TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty.

Aranas)
By: RLB | DHB | TLD | RRM 1
REVENUE  REGULATIONS   Profit:    
  Investment  worth  1000.  You  lost.  So  recovered  500.  Is  there  income  tax?  No.  There  is  no  
1.   Revenue   Regulations   (RRs)   are   issuances   signed   by   the   Secretary   of   Finance,   upon   profit.   So   when   we   talk   of   Profit,   it   means   RETURN   ON   CAPITAL.   Thus,   ON   top   of   your  
recommendation   of   the   Commissioner   of   Internal   Revenue,   that   specify,   prescribe   or   define   capital.  
rules  and  regulations  for  the  effective  enforcement  of  the  provisions  of  the  National  Internal    
Revenue  Code  (NIRC)  and  related  statutes.   II. Nature  of  Income  Tax  –  national,  excise,  direct,  and  general  tax.  
  ! Income  Tax  is  source  “blind”.  
N.B.  publication  not  required  in  Official  Gazette    
  • National  Tax:  The  BIR  has  the  authority  to  collect  as  found  in  RA  8424,  NIRC  which  
• Secretary  of  Finance:  Ceasar  V.  Purisima   took  effect  on  January  1,  1998.  
• The   role   of   CIR   insofar   as   RRs   are   concerned,   recommends   as   to   what   RR   will   be   • Also  considered  as   Excise  tax  (tax  on  exercise  of  profession/on  privilege  or  right  to  
promulgated  by  the  Secretary  of  Finance.   earn  something)  
  • Direct   Tax:   impact   and   incidence   of   taxation   is   upon   the   taxpayer.   Cannot   be   shifted  
2.  Revenue  Memorandum  Orders  (RMOs)   are   issuances   that   provide   directives   or   instruction;   to  another,  thus  personal.  
prescribe   guidelines;   and   outline   processes,   operations,   activities,   workflows,   methods   and   • General  Tax:  Levied  of  all  kinds  of  income.  If  through  gambling  or  robbery,  you  earn  
procedures   necessary   in   the   implementation   of   stated   policies,   goals,   objectives,   plans   and   income,  taxable.  Thus,  SOURCE  BLIND  (so  long  as  there’s  flow  of  wealth,  increase  in  
programs  of  the  Bureau  in  all  areas  of  operations,  except  auditing.   income,  even  if  source  is  illegal,  should  be  subject  to  income  tax).  
   
• Usually  issued  by  the  BIR  through  the  CIR.   III. Purposes  of  Income  Tax  
   
3.   Revenue   Memorandum   Rulings   (RMRs)   are   rulings,   opinions   and   interpretations   of   the   • FISCAL  PURPOSE:  To  provide  large  amounts  of  revenue  
Commissioner   of   Internal   Revenue   with   respect   to   the   provisions   of   the   Tax   Code   and   other   • NON  FISCAL  PURPOSE:  
tax   laws,   as   applied   to   a   specific   set   of   facts,   with   or   without   established   precedents,   and   o To  offset  regressive  sales  and  consumption  of  taxes  
which  the  Commissioner  may  issue  from  time  to  time  for  the  purpose  of  providing  taxpayers   o To   mitigate   the   evils   arising   in   the   unequal   distribution   of   income   and  
guidance   on   the   tax   consequences   in   specific   situations.   BIR   Rulings,   therefore,   cannot   wealth  
contravene  duly  issued  RMRs;  otherwise,  the  Rulings  are  null  and  void  ab  initio.   • All   taxes   are   for   the   purpose   of   raising   revenue   save   for   the   case   of   secondary  
  purposes  such  as  to  offset  the  effects  of  sales  and  consumption  taxes  which  are  seen  
4.   BIR   Rulings   are   official   position   of   the   Bureau   to   queries   raised   by   taxpayers   and   other   as  regressive  taxes  by  some  proponents  and  in  order  to  mitigate  the  effects  of  the  
stakeholders  relative  to  clarification  and  interpretation  of  tax  laws.   inequitable  distribution  of  wealth  between  different  income  earners.  Of  course,  this  
  is   made   together   with   the   imposition   of   estate   taxes   because   we   are   taking   about  
• Difference  between  RMR  and  BIR  Ruling?   wealth  and  income  distribution  
• RMR  is  more  comprehensive  and  encompassing  than  the  BIR  Ruling.    
• BIR  Ruling  should  be  in  accordance  with  RMR  but  BIR  Ruling  is  more  common  than   IV. Brief  Historical  Background  of  Philippine  Income  Taxation  
the  RMR.    
  1. US  Revenue  Act  of  1913—Income  Tax  of  Philippines  has  an  American  Origin.  This  Act  
5.   Revenue   Memorandum   Circulars   (RMCs)   are   issuances   that   publish   pertinent   and   administered  collection  of  income  tax  here  in  the  Philippines.  US  was  trying  to  
applicable   portions,   as   well   as   amplifications   (highlights),   of   laws,   rules,   regulations   and   collect  revenue  taxes.  
precedents  issued  by  the  BIR  and  other  agencies/offices.    
  2. Revenue  Act  of  1916  and  War  Revenue  Act  of  1917-­‐-­‐-­‐amended  Rev  Act  1913.  Still  
6.  Revenue  Bulletins  (RBs)  refer  to  periodic  issuances,  notices  and  official  announcements  of   American  origin.  
the   Commissioner   of   Internal   Revenue   that   consolidate   the   Bureau   of   Internal   Revenue’s    
position  on  certain  specific  issues  of  law  or  administration  in  relation  to  provisions  of  the  Tax   3. Act  2833,  promulgated  by  the  Philippine  Congress  under  the  authority  conferred  to  
Code,  relevant  tax  laws  and  other  issuances  for  the  guidance  of  the  public.   it  under  the  1917  Act.—this  started  during  the  Commonwealth  Era  
   
I. Definition  of  Income  Tax   4. CA  466  or  NIRC  of  1939—revised,  amended,  and  codified  all  internal  revenue  laws  
! A  tax  on  all  yearly  profits  arising  from  property,  professions,  trades  or  offices,  or   embodied  in  the  1939  NIRC.    
! A  tax  on  a  person’s  income,  emoluments,  profits  &  the  like.    
! It  may  be  succinctly  defined  as  a  tax  on  income,  whether  gross  or  net,  realized   5. PD  1158  or  NIRC  of  1977  
in  one  taxable  year.    
 
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 2
6. PD  1994  of  NIRC  of  1986  which  enacted  to  simplify  certain  provisions  of  the  NIRC.   - No.   Rather,   it’s   Donor’s   Tax.   There   is   no   income   because   what   has  
VAT  was  first  started  and  introduced  in  this  era.  SNITS  (Simplified  Net  Income  Tax   been   forgiven   is   just   equivalent   to   the   debt.   It   is   not   taxable   income  
System)  was  also  introduced  here.   but  may  be  subjected  to  donor’s  tax.  
   
7. RA  8424,  Jan  1  1998,  amended  by  RA  9337.  Present  Day  NIRC.   • Rocha   owed   Gocuan   100,000.   Out   of   love   and   liberality,   Gocuan   condoned  
  the   debt   in   exchange   for   a   free   massage   for   one   year.   Is   there   a   taxable  
8. Since  American  Origin,  in  case  of  doubt,  they  usually  refer  to  US  Jurisprudences.   income?  
  - Yes.   There   is   already   consideration—service.   Thus,   there   can   be  
V. Sources  of  Income  Tax  Law   income.   THUS   if   it   is   just   a   mere   return   OF   capital,   no   income.   But   if   it  
- National  Internal  Revenue  Code,  as  amended   is  a  return  ON  capital,  there  is  an  income  and  such  is  taxable.  
   
VI. Definition  of  Terms   ! Gain   -­‐   transaction   resulting   in   increases   of   wealth   capable   of   pecuniary  
  estimation  
! Income   (broad   sense)-­‐   all   wealth   w/c   flows   into   the   taxpayer   other   than   as   a    
mere  return  of  capital;     includes   the   forms   of   income   specifically   described   as   ! Gross   Income   –   income   (in   its   broad   sense)   less   income   w/c   is   by   statutory  
gains  &  profits,     including  gains  derived  from  the  sale  or  other  disposition  of   provision   or   otherwise   excluded   from   the   tax   imposed   by   law.   This   includes   but  
capital  assets.  (Return  ON  income)   not  limited  to  the  enumerations  under  Section  32a.  
Income  means  -­‐    
! accession  to  wealth   ! Gross   Income   Taxation   –   a   system   of   taxation   where   the   income   is   taxed   at  
! gain   gross.  The  taxpayers  under  this  system  are  not  entitled  to  any  deductions.  
! flow  of  wealth    
  ! Net   Income   Taxation   –   system   of   taxation   where   the   income   is   taxed   at   net.  
! Capital   –  a  fund  or  property  existing  at  one  point  of  time  (while  income  denotes   The  taxpayer  may  claim  allowable  deductions.  
a  flow  of  wealth  during  a  definite  period  of  time).  Capital  is  wealth,  income  is    
the  flow  of  wealth.  Should  not  be  subject  to  income  tax.   ! Passive  Income   –   refers   to   those   items   of   gross   income   earned   by   the   taxpayer  
  w/o  his  active/direct  participation  in  the  earning  process.  
Example:  Manufacturing  of  Furniture    
Cost  –  1M   ! Taxable   Income   (previously,   Net   Income)   –   pertinent   items   of   income   as  
Sales  –  1M   specified   in   the   Tax   Code   less   the   deductions   and/or   personal   and   additional  
- Is  there  an  income?  None.   exemptions,   if   any,   authorized   for   such   types   of   income   by   the   Code   or   other  
- Is  cost  of  sales  equated  to  capital?  Not  necessarily.   special   laws.   It   is   the   amount   of   income   that   is   taxed   [Pertinent   items   of   GI   –  
  Allowed  Deductions]      
Madrigal  vs  Rafferty    
→ Income   as   contrasted   with   capital   or   property   is   to   be   the   test.   The    
essential   difference   between   capital   and   income   is   that   capital   is   a   fund;   VII. General  principles  of  Income  Taxation  in  the  Philippines  
income  is  a  flow.  A  fund  of  property  existing  at  an  instant  of  time  is  called   a. A   RESIDENT   CITIZEN   is   taxable   on   all   income   derived   from   sources   within   and  
capital.   A   flow   of   services   rendered   by   that   capital   by   the   payment   of   without  (outside)  the  Philippines.  
money   from   it   or   any   other   benefit   rendered   by   a   fund   of   capital   in    
relation  to  such  fund  through  a  period  of  time  is  called  an  income.  Capital   • Sec  1,  Art  IV,  1987  Phil  CONSTI  –  The  following  are  citizens  of  the  
is  wealth,  while  income  is  the  service  of  wealth.  (See  Fisher,  "The  Nature  of   Philippines:  
Capital   and   Income.")   The   Supreme   Court   of   Georgia   expresses   the   (1) Those  who  are  citizens  of  the  Philippines  at  the  time  of  the  
thought  in  the  following  figurative   language:   "The  fact  is  that  property   is   a   adoption  of  this  Constitution;  
tree,  income  is  the  fruit;  labor  is  a  tree,  income  the  fruit;  capital  is  a  tree,   (2) Those  whose  fathers  or  mothers  are  citizens  of  the  Philippines;  
income   the   fruit.   A   tax   on   income   is   not   a   tax   on   property.   "Income,"   as   (3) Those  born  before  January  17,  1973,  of  Filipino  mothers,  who  
here  used,  can  be  defined  as  "profits  or  gains."     elect  Philippine  citizenship  upon  reaching  the  age  of  majority;  
→ So  what  is  being  taxed  is  the  fruit  not  the  tree.   and  
  (4) Those  who  are  naturalized  in  accordance  with  law.  
Illustration:    
• Rocha   owed   Gocuan   100,000.   Out   of   love   and   liberality,   Gocuan   condoned   b. A   NON-­‐RESIDENT   CITIZEN   is   taxable   only   on   incomes   derived   from   sources  
the  debt.  Is  there  taxable  income  for  Rocha?   within  the  Philippines.  
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 3
  1. Schedular  Income  Tax  System  
• Sec  22(e)  of  NIRC  –  The  term  'nonresident  citizen'  means:   - Follows  a  schedule  of  tax  rates  
(1) A  citizen  of  the  Philippines  who  establishes  to  the  satisfaction  of   - The  Tax  Code  or  Congress  treats  differently  every  category  of  income  earners.  
the  Commissioner  the  fact  of  his  physical  presence  abroad  with  a   - Usually  applicable  to  Individual  Tax  Payers  
definite  intention  to  reside  therein.    
(2) A  citizen  of  the  Philippines  who  leaves  the  Philippines  during  the   2. Global  Income  Tax  System  
taxable   year   to   reside   abroad,   either   as   an   immigrant   or   for   - follows  the  proportional  rate  
employment  on  a  permanent  basis.   - applicable  to  corporate  taxpayers:  30%  
(3) A  citizen  of  the  Philippines  who  works  and  derives  income  from   - a   uniform   rate   or   proportional   rate   for   all   types   of   income   so   long   as   it   is  
abroad   and   whose   employment   thereat   requires   him   to   be   classified   within   the   same   class.   If   it   is   corporate   taxpayer,   all   the   income   of   the  
physically   present   abroad   most   of   the   time   during   the   taxable   corporations  regardless  of  value  is  taxed  at  a  flat  rate  of  30%  
year.    
(4) A   citizen   who   has   been   previously   considered   as   nonresident   IX. Kinds  of  Income  Tax  Methods  
citizen  and  who  arrives  in  the  Philippines  at  any  time  during  the   1. Gross  Income  Taxation  
taxable   year   to   reside   permanently   in   the   Philippines   shall    
likewise  be  treated  as  a  nonresident  citizen  for  the  taxable  year   2. Net  Income  Taxation  
in  which  he  arrives  in  the  Philippines  with  respect  to  his  income    
derived   from   sources   abroad   until   the   date   of   his   arrival   in   the   Formula:  
Philippines.   All  income  
(5) The  taxpayer  shall  submit  proof  to  the  Commissioner  to  show  his   Less:  Exclusions  (as  enumerated  under  NIRC)  
intention  of  leaving  the  Philippines  to  reside  permanently  abroad   Gross  Income  
or  to  return  to  and  reside  in  the  Philippines  as  the  case  may  be   Less:  Deductions*/Exemptions  
for  purpose  of  this  Section.   Net  Income  or  Taxable  Income  
   
c. An   OVERSEAS   CONTRACT   WORKER   (OCW)   is   taxable   only   on   income   from   *DEDUCTIONS:   pertains   to   expenses,   loss,   interest,   tax   payments   made   by  
sources  within  the  Philippines.  A  seafarer  who  is  a  citizen  of  the  Philippines  and   corporations  plus  operating  expenses.  
who   receives   compensation   for   services   rendered   abroad   as   a   member   of   the   *  Net  Income:  refers  to  Taxable  income  
complement  of  a  vessel  engaged  exclusively  in  the  international  trade  shall  be   - For  Individual,  subjected  to  graduated  tax  rate  of  5-­‐32%  
treated  as  an  overseas  contract  worker.   - For  Corporation,  Final  Income  Tax  of  30%  
- Example:   Shipper   for   Coast-­‐wise   shipping   (inter-­‐island   destination   not    
international)—since  this  is  domestic,  thus  it  means  you  are  still  domiciled.   X. Features   of   Our   Present   Income   Taxation   (RA   No.   8424,   RA   No.   9504,   RA   No.   9337)   –  
Thus  Taxable  within  or  without.   Comprehensive  Tax  Situs  
  - To  determine  taxable  income,  based  on:  
d. An   ALIEN   INDIVIDUAL   whether   a   resident   or   not   of   the   Philippines,   is   taxable   • Domicile  of  the  taxpayer  
only  on  income  derived  from  sources  within  the  Philippines.   • Citizenship  or  Nationality  of  the  taxpayer  
  • Source  of  the  income  itself  
e. A   DOMESTIC   corporation   is   taxable   on   all   income   derived   from   sources   within    
and  without  (outside)  the  Philippines.   1. Basic  Features  of  Individual  Income  Taxation  
- Domestic  Corp:  organized  and  existing  under  the  laws  of  the  Philippines   a. Schedular  System  of  Taxation.  
- Foreign  Corp:  under  the  Foreign  laws.   - Graduated  Income  Tax  (GIT);  rates:  5%  -­‐  32%  
  - Unlike  in  corporate,  we  use  Normal  Income  Tax  (NIT);  rate:  30%  
NB:   To   determine,   we   do   not   look   at   the   nationality   of   stockholders   or    
incorporators  BUT  we  look  at  the  law  incorporating  the  corporation.   b. Tax  rates  are  progressive  in  character.  
  - When  tax  rate  increases  as  the  income  of  the  taxpayer  increases.  
f. A   FOREIGN   Corporation   whether   engaged   or   not   in   trade   or   business   in   the   - Tax  base  increases  as  tax  rate  increases.  
Philippines,   is   taxable   only   on   income   derived   from   sources   within   the   - Ability  to  pay  principle.  (Consistent  with  constitutional  provision)  
Philippines.    
  c. Modified  gross  income  taxation  as  regards  pure  compensation  earner.  
VIII. Systems   of   Income   Taxation   [Philippines:   partly   schedular   and   partly   global   system   of   - Pure   compensation   income   earner   in   the   Philippines   -­‐   all   income   is  
income  taxation]   derived   from   pure   employment   (purely   under   employer-­‐employee  
 
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 4
relationship,  no  business  income,  no  passive  income,  etc.),  subjected      
to  gross  income  taxation  although  modified.     2. Basic  Features  of  Corporate  Income  Taxation  
- Modified  because  deductions  such  as  expenses  (ex.transportation   a. Global  Concept  of  Taxation  
expenses)  are  not  allowed.   - No  schedule,  no  graduation  of  tax  rates;  tax  rate  is  applied  as  a  final  
- Only   personal   (P50,000)   and   additional   (P25,000   per   dependent)   tax  rate  (30%).  
exemption  are  allowed  to  be  deducted.    
  b. Corporate  taxpayers’  exception-­‐  resident  foreign  corporations  are  entitled  
d. Net   income   taxation   as   regards   those   individual   taxpayers   that   derive   to  deductions.  Net  Income  taxation  is  applicable  to  domestic  corporations  
business,   trade   or   professional   income.   Allowable   deductions   under   and  resident  foreign  corporations.  
Section   34   may   be   claimed   by   individual   taxpayers   who   derive   business,   - Only   resident   foreign   corporations   are   entitled   to   deductions,   non-­‐
trade  and/or  professional  income.   resident   foreign   corporations   are   not   entitled.   Not   all   allowable  
- Pure   business   income   earner,   pure   profession   income   earner   or   deductions   applicable   to   domestic   corporation   are   applicable   to  
modified   (both   income   and   employment)   -­‐   allowed   to   claim   resident  foreign  corporation.  Subject  to  reciprocity  rule.  
deductions;   covered   by   net   income   taxation.   But   in   all   cases,   the   - Net   Income   taxation   -­‐   applicable   to   domestic   corporations   and  
schedular  rates  will  have  to  be  applied  for  individuals.   resident  foreign  corporations.  
- Background  on  Individual  income  taxation—    
o Always,  always  the  rates  will  be  schedular.       c. “Pay-­‐as-­‐you-­‐File”   system   (except   in   cases   of   electronic   filing   system  
o WON  an  individual  is  allowed  deductions;  RULES:     application)  
(1) Pure   compensation   income   earner:   modified   gross   - Exception  -­‐  in  cases  of  electronic  filing  system  application  (EFPS)  
income   taxation;   deductions   would   only   be   personal    
and  additional  exemptions  which  will  subjected  to     3. Criteria  Used  
(2) Compensation   PLUS   business   earner   or   profession   or   a. Residency  (Domiciliary  Rule)    
trade   earner:   net   income   taxation;   deductions   are   b. Nationality  or  citizenship  (Nationality  Rule)  
allowed.  Logic  behind-­‐-­‐  is  once  you  earn  income  other   c. Place/Source  of  Income  (Source  Rule)  
than   from   employment,   you   will   be   expected   to   have    
incurred   expenses   for   your   business,   trade   or   XI. Sources  of  Income  
profession.   1) Capital    
  - A  fund  or  property  existing  at  one  point  of  time.  
e. “Pay-­‐as-­‐you-­‐File”  System.   2) Labor  -­‐  Taxable  if:  
- Expected  to  pay  within  the  same  day  upon  filling  of  return.  Regarding   - it  is  for  the  benefit  of  another  and;  
last   minute   questions,   taxes   still   needs   to   be   paid   but   rather   pay   it   - it  has  pecuniary  value  or  is  capable  of  pecuniary  estimation.    
“Under  Protest”.   3) Both  Labor  and  Capital  
- Self-­‐Assessment  System   4) Sale  of  Property  
• the  taxpayer  will  be  the  one  who  will  determine  how  much  is  the   - Shares  of  tax  or  real  property  
taxable   income   (computation)   in   trade,   business   or   exercise   of    
profession,  not  the  BIR.   Example  1:  
• if  pure  compensation  earner,  employer  will  be  the  one  who  will   • Farming  (fruits  and  vegetables  for  personal  consumption  only);    
determine   how   much   is   the   taxable   income.   The   one   who   will   • painter  (painted  his  own  house)  
pay  and  file  is  the  employer,  this  is  called  substituted  filling.    
   *Both  are  under  Self-­‐Help  income  –  not  taxable,  even  if  income  is  sourced  from  labor.  
     
f. Under   certain   cases,   “Pay-­‐as-­‐you-­‐Earn”   system,   as   applicable   to   income   Example  2:  
subject  to  withholding  tax.   • N  painted  the  house  of  R,  in  return,  R  massaged  N.    
- Applicable  to  income  subject  to  withholding  tax.   - Not  taxable;  not  under  self-­‐help  income  
- Applied  primarily  to  passive  income.   - If  it  can  be  estimated,  taxable  (conceptually  only)  
- Immediately  when  earned  it  will  be  subjected  to  tax  basically  final    
withholding  tax.     XII. Criteria  to  Determine  if  Income  is  Taxable  
- Example:   if   you   have   deposits   in   the   bank   and   it   earns   interest,   the    
bank  will  automatically  deduct  the  FWT  from  the  interest  income.  You   1. There  is  gain  or  profit  
did   not   file   yet   but   the   tax   is   already   deducted   and   remitted   by   the   - Condition  based  from  closed  and  completed  transaction  (capital)  
bank  to  the  BIR.  
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 5
o No  more  condition   TESTS:  
o Service  is  rendered   i. Flow  of  Wealth  Test  
- Determine  if  under  employer-­‐employee  or  practice  of  profession  (labor)   - There  is  gain  derived  in  a  particular  transaction  
- NB:  In  determining  the  profit  for  sale  of  property,  the  formula  is   - If  there  is  gain,  there  is  flow  of  wealth  
 Amount  Received/Realized  LESS  Cost  of  Property  =  Profit    
- Concept  of  accrual  and  deferral  in  accounting  will  not  matter  because:   ii. Realization  Test  
o Rendered  the  service-­‐  taxable   - No   taxable   income   until   there   is   a   separation   from   capital   of  
o Not   rendered   the   service   but   received   the   money/payment-­‐   something   of   exchangeable   value,   thereby   supplying   the  
taxable  (constructive  receipt)   realization  or  transmutation  which  would  result  in  the  receipt  of  
  income  
2. The  gain  or  profit  is  realized  or  received  (either  actually  or  constructively)   - Eisner  vs  Macomber  (Macomber  Test)  
- Actually  or;   → Issue:  Whether  or  not  stock  dividends  is  an  income  or  not.  It  
o physical   possession   regardless   whether   there   was   service   cannot   be   considered   as   a   taxable   income   because   it   does  
rendered  or  not       not  make  the  stockholder  nor  the  corporation  any  richer  or  
- Constructively     poorer.   The   stock   dividend   merely   changes   the   interest   of  
o the  disposition  is  under  your  control  although  not  yet  received   the  stockholder  in  the  corporation  (General  Rule).  Exception  
o Constructive  Receipt  concept     to   the   Rule:   if   only   one   or   some   of   the   stockholders   are  
→ Income  which  is  credited  to  the  account  of  or  set  apart  for  a   given   the   stock   dividends   and   hence,   the   percentage   of  
taxpayer  and  which  may  be  drawn  upon  by  him  at  any  time   ownership  of  each  stockholders  will  now  change.  
is  subject  to  tax  for  the  year  during  which  so  credited  or  set    
apart,   although   not   then   actually   reduced   to   possession.   iii. Economic-­‐Benefit  Principle  
The   income   must   be   credited   to   the   taxpayer   without   any   - Increases  in  economic  status    
substantial  limitation  or  restriction  as  to  the  time  or  manner   - Flow  of  wealth  realized  is  taxable  only  when  the  taxpayer  is  
of  payment  or  condition  upon  which  payment  is  to  be  made.   economically  benefited.  
→ The  property/income  already  pertains  to  the  taxpayer  or  the   - Example:  stock  option  –  instead  of  giving  the  employees  bonuses  
taxpayer   already   has   the   control   over   the   property/income   in   cash,   employees   are   offered   to   purchase   stocks   at   a   much  
even   if   it   is   not   yet   actually   received   or   not   yet   in   lower   rate,   giving   them   a   chance   to   be   a   stockholder   of   the  
possession.   Constructively,   has   the   right   to   claim   as   an   corporation.   The   difference   between   the   fair   market   value   of   the  
income   because   it   was   already   earned   or   the   service   was   shares  of  stocks  and  the  stock  price  offered  to  the  employees  can  
already  rendered.   be   considered   as   taxable   income   because   there   is   an   economic  
→ Example:   dividends   applied   to   debts   of   shareholders,   benefit   on   the   part   of   the   employees.   Any   economic   benefit   to  
interests   on   saving   in   bank   deposits,   matured   interest   the  employee  that  increases  his  net  worth  is  taxable.  
coupons,   share   in   the   profits   in   a   general   of   professional    
partnership.   iv. Net  Effect  Test  
  - The   substance   of   the   whole   transaction   will   be   taken   into  
*exercise   of   profession;   ex.   lawyers;   deposits   of   clients   are   already   consideration.   We   do   not   look   at   the   form   (malversation   cases)  
treated  as  income  by  the  BIR.   of  the  transaction.  
  - Common  example:  shares  of  stock  transfers    
3. Such  gain  or  profit  is  not  exempt  under  any  law  or  treaty   o Shares   of   stock   (stock   owned   by   a   shareholder)   are  
- Otherwise   stated,   if   there   is   a   provision   of   law   recognizing   or   taxing   the   transferred   to   another   person.   Usually,   in   deed   of  
income.   assignment   or   deed   of   sale   of   stocks   it   reflects   that   the  
o In   short,   for   an   income   to   be   considered   as   taxable,   2   stocks  were  sold  at  par  value  (value  reflected  in  the  financial  
requirements:   statement)  to  make  it  appear  na  gamay  ra  ang  nabayaran.  
a) It  must  be  a  realized  income;   Under   this   test,   the   BIR   will   not   only   look   at   the   par   value  
b) It  must  be  a  recognized  income  or  there  is  a  law  which   reflected   in   such   deed   but   would   rather   look   at   other  
recognizes  it  as  taxable  income   documents   such   as   the   audited   financial   statement   or   look  
- If  the  gain  or  profit  is  recognize  under  the  law,  then  it  is  not  exempt.  If  It  is   at   the   appraisal   value   of   the   shares   of   stocks   being  
not  recognized,  then  it  is  excluded.   sold/transferred   -­‐   to   be   able   to   determine   its   fair   market  
  value   (to   find   out   the   real   rate   used   in   the   sale   of   such  
  shares  of  stock).  The  difference  between  the  par  value  and  
the  fair  market  value  will  be  considered  as  income.  
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 6
  Capital  Gains  Tax    
v. Claim  of  Right  Doctrine   - still  an  income  tax;    
- More   or   less   the   same   as   the   realization   test   (in   the   concept   of   - when  transaction  involves  (sale  or  exchange  of)  capital  assets,  and  there  is  
accrual)–here   the   service   is   already   rendered   or   already   parted   a  gain  or  income,  the  income  is  subject  to  Capital  Gains  Tax  (CGT)  
ways   with   the   consideration   (goods   were   delivered)   then   the    
claim   of   right   accrues,   which   means   that   the   ownership   or     Capital  Gains  includes:  
control   of   the   property/income   can   already   be   claimed   due   to   a. income  from  dealings  in  shares  of  stocks  of  domestic  corporation  whether  
the  fulfillment  of  the  obligation.   or  not  through  the  stock  exchange;  
- Also   Known   as   Doctrine   of   Ownership,   Command   or   Control.    
Note:  it  does  not  necessarily  mean  that  you  are  the  owner.     Sale  of  shares  of  stocks  
- Example:  embezzled  funds  of  embezzler  is  taxable  as  income     a) listed  AND  traded  in  the  Local  Stock  Exchange  
o Income  is  source  blind   - exempt   from   CGT,   but   subject   to   Stock   Transactions   Tax  
o Wealth  increases  drastically  for  a  short  amount  of  time   (STT)   –   ½   of   1%   Fair   Market   Value   (FMV)   of   the   shares   of  
o A   taxable   gain   is   conditioned   upon   the   presence   of   a   claim   stocks  
of   right   to   the   alleged   gain   and   the   absence   of   a   definite   - STT  is  a  percentage  tax,  a  business  tax  
unconditional   obligation   to   return   or   repay   that   which   - STT   is   automatically   withheld   or   remitted   by   the   stock  
would   otherwise   constitute   gain.   To   collect   a   tax   would   give   brokers  
the  government  an  unjustified  preference  as  to  the  part  of   b) not  listed  OR  not  traded  in  the  Local  Stock  Exchange  
the   money   that   rightfully   and   completely   belongs   to   the   - subject  to  CGT  
victim.   The   embezzler’s   title   is   void.   (Commissioner   vs.   - first   P100,   000   –   5%;   excess   of   P100,   000   –   10%   (based   on  
Wilcox,  286u.s.  41~  424)   the  FMV  [less  cost]  of  the  shares  or  the  gain  [selling  price  –  
  cost]  of  the  shares  or  the  Book  Value,  whichever  is  higher)  
XIII. Kinds  of  Taxable  Income  or  Gain   - covers  listed  but  not  traded  shares  
   
1. Capital  Gains  

]-
FMV
- gains  or  income  from  the  sale  or  exchange  of  capital  assets   Whichever 5% (first P100, 000)
- can  be  realized  in  relation  to  capital  assets.   is higher Selling Price x
COST 10% (excess of P100,
  between
Capital   Asset   (Sec.  39,  NIRC)  –  the  term  “capital  assets”  means  property  held  by   Book Value 000)
the   taxpayer   (whether   or   not   connected   with   his   trade   or   business),   but   does    
not   include   stock   in   trade   of   the   taxpayer   or   other   property   of   a   kind   which   *FMV   is   based   on   the   zonal   value   (as   determined   by   the   CIR)   or   the   appraiser’s  
would   properly   be   included   in   the   inventory   of   the   taxpayer   if   on   hand   at   the   certificate  
close  of  the  taxable  year,  or  property   held   by   the   taxpayer   primarily   for   sale  to   *zonal  value  will  be  used  only  when  the  corporation  has  real  properties  
customers  in  the  ordinary  course  of  his  trade  or  business,  or  property   used   in    
the   trade   or   business,   of   a   character   which   is   subject   to   the   allowance   for   b. income  from  dealings  in  real  property  located  in  the  Philippines;  
depreciation  provided  in  subsection  (F)  of  Section  34;  or  real  property  used  in   - Capital  Asset;  not  used  in  trade  or  business;  not  primarily  held  for  sale  
the  trade  or  business  of  the  taxpayer.   - CGT  of  6%  FMV  or  selling  price,  whichever  is  higher  
  - Cost  is  not  deducted  from  the  FMV  or  selling  price  when  multiplied  by  
*the  tax  code  does  not  define  capital  assets,  instead  it  defines  ordinary  assets,  and  if   the   rate   of   6%   to   get   the   CGT   of   the   capital   asset;   cost   is   only  
it  does  not  fall  as  an  ordinary  asset,  it  is  a  capital  asset.   deducted  if  it  is  classified  as  ordinary  asset.  
   
Ordinary  assets:  (you  earn  an  ordinary  income,  thus,  it  is  subject  to  ordinary  tax   *what  if  the  real  property  is  located  abroad?  
rate)   - Determine  the  owner  of  the  real  property.  If  owned  by  a  resident  
1) Stocks  in  trade  –  must  be  part  of  your  inventory   citizen   or   domestic   corporation,   it   is   taxable   (worldwide).   CGT?  
2) Property  primarily  held  for  sale  –  (building  house  for  the  purpose  of  selling   or   ordinary   income   tax?   They   will   form   part   of   the   ordinary  
it)   income.   Because   they   are   located   outside   the   Philippines,   even   if  
3) Property  used  in  trade  or  business,  subject  to  allowance  for  depreciation  -­‐   they   are   NOT   used   in   trade   or   business   or   is   treated   as   capital  
(depreciable  assets:  machineries,  equipments)   assets   if   they   be   situated   in   the   Philippines,   they   are   treated   as  
4) Real  property  used  in  trade  or  business  –  (building  used  as  display  area  for   normal   income   on   the   part   of   the   domestic   corporation   or   the  
your  merchandise  or  inventory;  real  estate  dealers)   resident  citizen.  
 
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 7
- Reason   of   the   law:   administration   and   implementation   of   the   Sec.   32(A)   –   Except   when   otherwise   provided   in   this   Title,   gross   income   means   all  
law.  How  will  the  FMV  be  determined  if  it  is  located  outside  the   income   derived   from   whatever   source,   including   (but   not   limited   to)   the   following  
Philippines?   And   when   we   talk   of   CGT,   it   necessitates   that   you   items:    
have   to   file   a   separate   Tax   Return.   This   case   is   difficult   that   the   (1) Compensation   for   services   in   whatever   form   paid,   including,   but   not  
property  may  not  be  declared  to  be  part  of  the  income.   limited  to  fees,  salaries,  wages,  commissions,  and  similar  items;    
  (2) Gross   income   derived   from   the   conduct   of   trade   or   business   or   the  
c. income  from  dealings  in  other  capital  assets  other  than  (a)  and  (b).   exercise  of  a  profession;  
  (3) Gains  derived  from  dealings  in  property;    
2. Ordinary  gains   (4) Interests;    
- gains   or   income   from   the   sale   or   exchange   or   property   which   are   not   capital   (5) Rents;    
assets.   (6) Royalties;    
a. Business   income   –   derived   from   business;   merchandising,   manufacturing,   (7) Dividends;    
exercise  of  profession;     (8) Annuities;    
- flow  of  wealth  in  the  ordinary  day-­‐to-­‐day  transaction;   (9) Prizes  and  winnings;    
- if  the  inflow  is  extraordinary,  it  will  fall  under  capital  gains.   (10) Pensions;  and    
- Q:  if  you  are  in  a  business  of  stock  trading,  your  income  will  not   (11) Partner's   distributive   share   from   the   net   income   of   the   general  
anymore  fall  under  Capital  Gains?   professional  partnership  
→ Stock  Brokers  or  Underwriters  (business  engaged  in  stock   - The  enumeration  is  not  exclusive.  
trading),  whatever  income  they  earned  in  stock  trading,   - Special  Items  Treatment:  
they  report  it  as  their  normal  income.  As  to  the  corporations   i. Self-­‐help  income  –  it  is  not  subject  to  income  tax  
which  listed  there  stocks  in  the  PSE,  are  they  into  stock   ii. Forgiveness/Condonation   of   Debt   –   if   there   is   a   consideration,  
trading?  No.  thus,  in  so  far  as  they  are  concerned,  even  if   taxable;   but   if   condonation   is   purely   out   of   love   and   liberality,  
their  shares  are  listed,  they  will  report  capital  gains  because   exempted  
their  primary  business  purpose  is  into  telecommunications,   iii. Recovery  of  amounts  previously  written  off  –  apply  tax  benefit  rule  
manufacturing,  mass  media,  etc.    
  " COMPENSATION   for   services   in   whatever   form   paid,   including,   but   not   limited   to  
b. Compensation  income  –  presupposes  EE-­‐ER  relationship   fees,  salaries,  wages,  commissions,  and  similar  items  
c. Passive  income  –  received  without  any  act  from  the  taxpayer  (rent  income,     - All   remuneration   for   services   performed   by   and   EE   for   his   ER   under   an   ER-­‐EE  
interest  income)   relationship  
d. Other  income  derived  from  whatever  source.   - Wages  and  salaries,  insofar  as  taxation  is  concern,  are  just  the  same  
  - The  remuneration  referred  here  DOES  NOT  INCLUDE  (Sec.  78(a)  of  NIRC):  
  (1) For  agricultural  labor  paid  entirely  in  products  of  the  farm  where  the  
  labor  is  performed,  or    
Illustration:  Shares  of  stocks  is  NOT  LISTED  and  NOT  TRADED   (2) For  domestic  service  in  a  private  home,  or    
  (3) For  casual  labor  not  in  the  course  of  the  employer's  trade  or  business,  
FMV   2M   or    
Cost   (1M)   (4) For   services   by   a   citizen   or   resident   of   the   Philippines   for   a   foreign  
Net  Capital  Gain   1M   government  or  an  international  organization.  
  - Includes  the  cash  value  of  all  remuneration  paid  in  any  medium  other  than  cash  
So  therefore,   (like   for   example   the   ER   pays   you   with   properties   or   stock   options   basta   not  
  cash,   it   is   still   considered   as   compensation   income   and   subject   to   income   tax,  
5%  x  100k*   =  5K   just  determine  the  cash  value)  
10%  x  900k*   =  90K   - Types  of  taxable  compensation  income:  
CGT*     =  95K   • Salaries  
  • Wages  
*100K  is  the  first  100,000   • Bonus  
*900k  (1M  nga  NCG  minus  100K)  is  referring  to  the  excess  of  the  first  100,000   • Remuneration  
*Capital  Gains  Tax   • Honorarium  
  • Benefits  and  allowances  
XIV. Gross  Income  
1. INCLUSIONS  –  Section  32A  (C-­‐B-­‐G-­‐I-­‐R-­‐R-­‐D-­‐A-­‐P-­‐P-­‐P)  
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 8
• For   government:   Representation   and   Transportation   Allowances   " GAINS  derived  from  dealings  in  property  
(RATA);  Personal  Emergency  Relief  Allowance  (PERA)   A. Shares  of  stock  of  a  domestic  corporation  
• Longevity  pay   1) Capital  asset  if  not  a  dealer  in  securities  
• Subsistence  allowance   - A  dealer  in  securities  is  the  term  used  for  an  individual  who  is  engaged  
• Hazard  pay   in  buying  and  selling  of  securities  or  shares  of  stock  
• Annuities,  pensions  and  etc.   - So  if  you’re  a  dealer  in  securities,  the  shares  of  stocks  are  considered  
  as  your  ordinary  asset,  so  subject  to  ordinary  income  tax  rate  
# Take   note   that   salaries   and   wages   refers   to   basic   pay;   these   other   benefits   - If   NOT   a   dealer   in   securities,   the   shares   of   stocks   are   considered   as  
enumerated   above   are   usually   termed   as   “other   benefits”;   and   these   your  capital  asset,  so  subject  to  capital  gains  tax  
“other  benefits”  have  a  specific  amount  which  is  considered  excluded  from    
the   taxable  income  and  the  ceiling  amount   is  30K.   Meaning   to   say,   so   long   2) Listed  AND  traded  in  local  stock  exchange  
as  these  allowances  do  not  exceed  30K,  it  will  not  be  subjected  to  tax  but  if   - Subject   to   Stock   Transactions   Tax   of   ½   of   1%   based   on   gross   selling  
it  exceeds  30K,  the  excess  is  taxable.   price;  but  whatever  is  the  excess  there  maybe  subject  to  donor’s  tax  
   
- Backwages,   allowances   and   benefits   awarded   in   labor   disputes   are   subject   to   3) NOT  listed  OR  listed  but  NOT  traded  in  local  stock  exchange  
withholding  tax  on  the  wages.   - not  over  100,000:  5%  
• Different  treatment  when  it  comes  to  separation  pay  and  retirement  pay,   - On  any  amount  in  excess  of  P100,000:  10%  
will  be  discussed  soon.    
- Primary  method  of  collecting  tax  from  compensation  income  is  WITHHOLDING   # How  to  compute  the  Fair  Market  Value  (FMV)?  
tax.   - If  listed  but  NOT  traded,  the  FMV  is:  
• It  is  being  withheld  by  the  ER  for  the  benefit  of  the  EE  because  it  is  the  ER   o The   closing   rate   on   the   date   of   the   transaction   (ang  
who  will  have  to  understandably  remit  it  to  the  BIR.   closing   rate   kay   kanang   rate   nga   makit.an   nimu   sa  
• The   goal   there   is   that   the   total   amount   withheld   by   the   ER   should   equal   to   newspaper  sa  stock  exchange  section)  
the  total  amount  of  annual  income  tax  payable  of  the  EE.   o If  no  sale  on  the  date  of  transaction,  the  basis  of  your  
• Two   types   of   withholding:   (1)   Final   Withholding   Tax;   (2)   Creditable   FMV  would  be  the  closing   rate   nearest   to   the   date   of  
Withholding  Tax   sale  
 
• So   therefore,   as   a  General   Rule:   withholding   by   the   ER;   Exception:   those  
- If  NOT  listed  and  NOT  traded:  
employed   by   the   foreign   embassies   and   diplomatic   missions   (RMC   31-­‐
o Based  on  Net  Capital  Gains,  so  the  BIR  will  compare  the  
2013)  –  basaha  nalang  ni  kay  kapui  summarize  ☺  
selling  price  (SP);  or  the  book  value  (BV)  of  the  shares;  
 
or  FMV  
o COMPENSATION  VIS-­‐À-­‐VIS  FRINGE  BENEFITS    
*SP   is   the   consideration   or   the   amount   of   money   that  
- Fringe  Benefits:  these  are  the  benefits  provided  or  granted  to  the  EE  
you  indicate  in  your  deed  of  transfer  or  deed  of  sale  
other  than  the  basic  pay.  
*BV   of   the   shares   is   the   based   on   the   Audited   Financial  
→ To  supervisory  and  Managerial  EE:  subject  to  Fringe  Benefits  Tax  
Statement  (AFS)  
(FBT)  
*FMV   can   be   based   on   the   (1)   zonal   value   as  
→ To  rank  and  file  EE:  de  minimis  benefits,  exempted.  However,  if  it  
determined  by  the  BIR;  (2)  value  as  declared  in  the  tax  
exceeds  30K,  it  is  taxable  
declaration   by   the   Assessor’s   office;   (3)   appraiser’s  
" BUSINESS  INCOME   –   gross   income   derived   from   the   conduct   of   trade   or   business   or  
certificate  
the  exercise  of  a  profession  
 
- Manufacturing,  merchandising,  mining  business:  
B. Real  property  
→ GI  =  Total  Sales  –  COGS  +  other  income  from  other  investment  
- Located  in  the  Philippines  
- Service  enterprises  (like  accounting  firm,  law  firm,  etc.):  
o The   seller   or   transferor   is   a   real   estate   dealer:   ordinary   asset,   so  
→ GI   =   Total   receipts   –   Direct   costs   and   expenses;   refer   to   RMC   4-­‐2003   as   subject  to  ordinary  income  tax  
amended  by  RMC  30-­‐2008   o The   seller   or   transferor   is   NOT   a   real   estate   dealer:   capital   asset,   so  
- Difference  b/w  Professional  income  and  Compensation  income  is  the  fact  that   6%  based  on  SP  or  FMV,  whichever  is  higher  
you   earned   professional   income   without   any   ER-­‐EE   relationship.   Professional   o However,   if   real   property   is   sold   during   involuntary   sales,   like  
income  are  fees  received  by  a  professional  from  the  practice  of  his  profession   foreclosure,   taxes   should   be   counted   from   the   date   the   right   to  
provided   that   there   is   no   ER-­‐EE   relationship   and   thus   considered   as   business   redeem   (1   year   from   the   date   of   registration   of   the   certificate   of   sale)  
income.   the  property  has  expired  and  it  is  based  on  the  bid  price,  FMV  or  zonal  
  value,  whichever  is  higher  
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 9
  property,   in   cases   of   transfers   of   divided   interest,   shall   be   included   in   gross  
- Located  outside  the  Philippines   income.    
o Subject   to   graduated   income   tax   for   residents   or   normal   corporate    
income  tax  (NCIT)  for  corporations   (4)    Compensation  for  Injuries  or  Sickness.  -­‐  amounts  received,  through  Accident  
  or  Health  Insurance  or  under  Workmen's  Compensation  Acts,  as  compensation  
C. Other  Capital  Assets   for   personal   injuries   or   sickness,   plus   the   amounts   of   any   damages   received,  
- What  are  these?   whether  by  suit  or  agreement,  on  account  of  such  injuries  or  sickness.    
• motor  vehicles  not  used  in  business    
• short  term  commercial  papers  not  considered  deposit  substitute   (5)     Income  Exempt  under  Treaty.  -­‐  Income  of  any  kind,  to  the  extent  required  
- subject   to   the   graduated   income   tax   for   individuals   or   NCIT   for   by  any  treaty  obligation  binding  upon  the  Government  of  the  Philippines.    
corporations    
- holding   period   of   other   capital   assets   is   material   only   for   individual   (6)    Retirement  Benefits,  Pensions,  Gratuities,  etc.-­‐    
taxpayers   (a)     Retirement   benefits   received   under   Republic   Act   No.   7641   and   those  
o HOLDING  PERIOD  RULE:   received  by  officials  and  employees  of  private  firms,  whether  individual  or  
*50%  of  capital  gain  is  taxable  if  the  other  capital  asset  is  held  more   corporate,   in   accordance   with   a   reasonable   private   benefit   plan  
than  12  months  (long  term  capital  gain)   maintained   by   the   employer:   Provided,   That   the   retiring   official   or  
*100%  of  capital  gain  is  taxable  if  held  12  months  or  less  (short  term   employee   has   been   in   the   service   of   the   same   employer   for   at   least   ten  
capital  gain)   (10)   years   and   is   not   less   than   fifty   (50)   years   of   age   at   the   time   of   his  
  retirement:   Provided,   further,   That   the   benefits   granted   under   this  
Illustration:   subparagraph  shall  be  availed  of  by  an  official  or  employee  only  once.  For  
1/1/2014   –   Mr.   X   purchased   a   car   for   800K   but   instead   of   registering   the   purposes   of   this   Subsection,   the   term   'reasonable   private   benefit   plan'  
car  on  his  name,  Mr.  X  gave  it  to  his  son,  Y.   means   a   pension,   gratuity,   stock   bonus   or   profit-­‐sharing   plan   maintained  
7/22/2014   –   Y   purchased   a   new   car   and   traded-­‐in   the   old   car   valued   at   by  an  employer  for  the  benefit  of  some  or  all  of  his  officials  or  employees,  
900K.   So,   is   there   a   capital   gain?   If   yes,   how   much   of   the   capital   gain   is   wherein   contributions   are   made   by   such   employer   for   the   officials   or  
taxable?   employees,   or   both,   for   the   purpose   of   distributing   to   such   officials   and  
  employees   the   earnings   and   principal   of   the   fund   thus   accumulated,   and  
ANS:  Yes,  100K.  900K  -­‐  800K  =  100K  is  the  capital  gain.  The  capital  gain  is   wherein   its   is   provided   in   said   plan   that   at   no   time   shall   any   part   of   the  
here   short-­‐term   because   the   car   was   traded-­‐in   less   than   12   months   or   6   corpus  or  income  of  the  fund  be  used  for,  or  be  diverted  to,  any  purpose  
months  after  its  purchase.  Therefore,  the  100%  of  the  100K  is  part  of  the   other  than  for  the  exclusive  benefit  of  the  said  officials  and  employees.    
income  and  is  subject  to  the  graduated  income  tax  rate.    
  (b)     Any   amount   received   by   an   official   or   employee   or   by   his   heirs   from  
REMEMBER:   Capital   losses   can   be   offset   only   against   and   to   the   extend   of   the   the  employer  as  a  consequence  of  separation  of  such  official  or  employee  
capital.   Capital   loss   is   different   from   ordinary   loss.   Capital   gain   is   different   from   from   the   service   of   the   employer   because   of   death   sickness   or   other  
ordinary  gain.   physical  disability  or  for  any  cause  beyond  the  control  of  the  said  official  or  
  employee.    
2. EXCLUSIONS  –  Section  32B    
Exclusions   from   Gross   Income.   -­‐   The   following   items   shall   not   be   included   in   gross   (c)     The   provisions   of   any   existing   law   to   the   contrary   notwithstanding,  
income  and  shall  be  exempt  from  taxation  under  this  title:     social   security   benefits,   retirement   gratuities,   pensions   and   other   similar  
(1)     Life  Insurance.  -­‐  The  proceeds  of  life  insurance  policies  paid  to  the  heirs  or   benefits  received  by  resident  or  nonresident  citizens  of  the  Philippines  or  
beneficiaries   upon   the   death   of   the   insured,   whether   in   a   single   sum   or   aliens   who   come   to   reside   permanently   in   the   Philippines   from   foreign  
otherwise,  but  if  such  amounts  are  held  by  the  insurer  under  an  agreement  to   government  agencies  and  other  institutions,  private  or  public.    
pay  interest  thereon,  the  interest  payments  shall  be  included  in  gross  income.      
  (d)     Payments  of  benefits  due  or  to  become  due  to  any  person  residing  in  
(2)     Amount  Received  by  Insured  as  Return  of  Premium.  -­‐  The  amount  received   the   Philippines   under   the   laws   of   the   United   States   administered   by   the  
by   the   insured,   as   a   return   of   premiums   paid   by   him   under   life   insurance,   United  States  Veterans  Administration.    
endowment,  or  annuity  contracts,  either  during  the  term  or  at  the  maturity  of    
the  term  mentioned  in  the  contract  or  upon  surrender  of  the  contract.     (e)     Benefits  received  from  or  enjoyed  under  the  Social  Security  System  in  
  accordance  with  the  provisions  of  Republic  Act  No.  8282.    
(3)     Gifts,   Bequests,   and   Devises.   -­‐   The   value   of   property   acquired   by   gift,    
bequest,   devise,   or   descent:   Provided,   however,   That   income   from   such   (f)     Benefits   received   from   the   GSIS   under   Republic   Act   No.   8291,   including  
property,   as   well   as   gift,   bequest,   devise   or   descent   of   income   from   any   retirement  gratuity  received  by  government  officials  and  employees.    
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 10
  (f)     GSIS,  SSS,  Medicare  and  Other  Contributions.  -­‐  GSIS,  SSS,  Medicare  and  
(7)    Miscellaneous  Items.  -­‐     Pag-­‐ibig  contributions,  and  union  dues  of  individuals.    
(a)     Income   Derived   by   Foreign   Government.   -­‐   Income   derived   from    
investments   in   the   Philippines   in   loans,   stocks,   bonds   or   other   domestic   (g)     Gains   from   the   Sale   of   Bonds,   Debentures   or   other   Certificate   of  
securities,   or   from   interest   on   deposits   in   banks   in   the   Philippines   by   (i)   Indebtedness.   -­‐   Gains   realized   from   the   same   or   exchange   or   retirement   of  
foreign   governments,   (ii)   financing   institutions   owned,   controlled,   or   bonds,  debentures  or  other  certificate  of  indebtedness  with  a  maturity  of  
enjoying   refinancing   from   foreign   governments,   and   (iii)   international   or   more  than  five  (5)  years.    
regional  financial  institutions  established  by  foreign  governments.      
  (h)     Gains   from   Redemption   of   Shares   in   Mutual   Fund.   -­‐   Gains   realized   by  
(b)     Income   Derived   by   the   Government   or   its   Political   Subdivisions.   -­‐   the  investor  upon  redemption  of  shares  of  stock  in  a  mutual  fund  company  
Income  derived  from  any  public  utility  or  from  the  exercise  of  any  essential   as  defined  in  Section  22  (BB)  of  this  Code.  
governmental  function  accruing  to  the  Government  of  the  Philippines  or  to    
any  political  subdivision  thereof.     XV. Situs  of  Income  (Section  42)  
   
(c)    Prizes  and  Awards.  -­‐  Prizes  and  awards  made  primarily  in  recognition  of   Sources   Tax  Situs  
religious,   charitable,   scientific,   educational,   artistic,   literary,   or   civic   1.  Compensation   Place  where  the  service/s  is/are  rendered.  
achievement  but  only  if:     Income      
(i)     The  recipient  was  selected  without  any  action  on  his  part  to  enter   Example   1:   Mr.   Sevilla   is   employed   in   a   foreign   corporation,   and   it  
the  contest  or  proceeding;  and     asked   you   to   come   here   in   the   Phils.   and   do   some   work   here   in   behalf  
  of   the   foreign   corporation.   Is   Mr.   Sevilla’s   compensation   for   the  
(ii)     The  recipient  is  not  required  to  render  substantial  future  services   services  rendered  here  in  the  Philippines  subject  to  income  tax  here  in  
as  a  condition  to  receiving  the  prize  or  award.     the   Philippines   even   if   the   payor   is   a   foreign   corporation?   Yes.   The  
  residence   of   the   payor   will   not   matter,   what   matters   is   the   place  
(d)     Prizes   and   Awards   in   Sports   Competition.   -­‐   All   prizes   and   awards   where  service  is  rendered.  CIR  vs  Baier-­‐Nickel  
granted   to   athletes   in   local   and   international   sports   competitions   and    
tournaments  whether  held  in  the  Philippines  or  abroad  and  sanctioned  by   Example   2:   Bench   hired   the   services   of   the   advertising   agency   in  
their  national  sports  associations.     Singapore   to   do   advertisements   in   Singapore.   Is   the   advertising  
  income   of   that   advertising   agency   subject   to   income   tax   here   in   the  
th
(e)     13   Month   Pay   and   Other   Benefits.   -­‐   Gross   benefits   received   by   Phils.?   No.   it   will   not   be   subject   to   income   tax   because   the  
officials   and   employees   of   public   and   private   entities:   Provided,   however,   advertisement   is   not   rendered   here   but   was   rendered   in   Singapore.  
That   the   total   exclusion   under   this   subparagraph   shall   not   exceed   Thirty   Even  if  the  payor  is  a  domestic  corporation  here  in  the  Phils.  
thousand  pesos  (P30,000)  which  shall  cover:     2.  Business   Merchandising,  Farming,  Mining  
(i)     Benefits   received   by   officials   and   employees   of   the   national   and   Income   -­‐Place  where  the  business  is  undertaken.  
local  government  pursuant  to  Republic  Act  No.  6686;        
  Manufacturing  
(ii)     Benefits   received   by   employees   pursuant   to   Presidential   Decree   a. Goods   manufactured   and   sold   within   the   Philippines   –   income  
No.   851,   as   amended   by   Memorandum   Order   No.   28,   dated   August   derived  purely  within.  
13,  1986;     b. Goods   manufactured   &   sold   outside   the   Philippines   –   income  
  derived  purely  outside.  
(iii)     Benefits   received   by   officials   and   employees   not   covered   by   c. Goods  manufactured  within  the  Philippines  and  sold  outside  the  
Presidential  decree  No.  851,  as  amended  by  Memorandum  Order  No.   Philippines  –  income  partly  within  and  partly  without.  
28,  dated  August  13,  1986;  and     d. Goods  manufactured  outside  the  Philippines  and  sold  within  the  
  Philippines  –  income  partly  within  and  partly  without.  
(iv)     Other   benefits   such   as   productivity   incentives   and   Christmas   3. Income  from   1. If  it  involves  personal  property  –  the  place  of  sale.  
bonus:   Provided,   further,   That   the   ceiling   of   Thirty   thousand   pesos   Sale  or   2. In  the  case  of  sale  of  transport  documents*  –  the  place  where  the  
(P30,000)   may   be   increased   through   rules   and   regulations   issued   by   Exchange  of   transport  document  is  sold.  
the  Secretary  of  Finance,  upon  recommendation  of  the  Commissioner,   Property   3. If  it  involves  real  property  –  the  place  or  location  of  real  property  
after   considering   among   others,   the   effect   on   the   same   of   the    
inflation  rate  at  the  end  of  the  taxable  year.     *bill  of  lading;  airway  bill;  carrier’s  certificate  
  4. Interest   Residence  of  the  debtor/borrower.  
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
By: RLB | DHB | TLD | RRM 11
Income   - This  primarily  is  referring  to  life  insurance  
5. Rent  Income   Place  where  the  property*subject  of  the  contract  is  located.   - Reason  for  exclusion:  it  represents  a  mere  return  OF  capital.  
  - Insurance  premium  is  the  consideration  that  you  pay  to  the  insurer  for  bearing  
*either  personal  or  real  property   the  risk  of  the  specific  peril.  
6. Royalties   Place  where  the  intangible  property  is  used.    
7. Dividend   1. Received  from  domestic  corporation  –  income  purely  within.   3. Gifts,  Bequests,  Devises  
2. Received   from   foreign   corporation   outside   the   income   of   the   - It   is   exempted   because   it   is   already   subject   to   donor’s,   transfer   or   estate   tax.  
foreign  corporation  in  the  Philippines  during  the  last  preceding  3   The  reason  for  this  is  that  it  is  a  rule  under  the  Tax  Code  that  no  taxpayer  will  be  
taxable  years,  following  rules  shall  apply,  to  wit—   subjected  to  two  direct  taxes  at  the  same  time.  Take  note  that  donor’s,  transfer  
a.  The  income  is  purely  within  if  the  income  derived  from  the   and  estate  tax  are  direct  tax.  
Philippines  is  more  than  85%;    
b.  It  is  purely  without  if  the  proportion  of  its  Philippine  income   - Gifts   are   given   purely   out   of   love   and   liberality   so   if   there   is   a   consideration  
to  the  total  income  is  less  than  50%;   given  then  it  is  subject  to  income  tax.  
c.  There   should   be   an   allocation   if   it   is   50%   but   not   more   than    

 
85%.     o Example   1:   you   are   an   EE   of   a   corporation   for   30   years   and   the  
8. Annuities   Place  where  the  contract  was  made. corporation  gave  you  bonus  gift  of  5k  per  year  of  service,  it  is  taxable  
9. Prizes  and   If   on   account   of   services   rendered   –   place   where   the   services   were   because  there  is  a  consideration  which  is  your  30  years  of  service.  But  
Winnings   rendered.   it  is  subject  to  the  30k  threshold.  
If  not  on  account  of  service  rendered  –  place  where  the  same  is  given.      
10. Pension   Place  where  this  may  be  given  on  account  of  services  rendered.   o Example  2:  in  the  internet,  there’s  a  pop  up  window  saying  “you  are  
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11. Professional   Place  where  the  exercise  of  profession  is  undertaken.   the   1000   visitor   so   you   will   receive   an   ipad”.   You   receive   the   ipad,  
income  of   should  you  include  the  cash  value  of  the  ipad  as  part  of  your  income  
professional   and  thus  subject  to  tax?  It  is  subject  to  income  tax  because  the  act  of  
partners   visiting  that  website  is  the  consideration.  
 
 
- Bequests,   or   commonly   known   as   legacy,   gifts   of   personal   property   by   virtue   of  
CIR  vs  Baier-­‐Nickel  
a   will   and   the   recipient   is   called   legatee.   This   bequest   is   already   subject   to  
 
XVI. Exclusions  form  Gross  Income   transfer  taxes,  which  is  why  it  is  not  anymore  subjected  to  income  tax.  
 
 
- Exceptions   to   the   rule:   the   income   or   fruit   of   such   money   given   by   donation,  
1. Proceeds  of  Life  Insurance  Policy  
bequests  or  devise.  
- What   it   refers   here   in   LIFE   INSURANCE   because   there   are   different   kinds   of  
 
insurance.  
- Why  is  this  excluded?  Because  this  is  deemed  as  INDEMNITY  for  the  loss  of  life.   4. Compensation  for  injuries  or  sickness  
- Reason  for  exclusion:  this  is  just  an  indemnification  for  the  injuries  or  damages  
- Why   all   the   proceeds   are   excluded?   Because   under   insurance   law,   life   is  
suffered  (compensatory  in  nature).  
considered   priceless.   (oh   master   na   kaau   ninyu   ang   insurance,   nya   ang  
- The  sources  are:  
taxation?)   So   the   tax   code   cannot   put   a   ceiling   on   the   amount   because   again  
life  is  priceless.   a. The  compensation  may  be  paid  by  virtue  of  a  suit;  or    
b. It   may   be   paid   by   virtue   of   health   insurance,   accident   insurance   or  
- It   will   not   matter   whether   you   receive   it   in   lump   sum   or   installment   basis,   so  
Workmen’s  Compensation  Act.  
long  as  it  is  a  life  insurance  policy,  it  is  still  excluded  or  exempted.  
 
- However,  the  condition  here  is  that  the  insured  should  have  died.  Because  if  the  
Illustration:  
insured   did   not   die,   then   not   the   entire   proceeds   is   excluded,   only   up   to   the  
amount  of  the  premium  paid  is  exempted  if  the  insured  outlives  the  insurance.   Ms.  Burdeos,  kinsa  imu  gnhn  patyun  diri?  Mr.  Honculada  sir.  
So,   Mr.   Honculada   met   a   vehicular   accident.   His   car   was   damaged   and   Mr.  
 
Honculada   was   hospitalized,   so   he   was   not   able   to   go   to   work.   So   Mr.   Honculada  
• Instances  where  it  is  subject  to  tax:  
received  the  following:  
i. If  insurer  and  insured  agreed  that  the  amount  of  the  proceeds  shall  be  
                  Taxable  (?)  
withheld   by   the   insurer   with   the   obligation   to   pay   interest   in   the  
100k  –  Hospital  bills                  X  
same,  the  interest  will  be  subject  to  tax;  
50k  –  lost  income*                    ✓
ii. If  there  is  transfer  of  the  insurance  policy.  
10k  –  maintenance  and  medication            X  
 
1M  –  moral  damages                  X  
2. Amount  Received  as  Return  of  Premium  
500k  –  attorney’s  fees                  X  
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500k  –  car*  valued  at  200k                ✓   6) The   employer   must   give   contribution   and   no   amount   shall   inure   to   the  
  benefit   of   a   particular   employee   or   official.   This   must   be   established   for  
*lost   income   is   taxable   because   under   normal   circumstances,   he   would   have   earned   the  common  benefit  of  the  employees  or  officials;  
the  50k,  if  he  was  not  hospitalized  and  was  able  to  work.   7) This  can  be  availed  of  once.  The  subsequent  retirement  benefits  received  
*the  car  value  was  200k  but  Mr.  Honcx  was  able  to  receive  500k  for  the  damage  to   from  another  private  employer  is  no  longer  exempt  but  subject  to  tax.  (If  
the   car.   So   the   difference   of   the   500k   and   200k,   which   is   300k,   is   taxable   because   the  second  employer  is  a  government  entity  or  institution  –  exempt)  
that  is  the  extent  of  the  gain  he  got.    
  Illustration:  must  fall  in  with  ALL  of  the  above  requirements  to  be  exempted  
Atty.   A:   for   moral   damages   and   attorney’s   fees,   it   is   not   taxable   because   moral    
damages  pertains  to  your  non-­‐physical  injuries  related  to  your  physical  injuries.  Like   Employee   BIR  approved— Age   Length  of   Taxable  (?)  
si   Ron   pagbangga   niya   nagka.umod-­‐umod   na   siya   didto   nya   perti   na   gubaa   sa   iya   Private  Benefit  Plan   Service  
dagway,   dba?   So   moral   damages   daun.   While   for   the   attorney’s   fees,   it   represents   Jorj   ✓   51   8  years   ✓  
the   actual   fees   you   paid   your   lawyer   which   is   just   refunded   to   you,   so   basically   Kyle   ✓   45   15  years   ✓  
compensatory   in   nature.   And   the   hospital   bills   and   medications   are   just   refund   for   Ericka   X   60   12  years   ✓  
your  actual  expenses.   Jean   ✓   65   15  years   X  
   
5. Income  exempt  under  treaty   Atty.   A:   You   have   what   we   call   US-­‐Veterans   Benefit,   this   is   a   benefit   you   receive  
- Reason  for  the  exclusion:   from  the  United  States  Veterans  Administration  Office.  
o Treaty  has  the  obligatory  force  of  a  contract    
o Concept  of  reciprocity  and  amity  among  nations   7. Miscellaneous  Items  
- Exception:  as  may  be  provided  in  the  treaty.   a) Prizes   and   awards   given   in   recognition   of   Religious,   Charitable,   Scientific,  
  Educational,  Artistic,  Literary,  or  Civic  achievements.  
6. Retirement  benefits,  Pensions,  Gratuities   - Conditions:  
a) Retirement  benefits  under  R.A.  No.  7641  or  a  reasonable  private  benefit  plan   i. The   recipient   was   selected   without   any   action   on   his   part   to  
o Retirement  pay  is  the  payment  you  receive   upon  reaching  a  particular   enter  the  contest  or  proceeding,  and  
age  and  length  of  service.   ii. The  recipient  is  not  required  to  render  substantial  future  services  
b) Separation  pay  –  amount  received  by  an  official  or  an  employee  or  by  his  heirs   as  a  condition  to  receiving  the  prize  or  award.  
from  the  employer  due  to  separation  from  service  because  of  death,  sickness,   Illustrations:  
or  other  physical  disability  or  for  any  cause   beyond   the   control  of  the  official  or   • You   won   Ms.   Wasay-­‐wasay,   Bohol   2014   and   you   receive   50K.   Is   that   50K  
employee.   taxable?  The  50K  is  subject  to  income  tax.  
c) Social   security   benefits,   retirement   gratuities,   pensions   and   other   similar    
benefits   received   by   resident   or   non-­‐resident   citizens   or   resident   aliens   from   • You   are   an   author   of   a   fiction   book,   Adventures   of   Ms.   Wasay-­‐wasay,  
foreign  institutions,  whether  public  or  private.   Bohol  and  your  book  won  as  Best  Fiction  Book  and  you  receive  100K  as  a  
d) US   veterans   benefit   –   benefit   you   receive   from   the   United   States   Veterans   prize.  Is  that  prize  taxable  or  not?  You  qualify.  
Administration  Office   - If   you   submitted   your   entry   in   that   literacy   contest,   the   prize   is  
e) SSS  under  R.A.  8282   taxable  
f) GSIS  under  R.A.  8291   - If   it   was   randomly   selected   without   any   effort   on   your   part   and  
  without  your  knowledge,  not  taxable.  
Recipient:  Private  employees  or  official  of  private  firm.    
  b) Prizes  and  awards  in  sports  competitions  
Requisites  for  Retirement  Benefits  to  be  exempted:   Requisites:  
1) The   private   employee   or   official   must   be   at   least   50   years   of   age   at   the   i. Competition  and  tournament  must  be  sanctioned  or  approved  by  the  
time  of  his  retirement;   National  Sports  Association;  and  
2) He  must  have  rendered  at  least  10  years  of  service  to  the  employer  at  the   ii. The   competition   and   tournament   must   also   be   approved   by   the  
time  of  retirement;   Philippine   Olympic   Committee,   whether   local   or   international,  
3) There  must  be  reasonable  private  benefit  plan;   whether  held  in  the  Philippines  or  outside.  (like  Palarong  Pambansa,  
4) Reasonable   private   benefit   plan   may   be   in   the   nature   of   pension   plan,   CVRAA,  FIBA  and  etc.)  
profit  sharing  plan,  stock  bonus  plan,  or  gratuity;    
5) The  reasonable  private  benefit  plan  must  be  approved  by  the  BIR;   Illustration:  
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• You  joined  the  Brgy.  Wasay-­‐wasay  Badminton  competition  and  you  won  as   - It  is  excluded  as  long  as  it  does  not  exceed  the  ceiling  or  threshold  of  P30,  
champion  with  a  prize  or  10K.  Is  that  10K  excluded  or  subject  to  tax?   000.  The  excess  shall  be  treated  as  taxable  compensation  income.  
th th
- If  approved  by  the  Philippine  Olympic  Committee,  it  is  exempted.  But   - How  about  the  14  month  pay,  15  month  pay,  etc.?  
in  reality,  a  barangay  sports  competition  does  not  have  approval  from   o It   is   already   subject   to   the   P30k   threshold   because   what   is   excluded   is  
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the  POC  and  thus  your  winning  is  subject  to  income  tax.   only  the  13  month  pay.  
   
c) Income   derived   by   the   Government   or   its   political   subdivisions   from   the    
exercise  of  any  essential  governmental  function  or  from  any  public  utility.   h) Gains   derived   from   the   sale,   exchange,   retirement   bonds   debentures   or   other  
  certificate  of  indebtedness  with  a  maturity  of  more  than  five  (5)  years.  
d) Income  derived  from  investments  in  the  Philippines  by  Foreign  Government  or    
Financing  Institutions   XVII.  Allowable  Deductions  
Requisites:    
i. Recipient  must  be  a:   INCOME  
a. Foreign  government;   -­‐  EXCLUSIONS  
b. Financing   institution   owned,   financed   or   controlled   by   GROSS  INCOME  
foreign  government;   -­‐  DEDUCTIONS/EXEMPTIONS  
c. Regional   financing   institution,   international   financing   NET  INCOME  
institution  established  by  foreign  government.    
ii. It  must  be  an  income  received  from  investment  in  the  Philippines.   1. Deduction  (outflow)  vs.  Exemption  (inflow)  
   
Atty.   A:   this   is   important,   you   have   to   remember   that   the   one   who   makes   an   2. Deduction  (outflow)  vs.  Exclusion  (inflow)  
investment  in  the  Philippines  is  the  foreign  government  or  financing  institution    
which   is   owned,   financed   or   controlled   by   the   foreign   government.   It   is   not   just   ! Similarity  between  deductions,  exemptions  and  exclusions  –  they  will  cause  a  
any   financing   institution.   Let’s   say   for   example,   when   the   problem   states   “Co.   decrease  in  your  taxable  income  or  tax  due.  
XYZ  is  a  financing  institution  makes  an  investment  in  the  Philippines  and  earned    
1M”   kana   lang…and   you   are   asked   if   the   1M   is   taxable,   you   have   to   qualify.   ! Difference  between  deductions,  exemptions  and  exclusions:  
Dapat  si  Co.  xyz  nga  financing  institution  is  owned,  financed  or  controlled  by  a   - Deductions:  expenses,  outflows;    
foreign   government.   It   is   also   the   same   case   if   it   company   is   a   RE-­‐financing   - Exemptions:   inflows   not   subject   to   tax   because   the   law   or   treaty   expressly  
institution,  qualify  japun  ka.   provides  for  its  exemption.  
  - Exclusions:  inflows  not  subject  to  tax  because:  
e) Gains   derived   from   redemption   of   shares   of   stock   issued   by   a   Mutual   Fund   1) these  are  not  subject  to  income  tax  because  it’s  just  a  
Company   return   of   capital   and   not   a   return   on   capital   which  
- Redemption  –  means  you  are  going  to  buy  back.   means  there  is  no  gain  or  income.  
- Mutual  Fund  –  you  have  smalls  funds  and  you  pool  it  and  you  make  bigger   2) it  may  already  be  subjected  to  other  direct  taxes  as  in  
investments.   So   if   you   redeem,   it’s   still   excluded   because   its   just   the  case  of  gifts,  bequeaths,  devises.  
considered  as  your  return  of  capital.  There’s  no  income  gained.   3) it  may  just  be  compensatory  in  nature.  
   
f) Contributions  to  GSIS,  SSS,  PAG-­‐IBIG,  and  Union  Dues   Atty.  A:  deduction  is  the  word  I  use  instead  of  minus.  
- Pag-­‐ibig:   Let’s   say   your   salary   is   P10k   and   you   want   to   avail   of   higher   loan,    
you   can   increase   your   contribution.   Instead   of   contributing   the   minimum   ! Is  exclusion  more  or  less  the  same  as  exemption?  
contribution  which  is  P100,  you  instructed  your  employer  to  increase  your   - By  nature,  they  are  just  the  same.  But  as  to  items  considered  as  excluded  
contribution   to   P500.   Take   note   that   whatever   is   the   difference   between   or  items  considered  as  exempted,  they  are  different.  
your   minimum   contribution   and   your   increased   contribution   is   already    
taxable   because   what   is   excluded   from   income   tax   is   the   minimum   3. Basic  principles  governing  deductions  (double-­‐nexus  rule)  
contribution  which  is  P100,  the  excess  of  P400  is  now  taxable  as  income  on   i. The   taxpayer   seeking   deduction   must   point   to   some   specific   provisions   of   the  
your  part.   statute  authorizing  the  deduction,  and  
  ii. He   must   be   able   to   prove   that   he   is   entitled   to   the   deduction   authorized   or  
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g) Benefits  in  the  form  of  13  month  pay  and  other  benefits   allowed.  
- 13  month  pay:  1  month  pay   iii. Doubtful  provisions  pertaining  to  deductions  are  strictly  construed  against  the  
- Other  benefits:  Christmas  bonus,  Midyear  bonus,  loyalty  award.   taxpayer  and  liberally  construed  against  the  government  
  iv. You  must  be  able  to  follow  statutory  requirements  
TAXATION 1 A.Y. 2014 - PART 2 (based on the syllabus and discussion of Atty. Aranas)
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  - Tax   code   presumes   that   your   personal   expenditure   in   1   year   is   only   equivalent   to  
Illustration   1:   The  act  of  withholding  a  particular  payment.  X  is  the  seller  and  Y  is  the   P50k.    
th
buyer.  If  it’s  a  sale  of  land  and  it’s  a  capital  asset,  that’s  6%  capital  gains  tax.  Who   o Additional  P25k  if  you  have  a  child.  Up  to  the  4  child.  
pays  this  6%?     - Cannot   be   deducted:   your   meals,   transportation   expenses,   etc.   because   under   the  
th
- If   there   is   no   agreement,   generally   it   should   be   withheld   by   Y,   buyer.   If   the   law,  you  are  already  given  an  annual  P50k  plus  P25k  if  you  have  a  child,  up  to  the  4  
selling   price   is   P1   million,   Y   should   remit   to   X   P940,000   (P1   million   less   6%   or   child.  
94%  of  P1  million).  The  P60,000  will  he  withheld  by  Y,  the  buyer  and  remitted    
automatically  to  the  BIR.   ii. Amount  paid  for  new  buildings  or  permanent  improvements,  or  betterment  to  increase  
- On   the   part   of   the   buyer,   the   act   of   buying   the   lot   can   be   considered   as   an   the  value  of  any  property  or  estate;  
expense.  Before  this  buyer  can  deduct  for  expenditure  in  purchasing  the  land,   - It’s   non-­‐deductible   because   under   our   Tax   Code,   it   is   presumed   that   you   must  
he  must  be  able  to  remit  first  the  amount  being  withheld.  If  he  failed  to  remit   capitalize  these  expenses;  
the  amount  being  withheld,  can  he  claim  that  expense  for  purchasing  the  lot?   o Capitalize:  recorded  as  part  of  your  asset  and  not  as  an  expenditure.  These  
No.   periodic  expenses  are  recognize  as  depreciation.  
   
Illustration   2:   In   cases   of   rents,   the   amount   you   should   withheld   is   5%.   You   rent   a   o Example:   In   your   business,   you   constructed   a   building   worth   P10   million  
specific   stall   in   eMall.   You   pay   a   rent   of   P10k   per   month.   Will   you   automatically   with   a   projected   useful   life   of   10   years.   Can  you  outrightly  deduct  it  as  an  
remit  the  entire  P10k  to  eMall?     expense   in   the   year   when   the   building   was   completed?   No.   you   will  
- No.  Under  the  law,  you  should  withhold  at  least  5%  of  P10k.  On  your  part,  you   staggered  the  cost  of  constructing  the  building  based  on  the  useful  life  of  
can   recognize   deduction   for   rent   expenses.   But   before   you   can   deduct   rent   the  building.  You  will  recognize  P1  million  depreciation  expense  per  year.    
expenses,  you  must  be  able  to  prove  that  you  have  withhold  such  amount.  No   ! Exemption:   Non-­‐stock,   non-­‐profit   educational   institutions-­‐   they  
withholding  =  no  deduction   are  not  liable  to  pay  any  taxes.    
  ! When   these   institutions   construct   a   building   worth   P10   million,  
4. Kinds  of  allowable  deductions   they  have  the  option  to  outrightly  deduct  the  cost  of  the  building  
- It   would   depend   on   whether   you   are   an   individual   taxpayer   or   a   corporate   for  that  particular  year.    
taxpayer    
  o For   entities   not   exempted,   staggering   the   expenses   is   actually   more  
i. Personal  and  additional  deductions/exemptions  (Section  35)   beneficial  because  depreciation  is  a  deduction.  
- Equivalent  to  P50k  regardless  of  your  civil  status.   ! Example:   In   2014,   you   have   an   income   of   P1   million   and   you  
- Does  not  apply  to  corporate  taxpayers.   outrightly   recognize   the   P10   million   cost   of   the   building   as  
- Additional  deductions/exemptions  pertains  to  your  child.   expenses   of   that   year,   you   have   –P9   million.   You   don’t   tax   only  
o P25k  per  child   for   one   year.   But   if   you   spread   the   expenses   for   a   period   of   10  
th
o Up  to  the  4  child.   years,  that  will  be  more  beneficial  to  you.  
- Estate:  personal  exemption  up  to  P20k.  (to  be  discuss  later)    
  o Example:   You   have   a   building   worth   P1   million.   You   introduce  
ii. Itemized  deductions  (Section  34A-­‐K  and  34M)   improvements   to   the   building   which   are   permanent   in   nature   worth  
- You   are   going   to   enumerate   the   expenses   and   losses   related   to   your   P500k.   You   sell   the   building   together   with   the   improvements   for   P1.5  
business.   million.   Can   you   still   claim   depreciation   expenses   for   those  
  improvements?  No  because    
iii. Optional  Standard  Deduction  of  forty  percent  (40%)  of  the  Gross  Income.   1. if   that   building   is   recorded   as   a   capital   asset,   you  
- If   you   do   not   want   to   claim   the   itemized   deduction,   you   may   claim   the   are   not   allowed   to   claim   for   depreciation.  
optional   standard   deduction   which   is   equivalent   to   40%   of   the   gross   Depreciation  only  pertains  to  ordinary  asset.  
income.   2. If   you   sell   the   building   and   if   the   improvements  
- Both   itemized   deduction   and   optional   standard   deduction   can   be   availed   are   attached   to   the   building,   then   technically   you  
of  by  an  individual  taxpayer  or  by  a  corporation.  Provided,  that  in  the  case   sell   everything.   Ownership   is   already   transferred  
of   an   individual   taxpayer,   you   have   your   business   income   or   professional   to  another  person,  so  you  cannot  claim  expenses.  
income,  which  means  you  are  not  a  pure  compensation  income  earner.    
- Cannot   be   claimed   by   a   non-­‐resident   alien   not   engaged   in   trade   or   iii. Any  amount  expended  in  restoring  property  or  in  making  good  the  exhaustion  thereof  for  
business.   which  an  allowance  is  or  has  been  made;  or  
  - What  do  we  refer  as  allowance  is  or  has  been  made?  It  is  still  depreciation  expense.  
XVIII. Non-­‐deductible  Items,  (Section  36A  and  36B)   So  it  refers  to  MAJOR  REPAIRS  in  the  asset  which  understandably  extends  the  life  of  
i. Personal  living  or  family  expenses;   the  asset,  thus  you  must  record  depreciation  expense.  
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o Example:   This   building   (referring   to   the   law   building)   is   going   thru   d. Between  the  grantor  and  a  fiduciary  of  any  trust,  or  
retrofitting  to  extend  the  life  of  the  building,  is  the  cost  of  the  retrofitting   e. Between   fiduciary   of   a   trust   and   the   fiduciary   of   another   trust,   if   the   same  
deductible  immediately?   person  is  a  grantor  with  respect  to  each  trust;  or  
- No.   Make   it   in   staggered   basis   and   provide   an   allowance   for   f. Between  a  fiduciary  of  a  trust  and  a  beneficiary  of  such  trust.  
depreciation   based   on   the   extended   life   of   that   repaired   asset.    
Capitalized  ang  asset.  Otherwise,  if  the  repair  has  no  effect  on  the  life   Atty.   A:   the   reason   why   these   losses   from   sale   or   exchanges   are   not   to   be   deducted   is  
of  the  asset  then  it  is  an  outright  deductible.   because  in  the  above  instances  pertains  to  related  parties  and  under  the  tax  code,  there  
  is  a  presumption  that  if  it  a  related  party  transaction,  it  is  not  a  transaction  in  good  faith  
iv. Premium  paid  on  any  life  insurance  policy  covering  the  life  of  any  officer  or  employee  or   or   not   an   arm’s   length   transaction.   It’s   more   of   a   transaction   for   the   benefit   of   either   the  
of  any  person  financially  interested  in  any  trade  or  business  carried  on  by  the  taxpayer,   parties  
individual   or   corporate,   when   the   taxpayer   is   directly   or   indirectly   a   beneficiary   under    
such  policy.   Illustration:  if   there   is   a   sale   of   property   with   a   selling   price   of   2M   and   the   cost   is   1M.   So  
- We  are  talking  here  of  the  premiums  paid,  the  outflow  na.   therefore  you  have  a  loss  of  1M.  
- In  other  words,  if  the  taxpayer  is  the  one  who  took  the  life  insurance  and  he  is  also   - As   a   general   rule,   when   it   comes   to   losses   the   loss   of   1M   is   deductible.   Unless   it   falls  
the  beneficiary,  he  is  not  deductible.   under  those  6  instances  above.  
   
st
Illustration  1:   1  scenario:  
Life  Insurance   Insured   Beneficiary   Assured   Deductible  (?)   X  sold  the  property  to  Y  and  X  and  Y  are  siblings.  Can  you  deduct  a  loss  of  1M?  No,  
Premium   because  this  is  a  related-­‐party  transaction  
50K   President’s  life   Company  X   Company  X   No    
nd
of  Company  X   2  scenario:  
  Company   S   sold   the   property   to   Company   B,   and   there   is   a   loss   of   1M.   But   the  
Here,  Company  X  took  a  life  insurance  for  its  president  and  the  president  died  then  the   problem  is  silent.  Is  this  deductible?  Yes.  It  can  be  deducted.  
proceeds  thereof  will  go  back  to  Company  X.  Thus,  it  is  NOT  deductible  because  it  is  just    
rd
an  indemnity  of  the  loss  of  Company  X’s  president’s  life.  Of  course  it  is  the  premiums  paid   3  scenario:  
we  are  talking  here,  so  it  follows  that  it  is  just  return  OF  capital.   Mr.   Seller   sold   the   property   to   Company   B   and   Mr.   Seller   has   a   share   of   40%   of  
  Company   B,   and   there   is   a   loss   of   1M.   Is   this   deductible?   Yes.   It   can   be   deducted  
Illustration  2:   because  Mr.  Seller’s  share  is  not  more  than  50%.  
Life  Insurance   Insured   Beneficiary   Assured   Deductible  (?)    
th
Premium   4  scenario:  
50K   President’s  life   Estate  of   Company  X   Yes   If  Mr.  S  owns  60%  of  Company  B,  is  it  deductible?  No,  because  it  is  a  related-­‐party  
of  Company  X   President   transaction  and  there  is  a  presumption  that  it  is  not  an  arm’s  length  transaction.  It  is  
  not   an   arm’s   length   transaction   when   the   seller   is   not   compelled   to   sell   and   the  
Here,  the  beneficiary  is  the  estate  of  the  president.  So  the  proceeds  will  go  to  the  heirs  of   buyer  is  not  compelled  to  buy.  
the   president.   Can   Company   X   make   a   yearly   deduction   representing   the   yearly   premium   o But   if   the   sale   happens   during   liquidation   of   Company   B,   it   is   not  
of  50K?  Yes  because  it  is  really  an  outflow  on  its  part  and  nothing  of  it  will  inure  of  the   deductible.  
benefit  of  Company  X.    
th
  5  scenario:  
So  the  rule  here  is  that  the  premium  pay  on  life  insurance  policy  can  only  be  deducted  if   Company   S   owned   by   K,   L,   M,   N,   O,   sold   property   at   a   1M   loss   to   Company   B   is  
the  beneficiary  is  another  person  who  not  the  taxpayer  himself.   owned  by  O,  P,  Q,  R  ,  S,  T  with  the  following  shares—  
   
v. Losses  from  sales  or  exchanges  of  property  directly  or  indirectly-­‐   Company  S   Company  B  
a. Between   members   of   a   family   (brother,   sister   of   half   or   full   blood,   spouse,   K’s  share  –  10%   O’s  share  –  10%  
ascendants,  lineal  descendants).   L’s  share  –  10%   P’s  share  –  20%  
b. Except   in   case   of   distributions   in   liquidation,   between   an   individual   and   a   M’s  share  –  10%   Q’s  share  –  30%  
corporation—more  than  50%  in  value  of  the  outstanding  stock  of  each  of  which   N’s  share  –  10%   R’s  share  –  20%  
is  owned  directly  by  or  for  such  individual;   O’s  share  –  60%   T’s  share  –  20%  
c. Except  in  case  of  distributions  in  liquidation,  between  two  corporations—more    
than  50%  in  value  of  the  outstanding  stock  of  each  of  which  is  owned,  directly   So   we   have   here   an   interlocking   shareholder,   Mr.   O.   The   1M   loss   is   deductible  
or   indirectly,   by   or   for   same   individual,   if   either   one   of   such   corporation   is   a   because  Mr.  O  merely  own  10%  of  Company  B  and  the  law  states  that  it  must  more  
personal  holding  company  or  a  foreign  personal  holding  company;  or   than  50%  of  EACH  company.  
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th th
6   scenario:  same  facts  as  the  5  but  this  time,  O’s  share  in  Company  B  is  60%.  Is  
the  loss  of  1M  in  the  sale  deductible?  No,  it  is  not  deductible  because  O’s  share  in  
both  companies  is  more  than  50%.  
 
th
7   scenario:  same  facts  but  this  time,  another  company,  Company  Z,  owns  50%  of  
the   shares   of   Company   B.   A   corporation   is   a   shareholder   of   another   corporation   is  
allowed.  
 
O’s  share  in  Company  B  is  10%  while  he  also  has  60%  shares  in  Company  Z.  So  O’s  
share  in  Company  B  is  now  40%*.  Is  the  1M  loss  deductible?  Yes,  because  O’s  share  
in  both  companies  is  less  than  50%.  
 
*10%  in  Company  B  +  (50%  x  60%  in  Company  Z)  =  40%  is  O’s  share  in  Company  B.  
   
Atty.  A:  we  use  the  grandfather  rule,  wherein  Mr.  O  owns  a  direct  share  of  10%  
in  company  B  and  30%  (referring  to  the  50%  x  60%  in  Company  Z)  indirect  share  
in  Company  B.  
 
th th
8  scenario:  Same  facts  in  7  but  this  time,  Mr.  O  owns  99.9%  of  Company  Z.  How  
much   is   Mr.   O’s   share   in   Company   B?   60%*   and   therefore,   it   is   not   deductible  
because  his  share  is  more  than  50%  in  both  companies.  
 
*60%   =   10%   direct   share   +   50%   indirect   share   (referring   to   the   50%   x   99.9%   in  
Company  Z)  
 
-­‐-­‐  end  -­‐-­‐