taxation} tax i
TRANSCRIPT
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 1/81
TAX NOTES (LEGAL GROUND)
Lectures of Atty. Japar B. Dimampao
Supplement Bar Material
STATE POLICY
Declared Policy of the State: (CodeRD!"N)
1) to promote sustainable economic growth through the rationalization of the Philippine
internal revenue tax system, incluing tax aministration!") to provie, as much as possible, an e#uitable relief to a greater number of taxpayers in
orer to improve levels of isposable income an increase economic activity!
$) to create a robust environment for business to enable firms to compete better in the
regional as well as the global mar%et!
&) the State ensures that the 'overnment is able to provie for the nees of those uner its
(urisiction an care
T#E !$I$R$
1) Po%er& a'd dtie& of the !IR$
*he B+ shall be uner the supervision an control of the -./ an its powers an uties
shall comprehen: (CODE ACE"P)
1) the assessment!
") collection of all national internal revenue taxes, fees, an charges!
$) the enforcement of all forfeitures, penalties, an fines!
&) execution of (ugments in all cases ecie in favor by the 0* an orinary courts
2) give effect an to aminister the supervisory an police powers conferre to it by the
0oe an other laws
") PO*ERS of the Co++i&&io'er of the I'ter'al Re,e'e$
1) to interpret tax laws an to ecie tax cases 3Sec &)!
") to obtain information an to summon, examine, an ta%e testimony of persons 3Sec 2)!
$) to ma%e assessments an prescribe aitional re#uirements for tax aministration an
enforcement 3Sec 4)!
&) to elegate powers 3Sec 5)!
2) to aminister oaths an ta%e testimony 3Sec 1&)!
4) to ma%e arrests an seizures 3Sec 12)!
5) to assign or re6assign internal revenue officers 3Sec 14 7 15)
RE-UISITES O. A /ALID TAX REGULATION 38+M+**+.9 ./ *; P.<; *.
+9*;P;* *= 8<S)
1) +t must be consistent with the provision of the *ax 0oe") easonable
$) >seful an necessary
&) +t must be publishe in the official gazette or in the newspapers of general circulation
SOURCES O. RE/ENUES
The following taxes, fees and charges are deemed to be national internal revenue taxes :
(CodeIE/PEDO or E/E"PIDO)
1) +ncome tax!
") ;state an onor?s taxes!
$) @alue6ae tax!
&) .ther percentage taxes!
2) ;xcise taxes!
4) -ocumentary stamp taxes! an5) Such other taxes as are or hereafter may be impose an collecte by the Bureau of
+nternal evenue
INCO0E TAX
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 2/81
.EATURES O. OUR PRESENT INCO0E TAXATION
- <hat are the features of our present income taxation in the light of A&"&
A$ <e aopte the so6calle C!"#$%&%'()*% TA+ ()T( D E 0omprehensive in the sense
that we practically apply all possible rules of tax situs
Criteria &ed (Code R$ P$ N$)a) Residency of taxpayer!
Situations where we utilize resiency as basis:
1) <e tax the income of a resient alien erive from sources within the Philippines
") <e also tax the income from sources within of resient foreign corporation in the
Philippines
b) Place/Source
>se as a basis in taxing the income of a non6resient alien iniviual <e can only tax his
income erive from sources within an in taxing the same, we consier the place where the
income is erive
c) Nationality or Citizenship in the case of individual taxpayer <e use that as a basis in imposing tax on the income of a resient citizen Resident citizen
may be taxe from his sources within an without *he source of income here is immaterial what
we consier is the nationality or citizenship of the taxpayer
Domestic corporation E we can tax its income erive from sources within an without
.n Non-resident citizen, they can only be taxe on their income erive from the sources
within E tax situs is the place Fsource of income
Ta12ayer Sorce&
1 0 +F. 3Sec "$ GH)
" 90 + 3Sec "$ GBH)
$ .0< + 3Sec "$ G0H)
& 8+;9
&1 96;*B
&" 969;*B
&$ 8+;9 ;6M90 && 8+;9 .B>s
&2 8+;9 PS0S
+ 3Sec "$ G-H)
2 -omestic 0orp + 3Sec "$ G;H)
4 /oreign 0orp6/0F9/0 + 3Sec "$ G/H)
1) resident citi-en is taxable on all income erive from sources within an without the
Philippines
") nonresident citi-en is taxable only on income erive from sources within the
Philippines
$) n overseas contract wor/er is taxable only on income from sources within the
Philippines! a seaman who is a citizen of the Philippines an who receives compensation
for services renere abroa as a member of the complement of a vessel engage
exclusively in the international trae shall be treate as an overseas contract wor%er
&) n alien individual , whether a resient or not of the Philippines, is taxable only on
income erive from sources within the Philippines
2) domestic corporation is taxable on all income erive from sources within an
without the Philippines! an
4H foreign corporation, whether engage or not in trae or business in the Philippines, is
taxable only on income erive from sources within the Philippines
I'co+e Ta1atio' +ay 3e 4ro2ed i'to
"
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 3/81
1) iniviual income taxation
") corporate income taxation
- What are the basic features of individual taxation (S$P$ .$ E$ 0$)
A
5) +niviual income taxation aopte the Schedlar &y&te+ of ta1atio'
Schedlar Sy&te+ of Ta1atio' E is a system employe where the income tax treatment
varies an mae to epen on the %in or category of the taxpayer?s taxable income (an vs! Del
Rosario"!
Characteristics of schedular system of taxation:
a) +t gives or accors ifferent tax treatment on the income of iniviual taxpayer
b) +t classifies income
#anifestations$ 3that uner the iniviual taxation we aopte the scheular system of
taxation)
6C7 !7 P7 D27 I7 R7 R7 D7 A7 P%7 P7 P8
>ner Sec $"3a), income may be categorize as follows:
1) compensation income,
") business income,
$) professional income,&) income erive from ealings in property,
2) interest income,
4) rent income,
5) royalties,
A) iviens,
I) annuities,
1J) prizes,
11) winnings,1") pensions, an
1$) partner?s istributive share from the net income of the general professional partnership
*his is the manifestation that as far as iniviual income taxation, the income is
categorize
98 *he ta1 rate& are 2ro4re&&i,e i' character *his is clear uner Sec "& 3a) Kou will notice
there that the tax base increases as the tax rate increases
:8 0odified 4ro&& i'co+e a& re4ard& co+2e'&atio' ear'er Moifie because in eterminingthe taxable compensation income, the only allowable euctions are personal an aitional
exemption Kou cannot euct the allowable euctions uner Sec $& from gross compensationincome
But as regars those iniviual taxpayers that erive business, trae or professionalincome, we aopte the 'et i'co+e &y&te+$ *his is so because uner Sec $&, allo%a3le
dedctio'& may be claime by iniviual taxpayers who erive business trae an professional
income
;8 <e employ this CPay a& yo .ileD system
<8 >ner certain cases, we employ the C2ay a& yo ear'D system *his applies to Cincome
su%&ect to 'ithholdin tax)!
-$ <hat are the basic features of corporate income taxationA$
58 Glo3al Co'ce2t has been aopte LLL 'lobal system where the tax treatment views
inifferently the tax base an treats in common all categories of taxable income of taxpayer 3*an
vs -el osario)
Characteri&tic& of Glo3al &y&te+ of Ta1atio'
$
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 4/81
a) *niform tax treatment E this is sub(ect to iminishing corporate tax rates of $& 3Nan 1,
1IIA), $$ 3Nan 1, 1III), $" 3Nan 1, "JJJ) See 0hapter +@, Sec "5)
b) Does not cateorize income
98 orporate taxpayer, particularly domestic corporations are entitled to deductions So, insofar
as omestic corporation an resient foreign corporation is concerne, we aopte here the netincome tax system
9ew provisions uner A&"&: 1J tax on improperly accumulate earningsof a corporate taxpayer
:8 Pay a& yo file &y&te+ has also been employe
0orporate taxpayer is allowe to aopt calenar or fiscal year perio 0orporate
taxpayer files corporate income tax return #uarterly n it also files the so6
calle /+98 -N>S*;- ;*>9
+n the case of iniviual taxpayer, the payment shoul not be later than pril 12
of every taxable year +niviual taxpayers are not allowe to aopt the so6calle
/+S08 K; P;+.-
O +ndividual taxpayers are allowe to aopt only the calenar year perio while corporate
taxpayers have the option either the calenar year perio of the fiscal year perio
Cale'dar year 2eriod E this covers the perio of 1"6month commencing from Nan 1 an ening
-ec $1
.i&cal year 2eriod E this is also a 1"6month perio commencing on any month or ening on any
month other than -ec $1
DE.INITION O. CERTAIN TER0S
GROSS INCO0E TAXATION E is a system of taxation, where the income is taxe at gross
*he taxpayers uner this system are not entitle to any euctions
+n general, we aopte the 'et i'co+e ta1atio' because uner Sec $&, taxpayers are allowe to
claim the so6calle 88.<B8; -;->0*+.9S
GROSS INCO0E E means all income erive whatever source, incluing but not limite to thefollowing: 6STP"IRR"DAP"PS8
1 0ompensation for services!
" 'ross income from trae or business or the exercise of a profession!
$ 'ains erive from ealings in property!
& +nterests!
2 ents!
4 oyalties!
5 -iviens!A nnuities!
I Prizes an winnings!
1J Pensions! an
11 Partner?s istributive share from the net income of the general professional partnership
NET INCO0E TAXATION E income is taxe at net *he taxpayer may claim allowableeuctions
INCO0E E all wealth which flows in the taxpayer other than a mere return of capital +t inclues
all income specifically escribe as gain or profit incluing gain erive from the sale or
isposition of capital asset
,*D+C+. D0+N++1N : +t also means gains erive from 31) capital, 3") labor, or 3$) both labor
an capital incluing gains erive from the sale or exchange of capital asset
.OUR (;) Sorce& of INCO0E= 6Cla!S8
a 0apital
b 8abor
c Both labor an capital
&
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 5/81
Sale of property
;xample of income erive from capital LLL +nterest +ncome
;xample of income erive from labor LLL 0ompensation +ncome
;xample of income erive from both capital an labor LLL +ncome of an inepenentcontractor *he inepenent contractor provies wor% force, provies capital an erives income
from such capital
O +n determinin the profit from the sale of property, you shoul always be guie by this
formula:
mount eceive .r ealize 8;SS 0ost of Property P./+*
TAXA!LE INCO0E E 3the ol term is 9et +ncome) E means all pertinent items of gross
income specifie in the *ax 0oe le&& the euctions anFor personal an aitional exemptions,
if any, authorize for such types of income by this 0oe or other special laws 3Sec $1 of the
* of 1II5)
Shoter @ersion: ll pertinent items of ross income less allo'a%le deductions!
-$ <hat are the avantagesFisavantages of gross income taxation an net income taxation
Advantages of gross income taxation0
1 +t simplifies our income taxation *his is so because since no euctions are allowe, it is very
easy to tax the income Kou on?t have to fin out whether euctions or expenses are legitimate
or not because they are not euctible
" *his will generate more revenue to the government
$ +t minimizes cost
Disadvantages of gross income taxation0
1 s far as the taxpayer is concerne, this is ine#uitable because they cannot claim the expenses,
which are incurre in connection with his trae or business or exercise of his profession
" n if this is the system, in all li%elihoo the taxpayers will lose interest to earn more +t will in
effect reuce the purchasing capacity of the taxpayer
$ Since taxpayers cannot claim those legitimate expenses as euctions, they may resort to
frauulent scheme that will minimize their tax ability an this may be one through the
unerstatement of income So, in effect, this will encourage tax evasion
Advantages of net income taxation0
1 s far as the taxpayer is concerne, they will consier this as e#uitable an (ust system
" *his will minimize tax evasion because examiners will be employe to chec% whether
expenses are correct or not
$ *he conse#uence of no " is that this will generate more revenues
Disadvantages of net income taxation0
1 vulnerable to graft an corruption
" vulnerable to tax evasion
$ will give rise to loss of revenues
SOURCES>SITUS O. INCO0E
n income may be an income from within or without the Philippines *he other term for
income within is .ocal +ncome while income without is sometimes calle 2lo%al +ncome or*niversal +ncome
+n determinin 'hether an income is an income 'ithin or 'ithout3 you have to consider
the classification or 4ind of income!
CLASSI.ICATION O. INCO0E 6C7 !7 P7 I7 R7 R7 D7 A7 P7 P7 P81 0ompensation income from services
2
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 6/81
" +ncome erive from business, trae or profession E in this regar, the common forms of
business are merchanising business, farming business, mining business an manufacturing
business
$ +ncome from sale or exchange of property 3either real or personal property)
& +nterest +ncome2 ent +ncome
4 oyalties5 -iviens, which may be receive from omestic or foreign corporation
A nnuities
I Prizes an winnings
1J Pensions
11 Partner?s istributive share in the net income of general professional partnership 3Professional
income of a partner)
? CO0PENSATION INCO0E
*ax Situs: Place 'here services are rendered So, if services are renere within the Phils, that
is a 8ocal +ncome +f it is a payment for services renere outsie the Phils, that is an income
without
0 E income from within an without are taxable 90 E only compensation income from sources within is taxable
E same as 90
? !USINESS INCO0E 60: .8a) Merchanising Business
b) /arming Business ax Situs$ Place 'here these
c) Mining Business %usiness are underta4en
) Manufacturing Business
ax Situs$
31) if the goos are manufacture in the Phils n sol within the phils *his is consiere as
income derived purely within!
3") 'oos manufacture outsie the Phils an sol outsie E income derived purely without.
3$) 'oos manufacture within the Phils an sol outsie the Phils E income partly within and
partly without.
3&) 'oos manufacture outsie the Phils an sol within the Phils E income partly within and
partly without.
? INCO0E .RO0 SALE OR EXC#ANGE O. PROPERTY
+f it involves personal property, in etermining the tax situs, we have to consier
the place of sale
+n the case of sale of transport documents, tax situs is the place where the
transport ocument is sol 3B.0 0ase)
+f it involves real property, the tax situs is the place or location of the real
property So, if the property sol is situate within the Phils, the income erive
from such sale is consiere as income within
? INTEREST INCO0E
*ax Situs: RS+DNC of the D51R
Case$ *here was this contract regaring the construction of ocean6going vessels *here was this
issuance of letter of creit an the payment of ownpayment ll the elements of the transactionstoo% place in Napan *he payment was mae in Napan *he letter of creit was execute in Napan*he elivery was mae in Napan *he de%tor is a domestic corp
+s the interest income on this loan evience by the letter of creit taxable to the Napanese
corp
4
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 7/81
6.D$ '!, because the tax situs of interest income is not the activity %ut the residence of the
de%tor! he place 'here the contract of loan is executed is immaterial!
? RENT INCO0E*ax Situs: the P.C of property su%&ect of the contract of lease!
? ROYALTIES*ax Situs: the P.C 'here the intani%le property is *SD
? DI/IDENDa Received from domestic corp E this is an income purely within
b Received from forein corp E consier the income of the foreign corp in the Phils uring the
last preceing three 3$) taxable years!
rules$31) *he income is purely 'ithin if the income erive from the Phil sources is more than A2
3") +t is purely 'ithout if the proportion of its Phil income to the total income is less than 4J
3$) here should %e an allocation if it is more than 2J but not exceeing A2
? ANNUITIES
*ax Situs: the P.C 'here the contract 'as made
? PRI@ES AND *INNINGS
Prizes may %e iven on account of services rendered E in which case, the tax
situs is the 2lace %here the &er,ice& %ere re'dered
+f these prizes are not iven on account of services, the tax situs is the 2lace
%here the &a+e %a& 4i,e'
ax situs of 'innins is the place where the same was given
?PENSION*ax Situs: P.C 'here this may %e iven on account of services rendered
?PRO.ESSIONAL INCO0E O. PRO.ESISONAL PARTNERS
*ax Situs: P.C 'here the exercise of profession is underta4en
GROSS INCO0E
GROSS INCO0E E means all income erive from whatever source, incluing but not limite
to the following:
)'L()!'0 6code STP"IRR"DAP"PS8
1 compensation for services
" gross income from trae or business or the exercise of a profession
$ gains erive from ealings in property
& +nterests
2 ents
4 oyalties
5 -iviens
A nnuities
I Prizes an winnings
1J Pensions an
5
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 8/81
11 Partner?s istributive share from the net income of the general professional partnership (Sec!
78 of R of 9::;"
%+L()!'( 6code LAGCIR08
1 procees of life insurance policy" amount receive by the insure as return of premium
$ gifts, be#uests, evises or escent& compensation for in(uries or sic%ness
2 income exempt uner treaty
4 retirement benefits, pensions, gratuities
and others: (.7 /7 R7 S7 S7 G)
a retirement benefits receive from foreign institution whether public or private
b veteran?s benefits
c retirement benefits receive from private firms whether iniviual or corporate
separation pay
e SSS
f 'S+S
5 miscellaneous items:
a prizes an awars given in recognition of religious, charitable, scientific, eucational,artistic, literary, or civic achievements
0.9-+*+.9S:
1 the recipient was selected 'ithout any action on his part to enter the contest or
proceeing" the recipient is not re<uired to render su%stantial future services as a conition to
receiving the prize or awar
b income erive by the government or its political subivisions from the exercise of any
essential governmental function or from any public utility
c income erive from investment in the Philippines by foreign government or financing
institutions
prizes an awars in sports competitions
e gain erive from the reemption of shares of stoc% issue by the mutual fun companyf contributions to 'S+S, SSS, P'6+B+', an union ues
g benefits in the from of 1$th month pay an other benefits
h gain erive from the sale, exchange, retirement of bons ebentures or other certificate of
inebteness with a maturity of more than five 32) years 3Sec $" 3b), * of 1II5)
?ALLO*A!LE DEDUCTIONS
1 1ptional Standard Deduction E of ten percent 31J) of the 'ross +ncome available only to
iniviual other than a non6resient alien provie he signifies in his return his intention to elect
.S-, otherwise, itemize euctions apply ;lection mae shall be irrevocable for the taxableyear 3Sec $& 8)
" +temized Deductions E uner Sec $& 6Q, an M$ Personal and dditional Deductions/xemptions under Sec! 7=
? ITE0I@ED DEDUCTIONS 6code ELIT"!DD"CRC8
1 expenses
" loses
$ interest
& taxes
2 ba ebts
4 epreciation
5 epletion of oil, gas wells an mines
A charitable an other contributions
I research an evelopment1J contribution to pension trust
? NON"DEDUCTI!LE ITE0S
1(ec. 23 A4
1 Personal living or family expenses!
" mount pai for new builings or permanent improvements, or betterment to increase the
value of any property or estate!
A
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 9/81
$ ny amount expene in restoring property or in ma%ing goo the exhaustion thereof for
which an allowance is or has been mae! or
& Premiums pai on any life insurance policy covering the life of any officer or employee, or of
any person financially intereste in any trae or business carrie on by the taxpayer , iniviual
or corporate, when the taxpayer is irectly or inirectly a beneficiary uner such policy
1(ec. 23 B4 .osses from sales or exchanes of property directly or indirectly >1 Between members of a family 3brother, sister of half or full bloo, spouse, ascenant, lineal
escenants)!
" ;xcept in case of istributions in li#uiation, between an iniviual an a corporation E more
than 2J in value of the outstaning stoc% of which is owne irectly, by or for such an
iniviual! or
$ ;xcept in case of istributions in li#uiation, between two corporations E more than 2J in
value of the outstaning stoc% of each of which is owne, irectly or inirectly, by or for same
iniviual, if either one of such corporation is a personal holing company or a foreign personal
holing company! or
& Between the grantor an a fiuciary of any trust! or
2 Between fiuciary of a trust an the fiuciary of another trust, if the same person is a grantor
with respect to each trust! or4 Between a fiuciary of a trust an a beneficiary of such trust
TAXA!LE INDI/IDUALS
RESIDENT CITI@ENS (RC)
+ncome from 'ithin and 'ithout E taxable
NON"RESIDENT CITI@ENS (NRC)
+ncome from 'ithin
When an NRC returns to the Phils!3 his income may also %e taxed as ResidentCitizen or Non-Resident Citizen!
+llustration$ , an .0<, arrive in the Phils sometime in Nune 1IIA e will be taxe as a 9on6
esient 0itizen 390) as regars the income that he earne which covers the perio of Nanuary
to Nune 9ow as regars the income that he will erive upon his arrival from Nune to -ecember,
he will be taxe as esient 0itizen 30)
5ut if he is not in the Phils from the perio of Nanuary to -ecember 1IIA, he will be taxe as
90 for the sai perio
+f he will return to the Phils an stay there from Nanuary t -ecember 1III, he will be taxe as
0 for the same perio
? NRC must prove to the satisfaction of the 5+R Commissioner the fact of physical presence
a%road 'ith the intention to reside therein!
? When an NRC decides to return to the Phils!3 he must prove his intention to reside here
permanently!
? No' NRC includes 1@RSS C1NC W1RARS (1CW"3 +##+2RNS3 and those 'ho
SB 1*S+D the Phils! %y virtue of an employment!
RESIDENT ALIEN (RA)1 n iniviual who is not a citizen of the Phils but a resient of the Phils
O +nclues those who consier the Phils as a secon home
OOO ransient tourist who (ust so(ourn, their stay is merely temporary, thus may not be
consiere as
O +f an alien stays in the Phils! for a period of more than one (9" year3 he is considered as R!
SPECIAL NON"RESIDENT ALIEN ENGAGED IN TRADE OR !USINESS (NRA"NET!)
I
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 10/81
O e must be an alien iniviual who is not resiing in the Phils an not engage in trae or
business in the Phils
O 6e is one 'hose stay in the Phis!is not more than 9 days
SPECIAL NON"RESIDENT NOT ENGAGED IN TRADE OR !USINESS (SNRA"NET!)
5 Those employed by0 (ROP)1 egional or rea ea#uarters of Multinational corporations!
" .ffshore Ban%ing >nits!
$ Petroleum Service 0ontractors
NON"RESIDENT ALIEN ENGAGED IN TRADE OR !USINESS (NRA"ET!)
E considered as enaed in trade or %usiness if his stay is more than 9 days
L <e can no longer tax his income from sources without <e can only tax his income from
sources within
ENTITLE0ENT O. DEDUCTIONS
RC E entitle to euctions because the tax base is taxable income
'ross +ncome
8ess: llowable euctions
*axable +ncome
NRC E entitle to euctions because the tax base is taxable income
RA E entitle to euctions because the tax base is taxable income
NRA"T! E entitle to euctions because the tax base is gross income *heir income is sub(ect to"2 tax rate
SNRA"NET! E sub(ect to 12 tax rate on their income in the from of:
S 6 Salaries
# 6 onoraria
O 6 .ther
* 6 <ages
E 6 ;moluments
R 6 emuneration
EXCLUSION .RO0 GROSS INCO0E
PROCEEDS O. LI.E INSURANCEB
(ub6ect to tax if 0
1 the insurer an insure areed that the amount of the procees shall be withhel by the insurer
with the obligation to pay interest in the same, the interest is the one su%&ect to tax!
" there is transfer of the insurance policy!
xample$
transferre to B his life insurance policy *he value of the policy is P1 M B pai a
consieration amounting to P$JJ,JJJ B continue paying the premiums after the transfer suchthat the premiums amounte to P"JJ,JJJ >pon the eath of the insure, the P1 M may be
receive by the heirs
-$ +s the full amount of P1 M exempt
A$ 9., only the consieration given an the total premiums pai may be exclue *hat is, P1 M
less P2JJ,JJJ
1J
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 11/81
Pro%lem$
obtaine a life insurance policy for B B is the presient of ?s corporation 0orp has
an insurable interest in the life of its officers, so premiums may be pai by the employer >pon
the eath of B, his esignate beneficiaries will receive the procees
a +s the amount representing the procees of the life insurance policy taxable
b <hat about the premium pai by the employer -oes this amount form part of thegross compensation income
c -oes the amount representing the procees of life insurance policy from part of the estate
of the eceent
ns'ers$
a 8et us first ma%e t'o (8" assumptions 8et us assume that:
1 the beneficiary esignate is the employer!
" the beneficiary esignate is the heir of the family of the insure
he ax Code ho'ever3 ma4es no distinction! Reardless of the desinated %eneficiary isthe employer or the heirs3 or the family of the insured proceeds of life insurance policy should
al'ays %e excluded!
b Premiums of life insurance policy pai by the employer may form part of compensationincome! hence, taxa%le if the %eneficiary desinated are the heirs or the family or the
employees
+t is not taxa%le compensation income if the desinated %eneficiary is the employer because that is
(ust a mere return of capital
c! Proceeds of life insurance policy may %e excluded from the ross estate of the decedent
under the follo'in cases$1 if the beneficiary esignate is a $r person an the esignation is irrevocable!
" it is a procee of a group insurance policy
owever 3 it is included in the ross estate of the decedent$
1 if the beneficiary esignate in the estate, executor or aministrator of the estate
or the family of heirs of the eceent!" if the beneficiary esignate is a $r person an the esignation is revocable Gsee
Section A2 3e)H
s far as Sec! = (e" is concerned3 an employer may %e considered a 7rd person!
A0OUNT RECEI/ED !Y INSURED AS RETURN O. PRE0IU0Beason for ;xclusion: +t represents a mere return of capital
*he &orce& of thi& retr' of 2re+i+ (L$E$A$)
1 8ife +nsurance Policy
" ;nowment contracts$ nnuity contracts
666Whether the premiums are returned durin or at the maturity of the term mentioned in the
contract or upon surrender of thee contract
Pro%lem$
too% out an enowment policy amounting to P1 M e pai premiums amounting to
PAJJ,JJJ >pon the maturity of the policy, receive that P1Mow much is the taxable amount
ns'er$
*hat is P1,JJJ,JJJ E value of enowment policy
8;SS: P AJJ,JJJ E representing amount of premium
P "JJ,JJJ E taxable amount
11
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 12/81
?GI.TS7 !E-UESTS a'd DE/ISESB
ationale: <hat is contemplate here are onations which are purely ratuitous in character in
orer that it may be exclue
2ifts are exclue because these are sub(ect to donorFs tax
5e<uests and devises are exclue because these may be sub(ect to estate tax
<hat about remuneratory onations Remuneratory donations are su%&ect to
income tax!
%+%#T)!'( to the $ule:LLL the income or fruit of such money given by onation, be#uests
or evise, incluing the income of this gift, be#uest or evise in cases of transfer of ivie
interest
?CO0PENSATION .OR INURIES OR SICNESSBeason for ;xclusion: *his is (ust an indemnification for the in&uries or damaes suffered *his is
compensatory in nature
*he sources are:
1 *he compensation may be paid %y virtue of a suit !
" +t may be paid %y virtue of health insurance3 accident insurance or Wor4menFs Compensation
ct
5ut as reards damaes representin loss of anticipated income3 this is the one that is taxa%le!
+f damaes are in the nature of moral3 exemplary3 nominal3 temperate3 actual and li<uidated
damaes3 as a rule3 these may not %e su%&ect to tax!
;xample:
+f a person suffere in(ury as a result of a vehicular accient, an an action is file in
court, the 0ourt awars the following:
Moral 6 P1JJ,JJJ
;xemplary 6 P1JJ,JJJ
ctual 6 P 4J,JJJ 3hospitalization expenses)
P "J,JJJ 3repair of car)
P 4J,JJJ 3loss of income)
OOO ll damaes a'arded are tax-exempt except damaes of representin loss of income!
Ruestion: re amages aware by the 0ourt on account of breach of contract taxable
nswer: Rualify your answer <ith regars to amages aware on account of loss of earningsof the contracting party, it is taxable
INCO0E EXE0PT UNDER TREATYBeason for the ;xclusion: reaty has o%liatory force of contract
%xception0 s may be provie for in the treaty
?RETIRE0ENT !ENE.ITS7 PENSIONS7 GRATUITIES AND OT#ERSB
*%T%$A'7( B%'%8)T
O *his may be given by the >S ministration
O *he recipient must %e a resident veteran!
B%'%8)T( 9)*%' B: 8!$%)9' A9%')%( !$ )'(T)TT)!'( ;&%T&%$ #BL)
!$ #$)*AT%
'iver: /oreign government agencies or institutions whether public or privateecipient: esient citizen, non6resient citizen or resient alien
1%servation$
1"
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 15/81
O2overnment-o'ned and controlled corporations are no' su%&ect to corporate income tax,
except :
a SSS
b 'S+Sc Phil ealth +nsurance 0orp
P0S.e P'0.
Situation: municipality erive income from holing a fiesta
Rle: *he rule is settle that holing a town fiesta is consiere a proprietary function *herefore,
sai income is sub(ect to tax
Situation: municipality erive income from the operation of public mar%et, electric power
plant an other public utilities
Rle: *hat income is tax exempt
d. )ncome derived from investment in the #hils. 1=4 by foreign government or 1>4
financing institutions, owned, controlled or financed by foreign government, regionalor 124 international financing institutions established by foreign government
;R>+S+*;S:
9! Recipient must %e$a foreign government!
b financing institution owne, finance or controlle by foreign government!
c regional financing institution, international financing institution establishe by
foreign government!
" +t must %e an income derived from investment in the Phils
Sources of such income:
666 +t may be in the nature of bons So, foreign government here may be consiere the creitor E possible income here is the i'tere&t of 3o'd& 9ow, loans may be extene E possible income
here is i'tere&t o' loa'&
666 +f a forein overnment or financin institution mae a eposit in a ban%, Phil currency
eposit E the income here is the nature of i'tere&t i'co+e
666 +f a forein overnment mae an investment in a omestic corporation +t may be consiere a
stoc%holer n a stoc%hler is entitle to ivien ence, the di,ide'd i'co+e receive from
omestic corporation is ta1 e1e+2t
OO +f the recipient of such ivien is a re&ide't forei4' cor2oratio' that is also ta1 e1e+2t +t
is only sub(ect to tax if the recipient of such ivien is a 'o'"re&ide't forei4' cor2oratio'
Ca&e ;=+MB9Q, which is a consortium of Napanese ban%s, extene a loan in the amount of
S"JM to Mitsubishi Metal 0orp, a Napanese corporation *he same amount was extene by
Mitsubishi as a loan to tlas 0orp, a omestic corporation
*he contract entere into between Mitsubishi Metal 0orp is enominate as Ccontract of
loan an saleD +t is a contract of loan because Mitsubishi woul len tlas S"JM +t is a contract
of sale because uner the contract tlas boun itself to sell the concentrates 3this is a mining
corp) that may be prouce by the concentrator machineFe#uipment purchase through the use of
the S"JM for a perio of 12 years
*his being a contract of loan, Mitsubishi is entitle to interest on loan
+SS>;: <hether or not such interest on loan is sub(ect to Phil income tax
R2*#NS : Mitsubishi contene that this is not taxable because:1 *he source of S"JM is a tax exempt entity 3;=+MB9Q is a financing institution controlle
an finance by a foreign government)! an
" Mitsubishi is an agent of ;=+MB9Q, a tax exempt entity
12
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 16/81
;8-: *here was no evience to the effect that Mitsubishi is an agent of ;=+MB9Q +t is a
mere allegation that has not been proven
+n a contract of loan, once the loan is consummate, the amount becomes exclusive property of the borrower +t is no longer consiere the money of ;=+MB9Q ence, the
interest of such loan shoul be sub(ect to tax
*he lener is not a tax exempt entity *he creitor here is Mitsubishi an it is not a tax
exempt entity Such being the case, tax exemption must be strictly construe against the taxpayer
an liberally in favor of the government <hen you claim exemption, you shoul prove it clear
an categorical terms
O *he problem may be moifie by the examiner *he examiner may clearly state the Mitsubishi
is an agent of ;=+MB9Q *he answer is, the interest on loan is tax exempt Mitsubishi then is
consiere as an extension of ;=+MB9Q +t is as if the lener is ;=+MB9Q
e. =2th month #ay and Benefits
O *his applies both to private an public employees
O *otal exclusion shoul not excee P$J,JJJ sub(ect to increase by the Secretary of /inance upon
the recommenation of the B+ 0ommissioner
f. ontributions to 9()(, (((, "%D)A$%, #A9)B)9, and union dues
O *his is a surplusage ;ven if this is not mentione, we cannot tax that
g. (ale, exchange, retirement of bonds, debentures and other certificates of indebtedness
with a maturity of more than 8)*% 1?4 :%A$(
6 +f maturity is less than 2 years, taxable
Rle +nterest on %onds
1 issue by 0B 6 exempt
" if issue by corp6 not exempt
Rle Redemptions of share in mutual funds:
6 only those gains erive from reemption of shares issue by a mutual fun company are
exempt
6 it must emanate from a mutual fun
6 +f the term is not more than 2 years 32 years or less), the gain erive from the sale, exchange
an retirement of the same, may be sub(ect to tax
+llustration:+f you are a creitor, you may sell these bons, ebentures or certificates of inebteness
to another 6indi mo na mahintay an maturity 4asi lon term! +f there is a gain on the sale of the
same, it woul be a tax exempt provie that the bons, etc, have a maturity or term of more than
2 years
etirement of bons, ebenture, etc 666 Na%ayad na Iyun de%tor! *here may be gain
erive from the same, such as interest *his time, since the gain is in the nature of interest, it is
sub(ect to tax But, the gain erive from the sale, exchange or retirement with a term of more
than 2 years, is tax exempt *his is because exemptions are strictly construe against the taxpayer
an liberally in favor of the government +nterests on bons, ebentures, etc are taxable, the
provision is clear +t only covers saleFexchangeFretirement of bons, ebentures an other
certificate of inebteness with a maturity of five years Strict interpretation of tax exemption
TYPES> CLASSI.ICATION O. INCO0E
5$ CO0PENSATION INCO0E an income erive uner an employee6
employer relationship
his may include the follo'in : 3*E!!"DROP)
14
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 17/81
*ages, Emoluments, !onuses, !enefits, Director?s fee, *axable R etirement Benefits, Other
items of income of similar nature, *axable Pensions
O $etirement benefits may be sub6ect to tax , if it oes not comply with the provision of Sec $"
3b) par 4 subpar a
O #ensions may be sub6ect to tax , if it is given not in accorance with the conitions lai ownuner that exclusion provision
O !ther items of income of similar nature may include: (C#A0P)
0lothing allowance, ospitalization allowance, llowances for /oo, Meical allowance, Share
from the Profit sharing plan of the employee
O T%(T( T! D%T%$")'% ;&%T&%$ A' )'!"% )( !"#%'(AT)!' or '!T0
/in out whether it is receive uner an employer6employee relationship
ny payment receive uner an employer6employee relationship is compensation
income
OT%(T( T! D%T%$")'% T&%$% %+)(T( A' %"#L!:%$%"#L!:%% $%LAT)!'(&)#0 1AD4
1 ppointment 3selection an hiring)
" 0ompensation
$ -ismissal power
& 0ontrol test
N$!$ : *he name or esignation of income is immaterial *he basis of the income is immaterial
an the manner by which it is pai, is also not important s lon as it is iven under an
employer-employee relationship3 then that is compensation income
A'%LLAT)!' !8 )'D%BT%D'%(( E 0onsiere as compensation income is the
inebteness ha been cancelle in consieration of the services renere
OOO Share of the employee from the PR10+ S6R+N2 P.N of the employer- 0ompensation
income receive in consieration of services renere
TA+ L)AB)L)T: !8 T&% %"#L!:%% #A)D B: T&% %"#L!:%$ @ 0ompensation income
if pai uner an employer6employee relationship in consieration of services renere
#$%")"( #A)D B: T&% %"#L!:%$ !' T&% )'($A'% #!L): !8 T&%
%"#L!:%% @ 0ompensation income if the beneficiary esignate is the family of heirs of the
employee
OOO he %asis of the income is immaterial ;ven if it is pai in piece wor%, fixe rate or percentage basis as long as it is pai uner an employer6employee relationship
$%<)()T%( 8!$ TA+AB)L)T: !8 !"#%'(AT)!' )'!"% A$%0 (SPR)1 *here must be services, renere uner an employer6employee relationship
" +f payment must be for that services renere
$ +t must be reasonable *he compensation for services renere must be reasonable
#urpose why only a reasonable amount may be taxed as compensation income0
*a%e note on the part of the employer, he can claim such compensation for services aseuction 9ow, only the amount that is reasonable uner the circumstances can be claime as
euction So, if the amount or the value of the services renere is P1J,JJJ but the employee
receive P12,JJJ s far as the employer is concerne, he can only claim the reasonable amountof P1J,JJJ +n the case of an employee, he can consier P1J,JJJ as compensation income *heexcess of P2,JJJ may be treate as other income
OOO Not all payments for services rendered are considered compensation income .nly those
pai uner the employer6employee relationship
T#E .OLLO*ING ARE NOT CO0PENSATION INCO0E (P I)
15
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 18/81
1 0ompensation for services renere by independent service contractor *his may be treate as
trae or business income
" +ncome erive by professionals from the practice of profession uner professional
partnership *his is treate as professional income
OOO 8ringe benefit is considered as compensation income. *his is governe by Sec $$, *
1II5 *his is compensation income in the sense that this is receive uner an employer6employeerelatioship
D!T$)'% !8 A(& %<)*AL%'T
6 you may be pai in cash or in propertyF%in
6 e#uivalent value of property is taxable
? DI..ERENT .OR0S O. CO0PENSATION INCO0E
=. #ropertyind E /air Mar%et @alue (0#@" of the property +f there is a price stipulated3 it is
the price stipulate that will be followe in the absence of contrary evience
>. #romissory 'ote or other evidence of )ndebtedness
a +f it is not discounted , it is the face value of the promissory note b +f it is discounted , it is the fair iscounte value of the promissory note
2. (toc/ @ /M@ of that shares of stoc%
C. ancellation of )ndebtedness @ Cancellation of inde%tedness has the follo'in taxconse<uences$
a +t may amount to taxa%le compensation income if the inebteness has been
cancelle in consieration of the services renere
b +t may amount to taxa%le ift or donation if the inebteness has been
cancelle without any consieration at all *his is not sub(ect to income tax but may amount to taxable gift or onation
c +t may amount to capital transaction if the creitor is a corporation an the
ebtor is a stoc%holer +f creditor corporation condoned the inde%tedness ofthe de%tor stoc4holder , that may amount to taxable capital transaction *his is
the form of irect ivien 9ow, property dividend is su%&ect to tax rates of
HG3 G and 9G! -ivien receive from omestic corporation is nowsub(ect to tax
?. Tax liability of the %mployee paid by the employer in consideration of services
rendered @ amount of tax liability
3. #remiums paid by the employer on the life insurance policy of the employee.
a +t is a taxa%le compensation income if the beneficiary esignate are the heirsof the employee or his family
b +t is not a taxa%le compensation income if the beneficiary esignate is theemployer because it is (ust a mere return of capital
+f the desination of the employer as %eneficiary is indirect 3eg: +t is the creitor
of the employer that is esignate as beneficiary), that is still not taxable compensation
income
xample of +ndirect desination of the employer as a %eneficiary$a Beneficiary is the wife of the Presient of a close corporation
b +f the employer may secure a loan from he insurance policy
1A
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 19/81
Premiums 'ill %e taxed under Sec! 77 par!% no!9 it is state there: C8ife or health
insurance an other non6life insurance premiums or similar amounts in excess of what the
law allows
O +f the payment 'as received %y the employee 'hen he 'as no loner connected 'ith his
employer , it is still consiere compensation income <hat is important here is that itmust be receive uring the existence of the employer6employee relationship ;mployees
may be ismisse by the employer, an they may file complaint for illegal ismissal
against the employer Nugment was renere by the arbiter in favor of the employee llthe wages suppose to be pai 3eg bac%wages) can be taxe as compensation income
<hat about attorney?s fees *hat is exempt
.RINGE !ENE.ITS code (#E/"#I0"E#EL)
8$)'9% B%'%8)T E ny goo, service, or other benefit furnishe or grante in cash or in %in
by an employer to an iniviual employee (except ran4 and file employee" such as but not limiteto the following:
1 ousing!
" ;xpense account!
$ @ehicle of any %in!
& ousehol personnel such as mai, river, others!
2 +nterest on loan at less than mar%et rate to the extent of the ifference between the
mar%et rate an the actual rate grante!
4 Membership fees, ues an other expenses borne by the employer for the employee in
social an athletic clubs or other similar organizations!
5 ;xpenses for foreign travel!
A oliay an vacation expenses!
I ;ucational assistance to the employee or his epenents! an1J 8ife or health insurance an other non6life insurance premiums or similar amounts in
excess of what the law allows!(if contri%ution-exempt"
O &ousing allowance may be exempt from tax if the living uarters are0
a Provie with the premises of the employer
b +t must be mae as a conition of employment
+f sai re#uisites are not present, housing allowance may be taxe as fringe
benefits
O "eal allowance may be exempt from tax if it is provie within the premises of the employer
O #rivilege or purchase discount are tax exempt if it oes not excee of the basic monthly
salary of the employee +f it is more than J3 the excess may be as fringe bene
5 "edical or hospital allowance, clothing allowance, rice allowance may be exempt from tax if
the following reuisites are present0
1 +t must be of relatively small value 3reasonable amount) 3S@)
" +t must be given for the following purposes: 30;')
a *o promote 0ontentment
b *o promote ealth
c *o promote ;fficiency
*o promote 'oowill
O Ta1 E1e+2t fri'4e 3e'efit& (R.7 D07 C7 E17 ECR)
1 5enefits iven to the ran4 and file employees, whether grante uner a collective bargaining
agreement or not
" KDe minimis %enefitsD E means of small amount *hese are benefits relatively of small
amount
1I
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 20/81
$ 0ontributions of the employer for the benefit of the employee to retirement, insurance an
hospitalization benefits plans
& /ringe benefits which are authorize or exempte from tax uner special laws
2 *hose given for the convenience of the employer, incluing those which are re#uire by the
nature of the trae, business or profession of the employer (mployerFs Convenience Rule"
De minimis benefits 3of relatively small value) E limite to facilities or privileges furnishe or
offere by employer to his employees merely as a means of promoting health, goowill,
contentment, or efficiency of employees, such as:
a Monetize unuse vacation leave creits not exceeing ten 31J) ays uring the year!
b Meical cash allowance to epenents of employees not exceeing P52J per semester of
P1"2 per month!
c ice subsiy of P$2J per month!
>niforms!
e Meical benefits
f 8aunry allowance of P12J per month!
g ;mployee achievement awars, for length of service of safety achievement in the form of
tangible personal property other than cash gift certificate, with an annual monetary value
not exceeing month of the basic salary of employee receiving the awar uner an
establishe written plan which oes not iscriminate in favor of highly pai employees!
h 0hristmas an ma(or anniversary celebrations for employees an their guests!
i 0ompany picnics an sports tournaments in the Philippines an are participate in
exclusively by employees! an ( /lowers, fruits, boo%s or similar items given to employees uner special circumstances
on account of illness, marriage, birth of a baby, etc
5#rinciple of %mployer7s onvenience $ule0
6 fringe benefits may be exemptFnot sub(ect to tax if these are given for the benefit
or avantage of the employer
The following are the possible fringe benefits, which may be exempt under the %mployer7s
onvenience $ule0 (# / # 0 T)
a ousing benefit
b @ehiclec ousehol personnel
Membership in a social or athletic club or similar organization
e *raveling expense benefit
O &ousing benefit E in etermining whether the same is exempt uner the employer?s
convenience rule, you have to consier the peculiar nature of the special nees of the employer $euisites for exemption0
1 +t must be mae as a condition for employmentL
" +t must be provided 'ithin the premises of the employer
OOO *his may apply to a supervisor of a plant or a company
O +f the housin or livin <uarters are provided outside the premises of the employer3 even if that
is for the convenience of the employer3 this is only exempt up to =G of the amount So, 2Jtaxable, 2J exempt
O *ehicle E ;xempt but epens upon the peculiar nature of the special nees of the business of
the employer xample$ 8B0 or -8 business
O &ousehold personnel such as maid, driver and others E ;xempt, but epens upon the
peculiar nature of the business of the employer
O "embership in a social club, etc E Peculiar nature re#uirement
"J
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 21/81
O Traveling expense benefit E Peculiar nature re#uirement xample$ ;mployer sent his
employees abroa to atten a particular seminar to improve their technical %now6how
B R>;S*+.9: is a river of 0ongressman Magtanggol an he receive a monthly salary of
P2,JJJ an living #uarter allowance of P",2JJa <hether the P",2JJ living #uarter allowance is exclue or sub(ect to tax
b ssuming the employer is an obstetrician woul your answer be the same
9S<;:
a *hat shoul be sub(ect to tax
b +t shoul be exclue eason: 0onvenience of the employer?s rule
9$ GROSS INCO0E .RO0 !USINESS7 TRADE OR PRO.ESSION
B()'%(( @ ny activity that entails time, attention, effort for purposes of livelihoo or profit
s reards construction %usiness, the taxpayer here must be an inepenent
contractor e may report his income uner the percentage of completion metho
or uner the so6calle complete contract metho
#$!8%(()!'AL )'!"% @ *he recipient of the same must be professionals
ow about those who claim that they are professionals but are not registere in
the P 0, can they still be tax as such
Kes, irrespective of whether they are license or not because of the rule that
gross income erive from whatever source
:$ PASSI/E INCO0E
#A(()*% )'!"% @ *his is the income that is sub(ect to final tax
)ncome sub6ect to final tax are the following0 (codeRPD"*IDS)
1 oyalties
" Prizes
$ <innings
& +nterests on ban% eposit, eposit substitutes, trust funs an
other similar arrangements
2 -ivien receive from omestic corporation, mutual fun insurance company,
regional hea#uarters of multi6national corporation an other corporation
4 Share a partner in the net income after tax of a taxable partnership, (oint account, (oint
venture or concessions
OOO Do not include passive income in the income of your business or profession, or in your
compensation income *his is so because when you receive this income, the tax ha alreay been
impose an eucte
RC7 NRC7 RA NRA"ET! NRA"NET!
"1
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 22/81
ROYALTIES "J except in the
case of literary'or4s3 %oo4s and
musical
compositions 'hich
are su%&ect to 9G final tax
Same as 0, 90,
"2
PRI@ES e1ceedi'4P57$
+f it is P93!
or less3 it is N1 su%&ect to final tax
%ut the same must
%e included in otherincome 3eg
compensation,
business, professional)
"J
"J "2
*INNINGS except
PCS1 M .otto
"J "J "2
INTERESTS ON
!ANDEPOSITS7 etc
"J "J
"2
DI/IDENDS
RECEI/ED fro+do+e&tic cor2$7 etc$
Sub(ect toincreasing rates of
4 if receive in
1IIA! A in 1III!
an 1J in "JJJ
"J "2
S#ARE O. A
PARTNER i' the'et i'co+e after a
ta1 of a ta1a3le
2art'er&hi27 etc
6 o6
4, A 7 1J
"J "2
Ruestion: ow o you treat that share of a professional partner from the net income of a general6
professional partnership
nswer: *his shoul be taxe at the rate provie uner Sec"&, that is, 2 to $&
But as regards the share of a partner in the net income after tax of a taxable or
business partnership, that is one which is sub(ect to final tax
#$)E%( @ may be exempt if given in sports competition an if given primary in recognition ofscientific, artistic, literary, eucational, religious, charitable, or civic achievement
INTEREST
$ules
1 +f it is an interest on forein currency deposit system3 it is exempt
+f the recipient is non6resient iniviual 390, 96;*B, 969;*B)
" +f the recipient is a resident individual (RC3 R"3 that is sub(ect to 52
$ +nterest income is also exempt if it is an interest income on a long6 term eposit or long6term investment 3this must have a term of not less than 2 years)
)f the term is less than ? years it is sub6ect to the following rates:1 & years to less than 2 years 2
" $ years to less than & years 1"
$ 8ess than $ years "J
""
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 23/81
D)*)D%'D $%%)*%D 8$!" D!"%(T) !$#!$AT)!'
1 his is exempt from tax if the recipient is a foreign government, financing institution,
regional financing institution, international financing institution establishe by foreign
government Gsee Sec$" 3B) 35) 3a)H
" +t is also exempt if the recipient of such ivien is another omestic corporation orresient foreign corporation Gsee Sec "A3)35)3)H
A#)TAL 9A)' D%$)*%D 8$!" (AL% !8 (&A$%( !8 (T!
Listed and traded through local stoc/ exchange @ this is not sub(ect to income
tax but sub(ect to percentage tax of of 1 of the gross selling price
'ot listed and traded through local stoc/ exchange E this is the one sub(ect to
income tax
9ot over P1JJ,JJJJJ 2
mount .ver P1JJ,JJJJJ 1J
+f the share of stoc4 is not listed and traded throuh local stoc4 exchane, the
basis of the tax is net capital gain So, you shoul first euct the capital loss
+f listed and traded throuh local exchane, there is no euction allowe
because the basis of the tax rate of of 1 of the gross selling price
he a%ove-mentioned tax rates apply to all individual taxpayers!
5 A#)TAL 9A)' D%$)*%D 8$!" T&% (AL% !8 $%AL #$!#%$T: 6 *he real property involve must be consiere 0P+*8 SS;*
6 *he tax on capital gain erive from the sale of real property is 4 of the gross selling price or
zonal value which ever is higher
O CAPITAL ASSET property held %y the taxpayer 'hether or not connected in his trade or
%usiness except : (code SOUR)
1 Stoc% in trae or other property of any %in which woul be inclue in the inventoryof the taxpayer if on han at the en of the taxable year
" Property primarily hel for sale to customers in the .rinary course of trae or
business
$ Property >se in trae or business sub(ect to epreciation
& eal property use in trae or business
T *he efinition of capital asset says Creal property hel by the taxpayer whether or not
connecte with his trae or business except real property use in trae or businessD So, in
order to %e a capital asset3 the real property must %e one not used in trade or %usiness
T *hat is why, the sale of resiential house an lot is sub(ect to 4 of capital gains because it
is a real property not use in trae or business
T But, sale of real property by a real estate dealer is not a capital transaction because the
property involve is one primarily hel for sale to customer in the orinary course of trae
or business *hat is not a capital asset %ut an ordinary asset
T *his covers not only CsaleD of property! it also covers conitional sale of real property
incluing the so6calle pacto de retro sale uner rt 14J" of the 900, or isposition of property locate in the Phils
T +f the %uyer is the overnment or any of its political su%-divisions or political aencies3
includin overnment o'ned and controlled corporations3 the seller have the option to avail
"$
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 24/81
the 4 or uner Sec "&3), wherein the basis uner sai section is taxable income so
euctions may be allowe *he cost of the property may be eucte but when you avail of
the 4, the basis is gross selling price or zonal value whichever is higher
T +s this a tax on the buyer or the seller +t is a tax on the seller But sometimes, through an agreement, p'ede nilan +-transfer sa
%uyer3 an there?s nothing that can prevent the seller from transferring the tax to the buyer inthe contract of sale
OT#ER INCO0E
O !T&%$ )'!"% includes 6code R$I$D$O$8a ent income other than royalties
b +nterest income other than interest income on ban% eposit
c -ivien income
+ncome from .ther sources an this may inclue: (!IT"CDC)1 Ba ebts recovere
" +llegal gains erive from gambling
$ *ax funs
& 0ompensation for private property expropriate by the
government for public use
2 -amages
4 0ancellation of inebteness
5$ $%'T 6 0ompensation for the use of one?s property
6 *he payment may be in cash or in %in *he property involve is either
personal or real property
6 +n the case of personal intani%le property3 sub(ect to final tax if it involves
intellectual property, copyright, traemar%s etc
T&% 8!LL!;)'9 !'(T)TT%( TA+ABL% $%'T )'!"%0
1 *he re4lar re't may be monthly, semi6annually or annually
" Additio'al re't i'co+e which inclues:
a !bligation of the lessor assumed by the lessee *he following are obligations which
may be assume by the lessee: 6R$I$D$I$O$8a1 eal property taxe on lease premises
a" .bligation to pay insurance premium on the insure lease premises
a$ +f the lessor is a corp, the obligation to istribute -iviens to its stoc%holers
a& .bligation to pay interest on the bons issue by the lessor
a2 .ther obligations of the lessor which may be assume by the lessee
b *alue of permanent improvements on leased premises *his may be reportethrough:
b1 1utriht method at the time of permanent is complete, he may report that as
aitional rent income E /M@ of the builing or permanent improvement
b" Spread out method by allocating the epreciation among throughout the
remaining term of the lease
c. Advance rentals
c1 +f in the nature of the prepai rentals without restriction on the use of the
amount, it is taxa%le
c" +f it is in the nature of security eposit, it is taxa%le rent income if there is aviolation of the term of the lease
c$ +f it is in the nature of a loan to the lessor, it is not taxa%le
>. )'T%$%(T )'!"% E compensation for the use of money6 <hether it is an interest on loan pursuant to the business of a taxpayer or personal
transaction, interest income, except if it is tax exempt, is always taxable *his is so
because the source of income is immaterial, even if it is from an illegal source
"&
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 25/81
6 +nterest income on ban% eposits is sub(ect to final tax
2. D)*)D%'D )'!"% E amount eclare, set asie an istribute by the Boar of -irectors
to stoc%holers, on eman or a fixe perio
lasses of Dividend $ GC$L$I$P$S$S$HCash dividend
.i<uidatin dividend- this is given upon li#uiation of corporate affairs
+ndirect dividend - it is given in other form an this inclues cancellation of
inebteness by the corp of the obligation of stoc%holer
Property dividend - it may be in the form of stoc% other than the stoc% of the corpStoc4 dividend - stoc% issue by the giver corp
Script dividend - +t is given in the form of promissory note or other evience of
inebteness
STOC DI/IDEND @ as a rule not taxable. *his is so because there is no income here +t
merely represents the transfer of surplus account to the capital account
CP+1NS to the Rule:
(toc/ dividend may be sub6ect to tax under the following exceptional cases0 6C OR D8
1 +f there is a 0hange in the stoc%holers interest in the net assets of the corp!
" +f it is one issue by .ther corp <e call that Cdividend stoc/ D
(toc/ dividend vs. dividend stoc/ E Stoc% ivien as a rule is not taxable whereas
ivien in stoc% is taxable
$ eemption of stoc% ivien!
& +f the corp issues -ifferent shares of stoc% +f the corp issues two ifferent classes of
shares of stoc%, the ivien that may be eclare thereafter is taxable
;xample:
!utstanding stoc/ (toc/ dividend Taxable
1 Preferre 0ommon 9*
" 0ommon Preferre 9*
$ Preferre Preferre 9*
& 0ommon 0ommon 9*
2 PreferreF0ommon Preferre *
4 PreferreF0ommon 0ommon *
Disguised dividend @ treasury stoc% ivien eclare out of the outstaning capital stoc%, the
purpose of which is to avoi the effect of taxation 3Commissioner vs! #annin"!
+t is one which is mae to appear as stoc% ivien when the truth of the matter is that it is a
ivien which is illegally eclare, such a case, since the purpose is to evae taxation, it is
taxable
emember, treasury shares of stoc/ are not entitled to dividends.
ALLO*A!LE DEDUCTIONS (SEC$ :;)
As regards individual taxpayers, the following may claim allowable deductions0
1 0
" 90, only those expenses incurre in the Phils because here, we cannot tax his incomeerive from sources without
$ , only those expenses incurre in the Phils
& 96;*B, but only those expenses incurre in the Phils
2 PP 3Professional Partners uner Sec "4)
%xceptions0
1 +* earning 0+ E ;;, ; ;8
"2
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 26/81
" 969*B
$ liens employe
M0
B .B>
0 PS0& 9/0
As regards corporate taxpayers, the following are entitled to claim allowabledeductions0
1 -0, which inclues private eucational institutions, non6profit hospital, government6owne
an controlle corps
" /0
ITE0I@ED DEDUCTIONS 6E7I$T7L7!7D7D7C7R7C81 ;xpenses 4 -epreciation
" +nterests 5 -epletion of oil, gas, wells an mines
$ *axes A 0haritable contributions
& 8osses I esearch 7 -evelopment
2 Ba ebts 1J 0ontribution to Pension *rust
O +n the case of individual taxpayers, they may avail of the optional standard deduction of 9G
of ross income
O Corporate taxpayers are not allowe to claim 1J optional stanar euctions
O ll iniviual taxpayers except the 9 iniviual may claim this optional stanar
euctions
O )temi-ed deduction may apply to corporate taxpayers as well as individual taxpayers
5 8'DA"%'TAL #$)')#L% )' D%DT)!'(
1 *he taxpayer must prove that there is law authorizing euctions
" *he taxpayer must prove that he is entitle to euctionsOOO NR0C are not entitled to claim deductions
5$ EXPENSES
!$D)'A$: F '%%((A$: %+#%'(%(
<hen we spea% of .-+9K, this simply refers to the expenses which are normal, usual orcommon to the business, trae or profession of the taxpayer *his may not be recurring
xample: if an action is file in court, it is but normal to hire the services of a lawyer So, the
taxpayer has to pay attorney?s fees +t is an orinary expense uner this circumstances
9;0;SSK6 +t is one which is useful an appropriate in the conuct of the taxpayer?s trae or profession
.-+9K 7 9;0;SSK ;=P;9S;S
6are those which are incurre or pai in the evelopment, operation management of the business,
trae or profession of the taxpayer
;=*6.-+9K ;=P;9S;S E 'ot Deductible *hese are amortize or in lieu of the same,
you may claim that so6calle allowance for epreciation n if it involves intangible asset, the
wor use is M.*+U*+.9
*here is no har an fast rule n expense may %e ordinary insofar as a particular
taxpayer is concerned and it may not %e an ordinary as reards another taxpayer!
;xample:
+f you have business here in Manila an you also have business in *awi6tawi, what is the
expense that you may incur in *awi6tawi which you may not possibly incur in Manila
+n *awi6tawi, you may nee people to guar your business But here in Manila, you may
nee not because of our new Presient6elect
"4
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 27/81
INDS O. ORDINARY F NECESSARY EXPENSES 6C$A$R$T$E$R$S$8
1 0ompensation for services renere
" vertising 7 promotional expenses
$ ent expenses& *ravelling expenses
2 ;ntertainment expenses4 epairs 7 maintenance expenses
5 Supplies an materials
!""!' $%<)()T%( 8!$ D%DT)B)L)T: of these ordinary F necessary expenses0
6D$I$R$8a #ust %e paid or incurred D*R+N2 the taxa%le year!
+f you incur expenses in 1II5, you cannot carry this over to 1IIA expenses incurre
uring a particular year must be claime as euctions uring this year when the same
were incurre
CP+-D E to signify the fact that the taxpayer uses the 0S
BS+S >ner the 0S BS+S, an expense is recognizewhen it is P+-
C+90>;-D E implies that the taxpayer employs the 00>8
BS+S >ner the 00>8 BS+S, income is recognize
when earne regarless of the receipt of the same an
the expense is recognize when incurre
b #ust %e paid or incurred in connection 'ith the trade3 %usiness or profession of the
taxpayer!
c #ust %e proven %y RC+PS!
SPECIAL RE-UISITES .OR DEDUCTI!ILITY O. T#ESE ORDINARY F
NECESSARY EXPENSES
=. !"#%'(AT)!' 8!$ (%$*)%( $%'D%$%D
*his must be reasona%le, meaning, this must not be ostensible
Ca&e 5: Partnership was sol to a corp an it was agree that the partners will serve the corp an
ma%e it appear that they rener services So, compensation for services was ostensibly mae by
the corp
#eld *hese is a mere ostensible salary or payment for services not actually renere
because that amount really forms part of the properties purchase by the corp
Ca&e 9: 0orporate officers succeee in selling the property of the corp So, profit was erive
therefrom Bonuses were given to these corporate officers
#eld *he rule is settle Bonuses must be given in goo faith *here must be services
renere because bonuses are aitional compensation +n this particular case, there was really no
services renere because that sale was mae through a bro%er *he corp mae it appear that it
was through the efforts of these corporate officers that brought about a successful sale of
property
5onuses must %e iven in ood faith and in determinin 'hether %onuses 'ill form part
of the compensation for services rendered3 you have to consider the 31) nature of the business, 3")the financial capacity of the taxpayer an 3$) the extent of the services renere
>. AD*%$T)()'9 A'D #$!"!T)!'AL %+#%'(%(
6 +t must be reasona%le!
Ca&e: Sugar -ev?t 0orp pai P1"2,JJJJJ to lgue 0orp representing promotional expenses
"5
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 28/81
#eld *his is reasonable uner the circumstances because the particular buget sub(ect for
promotion involves million of pesos n uner that circumstances, the P1"2,JJJJJ is
reasonable as this may coincie with the efforts exerte consiering that the taxpayer has no
venture in that experimental pro(ect to establish that vegetables of investment company an this
involves millions of pesos
2. $%'T %+#%'(% a *he taxpayer must N1 %e the o'ner of the property or he has no e#uitable title over
the property
b *his is su%&ect to 'ithholdin tax! Kou cannot claim that the taxes suppose to be
withhel have not been pai or remitte to B+
C. T$A*%LL)'9 %+#%'(%(
6 *his must be incurred or paid 'hile Ka'ay from home)!
6 K6ome) oes not refer to your resience but to the station assignment or post
xample$ /rom home office to branch office, the traveling expenses incurre are
euctible n this inclues not only the transporatiotion expenses but also meal allowance anhotel accommoations
?. %'T%$TA)'"%'T %+#%'(%(
6 *his must not %e contrary to la'3 morals3 ood customs3 pu%lic policy or pu%lic order
6 ence, %ri%es3 4ic4%ac4s3 and similar payments are not deducti%le
6lso, the expenses incurre by the taxpayer in entertaining gov?t officials in 26star hotel to gain
political influence are not euctible
3. $%#A)$( A'D "A)'T%'A'% %+#%'(%(
6 1nly ordinary or minor repairs are deducti%le!
- xtra-ordinary repairs cannot %e claimed as deduction an in lieu of that, the taxpayer may not
be allowe to claim epreciation
- +f the cost of the repair increases the life of an asset for a period of more than one (9" year3 that
amount is consiere extra6orinary repair 1ther'ise3 it is consiere orinary repair
G. (##L)%( A'D "AT%$)AL(
6his must %e actually consumed durin the taxa%le year!
6 RULE ON SU!STANTIATION simply re<uires that ordinary and necessary expenses must
%e proven *he 2roof& re#uire inclue:
6N$O$R$E$D$8a .fficial receipts
b e#uate ecourse
c mount of ;xpense
-ate an place where such expense is pai or incurre
e 9ature of expense
9$ INTEREST
$%<)()T%( 8!$ D%DT)B)L)T:
1 *his must be pai or incurre ->+9' the taxable year
" *his must be pai or incurre in connection with the trae, business or profession of thetaxpayer
$ *here must be an obligation which is vali an subsisting
& *here must be an agreement in writing to pay interest
Ruestion 1:
<hat about that interest on unclaime salaries of the employees, is that interest
euctions
"A
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 29/81
nswerFel:
9., because there is no obligation or inebteness +t is the fault of the employees in
case they faile to claim their salaries
Ruestion ":
<hat about that interest charge to the capital of the taxpayer, is that euctible
nswer:
+nterest on cost6%eeping purposes is not euctible *his oes not arise uner an interest6
bearing obligation
T&%!$%T)AL )'T%$%(T @ an interest which is compute or calculate, not pai or incurre,
for the purposes of etermining the opportunity cost of investing in a business *his oes not arise
from legally emanable interest6bearing obligation *his is not a deducti%le interest!
Ruestion $:
<hat about interest on preferre stoc%, is this euctible
nswer:
s a rule, interest on preferred stoc/ is not deductible , because there is no obligation to
spea% of +t is in effect an interest on ivien *he reason why it is not euctible is that the
payment is epenent upon the profits of the corp +t will only be pai if the corp earn profitsn woul not be pai of the corp incurs losses
BT if it is not dependent upon corporate profits or earnings, that is deductible +f is
payable on a particular on a particular ate or maturity without regar to the corporate profits, it
is euctible
he Supreme Court mentions W1 (8" 0C1RS$
1 not epenent upon corporate profits! an" agreement as to the ate or term within which payment will be mae
)'T%$%(T !' 9!*7T (%$)T)%( is now taxable.
So, if the taxpayer obtaine a loan from P9B an use the procees in purchasing gov?t
securities, the interest is now taxable 8i%ewise, the interest expense pai on that loan, the
procees of the same, ha been use to purchase gov?t securities is now euctible
-$ <hat about an interest on a loan pai in avance, is this euctible 8et us say that the
taxpayer obtaine a loan from a ban% an it is payable within 2 years *he loan obtaine is
P2J,JJJJJ 9ow, it was eucte in avance, can that be claime as euctions
A$ 9. Kou can only euct the same when the installment is ue a particular year
INTEREST EXPENSES *#IC# ARE NON"DEDUCTI!LE 6PARCAPU81 +nterest expense on P;/;;- S*.0Q!
" <hen there is 9. ';;M;9* in writing to pay interest!
$ +nterest expense on loan entere into between ;8*;- *=PK;S
& +nterest pai or calculate for 0.S*6Q;;P+9' P>P.S;S
2 +nterest pai in -@90;
4 +nterest on obligation to finance P;*.8;>M ;=P8.*+.9
5 +nterest on >908+M;- S8+;S of the employees
$elated taxpayers$
a! mem%ers of the same family 'hich includes$
a1 spouses
"I
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 30/81
a" brothers an sisters
a$ escenants an ascenants
b %et'een t'o (8" corporations o'ned or controlled %y one individual! e must have a
controlling interest over these two corporations ., if one corp is consiere as
personal holing company of another corpc! %et'een a corp! and an individualL that individual o'ns or controls more than =G
of the outstandin capital stoc4 of the such corp! parties to a trust !
1 grant or fiuciary
" fiuciary of one trust an fiuciary of another trust but there is only one
grantor
$ beneficiary an fiuciary
OKour %nowlege of relate taxpayers is also important in etermining whether losses
are euctible or not +f losses 'ere incurred or paid in connections 'ith the
transactions %et'een these related taxpayers3 these are not deducti%le!
Ruestion: ow much interest expense is euctible
nswer: *he interest that may be claime as euctions shall be reuce
by:
a &1 6 Beginning Nanuary 1, 1IIA
b $I 6 Beginning Nanuary 1, 1IIIc $A 6 Beginning Nanuary 1, "JJJ of the income sub(ect to final tax
#P. 10 +NC1# S*5,C 1 0+N. $
1 interest on ban% eposit
" interest on eposit maintaine uner the foreign currency eposit system
So, if the interest income on ban% eposit amounte to P1JJ,JJJJJ n the total interest
expense incurre or pai by the taxpayer is P"JJ,JJJJJ +f this is incurre in 1IIA, &1 ofP1JJ,JJJJJ is P&1,JJJJJ *hat P"JJ,JJJJJ interest expense incurre or pai, shoul be
reuce to P&1 of that P1JJ,JJJJJ to arrive at P12I,JJJJJ which is the interest that may be
claime as euction
P"JJ,JJJJJ
6 &1,JJJJJ
66666666666666666666666 P12I,JJJJJ
*he rule has been establishe that S are N1 1RD+NRB 15.+2+1NS But the
Supreme Court in t'o (8" cases relaxed the distinction %et'een taxes and ordinary o%liations
1 *he interest on deficiency donor7s tax is deductible *he S0 explaine that taxes here areconsiere obligations or inebteness n it rule that we have to relax the istinction
between tax an orinary obligation in this respect
" )nterest on deficiency income tax can also be claimed as deductible interest expense
because taxes here are consiere orinary obligations
:$ TAXES
$%<)()T%( 8!$ D%DT)B)L)T: :
1 *his must be pai or incurre uring the taxable year
" *his must be taxes pai or incurre in connection with the trae, business or profession of thetaxpayer
OOO axes that may %e claimed as deductions may %e national or local taxes!
$J
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 31/81
T&% 8!LL!;)'9 A$% '!'D%DT)BL% TA+%( 6S$I$N$E8
1 SPC+. SSSS#N E tax impose on the improvement of a parcel of lan
" +NC1# E *his inclues foreign income tax +n this regar, the so6calle foreign
income tax may be claime as a euction from gross income or this may be claime as taxcreit against Phil income tax +n the event that he claims that as tax creit, he can no
longer claim the same as euction
$ *axes which are N1 C1NNCD W+6 6 RD3 5*S+NSS 1R PR10SS+1N
10 6 PBR
& S 3 D1N1RFS 3see also iscussion on tax benefit rule)
TA+ A( D%DT)!'( vs. TA+ $%D)T
T *axes as euctions may be claime as euctions from gross income
T *ax creit is a euction from Phil income tax
T *ax as euction inclues those taxes which are pai or incurre in connection with the
trae, business or profession of the taxpayer owever, the sources of a tax creit is foreignincome tax pai, war profit tax, excess profit tax pai to the foreign country
T *he foreign income tax pai to the foreign country is not always the amount that may be
claime as tax creit because uner the limitation provie uner the *ax 0oe, it must not
be more than the ratio of foreign income to the total income multiplie by the Phil income
tax
T *axes are euctible only by the person upon whom the tax is impose
xcept$
1 Share holer
" corporate bons 6 tax free 0ovenant clause
The following are entitled to claim tax credit0
10 " -0
;$ LOSSES
CLASSI.ICATION O. LOSSES 6O$ C$ *$ C$ S$8
1 !$D)'A$: L!((%( E losses sustaine in the course of trae,
business or profession of the taxpayer
" A#)TAL L!((%( E the assets that must be involve there must be
capital assets
Ca2ital Lo&&e& i'clde the follo%i'4a 8oss arising from failure to exercise privilege to sell or buy property
b <orthless securities
c banonment losses in the case of natural resources
8oss from wash sale
$ ;A9%$)'9 !$ 9A"BL)'9 L!((%( E the amount that is euctible
must not excee the gains
%xample0
*he winnings amounte to P1,JJJJJ 8oss is P2JJ *his loss is euctible
+f the winning is P2JJ an if the loss is P1,JJJ *he amount euctible is only P2JJ
because the amount must not excee the gains+f there is no winnings an loss is P2JJ -euction losses here is U;.
& A(ALT: L!((%( E this must be reporte to the B+ earlier than $J
ays but not later than &2 ays following the ate of the loss
Ca&alty lo&&e& i'clde
a /ire
$1
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 32/81
b Storm
c shipwrec%
.ther casualty losses
e obbery
f ;mbezzlementg *heft
2 (#%)AL L!((%( E include the following $
a! loss arisin from voluntary removal of %uildins as an incident to rene'al or replacement
Problem:
Suppose the taxpayer ha a builing constructe on a parcel of lan e owne this
as well as the builing erecte thereon e ha business an his business was
conucte within the premises *hen, he ecie to remove such builing as to
construct a new builing for new business
+s the cost of emolition to give way to a new builing euctible loss YES$
Suppose purchase that parcel of lan of B an inclue in that sale was that of the builing emolish this builing in orer to construct a new builing +s the cost of
emolition euctible insofar as is concerne
NO$ *hat can only be claime as euctions if the one emolishing the same is thetaxpayer *he moment that is sol to another claim that as euctible loss *he
treatment here is, the cost of emolition shoul be capitalize in the selling price
E1ce2tio': may claim that as euctible loss if this was emolishe by value of a
court orer because the gov?t consiere this as a fire hazar, loss of useful value of
property or capital asset
T&% !""!' $%<)()T%( for D%DT)B)L)T: !8 L!((%( are0
1 .osses must %e actually/sustained and not mere anticipated lossesL
" #ust not %e compensated %y insuranceL
666 +f it is partly compensate, only the amount not compensate by insurance is euctible
$ #ust %e evidenced %y a completed transaction
Co+2leted Tra'&actio' this means that the loss must be fixe by ientifiable event
xample: +f it is a loss sustaine from sale, the event that may ientify or complete the
transaction is the consummation of the contract of sale
Suppose it is in the nature of casualty losses li%e fire
*he fire estroye your property in 1II2, no payment has been mae because the insurer
an the insure were still uner negotiation +t was only in 1II5 that they agree on the
amount *he amount agrees upon is P1JJ,JJJ *he taxpayer may claim that casualty lossesonly in 1II5 when payment was actually mae *his is the event that will complete the
transaction
<$ !AD DE!TS
$%<)()T%( 8!$ D%DT)BL)T:0 6CU7 *7 T!P7 /S7 U8
1 Must be chared off and uncollecti%le within the taxable year!
" Must be ascertaine to be 'orthless
$ Must arise from trade3 %usiness or profession of the taxpayer!
& Must be valid and su%sistin inebteness!2 Must be uncollecti%le in the near future
&!; T! #$!*% T&% ;!$T&L%(('%(( !8 !BL)9AT)!'0
ccordin to the Supreme Court3 the follo'in SPS must %e complied :
1 *here must be a statement of account sent to the ebtor!
" collection letter!
$"
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 33/81
$ +f he faile to pay, refer the case to a lawyer!
& +f lawyer may sen a eman letter to the ebtor!
2 +f the ebtor still fails to pay the same, file an action in court for collection
+n provin that the de%tor is insolvent of %an4rupt , mere allegation of the same is notenough Kou shoul prove that the ebtor is inee ban%rupt or insolvent So, you may
secure a copy of that decision %y the SC or other agency as the case may be, eclaringthe ebtor as ban%rupt or insolvent n then there must be a eman letter sent to him
+n case the de%tor 'as ro%%ed , there must be a police report to that effect
*he de%tor may %e a NR0C , so you may argue that he may not be sue here ccoring
to the Supreme 0ourt, as a rule that is not an excuse Kou shoul still send a demand
letter to that NR0C +n other wors, there must %e dilient efforts to collect the
inde%tedness and to prove that in the near future such o%liation is no loner collecti%le
OOO +f the recovery of %ad de%ts3 resulted in a tax %enefit to the taxpayer , that is taxable +f it
did not result in any tax %enefit to the taxpayer , that is not taxable (TAX !ENE.IT
RULE)
9B ea the case of Phil! Refinin Company vs! Commissioner , a 1IAI case
$ DEPRECIATION
he idea here is not to recover profit3 %ut to recover the cost of property invested in
%usiness <hen the properties are use in trae, business or profession of the taxpayer, the law
consiers or recognizes the graual loss or sale of property
D%#$%)AT)!' refers to the graual iminution of the useful value of the property
use in trae, business or profession of the taxpayer, arising from wear an tear ornatural obsolence
$%<)()T%( 8!$ D%DT)B)L)T:0 6U P R A C 8
1 *he property must be used in trade3 %usiness or profession of the taxpayer!
" *here must be deprecia%le properties
*he nondepreciable properties are
a Personal property not use in trae, business or profession of the taxpayer!
b +nventoriable stoc% an securities
c 8an
Mining an other natural resources
$ *he allo'ance for depreciation must %e reasona%le
& *he method in computin the allowance for epreciation must be in accordance 'ith the
method prescri%ed by the Sec of /inance upon the recommenation of the B+
0ommissioner
This prescribed method includes:
a -eclining balance metho b Sum of the years igit metho
c Straight line metho
ny other metho as may be prescribe by the Sec of /inance upon the
recommenation of the B+ 0ommissioner
2 *his must be chared off durin the taxa%le year!
H$ DEPLETION natural resources
T *his involves natural resources such as oil, gas wells an mines *hese are non-replacea%le
$$
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 35/81
K$ RESEARC# F DE/ELOP0ENT PROGRA0
This may not be claimed as deduction if the amount is:
1 Spent for the ac#uisition or improvements of lan or for the improvement or
evelopment of natural resources
" Pai or incurre for the purpose of ascertaining the existence, location, extent or
#uality of any natural resources li%e eposits of ore or other minerals incluing oil or gas
5$ CONTRI!UTION TO PENSION TRUSTS
$%<)()T%( !8 D%DT)B)L)T: $1 *here must be a pension plan establishe by the employer!
" *he pension must be reasonable or soun!
$ 0ontribution must be given by the employer to that pension plan!
& *his must be for the benefit of the employees!
2 *he plan must not be sub(ect to the control of the employer
Contri%ution to pension trust may refer to the current year or past years!
C*RRN BR- this is considered as ordinary M necessary expenses
;mployer may also ma%e a contribution to the pension plan in regar to the
services renere for the past 1J years
PERSONAL EXE0PTIONS
PERSONAL EXE0PTIONS
5$ #ersonal and additional exemptions 39ote: <ala na yung S$A$P$E)
>. #remiums on health and hospital insurance
Limitations$
a$ +t must not be more than P",&JJJJ a year +n other wors, P"JJJJ a month *he
P",&JJJJ is the maximum amount that may be claime as euctions
3 *he family must have an income of not more than P"2J,JJJJJ a year
c *he claimant must be the spouse claiming the aitional exemption
Premiums on life insurance policy is also included here %ecause it is included under the
health insurance policy!
PERSONAL EXE0PTION
*his is an arbitrary amount in the nature of euctions from gross compensation income
+f the taxpayer has no compensation income, this can be claime as euction from gross
income from business, trae or profession
Personal exemption is given to approximate the nees of the taxpayer +t is a substitute
for the isallowance of family, personal an living expenses
)'D( !8 #%$(!'AL %+%"#T)!' $
$2
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 37/81
b -epenent upon the taxpayer for chief support!
c >nmarrie!
9ot gainfully employe!
e 9ot more than "1 years ol except if physically or mentally incapacitate
T -epenent is consiere Cliving with the taxpayer D even if the former or the latter are not
physically together if that is brought about by force of circumstances xample if one of the parents will have to unergo by6pass operation in the >S
TChief S22ort E means more than 2J of the nees of the epenents are provie by the
taxpayer
Pro3le+: +f the chil or the brotherFsister got marrie an then he has foun to be physically or
mentally incapacitate, so bumali% si tatay at epenent sa tatay for chief support, can he #ualify
as epenent
A'&%er 9o, physical or mental defect applies only to ae re<uirement! 1nce the child or
%rother/sister ot married3 he is automatically dis<ualified as dependent!
T &A'9% !8 (TAT( :
1 -eath of spouse uring the taxable year!
" -eath of epenent uring the taxable year!
$ -eath of the taxpayer uring the taxable year! estate of the taxpayer may claim the %asic
personal exemptionL
& itional epenent uring the taxable year!
2 *axpayer got marrie uring the taxable year!
4 'ainful employment of the epenent uring the taxable year
5 -epenent became more than "1 years ol uring the taxable year
T ven if the a%ove-mentioned chane of status happened durin the taxa%le year3 the taxpayermay still claim the %asic personal exemption %ecause it is as if the chane of status happened at
the end of the taxa%le year!
T *here is a provision in the *ax 0oe, which is not so clear /or purposes of head of the
family7 in the case of natural chilren or chil, there is that wor Hac/nowledged or recogni-edI.
T 0or purposes of the definition of head of the family, it is clear that to #ualify as epenent, the
natural chil or legitimate chil must be ac%nowlege or recognize by the taxpayer
T But in the efinition of the epenent, dependent means legitimate, illegitimate or legally
aopte chil or chilren *here is no wor ac%nowlege or recognize
T <as this eliberately omitte by our 0ongressmen -oes this imply that since they have somay illegitimate chilren, they may not be re#uire to ac%nowlege or recognize them an they
can claim this illegitimate chil as their epenent *his is not clear +f we will try to interpret the
law literally, there is no nee of any recognition on the part of the taxpayer
T +s this really the intention of law
T 9o he intention of the la' has al'ays %een to reconize this illeitimate child and this is
one 'ay of compellin the taxpayers to reconize this child!
T *he #resident of the $epublic of the #hils. cannot issue an executive order to increase the
basic personal exemption because the provision uner the .l *ax 0oe authorizing the
Presient to increase the personal an aitional exemption upon the recommenation of the Secof /inance has been remove or elete by A&"&
T No'3 you can only increase the amount of personal and additional exemption %y leislative
enactment
NON"DEDUCTI!LE ITE0S
$5
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 38/81
1 Personal, living or family expenses
" *hose which are consiere capital expenses Capital expenditures may be one that may
increase the value of an asset
$ ;xtra6orinary repair expene to restore the property, or ma%ing goo its exhaustion
xtra-ordinary repair is one that may prolong the life of an asset for more than one 31) year
Kou cannot claim the same as euction +nstea, you may claim it as allowance for
epreciation
& Premiums pai on the life insurance policy of the officer or employee of the employer, when
the employer is irectly or inirectly esignate as beneficiary
2 8osses from sales or exchanges of property between relate taxpayers
RULES
T Premiums paid on the insurance policy of the officer or employee may %e claimed as
deduction %y the employer3 +f the beneficiary is the family or the heirs of the officer or theemployee
T +t is not deducti%le on the part of the employer3 +f the beneficiary esignate irectly or
inirectly is the employer +f the %eneficiary desinated is the creditor or the heirs of the
employer3 the esignation is inirect! hence, that premium is not euctible
T .n the other han, on the part of the employees, these premiums may be a taxable
compensation income +t is taxa%le compensation income on the part of the employee if the
beneficiary esignate is the family of heirs of the employee
T Therefore, if these premiums are deducti%le on the part of the employer3 that is taxa%le on the
part of the employee! +f these premiums are not deducti%le on the part of the employer3 that is not
taxa%le on the part of the employee!
N$!$ Personal3 livin and family expenses are deducti%le for the simple reason that these are not
connecte with the business, trae or profession of the taxpayer +n lieu of the same, the taxpayer
may claim the so6calle CPersonal an itional ;xemptionD in the case of iniviual taxpayers
CORPORATE INCO0E TAXATION
CORPORATE TAXPAYER corporation, includes partnership no matter how create
or organize, (oint account companies, insurance companies an other associations
)t excludes0 GG227 /"c7 C" PGE"GH1 'eneral professional partnership!
" Noint venture for the purpose of unerta%ing construction pro(ects!
$ Noint consortium for the purpose of engaging in petroleum, geothermal another energy operations pursuant to a consortium agreement with the
government
TAX EXE0PT CORPORATIONSThe following organi-ations shall not be taxed in respect to income received by them as
such05 9eneral professional partnership E evote to a common profession, must not engage in
a business!
9 Joint venture for the purpose of unerta%ing construction pro(ects!
: Joint consortium for the purpose of engaging in petroleum, geothermal an other energy
operation pursuant to a consortium agreement uner service contract with the government
E there must be a consortium agreement with the government
$A
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 39/81
;$ 8abor, agricultural or horticultural organization not organize principally for profit
T So, it may erive income from such business as long as it is merely incidental , the
organization is still exempt <hat is important here is that in the articles of incorporation
of this tax6exempt organization, it must be clearly provie that these organizations arenot formed or oranized for profit!
E1a+2le: +n the course of promoting agricultural proucts, the agricultural
organization may sponsor exhibits an income may be erive from the same *hat will
not ma%e this corporation taxable because that is merely inciental *he activity has
connection with the purpose for which the corporation was organize
<$ #utual savins %an4 not having s capital stoc% represente by shares an cooperative
ban% without capital stoc% organize an operate for mutual purposes an without
profit
6 must form an organize for mutual purposes
6 Mutual savings ban% an cooperative ban% must not be organize for
profit So, it must not issue shares of stoc%
$ %eneficiary society3 order or association3 operating for the exclusive benefits of the
members such as a fraternal oranization operating uner the loge system, or a paymentof life, sic%ness, accient, or other benefits exclusively to the members of such society,
orer or association, or non6stoc% corp or their epenents
Lodge system E one which must operate uner a parent an subsiiary associations
H$ Cemetery company owne an operate exclusively for the benefit of its members
6 *his must be non6profit cemetery
;xample: 8ibingan ng mga Bayani
$ Non-stoc4 corporation or association organize an operate exclusively for reliious3
charita%le3 scientific3 athletic3 or cultural purposes3 or for the reha%ilitation of veterans !
no part of its income or asset shall belong to inure to the benefit of any member,
organizer, officer, or any specific person
K$ 5usiness leaue3 cham%er of commerce3 or %oard of trade, not organize for profit, an
no part of the net income of which inures to the benefit of any private stoc%holer or
iniviual
6 #a4ati stoc4 exchane and #anila stoc4 exchane are not covered %ythe exception *hey are sub(ect to tax
$euisites0
a *his must be establishe for common business interest
b 9o part of the income shall inure to the benefit of a particular iniviual
;xample: clearing house corp establishe by member not for profit an such corp is
tax exempt
+f an association is organize by businessmen for the purpose of encouraging prospective
investors to invest in the Phils that association is not tax exempt because the members of
such organization have ifferent business interests
5$ Civic leaue or oranization not organize for profit but operate exclusively for the
promotion of social welfare
;xample: Piso for Pasig /ounation is not for profit *his is a civic organization
omeowners ssociation is sub(ect to tax because that is not organize for profit
55$ 0armers associations or li4e associations, organize an operate as a sales agent, for
$I
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 40/81
the purpose of mar%eting the proucts of its members, an turning bac% to them the
procees of sales, less the necessary selling expenses on the basis of the #uantity of
prouce finishe by them
K<uantity of poduce) means proportionate *his must not be for profit
59 0armers cooperative or other mutual typhoon or fire insurance company3 mutual ditchor irriation company3 or li4e oranization of a purely local character3 the income of
which consists solely of assessments, ues an fees collecte from members for the sole
purpose of meeting its expenses
5:$ 2overnment educational institution *hese are >PMS>
5;$ non-stoc4 and non-profit educational institution
T *a%e note that the last paragraph of Sec $J! it provies, C9ot withstaning the
provisions in the preceing paragraphsD *his means that even thouh they are exempt3 as
reards certain income3 they may %e su%&ect to tax!
OO So, notwithstaning the provisions in the preceing paragraphs, the income of
'hatever 4ind and character of the foreoin oranizations from any of their properties3
real or personal3 or from any of their activities conducted for profit reardless of the
disposition made of such income3 shall %e su%&ect to tax!
OO *he implication is that if these tax exempt corps mentioned under nos! O to 9O3 made
an investment3 the income derived from such investment may %e su%&ect to tax!
T So, if they have real property and lease it to another , the rent income is sub(ect to tax
T+f they have deposit in a %an4 , the interest income on the same is sub(ect to tax
T+f they sell property for profit, that is sub(ect to tax
So, the exemption oes not cover this income erive form such investment *hus, it
must be an income erive from their activities which may be the purpose for which they
are organize
OOO *he insertion of non6stoc%, non6profit eucational institution, to my min, is not in
accorance with the provision of rt1& Sec $ par $, because the 0onstitution provies
for a particular test for exemption an that is CuseD of the property So, if a non6stoc%,
non6profit eucational institution has interest income erive from ban% eposit, in viewof this provision 3Sec $J, 9+0), the B+ may impose a tax on the same, regarless ofthe use or isposition So, even if the interest on such eposit is use to achieve
eucational purposes, that will not exempt it from taxation *he 0onstitution says
Cactually, irectly an exclusively use for eucational purposesD, the meaning of this is,
as the procees or income is actually irectly an exclusively use for eucational
purposes, that may be exempt But uner Sec $J, no *hat must be connecte with the
purposes or purposes for which such institution has been forme or organize Since this
runs counter to rt 1& Sec & par $ of the 0onstitution, this Sec $J shoul be eclare
unconstitutional *he 0onstitution says CuseD but here 3Sec $J) it is regarless of the use
or isposition *his must yiel to that 0onstitutional provision
5<$
(Sec$ 9H 2ar C7 TRA 5KKH)
'S+S 3'overnment Service +nsurance System)
5$ SSS 3Social Security System)
5H$ P+0 3Phil ealth +nsurance 0orp)
&J
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 41/81
5$ P0S. 3Phil 0harity Sweepsta%es .ffice)
5K$ P'0. 3Phil musement 7 'aming 0orp) Eno longer tax exempt as of "JJ56nob
9$ 9P.0. E special law
N$!$ he rule no' is settled3 2ovFt o'ned and controlled corps! re su%&ect to corporateincome tax except those mentioned under Sec! 8; par C!
PARTNERS#IP " *his is an association of two or more persons an they may contribute
money, property, or inustry to a common fun with the intention of
iviing the profits among themselves
Tests that will determine whether a partnership exists or not0
1 *here must be a contribution to a common fun
" *here must be an intention to ivie the profits among themselves
T Co-o'nership is not a partnership 0o6ownership, as a rule is a tax exempt because a co6ownership is forme an organize not for profit but for common en(oyment of the property
or for the preservation of the property
T Partnership is considered a corporate taxpayer *a%e note that this exclues general
professional partnership .nly partnership forme or organize for profit is exclue
T +f it is formed and oranized for the practice of common profession3 it is a tax-exempt
partnership!
T 0or purposes of taxation, this business partnership is taxable irrespective of whether it is
orally constitute or in writing an whether or not it is registere in the S;0
ase0 *he heirs of the ecent inherite the property *here was istribution of share But such
shares are hel uner single management +n fact the income of such property after istribution
was manage by one of the co6heirs
&eld0 *he fact that they agree that the shares shall be hel by the co6heir uner the
single management for profit, this accoring to the S0 convert the co6ownership in to a taxable
unregistere partnership 1na vs. ommissioner @ na doctrine4
ase0 *he heirs inherite the properties from their ecease mother *he property was
uner the aministration of an aministrator *his aministrator of the property was authorize to
sell these properties for profit, or lease properties for profit an engage in an income proucing
activities
&eld0 <hen these heirs inherite the property from their ecease mother, co6ownership exists
t the particular stage, it is exempt from tax when the heirs ecie to invest such property in an
income proucing activity that co6ownership is converte in to a taxable unregistere ownership
1(ea vs. ommissioner @ (ea doctrine4
ase *here was two sisters who form a common fun for the purpose of engaging in a series of
transaction for profit
&eld0 *here is a taxable unregistere partnership here
OOTest that will determine whether coownership is taxable unregistered partnership /in out
whether the heirs mae a substantial improvements on the inherite property *he heirs made a
su%stantial improvement on the inherited property, the implication is that they will engage in a
&1
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 42/81
business for profit, 1%vangelista vs. ommissioner @ %vangelista doctrine4. +f that happens, that
co6ownership will be taxe as unregistere
ase0 .belio Sr entere into a contract with .rtigas limite company >ner that contract,
.rtigas limite company will istribute parcels of lan to the 0hilren of .belio Sr for theirresiential houses fter the subivision of such parcel of lan to the chilren of .belio Sr, these
chilren ecie to sell this parcel of lan to <ie 0ity 0orp <as there a taxable partnershipforme by the chilren of .belio Sr
&eld0 *here was no partnership forme because there was no intention to ivie the profits
among themselves *his was a mere isolated transaction +solate transaction will negate any
intention to ivie the profits among themselves *hus, there was no taxable partnership forme
ase0 Pascual an -ragon purchase $ parcels of lan from Bernarino an " parcels of lan
form Mr o#ue *hereafter, the three parcels of lan which were purchase from Bernarino,
were sol to Marimer 0orp with a profit of P142,"""5J while the parcel of lan purchase from
Mr o#ue were sol at a profit of P4J,JJJ to eyes
&eld0 there was no partnership organize because this is (ust a mere sharin of ross returnn as you have learne in partnership, the law says, Cthe partners share in the net profits of a
taxable partnershipD So, mere sharing of gross return oes not of itself establish a partnership
oi't acco't E <hen two persons form or create a common fun an such persons engage in a
business for profit, this may result in a taxable unregistere association or partnership
Re4i&tratio' is not a re<uisite for purposes of taxation <hat is important here is they mustengage in a business or activity for profit
oi't &toc co+2a'ie& E *his is the miway between corporation an partnership *his has what
you call Khybrid personality)! +t is somewhat a partnership because it is an association, an
persons or members of the same contribute fun, money to a common fun n this us manage by Boar of -irectors! this means: it has that feature of a corporation n these persons may
transfer their share without the consent of others
E+er4e'cy o2eratio' *hese may be forme by two corporations *his two corporations have
separate personalities +f they form that emergency operation 3it is really a special activity) to
engage in a (oint venture, corporation 1 may be taxe only from the income erive from such
business *he income erive from such emergency operation shoul also be inclue in that
taxable income sub(ect to corporate income tax +n the same way, that corporation ", has a
separate an istinct personality! if it a part of that emergency operation, the income erive from
such special activity shoul also be inclue in the income of that corporation ", sub(ect to
corporate income tax, even if it is not registere with the S;0 3Securities an ;xchange
0ommission)
TBut if two corporations are manage by one manager, an this " corporations lease services,
manage by one person an it has " separate accounts, it is not an association forme which is
sub(ect to tax
Do+e&tic Cor2oratio' (DC) E corp forme or organize uner Phil 8aws
Re&ide't .orei4' Cor2oratio' (R.C) E foreign corporation engage in trae or business within
the Phils
No'"Re&ide't .orei4' Cor2oratio' (NR.C) E foreign corp not engage in trae or business
within the Phil
here is no fix criterion as to 'hat constitute enaed in trade or %usiness ;ach case
shall be (uge in the light of peculiar environmental circumstances But Kengaged in businessD
implies continuity of commercial transaction or ealings E continuity of business! there must be
continuity of intention to conuct continuous business
&"
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 43/81
ase0 B.0 is an offline international airline .ffline because it oes not rener any services
an no laning rights in the Phils
B.0 claime that it is not sub(ect to tax with respect to the sale of transport ocuments
or airline tic%ets in the Phils because it is an offline international airline +t oes not rener anyservice an it has no lening rights
&eld $ *he contention of B.0 is not tenable *he income erive from the sale of that
transport ocuments in the Phil is sub(ect to tax *he sub(ect of income may be property, activity
or service that prouce the same /or an income to be consiere as an income erive from
sources within the income must be erive from activity conucte or unerta%en in the Phil
+t is true that B.0 ha no property in the Phil from which its income may be erive
+t is true that B.0 i not rener any service in the Phil from which its income may be
erive But there was that activity that was unerta%en in the Phil from which income was
erive an that refers to the sale of transport ocument ccoring to the Supreme 0ourt, the
sale was mae in the Phil an the payment was mae in the Phil *his particular activity en(oys
protection of the Phil government So, it shoul share the buren of tax B.0 was consiere
oing business in the Phil uner this particular situation because there were series of transactions
mae in the Phil an B.0 was appointe a permanent agent in the Phil *his implies that thePhil an the B.0 ha no intention to establish continuous business here in the Phil 0ontinuity
of conuct is the peculiar circumstance referre to in the case
OO+f these were mere isolate transaction 3let?s moify the facts of the case) an B.0 has no permanent agent in the Phil, such airline is not consiere oing business in the Philippines
emember, international carrier is taxe on gross Philippine billings
ase0 foreign vessel unloae cargoes in the Phil twice
&eld0 <e cannot consier that as resient foreign corp *hese are mere isolate transactions
ase0 +f a corporation made an investment in another corp , the Supreme 0ourt hel that, it willnot ma%e the corp as oing business in the Phil because it has no intention to establish
continuous business
ase$ Marubeni corp is a foreign corp it investe in a omestic corp *his foreign corp has a
branch office in the Phil it mae a irect investment in that omestic corp So, it receive
ivien from that omestic corp
&eld0 *hat will not ma%e such foreign corp a resient foreign corp because of that absence of
intention to establish continues business +t woul be ifferent if it was course through the
branch office of such foreign corp
GENERAL RULES
Cla&&ificatio' Sorce& Ta1 !a&e E'titledDedctio'
Ta1 Rate
DC + F . *axable
+ncome F
$&6 1IIA
$$6 1III
:9J " 9
R.C + *axable
+ncome F
$& 6 1IIA
$$ 6 1III
:9J " 9
NR.C + 'ross +ncome =
<uestion: 0an 0ongress pass a law imposing tax on the income of a /0 erive from sourceswithout
Answer0 9o, because this will violate the principle of territoriality in taxation <e cannot
exten protection to that particular sub(ect of taxation he fundamental %asis of the po'er to taxis the capacity of the taxin authority to extend protection to the su%&ect of taxation!
&$
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 44/81
T he 7OG3 77G 78G tax rates mentioned may not %e applied except if it is lo'er than the 8G
of ross income of such corporate taxpayer *his is calle Kminimum corporate income tax rate
of >K of gross income)!
%xample$ +f a corporate taxpayer has a gross income of P"JM " of that is P&JJ,JJJ +nthis case, the tax to be pai must not be lower than P&JJ,JJJ +f the net income is P"JM an the
euction is P1IM, we only have P1M Kou multiply that by $& because now is 1IIA, so thatwill give you P$&J,JJJ *his is the corporate income tax applying that tax rate 3$&) is lower
than " which is P&JJ,JJJ 3this is the amount suppose to be pai) pplying the minimum
corporate income tax rate of " if the gross income, the amount to be pai as tax is P&JJ,JJJ
T So, the C+i'i++ cor2orate i'co+e ta1 rate of 9J of 4ro&& i'co+eD means that the
corporate taxpayer must pay corporate income tax not lo'er than 8G of its ross income +f the
actual corporate income tax is lower than the " tax that is suppose to be pai, it is the "
minimum But, if the actual corporate income tax applying that $& is P4JJ,JJJ, this is the tax
that shoul be pai
SPECIAL RULES
A$ SPECIAL DC SOURCES Ta1 !a&e Ta1 Rate
1 PRI/ATE
EDUCATIONAL
INSTITUTION
+F. *axable +ncome
1IIA:1Jor$&
1III: $$
9 :9J
'otes0
T ax rate is 9G if its income derived from unrelated trade3 %usiness or activity does N1
exceed =G of its ross total income!
T 5ut its income is su%&ect to 7OG tax rate if its income from unrelated3 trade or %usiness
or activity exceeds =G of its ross income
%xample0 +ts income erive from unrelate trae, business or activity amounte to P"JM n
income erive from relate trae, business or activity is P1JM So, the total income is P$JM +fthe allowable expenses amounte to P1JM, the taxable income now woul be P"JM
$HJ M 90 ,&$ 50 ::$:J
: :
I'co+e deri,ed fro+ I'co+e deri,ed fro+
U'related T!A Related T!A
So, the amount from unrelate *B 34445) is more than 2J of its gross income3P$JM) *hus, this P"JM taxable income is sub(ect to $& tax rate
But, if the income from relate *B is P"JM an its income erive from unrelate *B
is P1JM So:
Related T!A 66666666666666 vs V66666666666666666 U'related T!A
*he income from unrelate *B is not more than 2J of its gross income *hus, this P"JM is
sub(ect to P1J preferential tax rate
)'!"% D%$)*%D 8$!" $%LAT%D T$AD%, B()'%(( !$ AT)*)T:
T *his must be an income derived from an activity 'hich is su%stantially related to the performance of educational functions *his may inclue income from boo%store, canteen or
ormitory
Sorce& Ta1 !a&e Ta1 Rate
"NON"PRO.IT
#OSPITAL +F. *axable +ncome
1IIA61Jor $&
1III6$$
&&
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 45/81
"JJJ6$"
OOO/or purposes of non6profit hospital, this must be income derived from activities 'hich are
su%stantially related in achievin the primary purpose of that hospital , which is to rener services
to the public
*he explanation as to when the 1J or $& tax rate applies is the same as that of private
eucational institution
!$ SPECIAL R.C Sorce& Ta1 !a&e Ta1 Rate
1
INTERNATIONALAIR CARRIER
"
INTERNATIONAL
S#IPPING
I 3+ncome <ithin)
GROSSP#ILIPPINE
!ILLINGS
9$<J
(9$ J)
OOO /or purposes of )nternational Air arrier , GROSS P#IL$ !ILLINGS refer to the amount
of gross revenue erive from carriage of persons, excess baggage, cargo an mail originating
from the Philippines in a continuous an uninterrupte flight irrespective of the place of sale or
issue, an the place of payment of the tic%et or passage ocument
O Gro&& Phil$ 3illi'4& for 2r2o&e& of )nternational (hipping means gross revenue whether
from passenger, cargo or mail originating from the Phils up to final estination, regarless of the
place of sale or payments of the passage or freight ocuments
C$ SPECIAL NR.C Sorce& Ta1 !a&e Ta1 Rate
5$ LESSOR O.
CINE0ATOGRAP#IC
.IL0S
I GROSS 9<J
9$ LESSOR O.
/ESSELSC#ARTERED TO
.ILIPINO
NATIONALS ORCORP$= The harter
Agreement of which is
approved by "aritime
)ndustry Authority
I GROSS ;$<J
:$ LESSOR O.
AIRCRA.T70AC#INERY F
E-UIP0ENT
I GROSS H$<J
OOO Lessor of D and video is not inclue in no 1 So, it is sub(ect to $& tax rate
OOO Lessor of personal properties is not inclue in no ", so, it is also sub(ect to $& tax rate
&2
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 46/81
OT#ER RULES
DC R.C NR.C
5$
INTEREST
INCO0E ON !AN
DEPOSIT
9J 9J
*his shoul be inclue in its gross income
&3ect to :;J ta1$ B>* in the case ofinterest on loans which have been mae on
or after ugust 1, 1IA4, the same is &3ect
to 9J fi'al ta1
9$ INTEREST
INCO0E ON !AN
DEPOSIT UNDERT#E EXPANDED
.OREIGN
CURRENCY
DEPOSIT SYSTE0
H$<J H$<J Ta1"e1e+2t
:$ ROYALTIES
DERI/ED *IT#IN
T#E P#ILIPPINES 9J 9J :;J
;$ CAPITAL GAINS
DERI/ED .RO0
ITS SALE O.
S#ARES O.
STOC
a$ If it i& li&ted
a'd traded
thr local
&toc
e1cha'4e
Of 5J of the Gro&&
Selli'4 Price
3$ If it i& NOT
li&ted or
traded thr
local &toc
e1cha'4e
Not o,er P57$
<J O,er P57
5J
Thi& rle a22lie& !OT# to cor2orate a'd i'di,idal ta12ayer&$
<$ CAPITAL GAINS
DERI/ED .RO0
T#E SALE O.
REAL PROPERTY
*#IC# IS NOT
USED IN TRADE
OR !USINESS
J of the
Gro&& Selli'4
Prie or @o'al
/ale
%hiche,er i&
#i4her
Shold 3e treated a& OT#ER INCO0E SU!ECT to :;J
$ ??? !RANC#
PRO.IT
RE0ITTED !YA
!RANC# O..ICE(thi& o'ly a22lie& to
R.C)
NOT
APPLICA!LE
S3ect to
!ra'ch Profit
Re+itta'ce
Ta1 of 5<JNO*7 the
3a&i& of the
ta1 i& the
a+o't
a22lied for or
ear+ared
for
re+itta'ce
NOT APPLICA!LE
&4
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 47/81
CASE
Marubeni 0orp is a foreign corp it has a branch here +t mae a irect investment in a -omestic
0orp, so it receive cash iviens -o we have to inclue that in that profit to be remitte an sub(ect to
12
#ELD
9. *his is not effectively connecte with the conuct of trae or business of their branch office
*hat shoul be exclue from the profits that shoul be remitte to that Marubeni 0orp *he conition is, it
must be an income or profit effectively connecte with the conuct of trae or business of such corp
through its branch office
H$ DI/IDENDS
RECEI/ED .RO0
DC
EXE0PT EXE0PT
? *hese iviens receive from -0 by
9/0 is &3ect to 5<J .i'al Ta1 I. the
foreign govt of that foreign corp allows ata1 credit at lea&t 5KJ of the taxes eeme
pai in the Philippines by 9/0? So, the implication is that if that foreign
govt oes 'ot allo% a ta1 credit of at lea&t
5KJ7 that is &3ect to :;J a'd 'ot 5<J$
Note: *hese incomes must be erive from the Phils So, this is an interest income on ban% eposit
maintaine .>*S+-; the Phils, that is not sub(ect to final tax but shoul be inclue in the gross income
of the -0
INTRACORPORATE DI/IDENDS EXPLAINED
TAX SPARING CREDIT (Sec$ 9$! (<) 3) QQQ 5KJ
Pr2o&e *o attract investors in the Phils
Sitatio' 9/0 receive ivien, cash or property ivien from -0 *hat ivien
receive from -0 is sub(ect to 12 /+98 <+*.8-+9' *=
*his 12 may be impose on this ivien receive from -0 if the foreign govt of the 9/0
allows a tax creit at least 1I 31IIA), 1A 31III), 15 3"JJJ) +t shoul be creite from the
taxes eeme pai by this 9/0 in the Phils
So, if the foreign govt oes not allow a tax creit of at least 1I, the tax there is not 12 but
$& *hus, the tax spare or save is 1I because normally the tax is $& So, $& less 12
e#uals 1I, that is the tax save an that represents the tax creit allowe by the foreign govt
-e&tio': Must the foreign govt actually grant a tax creit or is it enough that theforeign govt allow such tax creit
A'&%er *here is no statutory provision that re#uires actual grant 9either is there a
evenue egulation re#uiring actual grant +t is clear that the provision of the law says CallowsD
So, it is enough to prove that the foreign corp allows a tax creit +t is not incumbent upon the
foreign corp to prove the amount actually grante
-e&tio': -oes a withholing agent or a subsiiary corp have the personality to file awritten claim or refun
A'&%er *he withholing agent has the personality to file a written claim for refun
withholing agent is technically a taxpayer because it is re#uire to euct an withhol the tax,
an it has the obligation to remit the same to the govt So, withholing agent is liable for tax +t hastherefore the personality to file a written claim for refun
<ithholing agent is not only an agent of the taxpayer but also an agent of thegovt Since it is an agent of the taxpayer, it is ipso facto authorize to file a written claim for
refun
CAPITAL TRANSACTIONS EXPLAINED
&5
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 48/81
0apital *ransaction +nvolves 0apital sset
0P+*8 SS;* means property hel by the taxpayer whether or not connecte with his trae or business
;=0;P*: GS.>H
1 Stoc% in trae or property of the taxpayer which may be properly inclue in the inventory at
the en of the taxable year Ginventoriable property may inclue finishe goos, raw materials or wor% in processH
" Property primarily hel for sale to customers in the .rinary course of trae or business
$ Property >se in trae or business sub(ect to epreciation, which means that this must be
epreciable property
& eal property use in trae or business
*hese & properties enumerate are calle ORDINARY ASSETS$
ASSETS *#IC# ARE CONSIDERED AS CAPITAL ARE
1 Properties not inclue in those above enumerate
" Properties use in trae or business classifie as capital assets:a accounts receivable
b property for investment in stoc% c subivision of lots to tenants at the instance of the government *he sale of these subivie
lots at the instance of the govt to the tenants is consiere as 0apital *ransaction
+nterest of a partner in a partnership *he partner may transfer that interest to another an he
may erive gain therefrom, that is consiere as 0apital *ransaction
9B +t is therefore safe to say that all properties not use in trae or business are consiere as 0apital
ssets
Ca2ital A&&et ca' 3e Co',erted i'to a' Ordi'ary A&&et$
E1a+2le property was inherite by the heirs from their ecease parents *hat property isconsiere as 0apital sset
+n the event that this property 3a parcel of lan) is improve by the heirs substantially an sell the
same at a profit, sai capital property is now converte into an .rinary sset *he profit erive from the
sale of the lan which has been substantially improve by the heirs is consiere as orinary gain
Ordi'ary A&&et ca' 3e co',erted i'to a Ca2ital A&&et$
E1a+2le +f the taxpayer is engage in real estate business, if he ies, these properties will be
transmitte to his heirs n if the heirs will iscontinue the business of that ecease parent, that
properties which are orinarily hel for sale to customers maybe converte into a 0apital sset
.ACTORS that &hold 3e co'&idered i' DETER0INING %hether it i& CAPITAL or NOT
5$ It +ay 3e the ,ocatio' of the ta12ayer$
+n one case, if the taxpayer is engage in hotel management an he inherite (ewelry
from his parents an he?ll sell the same, the 0ourt sai that it is a 0apital *ransaction
+t woul be ifferent if the one selling a parcel of lan is a real estate ealer an he
evelope the same before this property may be sol to another, this time such taxpayer
is engage in a business, in which case that sale of parcel of lan is consiere as
.rinary *ransaction
9$ So+eti+e& the 2eriod or the e1te't of acti,itie& +ay 2lay a' i+2orta't role$
Ca&e
+f a taxpayer is engage in a lumber business an he has been unsuccessful for a perio of 11 yearsan he trie again on the 1" th year *he sale that may be mae on the 1" th year may not be consiere
orinary transaction
But those sales which, woul have been mae uring that 11 th year when such taxpayer is engage
in trae or business may be consiere .rinary sset
+f the taxpayer stop his business an then unerta%e another business, that may be consiere
0apital *ransaction
&A
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 49/81
SPECIAL CAPITAL TRANSACTIONS these transactions are eeme capital transactions
SPECIAL CAPITAL TRANSACTIONS INCLUDE
5$ .ailre to e1erci&e o2tio' or 2ri,ile4e to 3y or &ell 2ro2erty$
E1a+2le B offers his lan to B gives 2 ays within which to ma%e up his min to buy this
parcel of lan for P2JJ,JJJJJ 9ow, pays B P2,JJJ for giving him time to thin% whether he will
buy that uring the 2 ay6perio +f fails to buy the same, he incurre a loss an we call this
0apital 8oss So, the loss of is consiere a gain on the part of B because the latter receive that
P2,JJJ
So, failure to exercise option to buy may result in a capital loss on the part of the offeree or buyer
s regars the seller, the gain is consiere 0apital 'ain
9$ Di&tri3tio' of a&&et& or &hare& of &toc to &tocholder 2o' liidatio' of a cor2oratio'$
E1a+2le fter li#uiation, the stoc%holers are entitle to the return of their capital if there is still
something left +f mae an investment an the value of his shares of stoc% is P1JJ,JJJ, after li#uiation
of the corporate affairs, the corp gives P12J,JJJ *he gain of which is P2J,JJJ is consiere 0apital'ain
:$ Read&t+e't of 2art'er& i'tere&t i' a 2art'er&hi2$
E1a+2le partnership is earning a profit, let us say, P1JJ,JJJ *hen it increases to P1M So, the
partnership may rea(ust the partner?s interest in the partnership .r it may also arise if for
example, mae an aitional contribution So, ?s interest will change
9ow, in ma%ing rea(ustment of interest, the partner may erive gain therefrom, an that is a
0apital 'ain
;$ Retire+e't of 3o'd&$
E1a+2le *he ebtor issues bons an after one 31) year, he pays the same *he value of the bons
is P1JJ,JJJ >pon reemption, the ebtor pays P1"J,JJJ to the creitor So the P"J,JJJ is a gain to the
creitor an we consier that as a 0apital 'ain But if there is a loss, that is consiere as 0apital 8oss
<$ *a&h Sale *his has been escribe as C41 ays saleD
*he seller here is not a ealer in securities
+t is escribe as 41 ays sale because here, $J ays before the sale, the seller ac#uire
substantially ientical securities . $J ays before the sale, he ac#uire ientical or substantially the same
stoc%s or securities CSaleD may also inclue exchange or option to sell securities
E1a+2le: *oay is Nune 1J, 9ow, here is who is not a ealer in securities or stoc%s e sellssecurities
0an that be classifie as wash sale
Kou must fin out whether $J ays before Nune 1J, he purchase ientical securities .r he ma not have
purchase ientical securities within that $J ay perio before the sale but it is possible that within $J ays
after Nune 1J, he may have purchase ientical securities
*he tax treatment here is, the gain is taxable, meaning that is classifie as 0apital 'ain because the seller is
not engage in such business +f there is a loss, since it is classifie as 0apital *ransaction, that isconsiere 0apital 8oss
*he capital gain is taxable but the capital loss incurre from wash sale transaction is not euctible
$ Short Sale a transaction wherein a person sells securities which he oes not own yet *he seller here is
a mere speculator! he is selling securities which he is yet to ac#uire, provie however, that he has
ownership of the securities at the time of elivery E he has the right to transfer ownership 3See further
iscussion on p 55)
RULES T#AT GO/ERN CAPITAL TRANSACTIONS
&I
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 52/81
Before we answer that, we shoul %now these transactions where the gain is not recognize 3meaning it is
not taxable) an the loss is not recognize 3meaning, it is not euctible)
*he basic rule is, in the sale or exchange of property if there is a gain, the gain taxable! +f there is loss, theloss is euctible)
E1ce2tio' to the 3a&ic rle ('o 4ai' or lo&& &hall 3e reco4'ied)
5$ Tra'&actio'& +ade 2r&a't to 2la' of +er4er or co'&ideratio'$ Sometimes, we call this C Ta1
E1e+2t Tra'&actio'&B or Tra'&actio'& Solely i' i'dB$
a corporation, party to merger or consoliation exchanges its properties solely for stoc% in corp,which is a party to the merger or consoliation
Ill&tratio'
Pro2erty
Cor2$ A Cor2$ ! 2ro2erty for Stoc
Stoc
b stoc%holer of a corp party to a merger or consoliation exchanges his stoc% solely for stoc% in
another corp party to that merger or consoliation
Ill&tratio'
Secrity or Stoc
Stocholder """""""""""""""""""""""" Cor2$ 5$ Stoc for Stoc
9$ Secritie& for &toc
:$ Secritie& for Secritie&
Secrity or Stoc
?? Sometimes, we call the above6mentione transactions as Tra'&actio'& &olely i' i'dB or Ta1
E1e+2t Tra'&actio'&B$
" +f a person alone or together with others or not exceeing four 3&) 3so, the total number shoul be five 32)
exchanges his property for stoc% in a corp an this person or persons, after this exchange, ac#uire
controlling interest over that corp *his means that they ac#uire at least 12 of the shares of stoc% of such
corp
6 *his is also a transaction solely in %in
-e&tio' Suppose these persons, at the time of transaction, alreay ac#uire controlling interest
over such corp, is the transaction or exchange taxable
A'&%er ;ven if these persons ac#uire controlling interest at the time of the transaction, the rule
is still applicable in which case that is still tax exempt
-e&tio' So, if these properties ac#uire uner this tax exempt transactions are subse#uently
ispose of, how will you etermine the basis
A'&%er *he basis of the stoc% or properties ac#uire uner this no gain, no loss recognize shall be the same basis in the hans if the transferor
S22o&e the 2ro2erty %a& acired 'der tra'&actio'& %here 4ai' i& reco4'ied a'd lo&& i& 'otreco4'ied (GAIN RECOGNI@ED7 LOSS NOT RECOGNI@ED)
Tra'&actio' &olely i' i'd this means that there are other consieration given other than those
mentione uner transactions solely in %in 3nos 1 an " above, but cash is ae)
E1a+2le 0orp party merger or consoliation transfers its cash an property to 0orp B, also a
party to such merger or consoliation
0orp B, in exchange, transfers its stoc%s to 0orp
2"
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 54/81
? *he basic istinction is in wash sale, the loss that may be incurre is not euctible, whereas in short sale,
the loss is euctible
TRANS.ER TAXES
;S**; 7 *>S*S
;S**; E refers to the mass of properties left by eceent or testator to his heirs or
beneficiaries
*>S* E is the right to the property, real or personal, exercise by one person for the benefit of another
parties
Parties to a *rust:
a Tr&tor or 4ra'tor 6 one who create the trust
b Tr&tee or fidciary E one who may hol the property for the benefit of other person %nown as3e'eficiary$ Sometimes, the fiuciary is also the nbeneficiary$
c Beneficiary
;state may be the sub(ect to tax, if it is uner your aministration +t may only be uner
aministration or settlement if the properties of the eceent are settle uner (uicial
settlement
+f the estate is uner extra6(uicial settlement, it is not sub(ect to tax because that will not
earn income consiering that the heirs agree to settle the estate extra6(uicially
<hen we spea% of (uicial settlement, this may inclue estate or intestate proceeings
Tr&t +ay 3e &3ect to ta1 if the tr&t i& irre,oca3le
No'"ta1a3le tr&t are
5$ Re,oca3le Tr&t$ *he income here will be taxe in so far as the recipient of the same is concerne
9$ E+2loyee& Tr&t$ +f an employer establishes a pension trust for the benefit of the employees, that
pension trust is not taxable
The tr&t i& re,oca3le if the 2o%er to re,e&t the title to the 2ro2erty of the tr&t i& ,e&ted
1 in the grantor or in con(unction with other person who oes not have the substantial averse interest in
the isposition of the property
" in any person who oes not have substantial averse interest in the isposition of the property
+n irrevocable trust, you cannot transfer or revest the title of the property
C9o substantial interest in the isposition of the propertyD E he must not be the
beneficiary
+f the properties of the estate is not investe in a business, so ten heirs are (ust co6owners
of the property, that is not taxable because co6ownership as a rule is not taxable
+f the heirs ecie to continue the business, such that the aministrator may manage thesame, that will become an unregistere taxable partnership
;state an trust may be taxe on the same manner an on the same basis as in the case of
iniviual taxpayers So, they may claim the euctions uner Section $& as long as these
euctions were pai or incurre in connection with the business of that estate or trust
;state an trust are entitle to personal exemptions P"J,JJJ
SPECIAL DEDUCTIONS (thi& ca' 3e a,ailed of o'ly 3y e&tate a'd tr&t)
1 +n the case of intestate, the executor, or aministrator may euct the income istribute to the heirs
uring the particular year when such estate is still uner settlement
" +n the case of a trust, the income may be istribute to the beneficiaries uring that year may also be
eucte *he trustee or fiuciary may istribute the income or accumulate the income *he trustee has the
iscretion whether to istribute the income to the beneficiaries uring the taxable year or to accumulate thesame an istribute such income after the lapse of certain perio of time or year +n the event that income of
the trust is istribute to the beneficiary, this particular amount may also be claime as euctions
2&
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 55/81
-e&tio'& +f there are two 3") trust create by one trustor or grantor, how o we tax the income of
that trust
A'&%er >ner the law, the taxable income of these two 3") trust must be consoliate *hat trustshoul be taxe as if they constitute one trust
Sitatio'
'rantor = create " trust .ne is trust create an the other is B trust *here is only one
beneficiary name K
8et us assume that the taxable income of trust is P1J,JJJ *he taxable income of B trust is
P"J,JJJ *he total taxable income is P$J,JJJ <e will tax these " trust separately but through
consoliation+n paying the tax after applying the applicable tax rate to the taxable income of P$J,JJJ, the tax
ue shoul be apportione to trust an B
So, for purposes of income tax, the taxable income of these " trust shoul be consoliate, but for
purposes of paying the tax, the tax ue shoul be apportione
TRANS.ER TAXES
*axes may be impose on onerous transmission of properties or on the gratuitous transmission of properties
Tra'&fer ta1e& that are i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie&
1 @* 3value6ae tax)
" Percentage *ax 3exclue this 1IIA Bar)
$ ;xcise *ax 3also exclue)
CONTENTS OF THE BACK PAGES
DIVISION OF GROSS ESTATE:1. INDIVIDUAL WHO DIED SINGLE
- G. E. includes all tat e !"ns at te ti#e !$ deat%. &ARRIED DE'EDENT - is estate includes is e(clusi)e *+!*e+ties and is sa+es in te c!n,ual *+!*e+ties UTNOT te e(clusi)e *+!*e+ties !$ te su+)i)in s*!use
/RO/ERT0 OWNERSHI/ et. S/OUSES- N'' 2 e$!+e Au. 34 15667 '/G- E8'LUSIVE /RO/ERT0 unde+ N.'.'.1. +!ut int! te #a++iae as is9e+ !"n%. acui+ed du+in te #a++iae ; LU'RATIVE TITLE
3. acui+ed ; RIGHT !$ REDE&/TION !+ E8'HANGE "it !te+ e(clusi)e *+!*e+ties<. *u+cased "it e(clusi)e #!ne;- '/G unde+ N.'.'.1. acui+ed ; ONEROUS TITLE- c!##!n $und%. acui+ed ; INDUSTR09WOR=4 SALAR0 !+ eite+3. FRUITS> RENTS !+ INTERESTS ?c!n,ual9e(clusi)e@<. all *+!*e+ties n!t dete+#ined t! e e(clusi)e sall e *+esu#ed t! e c!n,ual
FA&IL0 'ODE - a$te+ Au. 34 1566- A'/
- E8'LUSIVE /RO/ERT0 unde+ te F.'.1. i$t4 d!nati!n4 c!nt+iuti!n e(clusi)el; i)en t! !ne !$ te s*!uses !nl;- i$t and $+uits9inc!#e c!nside+ed e(clusi)e%. INHERITAN'E i)en e(clusi)el; t! !ne s*!use- i$t !+ $+uits9inc!#e c!nside+ed e(clusi)e3. acui+ed !$ *e+s!nal and e(clusi)e use- e(ce*t EWELR0
22
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 56/81
<. e(clusi)el; !"ned e$!+e #a++iae includin $+uits 9inc!#e IF s*!use as cild+en $+!#te $!+#e+ #a++iaeB. *u+cased $+!# e(clusi)e $und.
E8E&/TIONS FRO& ESTATE TA8
- s*ecial la"s1. ene$its +ecei)ed ?GSIS4 SSS@%. *+!ceeds !$ GSIS li$e insu+ance3. ene$its +ecei)ed 2 U. S. Vete+ans<. RE/ARATIONS 2 WW II Vete+ansB. RETIRE&ENT ENEFITS- i$ included in +!ss estateC. *+!ceeds !$ +!u* insu+ance
DE'EDENTS INTEREST assets tat a+e still !"ned ; decedent at te ti#e !$ deat t! te e(tent
!$ is euit; !+ inte+est in an; *+!*e+t; "ete+ as e(clusi)e !"ne+4c!n,ual !"ne+4 !+ c!##!n !"ne+.
'O&/OSITION OF GROSS ESTATE?DI4 T-G/A4 RT4 T-I'4 /-LI4 T-'D@1. DE'EDENTS INTEREST %. TRANSFER ; VIRTUE OF GENERAL /OWER OF A//OINT&ENT 3. REVO'ALE TRANSFER<. TRANSFER $!+ INSUFFI'IENT 'ONSIDERATIONB. /RO'EEDS $+!# LIFE INSURAN'EC. TRANSFER in 'ONTE&/LATION !$ DEATH
FUNERAL E8/ENSES IN'LUDE:1. e(*enses $!+ inte+#ent%. #!u+nin cl!tin ?"id!"4 cild+en@3. e(*enses $!+ "ae e$!+e u+ial<. ca+es $!+ +ites and ce+e#!nies incident t! inte+#entB. c!st !$ u+ial *l!tC. t!#st!ne !+ #!nu#ent. !itua+; !+ deat n!tices
UDI'IAL E8/ENSES
1. acc!untants $ee%. a**+aise+s $ee3. ad#inist+at!+s $ee<. att!+ne;s $eeB. d!cet $eeC. sten!+a*e+s $ee. !te+ e(*enses !$ c!u+t ea+ins
'LAI&S AGAINST THE ESTATE- !liati!ns !$ te decedent c!nt+acted in !!d $ait "ile still ali)e ut +e#ains un*aid atte ti#e !$ deat
UN/AID &ORTGAGES OR INDETEDNESS RULES: clai#ed as deducti!ns1. te said #!+tae9indetedness #ust a)e een c!nt+acted du+in te
decedents li$eti#e in !!d $ait $!+ an adeuate and $ull c!nside+ati!n in #!ne; !+ #!ne;s"!+t
%. te )alue !$ te decedents inte+est in te *+!*e+t; #!+taed is included in te)alue !$ te +!ss estate
24
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 57/81
6 #ust e undi#inised ; said #!+tae9indetedness
3. #ust n!t include:A. an; inc!#e ta( u*!n inc!#e +ecei)ed a$te+ te deat !$ decedent. *+!*e+t; ta(es n!t acc+ued e$!+e is deat
'. an; estate ta(
LOSSES 2 $i+e4 st!+#4 si*"+ec !+ !te+ casualt;4 +!e+;4 te$t4 e#ele#ent
RULES:1. #ust n!t e c!#*ensated ; insu+ance%. #ust a)e een incu++ed du+in te settle#ent !$ te estate UT NOT LATER tan telast da; $!+ te *a;#ent !$ te estate ta( C #!s.3. n!t clai#ed as deducti!n in an inc!#e ta( +etu+n !$ te ta(ale estate
TA8ES "ic a+e n!t DEDU'TILE
1. inc!#e ta( !+ inc!#e +ecei)ed a$te+ deat%. *+!*e+t; ta(es n!t acc+ued e$!+e deat3. estate ta(
'O&/UTATION !$ VANISHING DEDU'TION FOR&ULA:INITIAL ASISGROSS ESTATE 8 E. L. I. T. and t+ans$e+s $!+ *ulic *u+*!ses
SHARE OF SURVIVING S/OUSERULES:1. te +!ss c!n,ual estate sall e di#inised ; e(*enses and ca+es E8'E/T t!se
ca+eale t! te e(clusi)e *+!*e+ties%. te NET a#!unt sall e di)ided int! t"! %3. J !es t! te su+)i)in s*!use and deducted $+!# te estate !$ te decedent
ALLOWALE DEDU'TIONS- NON-RESIDENT DE'EDENT ?ELIT-TVS@1. ELIT e(*enses4 l!sses4 indetedness4 ta(esFOR&ULA:
/HIL. GROSS ESTATEWORLD GROSS ESTATE ( E L I T
%. t+ans$e+ $!+ *ulic *u+*!ses
3. )anisin deducti!ns<. sa+e !$ te su+)i)in s*!use
NOTI'E OF DEATH- i$ )alue e(ceeds /*%K4KKK- FILE n!tice "it IR "itin t"! #!s. O$ decedents deat !+ "itin t"! #!s. A$te+electi!n !$ uali$ied e(ecut!+ !+ ad#inist+at!+
ESTATE TA8 RETURN6 i$ +!ss )alue !$ estate e(ceeds /%KK4KKK !+ i$ +!ss estate c!nsists !$
+eiste+ed *+!*e+t;4 FILE in du*licate and unde+ OATH
6 i$ )alue !$ +!ss estate e(ceeds /%4KKK4KKK4 +etu+n #ust e su**!+ted ; ace+ti$icate !$ './.A.
TI&E FOR FILING RETURN6 "itin C #!s. F+!# decedents deat6 E8TENSION: n!t e(ceed 3K da;s
25
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 58/81
/A0&ENT OF ESTATE TA86 u*!n $ilin !$ te estate ta( +etu+n and e$!+e deli)e+; t! an; ene$icia+;
!$ is dist+iuti!ns sa+e !$ te estate6 E8TENSION: n!t t! e(ceed B ;ea+s6 I$ e(t+a-,udiciall; settled4 % ;ea+s
6 It #ust $ile !nd 2 n!t t! e(ceed d!ule te )alue t! e *aid
SUR'HARGE- %B $!+ late $ilin4 $!+ late *a;#ent- BK $!+ $ilin !$ $alse !+ $+audulent +etu+n
INTEREST 2 %K *e+ annu#
/ARTIES TO A DONATION1. DONOR 2 +atuit!usl; dis*!ses
%. DONEE 2 +ecei)es and acce*ts
=INDS OF DONATION1. /ERSONAL /RO/ERT0 2 #a; e !+all; !+ in "+itinE8'E/T: e(ceeds /B4KKK 2 d!nati!n and acce*tance #ust e in "+itin%. REAL /RO/ERT0 2 /ULI' DO'U&ENT A''E/TAN'E - sa#e deed !$ d!nati!n !+ se*a+ate inst+u#entM d!ne du+in te li$eti#e !$te d!n!+ RULE: HUSAND AND WIFEG.R.: E)e+; d!nati!n et"een Husand and Wi$e du+in te #a++iae is VOID
E8'E/TION:1. d!nati!n #!+tis causa%. #!de+ate i$ts - $a#il; a$$ai+ i$ts c!#in $+!# te c!n,ual *+!*e+t; #ade ; !t s*!uses a+e ta(ale4 J t! eacs*!use
RULE !n INADEUATE 'ONSIDERATION i$ te *+!*e+t; t+ans$e++ed is +eal *+!*e+t; classi$ied as ca*ital asset4 te t+ans$e+ issu,ect t! ca*ital ains ta( !$ C and n!t t! d!n!+s ta( "e+e te c!nside+ati!n is $ictiti!us4 te enti+e )alue !$ te *+!*e+t; t+ans$e+ sall esu,ect t! d!n!+s ta(
te a#!unt ; "ic te )alue !$ te *+!*e+t; e(ceed te a#!unt !$ c!nside+ati!n salle dee#ed a i$t $!+ *u+*!ses !$ te d!n!+s ta(
VALUATION OF GROSS GIFTS- F&V at ti#e !$ d!nati!n1. Real /+!*e+t;- IR !nal )alue !+ F&V $i(ed ; cit;9*+!)incial assess!+ "ice)e+ is ie+%. Sa+es !$ St!cA. I$ listed 2 a)e+ae )alue at te date !$ d!nati!n. I$ n!t listed 2 !! )alue at te date !$ d!nati!n3. /e+s!nal /+!*e+ties 2 F&V at te ti#e !$ d!nati!n
F&V P *a"n )alue ( 3
E8E&/TIONS9ALLOWALE DEDU'TIONS1. DOWRIES
RULES:A. E(e#*t u* t! 1st /1K4KKKM
2A
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 59/81
. Leiti#ate +ec!nied !+ leall; ad!*ted cild+enM'. &ade e$!+e #a++iae !+ "itin !ne ;ea+ te+e!$.2. GIFTS TO NATIONAL GOV’T. or POL. SUB.
- n!t c!nducted $!+ *+!$it3. GIFTS TO E, C, R, C, S, N, T, P, or R orgs.
- n!t #!+e tan 3K used $!+ ad#inist+ati)e *u+*!ses- #a; e a sc!!l !+ n!n-st!c entit;
DEDUCTIONS ALLOWABLE
1. ENCUMBRANCES !+ d!nated *+!*e+t;4 i$ assu#ed ; te d!nee2. DIMINUTION !$ te d!nated *+!*e+t; as s*eci$ied ; te DONOR
RULE (o!r"s#$"% $oor&
1. Sa#e all!"ale deducti!ns as +esident d!n!+s e(ce*t tat te sa#e #ust e c!nnected"it d!nated *+!*e+t; situated in te /ils.%. NO deducti!ns $!+ Qd!"+ies
RULE #' Do"" #s S%rg"r
1. TA8 /A0ALE 2 3K !$ net i$tSTRANGER 2 !ne "! is n!t a +!te+4 siste+ "!le !+ al$-l!!d4 s*!use4 ancest!+4 linealdescendant !+ +elati)e ; 'ONSANGUINIT0 in te 'OLLATERAL LINE "itin te < t
de+ee.
RULE ON /OLITI'AL 'ONTRIUTIONS- c!nside+ed TA8ALE GIFTS- d!nee in tis case is dee#ed t! +ecei)e a $inancial ad)antae +atuit!usl;
AD&INISTRATIVE /ROVISIONS- d!n!+s ta( +etu+n #ust e $iled unde+ !at and in du*licate- $iled "itin 3K da;s $+!# date !$ d!nati!nE8TENSION: n!t e(ceedin 3K da;s- WHEN /AID- ti#e te +etu+n is $iledE8TENSION: n!t e(ceedin C #!s./ROVIDED 2 OND- d!ule te a#!unt !$ TA8
TA8 'REDIT $!+ d!n!+s ta( *aid t! a $!+ein c!unt+;- d!n!+ "as a Fili*in! citien !+ +esident alien at te ti#e !$ $!+ein d!nati!n
- d!n!+s ta(es !$ an; ca+acte+ !+ desc+i*ti!n a+e i#*!sed and *aid ; te aut!+it; !$ a$!+ein c!unt+;LI&ITATIONS:1. Te a#!unt !$ c+edit in +es*ect t! te ta( *aid t! an; c!unt+; sall NOT E8'EED tesa#e *+!*!+ti!ns !$ te ta( aainst "ic suc c+edit "as taen%. Te t!tal a#!unt !$ c+edit sall n!t e(ceed te sa#e *!+ti!n !$ te ta( aainst "icsuc c+edit is taen
Tra'&fer ta1e& i+2o&ed o' 4ratito& tra'&+i&&io' of 2ro2ertie& are
1 ;state tax
" -onor?s *ax
ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of a eceent ortestator
DONORS TAX tax impose on the right or privilege to transmit properties gratuitously in favor of
another who accepts the same *his transmission of properties occurs uring the lifetime of the onor an
the onee
ESTATE TAX
2I
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 60/81
NATURE O. ESTATE TAX E +t is an excise tax since the sub(ect of the tax is the right or privilege to
transmit properties an not the property itself
PURPOSES O. ESTATE TAX to avoi the unue accumulation or concentration of wealth
1 *he primary purpose is to raise revenue in orer to support the government!" *o supplement income tax!
$ *o reuce successive ine#ualities in wealth, meaning, to achieve social e#uality
INDS O. ESTATE TAXPAYER
5$ Re&ide't e&tate ta12ayer inclues citizen of the Phils, resient alien who ie in the Phils, an such
alien, at the time of his eath, is a resient of the Phils!
9$ No'"re&ide't e&tate ta12ayer is limite to non6resient alien iniviual
eal properties, personal tangible properties an personal intangible properties of
resient eceent 3-) are taxe wherever situate
eal an personal tangible properties of non6resient eceent 39-) are taxable only if
they are locate in the Phils
eal an personal tangible properties of 9- are taxable only if they ac#uire tax situs in
the Phils
Per&o'al i'ta'4i3le 2ro2ertie& that are dee+ed to ha,e acired Phil$ &it& are 6.7 SO! (DC7 .C"
<J7 .C"SP)7 SR P8
1 /ranchise which is exercise in the Phils
" Shares of stoc%, obligation or bons issue by omestic corporation or sociedad anonima
$ Shares of stoc%, obligation or bons issue by foreign corp, A2 of the business of which is conucte
in the Phils
& Shares, obligations or bons ac#uire business suits in the Phils
L Such shares, obligations or bons ac#uire business situs in the Phils of they are use by foreigncorp in furtherance of its trae or business
2 Shares or rights in any partnership, business or in any partnership, business or inustry, establishe in the
Phils
T +f the personal intangible properties of a 9- oes not belong to the above6mentione enumeration,
they may not form part of his gross income or we may also apply the octrine of mo%ilia se<untur
personam!
T "obilia seuntum personam, accoring to the Supreme 0ourt, is a mere fiction of law So, it must
yiel to the provision of law which provies tax situs
-e&tio'
Suppose the personal intangible properties of 9- ac#uire tax situs in the Phils, can this be
exempt from real estate tax
A'&%er
K;S, by applying the rule on reciprocity
RULE ON RECIPROCITY the foreign country of that 9- oes not impose or allows exemption on
tax on the properties of the citizens of the Phils who ie in that foreign country
*he phrase Coes not imposeD an Callows exemptionD are ifferent from each other
<hen we say Coes not imposeD, this means totally exempt Cllows exemptionD means this may
not cover all properties but only certain properties
Ca&e
0ountry of Morocco has no international personality +f it grants exemptions to the intangible
personal properties if /ilipino citizens who ie in that country, will you apply also that rule onreciprocity
#eld K;S +t oes not matter whether the country has international personality or not <hat is important
is it allows or grants exemption from estate tax
Sec$ <7 9ross %state *he value 3/M@) of the gross estate of the eceent shall be etermine byincluing the value, at the time of his eath, of all property, real or personal, tangible or intangible,
wherever situate: Provie, however, *hat in the case of a non6resient eceent who at the time of his
4J
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 61/81
eath was not a citizen of the Philippines, only that part of the entire gross estate which is situate in the
Philippines shall be inclue in his taxable estateD
The co+2o&itio' of the 4ro&& e&tate +ay i'clde
5$ Decede't& I'tere&t$ 3inclues yiels, fruits an interest)6 *he gross estate may inclue the fruits an income of the properties an that may
constitute the eceent?s interest6 +n the case of parcel of lan, it may prouce income in the form of harvest which harvest
may form part of the gross estate
6 +n the case of apartment, the rental of such apartment shoul also be inclue, not only
the value of the property
6 -iviens
6 Partnership profits6 ights of usufruct
9$ Tra'&fer 3y ,irte of 4e'eral 2o%er of a22oi't+e't
6 +t implies that if the transfer is mae uner special power of appointment that shoul be
exclue from gross estate
6 +n general power of appointment, the power is exercisable or in favor of the estate,
executor, aministrator or a creitor of the estate +f the power is exercisable other than
these 3estate, aministrator, aministrator or creitor of the estate), that may beconsiere as special power of appointment
:$ Re,oca3le Tra'&fer ny transfer mae by the eceent uring his lifetime where the eceent has
reserve the right to 8*;, M;9-, *;M+9*;, or ;@.Q; such transfer! it is sufficient that the
eceent ha the power to ;@.Q;, though he i not exercise such power
6 +rrevocable transfers shoul be exclue from gross estate
6 evocable transfers are transfers which are sub(ect to alteration, termination, amenment
or moification by the eceent
;$ Tra'&fer& for I'&fficie't Co'&ideratio'
6 *he amount that may form part of the gross estate is the ifference between the /M@ of
the property an the consieration givenE1a+2le +f the property has a /M@ of P1JJ,JJJ an the consieration given is only
P2J,JJJ, the ifference of P2J,JJJ represents insufficient consieration
<$ Proceed& of Life I'&ra'ce Policy
6 Proceed& of life i'&ra'ce 2olicy +ay 3e i'clded if
a the beneficiary esignate is the estate executor, aministrator or heirs of the eceent E
whether revocable or not revocable
b the beneficiary esignate is a $r person who is revocably esignate as beneficiary
6 Proceed& of life i'&ra'ce 2olicy i& e1clded fro+ the 4ro&& e&tate i' the follo%i'4
ca&e&
a $r person is irrevocably esignate as beneficiary
b procees of group insurance policy E ta%en out by the co for its employeesc procees of accient insurance policy except accient insurance policy as characteristic
procees of 'S+S 8ife +nsurance Policy 3govt employees)e procees of life insurance payable to the heirs of ecease > S an Phil rmy
Note s regars the estate executor, aministrator or heirs as beneficiary, it is
immaterial whether the esignation is irrevocable or revocable
$ Tra'&fer i' Co'te+2latio' of Death
6 +f such transfer was inuce by the thought of eath principally, ;'-8;SS of
whether the eath is impening forthcoming or not
6 *9S/; may be one before, at the time of or even after the eceent?s eath6 $6K; P;S>MP*+.9 Gelete by P- 15J2 ug 1, 1IA4)
GM>69*, /, *61
S*
6B, B6S00HEXCEPTINS>EXCLUSIONS fro+ GROSS ESTATE
1) merger of >S>/>0* in the MQ;- *+*8;
") /+-;+0.M+SSK
$) transmission from 1st heir to another beneficiary6 will of the testator
&) B;R>;S*, -;@+S;;S, 8;'0+;S or *9S/;
6 S.0+8 <;8/;, 0>8*>8 an 0+*B8; institutions
41
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 62/81
6 no part of net income inures to any iniviual
6 not more than $J for amin purposes
DEDUCTIONS .RO0 GROSS ESTATE
DEDUCTIONS .RO0 GROSS ESTATE T#AT 0AY !E
1 0on(ugal euctions G/, N;, /;, M;, 0;, 8, >3MF+),*, S-, SP, 06+PH" bsolute euctions
$ ;xclusive euctions G@-, *6P>, >M, ;6;PH 3share of SS)
.*;S: GM6>, /, *61S*6B, '60+H
I$ CONUGAL AND A!SOLUTE DEDUCTIONS i'clde
1 /amily home" Nuicial of funeral expenses
$ 0asualty losses
& +nebtenessFunpai claim against the estate
2 ccrue taxes 3before the eath of the eceent)
4 Stanar -euction
5 Separation pay given to the heirs of the eceent on account of eath
Di&c&&io'
5$ .a+ily ho+e E 3even unmarrie person may have a family home) sub(ect to the following conitions:a there must be only one 31) family home!
b there must be certification issue by the Barangay 0aptain that the eceent is a resient of an
own that family home in that particular locality!
c the amount that is euctible or the /M@ of the family home shoul not be more than P1M!
excess shall be sub(ect to tax
the /M@ must be inclue in the gross estate of the eceent
+f the /M@ of the family home is P2M, this shoul be inclue in the gross estate of the eceent Butwhen you claim euctions, you can only claim up to P1M
9$ ;xpenses which may be in the nature of dicial e12e'&e& or f'eral e12e'&e&$
0edical e12e'&e& are also euctible sub(ect to the following conitions:
a the amount euctible, is limite only to P2JJ,JJJ!
b it must be incurre within one 31) year before the eath of the eceent!
c this must be substantiate by receipts
+n the case of funeral expenses, the amount euctible is the actual funeral expenses on the amount
which is not more than 2 of the gross estate whichever is lower, but in no case to excee P"JJ,JJJ
*here is no limitation as to amount with regar to (uicial expenses s long as it is pai or incurre in
connection with the preservation, aministration or settlement of the estate, it may be claime as
euctions Nuicial expenses also inclue extra6(uicial expenses
:$ 8osses that may arise from casualty or ca&alty lo&&e& such as fire, storm, shipwrec%, robbery,
embezzlement, theft an other casualty losses
*hese losses must be sustaine not later than six 34) months after the eath of the eceent
not compensate by insurance
;$ I'de3ted'e&& which parta%e of the nature of the '2aid clai+& a4ai'&t the e&tate$
*hese must be supporte by notarize ocuments *hese obligations must be incurre within three 3$)
years prior to eath of the eceent
nother inebteness which may be claime as euction is claim against insolvent persons ere, the
claimant is the eceent +n orer to be euctible, this claim must be inclue in the gross estate
euction from the gross estate shall be the collectible portion
<$ Ta1e& which must accre 3efore the eath of the eceent
$ Sta'dard dedctio'
4"
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 63/81
*he amount is P1M So, this may only be applie if the gross estate of the eceent is more than
P1M
H$ Se2aratio' 2ay given to the heirs of the eceent on account of eath
*he proceure is to inclue the amount in the gross estate an then claim this thereaftereuctions
II$ EXCLUSI/E DEDUCTIONS
*hese are euctions against exclusive properties
*hese may inclue: 3@P60;)
1 @anishing euctions E whether inherite or ac#uire by -onation
" *ransfer for public use$ .ther charges against the exclusive property
& ;ncumbrance on exclusive property
-iscussion:
5$ /ANIS#ING DEDUCTION 6<7 IP7 I"GE7 PD7 PT7 N"P"/D8
6 is an allowable euction against the exclusive property of the eceent
6 may be claime as euction 'der the follo%i'4 co'ditio'&
a -eath of a eceent which must ta%e place within /+@; K;S from the eath of the priorincient or before gift was given
Sitatio'
ie B is the heir 9ow, you may recall that properties ac#uire through gratuitous title uring
the marriage is classifie as exclusive property
.ne of the properties of which forms part of his gross estate ha alreay been taxe *his
property will be transmitte to B by way of succession +f B ie, ta%e note that one of his properties
was ac#uire through inheritance from an that is an exclusive property *his property ha alreay been taxe because that forms part of the gross estate of gain, this same property may be sub(ect
to estate tax because this exclusive property forms part of the gross estate of B *here seems to be
ouble taxation *hat is why, the purpose of vanishing euction is to mitigate the harshness of oubletaxation So, B may be entitle to that vanishing euction which may reuce his estate tax
*he conition set by law is that B must have ie within the 26year perio +f B ie 4 years after
the eath of , B can no longer claim such vanishing euctions
3$ Ide'tity of Pro2erty locate in the PhilsSo, there must be evience to that effect that this is the same property which forms part of the
gross estate of
c$ I'cl&io' of the ta1 2ro2erty i' the 4ro&& e&tate of the 2rior decede't$
d$ Pre,io& ta1atio'
*he estate of which inclue the property sub(ect of vanishing euction ha been
taxe! meaning, that estate tax ha been pai by prior estate
e$ No 2re,io& ,a'i&hi'4 dedctio'&$
-e&tio'
So, if B ie an the property is transmitte to 0, his heir, that property is also consiere as
exclusive property of 0 because it was ac#uire through inheritance
0an 0 claim vanishing euctions
A'&%er
9., because this ha alreay been claime by B Kou can only claim vanishing euction once
+t is impossible that B ac#uire the property not through inheritance but through onation -onor?s
tax ha alreay been pai *his is an exclusive property of B because uner the law, property ac#uireuring the marriage by gratuitous title is an exclusive property an forms part of his gross estate
0an we apply this vanishing euction
K;S ere, B must have ie within the 26year perio from the ate of onation
Aci&itio' a'd tra'&+i&&io' e1e+2t fro+ e&tate ta1 are
4$
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 64/81
a *he merger of usufruct in the owner of the na%e title
b *ransmission or elivery of the inheritance or legacy by the fiuciary heir or legatee of the
fieicommisssary
c *ransmission of the property from the first heir, legatee or onee in favor of another beneficiary,
in accorance with the esire of the preecessor Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no
part of the net income of which inures to the benefit of any iniviual an not more than $J ofsai be#uests, evises, legacies or transfers be use by such institutions for aministrative
purposes
So, transfers to non6stoc%, non6profit eucational institution is not exempt from estate tax because
this is not inclue from the enumeration B>* exempt from onor?s tax
9$ Tra'&fer .or P3lic U&e
*he onee must be the government or any political subivision +t must be use exclusively for
public use
*he transfer must be one orally but testamentary isposition an must be at its present value
:$ Other Char4e& A4ai'&t The E1cl&i,e Pro2erty
So, if the property has been mortgage with a ban%, we consier that as unpai mortgage
;$ E'c+3ra'ce O' E1cl&i,e Pro2erty
/ALUATION O. T#E GROSS ESTATE valuation as of the time of eath
1 Real Pro2erty
*he /M@ e#uivalent to the value as etermine by the B+ or zonal value . that of the value as
etermine by the provincial or city assessor whichever is higher
" Per&o'al Pro2erty
a *angible Personal Property if not being sol! pawn value x $! *he /M@ is e#uivalent to the selling price of the property 3Bran new items)
b +ntangible Property E inclues interest, shares of stoc%
6 +t must be the /M@ of the interest or shares of stoc%6 +f the intangible personal property is account receivable, it shoul be Principal P8>S
interest unpai upon the eath of the eceent except if worthless)
6 +f it is in the nature of usufruct, we must ta%e into consieration the basic stanar of
mortality rate
6 merican tropical experience table6 +/ 8+S*;- E mean or ave value between the highest an lowest stoc% #uotation
6 +/ 9.* 8+S*;- E B..Q value
DONORS TAX
DONORS TAX E is an excise tax because what is being tax here is the right or privilege to transmit or
ispose of property gratuitously in favor of another
6 *ax impose on the privilege of transmitting property by an living person to another byway of onation
6 Prevents avoiance of estate tax
PURPOSE O. DONORS TAX
1 *he primary purpose is to raise revenue!
" *o supplement income tax an estate tax
DONATION the act of liberality whereby a person isposes gratuitously of a *+9' or a +'* in
favor of another who accepts it
DONATIONS SU!ECT TO DONORS TAX
6 trust or not
6 real or personal6 tangible or intangible
1 +nirect onation E ;xample: 0ancellation of inebteness
" -irect onation
-onor?s tax applies to both natural an (uriical persons
*he law says, Conor?s tax apply whether the transfer is in trust or otherwiseD So, property hel in trust may be the sub(ect of onation But, this contemplates of a transfer
where the ominion, the right over such property, use, en(oyment of the same other
rights, must all be transferre to the onee so that it will constitute as taxable onation
4&
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 65/81
ea Section 1J&
C#ARACTERISTICS O. /ALID DONATION 6.7 A7 C7 I7 D8
1 +t must be given uring the lifetime of the onor" +t must be irrevocable
$ +t must comply with the formalities of onation
& cceptance of the onee
RE-UISITES O. /ALID DONATION
1 +t must comply with the for+alitie& of onation
6 +f the amount of personal property is P2,JJJ or less, the onation may be mae orally
6 +f the amount of personal property is more than P2,JJJ the acceptance shall be in writing
6 -onation of real property must be mae in a public instrument irrespective of the amount
" Acce2ta'ce by the onee of the onation
6 cceptance must be mae uring the lifetime of the onor
6 +f the amount of personal property is P2,JJJ or less, acceptance may be mae orally
6 +f the amount of personal property is more than P2,JJJ, the acceptance shall be in
writing
6 +n the case of onation of real property, acceptance must be mae in the same ee of
onation or in a separate public instrument
$ Ca2acity of the onor an the onee:
a *hose mae between persons who were guilty of aultery or concubinage at the time of the
onation
b *hose mae between persons foun guilty of the same criminal offense, in consieration thereof!
c *hose mae to a public officer or his wife, escenants an ascenants by reason of his office
I'ca2acitated do'ee& are 6P7 R"P7 G7 D7 NPL8
a *he priest who hear the confession of the onor uring his illness, or the minister of the gospel
who extene spiritual ai to him uring the same perio
b *he relatives of such priest or minister of the gospel within the &th egree, the church, orer,chapter, community, organization or institution to which such priest or minister belongs
c guarian with respect to onation mae by a war in his favor before the final accounts of theguarianship have been approve, even if onor shoul ie after the approval thereof!
nevertheless, any onation mae by war in favor of the guarian when the latter is his ascenant,
brother an sister, or spouse, shall be vali
ny physician, surgeon, nurse, health officers or ruggist who too% care of the onor uring his
last illness
e +niviuals, association 7 corporations not permitte by the law to receive onations
?The follo%i'4 are al&o i'ca2a3le of recei,i'4 do'atio'& 3y rea&o' of '%orthi'e&&:6P (AC7 ID7 A/)7 C"AL7 A" yr&$7 #"/D7 A or C7 ."D7 .8
a Parents who have abanone their chilren or inuce their aughters to lea a corrupt or immoral
life, or attempte against their virtue
b ny person who has been convicte of an attempt against the life of the onor, his or her spouse,escenants or ascenants
c ny person who has accuse the onor of a crime for which the law prescribes imprisonment for 4
years or more, if the accusation has been foun grounless
ny heir full of age who, having %nowlege of the violent eath of the onor, shoul fail to report
it to an officer of the law within a month unless the authorities have alreay ta%en action, this
prohibition shall not apply to cases wherein, accoring to law, there is no obligation to ma%e an
accusation
e ny person convicte of aultery or concubinage with the spouse of the onor
f ny person who by frau, violation, intimiation, or unue influence shoul cause the onor to
ma%e a onation or to change one alreay mae
g ny person who by the same means prevents another from ma%ing a onation, or from revo%ingone alreay mae, or who supplants, conceals, or alters the latter?s onation
h ny person who falsifies or forges a suppose onation of the eceent
>ner rt A5 of the /0, husban an wife are prohibite from ma%ing onation to each other
;$ I'te'tio' to onate the property of the onee 3or -.9*+@; +9*;9*)E1ce2tio' *ransfer of insufficient consieration in the case of a contract of sale
;xample:
42
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 66/81
+f the /M@ of the property is P1JJ,JJJ an P2J,JJJ was the consieration given *he ifference
of P2J,JJJ is consiere a onation
O *he amount receive by a isinherite heir is sub(ect to onor?s tax because he has no right to such
property an the same was gratuitously given, so there is no onative intent
<$ Deli,eryof the property
9ote: +f there is no vali onation, the recipient is sub(ect to income tax because of the provision C from
'hatever source derived!D
Cla&&ificatio' of do'or &3ect to do'or& ta1
1 Re&ide't do'or (RD) " this inclues citizen of the Phils or a resient alien" No'"re&ide't alie' (NRD) he must be a non6resient alien
RD E eal properties, personal tangible properties, an personal intangible properties of resient onor are
sub(ect to onor?s tax wherever situate
NRD E eal properties an personal tangible properties of a non6resient onor are sub(ect to onor?s tax
only if they are locate in the PhilsW Personal intangible properties of 9- are sub(ect to onor?s tax only
if they ac#uire tax situs in the PhilsW
Per&o'al I'ta'4i3le 2ro2ertie& that are dee+ed &itated or acire &it& i' the Phil&$ are GROSS
GI.TS 6.7 SO! (DC7 .C"<J7 .C"SP)7 SR7 P8
5$ .ra'chi&e which is exercise in the Phils9$ Share& of &toc7 obligation or bons issue by do+e&tic cor2$ or sociedad anonima.
:$ Share& of &toc7 obligations or bons i&&ed 3y forei4' cor2oratio'7 <J of the 3&i'e&& of %hich i&
co'dcted i' the Phil&$
;$ Share&7 obligations, bons i&&ed 3y a forei4' cor2$ %hich acire& 3&i'e&& &it& i' the Phil&$
Such shares, obligations or bons ac#uires business situs in the Phils if they are use by suchforeign corp in furtherance
<$ Share& or rights in any partnership, business or inustry establishe in the Phils
$ Real7 I'ta'4i3le a'd I'ta'4i3le Per&o'al 2ro2erty or 0i1ed
;ven if the personal intangible properties of the 9- ac#uire tax situs in the Phils it may still be
exempt from onor?s tax by applying the rule on reciprocity
Rle o' Reci2rocity +f the foreign country of that 9- oes not impose, or allows exemption
on the onor?s tax on the properties of citizens of the Phils who ie in that foreign country
Sec 1J& is applicable to both estate tax an onor?s tax
TARI.. AND CUSTO0S CODE
0>S*.MS 8< E oes not refer only to the provisions of *ariff an 0ustoms 0oe +t also inclues otherlaws an regulations sub(ect to enforcement by the Bureau of 0ustoms
Other la%& &3ect to e'force+e't 3y the !rea of C&to+&
1 9+0 E Sec 1J5 +mportation of goos or articles sub(ect to @* *he @* must be pai before these
goos are release from 0ustoms 0ustoy
" 9+0 E Sec 1$1 +mportation of rticles sub(ect to excise taxes *he payment of excise tax must be
mae before the goos are release from 0ustoms custoy
$ egulations that may be issue by the 0B, the implementation of such regulation is veste in the Bureau
of 0ustoms
C&to+& dtie& E are uties which are charge upon commoities on their being importe in or exporte
out of a country
Tariff means a boo% of rates! a table or catalogue rawn usually in alphabetical orer containing the
names of several states that hol commerce together
Office& char4ed %ith e'force+e't or ad+i'i&tratio' of C&to+& la%&
1 *ariff 0ommission 3*0)
44
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 67/81
" Bureau of 0ustoms 3B.0)
Po%er& of TC (TRACER)
*he power of the *0 are investigatory in nature: *hey investigate the following matters:
1 Matters relative to *ariff relations between the Philippines an the foreign countries So, that incluescommercial treaties
" elation between the rate on raw materials an finishe proucts$ Matters relative to the rrangement of scheules of values
& Matters pertinent to the 0lassification of articles
2 +t shall also investigate the ;ffects of foreign competition
4 +t shall investigate the operation of the *ariff 8aws an submit eport regaring the same
fter investigation, *0 shall submit its report to the Bureau 0ommissioners or to Secretary of/inance
P.<;S ./ *; B.0: 3P;S)
1 B.0 has the power to Prevent an suppress smuggling an other fraus upon B.0Co'&i&te't %ith thi& 2o%er7 the !OC ha&
a Power to control an supervise the clearance, as well as the entrance of vessels, aircrafts
originating from foreign countries b Police power to exercise over arbor, irport, iver an Port
c *he right of pursuit against vessel sub(ect to seizure even if it is seize beyon the maritime zone*his is calle the e1tra"territorial ri&dictio' of the !OC$ Sometimes, we call this right of
pursuit *he B.0 may exercise this power when:
c1 the vessel was sub(ect to seizure or forfeiture
c" there %a& ,iolatio' of the C&to+& la% co++itted %ithi' the Phil&$
s regars smuggle goos importe not in accorance with the provisions of the 0ustoms law, it
may be pursue by the B.0 even if it is transporte through air, lan or water
0onsistent with this power, the B.0 may enter in a builing, house, structure, enclosure an
warehouse 9o search warrant is re#uire s long as they reasonably believe that the place storesmuggle goos, seizure or search may be mae But it must be shown that the place must not constitute a
welling place or unit *his is also because if it is a welling place that is covere by the 0onstitutional
provision where warrant must be secure
Sitatio' Suppose the watchman or security guar an his family live in that place or builingwhere smuggle goos are store can there be seize without search warrant 0an we consier that a
welling place
A'&%er 9o, that will ma%e the builing a welling place ;ven if it is outsie of its istrict such
that it came from Uamboanga an was unloae at 0ebu, the collector of 0ebu may still seize the goos
<hat is only re#uire is that it came from a port of entry within the Phils
" ;nforcement of the *ariff an 0ustoms 8aw incluing other laws an regulation affecting theaministration of *ariff laws
$ ecommen to the Sec of /inance neee rules an regulations necessary for the effective enforcement
of the provisions of the *00
& ssessment an collection of lawful revenues from importe articles lso, assessment an collection of
fines, penalties, fees an other charges accruing uner the provisions of the *00
2 +t has the exclusive an original (urisiction over Seizure an forfeiture cases Meaning, to the exclusion
of regular courtsArticle& &3ect to C&to+& dtie&
rticles means wares, merchanise, goos an anything which may be mae sub(ect of
importation or exportation rticles inclue Philippine money So, if the Philippine money is transmitte orta%en out of the Phils without authority from the 0entral Ban%, that may be the sub(ect matter of seizure
Article& &3ect to C&to+& dtie&
1 -utiable articles E are articles sub(ect to 0ustom uties
" Prohibite articles:
a A3&oltely 2rohi3ited article& (S*ING)
1 those prohibite by Special 8aws
45
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 68/81
" <eapons of <ar
$ +nsiious, obscene or immoral articles
& 9arcotic or prohibite rugs
2 'ambling evices
b -alifiedly 2rohi3ited meaning sub(ect to restrictions or limitations +/ these limitations arenot complie with *hey will be prohibite
$ -uty free importe articles E these are articles not sub(ect to custom uties
*hese are: (0ASARAP)
a 0eals, bages use as trophies or awars
b Animals an plants for experimental purposes
c Sample articles
A#uatic resourcese R epair materials
f Articles necessary for the ta%e6off an laning of an airplane or for safe
navigation of vessels
g rticles for Public exposition +nclue here are historical boo%s an personal
househol effects
C&to+& dtie& +ay 3e cla&&ified a&
1 Re4lar or ordi'ary c&to+ dtie& these are the a valorem tax an specific tax
/or purposes of etermining the a valorem tax, the basis must be the home consumption value
#o+e co'&+2tio' ,ale is the price state in the commercial, trae or sales invoice +f there is a
reasonable oubt as to this value, recourse may be ha to the commercial an revenue attachX report, the
B.0 shoul refer to the available information that may help the B.0 etermine the applicable a valorem
tax
Ca&e 906Napan has a subsiiary in the Phils which is 906Phil *en aing machines were importe
from 906Napan an they use, for purposes for etermining a valorem, the home consumption value, the price state in the sales invoice +nstea, we shoul refer to the commercial revenue attachY report to
etermine the basis of that a valorem tax
" S2ecial c&to+ dtie& (DC0D)
a -umping uties
b 0ountervailing utiesNote The 2r2o&e of d+2i'4 a'd co'ter,aili'4 dtie& i& to 2rotect or local 2rodct& a4ai'&t
'fair forei4' co+2etitio'
c Mar%ing uties E the purpose of this is to prevent possible public eception
-iscriminatory uties E uties which are impose for the purpose of protecting our national
interest
D+2i'4 dty uty levie on importe goos where it appears that a specific %in or class of foreign
article being importe into or sol is li%ely to be sol in the Phils at a price less than its fair value
+mpose on specific %in or class of foreign article which is being importe into, or solor is li%ely to be sol for exportation to or in the Phils at a price less than its fair value,the importation or sale of which is li%ely to in(ure an inustry imposing li%e goos in the
Philippines
*he uty is e#ual to the ifference between the actual purchase price an the fair value of
the articles in #uestion in the country or exportation as etermine by the Sec of /inance
*hese are special uties impose on importe articles *his may be impose sub(ect to the ff
re#uisites:
1 *here must be a eliberate an continuous sale of importe article in the Philippines as price lower thanthe prices in the exporting country
" *his must pre(uice or cause or li%ely to cause in(ury to our local inustry
Sitatio' *here are articles of foreign origin the prevailing price of which in the >S is e#uivalent to
P1JJ *hese articles are sol or umpe in the Phils at lower than the prevailing price in the >S because
they are saleable in the >S
So, this will pre(uice our local inustries +n orer to protect our local prouct or to iscourage
people from buying this importe prouct, we shoul be impose special uties in aition to the regularuties -umping uties shoul be impose
4A
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 69/81
Co'ter,aili'4 dty uty e#ual to the ascertaine or estimate amount of the subsiy or bounty or
subvention grante by the foreign country on the prouction, manufacture, or exportation into the Phils of
any article li%ely to in(ure an inustry in the Phils or retar or consierably retar the establishment of such
inustry
+mpose on articles, upon the prouction, manufacture or export of which any bounty or
subsiy is irectly or inirectly, grante in the country of origin anFexportation 9o neeto show proof that the imports cause in(uries to omestic inustries proucing the same
proucts *he uty is e#ual to the ascertaine or estimate amount of the bounty or
subsiy given
Sitatio' Sometimes importe proucts en(oys certain subsiy from their government So, they
have an avantage .ur local proucts for example, oes not en(oy similar subsiy <e shoul counter that
avantage by imposing countervailing uties *he purpose there is to protect our local proucts againstunfair competition
*his represents the inlan excise tax on locally manufacture articles of the same %in to off6set
this avantage
s regars umping uties, the extent of the special uty is the amount that represents uner6
pricing
s regars countervailing uties, the extent is the excise inlan tax or the amount of avantage
en(oye by that importe article
0ari'4 dty uty on a valorem basis impose for improperly mar%e articles *he re#uirement that
foreign importation must be mar%e in any official language of the Phils, the name of the country of origin
of the article
*he purpose is to prevent eception of consumers
*he articles must be properly mar%e, otherwise a special uty of 2 of the value shall
be impose
Retaliatory or Di&cri+i'atory dty uty impose on importe goos whenever it is foun as a
fact that the country of origin iscriminates against the commerce of the Philippines in such manner as to place it at a isavantage compare with the commerce of any foreign country
*he amount may be increase in an amount not exceeing 1JJ ad valorem when the
Presient fins the public interest may be serve thereby
*his may be impose by the Presient of the Philippines when our goos are
iscriminate against
s regars umping, countervailing an mar%ing uties, it is the Sec of /inance, upon
recommenation of the *ariff 0ommission, who may impose these uties
-e&tio' <hat is the extent of the flexible power of the Presient of the Phils uner the *00
A'&%er *hat inclues the power to impose iscriminatory uties *he Presient upon
recommenation of the *ariff 0ommission may increase the tariff rates by not more than 2x or meaning
2JJx of the tariff rates e may also ecrease the tariff rates by not less than 2J
e can only exercise these powers in the interest of the national economy, national security an
general welfare of the people
9$ Other dtie&
a Stora4e fee this is charge on the goos or articles store in a warehouse uner the control an
supervision of the B.0
rticles owne by the government are exempt from storage fee is these articles are store
in a government warehouse
b ?*harfa4e de& E
;ven if there is no wharf where the goos may be unloae, wharfage ues may still beimpose because it is not a uty or charge on the use of the wharf ;ven if the goos are unloae
in a private wharf or seashore, wharfage ues still be impose because this is a uty impose on
the cargoes or articles which are unloae *hese are taxes *hese are not really custom uties
*he significance of this is that when tax exemption is grante from all forms of taxes, this may be
inclue +f the exemption is only from custom uties, wharfage ues is not inclue
c Arra&tre char4e& this is a uty impose on goos or articles for hanling, receiving or custoy
of such articles
4I
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 71/81
3i) Beast
3() *hing of value or money which is intene to influence B+ officers
Ta1 Re+edie& 'der the Tariff a'd C&to+& Code
Re+edie& Go,er'+e't I+2orter
31) ministrative or extra6(uicial
3a) ;nforcement of tax lien3b) Seizure
3a) *ax refun3b) banonement
3c) Protest
3") Nuicial 3a) /iling of civil action
3b) /iling of criminal action
if there is frau an it
must be serious
3a) ppeal to 0*, 0, S0
3b) /iling of criminal
action against erring
0ustoms officials
EN.ORCE0ENT O. TAX LIEN
Rei&ite&
31) rticles must neither be prohibite nor irregular
3") *he articles must be in the possession of the B.0
+f the articles are prohibite or irregular, the remey is seizure
banonment may be express or implie
Ca&e& co4'ia3le 3y the !OC
31) Seizure cases on the part of the government an
3") Protest case on the part of the importer
Seire ca&e& *he issue here pertain to the valiity of the importation because you may raise theefense that these are not prohibite importation
Prote&t *he issue here is the valiity of the assessment or collection, or the valiity of theclassification of articles where customs uties are impose
PROCEDURE IN PROTEST
Re+edy *here to file 6I&&e& %hich +ay 3e
rai&ed8
Pre&cri2ti,e Period
31) /ile a protest Collector of C&to+& 3a) @aliity if the
assessment or collection3b) @aliity of
classification of articles
5< day& from the
payment of 0ustomsuties
3") +f protest is enie,A22eal collector?s
ruling
C&to+&
Co++i&&io'er 300)
Ruestions of fact or
Ruestion of law
<ithin 5< day& from
receipt of the 0ollector?s
ruling
3$) +f 00 affirm
collector?s ruling,A22eal
CTA
Ruestion of fact or
Ruestion of law
<ithin : day& from
receipt of the ecision ofthe 00
3&) +f 0* affirm
collector?s ruling,A22eal
CA
Ruestion of fact or
Ruestion of law
<ithin 5< day& from
receipt of 0* ecision
32) +f 0 affirm
0*, A22eal SC Ruestion of law
<ithin 5< day& from
receipt of 0 ecision
TRANS.ER TAXES
ESTATES F TRUSTS
ESTATE E refers to the mass of properties left by eceent or testator to his heirs or
beneficiaries
51
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 72/81
TRUST is the right to the property, real or personal, exercise by one person for the benefit of another
parties
Partie& to a Tr&t
a$ Tr&tor or 4ra'tor " one who create the trust
3$ Tr&tee or fidciary E one who may hol the property for the benefit of other person %nown as3e'eficiary$ Sometimes, the fiuciary is also the beneficiary
c$ !e'eficiary
Z ;state may be the sub(ect to tax if it is uner aministration +t may only be uner aministration or
settlement if the properties of the eceent are settle uner (uicial settlement
Z +f the estate is uner extra6(uicial settlement, it is not sub(ect to tax because that will not earn income
consiering that the heirs agree to settle the estate extra6(uicially
Z <hen we spea% of (uicial settlement, this may inclue estate or intestate proceeings
Z Tr&t +ay 3e &3ect to ta1 if the tr&t i& irre,oca3le$
No'"ta1a3le tr&t are
5$ Re,oca3le Tr&t$ *he income here will be taxe insofar as the recipient of the same is concerne9$ E+2loyee& Tr&t$ So, if an employer establishes a pension trust for the benefit of the employees, that
pension trust is not taxable
The tr&t i& re,oca3le if the 2o%er to re,e&t the title to the 2ro2erty of the tr&t i& ,e&ted
1 +n the grantor or in con(unction with other person who oes not have substantial averse interest in the
isposition of the property
" +n any person who oes not have substantial averse interest in the isposition of the property
Z +n irrevocable trust, you cannot transfer or revest the title of the property
Z C9o substantial interest in the isposition of the propertyD E he must not be the beneficiary
Z +f the properties of the estate is not veste in a business, so the heirs are (ust co6owners of the property,
that is not taxable because co6ownership as a rule is not taxable
Z +f the heirs ecie to continue the business, such that the aministrator may manage the same, that will
become an unregistere taxable partnership
Z ;state an trust may be taxe on the same manner an on the same basis as in the case of iniviual
taxpayers S, they may claim the euctions uner Section $& as long as these euctions were pai or
incurre in connection with the business of that estate or trust
Z ;state an trust are entitle to personal exemptions to P"J,JJJ
SPECIAL DEDUCTIONS (thi& ca' 3e ,alid of o'ly 3y e&tate a'd tr&t)$ +n the case of estate, the executor or aministrator may euct the income istribute to the heirs uring
the particular year when such estate is still uner settlement
& +n the case of trust, the income may be istribute to the beneficiaries uring that year also be eucte
*he trustee or beneficiary may istribute the income or accumulate the income *he trustee has the
iscretion whether to istribute such income after the lapse of certain perio of time or year +n the eventthat income of the trust is istribute to the beneficiary, this particular amount may also be claime as
euctions
Z -e&tio'
+f these are two 3") trust create by one trustor or grantor, how o we tax the income of that trust
Z A'&%er
>ner the law, the taxable income of these two 3") trust may be consoliate *hat trust shoul be
taxe as if they constitute one trust
Z Sitatio'
'rantor = create " trust .ne is an the other is B *here is only one beneficiary name K
8et us assume that the taxable income of trust is P1J,JJJ *he taxable income of B trust is
P"J,JJJ *he total taxable income is P$J,JJJ <e will tax these " trust separately but through
consoliation
+n paying the tax after applying the applicable tax rate to the taxable income of P$J,JJJ, the tax
ue shoul be apportione to trust an B
5"
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 73/81
So, for purposes of income tax, the taxable income of these " trust shoul be consoliate, but for
purposes of paying the tax, the tax ue shoul be apportione
TRANS.ER TAXES
Ta1e& +ay 3e i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie& or o' the 4ratito&
tra'&+i&&io'& of 2ro2ertie&$
Tra'&fer ta1e& that are i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie&
1 @* 3value6ae tax) 3exclue this "JJJ Bar)
" Percentage *ax 3also exclue)
$ ;xcise *ax 3also exclue)
Tra'&fer ta1e& i+2o&ed o' 4ratito& tra'&+i&&io' of 2ro2ertie& are
1 ;state *ax
" -onor?s *ax
ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of the eceent or
testator
DONORS TAX E tax impose on the right or privilege to transmit properties gratuitously in favor ofanother who accepts the same *his transmission of properties occurs uring the lifetime of the onor an
the onee
ESTATE TAX
NATURE O. ESTATE TAX
+t is an excise tax since the sub(ect of the tax is the right or privilege to transmit
properties an not the property itself
PURPOSES O. ESTATE TAX
1 *he primary purpose is to raise revenue in orer to support the government!" *o supplement income tax!
$ *o reuce excessive ine#ualities in wealth! meaning, to achieve social e#uality
INDS O. ESTATE TAXPAYER
1 Re&ide't e&tate ta12ayer E inclues citizen of the Phils, resient alien who ie in the Phils, an such
alien, at the time of his eath, is a resient of the Phils!
" No'"re&ide't e&tate ta12ayer E is limite to non6resient alien iniviual
[ eal properties, personal tangible properties an personal intangible properties of resient eceent
3-) are taxe wherever situate
[ eal an personal tangible properties of non6resient eceent 39-) are taxable only if they are
locate in the Phils
[ Personal intangible properties of 9- are taxable only if they ac#uire tax situs in the Phils
[ Per&o'al i'ta'4i3le 2ro2ertie& that are dee+ed &itated or dee+ed to ha,e acired Phil$ &it&are
1 /ranchise which is exercise in the Phils
" Shares of stoc%, obligation or bons issue by omestic corporation or sociedad anonima
$ Shares of stoc%, obligations or bons issue by foreign corp A2 of the business of which is conucte
in the Phils
& Shares, obligations, bons issue by a foreign corp which ac#uire business situs in the Phils
Such shares, obligations or bons or in any partnership, business or inustry establishe
in the Phils if they are use by such foreign corp in furtherance of its trae or business
2 Shares or rights in any partnership, business or in any partnership, business or inustry establishe in the
Phils
[ +f the personal intangible properties of a 9- oes not belong to the above6mentione enumeration,
they may not from part of his income or we may also apply the doctrine of mo%ilia se<untur personam!
[ "obilia seuntur personam7 accoring to the Supreme 0ourt, is a mere fiction of law So, it must yiel
to the provision of law which provies tax situs
-e&tio'
Suppose the personal intangible properties of 9- ac#uire tax situs in the Phils, can this be
exempt from estate tax
5$
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 74/81
A'&%er
K;S, by applying the rule on reciprocity
RULE ON RECIPROCITY the foreign country of that 9- oes not impose or allows exemption on
estate tax on the properties of citizens of the Phils who ie in that foreign country
*he phrase Coes not imposeD an Callows exemtionD are ifferent from each other
<hen we say Coes not imposeD, this means totally exempt Cllows exemptionD means this may
not cover all properties but only certain properties
Ca&e
0ountry of Morocco has no international personality or not <hat is important is it allows orgrants exemption from estate tax
Sec$ <$ 9ross %state$ *he value of the gross estate of the eceent shall be etermine by incluing the
value, at the time of his eath, of all property, real or personal, tangible or intangible, wherever situate
Provie, however, *hat in the case of a non6resient eceent who at the time of his eath was not a
citizen of the Philippines, only that part of the entire gross estate which is situate in the Philippines shall
be inclue in his taxable estateD
The co+2o&itio' of the 4ro&& e&tate +ay i'clde
5$ Decede't& I'tere&t$
6 *he gross estate may inclue the fruits an income of the properties an that may
constitute the eceent?s interest
6 +n the case of parcel of lan, it may prouce income in the form of harvest which harvest
may form part of the gross estate
6 +n the case of apartment, the rental on such apartment shoul also be inclue, not only
the value of the property
9$ Tra'&fer 3y ,irte of 4e'eral 2o%er of a22oi't+e't
6 +t implies that if the transfer is mae uner special power of appointment that shoul be
exclue from gross estate6 *he general power of appointment, the power is exercisable or in favor of the estate,
executor, aministrator or a creitor of the estate +f the power is exercisable other than
these 3estate, aministrator or creitor of the estate), that may be consiere as special
power of appointment
:$ Re,oca3le Tra'&fer
6 +rrevocable transfer shoul be exclue from gross estate
6 evocable transfers are transfers which are sub(ect to alteration, termination, amenment
or moification by the eceent
;$ Tra'&fer for I'&fficie't Co'&ideratio'
6 *he amount that may form part of the gross estate is the ifference between the /M@ of
the property an the consieration given
E1a+2le
+f the property has a /M@ of P1JJ,JJJ an the consieration given is only P2J,JJJ, the
ifference of P2J,JJJ represents that insufficient consieration
<$ Proceed& of Life i'&ra'ce 2olicy$
6 Proceed& of life i'&ra'ce 2olicy +ay 3e i'clded if
a $r person is irrevocably esignate is the estate executor, aministrator or heirs of the
eceent
b the beneficiary esignate is a $r person who is revocably esignate as beneficiary
6 Proceed& of life i'&ra'ce 2olicy i& e1clded fro+ the 4ro&& e&tate i' the follo%i'4
ca&e&1 $r person is irrevocably esignate as beneficiary
" procees of group insurance policy
$ procees of accient insurance policy except if accient insurance policy has a
characteristic
& Procees of 'S+S 8ife +nsurance Policy
6 Note: s regars the estate executor, aministrator or heirs as beneficiary, it is
immaterial whether the esignation is irrevocable or revocable
5&
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 75/81
DEDUCTIONS .RO0 GROSS ESTATE
DEDUCTIONS .RO0 T#E GROSS ESTATE 0AY !E
5$ Con(ugal euctions9$ A bsolute euctions
:$ Exclusive euctions
I$ CONUGAL AND A!SOLUTE DEDUCTIONS i'clde
1 /amily home
" Nuicial or funeral expenses
$ 0asualty losses
& +nebtenessFunpai claim against the estate 2 ccrue taxes 3before the eath of the eceent)
4 Stanar -euction
5 Separation pay given to the heirs of eceent on account of eath
Di&c&&io'
5$ .a+ily ho+e7 sub(ect to the following conitions:
a there must be only one 31) family home! b there must be certification issue by the Barangay 0aptain that the eceent is a resient of an
own that family home, in that particular locality!c the amount that is euctible or the /M@ of the family home shoul not be more than P1M!
the /M@ of the family home is P2M, this shoul be inclue in the gross estate of the eceent
But when you claim euctions, you can only claim up to P1M
9$ ;xpenses which may be in the nature of dicial e12e'&e& or f'eral e12e'&e&$
+n the case of funeral expenses, the amount euctible is the actual funeral expenses or
the amount euctible is limite only to P2JJ,JJJ!
*here is no limitation as to amount with regar to (uicial expenses s long as it is pai
or incurre in connection with the preservation, aministration or settlement of the estate,it may be claime as euctions, (uicial expenses also inclue extra6(uicial expenses
:$ 8osses that may arise from casualty or ca&alty lo&&e& such as fire, storm, shipwrec%, robbery,
embezzlement, theft an other casualty losses
*hese losses must be sustaine not later than six 34) months after the eath of the
eceent
;$ I'de3ted'e&& which parta%e of the nature of '2aid clai+& a4ai'&t the e&tate$
*here must be supporte by notarize ocument *hese obligations must be incurre
within three 3$) years prior to the eath of the eceent
nother inebteness which may be claime as euction is claim against insolvent
persons ere, the claimant is the eceent +n orer to be euctible, this claim must be
inclue in the gross estate
<$ Ta1e& which must accre 3efore the eath of the eceent
$ Sta'dard Dedctio'
*he amount is P1M So, this may only be applie if the gross estate an the eceent is
more than P1M
H$ Se2aratio' 2ay is given to the heirs of the eceent on account of eath
*he proceure is to inclue the amount in the gross estate an then claim this thereafter
as euctions
II$ EXCLUSI/E DEDUCTIONS
*hese are euctions against exclusive properties
The&e +ay i'clde (/P"CE)
1 O /a'i&hi'4 dedctio'
" Tra'&fer for 23lic &e
$ Other char4e& a4ai'&t e1cl&i,e 2ro2erty
& E'c+3ra'ce o' e1cl&i,e 2ro2erty
Di&c&&io'
52
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 76/81
1 O /ANIS#ING DEDUCTION
6 is an allowable euction against the exclusive property of the eceent
6 May be claime as euction 'der the follo%i'4 co'ditio'&
a$ Death of the decede't %hich +&t tae 2lace %ithi' .I/E (<) YEARS fro+ the death of the
2rior i'cide't$
Sitatio'
ie B is the heir 9ow, you may recall that properties ac#uire through gratuitous title uring
the marriage is classifie as exclusive property
.ne of the properties of which forms part of his gross estate ha alreay been taxe *his
property will be transmitte to B by way of succession +f B ie, ta%e note that one of his properties was
ac#uire through inheritance from an that is an exclusive property *his property ha alreay beentaxe because that forms part of the gross estate of again, this same property may be sub(ect to estate tax
because this exclusive property forms part of the gross estate of B *here seems to be ouble taxation *hat
is why, the purpose of vanishing euction is to mitigate the harshness of ouble taxation So, B may be
entitle to that vanishing euction which may reuce his estate tax
*he conition set by law is that B must have ie within the five6year perio +f B ie 4 years
after the eath of , B can no longer claim such vanishing euctions
3$ Ide'tity of Pro2erty
So, there must be evience to the effect that this is the same property which forms part of he gross
estate of
c$ I'cl&io' of the 2ro2erty i' the 4ro&& e&tate of the 2rior decede't$
d$ Pre,io& ta1atio'
*he estate of which inclue the property sub(ect of vanishing euction ha been taxe!
meaning, that estate tax ha been pai by prior estate
e$ No 2re,io& ,a'i&hi'4 dedctio'&$
-e&tio'
So, if B ie an the property is transmitte to 0, his heir, that property is also consiere asexclusive property of 0 because it was ac#uire through inheritance
0an 0 claim vanishing euction
A'&%er
9., because this ha alreay been claime by B Kou can only claim vanishing euction at once
+f it is impossible that B ac#uire the property not through inheritance but through onation-onor?s tax ha alreay been pai *his is an exclusive property of B because uner the law, property
ac#uire uring the marriage by gratuitous title is an exclusive property an forms part of his gross estate
0an we apply this vanishing euction
K;S ere, B must have ie within 26year perio from the ate of onation
Aci&itio'& a'd tra'&+i&&io'& e1e+2t fro+ e&tate ta1 are1 *he merger of usufruct in the owner of the na%e title
" *ransmission or elivery if the inheritance or legacy by the fiuciary heir or legatee to thefieeeicommissary
$ *ransmissions of the property from the first heir, legatee or onee in favor of another beneficiary in
accorance with the esire of the preecessor
& Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no part of
the net income of which inures to the benefit of any iniviual an not more than $J of sai be#uests,
evises, legacies or transfers shall be use by such institutions for aministrative purposes
9$ Tra'&fer for P3lic U&e
6 *he onee must be the government or any political subivision +t must be use
exclusively for public use
:$ Other Char4e& A4ai'&t the E1cl&i,e Pro2erty
6 So, if the property has been mortage with a ban%, we consier that as unpai mortgage
;$ E'c+3ra'ce o' E1cl&i,e Pro2erty
/ALUATION O. T#E GROSS ESTATE
5$ Real Pro2erty
54
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 78/81
Le,y of real 2ro2erty
1 *he sub(ect property is real property
" <hat is issue is in the nature of an authenticate certificate escribing the property an stating the name
of the taxpayer as well as the amount ue
$ e#uires not only posting but also publication of the notice of sale in a newspaper of general circulationin $ consecutive wee%s
& +f the bi is not e#ual to the tax liability of there is no bier, the B+ may forfeit such real propertylevie by the government
2 *here is right of reemption within 1 year from the ate of sale plus 12 interest
4 *here is no such remey as constructive levy of property
Co'&trcti,e Di&trai't ca' o'ly 3e re&orted to 'der the follo%i'4 &itatio' Code C$A$R$L$)
1 <hen a taxpayer cancels or hies his property" +f he performs any act which will obstruct the collection efforts of the B+
$ +f he is retiring from business sub(ect to tax
& <hen he is about to leave the Philippines
;nforcement of the tax lien:
+f the taxpayer faile espite receipt of notice to pay the B+, a lien is create against the
properties of the taxpayer
+t is the iscretion of the B+ to avail itself of remeies which may result in the
expeitious collection of taxes
Ca&e <hich is preferre, the claim of the government arising from tax lien or the claim of the wor%ers
preicate on the (ugment renere by the 980
#eld *he claim of the government arising from tax lien is superior to the claim of a private litigant
preicate on a (ugment
E1ce2tio' *he claim of the laborers may be superior uner rt 11J of the 8abor 0oe when theemployer was eclare ban%rupt of (uicial li#uiation
O+n observing the provisions of the tax coe in regar to istraint or levy, the B+ cannot
apply or invo%e the presumption of regularity in aministrative proceeings
So, if the proceure ha been #uestione by the taxpayer, it is not for the
taxpayer to prove that the proceures uner the 980 in regar to istraint on levy ha
been complie with
evenue taxes are self6assessing taxes
Rei&ite& of A&&e&&+e't
1 <ritten notice stating that the amount is ue as tax
" <ritten notice must contain a eman for the payment of such tax
ssessment is not a conition sine #ua non for purposes of collecting taxes *his is so
because eman is not re#uire *he rule uner rt 114I of the 900 that eman isre#uire before a person may incur in elay cannot be applie *axpayer incurre inelay if he fails to pay the tax on ate fixe by *ax 0oe
ssessments, mae by the B+ 0ommissioner are presume correct *he presumption
oes not violate the ue process uner the 0onstitution because the presumption is
merely isputable
9ormally, the B+ may re#uire the taxpayer to submit reports, ocuments, boo%s of
accounts an other report to establish his tax liability +n the absence of these reports,
ocuments, etc, the B+ may etermine the tax liability by using other methos
O*he B+ can etermine the tax liability of the taxpayer on the basis of that so6calle best
evience obtainable in the absence of sai reports etc +n one case, agents of the B+ usethe boo%s of account seize as a result of rai by means of search warrant
NET *ORT# OR IN/ENTORY 0ET#OD (al&o called Net I',e&ti4atory 0ethod)
5A
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 79/81
6 *his is another metho that may be employe by the B+ in etermining the tax liability
of the taxpayer *his is an expansion of that accounting principle, a&&et& le&& lia3ilitie&
eal& 'et %orth
A&&e&&+e't i& +ade %he' it i& +ailed7 relea&ed or &e't$
E1a+2le+f it was receive by the taxpayer in a particular ate 3-ec 2, 1II5), you shoul count the prescriptive perio for ma%ing an assessment from the ate it was maile, release or sent by the B+ an
not from the receipt of the notice of assessment by the taxpayer
*he assessment may be sub(ect to revision by the B+ +f revise, the prescriptive perio will
commence to run from the safe when such revise assessment is maile, release or sent So, it is not from
the ate the original assessment is maile etc but from the ate the revise assessment has been maile*he ma%ing of assessment is prescriptible
The rle i&7 the !IR +ay collect ta1e& %ith or %ithot 2rior a&&e&&+e't$
PRESCRIPTI/E PERIOD .OR 0AING
AN ASSESS0ENT F COLLECTION
*ith 2rior a&&e&&+e't *ithot 2rior a&&e&&+e't
+ eturn file is not false or
frauulent
a eturn was file but there
exist a eficiency
b eturn was file but no
payment has been mae
: year& fro+ the date of actal
fili'4$ +f it was file earlier than
the ate fixe by the *ax 0oe
0.88;0*+.9: <ithin : year&
from the ate of assessment
: year& fro+ the date of actal
fili'4 or from the last ay fixe
by law for filing such return
++ /ailureF/alsifyF/rauulent
a +ntentional failure to file
a return b /alse return
c /rauulent return
5 year& fro+ the di&co,ery of
such omission of failure, falsityor frau
COLLECTION : year& from
the ate of assessment
*axes may be collecte even
without prior assessment an prescriptive perio is 5 year&
from the iscovery of failure or
omission, falsity or frau
Note& *he rule is if prior assessment has been mae, the B+ can avail of the aministrative an
(uicial remey But if without prior assessment, the B+ can only avail of the (uicial remeies
eturn must be the one prescribe by the B+ S., if you file your Boo%s of ccounts in
lieu of that return, that oes not constitute return
PRINCIPLES GO/ERNING T#E .ILING O. AN ACTION .OR COLLECTION
!Y T#E !IR
Collectio' i& 2ro2er 'der the follo%i'4 &itatio'&
a B+ assessment is consiere final an executory, if no protest or ispute has been mae by the
taxpayer +/ proteste by the taxpayer but he i not appeal, the B+ ecision on such protest, the
effect is that the B+ ecision shall be consiere final an executory b +/ he appeal the ecision of the B+ of the 0ommissioner to the 0* but he i not appeal the
ecision of the 0* to 0, the ecision of the 0* shall be final an executory
c +f he appeal to the 0 but the 0 ecision affirming that ecision of the B+ was not appeale tothe S0, 0 ecision shall be final an executory
+f appeale to S0 but S0 affirm the ecision of the 0, S0 ecision is final an executory
+f the ecision of the B+ is final an executory, the assessment mae cannot be
#uestione *he issue of prescription can no longer be raise except if the B+ submitte
the particular issue for the resolution of the 0ourt, that is consiere as waiver on the part
of the B+ an such issue of prescription may be sub(ect to resolution
*here is no provision in the *= 0oe that prohibits the B+ from filing an action for
collection even if the resolution on the motion for reconsieration on the assessment
mae is still pening <hen the case is pening before the 0*, collection may also be mae by filing of an
answer to the petition for review with the 0* *his is tantamount to a filing of
collection of tax *his will also stop the running of the prescriptive perio for collection
of taxes
0ollection of taxes is prescriptible
5I
8/12/2019 Taxation} Tax I
http://slidepdf.com/reader/full/taxation-tax-i 81/81
<;; *. /+8;: 3a) 7 3b) LLLLL B+ 0ommissioner
+SS>;S which may be raise LLLLL Ruestion of law or fact
or both #uestions of law an fact
<;9 LLLLLLLLLLLLLLLLLLLLLLL *ithi' : day& fromreceipt of such assessment
I. the ree&t for i',e&ti4atio' or reco'&ideratio' ha& 3ee' de'ied 3y the !IR
1 /ile a motion for reconsieration of the ecision with the B+! .
" ppeal the ecision with the 0*
OOO Motion for reconsieration must raise new grouns, meaning grouns which have not been raise in
that re#uest for reconsieration or reinvestigation .therwise, it is (ust a pro6forma motion, it will notsuspen the perio within which to appeal the B+ ecision to the 0* which is $J ays from receipt of
the B+ ecision
+SS>;S that may be raise on appeal with the 0* LLL Ruestions of
8aw or fact . both
If CTA affir+& the deci&io' of the !IR
ppeal the 0* ecision to 0
ISSUES LLLLLLLLLLLLLLLLLLLLLLLLLLLLLL Ruestions of law
*#EN QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ <ithin 12 ays from receipt of the
0 ecision
*he taxpayer may, instea of filing a protest, file a written claim for refun
RE-UISITES .OR .ILING RE.UND
1 *his must be file within the two 3") year perio from the ate of payment!
" *he fact of withholing must be proven!
$ *his must be inclue in the income tax return of the taxpayer!& +t must be shown that the payment or the amount state in the return was receive by the government
<;; *. /+8; ;/>9-: 666 B+
+SS>;S: 666 Ruestions of law or fact .
666 both .
666 the taxes are illegally or erroneously collecte
ILLEGALLY COLLECTED TAX ,&$ ERRONEOUSLY COLLECTED TAX
Ille4ally collected ta1 means it violates certain provision of the law +t may not be authorize by a
peculiar *ax 8aw or statuteErro'eo&ly collected ta1 means there may be a law passe but there was a mista%e in the
collection
*#EN TO .ILE *ithi' 9 year& from the ate of payment
L Payment must be proven in contemplation of *ax 8aw, there is payment when the tax liability is fully pai So, if it is payable in installment, there can only be payment when the final installment has been pai
A1