4. Types of Philippine income tax 5. Taxable period
a) Calendar period b) Fiscal period c) Short period 6. Kinds of taxpayers
a) Individual taxpayers (i) Citizens
(a) Resident citizens (b) Non-resident citizens (ii) Aliens
(a) Resident aliens (b) Non-resident aliens
(1) Engaged in trade or business (2) Not engaged in trade or business (iii) Special class of individual employees
(a) Minimum wage earner (b) Corporations
(i) Domestic corporations (ii) Foreign corporations
Marubeni Japan claimed a refund for excess taxes it had paid, contending that since it had a Philippine branch, it is a resident foreign corporation liable to pay only 10% intercorporate final tax on dividends received from a domestic corporation (and not to the branch profit remittance tax) following the principal-agent theory.
Marubeni Japan is considered a non-resident foreign corporation as to the dividends because when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. (
Marubeni Corp. vs.
Commissioner of Internal Revenue, et al., G.R. No. 76573, September 14, 1989
)BOAC is a resident foreign corporation because it maintained a general sales agent in the Philippines. There is no specific criterion as to what constitutes “doing” or “engaging in” or "transacting”
business. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. (
CIR vs BOAC, G.R. No. L-65773-74 April 30, 1987
)(a) Resident foreign corporations (b) Non-resident foreign corporations (iii) Joint venture and consortium
c) Partnerships
Pursuant to “reinsurance treaties,” a number of local insurance firms formed themselves into a “pool” in order to facilitate the handling of business contracted with a nonresident foreign reinsurance company. The insurance pool is deemed a partnership or association taxable as a corporation under the NIRC because Section 24 (on tax on corporations) [now Sec. 27 of the 1997 NIRC] covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members; moreover, the insurance pool, though unregistered, satisfies the requisites of a partnership: (1) mutual contribution to a common stock, and (2) joint interest in the profits.
(
Afisco Insurance Corp., et al. vs. Court of Appeals, et al., G.R. No. 112675, January 25, 1999
)The original purpose of the co-owners of the two lots was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property (
Obillos Jr. vs CIR, G.R. No. L-68118, October 29, 1985
)d) General professional partnerships e) Estates and trusts
f) Co-ownerships 7. Income taxation
a) Definition b) Nature
c) General principles 8. Income
a) Definition b) Nature
c) When income is taxable (i) Existence of income (ii) Realization of income
(a) Tests of realization
(b) Actual vis-à-vis constructive receipt (iii) Recognition of income
(iv) Methods of accounting
(a) Cash method vis-à-vis accrual method
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. (
CIR vs Isabela Cultural Corp., GR 172231, February 12, 2007
)(b) Installment payment vis deferred payment vis-à-vis percentage completion (in long-term contracts)
d) Tests in determining whether income is earned for tax purposes (i) Realization test
(ii) Claim of right doctrine or doctrine of ownership, command, or control
(iii) Economic benefit test, doctrine of proprietary interest (iv) Severance test
(v) All events test 9. Gross income
a) Definition
b) Concept of income from whatever source derived
c) Gross income vis-à-vis net income vis-à-vis taxable income d) Classification of income as to source
(i) Gross income and taxable income from sources within the Philippines
(ii) Gross income and taxable income from sources without the Philippines
(iii) Income partly within or partly without the Philippines e) Sources of income subject to tax
(i) Compensation income (ii) Fringe benefits
(a) Special treatment of fringe benefits (b) Definition
(c) Taxable and non-taxable fringe benefits (iii) Professional income
(iv) Income from business
(v) Income from dealings in property (a) Types of properties
(1) Ordinary assets
(2) Capital assets
The proceeds from the inherited land of petitioners, which they subdivided into small lots and in the process converted into a residential subdivision and given the name Don Mariano Subdivision, is taxable as ordinary income. Property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business; thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable--however, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's business. (
Tomas Calasanz, et al. vs.
Commissioner of Internal Revenue, et al., G.R. No. L-26284, October 9, 1986
)(b) Types of gains from dealings in property (1) Ordinary income vis-à-vis capital gain (2) Actual gain vis-à-vis presumed gain
(3) Long term capital gain vis-à-vis short-term capital gain
(4) Net capital gain, net capital loss
(5) Computation of the amount of gain or loss (6) Income tax treatment of capital loss
(a) Capital loss limitation rule (applicable to both corporations and individuals)
(b) Net loss carry-over rule (applicable only to individuals)
(7) Dealings in real property situated in the Philippines
(8) Dealings in shares of stock of Philippine corporations
(a) Shares listed and traded in the stock exchange
(b) Shares not listed and traded in the stock exchange
(9) Sale of principal residence (vi) Passive investment income
(a) Interest income (b) Dividend income
(1) Cash dividend (2) Stock dividend
Stock dividends, strictly speaking, represent capital and do not
constitute income to its
recipient. So that the mere issuance thereof is not yet subject to
income tax as they are nothing but an enrichment through
increase in value of capital
investment. However, the redemption or cancellation of stock dividends, depending on the time and manner it was made, is essentially equivalent to a distribution of taxable dividends, making the proceeds thereof taxable income to the extent it represents profits. The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable. (
CIR vs CA, G.R. No. 108576 January 20, 1999
)(3) Property dividend (4) Liquidating dividend (c) Royalty income
(d) Rental income
(1) Lease of personal property (2) Lease of real property (3) Tax treatment of
(a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease
(vii) Annuities, proceeds from life insurance or other types of insurance (viii) Prizes and awards
(ix) Pensions, retirement benefit, or separation pay (x) Income from any source whatever
(a) Forgiveness of indebtedness
(b) Recovery of accounts previously written-off – when taxable/when not taxable
(c) Receipt of tax refunds or credit (d) Income from any source whatever
(e) Source rules in determining income from within and without (1) Interests
(2) Dividends (3) Services (4) Rentals (5) Royalties
(6) Sale of real property (7) Sale of personal property
(8) Shares of stock of domestic corporation
(f) Situs of income taxation (see page 2 under inherent limitations, territorial)
(g) Exclusions from gross income (1) Rationale for the exclusions
(2) Taxpayers who may avail of the exclusions
(3) Exclusions distinguished from deductions and tax credit
(4) Under the Constitution
(a) Income derived by the government or its political subdivisions from the exercise of any essential governmental function
(5) Under the Tax Code
(a) Proceeds of life insurance policies (b) Return of premium paid
(c) Amounts received under life insurance, endowment or annuity contracts
(d) Value of property acquired by gift, bequest, devise or descent
(e) Amount received through accident or health insurance
(f) Income exempt under tax treaty
(g) Retirement benefits, pensions, gratuities, etc.
Respondent terminated petitioner’s services due to her illness, rendering her incapable of continuing to work, and gave her retirement benefits but withheld the tax due thereon. The retirements benefits are taxable because the petitioner was only 41 yrs old at the time of retirement and had rendered only 8 years of service; for these benefits to be exempt from tax, the following requisites must concur: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) the retiring official or employee is not less than fifty (50) years of age at the time of his retirement; and (4) the benefit had been availed of only once. (
Ma. Isabel T. Santos vs. Servier Phil., Inc., et al., G.R. No. 166377, November 28, 2008
)Respondents contend that petitioner did not withhold the taxes due on their retirement benefits because it had obliged itself to pay the taxes due thereon. This was done to induce respondents to agree to avail of the optional retirement scheme. It was only when respondents demanded the payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present the 1993 CBA to the BIR for approval, rendering such retirement benefits not exempt from taxes; consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their taxes. Petitioner used this “failure” as an afterthought, as an excuse for its refusal to remit to the respondents their salary differentials. Patently, petitioner is estopped from doing so. It cannot renege on its commitment to pay the taxes on respondents’ retirement benefits on the pretext that the “new management” had found the policy disadvantageous. (
Intercontinental Broadcasting Corp. vs. Noemi
B. Amarilla, et al., G.R. No. 162775, October 27, 2006
)Severance of employment is a condition sine qua non for the release of retirement benefits. Retirement benefits are not meant to recompense employees who are still in the employ of the government. (
Dev’t. Bank of the Phil. vs. Commission on Audit, G.R. No. 144516, February 11, 2004
)(h) Winnings, prizes, and awards, including those in sports competition
(6) Under special laws
(a) Personal Equity and Retirement Account (h) Deductions from gross income
(1) General rules
(a) Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession
(b) Deductions must be supported by adequate receipts or invoices (except standard deduction) (c) Additional requirement relating to withholding (2) Return of capital (cost of sales or services)
(a) Sale of inventory of goods by manufacturers and dealers of properties
(b) Sale of stock in trade by a real estate dealer and dealer in securities
(c) Sale of services (3) Itemized deductions
(a) Expenses
(1) Requisites for deductibility
(a) Nature: ordinary and necessary The expenses paid by Atlas for the services rendered by a public relations firm, aimed at creating a favorable image for Atlas, is not an allowable deduction as business expense under the NIRC. Efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto are not business expense but capital expenditures. (
Atlas Consolidated Mining & Devt. Corp. vs.
Commissioner of Internal Revenue, G.R. No.
L-26911, January 27, 1981
)A stock listing fee paid annually to a stock exchange for the privilege of having a corporation’s stock listed is an ordinary and business expense. This is distinguished from a single payment made to the stock
exchange, which is considered a capital expenditure. (
Atlas Consolidated Mining &
Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 1981)
The subject media advertising expense for
“Tang” incurred by respondent corporation was not an ordinary and necessary expense, but rather a capital expenditure because it failed the two conditions set by U.S. jurisprudence in determining whether or not it is an “ordinary” expense: first, reasonableness of the amount incurred and second, the amount incurred must not be a capital outlay to create “goodwill” for the product and/or private respondent’s business. The subject expense for the advertisement of a single product is inordinately large; furthermore, the corporation’s venture to protect its brand franchise was tantamount to efforts to establish a reputation and was akin to the acquisition of capital assets. (
Commissioner of Internal Revenue vs. General Foods, Inc., G.R. No. 143672, April 24, 2003
)(b) Paid and incurred during taxable year
(2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid Payment by the taxpayer-corporation to its controlling stockholder (Hoskins) of 50% of its supervision fees (paid by a client of the corporation for the latter's services as managing agent of a subdivision project) or the amount of P99,977.91 is not a deductible ordinary and necessary expense because it does not pass the test of reasonable compensation. If independently, a one-time P100,000.00-fee to plan and lay down the rules for supervision of a subdivision project were to be paid to an experienced realtor such as Hoskins, its fairness and deductibility by the taxpayer could be
conceded; however, the fee paid to Hoskins continued every year since 1955 up to 1963 and for as long as its contract with the subdivision owner subsisted, regardless of whether services were actually rendered by Hoskins. (
C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, G.R.
No. L-24059, November 28, 1969
)(3) Travelling/transportation expenses (4) Cost of materials
(5) Rentals and/or other payments for use or possession of property
(6) Repairs and maintenance
(7) Expenses under lease agreements (8) Expenses for professionals
(9) Entertainment/Representation expenses (10) Political campaign expenses
(11) Training expenses (b) Interest
(1) Requisites for deductibility (2) Non-deductible interest expense (3) Interest subject to special rules
(a) Interest paid in advance
(b) Interest periodically amortized (c) Interest expense incurred to acquire property for use in trade/business/profession
(d) Reduction of interest expense/interest arbitrage
(c) Taxes
Margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York head office are not allowable deductions as taxes because it is not a tax but an exaction designed to curb the excessive demands upon our international reserve. Margin fees are also not ordinary and necessary business expenses because they are not expenses in connection with the production or earning of petitioner's incomes in the Philippines; they were expenses incurred in the disposition of said incomes. (
Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue, G.R.
Nos. 28508-9, July 7, 1989
)(1) Requisites for deductibility (2) Non-deductible taxes
(3) Treatments of surcharges/interests/fines for delinquency
(4) Treatment of special assessment (5) Tax credit vis-à-vis deduction (d) Losses
(1) Requisites for deductibility (2) Other types of losses
(a) Capital losses
(b) Securities becoming worthless
“Securities becoming worthless” resulting from China Bank’s equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary, is capital loss and not an ordinary loss. An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss; shares of stock would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities.
(
China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000
) (c) Losses on wash sales of stocks or securities(d) Wagering losses
(e) Net Operating Loss Carry-Over (NOLCO)
(e) Bad debts
In claiming deductions for bad debts, the only evidentiary support given by PRC was the explanation posited by its accountant, whose allegations were not supported by any documentary evidence. One of the requisites to qualify as
“bad debt” is that the debt must be actually ascertained to be worthless and uncollectible during the taxable year, and the taxpayer must prove that he exerted diligent efforts to collect the debts by (1) sending of statement of accounts;
(2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. (
Philippine Refining Company vs. Court of Appeals, et al., G.R. No. 118794, May 8, 1996
)(1) Requisites for deductibility (2) Effect of recovery of bad debts (f) Depreciation
Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property
gradually waste, without making provision out of earnings for its replacement. (
Basilan Estates, Inc. vs.
Commissioner of Internal Revenue, et al., G.R. No. L-22492, September 5, 1967
)Both depletion and depreciation are predicated on the same basic promise of avoiding a tax on capital. The allowance for depletion is based on the theory that the extraction of minerals gradually exhausts the capital investment in the mineral deposit. The purpose of the depiction deduction is to permit the owner of a capital interest in mineral in place to make a tax-free recovery of that depleting capital asset. A depletion is based upon the concept of the exhaustion of a natural resource whereas depreciation is based upon the concept of the exhaustion of the property, not otherwise a natural resource, used in a trade or business or held for the production of income.
Thus, depletion and depreciation are made applicable to different types of assets. And a taxpayer may not deduct that which the Code allows as of another. (
Consolidated Mines, Inc. vs. Court of Tax Appeals, et al., G.R. Nos. L-18843 & 18844, August 29, 1974
)(1) Requisites for deductibility
(2) Methods of computing depreciation allowance
(a) Straight-line method (b) Declining-balance method (c) Sum-of-the-years-digit method (g) Charitable and other contributions
(1) Requisites for deductibility (2) Amount that may be deducted (h) Contributions to pension trusts
(1) Requisites for deductibility (i) Deductions under special laws (4) Optional standard deduction
(a) Individuals, except non-resident aliens
(b) Corporations, except non-resident foreign corporations
(c) Partnerships
(5) Personal and additional exemption (R.A. No. 9504, Minimum Wage Earner Law)
The increased personal and additional exemptions under the NIRC cannot be availed of by the petitioner for purposes of computing his income tax liability for the taxable year 1997. Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual