bucotax reviewer[1]

BUCOTAX Reviewer Term 1 – A.Y. 2010-2011

INTRODUCTION GENERAL PRINCIPLES OF TAXATION

Taxation – process, system or means by which the sovereign through its law-making body raises income or revenue to defray the necessary expenses of government. Act of laying a tax. power of the state as a sovereign power because its inherent in the sovereign and government – “likas” / built-in a way of apportioning the cost of the government among those who in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens. There is no need for a law about it. Primary purpose is to RAISE REVENUES for government expenses. Inherent sovereign power exercised only by law making body. Only legislative body can pass tax laws. President can fix tariff rates and import duties.

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Nature of the Power of Taxation 1. Inherent in every sovereignt 2. Subject to Constitutional and Inherent Limitation 3. Legislative in Character

Aspects of Taxation (The two processes together constitute the Taxation System) 1. Levying/Imposition of Taxes which is a Legislative Act, exercised by the legislative Body, or delegated by it to the Executive, or by the executive issuing orders or decrees in the exercise of emergency legislative powers. (TAXATION) 2. Enforcement/Collection (payment by the tax payer) of the tax levied which is administrative in character, exercised by the BIR. (TAX ADMINISTRATION).

Essential Characteristics of Tax 1. Enforced Contribution 2. Generally Payable in Moneya 3. Proportionate in Character 4. Levied on Person / Property 5. Levied by the state which has jurisdiction over person / property 6. Levied by the law – making body of the stateb 7. Levied for public purpose or purposes 8. Required to be paid at regular periods / intervals (yearly)

a Pecuniary Burden – exaction to be discharged alone in the form of money which must be in legal tender

NOTES TAKEN FROM ATTY. JOSE V. MEJIA. UNOFFICIAL BUCOTAX REVIEWER. THIS SPECIAL PRIVILEGE IS STRICTLY FOR BMS MEMBERS ONLY!!!

b The power of tax is a legislative power which under the Constitution only congress can exercise through the enactment tax statutes. Obligation of tax is a Statutory Liability. Power to tax is also granted by the Constitution to local governments subject to such guidelines and limitations as provided by law.

Taxation Power, Compared with Other Powers of the State Taxation Power – inherent power of the state to demand enforced contributions for public purpose Power of Eminent Domain – take private property for public use upon paying the owner just compensation through due process. Police Power – power to enact such laws to promote security and welfare to regulate

Basic Principles / Characteristics of a Sound Tax System 1. Fiscal Adequacy – sufficient revenues to pay the expenses of government . 2. Equality or Theoretical Justice – you fell justice was rendered when you paid taxes - impact of the taxes is equitably distributed and shouldered principally by those able to pay - tax burden should be in proportion to the taxpayer’s ability to pay (ability- to-pay principle) - contribution of each person towards the expense of government should be so apportioned such that he would feel neither more nor less inconvenienced from his share of the payment than every other person experiences from his. Taxation should be uniform as well as equitable. 3. Administrative Feasibility – system of enforcement and collection is simple to understand and should be capable of convenient, just and effective administration.

Distinctions from Other Kinds of Payment

A. Debt (Tax and a Debt are a both liabilities or obligations) TAXDEBTS

Obligation arising from Law

Civic Obligations Generally not subject to-set-off or compensation Payable in Money Governed by special prescriptive periods Doesn’t draw interest (except only when delinquent) Can’t be the subject of Assignment May be imprisoned for non-payment, unless poll tax

Obligation arising from Contract (expressed/implied) Civil Obligations May be subject to set-of or compensation May be paid in Kind Governed by ordinary periods of prescription Draws interest when it’s so stipulated or default Assignable Can’t be imprisoned for non-payment

B. License / Permit Fee (Building Permit) (Car Registration – both a tax and license fee)

TAX Burden for General Public Purpose

LICENSE FEE Should not reasonably exceed the expenses of


Generally Not Limited Imposed on businesses being carried on or property with in the state’s territory Revenue Imposed also on persons and property Failure to pay desn’t make the act illegal Rests upon Taxing Power

supervision and issuance of the license Confers the right to commence business or to have property in the state Regulation Imposed on the Right to exercise a privilege Failure to pay makes the act / business illegal Rests upon Police Power of the State

C. Special Assessment – enforced proportional contribution from owners of land specially or peculiarly benefited by public improvements. Impose a special levy on lands especially benefited by public works or improvements financed by it. Levied only on Land Based wholly on benefits (not necessity) Exceptional both to time and place Not a personal liability of the person assessed, his liability is limited only to the land involved D. Penalty – punishment from wrongdoings

TAXES Intended to Raise Revenue Imposed only by the Government

PENALTY Designed to regulate conduct Imposed by Gov’t or Private Individuals / Entities

E. Toll – proprietorship, used for payment of private property, sum of money for the use of something.

TAXES Imposed as an exercise of Sovereignty

Only imposed by Gov’t Levied to support the government Necessities of government dictate the amount

TOLL Collected as an exercise of Ownership / Proprietorship Imposed by Gov’t or Private Individuals / Entities Paid for the Use of Property Cost of the property / improvement determine the amount

Classification of Taxes A. Imposing Authority/Scope a. Local – imposed by municipal corp. or local government units (Real Estate Tax & Professional Tax) b. National – tax imposed by national government (VAT, Custom Duties & Income tax) B. Persons Destined To Pay It / Who Bears The Burden / Incidence / Burden of Taxation a. Direct – imposed on and borne by the person, income, business, or property of the taxpayer - demanded from the person who also shoulders the burden of the tax; or tax of which the taxpayer is directly or primarily liable or which he cannot shift to another. Not expected to pass on the burden.


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Example: Corporate & Individual Income Taxes; Community Tax; Estate Tax & Donor’s Tax - Backward Shifting – pass the burden onto them. b. Indirect – imposed on articles, goods, and merchandise before reaching ultimate consumer who bears the burden as part of purchase price. As long as its nature is passable / transferable. Tax imposed upon goods before they reach the consumer who ultimately pays for it not as tax but as part of the purchase price. Practically all business taxes are indirect (imposed on people, can pass the burden to the other people) - Example: VAT, Excise Taxes on specific goods, % Taxes, Custom Duties - Forward Shifting – taxpayer passes the burden to the buyer Object / Subject Matter a. Personal, Poll, Capitation or Right of Suffrage – imposed on all persons with in a particular class. - Examples: Community Tax (imposed on a person who belongs) (imposed per head / per person) b. Property – imposed on properties, persons having control of property - Examples: Real Estate Tax, which is based on assessed value c. Excise / Privilege – imposed on the exercise of a profession, engaging in an occupation or business, or the exercise of a right or enjoyment of a privilege / act (donate & sell = privilege) - Examples: Income Tax, Value Added Tax, Estate Tax and Donor’s Tax Purpose a. Fiscal – tax imposed for the general purposes of government (raise revenue for government needs) – Income Tax, VAT and almost all taxes b. Regulatory “Taxation is a Power to Destroy” – tax imposed for special purposes, achieve some social / economic ends irrespective of whether revenue is actually raised or not. - Examples: Protective Tariffs, Custom duties on Imported Goods Application a. Special – imposed for some particular / special specific purpose or for local benefits only b. General – imposed uniformly and for a general public purpose. Tax Base / Determination of the Amount – as the tax base increases, the tax rate increases a. Specific – specified in a unit of currency and based on a unit of measure, quantity or weights, no assessment. - Taxes on distilled spirits, wines and fermented liquors; cigars and others. - Imposed / determined through the mere use of a unit of measure. b. Ad Valorem – based on the value of the article subject to tax and indicated by percent, requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. According To Value – Ad Valorem.


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no regards to the size of object being taxed (based on the assessed value of the good being taxed) - Examples: Real Estate Tax, Excise Taxes, [cars, non-essential goods (jewelries and perfumes)] custom duties. G. Rate / Graduation / Nature a. Progressive / Graduated (Operation of Progressive Tax System) – income tax system - rates of tax proportionately increase as the tax base increases (Income, Estate & Donor’s Tax) b. Proportional – tax based on fix percent of amount of property, receipts (Real Estate, VAT & %taxes) - Tax Rate is constant regardless of tax base. c. Regressive – rates decrease inversely as the tax base increases, tax rate & tax base move in opposite directions. We have no regressive taxes.

Progressive / Regressive System of Taxation is different from Progressive / Regressive Tax.

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Limitations To The Power of Taxation

A. Inherent (built-in) – those which restrict the power although they are not embodied in the Constitution. a. Public Purpose / Governmental Purpose – purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals. - + Proceeds of tax must be used for the support of government, for any recognized objects of government and to promote the welfare of the community. b. Non-Delegation / Non-Delegability of the Legislative Power to Tax (implied form Constitution) - power of taxation being purely legislative, Congress can’t delegate the powers to others. - The power which can’t be delegated include the determination of the subjects to be taxed, the purpose of the tax, the amount or rate of the tax, the manner, means, and agencies of collection and the prescribing of necessary rules with respect. - + Delegation to the President – tariff / custom duties (constitutionally authorized) - + Delegation to Local Government – municipal corporations are merely instrumentalities of the state for the better administration of the government in respect to matters of local concern. The power to municipal corporations for the purposes of local self-government carries with it the power to confer the power to tax on such local governments. c. Exemption from Taxation of Government Entities – the reason is obvious: to levy a tax upon public property would render necessary new taxes on other


public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over to itself. d. International Comity – property of a foreign state or government may not be taxed by one another (sovereign equality among states, usage among states, foreign government may not be sued without its consent.) e. Situs / Jurisdiction / Territorial Jurisdiction – state may not tax property lying outside its border. Tax laws don’t operate beyond a country’s territorial limits.

B. Constitutional – expressly found in the constitution or implied from its provisions a. Implied – provisions that serve as a limitation to taxation but they don’t make a direct reference to taxation (Bill of Rights) No person shall be deprived of life, liberty and property without Due Process of Law, nor shall any person be denied the equal protection of the laws. Right to be heard, law that hears before it condemns Give notice, fair opportunity to assert he substantial rights before a competent tribunal.

Equal Protection of Laws - all persons subject to legislation shall be treated alike under circumstances and conditions both in the privileges conferred and liabilities imposed - laws must be applied equally to all - classifications (only if reasonable) Reasonable Classifications a. Must be based on substantial differences / distinctions b. Difference / Distinction must be germane (reasonably relevant) to the purpose of law c. Must apply not only to present but also to future conditions d. Must apply equally to those similarly situated

Freedom to Exercise One’s Religion / Non-Infringement of Religious Freedom a. the laws shall be passed abridging the freedom of speech, assembly, establishing the religion and b. Express – direct laws on taxation found in the Constitution

Taxation 1. Inherent – Sovereignty (essential to the existence of every government) 2. Legislative – exercise the taxation laws in the state – Only CONGRESS can impose taxes A. Exemptions a. President – Tariff & Import Taxes – by way of an exception (E.O.s) b. Local Government (local legislative body) – Local Government Code B. Movements


a. Levied – passed and imposed tax laws b. Collection – treasury c. Expenditure Process – money should return to the people in terms of service C. 4 Questions Congress has to address a. Whom do we tax? – Object of Taxation b. How much should we tax? c. When do we tax? d. What do we tax them with? D. Subject to Constitutional & Inherent Limitations 3. Purpose is to Raise Income & Revenues – Only Purpose of Taxation - most effective way of raising revenues 4. Public Purpose – for purpose to be public it doesn’t have to benefit all Filipinos as long as a particular imposition benefits a significant sector of society – public purpose

Extent of Legislative Power to Tax 1. Subjects / Objects to be Taxed – persons (natural/juridical), property (real or personal; tangible or intangible), businesses, transactions, rights and privileges 2. Purpose / Object of the tax so long as it’s a public purpose – PUBLIC PURPOSE 3. Amount / Rate of the Tax – depends on the legislature (whatever they see fit) 4. Manners, Means, and Agencies of Collection of Tax – Administration and Implementation of Tax Laws. Legislature has the sole power of tax, they also have the power to prescribe the method / mode by which the tax shall be collected, and to designate the officers through whom its will shall be enforced.

*Tax Evasion – taxpayer who refuses to pay his tax obligations and purposely disregards or violates the provision of a tax statute *Tax Avoidance – taxpayer who uses his knowledge of Taxation in order to free himself from the payment of taxes.

Non-Revenue Objectives of Taxation 1. Strengthen anemic enterprises or provide incentive to greater production 2. Protect local industries or encourage foreign trade 3. Bargaining tool 4. Curb Spending Power, Halt Inflation, Expand Business & Ward Off Depression 5. Expand Business & Ward of Depression 6. Reduce Inequalities in Wealth & Income 7. Promote Science & Invention 8. Finance Educational Activities 9. Improve Efficiency of Local police Forces 10. Implement of the Police Power to Promote General Welfare


Primary Purpose of Taxation Raise Revenue for the Support of Government. If the purpose is primarily for revenue of if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax. 1. Comapre & Contrast the three powers (taxation, Eminent Domain, & Police Power) 2. Distinctions from other kinds of payment

INCOME TAXATION –recallable / taxable period

Income Defined – “all wealth which flowds into the taxpayer other than as mere return of capital” Wealth – central concept of income - can be valued in terms of money (Php), capable of pecuniary expectations (valued as wealth) - must be an economic reality, only tax and zero in on income - Expected income is not taxable; it must be realized; existing for it to be taxable.

Income Tax – tax on net income or the entire income realized in one taxable year. T is levied upon corporate and individual incomes in excess of specified amounts and less certain deductions and or specified exemptions in cases permitted by law. - to mitigate the evils arising from the inequalities in the distribution of income and wealth which are considered deterrents to social progress, by a progressive scheme of taxation - generally regarded as an Excise Tax (Privilege Tax) and not a tax on persons, property, funds or profits. Tax on the right to earn income. Imposed to raise revenue.

Systems of Taxation 1. Global / Unitary Approach – all incomes from all sources / activities are combined and are taxed under one rate or schedule. 2. Schedular Approach (Schedular System of taxation) – recognizes that there are qualitative differences in each kind of income and each kind of income is taxed differently – Philippine System - each kind of income is treated differently (Compensation, Business & Passive Y)

Taxable Period 1. Fiscal Year – one year that starts other than January 1 2. Calendar Year – January 1 – December 31

Guiding Principles in the Study of Income Taxation


1. Not all wealth / money received by a person are considered as Income. In certain instances however even if what a person receives is considered as income the law (public policy or not) doesn’t include the same as income. Gross Income Less Deductions & Exemptions Equals Net Income (Tax Due). 2. The formula in the computation of the tax due differs / varies depending on the following factors: Different sources of income have different taxes. Type / Level of income the person owns. Factors that affect the manner of computation: a. Level / Type of Income Being Taxed i. Compensation Income ii. Business / Gross Income iii. Passive Income / Income Subject To Final Tax b. Nature of the Taxpayer i. Individual ii. Corporation iii. Estate / Trust c. Civil Status of the Taxpayer i. Single ii. Married iii. Head of the Family d. Citizenship / Residence i. Filipino (Resident or Non-Resident) ii. Alien (Resident or Non-Resident) [Engaged in Business or Not Engaged in Business in the Philippines] – Non-Resident

Three Kinds of Income 1. Compensation Income – income arising from an ER-EE relationship from employees point of view a. Employee – Employee Relationship b. Test to Determine an Employer – Employee Relationship i. Right to Control Test (under direct control & supervision of employer) - ER can control / has power to determine the final prduct and also the means to achieve it - He controls the manner by which the product / end result is done and also the means to achieve that end ii. Selection & Management of Employees & Power of Dismissal iii. Economic Test – ER hast the power to fix the salary and other benefits (GSIS & SS payments) - economic factor of the relationship / payment of contribution to the government 2. Gross / Business Income – income from business / profession (creditable WT / income tax) - income that is neither passive nor compensation Y


3. Income Subject to Final Tax / Passive Income – withholding tax / final WT - If the income payment is subject to final W of T, when you receive the income the tax has been withheld from you. Everything that is not compensation / passive is Business Income.

Three tax) 1. 2. 3.

Categories of Exclusions (not included in the 1st place, in the tax, exempt from

Items / Amounts Excluded Because They Are Not Income Income but the law doesn’t want to include them to subject tax Income excluded not because the law doesn’t want to subject to income tax but they are excluded. They are excluded from the mainstream formula because their computations are simple

Exclusions – not part of the gross income; income exempt from tax 1. Items or Amounts Excluded Because They Are Not Income / Mere Return of Capital a. Proceeds from Life Insurance (indemnification) Insurance – one by which a person undertakes to indemnify another for a consideration against death, accident or liability to third person. Insurance Contract. Excluded from computation of income tax. Accidental insurance. Third party liability insurance (TPL). Merely an indemnification of something that is lost. b. Return of Premiums c. Payment / Compensation for Injuries / Sickness / Damages 2. Income but the Law doesn’t want to Subject them to Tax a. Gifts / Bequests / Devices / Donations – incomes / donor’s tax / bequest (nomenclatures) b. Retirement Benefits / Pensions (SSS & GSIS Benefits – compensation income) / Gratuities c. Interest on Government Securities – Government Bonds & T-Bills d. Thirteenth Month Pay & Other Benefits (Christmas Bonus) to the extent of Php 30,000 is excluded from tax e. Miscellaneous Items Prizes & awards in recognition of religious, education, charitable, artistic or scientific achievements Sports Competitions sanctioned by Philippine associations Winnings from Lotto / Sweepstakes f. Fringe Benefits g. Income Exempt Under a Treaty – Balikatan Exercise h. Amounts received by employees received by reason, death, or separated beyond their control (non-voluntary dismissal / separation).


3. Income Subject To Final Tax (Passive Income) – tax has been withheld, that amount of tax is final - excluded from gross income and subject to special rates as final tax a. Capital Gains Tax on the Sale of Real Property located in the Philippines – 6% of the selling price or fair market value which ever is higher b. Capital Gains Tax on the Sale of Share of Stocks (proof of ownership in the company) not listed in the Stock Exchange c. Interest on Bank Deposits d. Cash / Property Dividend – subject to 10% final tax e. Royalty Income on Creations & Inventions (except books & literary work) – subject to 10% final tax f. Prizes & Winnings – Singing Contest (except Sweepstakes & Lotto) – subject to 20% final tax - Php 10,000 or less – not subject to 20% final tax but subject to compensation / business income (taxable net income).

Formula In Computing Individual Income Tax 1. Resident Filipino Citizen – income from ALL sources - taxed on all your income from all sources [local / foreign] Gross Compensation Y Less: Deductions [P.E. / A.E. / H.I.P] (All Sources / World) Net Y = Tax Due *Residency - frame of mind – “Animus Revertadi” – the intent to go back to a place and make your residence a home - doesn’t require physical presence - permanent place of abode / home - you can’t have two residences 2. Non Resident Citizens / Resident Alien Gross Compensation Y (Philippines) Less: Deduction (Philippines) Net Taxable Y 3. Non Resident Alien a. Engaged in Business in the Philippines Gross Compensation Y (Phils) Less: Deductions (Phils) Net Taxable Y b. Not Engaged in Business – Ashanti / Ja Rule / Foreign Artists Gross Compensation Y *25% Tax Due - Withheld

DEDUCTIONS – amount law allows to be deducted / reduced from Gross Income


- Individual Taxpayer – Person, Estate and Trust – personal cost of living

*Personal Exemptions – arbitrary deduction from the amount of gross income – arbitrary amounts (no basis) personal cost of living (food, shelter & clothing) – individual / estate / trust Basic Exemptions – cost of living of taxpayer Additional Exemptions – cost of living of qualified dependent

MEMORIZE

*Php 50,000 Unmarried / single individuals (not a dependent / nor qualified as a head of a family) Married person that is separated (legally) Widow / widower with no qualified dependents Estates of a deceased person or any property held in trust

*Php 50,000 Single / unmarried Head of a family, depending on him for chief support – 51% support minimum Only one person can be the head of the family for one dependent – 51% Legally separated

Head of Family – support, right to exercise family control and provide for these dependents (including senior citizens). Living with the Head of the Family & relying on him for chief support: a. Status – single, unmarried, legally separated, certain people dependent on him / her for chief support [51%] – sustenance (clothing, food) b. Relationship One or both parents One or more bros / sis (whole / half blood) – unmarried, not gainfully employed, not more than twenty-one Legitimate, Recognized, Natural or Adopted children – unmarried, not gainfully employed, unmarried, not more than 21. (1) Legitimate – born and conceived in the context of a valid marriage. (2) Illegitimate – born and conceived outside of wedlock (not married / invalid marriage) a. Natural Illegitimate –conceived and born whose parents at the time of conception were free to marry each other. Can be legitimated if parents get married. b. Spurious Illegitimate – conceived and born – at the time of conception the parents could not validly get married.


*Presumption – inference of a fact that is not known based on a fact that is known. Senior Citizens – living with and dependent on the taxpayer for chief support c. Residence – living with the tax payer d. Age Requirement – must not be married and must not be more than 21 - if more than 21 / regardless of age then must be physically / mentally incapable of self-support

*Php 50,000 Married (each married individual is entitled to Php 50,000) Both husband and wife are separate taxable units if: - Both are earning / receiving income - If not then only the earning spouse

*Additional Exemptions – Php 25,000 – for each dependent child – maximum of four dependents Dependent – legit, illegitimate, legally adopted child, recognized, natural, legitimate – only children Married & Head of the Family can only avail of this. Only I parent can claim If legally separated, exemption may be claimed by the spouse who has custody of the child / children

*Itemized Deductions (Direct Costs) for Individual Tax Payers Items listed in the law – business related expenses / deductions Can only be availed by Gross Compensation Y taxpayers

Requisites for Deductibility 1. Must be related to trade, business, or profession (connected) 2. Must be reasonable, ordinary, necessary 3. Incurred and paid during the taxable year 4. Must not be illegal, immoral, and against public policy 5. Proven and documented

Itemized Deductions – Bed Clip Dot 1. Interest Expense – amount of interest paid / incurred in the year 2. Taxes paid in the course of the business 3. Losses / Fortuitous Events – not covered by insurance 4. Bad Debts – debts that can no longer be collected – debt ascertained to be worthless


5. Depreciation – reasonable allowance for exhaustions, wear or tear of a property used in business / trade / profession *Straight Line Method – Depreciation Acquisition Cost Less: Salvage Value Answer divided by the number of years of useful life = Depreciation 6. Depletion 7. Item not related / exception to the requirement that it should be business related *Contributions to Charitable Institutions *BIR certified Donee Institution – any donation would be deductible in full 8. R&D – improvement of products 9. Pension Trusts – the amount the company pays as pension 10. Taxpayers establishing an honest to goodness pension plan 11. Business Expenses a. Salaries & Wages b. Fringe Benefits c. Traveling Expenses d. Rental Expenses e. Materials & Supplies f. Recreation / Entertainment Expense – membership in clubs

Optional Standard Deduction – allowed to a taxpayer – 40% of the Gross Income is deductible

Which is better? Optional Standard Deduction or Itemized Deduction? If you have all the documents, then use the Itemized Deduction.

*Fax Return – sworn statement – facts as to the nature & extent of the tax liability, can be subjected / prosecuted for perjury. *Change of Status (w/in calendar year) – any change of status should be considered favorably for the taxpayer (the higher exemption wins).

Income – product of investment/ product of labor or capital + interest- product of capital + dividend/ property dividend + winnings + stock dividend – not yet realized income + taxable income – payment for services

Not income: remuneration for something lost : if its in the nature of a reimbursable expense then its not an income.


*Income subject to Creditable Withholding tax is an advanced payment of the tax which you have to pay at the end of the year.

Total Gross Compensation Income: *salaries/ wages *commission that arises out of an EE-ER relationship *bonus – 1st Php 30,000.00 is exempt from taxation, Php 30,000 and above is subject to tax. *allowances – reimbursable expense (no benefit) +seek reimbursement for his advances – not part of taxable income +doesn’t have to account for his allowances (employee benefits) – part of taxable Y +for purposes of taxation the uniform meal allowance is not part of the taxable income of the employee because it benefits the employer. +more for the convenience of the employers if the project head stays in +allowance- Benefit of the Employer Rule – can’t be taxable to the employee +privilege to receive service income→ product of employee’s labor → enjoy the benefit/ was compensated → taxable y to the employee → Allowance *pension → retirement → final payment for service rendered +depends whether Pension Plans has been fully approved by the BIR, if its approved by the BIR then its not part of the taxable Y of the employee. If its approved its part of the taxable Y. +requirements for BIR to approve the Pension Plan - 60 years old, 10 years of service to the company, actuarially sound (life span and expenditures of a person) *hazard pay *honorarium *deminimis – taxable income of employees of small quantity, to foster camaraderie between and among employees, medical allowance, sports facilities *overtime payment – increase tax payment *fringe benefits/ perks – EE-ER relationship -income tax or part of employee’s gross compensation Y -tax on fringe particularly received by employees -payment in kind – certain benefits received by (housing, expense account, rice subsidy, vehicles, etc.) -tax shelter – employee furnished/ granted→ car/ housing→ it really benefits the company - if given to managerial employee then the Fringe Benefit will be subject to Final Tax

Fringe Benefits Tax Rates:

*98- 34% *99- 33% *00- 32%


*Imposition of tax on gross-up monetary value (GMV). The GMV is determined by dividing the actual monetary value of the fringe benefits by:

*98- 66% *99- 67% *00- 68%

Adjusted / Modified Gross Compensation Income:

Salaries (deduct all mandatory contributions → tax exempt → not part of taxable income → modified S) Less: SSS Contribution PhilHealth Contribution WT Payable Pag- Ibig Union Dues Cash Advances__________________________________________________________ Net Salary Add: Commision Allowances Bonus Hazard Pay______________________________________________________________ Total Gross Compensation Income Less: Personal Exemptions Additional Exemptions Premium for Hospitalization/Health Insurance Premium (Php 2,400.00) → if applicable_ Taxable Compensation Income *Income Tax Rate_______________________________________________________________ Income Tax Payable

If the gross Income is not more than Php 250,000.00, then the amount of health/hospitalization insurance premium of Php 2,400.00 shall be allowed as a deduction from the gross income.

Any Health Insurance Premium → Gross Compensation Income should not exceed P250,000 in order to avail of the P2,400.00 deduction. (P250,000 = P2,400 H/P)


Inclusions in the Gross Income: *salary, wages, commissions *overtime pay *COLA *Voluntary Separation Pay * Prizes not more the Php 10,000.00

Exclusions in the Gross Income: *Contribution to SSS, Pag-Ibig and Union Dues *compensations for Injuries/ Sicknesses *Gifts, Bequests, Devices *Qualified Pension Plan Benefits *Return on Premium * Involuntary Separation Pay

Special Treatment of Excluded Income 1. 13the month and other benefits not more then Php 30,000.00 2. De Minimis 3. Fringe benefits 4. Subject to Final WT

Mainstream Formula: Gross Income Less: Deductions and exemptions Net Income/ Taxable Income

*Estate tax – tax on the act of donating properties; tax on the privilege of succession. 1. you can donate today. 2. you can donate when you die → subject to estate tax

Trust – income of Trust is subject to income tax, entitled to Php 20,000 deduction (single individual). Condonation – indebtedness, originally the contractor wanted to be paid but it was donated to him.

Mode of Acquiring Ownership: 1. Intellectual Creation 2. Occupation – literally taking over property not owned by anyone (hunting, fishing, acquisition by occupying, hunting, fishing) 3. Prescription – through the lapse of time a person can own the property → public alienable land 4. Onerous – onus – burden (before you can acquire you have to pay, barter or exchange)


5. Gratuituos – transfer given for free without any material considerations. (gratuitous transfer a.k.a. donation) ***onerous and gratuitous – more common

Essential Requisites of Contract: 1. subject matter 2. cause

Donations (Gratuituos) – gratuitous transfer of property → without material considerations 1. Inter Vivos – take effect now → Donor’s Tax (during his lifetime) 2. Mortis Causa – takes effect after death → Estate Tax

4 elements of succession: 1. Estate – mass of properties left by the decedent 2. Decedent – person who died and whose properties are subject matter of succession. 3. Heir – person called upon to succeed. 4. Property – all kinds of properties – real/personal/intangible/tangible

Succession – coming from down under/ below and replacing someone; significant manner of taking over property; mode of acquisition by virtue of which the properties, rights and obligations, to extent of the value of the inheritance of a person who are transmitted or acquired either by will or by operation of law.

Relevance to the study of the Estate Taxation: 1. Testate/ Testamentary – takes place when the decedent left a will(WILL); when there is a valid will which would be the basis of distribution. Valid Will: a. Published Will – typed (other then your own handwriting, pagination, notarized, swear in the present of 2 instrumental witnesses). b. Holographic Will – handwriting (own handwriting of the testator in its entirety, duly signed and dated.) 2. Intestate – takes place when the testator left no will/ left no valid will (NO WILL); law will choose as to whom they will give the properties 3. Mixed Succession – some of the properties are in the will and the rest are not in the will. There is a valid will but in it, not including some properties. *Animus Testandi – intent to have / make a will *Probated –bring the will to the court and the court will determine if it’s a valid will - process of proving the validity of the will in court. * Legitime – portion of property reserved for compulsory heirs. * Compulsory heirs/ Forced Heirs – names have to be in the will a. children


b. parents c. spouse d. descendants *Preterition – completely took out a forced heir from the will, must be given. * Share of the Legal Child – ½ the state *Share of the Spouse – share that is equal to one child.

Formula in computing for Estate Tax:

Gross estate (properties of the descendant when he died) Less: deduction (supported by documents) Net Estate/ Net Taxable Estate = Estate Tax due = ETD

*Filipino Citizen (Resident/ Non-Resident/Alien Resident) – world, all properties included must be subject to estate tax *Alien Non resident – Philippine properties are only included in the gross estate

Inclusion – included properties if its not owned by the decedent at the time of death.

Included in the computation of gross estate: 1. Transfer in contemplation of death – if the decedent transfer the property (sale) because he knew he was about to die then it is still part of the estate tax. 2. Revocable transfer – fair market value at the time of death. 3. Usufruct – use of the property (as long as decedent is alive) 4. Properties Passing Under the General Power of appointment (Special Power of Attorney – Agency) 5. Proceeds of Life Insurance →Contact of Insurance – person undertakes to indemnify another

***If the decedent was married at the time of his death and there were conjugal/ community properties, then all conjugal/ community properties must be included in the gross estate of the decedent.

Conjugality/ Community – concept of co-ownership (owner of 50% of the property of your own right) – (50-50 owned by the spouses) - co-owner of every nook and corner - death of spouses, annulment, legal separation - if you see a conjugal property include it in the gross estate of the decedent.

Three kinds of property relationships between Husband and Wife (when is the property conjugal?)


1. System of absolute Community – al properties acquired before and during the marriage are deemed to be conjugal/ community properties except those earned/ acquired during the marriage exclusively by one of the spouses by virtue of the gratuitous title (donation). In the absence of a valid agreement this will be the one followed. (notarized) 2. Conjugal Partnership of Gains (Pre-nuptial agreement) – only properties earned/ acquired during marriage except those earned by the spouse exclusively during the marriage by virtue of gratuitous title by either spouses is deemed conjugal. - notarized pre-nuptial agreement –public document/ instrument - has to be done / entered before the marriage is celebrated 3. Complete Separation of property – each to his own.

All conjugal properties are included in the Gross Estate. When the decedent dies and there are existing conjugal properties then include it in the estate.

*Paraphernal - exclusive property of the wife. 8 Capital – exclusive property of the Husband

All conjugal property should be included in the property but in the end the Net Share of the Surviving Spouse is deducted.

Gross Conjugal Property Less: Deduction (changes that were made from the Conjugal Properties) Net Conjugal Property Divide: by 2 (two) Net Share of the Surviving Spouse

Changes against Conjugal Property → if the M.E. and J.E. were charged to the conjugal property then deduct it from the computation of NSSS (Net Share of Surviving Spouse) and not from the Gross Expense. It all properties are conjugal properties, then Gross Expense and Conjugal Properties are the same. NSSS → to be deducted from the G.E. among other deductions.

DEDUCTIONS TO GROSS ESTATE: 1. Ordinary Deductions – it pays to know your deductions, it pays to keep the receipts (deduct from the gross estate), it must be actually incurred provided they are proven and supported by documents. a. Funeral Expenses – burial, coffin, food, tombstone 5% of the gross estate, but in no case to exceed Php 200, 000. b. Judicial Expenses – expenses incurred in connection with the settlement of the estate, its not easy to settle the estate c. Claims Against Insolvent Persons (people who can’t pay) d. Claims Against Estate – indebtedness of decedent


e. Losses, Ship Wreckers, Fortuitous Events (not compensated by insurance) f. Taxes (Real Property Taxes) – incurred before the death of the decedent. g. Unpaid Mortgages 2. Family Home – last known residence of the decedent at the time of his death, fair market value but not to exceed Php 1,000,000. If conjugal you can only deduct ½ of the amount. Certification from the baranggay captain (presumed to be familiar with the residents of his baranggay) 3. Standard deduction: of Php 1,000,000.00 (to fight inflation); out of deductions 4. Medical Expenses – last know illness of the decedent for which he died → not to exceed P 500,000 5. Transfer for Public Purposes – donate to government to take effect upon his death, only possible with testamentary succession. 6. Vanishing Deduction – to ease the harshness of successive transfer taxation → “Property Previously Taxed” → amount with the law allows to be deducted from the gross estate of a present decedent over a property which was the subject mater of a gratuitous transfer with in a period of 5 years. Requisites for Applicability of Vanishing Deductions: a. Present decedent must have died with in a period of 5 years from the date of the 1st donation b. Property must be identifiable c. Property must have formed part of the gross estate or gross gift of the prior donor d. Previous estate/ donors tax must have been paid e. No previous vanishing deduction must have been allowed, can only claim vanishing deduction once.

Formula for vanishing Deduction: 1. Initial value – fair market value at the time of the 1st gratuitous transfer compared to the fair market value at the time of the 2nd gratuitous transfer, which ever is lower will be the initial value. 2. Initial Basis – deducting from the I. V. an mount either that had diminished the value of the property (encumbrances, mortgage indebtedness → burden that must be settled)

Initial Basis = Initial value Less: Mortgage Indebtedness/ Encumbrances Initial Basis

3. Initial Basis = Initial basis Less: (( Initial Basis/ Gross Expenses) * ELITTP) Final Basis

4. Final Basis Final Basis


* Rate Vanishing Deduction

ELITTP – Expenses, Losses, Indebtedness, Taxes, Transfers for Public Purpose (if any) ELIT – ordinary deductions

The longer time elapses, the deduction vanishes until it becomes 0.

VANISHING DEDUCTION TABLE:

w/in 1 year > 1 year <= 2 years > 2 years <= 3 years > 3 years <= 4 years > 4 years <= 5 years

→ 100% → 80% → 60% → 40% → 20%

Estate Tax Credit (E.T.C.) – deductible for Estate Tax Due, not Gross Expense *The decedent left properties outside the Philippines and he was charged either estate tax in the country where the property is located. *Double Tax *We don’t have control over where the tax is imposed a. Estate Tax Paid in the Foreign Country (F.C.) = Php _______ b. ((Net Taxable Estate in the F.C./Net Taxable Estate in the World) * Phil. Estate tax) = Php ___

Which ever among the 2 is lower will be deducted from the Estate Tax Due.

*Admin Provisions – filing notices Two types of Notices to file when there is death in the family: 1. Notice of Death (N.O.D.) 2. Estate Tax Return (E.T.R.) - w/ in 6 months

*When a person leaves at least Php 20,000, NOD has to be filed in 2 months. *ETR has to be filed when G.E. is more than 200,000, regardless of the nature of the property. If the property is less than P 20,000 but there is registrable property (land [land of deeds]/ car [LTO]) you still have to file an ETR. *For Gross expenses exceeding Php 2,000,000, certification/ statement duly certified by a CPA that is the ETR → must be filed with in 6 months after the decedent’s death subject to extension.

Donor’s Tax +tax on donations intervivous only


+doesn’t apply to donations mortis causa because that is subject to Estate Tax +Without any material considerations (donation) +there are certain onerous transfers that are subject to Donors Tax → exception

*Land worth Php 1M and you sold it for Php 500,000 (insufficient consideration) → transfers for insufficient consideration → pay Donor’s Tax for the remaining Php 500,000.

Gross Gift Less: Deductions Net Gift → Tax Due (table to get the Donor’s Tax Due)

*Filipino citizen whether donating or not, whether residing or not → included in the Gross Expenses *Alien Residents – only property in the Philippines → include in the Gross expense *Alien Resident – any land in the world

Donations – mode of acquiring ownership

Void donations – no effect

1. Donations between Spouses – against law and public policy [donations between common law spouse are void] 2. Donations in consideration of the commission of a crime 3. Donations to public officials – bribes

Deductions to Donor’ Tax: 1. Donations Propter Nuptias (donation on the amount of marriage) – donate to person getting married. Requisites: a. in consideration of marriage b. before celebration or w/in 1 year thereafter c. only allowed to parents who are making a donation to their children (legitimate, adopted, recognized, natural) d. Property must be located in the Philippines e. Deductions is only Php 10,000.00 f. If conjugal property is to be donated, eachparent can each get Php 10,000.00 each. 2. If you donate to the government/ charitable or educational institutions → tax exempt - deduction from Gross Income → transfers for public purpose - donations itself is exempted from Donor’s Tax (full tax exemption)


3. Encumbrance/ Any amount that diminishes the value of the property → mortgage indebtedness

Distinction between very 1st donation in calendar years and the other donations:

Formula of the Donor or Donees are relatives: 1st donation Gross Gift Less: Deduction Net Gift → donors tax due

2nd donation Gross Gift Less: Deductions Net Gift Add: Previous Net Gift Aggregate Net Gift

Aggregate net Gift = Donors Tax Aggregate Net Gift Less: Donors Tax previous Period Donors Tax Due On this Date

Formula if the Donors and Donees are strangers → compute separately Net Gift *30% Donors Tax Due

Stranger is one who is NOT: 1. A brother/ sister/ascendant/descendent 2. a relative by consanguinity in the collateral line (not direct) with in the 4th civil degree of the relationship → relative by blood

Stranger is someone in the 5th, 6th or 7th degree of consanguinity. VAT – Old Sales tax Law (nomenclature – changed the name) – 1988 - changed the name, remove the classification/ confusion, lower the rates to the 10% of the gross selling price, remove the distinction between the 3 classification of goods. - Old sales tax law, tax on sales, name and classification was changed, VAT reduced rates

3 Classification of Goods: 1. Essential – 10% 2. Non-Essential – 30%


3. Ordinary Goods – 20%

*Original sale – first time you introduce a product to the market *subsequent sale – 0.05% -cascading tax * sweethearts deals/ transactions

VAT – three transactions subject to VAT 1. tax on sale of goods in the course of the business 2. sale of services in the course of business 3. importation of goods whether or not in the course of business

Sales Transactions (transactions that are deemed sales) 1. Withdrawal of substantial amounts of goods meant for business 2. Retirement from business 3. Distribution of property dividends

Deductions from Gross Selling Price → sales Returns and Sales Discount (allowed to be deducted) *Zero Rated/ Exempt Transactions/ 0

Output Tax Less: Input Tax Vat payable → meant to hit consumers

Sellers of good and services and importers

Tax Credit – essence of VAT Tax Credit Method – there are zero rated transactions

Special People are exempted from VAT → Zero rated transactions 1. exporters 2. exporters of goods 3. selling Gold to BSP 4. selling raw materials to export oriented companies 5. services to international shipping lines

Exempt Transaction: *Exempt – not entitled to a tax credit, essential goods, agricultural and essential goods (meat, chicken, poultry, pork, beef, all agricultural products, vegetables, sea food products) *Basic Exemptions should be exempt from VAT. “in their original state”

Other Exempt Transactions:


*if gross selling price doesn’t exceed P550,000/ year you have the option not to be subject to tax *VAT tried to Minimize Tax Evasion → do away with the underground economy and monitor all transactions, main feature of VAT is Tax Credit, you will only enjoy VAT if before the 2nd term, 3% of the selling price if SME’s. *Basic Services – medical, dental petroleum, etc.

Other percentage Taxes/ Subject to % Taxes – other transactions that are subject tot his kind of tax: 1. Exempt VAT because gross receipts don’t exceed P550,000 and they opt to pay 3% 2. Domestic Carriers (buses, airplanes, jeeps) 3. International Carriers 4. Franchise Stock (for those who have franchises of Public utilities) 5. Banks and other financial companies 6. Overseas Communications Tax - tax on the communication originating from the Philippines (long distance calls) - subject to tax of 10% of amount paid, only for those originating in the Philippines 7. Tax in certain winnings, stock transactions and brokers

Sin Taxes – subject to excise tax, imposed on manufacturers/ importers of these goods, you don’t have to sell. Only when the government agencies declare. People in the possession of goods which are supposed to be subject to excise taxes but are not paid.

Items subject to excise taxes: 1. Alcohol products 2. Tobacco products 3. Automobiles 4. Mineral Products 5. Manufactures of Oils and Fuels 6. other non-essential Goods

*Payment is dependent on the volume/ capacity *Tax is due as soon as the goods come into existence. The goods become liable to tax.

Documentary Stamp Tax - tax on documents (affidavit, bank checks, deeds of sales, stock certificates, etc.) - depending on the amount effects on non-payment: document will not be accepted as evidence in court.

Community Tax Certificate – based on residence/ community tax.


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