SPIT January 8 Lecture

Problem in Quiz: How to tax Partnerships
In cases of Partnerships not covered by Exceptions - taxed like a corporation
-how to tax corporations: under the Global tax system
-WON registered w/ SEC or not: taxed as a corporation - no matter how created or formalized
-on the net income, we impose the corporate income tax; so net income has already been taxed on the level of the partnership
-what happens on the P800k? It is still taxed, on the part of the individual partners ...constructive receipt of income
...how do you taxed it?  As dividends
-special way of taxing dividends received from a corporation: 10% final withholding tax - schedular! Not global tax system!
-in taxation, the period is very important. So note the period when the tax rate should be imposed. So it is very important to consider the period involved! Note the corporate income tax rate on the part of CORPORATIONS _ beginning January 1, 2009 - reduced to 30% from 35%!
***
Shoot! Exclusions na!
Exclusions: amount that are not included in the determination of gross income
1. Return of capital
2. Income, gain or profit that are expressly exempt from income tax under the constitution, tax treaty, tax code or a general or a special law
Return of capital vs. Income
Return of capital: not taxable, not income
Income: fruits of the capital
For an amount to be taxable as income tax:
COMPLETE DEFINITION - 3 essential elements
1. Income/gain/profit
2. Received/ accrued/realized during the taxable year
3. NOT exempt from Income tax
We don't impose income tax on return of capital because it is not income/gain/profit
If we sell a real property classified as an ordinary asset, what do we do? Taxed under the global tax system - we allow the costs to be deducted from the gross selling price. We impose income tax only on the gain. Not on the selling price.
Life insurance proceeds
-considered by law as return of capital so excluded
-is it income on the part of the heirs?  No. It is considered a return of capital, as compensation for the less of life
Under the tax code: Exclusions from Gross Income
1. Return of capital
-impose tax only when there is gain/profit/income
2. Income-there is income, but it is expressly exempted by the tax code
3. Gift/Indemnity-already taxed with transfer tax (already taxed on the donor/giver of the gift )
If an insurer did not die at the age when he was supposed to die in the insurance contract, he receives back the premium. Is it income taxable? No. Still return of capital
Compensation for injuries
-excluded from gross income because it is return of capital
If it is a return of capital, it should be expressly provided by law as exempt so that tax would not be imposed on it
Income Expressly Exempted by Treaty
e.g. Interest income of an US Import/Export Bank. There is a treaty between the US and RP Government US X/M bank lends money to DBP. Earns 10% interest so from the US $1M, it would earn US $1.1 M at the end of the year...income....is it subject to income?
Exempt from interest income tax
1. There is a treaty provision AND ASIDE FROM THIS
2. It is owned, controlled by the foreign government - US government operates the US Import/Export bank
*Withholding tax is not an internal revenue tax. Why? It is only an advance method of collecting income tax! In section 21, it enumerates the internal revenue taxes and Withholding tax is not one of them!
Retirement Benefits, pensions, gratuities
1. RA 7641 retirement benefits of employees from private firms
2. RA 4917 - retirement benefits under a private benefit plan
3. Section 60(B) of NIRC
E.g. A worked for San Miguel for 20 years. PLDT wants my services. I received from San Miguel 100k. PLDT wants my services for double. A agreed to the PLDT offer. I received from San Miguel P1M as severance fee. A is 50 years old. Is it exempt from tax?
-NO.
Note: Under RA 4917
1. Age: 50 years at the time of retirement
2. Length of service: at least 10 years
The retirement plan requires to be:
1. Recognized by the BIR
2. It should be in TRUST form
What if there is a trust for the retirement benefits of the employees. The trust allows a loan to be made. Is it tax exempt?
Before, small savings are exempt from income tax. Bank does not withhold 20% FWT when deposit is less than (P5k? Or P1k?). But because small savers are wise, so the BIR noticed their strategy. They removed the exemption.
But in trusts: still exempted: Otherwise, taxation of those earnings would result in a diminution of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. (GCL case)
-plus the general law cannot repeal impliedly an exemption under a special law! So since RA 4917 is a special law which provides tax exemption, it cannot be repealed by a general law removing exemption.
Retirement benefits are exempt as incentive for work?
An employee would be happy, would work hard if after reaching a certain year, he would expect a certain amount of money. An employer would want a productive and happy employee. So they both contribute to a happy economy. So the government incentivizes this by granting tax exclusions and exemptions
When exempt: it is not imposed on the tax payer
So a retirement fund is such a great and advantageous thing!
But note of the requirements:
Under RA 4917
1. 10 years of service
2. At least 50 years old at the time of
3. Applied only once
4. Accredited w/ BIR
5. Covered by a deed of trust: ensures that the corpus may no longer be taxed by the employer
RA 7641 more liberal
Only requires:
1. Services rendered for at least 5 years
2. Age of not less than 60 but not more than 65 years of age at the time of his retirement
BIR accreditation is not even required
PRIZES AND AWARDS in recognition of religious and charitable accomplishments
Requisites:
1. Prizes and awards made primarily in recognition of
1. Religious
2. Charitable
3. Scientific
4. Educational
5. Artistic
6. Literary
7. Civic achivvement
2. Recipient selected w/o any action on his part to enter the contest or proceeding
3. Recipient nor required to render substantial future services
What about Pacquiao?
Prizes and awards for sports competition are exempt only if
1. Sanctioned by the Philippine Olympic Committee
So Pacquiao's income is subject to income tax. Isn't it taxed by the Nevada State, and the US State, and now the RP gov't? Yes taxable by all.
-double taxation is not prohibited by the Constitution. But here, no double taxation!
When double taxation:
Requisites:
1. Same property is taxed twice
2. Same purpose
3. Same taxing authority
4. Within the same jurisdiction
5. During the same taxing period
6. Same kind or character of tax
Here, different taxing entities!
HOW double taxation be prevented:
1. Exemption - unilateral act of the government
2. Tax Credit - both government agree to impose income tax only once
3. Deduction - instead of claiming as tax credit, deduct from gross income (but should be entitled to tax credit in order to be able to deduct)
-deduction is better because in deduction, there is no limit from the amount which could be deducted
Yay done! Now, I don't know what was asked from Pat Leccio. Did not read about it...
As to BIR Rulings: can be modified, amended...
DEDUCTIONS!!! SHET! JUMP UBER JUMP!
GS
-COS
GI (E)
-D
NI

EXCLUSIONS	DEDUCTIONS
A flow of wealth to the taxpayer which are not treated as part of gross income, for purposes of computing the taxpayer's taxable income, due to the ff reasons: Exempted by the fundamental law Exempted by statue Does not come w/n the definition of income	Amounts which the law allows to be deducted from gross income in order to arrive at net income
Pertain to the computation of gross income	Pertain to the computation of net income
Something received and earned by the taxpayer which do not form part of gross income	Something spent or paid in earning gross income

Kinds of deductions
1. Itemized deductions available to all kinds of taxpayers engaged in Trade or business or practice of profession in the Philippines
2. Optional standard deduction
-available only to individual taxpayers deriving business, professional, capital gains and passive income not subject to final tax or other income
3. Special deductions in Section 37 and 38, both of Tax code, and special laws like BOI Law
Mr. X is an official of SMC earning P50k per month. He has a car, sold a car at P20k gain. Is he entitled to deduction?
No. Compensation income earner.
What if Mr. X is retired already. So not earning compensation income. He sold his old car at P20k gain. Is he entitled to deduction?

	GLOBAL (CWT or not WT)	SCHEDULAR (FWT)
Compensation Income
Business/professional income
Capital Gains
Passive Income
5.Other Incomes

You're a resident citizen selling US intel shares at a profit, let's say P100k. How do we tax it?
Who is the tax payer: resident citizen - under SeC 23. Taxable on income w/n and w/o the Philippines
What is the nature of the income - Capital Gain
How do we tax it - under the Global tax system and not schedular because there is not final withholding tax
Would you be entitled to deductions on that?
In selling the shares of stocks of Intel, you hired a broker - Mr. A. Mr. A agreed to a commission. (let's say from the P100k, he would be entitled to P10k so you would only receive in the end P90k.
YES. As business expense! As long as you comply with the requirements for deductions.
But the business transaction here happened only once. Would he be entitled to deduction???
Distinction between itemized deductions and Optional standard deduction

	Itemized	OSD
Who may avail	All taxpayers -as for those who have Compensation income, only entitled to Section M deduction	Same Who may not avail: -nonresident alien -Compesation income earners
System of Taxation	Global tax system (or else, no deductions na pag-uusapan except the costs and...)	Same
Nonresident alien	Engaged in Trade or Business: YES Not engaged: NO	Basta nonresident, cannot avail
Basis	GR: No limit X: certain expenses	10% of taxpayer's gross income Corporation - gross income Individual - gross sales/receipt
Supporting documents	needed	Not needed
Partnership GPP Ordinary partnership	YES YES	YES YES
Partners of GPP	YES (but same with what was claimed by the GPP starting 2010)	NO *

Here is X Corp. A is a consultant of X corp, paid consulation fee.
What is the said relation: depends on WON there is an EER. If it is a business income, entitled to deduction. If a compensation income (there's an EER), then not deductible.
-in addition to the consultation fee, X Corp gives you a house which is rented at P100k. Is this part of the income?
(fringe benefit)
Is there an income: look at the 3 requisites:
1. Income/gain/profit
2. Received/ accrued/realized during the taxable year
3. NOT exempt from Income tax
 -this is an income on the part of the consultant
WHAT KIND OF INCOME: Other income?
If there is a fringe benefit tax: it is imposed on the employer. But the employer would be entitled to deductions (it is the employee who is still subject to tax, but the tax is assumed by the employer)
If there is not fringe benefit tax: the employee would pay for the said benefits as part of his income.
Back to the differences...
If the Compensation Income earners are not entitled to deductions, are the other income earners entitled to deductions? YES.
OSD -in lieu of itemized deductions
-req'ts:
1. merely a privilege enjoyed by certain taxpayers: citizens or resident aliens (nonresident aliens not entitled
2. Optional: should be indicated in the return of the availment
3. Irrevocable once made for the taxable year
4. Amount of standard deduction limited to 40% of taxpayer's gross income (as updated)
5. Proof of actual expenses not required

*Crickets* November 13 SPIT class

Updates on the BAR Exam: MCQs
Basis of grades:
• Surprise quizzes every now and then + Recitation - 40%
• If volunteer, mas mataas grade
• Midterms - 30% (income tax + transfer tax)
• Finals - 30% (VAT + Remedies)
• Term paper on any Tax Topic if mababa grade
TOPICS
• Income tax
• Transfer tax
• Remedies
• VAT
1. In making TAX REVIEWER for the Bar, use sir's book
NIRC Codal - Atty. Casasola
2. Sir's style in teaching: more on codal and principles vs. Cases
-but not by section, but by principles
***
INCOME TAX
-Title II: Income Tax
-Title III: Transfer Tax
-Title IV: VAT -Title VIII: Remedies
INCOME TAX
-includes withholding tax
What is INCOME TAX
-tax on income, profits or earnings
...on all profits
...fruits of capital
COMPLETE DEFINITION - 3 essential elements
1. Income/gain/profit
2. Received/ accrued/realized during the taxable year
3. NOT exempt from Income tax
-a direct tax on income/gain/profit received/accrued/realized during the taxable year which is not exempt from taxation
[DIRECT TAX: imposed upon the person upon whom tax is levied, he is not expected to pass it on to another person]
• But supposed there is no express provision making VAT an indirect tax. Would it now be a DIRECT tax? NO. It is still an indirect tax, which is supposed to be passed on. So only value added yung definition
• INCOME/GAIN/PROFIT
-not all received are income. It may include not only income, but also a return of capital
e.g. You borrowed money from the bank, w/ interest per annum. You pay what is due by the end of the year. The amount corresponding to the interest is not subject to income tax, because it is a return of capital
- Profit (gain or loss) = selling price - cost (or adjusted basis)
SP
-C/AB
G/(L)
[note: sir said that if symbols in parenthesis, it is in the negative]
[ADJUSTED BASIS: takes note of depreciation]
E.G. We have a delivery truck. Cost you P1M to acquire delivery truck. Can you deduct full amount of P1M from your gross income? NO. Take note of depreciation rate.
DEPRECIATION: amount that the law allows you to recover from your investment, determine useful life of the property.
[note that there is a formula for computing depreciation]
So in the example, what if after 5 years, you sell the truck at P800k. Do you gain or lose?
Let's say P100k is the depreciation per year. So the value of the truck after 5 years is P500k. If you sell the truck at P800k, and its current value is P500k, there is a gain of P300k.
P800k
-P500k
P300k
• ACCRUED...
• NOT EXEMPTED
GR: exemptions are construed strictly against tax payer. He who claims exemption should prove claim (show tax provision providing for the same).
-where do you find exemptions?
Section 29(d)
Section 30
HOW DO WE TAX?
2 types  of tax system adopted under tax code
1. Global tax system: uniform tax on income imposed
-why one rate? Because you consolidate all the kinds of income, then deduct all the allowable deductions, and on the net taxable income, you apply the rate imposed.
-what are these items you group together?
2. Schedular tax system: different kinds of income imposed different rates of tax
-when applied in general, as opposed to the global tax system?  When the income/gain or profit is subject to the FINAL WITHHOLDING tax
SEC 57(A): if not in Section 57, not subject to final withholding tax
(A) Withholding of Final Tax on Certain Incomes. ‐ Subject to rules and regulations
the Secretary of Finance may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by certain income payees,
the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3),
27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of
this Code on specified items of income shall be withheld by payor‐corporation
and/or person and paid in the same manner and subject to the same conditions as
provided in Section 58 of this Code.
When do you say that an income is the final withholding tax?
-imposed on the payor of the income, not the receiver
-the income/profit...is always subject to income tax when it is subject to withholding tax!
-it is subject to FINAL withholding tax if it is enumerated in Section 57(A)
-it is final as to the amount?
e.g. If i deposited P1k in the bank, the gross interest income (20%) would be P200, so only P800k would be credited to me, the depositor. But you do not receive any document from the bank saying they deducted the P200 from your account. They would remit the interest income tax to BIR. The P200 is the final withholding tax due actually to the depositor, but paid by the bank in behalf of the depositor, and so the depositor no longer needs to declare the interest income in your ITR because the bank paid it for you, the depositor, to the BIR!
CREDITABLE WITHHOLDING TAX: Art. 57(B)
(B) Withholding of Creditable Tax at Source. ‐ The Secretary of Finance may, upon
the recommendation of the Commissioner, require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the Philippines,
by payor‐corporation/persons as provided for by law, at the rate of not less than
one percent (1%) but not more than thirty‐two percent (32%) thereof, which shall
be credited against the income tax liability of the taxpayer for the taxable year.
*RR 2-98: different items of income subject to the creditable income tax - the tax basis and the creditable income tax applicable
-if CREDITABLE: just follow the RR to determine how much is the tax to be withheld
-the recipient of the income is still required to report the income on his ITR, and the withholding agent still withholds and remits the amounts withheld to BIR.
For purposes of crediting, the withholding agent would give the recipient a CERTIFICATE OF TAX WITHHELD so that the recipient would be able to report it correctly to his ITR, which would be credited (since it was already remitted by the BIR in his behalf by the withholding agent)
-applies GLOBAL tax system
HOW TO COMPUTE INCOME TAX: GLOBAL TAX SYSTEM:
GS (gross sales)
-COS (Cost of sales)
GI (Gross income
-D (deductions)
-PAE (Personal and additional exemptions for individuals)
NTI (Net taxable income)
x rate
IT due
-CWT
BALANCE
SCHEDULAR TAX SYSTEM:
-should first know the natures of income
• Business and professional income
• Compensation income
• Passive income
• Capital gains
• Other incomes
When subject to final withholding tax: See Section 57A

Nature of income	Subject to FWT
Compensation income	57A - creditable wht
Business/professional income
Capital Gains
Passive income
Other incomes

Is Pacquio's fight exempted from taxes? NO. He's a professional boxer. Olympic athletes are the ones exempted.