als - ingles tax 01 (2012)

Familiarization / Understanding / Mastery / Creativity PJG

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CourseOutlineTaxIBasedonAtty.Monterosoutline,with integratednotesfromAtty.Salvadors review class,Reyes, someMamalateo,and the variousreviewersinschool.A.InGeneral................................................................................2B.GeneralPrinciples....................................................................2C.IncomeTaxonIndividuals........................................................4D.Definitions.............................................................................40E.IncomeTaxRates...................................................................42F.ProprietaryEducationalInstitutionsandHospitals.................46G.GOCCs...................................................................................49H.PassiveIncome......................................................................49I.MinimumCorporateIncomeTax(MCIT).................................56J.IncomeTaxonResidentForeignCorporations........................59K.IncomeTaxonNonresidentForeignCorporations.................69L.ImproperlyAccumulatedEarningsTax(IAET)..........................76M.TaxexemptCorporations.....................................................82N.TaxableIncome.....................................................................91P.FringeBenefitsTax(FBT!Whutup!).....................................112Q.Deductions..........................................................................120R.CapitalGainsandLosses(SaleorExchangeofProperty)......173S.DeterminationofGainorLossfromSaleorTransferofProperty................................................................................................183T.SitusofTaxation..................................................................195U.AccountingPeriodsandMethods........................................208V.EstatesandTrusts................................................................218W.ReturnsandPaymentofTaxes...........................................225W.WithholdingTax.................................................................241


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A.InGeneralTaxableIncome

The essentialdifferencebetween capital and income is thatcapitalisafund;andincomeisaflow.Capitaliswealth,whileincomeistheserviceofwealth.

Propertyisatree,incomeisthefruit.Laborisatree,incomeisthefruit.Capitalisatree,incomethefruit.

Incomemeansprofitsorgains.(MadrigalvRafferty) Incomemaybedefinedastheamountofmoneycomingtoa

person or corporation within a specified time, whether aspaymentforservices,interestorprofitfrominvestment.o Amereadvanceinthevalueofpropertyofapersonora

corporation in no sense constitutes the incomespecifiedinthelaw.Suchadvanceconstitutesandcanbetreated merely as an increase in capital. (Fisher vTrinidad)

Cash dividends is taxed as income because it has beenrealized/received, while stock dividends is not taxed asincome because it is merely inchoate as it is a mereanticipationofincome(itbecomesincomeonceyousellit).o One isanactualreceiptofprofits;theother isareceipt

ofarepresentationof the increasedvalueof theassetsofacorporation.(FishervTrinidad)

When dealing with money or property, the questions youshouldaskare:o Isthiscapitaloristhisincome?o Hasitbeenrealized/receivedorisitmerelyinchoate?

B.GeneralPrinciples


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SEC.23.GeneralPrinciplesofIncomeTaxation inthePhilippines.ExceptwhenotherwiseprovidedinthisCode:(A) A citizen of the Philippines residing therein is taxable on allincomederivedfromsourceswithinandwithoutthePhilippines;(B)Anonresident citizen is taxableonlyon incomederived fromsourceswithinthePhilippines;(C) An individual citizen of the Philippines who is working andderiving income from abroad as an overseas contract worker istaxable only on income derived from sources within thePhilippines: Provided, That a seaman who is a citizen of thePhilippinesandwho receives compensation for services renderedabroad as a member of the complement of a vessel engagedexclusively in international trade shall be treated as an overseascontractworker;(D)Analienindividual,whetheraresidentornotofthePhilippines,is taxable only on income derived from sources within thePhilippines;(E)Adomestic corporation is taxableonall incomederived fromsourceswithinandwithoutthePhilippines;and(F) A foreign corporation, whether engaged or not in trade orbusinessinthePhilippines,istaxableonlyonincomederivedfromsourceswithinthePhilippines.Who are taxable on income derived from all sources, whetherwithinoroutsidethePhilippines?Taxedworldwide!

1. Residentcitizens.2. Domesticcorporations.

Theotherkindsof taxpayersare subject to taxonlyonincomederivedfromPhilippinesources.


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TaxableIncome TaxableIncomeCitizenship &Residency

InsideRP OutsideRPResidentCitizen Yes YesNonresidentCitizen Yes NoOverseas ContractWorker

Yes NoResidentAlien Yes NoNonresidentAlien Yes NoDomesticCorp Yes YesForeignCorp Yes NoC.IncomeTaxonIndividualsDefinitionsResidentcitizensandresidentaliensSection22(F)Theterm"residentalien"meansanindividualwhoseresidenceiswithinthePhilippinesandwhoisnotacitizenthereof. Residentalienisanindividual:

1. WhoseresidenceiswithinthePhilippines2. Whoisnotacitizen

Mere physical or body presence is enough. Not intention tomakethecountryonesabode.(GarrisonvCA)

An alien actuallypresent in the Philippineswho isnot ameretransient or sojourner is a resident of the Philippines forpurposesofthe incometax.Whetherhe isatransientornot isdetermined by his intentions with regard to the length andnatureofhisstay.


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o Amerefloatingintentionindefiniteastotime,toreturntoanother country is not sufficient to constitute him atransient.

o IfhelivesinthePhilippinesandhasnodefiniteintentionasto his stay, he is a resident. One who comes to thePhilippines foradefinitepurposewhich in itsnaturemaybepromptlyaccomplishedisatransient. Butifhispurposeisofsuchanaturethatanextended

staymaybenecessaryforitsaccomplishment,andtothatendthealienmakeshishometemporarily inthePhilippines,hebecomesaresident,though itmaybehis intention at all times to return to his domicileabroadwhenthepurposeforwhichhecamehasbeenconsummatedorabandoned.(RR2)

NonresidentcitizensSec22(E).Theterm"nonresidentcitizen"means:(1)AcitizenofthePhilippineswhoestablishestothesatisfactionoftheCommissioner the factofhisphysicalpresenceabroadwithadefiniteintentiontoresidetherein.(2)AcitizenofthePhilippineswholeavesthePhilippinesduringthetaxable year to reside abroad, either as an immigrant or foremploymentonapermanentbasis.(3)AcitizenofthePhilippineswhoworksandderivesincomefromabroad and whose employment thereat requires him to bephysicallypresentabroadmostofthetimeduringthetaxableyear.(4)A citizenwho has been previously considered as nonresidentcitizen andwho arrives in the Philippines at any timeduring thetaxableyeartoresidepermanentlyinthePhilippinesshalllikewisebetreatedasanonresidentcitizenforthetaxableyearinwhichhe


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arrives in thePhilippineswith respect tohis incomederived fromsourcesabroaduntilthedateofhisarrivalinthePhilippines.(5)The taxpayershallsubmitproof to theCommissioner toshowhis intention of leaving the Philippines to reside permanentlyabroadortoreturntoandresideinthePhilippinesasthecasemaybeforpurposeofthisSection. Meaningofnonresidentcitizen:

1. Citizen who establishes to the satisfaction of theCommissionerthefactofhisphysicalpresenceabroadwithadefiniteintentiontoresidetherein

2. Citizenwho leaves thePhilippinesduring the taxableyeartoresideabroad,eitherasanimmigrantorforemploymentonapermanentbasis

3. Citizen who works and derives from abroad and whoseemployment thereatrequireshim tobephysicallypresentabroadmostofthetimeduringthetaxableyear

4. CitizenwhohasbeenpreviouslyconsideredasnonresidentcitizenandwhoarrivesinthePhilippinesatanytimeduringthe taxable year to reside permanently in the Philippinesshall likewise be treated as a nonresident citizen for thetaxable year in which he arrives in the Philippines withrespecttohisincomederivedfromsourcesabroaduntilthedateofhisarrivalinthePhilippines.

Whoarenonresidentcitizens?(RR179)1. Immigrant one who leaves the Philippines to reside

abroadasan immigrant forwhicha foreignvisahasbeensecured

2. Permanentemployeeonewho leaves thePhilippines toreside abroad for employment on a more or lesspermanentbasis


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3. Contract worker one who leaves the Philippines onaccount of a contract of employment which is renewedfrom time to timeunder such circumstance as to requirehimtobephysicallypresentabroadmostofthetime (notlessthan183days)

Nonresidentcitizenswhoareexempt from taxwith respect toincome derived from sources outside the Philippines shall nolonger be required to file information returns from sourcesoutsidethePhilippinesbeginning2001.(RR52001)

Thephrasemostof the time shallmean that the saidcitizenshallhavestayedabroadforatleast183daysinataxableyear. Thesameexemptionapplies toanOCWbutassuchworker,

the time spent abroad is not material for tax exemptionpurposesallthatisrequiredisfortheworkersemployementcontract to pass through and be registeredwith the POEA.(BIRRuling332000).

NonresidentaliensengagedinbusinessinthePhilippinesSec 22. (G) The term "nonresident alien" means an individualwhose residence is not within the Philippines and who is not acitizenthereof. Whoarenonresidentaliens?

1. AnindividualwhoseresidenceisnotwithinthePhilippines2. NotacitizenofthePhilippineso Determination is by his intentionwith regard to the length

andnatureofhisstay.(Sec5,RR2) Lossofresidencebyalien


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o AnalienwhohasacquiredresidenceinthePhilippinesretainshis status until he abandons the same and actually departsfromthePhilippines.

o Amereintentiontochangehisresidencedoesnotchangehisstatus.Analienwhohasacquiredaresidence istaxableasaresidentfortheremainderofhisstayinthePhilippines.(Sec.6,RR2)

MinimumwageearnerSec22.(GG)Thetermstatutoryminimumwageearnershallreferto rate fixed by the Regional Tripartite Wage and ProductivityBoard, as defined by the Bureau of Labor and EmploymentStatistics(BLES)oftheDOLE.(HH)Thetermminimumwageearnershallrefertoaworkerintheprivate sector paid the statutory minimum wage; or to anemployee in the public sectorwith compensation income of notmore than the statutory minimum wage in the nonagriculturalsectorwherehe/sheisassigned. FixedbytheRegionalTripartiteWageandProductivityBoard. Minimumwageearner:

o Privatesectorpaidthestatutoryminimumwageo Publicsectornotmorethanthestatutoryminimumwage

inthenonagriculturalsectorwherehe/sheisassignedDependentSec35.(B)ForpurposesofthisSubsection,a"dependent"meansalegitimate, illegitimate or legally adopted child chiefly dependentuponand livingwith the taxpayer if suchdependent isnotmore


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than twentyone (21) years of age, unmarried and not gainfullyemployedor ifsuchdependent, regardlessofage, is incapableofselfsupportbecauseofmentalorphysicaldefect. Dependentisa

o Legitimate, illegitimate or legally adopted child and livingwiththetaxpayer

o Whomustbe: Notmorethan21, Unmarried,and Notgainfullyemployed,OR Dependent, regardless of age, is incapable of self

supportbecauseofmentalorphysicaldefect.Tosummarize,individualtaxpayersareclassifiedinto:1. Citizens,whoaredividedinto:

o ResidentcitizensthosecitizenswhoseresidenceiswithinthePhilippines;and

o NonresidentcitizensthosecitizenswhoseresidentisnotwithinthePhilippines.

2.Aliens,whoaredividedinto:o Resident aliens those individuals whose residence is

withinthePhilippinesandarenotcitizensthereof;ando Nonresidentaliens those individualswhose residence is

notwithin the Philippines but temporarily in the countryandarenotcitizensthereof.Theyare: Those engaged in trade or business within the

Philippines;and Thosewhoarenotsoengaged.(seeSec2325)

Kindsofincomeandincometaxofindividuals


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TaxformulaSEC.24.IncomeTaxRates.(A) Rates of Income Tax on Individual Citizen and IndividualResidentAlienofthePhilippines.(1)Anincometaxisherebyimposed:(a)OnthetaxableincomedefinedinSection31ofthisCode,otherthanincomesubjecttotaxunderSubsections(B),(C)and(D)ofthisSection,derived foreachtaxableyear fromallsourceswithinandwithoutthePhilippinesbeeveryindividualcitizenofthePhilippinesresidingtherein;(b)OnthetaxableincomedefinedinSection31ofthisCode,otherthanincomesubjecttotaxunderSubsections(B),(C)and(D)ofthisSection,derived foreach taxableyear fromallsourceswithin thePhilippinesbyanindividualcitizenofthePhilippineswhoisresidingoutside of the Philippines including overseas contract workersreferredtoinSubsection(C)ofSection23hereof;and(c)OnthetaxableincomedefinedinSection31ofthisCode,otherthanincomesubjecttotaxunderSubsections(b),(C)and(D)ofthisSection,derived foreach taxableyear fromallsourceswithin thePhilippines by an individual alien who is a resident of thePhilippines.(2)RatesofTaxonTaxableIncomeofIndividuals.Thetaxshallbecomputed inaccordancewithandat the ratesestablished in thefollowingschedule:(justseechartbelow,itsthesamething)For married individuals, the husband and wife, subject to theprovisionofSection51 (D)hereof, shallcompute separately theirindividual income tax based on their respective total taxableincome: Provided, that if any income cannot be definitelyattributedtooridentifiedasincomeexclusivelyearnedorrealizedbyeitherofthespouses,thesameshallbedividedequallybetween


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thespousesforthepurposeofdeterminingtheirrespectivetaxableincome."Provided, Thatminimumwage earners as defined in Section 22(HH)ofthisCodeshallbeexemptfromthepaymentofincometaxon their taxable income: Provided, further, That the holiday pay,overtimepay,nightshiftdifferentialpayandhazardpay receivedby such minimum wage earners shall likewise be exempt fromincometax.NotoverP10,000 5%Over P10,000 but not overP30,000

P500 + 10% of the excessoverP10,000

Over P30,000 but not overP70,000

P2,500 + 15% of the excessoverP30,000

Over P70,000 but not overP140,000

P8,500 + 20% of the excessoverP70,000

Over P140,000 butnotoverP250,000

P22,500+25%oftheexcessoverP140,000

Over P250,000 butnotoverP500,000

P50,000+30%oftheexcessoverP250,000

OverP500,000 P125,000 + 32% of theexcessoverP500,000

GrossIncomeLess:DeductionsTaxableIncome

TaxRate


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TaxDueKnowthetaxbaseandthetaxrate! Only resident citizens and domestic corporations are taxed on

incomederivedfromabroad.Worldwidetaxable! The tax is imposedupon taxablecompensationoremployment

income,businessincome,andincomederivedfromthepracticeofprofessionsderivedbycitizensandresidentaliens.

Married individuals shall compute separately their individualincometaxbasedontheirrespectivetotaltaxableincome.o If any income cannot be definitely attributed to, or

identifiedasincomeexclusivelyearnedorrealizedbyeitherofthespouses,thesameshallbedividedequallybetweenthem for the purpose of determining their respectivetaxableincome.

Minimumwageearnersareexemptfromthepaymentofincometax on their taxable income. Holiday pay, overtime pay, nightshift differential pay, and hazard pay received by them arelikewiseexemptfromincometax.

Anonresidentalien individualengaged in tradeorbusiness inthePhilippinesissubjecttotheincometaxinthesamemannerasan individual citizenanda residentalienon taxable incomereceivedfromsourceswithinthePhilippines.

Fornonresidentaliensnotsoengaged,thetaxiso 25%of the entireor gross income received from sources

withinthePhilippinesando 15% of the gross income received as compensation,

salaries, and other emoluments by reason of hisemploymentby:


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regionalorareaheadquartersand regionaloperatingheadquartersofmultinationalcorporations;

offshore banking units established by a foreigncorporationinthePhilippines;or

by foreign petroleum service contractor orsubcontractors operating in the Philippines. (Sec 25(AE))

Final income tax interests, royalties, awards, dividends, capitalgainsonsaleofshares,realtySec24.(B)RateofTaxonCertainPassiveIncome.(1) Interests,Royalties,Prizes,andOtherWinnings. Afinaltaxatthe rate of twenty percent (20%) is hereby imposed upon theamountofinterestfromanycurrencybankdepositandyieldoranyother monetary benefit from deposit substitutes and from trustfundsandsimilararrangements;royalties,exceptonbooks,aswellas other literaryworks andmusical compositions,which shall beimposed a final tax of ten percent (10%); prizes (except prizesamountingtoTenthousandpesos(P10,000)or lesswhichshallbesubject to tax under Subsection (A) of Section 24; and otherwinnings (except Philippine Charity Sweepstakes and Lottowinnings), derived from sourceswithin the Philippines: Provided,however,That interest income receivedbyan individual taxpayer(exceptanonresidentindividual)fromadepositorybankundertheexpanded foreign currency deposit system shall be subject to afinalincometaxattherateofsevenandonehalfpercent(71/2%)of such interest income: Provided, further, That interest incomefrom longterm deposit or investment in the form of savings,commonor individual trust funds,depositsubstitutes, investmentmanagement accounts and other investments evidenced bycertificates in such form prescribed by the Bangko Sentral ng


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Pilipinas (BSP) shall be exempt from the tax imposed under thisSubsection: Provided, finally, That should the holder of thecertificatepreterminatethedepositorinvestmentbeforethefifth(5th)year,a final tax shallbe imposedon theentire incomeandshallbedeductedandwithheldby thedepositorybank from theproceedsofthe longtermdepositor investmentcertificatebasedontheremainingmaturitythereof:Four(4)yearstolessthanfive(5)years5%;Three(3)yearstolessthan(4)years12%;andLessthanthree(3)years20%(2) Cash and/or PropertyDividends A final tax at the followingrates shall be imposed upon the cash and/or property dividendsactuallyorconstructivelyreceivedbyanindividualfromadomesticcorporation or from a joint stock company, insurance ormutualfund companies and regional operating headquarters ofmultinational companies, or on the share of an individual in thedistributable net income after tax of a partnership (except ageneralprofessionalpartnership)ofwhichheisapartner,orontheshareofanindividualinthenetincomeaftertaxofanassociation,a joint account, or a joint venture or consortium taxable as acorporationofwhichheisamemberorcoventurer:Sixpercent(6%)beginningJanuary1,1998;Eightpercent(8%)beginningJanuary1,1999;andTenpercent(10%beginningJanuary1,2000.Provided,however,That the taxondividends shallapplyonlyonincomeearnedonorafterJanuary1,1998.Incomeformingpartofretained earnings as of December 31, 1997 shall not, even if


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declaredordistributedonorafter January1,1998,besubject tothistax.(C) CapitalGains from Sale of Shares of Stock not Traded in theStockExchange.TheprovisionsofSection39(B)notwithstanding,a final taxat the ratesprescribedbelow ishereby imposeduponthenetcapitalgainsrealizedduringthetaxableyearfromthesale,barter, exchange or other disposition of shares of stock in adomestic corporation,except shares sold,ordisposedof throughthestockexchange.NotoverP100,000........5%OnanyamountinexcessofP100,00010%(D)CapitalGainsfromSaleofRealProperty.(1)InGeneral.TheprovisionsofSection39(B)notwithstanding,afinal tax of six percent (6%) based on the gross selling price orcurrentfairmarketvalueasdeterminedinaccordancewithSection6(E) of this Code, whichever is higher, is hereby imposed uponcapital gains presumed to have been realized from the sale,exchange, or other disposition of real property located in thePhilippines, classified as capital assets, including pacto de retrosalesandotherformsofconditionalsales,byindividuals,includingestatesand trusts:Provided,That the tax liability, ifany,ongainsfromsalesorotherdispositionsofrealpropertytothegovernmentor any of its political subdivisions or agencies or to governmentownedorcontrolledcorporationsshallbedeterminedeitherunderSection 24 (A) or under this Subsection, at the option of thetaxpayer.(2)Exception. Theprovisionsofparagraph (1)of thisSubsectionto the contrary notwithstanding, capital gains presumed to havebeen realized from the sale or disposition of their principal


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residencebynaturalpersons,theproceedsofwhichisfullyutilizedin acquiring or constructing a new principal residence withineighteen(18)calendarmonthsfromthedateofsaleordisposition,shall be exempt from the capital gains tax imposed under thisSubsection:Provided,That thehistoricalcostoradjustedbasisoftherealpropertysoldordisposedshallbecarriedovertothenewprincipal residence built or acquired: Provided, further, That theCommissionershallhavebeendulynotifiedbythetaxpayerwithinthirty (30) days from the date of sale or disposition through aprescribed return of his intention to avail of the tax exemptionherein mentioned: Provided, still further, That the said taxexemption can only be availed of once every ten (10) years:Provided,finally,thatifthereisnofullutilizationoftheproceedsofsaleordisposition,theportionofthegainpresumedtohavebeenrealizedfromthesaleordispositionshallbesubjecttocapitalgainstax.Forthispurpose,thegrosssellingpriceorfairmarketvalueatthe time of sale, whichever is higher, shall be multiplied by afraction which the unutilized amount bears to the gross sellingprice in order to determine the taxable portion and the taxprescribedunderparagraph(1)ofthisSubsectionshallbeimposedthereon.Sec22(Y)Theterm"depositsubstitutes"shallmeananalternativefromofobtaining funds from thepublic (the term 'public'meansborrowing from twenty (20) or more individual or corporatelendersatanyonetime)otherthandeposits,throughtheissuance,endorsement,oracceptanceofdebtinstrumentsfortheborrowersown account, for the purpose of relending or purchasing ofreceivablesandotherobligations,or financingtheirownneedsortheneedsoftheiragentordealer.Theseinstrumentsmayinclude,butneednotbelimitedtobankers'acceptances,promissorynotes,


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repurchaseagreements, including reverse repurchaseagreementsenteredintobyandbetweentheBangkoSentralngPilipinas(BSP)and any authorized agent bank, certificates of assignment orparticipation and similar instruments with recourse: Provided,however,Thatdebtinstrumentsissuedforinterbankcallloanswithmaturity of not more than five (5) days to cover deficiency inreserves against deposit liabilities, including those between oramongbanksandquasibanks,shallnotbeconsideredasdepositsubstitutedebtinstruments.TaxRateonCertainPassive IncomeonCitizensandResidentAliens

FinalTax1. Interest under the expanded foreign currencydeposit system (see RR 1098 below) Nonresidentcitizens:exempt

7.5%(vsexemptfornonresident

aliensengagedintrade/biz)

2. Royalty from books, literary works, & musicalcompositions

10%3.Royaltyotherthanabove 20%4.Interestonanycurrentbankdeposit,yieldorothermonetarybenefitsfromdepositsubstitute,trustfund&similararrangement

20%

5.PrizeexceedingP10,000 20%6.Otherwinnings,exceptPhilCharitySweepstakes&Lotto

20%7. Dividend from a domestic corp, or from a jointstock company, insuranceormutual fund company,& regional operating headquarters of multinational

10%(vs20%for


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companyorshareinthedistributivenetincomeaftertax o a partnership (except a general professionalpartnership), joint stock or joint venture orconsortiumtaxableasacorporation

But what about dividends from foreigncorporations for citizens (not resident aliens)?Well, the income here enters into thecomputation for Sec 24 (a) tax calendar. Forresident aliens, they are not taxed since itsincomederivedfromabroad.

nonresidentaliens

engagedintrade/biz)

8. Interest on longterm deposit or investment inbanks(withmaturityof5yearsormore)

exemptPrizetheresultofaneffort(likeaprizeinabeautycontest)Winning the result of a transaction where theoutcomedependsuponchance(likebetting)Deposit substitute a means of borrowing moneyfrom thepublic (20ormore individualor corporatelenders) other than by way of deposit with banksthrough the issuance of debt instruments (likebankers acceptances, promissory notes, repurchaseagreements, certificates of assignment orparticipation)

TaxRateon Interest Income fromForeignCurrencyDeposit(RR1098)

1. Interest income actually received by a residentcitizenorresidentalienfromFCD

7.5% finalwithholdingtax

2. If it was deposited by an OCW or seaman or Exempt


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nonresidentcitizen3.IfitwasinabankaccountinthejointnamesofanOCWandhisspouse(whoisaresident)

50%exempt/50% finalwithholdingtaxof7.5%

4. Interest income actually received by a domesticcorporationorresidentforeigncorporationfromFCD


Interestincomewhichisactuallyorconstructivelyreceivedbya

residentcitizenofthePhilippinesorbyaresidentalienindividualfrom a foreign currencybankdepositwillbe subject to a finalwithholdingtaxof7.5%.Thedepositorybankwillwithholdandremitthetax. Ifabankaccount is jointly inthenameofanonresident citizen, 50% of the interest income from such bankdepositwillbe treated asexemptwhile theother50%willbesubject toa finalwithholding taxof7.5%.TheRegulationswillapply on taxable income derived beginning January 1, 1998pursuant to theprovisionsof Section8ofRA8424. In caseofdepositswhichweremadein1997,onlythatportionofinterestwhich was actually or constructively received by a depositorstartingJanuary1,1998istaxable.(RR1098)

TaxRateonCapitalGains 1. On sale of shares of stock of a domestic

corporation NOT listed and NOT tradedthru a local stock exchange held as acapitalasset,o CapitalgainsnotoverP100,000o CapitalgainsinexcessofP100,000(see

5%ofthenetcapitalgains10% of the net


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RR62008below) capitalgains2.Onsaleofrealproperty inthePhilippinesheldasacapitalasset(seeRR898below)

6% of the grossselling price, or thecurrent marketvalueat the timeofsale, whichever ishigher

Tax Rate on Income from Sale, Barter,ExchangeorotherDispositionof SharesofStock(RR62008)

If shares of stock are listed and tradedthroughthelocalstockexchange

of 1% (or .005%)of the gross sellingprice or gross valuein money of thesharesofstock

If sharesnot traded through the local stockexchangeo CapitalgainsnotoverP100,000o CapitalgainsinexcessofP100,000

5%ofthenetcapitalgains10% of the netcapitalgains

Whoareliable?

1. Individualtaxpayer,whethercitizenoralien;2. Corporatetaxpayer,whetherdomesticorforeign;3. Other taxpayersnot fallingunder (1)and (2)above, suchas

estate,trust,trustfundsandpensionfunds,amongothers. Whoareexempt?


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1. Dealersinsecurities2. Investors in shares of stock in a mutual fund company, as

defined inSec22(BB),andSection2(s)oftheseRegulations,in ocnnectionwith the gains realized by said investor uponredemptionofsaidsharesofstockinamutualfundcompanyland

3. All other persons, whether natural or juridical, who arespecifically exempt from national internal revenue taxesunderexistinginvestmentincentivesandotherspeciallaws.

How to determine the tax base ofdispositionofstock(RR62008)

FairMarketValueSales of stock listed and tradedthroughtheLSE

FMV is the actual sellingprice

Sales of stock listed but not tradedthroughtheLSE

FMV is the closing price onthe day when the sharesweresold,transferred,etc(ifno sale was made on thatday in the LSE, then theclosing price on the daynearest to the date of sale,transfer,orexchangeof thesaidshares)

Sales of stock not listed and nottradedthroughtheLSE

FMVisthebookvalueoftheshares of stock as shown inthefinancialstatementsdulycertified by an independentCPA nearest to the date ofsale


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Final Tax Rate on Sales, Exchanges, orTransfers or Real Properties Classified asCapitalAssets(RR898)

SaleofrealpropertyinthePhilippines 6% of the grossselling price, orthe currentmarket value atthe time of sale,whichever ishigher

If sale was made to the government or toGOCCs

Either 6% of thegross sellingprice/currentmarket value orunder the normalincome tax rate,taxpayersoption

Creditable Withholding Tax on Sales,Exchanges or Transfers of Real PropertiesclassifiedasOrdinaryAssets(RR898)

1.Ifthesellerishabituallyengagedintherealestatebusinesso SellingpriceislessthanP500,000o SellingpriceisP500,000toP2mo SellingpriceisaboveP2m

1.5%3%

5%ofgrosssellingprice/currentmarketvalue,whicheveris

higher2. Iftheseller isnothabituallyengaged intherealestatebusiness

7.5% of grossselling


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price/currentmarket value,whichever ishigher

3. If the seller is exempt from creditablewithholdingtaxasperRR298

Exempt Conditions tobeexempt from capital gains taxof6%on the

sale,exchange,ordispositionofaprincipal residence (RR1399)1. The proceeds from the sale, exchange, or disposition of his

principal residence must be fully utilized in acquiring orconstruinganewprincipalresidencewithin18months.Theremustbeproof.

2. ThiscanonlybeavailedofONLYONCEevery10years3. The historical cost of his old principal residence shall be

carriedovertothecostbasisofhisnewresidence4. If there is no full utilization, he shall be liable for the

deficiencycapitalgainstaxoftheutilizedportion5. Iftheprincipalresidenceisdisposedinexchangeforacondo,

andifitisusedashisnewresidence,thenheisexempt6. The6%capitalgainstaxotherwiseduemustbedeposited in

escrow with an authorized agent bank, and can only bereleased when sufficient proof is shown that the proceedshavebeenfullyutilizedwithin18months.

Whatistheprincipalresidenceanyway?(RR142000)o It is the dwelling house, where the husband or wife or

unmarried individual resides; actual occupancy is notinterrupted or abandoned by temporary absence due totravel,studies,orworkabroad


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o Iftheownershipofthelandandthedwellinghousebelongto different persons, only the dwelling house shall betreatedasprincipalresidence

Payment of capital gains tax on foreclosure of mortgagedproperty(RR499)o Ifthemortgagorexerciseshisrightofredemptionwithin1

yearnocapitalgainstaxbecausenonehasbeenderivedandnotransferofpropertywasrealized

Incaseofnonredemption,thecapitalgainswillbeduebasedonthebidpriceofthehighestbidder

PersonalandAdditionalExemptionsSEC.35.AllowanceofPersonalExemptionforIndividualTaxpayer.(A) InGeneral. Forpurposesofdetermining the taxprovided inSection24(A)ofthisTitle,thereshallbeallowedabasicpersonalexemptionamountingtoP50,000foreachindividualtaxpayer.Inthecaseofmarriedindividualswhereonlyoneofthespousesisderiving gross income, only such spouse shall be allowed thepersonalexemption.(B)AdditionalExemptionforDependents.Thereshallbeallowedanadditionalexemptionof twenty five thousandpesos (P25,000)foreachdependentnotexceedingfour(4). Theadditionalexemption fordependent shallbeclaimedbyonlyoneofthespousesinthecaseofmarriedindividuals. In the case of legally separated spouses, additionalexemptionsmaybeclaimedonlybythespousewhohascustodyofthechildorchildren:Provided,Thatthetotalamountofadditional


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exemptions that may be claimed by both shall not exceed themaximumadditionalexemptionshereinallowed. For purposes of this Subsection, a "dependent" means alegitimate, illegitimate or legally adopted child chiefly dependentuponand livingwith the taxpayer if suchdependent isnotmorethan twentyone (21) years of age, unmarried and not gainfullyemployedor ifsuchdependent, regardlessofage, is incapableofselfsupportbecauseofmentalorphysicaldefect.(AmendedbyRA9504)Personal and additional exemption for individualtaxpayer

Basic personal exemption for each individualtaxpayero If married and only one of the spouses is

deriving gross income, only such spouse shallbeallowedthepersonalexemption.

P50,000

Additional exemption for each dependent, notexceedingfour(4)o Claimedbyonlyonespouseincaseofmarried

individualso If legally separated, additional exemptions

claimed only by spouse who has custody;should not exceed maximum additionalexemptionsallowed

P25,000perdependent

Exemptionstatutesarenotretroactive.(PensacolavCIR) Discountsforseniorcitizensisnowtreatedastaxdeductions,as

perRA9257.Thissucksforthetaxpayerbecausehedoesntgetthe peso for peso benefitwhich hewould have gotten if it


26

wereconsideredataxcreditasbefore.(M.E.HoldingsCorpvCIR&CTA)

SeniorCitizensareo Residentcitizenso Atleast60yearsold

They arenotexempt from income taxesunless theyare considered minimum wage earners. (RA 9994,which also took out the previous P60,000requirement)

ChangeofstatusSec35. (C)Changeof Status. If the taxpayermarriesor shouldhaveadditionaldependent(s)asdefinedaboveduring the taxableyear, the taxpayer may claim the corresponding additionalexemption,asthecasemaybe,infullforsuchyear. Ifthetaxpayerdiesduringthetaxableyear,hisestatemaystillclaim thepersonalandadditionalexemptions forhimselfandhisdependent(s)asifhediedatthecloseofsuchyear. Ifthespouseoranyofthedependentsdiesor ifanyofsuchdependents marries, becomes twentyone (21) years old orbecomesgainfullyemployedduringthetaxableyear,thetaxpayermaystillclaimthesameexemptionsasifthespouseoranyofthedependents died, or as if such dependents married, becametwentyone (21) years old or became gainfully employed at thecloseofsuchyear.PersonalexemptionallowabletononresidentalienindividualsSec. 35 (D) Personal ExemptionAllowable toNonresidentAlienIndividual. A nonresident alien individual engaged in trade,businessorintheexerciseofaprofessioninthePhilippinesshallbe


27

entitled to a personal exemption in the amount equal to theexemptionsallowed inthe incometax law inthecountryofwhichheisasubjectorcitizen,tocitizensofthePhilippinesnotresidinginsuchcountry,nottoexceedtheamountfixed inthisSectionasexemptionforcitizensorresidentofthePhilippines:Provided,ThatsaidnonresidentalienshouldfileatrueandaccuratereturnofthetotalincomereceivedbyhimfromallsourcesinthePhilippines,asrequiredbythisTitle.Personal Exemptions allowable tononresidentalienindividuals

Ifengagedintrade,businessorintheexerciseofaprofession

Entitled to a personalexemption in the amountequal to the exemptionsallowed in the income taxlaw of his country forFilipinos, but it shouldntexceed the amount fixedhereforexemptions

Ifnotengagedintrade,businessorintheexerciseofaprofession

None, because Sec 25 (B)states thathewillbe taxeduponhisentireincome.

De Leon states that nonresident aliens are not entitled to

additionalexemptionsfordependents.(P.135,FundamentalsofTaxation2009)

OptionalStandardDeduction


28

Sec.34(L)OptionalStandardDeduction.Inlieuofthedeductionsallowedunder theprecedingSubsections,an individualsubject totaxunderSection24,other thananonresidentalien,mayelectastandard deduction in an amount not exceeding forty percent(40%)ofhisgrosssalesorgrossreceipts,asthecasemaybe.Inthecase of a corporation subject to tax under section 27(A) and28(A)(1), it may elect a standard deduction in an amount notexceeding forty percent (40%) of it gross income as defined inSection32ofthisCode.Unlessthetaxpayersignifies inhisreturnhis intentiontoelecttheoptionalstandarddeduction,heshallbeconsideredashavingavailedhimselfof thedeductionsallowed intheprecedingSubsections.Suchelectionwhenmadeinthereturnshall be irrevocable for the taxable year for which the return ismade:Provided,Thatan individualwho isentitledtoandclaimedfor theoptionalstandardshallnotberequired tosubmitwithhistaxreturnsuchfinancialstatementsotherwiserequiredunderthisCode: Provided, further, That except when the Commissionerotherwise permits, the said individual shall keep such recordspertaining to his gross sales or gross receipts, or the saidcorporationshallkeepsuchrecordspertainingtohisgross incomeasdefined in Section32of thisCodeduring the taxable year, asmayberequiredbytherulesandregulationspromulgatedbytheSecretaryofFinance,uponrecommendationoftheCommissioner. Optional standard deduction is the deduction which an

individual other than a nonresident alien, or a corporation,subject to income tax,may elect in an amount not exceeding40%ofhisgrosssalesorgrossreceipts,asthecasemaybe,oracorporation, in an amount not exceeding 40% of its grossincome,inlieoftakingitemizeddeductions.

TheOSDmaybeavailedofby:


29

o Acitizen,whetherresidentornonresidento Residentalien,ando Taxableestateandtrust.

AnonresidentaliencannotclaimOSD. TheOSDallowed to individual taxpayershallbeamaximumof

40%ofgrosssalesorgrossreceiptsduringthetaxableyear.o Ifoneuses theaccrualbasisofaccounting forhis income

anddeductions,theOSDshallbebasedonthegrosssalesduringthetaxableyear.

o Ifoneuses the cashbasis, theOSD shallbebasedonhisgrossreceiptsduringthetaxableyear.

o Thelawisspecificthatforindividualtaxpayersthebasisofthe40%OSDshallbegrosssalesorgrossreceipts,notgrossincome,forwhichreasonthecostofsalesandthecostofservicesarenotallowedtobedeductedforpurposesofdeterminingthebasisoftheOSD.

o For other individual taxpayers allowed by law to reporttheir incomeanddeductionsunderadifferentmethodofaccounting, the gross sales or gross receipts shall bedeterminedinaccordancewiththesaidacceptablemethodofaccounting.

Example:

o Suppose a retailer of goods, an individual, whoseaccountingmethod isunder the accrualbasishas a grosssalesofP1mwithacostofsalesamountingtoP800k.thecomputationoftheOSDshallbedeterminedasfollows:GrossSales P1,000,000Less:CoGS BasisoftheOSD P1,000,000xOSDRate(max) .40


30

OSDAmount P400,000IfthetaxpayeroptstousetheOSD in lieuofthe itemizeddeductionsallowedunderSec34of theTaxCode,hisnettaxableincomeshallbeasfollows:GrossSales P1,000,000Less:CoGS GrossSales/GrossInomeP1,000,000Less:OSD(max) 400,000NetIncome P600,000

Premiumpaymentsonhealthand/orhospitalizationinsuranceSec.34(M)PremiumPaymentsonHealthand/orHospitalizationInsuranceofan Individual Taxpayer. The amountof premiumsnot to exceed Two thousand four hundred pesos (P2,400) perfamily or Two hundred pesos (P200) a month paid during thetaxable year forhealth and/orhospitalization insurance takenbythetaxpayerforhimself,includinghisfamily,shallbeallowedasadeduction fromhisgross income:Provided,Thatsaid familyhasagross incomeofnotmorethanTwohundredfiftythousandpesos(P250,000) for the taxableyear:Provided, finally,That in thecaseof married taxpayers, only the spouse claiming the additionalexemptionfordependentsshallbeentitledtothisdeduction. The taxpayer is allowed a deduction of P2,400/family or

P200/month for health and/or hospitalization insurancepremiums,provided:o Said familys gross income isnotmore thanP250,000 for

thetaxableyear.


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Ifmarried,onlythespouseclaimingtheadditionalexemptionfordependentscanavailofthis.

Exclusions and deductions (discussion from De Leons book, seealsoSec6164ofRR2) Exclusionsare incomes thatareexempt from the tax.Theyare

nottobeincludedinthetaxreturnunlessinformationregardingitisspecificallycalledfor.o Examples:

Lifeinsuranceproceedspaidtobeneficiariesuponthedeathoftheinsured.

Value of the property acquired by inheritance ordonation, because it is subject to estate or donorstax.

Retirement benefits, pensions, etc, received bygovernment officials and employees from the GSISand SSS in recognition of their services. So withretirement benefits of private firms, under certainconditions.

Prizes and awards made primarily in recognition ofreligious, charitable, scientific, educational, artistic,etc,competitionsandtournaments.

Christmas bonus, 13th month pay, productivityincentives,andotherbenefitsreceiveduptoamaxofP30,000.

Gains from the saleor retirementofbondsorothercertificatesof indebtednesswith amaturityofmorethan5years.

Deductions are items or amounts which the law allows to bedeductedunder certain conditions from the gross incomeof ataxpayerinordertoarriveatthetaxableincome.


32

Both reduce actual gross income although exclusions are notincludedintheincometaxreturn.

Somegeneralprincipalsgoverningdeductionsinclude:o The taxpayer seeking a deduction must point to some

specificprovisionofthestatuteauthorizingthededuction;and

o He must be able to prove that he is entitled to thedeductionauthorizedorallowed.

Theyareallowedonlywherethere isaclearprovision inthestatuteforthedeductionclaimed.

Taxablegrossincomeisaffectedbyexclusionsbecausethelatterare omitted from the former and are not reported on theincome tax return but is not affected by deductions becausethey are subtracted after gross income is determined and arereportedonthereturn.

Kindsofdeductions:1. Deductionsfromcompensationincome.2. Deductionsfrombusiness/professionalincome.3. Deductionsfromcorporateincome.4. Specialdeductions5. Deductionsallowedbyspeciallaws.

TaxonnonresidentaliensNonresidentaliensengagedinbusinessinthePhilippinesSEC.25.TaxonNonresidentAlienIndividual.(A) Nonresident Alien Engaged in trade or Business Within thePhilippines.(1)InGeneral.AnonresidentalienindividualengagedintradeorbusinessinthePhilippinesshallbesubjecttoanincometaxinthesame manner as an individual citizen and a resident alien


33

individual,ontaxable incomereceived fromallsourceswithinthePhilippines.Anonresident alien individualwho shall come to thePhilippinesandstaytherein foranaggregateperiodofmorethanonehundred eighty (180)daysduring any calendar year shallbedeemed a 'nonresident alien doing business in the Philippines'.Section22(G)ofthisCodenotwithstanding.(2)Cashand/orPropertyDividendsfromaDomesticCorporationorJoint Stock Company, or Insurance or Mutual Fund Company orRegional Operating Headquarters or Multinational Company, orShare in theDistributableNet Incomeof a Partnership (Except aGeneral Professional Partnership), Joint Account, Joint VentureTaxable as a Corporation or Association., Interests, Royalties,Prizes,andOtherWinnings.Cashand/orpropertydividendsfromadomesticcorporation,orfromajointstockcompany,orfromaninsurance ormutual fund company or from a regional operatingheadquarters of multinational company, or the share of anonresident alien individual in the distributable net income aftertaxofapartnership (exceptageneralprofessionalpartnership)ofwhichheisapartner,ortheshareofanonresidentalienindividualinthenet incomeaftertaxofanassociation,a jointaccount,orajointventuretaxableasacorporationofwhichheisamemberoracoventurer; interests; royalties (in any form); and prizes (exceptprizes amounting to Ten thousand pesos (P10,000) or lesswhichshallbesubject to taxunderSubsection (B)(1)ofSection24)andotherwinnings (except Philippine Charity Sweepstakes and Lottowinnings); shall be subject to an income tax of twenty percent(20%) on the total amount thereof: Provided, however, thatroyaltiesonbooksaswellasotherliteraryworks,androyaltiesonmusicalcompositionsshallbesubjecttoa finaltaxoftenpercent(10%) on the total amount thereof: Provided, further, Thatcinematographicfilmsandsimilarworksshallbesubjecttothetax


34

provided under Section 28 of this Code: Provided, furthermore,That interest income from longtermdepositor investment intheform of savings, common or individual trust funds, depositsubstitutes, investment management accounts and otherinvestments evidencedby certificates in such formprescribedbytheBangkoSentralngPilipinas(BSP)shallbeexemptfromthetaximposed under this Subsection: Provided, finally, that should theholderof the certificatepreterminate thedepositor investmentbeforethefifth(5th)year,afinaltaxshallbeimposedontheentireincomeandshallbedeductedandwithheldbythedepositorybankfrom the proceeds of the longterm deposit or investmentcertificatebasedontheremainingmaturitythereof: Four(4)yearstolessthanfive(5)years5%; Three(3)yearstolessthanfour(4)years12%;and Lessthanthree(3)years20%.(3) Capital Gains. Capital gains realized from sale, barter orexchange of shares of stock in domestic corporations not tradedthrough the local stock exchange, and real properties shall besubject to the tax prescribed under Subsections (C) and (D) ofSection24. A nonresident alien engaged in trade or business in the

Philippinesissubjecttothesameincometaxrateascitizensandresident aliens, on taxable income received from all sourceswithinthePhilippines.

AnonresidentalienwhostaysinthePhilippinesforanaggregateperiodofmore than180days shallbedeemedasnonresidentaliendoingbusinessinthePhilippines.

TaxRateonCertainPassiveIncomeonNonresidentAliens Engaged in Trade, Business or Exercising a

FinalTax


35

Profession1. Interest under the expanded foreign currencydepositsystem

exempt2. Royalty from books, literary works, & musicalcompositions

10%3.Royaltyotherthanabove 20%4.Interestonanycurrentbankdeposit,yieldorothermonetarybenefitsfromdepositsubstitute,trustfund&similararrangement

20%

5.PrizeexceedingP10,000 20%6.Otherwinnings,exceptPhilCharitySweepstakes&Lotto

20%7. Dividend from a domestic corp, or from a jointstock company, insuranceormutual fund company,& regional operating headquarters of multinationalcompanyorshareinthedistributivenetincomeaftertax o a partnership (except a general professionalpartnership), joint stock or joint venture orconsortiumtaxableasacorporation

What about dividends from foreign corps?Exempt. Nonresident aliens are not taxedworldwide.

20%

(comparewith

citizensandresidentaliens)

8.Grossincomefromcinematographicfilms&similarworks

25%9. Interest on longterm deposit or investment inbanks(withmaturityof5yearsormore)

exemptTax Rate on Capital Gains (same withresidents, and nonresident aliens notengagedinbusiness)


36

2. On sale of shares of stock of a domesticcorporation NOT listed and NOT tradedthru a local stock exchange held as acapitalasset,o CapitalgainsnotoverP100,000o CapitalgainsinexcessofP100,000


2.Onsaleofrealproperty inthePhilippinesheldasacapitalasset


NonresidentaliensnotengagedinbusinessinthePhilippinesSec.25(B)NonresidentAlien IndividualNotEngaged inTradeorBusinessWithin thePhilippines. There shallbe levied,collectedand paid for each taxable year upon the entire income receivedfromallsourceswithin thePhilippinesbyeverynonresidentalienindividualnotengaged in tradeorbusinesswithin thePhilippinesas interest,cashand/orpropertydividends,rents,salaries,wages,premiums, annuities, compensation, remuneration, emoluments,orother fixedordeterminableannualorperiodicorcasualgains,profits, and income, and capital gains, a tax equal to twentyfivepercent (25%) of such income. Capital gains realized by anonresidentalienindividualnotengagedintradeorbusinessinthePhilippines from the sale of shares of stock in any domesticcorporation and realproperty shallbe subject to the income taxprescribedunderSubsections(C)and(D)ofSection24.


37

Nonresident aliens not engaged in business are taxed 25% oftheirentireincomewithinthePhilippines.

Thatmeanstheyhavenodeductions! Theircapitalgainsarethesamewithnonresidentaliensengaged

inbusiness(seetableabove!)SpecialaliensSec. 25 (C) Alien Individual Employed by Regional or AreaHeadquarters and Regional Operating Headquarters ofMultinational Companies. There shall be levied, collected andpaidforeachtaxableyearuponthegrossincomereceivedbyeveryalien individual employed by regional or area headquarters andregionaloperatingheadquarters established in the Philippinesbymultinational companies as salaries, wages, annuities,compensation, remuneration and other emoluments, such ashonorariaandallowances,fromsuchregionalorareaheadquartersandregionaloperatingheadquarters,ataxequaltofifteenpercent(15%)ofsuchgross income:Provided,however,Thatthesametaxtreatment shall apply to Filipinos employed and occupying thesamepositionas thoseofaliensemployedby thesemultinationalcompanies. Forpurposesof thisChapter, the term 'multinationalcompany'meansa foreign firmorentityengaged in internationaltradewith affiliates or subsidiaries or branch offices in theAsiaPacificRegionandotherforeignmarkets.(D)Alien Individual Employed byOffshore BankingUnits. Thereshallbe levied,collectedandpaid foreach taxableyearupon thegross income received by every alien individual employed byoffshore banking units established in the Philippines as salaries,wages, annuities, compensation, remuneration and otheremoluments, such as honoraria and allowances, from such off


38

shorebankingunits,a taxequal to fifteenpercent (15%)of suchgross income: Provided, however, That the same tax treatmentshallapplytoFilipinosemployedandoccupyingthesamepositionsasthoseofaliensemployedbytheseoffshorebankingunits.(E)Alien IndividualEmployedbyPetroleumServiceContractorandSubcontractor.AnAlienindividualwhoisapermanentresidentofa foreign country but who is employed and assigned in thePhilippinesbya foreign service contractororbya foreign servicesubcontractorengaged inpetroleumoperations in thePhilippinesshall be liable to a tax of fifteen percent (15%) of the salaries,wages, annuities, compensation, remuneration and otheremoluments,suchashonorariaandallowances,receivedfromsuchcontractororsubcontractor:Provided,however,Thatthesametaxtreatment shall apply to a Filipino employed and occupying thesame position as an alien employed by petroleum servicecontractorandsubcontractor.AnyincomeearnedfromallothersourceswithinthePhilippinesbythealienemployeesreferredtounderSubsections(C),(D)and(E)hereofshallbesubjecttothepertinentincometax,asthecasemaybe,imposedunderthisCode.SpecialAliens 1.Employedbyregionalorareaheadquarters&regionaloperatingheadquartersestablished inthePhilippinesbymultinational;

15%ongrossincome

2.Employedbyoffshorebankingunits 15%ongrossincome

3.Permanentresidentofaforeigncountrybutwho is employed and assigned in the

15%


39

Philippinesbyaforeignservicecontractororbya foreign service subcontractor engaged inpetroleumoperationsinthePhilippines Provided the same tax shall apply to Filipinos employed and

occupyingthesamepositionasthesealiens. These apply only to positions of a highly technical or highly

managerialnature.(Atty.Montero) All incomeearned fromallother sourceswithin thePhilippines

bythespecialalienemployeesshallbesubjecttothepertinentincometaximposedbytheCode.

TipsonansweringThoughtprocessinansweringproblems:

1. Is this income? If not, then its not really a income taxproblem.

2. Whosthetaxpayer?Andwhatsthesource?RefertoSec23!3. Whatsthespecificrate?Seesec2425!

For example, what is the tax rate of on income derived fromdividends from foreign corporations for 1. Citizens 2. Residentaliensand3.Nonresidentaliensengagedintradeorbusiness?

1. Citizensa. Yes,itsincome.b. Thesource isoutsidethePhilippines.Arethey liablefor

sources from outside the Philippines? Yes! Citizens aretaxedworldwide!

c. Whatsthespecifictaxrate?Hmmsinceitsnotinanyof the charts,but they stillhave tobe taxed, then theincome they derive from dividends from foreign


40

corporationswillbeconsideredincomputingthetaxratebasedonthetaxcalendarofSec24(a)

2. Residentaliensa. Yes,itsincome.b. Thesource isoutsidethePhilippines.Arethey liablefor

sources from outside the Philippines? No! They arenttaxedworldwide.

3. Nonresidentaliensengagedintradeorbusinessa. Yes,mydear,itsincome.b. Thesource isoutsidethePhilippines.Arethey liablefor

source from outside the Philippines? No! They arenttaxedworldwideeither.

D.Definitions Section22,TaxCodeDefinitionofcorporationsSec 22 (B) The term "corporation" shall include partnerships, nomatter how created or organized, jointstock companies, jointaccounts (cuentas en participacion), association, or insurancecompanies,butdoesnot includegeneralprofessionalpartnershipsand a joint venture or consortium formed for the purpose ofundertaking constructionprojectsorengaging inpetroleum, coal,geothermalandotherenergyoperationspursuanttoanoperatingconsortium agreement under a service contract with theGovernment."Generalprofessionalpartnerships"arepartnershipsformedbypersonsforthesolepurposeofexercisingtheircommonprofession, no part of the income of which is derived fromengaginginanytradeorbusiness.


41

Corporationsinclude:o Partnerships,nomatterhowcreatedororganizedo Jointstockcompanieso Jointaccountso Associationso Insurancecompanies

Itdoesnotincludeo Generalprofessionalpartnerships;o Joint venture or consortium formed for the purpose of

undertaking construction projects, or engaging inpetroleum, coal, geothermal andother energyoperationspursuanttoanoperatingorconsortiumagreementunderaservicecontractwiththegovernment.(TheJVshouldNOTbeincorporated.)

Rememberyourpartnershiplessons!(AFISCOandPascualcases) All coowernships are not deemed unregistered

partnerships.(ObillosvCIR) Themomentinheritancesharesareusedaspartofthecommon

assets tobeused inmakingprofits, it isconsideredpartof thetaxableincomeofanunregisteredpartnership.(OnavCIR)

RequisitesofaJV:1. Contributionbyeachparty2. Profitsaresharedamongtheparties3. Thereisjointrightofmutualcontroloverthesubjectmatter4. Thereisasinglebusinesstransactionratherthanageneralor

continuoustransaction(BIRRuling31792, in thiscase, the firstagreementof the twopartiestoconstructthe6750Bldgwasnottaxablebecausetheyhadnotderived income/profits from it. theconstructionof thebuildingwasmerereturnofthecapitalwhichtheyshelledout.


42

However,oncethetwocorporationswereplacedunderonesolemanagement tooperate thebusinessaffairsof the two, the JVwas taxable separate from the two corporations comprising it.Thedistributionby the JV to the two constituent corporationswas not taxable because it was considered intracorporatedividends.)

E.IncomeTaxRatesSEC.27.RatesofIncometaxonDomesticCorporations.(A) In General. Except as otherwise provided in this Code, anincometaxofthirtyfivepercent(35%)isherebyimposeduponthetaxable incomederivedduringeach taxableyear fromall sourceswithinandwithoutthePhilippinesbyeverycorporation,asdefinedin Section 22(B) of this Code and taxable under this Title as acorporation, organized in, or existing under the laws of thePhilippines: Provided, That effective January 1, 2009, the rate ofincometaxshallbethirtypercent(30%).In the case of corporations adopting the fiscalyear accountingperiod, the taxable income shall be computedwithout regard tothe specific date when specific sales, purchases and othertransactionsoccur.Their incomeandexpenses for the fiscal yearshallbedeemed tohavebeenearnedandspentequally foreachmonthoftheperiod.The corporate income tax rates shall be applied on the amountcomputed bymultiplying the number ofmonths covered by thenew rates within the fiscal year by the taxable income of thecorporationfortheperiod,dividedbytwelve.Provided,further,ThatthePresident,upontherecommendationofthe Secretary of Finance, may effective January 1, 2000, allowcorporations the option to be taxed at fifteen percent (15%) of


43

grossincomeasdefinedherein,afterthefollowingconditionshavebeensatisfied:(1) A tax effort ratio of twenty percent (20%) of Gross NationalProduct(GNP);(2)Aratioof fortypercent (40%)of incometaxcollectiontototaltaxrevenues;(3)AVATtaxeffortoffourpercent(4%)ofGNP;and(4) A 0.9 percent (0.9%) ratio of the Consolidated Public SectorFinancialPosition(CPSFP)toGNP. The option to be taxed based on gross income shall beavailableonlytofirmswhoseratioofcostofsalestogrosssalesorreceiptsfromallsourcesdoesnotexceedfiftyfivepercent(55%). Theelectionofthegrossincometaxoptionbythecorporationshallbe irrevocable for three (3)consecutive taxableyearsduringwhichthecorporationisqualifiedunderthescheme. ForpurposesofthisSection,theterm 'gross income'derivedfrombusinessshallbeequivalenttogrosssales lesssalesreturns,discounts and allowances and costof goods sold. "Costof goodssold" shall include all business expenses directly incurred toproduce themerchandise tobring them to theirpresent locationanduse. Foratradingormerchandisingconcern,"costofgoods"soldshallincludetheinvoicecostofthegoodssold,plusimportduties,freightintransportingthegoodstotheplacewherethegoodsareactuallysold,includinginsurancewhilethegoodsareintransit. For a manufacturing concern, "cost of goods manufacturedand sold" shall include all costs of production of finished goods,such as raw materials used, direct labor and manufacturingoverhead, freight cost, insurance premiums and other costsincurredtobringtherawmaterialstothefactoryorwarehouse.


44

Inthecaseoftaxpayersengaged inthesaleofservice, 'grossincome' means gross receipts less sales returns, allowances anddiscounts.Tax rate of DomesticCorporations

30% of taxable income from allsources within and outside thePhilippines,or2%ofgross income ifMCITapplies,or15%ofgrossincomeifthefollowingconditionsaremet:

1. taxeffortratioof20%ofGNP2. ratio of 40% of income tax

collectiontototaltaxrevenues3. VAT tax effort of 4% of GNP;

and4. .9% ratio of the Consolidated

PublicSectorFinancialPosition(CPSFP) to GNP (this last onehasyettobeimplemented)

Optiontobetaxedbasedongrossincomeshallbeavailableonlyto firmswhose ratioof costof sales to gross salesor receiptsfromallsourcesdoesnotexceed55%

Electionofthegross incometaxoptionbythecorporationshallbeirrevocablefor3consecutivetaxableyears

Domestic corporations are subject to any or some of thefollowing:

Capitalgainstax Finaltaxonpassiveincome Normaltax


45

Minimumcorporateincometax(MCIT) Grossincometax(GIT) Improperlyaccumulatedearningstax(IAET)

GrossIncomeComputationGrossSalesLess:SalesReturnsDiscountsAllowancesCoGS (allbusinessexpensesdirectly incurred toproduce themerchandiseandbringthemtotheirpresentlocationoruse)TotalGrossIncomeCoGSforaTradingorMerchandiseConcernInvoicecostofgoodssoldImportdutiesFreightintransportingthegoodstotheplacewherethegoodsareactuallysoldInsurancewhilethegoodsareintransitCoGSforaManufacturingConcernAll costs of production of finished goods such as raw materials,directlabor&manufacturingoverheadFreightcostInsurancepremiumsOther costs incurred tobring the rawmaterials to the factoryorwarehouseGrossIncomeComputationforaServiceConcernGrossSalesLess:SalesReturns


46

DiscountsAllowancesCost of Services (all direct costs & expenses necessarilyincurred to provide the services required by the customers &clientsincluding:

Salaries & employee benefits of personnel,consultants & specialists directly rendering theservice

Cost of facilities directly utilized in providing theservicesuchasdepreciationorrentalofequipmentuse&costofsupplies

Ifitsabank,interestexpenseisincludedTotalGrossincomeofaserviceconcernF.ProprietaryEducationalInstitutionsandHospitals(B)ProprietaryEducationalInstitutionsandHospitals.Proprietaryeducationalinstitutionsandhospitalswhicharenonprofitshallpaya taxof tenpercent (10%)on their taxable income except thosecovered by Subsection (D) hereof: Provided, that if the grossincome from unrelated trade, business or other activity exceedsfifty percent (50%) of the total gross income derived by sucheducational institutions or hospitals from all sources, the taxprescribedinSubsection(A)hereofshallbeimposedontheentiretaxable income. For purposes of this Subsection, the term'unrelated trade, business or other activity' means any trade,businessorotheractivity,theconductofwhichisnotsubstantiallyrelated to the exercise or performance by such educationalinstitution or hospital of its primary purpose or function. A"Proprietary educational institution" is any private schoolmaintainedandadministeredbyprivateindividualsorgroupswith


47

an issued permit to operate from the Department of Education,CultureandSports(DECS),ortheCommissiononHigherEducation(CHED), or the Technical Education and Skills DevelopmentAuthority(TESDA),asthecasemaybe,inaccordancewithexistinglawsandregulations. Proprietaryeducationalinstitutionis:

o Any private schoolmaintained& administered by privateindividualsorgroups

o WithanissuedpermittooperatefromtheDECSorCHEDorTESDA

Tax rate of proprietaryeducational institutions andhospitals

10%ontheirtaxableincome(exceptforpassiveincome),or30%ontheirentiretaxableincomeifthe gross income from unrelatedtrade, business or other activityexceeds 50% of the total grossincomeoftheinstitution

Unrelatedtrade,businessorotheractivitymeanso Anytrade,businessorotheractivityo The conduct of which is not substantially related to the

exercise or performance by such its institution of itsprimarypurposeorfunction.

For nonstock, nonprofit educational institutions, all revenuesuse actually, directly and exclusively for educational purposesareexempt.o Their exemption refers only to revenues derived from

assetsusedactually,directlyandexclusivelyforeducationalpurposes.


48

o Income from cafeterias, canteens & bookstores are alsoexempt if theyareowned&operatedby theeducationalinstitutionandarelocatedwithintheschoolpremises.

o However,theyshallbesubjecttointernalrevenuetaxesonincome fromtrade,businessorotheractivity,theconductofwhich isnot related to theexerciseorperformancebysucheducational institutionsoftheireducationalpurposesor functions, i. e. rental payment from theirbuilding/premises.(RR762003)

Fornonstock,nonprofitcorporationswhoareexempt,theyarestillliablefortaxeson:o Income derived from any of their real properties (rental

paymentformtheirbuildingpremises)o Anyactivityconductedfromprofitregardlessofdisposition

thereofo Interestincomefromanybankdepositsoryieldondeposit

substitutes(finaltaxof20%)o If itsforeigncurrencydeposit,finaltaxof7.5%(DepOrder

14995,1995)o Theyshallalsobewithholdingagents fortheiremployees

compensation income subject to withholding tax (RR 762003)

Forprivateeducational institutions,theyareexempt fromVAT,buttheymustbeaccreditedwitheitherDECSorCHED.o However, income derived from trade, business or other

activityisstilltaxable.o Their bank deposits and foreign currency deposits are

exempt fromwithholding taxesbut theymustshowproofthat such income is used to fund proposed projects fortheirinstitutionsimprovement.


49

o They shall also be the withholding agents for theiremployees compensation income subject to withholdingtax.

G.GOCCsSec. 27 (C) Governmentowned or ControlledCorporations,AgenciesorInstrumentalities.Theprovisionsofexistingspecialorgeneral laws to the contrary notwithstanding, all corporations,agencies, or instrumentalities owned or controlled by theGovernment, except the Government Service Insurance System(GSIS), the Social Security System (SSS), the Philippine HealthInsurance Corporation (PHIC), and the Philippine CharitySweepstakesOffice (PCSO), shallpay such rateof taxupon theirtaxable incomeasare imposedby thisSectionuponcorporationsorassociationsengagedinssimilarbusiness,industry,oractivity. GOCCs are taxed on the same rate upon their taxable income

upon corporations or associations engaged in similar business,industry,oractivity.o ExemptGOCCs:

GSIS SSS PHIC PCSO AsperRA9337,PAGCORwasdeletedfromthe listof

exemptGOCCs.H.PassiveIncomeSec.27(D)RatesofTaxonCertainPassiveIncomes.(1)InterestfromDepositsandYieldoranyotherMonetaryBenefit


50

from Deposit Substitutes and from Trust Funds and SimilarArrangements, and Royalties. A final tax at the rate of twentypercent (20%) ishereby imposedupon theamountof interestoncurrency bank deposit and yield or any other monetary benefitfrom deposit substitutes and from trust funds and similararrangements received by domestic corporations, and royalties,derived from sources within the Philippines: Provided, however,That interest income derived by a domestic corporation from adepository bank under the expanded foreign currency depositsystemshallbesubject toa final income taxat the rateofsevenandonehalfpercent(71/2%)ofsuchinterestincome.(2)CapitalGainsfromtheSaleofSharesofStockNotTradedintheStockExchange.Afinaltaxattheratesprescribedbelowshallbeimposedonnetcapitalgainsrealizedduringthetaxableyearfromthe sale, exchange or other disposition of shares of stock in adomesticcorporationexceptsharessoldordisposedofthroughthestockexchange:NotoverP100,000.....5%AmountinexcessofP100,000..10%(3) Tax on IncomeDerived under the Expanded Foreign CurrencyDepositSystem. Incomederivedbyadepositorybankunder theexpanded foreign currency deposit system from foreign currencytransactions with nonresidents, offshore banking units in thePhilippines, local commercial banks including branchesof foreignbanks thatmaybe authorizedby theBangko SentralngPilipinas(BSP) to transact business with foreign currency deposit systemshall be exempt from all taxes, except net income from suchtransactionsasmaybespecifiedbytheSecretaryofFinance,uponrecommendation by the Monetary Board to be subject to theregular income tax payable by banks: Provided, however, Thatinterest income from foreign currency loans granted by such


51

depositorybanksunder said expanded system to residentsotherthanoffshorebankingunits in thePhilippinesorotherdepositorybanksundertheexpandedsystemshallbesubjecttoafinaltaxattherateoftenpercent(10%).Any incomeofnonresidents,whether individualsor corporations,from transactions with depository banks under the expandedsystemshallbeexemptfromincometax(4) Intercorporate Dividends. Dividends received by a domesticcorporation from another domestic corporation shall not besubjecttotax.(5)CapitalGainsRealizedfromtheSale,ExchangeorDispositionofLandsand/orBuildings. A final taxof sixpercent (6%) isherebyimposedonthegainpresumedtohavebeenrealizedonthesale,exchange or disposition of lands and/or buildings which are notactuallyused in thebusinessofa corporationandare treatedascapitalassets,basedonthegrosssellingpriceoffairmarketvalueas determined in accordance with Section 6(E) of this Code,whicheverishigher,ofsuchlandsand/orbuildings.Tax Rate on Passive Income of DomesticCorporations

FinalTax1. Interest under the expanded foreign currencydepositsystem

7.5%2.RoyaltyofalltypeswithinthePhilippines

o Royalty from abroad? Enters the taxableincome30%taxrate

20%

3.Interestonanycurrentbankdeposit,yieldorothermonetarybenefitsfromdepositsubstitute,trustfund&similararrangement

20%


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4. Dividend from domestic corporations (intercorporatedividend)

exempt Tax Rate on Capital Gains (same asindividuals)

3. On sale of shares of stock of a domestic

corporation NOT listed and NOT tradedthru a local stock exchange held as acapitalasset,o CapitalgainsnotoverP100,000o CapitalgainsinexcessofP100,000


2.Onsaleofrealproperty inthePhilippinesheldasacapitalasset


Tax Rate of BANKS on Income Derived under theExpandedFCDSystem

FinalTax1.IncomederivedbyadepositoryBANKfromforeigncurrencytransactionswithnonresidents,OBUs,etc

exempt2. Interest income from foreign currency loansgrantedbyabanktoresidentsotherthanOBUs

10%

Income of nonresidents (individuals or corporations) fromtransactions with depository bank under the expanded FCDsystemareexempt.


53

Whataredepositsubstitutes?(Y)The term"depositsubstitutes"shallmeananalternative fromof obtaining funds from the public (the term 'public' meansborrowing from twenty (20) or more individual or corporatelendersatanyonetime)otherthandeposits,throughtheissuance,endorsement,oracceptanceofdebtinstrumentsfortheborrowersown account, for the purpose of relending or purchasing ofreceivablesandotherobligations,or financingtheirownneedsortheneedsoftheiragentordealer.Theseinstrumentsmayinclude,butneednotbelimitedtobankers'acceptances,promissorynotes,repurchaseagreements, including reverse repurchaseagreementsenteredintobyandbetweentheBangkoSentralngPilipinas(BSP)and any authorized agent bank, certificates of assignment orparticipation and similar instruments with recourse: Provided,however,Thatdebtinstrumentsissuedforinterbankcallloanswithmaturity of not more than five (5) days to cover deficiency inreserves against deposit liabilities, including those between oramongbanksandquasibanks,shallnotbeconsideredasdepositsubstitutedebtinstruments. Adeposit substitute is ameansofborrowingmoney from the

public(20ormoreindividualorcorporatelenders)otherthanbyway of deposit with banks through the issuance of debtinstruments.

SaleofsharesTax Rate on Income from Sale, Barter,ExchangeorotherDispositionof SharesofStock(RR62008)

If shares of stock are listed and traded of 1% (or .005%)


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throughthelocalstockexchange of the gross sellingprice or gross valuein money of thesharesofstock

If sharesnot traded through the local stockexchangeo CapitalgainsnotoverP100,000o CapitalgainsinexcessofP100,000


FCDU Income of nonresidents (individuals or corporations) from

transactions with depository bank under the expanded FCDsystemareexempt.

Intercorporatedividends Dividends received by a domestic corporation from another

domesticcorporationshallnotbesubjecttotax.o Why? Law assumes that the dividends received will be

injectedtothecapital,whichwilleventuallybetaxedwhenthecorporationgetsincomefromtheuseofthecapital.

SaleofrealtyFinal Tax Rate on Sales, Exchanges, orTransfers or Real Properties Classified asCapitalAssets(RR898)

SaleofrealpropertyinthePhilippines 6% of the grossselling price, orthe currentmarket value at


55

the time of sale,whichever ishigher

If sale was made to the government or toGOCCs

Either 6% of thegross sellingprice/currentmarket value orunder the normalincome tax rate,taxpayersoption

Creditable Withholding Tax on Sales,Exchanges or Transfers of Real PropertiesclassifiedasOrdinaryAssets(RR898)

1.Ifthesellerishabituallyengagedintherealestatebusinesso SellingpriceislessthanP500,000o SellingpriceisP500,000toP2mo SellingpriceisaboveP2m

1.5%3%

5%ofgrosssellingprice/currentmarketvalue,whicheveris

higher2. Iftheseller isnothabituallyengaged intherealestatebusiness

7.5%ofgrossselling

price/currentmarketvalue,whicheveris

higher3. If the seller is exempt from creditablewithholdingtaxasperRR298

Exempt


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Ifthemortgagorexerciseshisrightofredemptionwithin1year,nocapitalgainstax.

Incaseofnonredemption,thecapitalgainswillbeduebasedonthebidpriceofthehighestbidder.(RR499)

I.MinimumCorporateIncomeTax(MCIT)Sec 27 (E) Minimum Corporate Income Tax on DomesticCorporations.(1) Impositionof Tax. Aminimum corporate income taxof twopercent(2%0ofthegrossincomeasoftheendofthetaxableyear,as defined herein, is hereby imposed on a corporation taxableunderthisTitle,beginningonthefourthtaxableyear immediatelyfollowing the year in which such corporation commenced itsbusinessoperations,whentheminimumincometaxisgreaterthanthe tax computed under Subsection (A) of this Section for thetaxableyear.(2) Carry Forward of Excess Minimum Tax. Any excess of theminimum corporate income tax over the normal income tax ascomputed under Subsection (A) of this Section shall be carriedforwardandcreditedagainstthenormal incometax forthethree(3)immediatelysucceedingtaxableyears.(3)Relief from theMinimumCorporate IncomeTaxUnderCertainConditions. The Secretary of Finance is hereby authorized tosuspend the impositionof theminimumcorporate income taxonanycorporationwhichsufferslossesonaccountofprolongedlabordispute, or because of force majeure, or because of legitimatebusinessreverses.TheSecretaryofFinanceisherebyauthorizedtopromulgate,uponrecommendation of the Commissioner, the necessary rules andregulationthatshalldefinethetermsandconditionsunderwhichhemaysuspendtheimpositionoftheminimumcorporateincome


57

taxinameritoriouscase.(4)GrossIncomeDefined.Forpurposesofapplyingtheminimumcorporate income tax provided under Subsection (E) hereof, theterm 'gross income' shall mean gross sales less sales returns,discounts and allowances and costof goods sold. "Cost of goodssold' shall include all business expenses directly incurred toproduce themerchandise tobring them to theirpresent locationanduse.Fora tradingormerchandisingconcern,"costofgoodssold'shallinclude the invoice cost of the goods sold, plus import duties,freightintransportingthegoodstotheplacewherethegoodsareactuallysoldincludinginsurancewhilethegoodsareintransit.For a manufacturing concern, cost of "goods manufactured andsold"shallincludeallcostsofproductionoffinishedgoods,suchasraw materials used, direct labor and manufacturing overhead,freightcost,insurancepremiumsandothercostsincurredtobringtherawmaterialstothefactoryorwarehouse.In the case of taxpayers engaged in the sale of service, 'grossincome' means gross receipts less sales returns, allowances,discounts and cost of services. "Cost of services" shall mean alldirect costs and expenses necessarily incurred to provide theservicesrequiredbythecustomersandclientsincluding(A)salariesand employee benefits of personnel, consultants and specialistsdirectly rendering the service and (B) cost of facilities directlyutilized inproviding the service such asdepreciationor rentalofequipmentused and costof supplies:Provided,however, That inthecaseofbanks,"costofservices"shallincludeinterestexpense. Beginning with the fourth year of operations, a domestic

corporationistaxedbywhicheverishigher:o Normaltaxof30%,or


58

o Minimumcorporateincometaxof2% The minimum corporate income tax is 2% of gross income

(comparewith thenormal taxwhichhas taxable incomeas itstaxbase)

Anyexcessof theMCITover thenormal taxofayear shallbecarriedforwardandcreditedagainstthenormaltaxforthethreeimmediatelysucceedingtaxableyears.o For the carry forward to apply, thenormal tax shouldbe

higherthantheminimumcorporateincometax.o Usually follows the firstin, firstout (FIFO) method (Atty.

Montero)o So, you usually compute both first, then apply either the

MCITorNormalTax,whicheverishigher.Example Year4 Year5 Year6 Year7MCIT 200 400 100 100Normal 100 200 300 200Incometax 200 400 0 200ExcessMCIT (100) (100) ubosnayungyear4excess (200) MCIT is implemented on domestic and resident foreign

corporations whenever they have zero or negative taxableincome,orwhentheMCITisgreaterthanthenormalincometaxdue.(RR998)

ThefollowingareexemptedfromtheMCIT:o Resident foreign corporations engaged in business as

internationalcarriers(seebelowformorediscussion)


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o Resident foreign corporations engaged in business asoffshorebankingunits

o Resident foreign corporations engaged in business asregionaloperatingheadquarters

o Firmsthataretaxedunderaspecialincometaxregime(likethoseunderPEZAorothereconomiczones)

J.IncomeTaxonResidentForeignCorporationsSec28(A)TaxonResidentForeignCorporations.(1) In General. Except as otherwise provided in this Code, acorporation organized, authorized, or existing under the laws ofany foreign country, engaged in trade or business within thePhilippines,shallbesubjecttoan incometaxequivalenttothirtyfivepercent(35%)ofthetaxable incomederived intheprecedingtaxableyearfromallsourceswithinthePhilippines:Provided,ThateffectiveJanuary1,1998,therateofincometaxshallbethirtyfourpercent (34%);effective January1,1999, the rate shallbe thirtythreepercent(33%),andeffectiveJanuary1,2000andthereafter,therateshallbethirtytwopercent(32%).In the case of corporations adopting the fiscalyear accountingperiod, the taxable income shall be computedwithout regard tothe specific date when sales, purchases and other transactionsoccur. Their income and expenses for the fiscal year shall bedeemedtohavebeenearnedandspentequallyforeachmonthoftheperiod.The reduced corporate income tax rates shall be applied on theamount computedbymultiplying thenumberofmonths coveredbythenewrateswithinthefiscalyearbythetaxableincomeofthe


60

corporationfortheperiod,dividedbytwelve.Provided, however, That a resident foreign corporation shall begranted theoption tobe taxedat fifteenpercent (15%)ongrossincomeunderthesameconditions,asprovidedinSection27(A).(2) Minimum Corporate Income Tax on Resident ForeignCorporations. Aminimum corporate income taxof two percent(2%) of gross income, as prescribed under Section 27 (E) of thisCode,shallbe imposed,underthesameconditions,onaresidentforeigncorporationtaxableunderparagraph(1)ofthisSubsection. A foreign corporation is one which is not domestic (ie

organized/incorporated here). It may be a resident or nonresidentcorporation.

A resident corporation is a foreign corporation engaged inbusinessinthePhilippines.o A foreign corporation can engage in business in the

Philippinesonlyafter ithadregisteredwith,andhadbeenallowed by, the regulatory agencies of the PhilippinegovernmenttoengageinbusinessinthePhilippines.

TaxrateofForeignResidentCorporations

30% of taxable income from allsourceswithinthePhilippines,or2%ofgross income ifMCITapplies,or15%ofgross income(again,theGIThasyettobeimplemented)

Tax Rate on Passive Income of Foreign Resident FinalTax


61

Corporations1. Interest under the expanded foreign currencydepositsystem

7.5%2.RoyaltyofalltypeswithinthePhilippines

o Royalty from abroad? Exempt. (remember,only taxed from sources within thePhilippines)

20%

3.Interestonanycurrentbankdeposit,yieldorothermonetarybenefitsfromdepositsubstitute,trustfund&similararrangement

20%

4. Dividend from domestic corporations (intercorporatedividend)

exempt TaxRateonCapitalGains

1. OnsaleofsharesofstockofadomesticcorporationNOT listedandNOTtradedthru a local stock exchange held as acapitalasset,

o CapitalgainsnotoverP100,000o CapitalgainsinexcessofP100,000


2. On sale of real property in thePhilippines

No provision forcapitalgainsforsaleofrealty.Atty. Montero saysthat you apply it tothe normalcorporate tax of30%


62

InternationalCarrierSec28(A)(3)InternationalCarrier.AninternationalcarrierdoingbusinessinthePhilippinesshallpayataxoftwoandonehalfpercent(21/2%)onits"GrossPhilippineBillings"asdefinedhereunder:(a) InternationalAir Carrier. "Gross Philippine Billings" refers tothe amount of gross revenue derived from carriage of persons,excessbaggage,cargoandmailoriginatingfromthePhilippinesinacontinuous and uninterrupted flight, irrespective of the place ofsale or issue and the place of payment of the ticket or passagedocument: Provided, That tickets revalidated, exchanged and/orindorsed to another international airline form part of the GrossPhilippineBillingsifthepassengerboardsaplaneinaportorpointin the Philippines: Provided, further, That for a flight whichoriginates from the Philippines, but transshipment of passengertakesplaceatanyportoutside thePhilippinesonanotherairline,onlythealiquotportionofthecostoftheticketcorrespondingtothe leg flown from the Philippines to thepointof transshipmentshallformpartofGrossPhilippineBillings.(b)InternationalShipping."GrossPhilippineBillings"meansgrossrevenuewhetherforpassenger,cargoormailoriginatingfromthePhilippinesuptofinaldestination,regardlessoftheplaceofsaleorpaymentsofthepassageorfreightdocuments. Tax rate for international carriers is 2.5% of Gross Philippine

Billings GrossPhilippineBillingsrefersto

o Gross revenue derived from carriage of persons, excessbaggage,cargoandmail


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o Originating from the Philippines in a continuous anduninterruptedflight

o Irrespectiveof theplaceof saleor issue and theplaceofpaymentoftheticketorpassagedocument

InCIRvBOAC,BritishOverseasAirwaysdidnothaveanylandingrightsherenordidtheyhave licensetooperatehere.Theyalsodid not carry passengers or cargo to or from the Philippines.Theydid,however,haveageneralsalesagentwhichsoldBOACtickets.Theywere taxed for the saleof the tickets (becauseofthesitusoftaxationprinciple),eveniftheservicetoberenderedwasoutsidethePhilippines.Theywerent liableforcarrierstaxthough.o Doing business has no specific criterion.As long as there

was a continuity of conduct and intention to establish acontinuousbusinessandnotoneofatemporarycharacter,thenyouaredoingbusinessinthePhilippines.(Rememberyourcorp!)

Anofflineairlinewhichhasabranch/agentinthePhilippinesandsellspassagedocumentstocoverofflineflightsofitsprincipalorother airlines is NOT considered engaged in business as aninternationalaircarrierinthecountryandisNOTsubjecttotheGPBnortothe3%commoncarrierstax.

If the airline has flightswhich originate from any point in thePhilippines,itissubjecttothe2.5%GPBtaxunlessitissubjecttoadifferenttaxrateunderataxtreatytowhichthePhilippinesisasignatory.

In anutshell, if an international air carriermaintains flights toand from the Philippines, it shallbe taxed at the rateof 2.5%GPBwhile international air carriers thatdonothave flights toand from the Philippines but nonetheless earn income from


64

otheractivities in the countrywillbe taxedat the rateof32%(now30%)ofsuchincome.(SouthAfricanAirways,Feb16,2010)

WhatisincludedincomputingtheGPB?o Grossrevenue frompassageofpersons (actualamountas

reflectedinthetaxcouponpartoftheplaneticket)o Excessbaggageo Cargo and mail originating from the Philippines in a

continuousanduninterruptedflight To compute theGPB: (monthly average net fare of all the tax

couponsofplaneticketsperpointoffinaldestination,perclassofpassage,per classificationofpassenger)MULTIPLIED by the(totalnumberofpassengersflownforthemonthasdeclared intheflightmanifest)

In caseofpassengers flights from anypoint in thePhilippinesandback,thatportionofrevenuepertainingtothereturntriptothePhilippinesisNOTincludedaspartoftheGPB.(RR152002)

OffshoreBankingUnits(4) Offshore Banking Units. The provisions of any law to thecontrary notwithstanding, income derived by offshore bankingunitsauthorizedbytheBangkoSentralngPilipinas(BSP)totransactbusinesswithoffshorebankingunits,includinganyinterestincomederived from foreigncurrency loansgranted toresidents,shallbesubject to a final income tax at the rateof tenpercent (10%)ofsuchincome.Any incomeofnonresidents,whether individualsor corporations,fromtransactionswithsaidoffshorebankingunitsshallbeexemptfromincometax.


65

Tax rate of offshore banking units authorized by the BSP(includinganyinterestincomeforeigncurrencyloansgrantedtoresidents)is10%finaltax.

Income of nonresidents from transactions with OBUs shall beexemptfromincometax.

Anoffshorebankingunit isabranchofa foreignbankwhish isauthorizedby theBSP to transactoffshorebankingbusiness inthePhilippines.

Aforeigncurrencydepositunitisadepartmentofalocalbankoran inexisting localbranchofa foreignbankwhich isauthorizedby the BSP to operated under the expanded foreign currencydepositsystem.

Gross onshore income covers all income arising fromtransactionsallowedby theBSPconductedbyandbetweenanoffshorebankwith anotheroffshorebankorwith an FCDUorwithanonresident.(RR1076)

The following are included in computing the gross onshoreincomeofOBUsandFCDUs?o Gross interest income arising from foreign currency loans

andadvancesandinvestmentswithresidentso Fees, commissions and other charges which are integral

partsoftheincomefromforeigncurrencyloantransactionsareEXEMPT.Theyarenottobeincludedincomputingthefinaltax.(RR1477)

o TaxRateon Interest Income fromForeignCurrencyDeposit(RR1098)

1. Interest income actually received by a residentcitizenorresidentalienfromFCD



66

2. If it was deposited by an OCW or seaman ornonresidentcitizen

Exempt3.IfitwasinabankaccountinthejointnamesofanOCWandhisspouse(whoisaresident)

50%exempt/50% finalwithholdingtaxof7.5%

4. Interest income actually received by a domesticcorporationorresidentforeigncorporationfromFCD


BranchProfitRemittanceTax(5)TaxonBranchProfitsRemittances. Anyprofit remittedbyabranch to itsheadofficeshallbesubject

als - ingles tax 01 (2012)

Documents

mastery creativity pjg

stock dividends

taxed asincome

c incomemeansprofitsorgains

whileincomeis propertyisatree

salvadors review class

specified time

questions youshouldaskare