the

day nearest to the date of sale,transfer, or exchange of the said

shares)

Sales of stock not listed and not traded through

the LSE

FMV is the book value of the shares of

stock as shown in the financial

statements duly certified by anindependent CPA nearest to the date of


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sale

Final Tax Rate on Sales, Exchanges, or Transfers or Real

Properties Classified as Capital Assets (RR 8-98)

Sale of real property in the Philippines 6% of the gross selling

price, or the current

market value at the timeof sale, whichever ishigher

If sale was made to the government or to GOCCs Either 6% of the gross

selling price/current

market value or under

the normal income tax

rate, taxpayers option

Creditable Withholding Tax on Sales, Exchanges or

Transfers of Real Properties classified as Ordinary Assets

(RR 8-98)

1. If the seller is habitually engaged in the real estate businesso Selling price is less than P500,000

o Selling price is P500,000 to P2m

o Selling price is above P2m

1.5%

3%

5% of gross selling

price/current market

value, whichever is

higher

2. If the seller is not habitually engaged in the real estatebusiness

7.5% of gross sellingprice/current market

value, whichever is

higher

3. If the seller is exempt from creditable withholding tax as per

RR 2-98

Exempt

Conditions to be exempt from capital gains tax of 6% on the sale, exchange, or

disposition of a principal residence (RR 13-99)

1. The proceeds from the sale, exchange, or disposition of his principal residence must

be fully utilized in acquiring or construing a new principal residence within 18

months. There must be proof.

2. This can only be availed of ONLY ONCE every 10 years

3. The historical cost of his old principal residence shall be carried over to the cost basis

of his new residence

4. If there is no full utilization, he shall be liable for the deficiency capital gains tax of

the utilized portion

5. If the principal residence is disposed in exchange for a condo, and if it is used as his

new residence, then he is exempt6. The 6% capital gains tax otherwise due must be deposited in escrow with an

authorized agent bank, and can only be released when sufficient proof is shown that

the proceeds have been fully utilized within 18 months.

What is the principal residence anyway? (RR 14-2000)

o It is the dwelling house, where the husband or wife or unmarried individual

resides; actual occupancy is not interrupted or abandoned by temporary absence

due to travel, studies, or work abroad


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o If the ownership of the land and the dwelling house belong to different persons,

only the dwelling house shall be treated as principal residence

o It is not necessarily the family home.

Payment of capital gains tax on foreclosure of mortgaged property (RR 4-99)

o If the mortgagor exercises his right of redemption within 1 year no capitalgains tax because none has been derived and no transfer of property was

realized In case of non-redemption, the capital gains will be due based on the bid price of the

highest bidder.

o Who pays the capital gains?

! If the mortgagee is a bank, then it is the mortgagee bank that pays it, not

the seller.

Personal and Additional ExemptionsSEC. 35.Allowance of Personal Exemption for Individual Taxpayer. -

(A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall beallowed a basic personal exemption amounting to P50,000 for each individual taxpayer.

In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shallbe allowed the personal exemption.(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of twenty five

thousand pesos (P25,000) for each dependent not exceeding four (4).The additional exemption for dependent shall be claimed by only one of the spouses in the case of married

individuals.In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who

has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimedby both shall not exceed the maximum additional exemptions herein allowed.

For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted childchiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of

age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-supportbecause of mental or physical defect. (Amended by RA 9504)

Personal and additional exemption for individual taxpayer

Basic personal exemption for each individual taxpayero If married and only one of the spouses is deriving gross income,

only such spouse shall be allowed the personal exemption.

P50,000

Additional exemption for each dependent, not exceeding four (4)

o Claimed by only one spouse in case of married individuals

o If legally separated, additional exemptions claimed only byspouse who has custody; should not exceed maximum

additional exemptions allowed

P25,000 per

dependent

Exemption statutes are not retroactive. (Pensacola v CIR)

Discounts for senior citizens is now treated as tax deductions, as per RA 9257. This

sucks for the taxpayer because he doesnt get the peso for peso benefit which hewould have gotten if it were considered a tax credit as before. (M.E. Holdings Corp v CIR

& CTA)

Senior Citizens areo Resident citizens

o At least 60 years old

! They are not exempt from income taxes unless they are considered

minimum wage earners. (RA 9994, which also took out the previous

P60,000 requirement)


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Change of statusSec 35. (C) Change of Status.- If the taxpayer marries or should have additional dependent(s) as defined aboveduring the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in

full for such year.If the taxpayer dies during the taxable year, his estate may still claim the personal and additional

exemptions for himself and his dependent(s) as if he died at the close of such year.If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one

(21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the sameexemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one

(21) years old or became gainfully employed at the close of such year.

Personal exemption allowable to nonresident alien individualsSec. 35 (D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien individual

engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personalexemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a

subject - or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed inthis Section as exemption for citizens or resident of the Philippines: Provided, That said nonresident alien should

file a true and accurate return of the total income received by him from all sources in the Philippines, as requiredby this Title.

Personal Exemptions allowable to

nonresident alien individuals

If engaged in trade, business or in the exercise of

a profession

Entitled to a personal exemption in the

amount equal to the exemptions

allowed in the income tax law of hiscountry for Filipinos, but it shouldnt

exceed the amount fixed here for

exemptions

If not engaged in trade, business or in the exercise

of a profession

None, because Sec 25 (B) states that

he will be taxed upon his entire

income.

De Leon states that nonresident aliens are not entitled to additional exemptions fordependents. (P. 135, Fundamentals of Taxation 2009)

Optional Standard DeductionSec. 34 (L) Optional Standard Deduction.- In lieu of the deductions allowed under the preceding Subsections,an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an

amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case ofa corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not

exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayersignifies in his return his intention to elect the optional standard deduction, he shall be considered as having

availed himself of the deductions allowed in the preceding Subsections. Such election when made in the returnshall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled

to and claimed for the optional standard shall not be required to submit with his tax return such financialstatements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise

permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the saidcorporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the

taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, uponrecommendation of the Commissioner.

Optional standard deduction is the deduction which an individual other than a non-

resident alien, or a corporation, subject to income tax, may elect in an amount notexceeding 40% of his gross sales or gross receipts, as the case may be, or a

corporation, in an amount not exceeding 40% of its gross income, in lie of taking

itemized deductions. The OSD may be availed of by:


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o A citizen, whether resident or non-resident

o Resident alien,

o Domestic corp,

o Resident foreign corp,

o Partnerships, and

o Taxable estate and trust.

!

A non-resident alien cannot claim OSD. The OSD allowed to individual taxpayer shall be a maximum of 40% of gross sales or

gross receipts during the taxable year.

o If one uses the accrual basis of accounting for his income and deductions, the

OSD shall be based on the gross sales during the taxable year.

o If one uses the cash basis, the OSD shall be based on his gross receipts during

the taxable year.

o The law is specific that for individual taxpayers the basis of the 40% OSD shall be

gross sales or gross receipts, not gross income, for which reason the cost of

sales and the cost of services are not allowed to be deducted for purposes of

determining the basis of the OSD.

o For other individual taxpayers allowed by law to report their income anddeductions under a different method of accounting, the gross sales or gross

receipts shall be determined in accordance with the said acceptable method of

accounting.o No need to substantiate with receipts!

Example:

o Suppose a retailer of goods, an individual, whose accounting method is under the

accrual basis has a gross sales of P1m with a cost of sales amounting to P800k.

the computation of the OSD shall be determined as follows:

Gross Sales P1,000,000

Less: CoGS --------------

Basis of the OSD P1,000,000

x OSD Rate (max) .40

OSD Amount P400,000

If the taxpayer opts to use the OSD in lieu of the itemized deductions allowed

under Sec 34 of the Tax Code, his net taxable income shall be as follows:Gross Sales P1,000,000

Less: CoGS ------------

Gross Sales/Gross InomeP1,000,000

Less: OSD (max) 400,000

Net Income P600,000

Premium payments on health and/or hospitalization insuranceSec. 34 (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer.

-The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundredpesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by thetaxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That

said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxableyear: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption

for dependents shall be entitled to this deduction.

The taxpayer is allowed a deduction of P2,400/family or P200/month for health and/or

hospitalization insurance premiums, provided:

o Said familys gross income is not more than P250,000 for the taxable year.


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o It must be taken by the taxpayer for himself and his family.

If married, only the spouse claiming the additional exemption for dependents can avail

of this.

Exclusions and deductions (discussion from De Leons book, see also Sec 61-64 of RR 2) Exclusions are incomes that are exempt from the tax. They are not to be included in the

tax return unless information regarding it is specifically called for.o Examples:

! Life insurance proceeds paid to beneficiaries upon the death of the

insured.

! Value of the property acquired by inheritance or donation, because it is

subject to estate or donors tax.

! Retirement benefits, pensions, etc, received by government officials and

employees from the GSIS and SSS in recognition of their services. So with

retirement benefits of private firms, under certain conditions.

! Prizes and awards made primarily in recognition of religious, charitable,

scientific, educational, artistic, etc, competitions and tournaments.

! Christmas bonus, 13th month pay, productivity incentives, and otherbenefits received up to a max of P30,000.

!

Gains from the sale or retirement of bonds or other certificates of

indebtedness with a maturity of more than 5 years. Deductions are items or amounts which the law allows to be deducted under certain

conditions from the gross income of a taxpayer in order to arrive at the taxable income.

Both reduce actual gross income although exclusions are not included in the income tax

return.

Some general principals governing deductions include:

o The taxpayer seeking a deduction must point to some specific provision of the

statute authorizing the deduction; and

o He must be able to prove that he is entitled to the deduction authorized or

allowed. They are allowed only where there is a clear provision in the statute for the

deduction claimed. Taxable gross income is affected by exclusions because the latter are omitted from the

former and are not reported on the income tax return but is not affected by deductions

because they are subtracted after gross income is determined and are reported on thereturn.

Kinds of deductions:

1. Deductions from compensation income.

2. Deductions from business/professional income.

3. Deductions from corporate income.

4. Special deductions

5. Deductions allowed by special laws.

Tax on non-resident aliens

Non-resident aliens engaged in business in the PhilippinesSEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines.-

(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to

an income tax in the same manner as an individual citizen and a resident alien individual, on taxable incomereceived from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines

and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar yearshall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code

notwithstanding.


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(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual

Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable NetIncome of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a

Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividendsfrom a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from

a regional operating headquarters of multinational company, or the share of a nonresident alien individual in thedistributable net income after tax of a partnership (except a general professional partnership) of which he is a

partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account,or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any

form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to taxunder Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto

winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided,however, that royalties on books as well as other literary works, and royalties on musical compositions shall be

subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographicfilms and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore,

That interest income from long-term deposit or investment in the form of savings, common or individual trustfunds, deposit substitutes, investment management accounts and other investments evidenced by certificates in

such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under thisSubsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment

before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld bythe depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining

maturity thereof:Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; andLess than three (3) years - 20%.(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations

not traded through the local stock exchange, and real properties shall be subject to the tax prescribed underSubsections (C) and (D) of Section 24.

A nonresident alien engaged in trade or business in the Philippines is subject to the

same income tax rate as citizens and resident aliens, on taxable income received from

all sources within the Philippines. A nonresident alien who stays in the Philippines for an aggregate period of more than

180 days shall be deemed as nonresident alien doing business in the Philippines.

Tax Rate on Certain Passive Income on Nonresident Aliens

Engaged in Trade, Business or Exercising a Profession

Final Tax

1. Interest under the expanded foreign currency deposit system exempt

2. Royalty from books, literary works, & musical compositions 10%

3. Royalty other than above 20%

4. Interest on any current bank deposit, yield or other monetary benefits


20%

5. Prize exceeding P10,000 20%

6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%

7. Dividend from a domestic corp, or from a joint stock company,

insurance or mutual fund company, & regional operating headquarters of

multinational company or share in the distributive net income after tax o

a partnership (except a general professional partnership), joint stock or

joint venture or consortium taxable as a corporation

What about dividends from foreign corps? Exempt. Nonresidentaliens are not taxed worldwide.

20% (comparewith citizens andresident aliens)

8. Gross income from cinematographic films & similar works 25%

9. Interest on long-term deposit or investment in banks (with maturity of

5 years or more)

exempt

Tax Rate on Capital Gains (same with residents, and

nonresident aliens not engaged in business)



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listed and NOT traded thru a local stock exchange held as

a capital asset,o Capital gains not over P100,000




2. On sale of real property in the Philippines held as a capital

asset 6% of the gross selling

price, or the current marketvalue at the time of sale,whichever is higher

Non-resident aliens not engaged in business in the PhilippinesSec. 25 (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. -

There shall be levied, collected and paid for each taxable year upon the entire income received from all sources

within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippinesas interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation,

remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income,and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident

alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domesticcorporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of

Section 24.

Nonresident aliens not engaged in business are taxed 25% of their entire income within

the Philippines. That means they have no deductions!

Their capital gains are the same with nonresident aliens engaged in business (see table

above!)

Special aliensSec. 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating

Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year

upon the gross income received by every alien individual employed by regional or area headquarters and regionaloperating headquarters established in the Philippines by multinational companies as salaries, wages, annuities,

compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or areaheadquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income:

Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positionas those of aliens employed by these multinational companies. For purposes of this Chapter, the term

'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiariesor branch offices in the Asia-Pacific Region and other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each

taxable year upon the gross income received by every alien individual employed by offshore banking unitsestablished in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments,

such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of suchgross income: Provided, however,That the same tax treatment shall apply to Filipinos employed and occupying the

same positions as those of aliens employed by these offshore banking units.

(E)Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a

permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign servicecontractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable

to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and otheremoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided,

however,That the same tax treatment shall apply to a Filipino employed and occupying the same position as analien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred to under

Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposedunder this Code.

Special Aliens


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1. Employed by regional or area headquarters & regional

operating headquarters established in the Philippines bymultinational;

15% on gross income

2. Employed by offshore banking units 15% on gross income

3. Permanent resident of a foreign country but who is employedand assigned in the Philippines by a foreign service contractor or

by a foreign service subcontractor engaged in petroleumoperations in the Philippines

15%

Provided the same tax shall apply to Filipinos employed and occupying the same position

as these aliens.

These apply only to positions of a highly technical or highly managerial nature. (Atty.

Montero)

All income earned from all other sources within the Philippines by the special alien

employees shall be subject to the pertinent income tax imposed by the Code.

Tips on answering

Thought process in answering problems:1. Is this income? If not, then its not really a income tax problem.

2. Whos the taxpayer? And whats the source? Refer to Sec 23!

3. Whats the specific rate? See sec 24-25!

For example, what is the tax rate of on income derived from dividends from foreigncorporations for 1. Resident citizens 2. Resident aliens and 3. Nonresident aliens engaged in

trade or business?

1. Resident citizens

a. Yes, its income.

b. The source is outside the Philippines. Are they liable for sources from outsidethe Philippines? Yes! Citizens are taxed worldwide!

c. Whats the specific tax rate? Hmm since its not in any of the charts, but

they still have to be taxed, then the income they derive from dividends from

foreign corporations will be considered in computing the tax rate based on thetax calendar of Sec 24(a)

2. Resident aliens

a. Yes, its income.

b. The source is outside the Philippines. Are they liable for sources from outsidethe Philippines? No! They arent taxed worldwide.

3. Nonresident aliens engaged in trade or business

a. Yes, my dear, its income.b. The source is outside the Philippines. Are they liable for source from outside

the Philippines? No! They arent taxed worldwide either.

D. Definitions Section 22, Tax Code

Definition of corporationsSec 22 (B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stockcompanies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include

general professional partnerships and a joint venture or consortium formed for the purpose of undertakingconstruction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an

operating consortium agreement under a service contract with the Government. "General professionalpartnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no

part of the income of which is derived from engaging in any trade or business.


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Corporations include:

o Partnerships, no matter how created or organized

o Joint-stock companies

o Joint accounts

o Associations

o Insurance companies

It does not includeo General professional partnerships;

o Joint venture or consortium formed for the purpose of undertaking construction

projects, or engaging in petroleum, coal, geothermal and other energy operations

pursuant to an operating or consortium agreement under a service contract with

the government. (The JV should NOT be incorporated.)

Remember your partnership lessons! (AFISCO and Pascual cases) All co-owernships are not deemed unregistered partnerships.(Obillos v CIR)

The moment inheritance shares are used as part of the common assets to be used in

making profits, it is considered part of the taxable income of an unregistered

partnership. (Ona v CIR)

Requisites of a JV:1. Contribution by each party

2.

Profits are shared among the parties

3. There is joint right of mutual control over the subject matter4. There is a single business transaction rather than a general or continuous transaction

(BIR Ruling 317-92, in this case, the first agreement of the two parties to construct the

6750 Bldg was not taxable because they had not derived income/profits from it. the

construction of the building was mere return of the capital which they shelled out.

However, once the two corporations were placed under one sole management to operate

the business affairs of the two, the JV was taxable separate from the two corporations

comprising it. The distribution by the JV to the two constituent corporations was not

taxable because it was considered intra-corporate dividends.)

On partnerships

Two kinds of partnership, for income tax purposes:

o Partnerships NOT subject to income tax, ie

! General professional partnership

! Joint venture or consortium agreement formed for the purpose of undertaking construction projects

engaging in petroleum, coal, geothermal and other energy

operations

o pursuant to an operating or consortium agreement under a

service contract with the government

o Partnerships subject to tax

! Usually, those whose income is derived from trade or business

Differences

NON TAXABLE TAXABLE business partnership

With regard to DISTRIBUTIVE SHAREo Distributive share is a partners computed and ascertained share in the net

profits of the partnership,

! Whether actually distributed to the partners or not

will form part of partners gross

income in the ITR subject to the

graduated income tax rates will be subjected to a creditable

Partners distributive share in the net

income is subject to a final tax of 10%

(resident citizens, non-resident citizens,OCWs, or resident aliens) or 20% (for


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withholding tax of 15% (if income

payments exceed P720,000 for thecurrent year) or 10% (if income

payments do NOT exceed P720,000

for the current year) to be withheldand paid by the partnership to the

BIR

NRAETB)

With regard to PARTNERS SHARE IN NET LOSS OF THE PARTNERSHIP

May be claim as a deductible expense in

his personal income tax return

Not deductible since subject to final tax

With regard to HOW THE PARTNERSHIP is TAXED

Still required to file an annual

information return on their incomes and

expenses for the purpose of

ascertaining the partners taxable

shares

Deemed and treated as corporations

subject to the corporate income tax rate

When co-ownership becomes taxable:o Income of the co-ownership is invested in other income-producing properties or

income-producing activities

o When there is NO attempt to divide the inherited property for more than 10 years

and the said property was not under any administration proceedings nor held in

trust (thus deemed an unregistered partnership)

E. Income Tax RatesSEC. 27. Rates of Income tax on Domestic Corporations. -

(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby

imposed upon the taxable income derived during each taxable year from all sources within and without the

Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as acorporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009,the rate of income tax shall be thirty percent (30%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computedwithout regard to the specific date when specific sales, purchases and other transactions occur. Their income and

expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.The corporate income tax rates shall be applied on the amount computed by multiplying the number of months

covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided bytwelve.

Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after

the following conditions have been satisfied:(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);

(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;(3) A VAT tax effort of four percent (4%) of GNP; and

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of salesto gross sales or receipts from all sources does not exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for three (3)

consecutive taxable years during which the corporation is qualified under the scheme.For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross

sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include allbusiness expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goodssold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including

insurance while the goods are in transit.


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For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production

of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurancepremiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less salesreturns, allowances and discounts.

Tax rate of Domestic Corporations 30% of taxable income from all sources within

and outside the Philippines, or2% of gross income if MCIT applies, or

15% of gross income if the following conditionsare met:

1. tax effort ratio of 20% of GNP

2. ratio of 40% of income tax collection tototal tax revenues

3. VAT tax effort of 4% of GNP; and

4. .9% ratio of the Consolidated Public Sector

Financial Position (CPSFP) to GNP (this last

one has yet to be implemented)

Option to be taxed based on gross income shall be available only to firms whose ratio of

cost of sales to gross sales or receipts from all sources does not exceed 55% Election of the gross income tax option by the corporation shall be irrevocable for

3 consecutive taxable years

Domestic corporations are subject to any or some of the following:

Capital gains tax Final tax on passive income

Normal tax

Minimum corporate income tax (MCIT) Gross income tax (GIT)

Improperly accumulated earnings tax (IAET)

Gross Income Computation

Gross Sales

Less: Sales Returns

DiscountsAllowances

CoGS (all business expenses directly incurred to produce the merchandise and bring

them to their present location or use)

Total Gross Income

CoGS for a Trading or Merchandise Concern

Invoice cost of goods sold

Import duties

Freight in transporting the goods to the place where the goods are actually sold

Insurance while the goods are in transit

CoGS for a Manufacturing ConcernAll costs of production of finished goods such as raw materials, direct labor & manufacturing

overhead

Freight cost

Insurance premiums

Other costs incurred to bring the raw materials to the factory or warehouse

Gross Income Computation for a Service Concern

Gross Sales


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Less: Sales Returns

Discounts

Allowances

Cost of Services (all direct costs & expenses necessarily incurred to provide the

services required by the customers & clients including:

Salaries & employee benefits of personnel, consultants & specialists

directly rendering the service Cost of facilities directly utilized in providing the service such as

depreciation or rental of equipment use & cost of supplies

If its a bank, interest expense is included

Total Gross income of a service concern

F. Proprietary Educational Institutions and Hospitals(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are

nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D)hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent

(50%) of the total gross income derived by such educational institutions or hospitals from all sources, the taxprescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection,

the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct ofwhich is not substantially related to the exercise or performance by such educational institution or hospital of its

primary purpose or function. A "Proprietary educational institution" is any private school maintained andadministered by private individuals or groups with an issued permit to operate from the Department of Education,

Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and SkillsDevelopment Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

Proprietary educational institution is:

o Any private school maintained & administered by private individuals or groupso With an issued permit to operate from the DECS or CHED or TESDA

Tax rate of proprietary educational

institutions and hospitals

10% on their taxable income (except for passive

income), or

30% on their entire taxable income if the grossincome from unrelated trade, business or other

activity exceeds 50% of the total gross income of

the institution In computing this 30% on the entire

taxable income scenario, include:

o Income subject to taxo Income which are exempt

Unrelated trade, business or other activity means

o Any trade, business or other activity

o The conduct of which is not substantially related to the exercise or performance

by such its institution of its primary purpose or function.

For non-stock, non-profit educational institutions, all revenues use actually, directly andexclusively for educational purposes are exempt.

o Their exemption refers only to revenues derived from assets used actually,

directly and exclusively for educational purposes.o Income from cafeterias, canteens & bookstores are also exempt if they are

owned & operated by the educational institution and are located within the school

premises.

o However, they shall be subject to internal revenue taxes on income from trade,

business or other activity, the conduct of which is not related to the exercise or

performance by such educational institutions of their educational purposes or

functions, i. e. rental payment from their building/premises. (RR 76-2003)

For non-stock, non-profit corporations who are exempt, they are still liable for taxes on:


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o Income derived from any of their real properties (rental payment form their

building premises)

o Any activity conducted from profit regardless of disposition thereof

o Interest income from any bank deposits or yield on deposit substitutes (final tax

of 20%)

o If its foreign currency deposit, final tax of 7.5% (Dep Order 149-95, 1995)

o

They shall also be withholding agents for their employees compensation incomesubject to withholding tax (RR 76-2003)

For private educational institutions, they are exempt from VAT, but they must be

accredited with either DECS or CHED.

o However, income derived from trade, business or other activity is still taxable.

o Their bank deposits and foreign currency deposits are exempt from withholding

taxes but they must show proof that such income is used to fund proposed

projects for their institutions improvement.

o They shall also be the withholding agents for their employees compensation

income subject to withholding tax.

G. GOCCsSec. 27 (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The

provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, orinstrumentalities owned or controlled by the Government, except the Government Service Insurance System(GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine

Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by thisSection upon corporations or associations engaged in s similar business, industry, or activity.

GOCCs are taxed on the same rate upon their taxable income upon corporations or

associations engaged in similar business, industry, or activity.

o Exempt GOCCs:

! GSIS

! SSS

! PHIC

! PCSO

!

As per RA 9337, PAGCOR was deleted from the list of exempt GOCCs.

H. Passive IncomeSec. 27 (D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Fundsand Similar Arrangements, and Royalties.- A final tax at the rate of twenty percent (20%) is hereby imposed upon

the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutesand from trust funds and similar arrangements received by domestic corporations, and royalties, derived from

sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from adepository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the

rate of seven and one-half percent (7 1/2%) of such interest income.(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. -A final tax at the rates

prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or

other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stockexchange:Not over P100,000..... 5%

Amount in excess of P100,000.. 10%(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a

depository bank under the expanded foreign currency deposit system from foreign currency transactions withnonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks

that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depositsystem shall be exempt from all taxes, except net income from such transactions as may be specified by the

Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income taxpayable by banks: Provided, however,That interest income from foreign currency loans granted by such depository


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banks under said expanded system to residents other than offshore banking units in the Philippines or other

depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under

the expanded system shall be exempt from income tax

(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation

shall not be subject to tax.(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six

percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition

of lands and/or buildings which are not actually used in the business of a corporation and are treated as capitalassets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this

Code, whichever is higher, of such lands and/or buildings.

Tax Rate on Passive Income of Domestic Corporations Final Tax

1. Interest under the expanded foreign currency deposit system 7.5%

2. Royalty of all types within the Philippines

o Royalty from abroad? Enters the taxable income 30% tax rate

20%

3. Interest on any current bank deposit, yield or other monetary benefits


20%

4. Dividend from domestic corporations (inter-corporate dividend) exempt

Tax Rate on Capital Gains (same as individuals)


listed and NOT traded thru a local stock exchange held as

a capital asset,





2. On sale of real property in the Philippines held as a capitalasset 6% of the gross selling

price, or the current market

value at the time of sale,whichever is higher

Tax Rate of BANKS on Income Derived under the Expanded FCD

System

Final Tax

1. Income derived by a depository BANK from foreign currency

transactions with non-residents, OBUs, etc

exempt

2. Interest income from foreign currency loans granted by a bank to

residents other than OBUs

10%

Income of non-residents (individuals or corporations) from transactions with depository

bank under the expanded FCD system are exempt.

What are deposit substitutes?(Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (the term

'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than

deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account,for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the

needs of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances,promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between

the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participationand similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans

with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, includingthose between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.


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A deposit substitute is a means of borrowing money from the public (20 or more

individual or corporate lenders) other than by way of deposit with banks through the

issuance of debt instruments.

Sale of shares

Tax Rate on Income from Sale, Barter, Exchange or

other Disposition of Shares of Stock (RR 6-2008)If shares of stock are listed and traded through the localstock exchange

!of 1% (or .005%) of thegross selling price or gross

value in money of the

shares of stock

If shares not tradedthrough the local stock exchange


o Capital gains in exces

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Taxation One Complete Updated (Atty. Mickey Ingles)

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