BA 127

March 7, 2019

Compensation Income (continued)

1. Vacation and sick leave
a. Taxable – if paid or availed as salary
b. Non-taxable
i. Monetized value of unutilized vacation leave credits of 10 days or less to
private employees (de minimis benefit)
ii. Monetized value of vacation and sick leave credits for government officials
and employees (de minimis benefit)
iii. Terminal leave or money value of accumulated vacation and sick leave
benefits received by heir upon death of employee
2. Thirteenth month pay and other benefits (Sec. 32.B.7.e, under Exclusions from Gross
Income)  Shall not be considered in determining 13th month pay ceiling
a. Gross benefits received by officials and employees of public and private entities  Excess can be included as part of other benefits not subject to tax as long as the total
are excluded, provided that the total exclusion shall not exceed Php 90,000, which amount of 13th month pay and other benefits confined only to the ceiling
shall cover:  MWEs receiving other benefits exceeding the ceiling shall be taxable regularly.
i. Benefits received by officials and employees of the national and local 4. Overtime pay
government (RA 6686) – Annual Christmas Bonus a. Premium payment for working beyond regular hours
ii. Benefits received by employees (PD 851) – 13MP b. Included in employee’s gross salary
iii. Benefits received by officials and employees not covered by PD 851 (MO 5. Profit sharing
No. 28) a. Proportionate share in profits of business, in addition to wages
iv. Other benefits 6. Awards for special services
1. Productivity incentives a. Awards for past services or suggestions to employer
2. Christmas bonus 7. Beneficial payments
3. Fringe benefits & de minimis a. e.g. where employer pays income tax owed by employee
a. Fringe benefits – Sec. 33, NIRC (not exhaustive) 8. Other forms of compensation
b. De minimis benefits - privileges of relatively small value given by employer to a. e.g. compensation in kind (insurance premium paid by the employer, where the
employees, tool of social welfare for the health, goodwill or contentment of heirs are the beneficiaries)
employees (non-taxable, exempt from income tax as well as withholding tax on
compensation income of both managerial and rank and file employees) Fringe Benefits (Sec. 33, NIRC) – any good, service or other benefit furnished or granted in cash
or in kind by an employer to an individual employee (except rank and file employees)
1. housing
2. expense account
3. vehicle
4. household personnel (maid, driver)
5. difference between market rate and actual rate of interest on loan
6. expenses borne by the employer for the employee in social and athletic clubs or other
organizations
7. expenses for foreign travel
8. holiday and vacation expenses
9. educational assistance to employee or dependents
10. life/health/non-life insurance in excess of what law allows
 i. Income derived by foreign government
Given to managerial and supervisory employees ii. Income derived by government or political subdivision
 Managerial employees – executes management policies, has the power to hire, transfer, iii. Prizes and awards
suspend, lay-off, recall, discharge, assign or discipline employees iv. Prizes and awards in sports competitions
 Supervisory employees – in the interest of the employer, recommends managerial actions v. 13th month pay and other benefits
requiring independent judgment vi. GSIS, SSS, Medicare, Pag-ibig contributions, union dues
 All those who does not fall under these are rank-and-file employees vii. Gains from sale of debt
viii. Gains from redemption of shares in mutual funds
Rationale of Granting Fringe Benefits Grossed-up monetary value represents:
1. incentive to encourage employees’ productivity and loyalty to employer 1. Whole amount of income realized by the employee
2. may decrease or discontinue fringe benefits, but cannot reduce the wage or salary during 2. Amount of fringe benefit tax due from the employee
financial difficulties
3. not included in additional remunerations Fringe benefits are payable by employer under Sec. 57A
 Final tax to be withheld and paid by the employer, but the law allows to deduct such tax from
Importance of Fringe Benefit Tax gross income
 to recover lost revenue of government due to a previous malpractice of the employer and  Withholding and remittance – quarterly basis
the managerial employee (declaring only partial of the total salary to lower the taxable
employee’s compensation) Secretary of Finance authorized to promulgate necessary rules and regulations to carry out
efficiently and fairly the provisions of this Section.
Fringe Benefits Tax - final tax of 35% on grossed-up monetary value of fringe benefit granted to
the employee by the employer (individual or corporation [or even the government and its The exemption of any fringe benefit from the fringe benefit tax shall not be interpreted to mean
instrumentalities]), unless: exemption from any other income tax under the Tax Code.
1. Fringe benefit required by the nature of or necessary to trade, business or profession of
the employer (non-taxable) Valuation of Fringe Benefits
2. When fringe benefit is for employer's convenience or advantage (non-taxable)  Money – amount granted or paid for
3. If taxable under Sec. 25BCDE (applicable rates, tax base grossed up)  Property other than money, ownership transferred to employee – FMV (Sec. 6E)
a. Non-resident aliens not engaged in trade or business (NRA-NETB) – 25%  Property other than money, ownership not transferred to employee – depreciated value
4. Fringe benefits of rank-and-file employees (part of compensation subject to income tax)
5. Fixed allowances regularly received by employee as part of compensation (compensation Housing Fringe Benefits (MV)
income)  (Rental) Lease of residential property – 50% x rental payments
6. Non-taxable fringe benefits under Sec. 33C  (ER owns and assigns to EE) Assignment of residential property – 5% x higher of zonal
a. Fringe benefits authorized and exempted from tax under special laws value and FMV x 50% = 50% of depreciated value, over a useful life of 20 years. (5% of
b. Contributions of employer for the benefit of employee (retirement, insurance, MV or ZV) is dep value.
hospitalization benefit plans)  (ER purchase in installment, assigns to EE) Purchase of residential property on installment
c. Benefits given to rank and file employees basis – 5% x acquisition cost – interest x 50% = 2.5%
d. De minimis benefits  (ER purchase and transfer ownership to EE) Purchase of residential property, transfer of
7. Fringe benefits not taxable under Sec. 32B (Exclusions from Gross Income) ownership – higher of FMV and ZV
a. Proceeds of life insurance policies o CGT: GSP & FMV, higher (ZV & AV, higher)
b. Amount received by insured as return of premium o Acquisition cost vs. zonal value, whichever is higher
c. Value of property acquired by gift, bequest, devise or descent  ER purchases and transfers to EE, at cost less than purchase price = FMV – cost
d. Compensation for personal injuries or sickness shouldered by the employee
e. Income exempt under treaty o For FMV, compare amount declared in the tax declaration vs. zonal value
f. Retirement benefits, pensions, gratuitities  Non-taxable: housing privilege of AFP, housing unit inside or adjacent to the premises of
g. Miscellaneous items a business or factory, temporary housing for an employee (3 months or less)
  If not in connection with business meetings or conventions, entire cost treated as taxable
Motor Vehicles (MV) fringe benefits.
 Purchase in employee’s name – acquisition cost (assumption AC = FMV)
 Cash given to employee to purchase vehicle in his name – cash received Educational Assistance
 Purchase, installment basis – 20% of acquisition cost (excluding interest) [deviation from  General rule: taxable (to employee or to his dependents)
the rule, uses a useful life of 5 years]  Non-taxable
 Employer shoulders a portion of purchase price – amount shouldered o To employee - conditions: directly connected with business, written contract to
 Employer owns and maintains a fleet of motor vehicles – 10% of acquisition cost remain in the employ of the employer (related, return service)
 Employer leases and maintains a fleet of motor vehicles – 50% of rental payments o To dependents – condition: provided through a competitive scheme under
 Aircrafts – business use not subject to FBT company’s scholarship program (competitive scholarship program)
 Yachts – taxable fringe benefit (measured based on depreciation, 20-year useful life)  What is a competitive scholarship program?

Expense Accounts Taxable Insurance Benefits

 Expenses incurred by employee, paid by employer – subject to FBT except receipt in  General rule: Taxable fringe benefit
the name of employer, not personal  Exceptions
 Expenses paid by employee, reimbursed by employer (receipted, not personal expense – o Contributions of the employer for the benefit of the employee pursuant to the
not subject to FBT) [subject to FBT, same exceptions] provisions of existing law (SSS, GSIS, etc.)
 Personal expenses of employee reimbursed by employer whether receipted or not o Costs of premiums borne by the employer for the group insurance of employees
[taxable whether or not in the name of the employer]

Household Expenses – taxable FBT, MV – amount paid

Interest on Loan at Less than Market Rate

 Such interest foregone by the employer (difference between actual interest rate and 12%)
shall be treated as taxable fringe benefit

Expenses for Foreign Travel (Class Discussion)

 Inland travel expense – exempt
o “Food, beverage and local transportation except lodging costs amounting to an
average of $300 or less per day are exempt”  maximum amount – to avoid abuse
 F, B, LT – necessary
 Up to $300 related to lodging – exempt
 Economy and business class plane tickets – exempt
 70% of first class plane tickets is exempt

Expenses for Foreign Travel Valencia

 Reasonable business expenses for attending business meetings or conventions are not
treated as taxable fringe benefits
 Inland travel expenses are not subject to FBT
 Lodging costs in excess of an average of $300 per day are subject to FBT
 Economy and business class airplane ticket not subject to FBT
 30% of cost of first class airplane ticket subject to FBT
BA 127 BA 127
March 12, 2019 March 19, 2019

Ex 1: Condominium Rental Problem 6-41

Rental = 65,000 / month
MV = 32,500 1. 5 000 000 x 5 % x 50 % = 125 000
GUMV = 32,500/.65 = 50,000 2. 192 307.69
FBT = 17,500 (benefits to the employee, expense) 3. 67 307.69
Total fringe benefits expense (How much is deductible from the income?) 65k + 17.5k = 82.5k 4. 500 000 / 5 (amount without interest) = 100 000 / 65 % = 153 846.15
5. 53 846.15
Dr. FB expense 65,000 6. Zero
Dr. FBT expense 17,500 7. Zero
Cr. Cash 82,500
c&d. Income from exercise of profession and income from business
Ex 2: Expense account  Classifications
Actual cash paid by employer 100,000 o Manufacturing
GUMV 153,846 o Merchandising/Trading
FBT 53,846 o Servicing
 Taxes shouldered by employer because stated by law – considered compensation o Farming
o Long-term Contract
Ex 3: Condominium owned by employer, assigned to employee  Business – any commercial activity engaged in as a means of livelihood/profit
FMV = 10M, ZV = 8M (depreciated value, useful life of 20 years) o Continuity, not just one-time
MV = (10M/20)x50% = 250,000  Profession – any endeavor/work requiring specialized training in the field of learning, art
GUMV = 384,615 (income of employee) or science
FBT = 134,615 o Only Filipinos can practice their professions in the Philippines
 Mixed Income Earner – rules are the same?
Dr. FBT expense 134,615 o Compensation and Business/Profession
Dr. Depreciation expense 500,000 (not employee income)  Gross Income from Business = Gross Sales - Sales Returns, Discounts and Allowances -
Cr. Cash 134,615 Cost of Goods Sold
Cr. Accumulated depreciation 500,000 o plus other items of income not subjected to final tax, and other incidental or outside
operations/sources
What if FMV = 10M, ZV = 8M, AC = 7M? o depreciation, depletion, selling expenses, losses should not be subtracted
RR – income constructively received, diff of 3M, amortize depending on the remaining useful life  Manufacturing = S – SRDA – COGMS + items not s.t. FT
 Merchandising = S – SRDA – COGS + items not s.t. FT
Dr. FBT expense 134,615  Service = R – Disc – (COS?) + any other income
Dr. Depreciation expense 350,000
 MCIT = include all other income
Cr. Cash 134,615
 Cost of Goods Sold
Cr. Accumulated depreciation 350,000
o Shall include all business expenses directly incurred to produce the merchandise
to bring them to their present location and use
Dr. FB expense 150,000
 COGM&S of manufacturing business = DM + DL + MOH + freight cost +
Cr. Constructive income 150,000
insurance premiums + other costs
 COGS of trading or merchandising business = invoice cost + import duties
+ freight incurred + insurance while in transit
  COS (MCIT) – direct costs and expenses necessarily incurred to provide iii. Dividends from Cooperative – exempt
the services required by customers and clients iv. Pure Liquidating Dividends – exempt (return of stockholder's investment,
 Salaries distrib of assets upon liquidation)
 Employee Benefits v. Cash/Property Dividend – PDs valued and taxable to the extent of FMV of
 Depreciation, Rent, Supplies to provide the service property @ declaration
 Interest (banks) 1. RC/NRC/RA 10%
 G.I. of telegraph and cable services of a foreign corporation 2. NRA-ETB 20%
o Income from services within the Philippines only 3. NRA-NETB 25%
 Gross revenues from messages originating in the Philippines 4. NRFC 15%
 Amount received by the company collected abroad on collect messages vi. Other Dividends – included in computation of taxable income and income
originating in the Philippines tax
b. Tax Sparing Rule – NRFC from DC = 15%, provided that foreign country does not
e. Income derived from dealings in property impose any tax on dividends received by the NRFC from DC. Otherwise, 30%.
 Gains from Dealings in Property – income from sale/exchange of assets. Taxable gain or c. Taxable Stock Dividends (Conditions)
deductible loss. i. option to take cash/property dividends
ii. some stockholders exercised the option
f. Passive income iii. exercise resulted in change of proportionate share in outstanding shares
1. Interest d. Redemption of Stock Dividend – amount is considered taxable income (distribution
a. Yield from Deposit Substitutes and Trust Fund of earnings or profits)
i. Deposit Substitute – debt instrument issued by bank to borrow money from e. SD =/= Shares Previously Acquired – not income, not taxable
public other than from client's deposit f. Scrip Dividend – promissory note, taxable to the extent of FMV, in the year where
ii. Trust Fund – any estate held in trust by a person in behalf of another person warrant issued
b. Interest Income – earning from depositing/lending money, goods, credits. Subject g. Indirect Dividend – e.g. cancellation of debt by corporation
to income tax 4. Rental Income
c. Tax-Exempt Interest Income a. Rental Income – gross receipts, earnings from leasing real estate/personal
i. received from members from duly-registered cooperative property, including obligations assumed to be paid by lessee in behalf of lessor
ii. received from BSP prescribed form of investments maturing > 5 years (general: gross receipts for the year, earned and unearned under accrual basis)
iii. received by non-resident aliens under EFCDS i. Prepaid Rental without Restriction – taxable in year received (cash/accrual)
iv. tenant who paid to a landowner on the price of land (tenant-purchaser ii. Security Deposit with Restriction – excluded
agreement, CARP) iii. Security Deposit with Acceleration Clause – same as ordinary security
d. Int Inc OFW with Co-Depositor = 50% of final tax deposit if not violated. The income to the lessor inures when the lessee
e. Int Inc s.t. Final WHT = 20% violates the terms of the contract.
f. Int Inc s.t. Normal Tax = Lending is the main course of business. Report in Annual b. Income from Leasehold Improvements – permanent improvements on leased
ITR. property which will become lessor’s property upon lease expiration, income of
2. Royalties lessor
a. Royalty Income – payment/portion of proceeds paid to the owner of a right i. Outright Method – income when improvement completed, at FMV
i. 10% for books, lit works, musical comps; 20% for others (derived from ii. Spread-Out Method – est. BV of improvement spread out over the term of
natural resources or products such as coal, gas, oil, copper, silver, gold the lease
and other similar products) c. Termination of Lease Contract
3. Dividends i. If improvement destroyed before lease expires – deduct previously
a. Dividend Income – earnings from distributions by corporation payable to recorded income less any salvage value, if not compensated by insurance
stockholders (money/property) ii. Lease is terminated – Lessor receives additional income if value of
i. Intercorporate Dividends – exempt (DC/RFC - DC) improvement exceeds amount of income already reported
ii. Pure Stock Dividends – exempt (transfer of R/E to PIC account)
g. Annuities Income from Dealings in Property – Outline
 Annuities – installment payments received for life insurance sold by insurance companies
 Interest part is taxable, return of premium is not taxable I. What are dealings in property?
II. Ordinary Asset vs. Capital Asset (39A1)
h. Prizes and winnings a. Ordinary Asset
 Prize – reward for a contest/competition i. Properties used in business
 Winning – reward for event that depends on chance 1. Inventory, Real property used for business, Properties subject to
 Generally taxable, except: depreciation used in business
o xxxxx a. Idle land? – Capital asset
ii. Includes real and other properties acquired by banks for clients’ loan
j. Partner's distributive share in general professional partnership settlements
 Partners' Distrbiutive Profits from Professional Partnership's Net Income – represents b. Capital Asset
partner’s gross income i. Not ordinary asset
ii. Includes investments in stocks and securities owned by banks
c. Change in purpose
k. Income from whatever source i. What is the determining factor in classifying the asset held?
1. Forgiveness of debt d. Ordinary Gain and Ordinary Loss
a. Gift – If C merely desires to benefit D e. Capital Gain and Capital Loss
b. Dividend Income – Corp to w/c SH is indebted forgives debt f. Net Capital Gain and Net Capital Loss
c. Income – D perform services for C, C cancels debt (to the extent of amount of debt III. Types of Gains from Dealings in Property
cancelled) a. Ordinary Income, Capital Gain
2. Recovery of amounts previously written off i. Gains/losses from ordinary assets
a. Bad Debt – amounts of receivable, ascertained worthless, written off 1. Subject to what tax?
b. Requisites for Deductibility ii. Gains/losses from capital assets
i. valid and existing debt from trade/business of taxpayer 1. Does not apply to capital assets subject to final CGT
ii. actually ascertained to be worthless and uncollectible 2. Capital assets subject to OPT
iii. charged off during taxable year 3. Others subject to what tax?
c. Bad Debt Recovery – included in GI @ year of recovery, taxable to the extent of iii. Computation of net capital gains/losses
the tax benefit in the year account written off 1. Individuals
3. Receipt of refund or credit 2. Corporations
a. Tax Refund or Credit – subject to the tax benefit rule (subject to tax if such tax iv. Tax rules for gains or losses from sales or exchanges of capital assets
previously deducted from GI resulting inr eduction of reported TI) 1. OG  NCG? NCL?
i. taxable except for estate, donor's, PH income, stock transaction, VAT 2. OG  OL?
claimed as input tax 3. CG  CL?
b. Damages Recovery – received by injured person as payment for loss of income or 4. NCLCO
payment to compensate damage a. Requisites?
i. First type is taxable, second type is non-taxable
 MCIT, NOLCO (3 years)
c. Income from Illegal Sources – gambling, kidnapping, extortion, smuggling,
embezzlement 2 special rules for individuals
i. Illegally-Obtained Income – taxable, included in wrongdoer's GI, obligated  Holding period – 100% (1 year or less, short-term), 50% (more than 1 year, long-term)
to return when discovered  Net capital loss carry-over – does not exceed taxable income of last year and net capital
ii. Embezzled Funds – income without consent with an obligation to repay gains of present year
 v. Capital gains or losses sustained by a corporation i. Non-recognition of gains or losses
1. Holding period? NCLCO? 1. Exchange solely in kind (for companies who are parties to a merger
2. Recognition of CG? CL? or consolidation)
3. Deductibility of CL? a. Property for stocks
4. OG  NCG? NCL? b. Stocks for stocks
vi. Summary of tax treatment of ordinary and capital assets c. Securities for securities
1. Gain from OA transactions 2. Transfer to a controlled corporation
2. Loss from OA transactions a. What is a controlled corporation?
3. Gain from CA transactions 3. Transferor corporation also receives money or property, but
4. Loss from CA transactions distributes it according to the plan of merger or consolidation
b. Actual gain, Presumed Gain ii. Recognition of gains, but not losses
i. Presumed gain 1. Exchange not solely in kind
1. Applicable in? a. Individual, shareholder, security holder or corporation also
2. What happens if there is a gain? Loss? receives money or property
ii. Actual gain i. Amount of gain recognized?
1. Applicable in? ii. What if it has the effect of a distribution of taxable
2. What happens if there is a gain? Loss? dividend? (shareholder)
iii. How to compute gain or loss? iii. Remainder of gain recognized
1. What is “amount realized”? b. Transferor corporation also receives money or property
2. What if a taxpayer sells a real or personal property? i. Does not distribute according to the plan of merger
c. Long-term Capital Gain, Short-term Capital Gain or consolidation
i. Long-term capital gain 1. Amount of gain recognized?
1. How much is recognized? iii. Substituted basis of stock or securities received by transferor upon the
ii. Short-term capital gain exchange
1. How much is recognized? 1. ??? less (??? and ???) add (??? and ???)
d. Net Capital Gain, Net Capital Loss a. Basis of “boot”
i. Net Capital Gain b. Assumption of liability
ii. Net Capital Loss c. If transferor receives several kinds of stocks or securities
e. Computation of the amount of Gain or Loss iv. Substituted basis of property transferor
i. Acquisition 1. ??? plus ???
ii. Disposition v. Recognition of gain or loss in exchange of property
1. General rule
Determining the basis according to how property is acquired 2. Exceptions
a. Companies parties to a merger or consolidation
f. Cost or basis of the property sold b. Property transferred to controlled corporation
i. Purchase (on or after ____________) – acquisition cost 3. Stocks issued for services
ii. Inventory vi. Definitions
iii. Inheritance (device, bequest) – FMV at the time of inheritance 1. Merger and consolidation for tax purposes
1. If not readily available? 2. Requirements to establish merger or consolidation
2. How do you estimate the FMV? (Zonal valuation under the BIR) a. Bona fide business purpose
iv. Gift or donation (lower of what?) – lower of FMV and basis (donor) b. Property transferred
1. Lower basis, higher tax base, higher taxes i. “Property”
v. Less than adequate consideration – amount paid by transferee ii. “Substantially all”
g. Cost or basis of the property exchanged in corporate reorganizations iii. Securities
 c. Control 2. If number of securities sold > number of securities purchased
h. Income tax treatment of capital loss 3. If number of securities sold < number of securities purchased
i. Capital loss limitation rule n. Short sales
1. Exception i. Short sale of properties
ii. NCLCO rule 1. Gains or losses considered as?
1. Limits ii. Failure to exercise option to buy or sell property
2. Applicability 1. Option money considered as?
i. Dealings in real property situated in the Philippines o. Securities becoming worthless
i. Persons liable and transactions affected i. Rules
1. Individual taxpayers, estates and trusts p. Liquidating dividends
a. What are treated as capital assets? i. Gain? Loss? From?
2. Domestic corporation q. Corporation’s own shares of stock
a. What are treated as capital assets? i. Original issue
ii. Rate and basis of capital tax ii. Transactions involving acquisition and sale of treasury stock
j. Sale of real property not located in the Philippines iii. Own share received in exchange of property
k. Dealings in shares of stock of Philippine corporations iv. Sale of treasury stock
i. Persons liable 1. Gain? Loss?
1. A r. Sale of corporate bonds
2. B i. Face value
3. C ii. Premium
ii. Persons not liable iii. Discount
1. A iv. Retirement of bonds
2. B s. Interest in partnership
3. C i. Gain or loss on sale
iii. Shares traded through stock exchange t. Abandoning property for a foreclosure sale
iv. Shares not traded through stock exchange i. Loss incurred in a foreclosure proceeding
1. Valuation (what method?) u. Disguised sale
a. “Fair value” i. Difference between FMV and SP
v. Installment sales of shares of stock ii. Difference between SP and cost
1. If initial payment does not exceed 25% of the selling price v. Sale of patents and copyrights
2. If the sale is not a mortgage sale w. Sale of goodwill
3. If the sale is a mortgage sale i. Gain or loss from sale of purchased goodwill
l. Sale of principal residence
i. Principal residence
ii. When is sale of principal residence exempt from CGT?
iii. Basis of the new principal residence
1. Sales proceeds fully utilized
2. Sales proceeds partially applied
3. Acquisition costs exceed the entire sales proceeds
m. Wash sales
i. “Substantially identical securities”
ii. Requisites of wash sale loss
iii. Treatment of losses and gains from wash sale
1. General rule
BA 127  Individuals except NRA-NETB, Corporations except NRFC
March 28, 2019 o 15% FINAL TAX – EFCDS
o 7.5% FINAL TAX – EFCDS (RFC)
Real Property Disposition o 25% – NRA-NETB
 Capital – CGT of 6% of higher of SP or FMV (higher of ZV – BIR, and AV – LGU) o 30% – NRFC
 Ordinary o Exempt
o Corporation – 30%  EFCDS – NRA-ETB
 Real property company – Creditable withholding tax (1.5/3/5%)  Long-term deposits – provided no pretermination
 Other than inventory – CWT of 6% o Graduated/8%/RCIT
 Sell to gov’t – FT of 6% or CWT of 6%  Royalties
o Individual – Graduated tax rates, up to 3M (based on gross sales/receipts) o 20% FINAL TAX – Individuals except NRA-NETB, Corporations except NRFC
o 10% FINAL TAX – Royalties from literary works, books, musical competitions
Sale of Principal Residence o 25% - NRA-NETB
 How do you know the “principal residence” of the taxpayer? o 30% - NRFC
o Permanent dwelling (absent, where you will go back to)  Dividends (all are FINAL TAXES)
o Certification from the Barangay Chairman or Building Administrator – not usual o 10% - RC, NRC, RA
 Usually, the Barangay Chairman issues certificate o 20% - NRA-ETB
 General Rule: Subject to 6% CGT o 25% - NRA-NETB
 Exception o 15%/30% - NRFC tax sparing rule
o Exempt o Exempt
 If proceeds fully utilized  Intercorporate – DC  DC/RFC
 Build a new principal residence within 18 months  Stock dividends (3 requisites?)
 Commissioner notified within 30 days  Liquidating dividends
 Once every 10 years  Prizes – award for contest or competitions
o If not all proceeds will be used o 20% - individuals except NRA-NETB
 Unutilized/GSP x higher of GSP and FMV x 6% o Graduated or 8% - less than Php 10,000
 Rule for the Basis o Exempt
o Fully utilized – same as old principal residence  Charitable, religious…
o Partially utilized – partially utilized proceeds/SP x old house basis  Sports competitions sanctioned by national sports authorities
o Spent more – old house basis plus the additional cost to build o 25% - NRA-NETB
o 30% - NRFC (on gross)
Sale of Real Property in Installments o 30% RCIT – DC/RFC
 Initial installments not more than 25% of gross selling price – pay taxes in installments  Other winnings – award for an event that depends on chance
 More than 25% of gross selling price – Cash o 20% - individuals except NRA-NETB
 Rules for installment (how to compute the tax due) o Exempt – PCSO & Lotto less than Php 10,000 for RC/NRC/RA, all winnings for
o Reportable income = installment received x NRA-ETB
o Tax due for the year = Installment tax due / contract price x total tax due o RCIT – DC/RFC
o “Installment received” o 25% - NRA-NETB
 Ordinary o 30% - NRFC
 Capital  Rental income
o Sale of service – when cash received, whether or not income is earned
Passive Income o Advance rental with restriction – not taxable as income yet, subject to restriction
 Interests o Security deposits
o 20% FINAL TAX – currency deposit, trust fund, deposit substitutes
Annuities BA 127
 Payments of regular intervals for life insurance April 2, 2019
 Rule: Interest is taxable, Return of premium is non-taxable
Class Discussion – Limitations under Sec. 32
Partners’ distributive share in GPP  Exclusion vs. Deduction
o General professional partnership? o Why are certain income items excluded?
o How do you get income? What rules do you follow?  Exclusions from Gross Income
o As if GPP is a corporation – net income, distribute income o MWE – overtime, holiday, NSD, hazard
o If income not distributed, what will happen to the income? o 13MP and Other Benefits
o Retirement Benefits
Income from whatever source  Benefits under RA 7641
o What is income from whatever source?  Requisites: at least 5 years service, at least 60 years old but not
o Forgiveness of debt more than 65, no retirement plan
o Gift  Those with retirement benefit plan
o Dividend Income  Requisites: at least 10 years service, at least 50 years old,
o Income approved by BIR, availed of only once
o Recovery of accounts written-off – extent of benefit taxable  Benefits received under US Veterans
o Follow tax benefit rule  SSS
o Receipt of refund or credit  GSIS
 Separation pay (for causes beyond control of employee)
 Net benefits from foreign governments
o Income received by foreign government
 Principle of international comity
o Gifts, bequests and devises
 Why are they excluded?
 How about the income?
o Prizes and awards
 Civic purposes
 Sports competitions
o Damage
 “Damage” – injury vs. “Damages” – compensation
 What damages are excluded from gross income?
 Loss of life, property or injury (non-taxable)
 If loss of profit, taxable.
 Interest is taxable.
o Income by employee for the benefit of employer
o De minimis benefits
o SSS and GSIS contributions
 Except the excess of voluntary from mandatory
o Tax-exempt inventors and inventions
 VAT portion repealed under TRAIN
 Income tax portion not repealed
o Barangay Micro Business Enterprise (BMBE)
 What are the qualifications under BMBE Law?
 o Gain on sale of bonds, debentures, etc. (more than 5 years) 1. Foreign governments
o Income earned by the government 2. Financing institutions owned/controlled by foreign governments
 Activities: governmental or proprietary 3. International or regional financial institutions established by foreign
 What is the requisite? governments
 If owned by government – is it considered proprietary? b. Income Derived by the Government or its Political Subdivisions – from public
 Business type of transaction utility/exercise of any essential governmental function
o Gov’t educ, non-stock non-profit educ c. Prizes and Awards – religious, charitable, scientific, educational, artistic, literary or
 Provided that? civic achievement
i. Recipient selected without any action on his part
Exclusions from Gross Income (Sec. 32B) ii. Not required to render substantial future services
1. Life Insurance – proceeds paid to heirs/beneficiaries upon death of insured (single sum/ d. Prizes and Awards in Sports Competition – sanctioned by national sports assoc.
otherwise) e. 13th Month Pay and Other Benefits – gross benefits received, total exclusion shall
a. Included in gross income if held by insurer under an agreement to pay interest not exceed Php 90,000 which shall cover:
2. Amount Received by Insured as Return of Premium – under life insurance, endowment or i. Benefits (officials and employees of national and local government, RA
annuity contract (term/maturity/surrender) 6686)
3. Gifts, Bequests and Devises – value of property acquired ii. Benefits received by employees (PD 851)
a. Income from property included in gross income iii. Benefits not covered by PD 851
4. Compensation for Injuries or Sickness – through Accident or Health Insurance or iv. Other benefits (productivity incentives, Christmas bonus)
Workmen’s Compensation Acts (personal injuries, plus damages) f. GSIS, SSS, Medicare and Other Contributions – incl. Pag-IBIG and union dues
5. Income Exempt under Treaty – required by any treaty obligation binding upon the g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness –
government of the Philippines maturity of more than 5 years
6. Retirement Benefits, Pensions, Gratuities, etc. h. Gains from Redemption of Shares in Mutual Fund
a. Retirement benefits (RA 7641), and those received by officials and employees of
private firms in accordance with a reasonable private benefit plan Situs of Taxation
i. Provided: at least 10 years of service, not less than 50 years old  Factors that affect situs of taxation?
ii. RPBP – pension, gratuity, stock bonus or profit-sharing plan maintained by o Interest – residence of the debtor (within PH if debtor is in PH)
an employer for some or all of his officials/employees; contributions are  What if resident earns income from non-resident?
made for distribution of earnings and principal o Dividends – residence of corporation
b. Separation pay – any amount received by an official/employee/heirs from employer  Declared by DC
as consequence of separation  Declared by FC – Philippine gross income three years before declaration
i. Cause: death, sickness, physical disability, or any cause beyond control of dividends divided by gross world income is at least 50%
c. Social security benefits, retirement gratuities, pensions and other similar benefits  Less than 50% - partly within and partly without
received by RC/NRC/aliens (reside permanently) from foreign government o Services – place of performance
agencies and other institutions  Territoriality rule
d. Payment of benefits due to PH resident under US laws administered by USVA o Rentals – location of the property
e. Benefits received from SSS (RA 8282) o Royalties – place of exercise
f. Benefits received from GSIS (RA 8291)  “place of exercise”?
i. Including retirement gratuity received by government officials and o Sale of RP – location of the property
employees  Territoriality
7. Miscellaneous Items o Sale of PP – location of the sale
a. Income Derived by Foreign Government  manufactured within and sold without – partly within and partly without
i. “Income” – Income from investments in PH (loans, stocks, bonds, domestic  manufactured without and sold within
securities), interest on deposits in PH banks o Sale of shares of stocks of corp
ii. “Foreign Government”  Shares involved – place of incorporation
Source Rules – Income from Sources Within the Philippines (Sec. 42) Taxable Income = Gross Income – Expenses, Losses and other Deductions properly allocated –
1. Interests ratable part of expenses, interests, losses and deductions effectively connected with business or
a. Within – interests derived from sources within the Philippines, interests on bonds, trade which cannot definitely be allocated (only if fully substantiated by the information necessary)
notes, etc. of residents  Income within – no deductions for interest paid/incurred abroad shall be allowed unless
b. Without - residual indebtedness incurred to provide funds for use in connection with the conduct or operation
2. Dividends of T/B in PH
a. Within – from domestic corporation, from foreign corporation (unless)
b. Without - residual Exam: 45 items
3. Services  7 items not multiple choice
a. Within – compensation for labor/personal services performed in PH
b. Without – performed without PH Annual comp, incl. of 13MP bonus (150k) & mandatory contrib (135k) 1 500 000
4. Rentals Income from barbershop business 1 000 000
5. Royalties Cost of sales 100 000
a. Within – rentals and royalties from property located in PH or from any interest in Other operating expenses 75 000
such property, including
i. A Total taxable compensation income (1.5 M – 90 K – 135 K) 1 275 000
ii. B Taxable income (1.275 M + 1 M – 100 K – 75 K) 2 100 000
iii. C Tax due – Lowest taxes (80 000 + 272 500) 352 500
iv. D
v. E
vi. F
vii. G
1. 1
2. 2
3. 3
b. Without – located without PH or from any interest in property, including those for
the use/privilege of using without PH: patents, copyrights, secret processes and
formulas, goodwill, trademarks, trade brands, franchises, and the like
6. Sale of real property
a. Within – RP located in PH
b. Without – RP located without PH
7. Sale of personal property
a. Within – PP located in PH
8. Sale of shares of stock of corporation
a.

Gross Income
 From Sources within the Philippines
 From Sources without the Philippines
 From Sources partly within and partly without the Philippines
o Items of gross income, expenses, losses and deductions, other than those
determined as “within” and “without”, to be allocated/apportioned to sources within
or without the Philippines