T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty.Emery Tiu P a g e | 95 August 31, 2010 PART IV – CORPORATE INCOME TAX A. Introduction and Definition of Terms Corporation – includes partnership no matter how created or organized, joint account companies, insurance companies and other associations except: 1. General professional partnership 2. Joint Venture for the purpose of undertaking construction projects 3. Joint consortium for the purpose of engaging in petroleum, geothermal and other energy operations pursuant to a consortium agreement with the government - What is a corporation? Does it include partnership? What does it include? o - Yes, except general professional partnerships. A corporation is defined based on Section 22, includes partnership no matter how created or organized, joint account companies, insurance companies and other associations except: 1. General professional partnership 2. Joint Venture for the purpose of undertaking construction projects 3. Joint consortium for the purpose of engaging in petroleum, geothermal and other energy operations pursuant to a consortium agreement with the government Sec 22. (B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. - Why does it exclude general professional partnership? For tax purposes, that a corporation includes all partnership except general professional partnership? Are there any type of partnership that you know? o Partnerships may be taxable business partnerships or the non-taxable partnerships which is the general professional partnership. In some books or in some discussions, you will see general co-partnership, but they are actually partnerships which are still taxable. o Generally, let’s just classify them into 2 kinds. The taxable partnerships, these are the business partnerships, the unregistered partnerships/ - What is a partnership? So if this room forms a partnership, it will be taxable to 30%? o - - And the non-taxable partnerships, which are the general professional partnerships. Binigyan answers: Yes. Does corporation include associations? Is an association a corporation? Note: Don’t confuse yourself with corporations being taxable all the time. My question is simple, is an association a corporation? Does it fall under corporate tax payers? o Note that NOT ALL corporations are taxable. o Yes, What is a joint venture? Example. o If you have a 10 hectare parcel of land and you put it in a corporation. So, corporation is a real estate corporation because the business is into land holdings. What will you do if you want to develop the land but you don’t have the funds to do it? To Your Income 40 Million 60 Million To the income of the Construction Company 100 Million total income Is this really exempt from income tax? NO! Someone else is liable and not the venture. ***In broken line borders are outline notes. In straight linejoint borders are codal(Someone provisions. else is taxed separately) 95 | P a g e T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Emery Tiu P a g e | 96 Corporations enter into joint ventures with other corporations for purposes of developing construction projects. if you are a land owner and you don’t have funds to develop that land that you own. You task a construction company who will develop the parcel of land and make condominium units, subdivision units out of it. Sharing would be 40-60 fusion or 30-70. You don’t spend. You are the owner of the land, you don’t spend for anything in the construction. After all is finished, 40% of the units given to you and 70 percent of the units will be owned by the construction company. o In that case, if you are the land owner and you get to have 40% of the subdivision units transferred in your name, is this subject to Capital Gains Tax? Is it a sale? CGT is imposed not only in sale and exchange but any other modes of disposition. But in this case it is NOT subject of CGT for the reason that the transfer is not really for a disposition of property but to simply effect what has been agreed in the joint venture agreement. Now, if the joint venture between your corporation and the construction company earns income, is it subject to income tax? Is your joint venture subject to the corporate tax rate of 30%? o General corporation or partnerships, they are not subject to the corporate tax. They are exempt from income tax actually. The income of joint ventures between 2 corporations under the sole management of either one company or particular group of persons will also be not covered under the corporate tax of 30%. But is the income really taxable? Can the government not collect any form of tax covered by the joint venture? Parcel of land with houses, everything was sold, 40% of the income, 40 million was given to you, 60 million was retained by the construction company. Since the total of 100million income is not taxable in a joint venture. So is this really free from tax? Can the government not really collect any form of tax on the income derived from the activity covered by the joint venture agreement? Who will be liable for the 100million income, is it the joint venture or someone else? o Someone else. Who is this someone else? o Joint venture for purposes of undertaking construction projects are not subject to corporate tax of 30%. Nonetheless, any income distributed to the parties who enter into a joint venture agreement will be separately taxable to income tax. o So, meaning to say, that the 4 million will be added to your other income of your corporation and the 60 million to the income of the construction company. It will still be subject to 30% tax still as part of the income for the entire taxable year. o It does not mean that joint venture is really free from the corporate tax of 30%. It is free from the corporate tax of 30% but the liability will be shouldered separately by the parties of the joint venture agreement. Now that’s joint venture. - Corporations are defined to include partnerships, associations or joint ventures, joint stock companies, joint accounts except for 3: o 1. General Professional Partnerships o 2. Joint Venture for the purpose of undertaking construction projects o 3. Joint consortium for the purpose of engaging in petroleum, geothermal and other energy operations pursuant to a consortium agreement with the government You have to be specific, all joint ventures as a rule, are subject to the corporate tax of 30% except if it for undertaking construction projects or a joint consortium for the petroleum, geothermal and other energy operations but it has to be with the government. If it’s a joint consortium NOT in contract with the government, it is taxable still. So you have to be careful on the requisites for these 3 entities which are not covered by the definition of a corporation. General Professional Partnership (GPP) – partnerships formed by person for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. Persons engaged in business as partners in a GPP, shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, ***In broken line borders are outline notes. 96 | P a g e In straight line borders are codal provisions. T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Emery Tiu P a g e | 97 actually or constructively received, in the net income of the partnership. Income of a GPP is deemed constructively received by the partners. - General Profession partnership. We now know, that the income of a joint venture is not taxable to the joint venture but taxable separately. How about general professional partnerships? Would the income of general professional partnerships be absolutely be free from tax or is it taxable on someone else? o You remembered when we said that any share of the partners in GPPs, the undistributed shares will still be considered as constructive income already taxable on the part of the individual partners. Now, even if the GPP is not subject to 30% corporate tax rate on the net income, the net income is considered as earned by the partners composing the GPP. And taxable separately on the part of these partners to 5%- 32%. o But is the GPP free from the obligation of filing an income tax return? General professional partnerships even if they are exempt from income tax are required to file an Income Tax Return for the simple reason that it is the only tool that the government will use to determine whether the partners composing the GPP are correctly declaring their income. It’s the basis, if there are 3 partners, the only thing that the government will do is divide it into 3, 1/3 must have been reported as part of the income tax return of the individual partners. In fact, the individual partners, when they submit their income tax return, strictly, they have to include and submit the income tax return of the GPP. - So you will see class that taxation may not be imposed in this type of person, whether natural or juridical but somehow since there is an income, the tax will be imposed upon some other tax payer. Joint Venture – created when 2 corporations, while registered and operating separately, are placed under one sole management which operated the business affairs of said companies as though they constituted a single entity thereby obtaining substantial economy and profits in the operation. Joint Account – created when 2 persons form or create a common fund and such persons engages in a business for profit. This may result in a taxable unregistered association or partnership Joint Stock Companies – the midway between a corporation and a partnership, a hybrid personality”, somewhat a corporation because this is managed by a Board of directors and such persons may transfer their share/s without the consent of others, and somewhat a partnership because it is an association, and persons or members of the same contribute fund, money to a common fund. Emergency Operation – these may be formed by 2 corporations with separate personalities. If they form that emergency operation (it is a really a special activity) to engage in a joint venture. Corporation 1 may be taxed only from the income derived from such business. The income derived from such emergency operation should also be included in that taxable income subject to corporate income tax. In the same way, that corporation 2, has a separate and distinct personality; if it’s a part of that emergency operation, the income derived from such special activity should also be included in the income of that corporation 2, subject to corporate income tax, even if it is not registered with the Securities and Exchange Commission. - Joint Venture: it is between 2 corporations placed under one sole management for sometimes, a special operation. - Joint Account: it is between 2 persons forming or creating a common fund for profit. It is usually an unregistered association. They do not need to register that with the SEC. - Joint Stock Companies: probably, the only time this will come out is when you are asked to define what it is. - Is a co-ownership a taxable entity? o General rule: A co-ownership is tax-exempt. It is not considered as a corporation, not a partnership. o Exception: when the co-owners in a co-ownership are earning profits, it will be considered as an unregistered partnership, subject to 30% tax. When you say earning profits, does elevating their status as an unregistered partnership, does it include sharing in the income of the estate left to them by the decedent? o If a co-owned property produces income and enjoyed by the co-owners, it is not automatic that it will be subject to the corporate tax rate of 30% as an unregistered partnership. ***In broken line borders are outline notes. 97 | P a g e In straight line borders are codal provisions. In so far as computing their tax due. See Section 28A A corporation formed. There is no fixed criterion as to what constitutes “engaged in trade or business”. Within and Without 2. and income and capital gains. Tax rate – 30% IN CONTRAST WITH: Foreign corporations ***In broken line borders are outline notes. authorized. EXCEPT. periodic. NET 3. profits. Abroad 3. organized. It is subject to tax on its net taxable income from sources WITHIN and WITHOUT the Philippines. Taxable Corporations – DC. 2. 3. See Section 26B A corporation formed. In the board: (explanation below the illustration) CORPORATE DOMESTIC FOREIGN 1. authorized or existing under the laws of any foreign country. It is subject to tax on its gross income from sources WITHIN the Philippines. emoluments or other fixed or determinable annual. Non-Resident Foreign Corporations (NRFC). Being “engaged in business” implies continuity of commercial transactions or dealings . RFC. 98 | P a g e In straight line borders are codal provisions. dividends. formed and organized under Philippine laws 2. . or casual gains. Within (allowed to deduct expense within and without) If allowed to deduct expense depends on: Resident Foreign Corporation Non-Resident Foreign Corporation Taxed at NET Taxed at GROSS Allowed to deduct expenses WITHIN NOT Allowed to deduct expenses Tax Rate: 30% Tax Rate: 30% Tax Rates: Domestic Corporation 30% Resident Foreign Corporation 30% Non-Resident Foreign Corporation 30% Domestic corporations 1. salaries. income is taxable within and without 3. Foreign Laws 2. and taxable on their net taxable income 4. Resident Foreign Corporation (RFC). as taxpayers? - Illustration of Atty. royalties. they are allowed to deduct expenses. Emery Tiu P a g e | 98 o It will only be considered as an unregistered partnership if co-owners themselves have undertaken steps to infuse investment and make it a profitable business. B. Philippine Laws 1.continuity of business or continuity of intention to conduct continuous business. rents. - Who are the taxable corporations? How do we classify corporations in the Philippines. premiums (except reinsurance premiums). and engaged in trade or business WITHIN the Philippines. annuities. capital gains from the sale of shares of stock not traded in the stock exchange.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. or existing (foae) under the laws of any foreign country. It is subject to tax on its net taxable income from sources within the Philippines. NRFC 1. Such gross income may include interests. organized. Domestic Corporations (DC) See Section 27 A corporation formed or organized under Philippine laws. 3. not doing business in the Philippines enters into isolated transactions with a domestic corporation or an individual. Allowed to deduct expenses but only those in relation to income generated within the Philippines. or your official registration in the Philippines. As to tax rate – 30% b. but taxable still to the same 30%. Why? Because the criteria really is not the registration for tax purposes. Non-resident foreign corporation 1. Since resident foreign corporations are taxable only on income generated within. The main difference is that this is taxable worldwide and no expenses allowed for NRFC. this is called self-assessment (you assess yourself as to how much your income is. how much expenses and what is your tax liability to the government). to register itself as a resident foreign corporation in the Philippines. to consider them as part of the taxpayer “NOT DOING BUSINESS”. P a g e | 99 Formed and organized under laws of a foreign country Income is taxable within In so far as computing their tax due and whether they can deduct expenses. it abounds in the Philippines. On their own. especially domestic corporations. But it is WON you are doing business in the Philippines. they are taxable on the gross. we don’t have the 25% for non-resident not engaged in trade or business. The problem is. Resident foreign corporation 1. 2. meaning they are allowed to deduct expenses. they are required to declare their income in a quarterly basis. 99 | P a g e In straight line borders are codal provisions. o But NON-REGISTRATION of a foreign corporation does not mean that you can never be classified as a resident foreign corporation. it depends whether they are: a. “expenses within and without” have no bearing because it is subject to tax at gross. NOT allowed to deduct expenses. So if it is registered as a Philippine branch of a foreign company. If they are considered as not doing business in the Philippines. Therefore. therefore. - What makes a foreign corporation “Resident” and what makes it a “non-resident” corporation? What is the simplest way of determining whether it is resident or non-resident? o If we go to the legal phase. tax rate – 30% - You see. So you cannot escape taxation simply by not registering. it is automatically considered as a resident foreign corporation. as a corporate taxpayer? o Notwithstanding that this foreign corporation. “Doing business in the Philippines” would require the determination of whether the activity you are doing in the Philippines is done in a continuous basis or regular basis. not doing business in the Philippines. All of them are taxable at 30%. they are taxed at GROSS. Therefore. . Filing of an Income Tax Return (ITR) - Domestic corporations are liable for 30% on the net income (because they are allowed expenses incurred within and without). NET. 2. Emery Tiu 1. are they required to file an ITR at the end of the year or on a quarterly basis and finalize at the end of the year? o - Corporations. There are only 3 kinds of taxable corporations. Because non-resident foreign corporations are foreign corporations not doing business in the Philippines. meaning there are no deductions.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. 3. meaning not regular or not on a continuous basis. foreign corporations not registered in the Philippines. just for the purpose of knowing what their taxability is in the Philippines. 2. under the diagram shown above. organized or incorporated abroad. They do receive some other source of income which is passive income. These are mere estimates and at the end of the year it is annualized. Resident foreign corporations: Are they required to file an ITR at the end of the year? ***In broken line borders are outline notes. we also consider them as part of the 3 types of corporate taxpayers because in some cases. 3. the expenses that they are allowed to deduct against their income would only be expenses within the Philippines or those which they have incurred in relation to producing the income that is taxable under Philippine laws. they have to do that. corporate tax payers are simpler to understand. a foreign corporation would like to do business in the Philippines. why do we have to discuss them. that is taxable of 30%. What it expects is that. Why does it give relief from double taxation? In what way does it give relief from double taxation if you would not be required to withhold the 30%? ***In broken line borders are outline notes. it should be taxed with finality. But what about Non-resident foreign corporations. it’s a final tax. Emery Tiu o - P a g e | 100 YES. what ways are there available to collect the 30% tax on the gross income? Any payments made to non-resident foreign corporations. if we go by the Tax Code. Is a non-resident foreign corporation expected to file an ITR at the end of the year? No.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. is that subject to tax? Yes. Payments to: o Non-RFC . If the contract fee is 1 Million US dollars. meaning to whom these persons is transacting with has the obligation of a withholding agent. Contrarily. they would have to be withheld of the tax. are they required to file an ITR at the end of the year or on a quarterly basis? o If you are from the BIR. he will be liable for non-withholding. not doing business in the Philippines. We don’t expect these foreign corporations to file at the end of the year. hence. they are categorized still having the same obligation of filing the ITR at the end of the year and/or a quarterly basis. the payment to the foreign corporation is not taxable as long as that foreign corporation has no permanent establishment here in the Philippines (meaning no office or any branch in the Philippines). there is a provision on business profits. how much will you pay to them? General Rule: You only pay them 700 US dollars. These are corporations organized abroad. including non-resident alien not engaged in trade or business a final withholding tax or creditable withholding tax? A final withholding tax. and you enter into a contract with a foreign corporation for them to render repairs to your machinery in the Philippines. When they enter into one isolated transaction in the Philippines. That is the general rule. In some schools. which says that “If a foreign corporation not doing business in the Philippines transacts business with a domestic corporation. being resident foreign corporations.withhold 30% of the tax o Non-resident aliens not engaged in trade or business – withhold 25% (they will receive 70% free from tax already or 75%) REASON: the Philippine government does not have jurisdiction over these taxpayers. Is this a final tax or a creditable tax? Is the tax withheld from a nonresident foreign corporation. the nature of a creditable withholding tax is that it is a tax withheld to approximate the liability of the taxpayer/payee at the end of the year. there is always an exception. Usually in a tax treaty. . just like payment to nonresident aliens NOT engaged in trade or business of 25%. since they are not considered as doing business in the Philippines. not being required to file an ITR everytime payment is being made to them. and not even registered as a business in the Philippines. because he is not doing business in the Philippines. the government cannot expect them to declare their income at the end of the year or on a quarterly basis. Example: if you have a domestic corporation. any payor of the income. deduct. What is the “Withholding with finality” – it is the final withholding tax considered as the full and final payment of the tax. 100 | P a g e In straight line borders are codal provisions. 300 US dollars will be remitted to the government. Therefore. they are required to read at least 1 tax treaty. As a withholding agent. In that case. But the tax treaty is something that gives a relief from double taxation. Except as otherwise provided in this Code. 28 B on non-resident foreign corporations. and we will tax that foreign corporation. . and. such as: 1. – (B) Tax on Non resident Foreign Corporation. dividends. 1998. periodic or casual gains. effective January 1. that is the purpose why the tax treaty is there. Dumagat will surely be taxable in the country where it is a resident. - If you read through SEC. Income Tax Exempt Entities. Rates of Income Tax on Foreign Corporations. - These are the general rules. etc. premiums (except reinsurance premiums). . the tax treaty is there in order to give relief. 101 | P a g e In straight line borders are codal provisions. emoluments or other fixed or determinable annual. 2000 and thereafter. Rents 4. Section 30 1. Emery Tiu P a g e | 101 That foreign corporation who came to the Philippines for 1 week to repair the equipments of Ms. the rate shall be thirty-two percent (32%). you will see special domestic corporations and special resident foreign corporations and non-resident foreign corporations. Under the Tax Code. it is 30%. it is not the 30%. General Professional Partnership 2. That effective 1. that is totally tax free. - Towards the end of the outline. a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines. Dividends 3. except capital gains subject to tax under subparagraphs (C) and (d): Provided. Although not in a strict sense. annuities. In more cases than not. because these are 2 different taxing jurisdictions. royalties. Premiums 7. the gross income of non-resident foreign corporations includes the same gross income that has been enumerated in non-resident aliens not engaged in trade or business. ***In broken line borders are outline notes. effective January 1. Interests 2. Annuities. Being a resident abroad. and capital gains. except capital gains on sale of shares of stock and sale of real properties classified as capital assets. that is double taxation already. to ease the burden of that corporation from 2 taxations in 2 different taxing jurisdictions. Salaries 6. exception is only capital gains on sale of shares of stock. Joint venture for the purpose of undertaking construction projects. 1999. In cases of conflict between the (Municipal law) Tax Code and Tax Treaty. do we follow the Tax Code. The reason is that nonresident foreign corporations are not expected to have probably real properties in the Philippines. Royalties 5. the rate shall be thirty-three percent (33%).T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. usually the Tax treaty will prevail because we respect agreements with other countries. etc Except: Capital gains on sale of shares of stocks. profits and income. The tax rates are different. C. salaries. - SEC. “except capital gains on the sale of real property”? Non-resident aliens not engaged in trade or business are subject to 25% final tax on gross income. such as interests. the 30%. let us concentrate on income being subject to 30%. it is taxable within and without. - As of now. In this case. for all types of gross income including interest. Only in case where the Tax treaty is more burdensome. rents. But if we invoke the Tax Treaty. the rate of income tax shall be thirty-four percent (34%). – (1) In General. 28. which will be subject to the same rate of: 5% and 10% Why did it not mention. or like organization of a purely local character. mutual ditch or irrigation company. SSS (Social Security System) 17. 102 | P a g e In straight line borders are codal provisions. order or association. found in section 30. This must be established for common business interest b. SEC. PCSO ( Philippine Charity Sweepstakes Office) 19. Joint consortium for the purpose of engaging in petroleum. sickness. PHIC (Philippine Health Insurance Corporation) 18. agencies or instrumentalities owned and controlled by the government shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business. organizer. and fees collected from members of the sole purpose of meeting its expenses 13. industry of activity. Farmers associations or like associations. not organized for profit.The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor. or board of trade. Farmers cooperative or other mutual typhoon or fire insurance company. chamber of commerce.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. 30. operating for the exclusive benefits of the members such as fraternal organization operating under the lodge system (one which must operate under a parent and subsidiary associations). or a payment of life. or for the rehabilitation of veterans. or any specific person 9. officer. GSIS (Government Service Insurance System) 16. Business league. Non-stock corporation or association organized and operated exclusively for religious. geothermal and other energy operations pursuant to a consortium agreement with the government 4. No part of the income shall inure to the benefit of a particular individual 10. or non-stock corporation or their dependents 7. - Example of an educational institution owned by the government. dues. these are government controlled corporations which are among the exceptions not subject to income tax. less the necessary selling expenses on the basis of the quantity produce finished by them (must be a non-profit association) 12. no part of its income or asset shall belong to or inure to the benefit of any member. Labor. or other benefits exclusively to the members of such society. for those associations or entitites not made for profit. the income of which consists solely of assessments. . Government educational institution 14. Exemptions from Tax on Corporations. Mutual savings bank not having capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit 6. In outline letter C you will see several enumerations of entities not subject to income tax. agricultural or horticultural organization not organized principally for profit. and no part of the net income of which insures to the benefit of any private stockholder or individual Requisites: a. Cemetery company owned and operated exclusively for the benefit of its members (must be a non-profit cemetery) 8. And from 15-19 in the outline. athletic. for the purpose of marketing the products of its members and turning back to them the proceeds of sales. organized and operated as a sales agent. definition of a corporation in the Tax Code. Section 22. Exception: 15. A beneficiary society. accident. ***In broken line borders are outline notes. order or association. . Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare 11. scientific. charitable. Non-stock and non-profit educational institution General Rule: All corporations. NAPOCOR (Special Law) - Give me 1 entity not subject to tax. or cultural purposes. o Government educational institutions are among the income tax exempt entities. Emery Tiu P a g e | 102 3. agricultural or horticultural organization not organized principally for profit 5. 103 | P a g e In straight line borders are codal provisions. VAT. Once a condominium building is set up. shall be subject to tax imposed under this Code. But there will be a condominium corporation composed by the different unit owners for the management of the entire building. mutual or cooperative telephone company. sickness. Emery Tiu P a g e | 103 (B) Mutual savings bank not having a capital stock represented by shares. the income of whatever kind and character of the foregoing organizations from any of their properties. order or association. or from any of their activities conducted for profit regardless of the disposition made of such income. they are not subject to income tax. . organizer. or cultural purposes. fruit growers'. mutual ditch or irrigation company.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. or for the rehabilitation of veterans. (F) Business league chamber of commerce. scientific. Water o Are these collections collected by the condominium corporation subject to income tax imposable on the condominium corporation? Or would a condominium corporation fall under income tax exempt entity (Sec 30)? o Are these considered income collected for profit? And are condominium corporations made for profit? NO. ABC is the developer. (D) Cemetery company owned and operated exclusively for the benefit of its members. (TAKE NOTE: in the outline there are additional… like from number 1 – 3): - Are the collections made by a condominium corporation subject to 30% income tax? No. so long as it is not made for mark-up or for profit. Is ABC the condominium corporation that we are talking about? NO. or like organization of a purely local character. or association. not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder. or board of trade. Electricity 3. Association dues 2. etc. and (K) Farmers'. less the necessary selling expenses on the basis of the quantity of produce finished by them. Notwithstanding the provisions in the preceding paragraphs. (C) A beneficiary society. The income of ABC is from the sales of the condominium units. (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare. officer or any specific person. ***In broken line borders are outline notes. (J) Farmers' or other mutual typhoon or fire insurance company. (E) Nonstock corporation or association organized and operated exclusively for religious. and fees collected from members for the sole purpose of meeting its expenses. or nonstock corporation or their dependents. You call it a condominium corporation. no part of its net income or asset shall belong to or inures to the benefit of any member. Common charges expense 4. local business taxes. the developer is separate from this building and every unit owner is a separate taxpayer. or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales. Condominium corporations in so far as they collect association dues. (I) Government educational institution. (H) A nonstock and nonprofit educational institution. accident. or mutual aid association or a nonstock corporation organized by employees providing for the payment of life. order. - What is a condominium corporation? o This is a condominium building. he will be subject to income tax on the rents. So if he decides to lease it out. dues. and cooperative bank without capital stock organized and operated for mutual purposes and without profit. the income of which consists solely of assessments. or other benefits exclusively to the members of such society. operating fort he exclusive benefit of the members such as a fraternal organization operating under the lodge system. charitable. or individual. these are not income and these are not collected for profit!!! Condominium corporations are not made for profit. real or personal. athletic. membership dues. The proceeds or collections of a condominium corporation are: 1. Even if it will be used for beautification purposes. Because in some areas. o It can be profitable in some sense. (not the one selling the lots because it is a corporation). Since the law is clear that it does not give any preference. they will still be subject to income tax if and when they realize income coming from any of these three: 1. Letter A: Labor. it will be subject to income tax. will the proceeds be subject to tax? - What if the proceeds will be used to repaint the gravestones? o YES. whether it is used for the purpose or not. and at the bottom that it is exempt. entity or corporation with the SEC and with it comes the registration of the BIR. they will be subject to income tax? o YES. you can deduct the actual cost. - Once there is an activity or usage of any real or personal property defining the rule in the last paragraph automatically. they will be required to file an ITR. it will be subject to income tax. that notwithstanding that these exempt entities have been granted exemption from income taxes. and recover only for the common charges. it is a profitable activity. If you run through the income tax exempt entities. 3. If they collect for electricity to raise (atty said rise. if the default is that they are exempt from income tax. the maintenance of the building. o Even if that leasing out would not fall under activities for profit. - If there is a cemetery. The usage of a personal property. What will be paid of tax is only the difference. if you make up a cemetery company. you are expected to be under the coverage reportorial requirements that have to be complied with before the BIR. it is taxable. Even if it is among the tax exempt entities. whether regular or not. still it is an income generated from the use of the real property. which is regular. o Legal basis There is a caveat in the last paragraph of Section 30. . All you have to do is simply put there the details. because if we have to declare the entire amount. but once they venture 3 activities. o Once you register an association. - How will the BIR expect payment from these types of organizations? What first comes to mind is that. can the BIR keep track of the liabilities of these corporations or entities? Or how will they keep track the liabilities of these entities? Are these entities required to file an ITR. it is not taxable. it will be subject to tax. then it is already income-earning. whether it is regular or not. ***In broken line borders are outline notes. let’s say it is only for once a year or twice a year. But so long as it is only for minimum membership dues to maintain this. but there is a corporation association of all the locators. whatever proceeds there is. Any activity made for profit. under Section 30. the excess or the entire amount? Whichever way. agricultural or horticultural organization not organized principally for profit. although it is not a condominium. Emery Tiu P a g e | 104 EXCEPTION: Once collections of condominium corporations exceed more than that which they require for the maintenance of the building. you are expected to file an ITR year in year out. What is taxed. the expense. but mura pud ug raise) the actual usage of that locator. 104 | P a g e In straight line borders are codal provisions. as long as it is not “principally” but other entities or associations are strictly requiring that it is not for profit.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. or unit owner. 2. like IT Park. but you are registered for BIR purposes. And some of these entities or associations should only cater for members. you will note that these are actually associations or entities which are made: o NOT for profit. The usage of a real property. These are subject to income tax regardless of how the proceeds will be used or utilized. it will already be subject to tax. and there is a big space rented out for a concert. a cemetery company is usually not for profit. Emery Tiu P a g e | 105 o If you want to avoid the reportorial requirements.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. we identified what are the types of income that an individual may be earning. Tax-exempt entities under Section 30 3. Compensation income 2. unless you have been given a special privilege of exemption of not filing an ITR. Gains derived from dealings in property 4. anyway you are not liable for income tax. means ) o Operating Lease Normal rent/lease that we know. - Example: You are renting an apartment in Cebu. . PHIC 4. while the one using it is only paying for the temporary usage of it. because there is a bar question. GSIS 2. but from Section 27(c) which covers domestic corporations. - What distinguishes lease as operating lease and lease as financial lease? o The basic difference between these 2 types of leases. Those which do not come within the definition of a corporation 2. it is one way for the tax authorities to examine the legality of the exemption being claimed. And there are many special laws that we actually don’t need to study in taxation. 1. is a special law. the default is whether you are exempt or not. because if you do declare huge amounts of proceeds but still considered as exempt. Rents: - ATTY: I included here rents. The owner of the property does not foresee relinquishing ownership over it at the end of the contract period. What you are paying is for the temporary use of property without the transfer of ownership at the end of the lease period. on what is the difference between an operation lease and financial lease. their exemption does not come from Section 30. o Once registered in the BIR. Probably when you are in practice. GOCC are domestic corporations. In individual income taxation. you are expected to file an ITR. get a ruling that you are exempt so that you will be taken out from the coverage of those who are required to file an ITR. 3 Categories of the Tax-exempt entities: 1. When you say that you are spending rent payment of an office space. Interests 5. Because usually. Exception: There are 4 GOCCs as specified under the tax code: o - 1. From numbers 15-19 of letter C in the outline. is that an operating lease or financial lease. I usually associate it with the word “nalang” (not clear what word Atty. SSS 3. Section 28 is resident foreign corporation General Rule – GOCC are taxable. you have to prove before the BIR. Business income 3. PCSO NAPOCOR is not by virtue of the tax code. when you are a tax exempt entity you don’t have huge amounts of proceeds and how the expenses will go as well. o It is for the operation of the business of the one leasing it. Financial Lease (Full payout lease) ***In broken line borders are outline notes. 105 | P a g e In straight line borders are codal provisions. Is that rental payment an operating lease or financial lease? Lease and rent are the same. Section 27 is domestic corporation. o This is one way of monitoring the activities of tax exempt entities. After accumulating profits. So if you’re in a financial lease. o Nonetheless. meaning. he will recover the full value of the property.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. o If you purchase a software. Royalty payments can be the transfer of technical knowledge. - F. It is simply the purchase of an item. You like to distribute dividends. profits which have accumulated in the corporation are distributable to the owners. . 106 | P a g e In straight line borders are codal provisions. is this subject to tax? ***In broken line borders are outline notes. 46 investors. do you think the royalty payments made by XYZ to the Republic of Zimbabwe. part of the purchase price. it can be covered as royalty payment or not. Use or privilege which can command the payment of royalties. whatever property you would wish to give to your stockholders it will be taxable. or use. in the form of subdivision units. whatever payments you are making is not an expense. with the transfer of technical knowledge. is the subdivision units given to stockholders subject to tax? House and Lots Give 1 each as dividend VILLA MANNY There were 46 investors o This is Villa Manny. o Under Section 42. privilege. Royalties o There are many types of activities for which you can pay royalties. It is not liquid. Emery Tiu “Lease to own” in common term. Property dividends o All encompassing. A purchase of the property P a g e | 106 The owner will relinquish ownership over the property at the end of the contract. while the one leasing it will become the owner of the property. You are not required to pay royalty fees for that. He decided to give 1 each stockholder. classifies under any of the classification? It was more on extracting the economic rent or the privilege to extract natural resources in a foreign land. you don’t recognize it as an expense in your books. o So royalties are more on the privilege of having the right to use a scientific or technical knowledge. In what way this will be distributed. let’s say the financial statement of Villa Manny is in short of cash. aside from Manny Villar. that we have the different kinds of dividends: 1. There are different subdivision units. o Example: if you are Manny Villar and you have investors. instead of distributing cash. whatever you are paying to the lessor is a purchase price. but it has enough properties to declare as dividends. It will be royalty payment if what you purchase is customized. Dividends - How many types of dividends do we have as of today? o Under the Corporation code. you will see that it is more of a right. but is an advance payment. It’s not the simple McDonald’s that we have been talking about. - G. If you’re into business and you lease out under financial lease. can you name some activities: In letter c. But the software you purchase is an offshelf available to all. The owner of the property is expecting that over the lease period not to go below 730 days. Cash dividends – given through cash 2. a corporation can declare dividends in any form so long as it has unrestricted retained earnings. B is the property given by A to UVWXY. If you wish to receive this property as a stockholder. but instead gives out the B shares that it holds to the stockholders. The effect is that U V W X Y will be part-owners of Corp. If Corp. Company B Company A B Shares Ü V W X Y ***In broken line borders are outline notes. you better prepare 10% as the tax on the property dividends you will be receiving. and under the law. A is the payor of the dividend. what Corp A did was to declare as dividends the shares it holds in Corp. Income derived from an activity in which you don’t materially participate. Is that a stock dividend? Because what are given are shares. so how will we pay the tax on the dividends? a. Take note of what shares will be declared by the corporation as dividends. B by virtue of the shares given by A to these stockholders. A decides not to give in cash or any other property. Is the issuance of B shares to U V W X Y Z to the stockholder. B a part of the payor-payee relationship of UVXWY? B is the item. UVXWY is the income earner of the dividend. Who is liable to remit the 10% tax on the government. a property or stock dividend? Is it subject to tax? Is the owner Company A Company B B Shares Ü V W A declares is stock in B as dividend – PROPERTY DIVIDEN Company X Y Z Who is the income earner? UVWXY Payor? Corporation A Is Corp. 107 | P a g e 100 + 100 + 100 100 100 100 100 Stock Dividends In straight line borders are codal provisions. . B. Corp A is the owner of Corp B. A (or its own shares). It is not the taxpayer or the withholding agent. Emery Tiu P a g e | 107 Recall that dividend is a passive income. The difference is the shares. b. B is simply the item given by A to its stockholders. Instead of giving cash dividends. you or Villa Manny? It is not given in cash. 10% tax shall be imposed on a cash and/or property dividend.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Corp A declared stock dividends and also gave you B shares. Illustration: You are a stockholder. therefore increasing their ownership in the corporation – STOCK DIVIDEND. because what is given are the same corporation. RULES: If what are declared as dividends are the shares of Corp. You sell property in order to generate cash. rather it is the property investment of Corp. 1. and you are given another or another 46 M will be transferred there. 1st Day of business10 years Assets46 Million500 Million Liabilities -----. In straight line borders are codal provisions. Emery Tiu P a g e | 108 Example: If UVWXY owns 100 shares each and instead of giving cash. subject to tax just like a cash dividend.(no profit yet)364 Million 46Million For each to receive 1M 364 Million profit is distributable to all of you. Stock Dividend representing the transfer of surplus to capital account shall not be subject to tax. Exception: when stock dividends will be taxable. except its own. you declare stock dividends and the corporation will cancel or redeem it right after. you cannot distribute in cash. because there is only 1 tax on the property dividend. A. unless you sell it or it is in cash. General Rule: Stock Dividends are NOT taxable. You are a part-owner. if you don’t want to pay any tax to the BIR. 108 | P a g e If subsequently cancelled and redeemed by the corporation . or under the exemptions given. If you have a cash of 500 M you can distribute 364 M to the owners. unless you sell first the property. . Your ownership will increase but you have not realized the income as yet. then you are taxable on the income from selling. Are you subject to tax? Not yet. otherwise it will be double. So might as well declare it automatically as →property dividends. So you don’t sell it. But what if this 500 M is in property. You are 46 all in all. It is part of the 500 Million asset. 1 Million each. ***In broken line borders are outline notes. A. because it is not the stocks of Corp. A will be giving out is the share of any other corporation. taxable again. And selling property would entail tax on the income. o If you have 1 M each. all you have to do is declare →STOCK DIVIDENDS. A said ok I will give another 100 A shares. unless it will be converted into cash. o But as stockholders.(no liabilities yet)100 Million Net Worth46 Million400 Million Capital (less)46 Million46 Million Profits ----. If other shares will be given. Stock Dividends Illustration: 10 years ago you formed a corporation. These are stock dividends not yet realized income. because there is simply a transfer of capital. If what Corp. you have been given 1 Million shares each for the 1 Million investment that you put into the corporation. it is not a stock dividend. And dividends can be declared out of the unrestrictive profits of the corporation. it is -PROPERTY DIVIDEND.If in order to avoid the tax on dividends. When you declare it as →cash dividends.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. o How to declare stock dividend? Simply put in or transfer the profits to the capital. You put 46 Million. It means to say that you received 1 M stock dividends. 3. and the corporation will redeem that. you are only 46. it will now be subject to tax. it is simply delusional???(ambot unsa na word) The interest of the other stockholders it will already be taxable. there is already an agreement after declaration it will be cancelled or redeemed by the corporation. Follow up Question of Carlo: What will be deducted from the retained earnings? ***In broken line borders are outline notes. the corporation will have to collect in cash from the stockholders. Alteration - Lovely’s question: When can we say it is “substantial” or any difference will be taxable already? o - In some books. as if it was an automatic declaration of cash dividends. 2. it is not taxable. who will in turn remit it to the government. your property dividends. What she will be receiving is more than what you will be receiving in the future. probably what it meant kung 1 share lang or 1 peso.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. So if it is 1 over 46 all of you. Before the dividends will be given out. automatically it will be subject to dividend’s tax or the final tax. meaning as stockholders you will surrender that. But the problem is. It will lead to an alteration of the interest of proportional holdings in the corporation. Her original 1 M plus the 5 M stock dividends. Why is it subject to tax? Because she gave an income over the other stockholders. Why? Because there is a rule in Corporation Code. That is subject to tax. Her total investment will be 6 M. 109 | P a g e In straight line borders are codal provisions. instead of outrightly declaring that. that declaration of stock dividends must follow strictly the percentage of ownership of the stockholders that are to receive it. All the rest will be having only 2 M. But the 1 person Ms. She will have more interest in the corporation. Substantial. But what is subject to tax is only the difference of 1 M. Carlo’s question: Who pays for the final tax in property dividend? o - Corporation will remit it in behalf of the recipient. it is 2 over 46 na that she will receive. Cristoria. Emery Tiu P a g e | 109 Imagine 46 M will be declared as stock dividend. it is already an alteration. If it leads to a substantial alteration in proportion of tax ownership in a corporation. . will receive the 5 M remaining. You are circumventing the law. In case it is a pure property dividends. Instead of all of you equally owning the corporation through shares. in lieu of 1 M each. Cristoria)= 1 Million 5 Million = 6 Million 4 Million TAXABLE!!! You decided to declare stock dividends awhile ago of 46 M. the Capital 46 Million Declared 50 Million as Stock Dividends Profits364 Million Illustration: 50 M as stock dividend Beginiing Investment +Declared SD =Total New investment 45 (classmates)= 1 Million each 1 Million = 2 Million 1 (Ms. 10% will be remitted or else to be paid by the stockholder to the corporation. But once the percentage of shareholdings will be different. she will now have an edge. But if behind that. you went through the path of stock dividends first then exemption. Let’s say you want 50 M to be declared as stock dividend. As a rule. All of you 45 will receive 1 M each. Since it lead to a substantial alteration of delusion >???? in your interest or ownership. not as a dividend distribution. Dividends are only given to stockholders of a corporation. or royalties declared to foreign corporation. once excessive payment of expenses is considered as a disguised dividend. 7. But if the corporation will simply pay royalties of 5%. . For tax purposes. It will be claimed by the company as an expense. YOUR ASSIGNMENT!!! SEPT. you ____. . liquidate whatever remaining assets you may have. The company will be benefited by the depreciation of the motor vehicle that they acquire. The point is. o Are disguised dividends taxable? Example: There is a parent company abroad. 110 | P a g e In straight line borders are codal provisions. no tax. is that not a dividend distribution disguised as honorarium. But disguised dividends is something else. 1st Example: If the owners composed of the Board of Directors. If it is corporation to corporation domestically. If the recipient of the disguised dividend is an individual – follow: 10% . but it is called dividends. Why? Because it is still an umbrella before the ultimate owner will receive the dividends. but the point is. ***In broken line borders are outline notes. your corporation decides to stop operations. 2010 Tuesday DISGUISED DIVIDENDS - Disguised dividends may be considered as distributed to an individual who is not a stockholder.for non-resident aliens NOT engaged in trade or business If the recipient is a domestic corporation – payments to domestic corporations of dividends ARE NOT AS YET TAXABLE.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. . it will not be taxed of 15% final withholding tax in dividends. and the honorarium for every meeting every month is 1 M for the presence of a 10-minute meeting. There is a subsidiary in the Philippines. Whenever the subsidiary will declare dividends abroad it will be subject to 15% final withholding tax. The distribution will be considered as liquidating dividend. Agree or disagree? o Disagree. it will be . if a distribution of payment is found to be a disguised dividend. . On what tax.for non-resident aliens engaged in trade or business 25% . . it is taxable just like cash or property dividends. 10% will be computed in the fair market value. not the fair market value. Emery Tiu o - P a g e | 110 It’s really the value in the books. it will be considered as dividend distribution subject to the rate of? What rate is imposed on disguised dividends? The point is. But for the books of the corporation. . in cash property and stock came from retained earnings and profit. 2nd Example: Refer to previous illustration. You dissolve. It may be any other kind of payment to the owners or stockholders not denominated as dividends but actually profit distribution simply to avoid tax. whenever there are huge amounts of payments to the owners not considered as dividends. What are disguised dividends? What type of payment will be considered as disguised dividends? o -So are you saying these are really dividends coming from the profits of the corporation? o The other dividends that we have discussed. what will be deducted is the actual cost that went out of its ownership. Nonetheless. But once payments to its stockholder. Whatever you receive will be subject to tax. Non-resident citizens and resident aliens 20% . it is not yet part of the topic. which is its parent-company becomes too excessive.for Resident citizens. the taxability of the disguised dividend would be the same as cash or property dividends being given. - What is a liquidating dividend? o When you decide. o Disguised dividends are payments made by the corporation to the stockholders in any other form. other than dividend payment. Instead of declaring the 364 Million you will be given 1 motor vehicle each. 46 owners. they are actually disguised dividends. 000 1.000 400. And whatever you have invested is the cost of your investment. assets grew to 100M.000. you distribute the 40M after you payout the liabilities to the creditors.000. If you dissolve and wind up the affairs of the corporation. is 46M.000 Net worth 46. like cash. It’s taxable. is not subject to tax.000.000.000 Liabilities -060.000 Liabilities -060. The stockholders will receive less than 1M. since there is a loss. . 10 years after. it will be taxable. In case excessive payment is made to an individual who is a stockholder. therefore. therefore. is 40M.000 340.000. o So if it will happen that your receipt of liquidating dividend is less than what you have invested in the corporation.000. being an income or an inflow of wealth in the hands of such individual. Would such liquidating dividend be taxable? NO. Would the stockholders be receiving the same amount that they invested of 1M each? NO. In what way? It depends on what is the treatment given by the Tax Code. property or assets as liquidating dividend? YES.000. it will not be treated as disguised dividends. if distributed to the stockholders. Net worth. Whatever income will be derived by an individual. 111 | P a g e In straight line borders are codal provisions. Any difference of what you receive as liquidating dividend from such cost will be considered as taxable income subject to the rate of 5-32%. it will be taxable subject to the ordinary rates to be withheld.000. properties or other remaining assets after paying out all the creditors of the corporation. you actually suffered a loss from the investment. LIQUIDATING DIVIDENDS - Whenever a corporation dissolves. Whatever you received. But still. Assets46. No dividends shall be given to a non-stockholder.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. But what will happen to the payment? Taxable still? It will be taxable on the part of the President but not as dividends. Do you think a stockholder will experience loss in receiving a liquidating dividend? YES. liabilities to 60M. o Liquidating dividends given. ***In broken line borders are outline notes. 20% or 25% depending on the classification of the taxpayer or the corporation? NO. and 25% for NRA-NETB.000.000.000. considered as liquidating dividend. it will be treated as disguised dividends and subject to the usual rates of 10% for RC. Is there a gain subject to tax? NO. it will not be considered as disguised dividends. Net worth.000 40.000 Capital stock46. of the 5-32% income tax according to the withholding tax on wages table. NRC and RA.000 Net worth46. Assets 46. 20% for NRA-ETB.000 But if it’s the other way around. Emery Tiu o P a g e | 111 Thus.000 Profits -0o Example: 46M as invested by 46 people for 1M each 10 years ago and 0 liability. who is not a stockholder. if he’s an employee. it may happen that assets will be left after paying all the creditors and these assets will be distributed to the stockholders in accordance with the proportion of ownership that they have in the business and it’s called liquidating dividends. it will be deductible. Capital stock of first day of operation is 46M and profits is 0. whenever an excessive payment of honorarium (1M a month) is given to a President of the Company. Can we consider the less than 1M receipt of cash.000100.000. But if it so happens that the individual who received excessive payouts or payments is not a stockholder. there is a gain or you receive more than what you have invested. liquidates and winds up its business operations. will it be subject to FWT 10%. The same as the available deductions for individual taxpayers? NO. DEDUCTIONS 1. only 1 and 2 would be deductible. Whatever the taxability. corporations doing business in the Philippines. If an individual is purely a compensation income earner. your capital is intact in the corporation. then use those rates in computing the tax due on the difference between your liquidating dividend and the initial investment or the cost of the investment that you put into the corporation. NOTE: Losses from investment or income from investment. A B C D E F JK Corp. But then. In so far as the corporation is concerned. Is such corporate stockholder subject to tax? XYZ Corp. such as liquidating dividends. Itemized deductions. all three would not be available to an individual who is classified as a NRA-NETB. optional standard deductions o REASON: Corporations venture into an activity which is for profit. he can also claim any of the itemized deductions or optional standard deductions because itemized deductions is for business expenses. Personal and additional exemptions 2. . E. Any income is taxable. on a normal basis. But if the individual is into business already. You shall not be taxed on the cost of the investment you put into unlike cash and property dividend. Compute your tax liability together with all your other income. What happens if the stockholder receiving the liquidating dividend is a corporation? o Example: Corporation XYZ is owned by A-F and JKL Corporation. Premiums on health and hospitalization insurance 3. you get it out free from the cost as yet because the corporation is not winding up. Therefore. or the stockholder is a corporation subject to 30%. 112 | P a g e In straight line borders are codal provisions. it is for business and with it comes the incurrence of business expenses.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. in fact. if the stockholder. it’s the income that matters. They’re only taxable as capital income and deductible against capital income if a loss is experienced. it’s the end of the corporation and the end of your investment. But in liquidating dividends. whether he is subjected to 5-32% or 25% because he is a NRANETB. are capital losses and capital income. or in lieu of such. After all. respectively. Fundamental Principles - Are corporations allowed deductions? YES. It’s never subject to FWT. which of the 3 deductions are available to a corporation? o Itemized deductions. whether together with ER-EE relationship. all corporations engaged in trade or business ***In broken line borders are outline notes. Emery Tiu P a g e | 112 So whenever you receive a liquidating dividend. just treat it as a capital income. not all these three are available to all types of individuals. Any loss is deductible. o What types of deductions and/or exemptions are available to individual taxpayers? 1. or in lieu of such. If XYZ Corporation liquidates and distributes the remaining assets to all 6 individual stockholders and a corporate stockholder. optional standard deductions However. Still whenever you receive cash and property dividends. That’s why as a rule. The taxpayer must prove that there is a law authorizing deductions o ii. is subject to 30% income tax except those capital gains from the sale of shares of stocks in a domestic corporation. is required to report on a quarterly basis the income tax liability of that business. can choose the other and the other one go for the other option. whether it is itemized deduction (ID) or OSD. o If the taxpayer forgets to choose which option is it taking. But exemptions are not available because it covers for personal and family living expenses and corporations are not natural persons. Itemized deduction is only 300K. whether individual taxpayer or a corporation. no itemized deduction. Every business. ***In broken line borders are outline notes. Not one of the taxpayers. Who are not allowed to claim itemized deductions? o 1. we construe it strictly against the taxpayer But what about OSD? Can corporations really claim OSD? o YES. Individuals. the partners don’t have any other choice but to go for ID. But once in the first quarter. as an option. forget about itemized deduction because itemized deduction is only in business. But if your itemized deduction is 900K. 113 | P a g e In straight line borders are codal provisions. o OSD example: If your gross income is 1M. You don’t even have to incur such expense. OSD. o 3. Whatever they earn in the Phil. usual or common to the business. So if a corporation or any taxpayer is not allowed to claim itemized deductions. GPP or the partners. OSD is in lieu of itemized deductions. It’s on a year-to-year basis. And the mere fact that a NRFC is construed as a corporation NETB. So GPPs and the individual partners are taken as a single entity for tax purposes. o Can the taxpayer choose ID the following year? YES because irrevocability of an OSD is only for the current year. the deduction is not allowed o iv. you can no longer shift back to or revert back to ID for the entire year. If the law provides for requirement that the amount or the expense payment needs to be withheld of tax.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. automatically. And premiums on health and hospitalization insurance are not as well considered as deductions. whoever that individual is. or invoices or in contracts. . there is no OSD allowed. who is not taxable. you can automatically deduct OSD of 400K. If the individual is a NRA-NETB. So that means. there is no deductions allowed from their income. elects to report its taxable income choosing OSD. Always. o If a GPP. a tax should have been withheld. go for OSD. then the partners who have to report their tax liability and paid will also be liable under OSD. if he is purely earning income from ER-EE relationship. Claim such itemized deduction as an expense. except NRFC. NRFC are never allowed itemized deduction or OSD. forget about OSD. the default is ID. Itemized deduction becomes the default of every businesses. otherwise. trade. But there are cases or exceptions when itemized deduction is allowed but OSD is not allowed. or profession. Can OSD be allowed as a deduction if the corporation is not allowed to claim itemized deductions? o NO. The only problem is that your books will be audited to determine whether you really have incurred 900K in total expenses and whether it is substantiated with official receipts. o 2. If the GPP elects ID. - - What are the underlying principles that need to be followed before a corporation can deduct itemized deductions? o i. The taxpayer must prove that he is entitled to deductions o iii. the taxpayer has already chosen OSD. EXPENSES - What are ordinary and necessary expenses? o Ordinary expenses (OE) – refers to the expenses which are normal. - - - REASON for exception: Such corporation. You don’t need to substantiate it with receipts. its tax base is at gross. Emery Tiu P a g e | 113 in the Philippines can deduct itemized deductions or optional standard deduction if it so chooses. trade or profession of the taxpayer. such as when the taxpayer is a NRA-ETB since OSD can be claimed by any individual except NRA but NRA-ETB can claim itemized deductions because they are subject to tax on net income. is irrevocable for the year at issue. Pay tax as a corporation on the 600K. These are extraordinary expenses which tend to increase the value or prolong the life of the taxpayer’s property. We follow the accrual method of accounting. If it’s only 1/10 every year. What are capital expenses (CE)? - They are expenditures for the extraordinary repairs which are capitalized and subject to depreciation. whatever you receive in cash is considered as sales and whatever you have paid for in your expense. usual and common. is deductible and the difference is taxable under the cash accounting method. it must have been incurred. If it’s incurred during the year.. then it is classified as a deductible business expense. o Is a capital expense deductible? YES. ii. So your expense claims must be paid this year or if not paid this year. for those who are similarly situated. The reason why it is deductible but not in the year of payment or not in the year when the year it was constructed. day-out but so long as it’s usual in the type of business or the industry to which that business is in then it can be considered as OE. What are the common requisites to make an ordinary or necessary expense deductible? o o i. It’s the matching principle wherein you only deduct the expenses which is related to the business activity. not unusual. it is not deductible expense. useful. appropriate and it’s ordinarily incurred in the business operations. purchased. which is not a NE in a siomai business. It must be paid or incurred during the taxable year (whether calendar or fiscal year) Exception: net operating loss carry-over If the expense that you’re claiming as a deductible item this year is an expense for the operation of the previous year. You can name more than a hundred expense accounts in your business. we do not usually follow the cash method in determining whether your income is already taxable or not. What expense is necessary for your business but is not necessary for your friend’s business? Banking business has to hire security guards and rent armored car for its business as a NE. . What important requisite for the deductibility of an expense is not complied with by a capital expenditure making it non-deductible on the year of incurrence? Capital expenditures are extraordinary expenses which prolong the life of an asset that has been repaired. But so long as the classification of that business is that it’s necessary. Cash method of accounting. Emery Tiu o - P a g e | 114 Necessary expenses (NE) – one which is useful and appropriate in the conduct of the taxpayer’s trade or profession. repaired. then the expense of the CE should be distributed over 10 years as well to benefit the company. o So what is necessary. ***In broken line borders are outline notes. When you say “paid”.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. it is expense but it must also pertain to the year for which that expense is related to the income generated by the business. So there is no standard rule for what type of expenses may be deductible for this corporation or another corporation. 114 | P a g e In straight line borders are codal provisions. The expenses must be ordinary and necessary It’s ordinary when it’s normal. useful and appropriate for one type of business may not be useful and appropriate for another kind of business. etc…. it must be paid or incurred during the taxable year. but may not be found in another type of business. it is always necessary expense for another? o NO. It either increases the value or increases the life or prolongs the life of the asset such that it violates the rule for an expense to be deductible. Can a NE of one business be a NE of another business? Or is it always the case that if the expense is necessary in this business. if the CE would prolong the life of an asset over which the asset would be useful for 10 years. Although sometimes it does not necessarily need to be incurred day-in. It’s NE when it’s useful and appropriate for the business activities. then only 1/10 of the expense is deductible. What’s the difference between paying an expense and incurring an expense? In the Phil. o Example: If you’re into banking business and your friend is into siomai business. goods have been delivered. 115 | P a g e EAR expense – to the extent only of 1% of the net sales if the corporation is engaged in services. Example: In you’re in 3 businesses. Expense. Emery Tiu P a g e | 115 But the accrual method. So in the expense. All the expenses must be paid or incurred during the year except net operating loss carry-over. And the amount is unreasonable. iv. it would be deductible. the bottomline figure for the entire year’s operations is a loss. So. the other party. it may be reasonable in so far as that business is concerned but your 100K will be unreasonable in another type of corporation. in the next 3 years. But once a business incurs NOL. And the other is a siomai business. So there is no fix amount within which we can determine whether this type of expense claimed is reasonable or not. the services have already been performed in your favor. is it deductible? o o Is the expense pertaining to last year’s activity deductible? o NO.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. iii. advance rental payments. whether paid or not. whether it has been paid by your customer or not. it means to say if it’s carried over to the next 3 years. has already the legal right to demand payment from you but not as yet. But since it is mandated by law to be deductible. taxable. . Many businesses claim representation expense – bringing clients to clubs. Probably. It’s already deductible. And 0. If you are the president of the corporation earning 100K a month. there is a period within which you can pay. EAR expense has been abused. it’s an exception to the rule that it does not really have to pertain for this year’s operations. and it’s payable.5% of the net sales if the corporation is into the sale of goods or properties. it’s deductible. You don’t mix the expenses. the expense is deductible. then the sale has been perfected. But there is one type of expense that is regulated by the tax authorities and that expense is Entertainment. It must be reasonable in amount. Amusement and Recreation expense (EAR expense). Why? Because this type of expense as a deduction has been abused. whatever you have sold. so long as you have completed the transaction. they claim it as representation expense – they require stockholder or employee to bring in receipts and thy can even ask receipts from you and have it reimbursed. You cannot claim the expenses of this business to that business. What is the ceiling set by the Secretary of Finance? o ***In broken line borders are outline notes. It pertains to the previous years. whether paid or not. there is an option for the business to carry it over to the next 3 years. One real estate business. It should necessarily be connected with the business that you’re in. so long as service has been performed. meaning. There is already a regulation that sets a quota for such expense. One manufacturing corporation. It must be paid or incurred in connection with the trade. If you’re claiming an expense which is for the future. business or profession of the taxpayer o Under the accrual method. It simply follows the “all-events test”. so long as it has been paid this year or has been incurred and it pertains to this year’s operations. it’s deductible. No fix amount but you have to consider it in so far as the operation is concerned. such as medical representatives. is reported as sales already and whatever you have paid as an expense including those expenses for which you have effected already the transaction. your supplier. it’s not the expense during those years. In straight line borders are codal provisions. You have all the events to complete the transaction. Instead of distributing as dividends. o NET OPERATING LOSS CARRY-OVER (NOLCO) If the business incurs a loss. meaning. you can sell it. In one of the major cases that we have in the Philippines is those in the business of manufacturing “carajinan”. as honorarium. o o P a g e | 116 Example: If the net income is only 1M. not being registered with the tax authorities because they’re not really into business. And those homeworkers are actually not registered in the business. net sales is 1M and it is engaged in the sale of service and goods. or profession of the taxpayer The evidence must be recognized or produced by the third party. business. it’s only 5K. the maximum EAR expense for services is only 10K while for goods or properties. automatically. what proof do you present to the government that indeed that you’ve made payments for these when it cost millions? ***In broken line borders are outline notes. In so far as salaries are concerned or bonuses of directors. it will be considered already as disguised dividends. the deposit that they made in millions to an individual in Mindanao. only 100K should be given to the Board of Directors for the entire year – for all of them. 116 | P a g e So in one of the companies here. no signature from the other party. etc. o What happens if you are both engaged in the sale of service or in the sale of goods? Which will you follow? You still have to follow the formula – 1% for the service and 0. and Official receipts Adequate records Amount of expense being deducted Date and place where such expense is paid or incurred Nature of expense – direct connection or relation of the expense being deducted to the development. It must be substantiated by sufficient evidence such as official receipts and other official records.5% for the goods and properties... 45K is not deductible for goods or properties since only 5K is the maximum deductible amount.R. you don’t have a large pool of employees so that you sub-contract the raw materials to the different homeworkers. You purchase it from different suppliers to grow such but they are not registered in the business of supplying. they can show you their guns. But if it is goods or properties.R. nor an invoice. cannot produce an O. They can surely sign.R. The problem is that if they do not produce an O. They cannot produce an O. Example: So it means to say that if the corporation. If the evidence solely comes from the company – you made it. So as a In straight line borders are codal provisions. management. What proof will you present to the tax authorities in order to claim the payments you made to these homeworkers? o A contract or an acknowledgment receipt will do. v. you drafted it. it is self-serving so it is not sufficient evidence. And for cost-cutting purposes. They just do what they’re required to do and when they bring it back to you. Homeworkers. Example: You’re in the business of manufacturing wooden toys for export in Europe. Emery Tiu o REASON for the difference: Because those engage in services usually needs representation expense to entertain their clients or treat them over meetings. It’s not always in all cases that you can require your supplier to produce an O.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. . the only thing that they can produce is the proof that it had been weighed by a reputable weighing company. should not exceed 10% of the net income of the corporation because if it exceeds. you pay them. If the corporation has 50K expense. But if you really want them to produce an O.R. Any excess will be considered as unreasonable. operation and/or conduct of the trade. so long as you have the product. it’s provided under the Corporation Code that Board of Directors. lunch meetings.R. R. Is it deductible as APE in the year it was incurred? NO. can be proof enough that expenses have been paid or incurred. It’s excessive and the purpose of actually of Clear is not to make it as an expense in the year of entry but rather its purpose was to give a brand and give a name recall for the customers and it’s expected to benefit a number of years for the company. that some expenses need not be supported by O. o How about payments to rebels as revolutionary taxes? Telecommunications towers. as a rule. In any case. However. it doesn’t go to the government. even to the members of the BOC or BIR or DOF. only 2.R. You will only pay 5M and you will be issued a tax clearance. it’s still a non-deductible expense because it’s contrary to law and public order. vi. so long as it’s not a legitimate payment of an expense. because the law in OSD says “whether or not you have incurred actual expenses”.5M or none of the above? o NONE of the above. . as kickbacks or bribes. APE are deductible unless it borders to creation of goodwill for the company or creating a name for the company. whatever the ***In broken line borders are outline notes. income tax paid to the foreign government. 117 | P a g e In straight line borders are codal provisions.5M will go. Is that deductible? NO. except income tax paid to the Phil. It can opt to deduct entirely the 100M in the year of purchase or amortized the 100M over its useful life.5M will be receipted as received by the government. public policy or public order Example: Bribes and kickbacks given to government personnel You have an assessment of 10M in unpaid taxes or delinquent taxes. etc… OPTION TO PRIVATE EDUCTIONAL INSTITUTION (OPEI) - PEIs have the option to deduct capital expenditures in the year it was paid or incurred or the other option is to depreciate the expense over the useful life of the asset.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. you don’t force them to issue an O. How much is deductible from your business operations? 10M. is it necessary when you want to claim OSD? o o There’s already a SC actually following the Cohan Rule in the U. estate tax. Whatever payments you made to the government. All taxes. ADVERTISING AND PROMOTIONAL EXPENSE (APE) - As a rule. Wherever the other 2. You come into a compromise or common grounds. almost all actors and actresses became endorsers for it. How much did they have as a budget for that? It’s 1B. even if they call it as a formal tax that is paid to the rebels. whatever expense it had paid during the year of entry will be amortized over future years. it is not deductible. morals. Let’s say. Head and Shoulders. future recall. government. It must not be against law. So this requisite applies only in so far as ID is concerned. donor’s tax and VAT. 2. but so long as it can be substantiated with other adequate records proving that in fact it has been purchased by the company and the goods received by the company which were actually converted to the product sold. we do not know. you have to pay a certain amount. however media will try to make it legal in the news. We’ve been through that for years already. so that it will not be blown up. Emery Tiu P a g e | 117 business man. When Clear came in. therefore. therefore. etc… o Example: Dandruff shampoos – we have Guard. o Example: USC would purchase a 100M value building. All the other taxes are deductible. NO. And for the 5M that you will pay. But not in all instances.S. 5M. for 5 years. TRAVEL EXPENSES (TE) - TE are deductible even if it’s not receipted because they’re TE that we incur without having a receipt from the carriers. are deductible. So how to prove to the BIR that these are valid and legitimate expenses? In this type of requisite. A is a holding company of Co. this group will have preferred shares. B (subsidiary company). when distribution happens. A (parent company) and Co. Usually the parent company grants a loan to a subsidiary company for operational purposes. no IE deduction. 2. The term preferred shares. The interest must be ordinary and necessary. Meaning. as a rule. company or PP is deductible so long as the common requisites are complied with: o 1. they have a collectible. INTERESTS EXPENSE (IE) - What is interest? o It’s the amount paid for the use or forbearance of money. If the agreement is stated that interest shall be paid in writing. If there comes a point in time that the business. B 100% and the loan is granted to the subsidiary company where interest is stipulated to be paid. It must be reasonable. Whenever you organize a corporation. whether or not you have actually paid an interest iii. It must be paid or incurred during the taxable year o 4. It doesn’t need to match the expense incurred today against the income for today or year-to-year basis. B. they will get their prior-year accrual dividends plus interest. in a certain year. Co. As a rule. Reasonableness would depend on the size of the business operation. since it’s not subject to tax. o 3. the interest is not deductible. . o 6. corporation. usually. o So if you obtained a loan to use it as a working capital of your operations. In the following year. Dividends comes out from your shareholdings and shareholdings. This must not be between related taxpayers IE which are non-deductible: (See outline) o Corporation to corporation where only one individual is maintaining the controlling interest. not in writing. It must be substantiated by the contract itself and payment vouchers. you will have a preference in the distribution of dividends. o Example: Co. the IE becomes a non-deductible expense. This must observe the limitation under the arbitrage rule iv. It must be paid or incurred in connection with the business o 5. you will receive yours for the year. according to the grandfather rule… If Co. A is owning Co. is the individual. the interest paid is deductible. Is the 120K for the entire year be deductible as a business expense if it’s related to the business? YES. Interest expense on preferred stock Example: A company declares dividends. is the interest payments made by the subsidiary to the parent company deductible? NO. 118 | P a g e In straight line borders are codal provisions. etc. nothing would accrue to you. cannot declare a dividend. It must not be contrary to law o Other additional requisites to make IE deductible: i. There must be an agreement in writing to pay interest - Otherwise. The 50%-rule (controlling interest rule) is only applicable to non-existing holding companies. you may say that this group has common shares. some dividend would accrue to them but not totally paid out. When one is a holding company of the other and extends loans. it won’t have any effect. Will the interest on the preferred shares be considered as deductible IE? ***In broken line borders are outline notes. IE incurred by a business.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. shares that you have can be classified as common shares or preferred shares. There must be an obligation which is valid and subsisting ii. Here. Emery Tiu P a g e | 118 option chosen by USC. Example: If you have a business and you obtained a loan for the working capital of your operation and you are to pay 10K monthly as interest. What is theoretical interest? Is it deductible? o - The concept of paying interest and interest as a deducible expense item is it must be payment for the use of someone else’s money – the forbearance of money. it is not deductible expense. so Co. automatically full interest payment can be deductible. o The arbitrage rule automatically limits the deductibility of the IE by reducing 33% of the interest income subject to final tax. C (no interest income). not paid or incurred. o If the IE is 100K.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. as a rule. apportion. A (earning interest income of 100K subject to 20% final tax). the Commissioner is authorized to distribute. it is deductible. or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations. B. 33% of 500K is 165K. apportionment. Thus. Say for example. o If the interest income is 500K subject to final tax. A is related to Co. any expense loan (let’s say 1M) to Co. In fact. You temporarily borrow money. which results to no deductible IE. under the Corporation Code. If it is dependent upon corporate profits. o Such provision is powerful in the sense that the BIR can do anything with it so long as it sees relationships between corporations. do you have a deductible IE? NO. which is interest-free. do you have a deductible IE? YES. B (earning 100K interest income from loans to employees) and Co. So the 165K will be deducted to 100K. whether or not engaged in back-to-back loan transactions. Emery Tiu - o The taxpayer’s allowable deduction for IE shall be reduced by an amount equal to 33% of the interest income earned by him which has been subjected to final tax. or allocate gross income or deductions between or among such organization. A is earning interest income subjected to final tax. A did not earn any interest income. C can fully claim the 600K as a deductible IE since it is not earning interest income. Example: If Co. It’s not real. What is imputed interest? Is it deductible? Is it an actual expense? o Sec. What is the Arbitrage Rule? - P a g e | 119 It’s an interest which is computed or calculated. But dividend declaration is not an obligation of the corporation. use it and for the use. Co. All of them obtained the 1M loan running for 10 years wherein they would be liable each for 600K annually as IE. you are to pay interest in addition to the principal payments that you will make. B can fully claim the 600K as a deductible IE since its interest income is not subjected to final tax. it’s not deductible nor taxable. The arbitrage rule applies since Co. Can Co. IE is 100K. The principle why such rule exists: To discourage Back-to-Back loan transactions – obtaining loan from one bank and invest it to another bank in order to benefit the difference between the tax due on interest income and the tax benefit from the IE. o Example: Let’s say that the company has an IE of 600K but it has no interest income. no IE because IE ***In broken line borders are outline notes. There’s no payment at all. a dividend can only be declared if there is enough unrestricted retained earnings or corporate profits that a corporation has. B deduct IE? Automatically. for the purpose of determining the opportunity cost of investing in a business. trade or business. Co. trades or businesses. REASON: The corporation did not really loan any money coming from the stockholders. Interest income subjected to final tax is only those coming from the banking institutions. Which of the 3 corporations can claim the full 600K as expense and which cannot? Co. The corporation is obligated to pay out dividends once it has profits. the arbitrage does not apply. interest income subject to final tax is 100K. is the IE deductible fully? YES. B as the controlling or fully owning the other corporation. You have a deductible IE of 67K (100K – [33% x 100K]). Co. trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests. 50 of the tax code – Allocation of Income and Deductions – In the case of 2 or more organizations. Co. if he determines that such distribution. A cannot claim fully the 600K as a deductible IE but only 567K (600K – [33% x 100K]). . If none. 119 | P a g e In straight line borders are codal provisions. If it is not dependent upon corporate profits on the preferred shares. business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. The taxpayer cannot benefit from a violation that he committed against the government. because it’s an indebtedness to the government. But since Co. A. Co. if it’s not subjected to arbitrage rule. you can claim the full benefit of the tax paid abroad since tax credit is a deduction from Philippine income tax. B is absolutely not allowed to claim the IE for no interest has been paid and there is no stipulation in writing. TAXES - GR: All taxes. - Can payment of interest for delinquent taxes be deductible? o - YES. It is only the interest that is deductible. 3. Thus. whether deductible now or deductible in the future? Co. surcharges and compromise penalties are concerned. But in so far as penalties. B obtained a loan to construct a property that is a capital expenditure. Whenever a taxpayer. Does Co. it becomes non-deductible if it uses the foreign tax paid as tax credits. the IE can be considered as capital added to the cost of the building and it will be considered as an expense over the estimated life of the asset that was acquired using the loan amount. is a deduction from gross income in computing the net income. the incurrence of expense is for working capital purposes. you cannot claim it as a tax expense. business or profession of the taxpayer ***In broken line borders are outline notes.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. as an expense. corporate or individual. interest incurred to acquire property used in trade. day-in day-out operations. o E: i. the accessory interest expense can also join the principal cost. A obtained a loan for working capital purposes. Emery Tiu P a g e | 120 must be stipulated in writing and there is no interest payment made. that taxpayer is not only liable to pay the basic tax but also has to pay surcharges of 25% and 50% if it is found to be fraudulent plus interest of 20% pa and additional compromise penalties. paid or incurred within the taxable year in connection with the taxpayer’s trade. these are not deductible. only to the extent of 30% of that foreign tax will it reduce the tax due since tax deduction. Both of them paid 1M in interest. You temporarily withheld the payment of taxes to the government for the use of money during the time which you have not paid properly your taxes. If the foreign tax is claimed as a tax credit. Example: Co. A to tax. Thus. is assessed of delinquent taxes. So if the building has an estimated life of 10 years or 20 years. So whether or not these payments are deductible. the IE incurred. Special assessment – tax imposed on the improvement of a parcel of land ii. But the BIR can impute an interest based on the legal rate of 12% and subject such interest income on the part of Co. . would be fully deductible as an expense for the year of incurrence. business or profession are deductible from gross income. on top of the tax . the IE not limited with the arbitrage rule. Where the principal cost goes. otherwise. B obtained a loan for construction of a building. B have an option in treating the IE. 1M in IE and no interest income subject to final tax. But Co. iii. Optional treatment of IE (OTIE) o At the option of the taxpayer. the IE can also be considered as a capital expenditure. Taxes which are not connected with the trade. you cannot claim it as a tax credit. tax credit is more beneficial. Claiming it as a tax credit. Income tax – includes foreign income tax Philippine income tax – absolute rule: totally not deductible Foreign income tax o Paid by domestic corporations and resident citizens (taxable within and without) – may be claimed as a deduction if it opts for tax deduction. national or local. A or Co. But if you claim it as a tax expense. 120 | P a g e In straight line borders are codal provisions. But if you claim it as an expense. is interest deductible? YES. can Co. however there are exceptions. . VAT Is the real property tax (local tax) payment made by the corporation on its real property used in trade or business a deductible expense for purposes of computing income tax liability. - What type of taxpayer can offset the foreign taxes directly by 100% against the Philippine tax due? o i. 20M (foreign income)/100M (global income) = 20% x 30M (Phil. Beneficiaries of estates and trusts If the tax paid in China is 10M and the tax due on your entire income here in the Philippines is 30M. What are the taxes that are deductible and what are those that are not deductible expense? o Generally taxes are deductible. Emery Tiu - P a g e | 121 Whatever type of tax that is. iv. o They are not deductible if it is: o 1. B fully deduct the 10M against the 30M? o NO. Substantiated with O. Reasonable in amount 3. Value added taxes o 3. September 14. Resident Citizens – since liable of income within and without to avoid double taxation - NRC – not included because liable of income within only – no double taxation o ii. donor’s tax v. - All taxes. o Thus. ***In broken line borders are outline notes. not real property tax liability? o YES. whether national or local tax. taxes – local benefit. Why is estate and donors taxes not deductible? They are not deductible because they are not related to the business of the taxpayer. will be considered as deductible from gross income in computing the net taxable income so long as it follows the requisites of being paid or incurred during the taxable year in connection with the trade. Real property taxes are deductible so long as: 1. you claim whichever is lower in favor of the government. it must not be more than the ratio of foreign income to the total or global income multiplied by the Phil. Philippine income tax o 2. Capital gains tax/final taxes o 4. B (which operates 80% in the Philippines and 20% in China with 100M total income. Thus.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. o Had it been the other way around. public policy or morals - Example of national tax that is deductible: Customs duties when the corporation is engaged in importation of goods. business or profession of the taxpayer. income tax due. It is ordinary and necessary 2.Rs 6. Estate and donor’s taxes. Estate tax. business or profession of the taxpayer subject to the exceptions. since the foreign income tax paid to the foreign country is not always the amount that may be claimed as tax credit because under the limitation provided under the tax code. It’s not contrary to law. since it’s not connected with the trade. 121 | P a g e In straight line borders are codal provisions. can Co. business or profession 5. It has been paid or incurred in connection with trade. Domestic corporations – since liable of income within and without to avoid double taxation o iii. it’s not deductible. 20M from China and 80M from the Philippines). Therefore. Members of GPPs o iv. only 6M can only be claimed as a tax credit. It has been paid or incurred during the taxable 4. income tax) due = 6M limit. automatically. if the limit is higher than the actual tax payment abroad. 2010 - Q: What have we discussed in taxes as a deductible expense. It means to say that only expenses within the Philippines are deductible. we are only concerned with what is within the jurisdiction of the Philippines. Philippine income taxes are not deductible against gross income. has income within and income without. 122 | P a g e In straight line borders are codal provisions. While the VAT that the corporation actually pays on its purchased product are not considered as part of the cost of the product but offset-able against the tax payable to the government. and whenever real properties are used in trade or business. and the Philippine income tax has been exclusively computed only against the Philippine income. Non-resident Corporation: Tax Due Not Deductible Because income tax not allowed Within = 1. It’s some form of a real property tax. - What’s the difference between allowing it as a tax credit or allowing it as a deductible expense? Are they in the same direction? ***In broken line borders are outline notes. All real properties are subject to real property taxes. o Special levies are imposed on the improvement or the fact that a parcel of land has been benefited by an improvement. X. Being a non resident citizen. a non resident citizen. which makes it some kind of a tax on the property.000 Without = 1. If it is not a deductible expense. - Mr X.000. o The tax paid to the US government is a foreign income tax. o It is not deductible because this is not the basic real property tax. exclusively foreign tax. Is it deductible? If this has already been paid to the US. only happens when there are improvements.000 as well. this 300. Income within amounted to 1M. Why is it not deductible? What’s the difference? o The special assessment is a tax on the improvement on a property but that improvement is not owned by the owner of the property. o But special assessments are one kind.000. Exclusively Philippine tax.000 Not Deductible Because NRC It is not deductible.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. expense related to the income generated by the taxpayer. cannot be claimed as tax credit. What makes it different from real property tax being deductible taxes? o Real property tax is a tax on the land itself while assessment is a tax directed against the land for the benefit derived from the improvement made by the government.000 and 300. . when in fact it is related to selling your product or services? Value added tax is not deductible for computing gross income because VAT is an indirect tax. Special assessment is that being paid or collected by the government from landowners whose property has been benefited by an improvement made by the government. can the foreign income tax paid be offsetted against the Philippine income tax due? NO.000 paid to the US as an expense deduction or at his option as a tax credit against his Philippine tax due? MR. in computing whether an expense is deductible or not. what benefit will Mr X get out of the 300. the real property taxes due from these real properties are rightfully deductible against the gross income of the corporation. the VAT that the corporation is paying to the government is a tax that has been shouldered by the customer or consumer. it is deductible but special assessments are not deductible.000 = 300.000 income tax? Is there any benefit? Do you think it is proper for Mr X to claim as deduction the 300. income without amounted to 1M.000 tax on 1M income earned abroad. Is this income tax paid to the Philippine government a deductible tax? Is this a deductible tax? NO. Is real property tax a deductible tax? Yes. o Foreign income tax has only been computed directly against the foreign income. Tax due paid in the respective countries amounted to 300. - Special assessments of levy – are they deductible? No.000 = 300. Emery Tiu o P a g e | 122 Why is value-added tax not deductible. and these are only premium fees that you need to pay whenever you have derived any benefit – which is not directly related to the operation of the business itself which makes it non deductible. No component of this Philippine tax due pertains to any foreign income. the jurisdiction of the Philippine taxing authority pertains only to income within. not only that. In straight line borders are codal provisions.000 = Max 150.000 1 million X 300.000 is recognized by Philippine government.000 2 million He can claim in part. If the tax paid abroad is 100. Foreign tax paid is 300. because tax credit claim shall not exceed the limit provided by law.000 = 300.000 = 300.000.000 foreign.000 Without = 1.000 = 300. How much can he claim? Since this is only one foreign country.000. o Same facts. o Say for example.000. Philippine tax is still at 300. not the whole 300. the maximum limit that can be claimed as a tax credit is only 150. one-half the proportion of the foreign income against the entire global income against the Philippine tax due so the component is still 150. If you say within and without.000. this cannot be claimed totally as a tax credit. and the ratio is one-half. Since this is only one foreign country. one-half of this is a foreign tax recognized by the Philippine tax authority. - Let us change the facts.000. you will not forget the formula.000. claim only Php 100. o Foreign tax credit can only be claimed or offsetted against the Philippine tax due if the Philippine tax due is that of a resident citizen or domestic corporation because these two types of taxpayers are taxable on income within and income without. 123 | P a g e Therefore. since a resident citizen is taxable within and without. How much is his total income? 2M. and the limit still remains the same. income without is 1M. you go for both limitations. How much can Mr X claim as a foreign tax credit? MR. o Formula: - The tax credit that shall be allowed to the taxpayer Mr X shall only be to the extent of the foreign tax component in the Philippine tax due.000. component of that is a foreign tax.000 Max 2 millionX 300. Therefore. what is the formula? So.000 1 million 150. you can directly go to global limitation. this is a resident citizen. If there are more than two foreign countries. The limit is still 150. You will note that if this is the amount collected by the Philippine tax authorities. Imagine this being the entire Philippine tax due of his global income. would your answer be different or the same? Let’s say income within is 1M.000 whichever is lower . the Philippine tax already comprises of tax on the Philippine income and the foreign income.000 ***In broken line borders are outline notes. Within = 1. Can the taxpayer claim the foreign income tax as an expense deduction or offsetted as a tax credit? Can he claim it as an expense? Yes. How much is his income abroad? 1M.000 Without = 1. X. One-half proportion . Emery Tiu P a g e | 123 o The deductibility of an expense is always premised on whether or not it is related to the trade.000 =150. business or profession or whether it is directly related to the income of the taxpayer. he can also claim it as an expense. directly offsetted against the Philippine income tax due.000 as foreign tax credit? MR. whichever is lower.000.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. His other option is to claim it as a tax credit. and required to declare the total global income.000. Resident Corporation: TaxTherefore. for income within and without. Mr X cannot claim fully. Resident Corporation: Tax Due Within = 1. What is the component recognized by the Philippine tax authorities as forming part in this tax? What is that foreign component? It is the proportion of his foreign income against his entire income multiplied by his Philippine income tax. Therefore. X. Due ½ of 300. which should rightfully be managed.000 = 100.000. can Mr X claim 300. .000.000. maintain the same.000. You don’t have this formula for every country. foreign individuals cannot engage in the practice of law. but we will discuss that when we reach estate taxation. Emery Tiu o P a g e | 124 100.000.000. 150K. what are the proofs that you need to show? o The taxpayer must establish to the satisfaction of the Commissioner the following: (1) the total amount of income from sources without the Philippines. whichever is lower.000 300. - o If your actual tax payment abroad is 500. Whichever is the lowest is the available tax credit. we don’t compute the limit per country. what the resident citizen or domestic corporation has more than one foreign source. Beneficiaries of estates and trusts. 124 | P a g e In straight line borders are codal provisions. and your actual tax payment is 200.000 Therefore. you can only claim 300.000. we only have Filipino practitioners. As a rule. whichever is lower in all cases.000 500.000 300. This means to say. compute the limit per country.000. foreign income against worldwide income. your tax credit would only be 200. Per Country Limit Global Limitation Actual Within 150. So if the total of the global limitation is 400. (2)the amount of income derived from each country.they are allowed to claim foreign tax credit. o If there are two foreign countries and the limit is 150K. o If there is more than one foreign country. who may claim tax credits for taxes of foreign countries: o Resident citizens o domestic corporations o We may as well mention members of general professional partnerships in the Philippines. Lifeblood doctrine. you “pull in???” all the foreign countries here. Per Country Limit Global Limitation Actual Within 150. Use the principle.000 150.000 400. In the global limitation.000 Therefore.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. o Beneficiaries of estates and trusts.000 (?). in considering what is the maximum limit. Why member of GPPs in the Philippines – they should still be resident citizens. o So global limitation. for a taxpayer who has more than two foreign sources. The reason there in letter C in the outline.000 200. It shall not exceed the maximum limit or the actual payment abroad. compute it globally using still the same formula. he has to consider the global limitation and the per country limitation.000 150. Per country. The government f the Philippines would only allow you to claim a foreign tax credit to the extent of what you have actually paid or to the extent of what it recognizes as a foreign component of the Philippine tax that it is trying to collect. the tax paid or incurred to which is claimed as a credit. You will see there a per country limitation. claim only Php 200. Per country limitation would still be the same. This is what will come out.000 400. and compare it to the actual. and - (3) all other information necessary for the verification and computation of such credits. ***In broken line borders are outline notes.000. claim only Php 400. in global limitation. this is 300. the taxpayer should know per country how much is the maximum total. In order to claim foreign tax credits. did your tax liability decrease? If it did.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty.000 Gross Income 2. in the tax that you have subsequently been refunded. This will become zero. He can always forego claiming the tax credit and opt for expense. your taxable income is 1M. Your tax would be zero. Is that a taxable refund or inflow of money or not? Tax Refund Sales 10. would all tax refunds be taxable? Were you benefited by the foreign tax that you have overpaid prior? Remember bad debts expense. Therefore – Remember the tax benefit rule? If this is your finances.000. You will have additional 30% tax.000. But it can be a deductible tax if the taxpayer is a resident citizen or a domestic corporation. Because it is more strict to claim the tax paid abroad as a credit.000. o Remember. you will have additional 300. all you need to know is whether in the year that you claimed it as an expense. because the option lies with him either to claim it as a tax credit or a tax expense. Bad debts expense is an expense that you claim.000. Because the tax credit benefit always is available to domestic corporation and resident citizens. If within the same year you decide to claim as an expense the bad debts amounting to 1M also. The topic is itemized deductions.000 o Let’s put that into illustration. the 1M is fully deductible.000 + 1. bad debts that have been subsequently refunded can only be taxable to the extent that you have been benefited by the expense that you have previously claimed.000. you will be taxable. no income abroad. In filing your income tax return for 2009.000 taxes on the 1M. if you look at the tax code. In this case. gross income 2M. you were refunded. In 2007. So it’s a little bit complicated if you don’t know the principle. it will reduce your income tax due. you immediately applied for a refund. Foreign income tax is one of the exceptions to the deductibility of taxes. The 1M tax that you have overpaid pertains strictly to Philippine income.the topic is expense. your expenses is 1M. you have overpaid 1M in income taxes. this will be your other expenses plus the uncollectible loan of your debtor. 125 | P a g e In straight line borders are codal provisions. or in the year that you decided it’s no longer collectible. did it decrease your tax liability in the prior years? Did you ever claim income tax as an expense before? No. Emery Tiu - - P a g e | 125 Foreign income tax. You try to memorize it.000 Less: Expenses 1. let’s restate it. would you take into consideration the inflow of 1M cash that has been refunded to you for overpaid taxes? Yes. ***In broken line borders are outline notes. wherein he has the option to claim it as an expense or a tax credit. then it will be taxable at the year that you will collect it or you are able to recover it from your debtor. you sought for a refund. If in the subsequent year this was recovered. In 2008. o Again. therefore you’re liable for 300. o In this case it is the same. .000. can it be claimed as an expense? o As a rule.000 Net Taxable Income 1. It is one of the exceptions to the rule that it is deductible unless if it is claimed as a tax deduction. probably you can say foreign income tax is not deductible as an expense unless the taxpayer is a resident citizen or a domestic corporation. No exception to that? o You have to answer the question: Have you been benefited previously? Because the taxability of a tax that has been subsequently refunded would lie on whether you have been benefited in prior years.000 Cost 8. If it is subsequently refunded because your debtor has funds to pay you. In 2009 you were granted the refund.000. can a tax subsequently refunded to a taxpayer be taxable? Say for example you have overpaid taxes. You are a resident citizen. But you may suffer a net operating loss because the salary of your tinder is Php 10. But usually you don’t go into business selling at a loss.000. Losses - Are all losses deductible losses? No. you have to pay 300. you are given Php1M refund in cash. The government will only try to recover that which you have not paid. Why? Because you never claimed it as an expense. is deductible expense. If your operating loss is Php 3Million. etc. you don’t sell it at Php 6 pesos or Php 8 pesos. This is what will produce the net operating loss because ordinarily. Cost is the construction of the house. you still have gross income of Php 2. if the Php 3million is carried over as a deduction. which erased your tax liability. It never reduced your tax liability. o The cost. o Example. only to that extent will the refund of taxes be taxable. The only difference is that (in all aspects daw but there is a difference): In bad debts. you sold it at Php 12. it is a valid deduction notwithstanding that this Php3Million is not incurred in year 2. if subsequently that expense that you claimed has been refunded because it was a wrongful tax that you’ve paid. o But if the RPT only benefited to the extent to the portion of the tax. we will suffer a loss. SO you know that ordinary losses are those that which have been sustained ordinarily in the course of trade. you bought it at Php 10. o For example. not incurred in year 3. will the RPT subsequently refunded be taxable? You overpaid Real Property Taxes after filing a claim for refund.000. uncollectible. - If its real property tax (RPT) that has been refunded to you. It is entirely the same principle as bad debts that you subsequently recovered. Because usually in the initial stages of your business. Let’s say. if the tax that has been refunded to you is not a deductible tax. Because if you change the sales to 12M. 126 | P a g e No taxable income because: Net Taxable Income: 4.000 No Taxable Income -0- In straight line borders are codal provisions.000. So that if you deducted Php1M real property tax here. paid or incurred during the year. for those losses arising from ordinary transactions involving ordinary assets. What is a net operating loss? In our formula. Now. And these are deductible. business or profession. If it’s not a deductible tax. so if it subsequently refunded by the government. this will be gross loss. you have taken legal actions. follow the bad debts principle. And it is the exception to the rule that expenses or deductions shall only pertain during the year. Capital losses are those losses arising from capital transactions and capital transactions involve capital assets. to the extent of the benefit that you have derived. This is the house that you are selling (Sales Portion). effectively reduced your tax liability. So if it is subsequently recovered by you. the law provides that it can be carried over to the next 3 succeeding years. you purchase siopao at Php 10. As for taxes. will the Php 1M subsequently received as a tax refund be subject to tax? Yes or no? o Yes. What will you change in the formula? Change the cost to 3M and it will become net operating loss. Income tax is not a deductible tax. You usually sell it at a mark up. tax authorities would expect this (gross income) to be positive. On this level only. you have to be very aware what kind of taxes has been refunded. there is never any taxable income at the time that it is refunded.. 4. if you have this.000 Loss on Year 2: 1. it’s not taxable.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty.000. ***In broken line borders are outline notes.000 Less: Loss on Year 1: 3. In this case. - What losses are deductible? What’s the opposite of ordinary losses? o - - For tax purposes. What is net operating loss carry over? Let’s make the expenses Php5Million your net operating loss. in all aspects. so long as you can prove that it’s worthless. nor incurred in year 4 because that is the exception. o That is the same principle in tax refund. forget about the principle. . change it to an operating loss. If it’s a deductible tax. Emery Tiu P a g e | 126 Why? The government will seek to recover the tax that it failed to collect because you claimed it as an expense. we have ORDINARY losses.000 a month. that will be taxable because that RPT which you erroneously paid before. you cannot use the Php3 million because you are at a loss. then the next succeeding year. if the loss in the first year. you can carry it over to the next 3 succeeding years. whatever loss that you suffered. At this point in year 2. that you should use it consecutively. If in year 2. whether fully or partially. In the 5 th year of operation. If it has no use in the next year. is already a deductible loss. - Is it favourable to the government? You might think it is not. - For year 3. suffered in year 1? Can you carry over or can you utilize the Php3Million net operating loss in year 1 to year 2? Can you use the Php3Million loss in year 2? We are done with year 1. you suffered still a loss. both companies owned 80% by A. you already used Php 4million of losses. o Meaning or which means to say that net operating losses that can be carried over can only arise when a corporation is subject to income tax. Only 3 years at a time. until the 3 rd year. - o Why? What’s the reason? Whenever a corporation is at a stage or it is granted exemption from income taxes. whichever is higher. Emery Tiu P a g e | 127 - In year 2. A 80% B 5% C 5% D 5% E 5% . Therefore. it earned income. any losses suffered during those years covered by the exemption cannot be considered as a loss or carry over. can you carry over the Php3M. Year 1 is allowed 3 years. - Point is. It will not benefit years that the corporation will subsequently be taxable. - For losses only. can you use the loss of Php3Million in year 1? No. is not used up the next 3 years. Shown below are the list of shares in each company. Your accumulated losses as of year 2 is already 5 million. So you have to pay 30% of Php 4 million as a corporation? How much will you pay? How much is your tax liability in year 3? ZERO because you used used up Php3Million for year 1 and Php 1Million for year 2. o So in year 3. Can the losses suffered in the previous years be used up to offset against the taxable income in the 5th year? No. the losses or whatever net operating loss that you have suffered. it is no longer usable in the 4 th year after it has been suffered as a loss. - Let’s change the facts. XYZ Corporation and ABC Corporation. o So this is on a first in. This is XYZ Corporation. But of course the government has devised a way to still collect taxes notwithstanding that you are losing. And 1 million is taken from year 2. year 3 and year 4. Why? Because you still suffered a loss in year 2. You may be at a loss at the level of net income but you still have to pay taxes at the level of gross income. assuming expenses exclusive of losses. when you already earned positive income. your accumulated loss is only 1 million. Whatever came in first as an accumulated loss. A 80% U 5% V 5% W 5% X 5% XYZ Corporation MERGE Year 1 LOSS Year 5 ***In broken line borders are outline notes. it totally suffered annual operating losses. We will discuss this once we reach minimum corporate income tax. It does mean that you should use the loss in year 1 in year 2. o You accumulated losses at the end of year 1 is Php 3Million. how much is your net taxable income? Php 4million. Let us not combine the 2 as yet. given the facts. This has a life of 3 years. o In year 3. 127 | P a g e ABC Corporation Year 1 INCOME Year 5 In straight line borders are codal provisions. it has been given 4 years income tax holiday. your losses will only accumulate. will have to go out and offsetted against the income.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Year 1 has been entirely used up already. it goes down the drain. you can utilize the loss in year 1. For the first 4 years of operation. first out. Year 2 has a life of 3 years. Because the loss in year 1 is usable in year 2. T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Emery Tiu o P a g e | 128 A total of 100% ownership for both companies. Year 1 until year 5, operate at a loss. Year 1 to year 5 for ABC Corporation operated positive. The stockholders of XYZ Corporation could not use the losses suffered in year 1 to the next 3 years nor the losses in year 2 to the next years. Why? Because it consistently operated at a loss. In this case, ABC has been paying huge income taxes. So what stockholders of both corporation decided was to merge in the hope of using the losses of XYZ Corporation to offset against the income of ABC Corporation and claim it as a deductible expense. Is it allowed? Yes as long as the change in ownership is not less than 75%. Should it be more than 75%? Which means? Not less than 75% is 75% or above. o So if the facts above is changed to 75% ownership: Can the loss be considered as deductible in the merged corporation? Yes. It is still deductible because the merger because the ownership is still owned by A at 75%. o Combining corporations in order to use up the losses suffered by 1 corporation is allowed so long as there is no substantial change in ownership from the individual corporations down to the merged corporation. Substantial ownership, no change in substantial ownership means that at least 75% of the paid up capital of the corporation is still held by, or in behalf of the same person(s). So in that case, it is still Mr. A who is still holding the same percentage prior to merger. So long as after merger, it is still A who is holding atleast 75%. o In cases, where it does not reach 75% or there is a substantial change in the ownership, the opposite, substantial change meaning there is already a change of more than 25%. It means to say that the loss suffered by 1 corporation cannot be used by the merged corporation. When it merges, or there is a merger of corporation, there is only 1 surviving entity will remain. - CAPITAL LOSS CARRY OVER - What is meant by capital loss carry over? Losses from sale or exchange of capital assets. o So can you say that there can be capital losses on sale of real properties classified as capital assets? NO. You do not disturb these rules class. There are only 3 types of capital assets which can give rise to capital transactions. o Sale of real properties classified as capital assets. o Sale of shares of stock wherein you are not a broker of securities subject to capital gains tax. o And ALL other capital assets. Real properties are taxable on the gross selling price or fair market value whichever is higher. So any loss that you suffered from the sale of this property cannot be carried over because it is on a per transaction basis and you are never taxed on the profit alone. You are taxable on the gross selling price or the fair market value itself. But on the other 2, you can have capital losses. (Meaning capital losses can only arise in sales of shares of stocks and all other capital assets. Never on the sale of real properties.) o Motor vehicle that you personally own. So if you sell a motor vehicle that you personally own. You are not in the business of leasing or buying or selling of motor vehicles. You bought it at Php 4million and sold it at Php 2Million, you suffered a loss. This is capital loss. And there is also what we call as, NET CAPITAL LOSS CARRY OVER. o The loss that you suffer in a capital transaction excluding the sale on real properties can be carried over only to the NEXT YEAR. Not 3 years. CAPITAL ASSETS: Applicable NCLCO? 1. Real Property 6% Capital Gains Tax X 2. Shares of Stock 5% / 10% 3. All other MV (personally own) Bought 4Million Carry this over the NEXT YEAR! o Sold2Million Capital Loss2Million ***In broken line borders are outline notes. In straight line borders are codal provisions. NCLCO can only be carried over the NEXT YEAR ONLY! 128 | P a g e T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Emery Tiu - P a g e | 129 Does this rule apply, for capital losses to be carried over, is this available to corporate taxpayers? It is NOT. As provided in the outline, it’s not available to corporate taxpayers. Therefore, we will discuss the mechanics of this one once we reach capital transactions towards the end of the semester. o Can you give me some example of capital losses? Securities becoming worthless simply means to say that if you are a corporate tax payer and have invested in another corporation which that investing corporation, the other corporation which you have invested in, is suffering a loss, insolvent or dissolved, etc. Your shares or securities held in that corporation, your ownership is already worthless. So the losses that you suffer is a capital loss. This is not, you are not into active trading of shares. - How about liquidating loss? o When the corporation in which you have invested in as a stockholder has given you a liquidating dividend lower than your initial investment or your investment cost. Is the loss a capital loss? Losses from liquidation of corporations are in the same category as securities becoming worthless. It’s a capital loss. And whoever the tax payer experiencing a loss, it would have to depend whether or not he can carry over such loss. Only individual taxpayers experiencing capital losses have the option to carry it over to the next succeeding year. Without an S. In the outline, losses arising from failure to exercise privilege to sell or buy property like option money that you have for which you did not exercise the option, it’s a loss if you are the one who put up the option money. It’s a capital loss. - Abandonment losses in the case of natural resources wherein you have invested in a property hoping to find natural resources or minerals only to find out that there is none. So abandonment losses is a capital loss because you are not yet in the operation of the mining business. It’s still under exploratory stage. - Losses from wash sales or stock securities, I want you to read that class. We will discuss that once we reach capital transactions. o Wash sales or stock securities are just like I think a simulated sale. Is this a simulated sale? Wherein a sale and a purchase of the same type of stocks or securities happens within 30 days. No deduction of capital losses experienced will be allowed unless the one experiencing it is a dealer of stock securities. Because wash sales are type of simulated sales of securities in order to influence the stock market. So as to make it appear that the shares of this company is actively traded in the market in order to increase its value, some person in trading, within the span of 30 days, would buy himself for the same but it is simply simulated in order to influence the value of the shares in the market, its not any loss that is deductible. Unless you really are a dealer in shares. Because if you really are a dealer in stock securities, your eyes really is on the stock market. You buy and sell shares many times within the day. - Are gambling losses deductible? Can you deduct the excess of your gambling loss over your gambling gains? Can you deduct the excess against your ordinary business income? You cannot deduct? o Say for example your gambling gain is Php2million, your gambling loss is Php5 million, separate days. Your net gambling loss is Php 3million. Can you offset the 3 million against your business income of Php100million? Capital losses can NEVER BE DEDUCTED AGAINST ORDINARY INCOME. Capital losses are off settable against capital gains to the extent of the gain. Any excess so long as its NOT ILLEGAL losses can be carried over as an individual taxpayer to the next year. Corporate forget about it! No carry over of net capital losses. Ordinary income can only cater to ordinary expenses and ordinary losses because one of the common requisites that we have in order for an expense to be deductible, is that it must be incurred or paid directly in relation to the trade, business or profession. Your gambling losses is NOT really related to your business. Therefore, you put a border line but in the end, as a individual taxpayer or corporate tax payer, you report under 1 income tax return your ordinary income, ordinary losses, ***In broken line borders are outline notes. 129 | P a g e In straight line borders are codal provisions. T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Emery Tiu P a g e | 130 bottom line, you pay for the tax. As long as you don’t cross over. Capital for capital and ordinary for ordinary. - Casualty Loss What is the casualty loss? And what are the requisites to make it deductible? o Number 1, whenever you, whenever the business suffers a casualty loss and casualty losses are those major losses really, fire, storm, shipwreck, robbery, embezzlement, and theft losses. It must be duly reported within 45 days by a sworn statement to the tax authorities. o The loss must be incurred in trade or business o It must be actually sustained during the year in which you want the charge it off against your income. o Evidenced by a close and completed transaction. o Actually sustained o Must not be compensated by an insurance. In case there is an insurance, remember that only the difference between that that has not been compensated by the Insurance Company is deductible. And we know for a fact that property can only be insured to the extent of the value otherwise, any excess will become over insurance. It will not be paid by the insurance company. So we don’t actually have to discuss the excess of the insurance over the loss because these are property losses, casualty losses. Unless of course if its….ok! (Wala gi tiwas n atty. Iya sentence..:( ) Which leads me to princess of the stars. Is the loss deductible in so far as sulpicio lines is considered? Deductible fully or does it have..? Is it still floating class? Here, class interacts na no na daw. So it will be total loss not floatable na. Deductible? o It happened in 2008. And insurance companies will only pay when everything has been cleared. The finding of the fault, etc., etc., in so far as the shipping company is concerned. When do you think is the casualty loss deductible? In 2008 or in 2009, assuming that it is only in 2009 that everything has been settled with the insurance company. It is only in 2009 that the insurance company admitted that it is liable to pay. If it remains unclear by 2008 whose fault was it leading the insurance company to suspend the payment of the payment or the face value. Do you think you can charge it still in 2009? Or it would depend if you are for the government or for the company in that case? In 2009, because only then there is a closed and completed transaction of the loss. Diba you know that it sunk in 2008 but if its still under investigation as to whose fault is it, the government will not allow you to deduct fully in 2008 when you are expecting to be compensated by the insurance company in 2009. So, unless and until, in Atty.’s opinion, everything has been settled with the insurance company, only then can you determine how much is your deductible loss. Because only to the extent of the value that is not compensated by the insurance company can you claim the loss. You cannot claim fully the loss. Probably that’s the reason why Atty. has heard that it has or it should not still float. Atty .does not know the reason. Gaboobs: Is there a prescription? T: I think that is the problem of Sulpicio Lines because if the investigation would drag on, to claim the exemption, it should at least approximate the time when the loss was suffered. So I think that has to be settled because this is a special case which needs to be settled, I heard with the BIR that Sulpicio Lines, their hands should not be tied in claiming the exemption this year or next year. It would have to be based on the agreement with the ***In broken line borders are outline notes. 130 | P a g e In straight line borders are codal provisions. o So unless probably that when you are declared as insolvent. your still mid solvent. you have separate businesses. if you are the bank. - When can you say that it is already worthless? - If you are a credit card company. o A collection letter. You will become insolvent only after when your liabilities exceed Php1 over your asset. it will no longer be deductible in the subsequent years. You will hire a lawyer for the collection case. If your liability is equal your asset. Otherwise. there is no real loss.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. And if the credit card holder will not pay even upon receipt by the demand letter issued by the lawyer. - What are the requisites to make a debt a deductible bad debt? 1. it must have been ascertained to be worthless. and to be worthless. it will not be deductible already because there is no matching of the losses that occurred in 2008 and 10 years after. o For example. you call it bad na if you cannot collect the unpaid debt. 131 | P a g e In straight line borders are codal provisions. Number 2. there are had been many instances that the Supreme Court actually denied the claiming of a bad debt or a debt unpaid as a deductible expense. number 5. you have an idea that in case casualty loss is suffered. arising from trade. when you are able to determine it to be worthless. not two years from now. must arise from a valid and subsisting obligation. When can you become insolvent again class? When your liabilities will exceed your assets. is that it must be uncollectible in the near future. It’s not yet bad. Non reporting of the loss would result to non deductibility. and its 10 years after already. is it enough for you as a credit card company to claim the unpaid account as a deductible bad debt? If the loan is only Php10.000 pesos. you file an action in court. As long as not next year. Hopefully nalang. when its covered by insurance. And once you determine it to be worthless this year. 4. Tiu does not know what is near. you should act within 45 days to report the loss. o So. BAD DEBTS - Bad Debts. The final requisite. o Say for example. o Atty. 5. Far away. No! Because you still have the estate against which to collect. there are steps that we need to undertake: o Sending statements of accounts. o Nonetheless. What are bad debts? - These are debts due to the taxpayer which are usually ascertained to be worthless and charged off within the taxable year. that is the only year when you charge it against your income as an expense. o So it probably will be collectible in the far future but not in the near future. 3. you are still solvent. automatically charge it against your income this year. o Referral to lawyer o Demand letter o And if the debtor still fails to pay. So number 1. Number 3. Emery Tiu P a g e | 131 insurance company and the tax authorities as to when really there is a closed and completed transaction of the loss. you placed your bet on Brother Eddie. business. The other party placed her bet on President ***In broken line borders are outline notes. or profession. But during the election. We know that there are many credit card holders who don’t pay or settle their accounts. 5. you and your seat mate. . if the debtor is already dead is it enough for you to say that it is an uncollectible and worthless loan? Can you automatically deduct the unpaid debt of that decedent who just recently died? In 1 SC case. Because if you wait forever for the insurance company. 2. is the filing of the case needed? o In many supreme court cases. during those stage you accumulate cost for coming up with a model or a prototype. business. How different is this against amortization? (Did it ring already? So she can finish amortization) Amortization is applied to intangible assets. But for tax purposes. that’s an intangible property. The cost of your research and development can be amortized over 5 years once you go full production. It is not related to the trade or business or profession that you are in. or profession of the taxpayer arising from wear and tear or natural obsolescence. 6. For accounting properties. o Even your personal laptops. then divide it for ten years. over 10 expected. Like if the volcano near by will erupt. It’s not amortizable. o - So its dependent on the natural resource. o What asset can be amortized? You can amortize intangible properties that you have for example: There are new rules already. 132 | P a g e In straight line borders are codal provisions. So its amortized rather than depreciated or depleted. . which as a rule. for goodwill. She failed to pay despite persistent collections. These are non-replaceable assets. Is there an instance where a parcel of land will diminish in value? Wear or tear? Is it really wear and tear? It does not depreciate as a rule but the value may decrease in some instances. o If you produce 5 truckloads in the first year. after probably a year. Lahar-filled. o But if it’s a goodwill that you just put up your business without any extra cost. it will increase in value because of the trade and profession. So you tried to collect as agreed. September 21. It is easier to depreciate than to deplete. Depletion refers only to natural resources. o So a machinery will depreciate in value. opposite. You won. research and development is not really tangible. Anyway. - - So when you are talking about depreciation. What happens if the parcel of land that you are holding becomes a red district? Ermita for example in Manila. Php1Million. If you think you can produce 10 truck loads of diamonds in 10 years. o But natural resources sometimes is undetermined. Can you claim the Php1million as a bad debt expense? First.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. The only thing that you can do if you expect 10 truckloads of diamonds is if you can produce this year 2 truckloads. then 20% of your cost of your property should be depleted already. we refer to properties or assets which depreciate or whose value gradually diminish naturally. You will have to depend on how much the estimated produce from that parcel of land. Another instance wherein you can amortize an expenses is when you under go research. Second. the use of which in trade or business is definitely limited in duration. - As against depletion. estimated is 10. the value will go down. what is the difference? - Depletion is the exhaustion of natural resources like mines and oil and gas wells as a result of production or severance from such mines or wells. Your resale value is only ½. goodwill is no longer deductible. as a general rule would diminish in value unless of course if it pertains to parcels of land. Does it appreciate in value or depreciate? As a rule. We all know that all properties and assets. DEPRECIATION - What is depreciation? The gradual diminution of the useful value of the property used in trade. You bought it for this much. It’s not deductible. You only have a formula. obsolescence. 2010 LAST WEEK’S QUIZ: ***In broken line borders are outline notes. If you PURCHASED. only ½ of its price. you cannot divide it for over 10 years. Because depreciation is an exact computation. will appreciate in value. Remember it’s just a betting game. Research and development. it may be deductible if you really PURCHASED the good will. The term is also applied to amortization of the value of intangible assets. etc. The wear and tear. So ½ of the natural resources should be depleted as of that year. it did not arise from any valid and subsisting obligation to pay. Emery Tiu P a g e | 132 Noy. If it will exist for 10 years. therefore no withholding is necessary. it is just like a property of that company and if given. To whom were interest payments made? It was made to the foreign government. It paid interest of Php1M for the entire taxable year. o - Did we not say that stock dividends would only refer to dividends given in the form of shares issued by the issuing company? If the shares given by the company is the shares held as in an investment of another corporation. a resident foreign corporation paid Php5M income taxes to the United states for the taxable year 2010. interest expense is fully deductible unless the arbitrage rule will apply. Does it make any relevance class? Doesn’t. the expense is NOT deductible ***In broken line borders are outline notes. is the interest deductible in light of the existence of the interest income earned from loans extended to affiliate companies. In the assumption that all other requisites are present. regional operating headquarters are exempt from income tax except if it derives income from any of its real or personal properties or from any of its activities conducted for profit. Company ABC. One not totally earning interest income. And interst income that is subject to final tax are those interests incomes earned from deposits and investments or placements in banking institutions and financial institutions or intermediaries. This is just a recap of what we have learned before midterms. Section 32B. And in so far in our discussion. o - True or false. So FULLY DEDUCTIBLE! o Many answered subject to the arbitrage rule. Diba we made illustrations gani. Discuss your answer briefly. it is not subject to tax therefore. making the stockholders. Regional AREA headquarters are the ones that are exempt from tax. - One more area. That’s the only statement that we need to address. the stockholders of the investing company. Because arbitrage rule will only apply if the interest income earned by the company is subject to final tax. o As to the rule wherein you cannot deduct if you did not withhold taxes? Okay Section 34K(?) of the tax code says that in so far as it is required that it needs to be withheld. 133 | P a g e In straight line borders are codal provisions. So the question was simple. Many answer this. The only issue is if the interest expenses were being paid to the affiliate companies? Here. it’s actually the other way around. one earning interest income subject to final tax. o That whenever an interest is paid on a loan made from a bank that is wholly owned from a foreign government. it should be withheld. One earning interest income not subject to final tax. It’s just a matter of fact. o Answer is it’s deductible because it is a valid expense. On the part of the domestic corporation if during the same taxable year it earned interest income of Php2M from loans of affiliate companies. Does the arbitrage rule will apply if the interest income that the company is earning comes from loans extended to affiliate companies? No. Emery Tiu - P a g e | 133 Last week’s quiz. why or why not? Totally. o Question is the interest a deductible expense? I am referring to the interest payments made to the foreign bank. Regional operating headquarters are NOT exempt. Is this an expense deductible. interest income was earned from an affiliate company. The dividends were given in form of XYZ shares of stock held by ABC corporation. wholly owned by a foreign government.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. there is no need to withhold. otherwise. it will not be deductible. it will be considered as property dividends. . ABC Corporation declared dividends in favor of its stockholders. How could you relate the bank as an affiliate company when the interest expenses were being paid to a foreign bank. The interest expense were valid payments. To the bank that is fully owned by the foreign government. ABC Corporation. Will the dividends be subject to final withholding tax? Many said it is not subject to withholding tax because it is a stock dividend. And property dividends are subject to tax just like cash dividends. XYZ Corporation obtained a loan from a bank. o The issue was or is it fully deductible in light of the income that was earned from loans to affiliate companies? What did we say about interest? Interest is deductible subject to the arbitrage rule. There were less than 5 who got it right. many of you didn’t get it right. FALSE. But no withholding of tax was made. o Some were saying that it’s not deductible because the loans were to affiliate companies. says of the exclusion that investments of the foreign government which includes loans extended to domestic corporations is not subject to tax. we were all in the same track. business. In the first few years machineries would have maximum use. But if you are asked to enumerate. minimize the expenses. This is for accountants. - And whenever a property. - Mr. If you are asked to enumerate. o Example: If you purchase a building or machinery. Liquidating dividends if the value of the properties received in time of liquidation is more than the investment made in the company. Depreciation - Depreciation is the gradual diminution of the useful value of a property that is used in trade. To which Mr. there is no gain. ***In broken line borders are outline notes. If you intend to change it say for example to straight line method – why do you have to change it class? Sometimes you need to change in order to make do with your financials. So if you need to change it. So. the easiest that we can determine is the straight line method. Resident foreign corporations are not taxable for income outside. Therefore. depreciation shall not be allowed. No approval. After another 5 years. I heard this came out in the mockbar exam last Sunday. or profession of the taxpayer. Ingon Atty: Exactly!). But I doubt it if you will be asked to explain. the Php5M income taxes are not deductible not even for tax credit or expense. - How about if your property will be obsolete already? What are the kinds of properties that may become obsolete in a few years time? Software. No expense shall be deductible. no tax. you can do something with the method of depreciating the assets. let’s say machinery nalang because probably a building will have an equal and gradual diminution of the value diba? But machineries do not have. These properties should not exist for more than 5 years in the business. corporation or individual which gradual diminution of the useful value refers to the gradual wear and tear or the natural obsolescence of the property that is depreciated. it’s a change in the method of depreciation. . So the proper depreciation for machineries that will be used fully in the earlier years will either be the double declining method or the sum of year digit method. If you want to claim more expenses. It will not be considered in determining whether gain was earned or not. o Sum of years digit method. what are the methods for depreciating a property as provided in the tax code. A invested Php1M in XYZ. Start of Classes: 6. then you depreciate the property over a hundred years. there are 4: o Straight-line method. o Last method is any other method that can be agreed upon or prescribed by the Secretary of Finance which would include double declining method. Whatever will be received will be considered as liquidating dividends which is not a guarantee that tax will be imposed. it requires approval by the Bureau of Internal Revenue. towards the end. Emery Tiu P a g e | 134 because the Php 5M income taxes paid to the US is for taxes on income that is earned outside the Philippines. o Declining Balance Method. Whenever a corporation comes into an agreement as to the depreciation mode or method of depreciating a property. So if its 100 years. it will have minimal use. 134 | P a g e In straight line borders are codal provisions. the business was dissolved and its remaining assets were distributed to the creditors and after which stockholders got properties in proportion to the interest they hold in the corporation. electronics (Class ni answer ni. it shall be used as long as that property shall exists in the books unless you will apply for a new method that will be used for that same property. Is it subject to income tax or final withholding tax? o It is not subject to income tax because the corporation is already in the process of liquidation. Apply where? Apply with the Bureau of Internal Revenue for approval that you will be using another method. So the number of years that the property is estimated to be useful is the factor with in which we spread out the value of the property.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. 5 years after he received Php5M in case dividends. you should use it all through out the existence of the machinery. A received Php1M in properties. if you have come into an agreement with the Bureau of Internal Revenue that you would be using the sum of years digit method for a particular machinery. o And if the investment is only pHp1M and what he received thereafter is Php1M. etc2x. o What about the Php5M that was received throughout the existence of the corporation and given as dividends? It was already subjected to final withholding tax as passive income. you put it a new technology and expected it to last for 5 years. Diba remember. So its Php5million. 7. o o - There are actually 3 cases class that a contribution or donation may be Deductible in full It may be deductible partially subject to the limitations of 5% or 10% Or it may be totally not deductible expense. It must be made within the taxable year. copyright. it’s the percentage of the ratio that you can deplete the natural resource. o 4. and you have this concern for social welfare. you determine. whatever amount it is. We call these special contributions. If you decide to contribute or donate your entire taxable income to a specific entity that is among the recipients of these special contributions. The contribution must actually be paid or made to the Philippine Government or any political subdivision or to any of the domestic corporations or associations specified by the Tax Code. If on the 3 rd year. then the remaining value of the asset can be claimed as obsolescence of the property. It must be evidenced by adequate records or receipts First. Would all contributions and donations and limitations be subject to the limitation that it shall not exceed 10% for individuals. It must not exceed 10% in the case of an individual and 5% in the case of a corporation of the taxpayer’s taxable income except where the donation is deductible in full to be determined without the benefit of the contribution. No part of the net income of the beneficiary must inure to the benefit of any private stockholder or individual. 10% of the taxable income of individuals or 5% of taxable income of corporations? No. Emery Tiu - o Probably. Charitable Contributions - Are contributions and donations deductible in. if and when a contribution is made to particular persons which qualify to special contributions. 135 | P a g e In straight line borders are codal provisions. we have said that contributions will be classified into 2: o Special Contributions Ordinary Contributions The easiest to think is that. fully deductible. if at the point that there will be no introduction of new technology and you think that your asset is already obsolete even if you have not fully utilized the number of years intended for it to be useful. Are your contributions and donations deductible for purpose of computing your tax liability to the government? What are the requisites to make a charitable contribution deductible? o 1. o But if the intangible is built solely on goodwill for which you cannot truly identify the actual cost that you have spent. you can claim it as an obsolete product and you can claim an expense in addition to the depreciation that you are already claiming.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. such as patent. and 10% of what? Of taxable income. Only for those intangibles in which you have actually incurred an expense. o 3. It’s a deductible expense so long as it can be proven. that it is no longer usable forever. And finally we said that amortization is as well available to intangible properties. And we said that depletion of assets would only refer to assets which are referred to as natural resources. if you expect that this is the number of units that you can recover and these are the number of units that you actually recovered. . you have ACTUALLY SPENT or shelled out money for an intangible. What are the fully deductible contributions? Or rather to whom will the contributions. If and when you purchased an intangible. totally that is deductible. That is amortized over its useful life. And we have actually illustrated that depleting a natural resource would depend on some factors: o - P a g e | 135 The basis of property The estimated total recoverable units in the property And the number of units recovered during the taxable year. o For example. your contribution is fully deductible. you spend for it. it is not a deductible expense. because class in our outline. o 2. then. ***In broken line borders are outline notes. can be depreciated over its useful life. say for example you have a business. 5. Php1million per year through the straight line method. goodwill. etc. 3. In so far. o 3. it must be made within the taxable year within which you want to charge off the expense. Foreign government or institution and international civic organizations. But in so far as who the recipients are. special contributions are fully deductible and ordinary contribution is not fully deductible or just partially deductible. Emery Tiu 1 2 3 4 5 Special Contributions . special contributions. etc. . DSWD. Formed or organized for educational purposes. ordinary contributions. o No. avoiding taxation. 2 whatever you make contributions that you make your recipients in order to be dedutible. for special contributions. Priority projects would be SHE: o Sports development. Otherwise.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. And accreditation would mean that it has been accredited by the duly appointed accrediting entity. the main difference. But there is already a new accrediting entities. 136 | P a g e In straight line borders are codal provisions. it must be made within the taxable year. 5. o 2. special contributions are fully deductible and ordinary contributions are partially deductible. or to be used in undertaking PRIORITY PROJECTS. So it would actually depend on what type of NGO it is. Give me an example of an international. requirements no.Deductible Recipients Not inure to a private stockholder Within Taxable Year Sufficient Records Fully Deductible Ordinary Contributions -Deductible Recipients Not inure P a g e | 136 Contributions NonDeductible All others Within Taxable Year Sufficient Records Partially Deductible But nonetheless. and educational. Accredited NGO. both contributions specially made or ordinarily made must not inure to any private individual or stockholder. then you know that the accrediting body would refer to CHED or DECS. health. you have to know who the recipients are. etc)? What areas would all contributions to a local government unit be fully deductible for tax purposes? It must for priority projects. and contributions which are not deductible. o No. What must be registered? Would all donations to a non-government organization that is organized for education be fully deductible? The NGO class. it must. are in order for a contribution and donation to be deductible. o First. science and invention o Health and human settlement o Educational and economic development So what happens if your donation is made to the Government or political subdivisions or GOCC and it Is intended to finance a non-priority project? Is that deductible? Yes. including GOCCs. you will just be transferring funds. to provide for. and 4. o Prior it has been the Philippine Council for NGO Certification which is PCMC. as all other common requisites. 2. All others which do not qualify to the recipients in the special and ordinary contributions. Government or to any of its agencies or political subdivisions. CHED. International Rights Research Institute. it must not inure to a private stockholder or an individual. you have to determine whether the NGO is accredited or not. However not fully deductible. 4. exclusively to finance. o No. What do you call these (sports. who are the recipients? o 1. There must be sufficient records to support your contribution or donation. o No. sufficient records. NOT ALL donations to non-government organizations would be fully deductible. as the tax wise or the benefit. - Who. civic organization? Wherein you make a donation that is fully deductible? Unicef. 3. there is a difference. ***In broken line borders are outline notes. GOCCs for priority projects. the process of accreditation is that these accrediting bodies would determine whether indeed that NGO has complied with all the requirements that it is. because if it were an accredited NGO. charitable and sports. you can make the entire 90% as your salary. example education. it is still a deductible expense but not fully – meaning subject to limitations? Would a donation or a contribution to a particular group of individuals that is not organized as an association.0 cTax Due 950. NGO is a non profit corporation. political subdivisions. o But if the recipient of your donations is beyond those identified in the tax code. if you are an organization and allowed to use the donation without any limit for administrative purposes. Cost9 Million Cost9 Million Gross Income2 Million Gross Income2 If it’s an NGO that is not accredited by an accrediting body. In the law. it may only be deductible. it’s partially deductible. - So give an example of a recipient of a donation wherein a donation is covered only as ordinary but not special donation: o - Question: so if it is given to an NGO that is not accredited. Net Income1 Netaccredited. . it will be fully deductible if it is accredited for the purpose of research. that it is to address or to support indigent students. it’s fully deductible if you fund it for a priority project. be deductible contributions? o - I don’t think so. sports. not an entity. If fully deductible: But for NGOs. research. So. not an NGO. Sales11Million Sales11Million education. so any group of individuals who have convened under a charitable cause does not necessarily mean that they are a non-profit corporation. Accrediting would mean. when you say that there is a donation. political subdivisions. o o If it’s not a priority project. it must be made to the government. CD (1Million) CD 50. o If you give it to the government. or to a social welfare institution or to an NGO whether accredited or not. not the government etc. And its for social welfare.000 Tax Due . you cannot automatically conclude that it is either partially deductible or fully deductible. it should be made to an NGO (?).T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. the deduction is fully deductible. GOCCs. health. 137 | P a g e In straight line borders are codal provisions. class. any donation outside of those will NOT be deductible. o The difference lies in that if you give your contributions or donations to these kind of entities. to run the organization. o If its non-government for civic purposes. charitable. You’re saying that A donation to a particular group of individuals that is not organized properly is not a deductible expense? Totally? So what’s the difference between (white board)? o - When the donation is given to a non-accredited NGO. all others are not deductible. etc. DSWD. o Imagine class if you are allowed to use the donation. education. not the members. The accreditation is only needed for the amount of deductions. It may be not deductible. it should be for specific purposes and to benefit other people not the stockholders. the only question that you have is – does it belong to an ordinary donation or a special donation. who are the recipients wherein the donation is subject to limitations? o You only have three categories of recipients of donations or contributions: (1) the Philippine government. Not more than 30% of its funding or donations or contributions would be used for administrative purposes. whether fully or partially if it is formed as a non profit corporation. which is not actually addressing the issue. Million the donation will still be Less: Expenses1 Million Less: Expenses1 Million deductible but subject to limitations. Donation to a foreign government or international civic organization always fully If OC-D: deductible because there is no qualification made under the tax code. etc. Income1 Million Other than that. Emery Tiu o P a g e | 137 If its for Science then it should be DOST. The activities itself and that no member of that organization would be directly or indirectly benefited by any fundings made by outsiders. (2) foreign governments or international civic organizations. Taxable/ Taxable/ If it’sMillion a social welfare institution that is still not it will belong (deductible). - If we only have 3 categories of recipients in order to make a donation fully deductible. etc. (3) non government organizations which are duly accredited for purposes of health. but regardless of that. its political subdivisions.000 Note: Expenses here do not include charitable donations ***In broken line borders are outline notes. Because for a donation to be deductible. you pay zero tax dues. computer equipments etc.5M. but since your donation is subject to limitation because the recipient is not one of those reported as fully deductible donation. political subdivisions. o If the recipient of the 1M donation is recipient no 1 (government. even if you donate the entire 1M. it will be fully deductible – no tax due. etc) for priority projects. you report zero taxable income. will you be liable to tax? Yes. your gross income is 2M. what is the extent of the donation that you can make to a nonaccredited NGOs? It must not be more than 5% of 1M which is the taxable income or 50. it’s not based on gross. and perfection of the donation can only happen if there’s acceptance which is different on a case to case basis depending on what is being donated. have yourself accredited and whatever your donation to that school is. - Question: for that donation to be deductible. What’s the basis for your tax liability? You made 1M contribution. is acceptance necessary? o There can be no donation if the donation is not perfected. Where do you base your limited deductibility of the expense? Under Taxable income. it’s fully 100% deductible plus 50% deductible. it’s fully deductible as expense.000 is the basis for your tax due. ***In broken line borders are outline notes. this is special law. and whenever you do that. OK class. o If the recipient is a non-accredited NGO. o So if this is a corporation. - Another exception provided by your special law is when you adopt a school. expenses is 1M.000. - I think we discussed already research and development. but if they donate the entire 1M because they want to avoid paying the tax to these kind of recipients. you said you are still liable for tax to the BIR. you donated the entire 1M (same facts and figures). o If it’s a real property. (illustration) you have sales of 11M. There is what we call as adopta-school program. you have cost of 9M. it should be accepted in writing in the document or in a separate document. you contributed the entire 1M to an NGO that is not accredited. you will still be liable for tax. So if you donate 1M in books to a school that you have adopted. They can donate the 1M. You pay 30% of the 950. there are some research and development expenses that you can fully claim as an expense in the year that you have incurred it or those that you can chose to amortize over 5 years so long as it is attributable to a capital asset or capital account.000 regardless of zero cash. What usually happens now is that every NGO is striving to have itself accredited in order to encourage donors.assuming this expense does not include yet the donations. What is the basis of your 30% tax due? o o 950. because donors would only be encouraged to donate to NGOs that are accredited because they can claim full deduction of expense and they can also be exempt from paying the donors’ tax. Emery Tiu - P a g e | 138 So when you say that it is subject to a limitation. they can actually donate everything. The basis would be the net taxable income less the maximum limit that you can actually contribute which is 5% of your net taxable income. you will get a deduction but you will still be liable for tax. This is beyond the tax code. zero .T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. .. o The basis of the limit for a corporation. You provide books. your deductible donation is 1. 138 | P a g e In straight line borders are codal provisions. the contribution must be given by the employer and the amount contributed must no longer be under the control of the corporation. Divide the amount to be paid over the next 10 years. In order for the contributions to be deductible. Would the transfer of funds to this retirement plan by the corporation be a deductible expense? Yes. the payment has not yet been allowed as a deduction – it cannot be deducted twice. for whose benefit is this? For the employees. o Are all contributions made by a corporation to a retirement plan deductible? No. This is not like other expenses. this is totally a separate entity and any income earned from this plan is not an income of the corporation. This is a separate entity from the corporation. o Second requisite. it is already considered as an expense because it will not go back to the coffers of the corporation. o When you have a perfected donation because there’s acceptance. etc. Corporation Retirement Plan Employees Separate Entity Deductible Expense? Yes! o This is the retirement plan. This is a separate entity so whatever comes out of the corporation is an expense.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. the income of this retirement plan is totally tax free. Whenever an employee retires. if it’s less than 5000 in cash – oral acceptance is allowed. If you have a retirement plan. Mind you. If the corporation puts in money to this retirement plan for the exclusive benefit of its employees. corporation need to Why? This is for the current year service of the employees. Emery Tiu - P a g e | 139 o If it’s more than 5000 . any money that is placed by the corporation here. you can have it amortized over a period of 10 years. If it is for that year. 139 | P a g e In straight line borders are codal provisions. the amount contributed to the plan must be: o Reasonable. it can be deductible if it is considered as ordinary expense for that year. o Whenever the corporation gives out money for the retirement plan for the benefit of the employees. the corporation may no longer get back the money or use it in their operations. this is the corporation. 2010 2011 1Million – For Current Year 100% Deductible Contribution: 1Million – For Past year 1/10 DR 2Million ***In broken line borders are outline notes. what is the average length of service they will render.in another document. o Do you know actuaries? Those who compute the retirement fees of individuals. the funds will not be taken from the corporation but from the plan. they will compute how many individuals are there in the company. But if such deductions were made for services that have been rendered for the past years. . the money is given to an insurance company or whoever is considered to hold the money in trust. If the corporation does not contribute this year. donors tax is imposed depending on whether or not exemption is allowed. So if they will determine that there are 100 employees and the put in 1M every year. You remember our discussion on retirement plans? Every corporation is encouraged to have a retirement plan in order to address the need if someone in the company would be retired. this will only be deductible if it is paid – meaning there is an actual contribution. If 1M will be placed in the funds this year. Whether or not it is deductible is another issue. o Whenever a corporation sets up a retirement plan. this 1M every year will be deductible expense. And plan is for the benefit of the employees and deductions apportioned in equal portions over 10 consecutive years beginning in the year in which the transfer was first made. then the 1M is entirely and fully deductible for that year. Once the corporation has transferred the money. there will be no deduction of expense. Tax Rates - Let’s go to tax rates. expenses 500. Cost 9. In 2011. the other (1M) is for the past year’s service of the employees.000 o In the 2M (gross income/same illustration).T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. this will be fully deductible because this year pertains to the current year service of the employees covered by the plan.5M. o Assuming illustration is a domestic corporation.000. o How about the 9/10? It will be spread out for the next years.000. Non-resident foreign corporations are not expected to file these tax returns and are subject to final withholding tax of 30%. Why? If the corporation does actually contribute 1M this year. That. G. Only available to domestic corporations and resident foreign corporations. This is for the current service of the employees covered by the plan. the ratio of the cost to their gross sales or receipts from all sources should not exceed 55%.000 15% Gross Income 2. The option is given to the domestic corporations and resident foreign corporations where they can choose to be taxed at the preferred rate of 15% gross income taxation. it is allowed but the problem is that if it contributes only next year. Using this data. would you want to be subjected to the 30% net taxable income or would you want to pay 15% of the gross income? What’s 30% of 1M – 300. 140 | P a g e In straight line borders are codal provisions.000. And since we said that expense can only be deducted in the year that it pertains.000. while the 10M will only be deductible 1/10 every year. 1M for the year which it failed to contribute and 1M for the current year. You should only opt for the 15% gross income taxation if it is more beneficial to you. ***In broken line borders are outline notes. What is 15% of gross income 2M – 300.000 Less 500. She wants to chose gross income taxation of 15%.5M is 450. We’re already familiar that the tax rate for all corporations is always at 30%. - What is 15% gross income taxation? Where shall you apply the 15%? Sales 11. o How much is deductible for next year? 1M which is for the current year and 1/10 th of the 1M.000. only 1M is current and fully deductible . the corporation made a contribution of 2M. it shall be irrevocable for three years. If on the 11th year.000. Emery Tiu - P a g e | 140 Let us say the following year.000 = 400. it is required to contribute another 1M. this is 100% deductible (1m current year) and this is only 1/10 th deductible (1M past year).000 30% Net Income 1. o Would everybody be allowed to choose 15% gross income taxation? NO. What will happen if the corporation does not contribute for 10 years. . Unless if it falls under special corporations. This still addresses the common requisite that an expense must pertain to the taxable year for it to be deductible.000.000 = 300.500. only available if the ratio of cost of sales to gross sales or receipts should not exceed 55%. and if they shall elect that option.000 55% of 11M is 605. the GDP rate etc.000. You don’t actually benefit in choosing either. The general rule is 30% tax of the net taxable income and there is an option not to be taxed at 30%.000. o The details: 2010 the corporation is required to contribute 1M. therefore net taxable income of 1. are present? Yes. If it foregoes contributing and decides to contribute next year 2M. o Now (refer to lower part of illustration) still the gross income is 2M. there’s no deduction for 10 years of 1M. can the domestic corporation chose to pay 15% based on gross income? Yes. it decides to put in bulk of 11M. what is current for next year? o This one only (1M).000? Assuming that all the ratios. 30% of 1. provided that certain conditions are met. Are you allowed to pay 300. This is the cost to avail. How much contribution did the corporation give to the retirement plan? 2M. because 15% of 2M gross income is only 300. T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty.05M. you will have to pay the 30% MCIT. 141 | P a g e In straight line borders are codal provisions. This (costs) should not exceed 6M. you will surely be benefited by gross income taxation. - Can the 2% MCIT be imposed if you are not liable for the 30% normal corporate income tax? - o NO. Whichever is more favorable and higher in taxes to the government for your operations. ***In broken line borders are outline notes. They bloat the expenses resulting to either minimal net taxable income or they bloat this to the extent of reporting a loss. during those years when you are not liable for the 30% normal corporate income tax . it will only be applicable if you are liable for 30% tax so those entities which are exempt from the 30% tax are not liable for the MCIT. o Does the corporation have to pay MCIT always? No. prior to 1998. the BIR is assured of collection. o Whether or not a corporation is liable at all times for MCIT. there are corporations which were operating at a loss for more than 10 years. you have to pay it to the government. But in years wherein the corporation is operating at a loss. Emery Tiu P a g e | 141 Does this satisfy that requirement? NO. for example this is 10M (costs) which is almost 100%. not the net taxable income. o You don’t have the complete liberty of choosing 15% gross income. because corporations are abusing expenses. Now at least the BIR is assured. o Is that income tax? Yes. Minimum corporate income tax is a 2% tax on the gross income of a corporation. o Can it happen that a corporation may be liable for both the 30% regular/normal corporate tax and the 2% MCIT? No. the answer is No. 2% MCIT which is 2% of the gross income. - What is the principle of imposing the MCIT. o If you are a corporation that has been granted income tax holiday for 4 or 6 years. (2) the ratio of the cost to your sales must not exceed 55%. you don’t have 30% tax. And normally you don’t exist for 10 years at a loss. Your actual tax liability to the government is always the 30% tax. o Otherwise. you should have closed your business already. . the other is excluded from being applied. this was not imposed. if you have no limit here. assuming that all conditions are present is that: (1) you must either be a domestic corporation or resident foreign corporation. 55% of 11M is 6. Why? If the corporation is not subject to the 30% normal corporate income tax. if you report a loss. is only a tax that is made in lieu of the 30%. you have to pay the 2% MCIT. What is the relationship of these two types of taxes? It excludes the other. So: o (1) if the 2% MCIT is higher than the 30% normal corporate tax. How about non-profit hospitals or proprietary educational institutions? They are subject to 10% tax on net income. The problem was there was over-claiming of expenses but the BIR would not believe you if you would report this at a loss at this level. The only time that you can opt to pay the 15% gross income taxation. The 2% MCIT will apply if the 2% MCIT is higher than the 30% normal rate of gross income. Or in years wherein the corporation’s regular tax on net income is lower than 2% MCIT. therefore there will be no income tax. you will not as well be liable for the 2% MCIT. If one is used. Minimum Corporate Income Tax - - When are you required to pay the minimum corporate income tax? MCIT is 2% from the gross income of the corporation. the MCIT will apply and o (2) if the corporation is operating at a loss then the MCIT will apply. then it will not also be subject to the MCIT. Lifeblood doctrine still dictates that you have to pay more. This is what the BIR was looking into. o When is a corporation required to pay the MCIT? A corporation is required to pay the MCIT if the normal corporate income tax is less than the 2% gross income tax which is the MCIT. Does 9M (costs) exceed 55% of 11M (sales)? OK. E. But once they violate the predominance test.000. then – Imagine Timex. a proprietary educational institution.000 from Rental Fees 200. These are not nonstock nonprofit. general rule is that they are subject to 10% tax rates on their net taxable income. meaning once their income from other activities (other than educational or other than hospital services). You have 200M total income. they are not liable for VAT. unless if it refers to another activity or they are doing another activity in which they are not registered. it would depend on whether MCIT is higher or normal corporate tax rate is higher.000 Total Subject to 10% o If you own a school. Next example. Emery Tiu o - P a g e | 142 Are they liable for 2% MCIT in case they operate at a loss.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. MCIT also not applicable because the 30% normal tax is not applicable to them.000 from Tuition Fees 100. are they subject to the 2% MCIT? o Not subject to 2% MCIT. they are subject to 5% tax on gross income in lieu of all taxes. Proprietary educational institutions and nonprofit hospitals are subject to 10% tax on their net taxable income as preferred or special corporations. they will not be liable to MCIT at all because it is only imposed if you are subject to 30%. etc. it’s within the zone. 142 | P a g e In straight line borders are codal provisions. If they venture into activities that are not covered by the 5% tax. No. As to whether MCIT applies to these activities. if they opt to be subject to 5% income tax based on gross income in lieu of all taxes. and your gross income. You do not divide the income. Gross Income: 100. And they earn 5M income from selling old furniture. this is not subject to 5% tax. o Are they subject to tax? Yes.000. is this covered by the registration? No. the entire income will be subject to the regular rate of 30%. o Those corporations that are located inside the economic zone and even in IT Park. - Question: does that rule apply also to proprietary educational institutions? Proprietary Educational Institutions MCIT YESGR: 10% on NTI NOExc: 30% on NTI o Proprietary educational institutions are those private institutions which are owned and administered by individuals and organized for profit. not liable for other taxes. ***In broken line borders are outline notes. Timex 100 Million 5 Million Registered Selling FF. M 5% 30% MCIT: X o Timex has 100M sales of registered activities (watch manufacturing and sales etc). equipments. . o These corporations within the economic zones however are only allowed to pay 5% tax on activities that have been registered with the government. is 100M from tuition fees and 100M from rental fees. Exception is if the profits are a result of engaging in activities that are not related to the trade and it exceed 50% of their income – the rate is 30% normal tax on net taxable income. a corporation that is registered with the Philippine Economic Zone Authority or the Subic Bay Free Port Enterprise. this will be subject to 30%.000. What is the tax rate applicable? It is still 10% because it did not exceed 50% of the gross income. 10% tax on the entire net taxable income. motor vehicles. in the fourth taxable year beginning after the year the corporation has commenced (pertains to registration with BIR) business operations. o What is that rule again? Any excess of the MCIT over the NCIT can be carried over to the next 3 consecutive years and offsetted against the NCIT.000. whether the product be goods or services. So MCIT will only be present if the school is 30% taxable. o So. 143 | P a g e In straight line borders are codal provisions. the processing of the product. whenever 30% is present. o The cost would pertain to the expenses for bringing the product into the location or sale. . what rate shall apply? Once the other income (other sources) exceeds 50% of the total income. the cost that you can deduct on your sales in order to arrive at the gross income would only pertain to the products that you actually trading plus the insurances plus the costs to put that product into the location or sale. still on MCIT: if the school is still under 10% tax. Therefore. o So if you’re selling siomai. the insurance. Just simple class (!). When you say transportation cost. It did not violate the rule that it should not exceed 50%. Of course. the commission from buying it. in 2005 December 24: you registered your business. 2% is lurking around.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Why? It’s the fourth year after 2005. When you say gross income. It’s a temporary tax that you have to pay but eventually. So these are. what would be the cost is the siomai that you bought. The MCIT is only a tax temporarily in lieu of the income tax that you cannot pay probably because you’re losing or the NCIT is low. it’s 50-50. when is the year after you commenced business operations – 2006. 27(e) of the Tax Code. o - - You registered your business with BIR in 2005. Emery Tiu P a g e | 143 Say for example the gross income from tuition fees is 100M and from rental fees is 100M. o So gross income is very restrictive. it would only refer to the definition found in Sec. subject to 30%. will MCIT apply? YES.000. 30% would apply on the whole net taxable income.000 from Rental Fees 200. on the first year of operations? No. the cost of buying the raw materials. Gross Income: 100. in short. the direct expenses – the direct cost to put the product available for sale. o Question. is MCIT applicable? NO. you are allowed to credit the excess of the MCIT that you’ve paid beyond the NCIT.000 Total Subject to 10% o If this becomes 101M (from rentals. Beginning the fourth taxable year following the year in which you commenced your business operations. When should you start comparing your 2% MCIT against your 30% normal corporate tax? In 2009. If it’s manufacturing business – the cost of the raw materials. the freight/shipment. ***In broken line borders are outline notes. It’s either 10 or 30 applied to the whole income. o You cannot deduct the expenses which are already for operation and for selling or for marketing. o And it would also depend if you’re into one type of business. and the transportation cost from getting it from the supplier down to your business. if it’s trading. it would refer to transportation from buying or transportation from selling. o - If the corporation surpasses the 50% boundary. But if you’re engaged into merchandising or trading business. assuming you follow the calendar year. It would already form part of your selling expenses.000 from Tuition Fees 100. That is the reason why the tax rate of MCIT is very low – 2% lang unlike 30% taxable income of normal corporate income tax (NCIT) because you’re allowed to deduct all the business expenses that you’re incurring. the transportation that would pertain from the delivery to your consumers or customers would no longer form part of the cost. When do you begin to impose the MCIT. the entire taxable income of this school is subject to 10% tax. and of course. The 2% MCIT is based is on gross income.000. other income). what is gross income as a general rule and what is gross income for a corporation that is engaged in the sale of service and a corporation that is engaged in the sale of merchandise? o So when you actually want to know what is gross income for purposes of computing the 2% MCIT. total of 200M. 8M 200K 5. following the year you registered your business for BIR purposes. dba when are you required to pay MCIT? Only if your NCIT is lower than the MCIT or when you’re totally at a loss wherein you don’t pay any NCIT. how much are you going to pay to the government? o Remember. It cannot be credited against the MCIT. But once you reach to the point that your liability is already the NCIT. So what you’ll have to pay is MCIT – any excess over the NCIT can be used up as a credit against your future NCIT in the succeeding 3 years. you cannot deduct the reserve yet. o How much are you going to pay to the government? 140K because MCIT is higher than the NCIT. Let’s go to the 7th year. it is still the 4th year. o How much is your reserve now? 250K. Emery Tiu P a g e | 144 Can it be offsetted against MCIT? o NO. your NCIT is also 0. So the government will receive 160K because MCIT is higher than NCIT. In this case. In this case. o How much is your excess MCIT? 100K. whatever it is. how much will you pay to the government? ***In broken line borders are outline notes. your payment to the government is 0.7M 300K 6. Let’s go to the 5th year. you’re not yet liable to MCIT because MCIT will commence at the 4 th taxable year following the year that you commence business operations. in the 4th year. How much will you pay to the government? o 160K because MCIT is higher than NCIT. How much is MCIT? o 140K.6M 400K 0 0 0 60K 160K 160K 90K 160K 160K 60K 140K 140K 150K 120K 0 120K 120K 20K 0 100K 170K 250K 100K 0 Given the table above. Let’s go to the 6th year. At this point. 144 | P a g e In straight line borders are codal provisions. . In the 8th year.8M 200K 7. o Since here.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Therefore. how much is your tax liability? 0. therefore. How much is your liability to the government? How much are you going to pay to the government? o 160K. At this point. - Tiu: I will illustrate how it works…… 4th year Sale Less: Cost Gross income (2% MCIT) Less: Expenses Net taxable income (30% NCIT) 30% tax due (NCIT) MCIT (2%) Paid to the government Excess MCIT - 6th year 7th year 8th year 9th year 10M 5M 5M 5th year 10M 2M 8M 10M 2M 8M 10M 3M 7M 10M 4M 6M 10M 4M 6M 5M 0 7. you have a reserve of 100K that is creditable against your future tax liability in the succeeding 3 consecutive years. you have a reserve nah! Your true tax liability to the government is only the NCIT. when do we commence computing MCIT? Beginning the 4th taxable year following the year that you commence business operations or which means to say.5M 500K 5. because excess MCIT is only offsettable against the NCIT. it’s when you can use the reserve. So any excess or the excess of your MCIT over your NCIT. o - - So how much is your reserve at this point? 170K. which in fact is the 5th year. but you paid the MCIT of 160K because MCIT is higher than NCIT. MCIT is 0. Your excess MCIT is 0. o Can you not deduct your reserve of 100K? NO. your payment to the government is MCIT so. It’s an offset. You always have to pay the MCIT. - - o So in the 4th year. there will be an unused MCIT. But in the 8th year. So long as no MCIT expires. Was the 100K used within the 3 succeeding years? YES. Example: Where MCIT expires - 4th year 5th year 6th year 7th year 8th year 9th year Sale 10M 10M 10M 10M 10M 10M Less: Cost 5M 2M 2M 3M 4M 4M Gross income (2% 5M 8M 8M 7M 6M 6M MCIT) Less: Expenses 5M 7. It’s not. you only paid 20K. Therefore. you are required to pay 160K. instead of paying 120K. But at any point that you operated at a loss or your NCIT is lower than MCIT.8M 5. you can offset it against the 120K. you pay 20K to the government [120K-100K] o You only pay the MCIT if the company is operating at a loss or when NCIT is lower than MCIT. such excess is offsettable against the 150K NCIT.4M Net taxable 0 200K 300K 200K 300K 600K income (30% NCIT) 30% tax due 0 60K 90K 60K 90K 180K (NCIT) MCIT (2%) 0 160K 160K 140K 120K 120K Paid to the 0 160K 160K 140K 120K 0 government Excess MCIT 0 100K 170K 250K 180K 0 Given the table above. thus. o The difference is that your true tax liability is always the 30% NCIT. 145 | P a g e In straight line borders are codal provisions.7M 5. o So instead of paying 60K in the 5 th year. nothing expired. which is the NCIT. At any point.7M 6. the NCIT is higher than the MCIT. You pay the NCIT supposedly. o Let’s look at the 5th year. So the 100K excess in the 8 th year pertains to a portion of the excess MCIT in the 6th year and 7th year. therefore. you are required to pay 160K.8M 7. you only pay 20K. so you still pay the NCIT. How much is your total tax due (NCIT) from the 5th year to the 9th year? o 480K. therefore. o So MCIT is not really your tax liability. In the 6 th year. In the 7 th year. you will always arrive at equal amounts. But since in this case. how much will you pay to the government? o How much is your MCIT? 120K. it was carried forward for 3 years but was never used? o NO. instead of 90K. meaning. In the 9th year. so the remaining reserve is 100K [250K150K]. In the 9 th year. you are required to pay 140K. But if at any point. o How much did you actually pay to the government? 480K still. it was used in the 8th year [first in-first out dba?]. Here. you have an existing 250K total of excess MCIT. Emery Tiu o - - - P a g e | 145 0. o So bottomline. But since you have an excess reserve still of 100K coming from the prior years. It’s just an advance payment of your NCIT offsettable against your future NCIT because the government would want to collect regularly from you. o So assuming that the excess 100K in the 5th year is not used at any time because you operated MCIT all throughout. your true tax liability (NCIT) for these years is only 480K. o So. The amount that you actually paid is also 480K. you paid actually 0. meaning nothing is unused. did any excess MCIT expire? Was there an expiration of excess MCIT. that expired MCIT will be the amount that you have overpaid the government. o How much is your NCIT? 120K. instead of 60K. it’s equal. How much will you pay to the government in the 8 th year? ***In broken line borders are outline notes. . you will be required by the government to pay MCIT as an advance payment for future years. In this case. you don’t need to pay the MCIT. so therefore. let’s start-off with the 8 th year. your actual payment would be higher than your true tax liability (NCIT).T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Why an advance payment for future years? Because whatever excess MCIT that you pay to the government will be creditable to the next 3 years. instead of paying 150K. at some point. Since at the end of the 8 th year. 7th and 8th year. which comes from 30K excess MCIT of the 8th year + 80K excess MCIT of the 7th year + 70K excess MCIT of the 6th year. it is only in the 9 th year wherein you benefited from the excess MCIT payments because it was only in the 9th year that you have a higher NCIT. Since such excess was not used because in the 8 th year. in the 3rd year. Force majeure o 3. you only cover the excess MCIT from the 6 th year. so you have to take it out on the total reserves in the 8 th year. Emery Tiu P a g e | 146 o 120K because MCIT is higher than the NCIT. Then you add 30K which is the excess MCIT in the 8 th year. o So that’s the difference when there is an expired excess MCIT. o What will happen to your excess MCIT in the 8 th year? How much is your total reserve for the 8th year that is usable or that can be carried forward in the 9 th year? 180K [(250K-100K) + 30K]. 146 | P a g e In straight line borders are codal provisions. Tax rate is 30% ordinary tax rate is its income from unrelated trade. What are the instances wherein you can ask temporary relief from the payment of MCIT? o 1. You can utilize it afterwards. The excess MCIT of the 5 th year has already expired because you were unable to use the excess MCIT of 100K of the 5th year. o In this case. You can zero out your net taxable income by claiming huge expenses then when you zero out your net taxable income. The life of the 100K excess MCIT of the 5 th year would only exist for 3 years after. as the case may be. SPECIAL DOMESTIC CORPORATIONS - Proprietary Educational Institutions (PEI) – what are the requirements? Or should it be a formal EI for you to avail of the 10% special rate? o YES. you will be paying MCIT due. it must have been issued a permit to operate from the DECS or CHED. Therefore. . - - - - If we have the same figures in the 9th year. Prolonged labor dispute o 2. you paid MCIT. o But in this case. business or activity does not exceed 50% of its gross total income. or business or activity exceeds 50% of its gross income. ***In broken line borders are outline notes. report a higher NCIT so you can utilize your excess MCIT. So long as no MCIT excess will expire. you actually paid 580K because you failed to utilize your excess MCIT or advance payments to the government. 250K is the total reserve of the 7 th year and you deduct the 100K from 250K because the 100K excess MCIT of the 5 th year has already expired. So you only have 180K. although your true tax liability is 480K. or TESDA. the total reserve would now be 180K. But because of the MCIT. you will be honest enough to declare your true income tax in order to be liable for NCIT. It’s in order to plug the loophole in the tax code wherein the taxpayer is abusing the expenses that they claim as deductible.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. The 100K excess MCIT of the 5th year can only be carried forward in the 6 th. o So if you feel that on the 3rd year. o How much is your true tax liability (NCIT)? 480K. o REMEMBER: Your true tax liability is only the NCIT. Legitimate business reverses MCIT means that you are required to pay regularly to the government. your actual payment to the government will equal your NCIT liability. something is expiring. o What are the rules on the taxability of PEI or Non-Profit Hospital (NPH)? Tax rate is 10% if its income derived from unrelated trade. The first 100K excess MCIT of the 5th year was not being utilized. it’s no longer usable in the 8th year. And in order to avoid expiring the MCIT. How much did you actually pay to the government from the 5th year to the 9th year? o 580K. we’re looking at the excess MCIT that will be applied in the 9th year. we have an expiry of excess MCIT in the 8 th year. you’re not required to pay any income tax due. So therefore. how much will you pay to the government in the 9th year? o 0. It’s just an advance payment. On the normal basis.5% on GPB. it will be subject to the normal tax of 30% because the 2.5% on GPB? GPB would not apply to all sales of airways or airlines or transport companies.5%? o Would all foreign corporations selling tickets here in the Phil. in a continuous and uninterrupted flight regardless of where the ticket is sold. - NPH – same rule as PEI o - But if it’s profitable? It’s subject to the 30% ordinary tax rate. and the place of payment of the ticket or passage document. in a continuous and uninterrupted flight. excess baggage. cargo and mail originating from the Philippines in a continuous and uninterrupted flight irrespective of the place of sale or issue. etc… it’s not many. whatever the port of origin or airport of origin is. - Regional Operating Headquarters (ROHQs). selling tickets. which is based in Singapore. specifically. Now. When you put up a corporation and register it here and you sell tickets. cargo and mail ORIGINATING FROM THE PHIL. be subject to the 2. the net taxable income of that PEI would be subject to 30%. it does not guaranty you 2.5% on GPB refers only to the revenues based on a flight originating from the Phil. business or activity. o For purposes of IS. like SILKAIR or QATAR AIRWAYS. tuition lang. to the amount of gross revenues derived from the carriage of passengers. You have lots of expenses that you can claim in commercial activities but for educational. PEI and NPH are special domestic corporations. So it’s different. if and when a foreign corporation. GPB means gross revenue whether from passenger. If more than 50%. excess baggage. whatever the destination is or the port of origin or airport of origin. because the net income of educational activities and the net income of commercial activities is different. So what is the requirement? What is that basic requirement that makes the tax rate a lower rate of 2. exchanged. But for purposes of determining whether the predominance test has been violated or not. Lets say a corporation. you look into the gross total income. cargo or mail originating from the Philippines up to final destination. 147 | P a g e In straight line borders are codal provisions. opens an agency in the Philippines to accept purchase of tickets for Singapore airlines.5%. so long as the origin of the flight is in the Philippines. and/or endorsed to another international airline form part of the GPB is the passenger boards a plane in a port or point in the Philippines. GPB would only apply. not the special rate. open up an agency or outlet here in the Phil. It’s either all the net income will be subject to 10% because it did not exceed 50% on unrelated trade. how much of it comes from unrelated trade. it will already be covered by the normal tax rate for RFC.5% on GPB? NOT NECESSARILY. not the net income.5% tax as GPB? o What is the basic requirement for a foreign corporation to be allowed to avail of the lower rate of 2. Emery Tiu P a g e | 147 So we have to consider that if this is the gross total income of the PEI.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty.5% tax on GPB? The outlet caters to all sales of SILKAIR tickets. Why? It’s already engaged in selling tickets. subject to tax on what? ***In broken line borders are outline notes. You don’t apportion 10% to tuition fees and related educational income and 30% to other income. o For purposes of IAC. which are taxable from sources within and without. It would really depend on what you’re selling and what is covered by GPB. SILKAIR. regardless of the place of sale or payments of the passage or freight documents. then automatically. business or activity or all the net income will be subject to 30%. Billings (GPB) at the tax rate of 2. o It’s an outlet – a sale of tickets – whether or not originating in the Philippines. Tickets revalidated. It would also include ticket sales made elsewhere other than the Phil. it becomes subject to the 30% tax. Would it be subject to the 2. . would the sales be considered as subject to 2. SPECIAL RESIDENT FOREIGN CORPORATIONS - - International Air Carrier (IAC) and International Shipping (IS) are taxable within on their tax base of Gross Phil. If the existence of such corporation is really to sell tickets. o If you register a foreign corporation here and it ventures on the sale of tickets from whatever point of origin or airport of origin. GPB refers to the amount of gross revenue derived from carriage of persons. Will it be required to remit? YES. OBUs. But if the income is derived from foreign currency loans or transactions to non-residents. managerial or technical. A and C are one and the same. maybe engaged in operations in the Phil.. local commercial banks. commercial bank or a local commercial bank. There is B Corp. taxable at 10%. It’s an income within for OBUs. Emery Tiu o They are subject to 10% tax. it’s as if off-shore. Since C is a mere branch of the home-office abroad established in the Philippines as a RFC. if foreigner. o But what type of income is subject to tax? Income derived by the OBUs from foreign currency loans to residents is subject to the preferential rate of 10%. jurisdiction.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. other OBUs. ROHQs as well are granted the preferential rate as a corporation at 10%. But there is one EXCEPTION to the rule – if the income is derived from a Phil. OBUs are just an extension of foreign banks. 148 | P a g e In straight line borders are codal provisions. it will be subject to the preferential rate of 10%. And if it’s an income derived from investments or deposits or other loans to non-residents. being operational. Easy recall would be – if the income is derived by the OBUs from residents. How about Off-shore Banking Units (OBUs)? o As RFC also. In the absence of the stockholders. exempt. therefore. There is no set of Board of Directors. the taxable income of which. it means to say that the owner of C is the owner of A. corporations. OBUs are only taxable on income derived within. That’s why it’s exempt. whether individuals. whether individual or corporation. It’s just that as far as income tax is concerned. will be subject to the special rate of 10%. managerial and technical positions. is exempt. ***In broken line borders are outline notes. BPRT will only be applied in the A and C relationship and not A and B relationship. It has employees. you call such relationship as the parent-subsidiary relationship. the situs is in the Phil. Just a general management because the set of Board of Directors is found in the home office. it will not be subject to income tax. dba what is the situs of interest or income from loan transactions? It’s where the debtor resides. Everything is the same except to the preferential rate of 10% to the corporation and 15% to its employees occupying managerial and/or technical positions. - ROHQs are just like any other corporations. and any profits. BRANCH PROFITS REMITTANCE TAX - Branch Profits Remittance Tax (BPRT). and C. When it grants foreign currency loans to also non-residents. individual residents.. Which relationship must exist? The relationship between A and B or A and C? A and C relationship.. It will be liable for other taxes. which is 100% fullyowned by A International Corp. The A and B relationship – when a NRFC fully owns a corporation. - In so far as RAHQs are concerned. That’s why it’s taxable at 10%. A as well has its own set of stockholders and own set of Board of Directors. . B is a separate corporation distinct from the parent company. Here. But if the foreign currency loan to residents. it will generate profits. The question as to whether it will be required to withhold taxes on the employees’ compensation? YES. it is still exempt. C doesn’t have any stockholders. 22 of the tax code. It’s beyond the Phil. B is registered with its own set of stockholders and own set of Board of Directors. If the income is derived from non-residents. what is that? When are they required to pay it? What does it imply? Would a DC be liable for the 15% BPRT before it pays off to a FC? What kind of relationship must exist for the 15% BPRT to apply? o Illustration: There is A International Corp. The A and C relationship – you call it a home-office branch under the single entity concept. it will be exempt. And if the loan is granted to a resident and a resident of the Phil. Being non-operational. are Regional Area Headquarters (RAHQs) liable for income tax as a special RFC? o - NO. (domestic). which is a Phil. if Filipino. o Why 10%? P a g e | 148 A ROHQ is defined in your Sec. Branch of A International Corp. which is A International Corporation. in the same manner that the employees of these ROHQs of multinational corporations are given the preferential rate of 15% so long as they’re occupying. October 5. it is exempt to avoid double taxation. But if the recipient is a NRFC. In the same way that RFCs are also exempt for further distribution to its individual stockholders. I3. So it will go outside of the country. So everything that goes outside the Phil. branches be subject to the 15% BPRT on remittances made abroad? The tax code provides that if and when the Phil. the NRFC will be subject to 15% intercorporate dividends. 20% if it’s NRA-ETB and 25% if it’s NRA-NETB. it’s 15%. B. Why exempt? In order to avoid double taxation because DCs are also owned by corporations. That’s why there were some subsidiaries within the economic one that converted itself into Phil. since it has no stockholders on its own. any remittances made to its home office will not be covered by the 15% BPRT. branch office will be totally tax-free. owned by 5 individuals (I1. what is its taxability? Dividends declared by a DC to a DC is exempt. This is just to put the same relationship. But in receiving the dividends from a DC. which is 30% tax rate for NRFC minus 15% credit granted by the foreign government. I4 and I5). Another DC. You call this declaring dividends to its stockholders. it would simply merge its income with A. But what is that special rule on dividends being given to NRFC? If a foreign government grants or allows tax credits to Phil. . the next step for it is to declare the profits in favor of its ownerstockholders. Because if you tax the dividend given to the other DC and the ultimate distribution to the latter’s individual stockholders. whenever it has unrestricted retained earnings. Another RFC. you locate yourself as a Phil. There should only be one. But once dividends will be declared to a NRFC. the profit that is earmarked for abroad to be remitted to its head office will be subject to 15% BPRT. same taxability. Emery Tiu P a g e | 149 If let’s say A invested in B corporation and A put up a branch. It means to say that dividends received by a NRFC are subject to the normal rate of 30%. what credit does it give? At least how much? If the foreign country grants tax credits of at least 15% to Filipino corporations deriving income from any domestic corporations abroad. In order to totally avoid the 15% BPRT and totally avoid the 15% intercorporate tax dividends. But what about a stockholder who is DC and a stockholder who is RFC? Both are exempt. Here. all individuals. it’s subject to 10% FWT on dividends if it’s cash or property to RC and NRC. there would be now 2 stages of tax nah. branch is located within the economic zone. Whether you are a foreign corporation investing in a branch in the Phil. o C. I2. If the DC will declare dividends to I1 – I5. will be subject to the same tax rate. or investing in its subsidiary that is totally distinct from itself. Illustration: DC. any profit going outside the Phils. C. How would B distribute the profits to A and how would C distribute the profits to A? How would B corporation give profits to its stockholders? Or how would A get profits from B? o B corporation will declare dividends. who is a NRFC. o Would all Phil. The profit is simply transfer to the other DC. when the recipient is NRFC. It will remit whatever profits it has received. it’s exempt. branch within the economic zone (Tax avoidance scheme). Dividends declared by a DC to a RFC is exempt. the dividends given to a DC is simply a transfer of profits. Taxability would only arise once it goes out to an individual. it follows the general rule that all incomes of a NRFC are subject to the 30% tax except on capital gains from capital gains on sale of shares. 2010 Tuesday ***In broken line borders are outline notes. Both are performing well (B and C). At the point that the DC declared dividends to another DC of property and cash dividends. You call this remitting profits of the branch to the head office. Thus. The dividends that will be declared by B in favor of A as stockholder. it is subject to tax. Example: If the DC gives dividends to another DC or to a RFC. branches so that to avoid the 15% BPRT.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. corporations abroad. 149 | P a g e In straight line borders are codal provisions. So any distribution made by a DC is called dividends-distribution. likewise. branch.so the difference is 15%. In BPRT. . branch. corporations. o But would dividends declared and paid by a subsidiary corporation to a NRFC be subject to the 30% tax? If the foreign government of such NRFC allows or grants tax credit to Phil. jurisdiction. It’s just that for every instance that there will be profits earmarked for remittance abroad. since BPRT is only applicable to a home-office branch relationship under the single-entity concept between a RFC and NRFC. it will cross borders – territorial jurisdiction – it will already be subject to the 15% BPRT in order to equal the tax on the dividends that will be declared by the subsidiary corporation. But when that NRFC. o - RFC Phil. will be subject at the same rate of 15%. the intercorporate dividends would be subject to 15% tax. - When is BPRT due to the government? - P a g e | 150 o BPRT is due to the government when a RFC. It means to say that 30% tax rate of NRFC less the tax credit that is expected to be granted by the foreign country to Phil. Intercorporate dividends. One is intercorporate dividends. not the 30% tax. o The reason why intercorporate tax on dividends is at 15% is because: 1. branches of a NRFC is liable for 15% BPRT on the total profits that it earmarks for remittance abroad except if the Phil. remits profits to such NRFC. It is simply a branch – an extension of its home-office – and any profit of the branch is directly a profit of the home-office. the fruit of that capital stock is a dividend. which is a home-office branch here in the Philippines of a NRFC under the single-entity concept. As a rule. branches of a NRFC. One in a DC. So BPRT should involve the Phils. because it’s one and the same entity covered by one jurisdiction – the Phil. But if there is a tax credit that is granted by the foreign country to Phil. A DC. whether he chooses the parent-subsidiary type of investment or the home-office branch type of investment. What is the difference between the two? NRFC 100% DC Subsidiary Corp. o So is it possible that a DC be liable for 15% BPRT? Is it possible for the government to collect BPRT on a profit-distribution made by a DC to a NRFC? NO. BPRT is only applicable to RFC. o - Illustration: If a NRFC puts two investments in the Phils. Emery Tiu - Can a DC be liable for the 15% BPRT? NO. The difference of 15% is the rate of intercorporate tax on dividends. Branch Would all Phil. There will be no BPRT of a DC having a branch anywhere in the Phils. not traded in the stock exchange. a NRFC. such branch is not a separate entity from the NRFC. differently termed. - RAHQs are not taxable because they’re not expected to be performing any profitable activities in the Phils. we can only impose tax of 15% as well. this involves 2 countries – the Philippines and one from abroad. So in both cases. 150 | P a g e In straight line borders are codal provisions. not a resident there. fully-owning it and one establishing a Phil. In order to equal the rate of the BPRT 2. BPRT vis-à-vis intercorporate dividends or under the tax sparing credit rule. be liable for the 15% BPRT? As a rule. and another foreign country. a foreign country.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. NRFC will be taxed at 30% on gross income including dividends earned from a DC. will have entirely different sets of officers. ***In broken line borders are outline notes. when it earmarks profits for remittance abroad. What is the general rule of the taxability of a NRFC? o All income received by a NRFC will be subject to 30% tax except capital gains from the sale of shares of stock. being a subsidiary corporation. equivalent to 15% then. branch is located within the economic zone that is legally recognized by the government. etc… only that 100% of it is owned by a parent company. corporations located abroad. corporations at 15% . The other is a BPRT. Phil. establishes or opens up a Phil. It’s not remittance of profits because for every capital stock that is owned by a stockholder. its own capital stock. it’s 30% because as a rule. as a rule. except that if they’re NRA. it’s 30%. So whatever the arrangement is with the lease. whether it be by bareboat charter or demise charter.5% for RFC and DC while NRFC is exempt just like placing your deposit or investment in an OBU. it must be an income that is derived within the Phils. lessor or distributor – taxed at 25% on their gross income derived from within. It’s offshore. o Some DCs would lease out vessels from foreign owners in order to ship in the raw materials that they’re purchasing. It is considered as a special RFC subject only to 10%. so. it is exempt if the depositor and the bank that is accepting the deposit are treated as non-residents. It’s just like a corporation taxable on its income and a corporation required to withhold on the dividends or the profits that it will remit abroad. When a DC or a RFC derives interest income from bank deposits. although it’s located in the Phils. Emery Tiu - P a g e | 151 What about ROHQs? o They are subject to 10% tax on their taxable income derived within. The tax base is only the taxable income because it’s regarded as a RFC and RFCs are taxed at net income. Can we consider it as a passive income subject to FWT? Or what is covered by passive income of corporations subject to FWT? When you say passive income of corporation that is subject to FWT. they’re.5% on gross income for the lease payments. ***In broken line borders are outline notes. it’s both at 20%. It’s outside the jurisdiction of the Phils.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. if the income-earner is a DC or a RFC. it will also be subject to the 15% BPRT. it’s covered by the 4. An income derived from inactivity. whether corporate or individuals. SPECIAL NRFC - Non-resident cinematographic film owner. 151 | P a g e In straight line borders are codal provisions. lease or charter fees derived from within o The Charter Agreement of which is approved by Maritime Industry Authority. it will still be subject to the same 20% imposed on individuals. in favor of its affiliates within the Asia Pacific Region.. Subject to tax or not? NO. But if the royalty income that’s considered as passive income. 20% final tax. A NRFC places a time deposit in your bank. When a NRFC derives interest income on bank deposits. - Royalties derived within the Phils. o - - A cinematographic film owner. NRFCs are taxable at 30%. on the income coming from within the Phils.. whether it’s with crew or not. is earned abroad or has situs abroad. machinery and equipment – taxed at 7. The 15% is the tax on the profits remitted abroad. ROHQ is operating activities within the Phils.5% on gross rentals. At what rate? 30%. lessor or distributor – it does not include leasing out DVDs or CDs. - Under the expanded FCDU. An interest income is a passive income. o The 10% is income tax. if applicable. But interest income on loans. If the income. It does not negate from the rates that is applicable to individual taxpayers. subject to the 20% tax withheld on the interest income that they earn – DC and RFC. Non-resident owner or lessor of aircraft. Non-resident owner or lessor of vessels chartered to Filipino Nationals or Corporations – taxed at 4. What it includes is only films – one which is used probably for movies. as a rule. whether it is a kind of passive income. Are you going to withhold on the interest income? YES. o How about NRFC? Are they subject to the general rule of 30%? Or are they given the preference as well of 20% tax on interest income? Let’s say that you are the manager of the bank. it’s 7. Let’s say the NRFC placed its time deposit in an OBU. instead of the 30% tax. are subject to the 20% tax withheld on the interest income that they earn. - When we look at corporate taxpayers. the earner is NRFC. will just simply form part of the other income of the taxpayer. since they’re exempted.5% on gross rentals or fees derived from within PASSIVE INCOME - Individuals. o And if ever a ROHQ remits profits abroad to its home-office. it will not be considered as income subject to FWT but the income. as a special treatment. in order for us to have jurisdiction over the withholding agent. . - Capital gains derived from the sale of real property. This is one income or one type of gain – capital gain – wherein the rate holds true or the same for all types of corporate taxpayers. branch of NRFC (STU). blah… all types of income have been mentioned. let’s say DC (ABC) is not 100% owned by RFC (STU). Would the rates differ if the seller is a NRFC? NO. which is a Phil. - Illustration: Based on the illustration above. except capital gains on sale of shares of stock. Now DC (ABC) earned ***In broken line borders are outline notes. whichever is higher o For RFC and NRFC – should be treated as OTHER INCOME subject to 30% NRFC (STU) 100% RFC (JKL) Phil. branch (JKL). . What is the taxability of the different corporate taxpayers? o For DC – 6% of the GSP or Zonal Value. 20% owned by RFC-Phil. RFC-Phil. DC (ABC) was setup by the NRFC (STU).T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Branch (JKL)OW and 20% owned by another DC (XYZ). 152 | P a g e In straight line borders are codal provisions. If you look into Sec. For capital gains derived from the sale of shares of stock: o If it is listed and traded thru local stock exchange: ½ of 1% of the GSP o If it is not listed or traded thru local stock exchange: Not over 100K – 5% and over 100K – 10% Is this the same rate applicable to individual taxpayers? YES. Branch DC (ABC) Subsidiary Corp. DC (ABC) is 60% owned by NRFC (STU). which means that it will be subject to the 5 and 10%. NRFC (STU) Single-entity (15% BPRT) 60% RFC (JKL) Phil. Emery Tiu o - P a g e | 152 NOTE: Royalties should be considered first as a passive income before you apply the special rates of 20% and 30%. Afterwards. Branch 20% 20% DC (XYZ) DC (ABC) Subsidiary Corp. Blah. it will be subject to the ordinary tax rate of 30%. If the royalty income is already an active income that is earned in the usual course of trade or business of the corporation. both of them (the NRFC (STU) and RFC-Phil. branch (JKL) and NRFC (STU)? Home-office branch relationship. How about RFC-Phil. There is also a RFC. blah. branch (JKL)) invested in the DC (ABC). Profits – 100M Declaration of Dividends - Another illustration: Based on the illustration above. what is the relationship between DC (ABC) corporation and NRFC (STU)? Parent-subsidiary relationship. branch. 28(b) – NRFC are subject to 30% tax on gross income…. Such NRFC setup a Phil. According to the SC. it’s automatic that we can apply the tax sparing credit rule – instead of the 30% general rate on NRFC. If we pull out such 15% tax just so to equalize the exemption granted to RFC. 27. 28(a)).T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. we can actually imposed the 15% intercorporate tax on dividends declared by a DC to a NRFC. since it is also exempted from tax on dividends received from a DC (Sec. The law already provides. Emery Tiu P a g e | 153 profits and it would like to distribute the profits. o There’s a principle why IAET has to be imposed. Once the RFC receives the dividends from a DC. . 28(a) (7) also provides that the dividends declared by DC to a RFC is as well exempt from tax. under Sec. 20M will go to XYZ. it will also be exempt just like a RFC? o NO. 20% or 25% applicable to individual taxpayers o How about the 20M dividends to JKL? Will it be subject to withholding tax? NO. Is ABC required to withhold tax on the dividends to XYZ? NO. branch. it’s still exempt. How will it distribute the profits? Declaration of dividends or remittance of profits? o Declaration of dividends. Sec. Sec. With more reason that a NRFC is not subject to BPRT since a foreign branch is not within our jurisdiction. what is this IAET? o It is a 10% tax imposed for each taxable year on the improperly accumulated taxable income of each corporation. Can the NRFC raise the argument that under the single-entity concept. And the SC clearly stated that for purposes of investing in a corporation in the Phils. both investing in the same corporation. No actual grant is necessary so long as it can be seen that the foreign country allows a tax credit to Philippine corporations in such country. Here. 28(b)). that dividends declared by a DC to another DC is not subject to tax as yet. the single-entity concept will not apply wherein a NRFC and its Phil. o And BPRT is only directed to a RFC. TAX ON IMROPERLY ACCUMULATED EARNINGS - IAET – Improperly Accumulated Earnings Tax. Unlike RFC.. they will be considered as separate entities for purposes of taxing the dividends. Dividends will have to be declared and distributed to all stockholders. subject to the tax sparing credit rule. since it is exempted from tax on dividends received from a DC (Sec. If the foreign government of STU grants or allows tax credit. therefore. Assets100M Liabilities 80M Net worth 20M Capital Stock – 1M 1M as capital stock Profits (retained earnings) – 19M 18M for future expansion ***In broken line borders are outline notes. 153 | P a g e In straight line borders are codal provisions. the tax sparing credit rule can be applied. o If 100M will be distributed as the total dividends. Only when the dividends would be ultimately declared to individual stockholders will the tax rates apply of 10%. So DC is not subject to the 15% BPRT. 28(b) provides that the dividends declared by a DC to a NRFC. will be subject to 15% tax. the NRFC cannot use the single-entity concept in avoiding the tax of 15% on dividends declared to it in comparison to the dividends declared by the subsidiary corporation to a RFC of which it owns. the intercorporate tax of 15% shall be imposed on the dividends received by STU from ABC. o How about the 60M dividends to STU? Liable for tax at 30% but subject to the tax sparing credit rule (Sec. it will still remit the profits abroad subject to the 15% BPRT. 27). The reason why the RFC is exempt and why the NRFC is taxable is because the NRFC is already a given state – it’s direct dividends. there will be no tax that can be collected by the government. it will already cover for the normal 10% FWT on dividends. The retained earnings is not the base. at what rate can the BIR collect the tax on the distribution of dividends to stockholders? Dba. subsequent distribution as dividends would still entail withholding of the regular rates of 10% to RC. if the recipient is a RC. If your capital or investment from the start of your business is only 1M. Have you accumulated profits unreasonably? Is there a chance that the BIR will impose the IAET? o What’s the principle behind imposing the IAET? Why is the BIR taxing a profit that is already exempt from the tax? Dba class. They have different purposes. 154 | P a g e In straight line borders are codal provisions. 1 ending in Oct. o Under Sec. 20% to NRA-ETB. FORMULA: Taxable income adjusted by: ADD o Income exempt from tax o Income excluded from gross income o Income subject to final tax o Amount of net operating loss carry-over deducted (NOLCO) ***In broken line borders are outline notes. - If you’re from the BIR. 31. 1998. When you accumulate the earnings of your business improperly. a red light. Your dividends or accumulated earnings from Dec. And if you’re operating on a fiscal year basis. 29. Being unreasonably accumulated (the profits). you will be subject to the income tax. 29 of the tax code. Even if your profits which you have unreasonably accumulated have been exposed already and you have paid the 10% IAET. generally. 31 down would still be free from the IAET because this kind of tax has already been effective Jan. and 25% to NRA-NETB. 1. Your net worth is 20M. for the BIR to assess. It doesn’t means that if you have already shouldered the 10% IAET. But it is not a guaranty that the BIR will actually collect the IAET. which means that you start at any day other than Jan. . 1. Why is the BIR taxing the profits that you have accumulated? The reason why there is IAET is to actually penalized corporations that have been unreasonably withholding the profits from being distributed to the stockholders. Emery Tiu P a g e | 154 Illustration: The net worth of your business is broken down into capital stock and profits (earnings that you retain in the business or in the corporation). Why? Because had it been distributed to the stockholders. 1998 down would still be free from IAET. The 19M accumulated retained earnings given in the illustration above is only an indicator. it will try to compute the IAET. If your asset is 100M. You accumulate earnings improperly. The moment that the retained earnings would exceed 100% of your capital stock. NRC and RA. It means to say that the profits that you have accumulated is 19M.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. who are all RC. So this is the current state – you did not distribute the 19M worth of profits to your stockholders. Case scenario: If you will be subjected to the 10% IAET for unreasonably withholding of profits and you decide later on to distribute the profits as dividends to all of your stockholders. Average for the dividends or accumulated earnings that is a probable area for imposing the 10% IAET would only start from 1998. the BIR is going to penalize the corporation. These taxes (IAET and FWT on dividends) are entirely separate. do you have the figure or taxable base within which you can impose the IAET? Is it readily available in the given illustration above? Where do you have to pick out the taxable base for the 10% IAET? o The 10% IAET will be computed according to the formula given in Sec. computing IAET would start-off from your taxable income for the year that the BIR is considering imposing the IAET. One (IAET) is imposed as a penalty and the other one (FWT) is simply a tax on the income earned by the stockholders. you might be imposed of the 10% IAET. Liabilities is 80M. Oct. it would have been subjected to 10% tax. Whatever remains is the profit that you will accumulate and will only be taxable again once it will be distributed to the stockholders. when you earn income. The BIR could have collected tax on the profits had this profits been distributed. There is no double taxation here. 31. It is just an indicator that you have improperly accumulated your earnings. So if your fiscal year is Nov. would you still be required to withhold another 10% tax on the dividends subsequently declared to such stockholders after being penalized of the 10% IAET? o YES. your free coverage from IAET would be starting from the last month in 1998 – the end of your fiscal year. - When you say that you would want to accumulate profits for expansion projects. In the case of subsidiaries of FCs in the Phils. But the BIR is not so unreasonable as to not allow you to accumulate profits. . 2. How do you justify the “reasonable needs of the business” according to Rev. So if your taxable income for the year that is covered by the assessment of the IAET is 0. etc…. Emery Tiu P a g e | 155 And reduced by the sum of: MINUS o Dividends actually or constructively paid. prepare a board resolution by your Board of Directors that 18M ***In broken line borders are outline notes. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date.. and o Income tax paid for the taxable year TAX BASE (IAE – Improperly Accumulated Earnings) = taxable income + income exempt from tax + income excluded from gross income + income subject to final tax + NOLCO – [dividends actually or constructively paid + income tax paid for the taxable year] So the basis of the 10% IAET is not the retained earnings given from the formula in the illustration given above but the formula on the TAX BASE (IAE). You have no exempt income. not necessarily the payment of 10% IAET because 10% IAET is based on the TAX BASE (IAE) formula. 2-01? 1. you have an inkling that you will be audited or assessed by the BIR so you decided to put into record. It simply means that if the bank requires you to maintain – not disposing of your retained earnings. blue prints. therefore. to the extent of the compliance. all undistributed earnings intended or reserved for investments within the Phil. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution 6. you have to comply with that provision strictly. you have no IAET. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body So for definite corporate expansion projects 3.. 0 as well. Therefore. 5. etc…. for IAET. So you can retain profits up to 100% of your capital stock. There are instances when you are allowed to accumulate profits even beyond your capital stock. you will not be liable. Earnings reserved for compliance with any loan covenant or preexisting obligation established under a legitimate business agreement This only means that if you have an existing loan agreement with any national banks or domestic banks or international banks wherein it is required that you have to maintain a ratio of your profits against capital stock. and so therefore. such retained earnings is only an indicator for audit and assessment.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. inclusive of accumulations taken from other years. what are the steps that you need to make? Is it enough that you will tell the BIR that you are planning to expand your business? How will you prove? What if for 10 years already you have been placing in your financial statements that this is for future expansion projects. But it should be definite expansion projects proven by sufficient documentary evidence o If at the end of this year. What are the instances when you have the free time to accumulate the profits more than 100% of your capital stock? What are the instances when you are allowed to accumulate profits beyond 100% of your capital stock? o If it is justified under the “reasonable needs of the business”. not declaring it as dividends – then you are allowed to accumulate profits beyond 100% of your capital stock. as can be proven by corporate records and/or relevant documentary evidence. but it never really took place? Can you now be imposed on the IAET? o Proven by a Board resolution. even if you have retained earnings because again. 155 | P a g e In straight line borders are codal provisions. Reg. plants or equipment acquisition as approved by the Board of Directors or equivalent body 4. Earnings reserved for building. And you have not paid any tax. So it should be paid out within 1 year. So automatically. and the other 50% is owned by 1 individual. otherwise. It’s open to the public. will automatically be considered as publicly held. having complied the definition of closely-held that 50% of the voting stock is owned by not more than 20 individuals. the illustration above is not a publicly held corporation. o By your definition of closely-held. that is 50% of the voting stock is owned by not more than 20 individuals? YES. It should actually be distributed within 1 year from the close of the taxable year wherein you declare the dividends. maintain 100% of your capital stock and the excess. Therefore. - What corporations or entities are not covered by the IAET? o 1. you will pay the IAET. it will be subject to the 10% IAET. Closely-held corporations are those corporations at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. which does not fall within the definition of a closelyheld corporation. then it is closelyheld for purposes of IAET. Emery Tiu P a g e | 156 of the retained earnings will be declared as dividends. whenever such corporation in the illustration above will unreasonably or improperly accumulate its earnings. Publicly held corporations What is a publicly held corporation? Is that the same as a publicly listed corporation? NO. you have to know the definition first of what a closely-held corporation is. Any corporation. Consequently. either for future expansion projects or dividend distribution. it would normally have numerous stockholders. a publicly listed corporation is a publicly held corporation because being listed. ***In broken line borders are outline notes. If you want to avoid the IAET. Publicly listed corporations are corporations wherein the stocks are listed and offered to the public. . 156 | P a g e 49% 51% above be publicly held? When can we say in the illustration 1 individual PUBLICLYHELD CORPORATION 21 individuals In straight line borders are codal provisions. within how many months or years should you actually pay out the 18M? What is the time frame that is given you by the tax authorities to realize the actual distribution of dividends? At the end of every taxable year. DCs not falling under the aforesaid definition are. because a publicly held corporation means that which is not covered by the definition of a closely held corporation What is a publicly listed corporation? It is a publicly listed corporation if its stocks are listed in the stock exchange. But it cannot stay forever as is. 50% more than 50% CLOSELY-HELD CORPORATION 20 individuals 1 individual Illustration: A DC. But a publicly held corporation is different because publicly held corporations are corporations which are not closely-held. 50% of its capital stock is owned by more than 20 individuals. is the illustration above closely-held. therefore. publicly held corporations. What is not covered by a closelyheld corporation becomes a publicly held corporation.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. you are given the leeway on how to distribute your accumulated earnings. And for purposes of the IAET. Therefore. But the option is still given to them. Banks and other non-bank financial intermediaries Why is it not covered by the IAET? o o Because they’re required to maintain a certain level of cash or liquidity 3.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. But a family corporation is a closely held corporation. which includes the exemption from the payment of IAET. it is considered a closely held corporation. 49% 21 individuals 51% CLOSELYHELD CORPORATION 1 individual Another illustration: A DC. to a special rate of 5% tax on gross income in lieu of all taxes. This is already a publicly held corporation. PEZA-registered companies Not covered by IAET because they’re liable. Emery Tiu P a g e | 157 Example: If the ownership of the corporation is at 49%. 49% of its capital stock is owned by 21 individuals and 50% of its capital stock is owned by 51% of 1 individual. PEZA-registered companies are subject to the 5% special rate or preferential rate on gross income in lieu of all national or local taxes. Being a publicly held corporation. o Would all closely held corporations be family corporations? NO. owned by 1 individual. While 51% is owned by 21 individuals. PEZA-registered may opt to be liable for 30% on taxable income ***In broken line borders are outline notes. whether national tax or local tax. As a rule. Purpose for the difference between a publicly held and a closely held corporation: o Publicly held corporations are not exposed to liability for IAET while closely held corporation are exposed to such liability. o Not all closely held corporations are family corporations because so long as a corporation satisfies at least 50% owned by not more than 20 individuals. 466) 2. 157 | P a g e In straight line borders are codal provisions. instead of the 30% corporate tax. which is not at least 50%. o Is the illustration above publicly held or closely held? CLOSELY-HELD because at least 50% is owned by not more than 20 individuals. Insurance companies Not covered by IAET because they’re required to maintain some reserves and regulated with the Insurance Commission o 4. this is not covered by the IAET. these companies within the economic zone are not liable to pay 30% on their taxable income. . o RULES – (See Mamalateo on p. Is a closely held corporation a family corporation? o NO. because a Phil. Even if it’s part of your trade. property for investment in stock ***In broken line borders are outline notes. For PEZA. will it be liable for IAET or not? YES. it is considered as capital asset. General professional partnerships It’s also not covered by the IAET because it is not considered as a corporation for tax purposes. 6. [Gross total sales – costs = gross income]. Property primarily held for sale to customers in the ordinary course of trade or business o 3. o 2. o If you have an accounts receivable or collectible from your customer and you are short of cash and would like to assign that receivable or collectible to another corporation by selling your right to collect. How would that happen? Or why would it happen? Why would the PEZA company choose to be liable of 30% instead of 5%? o The reason is simple. o 5. the costs is regulated to 9 types of expenses that is directly related. - What’s an Ordinary Asset (OA)? (Sec. o If the PEZA-registered company opts to be taxed at 30%. Property used in trade or business subject to depreciation. branch of a NRFC be liable for IAET? o o NO. then the IAET will still apply. Real property used in trade or business What are Capital Assets (CA)? o 1. which is an irrevocable choice.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. 39 – negative definition of what capital assets are) - o 1. Properties used in trade or business classified as capital assets: i. Emery Tiu P a g e | 158 instead of the 5% on gross income. if it maintain the 30% regular rate. business or profession of the taxpayer can be deducted. 2-01 on IAET provides that a corporation registered with the PEZA (Philippine Economic Zone Authority) is not covered by the IAET if it enjoys the preferential rate or special rate given to it. o 7. 158 | P a g e In straight line borders are codal provisions. business or profession but because you’re not into selling receivable or collectible. if it does not opt to be subject to the special rate of 5% tax in lieu of all taxes. Taxable business partnerships It’s not covered by the IAET because it does not have a capital stock Not taxable joint ventures are as well not covered by the IAET because it is not considered as a corporation for tax purposes. CAPITAL TRANSACTIONS - 2 types of assets: o Capital asset – capital income o Ordinary asset – ordinary business income or trade income - Capital transactions are transactions arising from the use of capital assets. Whereas if they choose to be liable for 30%. it’s still considered as capital transaction. The 5% tax is based on the gross income and gross income for companies located within the economic zone is heavily regulated wherein they can only deduct 9 types of expenses or costs from the sales. ii. . Foreign corporations Is a RFC covered by the IAET? Will a Phil. When you say capital loss. which means that this must be depreciable property o 4. Properties not considered as ordinary assets. o 2. Rev. Reg. Stock in trade or property of the taxpayer which may be properly included in the inventory at the end of the taxable. Now. branch does not have a capital stock. it’s the loss that you suffered from transacting using capital assets. accounts receivable o Unless you are in a business of selling accounts receivable. it’s based on the taxable income – all expenses related to the trade. you will be considered as in the regular conduct of selling real properties – ordinary transactions. without BIR registration. you acquired the same or substantially similar shares or 30 days after. o Example: The properties of a taxpayer engaged in real estate business are considered as OA. and sold it again to your other seatmate. - What is the difference between wash sale and short sale? o Wash sale It’s like selling the shares today but 30 days before. which is more favorable? o It depends. You better be subjected at 6% CGT because if you sell that property you purchased 50 years ago. improved it. such properties which are ordinarily held for sale to customers may be converted into CA. Should the heirs discontinue the real estate business of the deceased parent. The 5-32% is based on the net taxable income. 6% is based on the GSP (Gross Selling Price) or FMV (Fair Market Value). you acquired the same or substantially similar shares. Emery Tiu P a g e | 159 o If you have a business and you’d like to invest in another business. you bought a house and lot. still capital transactions. whichever is higher. In the event that this property is substantially improved by the heirs and sold at profit. If you are able to sell at least 6 real properties in one year on your individual capacity without registration. CGT of 6% will no longer apply. The profit derived from the sale of the land is already considered as ordinary gain. And ordinary transactions are liable for VAT while capital transactions. But if you’re a broker of shares.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. This went on monthly during the year. can a CA be converted into an OA? o YES. 159 | P a g e In straight line borders are codal provisions. If you sell lower than 6 during the calendar year. o It is really better to stick selling pure pieces of real properties every year in order to be still covered by CGT. Therefore. ***In broken line borders are outline notes. After a month. no VAT. The first sale – is that a capital transaction or ordinary transaction? Or can you say that your income is subject to the 6% CGT or you’re already covered by the 5-32% OT (Ordinary Taxes)? Can you now be considered at the end of the year that you’re now already into ordinary transactions of buying and selling real properties? Is registration of a real estate business necessary to make your real estate transactions ordinary transactions? o NO. you will already be considered into engaging ordinary transactions of buying and selling real estate properties. so long as you’re not a holding company into investing another businesses. o If you’re selling a property that you acquired 50 years ago and you sell it today. o BIR has already set the limit. can you already be subject to the OT of 5-32% as an individual or will you still be covered 6% CGT? Because of the regularity and the continuity of the conduct of the buying and selling of real estate properties. these properties will be transmitted to the heirs. o Example: Land inherited by the heirs from their deceased parents is considered as CA. - - - iii. If the taxpayer dies. the difference in the selling price and the cost is very wide wherein you can already be subject to the highest tax bracket in the individual tax table of 5-32%. Interest of a partner in a partnership Can an OA be converted into a CA? o YES. Conversely. . So you stop at 5. You’re not registered in any business. Lets say for example you got interested in buying a certain parcel of land and sold it to your seatmate. that’s automatically considered as ordinary assets. Registration of activities is not necessary for you to be covered by OT rates. The difference in rates would actually have to depend on how much your actual cost is and the selling price. said CA may be converted into an OA. that particular asset – the investment in capital stock – is still considered as capital asset while you are not into trading shares. subdivision of lots to tenants at the instance of the government iv. Viewing the tax rates of 6% and 5-32% on a property. if you sold house and lots 12 times last year every month. Is the gain taxable and is the loss deductible? o YES. you acquire the same or substantially similar shares. provided. Do not cross the border of offsetting the capital losses from ordinary income. The gain is taxable and the loss is deductible. It’s a simulated sale. Emery Tiu P a g e | 160 Your reckoning point is WON 30 days before the sale. o Is there an instance where a capital loss arising from a sale wherein 30 days prior. within 1 day or within 2 days that you have acquired substantially similar shares or the same shares. what are these? o 1. You’re not engaged in the real estate business or in any other businesses wherein the land is used in trade or business. you already have the ownership of such shares – still valid basta so long as he has the ownership at the time that he needs to deliver. 31. is not deductible. It’s a transaction wherein a person sells securities which he does not own yet. ***In broken line borders are outline notes.5M 50% of (500K) 500K 500K Not deductible against 500K bec. If the property has been held for more than 12 months. the gain or loss is 100% recognized. . be deductible? Is there an instance wherein your capital loss is deductible in such case? YES.5M100% of 500K500K 2) Selling price .5M100% of 500K 2) Selling price 2M 50% of 1M Change of facts: 1) Selling price 1. being a simulated sale. 2009 for a cost of 1M each. the gain is taxable and the loss. Is the gain taxable or is the loss deductible in this kind of transaction? o In all cases. The 1 ST parcel of land. lifeblood doctrine. If the property has been held by the taxpayer for a period of not more than 12 months. only offset it against the capital gains. Holding-period rule Applies only to individual taxpayers – because the capital gain derived from capital transaction of corporate taxpayers is always 100% recognized irrespective of the number of months during which the property was in the possession of the corporate taxpayer. you’re into ordinary transactions of buying and selling shares whether it’s within 30 days. however. not on the same year (250K) Example: You have 2 parcels of land. 2 Lands Cost 1M Gain 1) Selling price 1. Basta the rule is. in capital transactions.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. You purchased such lands Jan. 160 | P a g e In straight line borders are codal provisions. whenever a loss is deductible. that he has ownership of the securities at the time of delivery – he has the right to transfer ownership. in which case. you can deduct the losses and offset it with your other capital gains. you sold it at Dec. you acquired the same or substantially similar shares or 30 days after. - There are 3 rules governing capital transactions which are not applicable to ordinary transactions. o Short sale It’s just like advance selling but just make sure that at the time you need to deliver the shares that you have sold prior. 31. It’s a wash sale. the question whether the gain is taxable or not. the gain or loss is 50% recognized. if the seller is a dealer in securities or shares of stock. o The reason for such rule is that whenever you purchase a personal property. Assuming that you had no other transactions in 2010. since the loss of (250K) was from the sale of a capital asset held for more than 12 months. Can capital loss limitation rule apply to corporations as well? o YES. such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months. If the taxpayer sold it within a few months.5M. So 1 year only. no other sale. the net capital loss carry-over rule cannot be applied. EXCEPT on banks and trust companies (because they are considered as dealer in securities) o 3. the sale of the 2 nd parcel of land constitutes a loss of (500K). 5. o 2. The difference between NOLCO and net capital loss carry-over is that NOLCO can be carried over for the succeeding 3 consecutive years but net capital loss carry-over can be carried only to the next year.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. While the 2 nd parcel of land. you are not expected to dispose of it easily. you sold it today. only 50% is taxable or 50% is deductible. Another distinction also is that net capital loss carry-over can only be availed of by individual taxpayers while NOLCO can be availed of both by individual and corporate taxpayers so long as they’re registered for business. Such rule applies to both individual and corporate taxpayers. 12 months or less. The net capital loss carry-over rule cannot be applied. 161 | P a g e In straight line borders are codal provisions. Other facts are the same with the preceding example. which is 500K. is taxable because such land was held on to for more than 12 months. you are considered to be in trade or business but not necessarily. Another distinction is that NOLCO involves loss arising from ordinary transactions while net capital loss carry-over involves loss arising from capital transactions. If the property has been held on to by the taxpayer for more than 12 months. how many years can you carry forward a net capital loss? o In the succeeding taxable year only. o For individual taxpayers holding capital assets which they sell. So gain – 100% is taxable or 50% is taxable. 2010 for the selling price of 2M. The 2 nd parcel of land was sold for . you have a loss of (250K). In net capital loss carry-over rule. can you carry forward such loss? NO. 50% of (500K) is (250K). The net capital loss carry-over rule provides that if any individual taxpayer sustains in any taxable year a net capital loss. Is the (250K) recognized loss deductible on the capital gain of 500K from the sale of the 1st parcel of land? NO. . Oct. The 2 nd parcel of land. Capital loss limitation rule Capital losses are deductible only to the extent of capital gains during the year – on a yearly basis. The loss is deductible but not against such 500K. Net capital loss carry-over rule ***In broken line borders are outline notes. In this case. which is 500K. you gained 500K and 100% of 500K. It’s the same way that the loss is only 50% deductible or 100% deductible. Another example: Lets change the facts. What will happen? o In this case. is taxable because such land was held on to for 12 months. everything is taxable and deductible (100%). When you dispose of personal property more often within 1 year.5M. o In the case of the 1st parcel of land. Emery Tiu P a g e | 161 2009 for the selling price of 1. you gained 1M but only 50% of 1M. you have to consider the period within which the property was with the seller – the holding period (for how many months was it with the taxpayer who’s selling it). in 2009. The loss is deductible against the capital gain that has been earned in 2010 but not against the 500K because such 500K was earned a year ago. the taxable income is 800K. You have to consider that it should not exceed the net income from the ordinary transactions of the year when such loss is incurred. in general. If the 500K that you’re deducting (FMV at the time of donation) is greater than the FMV today. o What type of property do you think that the FMV is lower today than the time it was donated? Depreciable assets. for the purpose of determining loss. . It’s a capital loss. If the property sold was previously acquired through inheritance – the FMV of the property at the time of the acquisition (the time you’ve inherited such property). o 3. 162 | P a g e In straight line borders are codal provisions. You have to look into how much is the net income from ordinary transactions. ***In broken line borders are outline notes. is the “amount that you received as consideration for the property“. you can carry-over such (250K) loss in the succeeding taxable year. o Example: You have a parcel of land in Alabang. If the property sold was acquired for less than an adequate consideration in money or money’s worth – the amount paid by the transferee for the property Example: If you purchase it at an amount that is inconsiderably low as compared to the FMV. GAINS DERIVED FROM DEALINGS IN PROPERTY - The basic formula in determining the gain that you derived from selling your real property or property. But as to how much is subject to tax. It’s the excess of the loss over the capital income or capital gains. you can carry-over 250K – it should not exceed. - The general rule is that for every sale of property. If at the time it was donated. o It simply means that if you’re selling a property today. Both lands have the same square meters – 1 ha or 10K sq. It can be carried over only to the succeeding next year by an individual. Lifeblood doctrine. If the ordinary net income is 250K. you can only deduct as cost 1 peso. Oct. lifeblood doctrine states that the cost in determining your income for tax purposes would have to be the amount that you’ve given up. you can carry-over only 200K. 2010. The law says that the amount that you have to deduct as cost in determining your income subject to tax would be the amount as if it is in the hands of the donor. 4. Oct. If the ordinary net income is 500K. m. subject to CGT or OT. say for example. o Example: Motor vehicles. It may be exchange of property or may be sale of property. Will there be tax? YES. This is basically the GSP or any consideration. 5. you have to be taxed if there is an income after costs has been deducted from the selling price or consideration for all types of exchanges in property. If the property sold was acquired through donation – the same as if it would be in the hands of the donor (so. the basis shall be such FMV. So if you bought a 1M car for 1 peso and you sold it for 1M. You’re selling it at 1M. If it was acquired through purchases – the cost of the property o 2. The cost of your property that you’re selling or exchanging would differ according to how you acquired your property. If the ordinary net income is 200K. Emery Tiu P a g e | 162 Net capital loss carry over rule is very complicated: o 1. Example: Assuming that the (250K) net loss arose from the sale of capital assets held on to for not more than 12 months. There is an exchange of property without any cash involved. you have to determine what is the cost of your property. The other person has a parcel of land in Muntinlupa. it will no longer be usable the 2nd year. So how do you determine the cost of the property that you’re selling? o 1. o 3. as the case may be. its value was 500K. it’s the same amount at the time the donation was made) BUT: Exception: If the basis is greater than the FMV of the property at the time of the donation/gift then. the FMV of the property today is 200K – so you use such 200K. Then you deduct it from the 1M. o But there’s an exception to the rule. 5. 2010. The property that you’re selling has been donated to you. The amount that can be carried over is not exactly the same amount that you will see as the net capital loss for the year for capital assets held on to for not more than 12 months. It means at the time it was donated. If it remain unutilized.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. Why? If you use 200K. so you get an income of 500K – taxable. o 2. the interest of the first 5 would only be 10. so therefore. This is a case of an exchange of property. It has existing capitalization of 5M owned by 5 people at 1M shares each. thus. 46M 5M 51M 46 U & 45 46 people 1 person 51 people LAND 46M Example: Lets say there is ABC Corp. If you put such land as an investment in ABC Corp. Anyways mkasabot ramo later as you go on reading… I hope…] o So. want to invest in such corporation. in this case. not exceeding 4 (so total of 5). 7 U&6 LAND ***In broken line borders are 7M outline notes. You gave out land to ABC Corp. Emery Tiu P a g e | 163 Both properties do not actually have the same value in so far as the owners are concerned. (5 + 46). applying the first-highest-5-rule. in exchange of 46M shares. - There are instances wherein no gain and no loss is recognized for certain types of exchange. the total capitalization would now be 51M (5M + 46M) and the total owners would be 51 people. So the 46 of you invested 46M worth of land co-owned by 46 of you. para short-cut lng sa transcription…. all the gains of the 46 people from the exchange of property will be subject to 6% CGT) NOTE: [the “first-highest-5-rule” kay g-himo-himo ra nko na rule. Transactions made pursuant to plan of merger or consolidation This happens when you gave out your properties in exchange for the shares of the surviving/absorbing corporation or when you exchange shares for the shares of the other corporation. they did not acquire controlling interest.. how do we make the facts non-taxable? ABC Corp. 46 of you. You and your classmates.87%. 163 | P a g e 5 U & 7M 4 2M 9M 7 people 1 person 8 people 46M 5M 51M 5 people 1 person 6 people LAND 46M In straight line borders are codal provisions. after this exchange. wala jud na na term actually… hehe. . (Sec.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty.. This means to say that they acquired at least 51% of the shares of stock of such corporation.. If a person alone or together with other. exchanges his property for stock in a corporation and this person or persons. ABC Corp. which will be discussed later. What are these? o 1. Land for shares – shares for land. ABC Corp. acquired controlling interest over that corporation. 40(c)(2)) This is also a transaction solely in kind. o 2. Is the 46M parcel of land subject to 6% CGT? o YES (apply the “first-highest-5-rule”. so long as the first highest 5. so you know that the first 5 would have 5M. so therefore. . o What will happen is if of the many. there would be a problem. 5 will be exempt. o [Mao nani siya ang “first-highest-5-rule”] o Consider first whether the first 5 transfers acquired controlling interest over the capital stock of the corporation. ABC Corp. And 5M/9M is more than 51%. the first 5 transfers acquired more than 51% so that they have acquired controlling interest over the capital stock of ABC Corp. So you want to put in the parcel of land so you’ll be given 7M worth of shares of stock. 164 | P a g e In straight line borders are codal provisions. the rest will be subject to 6% CGT. even if the transfer numbers more than 5 people. 5M over 9M total capital stock is 55. So the total capitalization of ABC Corp. the gains from the exchange of property will not be subject to the 6% CGT with respect only to the first 5. If they own the stocks equally. So the total capitalization is 51M and there are already 6 people owning ABC Corp. Transactions not solely in kind ***In broken line borders are outline notes. the first 5 transfers amounts to 5M. 5 will acquire controlling interest. has a capitalization of 2M owned equally by 5 people/stockholders. Emery Tiu P a g e | 164 So that the facts would be that there are 5 people who invested 46M parcel of land in exchange for the 46M shares in ABC Corp. 7 U&6 7M 2M 9M 7 people 5 people 12 people LAND 7M Change of facts: ABC Corp. Wash sale o 2. they (the first highest 5) will be granted exemption from the 6% CGT. the 46M parcel of land is exempted from the 6% CGT and documentary stamp tax. is 9M [2M + 7M] owned by 12 people [5 + 7]. so that the first highest 5 will be exempted from CGT. Therefore. - Instances where gain is recognized and loss is not recognized: o 1. Since in this case. Thus. Illegal transactions o 3. Consider first the first highest 5. o In this case. and as such. [5M/9M = 55. this case is covered by the exception. because they own 46M shares out of the total 51M shares from the exchange of property (more than 51%). then. In this case. the 7M is equally owned by the 7 people.55%]. It depends actually on their agreement whether they will share the burden of tax or whether who will be exempted and who will be subjected to CGT. the 5 people acquired controlling interest over ABC Corp. Those transactions involving related taxpayers o 4.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. You want to invest in ABC Corp. Therefore. would acquire controlling interest over the new capital stock of the corporation. Is the gain from the exchange of property subject to CGT? Is it covered under the tax-free exchange? o YES. You together with 6 others have a 7M parcel of land. but partially.55%. You earn 100K a month. Your personal and additional exemption is 50K. therefore. Emery Tiu P a g e | 165 It means to say that transactions not solely in kind is when the transfer involves cash. 3. Every alien residing in the Phils. if you’re the President of the corporation. - So in all instances. You’re not required to file an ITR. Every Filipino citizen residing outside the Phils. you have to combine that with your income from your employment. regardless of the amount that he’s earning. The reason why you’re required to combine your income is to determine what bracket you really belong to. a NRA-NETB is never expected to file an ITR. An individual whose sole income has been subjected to a FWT o 4. whether from trade.. Every NRA-ETB or in the exercise of a profession in the Phils. business or profession. every payor of that NRA-NETB is required to withhold a final tax. o This is called the SUBSTITUTED FILING OF ITR. You only have one employer who has been correctly withholding you but during break time. you have 12K in a year. You only have to have 1 employer ***In broken line borders are outline notes. An individual whose gross income does not exceed his total personal and additional exemptions Example: If your income is 1K a month. An individual who is exempt from income tax What is the substituted filing of ITR? o It is when an employee is no longer required to file an ITR at the end of the year so long as he is a pure-compensation income earner. And substituted filing is very strict in a sense that: o 1. Every Filipino citizen residing in the Phils. is transferred. How do you call that? What’s the correct term for that? o Example: You’re the president of ABC Corp. If cash. TAX RETURNS AND PAYMENT OF TAX - Returns and Payment of tax o Individuals required to file returns (General Rule): 1. you have 100K income monthly. and he has only one employer who has been correctly withholding the tax. That’s why every income should be consolidated. Example: Once this is violated. no exemption from CGT. the income tax on which has been correctly withheld. that’s already other income. ACCOUNTING PERIOD. What are the instances when individuals are not required to file an ITR? o 1. you sell siopao to your officemates. if the income tax has been correctly withheld by the employer and your only income is the 100K you earn a month as the president of ABC Corp. Withholding of a final tax is a tax with finality. If you have only 1 employer and your tax has been correctly withheld by your employer. o Who has not been mentioned here? What type of individual taxpayer is not required to file ITR? NRA-NETB Why? Because they’re subject to a FWT rate of 25%. no need to file an ITR. There’s no requirement for that income-earner to report the income already subjected to final tax as part of his ITR. on income derived from sources within the Phils. Thus. METHODS OF ACCOUNTING. he does not have any other income from any source. o When you say pure-compensation income earner. Are you required to file an ITR or not? - o NO. . That’s below minimum wage. meaning to say. on his income from sources within the Phils. o 2.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty.. 4. it’s no longer exchange solely in kind. An individual with respect to pure compensation income derived from sources within the Phils. in addition to property.. 165 | P a g e In straight line borders are codal provisions. 2. in exchange for shares. And being other income. o 3. Maybe your income from siopao business will escalate your bracket of income. 30 and the final ITR has to be filed on or before the 15 th day of the 4th month following the end of the calendar year. Both employers. There was no overlapping of employment. because the requirement must have to be only 1 employer. correctly withheld the taxes. and the final ITR has to be filed April 15 – No other date. 60 days after the end of every quarter and the last is on or before the 15 th day of the 4th month following the close of the taxable year. 5. 30 has to be filed 45 days after. . Why? Because at the end of the year. No other income. we individuals (individual business income earners) would file 2 ITRs – one is for full year and one is for 1 st quarter of the new year. Correct withholding of tax o 4. - Who are the individuals not qualified for substituted filing? o See outline. Corporations. etc. 2 ND quarter of June 30 has to be filed 45 days after. o If it’s fiscal year. P a g e | 166 If the requirements are not met. after Sept. you have to file an ITR. in so far as it is practicable to combine both your income – husband and wife – it (the filing of ITR) has to be done for purposes of determining the true tax bracket that you belong to. 2010. according to their own records. Your tax has been correctly withheld by your employer. whether 2 employers employing at the same time or 2 employers employing successively. 166 | P a g e In straight line borders are codal provisions. By November. So it would appear that on April 15. you’re not qualified for substituted filing because they’re may be a chance that the correct tax when the combined income is computed has not been correctly withheld by those employers. can we have fiscal year basis? NO. When are corporations required to file an ITR? o Quarterly – 3 times. 15. o Another illustration: You’re the President of a multi-national corporation. Why? Because we only follow calendar basis. o But for individual taxpayers. 2010-Oct. after June 30. you applied and got hired by XYZ Corp. o - So if you are a practicing lawyer with no law firm. 3 rd quarter of Sept. Pure-compensation income earner o 3. 1. - Self-employed individuals. no substituted filing for you both. quarterly ITR has to be filed 60 days after March 31. at the end of the year. - CGT return has to be filed within 30 days after the transaction and paid within 30 days after the transaction. You only have 1 employer. Are you qualified for substituted filing? NO. o To make it easy. ***In broken line borders are outline notes. First quarter ITR has to be filed April. which is April 15 – the 4 th month. Emery Tiu o 2. from Jan.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. So in order for you to be qualified for substituted filing. like siomai business. If you’re qualified for substituted filing but your spouse is earning business income. it’s a little bit complicated. because you are no longer required for substituted filing if and when any of the spouses would not as well qualify with the full requirements. Always we have to follow calendar year basis and the quarterly ITR is 45 days after the end of every quarter except first quarter. all of them are not met or one of them is not met. make sure that your spouse is also qualified for substituted filing. Are you qualified for substituted filing? NO. o What is fiscal year? Starts on any day other than Dec. corporations can follow the calendar year or the fiscal year. o Illustration: You were employed by ABC Corp. But your husband is selling siomai. 31 and ends 365 days after. o NOTE: Letter c of outline is no longer applicable in the advent of RA 9504 – individuals who are minimum-wage income earners are exempt from income tax so they’re no longer required to file an ITR. o So if the corporation follows the calendar year. You are required to file your ITR (professional or trade income) on a quarterly basis still. If you have 2 employers now. Is the payment by the domestic corporation ABC to the non-resident foreign corporation XYZ which is 5 % of its revenues received from customers. NO for corporations. how did you find it? Let’s go through the items that we have discussed. o B. Under the agreement. False. In consideration for such rights. you will be given informer’s reward. which reward is still subject to 10% tax. Against gross sales or gross income? Gross income. - ABC.we will discuss that towards the end. FALSE! False. o Informer’s Reward is subject to final withholding tax of 10%. I think next week. 40% OSD is applicable. This is true. In the outline. which the parties forged in the US. ABC agreed to pay 5% of the revenues it receives from the customers who will use and apply the program in the Philippines. What is stated here is gross sales or receipts.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty.000. in all cases. premium payments for health insurance of an individual who is an employee in an amount of PhP2500 per year may be deducted from gross income if his gross salary per year is not more than PhP250. . Discuss the tax implication of the transaction. o This one. Are they exempt? Exclusion from gross income class. 167 | P a g e In straight line borders are codal provisions. So for those who have read. Royalties will have situs in the country where it is used. Let us see how you will fare if you have taken the bar exam. o What are these payments? Royalty payments abroad. What is the difference? Remember the formula that we have had before? (Sales – Cost = Gross Income) less Expense = Taxable income What is optional standard deduction for? It’s in lieu of – Itemized deductions. A corporation can claim the optional standard deduction equivalent to 40% of its gross sales or receipts as the case may be. a non resident foreign corporation based in the United States. a domestic corporation entered into a software license agreement with XYZ. = FALSE. an individual can never chose to be taxable in the fiscal year basis. Emery Tiu o o P a g e | 167 Can we pay on installment basis on income taxes due? YES for individuals and if their income tax due is more than 2K. PhP2400. Corporations have to pay the taxes on due dates. Only corporate taxpayers have the option to be taxable on a taxable year which starts on any day other than January 1. Yes this is true. Always his taxability begins January 1 and ends December 31. o C. o An individual taxpayer can adopt either the calendar or fiscal year period for purposes of filing his income tax return = False. Gains realized by the investor upon redemption of the shares of stock in a mutual fund company are exempt from income tax. o Who is the income earner? The non-resident foreign corporation. o The Capitalization rules may be resorted – this will be discussed. How many times is a business taxpayer required to file an ITR? 4 (3 quarterlys and 1 final ITR) BAR EXAM RESULTS: - Have you read the bar exam for tax? There are around 40 items. the first installment. interesting. o D. If you report someone and it will lead to collection of taxes. o A . - True or False. The tax code allows an individual taxpayer to pay in two equal installments. So since this is what you don’t want to claim. ending 365 days thereafter. A non-resident alien who stays in the Philippines for less than 180 days during the calendar year will be entitled to personal exemption not to exceed the amount allowed to citizens of the Philippines in the country of which he is a citizen. because only non-resident aliens engaged in trade more than 180 days in the Philippines are allowed through reciprocity rule to claim personal exemptions. ***In broken line borders are outline notes. XYZ the nonresident foreign corporation granted ABC the domestic corporation the right to use the computer system program and to avail of the technical know-how relative to such program. Individual taxpayer. o Is it taxable in the Philippines? Yes. One fine day. trade or profession . where the customers of the domestic corporation are using it. no Philippine tax. him being a non resident alien in the US. No use of tax credits. o - - It would be different because if he becomes a non resident citizen. Ownership is for the government property. it will be exempt from real property tax? But – the assessment is for real property tax. additional exemptions. Unless and until the taxpayer claiming casualty losses has a business. He was notified the following day by the police that the marines and the militants had a bloody encounter in his car and his car was completely destroyed after a grenade hit it. Would your answer in letter A be the same if he became a US immigrant in 2008 prior to receiving the dividends and had become a non resident Filipino citizen. this is exempt from real property tax based on Use and not ownership. A inherited a two storey building in Makati from his father a real estate broker in the 60s (?).Filipino. he wouldn’t have that expense deductible for him. a group of militants seized his car. (I know you have read losses na. Is the assessor justified in assessing A’s deficiency real property taxes? o The question here is: Is it correct for the city assessor to collect real property tax? Question is real property tax – if a real property is actually. A is a travelling salesman working full time for new (NU) skin products. o What is the status of A? A is a salesman working full-time as an employee and as an employee. Emery Tiu o - P a g e | 168 And where is the technical knowledge imparted by the non-resident foreign corporation. o What’s your tax advice – can A file for casualty loss? NO. a resident Filipino citizen received dividend income from a US based corporation which owns a chain of Filipino restaurants in the West Coast US. From where is his income? From a non-resident foreign corporation.T A X A T I O N I T R A N S C R I P T I O N S 2010 – 2011 of Atty. ***In broken line borders are outline notes. Local government code exemption from real property taxes – Yes. Where is it used? In the Philippines. losses is a deductible expense). What will be your advice to him in order to lessen the income and possible double taxation on the same income? o Tax credit or avail of the tax treaty provisions under the RP-US tax treaty. SO who is the income earner? The resident citizen . A accepted the rental of 1M for the whole year. Explain the legal basis for your tax advice. A wants to file a claim for casualty loss (losses from theft. . o What are the deductions or exemptions that he can claim? Personal exemptions. A group of monks approached A and offered to lease the building in order to use it as a venue for their Buddhist rituals and ceremonies. He receives a monthly salary plus 3% commission on his sales in the Southern province where he is based. The following year the city assessor issued assessment against A for non payment of real property taxes. and exclusively used for religious purposes. The dividend remitted to the resident citizen is subject to US withholding tax with respect to the United States. In 2009. 168 | P a g e In straight line borders are codal provisions. robbery . embezzlement etc). not income tax. directly. premiums and health and hospitalization insurance. no use in availing tax treaty. He regularly uses his own car to maximize his visits even to farflung areas. he is only taxable on income within and the dividends given by the non-resident foreign corporation based in the US is an income without so it is totally subject to US tax only.