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Domondon Taxation Bar Exam Answers Part 2

Published by admin on December 3 ! 2" 2 # $es%onse

CONCEPTS OF INCOME AND INCOME TAXATION

Nature, Sco e, C!assi"ication and Essentia! C#aracteristics o" Income
De"ine income "or tax ur oses$ %&'(') &ncome means all wealth which 'lows into the tax%ayer other than as a mere return o' ca%ital( &t includes the 'orms o' income s%eci'ically described as )ains and %ro'its! includin) )ains deri*ed 'rom the sale or other dis%osition o' ca%ital assets( +,ec( 3- $e*( $e)( .o( 2/ &t is an amount o' money comin) to a %erson or cor%oration! whether as %ayment 'or ser*ices! interest or %ro'it 'rom in*estment( +0onwi et al *( 0TA 2 3 ,0$A 13/ &ncome is a 'low o' ser*ice rendered by ca%ital by the %ayment o' money 'rom it or any other bene'it rendered by a 'und o' ca%ital in relation to such 'und throu)h a %eriod o' time( +2adri)al *( $a''erty 31 Phil 3 3/ &ncome is the )ain deri*ed 'rom ca%ital! 'rom labor! or 'rom both combined! %ro*ided it be understood to include %ro'it )ained throu)h a sale or con*ersion o' ca%ital assets( +4isher *( Trinidad 33 Phil 51 /(Thus! to tax a stoc6 di*idend would be to tax a ca%ital increase rather than the income( +0ommissioner *( 0A! 7anuary 2"! 555/ &ncome means earnin)s law'ully or unlaw'ully ac8uired! without consensual reco)nition! ex%ress or im%lied! o' an obli)ation to re%ay and without restriction as to their dis%osition( +7ames *( 9,! 3-- 9, 2 3/ Distin*uis# income "rom ca ita! %&'(+) ,ow does -income. di""er "rom -ca ita!./ %&''+) 0a%ital is wealth or 'und while income is %ro'it or )ain 'rom the 'low o' wealth( +0ommissioner *( 0TA et at 7anuary 2"! 555/

0a%ital is a 'und o' %ro%erty existin) at an instant o' time while income is that 'low o' ser*ices rendered by that ca%ital by the %ayment o' money 'rom it or any other bene'it rendered by a 'und o' ca%ital in relation to such 'und throu)h a %eriod o' time( 0a%ital is wealth while income is the ser*ice o' wealth( 0a%ital is a tree! while income is the 'ruit( +2adri)al *( $a''erty! 31 Phil 3 3/ De"ine or ex !ain t#e meanin* o" net taxa0!e income o" an indi1idua! or a cor oration$ %&'2&) In 0rie", w#at do 3ou mean 03 net income "or ur oses o" income tax/ %&'22) 4#at is meant 03 taxa0!e income/ %2555) Taxable income means the %ertinent items o' )ross income s%eci'ied in the .&$0 less the deductions and /or %ersonal exem%tion and additional exem%tions! i' any! authori:ed 'or such ty%es o' income by the .&$0 and other s%ecial laws( +,ec 3 ! .&$0/ 2r( 0ru: bou)ht a residential house and lot in 515 'or P 2"!"""( &n 2""2! curious as to how much his %ro%erty then cost! he as6ed a real estate bro6er to rea%%raise the same( The real estate bro6er re%orted that the *alue o' his %ro%erty has increased to P !1""!"""( ,hould 2r 0ru: re%ort the P !-1"!""" increase in his income tax return 'or the year 2""2; $easons + 512/ .o( The P !-1"!""" increase in the *alue o' the residential house and lot is not considered as income re%ortable as income o' 2r( 0ru: because such increase has not yet been recei*ed by 2r( 0ru:! either %hysically or constructi*ely( Besides! ca%ital )ains o' indi*iduals on dis%ositions o' real %ro%erty are sub<ect to a 'inal tax! the %resumed ca%ital )ain tax( 0onse8uently! increases in *aluation are not re%orted in the income tax return( &ncreases in *aluation o' real %ro%erty are not sub<ect to income tax! hence not re%ortable in the income tax return( 6omu!us, 78 3ears o" a*e and a retired em !o3ee #ad t#e "o!!owin* ro erties and transactions at t#e end o" t#e 2552 taxa0!e 3ear9 a) S#ares o" stoc: in Sa0inian Cor oration w#ic# #e 0ou*#t in &''8 "or P+5,555$55 and w#ic# were wort# P25,555$55 as o" t#e end o" 2552$ 0) S#ares o" ;isi*ot# Cor oration w#ic# #e 0ou*#t "or P75,555$55 in &''5 and w#ic# #e so!d "or P&55,555$55 in 2552$ Are t#e a0o1e items su0<ect to t#e re*u!ar tax rates "ound in t#e sc#edu!e under Section 27 %A) o" t#e NI6C w#ic# states t#e tax rates on citi=en and residents/ Ex !ain 3our answer$ %&'8()

a( The shares o' stoc6 in ,abinian 0or%oration are not sub<ect to the re)ular tax rates 'ound in the schedule under ,ec(23 +A/ o' the .&$0 o' 55= because the shares ha*e not been dis%osed o'( Thus! there is no )ain to be taxed( b( Assumin) that the shares o' >isi)oth 0or%oration are ca%ital assets o' $omulus! not listed and traded throu)h a local stoc6 exchan)e! then the sale is not sub<ect to the re)ular tax rates 'ound in the schedule under ,ec( 23+A/ o' the .&$0 o' 55=! because the actual )ains deri*ed 'rom the sale are sub<ect to the 'inal tax %ro*ided under ,ec( 2 +B/ +0/ o' the .&$0 o' 55=( Mananan**o!, a !aw3er, #as amon* #is c!ients a recruitment a*enc3 w#ic# a3s #im a mont#!3 retainer o" P&5,555$ In order to reduce #is income tax !ia0i!it3, Mananan**o! arran*ed "or t#e retainer to 0e aid direct!3 to #is dau*#ter, C#ristina$ T#is 3ear, Mananan**o!>s *ross income "rom #is !aw ractice, exc!usi1e o" t#e P&5,555 mont#!3 retainer "ee is P2,555,555$ ,ow mus# *ross income must Mananan**o! re ort t#is 3ear/ Ex !ain 3our answer$ %&'8() The total amount o' P2! 2"!""" which consists o' the amount o' P2!"""!""" )ross income 'rom his law %ractice %lus the total amount o' P 2"!""" %aid as a retainer 'ee to his dau)hter( This should be so because there was no *isible ser*ice rendered by 0hristina to the recruitment a)ency( Hence! it is clear that said %ayment is a mere subter'u)e on the %art o' 2ananan))ol to a*oid the taxes( In &''(, Cor oration -X. #ad a ca ita! stoc: o" &,555 s#ares wit#out ar 1a!ue$ At t#e time o" its incor oration, t#e 1a!ue o" eac# no? ar 11a!ue s#are was P&5$ In 2552, due to its ro"ita0!e o erations, t#e cor oration earned a sur !us o" P255,555$ T#e cor oration>s 0oard o" directors increased t#e stated 1a!ue o" eac# s#are 03 P&'5 ma:in* eac# s#are wort# P255$ T#e BI6, "or income tax ur oses, assessed eac# stoc:#o!der "or t#e P&'5 increase$ Is t#e BI6 correct$ Ex !ain$ %&'8') .o( The stoc6holders ha*e not %hysically or constructi*ely recei*ed any income sub<ect to tax( There was no chan)e in the %ro%ortion o' their ownershi% in the cor%oration considerin) that the shares o' stoc6 are without %ar *alue( 4urthermore! there was no reali:ation o' the income throu)h the chan)e in the stated *alue( ?hen the stoc6holders dis%oses o' the shares! then the same would be sub<ect to ca%ital )ains tax( -A. was en*a*ed 03 Premiere Mo1ies to er"orm A PANTOMIME ACT IN A MO;IE IT 4AS MA@INA$ -A. was to 0e aid P25,555 "or #is er"ormance and t#e arties si*ned t#e necessar3 contract$ -A. t#en *ratuitous!3 assi*ned #is ri*#ts under t#e contract to #is son, -B.$ -B. !ater on co!!ected t#e P25,555 "rom t#e Premiere Mo1ies$ Is t#e P25,555 taxa0!e to -A./ 6easons$ %&'8') Yes( The P2"!""" A recei*ed 'or the %er'ormance is income 'rom the %ractice o' his %ro'ession as an artist( +,ec( 32 +A/! .&$0 o' 55=/(The 'act that he )ratuitously )a*e the same to his son does not detract 'rom his +A@s/ ha*in) recei*ed the income in exchan)e 'or his %ro'essional ser*ices(

,ince! there is no showin) o' other donations made by A! then the P2"!""" is not sub<ect to the donor@s tax because the 'irst P ""!""" net donation is exem%t 'rom donor@s taxes( +,ec( 55+A/! .&$0 o' 55=/ T#e em !o3ees o" Tra1e!!ers, Inc$ sat*ed a stri:e$ X, a non?union mem0er <oined t#e stri:e and 1o!unteered to ic:et t#e com an3 remises "rom 8am to + m, Monda3 t#rou*# Frida3$ Six mont#s into t#e stri:e, X ran out o" mone3 and as:ed "inancia! aid "rom t#e union since #e #as no ot#er source o" income and needed "inancia! assistance in order to !i1e$ T#e union *a1e #im PB,555 a mont# to ta:e care o" #is "ood reCuirements !us P&,555 to ta:e care o" #is mont#!3 rent$ 4#en X "i!ed #is return, #e exc!uded t#ese 0ene"its "rom #is *ross income$ T#e exc!usion was denied 03 t#e BI6$ Decide$ %&''B) The denial o' the inclusion is not *alid( & would consider the amount )i*en as a )i't! which should be excluded 'rom his )ross income because there is no le)ally demandable obli)ation on the %art o' the union to )i*e A money( The money was in the nature o' a donated 'inancial assistance and not com%ensation 'or ha*in) <oined the %ic6et( In &''', X started constructin* a commercia! 0ui!din* wit# s aces "or !ease to t#e u0!ic$ X reCuired D, a ros ecti1e !essee, to si*n a re?!ease a*reement, w#ic# rinci a!!3 ro1idedE %a) t#at t#e !essee s#a!! extend to t#e !essor a non?interest 0earin* !oan o" P&55,555 a3a0!e wit#in &2 mont#sE and %0) t#at in consideration o" t#e !oan, t#e renta!s s#a!! not 0e increased w#i!e t#e !oan remains un aid$ F on com !etion o" t#e 0ui!din* in 2552, D extended t#e !oan o" P&55,555 to X and #e %X) was *i1en a s ace in its *round "!oor$ Ma3 t#e BI6 consider t#e P&55,555 as taxa0!e income o" X/ 6easons$ %&''B) .o( There was no )ain reali:ed by A whether as %ayment 'or ser*ices! interest or %ro'it 'rom in*estment because he is re8uired to re%ay the P ""!""" loan( A, an arc#itect, owes G, a 0usinessman, t#e sum o" P&5,555$ G en*a*ed t#e ser1ices o" A to remode! #is residence at Ma*a!!anes ;i!!a*e, Ma:ati$ T#e 1a!ue o" t#e ser1ices rendered 03 A is P&55,555$ Accordin*!3 G cance!!ed t#e de0t o" A$ a$ Is t#e P&55,555 1a!ue o" t#e ser1ices considered income su0<ect to tax/ Ex !ain 0rie"!3$ 0$ Fnder t#e same "acts, su ose G aid A P&55,555 "or t#e ser1ices rendered and at t#e same time condoned A>s inde0tedness$ Is t#e amount condoned considered income su0<ect to tax/ Ex !ain 0rie"!3$ %&'28) a( Yes( ?hether A uses the accrual method or cash method o' accountin)( &' A uses the accrual method o' accountin)! then he has reco)ni:ed income u% to the total extent o' P ""!""" as there is now constructi*e recei%t o' income( Bn the otherhand! i' he uses the cash method! he should be sub<ect to tax only u% to the extent o' P "!""" the amount condoned( This is so because the condonation was in exchan)e o' the ser*ices rendered( The P5"!""" *alue o' the ser*ices is not yet deemed collected(

b( Yes( ?hen C %ays A P ""!"""! then! the same is considered income 'rom the exercise o' A@s %ro'ession because o' the %hysical recei%t o' the money( The amount o' P "!""" condoned is considered as a )i't because the cancellation was without consideration( Onesi #orous, a <unior executi1e, owed #is em !o3er P7,555$ T#e mone3 was ad1anced to #im to a3 "or #is ersona! 0i!!s$ Hust recent!3, #e su0mitted an exce!!ent re ort to #is em !o3er w#o 0ecame 1er3 !eased 0ecause it attracted a 0i* c!ient to t#eir com an3$ T#e em !o3er, t#ere"ore, decided to cance! t#e de0t o" Onesi #orous and, in addition, *a1e #im a round tri tic:et to ,on*:on* !us oc:et mone3 o" P+,555$ ,ow are t#e a0o1e items to 0e treated on t#e income return o" Onesi #orous/ The P3!""" is considered as %art o' the com%ensation income o' Bnesi%horous to be re%orted in his income tax return because the condonation was in exchan)e o' ser*ices %er'ormed by him 'or his em%loyer as a result o' em%loyerDem%loyee relationshi%( The *alue o' the round tri% tic6et to Hon)6on) includin) the %oc6et money may be treated as income to be re%orted in the income tax return i' Bnesi%horous is a ran6 and 'ile em%loyee! because income includes e*erythin) o' *alue not necessarily in money( &' Bnesi%horous is not a ran6 and 'ile em%loyee! then the *alue o' the round tri% tic6et to Hon)6on) includin) the PE!""" %oc6et money are 'rin)e bene'its taxable to the em%loyer and not re%ortable by the em%loyee in his income tax return( +,ec( 33! .&$0 B4 55=/ Mr$ X as:ed 3ou to re are #is income tax return$ Is #e reCuired to inc!ude as art o" t#e *ross income #is romissor3 note amountin* to P&5,555 w#ic# was condoned 03 #is creditor/ Ai1e 3our reason$ .o( there is no showin) in the 'acts that the condonation was in exchan)e o' ser*ices rendered by 2r( A( the condonation amounts to a )i't( Mr$ Francisco 0orrowed P&5,555 "rom #is "riend Mr$ Autierre= a3a0!e in one 3ear wit#out interest$ 4#en t#e !oan 0ecame due, Mr$ Francisco to!d Mr$ Autierre= t#at #e %Mr$ Francisco) was una0!e to a3 0ecause o" 0usiness re1erses$ Mr$ Autierre= too: it3 on Mr$ Francisco and condoned t#e !oan$ Mr$ Francisco was so!1ent at t#e time #e 0orrowed t#e P&5,555 aand at t#e time t#e !oan was condoned$ Did Mr$ Francisco deri1e an3 income "rom t#e cance!!ation or condonation o" #is inde0tedness/ Ex !ain$ .o( 2r( 4rancisco did not deri*e income( &t is clear that the creditor! 2r( Futierre:! merely desired to bene'it the creditor! 2r( 4rancisco! and without any consideration thereo' cancelled the debt( The amount o' the debt cancelled is a )i't and not income( An inso!1ent com an3 #ad an outstandin* o0!i*ation o" P&55,555 "rom a creditor$ Since it cou!d not a3 t#e de0t, t#e creditor a*reed to acce t a3ment t#rou*# dacion en a*o a ro ert3 w#ic# #ad a mar:et 1a!ue o" PB5,555$ In t#e dacion en a*o document, t#e

0a!ance o" t#e de0t was condoned$ a$ 4#at is t#e e""ect o" t#e disc#ar*e o" t#e un aid 0a!ance o" t#e o0!i*ation on t#e de0tor cor oration/ 0$ Inso"ar as t#e creditor is concerned, #ow is #e a""ected taxwise as aa conseCuence o" t#e transaction/ %&''2) a( The creditor cor%oration is deemed to ha*e recei*ed a )i't 'rom its creditor to the extent o' the di''erence! between the debt P ""!"""/ and the *alue o' the %ro%erty %aid +P "!"""/! which is P="!"""( &t is clear that the creditor merely desires to bene'it the debtor cor%oration and without any consideration thereo' cancels the debt( +,ec( E"! $e*( $e)( E"/( Thus! the amount 'ore)one which is P="!""" is considered a )i't and not to be re%orted as income in the cor%oration@s return( b( ,ince the P="!""" is considered a )i't! the creditor shall be sub<ect to a%%ro%riate rate 'or donor@s tax(

Aross Income
4#at is -*ross income. "or ur oses o" t#e income tax/ Exce%t when otherwise excluded! G)ross income means all income deri*ed 'rom whate*er source! includin) +but not limited to/ the 'ollowin) items: + / 0om%ensation 'or ser*ices in whate*er 'orm %aid! includin)! but not limited to 'ees! salaries! wa)es! commissions and other similar itemsH +2/ Fross income deri*ed 'rom the conduct o' trade or business o' the exercise o' a %ro'essionH +3/ Fains deri*ed 'rom dealin)s in %ro%ertyH +3/ &nterestsH +E/ $oyaltiesH +-/ Di*idendsH +=/ AnnuitiesH +1/ Pri:es and winnin)sH +5/ PensionsH and + "/ Partner@s distributi*e share 'rom the net income o' the )eneral %ro'essional %artnershi%(I J,ec( 32 +A/ o' .&$0 o' 55=K 4 was noti"ied 03 #er de ositor3 0an: on Hune B, 2555 t#at P+5 mi!!ion #ad 0een credited to #er sa1in*s account 0ecause o" t#e remittance o" FSI& mi!!ion t#rou*# a FS 0an: 03 #er sister in t#e F$S$ 4 !ost no time in s endin* most o" t#e mone3 "or 1arious ur oses, suc# as t#e urc#ase o" !uxurious condominium unit and a !uxur3 car, mone3 mar:et !acement *i"ts to re!ati1e, etc$ Soon t#erea"ter, t#e FS 0an: disco1ered t#at 4>s sister remitted on!3 FSI&,555 and not FSI& mi!!ion$ On or a0out Hune 2', 2555, t#e FS 0an: "i!ed a com !aint "or t#e reco1er3 o" t#e excess amount wit# t#e a ro riate Mani!a court a*ainst 4, as t#e remittance o" so #u*e an amount arose "rom a c!erica! error$ 4 was a!so c#ar*ed wit# esta"a on account o" t#e same mone3$

On Marc# &+, 255&, 4 "i!ed #er income tax return "or t#e ca!endar 3ear 2555, wit#out a dec!aration o" t#e P+5 mi!!ion 0ut wit# a "ootnote to t#e return w#ic# reads9 ->Tax a3er was t#e reci ient o" some mone3 "rom a0road w#ic# s#e resumed to 0e a *i"t 0ut turned out to 0e an erroneous remittance and is now su0<ect o" !iti*ation$. In Marc# 2, 255B, t#e Commissioner o" Interna! 6e1enue assessed 4 a de"icienc3 income tax on t#e P75 mi!!ion, im osed a +5J surc#ar*e "or "i!in* a "a!se and "raudu!ent return, and c#ar*ed interest co1erin* t#ree 3ears "or !ate a3ment$ 4 contented t#at t#e erroneous remittance is not -*ross income. wit#in t#e meanin* o" t#e Tax Code$ S#e a!so dis uted t#e im osition o" t#e +5J surc#ar*e$ I" 3ou were t#e Hud*e, #ow wou!d 3ou ru!e on t#e !e*a! oints raised 03 4/ %&'87) ?@s contention that the erroneous remittance is not G)ross incomeI is de*oid o' merit( &t is considered under the .&$0 o' 55= as 'allin) within the ambit o' Gincome 'rom whate*er source deri*edI because it is income tax not ex%ressly excluded or exem%ted 'rom the class o' taxable income( This is irres%ecti*e o' the *oluntary or in*oluntary action o' ? in %roducin) the income( +Futierre: *( 0ollector o' &nternal $e*enue! 0TA 0ase .o( -E! Au)ust 3 ! 5-E/ As a matter o' 'act the source o' the income may be le)al or ille)al( ? was correct in her intention that she should not be sub<ected to the E"L surchar)e( There was no actual and intentional 'raud throu)h will'ul and deliberate misleadin) o' the Bureau o' &nternal $e*enue( The )o*ernment was not induced to )i*e u% some le)al ri)ht and %lace itsel' at a disad*anta)e so as to %re*ent its law'ul a)ents 'rom %ro%er assessment o' tax liabilities because ? did not conceal anythin)( ?@s notation on her income tax return was an Gerror or mista6e o' 'act or lawI not constitutin) 'raud( ,o also such notation was %ractically on in*itation 'or in*esti)ation and that ? literally Glaid cards on the table(I +0ommissioner o' &nternal $e*enue *( 7a*ier! 7r(! 55 ,0$A 123/ -X. issued a c#ec: drawn on a 0an: in w#ic# #e #as no "unds$ ,e ne*otiated t#e c#ec: and recei1ed P&5,555$ ,e tried #is !uc: in a casino 0ut !ost$ T#erea"ter, #e was c#ar*ed and con1icted "or assin* a wort#!ess c#ec:$ T#e BI6 wants to tax #im "or t#e P&5,555 #e *ot "rom ne*otiatin* t#e c#ec:$ Decide$ %&'8') A should be taxed( The P "!""" is considered as his Gincome 'rom whate*er source deri*ed!I J,ec( 32 +A/! .&$0 o' 55=K( The %hrase is so broad that it includes all income not ex%ressly excluded or exem%ted 'rom the class o' taxable income! irres%ecti*e o' the *oluntary or in*oluntary action o' the tax%ayer in %roducin) the income( +Futierre: *( 0ollector o' &nternal $e*enue! 0TA 0ase .o( -E! Au)ust 3 ! 5-E/ Mr$ Ka<o<o is a 0i*?time swind!er$ In one 3ear #e was a0!e to earn P& mi!!ion "rom #is swind!in* acti1ities$ 4#en t#e Commissioner o" Interna! 6e1enue disco1ered #is income tax "rom swind!in*, t#e Commissioner assessed #im a de"icienc3 income tax "or suc# income$

T#e !aw3er o" Mr$ Ka<o<o rotested t#e assessment on t#e "o!!owin* *rounds9 a) T#e income tax a !ies on!3 to !e*a! income, not to i!!e*a! incomeE 0) Mr$ Ka<o<o>s recei ts "rom #is swind!in*, #ence, #is recei t "rom swind!in* was simi!ar to a !oan, w#ic# is not income, 0ecause "or e1er3 eso 0orrowed #e #as a corres ondin* !ia0i!it3 to a3 one esoE and, c) I" #e #as to a3 t#e de"icienc3 income tax assessment, t#ere wi!! 0e #ard!3 an3t#in* !e"t to return to t#e 1ictims o" swind!in*$ ,ow wi!! 3ou ru!e on eac# o" t#e t#ree *rounds "or t#e rotest/ Ex !ain$ %&''+) a( The 'irst )round should be denied 'or the reason that all incomes not ex%ressly excluded or exem%ted 'rom the class o' taxable income! irres%ecti*e o' the *oluntary or in*oluntary action o' the tax%ayer in %roducin) the income are sub<ect to tax +Futierre: *( 0ollector o' &nternal $e*enue! 0TA 0ase .o( -E! Au)ust 3 ! 5-E/( There is no distinction whether the income may be le)al or ille)al( b( and c( The second and third )rounds should be sustained( There is no income sub<ect to tax 'or the reason that to collect a tax would )i*e the )o*ernment an un<usti'ied %re'erence as to the %art o' the money which ri)ht'ully and com%letely belon)s to the *ictim( 4urthermore! there is no income yet because under the claim o' ri)ht doctrine in the determination o' income! there is an obli)ation to return! hence 2r( Ma<o<o does not ha*e a claim o' ri)ht o*er the amounts swindled( .BTE .BT PA$T B4 THE A.,?E$: A contrary answer may be <usti'ied on the basis o' the Futierre: case and under the doctrine o' control o' income( ,ince! 2r( Ma<o<o has the un'ettered ability to dis%ose o' the amounts swindled! then it is income to him sub<ect to tax( In order to "aci!itate t#e rocessin* o" its a !ication "or a !icense "rom a *o1ernment o""ice, Cor oration A "ound it necessar3 to a3 t#e amount o" P# &55,555 as a 0ri0e to t#e a ro1in* o""icia!$ Is t#e P# &55,555 deducti0!e "rom t#e *ross income o" Cor oration A/ On t#e ot#er #and, is t#e P# &55,555 taxa0!e income o" t#e a ro1in* o""icia!/ %255&) The Ph% ""!""" bribe is not allowed to be deductible 'rom )ross income because it is an ille)al ex%enditure( J,ec( 33 +A/ + / +c/! .&$0 o' 55=K The bribe is considered as income o' the reci%ient sub<ect to tax( All incomes not ex%ressly excluded or exem%ted 'rom the class o' taxable income! irres%ecti*e o' the *oluntary or in*oluntary action o' the tax%ayer in %roducin) the income are sub<ect to tax +Futierre: *( 0ollector o' &nternal $e*enue! 0TA 0ase( .o( -E! Au)ust 3 ! 5-E/( There is no distinction whether the income may be le)al or ille)al( Mr$ Domin*o owns a 1acant arce! o" !and$ ,e !eases t#e !and to Mr$ EnriCue= "or ten 3ears at a renta! o" P&2,555$55 er 3ear$ T#e condition is t#at M6$ EnriCue= wi!! erect a 0ui!din* on t#e !and w#ic# wi!! 0ecome t#e ro ert3 o" Mr$ Domin*o at t#e end o" t#e !ease wit#out com ensation or reim0ursement w#atsoe1er "or t#e 1a!ue o" t#e 0ui!din*$ Mr$ EnriCue= erects t#e 0ui!din*$ F on com !etion, t#e 0ui!din* #ad a "air 1a!ue o" P& mi!!ion$ At t#e end o" t#e !ease, t#e 0ui!din* is wort# on!3 P'55,555$55 due to de reciation$

4i!! Mr$ Domin*o #a1e income w#en t#e !ease ex ires and 0ecomes t#e owner o" t#e 0ui!din* wit# a "air mar:et 1a!ue o" P'55,555$55/ ,ow muc# income must #e re ort on t#e 0ui!din*/ Ex !ain$ %&''+) ?hether 2$( Domin)o! the lessor! will ha*e income when the lease ex%ires and he becomes the owner o' the buildin) de%ends u%on the method o' reco)nition he shall use( 2r( Domin)o! the lessor may re%ort as income the 'air mar6et *alue o' the im%ro*ements at the time o' com%letion o' construction( &n such a case! he need not re%ort any income at the ex%iration o' the lease( &' 2r( Domin)o! the lessor s%reads o*er the li'e o' the lease the estimated de%reciated *alue o' the im%ro*ement at the termination o' the lease and re%ort as income 'or each year o' the lease an ali8uot %art thereo' +,ec( 35! $e*( $e)s( .c( 2/! he also need not re%ort any income at the ex%iration o' the lease( Bn the other hand! 2r( Domin)o! may reco)ni:e as income the P5""!"""("" 'air mar6et *alue o' the buildin) at the ex%iration o' the lease! i' he did not reco)ni:e income in the abo*e described manner(

Conce ts o" Income Taxation

Discuss t#e meanin* o" t#e A!o0a! and Sc#edu!ar s3stems o" taxation$ %&''2) Flobal system o' income taxation A system em%loyed where the tax system *iews indi''erently the tax base and )enerally treats in common all cate)ories o' taxable income o' the indi*idual( +Tan *( Del $osario 7r( 23= ,0$A! 323! 33 / A system which taxes all cate)ories i' income exce%t certain %assi*e incomes and ca%ital )ains( &t %rescribes a unitary but %ro)ressi*e rate 'or the taxable a))re)ate incomes and 'lat rates 'or certain %assi*e incomes deri*ed by indi*iduals( The a%%arent intent o' current amendatory laws to the income tax law is to maintain! by and lar)e! the )lobal treatment on taxable cor%orations( +Tan! su%ra/ .BTE: The )lobal system o' income taxation 'or all cor%orations is e*ident in the %ro*isions o' 0ha%ter &> N Tax on 0or%orations! ! Title && N Tax on &ncome! the .&$0 o' 55= which im%oses a tax o' whiche*er is hi)her o' a reduced rate o' 32L on taxable income or a 2L minimum cor%orate income tax( This is irres%ecti*e o' the tax base( Thus! whether the taxable income is P !"""(""! P " million! or e*en hi)her! the tax rate is the same( &n short! the tax on cor%orate income is not %ro)ressi*e in character( ,chedular system o' income taxation( A system em%loyed where the income tax treatment *aries and is made to de%end on the 6ind or cate)ory o' taxable income o' the tax%ayer( +Tan *( Del $osario! 7r(! 23= ,0$A 323! 33 / A system which itemi:es the di''erent incomes and %ro*ides 'or *aried %ercenta)es o' taxes! to be a%%lied thereto(

&t is a%%arent intention o' current amendatory laws to the income tax to increasin)ly shi't the income tax system toward the schedular a%%roach in the income taxation o' indi*idual tax%ayers( +Tan! su%ra/ .BTE: ,ec 23 +A/ + / +c/( .&$0 o' 55= %ro*ides 'or the a%%lication o' the schedular system o' income taxation to indi*iduals( There is ado%tion o' a %ro)ressi*e rate which taxes at EL taxable incomes which do not )o beyond P "!"""(""! %ro)ressi*ely increasin) u% to a hi)h o' 32L 'or taxable incomes exceedin) PE""!"""(""( To w#ic# s3stem wou!d 3ou sa3 t#e met#od o" taxation under t#e Nationa! Interna! 6e1enue Code 0e!on*s/ %&''2) a/ Flobal ,ystemH b/ ,chedular .BTE: The Phili%%ines has ado%ted both o' these systems( and system(

Distin*uis# 0etween -sc#edu!ar treatment "rom *!o0a! treatment.9 as used in income taxation$ %&''7) a/ 9nder the schedular treatment there are di''erent tax rates! ?H&ME under the )lobal treatment there is unitary or sin)le tax rateH b/ 9nder the schedular treatment there are di''erent cate)ories o' taxable income! ?H&ME under the )lobal treatment there is no need 'or classi'ication as all tax%ayers are sub<ected to a sin)le rate( c/ The schedular treatment is usually used in the income taxation o' indi*iduals! ?H&ME the )lobal treatment is usually a%%lied to cor%orations( 4#at are t#e 0asic "eatures o" t#e resent income tax s3stem/ a/ b/ Flobal system 'or taxable c/ 9ses )ross com%ensation system( cor%orations and schedular 'or Pro)ressi*eH indi*idualsH

Current!3 we #ear o" t#e s3stem o" income taxation 03 0asin* t#e tax on t#e *ross rat#er t#an on t#e net income$ 4#at do 3ou understand 03 -*ross income taxation./ %&'85) 4#at is t#e s3stem *ross income taxation/ Ex !ain$ %&'8B) &n a broad sense! the tax base is the total )ross income o' an indi*idual durin) the taxable year without any deductions allowed( 4#at are t#e ad1anta*es and disad1anta*es, i" an3, o" an income tax 0ased on *ross o1er one 0ased on net income/ Ex !ain 3our answer 0rie"!3$ %&'85)

The ad*anta)es o' )ross a/ The %rocedure 'or the com%utation o' the tax is net b/ Mess discretion will be allowed on the c/ Examination and/or in*esti)ation o' d/ &' cou%led with an e''ecti*e withholdin) tax )o*ernment(

income taxation are: sim%ler than in the case o' taxation based on incomeH tax examiners thereby minimi:in) )ra'tH tax returns can be made 'asterH system would %ro*ide more returns to the

The disad*anta)es o' )ross income taxation are: a/ A tax%ayer may deri*e )ross income but su''ers a net lossH b/ The rule o' taxation may not be e8uitable and uni'orm i' the )ross income were the basis o' the taxH c/ &' )ross income were the basis! it may ser*e as a disincenti*e to 'urther em%loyment( .BTE: the 51= Phili%%ine 0onstitution re8uires thatH GThe rule o' taxation shall be uni'orm and e8uitable(I +,ec( 21 + /! Article >&/

Aenera! Princi !es o" Income Taxation

In *enera!, on w#at does t#e taxa0i!it3 o" income de ends as re*ards indi1idua!s and cor orations/ Ex !ain 3our answer, citin* t#e income taxa0!e under our Income Tax Kaw$ %&'25) The law! in le*yin) the tax! ado%ts the most com%rehensi*e tax situs o' nationality and residence o' the tax%ayer +that renders resident citi:ens sub<ect to income tax liability on their income 'rom all sources/ and o' the )enerally acce%ted and internationally reco)ni:ed income taxable base +that can sub<ect nonDresident aliens and 'orei)n cor%orations to income tax on their income 'rom the Phili%%ine sources/( +Tan *( Del $osario! 7r( 23= ,0$A 323! 333/ 4#at incomes are su0<ect to tax under t#e Nationa! Interna! 6e1enue Code/ %&'(') 4rom what sources o' income are the 'ollowin) %ersons/cor%orations taxable by the Phili%%ine )o*ernment; ( 0iti:ens o' the Phili%%ines residin) thereinH 2( .onDresident citi:enH 3( An indi*idual citi:en o' the Phili%%ines who is wor6in) and deri*in) income 'rom abroad as an o*erseas contract wor6erH 3( An alien indi*idual! whether a resident or not o' the Phili%%inesH E( A domestic cor%oration( + 551/ The )eneral %rinci%les o' income taxation in the Phili%%ines are: a/ A citi:en o' the Phili%%ines residin) therein is taxable on all income deri*ed 'rom sources within and without the Phili%%inesH b/ A nonresident citi:en is taxable only on income deri*ed 'rom sources within the Phili%%inesH c/ An indi*idual citi:en o' the Phili%%ines who is wor6in) and deri*in) income abroad as an o*erseas contract wor6er is taxable only on income 'rom sources within the Phili%%ines: Pro*ided! That a seaman who is a citi:en o' the Phili%%ines and who recei*es com%ensation 'or

ser*ices rendered abroad as a member o' the com%lement o' a *essel en)a)ed exclusi*ely in international trade shall be treated as an o*erseas contract wor6erH d/ An alien indi*idual! whether a resident or not o' the Phili%%ines! is taxable only on income deri*ed 'rom the sources within the Phili%%inesH e/ A domestic cor%oration is taxable on all income deri*ed 'rom sources within and without the Phili%%inesH and '/ A 'orei)n cor%oration! whether en)a)ed or not in trade or business in the Phili%%ines! is taxable only on income deri*ed 'rom sources within the Phili%%ines( +,ec( 23! .&$0 o' 55=/ Huan de !a Cru=, a resident o" t#e P#i!i ines, !e"t "or Austra!ia on Au*ust 27, 2552 to reside ermanent!3 t#ereat$ Durin* #is sta3 in t#e P#i!i ines, #e recei1ed an income o" P&+,555$55 "rom Hanuar3 &, 2552 u to t#e date o" #is de arture$ In Austra!ia, #e recei1ed durin* t#e remainder o" t#e 3ear 2552 an additiona! income o" I&5,555$55 "rom sources wit#in t#at countr3$ Are t#ese two %2) incomes, P&+,555$55 and I&5,555$55 taxa0!e in "u!! and is Huan de !a Cru= entit!ed to "u!! ersona! exem tions and deductions a!!owed 03 our !aw/ I" Huan de !a Cru= was not a citi=en 0ut a resident, on w#at amount is #e taxa0!e in "u!!, and w#at deduction can #e c!aim w#i!e in t#e P#i!i ines/ Ex !ain "u!!3 3our answer$ %&'2') Yes( The two incomes! P E!"""("" and O "!"""("" are taxable in 'ull( 7uan is considered as a resident citi:en( The reason bein) that he stayed only in Australia 'or about 'our +3/ months! 'rom Au)ust to December! durin) the taxable year( To be considered as a nonDresident citi:en! 7uan must ha*e stayed in Australia most o' the time durin) the taxable year( ,ince he is a resident citi:en! his taxable income includes all income deri*ed 'rom sources within or without the Phili%%ines( 7uan is li6ewise entitled to 'ull %ersonal exem%tions and deductions because he is considered as a resident citi:en( &' 7uan is a resident alien! he shall be taxed only on all his income deri*ed 'rom sources within the Phili%%ines( He shall also be entitled to the same deductions as a resident citi:en( Mr$ AD, a FS citi=en #ired "or "i1e%+) 3ears as !ant mana*er o" a !oca! minin* com an3, deri1es income "rom in1estments and rea! ro ert3 #e owes in t#e Fnited States$ Besides #is sa!ar3 and 0onuses "rom t#e !oca! minin* com an3, #e is ro1ided wit# a #ouse and a!!owances "or t#e sa!aries o" #is dri1er and t#ree maids$ T#e minin* com an3 reim0urses a!! #is *aso!ine and oi! ex enses "or t#e use o" t#e com an3 car, !us ex enses "or #is *rocer3$ a$ 4#at income items, i" an3, s#ou!d #e dec!are in t#e P#i!i ine income tax return/ Ex !ain$ 0$ Fnder t#e same "acts, exce t t#at Mr$ AD is a Fi!i ino citi=en wor:in* in Saudi Ara0ia and #is in1estments and rea! ro ert3 are !ocated in t#e P#i!i ines$ 4#at income items, i" an3, s#ou!d #e dec!are in #is P#i!i ine income tax return and at w#at rates is #e taxed/

a( Bnly his income deri*ed 'rom sources within the Phili%%ines such as his salary and bonuses 'rom the local minin) com%any and the ex%enses 'or his )rocery( This is so because bein) a resident alien he shall be sub<ect to tax only on the income deri*ed 'rom sources within the Phili%%ines( The *alue o' the use o' the house! allowances 'or the salaries o' his dri*er and the three maids! the *alue o' the use o' the com%any car! as well as the )asoline and oil! are considered as 'rin)e bene'its which are taxable to his em%loyer( b( ,ince 2r( AD is an o*erseas contract wor6er taxable only on his income deri*ed 'rom sources within the Phili%%ines( He is to be taxed only on his income deri*ed 'rom his in*estments and %ro%erties located in the Phili%%ines( &' the %assi*e income! then he shall be sub<ect to 'inal taxes( &' not! then to the schedular tax( Areat 4a!! mac#ineries Cor oration %A4MC) is a cor oration incor orated and o eratin* under t#e !aws o" t#e Peo !e>s 6e u0!ic o" C#ina$ AA4MC and t#e Da1ao Ceramics Cor oration %DCC) !an to enter into a FS I&555,555 contract on CLF 0asis, w#ere03 A4MC s#a!! se!! to DCC a A4MC?manu"actured 0a!! mi!!$ Fnder t#e ro osed contract w#ic# wi!! 0e si*ned in ,on*:on*, A4MC wi!! s#i t#e 0a!! mi!! "rom S#an*#ai to Da1ao Cit3$ A4MC wi!! a!so send its C#inese tec#nicians to Da1ao Cit3 to insta!! t#e 0a!! mi!! and to train DCC ersonne! on #ow to run t#e 0a!! mi!!$ T#e insta!!ation and t#e trainin*wi!! ta:e B5 da3s to com !ete$ T#e air"are, #ote! accommodation and sa!aries o" A4MC w#o wi!! 0e sent Da1ao Cit3 wi!! 0e aid "or 03 A4MC$ T#e contract wi!! 0e "u!!3 er"ormed 03 A4MC wit#in (+ da3s "rom t#e si*nin*$ Fnder t#e contract, DCC wi!! remit a3ment in FS do!!ars to A4MC>s 0an: account in ,on*:on*$ T#is is t#e "irst contract t#at A4MC wi!! si*n wit# a customer in t#e P#i!i ines$ AM4C ,AS NO OFFICE O6 AAENT IN T,E P#i!i ines$ Mand AM4C #as no intention o" securin* a !icense to do 0usiness in t#e P#i!i ines$ 4i!! said A4MC ersonne! sent to Da1ao Cit3 0e su0<ect to P#i!i sa!aries w#i!e t#e3 wor: in Da1ao Cit3/ Ex !ain$ %&''5) ine income tax on t#eir

Yes! the 'orei)n %ersonnel are sub<ect to Phili%%ine income taxation( This is so because the %ersonnel are considered as nonDresident aliens not en)a)ed in trade or business within the Phili%%ines( They are not citi:ens o' the Phili%%ines aand they are not also residents o' the Phili%%iens not ha*in) stayed therein 'or an a))re)ate %eriod o' more than 1" days durin) the calendar year( +,ec( 22 +F/ and 2E+A/ + /! both o' the .&$0 o' 55=/( 0onse8uently! they should be sub<ect to income taxes on all income recei*ed within the Phili%%ines which includes com%ensation( The tax im%osed is 2EL B4 THE F$B,, 0B2PE.,AT&B. &.0B2E $E0E&>ED( +,ec 2E +B/! .&$0 B4 55=/ Newtex Internationa! %P#i!s$ ) Inc$ is an American "irm du!3 aut#ori=ed to en*a*e in 0usiness in t#e P#i!i ines as a 0ranc# o""ice$ In its acti1it3 o" actin* as a 0u3in* a*ent "or "orei*n 0u3ers o" s#irts and dresses a0road and er"ormin* !iaison wor: 0etween its #ome o""ice and t#e Fi!i ino *arment manu"acturers and ex orters, Newtex does not *enerate an3 income$ To"inance its o""ice ex enses #ere, its #ead o""ice a0road re*u!ar!3 remits to it

t#e needed amount$ To o1ersee its o erations "or two %2) 3ears, t#e #ead o""ice assi*ned t#ree %B) "orei*n ersonne!$ Are t#e t#ree "orei*n ersonne! su0<ect to P#i!i ine income tax/ %&''&)

Yes! they are considered as resident aliens ha*in) stayed in the Phili%%ines 'or more than two years( They shall be taxed on the incomes deri*ed 'rom sources within the Phili%%ines( They Per'ormed the ser*ice within the Phili%%ines! hence taxable( Huan, a Fi!i ino citi=en, #as emi*rated to t#e Fnited States w#ere #e is now a ermanent resident$ ,e owns certain income?earnin* ro ert3 in t#e P#i!i ines "rom w#ic# #e continues to deri1e su0stantia! income$ ,e a!so recei1es income "rom #is em !o3ment in t#e Fnited States on w#ic# t#e FS income tax is aid$ On w#ic# o" t#e a0o1e incomes is #e taxa0!e, i" at a!!, in t#e P#i!i *enera! terms, wou!d suc# income or incomes 0e taxed/ %&''2) ines, and #ow, in

7uan is taxable only on his income deri*ed 'rom sources within the Phili%%ines because he is a nonresident citi:en( &' the income is %assi*e income! then he shall be sub<ect to 'inal taxes! i' not! then to the schedular tax( ,@ Co$ is a ,on* @on* cor oration not doin* 0usiness in t#e P#i!i ines$ It #o!ds 75J o" t#e s#ares o" A co$, a P#i!i ine com an3 w#i!e t#e (5J is owned 03 P Co$, a Fi!i ino? owned P#i!i ine cor oration$ ,@ a!so owns &55J o" t#e s#ares o" B Co$, an Indonesian com an3 w#ic# is a du!3 !icensed P#i!i ine 0ranc#$ Due to t#e wor!dwide restructurin* o" t#e ,@ Co$ *rou , ,@ Co$ decided to se!! a!! its s#ares in A and B Cos$ T#e ne*otiations "or t#e 0u3?out and t#e si*nin* o" t#e A*reement o" Sa!e were a!! done in t#e P#i!i ines$ T#e a*reement ro1ides t#at t#e urc#ase rice wi!! 0e aid to ,@ Co$>s 0an: account in t#e FS and t#e tit!e to A and B Cos$ S#ares wi!! ass "rom ,@ Co$ to P Co$ in ,@ w#ere t#e stoc: certi"icates wi!! 0e de!i1ered$ P Co$ see:s 3our ad1ice as to w#et#er or not it wi!! su0<ect t#e a3ments o" t#e urc#ase rice to 4T$ Ex !ain 3our ad1ice$ %&''') The %ayments 'or the %urchase %rice are sub<ect to ?T because they are considered as income deri*ed 'rom sources within the Phili%%ines( ,ince the shares o' stoc6 were sold in the Phili%%ines! the income shall be treated as deri*ed entirely 'rom sources within the Phili%%ines and corres%ondin)ly taxed therein( P2nd %ar(! ,ec 32 +E/! .&$0 B4 55=K A Co$, a P#i!i ine cor oration, #as an executi1e %P) w#o is a Fi!i ino citi=en$ A Co$ #as a su0sidiar3 in ,on* @on* %,@ Co$) and wi!! assi*n P "or an inde"inite eriod to wor: "u!! time "or ,@ Co$ P wi!! 0rin* #is "ami!3 to reside in ,@ and wi!! !ease out #is residence in t#e P#i!i ines$ T#e sa!ar3 o" wi!! 0e s#ou!dered +5J 03 A Co$ w#i!e t#e ot#er +5J !us #ousin*, cost o" !ea1in* and educationa! a!!owance o" P>s de endents wi!! 0e s#ou!dered 03 t#e ,@ com an3$ A Co$ wi!! credit t#e +5J o" P>s sa!ar3 to P>s P#i!i ine 0an: account$ P

wi!! si*n t#e contract o" em !o3ment in t#e P#i!i income "or t#e !ease o" #is P#i!i ine residence$

ines$ P wi!! a!so 0e recei1in* renta! ine income tax/ %&''')

Are t#ese sa!aries, a!!owances and renta!s su0<ect to P#i!i

The salaries and allowance o' P are not sub<ect to Phili%%ine income tax because these are incomes 'rom without the Phili%%ines earned by P! who is an o*erseas contract wor6er( The rental income deri*ed 'rom his Phili%%ine residence is considered as income deri*ed 'rom sources within the Phili%%ines! hence sub<ect to Phili%%ine tax( Mr$ Cortex is a non?resident a!ien 0ased in ,on* @on*$ Durin* t#e ca!endar 3ear 2555, #e came to t#e P#i!i ines se1era! times and sta3ed in t#e countr3 "or an a**re*ate eriod o" more t#an &85 da3s$ ,ow wi!! Mr, Corte= 0e taxed on #is income deri1ed "rom sources wit#in t#e P#i!i ines and "rom a0road/ %2555) 2r( 0orte: bein) a nonDresident alien en)a)ed in trade in business in the Phili%%ines is )oin) to be taxes only on his income deri*ed 'rom sources within the Phili%%ines J,ec( 2E +A/ + / in relation to ,ec( 23! both o' the .&$0 o' 55=K in the same manner as indi*idual citi:en and resident alien indi*iduals and shall be sub<ect to same exclusions! deductions and tax rates! exce%t that taxes are allowed as a deduction only i' and to the extent that they are connected 'rom the sources within the Phili%%ines( J,ec! 33 +0/ +2/! &bidK( 4urthermore! he is allowed to use only the itemi:ed deductions but not the standard o%tional deduction( J,ec 33 +M/! &bidK( 4inally 2r( 0orte: is allowed to deduct %ersonal exem%tions only sub<ect to reci%rocity J ,ec 3E +D/! &bidK Mr$ Se0astian is a Fi!i ino seaman em !o3ed 03 a Norwe*ian com an3 w#ic# is en*a*ed exc!usi1e!3 in internationa! s#i in*$ ,e and #is wi"e, w#o mana*es t#eir 0usiness, "i!ed a <oint income tax return "or &''8 on Marc# &+, &'''$ A"ter an audit o" t#e return, t#e BI6 issued on A ri! 25, 2552 a de"icienc3 income tax assessment "or t#e sum o" 2+5,555, inc!usi1e o" interest and ena!t3$ For "ai!ure o" Mr$ And Mrs$ Se0astian to a3 t#e tax wit#in t#e eriod stated in t#e notice o" assessment, t#e BI6 issued on au*ust &', 25552 warrants o" distraint and !e13 to en"orce co!!ection o" taxes$ 4#at is t#e ru!e o" income taxation wit# res ect to Mr$ Se0astian>s income in &''8 as a seaman on 0oard t#e Norwe*ian 1esse! en*a*ed in internationa! s#i in*$ Ex !ain 3our answer$ %2552) 2r( ,ebastian is a seaman who is em%loyed by a *essel exclusi*ely en)a)ed in international trade( Thus! his income as a seaman is considered as income deri*ed 'rom sources without the Phili%%ines not sub<ect to Phili%%ine income taxation