TAX MIDTERM REVIEWER

TAXABLE INCOME – pertinent items of gross income less deductions, if any, authorized for such types of
income by the Code or other special laws

Income – all such gains, profits or income derived from any source whatever, such as for services,
whether constituting a demandable debt or not, or from or for the use of capital

Capital vs income – capital is a fund, income is a flow; capital is wealth, income is the service of wealth;
capital is the tree, income is the fruit

Gross income – all income from whatever source derived

Tax on Dividends declared by domestic corporation, received by:

 Resident citizen, nonresident citizen, resident alien – 10% FT

 Nonresident alien engaged in trade or business – 20% FT
 Nonresident alien not engaged in trade or business – 25%
 Domestic corporation – exempt
 Resident foreign corporation – exempt
 Nonresident foreign corporation – 15% tax (provided the difference is allowed as a tax credit in
the country where the corporation is domiciled)

Stock dividends are generally NOT TAXABLE (because it represents CAPITAL), unless!

 These are later on REDEEMED by the corporation for a consideration or otherwise CONVEYED by
the shareholder for such consideration
 When the recipient is other than the shareholder
 When a change in stockholder’s equity results by virtue of the stock dividend issuance

NOTE: distributions of TREASURY SHARES as stock dividends are TAXABLE

Capital gains on certain sales or exchanges of real properties by individuals

>Sale of real property classified as CAPITAL ASSET = CGT of 6% of GROSS SELLING PRICE/FMV,
WHICHEVER IS HIGHER

>if an INDIVIDUAL sells real property (capital asset) to the GOVERNMENT or GOCC, he has the OPTION
to treat is either as:

*ordinary income (subject to schedular tax) or

*subject it to 6% CGT

>if an INDIVIDUAL sells his PRINCIPAL RESIDENCE, he may be EXEMPTED from the CGT, provided!!!

 Proceeds of which are fully used in acquiring or constructing a new principal residence within 18
MONTHS from the date of sale
  Written notice to the Commissioner of intention to avail of exemption
 Historical cost or adjusted basis of the real property sold shall be carried over to the principal
residence built or acquired
 Availed of only ONCE EVERY 10 YEARS

Fringe benefit tax = 35% of the GROSSED UP MONETARY VALUE (must be given only to
supervisory/managerial employees)

Employer’s convenience rule– if the benefit given is for the convenience of the EMPLOYER, it is not
taxable on the employee

De minimis benefits – benefits of small value given to rank and file employees for the purpose of
enhancing their productivity and goodwill (not taxable)

Equivalent of cash doctrine – subjects to tax any economic benefit to the employee whatever may have
been the mode by which it is effected

*increase in value of property is NOT INCOME until it is realized upon the sale or exchange of the
property (unrealized income is NOT TAXABLE)

EXCLUSIONS FROM NET INCOME (LRG DERM) – in the nature of tax exemptions, and must be proven
convincingly by taxpayer

1. Life insurance payable upon death of the insured

2. Return of premium paid under life/endowment annuity
3. Gifts, bequests, devises (except income thereof; except in consideration of services rendered)
4. Damages received for personal injuries or sickness
5. Income Exempt under treaty
6. Retirement benefits, pensions or gratuities (PIF VSG)
a. Reasonable Private Benefit Plan, provided:
i. Recipient has worked for at least 10 years in the same employer
ii. At least 50 y/o at time of retirement
iii. Availed of only once
b. Involuntary separation (BEYOND THE CONTROL of the employee)
c. Social security received from foreign government
d. US Veterans Administration
e. SSS
f. GSIS
7. Miscellaneous items (FPPPGGLR)
a. Income of Foreign governments from passive investments in the Philippines
b. Income of the government of the Philippines from its essential functions
c. Prizes and awards in recognition of CARCELS achievements, only if
i. Recipient has been selected without any action in his part to enter the
contest/proceeding
 ii. Not required to render substantial future services as a condition to receive the
prize
d. Prizes received by athletes in local/international sports competitions sanctioned by their
national sports associations
e. Gross benefits up to P90,000
f. GSIS, Philhealth, Pag ibig, contributions and union dues
g. Gains from retirement of long term debt (>5 year maturities)
h. Retirement of shares in mutual funds

DEDUCTIONS FROM GROSS INCOME (CLIRDEBT)

NOTE: Deductions for individuals/corporations which are taxable only from income within the
Philippines shall only be allowed for those incurred WITHIN the Philippines

1. Charitable contributions
a. Individuals – up to 10% of net income without the contribution
b. Corporations – up to 5% of net income without the contribution
2. Losses (ACNLB)
a. Actual
b. Sustained in a CLOSED AND COMPLETED transaction
c. Not be compensated by insurance or otherwise
d. Liquidated and charged off during the taxable year
e. Related to business, trade or profession

THE DEDUCTION FOR LOSSES SHALL BE IN FULL OR NONE AT ALL

Net Operating Loss Carry Over (NOLCO) – carried over THREE consecutive taxable years
immediately following the year of loss and deducted from gross income

Net operating loss – excess of the allowable deductions over the gross income

Unrealized loss from shrinkage in value of shares of stock are NOT DEDUCTIBLE until they would
have been realized from their sale or disposition

EXCEPT! If the shares (capital assets) become worthless, it shall be considered a CAPITAL
LOSS on the LAST DAY of the taxable year

3. Interest expense (RLP)

a. Related to the business/trade
b. Must be LEGALLY DUE
c. PAID/ACCRUED during the taxable year
Note: interest on delinquent taxes are DEDUCTIBLE, if the taxes are RELATED to the business
VIP NOTE: DEDUCTIBLE INTEREST EXPENSE SHALL BE LIMITED TO ONLY 33% OF INTEREST
INCOME SUBJECT TO FINAL TAX
4. Research and Development
5. Depreciation and amortization
6. Expenses (NORRAS)
a. Necessary
 b. Ordinary
c. Related to business
d. Reasonable in amount
e. Actually paid during the taxable year
f. Substantiated

Cohan rule – where it is certain from the evidence adduced that the taxpayer DID INCUR
expenses, but the actual amount thereof has not been established, the Commissioner should
make a close approximation thereof, and his determination thereof shall bear heavily on the
taxpayer for his own inexactitude

Premium paid on life insurance of an officer, employee, etc. where the TAXPAYER (the one
paying the premiums) is directly or indirectly the beneficiary, is NOT DEDUCTIBLE

7. Bad debts (VCWC)

a. Valid and subsisting debt
b. Connected with the trade/business
c. Actual ascertainment that debt is WORTHLESS
d. Charged off during the year

TAX BENEFIT RULE – the RECOVERY of amounts DEDUCTED in previous years from gross income is
TAXABLE unless, to the extent thereof, it did not result in any tax benefit to the taxpayer

8. Taxes – NOTE: TAX BENEFIT RULE (if tax is deductible, its refund is taxable)

Tax deduction vs tax credit: tax deduction is considered BEFORE the tax is computed, while a tax credit is
considered AFTER the tax is computed

Income payments required to be withheld must be subjected to withholding, otherwise, such payments
may not be deductible from gross income

PRIVATE EDUCATIONAL INSTITUTIONS have the OPTION to treat CAPITAL EXPENDITURES as either:

a. Expenses as incurred; or
b. Capitalized and depreciated

TAX CREDIT – TWO PROVISOS (this only applies to RESIDENT CITIZENS AND DOMESTIC CORPORATIONS)

1. Compute the total Philippine income tax due on income from ALL SOURCES. Then multiply it to
the proportion (for each country) of the taxable income from that country to the total taxable
income from all sources. Compare the amount computed to the actual tax paid in that country,
WHICHEVER IS LOWER.
2. Multiply the TOTAL FOREIGN TAXABLE INCOME to the proportion of the TOTAL PHILIPPINE
INCOME TAX DUE from ALL SOURCES to the Total TAXABLE INCOME FROM ALL SOURCES.
3. Choose whichever is lower among 1 or 2 === TAX CREDIT
OPTIONAL STANDARD DEDUCTION – Nonresident aliens and nonresident Foreign corporations are NOT
allowed to avail

 Individuals – 40% of GROSS RECEIPTS/SALES

 Corporations – 40% of GROSS INCOME

Income tax treatment on the Sale or Exchange of Property

Two main considerations in resolving whether or not a SALE OR EXCHANGE transaction has taken place:

a. Element of TRANSFER
 w/n the taxpayer-transferor RETAINS some interest over the thing sold as would entitle him
some control over it
b. Element of CONSIDERATION – a sale or exchange could not in strictissimi juris be validly effected
without a valuable consideration

Sale or exchange transactions may be categorized into the ff groupings:

1. Sale or exchange of ordinary assets

2. Sale or exchange resulting in taxable gain and no loss recognition
3. Sale or exchange of capital assets

Ordinary assets – held primarily by the taxpayer for use in trade, business, or profession. Includes:

 Stock in trade that would be included in inventory

 Property held by the taxpayer primarily for sale to customers in the ordinary course of trade
or business
 Real property USED in the trade/business of the taxpayer

Sale or Exchange resulting in TAXABLE GAIN and NO LOSS RECOGNITION

 Between RELATED PARTIES

 WASH SALES – sale or exchange of shares of stock or other kinds of securities wherein the seller,
within 30 days before or 30 days after the sale or exchange, PURCHASES the SAME OR
IDENTICAL shares or securities (EXCEPT!!! Sales by dealers in securities)
 Exchanges not solely in kind in mergers and consolidations
 Illegal transactions or sales and exchanges not at arm’s length

Capital assets – not used in the trade or business; NOT ordinary assets

NOTE: parcels of land acquired by a bank through foreclosure and sold is an ORDINARY ASSET

3 SPECIAL KINDS OF TRANSACTIONS CONSIDERED AS CAPITAL SALES BY LAW

1. Retirement of bonds, notes, etc. issued by corporations with interest coupons or in registered
form
 2. Short sales
3. Options to buy or sell property AND securities becoming worthless

TAX TREATMENT OF CAPITAL GAINS AND CAPITAL LOSSES

INDIVIDUALS

In general

a. Holding period rule

i. If capital asset held for MORE THAN 12 MONTHS = 50% recognized
ii. If capital asset held UP TO 12 MONTHS = 100% recognized
b. Loss limitation rule – capital losses can only be deducted against capital gains
c. Net capital loss carry over rule – the NET CAPITAL LOSS in a year can be deducted in the
NEXT YEAR from the capital gains, BUT! ONLY UP TO THE AMOUNT OF NET TAXABLE
INCOME IN THE YEAR OF THE NET CAPITAL LOSS

CORPORATIONS

ONLY the Loss Limitation Rule applies (no holding period; no capital loss carry over)

TAX-EXEMPT SALES OR EXCHANGES (no gain or loss is recognized)

1. Exchanges solely in kind in legitimate mergers and consolidations

a. Between the CORPORATIONS which are the parties to the merger or consolidation –
when the transaction involves purely an exchange of property for stock
b. Between a stockholder of a corporation party to the merger or consolidation and the
other party corporation – when the transaction involves purely an exchange of stock for
stock (if cash and/or property is included, it is a TAXABLE GAIN, BUT NOT A TAXABLE
LOSS)
c. Between a security holder of a corporation party to the merger or consolidation and
the other corporation – when the transaction purely involves exchange of security for
security or stocks
Note: in the foregoing, the assumption of liability is not money/property. It does not
prevent the transaction from being exempt
2. Transfer or exchange of property for stock resulting in the acquisition of corporate control
-a person exchanges his property for stock, and as a result thereof, he acquires
CONTROL over the corporation (at least 51% of the voting power)
-would APPLY even when the exchanger ALREADY has control of the corporation

RULES IN DETERMINING SITUS OF TAXATION

 Interest – residence of obligor

 Dividends
o From domestic corporation – WITHIN
o From FOREIGN CORPORATION
  If AT LEAST 50% of its gross income for the past three years preceding the date
of declaration came from sources WITHIN the Philippines – ENTIRELY WITHIN
 IF LESS THAN 50% of its gross income for the past three years preceding the
date of declaration came from sources WITHIN the Philippines – PARTLY
WITHIN AND WITHOUT (WITHIN: proportion of dividends corresponding to the
proportion of income from Philippines to the total gross income)
 Services – place where rendered
 Rents and royalties – location of property (rent) or place of use of the intangible (royalties)
 Sale of REAL property – location of property
 Sale of personal property – location of property
o Sale of personal property purchased without and sold within the Phils, or purchased
within and sold without the Philippines shall treated as derived from sources ENTIRELY
WITHIN THE COUNTRY IN WHICH SOLD
o Sale of SHARES OF STOCKS of DOMESTIC CORPORATIONS – derived WITHIN

Accounting Methods

Cash basis – actually or constructively receipt

Doctrine of constructive receipt – refers to the availability of the income to the taxpayer but, by
his own and exclusive choosing, he prefers not to actually receive the income

Accrual basis

In the case of lease agreements in which the improvements introduced by the lessee would thereby or
later on become the lessor’s property, the lessor has the option to treat the improvement as income

a. MV Upon completion of the improvement

b. Spreading the estimated depreciated value of the improvement over the life of the lease

Installment basis method

What is the legal basis for employing the other accounting methods?

>section 6 and section 43 of the Tax Code

Section 6. When a report required by law for the assessment of any internal revenue tax is not
forthcoming, or when there is reason to believe that such report is false, incomplete or erroneous, the
Commissioner shall assess the proper tax on the best evidence available

Who are REQUIRED TO FILE INCOME TAX RETURNS?

INDIVIDUALS

a. Filipino citizens residing in the Philippines

b. Filipino citizens residing outside the Philippines, on his income from sources WITHIN
c. Resident aliens, on income from sources WITHIN
d. Nonresident aliens engaged in trade or business or profession

INDIVIDUALS NOT REQUIRED TO FILE ITR

 a. Those whose TAXABLE INCOME does not exceed P250,000
b. Pure compensation earners whose income has been withheld, except! More than one employer
c. Minimum wage earners
d. Sole income has been subject to final tax
e. Exempt from income tax under the Code/special laws

CORPORATIONS

ALL CORPORATIONS subject to income tax MUST FILE A RETURN

>quarterly, on a cumulative basis

>final, or adjusting, income tax return on April 15th

>return for the first quarter is filed on May 15th

Capital Gains Tax Return – 30 days after the transaction

DST Return – on the 5th day of the month following the transaction