7/30/2019 Taxation-Reviewer -
1/145
ATENEOCENTRALBAROPERATIONS 2007
Taxation LawSUMMER REVIEWER
QuickTime and aTIFF (U d) d
PART I GENERAL PRINCIPLES
TAXATION power inherent in every sovereignState to impose a charge or burden upon persons,properties, or rights to raise revenues for the use andsupport of the government to enable it to dischargeits appropriate functions
SCOPE OF TAXATIONTAXATION IS: Unlimited, Far-reaching, Plenary Comprehensive Supreme
STAGES OF TAXATION: (LAP)
1. Levy2. Assessment3. Payment
Basic Principles of a Sound Tax System1. Fiscal Adequacy2. Theoretical Justice3. Administrative Feasibility
INHERENT LIMITATIONS (SPING)1) Situs or territoriality of taxation2) Must be for a Public purpose
Test is whether proceeds will beused for something which is theduty of the State to provide.
Legislature is not required toadopt a policy of all or none.
Incidental benefit to individual
does not defeat exemption3) International comity
Property of a foreign State ofgovernment may not be taxed byanother
4) Non-delegability of the taxing power
Contemplates power tod t i ki d bj t t t
to the other
Applies only to entities exercisinggovernment functions (acta jureimperii)
CONSTITUTIONAL LIMITATIONSA. Direct
1) Due process
Should not be harsh, oppressive,or confiscatory (Substantive)
By authority of valid law(Substantive)
Must be for a public purpose(Substantive)
Imposed within territorialjurisdiction (Substantive)
No arbitrariness in assessmentand collection (Procedural)
Right to notice and hearing(Procedural)
2) Equal protection
All persons subject to legislationshall be treated alike, under likecircumstances and conditionsboth in privileges conferred andliabilities imposed.
Power to tax includes power toclassify provided:(a) Based on substantial
distinction(b) Apply to present and future
conditions(c) Germane to purpose of law(d) Apply equally to all members of
the same class
3) Non-impairment clause Rules
(a) When government is party tocontract granting exemption cannot be withdrawnwithout violating non-impairment clause
7/30/2019 Taxation-Reviewer -
2/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
Uniform: all articles or properties
of the same class taxed at samerate
Equity: apportionment must bemore or less just in the light oftaxpayers ability to shoulder taxburden
5) Non-imprisonment for non-paymentof poll tax
Taxpayer may be imprisoned fornon-payment of other kinds oftaxes where the law so expresslyprovides.
6) Congress shall evolve a progressivesystem of taxation
As resources of the taxpayerbecomes higher, his tax ratelikewise increases (ex. Incometax)
Constitution does not prohibit
regressive taxes; this is adirective upon Congress, not a
justiciable right.7) All appropriation, revenue or tariff bills shall
originate exclusively in the House ofRepresentatives, but the Senate maypropose or concur with amendments
It is the bill, not the law, that mustoriginate from House; bill may undergo
extensive changes in Senate Rationale: members of House are more
sensitive to local needs.8) Freedom of religion
Activities simply and purely forpropagation of faith are exempt (e.g. saleof bibles and religious articles by non-stock, non-profit organization at minimalprofit).
Tax is unconstitutional if it operates as aprior restraint on exercise of religion
Income even of religious organizationsfrom any activity conducted for profil orfrom any of their property, real orpersonal, regardless of disposition ofsuch income, is taxable
9) F d f / i
ACTUALLY, DIRECTLY and EXCLUSIVELY
USED for charitable, religious andeducational purposes shall be exempt fromtaxation
Pertains only to real estate tax.
Test of exemption: actual use of theproperty, not ownership
Use of word exclusively meansprimarily rather than solely.
Exemption extends to property incidentalto or reasonably necessary for theaccomplishment of the purposesmentioned.
11) Tax exemption ofall revenues and assets of(a) non-stock, non-profit educational
institutions(b) used ACTUALLY, DIRECTLY AND
EXCLUSIVELY for educationalpurposes
Exemption covers income, property,
donors tax, and customs duties(distinguish from previous which pertainsonly to property tax)
Revenue must both be (a) derived froman activity in pursuance of educationalpurpose; and (b) proceeds must be usedfor the same purpose (ex. hospitaladjunct to medical school tax exempt)(ex. Interest income not exempt).
Income exempt provided it is used formaintenance or improvement ofinstitution.
Distinguish from tax treatment of (a)proprietary educational institutions(Preferential Tax); and (b) governmenteducational institutions (exempt, ex. UP)
12) Delegated authority of President to imposetariff rates, import and export quotas,
tonnage and wharfage dues delegated by Congress
through a law
subject to Congressional limits andrestrictions
within the framework of nationaldevelopment program
7/30/2019 Taxation-Reviewer -
3/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
15) Special purpose - special fund for said
purpose, balance goes to general funds16) Veto power of the President - revenue/tariffbill
17) Power of review of the SC18) Power of Local Government to create their
own sources and levy taxes, fees, charges19) Just share of local government in national
revenue which shall be automaticallyreleased.
20) Tax exemption of all revenues and assets of
(a) proprietary or cooperative educationalinstitutions
(b) subject to limitations provided by law21) Tax exemption of grants, endowments,
donations or contributions USEDACTUALLY, DIRECTLY and EXCLUSIVELYfor educational purposes
CIR v. CA (298 SCRA 85)
Facts: YMCA is a non-stock, non-profit institution,which conducts various programs and activitiesbeneficial to the public pursuant to its religious,educational and charitable objective. In 1980, YMCAearned an income of more than P600K from leasingout a portion of its premises to small shop ownersand P47K from parking fees.
Issue: Is the rental income from real property ownedby the YMCA subject to income tax?
Held: YES, the exemption claimed by YMCA isexpressly disallowed by the last paragraph of then27 of the NIRC. Furthermore, Art. XIV, 4 (3) of theConstitution only exempts YMCA from property taxesNOT income tax. YMCA cannot be considered as aneducational institution within the purview of theabove-cited article. The term educational institution
under the Education Act of 1982 refers to schools.The school system is synonymous with formaleducation, which refers to hierarchically structuredand chronologically graded learnings organized andprovided by the formal school system and for whichcertification is required in order for the learner toprogress through grades or more to higher levels
(c) without regard to their property,
occupation or businessEx. Community Tax (Cedula)2) property tax
(a) imposed on property, real or personal(b) in proportion to its value or other
reasonable method of apportionmentEx. Real estate tax
3) excise, privilege tax - (different from theexcise tax in Taxation II)(a) imposed upon performance of an act, the
enjoyment of a privilege or the engagingin an occupation, profession or business
Ex. Income tax, VAT, estate tax, donors taxB. As to who bears the burden
1) Direct the tax is imposed on the personwho also bears the burden thereofEx. Income tax, community tax, estate tax
2) Indirect imposed on the taxpayer whoshifts the burden of the tax to another
Ex. VAT, specific tax, percentage tax,customs duties
C. As to determination of amount1) Specific tax imposed and based on a
physical unit of measurement, as by head,number, weight, length or volumeEx. Tax on distilled spirits, fermentedliquors, cigars
2) Ad Valorem - tax of a fixed proportion of thevalue of property with respect to which thetax is assessed; requires intervention ofassessor.Ex. Real estate tax, excise tax on cars, non-essential goods
D. As to purpose1) General, fiscal or revenue - imposed for the
general purpose of supporting thegovernmentEx. Income tax, percentage tax
2) Special or regulatory - imposed for aspecial purpose, to achieve some social oreconomic objectivesEx. Protective tariffs or customs duties onimported goods intended to protect localindustries
E. As to authori ty imposing the tax
7/30/2019 Taxation-Reviewer -
4/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
F. As to graduation of rate (Three systems of
taxation)1) Proportional - based on a fixed percentage
of the amount of the property, income orother basis to be taxedEx. Real estate tax, VAT, percentage tax
2) Progressive or graduated - tax rateincreases as the tax base or bracketincreasesEx. Income tax, estate tax, donors tax
3) Regressive - tax rate decreases as the taxbase increases
4) Degressive - increase of rate is notproportionate to the increase of tax base
SITUS OF TAXATION - the place of taxation, thecountry that has the power to levy and collect thetax.
TAX DISTINGUISHED FROM POLICE POWER
TAX POLICE POWER (inthe form of a FEE)
Purpose Raise revenue Exercise to promotepublic welfare throughregulation
Amount ofexaction
No limit Limited to the cost ofregulation, issuance
of license, orsurveillance
Superiorityofcontracts
Contracts maybe impairedunless (a)government isparty tocontractgranting
exemption; or(b) involvesfranchise
Contracts may beimpaired
Transferofpropertyrights
Taxes paidform part of thepublic funds
Allows merely therestraint on theexercise of propertyrights
taxes accrue
to the generalbenefit of thecitizens of thetaxing State
is given the owner
of the expropriatedproperty
Personsaffected
Applies to allpersons,property andexcises thatmay be
subjectthereto
Only particularproperty iscomprehended
TAX DISTINGUISHED FROM LICENSE FEE
TAX LICENSE FEE
Source Exercise ofTaxing power
Emanate from the policepower of the State
Purpose Raise
revenue
Regulation
Object Persons,property andprivilege
Right to exercise aprivilege
Amount no limit only necessary to carryout regulation
Distinction lies in the primary purpose:
License fee if primary purpose is toregulate and the excess of the amountcollected from the cost to carry out theregulation is minimal and incidental.
Tax if primary purpose, or at least one ofthe real and substantial purposes is toraise revenue.
If amount is too high for regulation, it wouldbe a tax; unless imposed on non-usefuloccupations or businesses.
Purpose of distinction: limitations andexemptions apply only to one and not to theother (ex. Exemption from taxation does notinclude exemption from fee)
TAX DISTINGUISHED FROM DEBT
7/30/2019 Taxation-Reviewer -
5/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
Generally not
subject tocompensation/set-off
May be the subject
ofcompensation/set-off
Imprisonment issanction for non-payment
No imprisonmentfor non-payment
GENERAL RULE: Taxes cannot be the subject ofcompensation or set-off* A person cannot refuse to pay a tax on the groundthat the government owes him an amount equal to orgreater than the tax being collected. The collection oftax cannot await the results of a lawsuit against thegovernment.
Reasons:
a) lifeblood theoryb) taxes are not contractual obligation (absence
of consent of taxpayer)c) taxpayer and government are not mutual
debtors and creditors of each other
EXCEPTIONS:1) Both claims already became overdue and
demandable as well as fully liquidated there
must have already been an act of appropriationby the government (legislative) of funds forpayment of the debt.
2) Tax overpayment (BIRs obligation to refund orset-off arises from time tax was paid)
3) If the case involves local government taxes
TAX DISTINGUISHED FROM SPECIALASSESSMENT
TAX SPECIALASSESSMENT
Imposedon
persons,properties, etc.
Only on land
Whyimposed
regardless ofpublic
Public improvementthat benefits the land
TAX DISTINGUISHED FROM TOLL
TAX TOLL
Kind ofdemand
Demand ofsovereignty
Demand ofownership
Purpose support ofgovernment
Collection for theuse of property
Amount no limit dependson need of the
government
Fair return of thecost of the property
or improvement
TAX DISTINGUISHED FROM CUSTOMS DUTY
TAX CUSTOMSDUTY
Coverage More comprehensivethan customs duty
kind of tax
Object Persons, prop, etc goods importedor exported
DOCTRINE OF EQUITABLE RECOUPMENT1) refund of a tax illegally or erroneously collected
or overpaid by a taxpayer2) such tax refund is barred by prescription3) tax presently being assessed against a taxpayer4) may be recouped or set-off against the tax barred
by prescriptionnot allowed in Philippines, reason - LIFE BLOOD
CONCEPT OF DOUBLE TAXATIONKinds of Double Taxation
A. DIRECT DUPLICATE
taxing same person, property or righttwice
for the same purpose
by the same taxing authority within the same jurisdiction or taxing
district
within the same taxable period
and they must be of the same kind orcharacter of tax
B INDIRECT DUPLICATE
7/30/2019 Taxation-Reviewer -
6/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
TAX TREATY AS A MODE OF ELIMINATINGDOUBLE TAXATION:
1) EXEMPTION METHOD the income or capitalwhich is taxable in the state of source or situs isexempted in the state of residence, although insome instances it may taken into account indetermining the rate of tax applicable to the taxpayers remaining income or capital (ex. TaxSparing Credit scheme)
2) CREDIT METHOD the tax paid in the state ofsource is credited against the tax levied in thestate of residence
Af isco Insurance Corp v. CA (G.R. No. 112675,Jan. 25, 1999)
Petitioners are local non-life insurance corps. Whichformed a pool in order to enter into a ReinsuranceTreaty with a German company. BIR assesseddeficiency taxes against the pool on the ground thatit is considered a partnership taxable as a corp.
Petitioners insist that the pool is a mere agent, notacting on its own and therefore, cannot be taxed as acorp., there being no risk undertaken by the pool, nocommon fund and no control exercised by its board inthe management of its fund.
Issue (1) : Is the Pool Taxable as a Corp?
Held (1): YES. Pursuant to 24 of the NIRC, the
pool is included within the definition of domesticcorps. Which comprises even unregisteredpartnerships and associations. In this case, theceding cos. Entered into an association that wouldhandle all business under the Treaty. It has acommon fund and an executive board to manage itsaffairs. Moreover, even if the pool itself did not issueany policies on its own, its work was indispensable tothe business of the ceding companies and theGerman Co,
Issue (2): Is there double taxation?
Held(2): NO. Double taxation means taxing thesame person twice by the same jurisdiction for thesame thing. The pool is a taxable entity distinct fromthe individual corporate entities of the ceding
taxpayers property. As long as the power to tax
does not violate any constitutional or statutoryprovisions, said power can be a power to destroy.
But for all its plenitude, the power to tax is notunconfined as there are restrictions. Adverselyeffecting as it does property rights, both the dueprocess and equal protection clauses of theConstitution may properly be invoked to invalidate inappropriate cases a revenue measure. If it wereotherwise, there would be truth to the dictum that the
power to tax involves the power to destroy. The webor unreality spun from Justice Marshalls famousdictum was brushed away by one stroke of Mr.Justice Holmes pen, thus: The power to tax is notthe power to destroy while this Court sits. So it is inthe Philippines. [Reyes v. Almanzor (1991), citingSison v. Ancheta (1984); Obillos v. CIR (1985)].
Tax Avoidance (Tax Minimization) tax saving
device that is legally permissible
Tax Evasion (Tax Dodging) connotes fraudthrough the use of pretenses and forbidden devicesto lessen or defeat taxes; must be willful andintentional.
CIR vs. The Estate of Benigno Toda, GR No.
147188, Sept. 14, 2004
Facts: This Court is called upon to determine inthis case whether the tax planning scheme adoptedby a corporation constitutes tax evasion that would
justify an assessment of deficiency income tax.CIC authorized Toda, Jr., President and owner
of 99.991% of its issued and outstanding capitalstock, to sell the Cibeles Building and the two
parcels of land on which the building stands for anamount of not less than P90M. Toda thenpurportedly sold the property for P100 M to Rafael
Altonaga, who, in turn, sold the same property onthe same day to RMI for P200M. These 2transactions were evidenced by Deeds of AbsoluteSale. For the sale of the property to RMI, Altonagapaid capital gains tax in the amount of P10M
7/30/2019 Taxation-Reviewer -
7/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
7/30/2019 Taxation-Reviewer -
8/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
NATURE OF TAX AMNESTY1) general or intentional overlooking by the State of
its authority to impose penalties on personsotherwise guilty of evasion or violation of arevenue or tax law
2) partakes of an absolute forgiveness or waiver ofthe Government of its right to collect
3) to give tax evaders, who wish to relent & arewilling to reform a chance to do so
RULES ON TAX AMNESTY
1) Tax amnesty(a) like tax exemption, never favored nor
presumed(b) construed strictly against the taxpayer (must
show complete compliance with the law)2) Government not estopped from questioning the
tax liability even if amnesty tax payments were
particular accused and not the character ofthe acts charged in the information
PART II THE NATIONAL INTERNAL REVENUECODE OF 1997
TITLE I. ORGANIZATION AND FUNCTION OF THEBUREAU OF INTERNAL REVENUE (BIR)
POWERS AND DUTIES OF THE BIR (ACEEGA)1) Assessment and Collection of national internal
revenue:(a) taxes(b) fees(c) charges
2) Enforcement of all(a) forfeitures
(b) fines and(c) penaltiesconnected therewith
3) Execution of all judgments decided in BIRs favorby(a) the Court of Tax Appeals (CTA) and(b) the ordinary courts
4) Give effect to andAdminister the supervisory andpolice powers conferred to it by NIRC or by otherlaws. (Sec. 2)
Officials of the BIR1) one chief - Commissioner of Internal Revenue
(Commissioner)2) four assistant chiefs - Deputy Commissioners
(Sec. 3)*E.O. 430 (July 28, 1997) designates each of the
4 Deputy Commissioners to head the followingfunctional groups:
(a) Operations group(b) Legal Enforcement Group(c) Information Systems Group(d) Resource Management Group
Powers of the CommissionerA. Power to interpret tax law and decide tax
7/30/2019 Taxation-Reviewer -
9/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
laws or portions thereof administered bythe BIR subject to the exclusive appellate
jurisdiction of the CTA
B. Power to obtain information, summon,examine and take testimony of persons (Sec.5)1) For the Commissioner to ascertain:
(a) correctness of any return or in making areturn where none has been made
(b) liability of any person for any internal
revenue tax or in correcting such liability(c) tax compliance
The Commissioner is authorized:2) to Examine any relevant Book, paper, record
or other data3) to Obtain any Information (costs, volume of
production, receipts, sales, gross income,etc), on a regular basis from:
(a) any person other than the person underinvestigation or(b) any office or officer of the national/local
government, government agencies andinstrumentalities (Bangko Sentral,GOCCs)
4) To Summon(a) the person liable for tax or required to file
a return or(b) any officer or employee of such person
or(c) any person having in his
possession/custody/ care1. the books of accounts2. accounting records of entries relating
to the business of the person liablefor tax or any other person
5) to Produce such books, papers, records and
other data and to give testimony6) to take the Testimony of the person
concerned, under oath as may be relevant tothe inquiry
7) To cause revenue officers and employees tomake a Canvass of any revenue district orregion
tax due -(a) After a return has been filed the
Commissioner or his representative mayauthorize
i. the Examination of any taxpayer;and
ii. the Assessment of the correctamount of tax;
(b) Failure to file a return shall not preventthe Commissioner fromauthorizing the examination of any
taxpayer;
Any tax or deficiency tax so assessed shall bepaid upon notice and demand from theCommissioner or his representative.
Any return, statement or declaration filed in anyauthorized office shall not be withdrawn; butwithin THREE YEARS from date of filing, the
same may be modified, changed or amended;provided that no notice for audit or investigationof such return, has in the meantime, beenactually served upon the taxpayer.
2) Failure to submit required returns and otherdocumentsIf a person(a) fails to file a required return or report at
the time prescribed or(b) Willfully or otherwise files a false or
fraudulent return,The Commissioner shall Make or Amend thereturn from
(a) his own knowledge or(b) from such information as he can obtain
through testimony or otherwisewhich shall be prima facie correct and sufficientfor all legal purposes
3) Inventory-taking, Surveillance, PresumptiveGross Sales(a) Commissioner may, at any time during
the taxable year1. order the Inventory taking of goods
of any taxpayer; or
7/30/2019 Taxation-Reviewer -
10/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
(b) Commissioner may prescribe a Minimumamount of gross receipts, sales andtaxable base (taking into account thesales and income of other personsengaged in similar business) :1. When a person has failed to issue
receipts as required by Sec. 113(Invoice requirements for VAT-registered persons) and Sec. 237(Issuance of Receipts or CommercialInvoices); or
2. When the books of accounts orrecords do not correctly reflect thedeclarations made or required to bemade in a return,
such minimum amount shallbe prima facie correct
4) Terminate taxable period -Commissioner shall declare the tax period of
a taxpayer terminated and send notice to thetaxpayer of such decision with a request forimmediate payment of the tax, when it hascome to the knowledge of the Commissioner:(RIRHO)(a) that a taxpayer is Retiring from business
subject to tax or(b) is Intending to leave the Philippines or(c) to Remove his property therefrom or(d) to Hide or conceal his property or(e) is performing any act tending to Obstruct
the proceedings for the collection of tax
5) Prescribe Real Property Values -The Commissioner is authorized to:(a) divide the Philippines into different zones
or areas and(b) determine the fair market value of real
properties located in each zone or area
For tax purposes, the value of the propertyshall be whichever is higher of:(a) Fair market value as determined by the
Commissioner; or(b) Fair market value as shown in the
schedule of values of the provincial andcity assessors.
The taxpayers application for compromiseshall not be considered unless he waives inwriting his privilege under RA 1405 and othergeneral or special laws. Such waiver shallauthorize the Commissioner to inquire intohis bank deposits.
7) Authority to Register tax agents -(a) The Commissioner shall Accredit and
Register, individuals and generalprofessional partnerships and their rep.
who prepare and file tax returns andother papers or who appear before theBIR
(b) The Commissioner shall create nationaland regional accreditation boards
Those who are denied accreditation mayappeal the same to the Sec. of Finance whoshall rule on the appeal within 60 days from
receipt of such appeal. Failure of the Sec. ofFinance to rule on the appeal within the saidperiod shall be deemed as approval foraccreditation.
8) Authority to Prescribe AdditionalRequirements-
The Commissioner may prescribe themanner of compliance with any documentaryor procedural requirement for the submissionor preparation of financial statementsaccompanying tax returns.
D. Authority to delegate power (Sec. 7)
The Commissioner may delegate the powers vestedin him to subordinate officials with rank equivalent toDivision Chief or higher, subject tolimitations/restrictions imposed under the rules and
regulations EXCEPT, (the following powers shallNOT be delegated): (RIR CoA A)
1) power to Recommend the promulgationof rules and regulations by the Sec. ofFinance
2) power to Issue rulings of first impressionor to Reverse, revoke, modify any
7/30/2019 Taxation-Reviewer -
11/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
determined by the rules
Regional Evaluation Board is composedof:
i. Regional Director as Chairmanii. Asst. Regional Directoriii. Heads of the Legal, Assessment and
Collection Div.iv. Revenue District Officer having
jurisdiction over the taxpayer
4) power to Assign or reassign internalrevenue officers to establishments wherearticles subject to excise tax are kept
E. Assignment of Internal Revenue Officers(Secs. 16 &17)
The Commissioner may assign/ reassign internalrevenue officers:1) involved in excise tax functions as often as the
exigencies of revenue service may require;provided that he shall in no case stay in hisassignment for more than 2 years (Sec. 16)
2) without change in rank and salary, to other orspecial duties connected with the enforcementand administration of internal revenue laws asthe exigencies of the service may require;provided that officers assigned to performassessment or collection functions shall notremain in the same assignment for more than 3years; assignment of officers and employees tospecial duties shall not exceed 1 year (Sec. 17)
F. Internal Revenue Distric ts (Sec. 9)The Commissioner, with approval of the Sec. of
Finance, shall divide the Philippines into suchnumber of revenue districts for administrativepurposes. Each district shall be under the supervisionof a Revenue District Officer.
Duties of the Commissioner: (PASO)1) To Prescribe, provide and distribute to the proper
3) To Submit reports to the appropriate committeeof Congress upon its request and in aid oflegislation, which information or report shallinclude, but not be limited to:
(a) industry audits(b) collection performance data(c) status reports in criminal actions initiated
against persons(d) taxpayers returnsprovided, any return or information which canbe associated with or identifies, directly or
indirectly a particular taxpayer, shall befurnished to the appropriate committee ofCongress only when sitting in ExecutiveSession, unless the taxpayer consents inwriting to such disclosure
4) Submit reports to the Oversight Committeethrough the Chairman of the Committee on Waysand Means of the Senate and House ofRepresentatives, on the exercise of his powers of
abatement and compromise of taxes (Sec. 204)every 6 months of each calendar year. (Sec. 20)
NATIONAL INTERNAL REVENUE TAXES: (Sec.21) (I VEE DOO)1) Income tax2) Estate and Donors tax3) Value-Added tax4) Other percentage tax5) Excise tax6) Documentary stamp tax7) Such Other taxes as are or hereafter may be
imposed and collected by the BIR
TITLE II. TAX ON INCOME
DEFINITION OF TERMS1) Person an individual, a trust, estate or corp.2) Corporation include partnerships (distinguish
between ordinary and general professionalpartnership)
3) General professional partnership partnerships formed for the sole purpose ofexercising their common profession no part of its
7/30/2019 Taxation-Reviewer -
12/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
5) Taxpayer any person subject to tax6) Taxable Year can either be calendar year (Jan
1 to Dec 31), or the fiscal year7) Fiscal Yearan accounting period of 12 months
ending on the last day of any month other thanDecember (ex. Feb 1 to Jan 31)
8) Paid or incurred (cash method) or Paid oraccrued (accrual method) payment actuallymade or if not paid, actually liable for theexpense
TAXABLE INCOME
REQUISITES FOR INCOME TO BE TAXABLE:1) There must be a gain or addition to net worth2) The gain must be realized or received, actually or
constructively; recipient must have completedominion
3) The gain must not be excluded by law or treatyfrom taxation
Note:
Not recognized as income - when fundswere merely entrusted/held money in trust (withobligation to return) to taxpayer becausetaxpayer acquires no control and does notreceive economic benefit from it.
Proceeds of embezzlement/swindling areincome because embezzler/swindler alreadyhas complete dominion over them and can usesuch for his economic benefit.
Increase in the value of property is notrecognized as income; this only constitutesan unrealized increase which becomes taxableincome only upon disposition and realization ofgains. Same situation for stocks and stockdividends.
Deposit with no interest does not produce
income for the depositary; there is no flow ofwealth.
In a debt/loan situation it is important todetermine whether there was an originalintention to pay/consensual recognition of anobligation to repay.
If yes then the liability that
Income can be realized actually andconstructively.
Assignment of Income Doctrine Ex: A isentitled to his salary of P10m but assigns it to Bfor unknown reasons. In this case, both A andB realize income. A constructively receivedincome (because he was able to assign thushas complete control/dominion over it) and Bactually received it. The income is taxable inthe hands of both A and B.
Doctrine of Constructive Receipt Ex: A was
informed that his check dated December 16 isalready available and he can get it anytime. Adid not get the check until January 30. In thiscase, A constructively received income inDecember and is taxable in that taxable period.
Not recognized as income if proceeds aremerely a return of capital. Ex. Creditor lendsdebtor x amount. Debtor repays x amount plusy interest. Creditor does not have income on x
amount as this is merely return on capital; hehas income only with respect to the amount ofy interest.
COMPUTATION OF TAXABLE INCOME
1) Taxpayer earning purely compensatoryincomeGross Compensation
less : Personal Exemptionpremium payments on health and/orhospital insurance amounting to P2,400per year
equals: Taxable income
2) Taxpayer doing business, whether individualor corporation (domestic or FC doingbusiness)Gross Revenue/Sales
less: Cost of Salesequals: Gross Incomeless : Allowable Deductionsequals: Taxable Income for individuals, an additional deduction for
personal exemptions is allowed
7/30/2019 Taxation-Reviewer -
13/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
ITEM SOURCE
Interest Residence of the debtor
Compensation forpersonal services
Place of performance
Rent and royalty Location of property
Gain from sale ofreal property
Location of property
Gain from sale ofpersonal property
Place of sale
Gain from sale ofshares of stock ofdomesticcorporation
Philippine source
Dividend income (a) From a domestic corp. deemed income from withinPhil.(b) From a foreign corp. deemed income from without
provided more than 50% of thecorp.s worldwide income is notderived from Phil. sources
Al locat ion of Unallocated Deduct ions (partly Phi l.partly foreign)
GI, Philippines x Unallocated = Phil deductionsGI, Worldwide deductions
GI, Outside Phil x Unallocated = ForeignGI, Worldwide deductions deductions
Income from sale of personal property derived fromsources partly within and partly without the Phils.
Gain from sale of personal property produced in
whole or in part in one country and sold in anothercountry, where one of the countries is the Philippinesis income derived from sources partly within andpartly outside the Philippines.
Gains from the purchase of personal property withinand sold without the Philippines or the purchase of
Taxpayer Tax Base Taxable onincome
Resident Citizen TaxableIncome
Within andwithout thePhilippines
Nonresident Citizen TaxableIncome
Within thePhilippines
Resident Alien TaxableIncome
Within thePhilippines
Nonresident Alien
engaged in trade orbusiness
Taxable
Income
Within the
Philippines
Nonresident Alien notengaged in trade orbusiness
GrossIncome
Within thePhilippines
General ProfessionalPartnership
TaxableIncome
Withinor/andwithout thePhilippines
(dependingonclassificationof individualpartner)
Estate and Trust TaxableIncome
Same basisas anindividual(depending
onclassificationof decedent,if estate,trustor, iftrust)
Domestic Corporation TaxableIncome
Within andWithout thePhilippines
Resident ForeignCorporation
TaxableIncome
Within thePhilippines
Non-resident Foreigncorporation
GrossIncome
Within thePhilippines
*Taxable Income = Gross income (less) Deductions(less) Personal and additional exemptions
7/30/2019 Taxation-Reviewer -
14/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
gains)4) Fringe Benefits Tax (amount of benefits to
Managerial and Supervisory Employee paid byEmployer; Ee is taxed but burden is on Er)
5) Capital Gains Tax (Real property and stocks nottraded in stock market)
6) Optional Corporate Income Tax7) Minimum Corporate Income Tax (2% of GI)8) Improperly Accumulated Earnings Tax9) Preferential Rates (for special corporations)10) Branch Profit Remittance Tax
TYPES OF TAXPAYERS
A. Individuals
Kinds of Individuals1) Resident Citizen2) Nonresident Citizen = citizen of the
Philippines who:(a) Establishes the fact of his physicalpresence abroad with a definite intentionto reside therein
(b) Leaves the Philippines during the taxableyear to reside abroad, as immigrant or foremployment on a permanent basis
(c) Works & derives income from abroad &whose employment requires him to bephysically present abroad most of the
time (i.e. not less than 183 days) duringthe taxable year
(d) Previously considered as nonresidentcitizen & arrives in the Philippines at anytime during the taxable year to residepermanently in the Philippines
3) Resident Alien4) Nonresident Alien
a) Those engaged in trade or business in
the Philippines who come and stay in thePhilippines for an aggregate period ofmore than 180 days during any calendaryear
b) Those not engaged in trade or businessin the Philippines, which include non-resident aliens whose stay in the
TYPES OF INCOME1) General (part of gross income, subject to 5-
32%)a) Compensation Incomeb) Income from Businessc) Income from Exercise of Profession
2) Special Types of Income (not part of grossincome, subject to final tax)a) Interests, royalties, prizes and other
winnings subject to final tax (PassiveIncome)
b) Cash & property dividends (does notinclude stock dividends; these arerealized only upon their subsequent sale)(Passive Income)
c) Capital gains from sale of real propertyd) Capital gains from sales of shares of
stock not listed in the stock exchangee) Capital gains from sale of shares of stock
listed in stock exchange (subject to
percentage tax
B. Estates and Trusts
Estate: property, rights and obligations of aperson which are not extinguished by his deathand those that accrues thereto; taxed in the sameway as an individual provided it is irrevocable andearns income; what is taxed is not the propertythat constitutes the trust (this was already subject
to donors tax) but the income of such property.
Trust: arrangement created by agreement underwhich title to property is passed to another forconservation or investment with the income andthe corpus/principal distributed in accordancewith the directions of the creator; to be taxable asa separate entity, grantor must have absolutelyand irrevocably given up control and benefit over
the trust.
C. Corporation
A corporation shall include partnerships, no matterhow created or organized. Joint stock companies,
joint accounts, associations, and insurance
7/30/2019 Taxation-Reviewer -
15/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
the govt.
General Types:1) Domestic Corporation is created or
organized in the Philippines or under its laws2) Foreign Corporation is organized and
existing under the laws of a foreign country(a) Resident foreign corporation foreign
corp. engaged in trade or business withinthe Philippines
(b) Nonresident foreign corporation
foreign corp. not engaged in trade orbusiness within the Philippines
D. PartnershipsKinds of Partnerships1) General Professional Partnerships
Established solely for purpose of exercisingcommon profession and not part of incomederived from engaging in trade or business.
As an entity, it is not subject to income tax.Partners are liable for income tax on theirdistributive share (computed by dividing netincome of GPP). Each partner shall report hisdistributive share as part of his gross income.
2) Taxable/Business/Ordinary Partnership
All other partnerships no matter how createdor organized.
Includes unregistered joint ventures andbusiness partnerships.
Taxable as an entity ordinary corporateincome tax.
Joint ventures are not taxable ascorporations when its purpose if a)undertaking construction projects; b)engaged in petroleum, coal and other energyoperation under a service contract with thegovernment.
Partners are considered stockholders;
therefore, their distributive share is taxed asdividends.
TAX ON CORPORATIONS
I.DOMESTIC CORPORATIONS
B. Optional Gross Income Taxation
Effective Jan. 1, 2000: the President (uponrecommendation of the Sec of Finance) mayallow corporation an option to be taxed at 15% ofgross income after the ff. conditions aresatisfied:
Tax effort ratio 20% ofGNP
Ratio of IT collection to total taxrevenue
40%
VAT tax effort 4% of GNP
Ratio of Consolidated PublicSector Financial Position(CPSFP) to GNP
0.9%
Ratio of Cost of Sales to GrossSales from all sources
Does notexceed 55%
The election of the option shall be irrevocablefor 3 consecutive taxable years during which thecorp. is qualified under the scheme
Gross Income = Gross Sales( - ) Sales returns,discounts andallowances( - ) Cost of goods sold
Cost of Goods SoldTrading and Merchandising Concern
Invoice cost plus import duties andfreight in transporting goods to the placewhere actually sold, including insurancewhile in transit
Manufacturing concern
Cost of production of finished goods (rawmaterials, direct labor and manufacturing
overhead, freight cost, insurancepremiums, and other costs to bring theraw materials to the factory)
If taxpayer is engaged in sale of service: Gross Income = Gross receipts
( ) Sales returns
7/30/2019 Taxation-Reviewer -
16/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
nonprofit unrelated trade,business, or activityexceed 50% of totalincome
GOCC, AgenciesandIntrumentalities,includingPAGCOR
32%(2000-2005)35%(2006)
Same tax rate upontheir taxableincome in a similarbusiness, industry,or activity
GSIS/ SSS / PHIC/ PCSO
Exempt
Depository Banks 10% On interest incomefrom foreigncurrencytransactionsincluding interestincome fromforeign loans
Proprietary Educational Institutions & Hospitals(non-profit)
Proprietary educational institution anyprivate school maintained & administered byprivate individuals or groups with an issuedpermit to operate from DECS, or CHED orTESDA
Taxable at 10% on taxable income, except oncertain passive income (which are subject to finaltax)
Predominance Test: if GI from unrelatedtrade/business/other activity > 50% of the total GIfrom all sources, ENTIRE taxable income shallbe subject to the REGULAR corporate tax rate(35% Effective 2006)
Distinguish from non-profit non-stock educational
institutions which are exempt from tax onrevenues and assets Actually, Directly andExclusively used for educational purposes (Seeabove for discussion).
GOCCs
D. Rule for Corporations Exempt from Taxation
General Rule: those enumerated under section 30are exempt.
Exception: exempted corporations are subject toincome tax on their income from any of theirproperties, real or personal, or from any activitiesconducted for profit regardless of the disposition
made of such income. Ex. Non-stock, non-profit religious
organization is exempt from 35% ordinaryincome tax on corporations (by virtue ofsection 30 which uses as such) and from allproperty tax (by virtue of Constitution,provided ADE use for its religious purpose).However, if it derives income from itsproperty or conducts an activity that is for
profit (even if the proceeds will be used forthe religious purpose), the proceeds will betaxable.
Ex. For educational institutions, theproceeds, to be exempt, must be both a)realized from educational activities and b)used for educational activities.
E. Minimum Corporate Income Tax (MCIT)
1. MCIT Rate = 2% of gross income (GI)
When to begin/apply MCIT? Beginning on the4
thtaxable
year immediately following the year in
which such corporation commenced its businessoperation(Commencement of Business Operation:Upon Issuance of BIR Certificate of
Registration)
Imposed when on the 4th
taxable year, 2% ofthe corporations GI is greater than 35% of its TI.
Example: for 2006 calendar year
GI = P500 000 2% of GI = P10 000
7/30/2019 Taxation-Reviewer -
17/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
Excess of MCIT over the normal income tax shall
be carried forward & credited against normalincome tax for the 3 succeeding years
Example: (proceeding from above example)
Situation A: If regular income tax (35% of taxableincome) is greater than MCIT (2% of GI) PayRegular Income Tax
For 2007 calendar year:GI = P500,000 2% of GI = P10,000
TI = P50,000 35% of TI = P17,500
Income Tax payable for 2007= 17,500 (Regular Income Tax) 550 (MCITCarry Forward from 2006: 10,000-9450)= 16,950
NOTE: You can deduct MCIT Carry Forward only ifRegular Income Tax is greater than MCITY
Situation B: If regular income tax is less thanMCIT Pay MCIT
For 2007 calendar year:
GI = P500,000 2% of GI = P10,000
TI = P20,000 35% of TI = P7,000
Income Tax payable for 2007= 10,000
NOTE: MCIT carry forward as of 2007 is already3,550 (550 from 2006 and 3,000 from 2007).So if in 2008, Regular Income Tax is alreadygreater than MCIT, you may deduct 3,550from payable Regular Income Tax.
3. Relief from MCITMCIT may be suspended by the Sec ofFinance when corporations losses are dueto:
(a) prolonged labor dispute(b) force majeure(c) legitimate business reverses
( - ) Sales returns,discounts and
allowances( - ) Cost of Services
*means all direct costs and expensesnecessarily incurred to provide the servicesrequired by the customers including:a) salaries and employee benefits ofpersonnel, consultants and specialistsdirectly rendering the service;
b) costs of facilities directly utilized inproviding the service such as depreciation orrental of equipment used and costs ofsupplies
II. RESIDENT FOREIGN CORPORATION
A. In General (the rest is the same as domesticcorp.)
On taxable income from allsources within thePhilippines.
32% (2000-2005)35% (2006-2008)
30% (2009 onwards)
B. MCIT - same as domestic corp.
C. Special types of resident foreign corporations:
International Aircarriers
2.5% On Gross PhilippineBillings (see case ofAirCanada vs. CIR infra)
InternationalShipping
2.5% On Gross PhilippineBillings
Offshorebanking units
10% Any interest incomederived from foreigncurrency loans grantedto residents other thanoffshore banking units
or local commercialbanks, including localbranches of foreignbanks that may beauthorized by the BSPto transact businesswith offshore banking
7/30/2019 Taxation-Reviewer -
18/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
branches of foreignbanks that may beauthorized by the BSPto transact businesswith offshore bankingunits.
Regional/AreaHeadquarters
Exempt
RegionalOperatingHeadquarters ofMultinationalcompanies
10% On taxable income
Gross Philippine Billings
For international air carriers, refers to grossrevenue derived from carriage of persons,excess baggage, cargo, and mail originatingfrom the Philippines in a continuous and
uninterrupted flight, irrespective of the placeof sale or issue and the place of payment ofthe ticket or passage document
Provided, tickets revalidated, exchangedand/or indorsed to another internationalairline form part of the GPB if the passengerboards a plane in a port or point in thePhilippineso If the ticket is indorsed to another airline,
the GPB will be charged to thetransferee/indorsee
Provided, for a flight which orginates in thePhilippines but transshipment (transfer) ofpassenger takes place at any port outsidethe Philippine on another airline, only thealiquot portion of the cost of the ticketcorresponding to the leg flown from thePhilippines to the point of transshipment shallform part of the GPB.
o Note: Transfer of airline company, nottransfer of aircraft
GPB rule in the NIRC is a departure from theold rule which emphasized where ticketswere bought.
Now we adopt the originating rule meaningto form part of GPB passenger/cargo must
o Off line carriers: those without landingrights but may nevertheless be selling
tickets in the Phil subject to taxtreatment of ordinary resident foreigncorporation
Whats controlling is the amount stated in theticket and not the actual purchase value.
Air Canada vs. CIR, CTA Case No. 6572, Dec. 22,2004
It is evident that the definition of Gross PhilippineBillings under Section 28(A)(3)(a) of the 1997 TaxCode covers the gross revenue derived from thecarriage of persons, excess baggage, cargo and mailoriginating from the Philippines in a continuous anduninterrupted flight irrespective of the place or saleor issue and the place of payment of the ticket orpassage document. To originate would mean tocause the beginning of; to start (a person or thing) on
a course or journey; to begin, start. In other words,the flights carrying the passengers must haveoriginated or started from the Philippines. Verily,petitioner, being an off-line international carrier, asauthorized to operate by the CAB and having noflights originating from the Philippines in a continuousand uninterrupted flight, cannot be taxed pursuant toSection 28(A)(3)(a) of the 1997 Tax Code, that is,based on their Gross Philippine Billings.
However, although petitionerAir Canada is not
liable to pay the tax as an international air carrier(2.5% on gross Phil. Billings), it is still liable to payincome tax as a resident foreign corporation.
Under Section 22 of the 1997 Tax Code, the termresident foreign corporation applies to a foreigncorporation engaged in trade or business within thePhilippines, while the term non-resident foreigncorporation applies to a foreign corporation notengaged in trade or business within the Philippines.
However, with regard to the term doing or engagedin business, there is no fixed or specific criterion aswhat constitutes doing or engaging in business. Inthe case of The Mentholatum Co., Inc., et al. vs.Mangiliman, et al., 72 PHIL 524, the HonorableSupreme Court had thoroughly and clearly explainedthe term in this way:
7/30/2019 Taxation-Reviewer -
19/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
In order that a foreign corporation may beregarded as doing business, there must be continuity
of conduct and intention to establish a continuousbusiness, such as the appointment of a local agent,and not one of a temporary character. In otherwords, a foreign airline company selling tickets in thePhilippines through their local agents, whether liaisonoffices, agencies or branches, as in the case at bar,shall be considered as resident foreign corporationengaged in trade or business in that country for suchactivities show continuity of commercial dealings or
arrangements and performance of acts or works orthe exercise of some functions normally incident toand in progressive prosecution of commercial gain orfor the purpose and object of the businessorganization.
Branch Profit Remittance Tax
BPRT shall be imposed on any profit remittedby a branch to its head office.
Distinguish between a branch and asubsidiaryo If branch, subject to BPRTo If subsidiary amounts received by
non-resident foreign corporation wouldbe treated as dividends it becomespart of its Gross Income from withintaxable at 35%
Branch will first be subjected to ordinary
corporate tax as a resident foreigncorporation (35%). Afterwards, the profits forremittance shall then be subject to 15%BPRT. (Because branch assumespersonality of an RFC and is thereforetaxable as such)
Any remittance, so long as you can trace itfrom a branch to the foreign parentcorporation subject to BPRTo Ex. X foreign corp. has both regional
headquarters and branch in Philippines.Instead of remitting straight to X, branchpays amount to regional headquarterssupposedly for administrative supportservices The amount paid for theservices will still be subject to BPRTb h i i d f
reducing their tax liability in the Philippinesand in their residence countries.
Ex. Domestic corporation paid cash dividendto non-resident foreign corporation (NRFC)organized in Brazil. This shall form part ofNRFCs income therefore taxable also inBrazil. The dividend received shall only betaxed at 15% in the Phils (instead of 35%) ifBrazil will reduce/credit at least 20% of thetax imposed in the Phils. from its tax imposedin Brazil. [See Section 28(5)(b)]
If Brazil will credit/reduce less than 20% orwill not credit any amount, then the Phils willtax the dividend at 35% (ordinary incometax).
Phils. cannot give more than 15% tax creditbecause the law only allows such.
III. NONRESIDENT FOREIGN CORPORATION
A. In General
Gross Income from all sourceswithin the Philippines (exceptCapital Gains on sale ofdomestic shares subject to finaltax)
32% (2000-2005)35% (2006-2008)
30% (2009onwards)
Gross Income includes interest, dividends,
rents, royalties, salaries, premiums (exceptreinsurance prem.), annuities, emoluments orother fixed/determinable annual,periodic/casual gains, Capital Gains (notsubject to FT)
NON-RESIDENT FOREIGN CORPORATION
CinematographicFilm owner, lessor
or distributor
25% On gross income
Owner or lessorsof vessel chartedby Philippinenationals
4.5% On gross income
Owner or lessorsf i ft
7.5% On gross income
7/30/2019 Taxation-Reviewer -
20/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
Graduated rates of 5 to 32%.
B. Passive Income Please see exhibit
Capital Gains f rom Sale of Real Property
Final tax on gross selling price or current fairmarket value, whichever is higher.
Imposed upon capital gains presumed tohave been realized from the sale, exchange,or other disposition of real property located in
the Philippines, including pacto de retro salesand other forms of conditional sales.
Law presumes a gain, hence, even if the salewas at a loss (bought for 2M, sold for 1M),CGT will still be imposed on entire proceedsof the disposition; law does not talk about thenet gain, it only considers gross sellingprice/FMV whichever is higher.
Refers to real property held as capital asset
(not used for business/investment) asopposed to ordinary asset (used in ordinarycourse of business).
Special Rule for disposition to governmento Taxpayer has option of treating the
proceeds as (a) taxable income (5-32%on net gain) or as capital gains (6% finaltax on FMV/gross selling price).
o If second option is chosen: 6% final taxshall be based on actual considerationand not FMV since the former is usuallylower than FMV (BIR Ruling).
o If the disposition took nature ofexpropriation (no meeting of the minds,not voluntary), transaction is not subjectto CGT. Net gain (if any) will be treatedas part of GI. Includes disposition by
judicial order and other forms of forceddisposition.
Rule for Exchangeo FMV of the property exchanged/given up
shall be basis of CGT. (Ex. A exchangesproperty worth 1M for Bs property worth2M CGT on A will be based on 1M,CGT on B will be based on 2M)
E ti P i i l R id
utilization of the proceeds), the differencewill be subject to CGT.
o Exemption does not include exchange ofprincipal residence for a new principalresidence subject to rules onexchange above.
C. Special Tax Rates for Aliens Please seeexhibit
II. CORPORATIONS
A. In general2006-2008 35%2009-onwards 30%
B. Passive Income and other i ncomePlease seeexhibit
C. Tax rate for Resident Foreign Corporation Please see exhibit
D. Tax rate for special types of Resident ForeignCorporation Please see exhibit
IMPROPERLY ACCUMULATED EARNINGS TAX(IAET)(Sec. 29, as implemented by Rev. Reg. 2-2001
which prescribes rules governing the imposition ofIAET)
A. RuleThere is imposed for each taxable year, inaddition to other taxes, a tax equal to 10% of theimproperly accumulated taxable income ofdomestic and closely-held corporationsformed or availed of for the purpose of avoiding
the income tax with respect to its shareholders orthe shareholders of any other corporation, bypermitting the earnings and profits of thecorporation to accumulate instead of dividingthem among or distributing them to theshareholders (Ex. Holding company).
7/30/2019 Taxation-Reviewer -
21/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
tax on the earnings distributed to them.
C. ExceptionThe use of undistributed earnings and profits forthe reasonable needs of the business wouldnot generally make the accumulated orundistributed earnings subject to the tax. What ismeant by reasonable needs of the businessis determined by the Immediacy Test.
Immediacy Test It states that the
reasonable needs of the business are the1) immediate needs of the business; and2) reasonably anticipated needs (Ex.
Expansion)
How to prove the reasonable needs ofthe business: The corporation should provethat there is1) an immediate need for the accumulation
of the earnings and profits; or2) a direct correlation of anticipated
needs to such accumulation of profits.
D. Composition: The following constituteaccumulation of earnings for the reasonableneeds of the business: (ILL ABE)1) Allowance for the increase in the
accumulation of earnings up to 100% of thepaid-up capital of the corporation as of
Balance Sheet date, inclusive ofaccumulations taken from other years;
2) Earnings reserved for definite corporateexpansion projects or programs requiringconsiderable capital expenditure as approvedby the Board of Directors or equivalent body;
3) Earnings reserved for building, plants orequipment acquisition as approved by theBoard of Directors or equivalent body;
4) Earnings reserved for compliance with anyloan covenant or pre-existing obligationestablished under a legitimate businessagreement;
5) Earnings required by law or applicableregulations to be retained by the corporationor in respect of which there is legal
1. Closely-held corporations are those:
a) at least 50% in value of the outstanding capitalstock; or
b) at least 50% of the total combined voting powerof all classes of stock entitled to vote is owneddirectly or indirectly by or for not more than 20individuals. Domestic corporations not fallingunder the aforesaid definition are, therefore,publicly-held corporations.
F. Exempt Corporations: The IAET shall not applyto the following corporations:(BIG-PEN-T)1) Banks and other non-bank financial
intermediaries;2) Insurance companies;3) Publicly-held corporations;4) Taxable partnerships;5) General professional partnerships;6) Non- taxable joint ventures; and7) Enterprises that are registered:
(a) with the Philippine Economic ZoneAuthority (PEZA) under R.A. 7916;
(b) pursuant to the Bases Conversion andDevelopment Act of 1992 under R.A.7227; and
(c) under special economic zones declaredby law which enjoy payment of specialtax rate on their registered operations or
activities in lieu of other taxes, national orlocal.
G. Period for Payment of Dividend/IAET: Thedividends must be declared and paid or issuednot later than one year following the close ofthe taxable year, otherwise, the IAET, if any,
should be paid within fifteen (15) daysthereafter.
H. Determination of Purpose to Avoid IncomeTax1) The fact that a corporation is a mere holding
company or investment company shall be
7/30/2019 Taxation-Reviewer -
22/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
reasonable needs of the business.
I. Prima facie instances of accumulation ofprofits beyond the reasonable needs of abusiness and indicative of purpose to avoidincome tax upon shareholders
1) Investment of substantial earnings and profitsof the corporation in unrelated business orin stock or securities of unrelated business;
2) Investment in bonds and other long-term
securities; and3) Accumulation of earnings in excess of 100%
of paid-up capital, not otherwise intendedfor the reasonable needs of the business.The controlling intention of the taxpayer isthat which is manifested at the time ofaccumulation. A speculative and indefinitepurpose will not suffice. The mere recognitionof a future problem or the discussion ofpossible and alternative solutions is notsufficient. Definiteness of plan/s coupled withaction/s taken towards its consummation isessential.
Cyanamid Phils. vs. CA, GR No. 108067, Jan. 20,2000
Ideally, the working capital should equal thecurrent liabilities and there must be 2 units of currentassets for every unit of current liability, hence the so-
called "2 to 1" rule. A Debt-to-Equity ratio (CurrentAssets over Current Liabilites) of 2:1 is indicative ofthe liquidity of a corporation, and furtheraccumulation would expose it to the IAET.
I. GROSS INCOME
All income derived from whatever source, including
(but not limited to the following items) (GRIP CARDGPP)1) Gross income derived from the conduct of trade
or business or the exercise of a profession2) Rent Income3) Interest Income4) Prizes & winnings
partnerships is taxable as dividends; in this case,the ordinary partnership has already been subject
to ordinary corporate income tax)
All income from whatever source derived
Recovery of damages (compensation forinjury; from tortious acts)
Nottaxable
Recovery of items previously deductedfrom gross income (return of capital)
Taxable
Forgiveness of indebtedness (if effect ofentire transaction is a reduction ofpurchase price of property acquired inprior year)
NotTaxable
Income derived form illegal business(gain)
Taxable
Recovery of lost earnings Taxable
BIR Ruling #017-2003The transfer of land made by a person to another in
payment of services rendered in the form of attorneysfees shall be considered as part of the gross incomeof the latter valued at either the fair market value orthe zonal valuation, whichever is higher, in thetaxable year received.
II. EXCLUSIONS FROM GROSS INCOME (GIRLCRM)
1) Gifts, Bequests & devises
But, income from such property shall beincluded in GI
Must be characterized by disinterestedgenerosity and pure liberality
Difficult to establish gift situations if there isan Er-Ee relationship (A bonus/assistance asrecognition of service rendered is notexempt)
If given under a) constraining force of anymoral or legal duty or b) from the incentive ofc) an anticipated benefit of an economicnature or where it is a return for servicesrendered, proceeds cannot qualify as a gift.
Most critical consideration is the giversintention or motive.
7/30/2019 Taxation-Reviewer -
23/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
of the contract4) Life Insurance
Proceeds of life insurance policies paid to theheirs/beneficiaries upon the death of theinsured
If such amounts are held by the insurer underan agreement to pay interest, the interestpayments shall be included in the GI
Insured must die to avail of total exemption. Ifhe survives, there/s only partial exemption to the extent that the proceeds constitute
return of capital (total amount of premiumspaid).
5) Compensation for Injuries or Sickness
Received through Accident/Health Insuranceor Workmens Compensation Act, ascompensation for personal injuries/sickness+ amount of damages received on account ofsuch injuries/sickness
Damages will be exempt only if they arise
together with personal injury; however, ifdamages only amount to return of capital, itis exempt (Ex. Damages from car accidentexempt only if claim includes compensationfor personal injury. If no personal injury,damages for car wreckage will only beexempt to the extent of the amount of theactual damage return of capital)
Must be physical injury, not injury to rights.6) Retirement Benefits, Pensions, Gratuities
Formsa) RA 7641 or Reasonable Private
Benefit Plano See below for rules
b) Amount received as a consequenceof separation for any cause beyondcontrol (death, sickness or otherphysical disability)o Sickness must be job threatening
must render taxpayerincapable of working (Ex. Doesnot include STD)
o Benefits from separation due toretrenchment come underexemption (no choice/option; butif the Ee avails of an optional
resident citizens or aliens who residepermanently in the Philippines
d) Veterans benefitse) Benefits under SSSf) Benefits received from GSIS
2 Options under paragraph (a), Section32(B)(6)g) RA 7641
o Conditions: (i) at least 60 years old;(ii) 5 years of service at time of
retiremento Availed if there is no reasonable
private benefit plan (benefits underthis option is less)
o Limted exemption: month salaryfor every year of service. In RPBP,all is excludable.
h) Reasonable Private Benefit Plano Conditions: (i) at least 50 yrs old; (ii)
in the service of same employer forat least 10 years at time of retirement
o Must be approved by BIRo A pension, gratuity, stock bonus or
profit-sharing plan maintained by anER for the benefit of some or all ofhis officials/employees, whereincontributions are made by such ERfor the officials/employees, or both,for the purpose of distributing to such
officials & employees the earnings &principal of the fund thusaccumulated; & provided in the planthat no part of the income shall beused for/be diverted to any purposeother than for the exclusive benefit ofthe said officials & employees
Service must be continuous.
You can avail of the benefits only once
(once youve availed of RPBP, you cannotavail of another RPBP); but you can avail ofexemption under another groundo Ex. A government employee can claim
exemption for retirement benefitsreceived from the GSIS even afteravailing of RPBP taxpayer can claim
7/30/2019 Taxation-Reviewer -
24/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
Terminal Leave Pay: amount paid for thecommutation of leave credits
o Excludable only for governmentemployees (this exemption does not findsupport in NIRC but is backed by SCdecision and BIR Ruling #143-98)
7) Miscellaneous Items(a) income derived by foreign government (from
investments in Philippines in loans, stocks,bonds or other domestic securities)
Refers only to passive income. If theforeign government engages in trade,income is taxable.
(b) income derived by govt./its politicalsubdivisions (from public utility or exerciseessential governmental function)
Key: Income should accrue togovernment; if the income is retained bythe public utility, it is not exempt look
at charter of political subdivision/GOCCto determine whether its income accruesto the government or not.
(c) prizes, awards in sports competitionsanctioned by national sports associationswhether held in Philippines or abroad
Contemplates a particular competition,not a cumulative achievement (Ex.Sportsman of the year award does notqualify for exemption)
(d) prizes & awards in recognition of religious, charitable,
scientific, educational, artistic, literary orcivic achievement, but only if:
recipient was selected without any actionon his part
recipient not required to rendersubstantial future services as a conditionof receiving the prize/award
Example: Nobel prize award Construed strictly, take note of 7
categories. It does not include athleticachievement.
Contemplates a rational selectionprocess; cannot just be randomlyselected
BIR Ruling #125-98
The phrase shall not have availed of the privilegeunder a retirement benefit plan of the same oranother ER found in Sec. 32 (B) (6) (a) of the TaxCode means that the retiring official or EE must nothave previously received retirement benefits from thesame or another employer who has a qualifiedretirement benefit plan.
BIR Ruling #143-98
The terminal leave pay of government employeeswhose employment is coterminous is exempt since itfalls within the meaning of the phrase for any causebeyond the control of the said official or EE found inSec. 32(B) of the CTRP.
SPECIAL TREATMENT OF FRINGE BENEFIT
A. Fringe Benefi t
Any good, service or other benefit furnished orgranted in cash or in kind by an employer to anindividual employee (except rank and file employees)such as, but not limited to the ff:
1) housing2) expense account3) vehicle of any kind4) household personnel (such as maid, driver &
others)5) interest on loan at less than market rate to the
extent of the difference between the market rate& actual rate granted
6) membership fees, dues & other expenses borneby the employer for the employee in social &
athletic clubs or other similar organizations7) expenses for foreign travel8) holiday & vacation expenses9) educational assistance to the employee or his
dependents10) life or health insurance & other non-life insurance
i i il t i f h t
7/30/2019 Taxation-Reviewer -
25/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
1/1/99 33%1/1/00 32%
Fringe benefit is an income of the employee subjectto Fringe Benefit Tax but is payable by the Employer.Er can deduct FBT from its taxable income.
Fringe benefits are only for corporateofficers/management. For rank and file, it is called anallowance. Allowances (benefits to rank and file) arenot subject to FBT.
C. Fringe Benefits not subject to FBT
(a) FB authorized & exempted from tax underspecial laws
(b) Contributions of ER for the benefit of theemployee to retirement, insurance &hospitalizations benefit plan
(c) Benefits given to the rank & file employees,whether granted under a CBA or not
(d) De minimis benefits
De Minimis benefitsa) Monetized unused vacation leave credits of
private employees not exceeding 10 daysduring the year and monetized value of leavecredits paid to government officials andemployees
b) Medical cash allowance to dependents of
employees not exceeding P750 per semesteror P125 per month
c) Rice subsidy of P1,000 or 1 sack of 50 kgrice amounting to not more than P1,000
d) Uniform and clothing allowance notexceeding P3,000 per year
e) Actual yearly medical benefits not exceedingP10,000
f) Laundry allowance of P300 per month
g) Employee achievement awards, for length ofservice or safety achievement in the form oftangible personal property other than cash orgift certificate, with an annual monetary valuenot exceeding P10,000 received by theemployee under an established written planwhich does not discriminate in favor of highly
CONVENIENCE OF THE EMPLOYER RULE
When a fringe benefit is given solely for theconvenience of the employer, the fringebenefit is exempt from FBT because theemployee does not recognize income fromthe benefit.
Ex. Expenditure on housing of engineerwithin factory premises is not subject toFBT
General Rule: If housing is located
outside, it is subject to FBT. Exception: If the nature of the Ers
business is hazardous to health ofEe, housing can be located outsidethe factory without being subject toFBT.
Ex. If employee is given housing allowance incash, this will constitute compensation ofthe employee (income from whatever
source). However, if it qualifies as a FringeBenefit, then it will be subject to FBT andthe burden is shifted to Er (Tax on Ee,Burden on Er)
III. DEDUCTION FROM GROSS INCOME
Defined as: Items or amounts which the law allowto be deducted from gross income in order toarrive at the taxable income.
The basic principle governing deductions fromgross income apply to all taxpayers.
Because deductions are strictly construedagainst the taxpayer, one seeking a deductionmust point to some specific provisions of thestatute in which that deduction is authorized &must be able to prove that he is entitled to thededuction which the law allows.
Adequate records should be kept to support thedeductions.
The deduction claimed must have beensubjected to withholding tax, if required.
Deductions for income tax purposes partake ofthe nature of tax exemptions; hence, if tax
7/30/2019 Taxation-Reviewer -
26/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
(a) citizen(b) resident alien
(c) non-resident alien doing business in thePhilippines
(d) member of GPP2) Corporations
(a) domestic corp.(b) resident foreign corp.(c) proprietary educational institutions &
hospitals(d) GOCCs
WHO CANNOT AVAIL OF DEDUCTIONS FROMGROSS INCOME:
1. Citizens and resident aliens whose income ispurely compensation income (except forpremium payments on health and/orhospitalization insurance);
2. Non-resident aliens not engaged in trade orbusiness in the Philippines; and
3. Non-resident foreign corporation
THE FOLLOWING ARE THE ALLOWABLEDEDUCTIONS FROM GROSS INCOME BASED ONCLASSES OF TAXPAYER:1. Individuals with gross income from employee-employer relationship only (gross income only):
o Premium payments on health and/or hospitalinsurance (if requisites are complied with)
o Personal exemptions and additional
exemptions
2. Individuals with gross income from business orpractice of profession:
o Optional Standard Deduction (OSD) ORItemized deductions
o Optional Standard Deductions 10% of thegross income. May be availed only byindividuals (except nonresident aliens) who
are not purely compensation income earners.This is in lieu of the itemized deductions.o Premium payments on health and/or hospital
insurance (if requisites are complied with)o Personal and additional exemptions
3. Corporations
4) Taxes5) Depreciation
6) Interest7) Depletion of oil & gas wells & mines8) Charitable & other contributions9) Research & Development10) Pension trusts
1. EXPENSES (SEC 34A)
1) Ordinary & necessary trade, business or
professional expenses onlyREQUISITIES FOR DEDUCTIBILITY:a. Must be ordinary AND necessary (both
must be complied with)b. Must be paid or incurred during the
taxable yearc. Must be paid or incurred in carrying on or
which are directly attributable to, thedevelopment, management, operationand or conduct of the trade, business orexercise of a profession, includingreasonable allowance for:1. salaries, wages & other forms of
compensation for personal servicesactually rendered (including grossed-up monetary value of FB); but thefinal tax should have been paid
2. travel expenses in pursuit of trade,business/ profession
3. rentals &/or other payments aslessee, user or possessor
4. entertainment, amusement &recreation expenses directlyconnected to the devt., mgt. &operation & conduct of trade,business/ profession> The Regulations impose a limit of
0.50% of net sales (gross sales less sales
returns/allowances & sales discounts) fortaxpayers engaged in sale of goods orproperties; or 1% of net revenue (grossrevenue less discounts) for those engaged insale of services, including exercise ofprofession and use or lease of properties.(RR No. 10-02)
7/30/2019 Taxation-Reviewer -
27/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
evidence (i.e. official receipts, financialstatements or other adequate records) to
substantiate:(a) amt. of expense deducted(b) direct connection/relation of the expense
to the development, managementoperation &/or conduct of the trade,business or profession of the taxpayer
3) Bribes, Kickbacks & Other Similar Payments:not deductible
Ordinary expense normal or usual in relationto the taxpayers business and the surroundingcircumstance.
Necessary expense appropriate and helpful inthe development of taxpayers business and areintended to minimize losses or to increase profits.These are the day to day expenses.
While illegal income will form part of the incomeof the taxpayer, expenses which constitute bribe,
kickback, and other similar payment, beingagainst law and public policy are not deductiblefrom gross income (Sec. 34A1c).
Business expense expenditure related to thebusiness that is deductible in the year incurred, inthe same taxable year.
Capital expense expenditure that improves oradds to the value of your property or equipment.Not immediately deductible. It is deductible over
time, such as in the form of depreciation.
Expenses allowable to private educationalinstitutions: In addition to the expensesallowable as deductions, a private educationalinstitution has the option to elect either:
(a) to deduct as expense those otherwiseconsidered as capital outlays ofdepreciable assets for the expansion of
school facilities(b) to capitalize asset & deduct allowancefor depreciation
2. INTEREST
Requisites for deductibility, as implemented
incurred during the taxable year(f) interest must have been stipulated in
writing(g) interest must be legally due(h) interest payment arrangement must not
be between related taxpayers(i) interest must not be incurred to finance
petroleum operations(j) in case of interest incurred to acquire
property used in trade, business orexercise of profession, the same was not
treated as a capital expenditure(k) the interest id not expressly disallowedby law to be deducted from gross incomeof the taxpayer.
GENERAL RULE ON DEDUCTION- The amount of interest expensepaid or incurred within a taxable yearof indebtedness in connection withthe taxpayers trade, business, or
exercise of profession shall beallowed as a deduction from thetaxpayers gross income.
LIMITATION ON DEDUCTIONInterest expense shall be reduced by an amt.equal to the ff. % of interest incomesubjected to FT:
1/1/00 38%
1/1/061/1/09
42% (RA9337)33%
Example: Year 2006Int. exp. = P2,000 Int. income subjected toFT = P1,500Deduct as int. exp.: P2,000 - (P1,500 x 42%)
= P1,370
The objective of the limitation is to discourage taxarbitrage on back to back loans, the proceeds ofwhich are invested in income earning interest thatis subject to 20% final tax.
T ti L S R i
7/30/2019 Taxation-Reviewer -
28/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
1. interest on taxes, such as those paid fordeficiency or delinquency, since taxes are
considered indebtedness (provided that thetax is a deductible tax, except in the case ofincome tax). However, fines, penalties, andsurcharges on account of taxes are notdeductible. The interest on unpaid businesstax shall not be subjected to the limitation ondeduction.
2. Interest paid by a corporation on scripdividends.
3. Interest on deposits paid by authorized banksof the BSP to depositors, if it is shown thatthe tax on such interest was withheld.
4. Interest paid by a corporate taxpayer who isliable on a mortgage upon real property ofwhich the said corporation is the legal orequitable owner, even though it is not directlyliable for the indebtedness.
NON-DEDUCTIBLE INTEREST
(a) interest paid in advance through discountor otherwise(in case of cash basistaxpayer) allowed as deduction in the year the
debt is paid if indebtedness is payable in
periodic amortizations, int. isdeducted in proportion of the amt. ofthe principal paid.
(b) payments made:1. between members of a family
(include only brothers & sisters,spouse, ancestors, & linealdescendants)
2. between an individual & a corp. morethan 50% in value of outstandingstock is owned by such individual(except in case of distributions in
liquidation)3. between 2 corps. more than 50% invalue of outstanding stock owned bysame individual, if either one is apersonal holding co. or a foreignholding co. during the taxable yr.preceding the date of sale/exchange
reality is dividend9. interest on unpaid salaries and
bonuses10. interest calculated for cost keeping
on account of capital or surplusinvested in business which does notrepresent charges arising underinterest-bearing obligation
11. interest paid when there is nostipulation for the payment thereof
OPTIONAL TREATMENT OF INTERESTEXPENSE- at the option of taxpayer, interest
incurred to acquire property used in tradeor business may be allowed as:
(a) as expense (deduction)(b) as capital expenditure
3. TAXES- -the term taxes refers to national and local
taxes, and means TAXES PROPER, hence,no deductions are allowed for:
o a. Interestso b. surchargeso c. penalties or fines incident to
delinquency (sec. 80, Rev. Reg. 2)
DEDUCTIBLE TAXES- All taxes, national, or local, paid or incurred
during the taxable year in connection with thetaxpayers profession, trade or business, aredeductible from gross income.
REQUISITES FOR DEDUCTIBILITY:a. it must be paid or incurred within the
taxable yearb. it must be paid or incurred in
connection with the taxpayers trade,
profession or businessc. it must be imposed directly on thetaxpayer
d. it must not be specifically excludedby law from being deducted from thetaxpayers gross income
T ti L S R i
7/30/2019 Taxation-Reviewer -
29/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
a kind tending to increase the value ofthe property assessed
(e) final taxes, being in the nature of incometax
(f) special assessments
Taxes, when refunded or credited, shall beincluded as part of GI in the year of receipt tothe extent of income tax benefit of saiddeduction. (Tax Benefi t Rule)
For NRAETB and RFC, taxes paid or
incurred are allowed as deductions only ifand to the extent that they are connectedfrom income within the Philippines.
Exceptions to the rule that only such personson whom the tax is imposed by law can claimdeduction thereof:
a. taxes of shareholder upon hisinterest as such and paid by thecorporation withoutreimbursement from him, can be
claimed by the corporation asdeduction.
b. A corporation paying the tax forthe holder its bonds or otherobligation containing a tax-freecovenant clause cannot claimdeduction for such taxes paid byit pursuant to such covenant.
LIMITATIONS ON DEDUCTIONSIn case of a nonresident alien individualengaged in trade/business in the Philippines,taxes to be deducted shall be allowed only if& to the extent that they are connected withincome from sources w/in the Philippines
Tax Credit: a right of an income taxpayer to
deduct from income tax payable the foreignincome tax he has paid to his foreign countrysubject to limitation.
WHO CAN CLAIM?1. Citizen2. Domestic Corp
Limitation of Credit (SubstantiationRequirements)
-The tax credit shall be allowed onlyif the taxpayer establishes to the satisfaction ofthe Commissionerthe following:
a. The total amount of the income derivedfrom sources without the Philippines;
b. The amount of income derived from eachcountry, the tax paid or incurred to which isclaimed as a credit under said paragraph, such
amount to be determined under rules andregulations prescribed by the Secretary ofFinance; and
c. All other information necessary for theverification and computation of such credits.
What amount may be taken as tax credit: Theamount of tax credit allowed is equivalent to thetax paid or incurred to a foreign country duringthe taxable year but NOT TO EXCEED THEFOLLOWING LIMITS:
Per Country L imitation Amount of credit to taxpaid/incurred to any country shall not exceedsame proportion of the tax against which suchcredit is taken
Income from outside the Phils (per country)
Divided by Phil. IncomeSubtotalMultiplied by: TOTAL income from ALL sourcesLimitation per country
Global Limitation Total amount of credit shallnot exceed same proportion of tax which suchcredit is taken
Total income from OUTSIDE the Phils.Divided by total income from ALL sourcesSubtotalMultiplied by Philippine IncomeGlobal Limitation
TaxationLawSummerReviewer
7/30/2019 Taxation-Reviewer -
30/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
DIFFERENCES:Deduction: included in the gross income but later
deducted.Exclusion: not included in the computation of grossincome. Refers to income received or earned but isnot taxable as income because of exemption byvirtue of a law or treaty.Tax Credit: paid beforehand and is deducted from thetax liability of the taxpayer.
Example:
Particulars NetIncome Actual ForeignTax Paid inPhilippine
Peso
PhilIncomeTax due at
32%Country A P50,000 P18,000Country B 40,000 P11,000Phil-sourceincome
110,000
Total NI all
P200,000 P29,000 P64,000
A. PER COUNTRY LIMITATIONCountry A : [(50,000/200,000 x 64,000)] = 16,000Country B : [(40,000/200,000 x 64,000)] = 12,800
** maximum tax credit limit
B. GLOBAL LIMITATION[(90,000/200,000 x 64,000)] =
P28,800
Computation of Allowable tax creditTax Due on P200,000at 32%
P64,000
Less: Allowable Foreign Tax CreditCountry A P16,000Country B 11,000 27,000
Tax Still Due P37,000
** Cannot exceed maximum tax credit limitNOTE: For limitation A, Country A, 16K is lower thanthe actual; Country B, 11K (actual) is the loweramount; get the total of all per country amounts. Forlimitation B, 28.8K is lower than the total of the actualamount. Comparing the total of limitation A vs. B, theformer is the lower amount so that is the allowable tax
(d) incurred in trade, business or professionOR property connected w/ trade,
business or profession lost through fires,storm, shipwreck, or other casualties ORfrom robbery, theft or embezzlement
(e) evidenced by a completed transaction(f) not claimed as a deduction for estate tax
purposes(g) notice of loss must be filed with the BIR
within 45 days from the date of discoveryof the casualty or robbery, theft or
embezzlement
No loss shall be allowed as a deductionfor income tax purposes if such loss hasbeen claimed as a deduction for estatetax purposes.
The taxpayers failure to record in hisbooks the alleged loss proves that theloss had not been suffered, hence, notdeductible. (City Lumber Vs. Domingoand CA, January 30, 1964).
Category and Types of Losses1. Ordinary Losses
a. incurred in trade or business, or practice ofprofession
NET OPERATING LOSS CARRY-OVER (NOLCO)
- Refers to the excess of allowable deductions overgross income of the business for any taxable year,which has not been previously offset as deductionfrom gross income.REQUIREMENTS:1. the taxpayer was not exempt from income tax inthe year of such net operating loss;2. the loss was not incurred in a taxable year duringwhich the taxpayer was exempt from income tax, and
3. there has been no substantial change in theownership of the business or enterprise.
There is no substantial change in the ownership ofthe business when:
a. not < 75% in nominal value of outstandingissued shares is held by same persons
TaxationLawSummerReviewer
7/30/2019 Taxation-Reviewer -
31/145
Taxation Law Summer Reviewer
ATENEOCENTRALBAROPERATIONS2007
MCIT, or that the individual availed ofthe 10% Optional Standard
Deduction
(b) Net Operating Loss = excess ofallowable deduction over the GI
(c) For mines other than oil & gas wells, ifloss incurred in any of the 1st 10 yrs. ofoperation, carry-over for the next 5 yrs.
b. of property connected with the trade,business, or profession, if the loss arisesfrom fires, storms, shipwreck or othercasualties, or from robbery, theft orembezzlement
Total Destruction- the replacement cost torestore the property to its normal operatingcondition, but in no case shall the deductibleloss be more than the net book value of the
property as a whole, immediatel