CONSOLIDATED SYLLABUS IN TAXATION TAX1 A. General Principles of Taxation a, Concept*Underlying Basis? and Purpose 1. Taxation, Taxes Defined 2. Attributes or Characteristics of Taxes 1) Cebu Portland Cement v. CTA, 1-29059, 15 Dec 1987, 156 SCRA 535 (Lifeblood of the Government) 2) Mun, of Makati v. CA, et al, L-89898, 01 Oct 1990, 190 SCRA 206 (Exempt from execution) 3) CIRy. Algue, Inc. etal, 1-28896, 17 Feb 1988, 158 SCRA 9 (Lifeblood Theory; Rationale is Symbiotic Relationship; timeliness of assessment / collection; effect of warrant of distraint & levy; deductibility of promotional expense)* 4) BPI Family Savings Bank v. CA et al, 330 SCRA 507, G.R. No. 122480 April 12, 2000 (Mutual Observance of fairness & honesty; claim for refund due to losses, how to prove entitlement)* b. Principles of a Sound Tax System 1. Fiscal Adequacy 2. Theoretical Justice 3. Administrative Feasibility 4, Will the non-observance of these principles invalidate the tax law? No, unless other inherent and constitutional limitations are infringed. What is the concept of taxation? It can be viewed in two ways, namely@a) as a power to tax and (b) as the act or process by which taxing power is exercised. What is the theory or underlying basis of taxation? It Is a necessity without which no government could exist; revenues collected are intended to finance government and its activities. It can reach what traditionally are within police power measures to attain: i Social justice ji, Equitable distribution of wealth lil Economic progress iv. Protection of local industries, public welfare and the like ‘The substantive issue here is the deductibility of P75,000 promotional fees paid by Algue to certain individuals who were also its stockholders and who rendered services so that Algue ‘would earn commission fees. The procedural issue whether or not Aligue seasonably filed its appeal to the CTA from receipt of Warrant of Distraint and Levy. Due to a special circumstance, this case presents an excepted to the rule that a Warrant of Distraint and Levy is “proof of the finality of the assessment” and "renders hopeless a request for reconsideration,” being “tantamount to an outright dental thereof and makes the said request deemed rejected.” ‘This isa claim for tax refund due to losses, which was denied by the CTA allegedly for failure to present the Annual Income Tax Return of the following year, which would show whether the overpaid taxes had not been credited in that year’s tax lability.©. Scope of Taxation 1. No attribute of sovereignty is more pervading, unlimited, plenary, comprehensive and supreme 2. Wide spectrum of the power to tax reaches every trade or occupation, every object of industry, use or enjoyment, every species of possession Imposes burden, if not followed could result to seizure and penalty Pervasive affecting constantly and consistently all relations of life Italso involves the power to destroy per Justice Marshall [but Justice Holmes said no while the US SC sits] sae 5) CIR v Tokyo Shipping Co, 244 SCRA 332, G.R. No. L-68252 May 26, 1995 [Claim for Refund of tax on GPB from charter of vessel; claim for refund construed strictississimi juris finding of fact by CTA that vessel left without sugar laden; 15 years lapsed without refund though at one point lawyer of BIR said it was approved; Kall the goose that lay the golden eggs} d, Limitation of Taxation 1. Inherent Limitations a. Public Purpose b. Legislative in Nature ¢. Territorial 4d. International Comity 6) CIR Mitsubishi Metal Corp, 181 SCRA 214, 22 fan 1990 [Exemption of Japanese govt owned bank does not extend to Jap corp, who in turn lent the loan to alocal Company; exemption construed strictisissim] e. Exemption of Government from tax 2. Constitutional Limitations Directly affecting taxation a. Non-imprisonment for non-payment of poll tax b. Rule of taxation should be uniform and equitable; progressive system of taxation to evolve; authorized President to fix limits by Congress ¢. Exempt charitable and religious institution from property tax d. Exempting law must be passed by majority of all members of Congress Special purpose tax should be used for said purpose and excess to revert to general fund Veto power of the President Review power of the SC Grant of power to local government Exemption of non-stock, non-profit educational institution, etc from taxes reoIndirectly affecting taxation a. Due Process and Equal Protection Clauses b. Police Power and Eminent Domain higher, can override constitutional rights, subject to limitations Distinguish Taxation from Police Power and Eminent Domain ‘Taxation is subordinate to: 1) Due Process 1) Separation of Church and State 1) Non-impairment clause of contracts 1) Free exercise and enjoyment of religious profession 7) Phil Bank of Communications v. CIR, et al, 302 SCRA 241, G.R. No. 112024 January 28, 1999 [Summary collection does not infringe due process 8) Sison v. Ancheta, GR 59431, 25 Jul 1984 [Uniformity, Equal Protection and Due Process Clauses not violated when BP 135 adopted gross income taxation) [when the tax “operates with the same force and effect in every place where the subject may be found”, It was held to comply with uniformity requirement; “Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.] 9). Reyes v. Almanzor, 196 SCRA 322 G.R. Nos. L~49839-46 April 26, 1991 (Arbitrary valuation violated Due Process 10) Nitafan et al v. CIR, GR 78780, 23 Jul 1987 (Salaries of justices & Judges are not exempt from income tax) 11) PAL. Sec of Finance, GR 115852, 25 Aug 1994 (Withdrawal of PAL’s exemption from VAT without being mentioned in ttle not violative of bill embracing one subject) 12) Tolentino v Sec of Finance & CIR, GR 11545, 64 SCAD 352, 235 SCRA 630 (Does, VAT law violate the “progressivity rule of taxation” given that VAT is regressive?; equality & uniformity rule?) 18) ABAKADA Guro v. Exec Secretary, 469 SCRA 1, ete 1 Sep 2005 & 18 Oct 2005 G.R. No. 168056 September 1, 2005 Aspects of Taxation Levy 14) GAR v. Botelbo Shipping Corp, 20 SCRA 487 R. Nos, L-21633-34 June 29, 1967 (tax exemptions granted to particular persons) 15) Tan v. Del Rosario, Jr.5 237 SCRA 324(1994) G.R. No. 109289 October 3, 1994 (Legislative discretion to determine nature (kind), subject (purpose), extent (rate), coverage (subject), land situs (place), SNITS is valid; Assessment & Collection Payment Tan v. Del Rosario, 237 SCRA 324 (1994) ~ This isa challenge to the validity of Simplified Net Income Taxation applied to general professional partnerships; uniformity of taxation merely requires thatall subjects or objects of taxation similarly are to be treated alike both in privileges and liabilities.f£ Classification of Taxes According to subject matter (Capitation Tax, Property Tax, Excise Tax) According to burden or incidence (Direct or indirect) 16) Maceda v. Macaraeg 223 SCRA 217 G.R. No. 88291 May 31, 1991 17) ABAKADA Guro v. Exec Secretary, GR 168056 1 Sep 2005 & 18 Oct 2005 According to determination of amount (Ad Valorem, Specific) 18) Tan v Mun of Pagbilao GR 14264, 30 Apr 1963 7 SCRA 887 According to purpose (General, Special) 19) PAL v. Romeo Edu, GR 41383, 15 Aug 1998 164 SCRA 320 (exempt from taxes) 20) ESSO Std Eastern v CIR GR 28508-9, 7 Jul 1989 175 SCRA 149 (Margin Fee a license - police power, not taxing) 21) Lozano v. Energy Regulatory Board, GR 95119-21, 18 Dec 1990 192 SCRA 363, (OPSF nota tax) According to authority imposing the tax (National, Local) 22) Meralco Securities v. Central Board of Assessments Appeals, GR L-47245, 31 May 1982 114 SCRA 260 (Real Property under Real Property Tax Code, a national tax; This is no longer true under the Local Government Code) According to graduation (tax base / tax rate) - (Progressive, regressive, etc) g. Distinguished from other exactions License 23)Procter & Gamble v. Mun of Jagna, 94 SCRA 894, (nature and amount of license) G.R. No. L-24265 December 28, 1979 24)Golden Ribbon Lumber v City of Butuan, 12 SCRA 611 (non paymentis illegal) GR. No. L-18534 December 24, 1964 Toll 25) city of Ozamis v Lumapas, 65 SCRA 33 G.R. No. L-30727 July 15, 1975 Special Assessments (Now, Special Levy under the Local Government Coe) 26) Apostolic Prefect v Treasurer of Baguio, 71 PHIL 547 GR No. L-47252 April 18, 1941 Debt or an ordinary obligation27)Vietoria Milling v Phil Ports Authority, GR 73705 27 Aug 1987, 153 SCRA 317 (share of govt from earnings of arrastre and stevedoring from contractual compensation not tax) 28)CIR v Prieto 109 PHIL 592 G.R. No. L-13912 September 30, 1960 Interpretation and Construction of Tax Statutes How are tax laws interpreted or construed? a, Rules of Statutory Construction are applied, legislative intent is primordial b. Incase of doubt, construed in favor of taxpayer ¢. But for exemptions, construed against taxpayer i Except when it applies to government ii, Special class of subjects under special conditions iii, When the law says so 29)cIR v cA, Central Vegetable Mfg Co & CTA, GR 107135, 23 Feb 1999 30)Luzon Stevedoring v CTA, GR 30232, 29 Jul 1988, 163 SCRA 647 31)cIR v. Gotameo & Sons, GR 31092, 27 Feb 1987, 148 SCRA 36 32)CIR v. CA, CTA and Ateneo de Manila, GR 115349, 18 Apr 1997, 271 SCRA 605 How are the rules applied? Apply first the doctrine that imposition is a burden thus construed strictly vs. govt, then if applicable, the burden shifts to taxpayer to prove he is exempt. i. Classifications of Exemptions Express Section 30 of NIRC Section 105 of Tariffs and Customs Code Special Laws, like the Omnibus Investment Code Implied or by Omission i, Government is impliedly not subject to tax but it can tax itself Equity Contractual 33) Prov of Mizamis Oriental v. Cagayan Electric, GR 45355, 12 Jan 1990, 181 SCRA 38 j. Instances Exemptions construed liberally ‘The law says so Special classes of persons under special circumstances 34) CIR v.CA, ROH Auto Products Phils & CTA, GR 108358, 20 Jan 1995, 240 SCRA 368 In favor of the government, ete35)Maceda v. Macaraeg, 197 SCRA 77 Exemptions granted to traditional exemptees, such as religious / charitable 36)CIR v. DLSU - GR Nos 196596, November 9, 2016, G.R. No. 198841 and G.R. No. 198941 k, Certain Doctrines in Taxation Prospectivity of tax laws How may tax laws be applied? General rule, prospective, but the law can provide that it has retro effect and itis still valid, except if too harsh and oppressive as to violate due process clause of the constitution, 37)Hydro Resources v CA, GR L-80276 21 Dec 1990, 192 SCRA 604 [ad valorem tax imposed by law passed after transfer of ownership not applicable; contract of sale subject to suspensive condition; LC issued prior to law is not subject to ad valorem; no retro effect unless stated by law] 38)central Azucarera de Don Pedro v. CTA, 20 SCRA 344 [interest on deficiency tax ‘was imposed by a law passed after the deficiency was incurred is nota retroactive application) May tax laws be given retroactive effect? Yes, Lorenzo v. Posadas 64 Phil 353; Smietanka v First Trust Savings Bank, 257 US 602; Law on Federal Taxation, Vo; 1 p.154 Is the government bound by the errors of its agents? While the government is not bound by the error of its agent in issuing a ruling, in the interest of justice and fair play, reversal of ruling may not be given retro effect, 39) CIR v, Benguet Corp, 463 SCRA 28 (2005) 40) CIR v. Burmeisters & Wain Scandinavian, GR 153205 Jan 2007 Non-prescriptive 41) CIR v. Ayala Securities Corp, GR L-29485, 21 Nov 1989 - tax on undue accumulation of income does not prescribe because the law imposing does not provide for the fixed period within which to file a tax return; the SC reconsidered its earlier decision dated April 8, 1976; see Sec 29, NIRC May taxes prescribe? No, but the law can provide for its prescription, such as NIRC, Customs and LGC Double Taxation what is double taxation? Is it valid or constitutional? Direct Duplicate Taxation - same taxing authority, same year, same taxes but applying to some of the properties Indirect Duplicate Taxation - when otherwise42) Pepsi Cola v. Tanauan, 69 SCRA 460 [mun ordinance impose .01 per gallon per RAis not undue delegation; no double taxation; not specific tax] 43) CIR v. SC Johnson & Sons, 309 SCRA 87 (1999), [Most favored nation clau: double taxation; claim for refund in the nature of exemption; construction of RP-US tax Treaty ~ tax rate on royalty US v Germany, international juridical double taxation defined] Measures to avoid double taxation Treaty Reciprocity ili, Tax Credit Means of escaping taxation - tax avoidance / tax evasion 44) CIR v. Rufino, GR 1-33665-68, 27 Feb 1987, 148 SCRA 42, [tax exempt merger of two corporations) 45) Delpher Trades Corp vIAG, 157 SCRA 349 [tax exempt transfer of property to a corporation resulting to control} 46) CIR v. Benigno Toda, 438 SCRA 290 (2004) - meaning of fraud; tax avoidance / evasion Is equitable recoupment allowed though prescription has set in? 47) Collector v. UST, 104 PHIL 1062 - (rejected this common law doctrine) Set off of taxes 48) Philex Mining v. CIR,L-125704, 28 Aug 1998 (General rule: [Refundable VAT v. Excise tax); 49) CIR v ESSO Standard, 172 SCRA 369 18 Apr 1989, 172 SCRA 623 [ Offset of Percentage Tax and amusement taxes v. matured back pay certificates]; Domingo v. Garlitos, 8 SCRA 443 [1963] (exception: allowed)[Estate and Inheritance Taxes v specificallu appropriated fund for the payment of obligation to the estate] 10 offsetting) Tax mt e filed When disbursement of public funds involved BUT NOT to enjoin COMELEC to call election Funds were not raised through taxation Maceda v. Macaraeg, 197 SCRA 771 [Exemp! nn of NPC from taxes] Are compromises allowed? Yes by the BIR under NIRC and by Customs under TCP. NO similar provisions under the LGC, thus Civil Code applies suppletorily Are tax laws political in nature? No, it applies to territory and not by reason of occupying forces. DEFINITIONS OF DIFFERENT TAXES UNDER THE NIRCCapital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale, Documentary Stamp Tax is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights or property incident thereto Donor’s Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of the transfer. Estate Tax is a tax on the right of the deceased person to transmit his / her estate to his / her lawful heirs and beneficiaries at the time of death and on certain transfers which are made by law as equivalent to testamentary disposition. Income Tax is a tax on all yearly profits arising from property, profession, trades or offices or as a tax on a person's income, emoluments, profits and the like. Percentage Tax is a business tax imposed on persons or entities who sell or lease goods , properties or services in the ordinary course of trade or business whose gross annual sales or receipts do not exceed P1.Smillion and are not VAT-registered. Value-Added Tax is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal) lese of goods or properties (real or personal) or vendors of services. Itis an indirect tax, thus it can be passed on to the buyer. Withholding Tax on Compensation is the tax withheld from individuals receiving purely compensation income. Expanded Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is creditable against the income tax due of the payee for the taxable quarter / year. Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is not creditable against the income tax due of the payee for the taxable year. Income tax withheld constitutes the full and final payment of the Income Tax due from the payee on the said income Withholding Tax on Government Money Payments is the tax withheld by government offices and instrumentalities, including government owned or controlled corporations and local governmentunits, before making any payments to private individuals, corporations, partnerships and / or associations. . THE NATIONAL INTERNAL REVENUE CODE a. Taxes imposed under the NIRC (Sec 21, NIRC) b. Bureau of Internal Revenue (Sec 2 to 20, NIRC) Powers and duties of the Bureau of Internal Revenue Exclusive and original power of the CIR to interpret tax laws, subject to review by the Secretary of Finance Assess and Collect 50) CIR v. Pascor Realty & Dev Corp, 309 SCRA 402 (1999), Meaning of Assessment; is assessment prejudicial to fling a tax evasion case? 51) Marcos I v. CA, 270 SCRA 47(1997) Burden of Proof on taxpayer to prove erroneous assessment; inapplicability of the statute on non-claims under the Rules of Court to taxes 52) Meralco Securities Corp v. Savellano, 117 SCRA 804 (BIR cannot be compelled by Mandamus to issue assessment) Enforce forfeitures, penalti courts & fines, execute decision of CTA & ordinary 53) Republic v CA 366 SCRA 489(2001); Aznar v CIR 58 SCRA 519(1974); CIR v. Benigno Toda 438 SCRA 290 (2004) (meaning of fraud) Effect police powers Obtain information, ete 54) Sy Po v CTA, GR No. 81446, 18 Aug 1988 (best evidence to support assessment); CIR v. Hantex Trading GR L-136975, 31 Mar 2005; Aurelio P. Reyes v. Coll of Internal Revenue, CTA No. 42, 26 Jul 1956 and William Li Yao v. Coll, CTA No. 30, 30 Jul 1956 (use of net worth method) 55) Bache & Co. v. Ruiz, 37 SCRA 823 (requirement fora search warrant) 3. BIR Rules and Regulations 56) CIR v. CA, ROH Auto Products Phil Inc and CTA, GR No. 108358, 20 Jan 1995, 240 SCRA 368 (Nature of administrative rules and regulations) 57) CIR v. CA, CTA and Fortune Tobacco Corp, GR No. 119761, 29 Aug 1996, 261 SCRA 236 (Extent of BIR Interpretative rule) 58) CIR v, Burroughs Ltd, GR No, 66653, 19 Jun 1986, 142 SCRA 324 (Effect of revocation of ruling) 59) PBC v. CIR, GR No. 112024, 29 Jan 1999 (wrong interpretation will not prejudice the government)c 60) ABS-CBN'v. CTA & CIR, GR No. 52306, 12 Oct 1981 (circulars or rulings, prospective) 61) CIR v. Benguet Corporation, 463 SCRA 28 (2005) - Non-retroactivity of ruling; while government is not bound by the error of its agents issuing ruling, in the interest of justice and fair play, it may be not given retroactive effect (same holding in Sy Po v. CTA, GR No. 81446, 18 Aug 1988; 62) CIR v. Burmeisters & Wain Scandinavian, GR No. 153205, Jan 2007 - Non: retroactivity of BIR ruling; 0% VAT on export of services Income Tax ~c INCOME TAXATION (Secs 22 to 83, NIRC) 0 2) 3 4 5) 6) n 8) 9 1. Definition of Terms (Sec 22, NIRC) 2. General Principles (Sec 23, NIRC and cross refer to Sec 42) 3. RR8-2018 - implementing the Income Tax provisions of TRAIN law CIR v. BOAC 149 SCRA 395 ~ Source of income of airlines ~ sale of airline tickets of an offline carrier considered income derived from Phil by majority SC; source rule discussed; minority considered alrline tickets as contract of carriage or service, thus situs is where rendered; characterization becomes moat given the new provision on 2 ¥ % Phil Gross Billings regardless of where sold or paid provided cargo or passenger originates from Phil. [Read RA 10378, 29 Mar 2013, amending Sec 28()(3)(b), NIRC] NDC v CIR, 151 SCRA 472 (1987) ~ Source of interest income ~ Exemption strictly ‘construed; See 37 (ow Sec 42) - income from sources within the Philippines applied; also exclusions from gross income, 4. Meaning of Income Fisher v. Trinidad GR No. 17518, 30 Oct 1922, 43 Phil 973 - Income defined; stock dividends construed Madrigal v. Rafferty GR No. 12287, 07 Aug 1918, 38 Phil 14 ~ Functions of income tax The aim has been to mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay; income distinguished from capital. Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital isa fund; income is a flow. Capital is wealth, while income is the service of wealth. “The factis that property is a tree, income is the fruit; labor is a tree, income the fruit; capital isa tree, income is the fruit” Madrigal spouses reported income from conjugal partnership separately resulting to lower tax due. SC said under the law at the time they should report jointly. The partnership is not a business partnership: right of spouses inchoate, [Under current income tax law, spouses report their income jointly but income tax liability is computed separately, CONWI v. CTA, GR No, 48532, 31 Aug 1992, 213 SCRA 83 - Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor. The issue here is which exchange rate to use on $-denominated salaries of P&G employees earned abroad, RR issued by Sec of Finance required application of floating rate is applicable in this case but not the CB Circular. ‘Thus, refund claim is denied Javier v. CA 199 SCRA 824 - received by mistake in income Limpan Investment Corp v. CIR, 17 SCRA 703 (1966) ~ constructive receipt of rent income deposited in court in 1957 withdrawn in 1958 Fernandez v. CIR 29 SCRA 553 - Book error not income - liability to an insurance company overstated, thus when corrected the net worth went up. This is not taxable, Rutkin v. US, 343 US 130 ~ claim of right doctrine ~ illegally acquired (extortion) is income10) Eisener v. Macomber, 252 US 189; CIR v. CA 301 SCRA 52 ~ Severance test theory ~ separation from capital of something which is of exchangeable value, refers to taxability of stock dividends 11) Helvering v. Horst. 311 US 112, Control test - power to procure the payment of {income and enjoy the benefit thereof determines who is subject to tax on coupon bond donated to his son, 12) BIR Ruling 029 - 1998 - Economic benefit principle ~ exception to the rule that no income is earned when there is merely an increase in the value of the property 13) CIR v. Lednicky, 11 SCRA 603 ~ Partnership Theory - the right to tax income emanates from partnership in the production of income by providing protection, resources, incentives and climate to produce income, [Was income tax paid to foreign government by resident alien deductible though income exclusively came from the Philippines? No] 14) CIR v. Isabela Cultural Corp GR No. 17223, 12 Feb 2007 - All Events Test applied in recognizing income or liability under accrual method of accounting. Expenses incurred in prior year cannot be claimed as expense in another. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availabilty of the reasonable accurate determination of such income o liability. 5. INCOME TAXPAYERS [KINDS] Individuals (Sec 24 to 26, NIRC) Citizens ‘Aliens Residents Residents Non-residents Non-residents Engaged in business Not engaged Corporate Taxpayers (Sec 27 to 30, NIRC) Kinds of Corporation Domestic (Sec 27) Foreign (Sec 28) Resident - engaged in business Non-resident Others whose activities or ventures considered as corporation for income tax purposes Estate under judicial settlement ~ must be under judicial administration; entitled to deduction for single individual; allowed to deduct distribution to heirs. Trusts ~ irrevocable both as to corpus and as to income6. TAX BASE AND TAX RATES FOR INDIVIDUALS Resident citizens All sources - compensation, business and other income, (except passive income & capital gains ~ subject to final taxes) Readings / Questions: 15) Tan v. Del Rosario 237 SCRA 324 (1994) Global Taxation RR No. 2-98, as amended by RR 9-98, 12-98, 3-99, 8-2000, 10-2000, 6-2001, 12- 2001, 3-2002 and 14-2003 on withholding taxes RR3-98, as amended - Fringe Benefits Tax 16) Coll v. Henderson 1 SCRA 649 - Convenience of employer rule Overtime / Transportation Allowance & Duty Allowance on night / graveyard shift / outstation or out of town allowance for carrying on the business of employer are not subject to FBT being for the convenience of employer. Moreover, when they are pre- computed on daily basis and paid while on assignment, they likewise not subject to income tax and WT. [DA 013-2008, 16 Jan 2008] ‘What is compensation income? What are fringe benefits? (See Sec 33, NIRC) ‘What is meant by ordinary income? (Sec 22, NIRC) How is compensation of directors of corporation taxed? Effect if directors are not employees of the corporations? If not employed, taxed like a business income. [RMC 34-2008, 15 Apr 2008 - fees paid to directors of a corporation who are not employees of said corporation is considered as seller of services, hence also subject to VAT. How is taxable income computed? (Sec 31, NIRC) Gross compensation, less personal and additional exemptions and premiums on health and hospitalization (subject to conditions) Business and other income taxed at net taxable income (net income = GI less deductions under Sec 34, NIRC) Above items subject to 5, 10, 15, 20, 25, 30 to 32% graduated tax rates (10k, 30K, 70K, 140K, 250K, 500K) Passive Income Royalties ~ 20% (except books, literary, musical at 10%) Prizes exceeding 10K ~ 20% (except Lotto, PCSO); 10K or less subject to ordinary rates Other winning - 20% Interest (peso) ~ 20% Interest (foreign) - 7.5% Interest (5 years) - exemptInterest Pre-term, <3 years ~ 20%; <4 years - 12%; <5 years - 5% Dividends from domestic corp and taxable partnership, 10% Stock dividend, CIR v CA, 301 SCRA 152 Recipient other than shareholder, Bachrach v. Siefert, 87 Phil 483, ‘Treasury Stock, CIR v. Manning 65 SCRA 14 Dividends from foreign corp - subject to regular income tax Dealings in properties classified as capital assets Capital gains from sale of real property located in Phil - 6% or 5% to 32% (option when sold to government) RR 13-99 - Exemption of residence from CGT Other capital gains - 5% to 32% Sale of stocks of Domestic Corp Listed and thru Stock Exchange - exempt from income tax but subject to ¥ of 1% (non-deductible from gross income) See Sec 127 Not listed or if listed, not thru stock exchange ~ 5%, 10% (100k, >100k) See Rev Reg No. 2-82, 29 Mar 1982 - taxation of sales of shares of stocks classified as capital assets See RR 7-2003 - capital assets vs ordinary assets Cash reward to informers - 10%, max of 1M (see Sec 282, NIRC) Non-resident Citizen From within Phil - same rules as to resident citizen Without Phil - exempt Resident Alien Same rules as to resident citizen, but only on income earned from within Phil Non-resident Alien Engaged in business (183 days) - same as resident alien with respect to compensation, business, other income and passive income, but not entitled to additional exemption, except: dividends from domestic corp ~ 20% (Sec 25(a)(2) Not engaged - 25% on gross income (but entitled to preferred rates for sale of shares of stocks and real property) Dividends from domestic corp - 25% Royalties, prizes & winnings - 25% Employed by OBU, RHQ/ ROHQ, MNG, petroleum service contractors / subcon (same treatment to Filipino of same rank & job ~ 15% based on gross income of non-residents, whether individual or corp from transactions with depositary banks under expanded foreign currency deposit system - exempt from income tax, Sec 27 (D)(3)) Estates and Trusts (Sec 60 to 66, NIRC) CATEGORIES OF INCOME OF INDIVIDUAL TAXPAYERS Compensation Fringe Benefits Income from Trade / Bu:Exercise of Profession Passive Income Other Dealings in Property COMPUTATION OF INCOME TAX DUE OF INDIVIDUAL WHO EARNS BUSINESS, COMPENSATION AND OTHER INCOME Gross Sales / Receipts Less: Sales Returns & Discounts Net Sales Less: Cost of Sales / Service Gross Income from business or exercise of profession Compensation income (purely compensation income is not entitled to business deductions) Other income (other than those subject to final tax) Total Gross Income Less: Itemized Deductions or optional standard deduction Personal and additional exemptions Taxable Income Tax Due (Tax table 5% to 32%) Creditable W/Tax Tax still due / refund ‘TYPE OF GROSS INCOME OF INDIVIDUALS SUBJECT TO 5% TO 32% TAX Compensation Trade / Business Exercise of Profession Prizes / Winnings ~ P 10K or less Capital gains on real property sold to government - 6% ar 5% to 32% Other capital gains from dealings in property [except those subject to 6% final tax on land and 5% or 10% final tax on shares of stocks and % of 1% transaction tax on. shares of stocks traded and sold through the stock exchanges; see below Capital gains other than from real property and shares of stocks are still subject to the rules on long term and short term investments, ie. 1 year or less and over 1 year holding period; loss carry over and deduction rules of capital loss v. capital gains and ordinary income only. INCOME OF INDIVIDUALS SUBJECT TO FINAL TAX Passive Income Prizes / winnings >P1O0K, except from PCSO, ete Dividends Royalties Interest Capital Gains from sale or exchange of shares of stock (outside of stock exchanges}; Capital gains from sale of real property (held as capital asset) ‘Compensation from ROHQ/RHQ, OBU, etc Informer’s reward GENERAL PROFESSIONAL PARTNERSHIP (Sec 26)Exempt from income tax as a corporation but its partners are taxable on their share whether distributed or not 17) Its exclusion is a classification clause not an exemption thus construed in favour of taxpayer, CIR v. Ledesma, 31 SCRA 95, 30 Jan 1970 18) Sison v, Ancheta and Tan v, Del Rosario, supra TAX BASE AND TAX RATES APPLICABLE TO CORP (Sec 27 -30, NIRC) Meaning of Corp or partnership Sharing not taxable ~ Pascual v, CIR, 166 SCRA 560 (1988) Co-ownership is not taxable, Ona v. CIR, 45 SCRA 74; Obillos v. CIR, 139 SCRA 436 (1985); cited Ona, Evangelista cases Afisco Insurance v. CIR, GR No. L-112675, 25 Jan 1999; taxed as a corporation the pool of insurance companies Joint Emergency Operations ~ Coll v. Batangas, 54 0G 6724 Power of Attorney for operation of mining claims deemed partnership ~ Philex ‘Mining v. CIR, GR No. 148187, 16 Apr 2008 Kinds of Corporation Domestic (Sec 27) Profit-oriented (32%); effective July 1, 2005 - 35%; effective January 1, 2009 - 30% per RA 9337 Proprietary educational and non-profit hospital - 10% of taxable income, except passive income; contrast with a tax exempt non-stock and non-profit educational institution; See Art. XIV, Sec 3(3) of the Constitution; Central Mindanao State Universtiy v. Dept of Agrarian Reform 215 SCRA 86 (4992); and Abra Valley College, Inc. v. Aquino, 162 SCRA 106 (1988) Government Corps ~ SSS, GSIS, PHIC, PCSO & PAGCOR (Pagcor now taxable under RA 9337) Foreign (Sec 28) Resident - engaged in business Non-resident Others whose activities or ventures considered as corporation for income tax purposes ‘TAXATION OF DIFFERENT TYPES OF INCOME OF DOMESTIC CORP - SUBJECT TO TAX ON INCOME EARNED FROM ALL SOURCES (WITHIN & WITHOUT THE PHILS); see NV Reederif Amsterdam v. CIR GR No. 46029, 23 June 1988 On taxable income (other than passive income) ~ 34%, 33% or 32% starting 2000, 35%; effective January 1, 2009 - 30% per RA 9337 On Passive Income Royalty ~ 20% Interest / Yield from bank deposits, deposit substitutes, Trust Fund and similar arrangement ~ 20% [CIR v. Solidbank, GR No. 148191, 25 Nov 2003 - GRT v. FWT - no double taxation; accrued v. constructive] Interest Income (expanded foreign currency) ~ 7.5% Interest Income of depositary hanks from deposits in foreign currency & loans to residents ~ 10%Interest income from non-residents, whether individual or corp - exempt Interest (5 years or more maturity) - exempt; if pre terminated <3- 20%, <4-- 12%, <5 - 5% Interest passed on by parent company to its subsidiaries on reimbursement basis is not taxable to parent company. The real lender is the banks. [CTA Case No. 7086, 10 Jan 2008] Dividends from domestic corp and taxable partnership - exempt from regular income tax [See Sec 73, NIRC] Dividends from foreign corp subject to regular income tax Capital gains from sale of real property located in the Phil - 6% Where sale of land was made between PEZA-registered enterprises subject to 5% preferential tax * in lieu of all other taxes", the same is not subject to 6% CGT, VAT or DST [DA 025-2008, 22 Jan 2008] Sale of real property held for investment by a holding company and not engaged in real estate business is subject to 6% CGT & DST but exempt from VAT [DA 011-2008, 15 Jan 2008] Buyers of real property who are not engaged in trade or business are required to withhold the creditable tax from the purchase price, If seller already remitted the tax, there is no more obligation to pay the tax or the penalty, [DA 02-2008, 08 Jan 2008] Sale of stocks of domestic corp isted and thru stock exchange - exempt from income tax, but subject to business tax at ¥ of 1% of gross (Sec 127) IPO of a taxpayer granted with legislative air transport franchise is not subject to IPO tax because of ipso facto provision in its franchise that levels the playing field with competition. The competition franchise provides that it shall pay 2% franchise tax or basic corp income tax whichever is lower, ‘in liew of other taxes’. The issuance of shares of stocks is likewise not subject to DST. [DA 05-2008, 9 Jan 2008] Not listed or if listed, not trade thru stock exchange - 5%, 10% (100K, >100k) See RR 7-2003 Capital assets v. Ordinary Assets 2% MCIT BASED ON GROSS INCOME (see Rev Reg 9-98, 25 Aug 1998) Beginning immediately on the 4" taxable year from start of operations; compare tax based on 30% and 2% of Gross income whichever is higher. Carry Forward of Excess MCIT vs regular tax for 3 immediately succeeding years Relief due to prolonged labor disputes, force majeure, and other legit buss reverses Gross Income means Gross Sales less sale returns, discounts & allowances & Cost of Goods Sold (CGS). CGS include all expenses to produce the goods to bring them to their present location & use. For trading or merchandising, CIF & duties; for manufacturing, cost of goods manufactured and sold, cost of producing finished goods; for seller of services, Gross Receipts less sales returns, discounts, allowances & cost of services, facilities, salaries, benefits, equipment, rent, supplies; for banks, include interest expense.19) CREBA Inc v. Exec Secretary, et al - GR NO. 160756, 09 March 2010 (Validity of imposition of MCIT and other related issues) 15% OF GROSS INCOME IS AN OPTION TO CORPORATION Tax effort ratio = 20% of GNP Income tax collected = 40% total revenues VAT = 4% of GNP Consolidated Public Sector Financial Position = 0.9% of GNP RESIDENT FOREIGN CORPORATION 30% effective January 1, 2009 - same as domestic corp, except that taxable income should come from Phil sources International Carrier ~ 2 ¥% of Gross Phil Billings (GPB) Air Carrier - continuous and uninterrupted flight originating from Phil regardless of place of issue and payment, exchange with other airlines; but in transhipment, only the leg from Phil Shipping - originating from Phil up to final destination; regardless of sale or payment of document 20) CIR v. Tokyo Shipping Co. GR No. L-68252, 25 May 1995 [Claim for refund of tax on GGPB from charter or vesse}; claim fro refund construed stricticissimi juris finding of fact by CTA that vessel left without sugar laden; 15 years lapsed without refund though at one point lawyer of BIR said it was approved; kill te goose that ay the golden eggs} 10% - Offshore banking units - income from foreign transactions with local and resident banks, including from foreign loans with residents 15% - Branch profits remittances based on total profits applied or earmarked for remittance without deduction of tax component paid via withholding system Except activities registered with PEZA 21)items of income = rent, dividends, salaries, remuneration, capital gains, royalty, etc if not effectively connected with the conduct ofits trade or business in the Phils [See CIR v. 77 SCRA 500] 10% - RHQ, AHQ, ROHQ - Sec 22 DD & EE, NIRC, for definitions 20% - on interests & royalties 7.5% - on interest income from expanded foreign currency denominated units in a depositary bank 10% - on interest from depositary bank 5% to 10% - capital gains on sale of shares of stocks Inter-corporate dividends from domestic corp - exempt NON-RESIDENT FOREIGN CORPORATION 30% effective January 1, 2009 based on gross income 25% on cinema film owner, lessor or distributor 4% % on rentals to owners or lessor of chartered vessels to Phil residents 7% % rentals of aircraft, machineries & other equipment 20% on foreign loans contracted on or after Aug 1, 1988 capital gains on sale of shares of stocks -5% to 10% or % of 1% if sold through stock exchange Royalty - subject to tax treaty 22) Most favored nation clause CIR v. SC Johnson & Sons 309 SCRA 87 (1999) 15% on dividends from domestic corp provided a tax credit = to 33% if granted to non-resident corp for tax deemed paid23) CIR v, Procter & Gamble, 204 SCRA 378, GR No. 66838, 02 Dec 1991, Persons liable to tax v. persons subject to tax; rate of tax at 15% v. 35% 10% IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) See Rev Reg No. 2-2001, 12 Feb 2001 implementing Sec 29 of NIRC) Applies to domestic corporations; Exemptions Publicly held corp Banks & Non-bank Financial Institution Insurance Companies General Professional Partnerships Non-taxable Joint Venture PEZA, CDA entities Prima facie evidence of purpose to avoid payment of tax, if personal holding or investment company Evidence determinative if permitted to accumulate beyond the reasonable needs of the purpose to avoid tax upon shareholders unless contrary is proved Dividend must be declared and paid within 1 year from close of tax year, otherwise tax shall be paid within 15 days thereafter How computed: ‘Taxable Income during the year + Exempt, exclusions, final tax, NOLCO less dividends & income tax paid, and reasonable needs x 10% Reasonable needs include anticipated needs: 100% of paid up capital Definite expansion with board resolution Loan Agreements LWC requirements, meet competition, anticipated losses or reverses, hazards and emergencies Legal Prohibition Subsidiaries of foreign corp earmarked for investments Investments if unrelated business, bonds and long term securities are not deemed reasonable 24) Bardahl Formula and Immediacy Test (Cyanamid Phils Inc v. CA 332 SCRA 639, 2000) IAET is only imposed once on specific earnings but still subject to dividends tax to individuals EXEMPT CORPORATIONS (Sec 30, NIRC) Labor, agricultural & horticultural not principally for profit Non-stock, non-profit mutual and coop banks for mutual purpose & without profit Beneficiary society, order, association, frat benefits of members Exclusive cemetery for members Non-stock religious, charitable, scientific, cultural no income inures to its members or any specific person. (Art VI, Sec 28(3), Constitution) grants exemption to religious, non-profit cemeteries, charitable, educational covers property tax) NGOs engaged in micro financing are subject to income tax regardless of disposition because these are not the registered activities that are exempt [RR 14-2007, 11 Dec 2007] Business league, chamber or trade association Civic league, org Non-stock, non-profit educational institutions [Art XIV, Sec 4(3) of Constitution) are exempt from duties and taxes, all revenues and assets; substantial evidenceto prove that it fails under classification and that income is used actually, directly and exclusively for educational purposes. (See Rev Memorandum Circular No. 76-2003, 14 Nov 2003) Government Educational Institutions Farmers or other mutual typhoon or fire insurance co, mutual ditch, irrigation or coop telegraph, only fees, assessments are for meeting expenses Farmers fruit growers association for marketing products Notwithstanding the foregoing, income of whatever kind or nature from properties or activities conducted for profit regardless of disposition shall be subject to tax Interest Income of religious org subject to tax regardless of disposition; bank deposits are personal property (BIR Ruling 512, 21 Oct 1998, Ruling No 58, 05 Apr 1991); Rental income is taxable regardless of disposition (CIR v. CA 298, SCRA 83, 14 Oct 1998) Gain from sale of land & bldg of religious org used for same purpose is an isolated transaction, thus exempt from income tax; its rents, dividends, interest, profits from businesses are taxable, (Manila Polo Club, CTA No. 293, 31 August 1959; BIR Rulings No. 569, 29 Nov 1988; No. 115, 2 Apr 1992) Application of Sec 30 (H) - YMCA, CIR v. CA 298 SCRA 83 - YMCA's income is, not exempt from income tax. It is not an educational institution referred to in the constitution. MEANING OF TAXABLE INCOME (Sec 31) - ITEMS OF GROSS INCOME LESS DEDUCTIONS AND PERSONAL EXEMPTIONS, IF ANY, AUTHORIZED BY NIRC OR ‘SPECIAL LAWS Sec 32 (A) Definitions of Gross Income, includes compensation for services, conduct of trade or business or profit, gains from dealings in property, interest, rents, royalties, dividends, annuities, prizes, winnings, pensions, partners’ distributive share in general professional partnership Sec 32 (B) EXCLUSIONS FROM GROSS INCOME - Excluded and exempts from taxation Life insurance proceeds payable to heirs or beneficiaries, but if held by insurer to pay interest, the interest is taxable; Question: If beneficiary is the taxpayer itself, are the proceeds taxable or not? Justice dimaampao says yes. Return of premiums or cash surrender value under diff types of life insurance Gifts, bequests, devices of property, but income from such property & gifts, ete or income from any property, in case of transfer of divided interests, are taxable Compensation for injuries or sickness, plus damages whether by suit or agreement Exempt by treaty Retirement, pensions, gratuities, etc. under RA 7641 and from reasonable private benefit plan (50 / 10 / once; non-diversion of corpus & profits) Amount received as consequence of separation due to sickness / death, other physical disability, or causes beyond control 25) PLDT v CIR GR No. 157264, 31 Jan 2008 - separation pay due to redundancy. Proof of receipt by employees ofthe pay and the remittance ofthe withholding tax to the BIR are material to the claim for refund of erroneously paid withholding tax on separation pay.Also, it must be shown that employees declared the income and the tax paid to the BIR through withholding, "Section 10. Claims for tax credit or refund. - Claims for tax credit or refund of income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received was declared as part of the gross income and the fact of withholding is established by a copy of the statement duly issued by the payer to the payee (BIR Form NO, 1743.1) showing the amount paid and the amount of tax withheld thereon.” CTA Circular 1-95 states in part: 1. The party who desires to introduce as evidence such voluminous documents must, after motion and approval by the Court, present (a) a Summary containing, among others, a chronological listing of the numbers, dates and amounts covered by the invoices or receipts and the amounts of tax paid; and (b) a Certification of an independent Certified Public Accountant attesting to the correctness of the contents of the summary after making an examination, evaluation and audit of the voluminous receipts and invoices xxx 2. The method of individual presentation of each and every receipt, invoice or account for making, identification and comparison with the originals thereof need not be done before the Court or Clerk of Court anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices, vouchers or other documents covering the said accounts or payment to be introduced in evidence must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party who desires to check and verify the correctness of the summary and CPA certification, Likewise, the originals of the voluminous receipts, invoices and accounts must be ready for verification and comparison in case of doubt on the authenticity thereof is raised during the hearing or resolution of the formal offer of evidence. (Emphasis and underscoring supplied) Motion for New Trial & Liberal application of the CTA rules of court discussed, Petition denied. [See new Rules of Court for CTA issued in 2005) Social security, retirement, gratuities, pensions received by Filipinos or aliens who reside permanently in the Philippines from foreign government, other institution, public or private Received by any person residing in Phil from US Veterans Adi SSS, GSIS benefits and gratuities Income by foreign government, their financing institutions & international finance institution Income from public utility and essential functions of Phil government and political subdivisions Prizes & awards as recognitions for religious, charitable, scientific, educational, art, literary, civic if selection is without action on his part to enter the contest or proceedings and does not require substantial future servicePrizes and awards to athletes from local and international competition recognized by local sports association [cross reference to Other Percentage Tax, Title V, NIRC] 13% Month pay & other benefits under this paragraph, not more P30K such as government employees under RA 6686, benefits not covered by PD 851 as amended by MO No. 28, 13 Aug 1986, productivity incentives and Christmas bonus. Ceiling increased to P82K under RA 9504 $85, GSIS, Medicare, Pag-ibig, Union Dues by individuals Gains from sale of bonds, debentures, certificate of indebtedness with maturity of 5 years Gains from redemption of mutual funds company shares defined in Sec 22 (BB) ALLOWABLE DEDUCTIONS Itemized Deductions (Sec 34, NIRC) 10% Optional Standard Deductions (OSD) (Sec 34 (L), Amended pursuant to RA 9504, 07 Jul 2008, now 40%, includes corporation Allowed only to citizens and resident aliens engaged in business or profession No need to support expenses Election irrevocable for the year Unless indicated, itemized is deemed elected Premiums on medical & hospitalization (Sec 34 M) Personal Exemptions (Sec 35) Personal and additional exemptions Not allowed to claim deductions Individuals receiving compensation income (except premiums on medical / hospitalization subject to limitations and personal and additional exemptions) Non-resident aliens not engaged in trade or business Aliens (also Filipinos similarly situated) employed in ROHQ, AHQ, OBU, Petroleum contractors, Non-resident Foreign Corporations Income subject to Final Tax Itemized Deductions (Sec 34) ‘There must be a law allowing them (Atlas Consolidated Mining v. CIR 102 SCRA 246) Requisites: Ordinary, necessary, reasonable, not against law, ete Ordinary and necessary means reasonable Itappeared sale of property was effected by a broker hence bonus to company officer disallowed (Aguinaldo v. CIR, 112 SCRA 136, 1982) Fees paid to broker to induce investors are reasonable and deductible (On the substantive issue, SC allowed the deduction as reasonable citing Rev Reg No. 2. It is worth noting at this point that most of the payees were not in the regular employ of Algue, nor were they its controlling stockholders. The Solicitor General is correct when he says that the burden is on thetaxpayer to prove the validity of claimed deduction, In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed [see Algue case, supra] Must be connected with business, except: Contributions / donations Premium on health / hospitalization ‘These are allowed to corporations, individuals, partnerships Must be incurred during the year, [CIR v. Isabela Cultural Corp, GR No. 172231, 12 Feb 2007] - All events test applied in determining whether expenses booked on accrual basis should be claimed as deductible expense] Must be substantiated (ESSO v. CIR 175 SCRA 149 (1989)], see Cohan Rule ~ there is showing that expenses were incurred but cannot be ascertained due to absence of documentary evidence (RMC 23-2000) RR No. 6-2018 - requirements for deductibility of certain expenses, RR No. 11-2018 and 14-2018 relative to withholding of Income Tax Subject to withholding tax, where applicable FEBTC V. CA, CTA & BIR, 477 SCRA 49 (Dec 2005) - To sufficiently support claims for tax refund of excess creditable withholding tax, BIR Form 1743 must be submitted, Confirmation Receipts and ITRs are not sufficient. Having failed to do so, the claims were correctly denied. Under withholding tax system, itis the payor who withholds the tax and not the payee, The OR/CR did not indicate the nature and amount of the payment. "The findings of fact of the CTA, a special court exercising particular expertise on the subject of tax, are generally regarded as final, binding and conclusive upon this Court, especially if these are substantially similar to the findings of the CA which is normally the arbiter of questions of fact. ‘The findings shall not be reviewed nor disturbed on appeal, unless a party can show that these are not supported by evidence or when the judgment is premised on a misapprehension of facts, or when the lower courts failed to notice certain relevant facts which if considered would only justify a different conclusion, Income payments to registered enterprises availing of the Income Tax Holiday are not subject to Creditable Withholding Tax (DA 030-2008 23 Jan 2008}26) Barcelon, Roxas Securities v. CIR, GR No. 157064 07 Aug 2006 - Assessed for deficiency income tax for failure to withhold tax, assessment barred by prescription, Specific Deductions Salaries, bonuses, emoluments, allowances, incentives, Fringe Benefits Rental (without equity, operating lease) Advertising expenses are period costs deductible in the year incurred ot paid. However, they may be considered capital expenditures if so substantial in promoting a single brand (CIR v. General Foods, 401, SCRA 545) Entertainment, amusement, recreation, subject to ceiling Travel Expense Excess over 1s class not deductible, subject to FBT Excess over fixed allowance $150 / 100 not deductible, taxable to employee or to FBT Home leave not taxable to employee Family expenses taxable to employee to be deductible to employer Meals & Housing Generally taxable to employee, except when for the convenience of the employer or form part of Fringe Benefits of the employee Cash Advance / Reimbursement system Entertainment, amusement or recreation (EAR) facilities Directly related to business tly in furtherance of business Not contrary to law, ete Ceiling, % % or1% of Net sales or net revenues Substantiation in the name of taxpayer & subject to w/tax, where applicable Only one athletic club per officer Guests other than company officers, ete Exclusions from EAR ‘Treated as compensation or Fringe Benefit Charitable or fund raising events Bona fide business meetings of directors, etc Business league or professional organization meet Promotion, Ad and marketing Shifting to other accounts to hide -prohibited Separate item in ITR or note to FS Interest - Use, forbearance or detention of money [see Rev Reg 13- 2000, 20 Nov 2000 - Requisites} There is debt, and interest is agreed in writing Paid or incurred in connection with business during the year Legally due Not between related parties Not incurred for petroleum operations Not capitalizedLimitations on interest ~ interest is reduced by 41% (42% effective 01 Jul 2005); 39% and 38% of interest income subject to final w/tax Interest of business taxes not subject to limit Although cash basis, interest paid in advance deductible only in the year debt is paid in full or correspondingly to amortized principal Taxes Connected with trade or business, except Income Tax ~ Local [ Not an item of operating expenses because it does not help generate revenue, nor does it redound to benefit of customers, thus not to be considered in fixing rates of public utility (Republic v. Meralco, GR No. 141369, 14 Nov 2002) Income tax paid to foreign government (tax credit / deduction) CIR v. Lednicky 11 SCRA 604 - Partnership Theory ~ the right to tax income emanates from partnership in the production of income by providing protection, resources, incentives and climate to produce income. [Was income tax paid to foreign government by resident alien deductible though income exclusively came from the Phils? No.) Gift & Estate Tax Special Assessment or special levy under the Local Govt Code {Real Property Taxation} If allowed, as deductible and subsequently refunded, Tax Benefit rule applies Limitations on tax credit CIR v. Central Luzon Drug Corp (Mercury) 456 SCRA 414 (2005) - 20% Senior Citizens discount is a tax credit deductible from tax liability Losses Fires, shipwreck, theft other casualties Connected with trade or business Not compensated by insurance or otherwise Not claimed in the estate tax return Declared within 30 to 90 days with BIR NOLCO - Sec 34(D)(3) (see Rev Reg 14-2001, 27 Aug 2001) Losses from wash sales of stock & securities (Sec 38) What are wash sales and how are they treated for income tax purposes? Capital losses (Sec 39) Bad Debts (See Rev Reg No. 5-99, 10 Mar 1999, as amended by Rev Reg No. 25-2002, 19 Nov 2002 amending Sec. 3 of RR No. 5-99) Charged off during the year (see PRC v. CIR 256 SCRA 667) Connected with business Not related parties Effort to collect failedLegal debt Power of attorney for operation of mining claims deemed partnership; write off of bad debts not warranted; it was investment, thus not debt; alleged debtor has not filed for bankruptcy; assumed guaranteed obligations were not yet due ~ Philex Mining v. CIR GR No. 148187, 16 Apr 2008 ‘Tax Benefit Rule applies Depreciation Definition ~ Gradual diminution in the useful service value of tangible property used in business (Basilan Estates Inc v. CIR, 21 SCRA 17, 1967 Methods of depreciation [straight line, sum of years digits, etc] Depletion Definition - Exhaustion of natural resources like mines, oil and gas wells as a result of production or severance from such mines or wells. Charitable & Other Contributions Requisites [ See RR 13-98 and Sec 13 (C) of RR 2-2003]; What are the requirements for the deductibility of donations for income tax purposes? (Mariposa Properties Inc v. CIR, CTA Case No. 6402, 13 Feb 2007) In deciding on the BIR's disallowance of deduction for donations made to a private foundation, the CTA required the donor to prove compliance of both the donor and the donee with the requirements for deductibility of donations. Hence, for failure of the donor to present proof that the foundation’s income tax return and audited financial statements, as well as the annual information report of the foundation were submitted to BIR as required in the regulations, the deduction for donations was disallowed. Deductible in full and subject to limitations Donations by PEZA registered entity to Province of Batangas for national priority project of NEDA is exempt from donor's tax, deductible in full and not subject to DST [DA 026-2008, 22 Jan 2008) Research and Development Requisites for deductibility Limitations on deductions Pension Trust Contributions Nature and requisites Limitation on deduction Excess retirement plan assets reverted back to the employer company is subject to income tax [DA 020-2008, 17 Jan 2008] Personal Exemptions (Sec 35)Personal and Additional exemptions Status & amounts ~ RA 9504 dated July 6, 2008 eliminated the status of an individual taxpayer. Basic personal exemption of individual taxpayer is P50,000 each (both spouses are entitled provided they are both earning income) Qualified dependents at P25,000 each, maximum of 4 See Carmelino Pansacola v. CIR, GR No. 15999, 16 Nov 2006 - effectivity of increased personal exemptions Change in status Marriage Birth / Death Of age Gainfully employed See Silverio v. Republic of the Phils, GR No. 174689 22 Oct 2007 Items not deductible (Sec 36) Personal and living expenses Capital Expenditures Premium on insurance where beneficiary is the payor ~taxpayer Losses between related parties Special provisions re: income and deductions of insurance companies (Sec 37) Losses from Wash Sales of Stock or securities (Sec 38) Capital gains and losses (Sec 39) [See Rev Reg No. 7-2003, 27 Dec 2003] INCOME TAX TREATMENT ON THE SALE OR EXCHANGE OF PROPERTY (SEC 40) General rule on recognition of gain or loss in a sale or exchange of property Exceptions. Factors relevant to determination of gain or loss How is gain or loss computed? What is the basis to be used? ‘When are gains recognized, but not losses? What are the two types of merger or consolidation under Sec 40? What are the tax implications of merger, consolidation & acquisition of 80% of the assets? What are the requisites for taxable and tax free transfer of property resulting to majority ownership of the corporation? When stocks or securities are subsequently sold, how are gains or losses computed? Guidelines on Monitoring of Tax ~ Free exchange of property for shares [Rev Reg No. 18-2001] Implementing guidelines of Sec 40 [RMO 32-2001 & RMO 17-2002]Tax consequences of tax-free exchange of property for shares of stock of controlled corporation per Sec 40 (C)(2) [See Rev Memorandum Ruling No. 1-2001, 29 Nov 2001] Tax consequences of De Pacto Merger re Sec 40 (C)(2) and (6)(B) [See Rev Memo Ruling No, 1-2002] Determination of substituted basis of property transferred and shares received [See Rev Memo Ruling No. 2-2002]; CIR v, Rufino, GR No. L-33665-68, 27 Feb 1987, 148 SCRA 42 - [ tax exempt ‘merger of two corporations} Delpher Trades Corp v. IAC, 157 SCRA 349,- [tax exempt transfer of property toa corporation resulting to control] CIR v. Benigno Toda, 438 SCRA 290 (2004) - meaning of fraud; tax avoidance /evasion See De Leon’s NIRC Annotated Vol 1, 2003 ed discussions of Sec 40. How are inventories treated? (Sec 41) Income from sources within the Philippines (Sec 42) CIR v. BOAC 149 SCRA 395 - Source of income of airlines - [ sale of airline tickets of an offline carrier considered income from Phil by majority of SC; source rule discussed; minority considered airline tickets as contract of carriage or service, thus situs is where rendered; characterization becomes moot given the new tax provision on 2 % % Phil Gross Billings regardless of where sold or paid provided cargo or passenger originates from Phil] NDC v. CIR, 151 SCRA 472 (1987) - Source of interest income - [Exemption strictly construed; Sec 37 (now Sec 42) - Income from sources within the Philippines applied; also exclusions from gross income. Accounting periods and accounting methods (Sec 43 to 50) How are installment and deferred payment sales treated for income tax purposes? Accounting Methods (Sec 43) What accounting methods are acceptable to BIR What are accounting periods and their relevance How are leases treated for income tax, VAT and withholding purposes? ‘Two types of leases: (1) Full payout lease - it’s treated as capital lease ~ subject to VAT the full amount of lease and to 2% WT if payor is top 10,000 taxpayer; also subject to depreciation on the part of the lessee-buyer and (2) FMV or residual lease - treated as operating lease, the monthly rentals are subject to VAT and WT. See BIR Ruling No. 9-2007 and Rev Reg 19-86 Ericsson v. Pasig City 538 SCRA 99, 22 Nov 2007- Accrual accounting of income; financial reporting system; gross receipts v. gross income; double taxation explained; question of law v. of facts; Rules 41, 45 and 56; local taxation. Returns and Payments for individuals and corporations [Sec 51 to 59] ‘What returns should be filed Who are required to file the returns ‘When, where and how are returns filed and the tax paid Effects if returns are not file don time or not atall ‘What happens in case of excess creditable withholding for corporation?Philam Asset Management Inc v. CIR 477 SCRA 761, 14 Dec 2005 - Under Sec 76 of the NIRC, a taxable corporation with excess quarterly income tax payments may apply for either a tax refund or a tax credit, but not both. The choice of one precludes the other. Failure to indicate a choice, however, will not bar a valid request for a refund, should this option be chosen later on. [ 1997 and 1998 ITR]. Issues are: “Whether or not the failure of the petitioner to indicate in its annual income tax return the option to refund its creditable withholding tax is fatal to its claim for refund”; [NO] and “Whether or not the presentation in evidence of the petitioner's annual income tax return for the succeeding calendar year is a legal requisite in a dlaim for refund of unapplied creditable withholding tax” [NO] But if it is clear that an option was made although the box is not filled up, that choice shall prevail. [Narrated history of recent NIRC amendments] CIR v. Meralco, 535 SCRA 399, 10 Oct 2007 - Filing of ITR with excess payment applied for credit and refund; proof required. Note the amendments to the law applied in this case under 1986 NIRC v. 1997 NIRC provisions Estates and Trusts (Secs 60 to 66, NIRC) ‘The taxes imposed on individuals apply to income of estates and of any property held in trust, including: Income accumulated in trust for unborn or unascertained persons with contingent interest or for future distribution according to the terms of the will or trust Income to be distributed currently by fiduciary to beneficiaries, and income collected by guardian to be held or distributed per court order Income received by estates of deceased person during period of admin or settlement proceedings Trust holding employee retirement plan is not taxable subject to conditions under Sec 60(B). Any amount received by said employee or distribute in excess of his contribution is taxable to him. But under Sec 32 (B)(6)(a) ifthe conditions for its exclusion are present, the excess may also be exempt from income tax. Estate - refers to the mass of property [assets and liabilities] left by a decedent ‘Taxable as a separate taxpayer like an individual if under judicial testate or intestate proceedings, otherwise, income from said property is taxable to the heirs; it follows the status of the decedent ‘Trust - property held by one person for the benefit of another Taxable - Trust - if income is to be accumulated or if the trustee has discretion to accumulate or distribute to beneficiaries Beneficiary - if he / she received income from the trust during the taxable year pursuant to the trust agreement Grantor - if revocable or held for grantor’s benefit or to his designate Control test - power to procure the payment of income and enjoy the benefit thereof determines who is subject to tax on coupon bond donated to his son, Helvering v. Horst. 31 US 112Deductions ~ same as Estate Estates and Trusts entitled to deductions Personal exemption ~ P 20,000 (sec 62) Distribution to heir during the year; If no distribution, subsequent distribution of said income no longer taxable to heirs Distribution to guardian for the benefit of infant Administered in foreign country is taxable in the Philippines in the hands of the trust but no longer taxable in the hands of the beneficiary when distributed to him. These distributions are not allowed as deductions from the taxable return of the trust. Read BIR Ruling 003-05 - taxation of trusts under common trust funds. Other Income Tax Requirements (Secs 67 to 73) How are dividends taxed? (Sec 73) Quarterly corporate income tax, Annual declaration and quarterly payments of income tax (Secs 74 to 77) State Land Investment Corp v. CIR, GR No. 171956, 18 Jan 2008 - Excess creditable tax may be refunded or credited at the option of the taxpayer under former Sec 69, now Sec 76. Under then Sec 69, excess taxes may be credited in the following year only, after then need to be claimed for refund within wo (2) years from payment which SIC did. MR filed with CTA included 199 & 2000 ITRs showing losses, thus 1997 excess tax credit could not have been applied in 1999, Doctrines: SC is not trier of facts but if lower court mis-appreciated facts or failed to notice facts that could change conclusion, then it can review facts. Solutio indebiti applied against government. Refund granted. Note: counting of 2 years starts from the filing of final return. Irrevocability of option to claim credits for excess withholding taxes vs refund (Sec 76) Rhombus Energy Inc v. CIR Gr 206362, Aug 01, 2018 Withholding on Wages (Secs 78 to 83)