82311911 montero tax ingles 2011 update

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Taxation One: Outline with Codals

Course OutlineTax I

A. In General

Taxable Income

The essential difference between capital and income is that capital is a fund; and

income is a flow. Capital is wealth, while income is the service of wealth. ropert! is a tree, income is the fruit. "abor is a tree, income is the fruit. Capital is a

tree, income the fruit.

Income means profits or gains. #$adrigal v %affert!&

Income ma! be defined as the amount of mone! coming to a person or corporationwithin a specified time, whether as pa!ment for services, interest or profit from

investment.o ' mere advance in the value of propert! of a person or a corporation in no

sense constitutes the (income) specified in the law. *uch advance constitutesand can be treated merel! as an increase in capital. #isher v Trinidad&

Cash dividends is taxed as income because it has been realied-received, while stoc

dividends is not taxed as income because it is merel! inchoate as it is a mereanticipation of income #it becomes income once !ou sell it&.

o One is an actual receipt of profits; the other is a receipt of a representation of

the increased value of the assets of a corporation. #isher v Trinidad&

When dealing with money or property, the questions you should ask are:

o Is this capital or is this income?

o Has it been realized/received or is it merely inchoate?

B. General Principles

*/C. 01. 2eneral rinciples of Income Taxation in the hilippines. 3 /xcept when otherwise provided in this Code:#'& ' citien of the hilippines residing therein is taxable on all income derived from sources within and without thehilippines;#4& ' nonresident citien is taxable onl! on income derived from sources within the hilippines;#C& 'n individual citien of the hilippines who is woring and deriving income from abroad as an overseas contract

worer is taxable onl! on income derived from sources within the hilippines: rovided, That a seaman who is acitien of the hilippines and who receives compensation for services rendered abroad as a member of thecomplement of a vessel engaged exclusivel! in international trade shall be treated as an overseas contract worer;#5& 'n alien individual, whether a resident or not of the hilippines, is taxable onl! on income derived from sourceswithin the hilippines;#/& ' domestic corporation is taxable on all income derived from sources within and without the hilippines; and#& ' foreign corporation, whether engaged or not in trade or business in the hilippines, is taxable onl! on incomederived from sources within the hilippines.

6ho are taxable on income derived from all sources, whether within or outside the

hilippines7 Taxed worldwide89. %esident citiens.

0. 5omestic corporations.

The other inds of taxpa!ers are subect to tax onl! on income derived from

hilippine sources.

Taxable Income Taxable Income

Citizenship & Residency Inside RP Outside RP

%esident Citien es es

pdated: 5ecember 9?, 0=99 @ $ice!&

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sources outside the hilippines shall no longer be reBuired to file information returnsfrom sources outside the hilippines beginning 0==9. #%% 30==9&

The phrase Gmost of the timeH shall mean that the said citien shall have sta!ed abroad

for at least 9F1 da!s in a taxable !ear.

The same exemption applies to an OC6 but as such worer, the time spent abroad isnot material for tax exemption purposes all that is reBuired is for the worer)s

emplo!ement contract to pass through and be registered with the O/'. #4I% %uling1130===&.


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To summarie, individual taxpa!ers are classified into:9. Citiens, who are divided into:

o %esident citiens @ those citiens whose residence is within the hilippines; and

o


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"ess: 5eductionsTaxable Income

Tax %ateTax 5ue

"now the ta# base and the ta# rate%

Onl! resident citiens and domestic corporations are taxed on income derived from

abroad. 6orldwide taxable8

The tax is imposed upon taxable compensation or emplo!ment income, business

income, and income derived from the practice of professions derived b! citiens and

resident aliens.

$arried individuals shall compute separatel! their individual income tax based on theirrespective total taxable income.

o If an! income cannot be definitel! attributed to, or identified as income

exclusivel! earned or realied b! either of the spouses, the same shall be divided

eBuall! between them for the purpose of determining their respective taxableincome.

$inimum wage earners are exempt from the pa!ment of income tax on their taxableincome. Jolida! pa!, overtime pa!, night shift differential pa!, and haard pa! receivedb! them are liewise exempt from income tax.

' non3resident alien individual engaged in trade or business in the hilippines is subect

to the income tax in the same manner as an individual citien and a resident alien ontaxable income received from sources within the hilippines.

or non3resident aliens not so engaged, the tax is

o 0L of the entire or gross income received from sources within the hilippines

and

o 9L of the gross income received as compensation, salaries, and other

emoluments b! reason of his emplo!ment b!:

regional or area headBuarters and regional operating headBuarters of

multinational corporations; offshore baning units established b! a foreign corporation in the

hilippines; or

b! foreign petroleum service contractor or subcontractors operating in the

hilippines. #*ec 0 #'3/&&

&inal income ta# ' interests, royalties, awards, dividends, capital gains on sale o! shares,realty!ec "#. $B% Rate o Tax on Certain Passie Income.#9& Interests, %o!alties, ries, and Other 6innings. 3 ' final tax at the rate of twent! percent #0=L& is hereb!imposed upon the amount of interest from an! currenc! ban deposit and !ield or an! other monetar! benefit fromdeposit substitutes and from trust funds and similar arrangements; ro!alties, except on boos, as well as otherliterar! wors and musical compositions, which shall be imposed a final tax of ten percent #9=L&; pries #exceptpries amounting to Ten thousand pesos #9=,===& or less which shall be subect to tax under *ubsection #'& of

*ection 0?; and other winnings #except hilippine Charit! *weepstaes and "otto winnings&, derived from sourceswithin the hilippines: rovided, however, That interest income received b! an individual taxpa!er #except anonresident individual& from a depositor! ban under the expanded foreign currenc! deposit s!stem shall besubect to a final income tax at the rate of seven and one3half percent #D 9-0L& of such interest income: rovided,further, That interest income from long3term deposit or investment in the form of savings, common or individualtrust funds, deposit substitutes, investment management accounts and other investments evidenced b! certificatesin such form prescribed b! the 4ango *entral ng ilipinas #4*& shall be exempt from the tax imposed under this*ubsection: rovided, finall!, That should the holder of the certificate pre3terminate the deposit or investmentbefore the fifth #th& !ear, a final tax shall be imposed on the entire income and shall be deducted and withheld b!the depositor! ban from the proceeds of the long3term deposit or investment certificate based on the remainingmaturit! thereof:

$ice! Ingles0' #0C& 'teneo "aw 0=90'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ice!&

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our #?& !ears to less than five #& !ears 3 L;

Three #1& !ears to less than #?& !ears 3 90L; and"ess than three #1& !ears 3 0=L

#0& Cash and-or ropert! 5ividends 3 ' final tax at the following rates shall be imposed upon the cash and-or

propert! dividends actuall! or constructivel! received b! an individual from a domestic corporation or from a ointstoc compan!, insurance or mutual fund companies and regional operating headBuarters of multinationalcompanies, or on the share of an individual in the distributable net income after tax of a partnership #except ageneral professional partnership& of which he is a partner, or on the share of an individual in the net income aftertax of an association, a oint account, or a oint venture or consortium taxable as a corporation of which he is amember or co3venturer:

*ix percent #L& beginning Manuar! 9, 9EEF;/ight percent #FL& beginning Manuar! 9, 9EEE; and

Ten percent #9=L beginning Manuar! 9, 0===.

rovided, however, That the tax on dividends shall appl! onl! on income earned on or after Manuar! 9, 9EEF.Income forming part of retained earnings as of 5ecember 19, 9EED shall not, even if declared or distributed on orafter Manuar! 9, 9EEF, be subect to this tax.

#C& Capital 2ains from *ale of *hares of *toc not Traded in the *toc /xchange. 3 The provisions of *ection 1E#4&notwithstanding, a final tax at the rates prescribed below is hereb! imposed upon the net capital gains realied

during the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc in a domesticcorporation, except shares sold, or disposed of through the stoc exchange.


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Aliens

9. Interest under the expanded foreign currenc! deposit s!stem #see %%

9=3EF below& )onresident citizens: e#empt

D.L #vs exemptfor nonresident

aliens engaged in

trade-bi&

0. %o!alt! from boos, literar! wors, musical compositions 9=L

1. %o!alt! other than above 0=L

?. Interest on an! current ban deposit, !ield or other monetar! benefitsfrom deposit substitute, trust fund similar arrangement

0=L

. rie exceeding 9=,=== 0=L

. Other winnings, except hil Charit! *weepstaes "otto 0=L

D. 5ividend from a domestic corp, or from a oint stoc compan!,

insurance or mutual fund compan!, regional operating headBuarters ofmultinational compan! or share in the distributive net income after tax o

a partnership #except a general professional partnership&, oint stoc oroint venture or consortium taxable as a corporation

*ut what about dividends !rom !oreign corporations !or citizens

+not resident aliens?6ell, the income here enters into the

computation for *ec 0? #a& tax calendar. or resident aliens, the!

are not taxed since it)s income derived from abroad.

9=L #vs 0=L fornon3resident aliens

engaged intrade-bi&

F. Interest on long3term deposit or investment in bans #with maturit! of !ears or more&

exempt

rie @ the result of an effort #lie a prie in a beaut! contest&6inning @ the result of a transaction where the outcome depends upon

chance #lie betting&5eposit substitute @ a means of borrowing mone! from the public #0= or

more individual or corporate lenders& other than b! wa! of deposit withbans through the issuance of debt instruments #lie baner)s

acceptances, promissor! notes, repurchase agreements, certificates ofassignment or participation&

Tax Rate on Interest Income rom 'orei(n Currency )eposit $RR*+,-%

9. Interest income actuall! received b! a resident citien or resident alien

from C5

D.L final

withholding tax

0. If it was deposited b! an OC6 or seaman or nonresident citien /xempt

1. If it was in a ban account in the oint names of an OC6 and hisspouse #who is a resident&

=L exempt-=L final

withholding taxof D.L

?. Interest income actuall! received b! a domestic corporation or

resident foreign corporation from C5

D.L final

withholding tax

Interest income which is actuall! or constructivel! received b! a resident citien of the

hilippines or b! a resident alien individual from a foreign currenc! ban deposit will be

subect to a final withholding tax of D.L. The depositor! ban will withhold and remitthe tax. If a ban account is ointl! in the name of a non3resident citien, =L of the

interest income from such ban deposit will be treated as exempt while the other =Lwill be subect to a final withholding tax of D.L. The %egulations will appl! on taxable

income derived beginning Manuar! 9, 9EEF pursuant to the provisions of *ection F of %'F?0?. In case of deposits which were made in 9EED, onl! that portion of interest which

was actuall! or constructivel! received b! a depositor starting Manuar! 9, 9EEF is


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taxable. #%% 9=3EF&

Tax Rate on Capital Gains

1. On sale of shares of stoc of a domestic corporation )-.

listed and )-. traded thru a local stoc exchange held as

a capital asset,

o Capital gains not over 9==,===o Capital gains in excess of 9==,=== #see %% 30==F

below&

L of the net capital gains9=L of the net capital gains

0. On sale of real propert! in the hilippines held as a capital

asset #see %% F3EF below& L of the gross selling

price, or the current maretvalue at the time of sale,

whichever is higher

Tax Rate on Income rom !ale/ Barter/ 0xchan(e orother )isposition o !hares o !toc1 $RR 2,"++%

If shares of stoc are listed and traded through the local

stoc exchange

P of 9L #or .==L& of the

gross selling price or grossvalue in mone! of theshares of stoc

If shares not tradedthrough the local stoc exchange

o Capital gains not over 9==,===

o Capital gains in excess of 9==,===

L of the net capital gains

9=L of the net capital gains

6ho are liable7

9. Individual taxpa!er, whether citien or alien;0. Corporate taxpa!er, whether domestic or foreign;

1. Other taxpa!ers not falling under #9& and #0& above, such as estate, trust, trustfunds and pension funds, among others.

6ho are exempt79. 5ealers in securities

0. Investors in shares of stoc in a mutual fund compan!, as defined in *ec 00 #44&,

and *ection 0#s& of these %egulations, in ocnnection with the gains realied b! saidinvestor upon redemption of said shares of stoc in a mutual fund compan!l and

1. 'll other persons, whether natural or uridical, who are specificall! exempt from

national internal revenue taxes under existing investment incentives and otherspecial laws.


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3o4 to determine the tax base o dispositiono stoc1 $RR 2,"++%

'air 5ar1et 6alue

*ales of stoc listed and traded through the "*/ $Q is the actual selling price

*ales of stoc listed but not traded through the

"*/

$Q is the closing price on the da!

when the shares were sold, transferred,etc #if no sale was made on that da! in

the "*/, then the closing price on theda! nearest to the date of sale,

transfer, or exchange of the saidshares&

*ales of stoc not listed and not traded throughthe "*/

$Q is the boo value of the shares ofstoc as shown in the financial

statements dul! certified b! anindependent C' nearest to the date of

sale

'inal Tax Rate on !ales/ 0xchan(es/ or Transers or RealProperties Classiied as Capital Assets $RR ,-%

*ale of real propert! in the hilippines L of the gross sellingprice, or the current

maret value at the time

of sale, whichever ishigher

If sale was made to the government or to 2OCCs /ither L of the gross

selling price-currentmaret value orunder

the normal income taxrate, taxpa!er)s option

Creditable 7ithholdin( Tax on !ales/ 0xchan(es or

Transers o Real Properties classiied as Ordinary Assets

$RR ,-%9. If the seller is habitually engaged in the real estate business

o *elling price is less than ==,===

o *elling price is ==,=== to 0m

o *elling price is above 0m

9.L

1LL of gross selling

price-current maretvalue, whichever is

higher

0. If the seller is not habituall! engaged in the real estatebusiness

D.L of gross sellingprice-current maret

value, whichever is

higher

1. If the seller is exempt from creditable withholding tax as per%% 03EF 0xempt

Conditions to be exempt rom capital (ains tax o 28 on the sale/ exchan(e/ or

disposition o a principal residence $RR *9,--%9. The proceeds from the sale, exchange, or disposition of his principal residence must

be full! utilied in acBuiring or construing a new principal residence within 9Fmonths. There must be proof.

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1. The historical cost of his old principal residence shall be carried over to the cost basisof his new residence

?. If there is no full utiliation, he shall be liable for the deficienc! capital gains tax ofthe utilied portion

. If the principal residence is disposed in exchange for a condo, and if it is used as hisnew residence, then he is exempt

. The L capital gains tax otherwise due must be deposited in escrow with anauthoried agent ban, and can onl! be released when sufficient proof is shown that

the proceeds have been full! utilied within 9F months.

6hat is the principal residence an!wa!7 #RR *#,"+++%

o It is the dwelling house, where the husband or wife or unmarried individual

resides; actual occupanc! is not interrupted or abandoned b! temporar! absence

due to travel, studies, or wor abroad

o If the ownership of the land and the dwelling house belong to different persons,

onl! the dwelling house shall be treated as principal residence

a!ment of capital gains tax on foreclosure of mortgaged propert! #RR #,--%

o If the mortgagor exercises his right of redemption within 9 !ear @ no capital

gains tax because none has been derived and no transfer of propert! was

realied In case of non3redemption, the capital gains will be due based on the bid price of the

highest bidder

ersonal and 'dditional /xemptions

!0C. 9:.Allowance of Personal Exemption for Individual Taxpayer. -

$A%In General.3 or purposes of determining the tax provided in *ection 0? #'& of this Title, there shall beallowed a basic personal exemption amounting to =,=== for each individual taxpa!er.

In the case of married individuals where onl! one of the spouses is deriving gross income, onl! such spouse shallbe allowed the personal exemption.

$B%Additional Exemption for Dependents.3 There shall be allowed an additional exemption of twent! fivethousand pesos #0,===& for each dependent not exceeding four #?&.

The additional exemption for dependent shall be claimed b! onl! one of the spouses in the case of marriedindividuals.

In the case of legall! separated spouses, additional exemptions ma! be claimed onl! b! the spouse whohas custod! of the child or children: rovided, That the total amount of additional exemptions that ma! be claimedb! both shall not exceed the maximum additional exemptions herein allowed.

or purposes of this *ubsection, a AdependentA means a legitimate, illegitimate or legall! adopted childchiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!3one #09& !ears ofage, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self3supportbecause of mental or ph!sical defect. #'mended b! %' E=?&

Personal and additional exemption or indiidual taxpayer

4asic personal exemption for each individual taxpa!er

o If married and onl! one of the spouses is deriving gross income,

onl! such spouse shall be allowed the personal exemption.

=,===

'dditional exemption for each dependent, not exceeding four #?&

o Claimed b! onl! one spouse in case of married individuals

o If legall! separated, additional exemptions claimed onl! b!

spouse who has custod!; should not exceed maximum

additional exemptions allowed

0,=== per

dependent

/xemption statutes are not retroactive. #ensacola v CI%&

5iscounts for senior citiens is now treated as tax deductions, as per %' E0D. This


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sucs for the taxpa!er because he doesn)t get the Gpeso for pesoH benefit which hewould have gotten if it were considered a tax credit as before. #$./. Joldings Corp v CI%

CT'&

*enior Citiens are

o %esident citiens

o 't least = !ears old

The! are not exempt from income taxes unless the! are consideredminimum wage earners. #%' EEE?, which also too out the previous

=,=== reBuirement&

Change of status

Sec 35. (C) Change of Status.- If the taxpa!er marries or should have additional dependent#s& as defined above duringthe taxable !ear, the taxpa!er ma! claim the corresponding additional exemption, as the case ma! be, in full for

such !ear.If the taxpa!er dies during the taxable !ear, his estate ma! still claim the personal and additional

exemptions for himself and his dependent#s& as if he died at the close of such !ear.If the spouse or an! of the dependents dies or if an! of such dependents marries, becomes twent!3one

#09& !ears old or becomes gainfull! emplo!ed during the taxable !ear, the taxpa!er ma! still claim the sameexemptions as if the spouse or an! of the dependents died, or as if such dependents married, became twent!3one

#09& !ears old or became gainfull! emplo!ed at the close of such !ear.

ersonal exemption allowable to nonresident alien individuals!ec. 9: $)% Personal 0xemption Allo4able to ;onresident Alien Indiidual. 3 ' nonresident alien individual

engaged in trade, business or in the exercise of a profession in the hilippines shall be entitled to a personalexemption in the amount eBual to the exemptions allowed in the income tax law in the countr! of which he is asubect 3 or citien, to citiens of the hilippines not residing in such countr!, not to exceed the amount fixed inthis *ection as exemption for citiens or resident of the hilippines: rovided, That said nonresident alien shouldfile a true and accurate return of the total income received b! him from all sources in the hilippines, as reBuiredb! this Title.

Personal 0xemptions allo4able to

nonresident alien indiiduals

If engaged in trade, business or in the exercise of

a profession

/ntitled to a personal exemption in the

amount eBual to the exemptionsallowed in the income tax law of his

countr! for ilipinos, but it shouldn)texceed the amount fixed here for

exemptions

If not engaged in trade, business or in the exercise

of a profession


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permits, the said individual shall eep such records pertaining to his gross sales or gross receipts, or the saidcorporation shall eep such records pertaining to his gross income as defined in *ection 10 of this Code during thetaxable !ear, as ma! be reBuired b! the rules and regulations promulgated b! the *ecretar! of inance, uponrecommendation of the Commissioner.

Optional standard deduction is the deduction which an individual other than a non3resident alien, or a corporation, subect to income tax, ma! elect in an amount not

exceeding ?=L of his gross sales or gross receipts, as the case ma! be, or acorporation, in an amount not exceeding ?=L of its gross income, in lie of taing

itemied deductions.

The O*5 ma! be availed of b!:

o ' citien, whether resident or non3resident

o %esident alien, and

o Taxable estate and trust.

' non3resident alien cannot claim O*5.

The O*5 allowed to individual taxpa!er shall be a maximum of ?=L of gross sales or

gross receipts during the taxable !ear.

o If one uses the accrual basis of accounting for his income and deductions, the

O*5 shall be based on the gross sales during the taxable !ear.

o If one uses the cash basis, the O*5 shall be based on his gross receipts duringthe taxable !ear.

o The law is specific that for individual taxpa!ers the basis of the ?=L O*5 shall be

gross sales or gross receipts, not gross income, for which reason the Gcost ofsalesH and the Gcost of servicesH are not allowed to be deducted for purposes of

determining the basis of the O*5.

o or other individual taxpa!ers allowed b! law to report their income and

deductions under a different method of accounting, the gross sales or grossreceipts shall be determined in accordance with the said acceptable method of

accounting.

/xample:

o *uppose a retailer of goods, an individual, whose accounting method is under theaccrual basis has a gross sales of 9m with a cost of sales amounting to F==.

the computation of the O*5 shall be determined as follows:2ross *ales 9,===,===

ess: 0o12 333333333333334asis of the O*5 9,===,===

# -2 4ate +ma# .?=O*5 'mount ?==,===

If the taxpa!er opts to use the O*5 in lieu of the itemied deductions allowed

under *ec 1? of the Tax Code, his net taxable income shall be as follows:2ross *ales 9,===,===

ess: 0o12 3333333333332ross *ales-2ross Inome9,===,===

ess: -2 +ma# ?==,===


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taxpa!er for himself, including his famil!, shall be allowed as a deduction from his gross income: $rovided, Thatsaid famil! has a gross income of not more than Two hundred fift! thousand pesos #0=,===& for the taxable!ear: $rovided, !inally, That in the case of married taxpa!ers, onl! the spouse claiming the additional exemptionfor dependents shall be entitled to this deduction.

The taxpa!er is allowed a deduction of 0,?==-famil! or 0==-month for health and-orhospitaliation insurance premiums, provided:

o *aid famil!)s gross income is not more than 0=,=== for the taxable !ear.

If married, onl! the spouse claiming the additional exemption for dependents can availof this.

/xclusions and deductions #discussion from 5e "eon)s boo&

/xclusions are incomes that are exempt from the tax. The! are not to be included in the

tax return unless information regarding it is specificall! called for.

o /xamples:

"ife insurance proceeds paid to beneficiaries upon the death of the

insured.

Qalue of the propert! acBuired b! inheritance or donation, because it issubect to estate or donor)s tax.

%etirement benefits, pensions, etc, received b! government officials andemplo!ees from the 2*I* and *** in recognition of their services. *o withretirement benefits of private firms, under certain conditions.

ries and awards made primaril! in recognition of religious, charitable,

scientific, educational, artistic, etc, competitions and tournaments.

Christmas bonus, 91thmonth pa!, productivit! incentives, and other

benefits received up to a max of 1=,===.

2ains from the sale or retirement of bonds or other certificates ofindebtedness with a maturit! of more than !ears.

5eductions are items or amounts which the law allows to be deducted under certain

conditions from the gross income of a taxpa!er in order to arrive at the taxable income.

4oth reduce actual gross income although exclusions are not included in the income tax

return. *ome general principals governing deductions include:

o The taxpa!er seeing a deduction must point to some specific provision of the

statute authoriing the deduction; and

o Je must be able to prove that he is entitled to the deduction authoried or

allowed.

The! are allowed onl! where there is a clear provision in the statute for the

deduction claimed.

Taxable gross income is affected b! exclusions because the latter are omitted from theformer and are not reported on the income tax return but is not affected b! deductions

because the! are subtracted after gross income is determined and are reported on thereturn.

Rinds of deductions:

9. 5eductions from compensation income.0. 5eductions from business-professional income.

1. 5eductions from corporate income.

?. *pecial deductions. 5eductions allowed b! special laws.

Tax on non3resident aliens


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$A% "onresident Alien En#a#ed in trade or $usiness %ithin the Philippines.3

#9& In 1eneral. 3 ' nonresident alien individual engaged in trade or business in the hilippines shall be subect to

an income tax in the same manner as an individual citien and a resident alien individual, on taxable incomereceived from all sources within the hilippines. ' nonresident alien individual who shall come to the hilippines

and sta! therein for an aggregate period of more than one hundred eight! #9F=& da!s during an! calendar !ear

shall be deemed a Nnonresident alien doing business in the hilippinesN. *ection 00 #2& of this Codenotwithstanding.

#0& Cash and-or ropert! 5ividends from a 5omestic Corporation or Moint *toc Compan!, or Insurance or $utual

und Compan! or %egional Operating JeadBuarters or $ultinational Compan!, or *hare in the 5istributable pdated: 5ecember 9?, 0=99 @ $ice!&

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6hat about dividends from foreign corps7 /xempt. pdated: 5ecember 9?, 0=99 @ $ice!&

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contractor or b! a foreign service subcontractor engaged in petroleum operations in the hilippines shall be liableto a tax of fifteen percent #9L& of the salaries, wages, annuities, compensation, remuneration and otheremoluments, such as honoraria and allowances, received from such contractor or subcontractor: $rovided,however,That the same tax treatment shall appl! to a ilipino emplo!ed and occup!ing the same position as analien emplo!ed b! petroleum service contractor and subcontractor.

'n! income earned from all other sources within the hilippines b! the alien emplo!ees referred to under

*ubsections #C&, #5& and #/& hereof shall be subect to the pertinent income tax, as the case ma! be, imposedunder this Code.

!pecial Aliens

9. /mplo!ed b! regional or area headBuarters regionaloperating headBuarters established in the hilippines b!

multinational;

9L on gross income

0. /mplo!ed b! offshore baning units 9L on gross income

1. ermanent resident of a foreign countr! but who is emplo!ed

and assigned in the hilippines b! a foreign service contractor or

b! a foreign service subcontractor engaged in petroleumoperations in the hilippines

9L

rovided the same tax shall appl! to ilipinos emplo!ed and occup!ing the same position

as these aliens.

These appl! onl! to positions of a highly technical or highly managerial nature. #6tty5

9ontero

'll income earned from all other sources within the hilippines b! the special alien

emplo!ees shall be subect to the pertinent income tax imposed b! the Code.

Tips on answeringThought process in answering problems:

9. Is this income7 If not, then it)s not reall! a income tax problem.0. 6ho)s the taxpa!er7 'nd what)s the source7 %efer to *ec 018

1. 6hat)s the specific rate7 *ee sec 0?308

or example, what is the tax rate of on income derived from dividends from foreigncorporations for 9. Citiens 0. %esident aliens and 1. pdated: 5ecember 9?, 0=99 @ $ice!&

16


17/91

+amdg


). )einitions *ection 00, Tax Code

5efinition of corporations!ec "" $B%The term AcorporationA shall include partnerships, no matter how created or organied, oint3stoccompanies, oint accounts #cuentas en participacion&, association, or insurance companies, but does not includegeneral professional partnerships and a oint venture or consortium formed for the purpose of undertaing

construction proects or engaging in petroleum, coal, geothermal and other energ! operations pursuant to anoperating consortium agreement under a service contract with the 2overnment. A2eneral professionalpartnershipsA are partnerships formed b! persons for the sole purpose of exercising their common profession, no

part of the income of which is derived from engaging in an! trade or business.

Corporations include:

o artnerships, no matter how created or organied

o Moint3stoc companies

o Moint accounts

o 'ssociations

o Insurance companies

It does not include

o 2eneral professional partnerships;

o Moint venture or consortium formed for the purpose of undertaing construction

proects, or engaging in petroleum, coal, geothermal and other energ! operations

pursuant to an operating or consortium agreement under a service contract withthe government.

%emember !our partnership lessons8 #'I*CO and ascual cases&

'll co3owernships are not deemed unregistered partnerships.#Obillos v CI%&

The moment inheritance shares are used as part of the common assets to be used in

maing profits, it is considered part of the taxable income of an unregisteredpartnership. #Ona v CI%&

%eBuisites of a MQ:9. Contribution b! each part!

0. rofits are shared among the parties

1. There is oint right of mutual control over the subect matter?. There is a single business transaction rather than a general or continuous transaction

#4I% %uling 19D3E0, in this case, the first agreement of the two parties to construct theD= 4ldg was not taxable because the! had not derived income-profits from it. the

construction of the building was mere return of the capital which the! shelled out.Jowever, once the two corporations were placed under one sole management to operate

the business affairs of the two, the MQ was taxable separate from the two corporationscomprising it. The distribution b! the MQ to the two constituent corporations was not

taxable because it was considered intra3corporate dividends.&

0. Income Tax Rates!0C. "=. 'ates of Income tax on Domestic +orporations. -

#'& In 2eneral. 3 /xcept as otherwise provided in this Code, an income tax of thirt!3five percent #1L& is hereb!imposed upon the taxable income derived during each taxable !ear from all sources within and without the

hilippines b! ever! corporation, as defined in *ection 00#4& of this Code and taxable under this Title as acorporation, organied in, or existing under the laws of the hilippines: rovided, That effective Manuar! 9, 0==E,the rate of income tax shall be thirt! percent #1=L&.In the case of corporations adopting the fiscal3!ear accounting period, the taxable income shall be computedwithout regard to the specific date when specific sales, purchases and other transactions occur. Their income andexpenses for the fiscal !ear shall be deemed to have been earned and spent eBuall! for each month of the period.

The corporate income tax rates shall be applied on the amount computed b! multipl!ing the number of monthscovered b! the new rates within the fiscal !ear b! the taxable income of the corporation for the period, divided b!


17


18/91

+amdg


twelve.rovided, further, That the resident, upon the recommendation of the *ecretar! of inance, ma! effective Manuar!9, 0===, allow corporations the option to be taxed at fifteen percent #9L& of gross income as defined herein, afterthe following conditions have been satisfied:#9& ' tax effort ratio of twent! percent #0=L& of 2ross


19/91

+amdg


CoG! or a Tradin( or 5erchandise Concern

Invoice cost of goods sold

Import duties

reight in transporting the goods to the place where the goods are actuall! sold

Insurance while the goods are in transit

CoG! or a 5anuacturin( Concern'll costs of production of finished goods such as raw materials, direct labor manufacturing

overhead

reight cost

Insurance premiums

Other costs incurred to bring the raw materials to the factor! or warehouse

Gross Income Computation or a !erice Concern

2ross *ales

"ess: *ales %eturns

5iscounts

'llowances

Cost of *ervices #all direct costs expenses necessaril! incurred to provide theservices reBuired b! the customers clients including:

*alaries emplo!ee benefits of personnel, consultants specialists

directl! rendering the service

Cost of facilities directl! utilied in providing the service such asdepreciation or rental of eBuipment use cost of supplies

If it)s a ban, interest expense is included

Total 2ross income of a service concern

'. Proprietary 0ducational Institutions and 3ospitals

#4& roprietar! /ducational Institutions and Jospitals. 3 roprietar! educational institutions and hospitals which are

nonprofit shall pa! a tax of ten percent #9=L& on their taxable income except those covered b! *ubsection #5&hereof: rovided, that if the gross income from unrelated trade, business or other activit! exceeds fift! percent#=L& of the total gross income derived b! such educational institutions or hospitals from all sources, the taxprescribed in *ubsection #'& hereof shall be imposed on the entire taxable income. or purposes of this *ubsection,the term Nunrelated trade, business or other activit!N means an! trade, business or other activit!, the conduct ofwhich is not substantiall! related to the exercise or performance b! such educational institution or hospital of itsprimar! purpose or function. ' Aroprietar! educational institutionA is an! private school maintained andadministered b! private individuals or groups with an issued permit to operate from the 5epartment of /ducation,Culture and *ports #5/C*&, or the Commission on Jigher /ducation #CJ/5&, or the Technical /ducation and *ills5evelopment 'uthorit! #T/*5'&, as the case ma! be, in accordance with existing laws and regulations.

roprietar! educational institution is:

o 'n! private school maintained administered b! private individuals or groups

o 6ith an issued permit to operate from the 5/C* or CJ/5 or T/*5'

Tax rate of proprietar! educationalinstitutions and hospitals

9=L on their taxable income #except for passiveincome&, or1=L on their entire taxable income if the gross

income from unrelated trade, business or otheractivit! exceeds =L of the total gross income of

the institution

>nrelated trade, business or other activit! meanso 'n! trade, business or other activit!


19


20/91

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o The conduct of which is not substantially related to the exercise or performance

b! such its institution of its primar! purpose or function.

or non3stoc, non3profit educational institutions, all revenues use actuall!, directl! and

exclusivel! for educational purposes are exempt.

o Their exemption refers onl! to revenues derived from assets used actuall!,

directl! and exclusivel! for educational purposes.

o Income from cafeterias, canteens boostores are also exempt if the! areowned operated b! the educational institution and are located within the schoolpremises.

o Jowever, the! shall be subect to internal revenue taxes on income from trade,

business or other activit!, the conduct of which is not related to the exercise or

performance b! such educational institutions of their educational purposes orfunctions, i. e. rental pa!ment from their building-premises. #RR =2,"++9%

or non3stoc, non3profit corporations who are exempt, the! are still liable for taxes on:

o Income derived from an! of their real properties #rental pa!ment form their

building premises&

o 'n! activit! conducted from profit regardless of disposition thereof

o Interest income from an! ban deposits or !ield on deposit substitutes #final tax

of 0=L&o If its foreign currenc! deposit, final tax of D.L

o The! shall also be withholding agents for their emplo!ee)s compensation income

subect to withholding tax #RR =2,"++9%

or private educational institutions, the! are exempt from Q'T, but the! must be

accredited with either 5/C* or CJ/5.o Jowever, income derived from trade, business or other activit! is still taxable.

o Their ban deposits and foreign currenc! deposits are exempt from withholding

taxes but the! must show proof that such income is used to fund proposed

proects for their institution)s improvement.

o The! shall also be the withholding agents for their emplo!ee)s compensation

income subect to withholding tax.

G. GOCCs

!ec. "= $C% Government-owned or +ontrolled-+orporations, A#encies or Instrumentalities5 3 Theprovisions of existing special or general laws to the contrar! notwithstanding, all corporations, agencies, orinstrumentalities owned or controlled b! the 2overnment, except the 2overnment *ervice Insurance *!stem#2*I*&, the *ocial *ecurit! *!stem #***&, the hilippine Jealth Insurance Corporation #JIC&, and the hilippineCharit! *weepstaes Office #C*O&, shall pa! such rate of tax upon their taxable income as are imposed b! this*ection upon corporations or associations engaged in s similar business, industr!, or activit!.

2OCCs are taxed on the same rate upon their taxable income upon corporations or

associations engaged in similar business, industr!, or activit!.

o /xempt 2OCCs:

2*I* ***

JIC

C*O

's per %' E11D, '2CO% was deleted from the list of exempt 2OCCs.

3. Passie Income

!ec. "= $)% 'ates of Tax on +ertain Passive Incomes. -


20


21/91

+amdg


#9& Interest !rom eposits and ield or any other 9onetary *ene!it !rom eposit 2ubstitutes and !rom .rust &undsand 2imilar 6rrangements, and 4oyalties53 ' final tax at the rate of twent! percent #0=L& is hereb! imposed uponthe amount of interest on currenc! ban deposit and !ield or an! other monetar! benefit from deposit substitutesand from trust funds and similar arrangements received b! domestic corporations, and ro!alties, derived fromsources within the hilippines: $rovided, however, That interest income derived b! a domestic corporation from adepositor! ban under the expanded foreign currenc! deposit s!stem shall be subect to a final income tax at the

rate of seven and one3half percent #D 9-0L& of such interest income.#0& 0apital 1ains !rom the 2ale o! 2hares o! 2tock )ot .raded in the 2tock 7#change5 3' final tax at the ratesprescribed below shall be imposed on net capital gains realied during the taxable !ear from the sale, exchange orother disposition of shares of stoc in a domestic corporation except shares sold or disposed of through the stocexchange:! on Income )eried under the 0xpanded 'C)!ystem

'inal Tax


21


22/91

+amdg


9. Income derived b! a depositor! 4's, etc

exempt

0. Interest income from foreign currenc! loans granted b! a ban toresidents other than O4>s

9=L

Income of non3residents #individuals or corporations& from transactions with depositor!

ban under the expanded C5 s!stem are exempt.

6hat are deposit substitutes7#& The term Adeposit substitutesA shall mean an alternative from of obtaining funds from the public #the term

NpublicN means borrowing from twent! #0=& or more individual or corporate lenders at an! one time& other thandeposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account,for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or theneeds of their agent or dealer. These instruments ma! include, but need not be limited to banersN acceptances,promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b! and betweenthe 4ango *entral ng ilipinas #4*& and an! authoried agent ban, certificates of assignment or participation

and similar instruments with recourse: rovided, however, That debt instruments issued for interban call loanswith maturit! of not more than five #& da!s to cover deficienc! in reserves against deposit liabilities, includingthose between or among bans and Buasi3bans, shall not be considered as deposit substitute debt instruments.

' deposit substitute is a means of borrowing mone! from the public #0= or more

individual or corporate lenders& other than b! wa! of deposit with bans through the

issuance of debt instruments.

*ale of shares

Tax Rate on Income rom !ale/ Barter/ 0xchan(e or

other )isposition o !hares o !toc1 $RR 2,"++%

If shares of stoc are listed and traded through the local

stoc exchange

P of 9L #or .==L& of the

gross selling price or grossvalue in mone! of the

shares of stoc

If shares not tradedthrough the local stoc exchange



L of the net capital gains9=L of the net capital gains

C5>

Income of non3residents #individuals or corporations& from transactions with depositor!ban under the expanded C5 s!stem are exempt.

Intercorporate dividends

5ividends received b! a domestic corporation from another domestic corporation shallnot be subect to tax.

o 6h!7 "aw assumes that the dividends received will be inected to the capital,

which will eventuall! be taxed when the corporation gets income from the use of

the capital.

*ale of realt!

'inal Tax Rate on !ales/ 0xchan(es/ or Transers or RealProperties Classiied as Capital Assets $RR ,-%

*ale of real propert! in the hilippines L of the gross selling

price, or the currentmaret value at the time

of sale, whichever ishigher

If sale was made to the government or to 2OCCs /ither L of the grossselling price-current


22


23/91

+amdg


maret value orunder

the normal income tax

rate, taxpa!er)s option

Creditable 7ithholdin( Tax on !ales/ 0xchan(es or

Transers o Real Properties classiied as Ordinary Assets

$RR ,-%9. If the seller is habitually engaged in the real estate business

o *elling price is less than ==,===

o *elling price is ==,=== to 0m

o *elling price is above 0m

9.L1L

L of gross sellingprice-current maret

value, whichever ishigher

0. If the seller is not habituall! engaged in the real estatebusiness

D.L of gross sellingprice-current maret

value, whichever ishigher

1. If the seller is exempt from creditable withholding tax as per%% 03EF 0xempt

If the mortgagor exercises his right of redemption within 9 !ear, no capital gains tax.

In case of non3redemption, the capital gains will be due based on the bid price of the

highest bidder. #%% ?3EE&

I. 5inimum Corporate Income Tax $5CIT%!ec "= $0% *inimum +orporate Income Tax on Domestic +orporations5 '#9& Imposition o! .a#53 ' minimum corporate income tax of two percent #0L= of the gross income as of the end ofthe taxable !ear, as defined herein, is hereb! imposed on a corporation taxable under this Title, beginning on thefourth taxable !ear immediatel! following the !ear in which such corporation commenced its business operations,when the minimum income tax is greater than the tax computed under *ubsection #'& of this *ection for the

taxable !ear.#0& 0arry &orward o! 7#cess 9inimum .a#. 3 'n! excess of the minimum corporate income tax over the normal

income tax as computed under *ubsection #'& of this *ection shall be carried forward and credited against thenormal income tax for the three #1& immediatel! succeeding taxable !ears.#1& 4elie! !rom the 9inimum 0orporate Income .a# 8nder 0ertain 0onditions. 3 The *ecretar! of inance is hereb!authoried to suspend the imposition of the minimum corporate income tax on an! corporation which suffers losses

on account of prolonged labor dispute, or because of force maeure, or because of legitimate business reverses.The *ecretar! of inance is hereb! authoried to promulgate, upon recommendation of the Commissioner, thenecessar! rules and regulation that shall define the terms and conditions under which he ma! suspend theimposition of the minimum corporate income tax in a meritorious case.#?& 1ross Income e!ined5 3 or purposes of appl!ing the minimum corporate income tax provided under*ubsection #/& hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowancesand cost of goods sold. (0ost o! goods sold;shall include all business expenses directl! incurred to produce themerchandise to bring them to their present location and use.

or a trading or merchandising concern,(cost o! goods sold;shall include the invoice cost of the goods sold, plusimport duties, freight in transporting the goods to the place where the goods are actuall! sold including insurancewhile the goods are in transit.or a manufacturing concern, cost of (goods manu!actured and sold(shall include all costs of production of finished

goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums andother costs incurred to bring the raw materials to the factor! or warehouse.

In the case of taxpa!ers engaged in the sale of service, Ngross incomeN means gross receipts less sales returns,allowances, discounts and cost of services. (0ost o! services(shall mean all direct costs and expenses necessaril!incurred to provide the services reBuired b! the customers and clients including #'& salaries and emplo!ee benefitsof personnel, consultants and specialists directl! rendering the service and #4& cost of facilities directl! utilied inproviding the service such as depreciation or rental of eBuipment used and cost of supplies: $rovided, however,That in the case of bans, (cost o! services(shall include interest expense.

4eginning with the fourth !ear of operations, a domestic corporation is taxed b!whichever is higher:


23


24/91

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o


25/91

+amdg


conditions, on a resident foreign corporation taxable under paragraph #9& of this *ubsection.

' foreign corporation is one which is not domestic #ie organied-incorporated here&. Itma! be a resident or non3resident corporation.

' resident corporation is a foreign corporation engaged in business in the hilippines.

o

' foreign corporation can engage in business in the hilippines onl! after it hadregistered with, and had been allowed b!, the regulator! agencies of thehilippine government to engage in business in the hilippines.

Tax rate o 'orei(n ResidentCorporations

1=L of taxable income from all sources within thehilippines, or0L of gross income if $CIT applies, or9L of gross income #again, the 1I. has yet to

be implemented

Tax Rate on Passie Income o 'orei(n Resident Corporations 'inal Tax

9. Interest under the expanded foreign currenc! deposit s!stem D.L

0. %o!alt! of all t!pes within the hilippines

o %o!alt! from abroad7 0xempt. #remember, onl! taxed fromsources within the hilippines&

0=L

1. Interest on an! current ban deposit, !ield or other monetar! benefitsfrom deposit substitute, trust fund similar arrangement

0=L

?. 5ividend from domestic corporations #inter3corporate dividend& exempt

Tax Rate on Capital Gains


listed and )-. traded thru a local stoc exchange held as

a capital asset,o Capital gains not over 9==,===



9=L of the net capital gains0. On sale of real propert! in the hilippines )o provision !or capital

gains !or sale o! realty56tty5 9ontero says that you

apply it to the normalcorporate ta# o! =>

International Carrier*ec 0F #'& International 0arrier. 3 'n international carrier doing business in the hilippines shall pa! a tax of two and one3half percent #0 9-0L& on its (1ross $hilippine *illings(as defined hereunder:#a&International 6ir 0arrier5 3 (1ross $hilippine *illings(refers to the amount of gross revenue derived fromcarriage of persons, excess baggage, cargo and mail originating from the hilippines in a continuous anduninterrupted flight, irrespective of the place of sale or issue and the place of pa!ment of the ticet or passagedocument: $rovided, That ticets revalidated, exchanged and-or indorsed to another international airline form partof the 2ross hilippine 4illings if the passenger boards a plane in a port or point in the hilippines:$rovided,!urther, That for a flight which originates from the hilippines, but transshipment of passenger taes place at an!port outside the hilippines on another airline, onl! the aliBuot portion of the cost of the ticet corresponding to theleg flown from the hilippines to the point of transshipment shall form part of 2ross hilippine 4illings.#b&International 2hipping. 3 (1ross $hilippine *illings(means gross revenue whether for passenger, cargo or mailoriginating from the hilippines up to final destination, regardless of the place of sale or pa!ments of the passageor freight documents.

Tax rate for international carriers is 0.L of 2ross hilippine 4illings


25


26/91

+amdg


2ross hilippine 4illings refers to

o 2ross revenue derived from carriage of persons, excess baggage, cargo and mail

o -riginating !rom the $hilippines in a continuous and uninterrupted flight

o Irrespective of the place of sale or issue and the place of pa!ment of the ticet or

passage document

In CI% v 4O'C, 4ritish Overseas 'irwa!s did not have an! landing rights here nor did

the! have license to operate here. The! also did not carr! passengers or cargo to or

from the hilppines. The! did, however, have a general sales agent which sold 4O'Cticets. The! were taxed for the sale of the ticets #because of the situs of taxation

principle&, even if the service to be rendered was outside the hilippines. The! weren)t

liable for carrier)s tax though.

o 5oing business has no specific criterion. 's long as there was a continuit! of

conduct and intention to establish a continuous business and not one of a

temporar! character, then !ou are doing business in the hilippines. #%emember!our corp8&

'n offline airline which has a branch-agent in the hilippines and sells passage

documents to cover offline flights of its principal or other airlines in considered engagedin business as an international air carrier in the countr! and is "TI"I/5 b! the #total number of passengers flown for the month as declared in theflight manifest&

In case of passengers) flights from an! point in the hilippines and bac, that portion of

revenue pertaining to the return trip to the hilippines is nits#?& -!!shore *anking 8nits5 3 The provisions of an! law to the contrar! notwithstanding, income derived b!offshore baning units authoried b! the 4ango *entral ng ilipinas #4*& to transact business with offshorebaning units, including an! interest income derived from foreign currenc! loans granted to residents, shall besubect to a final income tax at the rate of ten percent #9=L& of such income.

'n! income of nonresidents, whether individuals or corporations, from transactions with said offshore baning unitsshall be exempt from income tax.

Tax rate of offshore baning units authoried b! the 4* #including an! interest incomeforeign currenc! loans granted to residents& is 9=L final tax.

Income of nonresidents !rom transactions with O4>s shall be exempt from income tax.

'n offshore baning unit is a branch of a foreign ban whish is authoried b! the 4* totransact offshore baning business in the hilippines.

' foreign currenc! deposit unit is a department of a local ban or an inexisting localbranch of a foreign ban which is authoried b! the 4* to operated under the expanded

foreign currenc! deposit s!stem.


26


27/91

+amdg


2ross onshore income covers all income arising from transactions allowed b! the 4*

conducted b! and between an offshore ban with another offshore ban or with an C5>

or with a non3resident. #RR *+,=2%

The following are included in computing the gross onshore income of O4>s and C5>s7

o 2ross interest income arising from foreign currenc! loans and advances and

investments with residents

o ees, commissions and other charges which are integral parts of the income fromforeign currenc! loan transactions are //$T. The! are not to be included incomputing the final tax. #RR *#,==%

o

Tax Rate on Interest Income rom 'orei(n Currency )eposit $RR

*+,-%

9. Interest income actuall! received b! a resident citien or resident alienfrom C5

D.L finalwithholding tax

0. If it was deposited b! an OC6 or seaman or nonresident citien /xempt

1. If it was in a ban account in the oint names of an OC6 and hisspouse #who is a resident&

=L exempt-=L final

withholding tax

of D.L?. Interest income actuall! received b! a domestic corporation orresident foreign corporation from C5

D.L finalwithholding tax

4ranch rofit %emittance Tax#& .a# on *ranch $ro!its 4emittances. 3 'n! profit remitted b! a branch to its head office shall be subect to a taxof fifteen #9L& which shall be based on the total profits applied or earmared for remittance without an!deduction for the tax component thereof #except those activities which are registered with the hilippine /conomicSone 'uthorit!&. The tax shall be collected and paid in the same manner as provided in *ections D and F of this

Code: provided, that interests, dividends, rents, ro!alties, 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 b! a foreign corporation during each taxable !ear from all sources within thehilippines shall not be treated as branch profits unless the same are effectivel! connected with the conduct of itstrade or business in the hilippines.

'n! profit remitted b! a branch to its head office shall be subect to a tax of 9L,except those registered with /S' #the! have their own tax rules as incentives&

6hat)s the base for the 4%T7

o It)s the total profits applied for remittance or earmared for remittance without

an! deduction for the tax component, not the pro!it actually remitted abroad5

o If it is a foreign corporation, the following are not included:

Interests

5ividends

%ents

%o!alties

a!ment for technical services

*alaries and wage premiums

'nnuities, emoluments, or other fixed or determinable casual gains rofits, income capital gains

7#cept i! the above are connected with the conduct o! its business in the$hilippines5

assive income is not included in computing for the 4%T. It is subect to a final tax.

#Compania 2eneral de Tabacos v CI%&

o /xcept when it arises from business activit! in which the corporation is engaged

or connected with the conduct of its business in the hilippines.


27


28/91

+amdg


%egional or 'rea JeadBuarters and %OJUs

*ec 00#55& The term (regional or area headquarters(shall mean a branch established in the hilippines b!multinational companies and which headBuarters do not earn or derive income from the hilippines and which actas supervisor!, communications and coordinating center for their affiliates, subsidiaries, or branches in the 'sia3acific %egion and other foreign marets.#//& The term (regional operating headquarters(shall mean a branch established in the hilippines b!

multinational companies which are engaged in an! of the following services: general administration and planning;business planning and coordination; sourcing and procurement of raw materials and components; corporatefinance advisor! services; mareting control and sales promotion; training and personnel management; logisticservices; research and development services and product development; technical support and maintenance; dataprocessing and communications; and business development.

%egional or 'rea JeadBuarters is a branch established in the hilippines b! multi3nationals and which headBuarters:

o 5o pdated: 5ecember 9?, 0=99 @ $ice!&

28


29/91

+amdg


corporation ma! be considered engaged in trade or business, its business transactionsmust be continuous. #5

9L


29


30/91

+amdg


Tax Rate on Capital Gains $same as orei(n residentcorporations%


listed and )-. traded thru a local stoc exchange held asa capital asset,




9=L of the net capital gains0. On sale of real propert! in the hilippines )o provision !or capital

gains !or sale o! realty56tty5 9ontero says that you

apply it to the normal

corporate ta# o! =>

Income covered b! tax treaties

In negotiating tax treaties, the underl!ing rationale for reducing the tax rate is that thehilippines will give up a part of the tax in the expectation that the tax given up for this

particular investment is not taxed b! the other countr!. There would be some incentiveson the part of the foreigners to invest in the hilippines because the rates of tax are

lowered and at the same time, the! are credited against the domestic tax abroad afigure higher than what was collected in the hilippines.

o Thus, if the rates of tax are lowered here, there should be a concomitant

commitment on the part of the state of residence #of the foreign corp& to grant

some form of tax relief, whether this be in the form of a tax credit or exemption.Otherwise, the tax which would have been collected here will simpl! be collected

b! another state, defeating the obect of the tax treat! since the tax burdenimposed would remain unrelieved.

o The purpose of the most favored nation clause is to establish the principle of

eBualit! of international treatment b! providing that citiens of the contractingnations ma! eno! the privileges accorded b! either part! to those of the most

favored nation. This allows the taxpa!er in one state to avail of more liberalprovisions granted to another tax treat! to which his countr! or residence is also

a part!. Jowever, the use of the most favored nation clause is subect to therationale of tax treaties.

o If the state of residence does not grant some form of tax relief to the investor

#the foreign non3resident corp&, no benefit would redound to the hilippines. #CI%v *C Mohnson and *on&


31/91

+amdg


#0& /vidence 5eterminative of urpose. 3 The fact that the earnings or profits of a corporation are permitted toaccumulate be!ond the reasonable needs of the business shall be determinative of the purpose to avoid the taxupon its shareholders or members unless the corporation, b! the clear preponderance of evidence, shall prove tothe contrar!.

#5& Improperl! 'ccumulated Taxable Income. 3 or purposes of this *ection, the term Nimproperl! accumulated

taxable incomeN means taxable incomeN adusted b!:#9& Income exempt from tax;#0& Income excluded from gross income;#1& Income subect to final tax; and#?& The amount of net operating loss carr!3over deducted;'nd reduced b! the sum of:

#9& 5ividends actuall! or constructivel! paid; and#0& Income tax paid for the taxable !ear.rovided, however, That for corporations using the calendar !ear basis, the accumulated earnings under tax shallnot appl! on improperl! accumulated income as of 5ecember 19, 9EED. In the case of corporations adopting thefiscal !ear accounting period, the improperl! accumulated income not subect to this tax, shall be reconed, as ofthe end of the month comprising the twelve #90&3month period of fiscal !ear 9EED39EEF.

#/& %easonable pdated: 5ecember 9?, 0=99 @ $ice!&

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Jow do !ou compute for the improperl! accumulated taxable income7

Taxable Income,I


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#4& $utual savings ban not having a capital stoc represented b! shares, and cooperative ban without capitalstoc organied and operated for mutual purposes and without profit;#C& ' beneficiar! societ!, order or association, operating fort he exclusive benefit of the members such as afraternal organiation operating under the lodge s!stem, or mutual aid association or a nonstoc corporationorganied b! emplo!ees providing for the pa!ment of life, sicness, accident, or other benefits exclusivel! to themembers of such societ!, order, or association, or nonstoc corporation or their dependents;

#5& Cemeter! compan! owned and operated exclusivel! for the benefit of its members;#/& pdated: 5ecember 9?, 0=99 @ $ice!&

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*ome stuff from the Omnibus Investment Code of 9EFD #Art 9-/ 0O ""2 , Incenties

to Re(istered 0nterprises under the Inestment Priorities Plan& @ these are

activit!3driven incentives:

o Income Tax Jolida!

or pioneer firms @ !ears from commercial operation

or non3pioneer firms @ ? !ears from commercial operation

or newl! registered firms @ full! exempt from income taxes /xtension of tax exemption for more than 9 !ear:

If the proect meets the prescribed ratio of capital eBuipment to

number of wors set b! the 4oard

If the utiliation of indigenous raw materials are at rates set b! the4oard

If the net foreign exchange savings or earnings amount to at leastVm annuall! during the first 1 !ears of operation

o 4ut no registered firm ma! avail of this incentive for a

period exceeding F !ears

/xemption for registered expanding firms:

or a period of 1 !ears form commercial operation, registered

expanding firms are entitled to tax3exemption proportionate totheir expansion, but if it availed of this incentive during this period,it is pdated: 5ecember 9?, 0=99 @ $ice!&

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4usinesses operating within the /COSO%C/. This includes, but

is not limited to, the enumeration in the codal.

In answering problems, the first thing !ou should as is GIs this gross income7H, and

then !ou as Gis this excludible7H #that)s the thought process to follow8&

Compensation

Compensation for services in whatever form paid, including, but not limited to:

o fees,

o salaries,

o wages,

o commissions,

o and similar items.

Compensation earners are not allowed to deduct an! other deductions from their salar!

o but the! ma! have deductions applied to income earned from other sources.


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4usiness income

2ross income derived from the conduct of trade or business or the exercise of aprofession

In the case of manufacturing, merchandising or other business, gross income means:

Total *ales"ess: cost of goods sold

'dd: all income from incidental and outside sources2ross Income

2ains

2ains derived from dealings in propert!

2ain or loss on sale or exchange of propert! is recognied when the propert! received in

exchange is essentiall! different from the propert! disposed and the propert! receivedhas maret value.

In sale or exchange of real or personal propert!, distinguish first between ordinar!

versus capital assets because capital assets have special rules governing them.

*ee % and * for more details

Interests

Income from interests are also to be included in computing for the gross income

In the case of 0 or more organiations, trades or businesses #whether organied

incorporated here or not& are owned or controlled 5I%/CT" or Ipdated: 5ecember 9?, 0=99 @ $ice!&

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report the income for each of the adeBuate part.o If the lease is terminated, and it is not through purchase b! the lessor, so that

the lessor comes into possession of the propert! prior to the time originall! fixed,the lessor is considered to receive additional income for that !ear #if the value of

the building exceeds the amount alread! reported as income&

pdated: 5ecember 9?, 0=99 @ $ice!&

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from his former interest. $!ection ":"/ RR "%

' stoc dividend constitutes income if it gives the shareholder aninterest different from that which his former stoc represented.

6hen a stocholder receives a stoc dividend which is taxable

income, the measure of income is the fair maret value of theshares of stoc received.

*ale of stoc received as dividends #!ection ":9/ RR "%o Once the recipient sells the stoc dividend, he ma! realie gain or loss. This gain

or loss is treated as arising form the sale or exchange of a capital asset.

o Computation of gain or loss #the new basis per share is used in comuting an!

gain or loss upon an! subseBuent sale of the shares&:

6hen stoc dividend is the same character as the stoc upon which it ispaid:

Cost: Old *hares - #total number of old and new shares&

6hen stoc dividend materiall! differs from stoc upon which it is paid:Cost: Cost of shares of 9 class - number of shares in

that class

6hen stoc was purchased at different times and at different prices so

that the identit! cannot be determined:Cost: resumed to be from stoc issued with respect to earliest

purchased stoc

*toc declaration and subseBuent redemption

o If after the stoc dividend declaration, a corporation cancels or redeems the

same in such time and manner as to mae the distribution-redemption essentiall!

eBuivalent to a distribution of a taxable dividend, the amount received shall beconsidered as a taxable dividend #9=L final tax for individuals&. #!ection ":#/

RR "%

6h! do corporations do this7

*o that the shareholder will avoid pa!ing tax. %emember, stoc

dividends are not taxable, but cash dividends are subect to 9=L

final tax for individuals #remember !our passive income charts8&.*o corporations declare stoc dividends, and then redeem them

#b! giving their shareholders cash& to go around the tax. 4utbecause of the law, their subseBuent redemptions are now taxable.

The issuance of stoc dividends and its subseBuent redemption

must be separate, distinct, and not related, for the redemption tobe considered a legitimate tax scheme.

o 5epending on each case, the exempting provision of *ec

F1#b& of the 9E1E Code #now, *ec 0?, %%0&, ma! not be

applicable if the redeemed shares were issued with bona!ide business purpose, which is udged after each and ever!

step of the transaction have been considered and the wholetransaction does not amount to a tax evasion scheme.

o It is in the issuance of the stocs which are subseBuentl!

redeemed that must have a bona !ide business purpose, not

the redemption. The existence of legitimate businesspurposes in support of the redemption of stoc dividends is

immaterial in income taxation. The test of taxabilit! underthe exempting clause is whether income was realied

through the redemption of stoc dividends. $CIR CA &Anscor%


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In other words, if there was a legitimate business

purpose in issuing the shares, '


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receiving the prie or award0. Those granted to athletes are exempt

1. Those that are in the nature of gifts

ensions

' pension is a gratuit! granted as a favor or reward or one paid under given conditions

to a person following retirement from service or to surviving dependents ensions are tax3exempt

*hare in 2)s Income*/C. 0. Tax "iabilit! of $embers of 2eneral rofessional artnerships. 3 ' general professional partnership as suchshall not be subect to the income tax imposed under this Chapter. ersons engaging in business as partners in ageneral professional partnership shall be liable for income tax onl! in their separate and individual capacities.or purposes of computing the distributive share of the partners, the net income of the partnership shall becomputed in the same manner as a corporation.

/ach partner shall report as gross income his distributive share, actuall! or constructivel! received, in the netincome of the partnership.

The 2 is tax3exempt, but the income of the individual partners are subect to tax.

/ach partner shall report as gross income his distributive share in the net income of the

partnership.

rom whatever source

Cancellation or forgiveness of debt ma! amount to

o a!ment of income @ that)s taxable. #a person performs service for a creditor

who cancels his debt&o ' capital transaction @ that)s taxable #a corporation forgives the debt of a

stocholder, that)s lie pa!ing a dividend&

o ' gift @ that)s exempt. #a creditor merel! wants to benefit a debtor b! canceling

the debt without an! consideration& #!ection :+/ RR "%

%efunds Tax Credits

o Taxes which were previousl! claimed and allowed as deductions but subseBuentl!

was refunded or granted as tax credit should be declared as part of the grossincome of that !ear. The purpose of this is put !ou bac in eBuilibrium @ to bring

!our gross income bac up.o /C/T:

/state and donor)s tax

Income, war3profit and excess profit taxes imposed b! a foreign countr!

/state and gift taxes

Taxes assessed against local benefits of a ind tending to increase the

value of the propert! assessed

*toc transaction tax

/nerg! tax

Taxes which are not allowable as deductions under the law

6hen refunded, the! are not declarable as gross income because

the! are not allowable as deductions.

*pecial tax credits

o *ales, compensating and specific taxes paid on supplies and raw materials

imported b! a registered export producer7 That)s given as tax credit.

o 6hen a registered 4OI Tourism enterprise assumes pa!ment of taxes withheld

due from the foreign lender on interest pa!ments on foreign loans, that)s given

as a tax credit too. #R5C *9,+%


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/xclusions!ection 9" $B% 0xclusions rom Gross Income. 3 The following items shall not be included in gross income andshall be exempt from taxation under this title:#9& "ife Insurance. 3 The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of theinsured, whether in a single sum or otherwise, but if such amounts are held b! the insurer under an agreement topa! interest thereon, the interest pa!ments shall be included in gross income.

#0& 'mount %eceived b! Insured as %eturn of remium. 3 The amount received b! the insured, as a return ofpremiums paid b! him under life insurance, endowment, or annuit! contracts, either during the term or at thematurit! of the term mentioned in the contract or upon surrender of the contract.#1& 2ifts, 4eBuests, and 5evises. 3 The value of propert! acBuired b! gift, beBuest, devise, or descent: rovided,however, That income from such propert!, as well as gift, beBuest, devise or descent of income from an! propert!,in cases of transfers of divided interest, shall be included in gross income.#?& Compensation for Inuries or *icness. 3 amounts received, through 'ccident or Jealth Insurance or under6ormenNs Compensation 'cts, as compensation for personal inuries or sicness, plus the amounts of an!damages received, whether b! suit or agreement, on account of such inuries or sicness.#& Income /xempt under Treat!. 3 Income of an! ind, to the extent reBuired b! an! treat! obligation bindingupon the 2overnment of the hilippines.#& %etirement 4enefits, ensions, 2ratuities, etc.3#a& %etirement benefits received under %epublic 'ct


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#ii& 4enefits received b! emplo!ees pursuant to residential 5ecree


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90. Those under special laws #C*O and lotto winnings8&

$inimum wage earners shall be exempt from the pa!ment of income tax too. Jolida!

pa!, overtime pa!, night shift differential pa! and haard pa! received b! such minimumwage earners shall liewise be exempt from income tax.

Income from emplo!ees) trusts are exempt from '"" inds of taxes, including final

withholding tax on interest income. #CI% v C' 2C"& Terminal leave pa! is not part of gross salar!. It is a retirement benefit and is tax

exempt. #CI% v C' Castaneda, and %eBuest of 'tt!. Sialcita&

If the emplo!ee is separated from a previous emplo!er, but is not emplo!ed b! another

emplo!er, he shall be refunded or credited the taxes withheld on his exempt 91thmonth

pa! and other benefits b! his present emplo!er.

If the emplo!ee is separated but has no present ob, he shall claim his refund

with the 4I%. #RR ",-: & R5C 92,-#%

Income derived b! foreign government

or it to be exempt, the income should be received b!:

4! foreign governments

4! financing institutions owned, controlled or eno!ing re3financing from foreigngovernments

4! international or regional financial institutions established b! foreign governments

P. 'rin(e Beneits Tax $'BT 7hut up%*/C. 11. *pecial Treatment of ringe 4enefit.3#'& Imposition of Tax.3 ' final tax of thirt!3four percent #1?L& effective Manuar! 9, 9EEF; thirt!3three percent#11L& effective Manuar! 9, 9EEE; and thirt!3two percent #10L& effective Manuar! 9, 0=== and thereafter, is hereb!imposed on the grossed3up monetar! value of fringe benefit furnished or granted to the emplo!ee #except ranand file emplo!ees as defined herein& b! the emplo!er, whether an individual or a corporation #unless the fringebenefit is reBuired b! the nature of, or necessar! to the trade, business or profession of the emplo!er, or when thefringe benefit is for the convenience or advantage of the emplo!er&. The tax herein imposed is pa!able b! theemplo!er which tax shall be paid in the same manner as provided for under *ection D #'& of this Code. Thegrossed3up monetar! value of the fringe benefit shall be determined b! dividing the actual monetar! value of thefringe benefit b! sixt!3six percent #L& effective Manuar! 9, 9EEF; sixt!3seven percent #DL& effective Manuar! 9,

9EEE; and sixt!3eight percent #FL& effective Manuar! 9, 0=== and thereafter: rovided, however, That fringebenefit furnished to emplo!ees and taxable under *ubsections #4&, #C&, #5& and #/& of *ection 0 shall be taxed atthe applicable rates imposed thereat: rovided, further, That the grossed 3>p value of the fringe benefit shall bedetermined b! dividing the actual monetar! value of the fringe benefit b! the difference between one hundredpercent #9==L& and the applicable rates of income tax under *ubsections #4&, #C&, #5&, and #/& of *ection 0.#4& ringe 4enefit defined.3 or purposes of this *ection, the term Afringe benefitA means an! good, service or

other benefit furnished or granted in cash or in ind b! an emplo!er to an individual emplo!ee #except ran and fileemplo!ees as defined herein& such as, but not limited to, the following:#9& Jousing;#0& /xpense account;#1& Qehicle of an! ind;#?& Jousehold personnel, such as maid, driver and others;#& Interest on loan at less than maret rate to the extent of the difference between the maret rate and actualrate granted;#& $embership fees, dues and other expenses borne b! the emplo!er for the emplo!ee in social and athletic clubs

or other similar organiations;#D& /xpenses for foreign travel;#F& Jolida! and vacation expenses;#E& /ducational assistance to the emplo!ee or his dependents; and#9=& "ife or health insurance and other non3life insurance premiums or similar amounts in excess of what the law

allows.#C& ringe 4enefits


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not; and#?& 5e minimis benefits as defined in the rules and regulations to be promulgated b! the *ecretar! of inance,upon recommendation of the Commissioner.The *ecretar! of inance is hereb! authoried to promulgate, upon recommendation of the Commissioner, suchrules and regulations as are necessar! to carr! out efficientl! and fairl! the provisions of this *ection, taing intoaccount the peculiar nature and special need of the trade, business or profession of the emplo!er.

ringe benefit is an! good, service, or other benefit granted in cash or in ind b! anemplo!er to an emplo!ee #except ran file& such as:

9. Jousing0. /xpense account

1. Qehicle of an! ind?. Jousehold personnel, lie maids and drivers

. Interest on loan at less than maret rate, to the extent of the difference between themaret rate and the actual rate granted

. $embership fees, dues other expenses in social athletic clubs or similar orgsD. /xpenses for foreign travel

F. Jolida! and vacation expensesE. /ducational assistance to the emplo!ee or his dependents

9=. "ife or health insurance other non3life premiums

This list is not exclusive. ringe benefit tax7 ' final tax of 10L on the grossed up monetar! value of fringe

benefits will be imposed.

o The fringe benefit tax on the taxable fringe benefit is computed as follows:

i. 5etermine the grossed3up monetar! value of the fringe benefit. This is the

monetar! value of the benefit divided b! FL

ii. Compute the fringe benefit tax b! multipl!ing the grossed3up monetar!

value of the fringe benefit b! 10L'ctual $onetar! Qalue-FL X 2rossed3up $onetar! Qalue

2rossed3up $onetar! Qalue x 10L X 4T

!pecial Cases or 'BT 'BT

%eceived b! non3resident alien not engagedin trade or

82311911 montero tax ingles 2011 update

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