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TAXATION I- 2nd exam

FROM THE LECTURES OF ATTY. DONALVO 2018


Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

2nd exam TSN

INCOME TAXATION PROPER 2 TYPES OF TAXATION IN THE PHILIPPINES


(1) Regular Income Taxation
We are now in Income Taxation Proper. Our discussions (2) Final Income Taxation
from now on will be focused only on income taxation. Do We will discuss them as we go along.
not look at the numbers. Just remember the technical terms
that you will encounter as we go along. GLOBAL TAX SYSTEM SCHEDULAR TAX SYSTEM
There is a single or unitary There are different tax
3 TYPES OF INCOME TAX SYSTEMS: tax rate. rates.
(1) Global Tax System There is no need for There are different
(2) Schedular Tax System classification because of categories of income.
(3) Semi-Schedular/Semi-Global Tax System the term itself Global.
It is generally used in It is generally used in
GLOBAL TAX SYSTEM taxation of corporations. income taxation of
When you say global, all types of income will be individuals.
collated and subjected to a single unitary tax rate. It treats
in common all types of income being earned by the tax USSC DECISIONS = AID IN INTERPRETING OUR TAX LAWS
payer. There are no distinctions. It if it is income, it is The semi-schedular tax system is one of the features of
subjected to an income tax. the Philippine Income Tax Law. While we don’t care
about other countries’ tax laws, it is important to know
SCHEDULAR TAX SYSTEM that the NIRC is patterned from the Internal Revenue
There is a classification either by the type of Code of the United States. Thus, SC has ruled that in case
income or the amount of income or both in order for one to of doubt, one of the aids of interpreting our tax laws are
determine the income tax statement of that particular USSC pronouncements relative to their income taxation.
income earned. There is a schedule, or certain classification.
INCOME TAXES ARE DIRECT TAXES
SEMI-SCHEDULAR TAX SYSTEM The impact and the incidence of taxation falls on the
It is the application of both global and scheduler person who is mainly liable to pay the tax.
tax system. This is what is applied in the Philippine setting.
It is almost impossible to imagine, passing the burden of
Illustration: The income of Nonresident Foreign income taxation to another person.
Corporations here in the Philippines will be subject to a
unitary tax rate that is 30%. The income of a Resident Why is that? Because income tax is an annual tax.
Foreign Corporation or a Resident Domestic Corporation,
as long as the income is not excluded or classified as final
tax, will be subjected to a single unitary tax rate that is
30%. FEATURES OF THE PHILIPPINE INCOME TAX LAW
a. DIRECT
However, when you look at the income taxation of Why is it difficult to imagine? Bakit hindi mo siya
individuals, there is a schedule provided for by the NIRC - pwedeng mapasa?
- especially when the citizens and residents are It’s because income tax is an annual tax. Kailangan mo
concerned. The schedule will be followed depending munang malaman kung meron kang income.
upon the income earned by an individual. The tax rate
that will be applied will depend on which bracket the Receipt is different from income.
income lies.
Income taxation is an annual tax. Sabihin natin milyun-
Another manifestation of the application of the semi- milyon ang tinatanggap nilang pera kada month.
schedular tax system is the concept of final income However, by the end of the year nalaman nila na their
taxation. There are certain types of income which differs expenses exceeded their receipts. Diba loss?
in tax treatment. While it is income, it will not be
subjected to the regular income tax. This leads us to the
conclusion that there are 2 types of taxation in the b. PROGRESSIVE
Philippines. Philippine income tax is more or less progressive in
nature. The higher the income, the higher the tax rate.

1
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

DON’T CONFUSE YOURSELF WITH THE PROGRESSIVE TAX - all income actually and constructively received
RATE FROM THE PROGRESSIVE SYSTEM OF TAXATION. including the income already earned but not yet
received without deducting anything.
c. COMPREHENSIVE - HOW DO YOU GET GROSS INCOME? It’s all income
The Philippine income taxation is comprehensive received by the taxpayer without applying any of the
because: deductions.
1. It lists down the types of income which are subject - example: non-resident foreign corporations
to Philippine income tax; They are taxable on their income
2. There’s a specific provision in the NIRC which covers earned in the Philippines only and they
all types of income, even if they are not specifically are taxed at gross. Meaning, the
listed in the NIRC. nonresident foreign corporations may
not be allowed any sort of deductions.

SEC. 32. Gross Income. - 2. Net Income Tax


(A) General Definition. - Except when otherwise provided - this time, the taxpayer is already allowed to claim
in this Title, gross income means all income derived for deductions.
from whatever source, including (but not limited to) - TAKE NOTE OF THE TERMS. Magkaiba ang
the following items: ‘exemption’, iba rin ang ‘deduction’, iba din ang
xxx ‘exclusion’ but all of these would mean deduction of
your gross income but they still have their specific
“Income from whatever sources.” technical meanings.
Meaning, regardless of the source of the income, whether - Normally, deductions refer to business expenses. So
earned in the Philippines or earned outside; regardless of if you put it in accountant’s parlance, you have:
the legality of the source of the income, it will still form part
of your taxable income.
Gross income xxx
What are the other characteristics of Philippine Income Less: deductions ______ xxx
Tax System? Net Income: xxx
 Excise Tax
Income tax is an excise tax. It is a tax imposed on the
privilege of earnig income. It’s not a tax on the property.
 National Tax 3. Presumptive Income Tax
- I asked this before: True or False. Presumptive
Whatever money is taken from the income taxation
Income Taxation is allowed in the Philippines.
system here in the Philippines goes to the national
- In the context of Capital Gains Taxation, YES, there
treasury.
is a presumed income. This time, what is important
 Internal Revenue Tax
is:
It is wrong to say that income taxation is the only
1. there is a transaction involved;
internal revenue tax. There are many internal revenue
2. there is a sale, barter, or exchange of income;
taxes existing under the NIRC.
3. which is specifically declared by law to be
subject to a presumptive income tax.
When you say it’s presumed, regardless of the cost
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX
of the property sold, and the amount received, there
Absent one of these, it would be practically impossible for
will be a corresponding tax consequence.
you to determine the taxability of that particular income.
These criteria is important because it will help you
determine whether an income is taxable here in the
4. Composite Tax
Philippines.
1. Residency
A tax consisting of a series of separate quasi-personal taxes
2. Citizenship
assessed to a particular source of income with a
3. Source of Income
superimposed personal tax on the income as a whole.

5. Unitary Income Tax


TYPES OF PHILIPPINE INCOME TAXATION
1. Gross Income Tax
It is the income tax that is arranged according to source.
- the taxpayer does not have to deduct anything.

2
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Now, we’ve been talking about tax. Preliminarily we have the BIR and pay the corresponding taxes before I will be
discussed that income tax is actually a double tax. This has given a clearance for the closure of my business.
something to do with the tax period. Normally, income tax
is an annual tax. It is yearly imposed – 12 months. There are
three types of accounting periods. KINDS OF TAXPAYERS
Definition of taxpayer – Sec. 22(n), NIRC
KINDS OF TAXABLE PERIODS
(Secs. 43, 46, 47, NIRC) SEC. 22 Definitions - When used in this Title:
xxx
1. Calendar Period (N) The term "taxpayer" means any person subject to
tax imposed by this Title.
The twelve (12) consecutive months starting on
January 1 and ending on December 31. SEC. 22 Definitions - When used in this Title:
(A) The term "person" means an individual, a trust,
2. Fiscal Period estate or corporation.

It is a period of twelve (12) months ending on the last


day of any month other than December. Normally, when you refer to a person, it is someone with a
juridical personality. So it’s either a natural person or in the
It’s still 12 months, but it does not necessarily start on eyes of the law what you call as a juridical person. But under
January 1, for example May 1. That is allowed. But the NIRC, estate is considered a person and a taxpayer, and
please take note that individual taxpayers are only pretty much the same with trust. It is also considered a
allowed to use the Calendar Period. person and taxpayer.

Fiscal Period is allowable only when the taxpayer Even if these entities have no legal personality, but for
involved is a corporation. purposes of income taxation, these entities, estate and
trust, are considered as a person. Again, just for purposes
3. Short Period of income taxation.

It is a shortened tax period, not the entire 12-month That’s why when someone dies, you will have to notify the
that is supposedly the annual period for accounting. BIR, mag notice of death kayo. It is important, that is one of
the requirements of estate taxation because an estate will
It is that shortened tax period resulting from: have to be issued another TIN.

a. A corporate taxpayer's change of a taxable


period;

Example: A corporation that initially used the


calendar year but for the following year they
decide to use the fiscal year because they want Recap:
to go global. As a result, the corporation will We already defined taxpayer as a person; we also know
have to file a short period tax return, what person is all about.
depending on when it will shift its accounting
period. There are 2 broad classifications of tax payers:
(1) individuals and
b. Where a separate final or adjustment return is (2) corporations
required or permitted by rules and regulations to
be made for a fractional part of a year. There are some terms or entities considered as persons
lies in the income tax law even if they do not have
Example: When the law or revenue regulation juridical personality to speak of, we have the estates and
requires the taxpayer to file a short period the trusts.
income tax return.

To illustrate, I close my business at the end of the year. One


of the requirements that I have to comply for the closure of
my business is I will have to submit my income tax return to

3
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Let’s begin with the: (1) Resident Citizens


(2) Nonresident Citizens
GENERAL PRINCIPLES OF TAXATION
ALIENS
It is found in Section 23 of the NIRC – (1) Resident Aliens
(2) Nonresident Aliens
SEC. 23. General Principles of Income Taxation in the a. Engaged in trade and business
Philippines- Except when otherwise provided in this (NRAETB)
Code: b. Not engaged in trade and business
(A) A citizen of the Philippines residing therein is (NRANETB)
taxable on all income derived from sources
within and without the Philippines; (2) RESIDENCY – you have residents and non-residents
(B) A nonresident citizen is taxable only on
income derived from sources within the
Philippines; How do you define NON-RESIDENT CITIZENS?
(C) An individual citizen of the Philippines who is Loosely speaking, the term itself means someone
working and deriving income from abroad as or a Filipino who does not reside in the Philippines or those
an overseas contract worker is taxable only on who reside abroad.
income derived from sources within the The NIRC provides for a technical definition of a
Philippines: Provided, That a seaman who is a nonresident citizen. For purposes of income taxation, you
citizen of the Philippines and who receives have to look at Section 22 (E) and the revenue regulations
compensation for services rendered abroad as for you to determine the classification of that citizen
a member of the complement of a vessel whether or not he or she is a resident or a non-resident
engaged exclusively in international trade shall citizen.
be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not (E) The term "NONRESIDENT CITIZEN" means:
of the Philippines, is taxable only on income
derived from sources within the Philippines; (1) A citizen of the Philippines who establishes to the
(E) A domestic corporation is taxable on all satisfaction of the Commissioner the fact of his
income derived from sources within and physical presence abroad with a definite
without the Philippines; and intention to reside therein.
(F) A foreign corporation, whether engaged or XXX
not in trade or business in the Philippines, is
taxable only on income derived from sources So the first one is the passive definition of a non-resident
within the Philippines. citizen. Someone who is absent here in the Philippines and
residing abroad. Definite intention, physical presence plus
These are the general principles which you will consider in definite intention to reside abroad.
determining the taxability of one’s income.

3 BASIC CONSIDERATIONS FOR THE TAXABILITY OF THE xxx


INCOME OF THE TAXPAYERS: (2) A citizen of the Philippines who leaves the
1. Citizenship Philippines during the taxable year to reside
2. Residency abroad, either as an immigrant or for
3. Source of the income- This is important because employment on a permanent basis.
it has something to do with the situs of taxation. xxx

PERMANENT EMPLOYEES
INDIVIDUALS Second, Sec. 22 (E)(2) pertains to PERMANENT EMPLOYEES.
There are 2 definitions given here:
Individuals are covered under Section 23, subsection A, B, 1. Immigrant – These are Filipinos who leave the
C, and D. Philippines to permanently reside abroad. (So
pwedeng green card holder sa US)
Classification of Individuals 2. For employment on a permanent basis – These
(1) CITIZENSHIP – you have citizens and aliens persons leave the Philippines to permanently
reside abroad as an immigrant because his
CITIZENS permanent employment requires him to stay

4
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

abroad. (i.e. nurses, butchers in Australia, The Filipino citizen is The Filipino citizen is
embalmers) permanently abroad abroad most of the time
because of employment. during the taxable year
Problem: because of his
Suppose I’m a Filipino residing and working in Davao City. I employment.
operate a funeral parlor. In the middle of the year, my visa
“PHYSICALLY PRESENT ABROAD MOST OF THE TIME”
for permanent residency in Japan was approved. I have to
Under Revenue Regulation 1-1979, the phrase means:
leave the Philippines because I have to work there as an
A Filipino citizen whose stay outside the Philippines
embalmer permanently. Despite of, I keep my funeral parlor
for not less than 183 days.
open in Davao City. So I have an employment in Japan and
When Kim Henares came, the not-less-than-183-day rule
permanent employment. On July 1, I left the Philippines for
changed.
good. What is the taxability of my income?
BIR Ruling 517-2011
This is a very tricky question because it has something to do
Facts: This involves local engineers whose employment
with the classification of a tax payer.
contract is with a domestic corporation (Filipino
Corporation) but then from time to time, they are sent
The NIRC will not give us the answer. Let’s look at Revenue
abroad because their duties and responsibilities involves
Regulations 1-1979.
work to be done abroad. If you count the days they were
1. Is my income here in the PH in my funeral parlor,
abroad, although they are employed here in the
taxable or not? TAXABLE. As a Filipino citizen, my
Philippines, it exceeds 183 days.
income in the Philippines will be subjected to
Philippine income taxation..
Issue: What is the taxability of the income received by the
local engineers?
2. What about my compensation income earned in
Japan beginning July? So the question here is: When
BIR Ruling: The Engineers cannot qualify as a non-resident
will I begin to be considered as a non-resident
citizen because of the phrase “employment thereat”.
citizen? According to the Revenue Regulation 1-
1979: It begins from the time the taxpayer ACTUALLY
Meaning, for all the work they have done abroad, even
DEPARTED from the Philippines. Meaning if I am able
if its 183 days, it’s still taxable under the Philippine
to prove to the Commissioner of the Internal Revenue
jurisdiction. Sabi nang BIR, “employment thereat” as
that I have a permanent employment abroad and
used in paragraph 3 Section 22(e) means that the
from the time I left the PH on July 1, I am already
individual must be employed in such country.
considered as a non-resident citizen.
Meaning, the BIR somehow disregarded the 183 day-
rule and looked at where the employment contract
So from January to July I will still be considered as a
was entered. It doesn’t matter if you render service
resident citizen. But after July 1 upon the satisfaction
abroad as long as the employment contract is entered
of the Commissioner proving my intention to be
here in the Philippines and the employee is still
permanently employed abroad I will be considered as
connected to the Filipino Corporation or Domestic
a non-resident citizen. I will taxable only in my income
Corporation.
earned within the PH. Legal basis for that is the
Revenue Regulation 1-1979.
The above rule is kind of weird for 3 reasons:
1. It disregarded the 183-day rule. There is a Revenue
xxx Regulation providing this 183-day ruling and yet,
(3) A citizen of the Philippines who works and the BIR seems to disregard that Revenue
derives income from abroad and whose Regulation.
employment thereat requires him to be
2. For the first time, the BIR tried to define the term
physically present abroad most of the time “employment thereat”. In here, it said that there
during the taxable year.
must be an employment contract and that said
xxx employment contract must be abroad.
3. The ruling disregarded the rules on situs of
Loosely speaking, let’s call them contract workers. Please taxation. For purposes of rendition of service, if
do not quote this in your exam notebook. This is just my way there is an income arising from rendition of service,
of referring to the provision. what is the situs of the income? It is supposed to be
SEC. 23. (E) (2) SEC. 23 (E)(3) the place where service was rendered. In this case,
where was the service rendered, is it in the Ph? No!

5
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

And yet, the BIR chose to look at the contract


instead of the place where the actual services are Because the term “most of the time during the taxable
rendered by his employees. year” has always been interpreted as time-based. Also,
we have to consider the situs of the income.
If we go back to Revenue Regulation 1-1975 Section 2(c)
“one who leaves the Philippines on account of a But if you come to think of it, the BIR’s
contract of employment which is renewed from that interpretation for this is not really far-fetched. If you
time within or during the taxable year under such read the NIRC provision, it’s not enough that the
circumstances as to require him to be physically employee should be outside the Philippines during the
present abroad most of the time during the taxable taxable year, there is also the element of “employment
year upon xxxx for not less than 183 days”. thereat”. Ano meaning nito? It has not been defined
for the longest time. Is it employment abroad or is it
So, if there is nothing stated in said Revenue Regulation employment in the Philippines?
which has the force and effect of law, do we need to
distinguish? When the law does not distinguish we must not If we look at the rules on Statutory Construction,
distinguish. things will become clearer. What is the effect if a
person is considered non-resident citizen? He is
BIR Ruling 305-2016 is more or less the same. This time taxable on income on Philippines only, those income
what is involved is a government employee (DSWD). There abroad are non-taxable, kasi exempted siya diba. And
was a secondment contract, there is a foreign organization what is the tax construction rule when it comes to tax
wanting that DSWD employee to work there. So what’s the exemption? Strictly construed against the tax payer.
mechanics? Dito sa Philippines sa DSWD, the employee is
considered to be on leave – still an employee, but must So which is which? (ikaw diay mutubag sir). This is still open
work abroad. But the entirety of the compensation will be to debate. Just to be safe about it, just use the codal
paid by the foreign entity. What is the taxability of the provisions. I think Dean is right, why? Because Kim Henares
income earned of that person? is not Dean. (wow)

The BIR said that he is considered as a resident citizen. (continuation of Sec. 23(E))
Because, the secondment abroad does not necessarily xxx
make an employee a non-resident citizen. In this case, (4) A citizen who has been previously considered as
the secondment was merely temporary, he continued nonresident citizen and who arrives in the
to be employed with the DSWD and has no intent to Philippines at any time during the taxable year
reside abroad. to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for
Again the question, what about the Revenue Regulation the taxable year in which he arrives in the
defining a non-resident citizen on top of temporary Philippines with respect to his income derived
employment? And second, what is the situs of the income? from sources abroad until the date of his arrival
So which is which? in the Philippines.

If we look at the BIR ruling, what seems to be the factor The taxpayer shall submit proof to the Commissioner to
now is the EMPLOYMENT CONTRACT, where that show his intention of leaving the Philippines to reside
employment contract is entered by the parties. Wala na tay permanently abroad or to return to and reside in the
pakealam sa situs, wala na tay pakealam sa time-frame, as Philippines as the case may be for purpose of this
long as the employee remains to be employed in a domestic Section.
entity, he will still be considered as a resident citizen for
purposes of this compensation income even if he or she is BALIKBAYAN
abroad most of the time during the taxable year. A citizen who has been previously considered as
nonresident citizen and who arrives in the Philippines at any
Looking at the BIR Rulings and the BIR Regulation, which do time during the taxable year to reside permanently in the
we follow? Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines
As of now there is no SC decision yet. Dean and I with respect to his income derived from sources abroad
discussed this and he said that he doesn’t believe in until the date of his arrival in the Philippines. (Section
this ruling because it is merely a Ruling, it may be 22(E)(4), NIRC)
overturned later on. Probably this was only brought
about by Kim Henares.

6
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Problem: With respect to this provision, I think that there is some


I am a Filipino Citizen. I have been residing in Japan for sort of a difference in opinion sa amin ni Dean.
the longest time until I decided to go back to the
Philippines for good. I have a lot of properties in Japan. Dean Quibod: You still have to show your intention. The
I also have properties here in the Philippines. All of last provision of Sec. 23(E)(5) provides:
which are income generating and then I arrived here in
the Philippines on June 1 , 2018. “The taxpayer shall submit proof to the
commissioner to show his intention of leaving the
Question: For the taxable year 2018, what is the Philippines to reside permanently abroad or to
taxability of my income? Am I taxable on my income return to and reside in the Philippines as the case
earned globally? Or to my income earned in the may be for purpose of this Section. (Section
Philippines only? 23(E)(5), NIRC)”

To answer that, we must ask the question: What is my That is why, kung intention lang, it’s very difficult for you
status as a taxpayer here in the Philippines? Status as to determine that intention, the take of Dean is, his
an individual. position is:

Am I a resident citizen? Or am I still considered as a From the ENTIRE TAXABLE YEAR, you will still be
non-resident citizen? considered as A NON-RESIDENT CTIZEN, but the
following year, in 2019, RESIDENT NA AKO.
If you will read the provision, ”A citizen who has been
previously considered as nonresident citizen and who That’s how Dean interprets it. Because of that
arrives in the Philippines at any time during the taxable “INTENTION”, how are you supposed to show that?
year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen….” Sinasabi ko bang mali si Dean?

What’s the qualification? Practically, kung practicality lang, in practice, I don’t


“For the taxable year in which he arrives in the think Dean is wrong. Because , how is the BIR supposed
Philippines..” to prove that INTENTION?

Another qualification: IN ANSWERING THE EXAM:


“With respect to his income derived from sources The safest way to go is, for me lang, YOU JUST FOLLOW
abroad until the date of his arrival in the Philippines. THE CODAL PROVISION. Kung gusto nyong manigurado,
(Section 22(E)(4), NIRC)” isipin nyo muna, sino ang nagbigay ng tanong. Si Percy
ba or si Dean?
So, if we go by this definition, it would seem that the
interpretation would be like this: So, I think you should couched your phrases, PROPERLY.

From the income earned from January 2018 until


June 1, 2018, I must still be considered as a non- There is another type of a non-resident citizen, it’s found in
resident citizen. It was only when I arrived in the Section 23 (C) NIRC: THE OFW
Philippines that I intended to definitely stay here.
Sec. 23. General Principles of Income Taxation in the
So, from June 1, 2018 onwards until the end of 2018 Philippines. – Except when otherwise provided in this
I will already be considered as a resident citizen. So, Code:
in effect if you want to be clear on your answer from xxx
January to June, I will be taxable only in my income (C) An individual citizen of the Philippines who is working
earned within the Philippines as a non-resident and deriving income from abroad as an overseas
citizen. But beginning June 1, 2018 until the end of contract worker is taxable only on income from
December,2018, I will already be considered as a sources within the Philippines: Provided, That a
resident citizen for which reason, my income will be seaman who is a citizen of the Philippines and who
totally taxable here in the Philippines. receives compensation for services rendered abroad
as a member of the complement of a vessel engaged
But here’s the thing, how are you supposed to exclusively in international trade shall be treated as
determine the intention of the person? an overseas contract worker.

7
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

OFW/OCW & SEAMEN (2) I am a Japanese citizen, living here in the


Philippines. I have a restaurant in Davao City and
So, OCWs (overseas contract workers), there are still Japan.
considered as a non-resident citizen.
Is the income in Davao City taxable? YES.
Take note of the rule regarding SEAMEN: Income in Japan? Not taxable.

“That a seaman who is a citizen of the Philippines and To summarize it all, only resident citizens are taxable on
who receives compensation for services rendered their income globally.
abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as an overseas contract worker. (Section 23(C), ALIENS
NIRC)”
1. RESIDENT ALIEN/S
OFW/OCW REGISTERED IN THE POEA
Now, there is also this rule that if OFW is registered in Section 22(F),NIRC:
the POEA, wala na tayong problema. Kasi pag
rehistrado na, AUTOMATICALLY considered as (F) The term "resident alien" means an individual whose
OFW/OCW within the meaning of this provision. residence is within the Philippines and who is not a
citizen thereof.
But if these people are not registered in the POEA, YOU
CANNOT APPLY THE OCW. You apply the 183 DAY RULE.
a. He is not a mere transient or sojourner
Sir is referring to this provision: b. He has no definite intention as to his or her stay
A citizen of the Philippines who works and derives c. His purpose is of such nature that an extended
income from abroad and whose employment thereat stay may be necessary for its accomplishment (i.e.
requires him to be physically present abroad most of Germans brought by NGOs to the Philippines to
the time during the taxable year. (Section 22(E)(3), stay for 1 to 2 years are considered Resident
NIRC) Aliens)

What are the 2 considerations for him to be


considered a nonresident citizen under this 2. NONRESIDENT ALIENS
provision? (From 2016 TSN)
a. Physically present abroad Section 22 (G),NIRC:
b. The length of time that he is abroad: 183
days or more (G) The term "nonresident alien" means an individual
whose residence is not within the Philippines and
who is not a citizen thereof.
SUMMARY OF SEC. 23:
1) Resident citizens are taxable within and without Non-resident Aliens are further classified in to two, which
the Philippines are:
2) Nonresident citizens are taxable only on their 1. NONRESIDENT ALIEN ENGAGED IN TRADE AND
income within the Philippines BUSINESS (NRAETB)
3) Only Resident Citizens are taxable on their income
globally. Regardless of the place where they According to Revenue Regulation 8-2018, they are
earned their income, it will always be taxable considered as engaged in trade and business if:
within the Philippines. i. They are engaged in business in the
Philippines.
Exercises:  They don’t live here. They are
(1) I am a Filipino who owns a restaurant here in foreigners. Yet, they have businesses
Davao City. I also have a restaurant in Japan. here in the Philippines. Pretty much like
the owners of Honda, mga hapon man
Is the income here in Davao City taxable? YES. talaga sila. Hindi yan sila stay in dito.
How about the income in Japan? Still, taxable. ii. They stay here for at least an aggregate
period of more than 180 days

8
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

 Those who don’t fall under these 2 Why are MWEs considered as a special type of taxpayer?
classifications, will fall under NETBs. Maybe because they are exempt from income
taxation.
2. NONRESIDENT ALIEN NOT ENGAGED IN TRADE
AND BUSINESS (NRANETB) - refers to
nonresident aliens who stay in the Philippines for
an aggregate period of 180 days or less. (Revenue CORPORATIONS
Regulation 8-2018, Section 2(L).
There is a technical definition of Corporation. Iba ang
Why is there distinction? Because later on there are definition ng Corporation sa taxation and sa Corporation
different tax consequences for these types of Code. So, don’t be confused.
individuals.
SEC. 22. Definitions. - When used in this Title: x x x

(B) The term 'corporation' shall include partnerships, no


Special Class of Individual Employees matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
MWES OR MINIMUM WAGE EARNERS association, or insurance companies, but does not
include general professional partnerships and a joint
SEC. 22. Definitions. – When used in this Title: x x x venture or consortium formed for the purpose of
undertaking construction projects or engaging in
(HH) The term 'minimum wage earner' shall refer to a petroleum, coal, geothermal and other energy
worker in the private sector paid the statutory operations pursuant to an operating consortium
minimum wage or to an employee in the public agreement under a service contract with the
sector with compensation income of not more Government. 'General professional partnerships'
than the statutory minimum wage in the non- are partnerships formed by persons for the sole
agricultural sector where he/she is assigned. purpose of exercising their common profession, no
part of the income of which is derived from engaging
in any trade or business.
Minimum Wage Earner (MWE) - refers to a worker in the
private sector who is paid with a statutory minimum wage
(SMW) rates, or to an employee in the public sector with CORPORATION includes:
compensation income of not more than the statutory 1. Partnership – we all know partnership is different
minimum wage rates in the non-agricultural sector where from corporation.
the worker/employee is assigned. Such statutory minimum 2. Joint Stock Companies
wage rates are exempted from income tax. Likewise, the 3. Joint Accounts
exemption covers the holiday pay, overtime pay, night shift 4. Associations
differential pay, and hazard pay earned by an MWE. 5. Insurance and Trust companies
(Revenue Regulation 8-2018, Section 2(I).)
But it does not include the following:
*FYI: 1. General Professional Partnerships –
SECTOR/INDUSTRY MIN. MIN.  Please take note that GPPs, even if they
WAGES WAGES are considered juridical personalities, are
(Effective (Effective not considered as persons/taxpayers in
August 16, Feb 16, the NIRC. GPPs are not taxpayers. A GPP is
2018) 2019) a tax-exempt entity.
Non-Agri/Industrial/ P370 P396  GPP is for the common exercise of
Commercial and Retail/ profession. So CPAs kayong lahat, Lawyers
Service employing more kayong lahat, Doctors kayong lahat. So
than 10 workers what if magkahalu-halo na tayo may
Agriculture P365 P391 lawyer, doctor, dentist and CPA? It is no
longer a GPP. It will considered as General
Retail/Service employing P355 P381
Co-Partnership, which in the eyes of
not more than 10 workers
Income Tax Law, will be taxed as a
Corporation.

9
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

2. Joint Venture or Consortium formed for the General Co-Partnership is taxed as a corporation. It is
purpose of undertaking construction projects or subjected to regular corporate tax.
engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating Co-ownerships - as a rule are not taxable. They are not
consortium agreement under a service contract considered entities to begin with. The fact that they are co-
with the Government. owners does not mean that they formed a partnership.

2 CLASSIFICATIONS OF CORPORATIONS Joint Ventures - in joint ventures, you have first identify the
1) DOMESTIC CORPORATION activities of that joint ventures.
GR: Joint ventures are corporations.
2) FOREIGN CORPORATION XPN: Joint venture or consortium formed for the
a. RESIDENT FOREIGN CORPORATIONS purpose of
b. NON-RESIDENT FOREIGN CORPORATIONS 1) undertaking construction projects or
2) engaging in petroleum, coal, geothermal
ONLY DOMESTIC CORPORATIONS ARE TAXABLE ON THEIR and other energy operations pursuant to
INCOME GLOBALLY. The rest of the corporations are taxable an operating consortium agreement
on their income earned within the Philippines. under a service contract with the
Government.

DOMESTIC CORPORATION What is the effect then if the JV is not considered a


SEC. 22. Definitions. – x x x corporation? Like GPP, the JV becomes a non-taxable
entity. But once the when the profits are distributed to the
(C) The term 'domestic', when applied to a corporation, corporations composing the JV, each corporation or
means created or organized in the Philippines or persons receiving income will be taxable on their own
under its laws. income.

Estate and Trusts - Ordinarily, they have no legal


THE NIRC USES THE INCORPORATION TEST IN
personalities but for purposes of income taxation, they
DETERMINING THE NATIONALITY OF A CORPORATION.
have limited personality. It is found under Section 60 of
If it is a Filipino Corporation, it is a domestic corporation.
NIRC.
If the corporation is organized by 95% Japanese but
incorporated here in the Philippines, what is the
classification of that corporation? It does not matter for
INCOME
as long as it is created or organized in the Philippines or
under its laws. Thus, it is still a domestic corporation
How do we define income, in the first place? There are
regardless of its composition.
many definitions given by the books , by different
authors.
 De Leon: Income is all wealth that flows to the
FOREIGN CORPORATION
tax payer other than as a mere return of
SEC. 22. Definitions. – x x x
capital. It is an accumulation of wealth.
(D) The term 'foreign', when applied to a corporation,
means a corporation which is not domestic.
 Fisher vs. Trinidad: defines an income as "the
amount of money coming to a person or
Two kinds of Foreign Corporations: corporation within a specified time whether as
1. Resident Foreign Corporation payment or corporation within a specified time
- applies to a foreign corporation engaged in whether as payment for services, interest, or
trade and business in the Philippines profit from investment."
2. Nonresident Foreign Corporation - applies to a
foreign corporation not engaged in trade and  Revenue Regulation: It includes the forms of
business in the Philippines. income specifically described as gains and
 In other words, the residency of a foreign profits including gains derived from the sale or
corporation can be determined by whether or other disposition of capital assets.
not it engaged in trade and business here in the
Philippines.

10
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

SOURCES OF INCOME What is being taxed by our NIRC is the income not the
capital. There must be something which increases your
1. Services rendered or labor wealth.So anoang ita-tax ninyo? Yung increase lang. its not
2. Capital enough that ypu determine if it is income going further you
This is not limited to money or property. You can must determine if that income is taxable.
also have your own profession or own services as
capital
Ex: If maayo ka mamasahe, you can make
a business out of it; if you’re a lawyer, you TAXABLE INCOME
render services A stupid definition would be – “Taxable income is net
3. Gains from Exchange of Properties income subject to tax.” But it works! Section 31 of
The most basic definition of income is a “gains the NIRC provides for the definition of taxable income:
from profit.” It is not limited merely on money
or property which you Section 31. Taxable Income Defined.
The term taxable income means the pertinent items
Is income synonymous from receipts? of gross income specified in this Code, less the
No. Pagsinabi mong income it’s the gain or profit deductions and/or personal and additional exemptions,
pag sinabi mong receipt it doesn’t necessarily result to if any, authorized for such types of income by this
income. Receipts is a broader term something which you Code or other special laws.
receive and includes income.
So if you go by the definition you start with Gross Income.
This is not yet your taxable income. This is the point
CAPITAL AND INCOME before any deductions – wala pang bawas. To
One favorite bar question is distinguish income from demonstrate:
capital, so how do you distinguish it?
Gross Income xx
INCOME CAPITAL Less: Deductions (xx)
Flow of such wealth Wealth Personal Exemptions (xx)
Taxable Income xx
Fruit Tree

Capital is wealth. Income is the profit or gain which flows


from that wealth.
Example: The basic example I could give you is REQUIREMENTS FOR TAXABLE INCOME
you deposited a money in the bank. You have 1. There must be a gain or profit;
P1,000,000 deposited in the bank in a time 2. The gain or profit must be received or realized; and
deposit. Here, you earn interest even if you 3. The income must not be excluded by law
do nothing. When it matures, you withdraw
the P1,000,000 including the interest you earn A. Problem: In 2014, I bought a land in Davao worth
from that time deposit. 1,000,000 but we all now that by 2016 Duterte
 P1,000,0000 is your wealth your became President increasing all the realty prices
CAPITAL and from that, here in our city. Now, under these circumstances
 There is a corresponding increase in the land that I bought is now pegged at 5,000,000
the wealth the increase is the
INCOME.  Is there a gain?
NONE, take note if there is an increase in the
Which is why sometimes when we talk about income, value of the property it’s a mere expectation
we actually talk about the net worth of a person or an of profit meaning it cannot be considered as
entity. a gain. Yes there is an appreciation of value,
Net Worth = Assets – Liabilities but mere appreciation of the property under
 Assets are the properties that we own. the eyes of the law as a gain which is subject
 Liabilities are your obligations – utang. to tax.
 What remains is your net worth. If
there is an increase in net worth, there  Next question, another reason why there cannot
is income. be a taxable income of the previous illustration is:

11
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

there is a lack of a realization. What is this Actual Receipt:


realization, what are the requisites of realization?
Definition: realization is determinative of the In actual receipt, we don’t have any problem with that
earning process. Income is not deemed realized because its just actually receiving the money or
until the fruit is plucked from the tree. property arising from the transaction.

REALIZATION REQUIREMENTS OF INCOME: Constructive Receipt:


1. The earning process is complete or virtually
complete; It is entirely possible that the tax payer has not been able
2. An exchange has already taken place to receive the money or property and yet it is still
considered his income because it was constructively
In the previous example: apart from the fact that there is no received.
gain, the element of realization is lacking because there is
an absence of a transaction. So if I decide right now to sell Q: When is there constructive receipt?
the land at 5,000,000 that is the only time that I can actually A: It occurs when the money, or consideration, or its
say that I have actually gained from that transaction. How equivalent is placed at the control of the person who
much is my gain? rendered the service without restriction of the payor.
It’s not the 5,000,000 instead its whats over and
above the capital. So what is taxable on my part if I
sell the property is the 4,000,000 which is above the Example 1: Interest on bank deposit.
capital of 1,000,000 at the time I bought the property. Online seller, ano ginagawa nyan? Diba mag order online
then ipadala niya ang gamit, and where do you pay? Diba
B. Problem: If a person donates something, say for sa bangko? The moment you deposit the money in the
example my girlfriend donates a house and lot. Is there bank, essentially you lose control of that money. You
a gain on the part of the donee? place the control over that money to the person selling
you the property.
 Is there a gain?
Of course! Example 2: Offsetting or compensation
May utang ako, may utang ka rin sa akin, quits na lang
 Is there realization? tayo. Diba may offset? Did I receive anything? Wala man.
Let’s check the elements: Because of that offsetting of our debts, it is as if I’ve
(1) Earning process: probably its constructively received the money or property which you
complete because I have received should have given to me.
the house and lot
(2) Exchange: None! if you put it in a tax parlance, what about that taxes that
you’ll have? You know how it goes? Meron sa tax, from
In that situation, that’s why under the NIRC donation its word “withholding”. You are the income earner and
is one of the exclusions, because in donation there is I’m the income payor. If I will pay to you the income, I will
actually absence of realization process, there is no hold a portion of it and remit it to the BIR. Ang tawag
exchange that has taken place. The principle is that natin jan is withholding tax. That withholding tax is not
there is a realization if there is an exchange, meaning my money, it your money, its just that I have it and
there must have some sort of sacrifice on the part of deposit with the __. It should form part of your taxes to
the person receiving the income. be paid to the government. Did you actually receive the
money? No! But you should still consider it as part of your
income because there has to be constructive receipt of
CONCEPT OF RECEIPT what I ____.
There is also the concept of receipt.
2 types of receipt: Example 3: Money is given to an agent.
1.) Actual Receipt
2.) Constructive Receipt LIMPAN INVESTMENT COPV. CIR

Facts:
So the BIR investigated the corporation’s income tax
return. They found out that there was under preparation

12
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

of income, so meron syang tax assessment. BIR asked accounting period in accordance with the method of
the corporation to pay. Anong sabi nang corporation? accounting regularly employed in keeping the books of
One of their defense sabi nila “why do we have to pay such taxpayer xxx
the taxes, we didn’t actually receive the income? Sabi ng
BIR “No, natanggap mo, tinanggap na ng president mo, The only time that the BIR can compel the tax payer to a
ng representatives mo ” The corporation said “there has particular accounting method or accounting system:
been an internal turmoil in the corporation, we already
remove the authority of the president to relthe rent and 1. When the method chosen by the tax payer does
we also revoke the authority of existing agents or not reflect the true income of the company or
representatives from receiving the rent.” business;
2. When the tax payer does not employ any
Issue: method at all.
Should the corporation declare that income received by
the president and representative of the corporation?
Q: Now what are the different accounting methods that are
being used or that is allowed by the BIR?
Ruling:
Yes. It should have been declared income because there A: In general, there are 2 ACCOUNTING METHODS:
was a constructive receipt of the rent income. A 1.) Cash method
corporation can only act through its officers, agents and 2.) Accrual method
representative. Whatever payment that has been made
through its agent, it is good as if it was received by the
corporation regardless of internal turmoil that have Cash Method:
been happening in the corporation.
This is mostly employed in small businesses. The
moment you receive cash, It’s part of your income and
Example 4: Consignment in court the moment you spend cash its already part of your
*Excerpt From 2017 TSN, Sir did not discuss this in detail. expenses. Regardless of your dealing with your client in
your business or company, you will not recognize it as an
What about the money paid to the court? Consignment to income as long as you did not receive any cash, and as
the court is also a constructive receipt. Once you deposit it an expense, if you did not spent anything in cash.
in court, you lose control of the money and the person who
is entitled to receive the money has the complete control
and discretion whether or not to withdraw the money. In Accrual Method:
other words, sala sa corporation why it did not withdraw
the money from the court. In accrual method, income is recognized when it is
earned regardless where it has been received or not, or
Since there is a constructive receipt of an income, the expenses are accounted for in the period when they are
taxpayer is obliged to report it and pay the corresponding incurred, even when not yet paid.
income tax
Lets put it this way:

ACCOUNTING METHOD: In accrual method, the moment that you render the
service, or the moment you delivered the good, there is
Q: Why is it important for you to know about accounting already an income. This is even if you have not received
method? the money yet. In the same way if there is an incurring
A: It is because the accounting method or methods billing or an expense, even if you have not spent
employed by the tax payer has a bearing on the anything on it, you will treat as part of your expenses.
recognition or realization as an income.
(Excerpt from 2016 TSN)
Take note that the BIR does not prescribe any accounting
method to be used by the taxpayer. So in choosing the Under the accrual method, income is recognized when
accounting system, it is an actual part of the tax payer. the requisites of the test has been complied with. What
are the 2 requisites?
Sec 43: General Rule.— The taxable income shall be 1.) Fixing a right to income or liability to pay.
computed upon the basis of the taxpayer’s annual

13
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

2.) Availability of the reasonable accurate GROSS INCOME


determination of such income or liability.
Definition of Gross Income- Section 32 of NIRC
For accountants, they always prefer the accounting
methods, because it actually reflect the financial status of a SEC. 32. Gross Income. -
particular company or business entity.
(A) General Definition. - Except when otherwise
Let’s conceptualize the difference between the two. provided in this Title, gross income means all
income derived from whatever source, including
PROBLEM: (but not limited to) the following items:
Suppose you own a commercial lot. I’m renting one of (1) Compensation for services in whatever form
your commercial spaces. In December, I went out of the paid, including, but not limited to fees,
country and I forgot to pay my rent for December. So salaries, wages, commissions, and similar
paano yan? What about on your part? items;
(2) Gross income derived from the conduct of
1. If you are applying the cash method of accounting: trade or business or the exercise of a
profession;
Because you have not receive any cash from me on (3) Gains derived from dealings in property;
or by December 31, 2017. You will not report it as (4) Interests;
an income. Kung magbayad ako sa January 2018 and (5) Rents;
I’m also paying for the rent on January 2018, you will (6) Royalties;
record it as part of your rent income, only on (7) Dividends;
January 2018 na. (8) Annuities;
(9) Prizes and winnings;
2. If you are applying the accrual method of (10) Pensions; and
accounting: (11) Partner's distributive share from the net
income of the general professional
Even if I have not paid you rent, you will already partnership.
recognize it as an income. Why? First, because I was
not able to pay and there is a rental contract, there
is already a RIGHT, you have the right to income
and I already have the liability to pay. Second, the Based on Accounting Equation:
income has been reasonably determined, mayron
man tayong contrata.

In accounting parlance, what you have against me is


your RECEIVABLES. It’s an asset, a gain on your part,
it increases your net worth because anytime yang
payment na ‘yan you will still able to collect and you
can force me too pay my obligation.

3. Deferred Payment Method (from 2016 TSN) Why is it important to know this? Because generally
It is applied when the initial payments will exceed 25% speaking, because the income subject to tax is the Net
of the contract price. This is in installments but your Taxable Income.
downpayment is bigger. Malaki ang matatanggap mo
within a single year because it is more than 25%. What In determining gross income, you must identify the ff.:
is the effect of that? In the deferred payment, the 1. Whether or not the property or money you
entire income will be recognized on the first year of the received is income?
contract even if there are payments still to be made by 2. If what you received is income, is it part of your
the buyer or the payor for the succeeding years. gross income?
For you to find you regular income tax, you must look for
4. Percentage of Completion Method (from the 2016 the Net Taxable Income.
TSN)
More on the construction.

14
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

I repeat this is not about the computations, this is not about speaking,when you say “except as otherwise provided in
the numbers, but this is about the compositions. this Title”, it is refers to two things which are:
1. It is excluded by law- meaning there is specific
This is about what composes gross income; what provision under the NIRC or any special law
composes exclusions; what composes exemptions and exempting the income from income taxation; or
deductions. 2. If the income is subject to Final Tax.

Take note: Exemptions are still applicable as of this


moment. GR: All income form part of Gross Income.
XPNS:
Does the kind of income matter? 1. Excluded by Law; or
No, whether we received properties or money, it is 2. If the Income is subject to Final Tax.
immaterial for as long as it is considered income, as
long as it is not excluded by law or exempted from
taxation, it will form part of gross income. What are the example of those excluded by law?
1. Income of resident alien outside the Philippines.-
Does the form matter? No. that is already an income excluded by law.

Does the source matter?


If we go with the general rule, if we talk about location What about income subject to final tax?
per se, the source does not matter. If we go by the I want you to put this things in your mind, there are two
general rule only, it practically includes income even it types of tax schemes here in the Philippines which are as
is earned outside the Philippines, subject only to few follows:
exceptions. 1. Regular Income Taxation- Tabular/Schedular
Income Taxation for Individuals as amended by
What about the legality of the source of income? Does it TRAIN LAW. With respect to Corporations, wala
matter? pa naman tayong TRAIN LAW 2, it is still 30% of
No. many would say na bakit ang mga druglords, the net taxable income;
estafadors hindi tinatax. Why is it the person being 2. Income subject to Final tax- why do you call it
convicted of estafa for millions of money is not subject final tax? It is called a final tax because that is the
to tax? Please not be mistaken about it. The matter of last income tax consequence of that specific
collection is different from taxability of the money or income provided by law as subject to final taxes.
property received as income. That is a problem in the Final meaning last. Meaning, yong income nay an
collection aspect because mainly the Philippine setting it is categorized by law as subject to final tax.
applies the self- assessment scheme. Meaning, the Then, there are no more income tax
taxpayers themselves have the first hand in consequence. Those income subject to final tax
determining how much is the income and how much is are no longer subject to regular tax, and those
the income tax the taxpayer is to pay. Siyempre kung income subject to regular taxes are no longer
naa ka income sa illegal business nobody would subject to final taxes.
declare that, so that is the problem with respect to
collection. May another aspect, bakit ang online seller
hindi tinatax ang income? Again, that is the problem of FINAL TAX
collection, actually that is malaking problema ng BIR. it is the last income tax consequence of that specific income
How is the BIR supposed to collect the taxes because provided by law as subject to final taxes
normally they do not declare? So how are we supposed
to go after the online sellers who do not declare their Meaning, kapag yang income na yan is subject to final tax,
income? They are not considered taxpayers kay wala there is no more income tax consequence. The principle
sila TIN. But again do not be mistaken about it, the here is that kapag subject to final tax, no longer subject to
collection aspect is different from the taxability of the regular tax. Those which are subject to regular tax, will not
income. Normally, pag meron ako natanggap it is part be subjected to final taxes.
of my gross income.
If you notice Sec. 32(A), ang dami nila. But if you want to
Sabi natin all income regardless of the source is part of gross simplify this, let’s reduce it into three:
income pero sabi ng batas “except as otherwise provided in
this Title”, what is that mean? Anong meaning nito batas 1. Compensation Income
“except as otherwise provided in this Title”? Simply 2. Business Income

15
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

3. Other Income necessarily mean that it’s part of the business income.
It probably is part of the other income. This is because
So basically, if you sum it up, the composition of gross we also have this concept of a (?) director that can be
income is only three. We will discuss them one by one. someone outside the corporation but is a sitting
director of a corporation.

COMPENSATION INCOME In accounting parlance, this is called as non-operating


income.
This is compensation for services in whatever form paid
including but not limited to: fees, salaries, wages, COMPENSATION INCOME ALSO INCLUDES
commissions, and similar items. Compensation means SUPPLEMENTARY COMPENSATION
remuneration which the taxpayer received by reason of Compensation income also includes supplementary
employee-employer relationship. compensation, such as overnight pay, nightshift
differential, hazard pay, etc.
So it means that for an income to be considered as
compensation income, it must arise from an employer- ALLOWANCES
employee relationship. What about Allowances?
Requirements of ER-EE Relationship:
There are 2 types of allowances:
1. Right to Select
2. Right to Pay Salaries or Wages 1. Fixed allowance – there is a specific fixed amount
3. Right to Discipline or Dismiss given to the employee per month.
4. Power to Control
2. Variable allowance – the amount is different
Supposing I approach someone and say, “I’ll give you every month.
P10,000, paint me like one of your French girls.” Is that
compensation income?
Are transportation, court travel allowances part of the
No, there’s no employer-employee relationship. compensation income?
GR: ALLOWANCES RECEIVED BY THE EMPLOYEE form part
Where does it fall? Is it business income? It’s just a of the compensation income.
past time, you like to paint, and it just so happens I
want you to paint me. Pag sinabi mo kasi business, it’s XPN: ALLOWANCES RECEIVED BY THE EMPLOYEE are
somewhat an ongoing concern and there’s continuity excluded from the compensation income when the
of profit, etc. ff. requirements are present:

So it may form part of business income or other 1. The allowance is a necessary and ordinary
income, but definitely not compensation income. expense of the employer.
o It’s normal for the employer to give such
kind of allowance to the employee.
MODE OF COMPENSATION IS IMMATERIAL 2. The allowance given to the employee is subject
Also please take note that the mode of compensation to accounting and liquidation.
is immaterial. So long as the person or taxpayer is 3. The expenses must be substantiated.
receiving the money or property under an ER-EE o This means that the expenses are
relationship, it’s considered as compensation income. supported by receipts and documents.

PER DIEMS OF A BOD o When the employee receives the


What about the per diems received by a Board of Director allowance, the employee must have to
of a corporation? It depends: account the money that he/she received
and any excess will be returned to the
If sitting as a director and employee of the employer.
corporation = per diems fall under compensation
income. Why is it not part of the compensation income?
Because at the end of the day, the money given,
Otherwise, the De Leon book would say that it’s part although there is physical transfer to the employee, it
of the business income. But I would say that it does not is still money owned by the employer. That is why this

16
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

does not take the form of compensation at all because SEPARATION PAY
it is not money given by the employer as payment for What if a person gets separated from work? What if he
services rendered by the employee. is re-trenched?

As we discussed earlier, there are two types of allowances: GR: Retirement pay and separation pay form part of
fixed or variable. Does it matter? your gross income. Vacation leaves, sick leaves,
No. Please take note of the 3 requirements. It doesn’t service incentive leaves, still form part of gross
really matter if it’s fixed or variable, but once it is income.
subject to liquidation and it’s an ordinary and XPN: Monetized unused vacation leave credits of
necessary expense for the employer, it will be employees not exceeding ten (10) days or less;
excluded from the compensation income. - as provided under revenue regulations

Under the Revenue Regulations, there is also a 3rd type of


expense, pertaining to allowances given in kind. FRINGE BENEFITS
Money or properties given by the employer to the
employee in addition to their regular salary. It is over
3. Allowances given in kind and above their regular salary. That is already
Rule: For the convenience of the employer rule. Meaning, if considered. It is the amount of money given by the
the facilities or complements are given by the employer to employer to the employee and the employer is not
the employee is for the convenience of the employer, it is required by law to afford the employee that benefit.
excluded form the gross income. It is NOT part of the
compensation income. SEC. 33. Special Treatment of Fringe Benefit.—
Example: Factory worker, siya lang ang
may alam mag operate ng machine, and he lives (A) Imposition of Tax.— Effective January 1, 2018 and
outside Davao. So what the employer will onwards, a final tax of thirty-five percent (35%) is hereby
probably do is house him. probably, he is to live imposed on the grossed-up monetary value of fringe
within the company premises. benefit furnished or granted to the employee (except rank
and file employees as defined herein) by the employer,
TIPS whether an individual or a corporation (unless the fringe
Is it compensation income? Most books would say benefit is required by the nature of, or necessary to the
that it’s part of the compensation income. But if you trade, business or profession of the employer, or when the
come to think of it, parang hindi man. It would have been fringe benefit is for the convenience or advantage of the
a different thing if merong tip box, diba? Kasi that would employer). The tax herein imposed is payable by the
surely form part of the compensation income kasi employer which tax shall be paid in the same manner as
paghahatian ninyo yan. Still, it is taxable income, but it provided for under Section 57(A) of this Code. The grossed-
might not be part of compensation income, if you have up monetary value of the fringe benefit shall be determined
to be very analytical about it. by dividing the actual monetary value of the fringe benefit
Tips received by employees because of the by sixty five percent (65%) effective January 1, 2018 and
services that an employee rendered is part of the taxable onwards: Provided, however, That fringe benefit furnished
income but is not subject to withholding tax. to employees and taxable under Subsections (B), (C), (D),
(Withholding tax to be discussed later on) and (E) of Section 25 shall be taxed at the applicable rates
imposed thereat: Provided, further, That the grossed-up
GRATUITIES value of the fringe benefit shall be determined by dividing
By the term itself, ang galling-galing mong magtrabaho, the actual monetary value of the fringe benefit by the
so may bonus ka sa akin. difference between one hundred percent (100%) and the
applicable rates of income tax under Subsections (B), (C),
Example: the employee has already retired so he receives (D), and (E) of Section 25.
a retirement pay. On top of that, the employee also
receives a gratuity pay because of the invaluable services
that the employee rendered to the company.
(B) Fringe Benefit defined.- For purposes of this Section,
the term "fringe benefit" means any good, service or other
Is it part of compensation income? Yes, because it is still
benefit furnished or granted in cash or in kind by an
given under the concept of employer-employee employer to an individual employee (except rank and file
relationship. employees as defined herein) such as, but not limited to,
the following:

17
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

(1) Housing;
(2) Expense account;
(3) Vehicle of any kind; Recap: Compensation Income is one of the lengthy
(4) Household personnel, such as maid, driver and others; discussions mainly because there are many forms of
(5) Interest on loan at less than market rate to the extent compensation income which has different tax
of the difference between the market rate and actual treatments. Some of them are subject to the regular tax,
rate granted; some of them are subject to final tax and some of them
(6) Membership fees, dues and other expenses borne by are actually excluded from the gross income.
the employer for the employee in social and athletic
clubs or other similar organizations; We are still in fringe benefits. Before that, I’ve already
(7) Expenses for foreign travel; defined to you the compensation income, the different
(8) Holiday and vacation expenses; types of compensation income. And we discuss a few
(9) Educational assistance to the employee or his compensation income and their respective tax
dependents; and treatments and now we are in fringe benefits or the FB’s.
(10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
FRINGE BENEFITS
They are benefits given to an employee which is over
What about the facilities and complements? Necessary ba
and above his regular salary. So basically it includes
na ibigay ng employer yan?
facilities and complements.
That can be considered as a fringe benefit because that
is over and above the salaries and wages of the
NATURE OF FRINGE BENEFIT
employee.
It is a compensation income. Normally it would form part
of your gross income but not all the time because
Who gives the fringe benefits?
(1) it may be possible that the fringe benefit is subject
It is given by the employer. These are compensation
to a final tax and
income received by the employee. It’s given by the
(2) it is entirely possible that the fringe benefit received
employer to the employees.
by the employee will be excluded from the gross
income.
Strictly speaking, fringe benefits is COMPENSATION
INCOME. The type of employer does not really matter.
What does fringe benefit include?
What is important in this case is the type of employee
involved. Sec. 33 (B) Fringe Benefit defined.- For purposes of this
Section, the term "fringe benefit" means any good,
service or other benefit furnished or granted in cash or
(C) Fringe Benefits Not Taxable. - The following fringe
in kind by an employer to an individual employee (except
benefits are not taxable under this Section:
rank and file employees as defined herein) such as, but
(1) Fringe benefits which are authorized and exempted
not limited to, the following:
from tax under special laws;
(1) Housing;
(2) Contributions of the employer for the benefit of the
(2) Expense account;
employee to retirement, insurance and hospitalization
(3) Vehicle of any kind;
benefit plans;
(4) Household personnel, such as maid, driver, and
(3) Benefits given to the rank and file employees, whether
others;
granted under a collective bargaining agreement or
(5) Interest on loan at less than market rate to the
not; and
extent of the difference between the market
(4) De minimis benefits as defined in the rules and
rate and actual rate granted;
regulations to be promulgated by the Secretary of
(6) Membership fees, dues and other expenses
Finance, upon recommendation of the Commissioner.
borne by the employer for the employee;
The Secretary of Finance is hereby authorized to
(7) Expenses for foreign travel;
promulgate, upon recommendation of the Commissioner,
(8) Holiday and vacation expenses;
such rules and regulations as are necessary to carry out
(9) Educational assistance to the employee or his
efficiently and fairly the provisions of this Section, taking
dependents; and
into account the peculiar nature and special need of the
(10) Life or health insurance and other non-life
trade, business or profession of the employer.
insurance premiums or similar accounts in
excess of what the law allows.

18
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Who gives the fringe benefit? Since this is compensation, RANK AND FILE EMPLOYEES
this is given by the employer and it is actually the employee Section 22(AA), NIRC provides:
who receives it. (AA) The term "rank and file employees" shall mean all
But for purposes of income taxation, we have to employees who are holding neither managerial nor
classify the type of employee that receives the fringe supervisory position as defined under existing provisions
benefit. This is because there are different income tax of the Labor Code of the Philippines, as amended.
consequences.

Let’s first read the provision relative to the fringe benefit. So alam natin, if you come to read the definition of rank and
It’s found in Sec. 33. By the way, this is amended by the file, it sounds like it’s residual in nature. ‘Pag hindi siya
Train Law ha. Please take note of that. managerial, hindi siya supervisory, that person is a rank and
file employee.
SEC. 33. Special Treatment of Fringe Benefit.-
MANAGERIAL EMPLOYEES
(A) Imposition of Tax.- Effective January 1, 2018 and How do they define a managerial or supervisory employee?
onwards, a final tax of thirty-five percent (35%) is Art. 212 (m) of the Labor Code.
hereby imposed on the grossed-up monetary value “Managerial employee” is one who is vested with the
of fringe benefit furnished or granted to the powers or prerogatives to lay down and execute
employee (except rank and file employees as management policies and/or to hire, transfer, suspend,
defined herein) by the employer, whether an lay-off, recall, discharge, assign or discipline employees.
individual or a corporation (unless the fringe benefit
is required by the nature of, or necessary to the When you say Supervisory Employee, how is this type of
trade, business or profession of the employer, or employee different from the managerial? Basically in the
when the fringe benefit is for the convenience or supervisory employee, if you come to the definition,:
advantage of the employer). The tax herein
imposed is payable by the employer which tax shall Supervisory employees are those who, in the interest of
be paid in the same manner as provided for under the employer, effectively recommend such managerial
Section 57 (A) of this Code. The grossed-up actions if the exercise of such authority is not merely
monetary value of the fringe benefit shall be routinary or clerical in nature but requires the use of
determined by dividing the actual monetary value independent judgment. All employees not falling within
of the fringe benefit by sixty-five percent (65%) any of the above definitions are considered rank-and-file
effective January 1, 2018 and onwards: Provided, employees for purposes of this Book.
however, That fringe benefit furnished to
employees and taxable under Subsections (B), (C), Now, what is the tax consequence? We said earlier that the
(D) and (E) of Section 25 shall be taxed at the type of employees matter.
applicable rates imposed thereat: Provided, further,
That the grossed -Up value of the fringe benefit shall a. If the fringe benefit is given to a rank and file
be determined by dividing the actual monetary employee, the
value of the fringe benefit by the difference
between one hundred percent (100%) and the GR: It forms part of the gross income
applicable rates of income tax under Subsections XPN: It does not form part of the gross income if
(B), (C), (D), and (E) of Section 25. it is excluded by law.

Following the Train Law, what is different here is just the tax b. If the fringe benefit is received by a managerial
rate because prior to Train Law, this used to be 32%. or supervisory employee,
Ngayon mas mahal na siya. It is already pegged at 35%.
GR: It does not form part of the gross income
because the fringe benefit is subject to a
There is Fringe Benefit Taxation because a fringe benefit tax fringe benefit tax or FBT, which is a final tax.
is different from your regular income tax.

For purposes of discussion for (Fringe Benefit Tax) FBT’s, NATURE OF FRINGE BENEFIT TAX
there are two types of employees involved: FBT is a final tax. It is the tax imposed on the fringe
1. Rank-and-File Employee benefit received by a managerial or supervisory
2. Managerial Employee

19
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

employee. It’s a FINAL TAX that’s why it is not


included in the Gross Income(GI) of the
managerial or supervisory employee. HOW TO GET GROSSED UP MONETARY VALUE(GUMV)

So meaning, i-grossed up mo sya, patungan mo pa ng fringe


TAX RATE OF FRINGE BENEFIT TAX benefit.
The tax rate would vary depending on the type of individual
receiving the FB. So if the tax rate is 25%, it’s just the monetary value of the
fringe benefit divided by the difference between 100 and
GR: 35.
Under the TRAIN law: It’s now 35%
GUMV = MONETARY VALUE OF THE FRINGE BENEFIT
Prior to January 2018, it’s just 32% that is the tax 100-35 = 65
rate, that’s the fringe benefit tax rate.

XPNS: note: Don’t ask why ;)


1. For non-resident aliens who are not engaged in
Trade and Business (NRANETB) - the tax rate FOR NON-RESIDENT ALIENS WHO ARE NOT ENGAGED
is 25% IN TRADE AND BUSINESS
2. Special individuals/aliens – 15%
GUMV = MONETARY VALUE OF THE FRINGE BENEFIT
4 TYPES OF SPECIAL ALIENS: 100-25 = 75
1) Aliens who are employees in regional
operating headquarters of multinational
companies.
2) Those who are engaged in offshore banking FOR SPECIAL INDIVIDUALS/ALIENS
units of foreign banks.
3) Those who are employed in petroleum GUMV = MONETARY VALUE OF THE FRINGE BENEFIT
service contractors or sub-contractors in 100-15 = 85
the Philippines.
4) Filipino citizens but they are employed here
in either the 3 companies occupying the
same position as those special aliens.
FBT = GUMV x Tax rate (35%,25%,15%)
TAX BASE OF FRINGE BENEFIT TAX
The tax base of fringe benefit is the GROSSED UP
MONETARY VALUE.
This GUMV, you already know the rates. But before you
can grossed up. You have to know first the monetary
It’s not the monetary value, it’s not the amount of
value. This Monetary Value would make this fringe
money or property received by the employee. But it’s
benefit taxation difficult. Kaya nga sinasabi ko sa mga
the grossed up monetary value.
classes ko Fucking Bitch Tangina (FBT) :D

Now, going back, if you’ve read the the entirety of the


COMPOSITION OF THE GROSSED UP MONETARY VALUE
text about monetary value, first few pages pa lang, boring
Generally speaking, the actual value of the fringe
na and you won’t understand a thing.
benefit, the amount of cash plus the fringe benefit tax
being paid by the employer.
FOR THE EXAM: But do not worry I will not be asking
about numbers, I will only be asking what is the monetary
That’s why if you have read books, this is the reason
value, which necessarily does not mean that you should
why, some books would say that the fringe benefit
explain it in figures. I want you to put it in writing. What
while it is based on the tax on the computations(?) of
is the monetary value for this? What is the tax base of
the employee, the burden of taxation actually falls on
this? How will you get the GUMV? So, dapat alam nyo ang
the employer. Such that, the employee is the one
Monetary Value. You must be able to explain it into
whose…for the tax. While the total value received by
words.
the employee is this: the actual value and the fringe
benefit tax.

20
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

RULES ON GROSSED UP MONETARY VALUE


In general, how do you determine the GUMV?
2. Employer owns a real property and assigns it to the
employee
The GENERAL RULES ARE AS FOLLOWS:

1. If it’s in MONEY or if the FB paid by the employer to MV = 50% of the AV (Annual Value)
the employee then the monetary value is THE
AMOUNT GIVEN OR THE MONEY PAID. To get AV:

Kung pila ang kwarta na gihatag. It’s either the Annual Value = 5% (FMV or ZV)
employer will give you money or the employer
will pay for whatever expenses that the employee
would incur. What is the annual value? 5% of the FMV (Fair
Market Value) or the ZV (Zonal Value) of the
2. If it’s other than money (thing), the trick here is you property whichever is higher
see whether there is a chance of transfer of ownership.
3. Employer purchases a real property/housing for the
employees use
A. If there is a transfer of ownership: The monetary value
would be the FAIR MARKET VALUE OF THE PROPERTY
MV = 50% of the AV
Ex: Ihatag nako ni sa imoha ning laptop and it
yours already. To get AV:

B. If there is no transfer of ownership: Meaning it’s just an AV = 5% of the Acquisition Cost exclusive of
assignment, then normally it just the DEPRECIATION interest
VALUE OF THE PROPERTY

*There are specific properties to which the law


declares specific monetary values for that kind of
property. It’s mostly provided by REVENUE 4. Employer purchases a housing and gives it to the
REGULATIONS. employee (there is a transfer of ownership)

Now there are specific properties to which the law imposes MV = Acquisition Cost (AC) or the Zonal Value of
specific monetary values for that kind of property. the property, whichever is higher
Maraming situation yan, it’s provided in the Revenue
Regulations and other laws – example is housing privileges,
expense account, motor vehicles, interest of loan. Is it still *So notice that there is a pattern, if there is a
fringe benefit if employer loans to the employee at low transfer of ownership, its either the FMV or AC of
interest or even no interest at all – it’s still a fringe benefit. the property. But if there is no transfer of
Because usually if you loan from other persons, there will ownership, or it’s just an assignment, it’s just 50%
really be interest to be paid. of the annual value.

5. Transfer of ownership at less than employers


HOUSING PRIVILEGES acquisition cost
You are living outside of Davao City and you are working in
a branch here, and the employer will provide for your Employer will buy a property and part of the
housing. purchase price of that property will be shouldered
by the employee.
1. Leased by the employer for the use of the employee

MV(monetary value) = 50% of the rent amount

21
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

MV = the difference between the Zonal


Value or FMV whichever is higher 3. Purchased by the employer on an installment basis (no
and the Cost to the employee. transfer of ownership)

ZV or FMV (which is higher) MV = Acquisition Cost exclusive of the interest


- Cost to the EE divided by 5 years
Monetary Value

4. Price is shouldered by the employer

NON-TAXABLE HOUSING PRIVILEGES: [TAX EXEMPT]


1. Housing Privileges of the Armed Forces of the MV = amount shouldered by the employer
Philippines (PNP excluded)

2. Housing unit situated inside or adjacent to the


business premises or the factory 5. Fleet of motor vehicles maintained by the employer for
the use of the employee (no transfer of ownership)
The Revenue Regulations defines “adjacent” as
within a 50-meter radius from the business
premises. MV = 50% of the Value of the Benefit which is the
Acquisition cost of all the vehicles divided
3. Temporary Housing for three (3) months or less by 5 years

EXPENSE ACCOUNT
It is when the employer spends for the employee. Example 6. Fleet of motor vehicles leased by the employer
groceries, the employer gives you a certain amount for
groceries in a month. This refers to the personal expenses
incurred by the employee but paid for by the employer. MV = 50% of the rental payments

This is subject to FBT.

This also includes payment for household expenses or 7. Yacht


assistants of the managerial or supervisory employee.
MV = depreciation amount which is based on its
useful life of 20 years
MOTOR VEHICLES
The principles in Housing Privileges is also applicable to
Motor Vehicles Privileges.
8. Aircrafts (including helicopters)
1. Motor Vehicle is purchased by the employer in the
name of the employee Not subject to FBT anymore.
It is presumed that it is for business use.
MV = Acquisition Cost

EXPENSES FOR FOREIGN TRAVEL


1. Non- taxable foreign travels shouldered by the
2. Cash is given by the employer to the employee employer - before these fringe benefits are exempted
from the taxes, they must be supported by receipts.
You have to follow the “SUBSTANTIATION RULE”.
MV = Cash Value given
Non-taxable foreign travel expenses not subject to
FBT:

22
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

(1) Reasonable business expenses for foreign There is a training bond or is a tie-up
business travel - for foreign business meeting or provision.
foreign business conventions. 2. Those which are given to the dependents of the
o If you notice the definition of fringe employee it is exempt from FBT under the following
benefit those which are necessary to the requirement:
business of the employer. They are not a. provided for through a competitive scheme under
subject to FBT. the company’s scholarship program
(2) Inland travel expenses,
o EXCEPT lodging cost, amounting to an
average USD 300 or less per day. Don’t
ask why, it is in the revenue regulations. NON-TAXABLE FRINGE BENEFITS
(3) The cost of economy or business class airplane What are those FBs which are not subject to FBTs?
fares.
o What about first class tickets- the non- Section 33 NIRC
taxable amount is 70% of the first class Section 33. Special Treatment of Fringe Benefit.-
air fare. XXX
(C) Fringe Benefits Not Taxable. - The following fringe
Take note that before these expenses be exempted benefits are not taxable under this Section:
from FBT it must be substantiated or the (1) Fringe benefits which are authorized and
substantiation rule must be followed. There must be exempted from tax under special laws;
documentary requirements supporting the expenses (2) Contributions of the employer for the benefit
and the nature of those expenses which are necessary of the employee to retirement, insurance and
or related to the business of the employer. hospitalization benefit plans;
(3) Benefits given to the rank and file employees,
2. Taxable foreign travel expenses subject to FBT: whether granted under a collective bargaining
 Foreign travel expenses which are not agreement or not; and
supported by documentary exhibits – no (4) De minimis benefits as defined in the rules and
brochures, no receipts presented to the BIR regulations to be promulgated by the
 30% of the first-class airfare Secretary of Finance, upon recommendation
 Traveling expenses of the family paid for by of the Commissioner.
the employer – that is taxable because that
is not related to business  From 2016 TSN: Benefits given to Rank-and-File
 Foreign travel expenses not related to EEs, whether granted under a CBA or not is exempt
business meetings or conventions from FBT because they are part of GI.

If you read the codal provision, there are at least 2 kinds:


EDUCATIONAL ASSISTANCE (1) Those required by the nature of, or necessary to
There are some employers who provide educational the trade, business or profession of the
assistance not only to the employees but also to the employer;
dependents to those employees. The rules we have to (2) Those granted for the convenience or advantage
follow pertaining to educational assistance: of the employer

GR: Educational assistance given to the employee or DE MINIMIS BENEFITS (DMBs)


managerial staff is subject to FBT - These are facilities or privileges furnished or
EXP: 2 types of exceptions: offered by the employer to his employees that are
of a relatively small value and are offered or
(1) If it is given to the employee the following furnished by the employer as a means of
requirements must be complied with so that it promoting health, goodwill, contentment or
will be exempted from FBT: efficiency of his employees.
a. The educational assistance is directly
connected with the employer’s business; and Sa ato pa binasaya pa- kanang ginagmay na hadhad. So
b. There is a written contract between the ikaw hatagan ka ug 500 etc. But it does not mean if you give
employer and the employee that the something which has a relatively small value automatically
employee shall remain in the employ of the it is called DMBs. Because DMB is actually a technical term.
employer for a particular period of time.

23
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

What is the nature of DMB?


For compensation income, of course sweldo siya. 9. Gifts given during Christmas and major anniversary
Number 2 it is also in a form of fringe benefit. Because celebrations not exceeding P5,000 per employee per
the employer is not really required to provide for annum; (RR No. 5-2011)
DMBs. It is over and above the salary or wage of the
employee. 10. Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty-five
What is the tax consequence if the employee receives a percent (25%) of the basic minimum wage on a per
DMB? region basis; (RR No. 5-2011)
As a GENERAL RULE if it is a DMB, it is excluded from
gross income. 11.Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
What are the basic principles when it comes to DMBs? productivity incentive schemes provided that the
1. Under Revenue Regulations for DMBs (I listed down total monetary value received from both CBA and
the RRs please secure copies for all the RRs in the productivity incentive schemes combined do not
outline). That list is exclusive. Even if the amount is exceed P10,000.00 per employee per taxable year.
relatively small value once it is not under the list, it is (RR No 1-2015)
not DMB.

From 2016 and 2017 TSN list: 2. If you notice in the listing in the RRs, there are ceilings
1. Monetized unused vacation leave credits of like uniform allowance. This second principle is as long
employees not exceeding ten (10) days during the as the amount is WITHIN THE CEILING, the amount of
year; (RR No. 5-2011) DMB is EXCLUDED from taxation not even subject to
FBT. Even if you give all the fringe benefits basta nasa
2. Monetized value of vacation and sick leave credits loob siya ng ceiling, it is still a tax benefit on the part of
paid to government officials and employees; (RR No. the employee. Always excluded from income taxation
5-2011) so long as it does not exceed the ceiling.

3. Medical cash allowance to dependents of employees, What if it will exceed the ceiling? For example, 1,500 for
not exceeding P750 per employee per semester or rice allowance. But the employer gives 2,500. So, if the
P125 per month; (RR No. 5-2011) amount EXCEEDS THE CEILING, the excess amount shall
form part of the 90,000 ceiling or non-taxable 13th month
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per pay and other benefits.
month amounting to not more than P1,500; (RR No. o BEFORE ang 90,000 is only 82, 000.
5-2011) o But RIGHT NOW because of the TRAIN LAW it is
already pegged at 90,000.
5. Uniform and Clothing allowance not exceeding P5,000  So pag sinabi natin na 13th month pay and
per annum; (RR No. 8-2012) other benefits to the extent of 90,000 it is
excluded from your taxable compensation
6. Actual medical assistance, e.g. medical allowance to income.
cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, What if my 13th month is 100,000 tapos nag sobra pa ang
and routine consultations, not exceeding P10,000.00 DMB ko. What is the consequence? If the 90,000 has
per annum; (RR No. 5-2011) already been consumed that is the only time that the DMB
will form part of the gross income.
7. Laundry allowance not exceeding P300 per month; (RR
No. 5-2011) DMBs given to managerial employees are EXEMPT from
FBT. Tax exemption under DMBs is not only for the benefit
8. Employees achievement awards, e.g., for length of of rank and file employees but also applicable to
service or safety achievement, which must be in the managerial.
form of a tangible personal property other than cash
or gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under
an established written plan which does not
discriminate in favor of highly paid employees; (RR CASE:
No. 5-2011)

24
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

CONFEDERATION FOR UNITY AND RECOGNITION AND issues to be resolved in this case? Sabi ng Supreme
ADVANCEMENT OF GOVERNMENT EMPLOYEES V. CIR Court, we are not a triar of facts. Although sometimes,
(GR NO 213446, JULY 3, 2018) the Supreme Court, in some cases and in some
circumstances, reviews the facts of the case because
Facts: blah blah blah. But sadly in this case, the Supreme Court
The main story here is that there is a Revenue opted not to discuss anything kasi baka nahirapan sila
Memorandum Order issued by the BIR which listed the kasi tax.
specific benefits, the legislative benefits and judiciary
benefits, which are subjected to withholding income tax.
Basically, these benefits are compensation income, thus, Anyway, what are the factual issues to be resolved here?
subjected to withholding income tax. 1. The nature of the fringe benefits given. Why is it
Withholding income tax is the advance payment of necessary to identify the nature of the fringe benefits
taxes being withheld by the employer which is to be paid given? Because there are some fringe benefits which
to the BIR. Now, the problem is this: the petitioner here are exempt from fringe benefit tax and even exempt
have been saying that because of the Memorandum from compensation income. If you read the codal
Order, this is unconstitutional or ultra vires because
provision under Section 33 of NIRC, there are at least
there are new taxes that are imposed by the BIR; and
2:
then, these are supposed to be fringed benefits or de
minimis benefits which are not subject to tax. That is i. Those are required by the very nature of the
how simple the case is. business or necessary to the business of the
employer; and
Issue: Whether or not the Revenue Memorandum ii. Those granted for the convenience of the
Order is unconstitutional? employer.

Issue related to income tax: Whether the Revenue So, you must able to prove that so that the fringe
Memorandum Order is ultra vires in so far as of its benefits, received by the employees, which falls under
Section 3 and Section 4 subject to taxes the non-taxable the exemptions will be exempted from any FBT or any
benefits, allowances and bonuses received by the income tax for that matter. To prove it, sabi ng
employee among others. Supreme Court , is proper documentation. As
borrowed from the wordings of the Supreme Court
So, the Supreme Court is being asked to determine that said “This, however, requires proper
whether these allowances are subject to income tax, and, documentation.
therefore subject to withholding tax. What is the
Supreme Court ruling with respect to this aspect? Without any documentary proof that the payment
ultimately redounded to the benefit of the employer,
Held: If you have read the case, the Supreme Court did the same shall be considered as a taxable benefit to
not give definite ruling to the legislative and judiciary the employee, and hence subject to withholding
benefits. Walang pronouncement ang Supreme Court. taxes.” So the rule is based on the taxability of the
The Supreme Court took the easy way out. Sabi niya, the compensation income, particularly the fringe benefits.
Supreme Court is not the trier of facts in determination
whether the fringe benefits received by the employee is What are the other factual issues you need to consider?
a factual matter. So, it is not enough you just put names.
Usual kasi niyan sa BIR, the usual idea is that okay you 2. The recipients of the fringe benefits. We have to
just put names, depende pala yan sa classification of the identify the recipients because there are different
income, you must classify the income and you manage it qualifications.
in such a way that it falls under the tax-exempt
compensation income. If the recipient is a managerial or supervisory
So, it will form as tax savings in the part of the employee the fringe benefit received, unless exempt
employees. But this time with regards to fringe benefits, from taxation, will be subjected to fringe benefit tax.
there are several factors that you have to consider and We all know that if the FB are subject to FBT, it is no
must be proved to the BIR especially if the fringe benefit longer part of the compensation income subject to the
is exempt from taxation. If you go back to our previous regular income tax; and, consequently it will not
discussion, dib a before sa general principles when it subject to any withholding income tax.
comes to tax exemptions, strict construction of tax
exemption against the taxpayer and in favor of the 3. Whether it the benefit is a De Minimis Benefit.
employee. The question here is, what are the factual

25
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

What I need you to consider is that what if the considered part of compensation income; thus, exempt
employee would say that it is a de minimis benefits? from withholding tax on compensation. Instead, these
fringe benefits are subject to a fringe benefit tax equivalent
The same way the employee must have to prove that to 32% of the grossed-up monetary value of the benefit,
it is really a de minimis benefit. which the employer is legally required to pay. On the other
hand, fringe benefits given to rank and file employees, while
On top of that, it is not enough that it is of small value, exempt from fringe benefit tax, form part of compensation
it should be included in the listing found in the income taxable under the regular income tax rates provided
Revenue Regulations as I said the last time. If it is not in Section 24(A)(2) of the NIRC, of 1997, as amended; and
in the list, even it is small in amount, will not be consequently, subject to withholding tax on compensation.
considered a de minimis benefits. It will form part of Furthermore, fringe benefits of relatively small value
your compensation income subject to regular income furnished by the employer to his employees (both
tax. managerial/supervisory and rank and file) as a means of
promoting health, goodwill, contentment, or efficiency,
From the case ruling: otherwise known as de minimis benefits, that are exempt
Determination of existence of fringe benefits is a question from both income tax on compensation and fringe benefit
of fact. tax; hence, not subject to withholding tax, are limited and
exclusive only to those enumerated under RR No. 3-98, as
Petitioners, nonetheless, insist that the allowances, amended. All other benefits given by the employer which
bonuses and benefits enumerated in Section III of the are not included in the said list, although of relatively small
assailed RMO are, in fact, fringe and de minimis benefits value, shall not be considered as de minimis benefits; hence,
exempt from withholding tax on compensation. The Court shall be subject to income tax as well as withholding tax on
cannot, however, rule on this issue as it is essentially a compensation income, for rank and file employees, or
question of fact that cannot be determined in this petition fringe benefits tax for managerial and supervisory
questioning the constitutionality of the RMO. employees, as the case may be.

To be sure, settled is the rule that exemptions from tax are Based on the foregoing, it is clear that to completely
construed strictissimij juris against the taxpayer and determine the merits of petitioners' claimed exemption
liberally in favor of the taxing authority. One who claims tax from withholding tax on compensation, under Section 33 of
exemption must point to a specific provision of law the NIRC of 1997, there is a need to confirm several factual
conferring, in clear and plain terms, exemption from the issues. As such, petitioners cannot but first resort to the
common burden and prove, through substantial evidence, proper courts and administrative agencies which are better
that it is, in fact, covered by the exemption so claimed. 85 equipped for said task.
The determination, therefore, of the merits of petitioners'
claim for tax exemption would necessarily require the All told, the Court finds Sections III and IV of the assailed
resolution of both legal and factual issues, which this Court, RMO valid.
not being a trier of facts, has no jurisdiction to do; more so,
in a petition filed at first instance. The NIRC of 1997, as amended, is clear that all forms of
compensation income received by the employee from his
Among the factual issues that need to be resolved, at the employer are presumed taxable and subject to withholding
first instance, is the nature of the fringe benefits granted to taxes. The Government of the Philippines, its agencies,
employees. The NIRC of 1997, as amended, does not instrumentalities, and political subdivisions, as an
impose income tax, and consequently a withholding tax, on employer, is required by law to withhold and remit to the
payments to employees which are either (a) required by the BIR the appropriate taxes due thereon. Any claims of
nature of, or necessary to, the business of the employer; or exemption from withholding taxes by an employee, as in
( b) for the convenience or advantage of the employer. This, the case of petitioners, must be brought and resolved in the
however, requires proper documentation. Without any appropriate administrative and judicial proceeding, with
documentary proof that the payment ultimately redounded the employee having the burden to prove the factual and
to the benefit of the employer, the same shall be legal bases thereof.
considered as a taxable benefit to the employee, and hence
subject to withholding taxes.

Another factual issue that needs to be confirmed is the


recipient of the alleged fringe benefit. Fringe benefits
furnished or granted, in cash or in kind, by an employer to
its managerial or supervisory employees, are not

26
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

MINIMUM WAGE EARNER (MWE) It is still the same, so long as I am MWE, I will still
be tax exempt from income taxation.
Who is a Minimum Wage Earner?
Section 22(HH), NIRC Minimum wage earner – That is the case of:
refers to a worker in the private sector paid the
statutory minimum wage, or to an employee in SORIANO VS SEC. OF FINANCE
the public sector with compensation income of not GR. 184450, Jan 24,2017.
more than the statutory minimum wage in the
nonagricultural sector where he/she is assigned. It all started because there was this revenue regulation
that was issued subjecting the minimum wage earners to
We all now what the Statutory Minimum wage is; withholding income tax if they have two or more
employers or they have their own businesses aside from
Section 22 (GG) Statutory Minimum Wage – refers to being employed at a minimum wage. So the Supreme
the rate fixed by the Regional Tripartite Wage and Court said what is being exempted by law is the
Productivity Board (RTWPB) as defines by the Bureau Statutory Minimum Wage so long as the employee is a
of Labor and Employment Statistics (BLES) of the MWE, that minimum wage will be exempt from income
Department of Labor and Employment (DOLE) taxation. But it does not mean that Minimum Wage
Earner is already exempt from income tax of course:
What is the tax implication of the taxpayer is a Minimum  on the excess of the 13th month pay;
Wage Earner or MWE?  if there are other compensation being received
 They are tax exempt. by that employee; or
That minimum wage earners xxx shall be  that employee is engaged in other type of
exempt from the payment of income tax on business and he also earns income.
their taxable income: Provided, further, That the
holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum Those income will be subjected to income taxation, so in
wage earners shall likewise be exempt from MWE what is being exempted is the most basic
income tax. (Section 24(A) last paragraph, NIRC) compensation an employee receives - the amount
afforded to the lowest paid employees by the mandate
Under the law 13th month pay and other benefits is tax of law R.A. 9504 is explicit as to the coverage of the
exempt up to 90,000, it is excluded from gross income. exemption: the wages that are not in excess of the
minimum wage as determined by the wage boards,
 First scenario: I am a minimum wage earner but then I including the corresponding holiday, overtime, night
am so good at my job pagdating ng 13th month pay I differential In a way, the legislature grants to these
have received other bonuses lumagpas ako ng 90,000. lowest paid employees additional income by no longer
What is the tax implication on my income? demanding from them a contribution for the operations
Going from the definition of Section 22(HH) it of government. This is the essence of R.A. 9504 as a
does not matter if the MWE exceeds the 90,000 social legislation. The government, by way of the tax
threshold the law does not say, so do not qualify. exemption, affords increased purchasing power to this
So long as he is a MWE, he will still be exempt from sector of the working class.
income taxation.
JAIME N. SORIANO VS SECRETARY OF FINANCE
 Second scenario: I am a minimum wage earner in the En Banc, GR No. 184450, Jan. 24,2017
morning I also sell hotdogs at the Ateneo Cafeteria and
I am a waiter at Knight’s Table. ISSUE: Whether Sections 1 and 3 of RR 10-2008 are
What is the tax implication on my income? consistent with the law in declaring that an MWE who
If you read the definition Section 22(HH), it receives other benefits in excess of the statutory limit
really does not matter if you are employed under 2 of P30,000 is no longer entitled to the exemption
employees. So okay lang, so long as I am a provided by R.A. 9504, is consistent with the law.
minimum wage earner.
RULING:
 Third Scenario: I am still a minimum wage earner plus Given the foregoing, the treatment of bonuses and
I sell hotdogs and have a mini sari-sari store at home. other benefits that an employee receives from the
What is the tax implication on my income? employer in excess of the P30,000 ceiling cannot but be
the same as the prevailing treatment prior to R.A. 9504

27
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

- anything in excess of P30,000 is taxable; no more, no wages of


less. employees,
Cost of
The treatment of this excess cannot operate to facilities like
disenfranchise the MWE from enjoying the exemption rent of office,
explicitly granted by R.A. 9504 and the
interest
In sum, the proper interpretation of R.A. 9504 is that it expense if the
imposes taxes only on the taxable income received in taxpayer is a
excess of the minimum wage, but the MWEs will not bank)
lose their exemption as such. Workers who receive the
statutory minimum wage their basic pay remain MWEs. Gross Income (In accounting, it is
The receipt of any other income during the year does essentially the same as gross profit)
not disqualify them as MWEs. They remain MWEs,
entitled to exemption as such, but the taxable income
they receive other than as MWEs may be subjected to
appropriate taxes. GAINS DERIVED FROM DEALINGS IN PROPERTIES
So we will be talking about GAINS. Pag sinabi nating gains
from dealing with properties normally this is connected to
the discussions in CAPITAL GAINS TAXATION. So isahin na
BUSINESS INCOME natin lahat para hindi na ta magbalik-balik.

Definition: Business income is income received by a Q: What do you mean by gains here - gains from
taxpayer who is engaged in business it is part of your gross dealings in properties?
income. A: This refers to the income derived from the sale,
exchange, or barter of assets which results in a gain.
So what is the gross income in business income?
EXCHANGE OF ASSETS
There are two general types of business:  this normally means that there is a TRANSFER of
1. You are engaged in the selling or manufacturing of property from one person to another for a good
goods, items or materials consideration
 so you take up from this discussion that to make a
Gross Income = Gross Sales (Nabaligya nimo tanan)
property’s receipt through donation or succession
(less) sales discounts
(less) sales allowances  technically speaking pag sinabi nating it is a property
(less) sales returns from donation or property from succession, you refer
Net Sales to it as a TRANSFER, it is not an exchange.
(less) Cost of Sales (this is your
manufacturing cost of the goods, your TWO TYPES OF GAINS:
“capital.”) 1. Ordinary Gain
Gross Income (in accounting, it is  these are gains you derived from the sale
essentially the same as of ORDINARY ASSETS
gross profit)
 Taxability – ordinary assets are part of
your GI.
Ordinary gains always form part of your
GI
2. You sell services
Gross Income = Gross Receipts
2. Capital Gain
(less) discounts
 it is from the sale, exchange, or barter of
(less) allowances
(less) returns (some books provide for CAPITAL ASSETS
returns  Taxability– some rules that must be
Net followed:
(less) cost of services (Composed of GR: it will form part of your GI - subject to
salaries and regular tax,
XPN:

28
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

(1) if it is excluded by law or 2. Property held by the taxpayer primarily for sale
(2) If it is subject to final tax to customers in the ordinary course of his trade
or business, or
So what are these two creatures?
 pretty much the same, still part of the
Q: How would you define ordinary assets?
A: For us to know what ordinary assets are all about let us inventory
look at the meaning of capital assets under 3. Property used in the trade or business, of a
character which is subject to the allowance for
SECTION 39, NIRC. depreciation provided in Subsection (F) of
SEC. 39. Capital Gains and Losses. - Section 34; or
 meaning DEPRECIABLE ASSETS
(A) Definitions. - As used in this Title -  you have a car that you use in your
business then that is a depreciable asset
(1) Capital Assets. - The term 'capital assets' – the longer the time that you hold the
means property held by the taxpayer (whether or property the lesser it got because the
not connected with his trade or business), BUT
value becomes lower overtime
DOES NOT INCLUDE
4. Real property used in trade or business of the
taxpayer
 stock in trade of the taxpayer or other
property of a kind which would properly  that is very easy to understand
be included in the inventory of the
taxpayer if on hand at the close of the So pag sinabi nating ordinary assets sabi natin this is already
taxable year or connected with your business.
 property held by the taxpayer primarily
for sale to customers in the ordinary Situation: I own a piece of property nagpatukod ko ug balay
course of his trade or business, or diha (built a house) or a structure which I use in carwash
 property used in the trade or business, of business. I own the land. I own the building. I bought
a character which is subject to the machineries etc there drums etc. I also have a small
allowance for depreciation provided in multicab which I mainly use to buy the soap and other
Subsection (F) of Section 34; or things I use for my business. At the end of the year I decided
 real property used in trade or business of na ayoko na mag car wash kay kapoy. I decided to sell
the taxpayer. everything.

Q: What is the classification of this house? Is this a capital


By looking at the provision, you will find FOUR TYPES OF
asset or and ordinary asset?
EXCEPTIONS. But by looking at the entire definition as a
A: Ordinary Asset.
whole, CAPITAL ASSETS are those ASSETS WHICH ARE NOT
USED IN BUSINESS.
Q: What about the land?
A: Ordinary Asset… Because the law says property used in
Pag tingin niyo sa definition na “whether or not connected
business
with his trade or business”, I don’t really know why the TAX
CODE placed that definition in the text.
Note: So again pag sinabi nating ordinary asset – used
in business. Pag capital asset – it is not used in
But if you understand the whole thing, pag sinabi mong
business.
capital assets, these are ASSETS WHICH ARE NOT USED IN
BUSINESS.
 We have to classify the asset traded or exchanged
Look at the EXCEPTIONS:
because there are TAX IMPLICATIONS again.
1. Stock in trade of the taxpayer or other property
of a kind which would properly be included in When we talk about ORDINARY ASSETS:
the inventory of the taxpayer if on hand at the  Any gain coming from ordinary assets, we have
close of the taxable year ORDINARY GAIN.
 so that’s inventory assets part of the  This will form part of your GROSS INCOME.
properties you will sell later on
But, when we talk about CAPITAL GAINS:

29
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

 GR: we go back to our basic premise part of the means that you avail of the services of a local
GROSS INCOME. stock dealer or broker.
 XPNs:
1. when EXCLUDED by law  This is subject to a Stock Transaction Tax which is
a final tax. So whatever gains here will no longer
2. subject to a FINAL TAX in which case
form part of the gross income.
we have the CAPITAL GAINS TAX
What is the tax rate?
Just because it is a capital gain, It doesn’t mean that it is  Under NIRC – ½ of 1%
already excluded from the gross income since it will be
 Under TRAIN Law – 6/10 of 1%
subject to final tax. No! You still have to classify further.
What is the tax base?
For purposes of our discussion in capital gains taxation,
 Gross Selling Price or Gross Value in Money
there are
3 types of properties being sold or traded:
1. STOCKS – this refers to domestic stocks i.e. SMC,
2. The stocks are not traded or listed.
MegaWorld, Aboitiz or stocks from other To put it short, to illustrate this, it’s the direct
domestic corporations family corporations stock selling of the stocks.
pa rin naman yan
2. REAL PROPERTIES If a person sells his stock portfolio to another
3. OTHERS – not a domestic stock, what is being person through direct selling and they will
execute a deed of sale, this will be:
traded is not a domestic stock and not also a real
 Subject to Capital Gains Tax which is a final
property so others sya
tax and whatever gain will no longer form part
of the gross income.
Let’s discuss this one by one.
What is the tax rate?
STOCKS
 Under old rule – 5% 10% rule
What are the rules you have to follow for you to determine
The first 100,000 – 5%
that income tax implication on exchange barter or exchange
Any excess on the 100,000 – 10%
or sale of domestic stocks
 Under TRAIN Law – pegged at 15%
First you have to identify the type of person dealing with
the stocks:
1. Dealers, Stock Dealers
What is the tax base?
If the stocks are sold by dealer of securities..
 The net capital gains
securities or stock dealers and stocks are part of
their inventory, it’s an ORDINARY GAIN.. its
Illustration:
business is selling stocks and securities. That’s
I sold my San Miguel stock portfolio.
why this is an ordinary gain and this is part of the
Selling price – P500,000
GROSS INCOME of the dealer
Buying price – P200,000
Selling expense (includes the Documentary Stamp Tax) –
2. Non-dealers
P20,000
What if the dealer sells stocks which are not part
of the inventory or stock sold by NON DEALERS.
(1) Through a local stock exchange
Pag sinabi nating dealers na hindi e-inventory
capital assets siya.
6/10 of 1% based on the Gross Selling Price
There are two possibilities: (P500,000)

1. The stocks are sold through a local stock Sir Percy’s Formula:
exchange;
STT – 500,000 x 6 / 10 x 1% = 3,000
When you trade your stocks at a local stock
exchange, it means listed siya ng corporation. It

30
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

(2) Through direct selling (1) Inah Bautista del Rosario 00:00-12:00
Under TRAIN Law – 15% of net capital gains
Recap: We are talking about dealings with properties and
Net capital gains = Selling price – buying price how it is related to capital gains taxation. We have defined
and selling expense the types of properties involved: stocks, real properties and
others.
500,000 With respect to stocks: we identify first whether
– (200,000 + 20,000) domestic stocks are sold by dealers or non-dealers. By
dealers, it is ordinary gain. If it is not sold by dealers, or
280,000 even if sold by dealers, but they are not part of the
inventory of such dealer, the sale will be subjected to
CGT – 280,000 x 15% = 42,000 capital gains tax or stock transaction tax. This depends
on where the taxpayer sold the stocks.

We also had a comparison between CGT applicable


before the TRAIN law was effective and what stock
Under NIRC –
transaction tax is before the applicability of the TRAIN
5% on the first 100,000
law.
10% on the excess thereof

100,000 x 5% = 5,000
REAL PROPERTIES
180,000 x 10% = 18,000
For real properties, what governs is Section 24(D)(1).
CGT – 5,000 + 18,000 = 23,000
SEC. 24. Income Tax Rates. –

(D) Capital Gains from Sale of Real Property. –


(1) In General. – The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%)
Summary of Stocks:
based on the gross selling price or current fair
market value as determined in accordance with
Determine whether it is Dealer or Non-Dealer
Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to
 If Dealer – it is an ordinary gain and forms part of the
have been realized from the sale, exchange, or
gross income
other disposition of real property located in the
Philippines, classified as capital assets, including
 If Non-Dealer – you further classify: whether it is sold pacto de retro sales and other forms of conditional
through a local stock exchange or through direct sales, by individuals, including estates and trusts:
selling Provided, That the tax liability, if any, on gains from
sales or other dispositions of real property to the
 If it’s through the local stock exchange – it’s government or any of its political subdivisions or
subject to Stock Transaction Tax based on the agencies or to government-owned or controlled
gross selling price, excluded from gross corporations shall be determined either under
income. Section 24 (A) or under this Subsection, at the
option of the taxpayer;
 If it’s through direct selling – it’s subject to
Capital Gains Tax of 15% based on the net
capital gains, still excluded from the gross
Applicability
income, as it is a final tax.
Section 24(D)(1) is applicable to citizens and resident aliens.
Section 25(A)(3) is applicable to NRAETB.
Section 25(B) is applicable to NRANETB
Take note of the tax base ha para di kayo malito. Again, I
will not require you to compute, I will only require you to PROPERTY HAS TO BE WITHIN THE PHILIPPINES TO BE
explain. SUBJECT TO CGT
Please take note that when we talk about CGT in all real
property, it is applicable on the sale on real property
Sept 6 recording (44:56)

31
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

classified as capital assets within the Philippines. The What are the transactions included here?
property necessarily has to be in the Philippines. (1) Sale
(2) Barter
What is the tax treatment if the real property is located (3) Exchange
abroad? If it is situated abroad, even if it is classified as a Example: A exchanged his land for B’s land. A and
capital asset, the proceeds from the sale, barter or B will pay their respective CGTs.
exchange will form part of the GI – depending also on the
taxpayer involved. (i.e. If the taxpayer is a nonresident PACTO DE RETRO SALES
citizen, his income is taxable only when derived in the It is a sale with a buyback provision. When the property is
Philippines) sold, there is a right to redemption in favor of the seller. This
is also covered by capital gains taxation. The seller de retro
How will you define a real property? will be liable for the CGT.
For Individuals – Real properties as defined in the NCC.
For corporations – Real properties subject to CGT are only What if the property is redeemed? If I will buy back the
lands and buildings. property, that is no longer subject to CGT. This is pursuant
to BIR Ruling.
NATURE OF CAPITAL GAINS TAX
Capital Gains Tax is a final tax. Thus, any income subject to If you read this portion of the text:
CGT is excluded from the gross income. other disposition of real property located in the
Philippines, classified as capital assets, including
What is the tax rate? 6% pacto de retro sales and other forms of conditional
What is the tax base? You have to consider the ff, sales, by individuals, including estates and trusts:
whichever is higher: There is no qualification – as to whether it is the pacto de
(1) selling price retro sale itself or the exercise of the right to redeem. With
(2) zonal value - valuation of real property as respect to this BIR Ruling, since the act of redeeming the
provided by the BIR property is an exercise of the right of redemption under the
(3) assessment value contract, it is no longer a taxable sale. You can also argue
that prior to the redemption, there has been no complete
What is being taxed by the government is not the actual transfer of property.
gain nor the right to transact but the presumed gain. Even
if the taxpayer has sold its property at a loss, it doesn’t really REDEMPTION OF LEVIED / FORECLOSED PROPERTY
matter. The law says that everytime you sell real properties How about the redemption in a mortgage? When a
considered as capital assets within the Philippines, the sale property is sold in a public auction because it is foreclosed
is subject to tax because of the presumed gain. or pursuant to an execution of a judgement, that is
supposed to be a taxable transaction – there is a sale. But
Who is liable for the Capital Gains Tax? then, when someone exercises the right to redeem the
NIRC clearly provides that it is the seller who is liable for property, it is no longer a taxable transaction. Because prior
CGT. to the expiration of the redemption period, what the buyer
has is merely an inchoate right over the property subject of
If the buyer will shoulder the CGT, it becomes part of the the pacto de retro sale.
consideration. This is based on our premise that CGT is a
direct tax. It is the seller who Is liable for it. PROPERTY SOLD TO THE GOVERNMENT &
EXPROPRIATION
Problem: RA 10752 was passed otherwise known as “The “Provided, That the tax liability, if any, on gains from
Right of Way Act.” It provides that it is the government sales or other dispositions of real property to the
which should pay the CGT on behalf of the seller / owner. government or any of its political subdivisions or
This law “destroys” the nature of the CGT as a final tax. The agencies or to government-owned or controlled
corporations shall be determined either under Section
Congress may later on amend the law to provide that the 24 (A) or under this Subsection, at the option of the
buyer may shoulder the CGT depending on their agreement. taxpayer”
But for now, just take note that the CGT will be paid by the
seller. If the buyer shoulders the CGT, this is supposed to be In other words, if the property is sold in favor of the
added to the entire consideration. Government, the taxpayer has the option to:
(1) Subject the proceeds to Capital Gains Taxation
(2) Subject the ordinary gains form part of his Gross
Income which is subject to regular income tax

32
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

This is also applicable to expropriation because there is still “the dwelling house, including the land on which it is
a transfer of property even if it is a forced sale. situated, where the husband and wife or an unmarried
individual, whether or not qualified as head of family,
SALE OF REAL PROPERTY EXEMPT FROM CAPITAL GAINS and members of his family reside. Actual occupancy of
TAXATION such principal residence shall not be considered
(1) Sale of real property located abroad interrupted or abandoned by reason of the individual’s
(2) Sale of principal residence under Section 24(2), temporary absence therefrom due to travel or studies or
NIRC work abroad or such other similar circumstances. Such
principal residence must be characterized by
(3) Jessalyn Puerin 24:01- 35:00 

permanency in that it must be the dwelling house in
which, whenever absent, the said individual intends to
SEC. 24. Income Tax Rates. – return.”
(D) Capital Gains from Sale of Real Property. -
(2) Exception. - The provisions of paragraph (1) of this
What if the property owned by the individual is just
Subsection to the contrary notwithstanding, capital
the house? This is allowed. Like the case I’m handling
gains presumed to have been realized from the sale
now – the house is owned by my client, while the lot
or disposition of their principal residence by natural
is owned by his mother. My client however got into a
persons, the proceeds of which is fully utilized in
fight with his 9 other siblings.
acquiring or constructing a new principal residence
within eighteen (18) calendar months from the date
o The status of the individual is immaterial – as long
of sale or disposition, shall be exempt from the
as the taxpayer has a principal residence. If he
capital gains tax imposed under this Subsection:
decides to sell it in certain conditions, he can be
Provided, That the historical cost or adjusted basis of
exempt from CGT.
the real property sold or disposed shall be carried
o When we say residence, we adopt the term as
over to the new principal residence built or acquired:
defined by the election laws: Residency is the trace
Provided, further, That the Commissioner shall have
of a home (?) characterized by a permanency
been duly notified by the taxpayer within thirty (30)
obtained by an individual, whenever absent
days from the date of sale or disposition through a
intends to return.
prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further,
Let’s simplify Sec. 24(D).
That the said tax exemption can only be availed of
once every ten (10) years: Provided, finally, That if
The law is that when you say real property, even if it is a
there is no full utilization of the proceeds of sale or
principal residence, it is still subject to CGT (Capital Gains
disposition, the portion of the gain presumed to have
Tax).
been realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the
Always follow the codal for tax exemptions.
gross selling price or fair market value at the time of
sale, whichever is higher, shall be multiplied by a
REQUIREMENTS FOR THE SALE OF PRINCIPAL
fraction which the unutilized amount bears to the
RESIDENCE TO BE EXEMPTED FROM CGT:
gross selling price in order to determine the taxable
1. The taxpayer must be an individual.
portion and the tax prescribed under paragraph (1)
2. The sale or disposition is that of the principal
of this Subsection shall be imposed thereon.”
residence of the taxpayer.
3. The proceeds of the sale must be fully utilized to
purchase or construct another principal residence.
Situation: The taxpayer has a principal residence. He sells it
4. The taxpayer must purchase or construct another
for a purpose of acquiring or constructing a new principal
principal residence within 18 months from the
residence.
date of sale or disposition.
5. The historical cost or adjusted basis of the real
PRINCIPAL RESIDENCE DEFINED
property sold or disposed is carried over to the
The term refers to the dwelling house including the
new principal residence built or acquired;
lot on which the dwelling house is situated where the
6. CIR must be informed within 30 days from the date
individual resides.
of sale or disposition through a prescribed return
of his intention to avail of the tax exemption
SEC. 2(2) of Revenue Regulations (RR) No. 13-99, as herein mentioned.
amended by RR No. 14-00 defines “principal residence” 7. This tax exemption may be availed of only once in
as: every 10 years.

33
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Other income is a kind of capital gains tax but is subject


For the sale of real property will be exempt from CGT: must to your regular income tax. It is a capital gain but will form
satisfy all the requirements stated above. part of the gross income.
- Taxpayer must be a natural person. While a
corporation may have a principal residence, this 2 THINGS TO REMEMBER:
provision is only applicable only to natural persons. 1. HOLDING PERIOD
The law is very clear on that. The holding period is the length of time that the
- Under RR, the 18 month period starts at the time of taxpayer holds the property before disposing the same.
the notarization of the deed of transfer or deed of sale.
SHORT TERM Not more than Must recognize
If you follow the Revenue Regulations, it provides an
HOLDING 1 year 100% of the
additional requirement:
PERIOD gain
1. Escrow Agreement.
- It goes like this, magdeposit ka sa bank, i- LONG TERM More than 1 Must recognize
deposit nimo ang capital gains tax, when you HOLDING year 50% of the gain
were able to comply all the requirements, you PERIOD
can still withdraw it. But if you are not able to
comply the requirements, then that is good as
payment of your CGT. Example: I sold a car in Sept 2018 for P500,000 (selling
2. You have to file Capital Gain Tax Return even it is price). Considering the depreciation, the price is
a tax-exempt transaction P400,000 (depreciated value/cost) na lang pala siya.
3. Then you also have to follow the post-reporting So I have a gain of P100,000.
requirements
If my holding period is short-term (i.e. I bought the car
4. You also have to follow the procedure for Escrow
in Jan 2018), I have to recognize 100% of the gain. I
Agreement
will recognize the entire amount of gain of P100,000
5. Also there is limitation for tax exemption as part of my gross income.
privilege. I think if you want to extend the
discussion of the rules, it is found in the De Leon If my holding period is long-term (i.e. I have owned the
Book. car for 3 years), I will only recognize 50% of the gain.
What I will put in my income tax return is the P 50,000
Problem: I sell my principal residence, house and lot in a (P 100,000 x 50%), because I held that property on a
subdivision, for P15M. I bought a condo for only P10M. Will long-term basis. That is the essence of the holding
I still covered by the tax exemption or can I avail of partial period. But take note, the holding period applies only
exemption? to individual taxpayers. Wala itong concept nato sa
The law says “Provided, finally, That if there is no full corporations.
utilization of the proceeds of sale or disposition, the
portion of the gain presumed to have been realized 2. CAPITAL LOSS INVOLVED (will be discussed when we
from the sale or disposition shall be subject to capital reach deductions)
gains tax.” In other words, if there is partial utilization
of the proceeds, the taxpayer can still avails the tax
exemption to the extent of that amount utilized for INTEREST
the purchase or construction of a new principal
residence. Interest is a compensation allowed by law or fixed by the
parties for the used or forbearance of money or damages
for its detention.
OTHER INCOME Simply speaking, interest is an income gained
when you loan money to someone else.
Let us go now to OTHERS. This constitutes properties that
are neither stocks nor real properties – those capital assets What is the nature of interest income?
which are not situated in the Philippines and those which First, it is a passive income.
are not domestic shares of stock. Pag sinabi mo na passive income, you normally do not
do anything at all before you can gain an income. This
involves very minimal action on your part. You just
lend the money and then you just wait someone pay

34
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

the money loaned plus interest already earned. That is exempt), derived from sources within the Philippines:
a passive income. Provided, however, That interest income received by an
individual taxpayer (except a nonresident individual) from
Compared to your active income, you have to do a depository bank under the expanded foreign currency
something about it for you to earn. Like for example, deposit system shall be subject to a final income tax at the
magtudlo ko kaninyo para makadawat ko ug swedo sa rate of fifteen percent (15%) of such interest income:
Ateneo. That is an active income. Provided, further, That interest income from long-term
deposit or investment in the form of savings, common or
Second, interest income may either be: individual trust funds, deposit substitutes, investment
1. Part of your business income; or management accounts and other investments evidenced
2. Part of your other income- meaning hindi mo siya by certificates in such form prescribed by the Bangko
business. Ano example niyan? Magpautang ako sa Sentral ng Pilipinas (BSP) shall be exempt from the tax
barkada ko tapos bayaran lang niya with interest imposed under this Subsection: Provided, finally, That
kasi kailangan niya ng pera. Meron ako classmates should the holder of the certificate pre-terminate the
dati gapautang ng money for payment of tuition deposit or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be
fees. May mga kaibigan naman na pautang mo
deducted and withheld by the depository bank from the
pero hindi ka na bayaran, sa ngalan na amigo mo.
proceeds of the long-term deposit or investment
Ganun daw ang true friends eh, “pautang bai” certificate based on the remaining maturity thereof:
HAHAHA.

(4) Marrie Allexa Campaner 35:01 - 44:56 Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Third, it is also entirely possible that this interest income Less than three (3) years - 20%
will be subject to Final Tax.
***those highlighted are the amendments by TRAIN
Just because passive income siya, it’s automatically
LAW.
subject to final tax. You have to classify, or determine
the nature of that income before you will be able to
Section 27 (D)(1) - Corporations
determine what the tax consequence of that income
is. (D) Rates of Tax on Certain Passive Incomes. -

GR: interest income is part of the Gross Income. (1) Interest from Deposits and Yield or any other
XPN: Monetary Benefit from Deposit Substitutes and from
1. When excluded by law; Trust Funds and Similar Arrangements, and Royalties. - A
2. When subject to final tax. final tax at the rate of twenty percent (20%) is hereby
What are those interest income subject to final tax? It’s imposed upon the amount of interest on currency bank
found in Section 24 (B)(1) and Section 27(D)(1). deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar
Section 24 (B)(1) - Individuals arrangements received by domestic corporations, and
(B) Rate of Tax on Certain Passive Income: - royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a
domestic corporation from a depository bank under the
(1) Interests, Royalties, Prizes, and Other Winnings. -
expanded foreign currency deposit system shall be
subject to a final income tax at the rate of fifteen percent
A final tax at the rate of twenty percent (20%) is hereby (15%) of such interest income.
imposed upon the amount of interest from any currency
bank deposit and yield or any other monetary benefit Let’s simplify (INTEREST INCOME SUBJECT TO FINAL TAXES):
from deposit substitutes and from trust funds and similar
arrangements; royalties, except on books, as well as other (1) Those subject to 20% Final Tax
literary works and musical compositions, which shall be
imposed a final tax of ten percent (10%); prizes (except  From currency bank deposits
prizes amounting to Ten thousand pesos (P10,000) or less
 Yield or any other monetary benefit from deposit
which shall be subject to tax under Subsection (A) of
substitutes and from trust funds and similar
Section 24; and other winnings (except winnings
arrangements
amounting to Ten thousand pesos (P10,000) or less from
Philippine Charity Sweepstakes and Lotto which shall be

35
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

What if I am engaged in the business of lending Four (4) years to less than five (5) years - 5%;
and I earn interest, will it be subject to 20% final Three (3) years to less than (4) years - 12%;
tax? Does it come from bank deposits? Does it and
yield from deposit substitutes? (be familiar Less than three (3) years - 20%
with the definition of “deposit substitutes” in
the NIRC). IT’S PART OF THE GROSS INCOME.
3. Interest earned by members of Cooperatives.
What if I have a bank deposit in Singapore what Case in point is Dumaguete Cathedral vs CIR
is the tax consequence of any interest income I (G.R. 182722, Jan. 22,2010)
will earn there? NOTE that 20% final taxes
apply only on domestic bank deposits. So it’s Dumaguete Cathedral vs CIR
part of the gross income. (G.R. 182722, Jan. 22,2010

Another principle: when we say income subject From the FT:


to final tax, this refers to income from domestic There is nothing in the ruling to suggest that it
sources. applies only when deposits are maintained in a
bank. Rather, the ruling clearly states, without
What are the types of individuals subject to this any qualification, that since interest from any
20% final tax on interest? Philippine currency bank deposit and yield or any
other monetary benefit from deposit substitutes
This is applicable to all types of individuals are paid by banks, cooperatives are not required
except one – Nonresident Alien Not to withhold the corresponding tax on the interest
Engaged in Trade and Business. The from savings and time deposits of their
reason is that the NRANETB are taxed at members. This interpretation was reiterated in
gross. The tax rate is 25%. BIR Ruling [DA-591-2006] dated October 5, 2006,
which was issued by Assistant Commissioner
What about corporations? The same, James H. Roldan upon the request of the
applicable to all types of corporations cooperatives for a confirmatory ruling on several
except Nonresident Foreign Corporations issues, among which is the alleged exemption of
because they are taxed at gross. The tax interest income on members deposit (over and
rate is 30% above the share capital holdings) from the 20%
final withholding tax. In the said ruling, the BIR
(2) Those subject to 15% Final Tax opined that:

This refers to a domestic bank but is under the xxxx


Expanded Foreign Currency Deposit System.
Dollar accounts for short. 3. Exemption of interest income on
members deposit (over and above
This is applicable to all types of taxpayers except the share capital holdings) from the
Nonresidents. So even to corporations, applicable 20% Final Withholding Tax.
to them except to Nonresident Foreign
Corporations. The National Internal Revenue Code
states that a final tax at the rate of
(3) Those which are tax exempt: twenty percent (20%) is hereby
imposed upon the amount of
1. Interest Income from Expanded Currency interest on currency bank deposit
Deposit System by Nonresidents (individuals and yield or any other monetary
and corporations). benefit from the deposit substitutes
and from trust funds and similar
2. Long-term deposits. You will know that it’s arrangement x x x for individuals
long-term because it’s for 5 years. But if there under Section 24(B)(1) and for
is a pre-termination, it will now become subject domestic corporations under
to final tax depending on the remaining Section 27(D)(1).Considering the
maturity period: members deposits with the
cooperatives are not currency bank

36
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

deposits nor deposit substitutes, Let’s say a building, what happens with that
Section 24(B)(1) and Section building? Is it the property of the landowner or is
27(D)(1), therefore, do not apply to it an income on the part of the lessor? In the lease
members of cooperatives and to contract, there can be a stipulation that by the
deposits of primaries with end of the term, the building and other
federations, respectively. structures, which cannot be removed, or anything
placed there as part of improvements will not be
removed by the person renting the property. If
Sept 11 (43:04)
(1) Joh Madum 00:00-11:00 that’s the case, that is what we called as leasehold
improvements. Even though in the meantime the
The last thing we discussed last time is about interest. We lot owner cannot own yet the property but later
discussed about the rules on interest. As a general rule it’s he will earn such property. Such improvements
part of gross income, exception if it is subject to final tax or will form part of your rent.
is exempted by law. We also learned about interests which
is subject to 20% final tax, those are interest income coming Two ways of recognizing gross income involving leasehold
from domestic bank deposit and etc.. Then we also have the improvements
7.5 % final tax rate. You also have tax exempt, common of 1. Outright method - the value of the property
which are the cooperatives. Take note, when it comes to introduced or the fair market value of the
NRANETB and Non-resident foreign corporation, they are acquisition cost of the property introduced in that
subject to a different final tax rate. land will form part of the gross income of the
property owner. Income is recognized at the time
Q: What are the changes introduced by the TRAIN law with the building was completed.
respect to interest? E.g. after the construction of the building you already
A: There is not much changes, except for the final tax under owned it, then the building will recognize as
EFCDS, before it is 7.5% now it is 15%. Just take note of automatically an income for that year. Paghuman
that. Everything in Interest income is the same including patukod sa building imoha na ang building then
the long term deposit. automatically ang income. (excerpt from the 2016 TSN)

RENTS 2. Spread out method – during the life time of the


Rent is another type of a passive income. It pertains to lease contract the property value will be
a lease or use of real property or personal property. It is a apportioned, and the depreciation of that
passive income because you don’t have to do anything building will form part of the income of the lessor.
before you earned the income. You only have to do is buy
that property, or earned or hold that property and you just *Under the l Revenue Regulation, the income is not the cost
sit and wait for the rents to come along. of the construction or cost of the improvements but the
GR: Rent income within the Philippines is part of your fair market value of the improvement.
Gross Income.

Q: What composes the rent income?


A: Composition of rent income NET INCOME
1. Regular rent payments – service lease
 Self-Employed taxpayer
2. Security deposits given without any restrictions
Meaning if the money is given as a security Q: What if the gross income of the taxpayer will exceed the
deposit, (it is not the “deposit” in a big sense), 3 million thresholds? How do you account for it? Is it part of
taxpayer or the income earner is allowed to use your gross income?
that security deposit for whatever he pleases.
A: One book would say that it would depend on the VAT
3. Taxes and other expenses relating to the rent registration of the taxpayer. The taxpayer will be subject to
paid by the lessee. VAT if he is:
E.g. Normally there is a stipulation in the lease 1. VAT-registered taxpayer - excluded from its
contract that payment of real property taxes shall gross income, this is his output tax, it is not
be shouldered by the lessee. part of the receipt or income ;

4. Leasehold improvements 2. Not a VAT-registered but exceeded the 3


The lessee introduces structures in that property. million threshold - the entire amount

37
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

including the VAT portion of gross sales or (2) Cash and/or Property Dividends from a
receipt will form part of his GI. Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund
Company or Regional Operating Headquarter
 Tax Rentals or Multinational Company, or Share in
Distributable Net Income of a Partnership
PROBLEM: (Except a General Professional Partnership),
Joint Account, Joint Venture Taxable as a
Suppose, in the beginning of the year 2018, I entered into Corporation or Association, Interests,
a lease contract for 1 year. Ano ginawa ko? Kasi ayaw kong Royalties, Prizes, and Other Winnings.— x x x
palagi ako sinisingil kasi sumasakit ang ulo ko, so I paid my royalties (in any form x x x shall be subject to
I year rent. That 1 year rent will cover July 1, 2018 until June an income tax of twenty percent (20%) on the
30, 2019. How am I supposed to account the rent income total amount thereof: Provided, however, that
then? royalties on books as well as other literary
works, and royalties on musical compositions
A: Normally, under the Revenue regulation, it’s kinda weird, shall be subject to a final tax of ten percent
because it does not really matter if the taxpayer bonded (10%) on the total amount thereof: x x x
cash form or in the accrual basis as long as there is already
a rent, or a money is received as rent, regardless of
accounting method, the taxpayer should recognize as part
of his gross income. Automatic sya even if the taxpayer got SEC. 27. Rates of Income Tax on Domestic Corporations.
to earned it later (Future rent). —
(D) Rates of Tax on Certain Passive Incomes.—
(1) Interest from Deposits and Yield or any other
(2) Dianne Marie Isidor 11:01-23:00 Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements, and
What if the taxpayer employs the accrual method? Royalties. — A final tax at the rate of 20% is
hereby imposed upon the amount of interest on
Weird mn gud yang accrual because..basta I will not discuss currency bank deposit and yield or any other
that anymore. Basta just think about it :( monetary benefit from deposit substitutes and
from trust funds and similar arrangements
When it comes to rent income, regardless of the accounting received by domestic corporations, and
method of the taxpayer: royalties,derived from sources within the
Philippines: Provided, however, That interest
You receive the money as rent, that will already form part income derived by a domestic corporation from a
of the income even if the rent pertains to future rent. depositary bank under the expanded foreign
currency deposit system shall be subject to a final
income tax at the rate of 15% of such interest
ROYALTIES income.

SECTION 24(B) Rate of Tax on Certain Passive Income


(1) Interests, Royalties, Prizes, and Other Winnings. - A SEC. 28. Rates of Income Tax on Domestic Corporations.
final tax at the rate of twenty percent (20%) is hereby —
imposed upon x x x.royalties, except on books, as well (A) Tax on Resident Foreign Corporations.—
as other literary works and musical compositions, (7) Tax on Certain Incomes Received by a Resident
which shall be imposed a final tax of ten percent Foreign Corporation. —
(10%); x x x (a) Interest from Deposits and Yield or any
other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar
Then you have Sec. 25 A par. 2, Sec. 27 D par. 1, Sec. 28 A… Arrangements and Royalties.— Interest
from any currency bank deposit and yield
SEC. 25. Tax on Nonresident Alien Individual. — or any other monetary benefit from
(A) Nonresident Alien Engaged in Trade or Business deposit substitutes and from trust funds
Within the Philippines. — and similar arrangements and royalties
derived from sources within the Philippines

38
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

shall be subject to a final income tax at the (2) If it’s a passive royalty, normally it’s subject to a
rate of twenty percent (20%) of such FINAL TAX.
interest: Provided, however, That interest
income derived by a resident foreign
corporation from a depository bank under Of course you have to look at the source of the royalty
the expanded foreign currency deposit income.
system shall be subject to a final income
tax at the rate of seven and one-half Please take NOTE That when you talk about PASSIVE
percent (7 1/2%) of such interest income. INCOME subject to Final Tax, we are talking about
DOMESTICALLY EARNED PASSIVE INCOME.
What do you mean by ROYALTY?
ROYALTIES mean payments of any kind received as a How do we distinguish both?
consideration for the use of or the right to use of any
copyright or literary, artistic or scientific work including Situation: So, supposing that you want an app, kunwari
cinematographic films, TV broadcast, any patent, foodpanda, example, we have grab, we have uber and
trademark etc. now we have hirna. Anyway, you want an app similar to
foodpanda, so you commission a computer geek to make
So to put it simply, royalties are monies received by the that app. So that computer geek makes that app for you
taxpayer for using his intellectual property rights. and then submitted the app for your approval and then
eventually when it’s all set and done, now you have the
Tax Treatment app. You let the computer geek run the app.
General Rule: The royalty income is part of your gross
income. So what do you pay the computer geek?

2 TYPES OF ROYALTIES (1) You pay for him royalties for making the app
Under our income tax laws, what are the two types of (ACTIVE ROYALTY)
Royalties? (2) You also pay him the royalty for the use of the app
because at the end of the day, it is stipulated in
(1) ACTIVE ROYALTY - is that which the taxpayer has the contract that it is the computer geek who will
to do some amount of work in order for him to own all the rights over that app that you
earn that royalty income. requested from him. (PASSIVE ROYALTY)

(2) PASSIVE ROYALTY - is somehow similar to the ft  So the money that you have paid to that
(final tax). computer geek for making the app is actually
ACTIVE ROYALTY.
You already own the intellectual property right, you will just
sit down, you allow others to use for compensation, that’s But if you talk about royatlies, the computer geek will
passive income (or royalty?). just manage etc. Usually maghanap lang yan sya ng
crash reports and for the improvements.
Question: Which of the two royalties is subject to Final Tax?
 For the use of the app, that is already your
If you read the heading or first line in tax code. Anong PASSIVE ROYALTY.
nakalagay jan? Final taxes di ba on PASSIVE INCOME?
So, on the part of the computer geek, how is he
So, what is subjected to the NIRC for the final tax is just the supposed to…..what’s the tax on the royalty he incur?
PASSIVE INCOME.
Active Royalty is part of his gross income.
This would mean that it is the PASSIVE ROYALTIES. Passive Royalty is subject to 20 % final tax, final
withholding tax to be withheld by the taxpayer.
SERVICE FEE
SUMMARY: What about the service fees paid for the maintenance of
that app?
So, again what’s the principle here:
Still it’s part of the gross income, no longer royalty.
(1) If what is involved is the active royalty, it’s part of
the GI (Gross Income), Remember:

39
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

When you talk about royakty, Passive Royalty it’s only for corporate assets. It will be distributed to the remaining
the use of the Intellectual Property Right. stockholders. You call that as the Liquidating Dividends.

RULES [Note: This refers to DOMESTIC DIVIDENDS.]


PASSIVE ROYALTIES SUBJECT TO FINAL TAX
GR: it’s part of your GI (gross income)
GR: The Final withholding tax would be 20% of the XPN: if it is subject to final tax or exempted by law.
passive royalty.
1. Cash or property dividends received by
XPN: Books, as well as other Literary works and individuals from a domestic corporation is
Musical compositions (BLM): Subject to Final Tax subject to FInal Tax.
of 10% A. For Citizens and Resident Aliens: The
Final Tax rate is just 10%
B. For Non-resident Aliens Engaged in
Trade and Business (NRAETB): The rate
is 20%
DIVIDENDS C. For Non-resident Aliens Not Engaged in
Trade and Business (NRANETB): The
Dividends are earnings distributed by a stock corporation to rate is 25%
its stockholders.

On the part of the stockholders, of course its income. You


(3) Patricia Nicole Manaloto Balgoa 23:01- 34:00
own a piece of the corporation, such that if the corporation
will be profitable because you have a unit of ownership, you
will earn DIVIDEND INCOME. That’s one way of earning  Non-resident Aliens Engaged in Trade and Business:
from corporations. You own a stock, depende sa kung rate is 20%
gaano karami, how many share do you own in that
corporation and if the corporation will distribute dividends,
 Non-resident Aliens NOT engaged in Trade and
its also parallel to the amount of paramount share that you
Business: rate is 25%
have in that corporation.
Depende on the TYPE of individuals.
Another way of earning money is if you sell shares of stock.

TYPES OF DIVIDENDS
CORPORATION
1. CASH DIVIDENDS- most common of all.
 Dividend income received by a domestic corporation,
or a resident foreign corporation from another
The corporation will earn a profit then a portion of it will
domestic corporation: TAX EXEMPT.
be distributed to the stockholders and it will be
This is what you call as “Inter-corporate dividends”
ditsributed through cash.
because a corporation is distributing dividends and the
recipient of those dividends are other corporations.
2. PROPERTY DIVIDENDS
It’s possible also that what will be distributed are
 Dividend income from a foreign corporation and
properties . So instead na kwartahay na lang, so what the
received by a domestic corporation: (situation: foreign
corporation will give you are the products of the
corporation distributes dividends and the recipient is a
company which either you can sell or you can use.
domestic corporation) Part of GROSS INCOME.
3. STOCK DIVIDENDS
 Dividend income from a foreign corporation and
received by a resident foreign corporation: TAX
The Corporation may also distribute its own stocks to its
EXEMPT. Resident foreign corporations are taxable only
stockholders as dividends. You call them as Stock
on the income earned within the Philippines.
DIvidends.
If it’s coming from a foreign corporation, it is as if these
dividends are coming from the source.
4. LIQUIDATING DIVIDENDS
If the corporation has already stop operating and
decides to dissolve and liquidate it properties or

40
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

 Dividend income received by a non-resident foreign FROM 2016 TSN: (Ruyeras)


corporation from a domestic corporation (domestic *Transcriber’s Summarization:
dividends received by a non-resident foreign
corporation): SUBJECT TO 15% FINAL TAX. DIVIDENDS

What is the condition so that these dividends will be GENERAL RULE: Dividend income is part of gross income.
subject to 15% final tax? EXCEPTION: Unless the law so provides for another tax
When the TAX SPARING RULE applies. treatment. To qualify for the exception, ask two (2) questions:

1st question: Is the type of dividend involved taxable?


Tax Sparing Rule
A non-resident foreign corporation will be subject Type of Dividend Taxable
to 15% preferential tax rate on the amount of ?
cash/property dividends received from a Cash Dividend YES
domestic corporation provided that the country
Property Dividend YES
in which it is domiciled shall allow a tax credit
Stock Dividend NO
against the tax due from its taxes deemed to
Liquidating Dividend NO
have been paid in the Philippines.
Dividend from NO
Cooperatives
What if the tax sparing rule does not apply?
The inter-corporate dividends received by a non-resident
2nd question: If the type of dividend is actually taxable
foreign corporation will be subject to 30% final tax. (double (e.g. Cash Dividend), who is the giver and the recipient?
ang final tax)
Dividend Dividend Received By: TAX
Given By: TREATMEN
STOCK DIVIDENDS, DIVIDENDS RECEIVED FROM T
COOPERATIVES, and PURE LIQUIDATING DIVIDENDS Domestic Indivi- Resident Subject to
Medyo magulo ang dividends. But just don’t forget the rules Corporation duals Citizen 10% Final
that I mentioned. Tax
Resident Subject to
[The following notes are culled from the 2016 tsn. Sir just Alien 10% Final
said the names of the above dividends] Tax
NRA-ETB Subject to
• Pure stock dividends are tax exempt. It’s tax exempt 20% Final
because it is just a transfer of one capital account to Tax
another. Technically you don’t receive any property. NRA-NETB Subject to
You receive a unit of ownership of that corporation. 25% Tax
That’s why it’s NOT income; Rate (NRA-
NETB are
taxed based
• Liquidating dividends are those received by the
on their
stockholder in the corporate assets upon liquidation. So gross
kung mag liquidate ang corporation and there are income)
remaining assets na isauli sayo, what is that? That is a Corpo- Domestic Tax Exempt
return of capital. What is the tax implication? It is again rations Corpo-
tax-exempt. Again, you do not tax capital. Return OF ration
capital is not taxable, what is taxable is return ON Resident Tax Exempt
capital; Foreign
Corpo-
• Dividends received from cooperatives are also tax- ration
exempt. Non- Subject to
Resident 15% Final
INTER-CORPORATE DIVIDENS Foreign Tax (subject
GR: Tax exempt. Corpo- to Tax-
XPN: When the recipient is a non-resident ration Sparing
foreign corporation. Rule)

41
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Foreign Resident Citizens and Part of Domestic prizes earned by a taxpayer is subject to
Corporation Domestic Corporations Gross 20% final tax.
(Note: Only Resident Income Exception to final tax rule: If the value or the
Citizens and Domestic amount of the prize 10K or below.
Corporations are taxable Tax Consequence? It will form part of the gross
on their income within income of the taxpayer.
and without. Other
taxpayers are taxable What about yung napanalunan ni Miss Universe Pia
only on income within). Wurtzbach? What is the tax consequence?
It’s part of the gross income. It is from outside source.

WINNINGS
(4) Nikki Tan 34:01-43:04
GR: Part of gross income.
XPN: When winnings are subject to final tax.
PRIZES AND WINNINGS Domestic winnings are subject to 20% final tax.
Exception to final tax rule: Winnings from PCSO
Prizes are different from winnings. Remember that these Sweepstakes or Lotto, but ONLY IF the winnings
rules on prizes and winnings are applicable to do not exceed 10K.
INDIVIDUALS ONLY. If the prize or the winning is Tax Consequence? Tax exempt.
earned by the corporation, there is no specific provision
in the NIRC that is why you go back to the general rule, *Prior to the TRAIN Law: The rule is if it is from
it is part of the gross income unless excluded by law. the PCSO Sweepstakes and Lotto, the entire
amount is exempt.
PRIZE is a reward because you joined in a contest and
because of your efforts.
With respect to prizes, they are subject to 20% final
WINNINGS, you won because of chance. tax. Who may avail of these exclusions?
What are the rules that we have to remember in prizes
Section 32 (B)(7)(c) Prizes and awards made primarily
and winnings?
in recognition of religious, charitable, scientific,
GR: It is part of gross income
educational, artistic, literary, or civic achievement but
XPN: It is not part of gross income when:
only if:
(1) excluded by law or
1. The recipient was selected without any action
(2) subject to final tax.
on his part to enter the contest or proceeding;
and
Sec. 24 (B) (1)
2. The recipient is not required to render
(B) Rate of Tax on Certain Passive Income: - substantial future services as a condition to
receiving the prize or award.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final
tax at the rate of twenty percent (20%) is hereby d. Prizes and Awards in Sports Competition – All prizes
imposed upon the amount of interest from any and awards granted to athletes in local and
currency bank deposit and yield or any other monetary international sports competitions and tournaments
benefit from deposit substitutes and from trust funds whether held in the Philippines or abroad and
and similar arrangements; royalties, except on books, as sanctioned by their national sports associations.
well as other literary works and musical compositions,
which shall be imposed a final tax of ten percent (10%); There are two things here:
prizes (except prizes amounting to Ten thousand pesos a) Prizes because of religious, charitable, etc.
(P10,000) or less which shall be subject to tax under b) Prizes in Sports Competition Prizes because of
Subsection (A) of Section 24; and other winnings religious, charitable, etc.
(except Philippine Charity Sweepstakes and Lotto
winnings), derived from sources within the Philippines: (a) Prizes because of religious, charitable, etc.
What are the requirements?
PRIZES a. Purpose – it must be for religious, charitable,
GR: Part of gross income. scientific, educational, artistic, literary, or civic
XPN: When prizes are subject to final tax: achievement;

42
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

b. The recipient was selected without any action EXCEPTION: Unless the law so provides for another tax
on his part to enter the contest or proceeding; treatment. To qualify for the exception, ask two (2) questions:
c. The recipient is not required to render
substantial future services as a condition to 1st question: Is the type of winning involved taxable?
receiving the prize or award.
Type of Winning Taxable?
 An example for this is the Datu Bago Award PCSO and Lotto Winnings NO
and the Ramon Magsaysay Award. In here Other winnings May be
they are only nominated and they win a taxable
plaque and I think may cash. depending
on the next
questions
(b) Prizes and awards in sports competition.
The key word here is sanctioned by the national
2nd question: What’s the source of the prize?
sport association. Right now, it is the Philippine
Olympics Committee.
Source Tax Treatment
Outside the Philippines Part of Gross Income
FROM THE 2016 TSN: (Ruyeras) Within the Philippines Subject to 20% Final Tax
*Transcriber’s Summarization:

PRIZES

GENERAL RULE: Prizes are part of gross income. PENSIONS, ANNUITIES AND PROCEEDS OF LIFE
EXCEPTION: Unless the law so provides for another tax INSURANCE
treatment. To qualify for the exception, ask three (3) questions:
GR: it is part of the gross income.
1st question: Is the type of prize involved taxable?
Type of Prize Taxable? From the 2016 TSN of Dean Quibod
Prize received from Sports NO
Competition sanctioned by the PENSION – in the event you retire, you receive pensions.
Philippine Sports Committee These pensios include retirement pay and separation pay.
Prizes for religious, charitable, NO They are taxable, as a rule, because they are payment for
artistic, etc. Achievements services rendered. They will be excluded only when they
where the two (2) requisites comply with the requirements for purposes of exclusion.
under the law are complied with
Other prizes May be ANNUITIES – Like interest income, this pertains to periodic
taxable payment. There is a fund set up, and that fund earns or
depending generates income in the form of annuities. This is taxable
on the next income in the hands of the beneficiary.
questions
Definition:
2nd question: What’s the source of the prize?
Art. 2021, CC. The aleatory contract of life annuity binds
Source Tax Treatment the debtor to pay an annual pension or income during
Outside the Philippines Part of Gross Income the life of one or more determinate persons in
Within the Philippines Depends on the Next consideration of a capital consisting of money or other
Question property, whose ownership is transferred to him at once
with the burden of the income. (1802a)
3rd question: What is the amount?
Section 32(B)(1), NIRC
Amount Tax Treatment Life Insurance. - The proceeds of life insurance policies
More than P10,000 Subject to 20% Final Tax paid to the heirs or beneficiaries upon the death of the
P10,000 or less Part of Gross Income insured, whether in a single sum or otherwise, but if such
amounts are held by the insurer under an agreement to
WINNINGS pay interest thereon, the interest payments shall be
included in gross income.
GENERAL RULE: Winnings are part of gross income.

43
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

*Transcriber’s Summarization:
GENERAL PROFESSIONAL PARTNERSHIP (GPP)
DISTRIBUTION OF PARTNERSHIP PROFITS
Please take note that a General Professional Partnership
(GPPs) is a tax-exempt entity. So meaning the income What kind of Tax Treatment Tax Treatment
generated by these professional partnerships are exempt partnership? as to as to Partners
from income tax. But it doesn’t mean that the Partnership
practitioners or the professionals composing the GPPs
are exempt from tax. So syempre partners sila, there GPPs Exempt from Amount received
will be a distribution of income kase yun naman ang Income Tax as distribution of
purpose ng partnership, the GPP is exempt from income profits part of
tax but the partners composing it are not exempt. So gross income
that’s why the distribution of income given to the GCPs Treat it as a corporation. Distribution
partners are part of the partner’s respective gross of profits to partners subject to final
income. tax.

It is different, however, if the partnership involved is a


General Co-Partnership (GCPs).
It is a partnership organized for business
purposes in general. Why? Because these GCPs are
treated as if they are a corporation. What is the tax
treatment of the distribution of profits when it comes
to GCPs? You treat the GCPs as if they are a OTHERS
corporation. So kung may matanggap ang partner ng If you will notice sa outline nyo merong nakalagay na
isang GCP, it is subject to final tax. others:

SEC. 26, NIRC Tax Liability of Members of General 1. Forgiveness of Indebtedness – it depends on
Professional Partnerships. – the situation,if there is no consideration at all
A general professional partnership as such meaning out of love so it is a donation, of
shall not be subject to the income tax imposed under this course, it’s not part of Gross Income anymore.
Chapter. It’s a gift. So therefore, it will be subjected to
Persons engaging in business as partners in a a Donor’s Tax. But if it is in consideration of
general professional partnership shall be liable for services, in that instance, it will already form
income tax only in their separate and individual part of your gross income.
capacities.
2. Recovery of Debts Written-Off – for example
For purposes of computing the distributive uncollectible may utang na di pa nabayaran
share of the partners, the net income of the partnership tapos na bankrupt. Then nanalo sya sa lotto
shall be computed in the same manner as a corporation. so he will be able to pay you again. What is
Each partner shall report as gross income his distributive the rule? It will form part of your gross income
share, actually or constructively received, in the net but will be subject to the TAX BENEFIT RULE.
income of the partnership. Recovery of Debts previously charged-off is
taxable to the extent of the income tax
benefit. This is pretty much the same with tax
refund or tax credit.
FROM 2016 TSN: (Ruyeras)
3. Tax Refund or Tax Credit – It is part of your
gross income but only to the extent of the
income tax benefit derived therefrom.

44
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Sept 13, 2018 - 46:14 Basically, all taxpayers may avail of exclusions –
(1) Lexi Singanon 00:00-12:00
individuals, corporations, estates or trusts. The list of
exclusions is found in Sec. 32(B) of the NIRC.
Do not forget the basic concepts that I taught you.
Is the list exclusive?
GR: It’s part of the Gross Income.
NO. We have already discussed a few items excluded
from the gross income, such as income earned by non-
Exceptions:
residents and non-citizens outside of the Philippines
1. It is excluded;
and those subject to final tax.
2. Subject to final taxes.
So now let’s go to the specific items under exclusions.
EXCLUSIONS
LIFE INSURANCE
(B) Exclusions from Gross Income. - The following items
What do you understand by exclusions? How is it different
shall not be included in gross income and shall be
from exemptions and deductions?
exempt from taxation under this Title:
When you say Exclusion in the context of the income
(1) Life Insurance. - The proceeds of life insurance
taxation, these refer to items of income, such as property
policies paid to the heirs or beneficiaries upon
or money received or earned but are not taxable as income
the death of the insured, whether in a single
by reason of law or treaty.
sum or otherwise, but if such amounts are held
by the insurer under an agreement to pay
Meaning, when you talk about exclusion, in a normal sense,
interest thereon, the interest payments shall
it’s supposed to be part of the gross income. But by reason
be included in gross income.
of a specific provision of law or treaty, it is exempt, you do
not consider it in computing your gross income.
xxx
Exclusions are different from deductions.
What is LIFE INSURANCE?
While the effects are the same because normally exclusions
Life Insurance is the insurance on human life, appertaining
would reduce your gross income and ultimately it would
thereto or connected therewith. Anything that has to do
reduce your income tax.
with human life. However, this is a misnomer because when
you talk about life insurance, normally, it refers to someone
Technically the same with deductions. It reduces your
who will die, it refers to death.
income, and also it reduces your net taxable income and
ultimately your income tax.
Diba? If you have life insurance, you can only collect the
benefits upon the death of the person insured. But there’s
The effects are the same but they are two different animals.
also this one type of insurance, to which, it doesn’t need
that someone will die, which is Annuity.
EXCLUSION DEDUCTION
Exclusion refers to Deductions refer to losses
Please take note that when we talk about exclusions, this
something which is or business expense;
has something to do with tax exemption already. Please
received by the taxpayer;
take note of the requisites because one of the requisites say
Exclusions would have Deductions are not
that it is already part of the gross income. Why? Because tax
been included in the gross included in the income; in
exemptions including exclusions are strictly construed
income, were it not for the fact, they are a subtraction
against the taxpayer and in favor of the government.
specific provision of law or from the income because
treaty excluding it from they are expenses;
WHAT ARE THE REQUISITES FOR EXCLUSION UNDER THIS
the gross income;
SECTION?
1. The proceeds are from life insurance;
Since deduction is an expense, it is something that is paid or 2. The proceeds are paid to the heirs or the
given away by the taxpayer which ultimately reduces the beneficiaries;
net worth of that taxpayer. 3. The proceeds are paid upon the death of the
insurer.
Who may avail of Exclusions?

45
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Why is it that the proceeds of life insurance policies are 3. It is paid either during the term or at the maturity
excluded from the gross income? of the term mentioned in the contract or upon
Because if you come to think about it, if you receive surrender of the contract.
proceeds out of life insurance, it’s not a form of income
but it’s more of a form of an indemnity. The surrender of the contract of life insurance or
anything that entails insurance is when the
Some life insurance have irrevocability clause. For example, insurer cancels the insurance policy. Upon
I am the insured and then I have a beneficiary. What if ayaw surrender, the cash surrender value is returned to
ko na siya? I want to disinherit this person, I want to take the insurer.
him out of my insurance policy. So I will revoke.
(2) Inah Bautista del Rosario 12:01-24:00
Does it matter when it comes to income taxation?
It doesn’t really matter. Regardless of the revocability, Let’s simplify the rules:
or the existence of irrevocability clause under the life
insurance, it doesn’t really matter, as long as the DEAD OR ALIVE RULE
beneficiary received proceeds from the life insurance, I call this the “Dead or Alive Rule.” Atty. Donalvo coined this
it will still be considered as an exclusion. term, so please don’t use this in the exam. Nonetheless,
please be guided by it.
When will it matter?
It matters only in estate taxation.
DEAD OR ALIVE RULE
Please also take note of the last clause in the provision: IF THE The beneficiary or his heirs will receive
INSURED something. The amount they receive is
“but if such amounts are held by the insurer under an IS DEAD excluded from the gross income.
agreement to pay interest thereon, the interest payments
shall be included in gross income.” If it refers to:
IF THE (a) Excess of Excluded from the Gross
If there is something apart from the insurance proceeds, INSURED Premiums income
there is interest involved, then the interests (because they IS ALIVE (b) Interest
are already a return on capital) are considered as taxable. (c) Return of It is part of the Gross
Premiums Income
RETURN OF PREMIUM
(2) Amount Received by Insured as Return of
Premium. - The amount received by the GIFTS, BEQUESTS AND DEVISES
insured, as a return of premiums paid by him
under life insurance, endowment, or annuity Sec. 32. Gross Income. —
contracts, either during the term or at the (2) Exclusions from Gross Income. — The following
maturity of the term mentioned in the items shall not be included in gross income and
contract or upon surrender of the contract. shall be exempt from taxation under this Title:
xxx
xxx (3) Gifts, Bequests, and Devices. — The value of
property acquired by gift, bequest, devise, or
descent: Provided, however, That income from
This is especially true when you talk of Annuity contracts. such property, as well as gift, bequest, devise
Return of Premium are excluded from the Gross Income -- or descent of income from any property, in
not just because it is specifically stated to be excluded in the cases of transfers of divided interest, shall be
NIRC -- but because it’s not income. It’s actually a return of included in gross income.
capital.
The rule is simple.
WHAT ARE THE REQUIREMENTS FOR EXCLUSION?
1. The amounts received are return of premiums GR: If someone receives property by reason of donation
paid by the taxpayer to the insurance company; or succession, the same is excluded from gross
2. It is by virtue of a life insurance, endowment or income.
annuity contract; XPN: When it pertains to income derived from the
property donated or received under succession, it is
part of the gross income.

46
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

GR: Damages received whether by suit or agreement,


on account of such injuries or sickness is
COMPENSATION FOR INJURIES OR SICKNESS excluded from the gross income.

Sec. 32. Gross Income. — How about the salaries I was not able to receive for a
(B) Exclusions from Gross Income. — The following month? That is loss profits. That is not excluded from
items shall not be included in gross income and shall the gross income.
be exempt from taxation under this Title:
xxx How about exemplary damages? Remember that it is
(4) Compensation for Injuries or Sickness. — awarded merely to ‘set an example.’ Is that an award
amounts received, through Accident or Health on account of such injuries or sickness?
Insurance or under Workmen's Compensation 2 SCHOOLS OF THOUGHT:
Acts, as compensation for personal injuries or (1) Exemplary Damages is part of the gross income
sickness, plus the amounts of any damages because it is not by reason of injuries or sickness.
received, whether by suit or agreement, on It is imposed by way of example or correction for
account of such injuries or sickness. the public good. It is not about compensating a
person for injuries.
(2) Exemplary Damages is excluded from the gross
ITEMS CONSIDERED UNDER THIS SECTION: income because the law merely says “Damages.”
1. Amounts received through Health or Accident If the law does not distinguish, we should not
Insurance as compensation for personal injuries or distinguish.
sickness  Atty Donalvo suggests that we go with the
2nd school of thought = Exemplary damages
To get the amount involved in a life insurance, the is excluded from the gross income.
insured has to die. Annuities are given every year  2018 BIR Ruling: Compensatory damages,
survived by the insured. This is not so in a health or actual damages, exemplary damages,
accident insurance. The insurance company will give attorney’s fees and the costs of suit are
something to the insured when he meets an accident excluded from gross income. But damages
or when he gets sick. which results to loss of earning capacity are
not excluded from tax. This is by virtue of
The amount received by virtue of a health or accident Section 32(B), NIRC.
insurance is excluded from the gross income.
What if the parties agree to the payment of moral
2. Amounts received through the Workman’s damages, what is its taxability? This is excluded.
Compensation Act as compensation for personal
(3) Sushmita Shane Castro 24:01 - 35:00
injuries or sickness
INCOME UNDER TREATY
I think this refers to persons engaged in hazardous Sec. 32. Gross Income. —
occupations. If you receive something by virtue of (B) Exclusions from Gross Income. — The following
WCA, aside from the health insurance, it is still items shall not be included in gross income and
excluded from the gross income. shall be exempt from taxation under this Title:
(5) Income Exempt under Treaty. — Income of
3. Damages received whether by suit or agreement, on any kind, to the extent required by any treaty
account of such injuries or sickness. obligation binding upon the Government of
the Philippines.
Just remember MENTAL.

Example: I skipped school and went down to go to


This would just highlight principles of international law and
Roxas. However, before I get there, I was run over by a
also one of the inherent limitations is international comity.
car. I woke up in the hospital with broken ribs. I wasn’t
able to go to work for a month. I sent a demand letter
to the driver of the car to pay for my hospital bills. He
RETIREMENT BENEFITS, PENSIONS, and GRATUITIES
doesn’t pay so I file a case against the driver. I won the
case. The court awarded moral damages, exemplary
SEC. 32. Gross Income. —
damages and actual damages.

47
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

(3) Exclusions from Gross Income. — The following administered by the United States Veterans
items shall not be included in gross income and Administration
shall be exempt from taxation under this Title:
xxx (e) Benefits received from or enjoyed under the
Social Security System in accordance with
(6) Retirement Benefits, Pensions, Gratuities, the provisions of Republic Act No. 8282.
etc.—
(a) Retirement benefits received under RA 7641 (f) Benefits received from the GSIS under
and those received by officials and Republic Act No. 8291, including retirement
employees of private firms, whether gratuity received by government officials
individual or corporate, in accordance with a and employees.
reasonable private benefit plan maintained
by the employer: Provided, That the retiring What are the benefits referred here under NIRC?
official or employee has been in the service 1. Retirement benefits under RA 7641- these are the
of the same employer for at least ten (10) retirement benefits under the Labor Code
years and is not less than fifty (50) years of 2. Employer maintain reasonable private retirement
age at the time of his retirement: Provided, benefit plan. This is the retirement benefit under
further, That the benefits granted under this the Tax Code
subparagraph shall be availed of by an
official or employee only once. For purposes UNDER THE LABOR CODE
of this Subsection, the term 'reasonable Requirements:
private benefit plan' means a pension, 1. There is no agreement as to the employees
gratuity, stock bonus or profit-sharing plan retirement benefit;
maintained by an employer for the benefit 2. The retiring employee must have served at least
of some or all of his officials or employees, five (5) years with the employer;
wherein contributions are made by such 3. The retiring employee is not less than sixty (60)
employer for the officials or employees, or years old;
both, for the purpose of distributing to such 4. It must be availed of by the employee only once.
officials and employees the earnings and (NOTE: this requirement was not mentioned by Sir
principal of the fund thus accumulated, and in our discussion but this was included as
wherein its is provided in said plan that at no requirement in the 2016 TSN)
time shall any part of the corpus or income
of the fund be used for, or be diverted to, UNDER THE TAX CODE
any purpose other than for the exclusive Requirements: 2 broad requirements
benefit of the said officials and employees. 1. There must be a qualified funding source- we
don’t have any problem with the qualified funding
(b) Any amount received by an official or source kasi nga we have a reasonable private
employee or by his heirs from the employer benefit plan that is approved by the BIR.
as a consequence of separation of such
Kailangan approval sa BIR.
official or employee from the service of the
employer because of death sickness or other
2. There must be a qualified employee to avail of the
physical disability or for any cause beyond
the control of the said official or employee. exclusion:
(c) The provisions of any existing law to the a. Service requirement- 10 years
contrary notwithstanding, social security b. Age- 50 years old
benefits, retirement gratuities, pensions and c. It must be availed of only once
other similar benefits received by resident
or nonresident citizens of the Philippines or I have an issue on that: Retirement benefits received under
aliens who come to reside permanently in Republic Act No. 7641 and those received by officials and
the Philippines from foreign government employees of private firms, whether individual or corporate,
agencies and other institutions, private or in accordance with a reasonable private benefit plan
public. maintained by the employer.

(d) Payments of benefits due or to become due WHAT IF THE EMPLOYEE RETIRED UNDER THE LABOR
to any person residing in the Philippines CODE? Hindi niya nakumpleto ang 10 year period. Diba ang
under the laws of the United States sabi 5 years lang pwede na siya mag retire and magkuha ng

48
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

retirement benefit. How will you treat that retirement the separation is VOLUNTARY meaning nag resign siya tapos
benefit then na natanggap niya? I am an employee there is nakatanggap siya ng separation pay that’s part of the GI.
no private retirement benefit plan set up for by the But if it’s INVOLUNTARY gipahawa siya because mag closure
employer or company and then I resigned and I received etc. it is already excluded. Separation pay is excluded.
something because the Labor Code is mandatory. But I was Let’s talk about some issues.
able to complete 5 years or 6 years of service lang. Can I a. What if the employee receives a separation pay
avail of the tax exemption for the retirement benefit? because of illegal termination? He was wrongfully
1. Some books would say, if you follow retirement terminated from employment so binigyan siya ng
under the Labor Code, nag retire ka that separation pay. (Diba normal man yan ang uso
retirement benefit or you should be able to kasi ngayon separation pay in lieu of
benefit from the tax exemption from the reinstatement. But it does not automatically
retirement pay you have received. But take a look follow for there must be a reason why the
at the requirement of the law. employee cannot be reinstated anymore. Ang
2. Sabi naman ng ibang books, even if you have gasgas na reason jan strained relations.) Taxable
received retirement benefit under the Labor or not? Is it voluntary on the part of the employee
Code, you must be able to comply these- service who was illegally terminated? Voluntary or
requirement- 10 years; age- 50 years old; must be involuntary?
availed of only once.
ANS of Sir: I think it’s INVOLUNTARY.
So which is which? I WILL STILL ASK DEAN ABOUT IT. But I
am inclined to say that this requirements must be complied b. What if I filed a case for illegal termination and
with. The reason for that is the strict construction of tax
then we settled. And then there is a separation
exemption. We are talking tax exemption.
pay. Voluntary or involuntary?
SEPARATION PAY ANS of Sir: I inclined to believe that it is still
INVOLUNTARY.
But if you are on the BIR side pwede mo i-argue
(b) Any amount received by an official or employee or by na VOLUNTARY kasi nag agree kayo and it has
his heirs from the employer as a consequence of never been determined whether or not there is
separation of such official or employee from the illegal dismissal, that is if you are on the BIR side.
service of the employer because of death sickness or c. What if you are legally terminated? By some
other physical disability or for any cause beyond the chance nangawat naka tapos gipapahawa ka, and
control of the said official or employee.
then nakadawat pa gyud ka ug separation pay?
Separation is somewhat similar with retirement pay. ANS of Sir: If the termination is for a just cause
Retirement pay is more specific because the reason you got then it is considered as VOLUNTARY on the
separated from your employer is because of your age- you employee’s part. So taxable.
are too old to work.

What is the rule on Separation Pay? It is the same with (3) Nikki Tan 35:01 - 46:14
Retirement Pay.
GR: Separation Pay is compensation income it forms part of What about if nagsuicide kasi nagatrabaho habanb naga-
the gross income- gross taxable income. law school? Is it voluntary or involuntary? Is the separation
XPN: Separation pay is excluded from gross income when: part of gross income?
1. Employee receives his separation pay from the For me the reason there is death, it’s not about
employer voluntary or involuntary.
2. The reasons for separation:
Other exclusions under this provision:
1) death, sickness, or other physical
 Benefits given by the United States Veterans
disability or for any cause beyond the
Administration;
control of the said official or employee
 Benefits received from Social Security System;
What’s the most important there is the last phrase: beyond  Benefits received from the GSIS.
the control of the said official or employee. It means that
taxability of the separation pay depends upon the
voluntariness of separation on the part of the employee- if MISCELLANEOUS ITEMS

49
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

(ii) The recipient is not required to render


INCOME DERIVED BY FOREIGN GOVERNMENT substantial future services as a
condition to receiving the prize or
“(a) Income Derived by Foreign Government. - award.
Income derived from investments in the
Philippines in loans, stocks, bonds or other (d) Prizes and Awards in sports Competition. - All
domestic securities, or from interest on prizes and awards granted to athletes in local
deposits in banks in the Philippines by (i) and international sports competitions and
foreign governments, (ii) financing institutions tournaments whether held in the Philippines or
owned, controlled, or enjoying refinancing from abroad and sanctioned by their national sports
foreign governments, and (iii) international or associations.
regional financial institutions established by
foreign governments.” GENERAL RULE: It is part of your Gross Income.
EXCEPTIONS: Except when the law provides for another
This is related to the inherent limitation of International tax treatment
Comity. For example, Indonesian schools the income there
is not taxable under Philippine Laws. First exception, prizes received within the Philippines.
The magic amount is P10,000. If it’s more than P10,000,
INCOME DERIVED BY THE GOVERNMENT OR ITS it’s subject to a final tax of 20% based on the prize. If
POLITICAL SUBDIVISIONS it’s P10,000 and below, it’s part of your gross income.

(b) Income Derived by the Government or its Political Second exception, religious, charitable, artistic, etc. – this is
Subdivisions. - Income derived from any public in Section 32(6)(c).
utility or from the exercise of any essential What are the requirements for these prizes to be excluded
governmental function accruing to the Government from your gross income?
of the Philippines or to any political subdivision a. Purpose – it is because of your religious,
thereof. charitable, artistic, etc. achievement;
b. You must be selected without any action on your
This is also related to the inherent limitations of part;
taxation. Pag gobyerno ang naga kita, general rule is it c. You must not be required to render substantial
is not taxable. The government need not tax itself. future service.

But there is an issue regarding PAGCOR. There is a Third Exception, sports competition The keyword here is,
recent Supreme Court case, PAGCOR vs. CIR G.R. No. it must be sanctioned by the National Sports
215427 (December 10, 2014): Organization. Under the current Revenue Regulations, it
is the Philippine Sports Commission through its Philippine
PAGCOR vs. CIR G.R. No. 215427 (December 10, 2014) Olympics Committee. It does not matter if it is held
The new rule now is this: within the Philippines or abroad or if it is sponsored by a
 The income of PAGCOR from its gambling domestic or international sponsor. What is important is that
operations is subject to 5% franchise tax; it is sanctioned by the Philippine Sports Commission. That’s
 The income of PAGCOR which is not related to its why, pag mga professional like Manny Pacquiao, it is no
gambling operations is subject to the normal longer tax exempt. Kase professional na.
corporate income tax.

13TH MONTH PAY AND OTHER BENEFITS


PRIZES AND AWARDS
(e) 13th Month Pay and Other Benefits. - Gross
(c) Prizes and Awards. - Prizes and awards made benefits received by officials and employees of
primarily in recognition of religious, charitable, public and private entities: Provided, however,
scientific, educational, artistic, literary, or civic That the total exclusion under this subparagraph
achievement but only if: shall not exceed ninety thousand pesos (P90,000)
(i) The recipient was selected without any which shall cover:
action on his part to the contest or (i) Benefits received by officials and
proceeding; and employees of the national and local
government pursuant to Republic Act
No. 6686;

50
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

(ii) Benefits received by employees


pursuant to Presidential Decree No. 851, (h) Gains from Redemption of Shares in Mutual Fund.
as amended by Memorandum Order - Gains realized by the investor upon redemption of
No. 28, dated August 13, 1986; shares of stock in a mutual fund company as defined
(iii) Benefits received by officials and in Section 22 (BB) of this Code.
employees not covered by Presidential
decree No. 851, as amended by
Memorandum Order No. 28, dated
August 13, 1986; and
(iv) Other benefits such as productivity
incentives and Christmas bonus:

Provided, That every three (3) years after the


effectivity of this Act, the President of the
Philippines shall adjust the amount herein stated
to its present value using the Consumer Price
Index (CPI), as published by the National
Statistics Office.

Pag 13th month pay, this refers to compensation diba?


13th month pay, for the first 90,000, it is exempt from
income tax. Does it include the 13th month pay only?
Take note that it’s 13th month pay and other benefits.
So kung meron kang Christmas bonus dyan or additional
cash gifts, you include that in your other benefits. Which
is why sabi natin last time sa De Minimis Benefits,
anything in excess of the ceilings provided by the
Revenue Regulations is included in the P90,000
computation. And it will only be taxable when you
already have consumed the entire P90,000

GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS

(f) GSIS, SSS, Medicare and Other Contributions. -


GSIS, SSS, Medicare and Pag-Ibig contributions, and
union dues of individuals.

Medicare, this is now PhilHealth. Yung luma kase


Medicare yan. “Other Contributions” – like what? Union
Dues. It’s also exempt from taxation.

These 2 have been removed by the TRAIN LAW:


GAINS FROM THE SALE OF BONDS, DEBENTURES OR
OTHER CERTIFICATE OF INDEBTEDNESS

(g) Gains from the Sale of Bonds, Debentures or


other Certificate of Indebtedness. - Gains realized
from the same or exchange or retirement of bonds,
debentures or other certificate of indebtedness with
a maturity of more than five (5) years

GAINS FROM REDEMPTION OF SHARES IN MUTUAL


FUND

51
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Note: Sir went back to explain Sec. 24(A) as amended by the the Philippines including overseas contract
TRAIN Law. This part explains the graduated tax rates and workers referred to in Subsection (C) of
8% preferential tax rates which is an option for Purely Self- Section 23 hereof; and
employed Individuals and/or Professionals and Mixed (c) On the taxable income defined in Section 31 of
Income Earners. this Code, other than income subject to tax
under Subsections (B), (C), and (D) of this
Section, derived for each taxable year from all
sources within the Philippines by an individual
INCOME TAX RATES FOR INDIVIDUALS alien who is a resident of the Philippines.
That is a reiteration of the general principles of taxation vis-
There are minimal changes introduced by the TRAIN law. à-vis the individuals – particularly, the resident citizens,
For income tax rates you have Sections 24 and 25. nonresident citizens and resident aliens.
Sec. 24 – Income tax rates for citizens and resident
aliens individuals GRADUATED INCOME TAX RATES FOR INDIVIDUALS
Sec. 25 – Income tax rates for nonresident alien SEC. 24.
individuals (2) Rates of Tax on Taxable Income of Individuals. – The
tax shall be computed in accordance with and at the
You should also take into consideration: rates established in the following schedule:
(1) Income Subject to Final Taxes
(2) General Principles of Taxation (a) Rates of Tax on Taxable Income of Individuals. —
The tax shall be computed in accordance with and
at the rates established in the following schedule:
Must look into :
(1) income of not
(2) type of taxpayer – because the classification is Tax Schedule Effective January 1, 2018 until December
also important 31, 2022:
(3) General principles of taxation -- the citizenship
and the residency of the taxpayer and the source
of the income Not over P250,000 0%

Take note when it comes to individuals : Only Over P250,000 but not over P400,000 20% of the
RC are taxable on their income globally within excess over
and without the Philippines. The rest of the P250,000
taxpayers are taxable only on their income
within the Philippines Over P400,000 but not over P800,000 P30,000 +25% of
the excess over
Let’s go now to income tax rates: P400,000

SEC. 24. Income Tax Rates. – Over P800,000 but not over P2M P130,000 + 30%
(A) Rates of Income Tax on Individual Citizen [whether of the excess
resident or non-resident] and Individual Resident over P800,000
Alien of the Philippines. –
(1) An income tax is hereby imposed: Over P2M, but not over P8M P490,000 + 32%
(a) On the taxable income defined in Section 31 of of the excess
this Code, other than income subject to tax over P2M
under Subsections (B), (C), and (D) of this
Section, derived for each taxable year from all Over P8M P2,410,000
sources within and without the Philippines by +35% of the
every individual citizen of the Philippines Excess over P8M
residing therein;
(b) On the taxable income defined in Section 31 of
this Code, other than income to tax under
Subsections (B), (C), and (D) of this Section, Tax Schedule Effective January 1, 2023 and onwards:
derived for each taxable year from all sources
within the Philippines by an individual citizen Not over P250,000 0%
of the Philippines who is residing outside of

52
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Over P250,000 but not over P400,000 15% of the P10,000 only – except when you are a minimum wage
excess over earner.
P250,000
Apart from being a minimum wage earner, and even if you
Over P400,000 but not over P800,000 P22,500 +20% are not one, if your income will not exceed P250,000, you
of the excess are exempt from income tax already.
over P400,000

Over P800,000 but not over P2M P102,500+25% HOW TO USE THE TABLE:
of the excess Problem:
over P800,000 Income for entire year: P600,000
Expenses: P100,000
Over P2M but not over P8M P402,500+ 30%
of the excess Net taxable income: P500,000
over P2M
1) FIRST: To determine which bracket the income
Over P8M P2,202,500+ belongs
35% of the
excess over P8M  It belongs to “Over P400,000 but not over
P800,000”

What is the tax base for this?  Tax: P30,000 +25% of the excess of P400,000
For the o this means that if you fall under this
o regular graduated income tax rates or bracket, you have to pay a fixed amount
o regular income tax or of P30,000 plus the excess of P400,000
o graduated income tax rates on individuals
the tax base would be your NET TAXABLE INCOME. 2) SECOND: Compute for the excess of P400,000

How to get NET TAXABLE INCOME: 500k


(400k)
Gross Income 100k
Add:
Compenstation Income 3) THIRD: Compute for the tax
Business Income BI
Operating Income 100k
Less: X 25%
Exclusions P25,000
Deductions:
Personal Exemption Add the excess:
NET TAXABLE INCOME P25,000
+ 30,000
Take note that the personal exemptions under the P55,000 INCOME TAX
TRAIN law, wala na siya. If you noticed your outline,
I put a question mark, wala na yung personal (in class nakalimutan ni sIr bawasan yung expenses; this
exemptions and the additional personal computation is corrected by editor)
exemptions. Including in the personal exemptions
are those deductions pertaining to the exception Let’s compare it to the old law:
on personal health and hospitalization insurance. (2) Rates of Tax on Taxable Income of Individuals. – The
tax shall be computed in accordance with and at the
Basically, it is just: exclusions and deductions. rates established in the following schedule:
Not over P10,000 5%
TAX EXEMPT AMOUNT IN TRAIN LAW VS. BEFORE TRAIN Over P10,000 but not P500 +10% of the excess
LAW over P30,000 over P10,000
If you noticed, the tax exempt right now is P250,000. If you Over P30,000 but not P2,500 +15% of the
compare it to the old law, the tax exempt amount is up to over P70,000 excess over P30,000

53
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Over 70,000 but not over P8,500 + 20% of the (1) compute their income taxes separately based on
P140,000 excess over P70,000 their total taxable income – each individual is still a
Over 140,000 but not P22,500 +25% of the separate distinct taxpayer
over P250,000 excess over P140,000 (2) they are required to file an ITR to include the
Over 250,000 but not P50,000 +30% of the income of both spouses (Sec. 51(D))
over P500,000 excess over P250,000
Over P500,000 P125,000 +32% of the What if they don’t know to whom an income belongs? For
excess over P500,000 taxation purposes, it is supposed to divided equally.

Problem: (old law applied) MINIMUM WAGE EARNERS


Income for the entire year P600,000
Expenses: P100,000 SEC. 24. (cont)
Provided, That minimum wage earners as
Net Taxable Income: P500,000 defined in Section 22(HH) of this Code shall be exempt
from the payment of income tax on their taxable
Excess: income: Provided, further, That the holiday pay,
500k – 400k = 100k received by such minimum wage earners shall likewise
be exempt from income tax.
Tax:
100k This is the same with the old law. Please don’t forget the
x 32% Soriano ruling:
32,000 So long as they are MWE, their minimum wage is
Add 125,000 exempted from tax including their supplementary
P157,000 benefits.
(In class sabi 34% but it’s really 32%)
Inserted illustration in RR 8-2018 for minimum wage earner
Illustration 1: Mr. CSO, a minimum wage earner, works
For me the TRAIN law exhibits a more fair computation of for G.O.D., Inc. He is not engaged in business nor has any
taxable income. other source of income other than his employment. For
TRAIN Law OLD LAW 2018, Mr. CSO earned a total compensation income of
9% of the income goes to 26% of the income goes to P135,000.
the government the government
a. The taxpayer contributed to the SSS, Philhealth,
This is why the BIR is having a hard time reaching their goals and HDMF amounting to P5,000 and has
received 13th month pay of P11,000. His income
because ang daming nawala sa income tax. Because the tax
rates are drastically reduced. tax liability will be computed as follows:

Total P135,000
MARRIED INDIVIDUALS Compensation
Income
SEC. 24. (cont)
For married individuals, the husband and wife, Less:
subject to the provision of Section 51(D) hereof, shall  Mandatory
compute separately their individual income tax based contributions 50,000
on their respective total taxable income: Provided, That  Non-taxable
if any income cannot be definitely attributed to or benefits 11,000 16,000
identified as income exclusively earned or realized by Taxable Income P119,000
either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining b. The following year, Mr. CSO earned, aside from
their respective taxable income. his basic wage, additional pay of P140,000
This is the same as the old law. which consists of the OT pay P80,000, NSD
P30,000, hazard pay P15,000 and holiday pay of
MARRIED INDIVIDUALS ARE REQUIRED TO: P15,000. He has the same benefits and
contributions as above.

54
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Total P135,000 (2) gross receipts and


Compensation (3) other non-operating income subject to regular tax
Income of the individual taxpayers in excess of P250,000
Add
 OT pay, NSD, What are the income covered? Gross sales, gross
hazard and 140,000 receipts, including non-operating income. That
holiday pay 8% covers only the excess of the P250,000.
Total Income P275,000
Less: What do you mean by non-operating income
 Mandatory subject to regular tax? An example of this is sales
contributions 5,000 of capital assets not real property plus tax. So you
 Non-taxable include that.
benefits 11,000 16,000
Net taxable P259,000 WHAT ARE THE CONDITIONS TO ENABLE TAXPAYER TO
income AVAIL OF SEC. 24(B)?
(1) Taxpayer is a purely self-employed individual and/or
Tax due EXEMPT
professional
(2) Gross sales or gross receipts and other non-operating
*Taxpayer is tax exempt as an MWE. The statutory
income of the taxpayer does not exceed the VAT
minimum wage as well as the holiday pay, OT pay, NSD
threshold of P3M
pay and hazard pay received by such MWE are
(3) Taxpayer should not be a VAT registered taxpayer
specifically exempted from income tax under the law.
because once he is, he or she will be subjected to VAT
regardless of the amount of the gross income.
(4) Taxpayer indicated in his tax income return at the start
Let’s proceed with the new provisions introduced by the
of the taxable period that he will be availing of the 8%
TRAIN law.
gross sales or gross receipts tax option.
Read RR 8-2018
Take note that this is an option that can be taken by the
taxpayer. The BIR cannot impose this on a taxpayer. It is the
PURELY SELF-EMPLOYED INDIVIDUALS AND/OR
choice of the taxpayer.
PROFESSIONALS
Sec. 24. (A) (1)
What if I don’t choose or forgot to choose? If the
(b) Rate of Tax on Income of Purely Self-employed
taxpayer will not choose, it is deemed that the
Individuals and/or Professionals Whose Gross Sales taxpayer chose or elected to be taxed with the regular
or Gross Receipts and Other Non-operating Income
income rate tax.
Does not Exceed the Value-added Tax Threshold as
Provided in Section 109(BB). – Self-employed
What if I have several businesses, will that take me
individuals and/or professionals shall have the option
out of the 8%? (i.e. carwash plus coffeeshop)
to avail of an eight percent (8%) tax on gross sales or
It will not matter as long as the 4 requirements
gross receipts and other non-operating income in
are satisfied -- Especially the 3M VAT threshold, I can
excess of Two hundred fifty thousand pesos
still avail of the 8% option.
(P250,000) in lieu of the graduated income tax rates
under Subsection (A)(2)(a) of this Section and the When does the 8% tax be paid? Income tax is an
percentage tax under Section 116 of this Code.
annual tax. But the RR and the NIRC provide that the
8% will be paid quarterly. A taxpayer is thus required
Who are the individual taxpayers covered here? Purely to submit a ITR 4x a year and to submit a consolidated
self-employed individuals or professionals. (Meaning they tax return at the end of the tax period.
do not earn compensation income.) They are businessmen,
deriving income solely on their business or exercise of Problem: At the beginning of the year I chose the 8% option
profession. and changed my mind in the middle of the year, can I
change back to the graduated tax schedule? NO. Revenue
INCOME TAX RATE: 8% Regulations provide that once the taxpayer makes his
Forget about the tax table. It is 8% choice in the beginning of the tax period, the choice is
irrevocable until the end of the year (of the year his choice
WHAT IS THE TAX BASE? was made.) Therefore, the taxpayer has to wait until the
(1) Gross Sales, or next tax period before he can choose an option.

55
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

the 3%
This goes both ways – from graduated to 8% and 8% to percentage tax.
graduated. The taxpayer’s choice is irrevocable for that
tax period in which his choice was made. Problem: Taxpayer is purely self-employed.
Gross Income P600,000
The 3M VAT threshold is good for a single year. Business Expenses P50,000

What if in the middle of the year the taxpayer reaches If that taxpayer went to you for advice, what advice would
the P3M threshold in gross sales? If the taxpayer you give?
reaches the P3M mark, he required to register as a VAT You answer like this: The tax consequence depends on
taxpayer. He will be taken out of the 8% application. As his choice of tax scheme. A purely self-employed
a result, he will automatically be subjected to the individual has 2 choices:
graduated income tax rates under the NIRC. (1) Regular graduated income tax
(2) 8% tax – Then you lay down the requirements.
Sir, you said that the taxpayer has to pay the
percentage quarterly. What happens to the Compute for the income tax for each scheme.
percentage tax already paid? Whatever payments the
taxpayer has made under the 8% scheme may be TRAIN LAW REGULAR GRADUATED INCOME TAX
availed of as a tax credit. Again, tax credits is a direct First get the Net Taxable Income which is
deduction of the tax liabilities. P600,000 – P50,000 = P650,000.

DIFFERENCE BETWEEN THE REGULAR GRADUATED Second, get the tax depending on the bracket.
INCOME TAX SCHEME AND THE 8% GROSS SALES, GROSS - Over 400,000 but not over 800,000
RECEIPTS TAX - P30,000 + 25% of the excess over
GRADUATED 8% P400,000
(1) Tax Base Uses the gross
Uses the net sales and gross Get excess: 550,000 – 400,000 = 50,000
taxable income receipts and
as tax base non-operating Get 25% of excess: 50,000 x 25% = 12,500
income as tax
base. Add 20% of excess to fixed amount:
(2) Tax rates Self-explanatory Self-explanatory P30,000 + 12,500 = P42,500
(3) Availment of Can claim No allowable
allowable allowable deductions are Remember that the taxpayer still has to pay
deductions deductions. allowed because percentage tax of 3%.
Meaning, their they are taxed at
gross income gross Gross Income x 3%
can be reduced = 600,000 x 3%
by their business = P 18,000
expenses
(4) Nature Percentage is a Will no longer Total Tax Impact = P42,500 + 18,00 = 60,500
business tax pay the 3%
8% TAX
Examples of PT:
(1) VAT The 8% includes RA 10963 provides that the 8% is on the gross sales or
(2) Percentage the 3%. (no need gross receipts and other non-operating income in
(3) Excise taxes to add 3%) excess of P250,000.

Will still pay the So if hindi ka P600,000 less P250,000


3% percentage umabot sa P3M = 350,000 x 8%
tax. mark, 5% lang = 28,000 Total Tax Due
yung income tax
mo since the 8% Inserted the illustration in RR 8-2018
already includes Illustration 1: Mr. EBQ operates a convenience store
while she offers bookkeeping services to her clients. In
2018, her gross sales amounted to P800,000. In addition

56
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

to her receipts from bookkeeping services of P300,000.


She already signified her intention to be taxed at 8% 1st qtr 2nd qtr 3rd qtr 4th qtr
income tax rate in her 1st quarter return. Her income tax 8% 8%
liability will be computed as follows: Total 500,000 500,000 2,000,000 3,500,000
sales
Gross Sales– Convenience Store P800,000 Less:
Gross Receipts – Bookkeeping P300,000 COS 300,000 300,000 1,200,000 1,200,000
Total Sales/Receipts P1,100,000 GI 200,000 200,000 800,000 2,300,000
Less: Amount allowed deduction 250,000 Less:
under Sec. 24(A)(2)(b) Oper. 120,000 120,000 480,000 720,000
Taxable Income P850,000 Exp.
Taxabl 80,000 80,000 320,000 1,580,000
Income
Tax Due: 8% of P850,000 = P68,000
Tax due shall be computed as follows:
 The total gross sales and gross receipts is
below the VAT threshold of P3M
Total sales P6,500,000
 Taxpayer’s source of income is purely from
self-employment, thus she is entitled to the Less: Cost of Sales 3,000,000
amount allowed as deduction of P250,000 Gross Income P3,500,000
under Sec. 24(A)(2)(b) of the Tax Code, as Less: Operating Expenses 1,440,000
amended. Taxable Income P2,060,000
 Income tax imposed is based on the total of
gross sales and gross receipts. Income tax due
 Income tax payment is in lieu of the graduated Tax due under the graduated rates P509,200
income tax rates under subsection (A) hereof Less: 8% income tax previously paid
and percentage tax due, by express provision (Q1 to Q3)
of law. (3M-250,000) x 8% 220,000
Annual Income Tax Payable P 289,200
Illustration 2: Ms. EBQ above, faied to signify her
intention to be taxed at 8% income tax rate on gross  The gross receipts exceeded the VAT threshold
sales in her initial Quarterly Income Tax Return, and she of P3M shall be liable to pay income tax under
incurred cost of sales and operating expenses amounting graduated rates pursuant to Section 24(A)(2)(a)
to P600,000 and P200,000, respectively, or a total of of the Tax Code, as amended.
P800,000, the income tax shall be computed as follows:  Taxpayer shall be allowed an income tax credit
of quarterly payments initially made under the
Gross Sales/Receipts P1,100,000 8% income tax option computed net of the
Less: Cost of Sales 600,000 allowable deduction of P250,000 granted for
Gross Income P500,000 purely business income.
Less: Operating Expenses 200,000  Taxpayer is likewise liable for business tax(es),
in addition to income tax. For this purpose, the
Taxable Income P300,000
taxpayer is required to update his registration
from non-VAT to VAT taxpayer. Percentage tax
Tax Due: on excess of (P300,000 – 250,000) x 20% =
pursuant to Section 116 of the Tax Code, as
P10,000
amended, shall be imposed from the beginning
of the year until taxpayer is liable to VAT. VAT
Aside from Income tax, Ms. EBQ is likewise liable to pay
shall be imposed prospectively.
business tax.
 Percentage tax due on non-VAT portion of the
sales/receipts shall be collected without
penalty, if timely paid on the due date
immediately following the month/quarter when
Illustration 3: Mr. JMLH signified his intention to be taxed
taxpayer ceases to be a non-VAT.
at 8% income tax rate on gross sales in his 1st Quarter
Income Tax Return. He has no other source of income. His
total sales for the first 3 quarters amounted to P3M with
Illustration 4: Ms. RPSV is a prominent independent
4th quarter sales of P3.5M
contractor who offers architectural and engineering

57
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

services. Since her career flourished, her total gross What if the taxpayer is employed and at the same time has
receipts amounted to P4,250,000 for taxable year 2018. his own business? Like employed as a teacher and have a
Her recorded cost of service and operating expenses grocery as a side business.
were P2,150,000 and P1M.
Let’s read Sec. 24(A)(1)(c)
Her income tax liability will be computed as follows:
Gross Receipts (from P4,250,000 MIXED INCOME EARNER
architectural and engineering Sec. 24(A)(1)
services)
Less: Cost of Service 2,150,000 (c) Rate of Tax for Mixed Income Earners. – Taxpayers
Gross Income P2,100,000 earning both compensation income and income from
Less: Operating Expenses 1,000,000 business or practice of profession shall be subject to
Taxable Income P1,100,000 the following taxes:

Tax Due: (1) All income from Compensation – The rates


On P800,000 P130,000 prescribed under Subsection (A)(2)(a) of this
On excess (P1.1M – 800,000) x 30% 90,000 Section.
Income tax Due P220,000 (2) All Income from Business or Practice of
Profession –
 The gross receipts exceeded the VAT threshold of (a) If Total Gross Sales and/or Gross Receipts
P3M; subject to graduated income tax rates; liable and Other Non-operating Income Do Not
for business tax – VAT, in addition to income tax. Exceed the VAT Threshold as Provided in
Section 109(BB) of this Code. – The rates
prescribed under Subsection (A)(2)(a) of
Illustration 5: In 2018, Mr. GCC owns a nightclub and this Section on taxable income, or eight
percent (8%) income tax based on gross
videoke bar, with gross sales/receipts of P2,500,000. His
cost of sales and operating expenses are P1M and sales or gross receipts and other non-
operating income in lieu of the graduated
P600,000, respectively, and with non-operating income
of P100,000 income tax rates under Subsection
(A)(2)(a) of this Section and the percentage
His tax due for 2018 shall be computed as follows: tax under Section 116 of this Code.
Taxable income from business (b) If Total Gross Sales and/or Gross Receipts
Gross Sales P2,500,000 and Other Non-operating Income Exceeds
Less: Cost of Sales 1,00,000 the VAT Threshold as Provided in Section
109(BB) of this Code. – The rates
Gross Income P1,500,000
Less: Operating Expenses 600,000 prescribed under Subsection (A)(2)(a) of
this Section.
Net income from Operation P900,000
Add: Non-operating Income 100,000
Taxable Income P1,000,000 What is a Mixed Income Earner?
One who earns both compensation income and business
Tax Due: income or exercising his profession.
On P800,000 P130,000 Example: Atty. Percy (part time teacher and practicing
On Excess (P1M-800,000) x 30% 60,000 lawyer)
Total Income Tax P190,000
RULES ON MIXED INCOME EARNERS:
1) Compensation Income will always be subject to the
 The taxpayer has no option to avail of the 8%
income tax rate on his income from business since graduated income tax rates. Therefore, 8% gross
his business income is subject to Other Percentage sales or gross receipts tax is inapplicable to
Tax under Section 125 of the Tax Code, as Compensation Income
amended.
2) For the Business Income and Other Non-operating
 Aside from income tax, taxpayer is liable to pay the
Income the individual as an option:
prescribed businesss tax, which in this case is
(a) to be subject to the graduated income tax
percentage tax of 18% on the gross receipts as
rates
prescribed under Sec. 125 of the Tax Code, as
(b) the 8%
amended.

58
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

REQUIREMENTS:
(1) The gross sales or gross receipts will not Income tax Bracket: Over 800k but not over P2M
exceed the VAT threshold of P3M
(2) The taxpayer is a non-VAT-registered Compute for excess:
taxpayer 1,400,000 – 800,000 = 600,000
(3) The taxpayer has indicated in his ITR that 600,000 x 30% = 180,000
he will be availing of the 8% gross sales INCOME TAX = P310,000
or gross receipts tax.
Please take note that the P310,000 here
3) If the gross receipts or the gross sales and other non- still does not include the percentage tax.
operating income exceeds the vAT threshold, the You still have to compute for the
taxpayer will automatically be subjected to the percentage tax. We did not compute
graduated income tax rates for individuals. since we are only concerned with the
income tax.
4) This is related to the compensation income. If you
noticed, the P250,000 is taken in consideration in What if the taxpayer opted to be taxed 8% gross
computing the 8%. But when it comes to mixed income sales, gross receipts?
earners, the P250,00 tax exemption will apply only to
the compensation income – That is if the taxpayer opts Compensation Income
to be taxed 8% for his business or professional income. P1,000,000
Do we subtract P250,000?
When the taxpayer opts to go with the 8%. No, because it is already covered in the tax table.
Since this the compensation income is subjected to the
graduated rates, the P250,000 tax exemption, will only Excess:
pertain to the compensation income. = 1,000,000 – 800,000
= 200,000 x 30%
Since the P250,000 is already incorporated in the = 60,000
graduated rates for compensation income, whatever
business income I receive, it can no longer benefit from Business Income
the P250,000 exemption. If I’m going to simplify this: = 8% x GS
 if the taxpayer opted to be taxed at 8% for = 8% x 1,000,000
his business income and the taxpayer is a = 80,000
mixed income earner, the P250,000 tax
exemption will apply solely to the Total Tax for Mixed Earner
compensation income. = 80,000 + 190,000
= 270,000
Illustration:

A taxpayer is considered as a mixed income If we go with the 8% option, will the tax due be always
earner. He has a business and is employed by a smaller than that if we go with the graduated rates?
corporation. Not necessarily. If your business expense is bigger, the tax
Gross Sales P1,000,000 due will necessarily be bigger.
Cost of Sales P500,000
Business Expenses P100,000 This is one way of tax avoidance. If a taxpayer’s business
Compensation P1,000,000 expenses are bigger, he should opt for the graduated rates.
You have to substantiate all your expenses. But if you don’t
What if the taxpayer opted to be taxed at the have any receipts, then you opt for the 8%. Under the 8%
graduated rates? scheme, you will be taxed gross.

Business Income P1,000,000 What if I am operating at a loss, and under the 8% scheme?
Cost of Sales (500,000) You are still made to pay the 8% because the tax base is the
Gross Income 500,000 gross. Wala kang deductions.
Business Expenses (100,000)
Net Business Income P400,000 Inserted illustration in RR 8-2018
Compensation Income P1,000,000
Net Taxable Income P1,400,000

59
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Illustration 1: Mr. MAG, a Financial Comptroller of JAB benefits (max) 90,000


Company, earned annual compensation in 2018 of Taxable Compensation Income P1,410,000
P1.5M inclusive of 13th month and other benefits in the Add: Taxable Income from Business –
amount of P120,000 but net of mandatory contributions Gross Sales 2,400,000
to SSS and Philhealth. Aside from employment income, Less: Cost of Sales 1,000,000
he owns a convenience store, with gross sales of P2.4M. Gross Income 1,400,000
His cost of sales and operating expenses are P1M and Less: Operating Expenses 600,000
P600,000 respectively, and with non-operating income Net Income from Operation 800,000
of P100,000. Add: Non-operating Income 100,000
900,000
His tax due for 2018 shall be computed as follows if he
opted to be taxed at 8% income tax rate on his gross Total Taxable Income P2,310,000
sales for his income from business:
Tax Due:
Total compensation income P1,500,000 On P2,000,000 P 490,000
Less: Non-taxable 13th month pay On excess (2,310,000-2M) 99,200
and other benefits (max) 90,000 Total Income Tax P 589,200
Taxable Compensation Income P1,410,000
 The taxable income from both compensation and
Tax due: business shall be combined for purposes of
1. On Compensation: computing the income tax due if the taxpayer chose
On P800,000 130,000 to be the subject under the graduated income tax
On excess rates.
(1,410,000-800,000) x 30% 183,000  In addition to the income tax, Mr. MAG is likewise
Tax due on Compensation Income P313,000 liable to pay percentage tax of P72,000, which is 3%
of P2,400,000.
2. On Business Income:
Gross Sales P2,400,000
Add: Non-operating income 100,000 On February 2019, taxpayer rendered his resignation to
Taxable Business Income P2,500,000 concentrate on his business. His total compensation
Multiplied by income tax rate 8% income amounted to P150,000 inclusive of benefits of
Tax Due on Business Income P200,000 P20,000. His business operations for taxable year 2019
remains the same. He opted for the 8% income tax rate.
Total Income Tax Due P513,000
Total compensation income P150,000
 The option of 8% income tax rate is applicable only to Less: Non-taxable benefits 20,000
taxpayer’s income from business, and the same is in Taxable Compensation Income P130,000
lieu of the income tax under the graduated income
tax rates and the percentage tax under Section 116 Tax Due:
of the Tax Code, as amended. 1. On Compensation
 The amount of P250,000 allowed as deduction under On P130,000 (not over 250,000) P0
the law for taxpayers earning solely from self-
employment/practice of profession, is not applicable 2. On Business Income
for mixed income earner under the 8% income tax Gross Sales P2,400,000
rate option. Add: Non-operating income 100,000
 The P250,000 mentioned above is already Taxable Business Income 2,500,000
incorporated in the first tier of the graduated income Multiplied by income tax rate 8%
tax rates applicable to compensation income. Tax Due on Business Income P 200,000

His tax due for 2018 shall be computed as follows if he Total Income Tax Due (Compensation and Business) =
is did not opt for the 8% income tax based on gross P200,000
sales/receipts and other non-operating income:
 The option of 8% income rate is applicable only to
Total compensation income P1,500,000 taxpayer’s income from business, and the same is in
Less: lieu of the income tax under the graduated income
Non-taxable 13th mo. and other

60
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

tax rates and the percentage tax under Section 116 We have already discussed the rest of the taxes on other
of the Tax Code, as amended. individuals. Passive income and final taxes lang yan.
 The amount of P250,000 which is allowed as
deduction under the law for taxpayers earning solely
from self-employed/practice of profession, is not NRAETB
applicable for mixed income earner under the 8%
income tax rate option. Sec. 25. Tax on Nonresident Alien Individual. –
 The P250,000 mentioned above is already (A) Nonresident Alien Engaged in Trade or Business
incorporated in the first tier of the graduated income Within the Philippines. –
tax rates applicable to compensation income. The (1) In General.—A nonresident alien individual
excess of the P250,000 over the actual taxable engaged in trade or business in the Philippines
compensation income is not creditable against the shall be subject to an income tax in the same
taxable income from business/ practice of profession manner as an individual citizen and a resident
under the 8% income tax rate option. alien individual, on taxable income received
from all sources within the Philippines. A
nonresident alien individual who shall come to
the Philippines and stay therein for an
Illustration 2: Mr. WBV, an officer of AMBS International aggregate period of more than one hundred
Corp., earned in 2018 an annual compensation of eighty (180) days during any calendar year
P1,200,000, inclusive of 13th month and other benefits in shall be deemed a 'nonresident alien doing
the amount of P120,000. Aside from employment business in the Philippines'. Section 22 (G) of
income, he owns a farm, with gross sales of P3,500,000. this Code notwithstanding.
His cost of sales and operating expenses are P1M and
P600,000, respectively, and with non-operating income NRAETB are taxed like Resident Citizens and Resident
of P100,000. Aliens.

His tax due for 2018 shall be computed as follows: Nonresident Alien Individual – one who shall come to the
Total compensation income P 1,200,000 Philippines and stay therein for an aggregate period of more
Less: than one hundred eighty (180) days during any calendar
Non-taxable 13th month pay year shall be deemed a 'nonresident alien doing business in
and benefits (max) 90,000 the Philippines'.
Taxable Compensation Income P 1,110,000
Add: Taxable Income from Business – Same lang ang tax scheme. Yung 8% magaapply din sa kanila
Gross Sales 3,500, 000
Less: Cost of Sales 1,000,000
Gross Income 2,500,000 SEC. 25. Tax on Nonresident Alien Individual
Less: Operating Expenses 600,000 (A)
Net Income from Operation 1,900,000 (2) Cash and/or Property Dividends from a Domestic
Add: Non-operating income 100,000 2,000,000 Corporation or Joint Stock Company, or Insurance or
Total Taxable Income P 3,110,000 Mutual Fund Company or Regional Operating
Headquarter or Multinational Company, or Share in
Tax Due: the Distributable Net Income of a Partnership
On P2M P 490,000 (Except a General Professional Partnership), Joint
On excess (3,110,000 – 2M) x 32% 355,200 Account, Joint Venture Taxable as a Corporation or
Total Income tax due P 845,200 Association., Interests, Royalties, Prizes, and Other
Winnings. - Cash and/or property dividends from a
 The taxpayer has no option to tavail of the 8% domestic corporation, or from a joint stock company,
income tax rate on his income from business since or from an insurance or mutual fund company or
his gross sales exceeds the VAT threshold. However, from a regional operating headquarter of
he is still not subject to business tax since the nature multinational company, or the share of a nonresident
of his business transactions is VAT exempt. alien individual in the distributable net income after
tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of
Read RR 8-2018 a nonresident alien individual in the net income after
tax of an association, a joint account, or a joint
venture taxable as a corporation of which he is a

61
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

member or a co-venturer; interests; royalties (in any What type of tax is that? Final tax of 20% based on their
form); and prizes (except prizes amounting to Ten gross income from cinematographic lease, distributorship
thousand pesos (P10,000) or less which shall be etc.
subject to tax under Subsection (B)(1) of Section 24)
and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to NRANETB
an income tax of twenty percent (20%) on the total
amount thereof: Provided, however, that royalties The tax treatment for NRANETB is
on books as well as other literary works, and royalties  25% at gross for their gross income earned within the
on musical compositions shall be subject to a final tax Philippines except two:
of ten percent (10%) on the total amount thereof: (1) Capital gains tax for sale of real property
Provided, further, That cinematographic films and situated in the Philippines
similar works shall be subject to the tax provided (2) Capital gains for sale of domestic shares
under Section 28 of this Code: Provided,
furthermore, That interest income from long-term When you talk about the capital gains for the domestic
deposit or investment in the form of savings, shares and also transfers of capital assets classified as real
common or individual trust funds, deposit property situated in the Philippines, the capital gains tax
substitutes, investment management accounts and applies.
other investments evidenced by certificates in such
form prescribed by the Bangko Sentral ng Pilipinas The rest of the income of the NRANETB is subject to the 25%
(BSP) shall be exempt from the tax imposed under of the Final Withholding Tax.
this Subsection: Provided, finally, that should the
holder of the certificate pre-terminate the deposit or 8% does not apply here.
investment before the fifth (5th) year, a final tax shall
be imposed on the entire income and shall be You also have the rules on special aliens. You need to just
deducted and withheld by the depository bank from read them.
the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof: Sec. 25 (F) = vetoed
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%;
and Sept 20
Less than three (3) years - 20%. Review on Individual Income: We have 3 kinds:
compensation, business, other; and those that are subject
to regular and those subject to final tax. In regular tax, the
individual has tax options whether to be taxed at the
Passive Income NRAETB. graduated rates or 8% provided that the individuals meet
 Same with the Resident Citizens the conditions mentioned. If the conditions are not met,
then the taxpayer will be subjected to the regular income
What is different? (highlighted portion) tax rates.
“Provided, further, That cinematographic films and similar
works shall be subject to the tax provided under Section 28 CORPORATIONS
of this Code:”
Under Section 28: Income tax code defines corporations “loosely” because it
SEC. 28. includes joint ventures, and even partnerships. Take note
(B) Tax on Nonresident Foreign Corporation. – that under the Tax Code there are 2 kinds of partnerships:
xxx 1. General Professional Partnership (GPP)
(2) Nonresident Cinematographic Film Owner, 2. General Co-partnership (GCP)
Lessor, or Distributor. – A cinematographic film
owner, lessor, or distributor shall pay a tax of GCPs are considered as corporations per se. That is why the
twenty-five percent (25%) of its gross income from income distributions of GCPs is considered as dividends.
all sources within the Philippines.
When GCP distributes their net income to the
So, same application except for these kinds of businesses – partners, that distribution will be subject to 10%
those which are lessors, owners, and distributors of withholding tax.
cinematographic films.

62
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

How about GPPS? GPPs are tax exempt entities. They are deemed to have been earned and spent equally for each
not considered as corporations. month of the period.

There is Sec. 26. The corporate income tax rate shall be applied on the
amount computed by multiplying the number of months
Sec. 26. Tax liability of Members of General covered by the new rate within the fiscal year by the
Professional Partnerships. – A general professional taxable income of the corporation for the period, divided
partnership as such shall not be subject to the income by twelve.
tax imposed under this Chapter. Persons engaging in
business as partners in a general professional Provided, further, That the President, upon the
partnership shall be liable for income tax only in their recommendation of the Secretary of Finance, may
separate and individual capacities. effective January 1, 2000, allow corporations the option
to be taxed at fifteen percent (15%) of gross income as
For purposes of computing the distributive share of the defined herein, after the following conditions have been
partners, the net income of the partnership shall be satisfied:
computed in the same manner as a corporation. A tax effort ratio of 20% of Gross National Product;
A ratio of 40% of income tax collection of total tax
Each partner shall report as gross income his distributive revenues;
share, actually or constructively received, in the net A VAT tax effort of 4% of GNP; and
income of the partnership. A 0.9% ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP.
“Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only The option to be taxed based on gross income shall be
in their separate and individual capacities.” available only to firms whose ratio of cost of sales to
 This concept is also applicable to JV which are not gross sales or receipts from all sources does not exceed
considered as corporations: fifty-five percent (55%).
1) JVs undertaking construction projects and
2) JVs engaging in petroleum, coal, geothermal and The election of the gross income tax option by the
other energy operations pursuant to an operating corporation shall be irrevocable for three (3) consecutive
consortium agreement under a service contract taxable years during which the corporation is qualified
with the Government. under the scheme.

You will notice that the discussions are fast when we talk For purposes of this Section, the term 'gross income'
about the income of a corporation because essentially the derived from business shall be equivalent to gross sales
income tax (except for a few) consequence of an income less sales returns, discounts and allowances and cost of
earned by a corporation is similar with the individuals: all of goods sold. 'Cost of goods sold' shall include all business
those are taken from Section 27 and 28. expenses directly incurred to produce the merchandise
to bring them to their present location and use.
Sec. 27. Rates of Income Tax on Domestic Corporations.
— For a trading or merchandising concern, ‘cost of goods
(A) In General. — Except as otherwise provided in this sols’ shall include the invoice cost of the goods sold, plus
Code, an income tax of thirty-five percent (35%) is import duties, freight in transporting the goods to the
hereby imposed upon the taxable income derived during place where the goods are actually sold, including
each taxable year from all sources within and without insurance while the goods are in transit.
the Philippines by every corporation, as defined in
Section 22(B) of this Code and taxable under this Title as For a manufacturing concern, ‘cost of goods
a corporation, organized in, or existing under the laws of manufactured and sold ‘ shall include all costs of
the Philippines: Provided, That effective January 1, 2009, production of finished goods, such as raw materials
the rate of income tax shall be thirty percent (30%). used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to
In the case of corporations adopting the fiscal-year bring the raw materials to the factory or warehouse.
accounting period, the taxable income shall be
computed without regard to the specific date when In the case of taxpayers engaged in the sale of service,
specific sales, purchases and other transactions occur. ‘gross income’ means gross receipts less sales, returns,
Their income and expenses for the fiscal year shall be allowances and discounts.

63
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

CORPORATION INCOME TAX RATE IS CURRENTLY 30%


When the NIRC was made effective in 1997, the corporate
income tax used to be 35%. By virtue of specific provisions Gross income
in the NIRC, the rate gradual decreased from 35% - 32% - Less Cost of Goods Sold
30% corporation income tax rate. Gross Profit
Less: Business Expenses and other related expenses
Take note of the definition of the Gross Income for NET TAXABLE INCOME
corporations. Essentially it is a juridical person and It is not
receive compensation income. It has 2 sources of income. The net taxable income is the tax base for the 10%.

SOURCES OF INCOME: CONDITIONS TO AVAIL OF THE TAX BENEFIT:


(1) business income Sec. 27. Rates of Income Tax on Domestic Corporations.
(2) other income – income not considered as business –
income but taxed under the regular corporate (B) Proprietary Educational Institutions and Hospitals.
income tax rate – x x x Provided, that if the gross income from 'unrelated
trade, business or other activity' exceeds fifty percent
What is gross business income? (50%) of the total gross income derived by such
It is not gross sales or gross receipts because they are educational institutions or hospitals from all sources, the
excluded in consideration of cost of goods sold. tax prescribed in Subsection (A) hereof shall be imposed
on the entire taxable income. For purposes of this
Gross profits in the business sense, is gross income Subsection, the term 'unrelated trade, business or other
deducted by the cost of goods sold or the cost of services. activity' means any trade, business or other activity, the
conduct of which is not substantially related to the
What is the tax rate: 30% (regular corporate income tax exercise or performance by such educational institution
rate) or hospital of its primary purpose or function.x x x

Total gross income from unrelated business income will not


exceed 50%.
SPECIAL DOMESTIC CORPORATIONS  As long as they don’t exceed the 50%, they can
avail of the tax rate. Otherwise, the school will be
Proprietary educational institutions and hospitals subjected to the 30% based on the net taxable
Subjected to a different income tax under specific income.
conditions = Section 27(b) Proprietary, education
institutions and hospitals. *Remember that you always have to indicate the
tax base.
What is a proprietary educational institution?
Sec. 27. Rates of Income Tax on Domestic Corporations. NON-STOCK AND NON-PROFIT EDUCATIONAL
— INSTITUTIONS ARE EXEMPT FROM TAXES ON REVENUES
(B) Proprietary Educational Institutions and AND ASSETS
Hospitals.— x x x A 'proprietary educational institution' Art. VI, Sec. 28 (3). Charitable institutions, churches and
is any private school maintained and administered by personages or convents appurtenant thereto, mosques,
private individuals or groups with an issued permit to non-profit cemeteries, and all lands, buildings, and
operate from the Department of Education, Culture and improvements, actually, directly, and exclusively used
Sports (DECS), or the Commission on Higher Education for religious, charitable, or educational purposes shall be
(CHED), or the Technical Education and Skills exempt from taxation.
Development Authority (TESDA), as the case may be, in By Constitutional provision, these non-stock, non-profit
accordance with existing laws and regulations. educational institutions are exempt from taxes on revenues
and assets.
Proprietary means for profit.

Ateneo is non-stock and non-profit. GOCCs


Sec. 27. Rates of Income Tax on Domestic Corporations.
Proprietary educational institutions and hospitals are —
subject to a different regular tax rate or a preferential tax (C) Government-Owned or Controlled Corporations,
rate. It is 10% based on the net taxable income. Agencies or Instrumentalities. -- The provisions of

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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

existing special or general laws to the contrary in the business of the


notwithstanding, all corporations, agencies, or corporation, treated as
instrumentalities owned or controlled by the capital assets)
Government, except the Government Service Insurance
System (GSIS), the Social Security System (SSS), the *when it comes to
Philippine Health Insurance Corporation (PHIC), the local machineries even if
water districts (LWDs), and the Philippine Charity rendered immovables, the
Sweepstakes Office (PCSO) and the Philippine gains in selling such will
Amusement and Gaming Corporation (PAGCOR), shall form part of the
pay such rate of tax upon their taxable income as are corporation’s gross
imposed by this Section upon corporations or income subject to regular
associations engaged in s similar business, industry, or corporate income tax.
activity.
Case on capital gains:
GR: GOCCs are taxable entities. SMI-Ed vs. CIR
E:
(1) GSIS Facts: SMI-Ed Philippines is a PEZA-registered
(2) SSS corporation authorized to engage in the business of
(3) PHIC manufacturing ultra high-density microprocessor unit
(4) local water districts package. After it registered, it constructed buildings and
PCSO was removed by the TRAIN law. It is now taxable as an purchased machineries and equipent. However, it failed
entity. And winnings are also taxable. to commence operations. Its factory was temporarily
closed. On Aug 1, 2000, it sold its buildings and some of
PASSIVE INCOME OF CORPORATIONS (Sec. 27) its installed machineries to Ibiden Philippines, another
Interest of deposits and 20% final tax PEZA registered enterprise for ¥2,100,000,000.00
yield or any other (₱893,550,000.00). SMI-Ed Philippines was dissolved.
monetary benefit from
deposit substitutes and In its quarterly income tax return for year 2000, SMI-Ef
from trust funds and Philippines subjected the entire gross sales of its
similar arrangements properties to 5% final tax on PEZA registered
corporations. It paid P44,677,500.
Passive Royalties
After requesting the cancellation of its PEZA registration,
Interest derived by a 15% final income tax SMI-Ed Phils filed an administrative claim for the refund
domestic corporation of P44,677,500 with the BIR on the ground that it was
from a depositary bank erroneously filed.
under the expanded
foreign currency deposit CTA denied the claim and the petition for review since
system (EFCDS) the incentives given to PEZA-registered enterprises may
Net Capital Gains realized be availed only by PEZA tregistered enterprises that had
during the taxable year already commenced operations. Since SMI-Ed had not
from the sale, exchange, commenced operations, it was not entitled to the
or other disposition of incentives of either the income tax holiday or the 5%
shares of stock in a preferential tax rate. SMI-Ed is actually liable for
domestic corporation P8,395,500 as deficiency tax (sale of assets were
subjected to 6% capital gains tax under Sec. 27(D)(5))
If stocks are sold through
the stock exchange, 6/10 Issue: Is the sale of the properties by SMI-Ed subject to
of 1% of the gross selling capital gains tax?
price or the amount value Ruling: NO.
in money. (1) The properties involved here are SMI-Ed’s
buildings, equipment and machinies. They are not
Capital Gains from the 6% final tax based on the
exclsions enumerated in Sec. 39(A)(1) of the NIRC.
sale, exchange or gross selling price or fair
None of the properties were used in petitioner’s
disposition of lands and/or market value
trade or ordinary course of business because
buildings (not usually used
petitioner never commenced operations. They

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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

were not part of the inventory. None of deposit system shall be exempt from all taxes, except net
themwere stocks in trade. Based on the definition income from such transactions as may be specified by
of capital assets under Section 39 of the National the Secretary of Finance, upon recommendation by the
Internal Revenue Code of 1997, they are capital Monetary Board to be subject to the regular income tax
assets. payable by banks: Provided, however, That interest
(2) The machineries and equipment cannot be income from foreign currency loans granted by such
classified as capital assets. CIR vs. Fortune depository banks under said expanded system to
Tobacco — The rule in the interpretation of tax residents other than offshore banking units in the
laws is that a statute will not be construed as Philippines or other depository banks under the
imposing a tax unless it does so clearly, expressly, expanded system, shall be subject to a final tax at the
and unambiguously. A tax cannot be imposed rate of ten percent (10%).
without clear and express words for that purpose.
Accordingly, the general rule of requiring Any income of nonresidents, whether individuals or
adherence to the letter in construing statutes corporations, from transactions with depository banks
applies with peculiar strictness to tax laws and the under the expanded system shall be exempt from
provisions of a taxing act are not to be extended income tax.
by implication. In answering the question of who This separate provision on EFCDS pertains to the banks. We
is subject to tax statutes, it is basic that in case of are talking about the income derived by the depositary
doubt, such statutes are to be construed most bank under the EFCDS are exempt from all taxes, except of
strongly against the government and in favor of the net income. But when you talk about other
the subjects or citizens because burdens are not corporations, particularly not banks, they will be covered by
to be imposed nor presumed to be imposed the 15% income tax.
beyond what statutes expressly and clearly
import. As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning Intercorporate Dividends
of the tax laws. Sec. 27. Rates of Income Tax on Domestic Corporations.
(3) Capital gains of individuals and corporations from —
the sale of real properties are taxed differently. (D) Rates of Tax on Certain Passive Incomes.—
Individuals are taxed on capital gains from sale of (4) Intercorporate Dividends. — Dividends received by a
all real properties located in the Philippines and domestic corporation from another domestic
classfiied as capital assets. corporation shall not be subject to tax.
(4) The only presumed gain from the sale of SMI’s Remember that this refers to domestic dividends only.
land and/or building may be subjected to the 6% Intercorporate dividends = from domestic to domestic, they
CGT. The income from the sale of petitioner’s are tax exempt.
machineries and equipment is subject to the
provisions on normal corporate income tax. Aside from the tax rates, the difference between individuals
and corporations when it comes to income tax rates,
Since petitioner had not started its operations, it was corporations have to compute for 3 types of regular taxes
also not subject to the minimum corporate income tax a. The regular corporate income tax of 30%
of 2% on gross income. Therefore, petitioner is not liable b. Minimum corporate income tax (MCIT)
for any income tax. (Sir only mentioned 2)

MCIT – This is the minimum amount of taxes that the


Tax on Income Derived under the EFCDS corporation must pay to the government. Even if the
Sec. 27. Rates of Income Tax on Domestic Corporations. corporation is at a loss or has no income, it is still required
— to pay the 2% MCIT
(D) Rates of Tax on Certain Passive Incomes.— Sec. 27. Rates of Income Tax on Domestic Corporations.
(3) Tax on Income Derived under the Expanded Foreign —
Currency Deposit System — Income derived by a (E) Minimum Corporate Income Tax on Domestic
depository bank under the expanded foreign currency Corporations. —
deposit system from foreign currency transactions with (1) Imposition of Tax. - A minimum corporate
nonresidents, offshore banking units in the Philippines, income tax of two percent (2%) of the gross
local commercial banks including branches of foreign income as of the end of the taxable year, as
banks that may be authorized by the Bangko Sentral ng defined herein, is hereby imposed on a
Pilipinas (BSP) to transact business with foreign currency

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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

corporation taxable under this Title, beginning


on the fourth taxable year immediately Otherwise stated: excess MCIT carry over.
following the year in which such corporation
commenced its business operations, when the Rules to follow:
minimum income tax is greater than the tax 1) MCIT is bigger than RCIT
computed under Subsection (A) of this Section 2) What is the effect of that? The corporate taxpayer
for the taxable year. may carry over the excess MCIT over the RCIT to
xxx the next succeeding taxable year. Meaning, the
Why do we have MCIT? There are many bad corporations excess MCIT can be made as a tax credit. It will be
who want to do away with the corporate tax pay by means a direct deduction of the income tax payments of
of underdeclaring their income. MCIT is a way of remedying that corporation.
that. 3) The carry-over is applicable only or good only for
the 3 immediately succeeding taxable years.
REQUIREMENTS FOR MCIT:
(1) Applicable to domestic corporations and resident 2. RELIEF FROM THE CORPORATE INCOME TAX UNDER
foreign corporations CERTAIN CONDITIONS
(2) Begins on the 4th taxable year immediately following Sec. 27. Rates of Income Tax on Domestic Corporations.
the year it commenced its business —
- MCIT does not apply to newly-opened (E) Minimum Corporate Income Tax on Domestic
corporations because they do not have income Corporations. —
yet brought about by the huge capital outlay. xxx
- At the beginning of the 4th year, the corporation (3) Relief from the Minimum Corporate Income Tax
has no choice but to pay 2% MCIT Under Certain Conditions. — The Secretary of
- Tax base: gross sales / gross receipts / gross Finance is hereby authorized to suspend the
income imposition of the minimum corporate income
(3) Corporation has 0% income or has a net loss or even if tax on any corporation which suffers losses on
the corporation has a gain, the MCIT is bigger than the account of prolonged labor dispute, or because of
regular corporate income tax (RCIT). force majeure, or because of legitimate business
- The corporation is operating at break-even or reverses.
the corporation is operating at a loss or even if it
is getting income but if you compute the MCIT The Secretary of Finance is hereby authorized to
and the RCIT, the MCIT would be bigger. promulgate, upon recommendation of the
Commissioner, the necessary rules and
regulation that shall define the terms and
Sir, parang unfair ata? This is repugnant to the principle that conditions under which he may suspend the
the government should only tax the income of a imposition of the minimum corporate income tax
corporation. in a meritorious case.
Atty. D: It does not stop there, because the government
provides for relief which the taxpayer may resort tom This a direct relief afforded by the NIRC. The taxpayer needs
should it be very difficult for them to apply the 2% MCIT. to file an application to this effect: the corporation cannot
pay the MCIT because it suffered losses on the account of –
RELIEF GIVEN TO THOSE UNDER MCIT: 1) Prolonged labor dispute; or
1. CARRY-OVER MCIT 2) Force majeure; or
Sec. 27. Rates of Income Tax on Domestic Corporations. 3) Legitimate business reverses
— The Secretary of Finance, authorized to suspend the
(E) Minimum Corporate Income Tax on Domestic imposition of the MCIT.
Corporations. —
xxx
(2) Carry Forward of Excess Minimum Tax. — Any
excess of the minimum corporate income tax RESIDENT FOREIGN CORPORATIONS
over the normal income tax as computed
under Subsection (A) of this Section shall be RFCs are basically taxed like domestic corporations, except
carried forward and credited against the for a few matters:
normal income tax for the three (3) (1) RFC taxable income only within the Philippines
immediately succeeding taxable years. (2) The residency of a foreign corporation is determined
xxx whether or not they are engaged in business here in

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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

the Philippines. Doing business refers to acts that Let’s discuss the examples one by one:
imply a continuity of commercial dealings in a period
casual or occasional but so systematic and regular as INTERNATIONAL CARRIERS
to the continuity and permanence of activity for Sec. 28. Rates of Income Tax on Foreign Corporations.
profits. —
(A)Tax on Resident Foreign Corporations.—
In other words, it operates as a going concern with a xxx
view of profit. 2) International Carrier. — An international
carrier doing business in the Philippines shall
Tax consequence: pay a tax of 2 1/2% on its “Gross Philippine
GR: 30% RCIT Billings’ as defined hereunder:
E: Unless the RFC is under a special tax rate.
(a) International Air Carrier. — ‘Gross
Sec. 28. Rates of Income Tax on Foreign Philippine Billings’ refers to the amount
Corporations. — of gross revenue derived from
(A)Tax on Resident Foreign Corporations.— • carriage of persons,
(1) In General. - Except as otherwise provided in • excess baggage,
this Code, a corporation organized, • cargo, and
authorized, or existing under the laws of any • mail originating from the
foreign country, engaged in trade or business Philippines
within the Philippines, shall be subject to an in a continuous and uninterrupted
income tax equivalent to thirty-five percent flight, irrespective of the place of sale
(35%) of the taxable income derived in the or issue and the place of payment of
preceding taxable year from all sources within the ticket or passage document:
the Philippines: Provided, That effective
January 1, 2009, the rate of income tax shall be Provided,
thirty percent (30%). ✓ That tickets revalidated, exchanged
and/or indorsed to another
international airline form part of
(3) RFCs subject to the regular income tax are also subject the Gross Philippine Billings
to the MCIT. Conversely, RFCs subject to special tax ✓ if the passenger boards a plane in a
rates are not subject to MCIT. port or point in the Philippines:
Examples:
1) International carriers Provided, further, That for a flight which
(2) Off-shore Banking Units originates from the Philippines, but
(3) Regional Operating Headquarters transshipment of passenger takes place
(4) Those under RA 7916, 7927 PEZA law / Bases at any part outside the Philippines on
conversion development tax another airline,
• only the aliquot portion of the cost
Sec. 28. Rates of Income Tax on Foreign of the ticket corresponding to the
Corporations. — leg flown from the Philippines to
(A)Tax on Resident Foreign Corporations.— the point of transshipment shall
xxx form part of Gross Philippine
1) A minimum corporate income tax of two Billings.
percent (2%) of gross income, as
prescribed under Section 27 (E) of this (b) International Shipping. — ‘Gross
Code, shall be imposed, under the same Philippine Billings’ means gross revenue
conditions, on a resident foreign whether for
corporation taxable under paragraph (1) • passenger,
of this Subsection. • cargo or
• mail
originating from the Philippines up to
final destination, regardless of the place
of sale or payments of the passage or
freight documents.

68
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Provided, That international carriers doing business in 3. in a continuous and uninterrupted flight,
the Philippines may avail of a preferential rate or 4. irrespective of the place of sale or issue and the
exemption from the tax herein imposed on their gross place of payment of the ticket or passage
revenue derived from the carriage of persons and their document.
excess baggage on the basis of an applicable tax treaty
or international agreement to which the Philippines is a
signatory or on the basis of reciprocity such that an What if there is an exchange of tickets?
international carrier, whose home country grants For instance, if a ticket from US air line carrier was
income tax exemption to Philippine carriers, shall exchanged with that from a Middle Eastern air line carrier,
likewise be exempt from the tax imposed under this the portion of the income will be part of the GPB only in
provision. the passenger ports of trade in the point of the Philippine
that goes abroad. Again, the emphasis is on “originating in
What is Gross Philippine Billings tax? the Philippines”
- Nature: income tax
- Special rates given to international common carriers Transshipment
covered by this provision To go to South Africa from the Philippines, the passenger
has to go to Saudi Arabia first and must ride a plane to
KINDS OF INTERNATIONAL AIR CARRIERS Africa.
(1) International Air Carrier
(2) International Shipping Carrier Philippines → Saudi Arabia → Africa
For a flight which originates from the Philippines but
transshipment of passenger takes place outside of the
KINDS OF INTERNATIONAL AIR CARRIER Philippines on another airline, only a portion of the cost of
 Online Carriers: the ticket corresponding to the leg flown from the
 Offline Carriers: Philippines to the point of transshipment shall form part of
 To distinguish the 2: look at the landing rights Gross Philippine Billings.
– whether or not the airline has the authority
or the right to land here in the Philippines. So the GPB will only include the first trip that which comes
from the Philippines.
If they don’t have landing rights here in the
Philippines, how do they earn income? In their The GPB is extensively discussed in the South African
ticketing offices. Offline air carriers are subject to Airways case.
the regular income tax.
South African Airways vs. CIR
What is the tax treatment of the income earned
by offline carriers? Off-line air carriers are subject Facts: South African Airways is an international air
to the Regular Corporate Income Tax. They are carrier which does not have any landing rights in the
perceived to be a RFC. Philippines. It has a general sales agent here, Aerotel
Limited Corporation (Aerotel.) Aerotel sells passage
What is the tax treatment of the income earned documents for compensation or commission for
by online carriers? When it comes to the online petitioners off-line flights for the carriage of passengers
air carriers or those which have landing rights and cargo between ports or points outside the territorial
here in the Philippines, these are the ones who jurisdiction of the Philippines. Petitioner is not
are subject to the GPB (Gross Philippines Billings) registered with the Securities and Exchange Commission
tax. as a corporation, branch office, or partnership. It is not
licensed to do business in the Philippines.
Definition of GPB/ Gross Philippine Billings
Sec 28(A)(3)(a) – South African Airways filed with the BIR a claim for
1. Amount of gross revenue derived from carriage of refund of P1,727,766.38 erroneously paid on GPB for the
persons, excess baggage, cargo, and mail taxable year of 2000. Such claim was unheeded. Thus,
2. originating from the Philippines on April 14, 2003, petitioner filed a Petition for Review
 Mail originating from the Philippines – the with the CTA for the refund of the abovementioned
flights come here to the Philippines and it amount.
goes abroad.
CTA: SAA is a RFC engaged in trade and business in the
Philippines. It is not liable to pay GPB under Sec.

69
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

28(A)(3)(a) of NIRC. It is liable however for 32% on its exception. As such, petitioner must fall
income derived from the sales of passage documents in under the general rule. This principle is
the Philippines. embodied in the Latin maxim, exception
firmat regulam in casibus non
CTA En Banc denied the petition. exceptis, which means, a thing not being
excepted must be regarded as coming within
Held: the purview of the general rule.
Whether SAA is liable for 32 % income tax. (c) If an international air carrier maintains
SAA IS LIABLE FOR 32% INCOME TAX. SAA failed to flights to and from the Philippines, it shall be
substantiate its claim that it is exempted from the 32% taxed at the rate of 2 ½% of its GPB, while
income tax. Since an action for a tax refund partakes of international air carriers that do not have
the nature of an exemption, which cannot be allowed flights to and from the Philippines but
unless granted in the most explicit and categorical nonetheless earn income from other
language, it is strictly construed against the claimant activities in the country will be taxed at the
who must discharge such burden convincingly. rate of 32% of such income.

Whether the new definition of GPB is to the effect that


if a corporation is subject thereto, it is exempted from
paying the income tax. OFF SHORE BANKING UNITS (OBUS)
NO. They are subject to final income tax of 10%
1) Off-line air carriers having general sales agents in the
Philippines are engaged in or doing business in the Sec. 28. Rates of Income Tax on Foreign Corporations.—
Philippines and that their income from sales of (A) Tax on Resident Foreign Corporations. –
passage documents here is income from within the (2) Offshore Banking Units. - The provisions of
Philippines. Thus, in CIR vs. British Overseas Airways any law to the contrary notwithstanding,
Corporation, we held that off-line air carrier is liable income derived by offshore banking units
for the 32% tax on its taxable income. authorized by the Bangko Sentral ng Pilipinas
2) Sec. 28(A)(2)(a) does not exempt all international air (BSP), from foreign currency transactions with
carriers from the coverage of Sec. 28(A)(1) of the nonresidents, other offshore banking units,
NIRC. If the legislature intended to exclude all local commercial banks, including branches of
international air carriers from the application of the foreign banks that may be authorized by the
general rule under Sec. 28(A)(1), it would have used Bangko Sentral ng Pilipinas (BSP) to transact
the appropriate language to do so; but it did not. business with offshore banking units shall be
Thus, the logical interpretation of such provisions is exempt from all taxes except net income from
that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, such transactions as may be specified by the
then the general rule under Sec. 28(A)(1) would not Secretary of Finance, upon recommendation
apply. If however, Sec. 28(A)(3)(a) does not apply, a of the Monetary Board which shall be subject
resident foreign corporation, whether an to the regular income tax payable by banks:
international air carrier or not, would be liable for the Provided, however, That any interest income
tax under Sec. 28(A)(1). derived from foreign currency loans granted to
(a) Sec. 28(A)(1) is a general rule that RFCs are residents other than offshore banking units or
liable for 32% tax on all income from sources local commercial banks, including local,
within the Philippines. Sec. 28(A)(3) is the branches of foreign banks that may be
exception to this general rule. authorized by the BSP to transact business
(b) In the instant case, the general rule is that with offshore banking units, shall be subject
resident foreign corporations shall be liable only to a final tax at the rate of ten percent
for a 32% income tax on their income from (10%).
within the Philippines, except for resident
foreign corporations that are international Any income of nonresidents, whether
carriers that derive income from carriage of individuals or corporations, from transactions
persons, excess baggage, cargo and mail with said offshore banking units shall be
originating from the Philippines which shall exempt from income tax
be taxed at 2 1/2% of their Gross Philippine
Billings. Petitioner, being an international
carrier with no flights originating from We also have
the Philippines, does not fall under the Tax on Branch Profits Remittances

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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola

Sec. 28. Rates of Income Tax on Foreign Corporations.



(A)Tax on Resident Foreign Corporations.—
(5) Tax on Branch Profits Remittances. - Any profit
remitted by a branch to its head office shall be
subject to a tax of fifteen (15%) which shall be
based on the total profits applied or earmarked
for remittance without any deduction for the
tax component thereof (except those activities
which are registered with the Philippine
Economic Zone Authority). The tax shall be
collected and paid in the same manner as
provided in Sections 57 and 58 of this Code:
Provided, that interests, dividends, rents,
royalties, including remuneration for technical
services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable
annual, periodic or casual gains, profits,
income and capital gains received by a foreign
corporation during each taxable year from all
sources within the Philippines shall not be
treated as branch profits unless the same are
effectively connected with the conduct of its
trade or business in the Philippines.
Profit remittances made by a branch to its head office
abroad shall be subjected to a 15% remittance tax. The tax
component is excluded.

Exception to this is when those activities are registered with


the Philippine Economic Zone Authority.

Regional or Area Headquarters and Regional Operating


Headquarters of Multinational Companies
Sec. 28. Rates of Income Tax on Foreign Corporations.

(A)Tax on Resident Foreign Corporations.—
(6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies. -
(d) Regional or area headquarters as defined
in Section 22(DD) shall not be subject to
income tax.
(e) Regional operating headquarters as
defined in Section 22(EE) shall pay a tax of
ten percent (10%) of their taxable income.
There is not much discussion here except for the tax rates
and the definition of these corporations.

71