The Basics In Philippine Individual Income Taxation.pdf

About the Author

MARIA TERESA M. CORRALES, LlB/CPA - Income Tax Professor, Polytechnic University of the Philippines - Tax Lecturer, DTI Mandaluyong -Negosyo Center - Committee Member, Extension & Community Involvement, Polytechnic University of the Philippines, College of Accountancy - Guest Speaker ( discussing Passive Income) Magnegosyo Tayo Program via Radio ng Bayan - Committee Member, Search for PUP’s Best Business Plan for 2015 - Speaker on Income Taxation, Class Synthesis at PUP Maragondon -Former Adjunct Professor, Holy Cross College, University of Immaculate Conception, Davao City, and St. Mary’s College Tagum City - Former Revenue Officer III, Bureau of Internal Revenue, Davao City - Former Fiscal Examiner II and Management and Audit Analyst III, Caloocan City Government

Maria Teresa M. Corrales is a Certified Public Accountant a holder of Bachelor of Laws Degree. Presently a regular faculty member of Polytechnic University of the Philippines (PUP); a former Revenue Officer III at the Bureau of Internal Revenue; and Senior Fiscal Examiner and Management and Audit Analyst III at Caloocan City Government. --A graduate from the Polytechnic University of the Philippines in April 1983 with a Degree of Bachelor of Accountancy; and -- From Manuel L. Quezon University in 1990 with her Bachelor of Laws Degree. She was chosen as one of the Values Trainors of the Bureau of Internal Revenue during the time of Commissioner Liwayway Vinzons- Chato and underwent training on Basic Foundation Course and Training Management Course at the Development Academy of the Philippines. She was tasked by the Davao Revenue Region to study the Comprehensive Tax Reform Program of 1997 for the Tax Briefing conducted in the whole region of Mindanao in January 1998. Before she transferred to the Polytechnic University of the Philippines, she was being groomed to work and man the Call Center of the BIR at the National Office in Quezon City. Prior to her work in the BIR, she was a member of a Task Force examining local taxes in the City of Caloocan. She had worked for the different Heads of Offices in the said Local Government Unit. She prepared the justification for the departmentalization of the City Planning Office, drafted the City‘s 1986 Budget Message and conducted the feasibility study on City Market Collections, which study is now the basis of market collection targets of the City Government. After her stints in varied fields of work, she is now a full time mother of 4 and a regular member as Assistant Professor of the PUP College of Accountancy Faculty where she is presently handling Taxation, Obligations and Contracts, and Basic Accounting subjects.

“THE DEPTH OF OUR THOUGHTS IS IN THE SIMPLICITY OF OUR WORDS AND ACTIONS” - MARIA TERESA MAPUE-CORRALES

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DEDICATION THIS SIMPLE AND HUMBLE WORK IS LOVINGLY DEDICATED TO ALL MY CHILDREN, ANNE LORENZE THERESE, CARLO JAMES LAMBERT, FRANZOEY GERALDINE AND JOHN KEVIN GERARD, WHO ARE THE PRIMARY SOURCE OF MY JOY AND LOVE. THIS IS ALSO DEDICATED TO MY MOTHER, CATALINA LANGITMAPUE WHOSE LOVE AND SUPPORT FOR ME AND MY CHILDREN NEVER WAVER DESPITE ADVANCED AGE. MAY THIS HUMBLE WORK BE A PLEASANT OFFERING TO MY GOD WHO IS MY COMFORTER, PROVIDER AND COUNSEL AND MAY EVERYONE WHO WOULD FIND TIME TO READ THIS BOOK BE ENLIGHTENED AND GROW MORE IN KNOWLEDGE OF HIS DUTIES NOT ONLY AS A TAXPAYER BUT ALSO AS A GOOD MEMBER OF THIS COUNTRY. TO GOD WHOSE GLORY DWELLS UPON THOSE WHO TRULY BELIEVE IN HIM, THANK YOU AND MAY YOUR BLESSINGS BE ALWAYS UPON US.

Mtmcorrales/ August 25, 2017 Tanza, Cavite Philippines

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PREFACE

This book entitled The Basics in Philippine Individual Income Tax is written to address the need of every individual taxpayer in the Philippines for a simple guide in understanding Philippine income tax. The Philippine income tax on individuals is hard to understand because the Tax Code combined the provisions for individual income tax and the corporate income tax, moreover, there are a lot of revenue regulations that have modified the Tax Code making it difficult to determine as to what are the prevailing and applicable tax laws on individual income. The tax code does not present a clear outline as to how individual income tax will be computed and most of the books in taxation deal with the topic with so much complexities that understanding the topic becomes so difficult. I have presented in this book some principles that are new and these are some principles that I have observed and learned from my more than 20 years‘ work experiences as a Local Tax Collector, Revenue Officer and as a College Professor in taxation. I prepared this book using the outline that guides me in my classroom discussion of Income Taxation. The outline is arranged starting with the discussion of topics about the State and the consequent powers, before the principles of taxation and computation of taxes are discussed. I believe that the students should first be able to understand well the source and history of Income Taxation so that it will be easier for them to analyze the problems. This book presents the easiest way to understand Individual Income Taxation because this topic was segregated from the multitude of topics on income tax law. The concepts presented here are based on the most current sources of tax laws e.g. Supreme Court Rulings, Revenue Regulations, Republic Acts, Revenue Memorandums and other sources of great import in the discussion of the topics herein presented. Copies of some RRs and RMCs which are vital in the understanding of the topics are likewise included en toto in this book so that the readers may be able to come up with their own analysis of the provisions of the pertinent laws and regulations. End of chapter tests were designed to include answer sheets so that the reader will have a readily available material for answering and learning will not be interrupted for the time required to look for papers to answer the activity. It is hoped that everyone will read this book from beginning to end to get the real picture of the Philippine Income Tax on Individuals.

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Acknowledgment

There are a lot of people who played vital roles in the preparation of this book and to whom I would like to express my sincerest gratitude. Their help is of great value in the preparation of this book. I would like to thank the people in the Polytechnic University of the Philippines who did not lose hope in trusting me and who allowed me to become part of the Faculty of Accountancy and Finance. I offer this humble work in recognition for their generosity in accepting me in the academe. First and foremost, I would like to express my deepest and sincerest gratitude to Prof. Ligaya ―Joy‖ Espino whose grace and beauty never fail to motivate me to do better even if against all odds. Thank you Ma‘am Joy for vouching for my credentials and potentials. To our former college dean, Dean Milagros Hernane who has given me a role model to follow for her simplicity, good character and intelligence. To my present dean, Dean Sylvia Sarmiento who always gives me inspiration for strength, courage and conviction, to all of you, thank you very much. Special thanks are also being extended to my relatives, friends, former classmates, and officemates who never fail to encourage me to do better in whatever tasks I engage in. Most special thanks go to my Facebook friends for affirming my person and my works and for providing me readily available source of names for the examples and illustrations in this book. My heartfelt appreciation goes to my bosom buddies, Anita Holgado- Irinco and Corazon Amugauan- Daza for being my companions, supporters and prayer warriors. My heartfelt gratitude is extended to all my students at the Polytechnic University of the Philippines who helped me accomplish this work, the BSA, Marketing and HRDM students who have helped me in one way or another in completing the materials and illustrations I needed in making this book. Most especial thanks go to my Marketing student, Angelo Lunas who prepared the cover layout for this book To my God who showed me the Truth, the Way and the Life and who is the silent coauthor of this book, thank you so much for you are indeed a Marvelous God.

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Introduction This book aims to discuss the Taxation in the Philippines not based on the sequence of the Codal provisions of the RA 8424 otherwise known as the Comprehensive Tax Reform Program of 1997, rather, the discussion presents the topics in a logical order to direct the reader on the steps in computing the Individual Income Tax. The computation in this book of the individual income tax will follow the outline that I have developed through the years of working as Local Tax Examiner, as BIR Examiner and as a Professor. This Outline is the one that I am using in my classroom discussion and in the seminars where I lecture. This is a book which by reading it will make one feel that he is present in a classroom, but without recitation and tests. Visuals have been added to give the reader a more interesting way to understand the topic. Taxation is really a boring subject matter because it talks about laws which are not usually encountered in daily life. People only get to be interested with taxation because of the fact that they need to pay their taxes. Tax laws are dynamic and cover a lot of situations thus understanding income taxation becomes so difficult for ordinary individuals. With this common difficulty, I was prodded to come up with something that will not only cater to the needs of the students who have to learn taxation to pass a subject but most importantly, to provide a guide book that will cater to the needs of those paying public, for a more understandable reading material in Philippine Income Tax. When I was working as Revenue Examiner in the Bureau of Internal Revenue, I was assigned to speak about latest issuances on internal revenue taxes in the different Regions in Mindanao. During those tax information campaigns of the BIR, where I presented my topics, some people approached me with so much gratitude because they said that they were able to understand a very difficult topic. These were ordinary people who would really want to learn taxation but did not have the chance to study the subject in Formal Schools. This book aims to answer that particular need of ordinary people who are so confused with the complexities of taxation and I hope that with this humble work I shall be able to answer this need.

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The Basics in Philippine Individual Income Tax Table of Contents About the Author

i

Dedication

ii

Preface

iii

Acknowledgement

iv

Introduction

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Chapter I - The State and Origin of the Power of Taxation

Page 1-

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Chapter II - Principles of Taxation

Page 18-

61

Chapter III - Income Tax on Individuals Part One- Principles of Income Taxation

Page 62-

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Part Two- Computation of Gross Income

Page 75-

99

Part Three- Specific Formula for the Computation of 1. Compensation

Page 100-

139

2. Business and

Page 140-

202

3. Passive Income Taxes

Page 202-

207

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Chapter IV - Withholding Taxes on Income and Tax Credits Withholding Taxes on Income

Pages 208-

257

Tax Credits

Pages 258-

267

Chapter V - Remedies Of the Government and Taxpayers Part One- Levy, Assessment and Collection Of Taxes

Pages 268- 285

Part Two- Penalties Imposed for the Violations of the Provisions of the Tax Code

Pages 285- 306

Chapter VI- Compliance Requirements Filing of Annual Income Tax Returns

Pages 307- 316

Filing of Quarterly Income Tax Returns

Pages 316- 317

Appendix

Attachment 1-

Revenue Regional Offices in the Philippines

Attachment 2-

Revenue District Offices in the Philippines

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CHAPTER I - THE STATE AND ORIGIN OF THE POWER OF TAXATION A. Definition of State A state is a community of persons more or less numerous, permanently occupying a definite portion of territory, having a government of their own to which the great body of inhabitants render habitual obedience, and enjoying freedom from external control. State is A body politic or society of men united together for the purpose of promoting their mutual safety and advantage, by the joint efforts of their combined strength. States vary in shapes and sizes, cultures, forms of government, natural resources, language, etc. However, all states possess four elements: a) people, b) territory, c) government, and d) sovereignty. There is still however a need for international recognition to formally introduce a state in the community of nations. Thus the elements of the state now are: 1. People; 2. Territory; 3. Government, 4. Sovereignty and 5. International Recognition. B. Elements of the State 1. People- The mass of population living within the state. These are the inhabitants of the state. It is the entire body of those citizens of the state who are vested with political power for political purposes. There is no specific number of people required in order that a state be considered as one. However, it is important that the number must be numerous enough to be self-sufficient so as to defend themselves and small enough to be administered. To date, the smallest state in terms of population is Vatican City with 826 citizens, who are mostly clerics and some Swiss guards. On the other hand, China is the largest state with 1.3 billion populations. The Philippines is also fast growing state with 97,976,603 populations. What is Nationality? Nationality - An ethic group forming a part of one or more political nations. Nationality can be applied to the country where an individual has been born. Nationality is inherited from parents, or called as a natural phenomenon. No one will be able to change nationality. What is Citizenship? Citizenship - It is a term denoting membership of a person in political society. It is the way the members of a group use their rights and carry out their responsibilities. It is the Individual‘s full political membership in the state. It requires permanent allegiance to the state. It is the Individual‘s integration into the political system. It is the Legal relationship between the individual and the state. Citizenship brings certain rights, duties, privileges and obligations. 3

It refers to the membership of a person to a democratic state which bestows upon him/her full civil and political rights (unless especially disqualified by law), and the corresponding duty to support and maintain allegiance to the state. Such membership underscores the symbiotic relationship of the state, which on the one hand gives protection to the citizen, and the citizen, who on the other hand is duty bound to support the state. https://tamayaosbc.wordpress.com/2014/08/02/citizenship-and-suffrage/ Who are subject to the power of taxation? Citizens or Nationals Only Citizens are subject to the power of taxation because, citizens have allegiance to the government. Nationality is about race and not allegiance. Who are Filipino Citizens, under the 1987 Constitution? Section 1, Article IV of the 1987 Constitution, provides: ―The following are citizens of the Philippines: (1) Those who are citizens of the Philippines at the time of the adoption of this Constitution; (2) Those whose fathers or mothers are citizens of the Philippines; (3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and (4) Those who are naturalized in accordance with law.‖ There are actually two kinds of Filipino citizens: 1. the natural born and 2. the naturalized. A natural born citizen is someone who is already a Filipino at the time of his birth and does not have to do anything to acquire or perfect his citizenship (Sec. 2, Art. II). In other words, he is a Filipino by birth, and these include citizens who were born after January 17, 1973 whose father or mother is a Filipino and those born before such date of Filipino mother who elected Philippine citizenship upon reaching the age of majority. On the other hand, a naturalized citizen is someone who was once a foreigner then later on became a Filipino by operation of law. Principles used in determining citizenship First is the jus sanguinis principle, which states that ―blood relations‖ determine citizenship, and the second is the jus soli or jus loci principle, which states that the ―place of birth‖ determines citizenship. The Philippines adopts the jus sanguinis principle and is now the underlying theory behind Article IV. Thus, someone becomes a Filipino by birth if either his mother ―or‖ father is a Filipino, so that by virtue of his blood relations to either his Filipino parents he is also a Filipino. If a person has a Filipino mother and a foreigner father, then he is still a Filipino by birth, and therefore a natural born citizen. 4

Under the old rule however, meaning, the rule up to January 17, 1973, if the father is a Filipino the child automatically becomes a Filipino, if the mother is a Filipino but the father is a foreigner, then the child should elect Filipino citizenship. If for example a person has for his mother a Filipina but his father is an American and he was born in the Philippines then he is a Filipino citizen only if he elects Filipino citizenship upon reaching the age of majority. What if he was born in the US? Then he becomes an American citizen because America follows the principle of jus loci or jus soli, place of birth determines the citizenship.

Naturalized citizens those are clothed by law with the rights and privileges accorded to a citizen of the Philippines, as well as bound by their duties to the State. In other words, they are also Filipinos in terms of allegiance and benefits but not in terms of racial features. Thus they can vote during elections, acquire real property, and engage in business, among others. They must likewise observe loyalty to the Philippines, pay their taxes, and obey the laws and duly constituted authorities of the land. However, they cannot be elected President or Vice-President, or occupy any seat in the government or undertake any nationalized business that is reserved only for natural born Filipinos.

Naturalization is a legal process that involves renunciation of former allegiance and the subsequent act of formal entrance into a new body politic. The grant of citizenship by naturalization is an act of grace on the part of the State. Just as the State can confer or grant citizenship, it can also withhold or take away the same. Thus, aliens or foreigners do not have a natural or inherent right to demand membership to the State.

Kinds of Naturalization.

(a) Judicial naturalization refers to naturalization by means of court judgment pursuant to the ―Revised Naturalization Act.‖ Applications are filed with the proper Regional Trial Court which will render the decree of naturalization;

(b) Legislative naturalization refers to naturalization by means of a direct act of Congress, that is, by the enactment of a law by the Congress declaring therein that a foreigner is conferred citizenship and admitted into the political community; and they inhabit in a definite territory. It is definite of fixed place where they reside permanently; develop a community of interests and a sense of unity. 2. Territory is a geographic area belonging to or under the jurisdiction of a governmental authority. The Philippine territory under the 1987 constitution states that ―The national territory comprises the Philippine archipelago, with all the islands and waters embraced therein, and all other territories over which the Philippines has sovereignty or jurisdiction, consisting of its terrestrial, fluvial, and 5

aerial domains, including its territorial sea, the seabed, the subsoil, the insular shelves, and other submarine areas. The waters around, between, and connecting the islands of the archipelago, regardless of their breadth and dimensions, form part of the internal waters of the Philippines.‖ For purposes of analysis, Philippine national territory includes the following: a.) the Philippine archipelago, with all the islands and waters embraced therein; b.) All other territories over which the Philippines has sovereignty or jurisdiction consisting of territorial, fluvial and aerial domains; c.) The territorial sea, the seabed, the subsoil, and insular shelves and other submarine areas; and d.) The waters around, between, and connecting the islands of the archipelago, regardless of their breadth and dimensions. Territorial sea is that part of the sea extending 12 nautical miles (19 kms) from the low-water mark. It is also called the marginal sea, the marginal belt or the marine belt. Seabed is the land that holds the sea, lying beyond the seashore, including mineral and natural resources. It is at the top portion of the submarine area. The subsoil is everything beneath the surface soil and the seabed including mineral and natural resources. Insular shelves are the submerged portions of a continent or offshore island, which slope gently seaward from the low waterline to a point where a substantial break in grade occurs, at which point the bottom slopes seaward at a considerable increase in slope until the great ocean depths are reached; and Other submarine areas refers to those which are under the territorial sea. They are otherwise referred to as seamount, trough, trench, deep, bank, shoal, and reef. What is Archipelagic Doctrine? Under this doctrine, the Philippine Archipelago is considered as one integrated unit instead of being divided into more than seven thousand island. This assertion together with the application of the straight baseline method is what is referred as the Archipelagic Doctrine. Straight Baseline Method, by using this Method, the outermost points of our archipelago are connected with straight baseline and all waters inside the baseline are considered as internal waters.

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Map of the Philippines showing extent of territorial jurisdiction based on the archipelagic doctrine. The innermost red line is the baseline; hence all waters, land and air enclosed in that imaginary baseline are the integral part of the Philippine Archipelago 3. Government- It refers to the agency to which the will of the state is formulated, expressed, and carried out. Government is the, indispensable machinery by means of which the state maintains its existence, carries on its functions and realizes its policies and objectives. A community of persons does not form a state unless it is organized by an established government. Government is different from administration although these two terms are often used interchangeably. Government refers to the institution while administration is the body of men running the government.

It is the institution or aggregate of institutions by which an independent society makes and carries out those rules of action which are necessary to enable men to live in a social state, or which are imposed upon the people forming that society by those who possess the power or authority of prescribing them. (Bernas, 2007). Simply stated, it refers to the agency through which the will of the state is formulated, expressed and implemented. There is no particular form prescribed to the State, provided only that the government is able to represent the State in its dealings with other states. The mandate of the government is to always protect the welfare of the people.

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Government is the machinery through which all the powers of the state are processed to give benefits to its people. It is likened to a stove which processes the LPG to give fire so as to cook food that will benefit the owner of that stove. The kind of fuel that will be used will depend upon the kind of stove that is being used. If it is a gas stove then it will need LPG, if it an electric stove it will need electricity. The kind of government will also dictate the kind of system used in processing the powers of the State. All States are possessed with the three (3) inherent powers, however, how these powers will be utilized depends upon the kind of government the State has. In the Philippines where the prevailing form of government is republican democracy, it follows the system of government found in the United States of America where the government is divided into three branches, namely executive, legislative and judicial and where the powers of the State are exercised through enactment of laws by the legislative body and implemented by the executive officials. Not all States process the powers in the same manner that these are processed in the Philippines or America, different states have different systems of processing their powers, depending upon the kind of government systems they have and there are numerous and various forms of government systems in the world. Governments can be classified into several types. Some of the more common types of government are: Democracy The word "democracy" literally means "rule by the people." In a democracy, the people govern. Republic A literal democracy is impossible in a political system containing more than a few people. All "democracies" are really republics. In a republic, the people elect representatives to make and enforce laws. Monarchy A monarchy consists of rule by a king or queen. Sometimes a king is called an "emperor," especially if there is a large empire, such as China before 1911. There are no large monarchies today. The United Kingdom, which has a queen, is really a republic because the queen has virtually no political power. Aristocracy An aristocracy is rule by the aristocrats. Aristocrats are typically wealthy, educated people. Many monarchies have really been ruled by aristocrats. Today, typically, the term "aristocracy" is used negatively to accuse a republic of being dominated by rich people, such as saying, "The United States has become an aristocracy." Dictatorship A dictatorship consists of rule by one person or a group of people. Very few dictators admit they are dictators; they almost always claim to be leaders of democracies. The dictator may be one person, such as Castro in Cuba or Hitler in Germany, or a group of people, such as the Communist Party in China.t forms used by countries. 8

Present Form of Government in the Philippines The Republic of the Philippines is a constitutional democracy, with the President as head of state. The president and vice president are elected by the people for six-year term. The national government has three co-equal branches that exercise a system of checks and balances: executive, legislative, and judicial. One basic corollary in a presidential system of government is the principle of separation of powers wherein legislation belongs to Congress, execution to the Executive, and settlement of legal controversies to the Judiciary. What are the branches of government in a Presidential form? The Branches of the Philippine Government The Legislative branch is authorized to make laws, alter, and repeal them through the power vested in the Philippine Congress. This institution is divided into the Senate and the House of Representatives. The Executive branch is composed of the President and the Vice President who are elected by direct popular vote and serve a term of six years. The Constitution grants the President authority to appoint his Cabinet. These departments form a large portion of the country‘s bureaucracy. The Judicial branch holds the power to settle controversies involving rights that are legally demandable and enforceable. This branch determines whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part and instrumentality of the government. It is made up of a Supreme Court and lower courts. The Constitution expressly grants the Supreme Court the power of Judicial Review as the power to declare a treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance or regulation unconstitutional. Separation of Powers and System of Checks and Balances in the Philippines The essence of a presidential form of government is the adoption of the principle of separation of powers and a system of checks and balances . Legal luminaries are of the agreement that the monopoly of power is fatally inimical to the principle of democracy. This resulted to a tripartite structure of government in the Philippines under the 1987 Constitution: legislative, executive, and the judiciary. Each branch performs different functions (i.e. legislative makes, alters and repeals laws; executive implements laws; judiciary applies and interprets laws). Under the separation of powers doctrine, governmental power cannot be possessed by one person or body only to prevent the concentration of power or group of persons as this may lead to its abuse and to tyranny. In the Philippines, this doctrine occupies a safe place in our constitutional history. In his book, La Revolucion Filipina, 9

Apolinario Mabini stresses the importance of soul-authority in a society. This authority needs the following to ensure a balance of government power: an intellect to direct it (legislative power); a will that is active and a resolve to make it work (executive power); and a conscience that judges and punishes what is bad (judicial power). Corollary to the doctrine of separation of powers is the system of checks and balances. Montesquieu, a French political philosopher, believes that power should be a check to power. The three separate branches of government cannot be compartmentalized. In the case of Francisco et al. vs. House of Representatives et al., G.R. No. 160261, November 10, 2003 (Supreme Court of the Philippines, 2003), the Supreme Court emphasized "the doctrine of separation of powers is clearly related with the principles of checks and balances." This corollary principle is provided by the Constitution to secure coordination between and among the branches of government. In Vargas v. Rilloraza, the Supreme Court has used this principle in the resolution of conflict arising from acts that impinge on the mutual interdependence of the three branches of government. However, the two doctrines function distinctively and separately. When the doctrine of separation of powers is practiced well, it does not mean that the system of checks and balances is also observed. As in the Philippine case, the doctrine of the separation of powers is practiced, however, the system of checks and balances is ill-practiced because some constitutional and legal structures designed to check and balance the President are subverted. It happens when the president or any branch of government for that matter justifies its unilateral action by invoking the principle of separation of powers but when checked of its action, it still invokes the same principle. Relacion, April Farell M., and Grace C. Magalzo. "System of Checks and Balances in the Philippine Presidential Form of Government." Journal of Multidisciplinary Studies 3, no. 2 (2014).

4. Sovereignty- The fourth essential element of the state is sovereignty. It is that important element which distinguishes the state from all other associations. The word 'Sovereignty' denotes supreme and final legal authority and beyond which no further legal power exists. The power to command and enforce obedience free from foreign control. Sovereignty is best defined as a sphere of authority and autonomy - the legitimate power to govern. It is often said that whatever the institutions of government, sovereignty resides in the people and it is the people who determine how they will be governed. It is the possession of absolute authority within a bounded space. In 1935, the Commonwealth of the Philippines was established with U.S. approval, and Manuel Quezon was elected the country‘s first president. On July 4, 1946, full independence was granted to the Republic of the Philippines by the United States. independence http://www.history.com/this-day-in-history/philippine -declared.

5. International Recognition The term recognition refers to the formal acknowledgement by one state that another state exists as a separate and independent government. Recognition is not a mere technicality. A state has no status among nations until it is recognized by other states, in spite of the fact that it might possess all other 10

attributes of a state, including a definable territory and population, a recognizable government, and a certain amount of continuity or stability. A nation is not truly sovereign and independent unless other nations recognize its sovereignty. Formal recognition operates to assure a new state that it will be permitted to hold its place and rank as an independent political body among the nations. Recognition takes effect from the time it is given as if the state had always existed, and a new government can carry forward international projects initiated by the old government it replaces. Many difficulties come into play when a government is not recognized. For example, an unrecognized government is not entitled to participate in diplomatic negotiations or to have its laws applied in lawsuits or in jurisdictions. When was Philippines officially recognized as an independent State? The U.S. Congress can determine the status of American territory under American law. It did determine in 1946 that the Philippines was independent. This act however, did not determine its status under international law. The Congressional Act was just evidence of importance in determining the international status of the Philippines but was not definitive until internationally recognized. Actually, the Philippines was recognized as an independent State through admittance to the United Nations. https://books.google.com.ph/books?isbn=9028613528/Acadimie Haye, Hague Academy of International Law

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POWERS OF THE STATE Once all the elements in the creation of a State are defined and established, there are created inherent powers. That is why people are waging war to be independent, because they want to acquire those powers which would automatically fall into their hands once they are able to create in themselves an independent state.

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The discussion of Taxation in this book did not begin with the Powers of the State, but rather, on the STATE itself, this being the source of the power of taxation. Most books introduce Taxation by starting in the discussion of the principles without introducing the story creating those principles that is why taxation becomes one of the hardest topics to understand. It is not really a hard topic but most of the books presented the topic in the middle so we often wonder why it came into being. But knowing the source of power and its nature would make the understanding of taxation a lot easier. Inherent Powers of the State 1. Police Power – Is the capacity of a state to regulate behaviors and enforce order within its territory. Police power is an inherent attribute of sovereignty. It can exist even without reservation in the constitution. It is based on necessity as without it, there can be no effective government. It is also referred to as the law of overwhelming necessity. It is the sovereign power to promote and protect the general welfare. It is the most pervasive and the least limitable of the three powers of the state, the most essential, consistent and illimitable which enables the State to prohibit all hurtful things to the comfort, safety and welfare of the society. It also refers to the power vested in the legislature by the Constitution to make, ordain, establish all manner of wholesome and reasonable laws, statutes, or ordinances, either with penalties, or without, nor repugnant to the constitution, as they shall be judge to be for the good and welfare of the state and the subjects. The basic purposes of Police Power are: To serve the general welfare, comfort and convenience of the people; To promote and preserve public health; To promote and protect public safety; To maintain and safeguard public order; To protect public morals; and To promote the economic security of the people. What is the basis of the exercise of the police power of the state? The exercise of police power is founded on the basic principles of salus populi est suprema lex (the welfare of the people is the supreme law) and sic utere tu et alienum non laedas (so use your property so as not to impair another) Who has the ultimate power to determine the necessity and the means of exercising the police power of the state? Congress has the ultimate power, because it is the judge of necessity, adequacy, reasonableness and wisdom of any law. The congress is the constitutional repository of police power and exercise the prerogative of determining the policy of the state. Limitations in the exercise of Police power 12

a) Due process clause and b) Equal protection clause 2. Power of Eminent Domain – It is an inherent power of the state that enables it to forcibly acquire private property, which is intended for public use, upon the payment of just compensation. It is based on political necessity; it is inseparable from the state unless it is denied to it by its fundamental law. Condemnation of private property is justified only if it is for the public good character. It is the courts of law that have the power to determine whether there is necessity therefore. Also called the power of expropriation, eminent domain is described as the ―highest and most exact idea of property remaining in the government‖ that may be acquired for some public purpose through a method ―in the nature of a compulsory sale to the state‖ Taking may not only include the import of a physical possession of the owner, as when he is ousted from his land or relieved of his watch or car but also covers trespass without actual eviction of the owner, material impairment of the value of the property or prevention of the ordinary uses for which the property was intended. What are the requisites in exercising the power of eminent domain? The property taken must be private property; The taking must be within constitutional limitations; The taking must be for public use Just compensation must be paid; There must be due process of law.

Who may exercise the Power of Eminent domain? The Congress The President The local legislative bodies What are the requisites before an LGU can exercise the power of eminent domain? Power of the LGUs to exercise eminent domain The following essential requisites must concur before an LGU can exercise the power of eminent domain: a.) an ordinance is enacted by the local legislative council authorizing the local chief executive to exercise the power of eminent domain; b.) it is exercised for the public use, purpose and welfare; c.) there must be payment of just compensation; and d.) a valid and definite offer has been previously made to the owner of the property sought to be expropriated.

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3. Power of Taxation -It is the inherent power of the sovereign, exercised through the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. It is the inherent power of the state to raise revenues to defray the expenses of the government or for any public purpose. This can be done through the imposition of burdens on persons, properties, services, rights, occupations or transactions. The importance of taxation derives from the unavoidable obligation of the government to protect the people and to extend to them benefits in the form of public projects and services. Taxation is based on necessity and the reciprocal duties of protection and support between the state and those that are subject to its authority. It is also defined as the act of levying a tax, the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. It is a method of apportioning the cost of government among those who, in some measure, are privileged to enjoy its benefits and must therefore bear its burdens. Taxation is the process whereby charges are imposed on individuals or property by the legislative branch of the government to raise funds for public purposes. The theory that underlies taxation is that charges are imposed to support the government in exchange for the general advantages and protection afforded by the government to the taxpayer and his property. The existence of government is a necessity that cannot continue without financial means to pay its expenses; therefore, the government has the right to compel the citizens and property within its limits to share its costs. The state has the power to impose taxes upon its citizens. Who may exercise the power of taxation? It is the Congress who exercises the plenary power to tax. However, it may be delegated by congress to local government units under such terms and conditions as may be prescribed by law. Nature of the Power of Taxation The power to tax being inherent in an independent state for its existence and survival and for the furtherance of its multifarious functions; the same does not require delegation from the supreme law of the land. However, exercise of such power upon the inhabitants is subject to limitations imposed by the power, by its very nature, or by the Supreme law of the land, the Philippine Constitution. To tax a subject matter, person, property or excise, there must be a valid law imposing the same. Validity of a tax measure presupposes the fact that is has overcome the test and scrutiny against it. Tax measures duly passed by the legislative department, the Congress or the local legislative under its delegated power, enjoy the presumption of validity and he who controverts has the duty of proving that the same is otherwise. By nature, power to tax is 14

inherent in sovereign estate so that the grant of which is not necessary for the exercise. This means that the state needs not be empowered by its constitution or any mandate for it to be allowed to tax. Such power co-exists with the state and thus, grant is not necessary. What are being provided by the supreme law of the land, the Constitution, are the guidelines and the limit on the exercise of the power. It wishes to curtail the exercise in such a way as not to abuse and misuse said power to the detriment of the majority and to the advantage of the selected few. Under our tax system, compliance is initially voluntary on the part of the taxpayers. Nevertheless, the government through the administrative agency empowered to administer the tax, the BIR, is clothed with such remedies, under proper procedures, to impose correct amount of taxes due to the government upon finding that the compliance based on the declaration in the return is insufficient. It can issue deficiency assessment and impose such measures provided under the law within the prescribed period to see to it that taxes are paid and that tax measure are complied with. This does not however follow that the taxpayer being assessed is doing an illegal business because non-payment of the tax does not make the business illegal. The Inherent and Constitutional Limitations on the Power of Taxation The Power of Taxation is not absolute; it is subject to some inherent and constitutional limitations. The true definition of Taxation is embodied in its limitations. Power without limitation is like a straight line without end points. What is a straight line without end points? It is an infinity and power, no matter how huge and vast, must be subjected to some form of restrictions or limitations so as to shape itself and be defined as a source of benefits for its subjects . Thus the power of taxation to be truly beneficial and not destructive should be exercised with the following restrictions or limitations: 1.

Inherent Limitations - The inherent limitations, which are so-called because they exist without the need of any written legal mandate, include the following: 1. Taxes may be levied only for public purpose; 2. The power to tax is limited to the territorial jurisdiction if the sovereign state; Situs or territoriality, as a rule, the taxing power cannot go beyond the territorial limit of the taxing authority. Situs of taxation is the State or country which has jurisdiction to tax a person, property or interest. 3. The power to tax, being essentially legislative, cannot be delegated; The principle in administrative law that congress cannot delegate its legislative powers to agencies. Rather, when it instructs agencies to regulate, it must give them an "intelligible principle‖ on which to base their regulations. 4. International comity (respect afforded by one state to another by virtue of the principle of sovereignty); and 5. Exemption from taxation of governmental entities. 6. Prohibition against double taxation

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2.

Constitutional limitations- are the limitations set forth in the Constitution.

What is a Constitution? Constitution is the fundamental law of the land, written or unwritten that establishes the character of government by defining the basic principles to which the society must conform; by describing the organization of the government and regulations, limitations and distributions of the functions of the different government departments; and by prescribing the extent and manner of the exercise of its sovereign powers. It is a legislative charter from which the government or group derives its authority to act. West's Encyclopedia of American Law, edition 2. S.v. "constitution." Retrieved August 23 2016 from http://legal-dictionary.thefreedictionary.com/constitution

The Constitution is a contract between the State and its People. It establishes the rights and duties of the State to its People and vice versa. Constitutional limitations are those provisions in the Constitutions that restrict or limit the exercise of the powers of the State over its subjects and objects. In the Philippines the following are the limitations on the power of taxation under the 1987 Constitution: 1. Observance of due process of law and equal protection of the laws, (sec, 1, Art. 3) is any deprivation of life liberty or property is with due process if it is done under the authority of a valid law and after compliance with fair and reasonable methods or procedure prescribed. The power to tax can be exercised only for a constitutionally valid public purpose and the subject of taxation must be within the taxing jurisdiction of the state. The government may not utilize any form of assessment or review which is arbitrary, unjust and which denies the taxpayer a fair opportunity to assert his rights before a competent tribunal. All persons subject to legislation shall be treated alike under like circumstances and conditions, both in the privileges conferred in liabilities imposed. Persons and properties to be taxed shall be grouped, and all the same class shall be subject to the same rate and the tax shall be administered impartially upon them. 2. Rule of uniformity and equity in taxation (sec 28(1) Art VI) All taxable articles or properties of the same class shall be taxed at the same rate. Uniformity implies equality in burden not in amount. Equity requires that the apportionment of the tax burden be more or less just in the light of the taxpayer‘s ability to bear the tax burden. 3.

No imprisonment for non-payment of poll tax (sec. 20, Art III) A person cannot be imprisoned for non-payment of community tax, but may be imprisoned for other violations of the community tax law, such as falsification of the community tax certificate, or for failure to pay other taxes.

4.

Non-impairment of obligations and contracts (sec 10, Art III ). the obligation of a contract is impaired when its terms and conditions are changed by law or by a party without the consent of the other, thereby 16

weakening the position or the rights of the latter. IF a tax exemption granted by law and of the nature of a contract between the taxpayer and the government is revoked by a later taxing law, the said law shall not be valid, because it will impair the obligation of contract. 5.

Prohibition against infringement of religious freedom (Sec 5, Art III) it has been said that the constitutional guarantee of the free exercise and enjoyment of religious profession and worship, which carries the right to disseminate religious belief and information, is violated by the imposition of a license fee on the distribution and sale of bibles and other religious literatures not for profit by a non-stock, non-profit religious corporation.

6.

Prohibition against appropriations for religious purposes, (Sec 29, (2) Art. VI) Congress cannot appropriate funds for a private purpose, or for the benefit of any priest, preacher or minister or for the support of any sect, church except when such priest, preacher, is assigned to the armed forces or to any penal institutions, orphanage or leprosarium.

7. Exemption of all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes from income, property and donor‘s taxes and custom duties (sec. 4 (3 and 4) art. XIV.) 8. Concurrence by a majority of all members of Congress in the passage of a law granting tax exemptions. Sec. 28 (4) Art. VI. 9. Non Deprivation of the Supreme Court to review tax cases. Congress may not deprive the Supreme Court of its jurisdiction to review, revise, reverse, modify or affirm on appeal or certiorari, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment or any penalty imposed in relation thereto.

End of Discussion-see practice exercises in the following pages

END OF CHAPTER TESTS A. Define The Following: 1.

State

2.

People

3.

Nationality

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4.

Citizenship

5. Naturalization 6.

Territory

7.

Archipelagic doctrine

8.

Government

9.

Sovereignty

10. International Recognition

B. Enumerate Or List Down The Answers In The Following Questions: 1. What are the elements of State? 2. What are the principles used in determining citizenship? 3. Who are Filipino citizens under the 1987 Constitution? 4. What are the kinds of Filipino citizens? 5. What are the kinds of naturalization? 6. What comprises the Philippine national territory as provided in the 1987 Constitution? 7. What are the common forms of government in the world? 8. What are the 3 branches of government in a Republican Democratic State? 9. What are the manifestations of a republican state?

C. Discuss The Following Topics: 1. Differentiate nationality from citizenship and how taxation affects them. 2. Discuss how the baseline method is used in determining a territory. 3. Discuss the separation of powers and system of checks and balances in the Philippine government. 4. Discuss the history of the Philippine sovereignty. 5. Discuss how the Philippines was recognized as an independent state.

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CHAPTER II - PRINCIPLES OF TAXATION TAXATION as one of the inherent powers of the State. Taxation is the process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses of the government. Taxation, as a power of the State, is inherent in sovereignty. A government cannot continue to exist and operate without financial means. The inherent power gives the government the right to tax citizens, rights and properties within its jurisdiction.

What are the Manifestations of a Sound Tax System? How can we know if the system of taxation adopted by a particular state is capable of achieving its purpose? Tax systems vary widely among nations, it is dependent on the form of government that the nation has. All nations are possessed of the inherent powers of the state, however not all nations process the powers in similar ways. The imposition and collection of taxes depend upon the form of government that the nation has. The taxation systems in the Philippines and other republican democratic states are similar. Tax laws are enacted by Legislative body, implemented by the Chief Executive and issues thereon are resolved by the Judiciary. The fundamental purpose of taxation is to raise the revenue necessary to fund public services. While there are many ways to achieve this goal, a widely agreed-upon set of principles should be used to evaluate tax systems. The summary of policies of a sound tax system that will be discussed here provides a basic overview of five commonly cited principles of sound tax policy: equity, adequacy, simplicity, exportability, and neutrality. However, the tax principles outlined here are not the only criteria used by policymakers in enacting tax changes— and these principles can come into conflict with each other. But almost everyone would agree that advocates of tax reform should keep each of these principles in mind as they seek to improve their state‘s tax system.

The following are the Elements or Principles of a sound tax system. I. Equity: (Theoretical Justice) Two Kinds of Tax Fairness When people discuss tax ―fairness,‖ they‘re talking about equity. Tax equity can be looked at in two important ways: vertical equity and horizontal equity. A. Vertical equity addresses how a tax affects different families from the bottom of the income spectrum to the top—from poor to rich. Three terms are used in measuring vertical equity: 1.

Regressive tax systems is the opposite of a progressive tax, a regressive tax, takes a larger percentage of income from low-wage earners than it does from high-wage earners. Sales tax is an example of a regressive tax 19

because if two individuals buy the same amount of goods or services, the sales tax constitutes a higher percentage of the lower-earning individual's wages and a lower percentage of the higher-earning individual's wages.

2

. Proportional or flat tax systems take the same share of income from all families. Unlike progressive and regressive tax systems, a flat tax system does not impose different tax rates on people with different income levels. Instead, flat taxation imposes the same percentage tax on everyone regardless of income. For example, if everyone is taxed at 10%, regardless of income, this is a flat tax. The capital gains tax on real property is considered a flat tax because it taxes all capital gains transactions on real property at the same percentage.

3.

Progressive tax systems require upper-income families to pay a larger share of their incomes in taxes than those with lower incomes. Personal income taxes are usually progressive.

Constitutional Provisions on Progressive System of Taxation. The Supreme Court declared RA 9337 or the VAT Reform Act constitutional. In the same decision, it clarified the constitutional provisions on progressive system of taxation. The increase in corporate income tax rate and the removal of certain exemptions are meant to distribute the burden of taxation. Although indirect taxes, e.g. VAT are regressive in nature, the constitution does not prohibit the imposition of indirect taxes. When the Constitution mandated Congress to evolve a progressive system of taxation, it simply meant that direct taxes should be preferred and that the regressive indirect taxes can be minimized with exemptions and differentiated rates (GR 168056, GR 168207, GR 168461, GR 168463, and GR 168730, Sept. 1, 2005). A progressive tax is a tax that takes a larger percentage from high-income earners than it does from low-income individuals. The Philippine income tax system is considered progressive. In the 1997 Comprehensive tax system, individuals who have under P10,000 of taxable income pay 500 plus 0% in excess of 10,000 in income tax, while taxpayers earning more than the benchmark cutoff of P500,000 fall into tax brackets with rate up to 32%.The progressivity of a tax structure depends on how quickly the tax rates rise in relation to increases in income. For example, if one tax code has a low rate of 0% and a high rate of 32%, and another tax code has income tax rates ranging from 10% to 80%, the latter is more progressive. Progressive tax systems reduce tax burdens on people who can least afford to pay them, and these systems leave more money in the pockets of lowwage earners, who are likely to spend all of their money and stimulate the economy. Progressive tax systems also have the ability to collect more taxes than flat taxes or regressive taxes, as tax rates are indexed to increase as income climbs. Progressive taxes allow the people with the greatest amount of resources to fund a greater portion of the services all people and businesses rely on, such as roads, first responders and snow removal. 20

Critics of progressive taxes consider them to be discriminatory against wealthy people or high-income earners. In the U.S. critics believe the U.S. progressive income tax is effectively a means of income redistribution, based on the myth most taxes are used to fund social welfare programs. However, only a small portion of government spending is devoted to welfare payments.

Effective Tax Rate It is a tax rate that result when the ratio of Income tax and Net Income is computed. The tax rate is expressed in terms of percentage of taxes on income. Income statements offer a quick overview of the financial performance of a given company over a specified period of time, usually annually or quarterly. On an income statement, you can view revenue, costs, gross margins, after-tax earnings and overhead costs, which is a litany of useful information. A company does not provide its actual percentage rate of taxation on the income statement. Expense from taxes is usually the last line item before net income calculation, and you can figure out the effective tax rate using the rest of the information on the statement. Calculating Effective Tax Rate Effective tax rate is the average tax rate paid by the company on its earned income. Locate net income on the company's income statement. This line may sometimes read "earnings." Net income shows how much revenue a company is able to keep after deducting taxes, and the two preceding line items should identify both revenue and taxes paid. The most straightforward way to calculate effective tax rate is to divide the income tax expenses by the income earned before taxes. For example, if a company earned php100,000 and paid php25,000 in taxes, the effective tax rate is equal to 25,000 / 100,000 or 0.25. In this case, you can clearly see that the company paid an average rate of 25% in taxes on income. http://www.investopedia.com/ask/answers/102714/how-are-effective-tax-rates-calculatedincome-statements.asp#ixzz4pOKm9MGg

B. Horizontal equity is a measure of whether taxpayers with similar circumstances in terms of income, family structures, and age pay similar amounts of tax. For example, if one family pays much higher taxes than a similar family next door, that violates ―horizontal‖ fairness. This sort of unjustified disparity undermines the public support for the tax system and diminishes people‘s willingness to file honest tax returns. It would be hard to defend a tax system that intentionally taxed lefthanded people at higher rates than right-handed people. Likewise, a tax that hits a wage-earner harder than an investor (as the federal income tax currently does), even if their total incomes are the same, fails the test of horizontal equity. Most people accept the notion that- at minimum- tax systems should not be regressive. Almost every state relies on some combination of regressive, proportional and progressive taxes. When you add these taxes together, the overall progressivity or regressivity of a tax system is determined by (1) the degree of progressivity or regressivity of each tax within the system and (2) how heavily a state relies on each tax. Thus, a state that relies on regressive sales, excise and 21

property taxes more heavily than a progressive income tax will end up with a very regressive tax system overall.

II. Adequacy (Fiscal Adequacy) An adequate tax system raises enough funds to sustain the level of public services demanded by citizens and policymakers. At the end of the day, adequacy is what separates successful tax systems from unsuccessful tax systems. Of course, at any given time, the primary concern for state lawmakers is short-term adequacy – making sure there‘s enough revenue to fund public services in the upcoming fiscal year. But it‘s equally vital for good government advocates and lawmakers to seek strategies that will achieve long-term adequacy, balancing budgets not just this year and next, but five years and ten years down the road. Two factors that contribute to the adequacy of a tax are its stability and elasticity. A stable tax is one that grows at a predictable pace. Predictable growth makes it easier for lawmakers to put together budgets that match anticipated revenues to spending. But stability is not enough to achieve adequacy in the long run. For example, property taxes grow predictably—but tend to grow more slowly than the cost of the services that governments provide. Elasticity is a measure of whether the growth in tax revenues keeps up with the economy—an important consideration because the cost of providing public services usually grows at least as fast as the economy. An elastic tax system is one that grows faster than the economy during good times, and falls faster than the economy during bad times. Over the course of the business cycle, elastic taxes like the personal income tax help to ensure adequate revenue streams.

III. Simplicity (Administrative Feasibility) Simplicity is often touted as a goal for tax reform – and it‘s an important one. Complicated tax rules make the tax system difficult for citizens to understand. Complexity also makes it harder for governments to monitor and enforce tax collections, and makes it easier for lawmakers to enact (and conceal) targeted tax breaks benefitting particular groups. A tax system full of loopholes gives those who can afford clever accountants an advantage over those who must wade through the tax code on their own. But beware. Tax reform proposals described as ―simplification‖ measures are often nothing of the kind. Anti-tax advocates frequently seek to ―simplify‖ the income tax by eliminating the graduated rate structure and instituting a flat-rate tax. This is a red herring: a graduated tax system is no more complicated than a flat-rate tax. What makes filing taxes more complicated – and makes the tax forms longer and longer each year – is the proliferation of special tax breaks. The right way to make income taxes simple is to eliminate tax loopholes, not to flatten the rates.

IV. Exportability (Note: this is a topic in American Tax law which is the basis of Philippine tax law. Examples here are of American settings or situations)

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The public services provided by state and local tax revenues are enjoyed by individuals from other states—including businesses that hire a state‘s high school and college graduates and tourists who use a state‘s transportation infrastructure. This is why state tax systems are often designed to make multi-state businesses and residents of other states pay their fair share of the state‘s taxes. An exportable tax is one that is at least partially paid by these non-residents. There are broadly three ways in which taxes can be exported: a)

Directly (sales taxes on items purchased by tourists, for example);

b)

By levying taxes on businesses which are then passed on to nonresidents; and

c)

Through interaction with foreign income tax. All taxes are at least partially paid by non-residents—and policy makers have the power to effectively adjust the percentage of taxes ―exported‖ to residents of other states.

Definition of 'Tax Exporting' The raising of revenue for one jurisdiction through the levying of taxes on residents of another jurisdiction. This means nonresidents pay for a share of the public services they benefit from while visiting another state. Without tax exporting, residents would pay for public service provision to visiting nonresidents. However, tax exporting can also discourage nonresidents from visiting another state if its tax exporting policy makes the activities they want to enjoy too expensive. Examples of tax exporting: Out-of-state visitors gambling in Las Vegas pay taxes that benefit the state of Nevada and its residents. Out-of-state visitors to California pay hotel taxes and other tourist taxes that benefit residents of California cities . Homestead exemptions, which lower property taxes for owner-occupant homeowners, shift the property tax burden to homeowners who don‘t occupy their properties, some of whom are out-of-state investors (especially in popular travel destinations). The taxes are therefore "exported" to homeowners who live out of state. Tax exporting has negative effects on the nonresidents who pay the taxes, and potentially on their home states. If Janet, a resident of California, spends more when she goes to Las Vegas (because of gambling taxes), she will have less money to spend at businesses in California, and she will pay less California sales tax as a result. Both businesses and the state treasury in California may take in less revenue because of Nevada‘s tax exporting. While voters may support tax exporting (they‘re seemingly approving a tax that they won‘t have to pay), certain tax exporting strategies, such as taxing tourism, mean state residents still end up paying higher taxes, because people often travel within their

23

home states. Tax exporters must strike a delicate balance between raising revenue and not discouraging nonresidents and residents from partaking in the taxable activity. Reference: Tax Exporting Definition | Investopedia http://www.investopedia.com/terms/t/taxexporting.asp#ixzz4pPIhoXPK

V. Neutrality The principle of neutrality (sometimes called ―efficiency‖) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment. If individuals or businesses make their investment or spending decisions based on the tax code rather than basing them on their own preferences, that‘s a violation of the neutrality principle, and can lead to negative economic consequences in the long run. State and local governments should not use tax policy to create ―winners and losers‖ by promoting one sector of the economy ahead of another or by favoring one type of income over another. Reference: https://itep.org/wp-content/uploads/pb9princ.pdf

GOVERNMENTAL CHARGES - Are all government charges, taxes? There are a lot of charges that a citizen pays, but these charges are not all taxes. A Citizen pays for licenses, toll, tariffs and customs duties, special assessment and debt to the government and it is quite important to know for what charges money are being paid for, because each charge has a different purpose and nature. Tax - is an enforced contribution from persons and properties levied by the State by virtue of its sovereignty for the support of the government and for all its public needs. (Cooley). ―A tax is a forced burden, charge, exaction, imposition or contribution assessed in accordance with some reasonable rules of apportionment by authority of the sovereign state upon persons, properties or property rights within its jurisdiction for purposes of raising revenue to support the governmental expenses. " (51 Am. Jur. 35-38) License fee- a permit from an authority to own or use something, do a particular thing, or carry on a trade. It is a formal permission from a governmental or other constituted authority to do something, as to carry on some business or profession. To grant a license to (someone or something) is to permit the use of something or to allow an activity to take place. Toll – is a payment or fee exacted by the state, the local authorities, etc., for some right or privilege, as for passage along a road or over a bridge. Tariffs and Customs Duties- Tariff is a kind of tax on goods a country imports or exports. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers. A specific tariff is levied as a fixed fee based on the type of item. European or U. S. made cars are more expensive because 24

the price will include tariffs which the government adds to the price of imported vehicles. A specific tariff is levied as a fixed fee based on the type of item. Customs Duties and Tariffs are taxes levied on imports (and, sometimes, on exports) by the customs authorities of a country to raise state revenue, and/or to protect domestic industries from more efficient or predatory competitors from abroad. These two words are used interchangeably; however, tariff is a more appropriate term to discuss the tax system while customs duty is used to denote the amount of tax. Special Assessment is the term used to designate a unique charge that government units can assess against real estate parcels for certain public projects. Tax levied on properties within an specific area which benefit directly from public improvements such as pavements (sidewalks), roads, sewers, street lights. Debt is an amount of money borrowed by one party from another. ... A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest. An example of debt is when the Government approves a lending activity to a sector it wants to help and a member of that sector availed of the lending facility offered by the government, then when that member pays to the Government, he is just returning what he owed plus the agreed interest thereon.

What are Taxes? Taxes are generally an involuntary fee levied on individuals or corporations that is enforced by a government entity, whether local, regional or national in order to finance government activities. http://www.investopedia.com/terms/t/taxes.asp#ixzz4oucqnqjE Taxes are levied by states upon their citizens and corporations to fund public works and services. Payment of taxes at rates levied by the state is compulsory, and tax evasion, the deliberate failure to pay one's full tax liabilities, is punishable by law. Most governments utilize an agency or department to collect taxes; in the Philippines, this function is performed by the Bureau of Internal Revenue on internal taxes and the Bureau of Customs on tariffs and customs duties on importation and exportation of goods. Like any other nations, the Philippines has a progressive tax system by which a higher percentage of tax revenues are collected from high-income individuals or corporations rather than from low-income individual earners. Taxes are imposed at National and local levels. Generally speaking, the National government levies income, business, transfer and other national taxes, The Bureau of Customs on the other hand collects tariffs and customs duties on importation and exportation of goods and the Local Government Units levy, among others, property tax and poll tax or residence certificate.

What are the taxes collected by the Philippine Government There are many different kinds of taxes in the Philippines. But we can group them into two basic types, namely, national taxes and local taxes. National taxes are those that 25

we pay to the government through the Bureau of Internal Revenue and Bureau of Customs. Our national internal revenue taxation is based on the National Internal Revenue Code of 1997 or the Republic Act No. 8424 otherwise known as the Tax Reform Act of 1997, as amended. The import and export tariffs on the other hand, are collected by the Bureau of Customs under Republic Act No. 1937 otherwise known as the Tariff and Customs Code of the Philippines (as amended). The local government taxation in the Philippines is based on Republic Act 7160 or otherwise known as the Local Government Code of 1991, as amended. These taxes, fees or charges are imposed by the local government units, such as provinces, cities, municipalities, and barangays, which were given by the code the power to levy or impose taxes on subjects within their territorial jurisdiction. Business owners, professionals, employees, consumers, and other taxpayers should be aware of the different kinds of taxes in the Philippines. The following are some of the common national and local taxes in the Philippines

National Taxes in the Philippines A. Taxes Collected by the Bureau of Internal Revenue 1.

Capital Gains Tax – is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale.

2.

Documentary Stamp Tax – is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or property incident thereto. Examples of documentary stamp tax are those that are charged on bank promissory notes, deed of sale, and deed of assignment on transfer of shares of corporate stock ownership.

3.

Donor‘s Tax – is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of the transfer. Donor‘s tax is based on a graduated schedule of tax rate.

4

Estate Tax – is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers which are made by law as equivalent to testamentary disposition. Estate tax is also based on a graduated schedule of tax rate.

5.

Income Tax – is a tax on all yearly profits arising from property, profession, trades or offices or as a tax on a person‘s income, emoluments, profits and the like. Selfemployed individuals and corporate taxpayers pay quarterly income taxes from 1st 26

quarter to 3rd quarter. And instead of filing quarterly income tax on the fourth quarter, they file and pay their annual income tax return for the taxable year. Individual income tax is based on graduated schedule of tax rate, while corporate income taxes in based on a fixed rate prescribed by the tax law or special law. 6.

Percentage Tax – is a business tax imposed on persons or entities that sell or lease goods, properties or services in the course of trade or business whose gross annual sales or receipts do not exceed the amount required to register as VATregistered taxpayers. Percentage taxes are usually based on a fixed rate. They are usually paid monthly by businesses or professionals. However, some special industries and transactions pay percentage tax on a quarterly basis.

7.

Value Added Tax – is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal) lease of goods or properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on to the buyer, causing this to increase the prices of most goods and services bought and paid by consumers. VAT returns are usually filed and paid monthly and quarterly.

8.

Excise Tax – is a tax imposed on goods manufactured or produced in the Philippines for domestic sale or consumption or any other disposition. It is also imposed on things that are imported.

WITHHOLDING TAX Withholding Tax is not a tax; it is a system of collecting in advance taxes so that the government will not have to wait for the end of the year to collect the entire taxes due from the taxpayers. Ordinarily, the due dates of most taxes are at the end of the year and if there is no withholding tax system, the government would only be able to collect most of the taxes at the end of the year, and if this is so, the budgeting of government resources will be very difficult because government expenses are distributed over different months of the year.

What are the Different kinds of Withholding Tax? 1.

Withholding Tax on Compensation – is the tax withheld from individuals receiving purely compensation income. This withholding tax is what employers take from their employees‘ compensation income and remit to the government through the BIR or its authorized collection agent.

2

. Expanded Withholding Tax – is a kind of withholding tax which is prescribed only for certain payers and is creditable against the income tax due of the payee for the taxable quarter/ year. Examples of the expanded withholding taxes are those that are withheld on rental income and professional income.

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3

. Final Withholding Tax – is a kind of withholding tax which is prescribed only for certain payers and is not creditable against the income tax due of the payee for the taxable year. Final income tax withheld constitutes the full and final payment of the income tax due from the payee on the said income. An example of final withholding tax is the tax withheld by banks on the interest income earned on bank deposits.

4.

Withholding Tax on Government Money Payments – is the withholding of tax by government offices and instrumentalities, including government-owned or controlled corporations and local government units. Government agencies are required to withhold a certain portion of money payments to their suppliers of goods and services. ( Note: Some Large Taxpayers are also accredited to withhold taxes)

TAXES COLLECTED BY THE BUREAU OF CUSTOMS A. Tariffs Tariff duties are levied on imported goods either as a revenue generating measure or a protective scheme to artificially or temporarily inflate prices to support the local industries of a particular country and protect its domestic output from their foreign counterparts. In the Philippines, import duties are imposed, generally in ad valorem form, on articles entering the country in accordance with their corresponding schedules and classifications as provided under Section 104 of the Tariff and Customs Code of the Philippines (TCCP) of 1978, as amended. With the exception of certain articles which can be imported duty-free, upon compliance with certain prescribed conditions or formalities, Goods are levied import duties depending on the trade agreements, regional groupings, among others. As per the TCCP, the rate of duty classification can either be ―Most Favored Nation‖ or MFN or ASEAN Trade in Goods Agreement (ATIGA). Under the MFN treatment, [It is the basic Philippine rate of duty applicable to imports coming from nonASEAN members],the rate of duty ranges from Free/Zero to 30% except in cases of sensitive agricultural products which are accorded a certain degree of protection via higher tariff rates reaching to as high as 65% The Tariff and Customs Code of the Philippines (TCCP), as Amended ASEAN Harmonized Tariff Nomenclature (AHTN) 2012 has indicated that the 65% duty for the said goods will be in force until 2015. . On the other hand, under the ATIGA Member States agreed to place 99% of all the products in their Inclusion List (IL) at zero-duty. In compliance with ATIGA, the Philippines implemented its tariff commitments, the last tranche of which was made via Executive Order (EO) No. 850 (implemented on January 1, 2010). Thus, most goods from the ASEAN are levied ordinary import duties of 0%.

Power of the President To Increase, Reduce, Or Remove Existing Protective Tariff Rates (Including Any Necessary Change In Classification)

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The President, upon recommendation of the National Economic and Development Authority (NEDA), in the interest of national economy, general welfare, and/or national security, is empowered to increase, reduce, or remove existing protective tariff rates (including any necessary change in classification) but in no case shall the increased rate of duty be higher than a maximum of one hundred (100) per cent ad valorem; establish import quota and/or ban importation of any commodity, as may be necessary; and impose an additional duty on all imports not exceeding ten (10) per cent ad valorem [Section 401 (Flexible Clause), TCCP, as amended] whenever necessary. The President may also gradually reduce the said protection levels upon periodic investigations by the Tariff Commission (TC) and as recommended by the NEDA.

B. Customs Duties 1. Importation Duties a.

Special Duties These are levied in addition to the ordinary import duties, taxes and charges imposed by law on the imported product under the following circumstances: a. Anti-Dumping Duty [ Provided under RA 8752 (August 12, 1999) Entitled, “An Act Providing the Rules for the Imposition of an Anti-Dumping Duty, Amending for the Purpose Section 301, Part 2, Title II, Book I of the Tariff and Customs Code of the Philippines, as amended by RA 7843, and for Other Purposes] The antidumping duty is a trade remedy measure adopted by the government to protect a domestic industry against the unfair trade practice of dumping]. It is a special duty imposed in the event that a specific kind or class (any product, commodity, or article of commerce) of foreign article, is being imported into, sold or is likely to be sold in the Philippines, at an export price less than its normal value in the ordinary course of trade for a like product, commodity or article destined for consumption in the exporting country which is causing or threatening to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing similar product. This duty is imposed by the Secretary of Trade and Industry, in the case of non-agricultural products, commodities or articles, or the Secretary of Agriculture, in the case of agricultural products, commodities or articles, after formal investigation and affirmative finding of the Tariff Commission of the said act. The duty is equal to the margin of dumping on such product, commodity or article and on like product, commodity or article thereafter imported into the Philippines under similar circumstances. However, the duty may be charged less than the margin of dumping if the said lesser duty is adequate to remove the injury to the local industry. The decision as to whether or not to impose a definitive antidumping duty even when the requirements for the imposition are met/fulfilled will remain the prerogative of the TC. It may take into consideration, among others, the effect of imposing an anti-dumping duty on the welfare of consumers and/or the general public, and other related local industries.

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b.

Countervailing Duty [Provided under RA 8751 (August 7, 1999) Entitled, ―An Act Strengthening the Mechanisms for the Imposition of Countervailing Duties on Imported Subsidized Products, Commodities or Articles of Commerce in Order to Protect Domestic Industries from Unfair Trade Competition, Amending for the Purpose Section 302, Part 2, Title II, Book I of Presidential Decree (PD) No. 1464, Otherwise Known as the Tariff and Customs Code of the Philippines, As Amended‖]. The countervailing duty is a special duty charged whenever any product, commodity or article of commerce is granted directly or indirectly by the government in the country of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product, commodity or article, and the importation of such subsidized product, commodity or article has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry. After formal investigation and affirmative finding by the Tariff Commission of such threat, the countervailing duty which is equal to the ascertained amount of the subsidy, may be imposed by the Secretary of Trade and Industry, in the case of non-agricultural products, commodities or articles, or the Secretary of Agriculture, in the case of agricultural products, commodities or articles on like product, commodity or article thereafter imported into the Philippines.

c.

Marking Duty [Section 303, TCC, as amended.] The marking of articles (or its containers) is a prerequisite for every article or container of foreign origin which is imported into the Philippines in accordance with Section 303 of the TCCP. The marking shall be done in any official language of the Philippines and in a conspicuous place as legibly, indelibly and permanently as the nature of article (or container) may permit to indicate to an ultimate purchaser in the Philippines the country of origin of the article. In case of failure to mark an article or its container at the time of importation, unless otherwise excepted [Section 303(a)(3), TCC, as amended.] from the requirements of marking, there shall be levied upon such article a marking duty of 5% ad valorem.

d.

. Discriminatory Duty [Section 304, TCC, as amended.] As stipulated under Section 304 of the TCCP, the discriminatory duty is a new or additional duty in an amount not exceeding 100% ad valorem, imposed by the President by proclamation upon articles of a foreign country which discriminates against Philippine commerce or against goods coming from the Philippines in such manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country.

e.

General Safeguard Measure [Provided under RA 8800 (July 17, 2000) Entitled, ―An Act Protecting Local Industries by Providing Safeguard Measures to be Undertaken in Response to Increased Imports and Providing Penalties for Violations Thereof.‖] A general safeguard measure is applied by the Secretary of Trade and Industry (for non-agricultural products) or the Secretary of Agriculture (for agricultural products) upon positive final determination of the Tariff Commission that a product is being 30

imported into the country in increased quantities, whether absolute or relative to domestic production, as to cause or threaten to cause serious injury to the domestic industry. In the case of non-agricultural products, however, the Secretary of Trade and Industry shall first establish that the application of such safeguard measures will be in the public interest. Upon positive determination, the Tariff Commission shall recommend to the concerned Secretary an appropriate definitive measure, in the form of: (1)

An increase in, or imposition of, any duty on the imported product;

(2)

A decrease in or the imposition of a tariff-rate quota (Minimum Access Volume) on the product;

(3)

A modification or imposition of any quantitative restriction on the importation of the product into the Philippines;

(4)

One or more appropriate adjustment measures, including the provision of trade adjustment assistance; and

(5)

Any combination of actions described in subparagraphs (1) to (4).

The general safeguard measure shall be limited to the extent of redressing or preventing the injury and to facilitate adjustments by the domestic industry from the adverse effects directly attributed to the increased imports. However, the law provides that when quantitative import restrictions are used, such measures shall not reduce the quantity of imports below the average imports for the three (3) preceding representative years, unless clear justification is given that a different level is necessary to prevent or remedy a serious injury. A general safeguard measure shall not be applied to a product originating from a developing country, if that country‘s share of total imports of the product is less than three percent (3%), provided that developing countries with less than three percent (3%) share collectively account for not more than nine percent (9%) of total imports. The decision imposing a general safeguard measure, the duration of which is more than one (1) year, shall be reviewed at regular intervals for purposes of liberalizing or reducing its intensity. In case where the definitive safeguard measure is in the form of a tariff increase, the increase shall not be subject or limited to the maximum levels of tariff as provided under Section 401(a) of the TCCP. f.

Special Safeguard Duty. An additional special safeguard duty is imposed on an agricultural product, consistent with Philippine international treaty obligations, whenever the cumulative import volume in a given year exceeds its trigger volume and when the actual c.i.f. (Cost, Insurance and Freight) import price falls below its trigger price.

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The special safeguard duty is imposed by the Commissioner of Customs, through the Secretary of Finance, upon request by the Secretary of Agriculture. Special Duty Based on the Volume Test [Section 23 of RA 8800]. The special safeguard duty to be imposed under the volume test shall be equivalent to not exceeding one-third (1/3) of the applicable out-quota customs duty on the agricultural product under consideration in the year when it is imposed. The said duty may only be maintained until the end of the year in which it is imposed and may be reduced or terminated in special cases such as when a shortage of a particular agricultural product exists, as determined by the Secretary of Agriculture. The special safeguard duty shall be determined as follows: The trigger volume is the amount obtained, after adding the change in the annual domestic consumption of the agricultural product under consideration, for the two (2) preceding years, to: (i)

One hundred twenty-five percent (125%) of the average annual volume of imports of the agricultural product under consideration in the three (3) immediately preceding years for which data are available, if the market access opportunity is at most ten percent (10%); or

(ii)

One hundred ten percent (110%) of the average annual import volume, if the market access opportunity exceeds ten percent (10%) but not more than thirty percent (30%); or

(iii)

One hundred five percent (105%) of the average annual import volume, if the market access opportunity exceeds thirty percent (30%): If the change in the volume of domestic consumption is not taken into consideration in computing the trigger volume, the trigger volume shall be equal to one hundred twenty-five (125%) of the average import volume for the immediate three (3) preceding years, unless it is justified that a different level is necessary to prevent or remedy the serious injury.

Special Safeguard Duty Based on the Price Test [Section 24 of RA 8800.] The special safeguard duty on the basis of the price test shall be determined as follows: The trigger price is the average actual c.i.f. import price or relevant reference price of the agricultural product under consideration from 1986 to 1988, unless clear justification is given that a different reference price is necessary to prevent or remedy serious injury. The Secretary of Agriculture shall publish the list of trigger prices corresponding to each of the agricultural products after the conduct of public hearings on the subject. The special safeguard duty to be imposed based on the price test shall computed as follows:

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(i)

Zero, if the price difference is at most ten percent (10%) of the trigger price; or

(ii)

Thirty percent (30%) of the amount by which the price difference exceeds ten percent (10%) of the trigger price, if the said difference exceeds ten percent (10%) but is at most forty (40%) of the trigger price; or

(iii)

Fifty percent (50%) of the amount by which the price difference exceeds forty percent (40%) of the trigger price, plus the additional duty imposed under (ii), if the said difference exceeds forty percent (40%) but is at most sixty percent (60%) of the trigger price; or

(iv)

Seventy percent (70%) of the amount by which the price difference exceeds sixty percent (60%) of the trigger price, plus additional duties under (ii) and (iii), if the said difference exceeds sixty percent (60%) and is at most seventy-five percent (75%) of the trigger price; or

(v)

Ninety percent (90%) of the amount by which the price difference exceeds seventy-five percent (75%) of the trigger price; plus the additional duties imposed under (ii), (iii), and (iv), if the said difference exceeds seventy-five percent (75%) of the trigger price.

The said special safeguard measure shall not be resorted to when the volume of the imported agricultural product under consideration is declining.

2. Export Duties Logs are the only remaining products subject to the duty under Section 514 of the TCCP, as amended. The export duty imposed on logs is 20% of the gross Free on Board (F.O.B.) value at the time of shipment based on the prevailing rate of exchange. However, only planted trees are subject to the export duty, since all naturally grown trees are banned from being exported under Ministry of Environment and Natural Resources Memorandum Order No. 8 (issued June 20, 1986).Source: A GUIDE TO PHILIPPINE TAXES – CHAPTER VII http://www.ntrc.gov.ph/images/Publications/guide-to-philippine-taxes-2016/tariff-andcustoms-duties.pdf

TAXES COLLECTED BY THE LOCAL GOVERNMENT UNITS THE LOCAL GOVERNMENT CODE OF THE PHILIPPINES- CHAPTER 2. Specific Provisions on the Taxing and Other Revenue Raising Powers of Local Government Units Article One - Provinces SECTION 134. Scope of Taxing Powers. - Except as otherwise provided in this Code, the province may levy only the taxes, fees, and charges as provided in this Article. SECTION 135. Tax on Transfer of Real Property Ownership. –

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(a) The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real property at the rate of not more than fifty percent (50%) of one percent (1%) of the total consideration involved in the acquisition of the property or of the fair market value in case the monetary consideration involved in the transfer is not substantial, whichever is higher. The sale, transfer or other disposition of real property pursuant to R.A. No. 6657 shall be exempt from this tax. (b) For this purpose, the Register of Deeds of the province concerned shall, before registering any deed, require the presentation of the evidence of payment of this tax. The provincial assessor shall likewise make the same requirement before canceling an old tax declaration and issuing a new one in place thereof. Notaries public shall furnish the provincial treasures with a copy of any deed transferring ownership or title to any real property within thirty (30) days from the date of notarization. It shall be the duty of the seller, donor, transferor, executor or administrator to pay the tax herein imposed within sixty (60) days from the date of the execution of the deed or from the date of the decedent's death. SECTION 136. Tax on Business of Printing and Publication. – The Province may impose a tax on the business of persons engaged in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and other of similar nature, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein. The receipts from the printing and/or publishing of books or other reading materials prescribed by the Department of Education, Culture and Sports as school texts or reference shall be exempt from the tax herein imposed. SECTION 137. Franchise Tax - Notwithstanding any exemption granted by any law or other special laws, the province may impose a tax on business enjoying a franchise, at a rate exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein. SECTION 138. Tax on Sand, Gravel and Other Quarry Resources - The province may levy and collect not more than ten percent (10%) of fair market value in the locality per cubic meter of ordinary stones, sand, gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction. The permit to extract sand, gravel and other quarry resources shall be issued exclusively by the provincial governor, pursuant to the ordinance of the Sangguniang Panlalawigan. The proceeds of the tax on sand, gravel and other quarry resources shall be distributed as follows: (4) Province - Thirty percent (30%); (5) Component City or Municipality where the sand, gravel, and other quarry resources are extracted - Thirty percent (30%); and (6) Barangay where the sand, gravel, and other quarry resources are extracted - Forty percent (40%). 34

SECTION 139. Professional Tax - (a) The province may levy an annual professional tax on each person engaged in the exercise or practice of his profession requiring government examination as such amount and reasonable classification as the Sangguniang Panlalawigan may determine but shall in no case exceed Three hundred pesos (P300.00) (b) Every person legally authorized to practice his profession shall pay the professional tax to the province where he practices his profession or where he maintains his principal office in case he practices his profession in several places: Provided, however, That such person who has paid the corresponding professional tax shall be entitled to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or free for the practice of such profession. (1) Any individual or corporation employing a person subject to professional tax shall require payment by that person of the tax on his profession before employment and annually thereafter. (2) The professional tax shall be payable annually on or before the thirty first (31st) day of January must, however, pay the full tax before engaging therein. A line of profession does not become exempt even if conducted with some other profession for which the tax has been paid. Professionals exclusively employed in the government shall be exempt from the payment of this tax. (3) Any person subject to the professional tax shall write in deeds, receipts, prescriptions, reports, books of account, plans and designs, surveys and maps, as the case may be, the number of the official receipt issued to him. SECTION 140. Amusement Tax - (a) The province may levy an amusement tax to be collected from the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts from admission fees. (4) In the case of theaters of cinemas, the tax shall first be deducted and withheld by their proprietors, lessees, or operators and paid to the provincial treasurer before the gross receipts are divided between said proprietors, lessees, or operators and the distributors of the cinematographic films. (5) The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical programs, literary and oratorical presentations, except pop, rock, or similar concerts shall be exempt from the payment of the tax herein imposed. (6) The Sangguniang Panlalawigan may prescribe the time, manner, terms and conditions for the payment of tax. In case of fraud or failure to pay the tax, the Sangguniang Panlalawigan may impose such surcharges, interests and penalties. (7) The proceeds from the amusement tax shall be shared equally by the province and the municipality where such amusement places are located. SECTION 141. Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products. – (a) The province may levy an annual fixed tax for every truck, van or any vehicle used by manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products as may be determined by the Sangguniang Panlalawigan, to sales outlets, consumers, whether directly or indirectly, within the province in an amount not exceeding Five hundred pesos (P500.00). (8) The manufacturers, producers, wholesalers, dealers, and retailers referred to in the immediately foregoing paragraph shall be exempt from the tax on peddlers prescribed elsewhere in this Code. 35

Article Two. – Municipalities SECTION 142. Scope of Taxing Powers. _ Except as otherwise provided in this Code, municipalities may levy taxes, fees, and charges not otherwise levied by provinces. SECTION 143. Tax and Business - The municipality may impose taxes on the following business: (9) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind of nature, in accordance with the following schedule:

With gross sales or receipts for the LESS THAN 10,000.00 P 10,000.00 or more but less than 15,000.00 or more but less than 20,000.00 or more but less than 30,000.00 or more but less than 40,000.00 or more but less than 50,000.00 or more but less than 75,000.00 or more but less than 100,000.00 or more but less than 150,000.00 or more but less than 200,000.00 or more but less than 300,000.00 or more but less than 500,000.00 or more but less than 750,000.00 or more but less than 1,000,000.00 or more but less than 2,000,000.00 or more but less than 3,000,000.00 or more but less than 4,000,000.00 or more but less than 5,000,000.00 or more but less than 6,500,000.00 or more at a rate not exceeding thirty-seven and a half percent (37 1/2%) of one percent (1%)

Preceding calendar year 15,000.00 20,000.00 30,000.00 40,000.00 50,000.00 75,000.00 100,000.00 150,000.00 200,000.00 300,000.00 500,000.00 750,000.00 1,000,000.00 2,000,000.00 3,000,000.00 4,000,000.00 5,000,000.00 6,500,000.00

Amount of tax per annum 165.00 220.00 302.00 440.00 660.00 825.00 1,320.00 1,650.00 2,200.00 2,750.00 3,850.00 5,500.00 8,000.00 10,000.00 13,750.00 16,500.00 19,800.00 23,100.00 24,375.00

(10) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedule:

With gross sales or receipts for the

P

Less than P1,000.00 1,000.00 or more but less than

Preceding calendar year

2,000.00

Amount of tax per annum 18.00 33.00 36

2,000.00 or more but less than 3,000.00 or more but less than 4,000.00 or more but less than 5,000.00 or more but less than 6,000.00 or more but less than 7,000.00 or more but less than 8,000.00 or more but less than 10,000.00 or more but less than 15,000.00 or more but less than 20,000.00 or more but less than 30,000.00 or more but less than 40,000.00 or more but less than 50,000.00 or more but less than 75,000.00 or more but less than 100,000.00 or more but less than 150,000.00 or more but less than 200,000.00 or more but less than 300,000.00 or more but less than 500,000.00 or more but less than 500,000.00 or more but less than 1,000,000.00 or more but less than 2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%)

3,000.00 4,000.00 5,000.00 6,000.00 7,000.00 8,000.00 10,000.00 15,000.00 20,000.00 30,000.00 40,000.00 50,000.00 75,000.00 100,000.00 150,000.00 200,000.00 300,000.00 500,000.00 750,000.00 1,000,000.00 2,000,000.00

50.00 72.00 100.00 121.00 143.00 165.00 187.00 220.00 275.00 330.00 440.00 660.00 990.00 1320.00 1870.00 2420.00 3300.00 4400.00 6600.00 8800.00 10000.00

(c) On exporters, and on manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-half (1/2) of the rates prescribed under subsections (a), (b) and (d) of this Section: (4) Rice and corn; (5) Wheat or cassava flour, meat, dairy products, locally manufactured, processed or preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not; (6) Cooking oil and cooking gas; (7) Laundry soap, detergents, and medicine; (8) Agricultural implements, equipment and post-harvest facilities, fertilizers, pesticides, insecticides, herbicides and other farm inputs; (9) Poultry feeds and other animal feeds; (10) School supplies; and (11) Cement (d)

On retailers, 37

With gross sales or receipts for the Preceding calendar year of:

Rate of Tax Per Annum

P 400,000.00 or less More than P 400,000.00

2% 1%

Provided, however, That Barangays shall have the exclusive power to levy taxes, as provided under Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fifty thousand pesos (P50,000.00) or less in the case of municipalities. (e) On contractors and other independent contractors, in accordance with the following schedule: With gross receipts for the preceding Calendar Amount of Tax year in the amount of: Per Annum

With gross sales or receipts for the

Preceding calendar year

Amount of tax per annum 27.50 61.60 104.50 165.00 275.00 385.00 550.00 880.00 1320.00 1980.00 2640.00 3630.00 4620.00 6160.00 8250.00 9250.00 10250.00 11500.00

Less than P5,000.00 P5,000.00 or more but less than 10,000.00 10,000.00 or more but less than 15.000.00 15,000.00 or more but less than 20,000.00 20,000.00 or more but less than 30,000.00 30,000.00 or more but less than 40,000.00 40,000.00 or more but less than 50,000.00 50,000.00 or more but less than 75,000.00 75,000.00 or more but less than 100,000.00 150,000.00 or more but less than 150,000.00 150,000.00 or more but less than 200,000.00 200,000.00 or more but less than 250,000.00 250,000.00 or more but less than 300,000.00 300,000.00 or more but less than 400,000.00 400,000.00 or more but less than 500,000.00 500,000.00 or more but less than 750,000.00 750,000.00 or more but less than 1,000,000.00 1,000,000.00 or more but less than 2,000,000.00 2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%) (f) On banks and other financial institutions, at a rate not exceeding fifty percent (50% of one percent (1) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium.

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(g) On peddlers engaged in the sale of any merchandise or article or commerce, at a rate not exceeding Fifty pesos (P50.00) per peddler annually. (h) On any business, not otherwise specified in the preceding paragraphs, which the Sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. The Sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed the rates prescribed herein. SECTION 144. Rates of Tax within the Metropolitan Manila Area. - The municipalities within the Metropolitan Manila Area may levy taxes at rates which shall not exceed by fifty percent (50%) the maximum rates prescribed in the preceding Section. Article Three. – Cities SECTION 151. Scope of Taxing Powers. –

Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. Article Four. - Barangays SECTION 152. Scope of Taxing Powers. – The Barangays may levy taxes, fees, and charges, as provided in this Article, which shall exclusively accrue to them: (a) Taxes - On stores or retailers with fixed business establishments with gross sales or receipts of the preceding calendar year of Fifty Thousand pesos (P50,000.00) or less, in the case of cities and Thirty thousand pesos (P30,000.00) or less, in the case of municipalities, at a rate not exceeding one percent (1%) on such gross sales or receipts. (b) Service Fees or Charges - Barangays may collect reasonable fees or charges for services rendered in connection with the regulation or the use of Barangay-owned properties or service facilities such as palay, copra, or tobacco dryers.

(c) Barangay Clearance - No city or municipality may issue any license or permit for any business or activity unless a clearance is first obtained from the Barangay where such business or activity is located or conducted. For such clearance, the Sangguniang Barangay may impose a reasonable fee. The application for clearance shall be acted upon within seven (7) working days from the filing thereof. In the event that the clearance 39

is not issued within the said period, the city or municipality may issue the said license or permit. (d) Other Fees and Charges - The Barangay may levy reasonable fees and charges: (1) On commercial breeding of fighting cocks, cockfighting an cockpits; (2) On places of recreation which charge admission fees; and (3) On billboards, signboards, neon signs, and outdoor advertisements. LIMITATION ON THE TAXING POWERS OF THE LOCAL GOVERNMENT UNITS SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: chanrobl es virtual law libr ary

(a)

Income tax, except when levied on banks and other financial institutions;

(b)

Documentary stamp tax;

(c)

Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa,except as otherwise provided herein;

(d)

Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned;

(e)

Taxes, fees and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise;

(f)

Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;

(g)

Taxes on business enterprises certified to by the Board of Investments as pioneer ornon-pioneer for a period of six (6) and four (4) years, respectively from the date of registration;

(h)

Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products;

(i)

Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;

(j)

Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

40

(k)

Taxes on premiums paid by way of reinsurance or retrocession;

(l)

Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles;

(m)

Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein;

(n)

Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) Otherwise known as the "Cooperatives Code of the Philippines" respectively; and

(o)

Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.

WHERE CAN TAXES BE COLLECTED? Situs of Taxation The situs of taxation -Literally, situs of taxation means place of taxation. It is the State or political unit which has jurisdiction to impose a particular tax. The rule is that the State may rightfully levy and collect the tax where the subject being taxed is within its territorial jurisdiction. The situs of taxation is determined by a number of factors: 1. Subject matter which is the person, property, activity or right to be taxed. 2. Nature of tax which is the kind of tax to be imposed. e.g. income tax, import or Export duty, poll tax or real property tax; 3. Citizenship of the taxpayer; and 4. Residence of the taxpayer. 5. Source of the income. Rules in Determining Situs or Place of Taxation When what is to be taxed is: Person – Residence of the taxpayer. Poll tax may be properly levied upon persons who are inhabitants or residents of the State, whether or not they are citizens. Real property or tangible personal property – Location of the property. Situs is where the property is located pursuant to the principle of lex rei sitae (the law of the place where the property is located). This applies whether or not the owner is a resident of the place where the property is located. This is so because the taxing authority has control over the property which is of a fixed and stationary character. The place where the real property is located gives protection to the real property; hence, the owner must support the government of that place. Lex rei sitae has also been adopted for tangible personal 41

property under Article 16 of the Civil Code. A different rule applies to intangible personal property, specifically, mobilia sequuntur personam Intangible personal property – As a rule, situs is the domicile of the owner unless he has acquired a situs elsewhere. Situs is the domicile of the owner pursuant to the principle of mobilia sequuntur personam (this is Latin maxim literally means that the property follows the person). Thus, the place where the owner is found is the situs of taxation under the rule that movables follow the person. This is generally where the owner resides. This principle is applied to intangible personal property the situs of which is fixed by the domicile of the owner. The reason is that this type of property rarely admits of actual location. However, there are two exceptions to the rule. One is when it is inconsistent with the express provisions of a statute. Two, when the interests of justice demand that it should not be applied, i.e. where the property has in fact a situs elsewhere. Originally, the settled law in the United States is that intangibles have only one situs for the purpose of inheritance tax – the domicile of the decedent at the time of death. But this rule has, of late, been relaxed. The maxim mobilia sequuntur personam, upon which the rules rests, has been decried as a mere fiction of law having its origin in considerations of general convenience and public policy and cannot be applied to limit or control the right of the State to tax property within its jurisdiction. It must yield to established fact of legal ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in inescapable and patent injustice. The relaxation of the original rule rests on either of two fundamental considerations: 1. Upon the recognition of the inherent power of each government to tax persons, properties and rights within its jurisdiction and enjoying the protection of its laws; or 2. Upon the principle that as to intangibles, a single location in space is hardly possible, considering the multiple, distinct relationships which may be entered into with respect thereto. Wells Fargo v. Collector, 70 Phil 325 This case involves the collection of inheritance taxes on shares of stock issued by the Benguet Consolidated Mining Corporation and owned by Lillian Eye. Said shares were already subjected to inheritance taxes in California and are now being taxed by Philippine authorities. It was held in this case that the actual situs of the shares of stock is in the Philippines, the corporation being domiciled therein. And besides, the certificates of stock have remained in this country up to the time when the deceased died in California, and they were in the possession of the secretary of the Benguet Corporation. The secretary had the right to vote, collect dividends, among others. For all practical purposes, the secretary had legal title to the certificates of stock held in trust for Eye. Eye extended in the Philippines her activities re: her intangible personal property so as to avail herself of the protection and benefits of the Philippine laws. Collector v. De Lara, 102 Phil 813 (exception to the decision of the SC on Wells Fargo v. Collector, 70 Phil 325)

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The Supreme Court did not subject to estate and inheritance taxes the shares of stock issued by Philippine corporations which were left by a non-resident alien after his death. Considering that he is a resident of a foreign country, his estate is entitled to exemption from inheritance tax on the intangible personal property found in the Philippines. This exemption is granted to non-residents to reduce the burden of multiple taxation, which otherwise would subject a decedent‘s intangible personal property to the inheritance tax both in his place of residence and domicile and the place where those properties are found. Multiplicity of situs, or the taxation of the same income or intangible subject in several taxing jurisdictions, arises from various factors: 1.

The variance in the concept of domicile for tax purposes;

2.

Multiple distinct relationships that may arise with respect to intangible personal property; or

3.

The use to which the property may have been devoted all of which may receive the protection of the laws of jurisdictions other than the domicile of the owner thereto.

The remedy to avoid or reduce the consequent burden in case of multiplicity of situs is either to: 1.

Provide exemptions or allowance of deduction or tax credit for foreign taxes; or

2.

Enter into tax treaties with other States.

Income – Taxpayer‘s residence or citizenship, or place where the income was earned. The Income is taxed based on the following theories on situs. 1.

Domiciliary theory. The location where the income earner resides is the situs of taxation. This is where he is given protection; hence, he must support it.

2.

Nationality theory. The country of citizenship is the situs of taxation. This is so because a citizen is given protection by his country no matter where he is found or no matter where he earns his income.

3.

Source theory. The country which is the source of the income or the place where the activity that produced the income is will be the situs of taxation.

Situs of income tax in the Philippines The situs is where the income is derived. The source of an income is the property, activity or service that produced the income. For the source of income to 43

be considered as coming from the Philippines, it is sufficient that income is derived from an activity within the Philippines. In BOAC‘s cases, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made in the Philippines. The flow of wealth proceeded from and occurred in the Philippine territory, enjoying the protection accorded by the Philippine government; in consideration of such protection, the flow of wealth should share the burden of supporting the government. The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. The test of taxability is the source of the income and the source is that activity which produced the income. Even if the tickets sold covered the transport of passengers and cargo to and from foreign cities, it cannot alter the fact that income from the sale of the tickets was derived from the Philippines. The word ―source‖ conveys one essential idea that of origin and the origin of the income is here in the Philippines. [Commissioner v. BOAC, 149 SCRA 395] Situs of tax on interest income is the residence of the borrower who pays the interest, irrespective of the place where the obligation was contracted. If the borrower is a resident of the Philippines, the interest payment paid by him can have no other source than within the Philippines. Business, occupation and transaction – Place where business is being operated, occupation being practiced and transaction completed. As far as the situs of business, occupation or transaction is concerned, the general rule is that the power to levy an excise tax depends upon the place where the business is done, or the occupation is engaged in, or the transaction took place. Gratuitous transfer of property – Taxpayer‘s residence or citizenship, or locations of the property will be the situs of taxation. The transmission of property from a donor to a donee or from a descendant to his heirs may be subject to taxation in the state where the transferor ( donor or decedent) is (was) a citizen or resident, or where the property is located. CAN A SIMILAR TAX BE COLLECTED BY THE SAME TAX AUTHORITY FROM THE SAME PERSON FOR THE SAME TAXABLE YEAR? WHAT IS DOUBLE TAXATION? Unlike the United States Constitution, our Constitution does not prohibit double taxation. However, while it is not forbidden by the constitution it is one of the inherent limitations on the power of taxation, hence it is something not to be favored, such taxation should, whenever possible, be avoided and prevented. In addition, where there is direct double taxation, there may be a violation of the constitutional precepts of equal protection and uniformity in taxation. The argument against double taxation may not be invoked where one tax is imposed by the State and the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or activity by both the State and a political subdivision thereof. And where the statute or ordinance in questions applies equally to all persons, firms and corporations placed in a similar situation, there is no infringement of the rule on equality. [City of Baguio v. De Leon, 25 SCRA 938] 44

In the case of Villanueva v. City of Iloilo, 265 SCRA 528. The SC held the same principle where an ordinance imposing a municipal tax on tenement houses was challenged because the owners already pay real estate taxes and also income taxes under the NIRC. The Supreme Court held that there is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling, or activity by both the State and a political subdivision thereof. Further, a license tax may be levied upon a business or occupation although the land used in connection therewith is subject to property tax. What the law prohibits is the imposition of two taxes on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction and during the same taxing period; this is called direct duplicate taxation thus, double taxation must be of this kind or character to be a valid issue. There are two kinds of Double Taxation 1.

Direct duplicate taxation, the imposition of two taxes on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction and during the same taxing period which is legally objectionable for being oppressive and inequitable.

2.

Indirect double taxation is one other than the direct double taxation. Though this type may not prove unlawful, it is being avoided so as not to bring injustice to the taxpayer.

When an item of income is taxed in the Philippines and the same income is taxed in another country, there is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are imposed by different taxing authorities. The usual methods of avoiding the occurrence of double taxation are: 1) allowing reciprocal exemptions either by law or by treaty; 2) allowance of tax credit for foreign taxes paid; 3) allowance of deduction for foreign taxes paid; and 4) reduction of the Philippine tax rate. TAX MINIMIZATION AND AVOIDANCE-Can taxes be avoided or minimized? What are the ways to legally minimize or avoid taxes? Because taxes are burdens, taxpayers would always want to find a means to lighten the burden, to minimize the amount of taxes to be paid by them or on the extreme to avoid and escape the effects of taxation. There are two ways by which the taxpayers can avoid or minimize taxes- the legal ones and the illegal ones. Legal ways of minimizing, avoiding or escaping taxes 1.

Through application of tax credit- Tax credits are usually advance tax payments directly made by the taxpayer or through a withholding agent. Tax credits should be applied to the appropriate tax due in order to minimize its payment. Example of tax credits is creditable withholding taxes, excess of tax payments on previous tax period which are otherwise available as tax refund.

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2.

Tax Exemption- Tax exemption is the express or implied grant of immunity from taxes to a particular person, right, transaction or property. There is an express exemption if the law indicates the particular person or persons, rights, transactions or property to be exempted from taxes. If the law t enumerates all the persons, rights and property to be taxed, those omitted from the enumeration are impliedly exempt from that particular tax.

3.

Tax Avoidance- It is an act of minimizing tax consequences which the law does not prohibit. Taxpayers are allowed to engage in tax avoidance by structuring their transactions, within the bounds of the law, to minimize tax payment. The example of tax avoidance is donating property to children on a regular basis in order to minimize the amount of conjugal property that would later on be part of the estate of the parent-spouses in case any of them dies and estate tax would be computed. Another example is an employee's take home salary. In an employer's point of view, a higher take home salary comes with a higher withholding tax. If an employer would like to increase an employee's salary without paying additional tax, he could opt to fill in the gaps through de minimis benefits that are spared from tax if within the threshold set by law. Although such schemes may be legal, the law still stipulates that tax avoidance be done in 'good faith' and 'at arm's length.'

4.

Tax Shifting- It is avoidance of tax by transferring the burden to another person. A capital gains tax is a seller‘s tax; however, the parties may stipulate that it is the buyer who would assume the payment of taxes. The Donor‘s tax is a liability of the donor but if the donor want to unburden himself from the payment of donor‘s tax, the donee may pay the donor‘s tax.

Illegal way of minimizing, avoiding or escaping taxes is called tax evasion or tax dodging. Tax evasion occurs when the taxpayer goes beyond the bounds of the law in structuring his transactions in order to minimize tax payments. Tax evasion or tax dodging is the fraudulent act of using pretenses or forbidden devices in order to lessen the tax liability or payment. Tax evasion or tax dodging is a criminal offense that is prohibited and punished by law. According to Sec. 253 of the National Internal Revenue Code, persons found guilty of tax evasion are subject to imprisonment of not less than two years but not more than four years. On top of that, tax evaders are also fined an amount of not less than P30, 000 but not more than P100, 000, depending on the severity of the case. Examples of Illegal means of tax reduction include: maintaining two sets of books of accounts, generation of falsified receipts, over-statement of expenses, under-reporting of income, and other means to intentionally defraud the government in an attempt to lessen tax liability or to completely avoid payment of taxes. The following are the consequences of tax evasion: 

Civil penalties resulting to the imposition of a 50% surcharge 46

  

Criminal penalties resulting to imprisonment and/or imposition of a fine upon conviction by the judicial courts Power of the BIR to assess and collect the tax is extended to 10 years from the date of discovery of the fraud Evasion being a fraudulent act cannot be the subject of a compromise

The following are examples of acts considered criminal violations of the Tax Code: 1. Failure to file tax return/s 2. Failure to pay taxes 3. Deliberate under declaration of income or overstatement of deductions by more than 30% of that declared per return (substantial under declaration or overstatement of deductions) 4. Hiding or transferring assets or income 5. Non-remittance of withholding taxes 6. Claiming personal expenses as business expenses (tax shield) 7. Failure to register with the BIR 8. Keeping more than one (1) book of accounts 9. Making false entries in financial books and records 10. Use of fake Certificate of Authorizing Registration (CAR), Tax Clearance Certificate (TCC), or other accountable forms HOW ARE TAXES BEING ADMINSTERED AND COLLECTED? Taxes are like crimes, there are no crimes when there are no laws making the acts punishable as crimes, in the same manner that there are no taxes when there are no laws imposing taxes. The power of taxation, being plenary or unlimited, comprehensive and supreme having only the constitutional and inherent limitations to restrict it must clearly, unequivocally define the taxes being imposed by the law. The rule ―no taxation without consent‖ was laid down in the Declaration of Independence of the United States whose tax laws are similar with the Philippine tax laws. Under this principle all that is necessary is that the rights of the tax administration and the corresponding obligations of the taxpayer be specified in the law; that is, in the text adopted by the people‘s representatives or Congress. Tax laws or internal revenue laws are not political in nature. They are deemed civil and not penal although penalties are provided for violations thereof. Only violations of the Tax Code which are coupled with Fraud will be criminally dealt with. The present tax law which is the Comprehensive Tax Reform Program of 1997 now simply called Tax Code is a special law; hence if there is any provisions in this code that will be in conflict with the provisions of the general law, Tax Code provisions will prevail. Tax law falls within the domain of public law—i.e., the rules that determines and limits the activities and reciprocal interests of the political community and the members composing it—as distinguished from relationships between individuals (the sphere of private law). International tax law is concerned with the problems arising when an individual or corporation is taxed in several countries. Tax law can be divided into two Aspects or Phases

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1. Material tax law- Substantive or Imposition or Levy, which is the analysis of the legal provisions giving rise to the charging of a tax; and 2. Formal tax law - Procedural or Administration or Assessment and Collection, which concerns the rules laid down in the law as to assessment, enforcement, procedure, coercive measures, administrative and judicial appeal, and other such matters. Material Tax Law is the Domain of the Congress of the Philippines. It is the duty of the Congress to enact tax laws that will meet the budgetary requirements of the State in carrying out developmental projects. The Philippine nation has developed its system of Taxation through the years from its initial tax law which was patterned after an American Federal Law. The first Philippine Internal Revenue Law, patterned after that existing in the United States, was approved by the Philippine Commission on July 2, 1904 as Act No. 1189 effective August 4, 1904. Subsequent internal revenue laws were approved in 1913, 1916 and 1917. On June 15, 1939, the National Assembly approved the National Internal Revenue Code (NIRC) as Commonwealth Act No. 466, which took effect on July 1, 1939. The Code was amended by Republic Act No. 6110 otherwise known as The Omnibus Tax Law in 1969, Presidential Decree No. 69 in 1972, NICRs of 1977 and 1986, and various presidential decrees and executive orders. On July 28, 1997 the Philippine Congress enacted Republic Act No. 8424, An Act Amending the National Internal Revenue Code, As Amended, And for Other Purposes, otherwise known as the CTRP or ―The Comprehensive Tax Reform Program of 1997." The Act declares the policy of the State to promote sustainable economic growth through the rationalization of the Philippine internal revenue tax system, including tax administration; to provide, as much as possible, an equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity; and to create a robust environment for business to enable firms to compete better in the regional as well as the global market, at the same time that the State ensures that Government is able to provide for the needs of those under its jurisdiction and care. Other Sources of Tax Laws 1. BIR Revenue Regulations and Rulings 2. Philippine Special Laws or Statutes 3. Decisions of the Philippine Courts, higher courts or lower courts on tax cases 4. Opinions/ Rulings of the Secretary of Justice on tax issues 5. Philippine Constitution 6. Presidential Decrees 7. International Treaties, Comities and Conventions

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Formal tax law is the Domain of the Executive Branch of the Government. National tax laws are implemented by the Office of the President through the Department of Finance and the Local taxes are implemented and administered by the Chief Executives of the Local Government units. The Department of Finance collects national taxes through the Bureau of Internal Revenue on internal taxes and through the Bureau of Customs on export and import duties or tariffs.

Interpretation of Tax laws When confronted with questions on whether or not particular transactions, events, persons or items are covered by certain tax legislations, we instantly consult our Tax Code, other pertinent Republic Acts, Commonwealth Acts Presidential Decrees, Proclamation Orders, Batas Pambansa, Jurisprudence or any other law from where we can get proof to support our argument. If there seems to be an issue or unclear provision in our tax laws that casts doubt on its applicability to a given circumstance or subject matter or when the law is expressed in such a general term that it can be interpreted to refer to a different thing or subject matter. It is well-settled rule in taxation that a statute should not be construed as imposing a tax unless it does so clearly, expressly and unambiguously. Likewise, it is an ancient principle that a tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws, and the provisions of a taxing act are not to be extended by implication (Marinduque Iron Mines Agents Inc. vs. The municipal council of Hinabangan, Samar G.R. No.L-18924, June 30, 1964). Inasmuch as revenue laws impose special burdens upon taxpayers, the same should be construed most strongly against the government, and in favor of the taxpayer, if the intent or meaning of the tax statute is doubtful. The application of tax laws, if the meaning thereof is doubtful, should not be extended by implication beyond the clear import of the language used. This rule on statutory construction, however, is used only if there is ambiguity in the law, The rule is different when the issue is about exemptions. Exemptions from taxation are highly disfavored in law, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications (Davao Light & Power Co. Inc. vs. Commissioner of Customs, L-28739 & L-28902, March 29, 1972). It is well settled that for tax exemptions, ―taxation is the rule, and tax exemption is the exception‖. The one who claims an exemption from his or its share of the common burden in taxation must justify his or its claim by showing that the legislature intended to exempt him by words too plain to be mistaken. Similarly, a claim for tax refunds or the issuance of tax credits partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language. Being in the nature of an exemption from taxation, a claim of refund is strictly construed against the claimant, and the failure to discharge this burden is fatal to the claim.

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Characteristics of Philippine Income Tax Law Philippine tax law which is patterned after American tax laws has the following characteristics: Direct – tax is imposed on the income-earner Progressive – tax base increases as the tax rate increases Comprehensive - the Philippines adopts the citizenship principle, residence principle, and the source principle Semi-schedular – more schedular with respect to individual taxpayers but more global treatment on corporations

The Bureau of Internal Revenue The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance and its powers and duties shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other laws. (Section 2 of the National Internal Revenue Code of 1997). With this, the BIR is empowered to execute these following acts and duties, to wit: 1. Assessment and collection of all national internal revenue taxes, fees and charges; 2. Enforcement of all forfeitures, penalties, and fines; 3. Execution of judgments in all cases decided in its favor by the Court Tax Appeals and ordinary courts; and 4. Administration of supervisory and police powers conferred to it; The BIR is composed of the following Officials: 1. The Commissioner of the Bureau of Internal Revenue 2. Four Deputy Commissioners a. For Operations b. For Legal c. For Information System d. For Human Resource 3. Assistant Commissioners 4 Regional Directors and Asst. Regional Directors in 20 Revenue Regions (see 50

attachment 1) 5. Revenue Dist. Officers and Asst. Revenue Dist. Officers in 131 Revenue Districts (see attachment 2) 6. Department Heads of the Assessment, Collection, Legal, Special Investigation and Administrative Groups 7. Other BIR Officials of various Operational / Functional Support Offices.

Powers of the Commissioner of the Bureau of Internal Revenue 1. Power to Interpret tax laws and decide tax cases; 2. Power to Obtain information, and to summon, examine, and take testimony of persons; 3. Power to Make assessments and prescribe additional requirement for tax administration and enforcement.

4. Power of the Commissioner to delegate his own powers 5. Power to file suit to recover tax based on false or fraudulent returns Power of the Commissioner to interpret tax laws , decide tax cases, obtain information etc. 1. The power to interpret the provisions of the Tax Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the Tax Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. (Sec. 4 1997 Tax Code) 2. The power to obtain information, and to summon, examine, and take testimony of persons; In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized: (A) To examine any book, paper, record, or other data that may be relevant or material to such inquiry; (B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the Bangko Sentral 51

ng Pilipinas and government-owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures of consortia and registered partnerships, and their members; (C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; (D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; and (E) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed. The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for in Section 6(F) of the Tax Code. 3. The Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. (A) Examination of Return and Determination of Tax Due. The Commissioner may authorize the examination of any taxpayer and the assessment of the correct amount of tax. The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative. Any return, statement of declaration filed in any BIR office or agent shall not be withdrawn. Within three (3) years from the date of such filing, the same may be modified, changed, or amended provided no notice for audit or investigation of such return, statement or declaration has in the meantime been actually served upon the taxpayer. (B) Failure to Submit Required Returns, Statements, Reports and other Documents. In case a person fails to file a required return or other document at the time prescribed by law, the Commissioner shall assess the proper tax on the best evidence obtainable. The Commissioner shall make or amend the return from his own knowledge and from such 52

information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes. (C) Authority to Conduct Inventory-taking, Surveillance and to Prescribe Presumptive Gross Sales and Receipts. - If there is reason to believe that a person is not declaring his correct income, sales or receipts for internal revenue tax purposes. The Commissioner may, at any time during the taxable year, order inventory-taking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities, or may place the business operations of the person under observation or surveillance The findings may be used as the basis for assessing the taxes for the other months or quarters of the same or different taxable years and such assessment shall be deemed prima facie correct. When a person has failed to issue receipts and invoices in violation of the requirements of Sections 113 and 237 of the Tax Code, or when the books of accounts or other records do not correctly reflect the declarations made in the return, the Commissioner, after taking into account the sales, receipts, income or other taxable base of other persons engaged in similar businesses under similar situations or circumstances or after considering other relevant information may prescribe a minimum amount of such gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such person. D) Authority to Terminate Taxable Period. - When a taxpayer is retiring from business or is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property, or is performing any act tending to obstruct the proceedings for the collection of the tax, the Commissioner shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid, and said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time fixed in the demand made by the Commissioner. (E) Authority of the Commissioner to Prescribe Real Property Values. - The Commissioner is authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors to determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be whichever the higher is of: (1) The fair market value as determined by the Commissioner; or (2) The fair market value as shown in the schedule of values of the Provincial and City Assessors. 53

(F) The Commissioner is authorized to inquire into the bank deposits and other related information held by financial institutions of: (1) A decedent to determine his gross estate; and (2) Any taxpayer who has filed an application for compromise of his tax liability Section 204(A)(2) of the Code by reason of financial incapacity to pay his tax liability. In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. (3) A specific taxpayer or taxpayers subject of a request for the supply of tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of. The Commissioner shall forward the information as promptly as possible to the requesting foreign tax authority. To ensure a prompt response, the Commissioner shall confirm receipt of a request in writing to the requesting tax authority and shall notify the latter of deficiencies in the request, if any, within sixty (60) days from receipt of the request. If the Commissioner is unable to obtain and provide the information within ninety (90) days from receipt of the request, due to obstacles encountered in furnishing the information or when the bank or financial institution refuses to furnish the information, he shall immediately inform the requesting tax authority of the same, explaining the nature of the obstacles encountered or the reasons for refusal. The term "foreign tax authority," shall refer to the tax authority or tax administration of the requesting State under the tax treaty or convention to which the Philippines is a signatory or a party of. (G) Authority of the Commissioner to Accredit and Register Tax Agents. Individuals and general professional partnerships who prepare and file tax returns, statements, reports, protests, and other papers with or who appear before, the BIR for taxpayers must be accredited and registered with the BIR. the Commissioner shall create national and regional accreditation boards, the members of which shall serve for three (3) years, and shall be designated from among the senior officials of the Bureau, one (1) chairman and two (2) members for each board, subject to such rules and regulations 54

as the Secretary of Finance shall promulgate upon the recommendation of the Commissioner. Those who are denied accreditation by the Commissioner and/or the national and regional accreditation boards may appeal such denial to the Secretary of Finance, who shall rule on the appeal within sixty (60) days from receipt of such appeal. Failure of the Secretary of Finance to rule on the Appeal within the prescribed period shall be deemed as approval of the application for accreditation of the appellant. (H) Authority of the Commissioner to Prescribe Additional Procedural or Documentary Requirements. - The Commissioner may prescribe the manner of compliance with any documentary or procedural requirement in connection with the submission or preparation of financial statements accompanying the tax returns. (I) Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. –Sec. 204 of the Tax Code: The Commissioner may – (1) Compromise the payment of any internal revenue tax, when: (a) A reasonable doubt as to the validity of the claim against the taxpayer exists; or (b) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. The compromise settlement of any tax liability shall be subject to the following minimum amounts: For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax. Where the basic tax involved exceeds One million pesos (P1, 000.000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners. (2) Abate or cancel a tax liability, when: (a) The tax or any portion thereof appears to be unjustly or excessively assessed; or (b) The administration and collection costs involved do not justify the collection of the amount due.

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All criminal violations may be compromised except: (a) those already filed in court, or (b) those involving fraud. (3) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, that a return filed showing an overpayment shall be considered as a written claim for credit or refund. A Tax Credit Certificate validly issued may be applied against any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable. Any request for conversion into refund of unutilized tax credits may be allowed, Provided, That the original copy of the Tax Credit Certificate showing a creditable balance is surrendered to the appropriate revenue officer for verification and cancellation: Provided, further, That in no case shall a tax refund be given resulting from availment of incentives granted pursuant to special laws for which no actual payment was made. 4. Power of the Commissioner to Delegate His Own Powers. - The Commissioner may delegate the powers vested in him to any or such subordinate officials with the rank equivalent to a division chief or higher, subject to such limitations and restrictions as may be imposed under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That the following powers of the Commissioner shall not be delegated: (a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau; (c) The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax liability: Provided, however, That assessments issued by the regional offices involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or less, and minor criminal violations, as may be determined by rules and regulations to be promulgated by the Secretary of finance, upon recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and

56

(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. 5. Power of the Commissioner to File Suit to Recover Tax Based on False or Fraudulent Returns SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an assessment is made in case of any list, statement or return, which in the opinion of the Commissioner was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment, shall be recovered by any suit, unless it is proved that the said list, statement or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines.

Duties of the Commissioner of the BIR 1. Duty of the Commissioner to Ensure the Provision and Distribution of Forms, Receipts, Certificates, and Appliances It shall be the duty of the Commissioner to prescribe, provide, and distribute to the proper officials the requisite licenses; internal revenue stamps; unique, secure and non-removable identification markings (unique identification markings), such as codes or stamps, be affixed to or form part of all unit packets and packages and any outside packaging of cigarettes and bottles of distilled spirits; labels and other forms; certificates; bonds; records; invoices; books; receipts; instruments; appliances and apparatus used in administering the laws falling within the jurisdiction of the Bureau. For this purpose, internal revenue stamps, or other markings and labels shall be caused by the Commissioner to be printed with adequate security features. Internal revenue stamps, whether of a bar code or fusion design, or other markings shall be firmly and conspicuously affixed or printed on each pack of cigars and cigarettes and bottles of distilled spirits subject to excise tax in the manner and form as prescribed by the Commissioner, upon approval of the Secretary of Finance. To further improve tax administration, cigarette and alcohol manufacturers shall require installing automated volume-counters of packs and bottles to deter over-removals and misdeclaration of removals. 2. Duty of the Commissioner to Acknowledge Receipts for Payment. - It shall be the duty of the Commissioner or his agent to whom any payment of any tax is made to acknowledge the payment of such tax, expressing the amount paid and the particular account for which such payment was made in a form and manner prescribed therefor. 3. Duty of the Commissioner to submit report on Tax Credits, Tax Compromises and Abatements. 57

The Commissioner shall submit to the Chairmen of the Committee on Ways and Means of both the Senate and House of Representatives, every six (6) months, a report on the exercise of his powers to compromise, abate and refund or credit taxes under Sec 204 of the tax code, stating therein the following facts and information, among others: a). names and addresses of taxpayers whose cases have been the subject of abatement or compromise; b). amount involved; amount compromised or abated; and c). reasons for the exercise of power: Provided, That the said report shall be presented to the Oversight Committee in Congress that shall be constituted to determine that said powers are reasonably exercised and that the Government is not unduly deprived of revenues End of Discussion-see practice exercises below and in the following pages

END OF CHAPTER TESTS A. Define The Following: 1. Police Powe 2. Power of Eminent Domai 3. Power of Taxation 4. Inherent limitations 5. Constitutional limitations 6. Constitution 7. Due process of law 8. Uniformity in Taxation 9. International comity 10. Poll tax B. Identify the following: The inherent limitations, which are so-called because they exist without the need of any written legal mandate, include the following: Taxes may be levied only for (1) _________________________ The power to tax is limited to the territorial jurisdiction of the sovereign state; (2) _________________ as a rule, the taxing power cannot go beyond the territorial limit of the taxing authority. 58

(3) _______________________________________ (respect afforded by one state to another by virtue of the principle of sovereignty); and (4) _________________________ is a contract between the State and its People. It establishes the rights and duties of the State to its People and vice versa. (5) ______________________________ are those provisions in the Constitutions that restrict or limit the exercise of the powers of the State over its subjects and objects. (6) No person shall be deprived of life, liberty or property without ____________________________________. It mandates that there should be a valid law imposing a tax to a particular taxpayer, and in case the taxpayer fails to pay the tax imposed by the said valid law, he should be given the opportunity to explain the reason for such failure. (7) ________________________________ relates to how a particular tax measure or ordinance is being applied to persons or class of persons similarly situated. Thus, if two persons are falling on the same classification they shall be taxed similarly. (8) ________________________ means all property belonging to the same class shall be taxed alike. All taxable articles or properties of the same class shall be taxed at the same rate. (9) _______________________________ (head tax or capitation tax, in U.S. English) is a tax of a portioned, fixed amount applied to an individual in accordance with the census (as opposed to a percentage of income, or any proxy for ability-to-pay). No law shall be passed impairing the obligations on (10) _________________. Congress cannot appropriate funds for a (11) _____________________purpose, or for the benefit of any priest, preacher or minister or for the support of any sect, church except when such priest, preacher, is assigned to the armed forces or to any penal institutions, orphanage or leprosarium. Exemption of all revenues and assets of non-stock, non-profit (12) ______________________________________ used actually, directly, and exclusively for educational purposes from income, property and donor‘s taxes and custom duties (sec. 4 (3 and 4) art. XIV.) Concurrence by a majority of all members of Congress in the passage of a law granting (13) ____________________________. Sec. 28 (4) Art. VI. Congress may not deprive the(14) _______________________ of its jurisdiction to review, revise, reverse, modify or affirm on appeal or certiorari, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment or any penalty imposed in relation thereto. 59

B.

Encircle the best answer 1.

Not one of the purposes or objectives of taxation a. Reduction of social inequality b. Protectionism c. Promotion of general welfare d. Expropriation

2.

The amount required is dictated by the needs of the government in a. License fee b. Tax

3.

c. Toll d. Debts

What is the rule on the taxability of income that a government educational institution derives from its school operations? Such income is (BEQ) a. subject to 10% tax on its net taxable income as if it is proprietary educational institution. b. Exempt from income taxation if it is actually, directly, and exclusively used for educational purposes. c. subject to the ordinary income tax rates with respect to incomes derived from educational activities. d. Exempt from income taxation in the same manner as governmentowned and controlled operations.

4.

All revenues laws shall emanate from the a. b.

5.

Committee on Appropriation Committee on Accounts Committee on Ways and Means Committee on Public Order

A tax must be imposed for public purpose. Which of the following is not a public purpose? a. b. c. d.

7.

c. Department of Finance d. House of Representatives

The committee in the House of the Representatives that is tasked to study, approve or disapprove in the committee level all bills pertaining to taxation a. b. c. d.

6.

President of the Philippines Senate of the Philippines

National defense Public Education Improvement of the sugar industry None of the above

No law granting any tax exemption shall be passed without the concurrence of

60

a. b. c. d.

Majority of all the members of the House of Representatives. Majority of all the members of the Senate. Majority of all the members present. Majority of all the members of Congress.

8.

Without revenue raised from taxation, the government will not survive resulting in detriment to society. a. Lifeblood theory c. Tax evasion b. Basis of taxation d. Symbiotic relationship

9.

A taxpayer gives the following reasons in refusing to pay a tax. Which of his reasons is not acceptable for legally refusing to pay the tax? a. That he has been deprived of due process. b. That there is lack of territorial jurisdiction. c. That the prescriptive period for the tax has elapsed. d. That he will derive no benefit from the tax.

10.

A canon of taxation which means that tax laws must be clear and concise, capable or proper enforcement, and not burdensome, convenient as to time and manner of payment. a. Fiscal adequacy c. Ability-to-pay principle b. Administrative d. Theoretical justice feasibility

11.

One of the characteristics of a tax is a. A tax is a pecuniary burden and the law may not allow payment in kind. b. It is dependent upon the will or contractual assent, express or implied, of the person taxed. c. It is levied by the state by virtue of its sovereignty. d. It is collected for public and private purposes.

12.

The distinction of tax from permit or license fee is that a tax is a. Imposition for regulation. b. One which involves an exercise of police power. c. One in which there is generally no limit on the amount that may be imposed. d. Answer not given.

13.

A tax upon a corporation a corporation for its property and upon its shareholders for their shares is an example of a. Poll tax c. Indirect/duplicate b. Direct/duplicate taxation taxation d. Uniformity in taxation

14.

In every case of doubt, tax statutes should be construed liberally in favor of the taxpayer and strictly against the government a. Transformation b. Interpretation of tax laws c. Double taxation d. Tax exemption 61

15.

The following, except one, are basic principles of a sound tax system: a. It should be capable of being effectively enforced. b. It must be progressive. c. Sources of revenue must be sufficient to meet government expenditures and other public needs. d. It should be exercised to promote public welfare.

16.

The following are constitutional limitations on the power of taxation, except one: a. Public purpose b. No imprisonment c. Equal protection of law d. Power of the President to veto items in a revenue bill

17.

Which of the following is subject to tax? a. A building being used actually, directly and exclusively for educational purpose. b. The roman catholic church c. Privately owned cemeteries d. Income from sermon of a parish priest.

18.

The defense available to a taxpayer who is required to pay excessive taxes a. That the tax is levied for religious purpose. b. Due process of law. c. Equal protection of law. d. Non-impairment of obligations on contract.

C. Answer the following questions. 1. What is the basis of the exercise of the police power of the state? 2. Who has the ultimate power to determine the necessity and the means of exercising the police power of the state? 3. What are the requisites in exercising the power of eminent domain? 4. Who may exercise the Power of Eminent domain? 5. What are the requisites before an LGU can exercise the power of eminent domain? 6. Who may exercise the power of taxation?

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CHAPTER III - INCOME TAX ON INDIVIDUALS PART ONE- PRINCIPLES ON INCOME TAXATION Income taxes shall be imposed on the taxable income of every individual. Our present tax system imposes progressive rates of income of taxpayers. This system equitably distributes the tax burden by recognizing the ability or capacity to pay of the individual taxpayer. Tax on individuals includes income of Estates and Trusts and Distributive share of a partner in a General Professional Partnership (GPP). The global system of taxing compensation and business income tax has been restored from the previous (Simplified Net Income Taxation Scheme -SNITS) schedular system. In the global system, tax rates for all income whether business or compensation are similar. A global system of taxation is one where the taxpayer is required to combine all items of income earned during a taxable period and pay under a single set of income tax rules on these different items of income. Under this system, the taxable income-which is the aggregate of the gross compensation income and gross business or professional income less the allowable deductions-is being subjected to a progressive graduated tax rates. In the scheduler system however, the income tax rates vary depending on the kind of taxable income of the taxpayer. A schedule system of taxation requires a separate computation and schedule for each kind of tax hence when a taxpayer has both business and compensation income, the business and compensation income shall be computed and presented separately since different tax rates are applicable to each kind of income. INDIVIDUAL TAXPAYERS Although two individuals are subject to the same tax on their respective taxable incomes, they are not taxed at the same rate because taxes are graduated and no two individual earning same sources of income and amount of income will automatically have the same tax liability because they may have different personal and additional exemptions. Tax liabilities are not determined by income and tax rates alone, personal circumstances are also considered in the computation of income tax. The purpose of taxation is not only to collect taxes but also to give justice to every member of the taxpaying public. Taxpayers should be classified in order to serve the uniformity and equity requirement of taxation. The present Tax Code classifies the individual taxpayers as follows: CLASSIFICATIONS OF INDIVIDUAL TAXPAYERS 1. Citizen a) Resident b) Non-resident

63

2. Alien a) Resident b) Non-resident 1. Engaged in trade or business in the Philippines 2. Not engaged in trade or business in the Philippines. a. Not engaged in trade or business who is employed by: i) Regional or area headquarters established in the Philippines by multinational companies (regional or area headquarters' shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets). ii) Regional Operating headquarters established in the Philippines by multinational companies ( regional operating headquarters' shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communications; and business development). iii) Offshore banking units (Offshore banking unit (OBU) shall mean a branch subsidiary or affiliate of a foreign banking corporation which is duly authorized by the BSP to transact offshore banking business in the Philippines in accordance with the provisions of Presidential Decree No. 1034 as implemented by Central Bank (Now BSP) circular no. 1389, as amended). iv) Petroleum contractors and sub-contractors. b. Not engaged in trade or business but who are not employed by those mentioned in item (a)

64

ILLUSTRATION OF INDIVIDUAL TAXPAYER CLASSIFICATION

65

Definition of terms 1. Citizen is a person recognized under the custom or law as being a legal member of a sovereign state or part of a nation. The following shall be considered citizens of the Philippines:   



Those who are citizens of the Philippines at the time of the adoption of the February 2, 1987 Constitution: Those whose mothers or fathers are citizen of the Philippine Those born before January 17, 1973, the date of the adoption of the 1973 Constitution, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority: and Those who are naturalized in accordance with the law.

2. Resident Citizen is a Filipino who permanently resides in the Philippines 3. Non-resident Citizen means:  A citizen of the Philippines who establishes his physical presence abroad with definite intention to reside therein.  A citizen of the Philippines who leaves the country during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.  A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. ―Most of the time‖ is interpreted to mean presence abroad for at least 183 days during the taxable year (BIR Ruling 128-99, August 18, 1999)  A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. 4. Resident alien means an individual whose residence is within the Philippines and who is within the Philippines and who is not a citizen thereof but a mere transient or sojourner. But residence does not mean mere physical presence. An alien is considered as a resident or a non-resident depending on his intention with regard to the length and nature of his stay. 5. Non-resident alien means an individual whose residence is not within the Philippines and who is not a citizen thereof. 6. Non-resident alien engaged in trade or business (NRA-ETB) is alien who is carrying on a business in the Philippines. It connotes more than a single act or isolated transactions. It involves some continuity of action. The term trade, business or profession shall not

66

include performance of services by the taxpayer as an employee but it includes the performance of the functions of a public office. BIR Ruling No. DA-056-2005 Under the tax code, a non-resident individual who stays in the Philippines for an aggregate period of more than 180 days during any calendar year shall be considered a non-resident alien engaged in trade or business in the Philippines and shall be subject to income tax at 5% to 32 % graduated rates. The phrase "any calendar year" should be interpreted to mean that when an expatriate stays in the Philippines for more than 180 calendar days in any calendar year, he would be taxes at the graduated rate of 5% to 32% not only in the year that he exceeds that 180-day period but also during the other years of assignment, even if his stay did not exceed 180 days 7. Non-resident alien not engaged in trade or business (NRA-NETB) Non-resident alien who has stayed in the Philippines for not more than 180 days during any calendar year shall be considered a non-resident alien not doing business in the Philippines (NRANETB) BIR Ruling No. DA-290-2005, June 27, 2005 An alien is a stockholder of a PEZA-registered enterprise. He has been involved in the company since its incorporation in 1996, has obtained a special non-immigrant visa and was required as company president to be in the Philippines most of the time to manage the day-to-day operations of the company. This alien qualifies as a resident alien for Philippine income tax purposes. His dividend income shall be subject to the 10% final tax imposed under section 24 (B) (2) of the Tax Code to be withheld by the payor-company.

Taxability of Individuals based on Citizenship and Residence Resident Citizen - A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; Non-resident Citizen - A non-resident citizen is taxable only on income derived from sources within the Philippines; Overseas Contract Worker and Seamen - An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

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Alien - An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. INDIVIDUAL

1. resident citizen

SOURCES OF INCOME W/in the Philippines

Without the Philippines

yes

yes

yes 2. non-resident citizen

yes

no

yes 3. overseas contract worker and seamen

yes

no

yes

no

4. resident alien

yes

no

5. non-resident alien engaged in trade

yes

no

6. non-resident alien not engaged in trade

yes

no

Income Subject to Tax 1. Compensation Income. In general, the term ―compensation‖ means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Tax Code. If a taxpayer is receiving compensation income from two or more employers, he/she must combine all compensation income received from all employers for a particular calendar year. Compensation income is taxed at graduated rates from 5% to 34% in 1998, with a provision for an annual reduction of the top marginal rate of 33% on January 1999 and 32 % on January 2000 and thereafter. (Sec.24A) 2. Business income are income derived from self-employment or practice of profession. This shall not include income from performance of services by the taxpayer as an employee. However, the same rates of taxes for compensation are used in the computation of taxes from business income.

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3. Passive Income. Passive income are income which are either compensation or business income but the law segregated them from the ordinary way of computing compensation and business because of the non- regularity of its occurrence or difficulty in monitoring income. Passive income is subject to a separate and particular final tax which ranges from 0-20% PASSIVE INCOME 1. on interest from any currency bank deposit 2. on interest income on foreign currency deposit under expanded foreign currency deposit system 3. on interest income from long term deposit or investment on pre-terminated long term deposit or investment 4. on royalties of books, literary works, and musical compositions on Other royalties 5. on prizes 10,000 and below on prizes more than 10,000 6. on winnings on sweepstakes and lotto on Other winnings 7. on property and cash dividends from a domestic corporation 8. Capital Gains from Sale of Real Property 9. Capital gains on sale of residential house 10. Cinematographic film rentals 11. Sales of shares of

Resident Citizen

Nonresident Citizen

Non-resident Not Engaged engaged

Resident Alien

25/15%

20%

7 &1/2% exempt

exempt

Non resident citizen is not taxable

25/15%

0% Four (4) years to less than five (5) years Three (3) years to less than (4) years Less than three (3) years

- 5%; - 12%; and - 20%

10%

25/15%

25/15%

20%

25/15%

Part of the ordinary income

25/15%

20%

25/15%

0% 20% beginning January 1, 1998 ( 6% ) beginning January 1, 1999 ( 8% ) beginning January 1, 2000 (10%)

25/15% 20%

25/15%

6% 0%/6% on the unused sales proceeds Not applicable

25% RR6-2001

Not applicable

25% RR6-2001

Not applicable Not applicable

5%-10%

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PASSIVE INCOME

Resident Citizen

Nonresident Citizen

Resident Alien

Non-resident Not Engaged engaged

stock not traded in stock exchange End of Discussion-see practice exercises below and in the following pages

END OF CHAPTER TESTS A.

Answer the Following Questions: a. How are Individual Taxpayers Classified?

70

2. Identify the Following a) ___________________________________________is a person recognized under the custom or law as being a legal member of a sovereign state or part of a nation. b) ___________________________________________is permanently resides in the Philippines.

a

Filipino

who

c) ___________________________________________a citizen of the Philippines who establishes his physical presence abroad with definite intention to reside therein. d) ___________________________________________a citizen of the Philippines who leaves the country during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. e) ___________________________________________ an individual whose residence is within the Philippines and who is within the Philippines and who is not a citizen thereof but a mere transient or sojourner. f) ___________________________________________an individual whose residence is not within the Philippines and who is not a citizen thereof. g) ___________________________________________ is alien who is carrying on a business in the Philippines. It connotes more than a single act or isolated transactions. It involves some continuity of action. The term trade, business or profession shall not include performance of services by the taxpayer as an employee but it includes the performance of the functions of a public office h) ___________________________________________ is an alien who has stayed in the Philippines for not more than 180 days during any calendar year. 3. Who are Filipino Citizens under the 1987 Constitution? B. Taxability of Taxpayer- write in the spaces opposite the taxpayer whether the income is taxable on ALL SOURCES or on SOURCES WITHIN THE PHILIPPINES ONLY. 1. Resident Citizen

________________________________

2. Non-resident Citizen

________________________________

3. Resident Alien

________________________________

4. Non-resident Alien

________________________________

5. Special Alien

________________________________

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6. Ordinary Alien

________________________________

7. Non-Resident Alien Engaged in Trade/Business

________________________________

8. Non-Resident Alien Not Engaged in Trade/Business

________________________________

9. Mr. Bato a Police Officer in Davao

_______________________________

10. Ryan Bang Korean actor in Pasay

________________________________

11. Pia Whurtzbach Miss Universe

________________________________

12. Manny Pacquiao World Boxer

_________________________________

13. Rose Fontana, OFW

________________________________

14. Grace Poe, Philippine Senator

________________________________

15. Mr. Smith, Manager of MultiNational Corporation in Clark Pampanga

_________________________________

C.

Identify the Following: Elements of Income Taxation

1.

_________________________________ is a document you file with the Bureau of Internal Revenue in reporting the income, profits and losses of business and other deductions as well as details about your tax refund or tax liability

2.

_________________________________ are income items which would otherwise be taxable if the law did not specifically considered them as income. They are not deductions from gross income, these are items ignored in the computation of gross income.

3.

________________________________ is the amount of wealth received by reason of employment, business or exercise of profession without any deduction.

4.

________________________________ is the amount an employee receives before any deductions or adjustments. Unlike gross salary, which is the earned hourly or annual wages before deductions, this includes tips, bonuses and other benefits that employers give to their employees during the tax period being reported.

5.

_______________________________ is an income from commercial or industrial activity of an independent nature undertaken for profit. The income derived from this activity is independent in nature means that there is no employer-employee between the persons paying and receiving income.

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6.

_______________________________ is revenue earned even without active effort to earn them. another name for this is residual income. this income is resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it. some of the examples of these are: rental income and incoming cash flow from property or any piece of real estate, interest income derived from a bank account or pension, royalties paid for intellectual property such as music, books, manuscripts, computer software, or a patent; earnings from internet advertisements on websites, dividend and interest income in the form of cash flow or capital gains from owning securities and commodities, such as stocks, currencies, gold, silver and bonds.

7.

_____________________________ are qualified expenses that allow a tax payer to reduce the total amount of income for which he must pay tax. For instance, someone who had a gross income of php150, 000 but claimed a deduction worth php10, 000, by this he only needs to pay taxes on php140, 000 of income. They come as specific expenses that taxpayers can identify. Some common examples are business expenses, charitable donations to qualified organizations, contributions to qualified pension accounts and payment of interest on loans.

8.

_____________________________ these deductions are eligible expenses that individual taxpayers can claim on income tax returns and which decrease their taxable income, and are claimable in place of the 40% deduction. This includes ordinary and necessary expenses paid or incurred during the taxable year to carry out the conduct of the trade, business or exercise of a profession. These expenses also include those which are directly attributable to the development, management, operation of the business or profession.

9.

_____________________________ in lieu of identifying deductions allowed to an individual subject to tax under Section 24, of the Tax Code other than a nonresident alien, a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, is allowed. Unless the taxpayer signifies in his return his intention to elect this kind of deduction, he shall be considered as having availed himself of the right to list down all his business expenses as deductions. Such election when made in the return shall be irrevocable for the taxable year for which the return is made.

10.

_____________________________ is a deduction granted to taxpayer to cover the amount of his personal, family and living expenses. The amount of 50, 000 is allowed on every taxpayer and in case he has qualified dependent children-25, 000 is given for every qualified dependent child up to the maximum of 4 children which is equivalent to php100, 000

11.

_____________________________ are children of the taxpayer for who he can claim additional exemptions. These children should be a legitimate, illegitimate or legally adopted child, chiefly dependent upon and living with the taxpayer, such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of selfsupport because of mental or physical defect.

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12.

_____________________________ is the amount of premiums not exceeding Two thousand four hundred pesos (P2, 400) or Two hundred pesos (P200) a month per family which is allowed as deduction from taxable income. However, this should be actually paid by the taxpayer whose family gross income does not exceed Two hundred fifty thousand pesos (P250, 000) during the taxable year. In the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to claim the deduction.

13.

________________________________ in this method, the taxpayer‘s net capital is determined both at the beginning and at the end of the same taxable year. The increase or decrease in net capital is adjusted by adding all non-deductible expenses and subtracting therefrom non-taxable receipts, as determined under the prevailing tax rules. The resultant figure is the BIR‘s computed taxable income before allowable personal and additional exemptions for individual taxpayer. The computed taxable income using this method will be compared to the taxpayer‘s declared income based on the Income Tax Return filed for that year. If it appears that the declared income is lower than the BIR‘s computed amount based on this method, then the taxpayer should explain the difference to the BIR. Any unexplained increase in net worth will be presumed to be derived from taxable sources, and hence, will be assessed for deficiency taxes.

14.

__________________ is not the same as a deduction. A deduction is a subtraction from gross income to arrive at taxable income. This does not even count as gross income therefore it cannot become part of taxable income although it may seem that this increases wealth.

15.

_____________________ these benefits-according to BIR Revenue Regulations No. 3-1998(C), the terms or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees

16

._____________________ an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower‘s own account, for the purpose of relending or purchasing the receivables and other obligations, or financing their own needs or the needs of their agent or dealer; e.g. promissory notes; subject to 20% final withholding tax (as with other loans)

17.

______________________ is any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property, it is corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time hence, included in the gross income of shareholder.

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18.

______________________ is a disbursement to the stockholder of the accumulated earnings of a corporation and this is subject to income tax.

19.

______________________ is a dividend payable in property, which may be investments in shares of stocks of a corporation, or real property, or some other property owned by the corporation, paying the dividend, this kind of dividend is subject to income tax.

20.

______________________ is dividend payable in the form of shares of stock of the corporation declaring such stock dividend. It is generally exempt from income tax because it represents capital; it is an unrealized gain and cannot be subjected to income tax until that gain has been realized

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PART TWO - THE COMPUTATION OF GROSS INCOME A. Definition of terms Capital is fund, wealth, it is the tree where income which is the fruit comes from, capital and return of capital is not subject from income tax because it is not an income. Income – all wealth that flows into the taxpayer other than as mere return of capital Income Tax Return is a document you file with the Bureau of Internal Revenue in reporting the income, profits and losses of business and other deductions as well as details about your tax refund or tax liability. A tax return is the tax form or forms used to report income and file income taxes with tax authorities such as the Bureau of Internal Revenue Service. Tax returns allow taxpayers to calculate their tax liability and remit payments or request refunds, as the case may be, below is a sample of an income tax return.

Income from whatever source - all income not expressly exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains Exclusions from Gross Income are income items which would otherwise be taxable if the law did not specifically considered them as exclusions. Exclusions are not deductions from gross income, exclusions are items ignored in the computation of gross income. Gross Income is the amount of wealth received by reason of employment, business or exercise of profession without any deduction. However in corporate income taxation, gross income means gross sales less cost of goods sold. Gross Income in taxation is net of exclusions enumerated in the Tax Code.

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Taxable Income is the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws Gross Compensation Income is the amount an employee receives before any deductions or adjustments. Unlike gross salary, which is the earned hourly or annual wages before deductions, gross compensation includes tips, bonuses and other benefits that employers give to their employees during the tax period being reported. In addition to wages, some employees receive benefits such as housing, stock options, or other retirement contributions paid by an employer, performance or holiday bonuses, employer-paid health care or payments for unused vacation time. All these types of income are part of an employee's total compensation package and may need to be reported to the BIR as part of each employee's income. Business Income-in determining whether an item of income is business income or not is to determine whether the activity giving rise to the income is properly characterized as a business. Business is a commercial or industrial activity of an independent nature undertaken for profit. If the income is derived from this activity, it is called business income. Independent in nature means that there is no employer-employee between the persons paying and receiving income. Passive Income is revenue earned even without active effort to earn them. Another name for passive income is residual income. Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it. Some of the examples of passive income are: Rental income and incoming cash flow from property or any piece of real estate Interest income derived from a bank account or pension. Royalties paid for intellectual property such as music, books, manuscripts, computer software, or a patent; Earnings from internet advertisements on websites Dividend and interest income in the form of cash flow or Capital gains from owning securities and commodities, such as stocks, currencies, gold, silver and bonds. Deposit Substitutes – an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower‘s own account, for the purpose of relending or purchasing the receivables and other obligations, or financing their own needs or the needs of their agent or dealer; e.g. promissory notes; subject to 20% final withholding tax (as with other loans) Dividend is any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property, it is corporate profit set aside, declared, and ordered by the directors to be paid to the

77

stockholders on demand or at a fixed time hence, included in the gross income of shareholder. Cash Dividend is a disbursement to the stockholder of the accumulated earnings of a corporation and this is subject to income tax. Property Dividend is a dividend payable in property, which may be investments in shares of stocks of a corporation, or real property, or some other property owned by the corporation, paying the dividend, this kind of dividend is subject to income tax. Stock Dividend is dividend payable in the form of shares of stock of the corporation declaring such stock dividend. It is generally exempt from income tax because it represents capital; it is an unrealized gain and cannot be subjected to income tax until that gain has been realized. 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 (see CIR v. A. Soriano Corp., G.R. No. 108576, Jan. 20, 1999) Deductions from Gross Income are qualified expenses that allow a tax payer to reduce the total amount of income for which he must pay tax. For instance, someone who had a gross income of php150, 000 but claimed a deduction worth php10, 000, by this he only needs to pay taxes on php140, 000 of income. Deductions come as specific expenses that taxpayers can identify. Some common deductions are business expenses, charitable donations to qualified organizations, contributions to qualified pension accounts and payment of interest on loans. There are two kinds of Deductions from Gross income, the itemized deductions and the optional standard deductions. Itemized Deductions- itemized deductions are eligible expenses that individual taxpayers can claim on income tax returns and which decrease their taxable income, and is claimable in place of optional standard deduction. This includes ordinary and necessary expenses paid or incurred during the taxable year to carry out the conduct of the trade, business or exercise of a profession. These expenses also include those which are directly attributable to the development, management, operation of the business or profession. Optional Standard Deduction (OSD). - In lieu of the itemized deductions allowed to an individual subject to tax under Section 24, of the Tax Code other than a nonresident alien, a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, is allowed. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the itemized deductions. Such election when made in the return shall be irrevocable for the taxable year for which the return is made. An individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return financial statements required under the Tax Code but he shall keep records pertaining to his gross sales or gross receipts Personal Exemption is a deduction granted to taxpayer to cover the amount of his personal, family and living expenses. These expenses are allowed to afford a fair and 78

reasonable tax base for the individual taxpayers. In the Philippines, Basic Personal Exemption of php50,000 is allowed on every taxpayer and in case he has qualified dependent children an Additional Exemption of php25,000 is given for every qualified dependent child up to the maximum of 4 children which is equivalent to php100,000. Qualified Dependent Children are children of the taxpayer for who he can claim additional exemptions. These children should be a legitimate, illegitimate or legally adopted child, chiefly dependent upon and living with the taxpayer, such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. Premium Payments on Health and/or Hospitalization Insurance is the amount of premiums not exceeding Two thousand four hundred pesos (P2, 400) or Two hundred pesos (P200) a month per family which is allowed as deduction from taxable income. However, this should be actually paid by the taxpayer whose family gross income does not exceed Two hundred fifty thousand pesos (P250, 000) during the taxable year. In the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to claim the deduction. Rank and File employee- The term rank and file employees means all employees who are holding neither managerial or supervisory position. Managerial employee - is one who is vested with powers or prerogatives to lay down and execute management policies and or to hire, transfer, suspend, lay off, recall, discharge, assign or discipline employees. Supervisory employees- are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. De Minimis Benefits- facilities or benefits furnished or offered by an employer to his employees that are of small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees. ‗De minimis‘ benefits that are exempt from the fringe benefits tax are in general limited to facilities or privileges offered by an employer which are of relatively small value and are furnished merely as a means of promoting employee‘s health, goodwill, contentment, or efficiency. (Revenue Regulations No. 10-2000, amending Revenue Regulations Nos. 298 and 3-98, as last amended by Revenue Regulations No. 8-2000) Fringe benefit is a special form of benefits provided by employers to their employees in addition to the salaries and wages of the latter. It means any good, service or other benefit furnished or granted in cash or in kind by an employer – corporate or sole proprietor, to individual employees. Free Legal Services A lawyer or professional partnership rendering actual free legal services, as defined by the Supreme Court, shall be entitled to an allowable deduction from the gross income, the amount that could have been collected for the actual free legal

79

services rendered or up to ten percent (10%) of the gross income derived from the actual performance of the legal profession, whichever is lower: Provided, That the actual free legal services herein contemplated shall be exclusive of the minimum sixty (60)-hour mandatory legal aid services rendered to indigent litigants as required under the Rule on Mandatory Legal Aid Services for Practicing Lawyers, under BAR Matter No. 2012, issued by the Supreme Court. Minimum Wage -The Minimum Wage is a legally mandated price floor on hourly wages, below which workers may not be offered or accept a job. The Net Worth Method -The net worth method is a very effective way of proving taxable income in criminal income tax investigations. The formula for calculating the subject‘s correct taxable income can be broken down into four steps: 1. The special agent must first calculate the change in a subject‘s net worth (assets less liabilities). This is done by determining the subject‘s net worth at the beginning and end of a period of time (a taxable year or years) and then subtracting the beginning period‘s net worth figure from the ending period‘s net worth figure. This computation will yield a change in net worth (either an increase or decrease in net worth). 2. The amount of this change in net worth is then adjusted for personal living expenses, non-deductible losses, and non-taxable items to arrive at a corrected adjusted gross income figure. 3. The corrected adjusted gross income figure is then adjusted for itemized deductions or the standard deduction amount, and then for exemptions, to arrive at a corrected taxable income figure. 4. Finally, by comparing the corrected taxable income figure with the taxable income reported on the tax return, the special agent can determine whether the subject failed to report any taxable income. Global Tax System – all items of income earned during a taxable period is paid under a single set of income tax rate Schedular Tax System – different types of incomes are subject to different sets of graduated or flat income tax rates, thus requiring separate tax returns; tax is computed on a per return or per schedule basis Semi-Schedular or Semi-Global Tax System – the compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income, and after deducting the sum of allowable deductions from business or professional income, capital gain and passive income not subject to final tax, and other income, in the case of corporations, as well as personal and additional exemptions, in the case of individual taxpayers, the taxable income is subjected to one set of graduated tax rates.

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B. KINDS OF INDIVIDUAL TAXPAYERS

Individual Income Taxpayers

Employee

Gross Income

Selfemployed

XXX

Partner in a general professional partnership

XXX

Estates and trusts

XXX

XXX

Less: Allowable Deductions Optional Standard Deduction

xxx/

Itemized Deduction

xxx

xxx/ XXX

Net Income

xxx

XXX

xxx/ XXX

xxx

XXX

XXX XXX

Less: Allowance/Exemption Personal Exemption

50,000

50,000

50,000

Additional Exemption

25,000

25,000

25,000

Health/hosp.premium payments

2,400

XXX

2,400 XXX

2,400

Taxable Income

XXX

XXX

XXX

XXX

Apply tax rates

0-32%

0-32%

0-32%

0-32%

XXX

XXX

Tax due

20,000

XXX

XXX

XXX

Less: Taxes paid in advance Income tax payments (1701 Q)

-

Creditable w/holding tax (2036)

xxx

Creditable w/holding tax (2037) Tax still payable/(refundable)

xxx xxx

XXX

xxx

XXX XXX

xxx -

xxx

XXX XXX

xxx

XXX XXX

The foregoing table shows the different kinds of individual taxpayers and the formula for the computation of their annual income taxes. There are 4 kinds of Individual Taxpayers, namely 1.

Employee

2.

Self-employed, or engaged in trade or business or practice of profession

3.

Partner in a general professional partnership

4.

Estates and trusts

It is important to know the kind of individual taxpayer a person is because of the different formula for each kind of taxpayer. Employees are not required to file annual 81

income tax returns if they are among those who are exempt from filing annual income tax returns, but a self-employed or one who is engaged in trade or business or practice of profession, are always required to file his income annual income tax returns. The annual income of a member of a general professional partnership includes both his personal income and his distributive share in that GPP. Estates and trusts are individuals existing only in human minds and have no physical existence but they are given personal exemptions as individuals, although lesser than what human individuals are allowed. Employee When is there an employer-employee relationship? Common Law tests in determining an employment relationship. The following "tests" are only pieces of evidence that shall be weighed, at times differently, depending on the situation, to determine whether a worker is part of the payer's business or in business on his own account .. 1. The Control Test This was the first attempt to clarify the relationship between a worker and a payer. It was set out in Regina v. Walker (1858). The Control Test was simply assessing the presence or absence of control a manager or supervisor might or might not have over their worker. "…A principal has the right to direct what the agent has to do; but a master has not only that right, but also the right to say how it is to be done." Regina v. Walker, (1858) 27 L.J.M.C. 207 This test was seen as too simplistic especially in recent years, when highly skilled and professional workers possess skills beyond the ability of their employers to direct. 2. The Fourfold Test This was developed in a 1947 Privy Council decision in Montreal v. Montreal Locomotive Works Ltd. et al where the court stated: "… It has been suggested that a fourfold test would in some cases be more appropriate, a complex involving (1) control; (2) ownership of the tools; (3) chance of profit; (4) risk of loss. Control in itself is not always conclusive. “Montreal v. Montreal Locomotive Works Ltd. et al, [1947] 1 D.L.R. 161 Lord Wright went on to indicate the crucial question is "whose business is it?" This question is from the worker's perspective and not the payer's. 3. The Integration Test This was first developed in Stevenson Jordon and Harrison, Ltd. v. MacDonald and Evans, (1952). This approach attempts to find if the

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service being provided by the worker is performed as an integral part of the business, or done on behalf of the business but not integrated into that business. This "test" is best explained by an excerpt from the decision: "… One feature which seems to run through the instances is that, under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it." Stevenson Jordan and Harrison, Ltd. v. MacDonald and Evans, [1952] 1 T.L.R. 101http://www.esdc.gc.ca/en/esdc/acts_regulations/labour/interpretations_policies/e mployer_employee.page

FACTORS TO CONSIDER IN DETERMINING IF THERE EXISTS EMPLOYEREMPLOYEE RELATIONSHIP

There are a number of factors to consider when determining if someone is your employee. These include: 

the right, authority or degree of control that the business operator can exercise over the worker



how the contract describes the nature of the relationship compared to the actual relationship between the parties to the contract



whether the focus is on the ultimate result or on what must be provided (e.g. labor)



whether the worker is conducting their own business



the capacity of the worker to pay others to undertake the services that the worker was engaged to provide



whether the worker bears the commercial risk and responsibility



whether the worker provides assets, tools and equipment or incurs overhead expenses



indicators that suggest an employer-employee relationship, such as 

the right to suspend or dismiss the worker



the obligation to work



working set and regular hours



the payment of a regular or fixed remuneration



the deduction of income tax



providing superannuation benefits, annual leave, sick leave and long service leave



requiring the worker to wear a company uniform.

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The abovementioned factors are not exclusive, any other factors that would determine or define the relationship must be considered in order to exactly ascertain if there really exist an employer-employee relationship. Self-employed Persons engaged in business and who derive their personal income from such business. This includes single proprietorships, i.e., manufacturers, traders, market vendors, owners of eateries, farmers and service shops. "Professionals" mean persons who derive their income from the practice of their profession. This includes lawyers and other persons who are registered with the Professional Regulation Commission such as doctors, dentists, certified public accountants and others similarly situated. The term "professional" also refers to one who pursues an art and makes his living therefrom such as artists, athletes and others similarly situated. Partners of General Professional Partnerships GPPs, as defined by Section 22(B) of the National Internal Revenue Code (NIRC), as amended, 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. Under Sec. 2.57.5(B)(4) of Revenue Regulation (RR) 2-98, as amended, payments made to GPPs in consideration of its professional services are exempt from creditable withholding taxes (d) Estates and trusts. The tax imposed upon individuals shall apply to the income of estates or of any kind of property held in trust, including: (1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant who is to be held or distributed as the court may direct; (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. Estates and trusts -Exception. The tax imposed on estates and trusts shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees: (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or

84

diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee Trusts Trusts like estates, are a taxable entity. A trust is a fiduciary entity whose objective is to hold and invest money or property held in the trust for the benefit of the beneficiaries. Trust property consists of principal (aka corpus), which is the property transferred to the trust by the grantor, and income earned by the trust, usually from investments. If the trust retains income beyond the end of the calendar year, then it must pay taxes on it. If money is distributed to the beneficiaries, then whether it is taxable or not to the beneficiaries will depend on whether principal or income was distributed, and if it was income, then whether it was tax-free income or retained income from previous years that the trust has already paid tax on. Because trusts are not subject to double taxation, either principal or income on which the trust paid taxes can be distributed tax-free to the beneficiaries. Likewise, any taxable distribution to beneficiaries is deductible by the trust

C. CLASSIFICATION OF INDIVIDUAL TAXPAYERS The formula for the computation of income tax on individuals is quite complex because individuals have different ways of earning a living and the law, in order to give justice to every individual has to treat one according to his peculiarities as an individual taxpayer. Even if two persons are both earning compensation and business income, the computation of their taxes will depend on their classifications as individuals. Definition of gross income, allowable deductions, personal and additional exemptions, health and hospitalization insurance premium payments and tax rates applications will vary according to the citizenship and residence of the individuals. Hence, before any individual income tax can be computed, the taxpayer should first be classified. The Tax Code defines a "resident alien" as an individual whose residence is within the Philippines and who is not a Filipino citizen. Resident aliens are taxable on their incomes derived from the Philippines in the same manner as resident citizens (Sec. 24 (A). A special tax system applies on aliens who are employed by the following: a) regional or area headquarters and regional operating headquarters of multinationals; b) offshore banking units; and c) petroleum service contractors and subcontractors. They are imposed a flat rate of fifteen percent (15%) on their gross income. The Tax Code ensured that the same tax treatment would be accorded Filipinos who are occupying the same positions in the said organizations (Sec. 25 (C) (D) (E). A nonresident alien is an individual who is not a Filipino and is not residing within the Philippines. The tax treatment on nonresident aliens under the Tax Code depends on whether they are engaged in business within the Philippines, i.e. whether they stay in the country for an aggregate period of 180 days or more. A nonresident alien who is engaged in trade or business within the Philippines is taxed just like a resident citizen and a resident alien (Sec. 25 (A) (1). However, there are certain passive income that the nonresident alien are taxed differently from a resident 85

and citizen, moreover, the claim for personal and additional exemption is subject to the rule of reciprocity. A nonresident alien who is not engaged in trade or business within the Philippines is imposed a twenty-five percent tax on his entire income from all sources within the Philippines such as interest, dividends, rent, salaries, wages, among others. His income from capital gains from the sale of shares of stocks and real property is taxed similar to the tax applicable to a resident citizen. Those employed by multinationals, offshore banking units and petroleum contractors and subcontrators, however, are subject to the preferential rate of 15%

SUMMARY OF TAXABILITY OF INDIVIDUAL TAXPAYERS (Based On The Classification Of Individual Taxpayers) 1. As to Taxable Income- All taxpayers are taxable on all income within the Philippine sources only based on the principle of territoriality, except in case of resident citizen who is taxable on all income within and without the Philippines. 2. As to Deductions, Itemized or Optional – All self-employed and professionals are entitled to deduct from their taxable income deductions related to their businesses, meaning all citizens, resident or non-residents, alien, resident or non-resident for as long as they are earning income from businesses or profession. 3. As to Personal and Additional Exemptions - All individual taxpayers are entitled to personal and additional exemptions, however, Non-resident alien engaged in trade or business is subject to rule of reciprocity and except non-resident aliens not engaged in trade or businesses, who are taxed on their gross income. 4. As to Payments on Hospitalization and Health Insurance Premiums – Only resident and citizen individual taxpayers are entitled to health insurance premium payments, nonresidents are not entitled to health insurance premium payments. 5. As to applicable tax rates - All individual taxpayers‘ income is subject to graduated tax rates of 0-32% except their passive income which is subject to final tax and except nonresident aliens not engaged in trade or business who are subject to final tax of 25%, however a preferential final tax of 15% is applied on income of those employed by: a. Regional/Area Headquarters of Multinational Corporation b. Regional Operating Headquarters of Multinational Corporation c. Offshore Banking Units (OBU) d. Foreign Petroleum Service Contractor or Subcontractor

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D. GENERAL FORMULA FOR THE COMPUTATION OF GROSS INCOME The general formula for the computation of Gross Income of Individuals is illustrated below ALL INCOME FROM WHATEVER SOURCE WHETHER LEGAL OR ILLEGAL

EXLUCSIONS FROM GROSS INCOME

_

= GROSS INCOME The problem in understanding the formula in the computation of individual income tax lies in the exclusion from the formula of the fact that all income whether legal or illegal are taxable. Most of the authors of the books in taxation introduce the formula to include only gross income without including all income from whatever source and exclusions from gross income. All income whether legal or illegal are taxable but the formula generally used covers only income for which a regular income tax return is filed and this usually covers income from legal sources, how then income taxes from illegal sources are computed?

ALL INCOME FROM WHATEVER SOURCE WHETHER LEGAL OR ILLEGAL

EXCLUSIONS FROM GROSS INCOME

_

= GROSS INCOME All income from whatever source is taxed. The legal income are usually filed with the office of the BIR and its authorized banks and to which the formula in the computation of income tax found in the tax code is applied. The illegal income however, is determined using the method as in the opinion of the Commissioner of the BIR will reflect the true income of the taxpayer. Section 6 of the 1997 Tax Code provides that where there are reasons to believe that the return filed by the taxpayer is false, incomplete or erroneous, the Commissioner shall assess the proper tax based on best evidence obtainable. The BIR uses the net worth method in computing for taxes on illegal or undeclared income.

ILLEGAL INCOME ARE TAXED USING THE NETWORTH METHOD What is net worth method? In the net worth method, the taxpayer‘s net worth is determined both at the beginning and at the end of the same taxable year .

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The increase or decrease in net worth is adjusted by adding all non-deductible expenses and subtracting therefrom non-taxable receipts, as determined under the prevailing tax rules. The resultant figure is the BIR‘s computed taxable income before allowable personal and additional exemptions for individual taxpayer. The computed taxable income using net worth method will be compared to the taxpayer‘s declared income based on the Income Tax Return filed for that year. If it appears that the declared income is lower than the BIR‘s computed amount based on the net worth method, then the taxpayer should explain the difference to the BIR. Any unexplained increase in net worth will be presumed to be derived from taxable sources, and hence, will be assessed for deficiency taxes. What are the legal bases for the use of net worth method? The use of the net worth method is founded on the 1997 Tax Code, as amended. Under Section 43 thereof, the "taxable income shall be computed upon the basis of the taxpayer‘s annual accounting period in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner reflects the income." Moreover, under Section 6 of the said Tax Code, when there is reason to believe that the return filed by the taxpayers is false, incomplete, or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. Illustration: Mr. Astroboy, single filed and income tax return showing the following details: Gross income from businessBusiness expenses Net Income

1,000.000.00 500,000.00 500,000.00

If for example, in the statement of financial position that he presented, the capital or net worth he declared was 3,000,000.00 but upon special investigation conducted on his lifestyle and from information gathered from the Assessor‘s Office and LTO, it was found out by the BIR that his true net worth is 10,000,000.00, and Mr Astroboy cannot explain the reason for this understatement of net worth, his gross income will be increased to 8,000,000.00 [declared gross income + difference in net worth, 1,000,000.00 + ( 10,000,000.00-3,000,000.00) 7,000,000.00=8,000,000.00] The Net Income of Mr Astroboy will now be: Gross Income Less: Business Expenses Net Income

8,000,000.00 500,000.00 7,500,000.00

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ALL INCOME FROM WHATEVER SOURCE WHETHER LEGAL OR ILLEGAL

_

EXCLUSIONS FROM GROSS INCOME

= GROSS INCOME When the formula starts with gross income, it is often conceived that exclusions are deductions from gross income when in fact exclusions were never part of the gross income and these cannot be deducted either.

WHAT IS AN EXCLUSION FROM GROSS INCOME ? EXCLUSION is not the same as a deduction. A deduction is a subtraction from gross income to arrive at taxable income. An exclusion does not even count as gross income therefore it cannot become part of taxable income although it may seem that an exclusion increases wealth.

Exclusions from Gross income as previously mentioned are detailed as follows: RA 8424Sec. 32 (B) Exclusions from Gross Income. – The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured's death. The amount received by the beneficiaries of the insurance policy is not included as part of the gross income of the said beneficiary. It covers proceeds of life insurance paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. - The amount receivedby the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or

89

upon surrender of the contract. There are life insurance policies that allow return of the premium paid for the coverage of the insurance if the insured party survived the policy‘s term. This amount received by the insured as a return of the premiums paid shall not be included in the gross income. It includes amount received by insured as return of premium paid by the taxpayer under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. Gifts, bequests and devises-these are actually income because there is an inflow of wealth to the donee, however, this is not taxed as an income but as donation. The tax levied on this inflow of wealth is called Donor‘s tax and not income tax (4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. (5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (6) Retirement Benefits, Pensions, Gratuities, etc.(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the

90

service of the employer because NIRC of 1997 of death sickness or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. – (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (b) Income Derived by the Government or its Political Subdivisions. Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. (c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. NIRC of 1997 (d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. (e) 13th Month Pay and Other Benefits. — Gross benefits received by officials and employees of public and private entities: Provided, however, that the

91

total exclusion under this subparagraph shall not exceed eighty-two thousand pesos (P82, 000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, That every three (3) years after the effectivity of this Act, the President of the Philippines shall adjust the amount herein stated to its present value using the Consumer Price Index (CPI), as published by the National Statistics Office (NSO). (f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code. 8. Other items excluded from gross income

Tax Code, Section 33. Special Treatment of Fringe Benefit.(A) Imposition of Tax. – A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe

92

benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25. (B) Fringe Benefit defined. – For purposes of this Section, the term 'fringe benefit' means 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 as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; NIRC of 1997 (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. (C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) Fringe benefits which are authorized and exempted from tax under special laws;

93

(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade, business or profession of the employer. De minimis benefits-according to BIR Revenue Regulations No. 31998(C), the terms or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. ―De minimis benefits‖, like fringe benefits, are granted by the employer on top of the employee‘s basic compensation, but are not considered as taxable compensation for income tax purposes nor subject to the fringe benefit tax. Employers are not obliged to give this kind of benefits but they are encouraged to do so since these benefits, no matter how small, are a big help to the workers. The concept of ―de minimis benefits‖ had been initially introduced in RR No. 3-1998 and underwent revisions and amendments which include BIR Revenue Regulations No. 10-2000, Revenue Regulations No. 5-2008, Revenue Regulations No. 5-2011, Revenue Regulations No. 8-2012 and the latest Revenue Regulations No. 1-2015 dated January 5, 2015. For tax purposes, only the benefits considered as ―de minimis‖ are considered as tax-exempt. All other benefits given by the employers which are not included in the listing of ―de minimis benefits‖ are subject to income tax as well as withholding tax on compensation income.

94

Below is the list of the latest ―de minimis benefits‖ of both managerial and rank-and-file employees for income tax purposes. All allowances regularly received by the employees are subject to income tax, except those that are enumerated below which are within the stated amount of ceiling. 1. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year; (RR No. 5-2011) 2. Monetized value of vacation and sick leave credits paid to government officials and employees; (RR No. 5-2011) 3. Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month; (RR No. 5-2011) 4. Rice subsidy of P1, 500 or one (1) sack of 50 kg. Rice per month amounting to not more than P1, 500; (RR No. 5-2011) 5. Uniform and Clothing allowance not exceeding P5, 000 per annum; (RR No. 8-2012) 6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum; (RR No. 5-2011) 7. Laundry allowance not exceeding P300 per month; (RR No. 5-2011) 8. Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; (RR No. 5-2011) 9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; (RR No. 5-2011) 10. Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis; (RR No. 5-2011) 11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total monetary value received from both CBA and productivity incentive

95

schemes combined do not exceed P10, 000.00 per employee per taxable year. (RR No 1-2015)

When is the De Minimis benefit taxable? The de minimis benefit is non-taxable only when it is given within the specified limit. If the value of the de minimis benefit exceeded the limit, the excess will be considered as part of the ordinary benefits and shall be taxable as ordinary income if the aggregate amount of these ordinary benefits exceeds the 82,000.00 limit, if received by a rank and file employee. However if such de minimis was received by a managerial or supervisory employee the excess will be subject to the final tax on fringe benefits. For example. The employee receives an annual clothing allowance of 12,000.00 when the ceiling or limit is 5,000.00, the 7,000 excess shall be included in the computation of other benefits and if such other benefits do not exceed 82,000.00 the de minimis remains tax exempt, however, if the other benefits by adding such excess in de minimis exceeded the limit, the excess in the 82,000 shall be included in the computation of the taxable income, if the taxpayer is a rank and file employee.

However, if the

employee is a managerial or supervisory employee, it will be subjected to the 32% fringe benefit tax. But before it can be considered as being taxable under normal income tax rate or fringe benefit tax, it is important to consider first the 13th month pay, bonuses plus the ―excess of the de minimis‖ benefits received by the employee and compare it to the limit of P82, 000 (RR No. 3-2015 dated March 9, 2015). If the excess benefits, bonuses, and the 13th month pay exceed P82, 000 limits, that‘s the time it is taxable as stated previously.

ALL INCOME FROM WHATEVER SOURCE WHETHER LEGAL OR ILLEGAL

_

EXCLUSIONS FROM GROSS INCOME

= GROSS INCOME 96

After identifying exclusions from gross income what remain would be the Gross Income and this gross income are enumerated as follows in the NIRC of 1997 CHAPTER VI – Section 32. Gross Income. – (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership.

End of Discussion-see practice exercises below and in the following pages

END OF CHAPTER TESTS A. Identify the item being described- Exclusions from Gross Income (1) _________________________________amount paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

97

(2)

_________________________________amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts if the insured party survived the policy‘s term.

(3)

__________________________________ amount received which is actually income because there was an inflow of wealth but are not subject to income tax, however, they are taxed as donations or inheritance.

(4)

__________________________________ amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for disability sustained, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.

(5)

__________________________________ income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.

(6-8)

Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least( 6) ________________years and is not less than (7)________________years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only (8)_____________. .

(9)

13th Month Pay and Other Benefits. — Gross benefits received by officials and employees of public and private entities: Provided, however, that the total exclusion under this subparagraph shall not exceed _________________________________________.

B.

Enumerate Items in The Gross Income

C. ANSWER THE FOLLOWING QUESTIONS- Computation of Gross Income Instruction: Put only one check mark on the appropriate space for your answer. Compensation Income

Business Income

Passive Income

1.

Minimum wage

_________

________

_______

2.

Commission of Real Estate Agent

_________

________

_______

3.

Honorarium

_________

________

_______

4.

Income from sale of goods

_________

________

_______

98

5.

Overtime pay

_________

________

_______

6.

Salary as Company President

_________

________

_______

7.

Fringe Benefits of Manager

_________

________

_______

8.

Prize as champion in the Voice

_________

________

_______

9.

Interest on bank deposit

_________

________

_______

10.

Rental Income

_________

________

_______

11.

Christmas Gift of employee

_________

________

_______

12.

BIR‘s informer‘s rewards

_________

________

_______

13.

Interest on dollar deposits

_________

________

_______

14.

Service fee of a mechanic

_________

________

_______

15.

Fringe Benefits of a school driver

_________

________

_______

16.

Dividends received from a Corp.

_________

________

_______

17.

Income of a manufacturing firm

_________

________

_______

18.

Hazard pay of a police officer

_________

________

_______

19.

Sales of sari- sari store

_________

________

_______

20.

Tips of waiters in the restaurant

_________

________

_______

21.

Pamaskong Handog raffle prize

_________

________

_______

22.

Part-time pay of a teacher

_________

________

_______

23.

Income of Phil. Airlines Company

_________

________

_______

24.

Rental income of OFW

_________

________

_______

25.

13th month pay of government official

_________

________

_______

26.

Share in a gen. prof. partnership

_________

________

_______

27.

Income of a taxi operator

_________

________

_______

28.

Rice allowance of private employee

_________

________

_______

29.

Sales of an Avon dealer

_________

________

_______

30.

Meal allowance of factory worker

_________

________

_______

99

D. Problem 1. An entrepreneur and employed resident citizen had the following financial data in the current year 2016: 1. 2. 3. 4. 4.

Business income P845,000 Cash dividend income from a nonresident foreign corporation 8,600 th 13 month pay and Christmas bonus 95,000 Salary and allowances from employment 15,000 Interest Income on long term investments in Philippines with 6 years maturity period 7,200 5. Life insurance proceeds received as beneficiary 150,000 6. Informer‘s reward from BIR 160,000 7. Cash gift on his Birthday 50,000 8. Cash and non-cash items received as inheritance 250,000 9. Sale Price of personal jewelry (cost price is P40,000) 60,000 10. Cash prize from the Philippine Charity Sweepstakes lotto draw 200,000 Determine the amounts the total gross income., classify the gross income and determine totals of the compensation income, business income, and passive income

100

PART THREE- SPECIFIC FORMULA FOR THE COMPUTATION OF COMPENSATION, BUSINESS AND PASSIVE INCOME TAXES CLASSIFICATION OF GROSS INCOME-After analyzing all income thereby determining what are the exclusions and what constitute the gross income; the Gross Income shall now be classified into business income, compensation income or passive income in order to determine the appropriate formula to be applied.

COMPENSATION INCOME

BUSINESS INCOME

GROSS INCOME PASSIVE INCOME

COMPUTATION OF INCOME TAX PAYABLE

COMPENSATION INCOME

Gross Income

BUSINESS INCOME

XXX

PASSIVE INCOME

XXX

XXX

Less: Allowable Deductions Optional Standard Deduction/

xxx/

Itemized Deduction

xxx

Net Income

XXX XXX

Less: Allowance/Exemption Personal Exemption

50,000

50,000

Additional Exemption (100,000 max)

25,000

25,000

Health/hosp. premium payments

2,400

Taxable Income Apply tax rates Tax due

XXX

2,400

XXX

XXX

XXX

0-32%

0-32%

0-25%

XXX

XXX

XXX

Less: Taxes paid in advance Income tax payments (1701 Q)

-

Creditable w/holding tax –comp.(2316)

xxx

Creditable w/holding tax (2307) Tax still payable/(refundable)

(1700)

XXX

xxx

xxx -

-

xxx

XXX

xxx

XXX

(1701)

XXX

(1701)

XXX

101

What is compensation income? It must be established first that there is really an employer-employee relationship that exist because the term compensation may be used but if there is no actual employer-employee relationship the money received will then be another kind of income but not compensation based on an employer-employee relationship. Without such relationship the income must be treated as business income or income from the exercise of trade or profession.

COMPENSATION INCOME Refers to all kinds of items of remunerations/emoluments earned or received in return for services rendered in an employer-employee relationship

What is business income? Income that are neither passive nor compensation are included in the computation of business income.

BUSINESS INCOME These are earnings resulting or derived from its main line of commercial business activity. Such as gross profit from sales of goods and services. This refers to the income, profit or gain earned and derived in the conduct or pursuit of trade, business or the exercise of a profession What is passive income? Passive income is either business income or compensation income but the law considers it as passive income subject to final tax because of the non-regularity of the occurrence of such income. The recipient of the income may receive such kind of income once a year or once in a lifetime such as prizes in raffle and contests. The income may be regularly received but the law deemed it more practical to collect taxes from the hands of the payor rather than from the hands of the taxpayer-payee, such as interest on bank deposits.

Means gains or income items obtained from activities in which the taxpayer does not participate on a regular and continuing basis

Passive Income

102

1. Computation of Income Tax on Compensation The formula for the computation of tax on compensation income is simpler than the computation of tax on business income because only personal and additional exemption plus health/hospitalization insurance premium payments if applicable are subtracted from the gross income to arrive at the net taxable income HOW DO WE COMPUTE FOR THE TAX DUE ON COMPENSATION INCOME? Below is the formula for the computation of Income Tax on Compensation:

COMPUTATION OF INCOME TAX PAYABLE

COMPENSATION INCOME

Gross Income

XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

Taxable Income Apply tax rates Tax due

XXX XXX 0-32% XXX

Less: Taxes paid in advance Creditable w/holding tax (2306) Tax still payable/(refundable) [bir form 1700]

xxx XXX

Take note that in the above formula, there was no allowable deductions from the gross compensation income because only income from business is allowed deductions. The compensation income earners are entitled to deduct from gross income only personal and additional exemptions and if qualified, health and hospitalization insurance premium payments. Compensation is the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required. Essentially, it's a combination of pay, vacation, bonuses, health insurance, and any other perks that maybe

103

received, such as free lunches and transportation. Different types of compensation include, basic pay, commissions, overtime pay, bonuses, profit sharing, merit pay, stock options, travel/meal/housing allowance, benefits including: dental, insurance, medical, vacation, leaves, retirement, etc.

What is GROSS COMPENSATION INCOME? GROSS COMPENSATION INCOME is the amount an employee receives before any deductions or adjustments. Unlike gross salary which is the earned hourly or annual wages before any deductions, gross compensation includes tips, bonuses and other benefits employers give to the employees during the period being reported. This information gives government agencies an accurate amount of the employee‘s taxable income

Everything that an employee receives from the employer, unless tax exempt or excluded, form part of the Gross Compensation Income. Gross compensation income is not limited to actual salary received but also includes other benefits whether cash or noncash provided these are not among those excluded by law. Using the general formula in computing for gross income, the formula for gross compensation income would be:

What are the exclusions from gross compensation income? The following items received from employer by an employee are not included in the computation of gross income:

1.De minimis benefits which are within the limits set by the Bureau of Internal Revenue De minimis benefits are defined by the Bureau of Internal Revenue (BIR) as ―facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, good, contentment or efficiency of his employees…‖ The term ―relatively small value‖ differentiates de minimis benefits from fringe benefits. Fringe benefits include employer support to an employee‘s major expenses, such as housing and vehicle or foreign travel costs. De minimis benefits, on the other hand, include minor perks and rewards.

Per Revenue Regulation No. 1-2015 the following are the tax exempt de minimis benefits:

104

       



Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year; Monetized value of vacation and sick leave credits paid to government officials and employees; (this has been declared as tax exempt) Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month; Rice subsidy of P1, 500 or one (1) sack of 50 kg. rice per month amounting to not more that P1,500; Uniform and clothing allowance not exceeding P5,000 per annum; (last amended by RR No. 8, 2012) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum; Laundry allowance not exceeding P300 per month; Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; [ A P5,000.00 extra cash gift given to employees during Christmas in addition to the P5,000.00 basic cash gift also given during Christmas, or a total of P10,000.00, are ‗de minimis‘ fringe benefits and therefore tax exempt However, since the ceiling for gifts given during Christmas and major anniversary celebrations is fixed at P5,000.00, the excess over the P5,000.00 ceiling amount of the ‗de minimis‘ fringe benefits shall be considered as ―other benefits‖ under Section 32 (B) (7) (e) (iv) of the Tax Code Thus, the excess of the gifts over the ‗de minimis‘ ceiling shall still be exempt provided that it, together with the total amount of other benefits, shall not exceed P30,000.00 (BIR Ruling No. DA-266-2004 (May 17, 2004)]



Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis; Meal and food benefits granted through meal and food vouchers, although not intended to be used for overtime work may be considered as ‗de minimis‘ benefits and therefore exempt from income tax provided that such meal benefits shall not exceed twenty-five percent (25%) of the daily minimum wage. (BIR Ruling No. 0232002

[June

21,

2002]

issued

to

Sodexho

Pass,

Inc.)

In rendering such an opinion, the Bureau of Internal Revenue explained that Revenue Regulations No. 8-2000 and 10-2000 are merely illustrative and non-exclusive in the enumeration of what are considered as ‗de minimis‘ benefits (BIR

Ruling

No.

081-03).

Any facility or privilege offered by an employer to his employees that is of relatively small value and furnished merely as a means of promoting the health, goodwill, contentment, or efficiency of employees may be considered as ‗de minimis‘ benefits (BIR Ruling No. 081-03). The meal and food vouchers pass the test of convenience on the part of the employer and the promotion of the health, goodwill, contentment, or efficiency of employees. The voucher system provides documentary support and ensures that the meal or food allowance given to employees is actually used for purchasing 105

food

and

meals

(BIR

Ruling

No.

081-2003).

Meal cash allowances are subject to standards set for ‗de minimis‘ thresholds for fringe benefits under Revenue Regulations 3-98 as amended by Revenue Regulations No. 8-2000 and 10-2000. They are also subject to the tests of convenience of the employer and promotion of employees‘ health, goodwill, contentment, or efficiency under Section 2.78.1 (A) (2) and (3) of Revenue Regulations No. 2-98 as amended by Revenue Regulations Nos. 8-2000 and 102000 (BIR Ruling No. 081-2003). Meal and food benefits granted, although not to be used for overtime work may still be added to the enumeration of ‗de minimis‘ fringe benefits. However, in terms of ‗de minimis‘ threshold for regular meal and food benefit the ceiling for benefits of similar nature under Revenue Regulations No. 8-2000 should be applied. Such being the case, meal and food benefits not exceeding twenty-five percent (25%) of the daily minimum wage may be considered a ‗de minimis‘ meal benefit and therefore tax-exempt (BIR Ruling No. DA-205-2005 [April 21, 2005] issued to Capt. Orlando C. Alovera c/o Philippine Coast Guard citing BIR Ruling No. 23-2002 [June 21, 2002]; BIR Ruling No. DA-168-2004 [April 5, 2004] issued to Philippines Samsung Electronics Corporation).

The excess of meal and food allowance given over the ‗de minimis‘ ceiling shall still be tax exempt provided that it, together with the total amount of other benefits, shall not exceed P30,000.00(now 82,000) (BIR Ruling No. DA-264-2004 issued to Petron Corporation).

In keeping with the spirit of the rules and regulations on ‗de minimis‘ benefits, there can be no aggregation of the values set for each item of benefit stated in Revenue Regulations Nos. 2-98 and 3-98 as amended by Revenue Regulations Nos. 8-2000 and 10-2000. The intent of the Regulations is to treat each item of ‗de minimis‘ benefit independently of each other. Thus, the Regulations separately provide maximum values for rice allowance and for meal allowance and there can be no aggregation of ‗de minimis‘ values for rice and meal and food benefits (BIR Ruling No. DA-168-2004, April 5, 2004, citing BIR Ruling No. 23-2002



2.

[June

21,

2002]).

Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive scheme provided that the total annual monetary value received from both CBA and productivity incentive scheme combined do not exceed ten thousand pesos (P10,000) per employee, per taxable year.

Statutory amount of 82,000.00 as tax exclusion for 13th month pay and other benefits (per Republic Act (RA) No. 10653, as implemented by Revenue Regulation No. 3-2015 dated March 9, 2015). Note: In applying de minimis benefits, it is important to take note of the stated limit for each one. In cases where the benefit amount exceeds the limit, the excess value will have to be added to the other benefits and determine whether the total of the excess and other benefits does not exceed 82,000.00 statutory limit for the exemption of

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13th month pay and other benefits. Any excess over 82,000.00 will be added to the taxable gross income items.

The amount of ‗de minimis‘ benefits that are within the enumerated threshold limits prescribed under Revenue Regulations No. 10-2000 shall not be included in the P30,000.00 (now 82,000.00) ceiling of ―other benefits‘ under Section 32 (B) (7) (e) of Republic Act No. 8424, otherwise known as the National Internal Revenue Code of 1997 or the “Tax Code” (Revenue Regulations No. 8-2000, amending Revenue Regulations Nos. 2-98 and 3-98). If an employer pays employees more than the threshold limits prescribed under Revenue Regulations No. 10-2000, the excess shall still not be taxable to the employee receiving the benefits as long as they are within the P30,000.00(now 82,000.00) ceiling on total ―other benefits‖ received by the employee during the year. Any excess of the foregoing benefits over the said P30, 000.00(now 82,000.00) ceiling will be taxable to the employee. The ―other benefits‖ referred to in Section 32 (B) (7) (e) of the Tax Code include gross benefits received by employees such as productivity incentives and Christmas bonus. It likewise includes the 14th month pay, if any, and benefits in excess of the limits prescribed on ‗de minimis‘ benefits under Revenue Regulations No. 10-2000. The employer may deduct as expense any amount given as benefits to employees whether classified as de minimis benefits or fringe benefits (Revenue Regulations No. 8-2000). 3.Fringe Benefits subject to final tax. Fringe benefit is a special form of benefits the employers provide to their employees in addition to the latter‘s salaries and wages. It includes any good, service or other benefit furnished or granted in cash or in kind by an employer –corporate or sole proprietor, to an individual employee/s. The fringe benefits given to rank and file employees are not subject to final tax but are included in the computation of other benefits which when exceeding the limit for exemption of 82,000.00 will be added to other gross compensation income items. Fringe benefits subject to final tax are not included in the computation of gross income and the final taxes therefor are paid and remitted by the employer to the BIR, thus when the managerial/supervisory employee receives his fringe benefits, he receives these net of tax.

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The term 'fringe benefit' means 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) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; NIRC of 1997 (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. 4. Fringe benefits which are authorized and exempted from tax under special laws; 5.Contributions of the employer for the benefit of the employee to retirement, and hospitalization benefit plans.

insurance

Note: The discussion of the de minimis and fringe benefits here is the same with the one presented in the earlier part of this book. Illustration: Edith Tan- Ang is an employee of the Resort World. During 2016 she received gross salary amounting to P600, 000.00. She also received as tips 100,000.00, Christmas bonus of 28,000.00 Rice allowances of 18,000.00, Clothing Allowance of 5,000.00, Medical allowance is 1,500.00. During here hospitalization, she received Medical assistance amounting to 10,000.00. How much is the gross compensation income of Edith TanAng? Answer: Gross Salary Christmas Bonus

P600,000.00 P28,000.00

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Rice Allowance Clothing Allowance Medical Allowance Medical Assistance Total Income Less: Exclusion from gross income: Statutory tax exemption of other incentives and benefits Gross Income

18,000.00 5,000.00 1,500.00 10,000.00

62,500.00 P 537,500.00 82,000.00 P475,500.00

Note: the illustration given does not include items on de minimis which are more than the limits set by regulation. Always take note of the ceilings or maximum limits prescribed in the regulations in computing for the other benefits subject to tax.

Use the following exercises to practice computing for the gross compensation income. 1. Cathy Ting is an employee in Pepsi Company, she is earned P300, 000.00 for the year 2016 with 13th month pay and other incentives amounting to 120,000.00. How much is her gross compensation income for the year 2016? 2. Kaka Rhumphot is an employee in Coca Cola Company where he receive an annual salary of 500,000.00 and 13th month pay and other incentives amounting to P78,000.00 for the year 2016. How much is his gross compensation income? 3. Magda Damot is an employee in RC Corporation where she is received 250,000.00 annual salary and 13th month pay and other incentives amounting to 57,000.00. Aside from these, she also has uniform allowance of 10,000.00 during the year and rice allowance of 2,000.00 per month for the whole year of 2016. How much is her gross compensation income for the year 2016? 4. Maria Ang-Palad is an employee of Manila City Hall, for year 2016 she received a salary amounting to 450,000.00. Her 13th month pay and other benefits amounted to 75,000.00. She received anniversary bonus amounting to 30,000.00 and monetized her 30 days leave credits, how much is her gross compensation income if her daily salary is 500.00 5. Anton Nohg is an employee of the PNR where he earned 500,000 annual salaries for 2016. He received 150,000.00 13th month and other incentives. He also received 5,000.00 medical allowance and 20,000.00 when he was hospitalized. How much is his gross compensation income for 2016? 6. Darius Radius is an Employee of Nestle Philippines where he earned 650,000.00 annual salaries for 2016. He has 13th month pay and other incentives amounting to 98,000.00. His other benefits included the following:

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Rice allowance i. 25,000.00 per annum Clothing allowance ii. 10,000 per annum Medical Allowance iii. 750.00 per month Daily mealiv. allowance 350.00 Anniversary v. Bonus 15,000.00 per annum Medical Assistance vi. 25,000.00 per annum Christmasvii. Gift 10,000.00 per annum Model Employee viii. Award 50,000.00 per annum b. How much is his gross compensation income for the year 2016, if the current minimum wage in his region is P380.00? 7. Nolan Hippie is an entrepreneur and an employed resident citizen and had the following income during 2016: business income 890,000.00, property dividend 50,000.00, cash dividend income from a resident foreign corporation, 13th month pay and Christmas bonus 95,000.00, salary and allowances from employment 300,000.00, Interest income on long term investment in Philippines with 6 years maturity period, life insurance proceeds received as beneficiary of his mother 150,000.00, informers reward from the BIR 1,000,000.00 Cash gift given by his employer on his birthday 5,000.00, rice allowance 20,000.00 daily meal allowance 150.00 current daily minimum wage in the area is 380.00. Compute for the 2016 gross compensation income of Nolan Hippie. 8. Veronica Vargas is a resident alien,who has the following income data for 2016: gross rental from apartment in Caloocan City 45,000.00, interest income from bank deposit 100,000.00, basic salary and overtime pay net of 30,000.00 withholding tax 560,000.00, Christmas bonus and other incentive pay from employment 65,000.00, Income tax refund for year 2015 30,000.00, insurance premiums returned to her 75,000.00, cash gift from her husband during her birthday, fringe benefits ( car ) as chief accountant of the company 350,000.00. Compute for the 2016 gross compensation of Veronica Vargas. 9. Noel So is a businessman who employed in Petron Philippines as driver. He also operates a restaurant in Malolos Bulacan. During 2016, he has the following income data: business income 1,000.000.00 business expenses 450,000.00, gain from sale of ordinary assets 30,000.000, health and hospitalization insurance paid by him 3,000.00/quarter, basic salary 850,000.00, overtime pay 250,000.00, 13th month pay, bonus, incentive pay 35,000.00, other fringe benefits from his employment 250,000.00. Compute for the gross compensation income of Noel So for the year 2016. 10. Elvie Ngeh is a minimum wage earner and has the following income for the year 2016. Basic salary and overtime pay amounting to 138,700. She received hazard pay and night shift differential pay of 45,000.00 and 25,000, respectively. She was given 5,000 per month clothing allowance, 150.00 per month medical allowance, rice subsidy of 2,000 per month, being the model employee she received a cash reward of 100,000.00, she has daily meal allowance of 145 pesos where the

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minimum wage for overtime work in the area is 380.00. Compute for the gross income of Elvie Ngeh for 2016.

COMPUTATION OF INCOME TAX PAYABLE

COMPENSATION INCOME

Gross Income

XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

Taxable Income Apply tax rates Tax due

XXX XXX 0-32% XXX

Less: Taxes paid in advance Creditable w/holding tax (2306) Tax still payable/(refundable) [bir form 1700]

xxx XXX

PERSONAL EXEMPTION AND ADDITIONAL EXEMPTION RULE ON PERSONAL EXEMPTION In general, each individual taxpayer shall be permitted to claim the basic allowed personal exemption amounting to 50,000.00 regardless of his civil status whether single, married or legally separated, whether a resident citizen, resident alien, nonresident alien engaged in trade or business in the Philippines. However, the nonresident alien engaged in trade or business in the Philippines is allowed this exemption if his country allows the same exemption to the Filipinos working there. The allowed personal exemption would be whichever is lower of the amount allowed as deduction by his country or by the Philippine law. For example Anton is married how much is his personal exemption? If he is single? If legally separated?

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If resident citizen? If resident alien? If non- resident alien engaged in trade or business? - The answer will be the same. Anton will be entitled to 50,000.00 as personal exemption. Rules on Change of Status: 1. If the taxpayer dies during the taxable year, his death shall not affect the amount of personal and additional exemptions his estate may claim. It is as if he died at the end of such year. 2. If the taxpayers should have additional dependents during the taxable year, he may claim the additional exemption for such year. 3. If any of the dependents dies or becomes twenty-one years of age, or gets married or became gainfully employed during the taxable year, the taxpayer may still claim the same exemption as if the change occurred at the end of the year

RULE ON ADDITIONAL EXEMPTION Each individual taxpayer shall be permitted to claim the additional allowed personal exemption amounting to 25,000.00 for each qualified dependent child or Persons With Disability (PWD) whom he is supporting and this allowance is up to 4 qualified dependents. Non-resident alien engaged in trade or business is also entitled to this allowance but subject also to reciprocity rule. Sec. 35(B) of the NIRC provides that in case of married individuals, additional exemption for dependents shall be claimed by only one of the spouses. In the case of legally separated spouses, additional exemptions shall be claimed only by the spouse who has custody of the child or children. RA 10165, entitled, ―An Act to Strengthen and Propagate Foster Care and to Provide Funds Therefor‖ (approved on June 11, 2012) include a ‗foster child‘ or a child placed under foster care in the definition of the term ―dependent‖ for purposes of claiming the PhP25,000 additional exemption allowance provided, that all other conditions provided for under the aforesaid section of the NIRC of 1997 are complied with. The Act requires, however, that the period of foster care must be for a continuous period of at least one (1) taxable year and that only one (1) foster parent can treat the foster child as a dependent for a particular taxable year. RA 10754, entitled, ―An Act Expanding the Benefits and Privileges of Persons with Disability (PWD)‖ (approved on March 23, 2016) likewise provides that PWDs who are within the fourth civil degree of consanguinity or affinity to the taxpayer and who are not gainfully employed and chiefly dependent upon the taxpayer, regardless of age, may also be claimed as dependents by those caring for them.

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TAX INCENTIVES FOR THE BENEFACTOR OF PERSON/S WITH DISABILITYUnder R.A 10754 taxpayers caring for and living with a person with disability shall be entitled to claim as dependent such person with disability (PWD), to wit: Section 14. Tax Incentives for those Caring for and Living with Persons with Disabilities – Those caring for and living with a person with disability, up to the fourth degree of affinity or consanguinity, shall be granted tax incentives in accordance with the provisions of the National Internal Revenue Code, as amended. For purposes of granting the incentives, persons with disability shall be treated as dependents under Section 35(b) of the National Internal Revenue Code of 1997, as amended, and as such, individual taxpayers providing care for them shall be accorded the privileges granted by the Code insofar as having dependents under the same section is concerned. The treatment of a person with disability as a dependent however should not be construed to mean an increase in the maximum number of dependents, which is currently limited to four (4) dependents, for which additional personal exemption may be claimed by a taxpayer under Section 35(b) of the National Internal Revenue Code of 1997, as amended.”

If for example a taxpayer has 1 child only, how much is the allowed additional exemption? Answer. 25,000.00. How much if he has 2 children? 50,000.00, How much if he has 3 children? 75,000.00, How much if he has 4 children? 100,000.00, How much if he has 5 children? 100,000.00. Note that the maximum allowance for dependent children is up to 100,000.00 only that corresponds for the maximum of 4 children. How much if he has 4 children and 1 PWD? 100.000.00. The PWD can be claimed for as long as the limit of 4 children has not been reached. How much if he has 2 children 1 PWD and 1 Senior Citizen Parent? 75,000.00 for the 2 children and PWD, the senior citizen parent can be claimed as dependent only if the senior is also a PWD. WHO IS A QUALIFIED DEPENDENT CHILD? A qualified dependent child is a legitimate, illegitimate, acknowledged natural or legally adopted child, below 21 years of age*, unmarried, not gainfully employed, living with and wholly dependent upon the taxpayer for chief support. *still qualified even if more than 21 years of age if incapable of self-support because of physical or mental defect.

Is a STEPCHILD a qualified dependent child? A stepchild who is a child of the spouse of the taxpayer is not legitimate, illegitimate, and natural neither acknowledged nor legally adopted child so he is not among those mentioned as qualified dependent. However, if he has been legally adopted then he becomes a qualified dependent because of the legal adoption.

113

Who is a legitimate child? A child born within wedlock, meaning the child is born after marriage of parents. Meaning, the child was born after marriage. Who is an illegitimate child? A child born out of wedlock where either or both parents have legal impediment or incapacitated by previous marriage to enter into a valid contract of marriage with the father or mother of the child. Who is an acknowledged natural child? An acknowledged natural child is a child born out of wedlock but the parents have no legal impediments to marry each other. Children of living-in, unmarried parents are acknowledged natural children. If the parents subsequently marry each other, the child becomes a legitimated child. Living with the person giving support does not necessarily mean actual and physical dwelling together at all times and under all circumstances. Thus, the additional exemption applies even if a child or other dependent is away at school or on a visit. If, however, without the necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family irrespective of the question of support. Chief support means principal or main support (such as paying for the rent and spending for the food of the dependent). It is more than one half of the support required by the dependent Illustration: Shaina Moneda married Chico Pagarigan, is KC Ressureccion, Shaina‘s child with Gabby Ressureccion, who is below 21 years old qualified dependent of Chico Pagarigan? No, because KC is a step-child of Chico Pagarigan and not among those mentioned as qualified dependent children but if KC has been legally adopted by Chico, then KC becomes Chico‘s qualified dependent child. After marriage, Shaina and Chico was blessed with Frankie, then Frankie becomes Chico‘s legitimate child. Shaina and Chico afterwards adopted a child named Michael, and then Michael is a qualified dependent child of Chico as an adopted one. If later on Chico will have an affair with a woman other than Shaina and that woman begets a child, then that child becomes an illegitimate child who is also a qualified dependent of Chico. What if Frankie was born before Shaina and Chico was married? Is she an illegitimate child? No. Frankie is an acknowledged natural child and she becomes a legitimated child upon marriage of Shaina and Chico.

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REVENUE REGULATIONS NO.5-2017 – Rules and Regulations Implementing Republic Act No. 10754 SECTION 8. ADDITIONAL EXEMPTIONS OF BENEFACTORS OF QUALIFIED PERSONS WITH DISABILITY.

8.1

Effective taxable year 2016, a Benefactor of a qualified PWD, may claim the additional exemption of twenty-five thousand pesos (P25,000) for each PWD, if such PWD, regardless of age, satisfies all of the following: a. Filipino citizen; b. within the fourth (4th) civil degree of consanguinity or affinity to the taxpayer/benefactor; c. not gainfully employed; and d. chiefly dependent upon and living with the taxpayer/benefactor.

8.2

The total number of dependents (qualified dependent children and/or qualified dependent PWD) for which additional exemptions may be claimed by the taxpayer/benefactor shall not exceed four (4);

8.3

The additional exemptions for qualified dependent PWD shall be claimed only by one taxpayer or by one of the spouses in the case of married individuals;

8.4

In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children or PWD: Provided, that the number of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions of four (4);

8.5

The Taxpayer/Benefactor of the persons with disability shall submit the following documentary requirements to the Revenue District Office (RDO) where he is registered in order to claim the additional exemption, for the first year of claiming the exemption and after three (3) years or upon renewal of the PWD ID whichever comes first: a. Duly accomplished BIR Form No. 2305; b. Photocopy of PWD Identification Card Issued by the Persons with Disability Affairs Office (PDAO) or the City/Municipal Social Welfare and Development Office (C/MSWDO) of the place where the person with disability resides or the National Council on Disability Affairs (NCDA); c. Sworn Declaration/Identification of Qualified Dependent PWD, Support and Relationship : d. Birth Certificate of PWD; e. Medical Certificate attesting to disability issued by in accordance with the Implementing Rules and Regulations of R.A. 10754; and f. Barangay Certification certifying that the PWD is living with the benefactor.

8.6

The submitted records of the PWD to the RDO must be used as reference for every taxable year, in order to validate the claimed additional exemption for the same PWD. Such record must be renewed by Taxpayer/Benefactor

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after three (3) years or upon renewal of the PWD ID whichever comes first. In case of Employee-Benefactor, the aforementioned documentary requirements must be submitted to the employer for record and withholding tax purposes. Illustrations. No. 1: In 2016, M, CPA, is a widower who supports the following dependents l iving with him: A – Mother of deceased wife, 65 years old, unemployed; B – Legitimate child of deceased wife with her first husband, 20 years old; C – Legitimate child, 18 years old; D – Legitimate new born child; E – Brother, 24 years old, physically defective, gainfully employed F – Nephew, 2 years old, with hearing disability, illegitimate son of his deceased sister; G – Sister, 26 years old, widow, with speech impairment, unemployed; H – Legitimate daughter of his widowed sister, 3 years old; I – Foster child, 5 years old. In October 2016, C married and G became gainfully employed. What is M‘s personal and additional exemptions for the years 2016 and 2017? 2016 Basic personal exemption: Additional exemptions: P25,000 x 4 (any of the ff: C,D,F,G and I ) Total

P 50,000.00 100,000.00 P150,000.00

M may claim additional exemptions if he cares for and supports any legitimate, illegitimate, or legally adopted child, foster child or a PWD (regardless of age) who is within the 4th civil degree of consanguinity or affinity to M, who is chiefly dependent upon and living with him, and not gainfully employed. If during the taxable year, any of the dependent children got marries or any of the dependents became employed, M may still claim the additional exemption as if C got married and G became gainfully employed at the close of such year. His mother-in-law A (a senior citizen without any disability), stepchild B, brother E and niece H are not dependents of M for purposes of claiming additional exemptions.

116

Note: (1) M has five qualified dependents (C, D, F, G and I) but can only claim a maximum of four qualified dependents. (2) (3)

(4) (5)

M can claim an additional exemption for his stepchild B, only if he legally adopts him. M cannot claim his mother-in-law A and brother E, a PWD, as his dependents since his mother-in-law is a senior citizen2 without any disability and his brother is gainfully employed. M cannot claim H, his niece, as his additional exemption. Single status also applies to those who are widowed; and the civil status of legally separated is married, for taxation purposes.

2017 Basic personal exemption: Additional exemptions: P25,000 x 3 (D, F and I) M Total

P 50,000.00 75,000.00 P 125,000.00

c annot claim anymore the additional exemption for his legitimate child C and his sister G, who got married and became gainfully employed respectively in 2016. No.2: X and W are husband and wife with six (6) minor children. They were legally separated in 2015, where the custody of five (5) children were awarded by the court to X, and one (1) child to W. W supports his brother L, who is mute, unmarried, unemployed and living with him. What is the personal and additional exemption of X and W in 2016? X: Basic personal exemption: Additional exemptions: P25,000 x 3 (3 children) Total

P

50,000.00

Basic personal exemption: Additional exemptions: P25,000 x 1 (1 child) Total

P 50,000.00

75,000.00 P 125,000.00

W:

P

25,000.00 75,000.00

X is legally separated spouse with five (5) qualified dependent children in his custody. W is also a legally separated spouse with two (2) qualified dependents in her custody, a child and a PWD, who is within the fourth degree of consanguinity. X can claim additional exemptions for three (3) qualified dependent children while W can claim additional exemption for one (1) qualified dependent child.

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The total amount of additional exemptions that may be claimed by both spouses shall not exceed the maximum allowed of four (4) qualified dependents. No.3:

Z, a CPA and Y, an employee are husband and wife with four (4) minor children. Y supports her 14-year-old brother J, a PWD, living with them. Z claims the additional exemptions for their four (4) children. Can Y claim for additional exemption for her brother who is a PWD? Answer: No. The total amount of additional exemptions that may be claimed by both spouses shall not exceed the maximum allowed of four (4) qualified dependents. Suppose, Z and Y have only three (3) qualified dependent children, can Y claim for additional exemption for her brother who is a PWD? Answer: No. Only one spouse can claim the additional exemption for qualified dependent PWD. Z may claim the additional exemption for his brother-in-law J, who is related within the second (2nd) civil degree of affinity to the brother of his wife. R.A. # 10754 modifies the provisions on R.A. 7432- Expanded Senior Citizen Act on qualifying senior citizens as dependents, to wit: SECTION 5. Government Assistance. - The Government shall provide the following assistance to those caring for and living with the senior citizen: a) The senior citizen shall be treated as dependents provided for in the National International Revenue Code and as such, individual taxpayers caring for them, be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. b) Individuals or non-governmental institutions establishing homes, residential communities or retirement villages solely for the senior citizens shall be accorded the following:1) realty tax holiday for the first five (5) years starting from the first year of operation;2) priority in the building and/or maintenance of provincial or municipal roads leading to the aforesaid home, residential community or retirement village.

Practice the following exercises: 1.

Ina Morales a resident citizen, is married to Kit Zatarain, they have two children, Robin 21 years old and Francis 20 years old. If Ina Morales has a gross income of 300,000.00 during 2016 and she is the claimant of the additional dependents, how much is her taxable income for 2016?

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2.

Ellenita Fallesgon a Indian doing business in the Philippines, is married with 3 dependent children , earned income of 250,000 for the year 2016. The Filipinos in India receive as exemption 100,000 for personal expense allowance, and 15,000.00 for each child expense allowance. How much is the taxable income of Ellenita?

3.

Chararat Boomboomboom is Filipino OFW in Saudi Arabia, she is earned income from rental here in the Philippines amounting to 500,000.00 in 2016. She is married with 4 qualified dependent children and has a brother who is chiefly dependent to her for support. How much will be the allowed personal exemption to her for 2016. What if she earned 500,000.00 from abroad and nothing in the Philippines, how much can she claim as additional exemption?

4.

Happy Yippee-Yehey is single and has a PWD brother who is dependent upon her for chief support. She earned compensation income of 300,000.00 in 2016. How much is the allowed additional exemption?

COMPUTATION OF INCOME TAX PAYABLE

COMPENSATION INCOME

Gross Income

XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

Taxable Income Apply tax rates Tax due

XXX XXX 0-32% XXX

Less: Taxes paid in advance Creditable w/holding tax (2306) Tax still payable/(refundable) [bir form 1700]

xxx XXX

HEALTH AND HOSPITALIZATION INSURANCE PREMIUMS

119

Aside from personal and additional exemptions a compensation income earner may also subtract from his gross income actual amounts he paid for his health and hospitalization insurance premiums. Premium payments on health and or hospitalization insurance may be deducted from the gross business/professional income or from the gross compensation income of a resident citizen, non-resident citizen and resident alien. Non-resident Alien engaged in trade or business is not entitled to HHIP although he is entitled to personal and additional exemptions subject to reciprocity rule.

. What are the rules in claiming HHIPP (Health and Hospitalization Insurance Premiums)? RULE ON HEALTH HOSPITALIZATION INSURANCE PREMIUM PAYMENTS

The taxpayer is allowed to claim an exemption for health hospitalization insurance premium subject to the following conditions and limitations.  The family income in case of married couple should not exceed p200,000.00 for the taxable year  There must be an actual health hospitalization insurance premium payment during the month or year  The claimable amount of health hospitalization insurance premium payment shall be lower of amount between the actual payment or the limit which is p2,400.00 per year or 200.00 per month.  In the case of married couple, only the spouse claiming the additional personal exemption for dependents shall be entitled to such exemption Illustration: Mr. Banoy married with 4 children whom he claims as dependent children took for him Maxicare for which he pays 2,800.00 per quarter, his wife also has Caritas health care card for which she pays 1,000.00 per quarter. Their combined income is 240,000.00 per annum. How much HHIPP can Mr. Banoy claim as subtraction from his gross income? Answer: Only 2,400.00. Can the wife claim HHIPP considering that she also pays for her health and hospitalization insurance? Answer: No. only the spouse claiming the allowance for additional dependent can claim the 2,400.00 HHIPP. What if the wife of Mr. Banoy is the claimant for the additional exemptions, how much HHIPP can Mr. Banoy claim? Answer: None. Practice the following exercises:

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1. Amanda, single parent, is a government employee who earns a monthly gross compensation income of P25,000. Effective, January 1, 2016, she took a hospitalization insurance for her and her 3 year old son. She right away paid the annual premium of P2,400. However, if she opted to pay her premium monthly, and she started paying 200pesos per month in June 1, 2016 . Is she entitled to the deduction? If she is entitled, how much will she be allowed? What if her income is 18,000.00, how much is her allowed HHIP? 2. Caloy Reyes is married with 3 dependent children. His wife is also working and for whom he waived his right to claim dependent children. He paid 1,800.00 as insurance premium. The combine salary of Caloy and his wife is 225,000.00. How much HHIP can he claim as deduction? 3. Lito Ortiz is an employee of Caloocan City hall and has earned 700,000.00 for the year 2016. His wife is also working in City hall and earned for 2016- 240,000.00. Maricel paid for 2,400.00 insurance premiums for 2016. Lito waived his right to claim for the dependent children, how much can Maricel claim as allowance for insurance premium payments? 4. Marianne is an employee of RGAZ gasul and earned for the year 2016 from her employment 200,000.00. She also has apartment for rent where she earned 500,000.00. She paid 1,800.00 health insurance premiums, how much can she claim as deduction for insurance premiums payments? 5. Rodolfo Lacap is an employee of San Miguel Brewery and earned 200,000.00 for the year 2016. He paid his 2,400.00 property insurance for his house located in Donya Rita, Caloocan City. He is married and with 4 qualified dependent children. How much can he claim as health insurance premium payments? How much can he claim if he paid 1,500.00 as life insurance premiums?

COMPUTATION OF INCOME TAX PAYABLE

COMPENSATION INCOME

Gross Income

XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

Taxable Income

XXX XXX

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Apply tax rates

0-32%

Tax due

XXX

Less: Taxes paid in advance Creditable w/holding tax (2306)

xxx

Tax still payable/(refundable) [bir form 1700]

XXX

INCOME TAX RATES USED IN THE COMPUTATION TAX DUE On Business and Compensation Income, the following tax table shall be used in computing for the tax due: IF THE TAXABLE INCOME IS:

1 2 3 4 5 6 7

OVER

NOT OVER

TAX DUE IS

PLUS

P0 10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

P0 500.00 2,500.00 8,500.00 22,500.00 50,000.00 125,000.00

5% 10% 15% 20% 25% 30% 32%

WITHOUT LIMIT

OF EXCESS OVER P0 10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

The tax due is computed by finding the bracket which perfectly describes the taxable net income, for example 255,000.00 taxable net income is over 250,000.00 but not over 500,000.00, therefore bracket number 6 will be used. In the computation of tax due where the tax due on 250,000.00 is 50,000.00 and 30% on the excess, tax due for the 255,000.00 will then be 51,500.00 [ on 250,000.00, 50,000.00 + 1,500.00 ( 255,000.00 – 250,000.00 = 5,000.00 x 15% ) on the excess.] Illustration: #1 Mr. Godofredo Corrales has a taxable net income of 1,500,000.00, how much is the tax due? On 500,000.00 the tax due is 125,000.00 On excess which is 1,000,000.00 the tax due will be 1,000,000.00 x 32% = 320,000 Total tax due is 125,000.00 + 320,000.00 = 445,000.00 Illustration: #2 Madam Butterfly has a taxable net income of 10,000.00, how much is the tax due from her? On 10,000.00 tax due is 10,000 x 5% Tax due is 500.00

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Illustration: #3 Mr. Bulutonggoy has a taxable net income of 35,000.00, how much is the tax due from him? On 30,000.00 tax due is 2,500.00 On excess which is 5,000.00 the tax due will be 5,000.00 x 15% = 750 Total Tax due is 2,500.00 + 750.00 = 3,250.00 Practice the following exercises: Compute for the tax due on the following net taxable income:

1, 2. 3. 4. 5. 6. 7. 8. 9. 10.

9,000.00 15,000.00 29,000.00 68,000.00 135,000.00 400,000.00 500,000.00 1,000,000.00 1,500,000.00 79,000.00

The annual Income tax due so computed shall be paid when tax return is filed, however, when the tax due exceeds P2, 000.00, the taxpayer may elect to pay in two equal installments, the first installment to be paid at the time the return is filed and the second installment on or before July15 of the same year the return was filed at the Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered. Ex. Ambrocia filed her return on April 15, 2016 with a tax due of 4,000.00, how much can she pay on April 15 and how much on or before July 15, 2016? Ans. 2,000.00 on April 15 and 2,000.00 on or before July 15, 2016. Practice the following exercises: 1. Boy Ampioco filed his Annual Income return on April 15, 2016. His tax due per computation is 5,000.00 but he has a withholding tax of 2,000.00, how much is his installment on April 15, if he has withholding taxes of 3,000.00. 2. Floro Makalintal in 2016, has earned 500,000.00 from his business and computed his tax due to be 30,000.00. He has withholding taxes amounting to 30,000.00 and tax credits amounting to 12,000.00. He wants to make installment payments, is he allowed? How much should he pay on or before July 2016? 3. Weng Legaspi earned in 2016 2,000,000.00 half of the income was subjected to 20% passive income tax rate and half was computed to be subject to 120,000.00.

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She had tax credits amounting to 118,000.00. How much should she pay on or before April 15, 2016 if she intends to avail of the installment payment. 4. Dodith Alfero is working as a casual worker in Davao City Hall and earned 120,000 for the year 2016, her tax due is 1,200.00 and she wants to avail of the installment payment. How much could have been her payment on July 2016? 5. Cheche Laag- Laagan is a clerk in Dencia‘s Restaurant in Davao and earned 200,000.00 compensation income for 2016. Her tax due was computed to be 1,700.00 but she has no money to pay the whole amount yet. How much could she pay on April 15, 2016 is she would avail the installment payment?

COMPUTATION OF INCOME TAX PAYABLE

COMPENSATION INCOME

Gross Income

XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

Taxable Income Apply tax rates Tax due

XXX XXX 0-32% XXX

Less: Taxes paid in advance Creditable w/holding tax (2316) Tax still payable/(refundable) [bir form 1700]

xxx XXX

COMPENSATION INCOME TAX DUE DEDUCTION Compensation Income is subject to creditable withholding tax. The employer who is a registered withholding agent, every end of the month must deduct from the employee‘s income an approximated amount of tax based on the withholding tax table. The Withholding tax system will be discussed in the next chapter in order to fully understand what is this withholding all about. Is it another tax? Is it the duty or obligation of the employee to withhold?

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The Withholding tax is the system used to collect in advance taxes which will otherwise be collected only on the due dates fixed by law imposing the said taxes. There are two kinds of withholding of taxes. The Final Withholding Tax and the Creditable Withholding tax.

The Final Withholding Tax and the Creditable Withholding Tax. The Final Withholding tax is collecting in advance taxes which will not be credited in any return. The tax so collected was the full and complete satisfaction of the tax due from the taxpayer. Passive income are subject to final withholding tax and the fringe benefit tax on managerial and supervisory employees.

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The Creditable Withholding Tax on the other hand is only an approximation of the actual and complete tax due from a taxpayer and the taxes so withheld will be deducted from the annual income tax due from the taxpayer. The original or first tax that was covered by the creditable withholding tax system was the income tax on compensation. Every employer is obliged to collect from the income of the employees a monthly tax based on the withholding tax tables. At the end of the year all the monthly tax collected will be reflected in a certificate issued by the employer and this certificate will then be used by the employee-taxpayer as an attachment to his annual income tax return. However, present tax policies require that all taxes from employees should be collected at the end of the year, this is called annualized withholding on income tax, it means that the taxpayer annual tax at the end of the year should have been fully withheld by his employer and there is no payable or refundable amount that would result in the computation of the annual income tax. If there was neither payable nor refundable tax at the end of the year, the employee need not file his income tax return and the certificate of compenstation withheld will be enough proof of his compensation and tax payments. The creditable withholding tax system was stretched further to include not only income from business but also other business taxes. Creditable withholding tax was also applied to VAT and Percentage taxes. In the payments for which creditable taxes are withheld under the Expanded Withholding Tax law, the withholding agent is not the employer but the buyer of goods or services. Money payments whether for income or business taxes, to Government is also subject to creditable withholding tax. Note however, that not all income payments are covered by the Expanded Withholding Tax law. Only taxes withheld on income payments for which there were issued Creditable Withholding Tax Certificates will be credited against tax due. This is the form issued to certify income tax withheld on compensation.

Below is the form used to certify taxes withheld on income covered by The Expanded Withholding Tax law ( Non-compensation withholding Tax )

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Illustration: #1 Mr. Godofredo Corrales has computed his tax due on compensation as 445,000.00 and his company withheld 350,000.00, how much will his income tax payable? 445,000.00 – 350,000.00 = 95,000.00

Illustration: #2 Madam Butterfly has computed her tax due on compensation as 500.00 but she has a withholding tax of 1,500.0, how much tax must she pay? None. Madam Butterfly does not need to pay on the contrary, she still has a refundable amount of 1,000.00 (500.00 – 1,500.00 = 1,000.00 refund) Illustration: #3 Mr. Bulutonggoy has computed his tax due on compensation as 35,000.00, and his company withheld the same amount from his compensation during the taxable year. How much must he pay? None, because the tax due on his compensation income is equal to the amount of taxes withheld during the year. INCOME TAX ON MINIMUM WAGE EARNERS Pursuant to Sec. 2 of RA 9504, minimum wage earners are exempt from the payment of income tax on their taxable income including their holiday pay, overtime pay, night shift differential pay and hazard pay. Minimum wage earners as defined under Sec. 22(HH) of the NIRC refer to workers in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned. ‗Statutory Minimum Wage‘ (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and

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Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each region shall determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income tax and for the Exemptions from Withholding Tax on Compensation.- The following income payments are exempted from the requirements of withholding tax on compensation: xxx xxx xxx (13) Compensation income of MWEs who work in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where he/she is assigned. Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise be covered by the above exemption. Provided, however, that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P82, 000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently, from withholding tax. (The Supreme Court (SC) ruled as null and void several provisions of the

revenue regulations (RR) that allow tax exemptions for minimum wage earners (MWE). In a 56-page order, the SC justices unanimously voted to nullify Sections 1 and 3 of RR 10-2008 “as they disqualify MWEs who earn purely compensation income from the privilege of the MWE exemption in case they receive bonuses and other compensation-related benefits exceeding the statutory ceiling of P30,000 (now P82,000).” “Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively declaring that a minimum-wage earner who receives other benefits in excess of the statutory limit of P30, 000 (now 82,000) is no longer entitled to the exemption provided by RA 9504,” the SC said. The high court ordered the respondents Department of Finance and the Bureau of Internal Revenue (BIR) to grant a refund, or allow the application of the refund by way of withholding tax adjustments, or allow a claim for tax credits by all individual taxpayers whose incomes for taxable year 2008 were subjected to prorated increase in personal and additional tax exemption.) MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax. For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, diseaseinfested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not

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satisfy the above criteria is deemed subject to income tax and consequently, to withholding tax. In case of hazardous employment, the employer shall attach to the Monthly Remittance Return of Withholding Tax on Compensation (BIR Form No. 1601C) for return periods March, June, September and December a copy of the list submitted to the nearest DOLE Regional/Provincial Offices – Operations Division/Unit showing the names of MWEs who received the hazard pay, period of employment, amount of hazard pay per month; and justification for payment of hazard pay as certified by said DOLE/allied agency that the hazard pay is justifiable.. Any reduction or diminution of wages for purposes of exemption from income tax shall constitute misrepresentation and therefore, shall result to the automatic disallowance of expense, i. e. compensation and benefits account, on the part of the employer. The offenders may be criminally prosecuted under existing laws. Compensation income of employees in the public sector with compensation income of not more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, applicable to the place where he/she is assigned shall likewise be exempted from income tax. The basic salary of MWEs in the public sector shall be equated to the SMW in the non-agricultural sector applicable to the place where he/she is assigned. The determination of the SMW in the public sector shall likewise adopt the same procedures and consideration as those of the private sector.

COMPUTATION OF WAGES. The basis of the computation of the minimum wage rates prescribed by law shall be the normal working time of eight (8) hours a day. The computation of wages shall be in accordance with the Collective Bargaining Agreement (CBA), if any, or the provisions of the Labor Code as implemented. Unless otherwise amended or repealed by subsequent pertinent laws, rules and regulations, the holiday pay, overtime pay, night shift differential and hazard pay shall be understood to be computed based on such agreement or labor law provisions. In the determination of the minimum wage on a monthly basis, the withholding agent shall be guided by the prevailing minimum wage as reflected in the latest Matrix of Wage Order and its own policy on whether employees are (a) not considered paid on Saturdays and Sundays or rest days, (b) not considered paid on Sundays or rest days, (c) considered paid on rest days, special days and regular holidays, or (d) required to work every day including Sundays or rest days, special days and regular holidays. The resulting number of days in the above enumerated categories is referred to as the factor or number of working/paid days in a year. On the first classification, the monthly SMW is computed by multiplying the applicable daily wage rate by the factor of 261 days and divide the same by twelve; the semi-monthly at one-half (1⁄2) of the monthly rate and the weekly SMW is arrived at by spreading the annual minimum basic wage over fifty-two (52) weeks.

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Thus, on a P382.00 minimum daily wage in Metro Manila, the monthly SMW is P8, 308.00, the semi-monthly at P4, 154.00 and weekly at P1,917.00. On the second category, the monthly SMW is computed by multiplying the applicable daily wage rate by the factor of 313 days and divide the product by twelve. Hence, on a P382.00 minimum daily wage, the monthly SMW is P9, 964.00, the semimonthly at P4, 982.00 and weekly at P2, 300.00. On the third classification, the monthly SMW is computed by multiplying the applicable daily wage rate by the factor of 365 days, divided by twelve. Thus, on a 382 minimum daily wage, the monthly SMW is P11, 619.00, the semi-monthly at P5, 810.00 and weekly at P2, 681.00. On the fourth classification, the monthly SMW is computed by multiplying the applicable daily wage rate by the factor of 392.5 days, divided by twelve. Hence, on a 382 minimum daily wage, the monthly SMW is P12, 495.00, the semi-monthly at P6, 247.00 and weekly at P2, 883.00.‖

End of Discussion-see practice exercises below and in the following pages

END OF CHAPTER TESTS E. -

ANSWER THE FOLLOWING QUESTIONS

1.

How much is the personal exemption of an individual taxpayer, other than estates and trust? _________________________________________________________ How much is the personal exemption of an estate or trust? __________________ How much is the additional exemption for each qualified dependent child?_______ How many children can be claimed as qualified for exemption? _______________ How much is the Health and Hosp.Ins. Prem Payments that can be allowed?_____ How much is the monthly HHIP is allowed for qualified taxpayer?______________ Who can claim the allowed additional exemption if both spouses are earning?____ Who can claim the allowed monthly Health and Hospitalization Insurance Premium Payments if both spouses are earning? __________________________________ How much should the income of the spouses be in order to claim the Health and Hospitalization Insurance Premium Payments? ____________________________ Mr. Suave is a resident citizen, with four qualified dependent children, how much is his personal exemption? _____________________________________________ Mr. Macho Guapito is a resident alien, with 5 minor children, how much is is personal and additional exemption?_____________________________________ Mrs. Corrales is an employee of an offshore banking unit with 3 qualified dependent children, how much is her personal exemption?__________________, how much is her additional exemption?______________

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

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13.

14.

15.

16.

17. 18. 19. 20.

Anne Lorenze is an employee of Bangko Sentral ng Pilipinas supporting the two qualified children of her mother, how much is her personal and additional exemptions?_______________________________________________________ Toni Gonzaga is married with one qualified child, she is receiving 800,000.00 as employee of ABS-CBN, she is paying 2,400.00/mo,for her maxicare, a health insurance card. How much is her total allowable exemptions and health insurance premium payments________ The administrator of Dolphy Quizon‘s Estate is filing the annual income tax return of the Estate of Dolphy Quizon, how much personal exemption should he claim for the estate?________________________, how much additional exemption_____? Robin Padilla is a Filipino Muslim, he has several wives and he is a resident of Quezon City where he earns his income. He has four qualified children with his first wife, 2 qualified children with his second wife and 3 qualified children with his 3rd wife, how much can he claim as personal and additional exemption?________? How much is the personal exemption of Empoy a single resident_____________? How much is the total exemption of Alessandra married with twin babies _______? How much is the additional exemption for a dependent mother?______________? How much is the personal exemption of an OFW? ________________________?

F. Problem I Ampy Laya is a resident citizen, married with six minor children. She has an annual gross compensation income from her employment amounting to 450,400.00 pesos for taxable year 2016. During the said year, she took a health insurance policy and paid 3,000.00 pesos as insurance premium. Compute for her taxable income for the year 2016 and explain your answer. Problem II Bag O-ong, a resident citizen taxpayer, has the following statement showing his income for taxable year 2016: Gross income from business in the Philippines 520,000.00 Direct cost of business in the Philippines 300,000.00 Gross income from business in Japan 400,000.00 Insurance premium paid on health insurance 2,400.00 Bag O-ong is married with the following living and dependent on him for support: His mother who is paralyzed Three minor dependent children How much is the taxable income of Bag O-ong ? Problem III Chi Charon, married, with five qualified dependent children, a resident citizen taxpayer has the following data for 2017: Gross Compensation Income Gross Income from Business Business Expenses

280,000.00 350,000.00 160,000.00 131

Premium Payment on Health Insurance

10,000.00

Compute for the taxable income of Chi Charon.

Problem IV. A married taxpayer with a legitimate child, illegitimate child and a senior citizen dependents, furnished us his business date for the taxable year 2013 as follows: Items of Income and Expenses Gross profit from sales Royalty income on books Dividend income from a foreign corporation Gain from sale of business assets Income exempt from income tax Income subject to final income tax Business expenses Non-deductible business expenses (included in the amount below) Personal family and living expenses

Philippines

America

P 950,000.00 150,000.00 12,000.00

P 800,000.00 200,000.00 5,000.00

60,000.00 50,000.00 15,000.00 700,000.00

15,000.00 0 7,500.00 650,000.00

35,000.00 165,000.00

48,000.00 35,000.00

Determine the taxable income. Problem V. An individual taxpayer, sole proprietor of a drug store presented us his data for the current taxable year 201: Compensation Income from employment Business Income Business Cost and Expenses Other Income Health Hospitalization Insurance Premium Payment

P 118, 000.00 480,000.00 320,000.00 40,000.00 3,750.00

If he is unmarried but has a nephew dependent, compute for his taxable net income

Problem VI. A national of the Corpus Christi, Texas, is a resident alien employee of a Regional Area Headquarter of a multi-national corporation established in the

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Philippines. He is designated as a technical consultant for operations and had the following data for the current year 2016: Salary from employment, gross monthly Allowances from employment, gross monthly Commission Income from employment Interest Income on bank deposit in Philippines, at final income tax Cash dividend from a domestic corporation, at final income tax Health Hospitalization Insurance Premium payment

P120,000.00 10,000.00 100,000.00 4,000.00 8,500.00 2,650.00

Compute for the taxable income subject to 0-32%

Problem VII. A taxpayer who is resident entrepreneur, is a divorcee, and has his 15- year old PWD sister and 80 year old mother as dependents for the taxable year 2016, he has the following data: Gross Business Income P1, 950,000.00 Other Income 280,000.00 20% of the above said other income are exempt from income tax 25% of the above said other income are subject to final tax Business Expenses 30% of the above-cited expenses are fines and penalties imposed by LTFRB Determine his taxable income

G. USE OF TAX RATES TABLE

1 2 3 4 5 6 7

OVER

NOT OVER

TAX DUE IS

P0 10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

P0 500.00 2,500.00 8,500.00 22,500.00 50,000.00 125,000.00

WITHOUT LIMIT

PLUS 5% 10% 15% 20% 25% 30% 32%

OF EXCESS OVER P0 10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

Problem #1 Various individuals had their taxable income for 2016, compute for the tax due using the tax table.

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Taxpayers 1 2 3 4 5 6 7 8 9 10

Mr. Flash Xero Mr. Yolo Joong Ms. Z, mixed income earner Ms. Avon, employee Mr. Binatog, self-employed Mr. Emmanuel Salazar Mr.GodofredoCorrales Atty. Fidel Valdez Mary Anne Tautjo Susana Halili

Amounts

Taxable income Taxable income Taxable income Taxable income Taxable income Taxable income Taxable income Taxable income

875,000.00 76,900.00 287,000.00 192,000.00 745,000.00 3,450,000.00 10,000,000.00 89,000.00 500,000.00 3,000,000.00

Problem #2 Compute for the tax due from Rommel Fernandez, a married resident who is a sole proprietor and had the following business data in the year 2016: Gross profit from sales P650,000 Deductible business expenses 400,000 Non-deductible business expenses 125,000

Problem #3

Compute for the tax due of the taxpayer with the following data:

Sherina Langit is a self-employed individual who is engaged in a merchandising business had the following data in the current year 2016: Gross Income

Expenses

January to March January to June January to September

P 350,000 735,000 1,342,000

P230,000 540,000 875,000

January to December

1,782,000

1,236,000

Problem #4 How much is the tax due from Amanda Vargas an individual taxpayer in the Philippines who is legally separated from her husband. She has three dependent children and has following data for the current year 2016:

Gross compensation income Gross business income Other gross income Business expenses

Philippines P140,000 450,000 15,600 240,000

Abroad P150,000 410,500 16,000 280,000

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Problem #5 Compute for the tax due from Roman Octavio, a married entrepreneur engaged in merchandising business, who had the following financial data in the Philippines in year 2016:

Gross profit from Sales Direct cost and expenses

1st Quarter P352,000 206,000

2nd Quarter P405,600 298,500

Data for the 3rd and 4th quarter follows: Gross sales Cost of sales

P647,000 249,200

H. COMPUTATION OF INCOME TAX DUE FROM COMPENSATION Problem I. During the current year, a Cornick Bawang, an employee had salaries and other income from employment of P180, 000. He had no income from business and from other sources. He is married and has the following dependents: his wife, grandfather, sister and her two children. He spent P7, 500 for health and hospitalization insurance premiums. Compute the taxable income and income tax due. Problem II. A married couple, with eight qualified dependent children, gave us their data in the year: Compensation Income of husband Compensation Income of wife Business Income of husband Business Income of wife Other Income Business Expenses of husband Business Expenses of wife Other Business Expenses Health Hospitalization Insurance payments

P180, 000.00 170,000.00 870,000.00 320,000.00 40,000.00 640,000.00 190,000.00 75,000.00 3,800.00

Determine the taxable net income and income tax due for each of the spouses. Problem III. A special employee (resident Filipino) of an Offshore Banking Unit in the Philippines provided us his financial data for the current taxable year 2016 as follows: a. Regular salary, monthly P150,000.00 b. Overtime pay in the year 135,000.00

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c. Royalty income from the Philippines d. One legitimate child dependent e. HHIP paid

69,000.00 3,600.00

Compute the taxable base and the income tax due on the compensation. Problem IV. Compute for the gross compensation and tax due. Put a check mark on the the items you included in the computation of gross compensation income. Miss Regina Smith, a resident alien, single and which her father as dependent had the following data for the current year 2016:

Basic salary/overtime pay (net of P3,150 withholding tax) 13th month pay Subsistence (Meals) allowances Christmas bonus and other Incentive pay from employment Refund of life insurance premium Allowances received Cash gift from friend on account of her birthday Properties received as inheritance from her deceased mother Cash dividend from a domestic corporation Property dividend from a non-resident foreign corp. Director‘s fees received Sales price Lot in Quezon City, held as capital asset: cost price

45, 000 27, 500 8, 250 16, 500 1, 900 1, 800 10, 800 180, 000 7, 300 5, 200 38, 000 120,000

Problem V. An employee serving as a messenger in a company in the Philippines, but is classified as a minimum wage earner has the following data in the current taxable year 2016: Basic salary, per day (six working days per week) Overtime pay Hazard pay Holiday pay Night shift differential pay 13th month pay, bonus, incentive pay (P82, 000 or less is exempt from income tax) De minimis benefit (exempt from income tax) Royalty income from Philippines (subject to final tax) Two legitimate children dependents in Phil. HHIP paid in Philippines

P 382.00 13,500.00 6,000.00 3,500.00 1,800.00 12,600.00 7,000.00 50,000.00 2,100.00

No other income from employment and business Compute for the Income tax due from the employee for 2016

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Problem V. Mr. Rommel Enriquez a rank and file employee, had the following financial information for the current taxable year 2016: Put C on Compensation income, put B for business income, E for Exclusion from gross income and P for Passive income: Salaries from employment (net of withholding tax of P21,500) Christmas bonus from employment Incentive bonus from employment Life insurance proceeds received from insurance policy of his deceased father Cash received as a refund of overpaid insurance premium on his insurance policy Royalty income on musical works in Philippines Toyota car received as a gift from a friend Cash received as inheritance from his decreased father Interest income on bank savings deposit-net of w/holding tax of P531.25 Compensation for injuries received in a car accident Cash dividend from the social security system Gross interest income on a P500,000 money market placement at a bank(28,000 withholding tax was made) Other fringe benefit from employer Share in the net income from a general professional partnership Cash dividend from San Miguel Corp. a domestic corporation A house and lot won in a raffle draw Cash dividend from Hitachi Corp. a domestic corporation Share in net income of an ordinary partnership Income from rental of a 5 door apartment Winnings from the Philippine Charity Sweepstakes Lotto draws Winning from gambling at the Casino Filipino Heritage Hotel Commission income as agent on the sale of house and lot of a friend Commission income from employment Gain on sale of house and lot Philippines held as capital asset Director‘s fee from XYZ Corp. Gain from sale of shares of stocks of domestic corp. held as Capital asset, sold thru the local stock exchange (cost price is P50,000) Interest income on loans receivable 13th month pay from employer Toyota car won in raffle draw in Philippines Representation and transportation allowance received from employment (to be accounted for by employee) Gross profit from sale merchandise Losses from gambling at Resort World

P160,750 15,500 25,500 50,000 1,760 125,000 170,000 150,000 2,125 7,400 1,300 140,000 45,200 75,000 20,000 250,000 5,400 120,000 60,000 70,000 40,000 25,000 60,000 40,000 12,000

87,200 4,700 24,000 175,000 16,000 860,000 12,500

Total Tax Due is: _____________________________________________________

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Problem VII. An employee serving as a messenger in a company in the Philippines, but is classified as a minimum wage earner has the following data in the current taxable year 2016: Basic salary, per day (six working days per week) P 382.00 Overtime pay 13,500.00 Hazard pay 6,000.00 Holiday pay 3,500.00 Night shift differential pay 1,800.00 13th month pay, bonus, incentive pay (82, 000 or less is exempt) 12,600.00 De minimis benefit (exempt from income tax) 7,000.00 Royalty income from Philippines (subject to final tax) 50,000.00 Other details: He has two legitimate children dependents in the Phil. HHIP paid in Philippines 2,100.00 No other income from employment and business 1. Determine the allowance and exemption, taxable net income and income tax due if there are no additional data aside from the above. 2. If earned other taxable income from employment of P75, 600 aside from the above listed income amounts, Compute the allowance and exemption, taxable net income tax due. Problem VIII. A special employee (resident Filipino) of an Offshore Banking Unit in the Philippines provided us his financial data for the current taxable year 2016 as follows: a. Regular salary, monthly P150,000.00 b. Overtime pay in the year 135,000.00 c. Royalty income from the Philippines 69,000.00 d. One legitimate child dependent e. HHIP paid 3,600.00 Compute the taxable base and the income tax due on the compensation. Problem IX. During the current year, Rowen Abad, an employee had salaries and other income from employment of P180, 000. He had no income from business and from other sources. He is married and has the following dependents: his wife, grandfather, sister and her two children. He spent P7, 500 for health and hospitalization insurance premiums. Compute the taxable income and income tax due.

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I. COMPUTATION OF FRINGE BENEFIT TAX

Problem 1. A corporate business-employer had the following data for the current year 2016: a. b. c. d. e. f. g. h. i.

Cost of Christmas gifts during the celebrations for employees Employee‘s expense account Uniform allowances not over P560 per month Housing benefits of officials of the Philippine Army Personal expenses of the officers, paid for by the company-employer Monetized unused vacation leave credits Household personnel benefit Medical cash allowance of P2,500 per semester to an employee Housing unit furnished to an employee, where said unit was situated inside the premises of the business j. Tuition fees in high school of a son of the comptroller-employee, borne by the employer-company k. One week expense in a holiday vacation of the company‘s vice-president for finance and his family in a Batangas resort

1. 2. 3. 4. 5.

P45,000 52,000 360,000 15,000 2,700 16,500

45,000 16,000 27,000

Classify and compute for the following items: Income subject to fringe benefit tax. Income exempt from fringe benefit tax. Total amount of fringe benefit tax. The allowed deduction from the gross income related to the fringe benefits.

Problem 2. In the current year 2016 , a sole-proprietorship business owned by Mr. Conrad Lou, granted fringe benefits to its employees as follows: 1. To employees who are officials, managers and/ supervisors, P1, 500,000 2. To rank and file employees, P 400,000 3. De minimis benefit to employees P300,000 (50% to Officials, 50% to rank and files) Determine the fringe benefit tax and the related allowed deductions on all fringe benefits.

COMPUTATION OF TAX OF MINIMUM WAGE EARNER Problem 1. An employee serving as a messenger in a company in the Philippines, but is classified as a minimum wage earner has the following data in the current taxable year 2016: a. Basic salary, per day (six working days per week) P382.00

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b. c. d. e. f.

Overtime pay 13,500 Hazard pay 6,000 Holiday pay 3,500 Night shift differential pay 1,800 th 13 month pay, bonus, incentive pay (P30,000 or less is exempt 12,600 From income tax) g. De minimis benefit (exempt from income tax) 7,000 h. Royalty income from Philippines (subject to final tax) 50,000 i. Two legitimate children dependents in Phil. j. HHIP paid in Philippines 2,100 k. No other income from employment and business 0 1. Determine the allowance and exemption, taxable net income and income tax due if there are no additional data aside from the above.

2. If earned other taxable income from employment of P75,600 aside from the above – cited income amounts, Compute the allowance and exemption, taxable net income tax due.

Problem 2. A clerk- employee of a government agency, classified as a minimum wage earner furnished us his employment data in the current year 2016 as follows: 1. Regular salary P345/day, with 5 working days in a week (without yet deducting no.2 item) 2. Withheld premium contributions to GSIS, Phil-health, Pag-ibig, labor union dues, P7,560. 3. Overtime pay, holiday pay, P12,500 4. 13th month, bonus, (Exempt from income tax) P30,000 5. Gross business income from canteen P450,000 6. Business expenses from canteen P320,000 7. HHIP payments, P3,250 8. Prizes/winnings from Lotto Draw of PCSO P65,000 9. Honoraria from employment P13,000 Compute the total allowance and exemption, taxable income and income tax due.

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2. Computation of Income Tax on Business INCOME TAX ON BUSINESS INCOME

BUSINESS INCOME

COMPUTATION OF INCOME TAX PAYABLE Gross Income

XXX

Less: Allowable Deductions Optional Standard Deduction/

xxx/

Itemized Deduction

xxx

Net Income

XXX XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

XXX

Taxable Income

XXX

Apply tax rates

0-32% XXX

Tax due Less: Taxes paid in advance Income tax payments (bir form 1701 Q)

xxx

Creditable w/holding tax (bir form 2307)

xxx

XXX

Tax still payable/(refundable)

(bir form1701)

XXX

There are two ways to compute for the allowable from business income. The Optional Standard Deduction (OSD) and The Itemized Deduction (Actual Expenses). If the taxpayer opted to use the optional standard deduction, he is entitled to deduct as expense 40% of gross income as. By choosing the OSD the taxpayer is no longer subject to the annual investigation or audit conducted by the BIR. Sec. 34 L) Optional Standard Deductions (OSD). - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case maybe. In the case of a corporation subject to tax under Sections 27(A) and 28 (A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income as defined

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in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon, recommendation of the Commissioner. The formula for the computation of income tax on business income when the taxpayer elected OSD is as follows:

COMPUTATION OF INCOME TAX PAYABLE

BUSINESS INCOME

Gross Income

XXX

Less: Allowable Deductions Optional Standard Deduction

40%

Net Income

XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

XXX

Taxable Income

XXX

Apply tax rates

0-32% XXX

Tax due Less: Taxes paid in advance Income tax payments (bir form 1701 Q)

xxx

Creditable w/holding tax (bir form 2307)

xxx

XXX

Tax still payable/(refundable)

(bir form1701)

XXX

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If the taxpayer chooses to use the itemized deductions, all his allowable business expenses may be considered in the computation of the taxable net income provided that he shall be able to fully substantiate these expenses. No expenses shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (a) the amount of the expense being deducted, and (b) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. THE FORMULA TO COMPUTE INCOME TAX USING ITEMIZED DEDUCTIONS

COMPUTATION OF INCOME TAX PAYABLE

BUSINESS INCOME

Gross Income

XXX

Less: Itemized Deductions Interest expense [Sec. 34 B]

xxx

Taxes expense [Sec. 34 C]

xxx

Losses [Sec. 34 D]

xxx

Bad Debts [Sec. 34 E]

xxx

Depreciation expense [Sec. 34 F]

xxx

Depletion [Sec. 34 G]

xxx

Charitable Contribution [Sec. 34 H]

xxx

Research and Development Cost [Sec. 34 I]

xxx

Pension Trust Contributions [Sec. 34 J]

xxx

Other expenses in general [Sec. 34 A]

xxx

Net Income

XXX XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

XXX

Taxable Income

XXX

Apply tax rates

0-32%

Tax due

XXX

Less: Taxes paid in advance

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COMPUTATION OF INCOME TAX PAYABLE

BUSINESS INCOME

Income tax payments (bir form 1701 Q)

xxx

Creditable w/holding tax (bir form 2307)

xxx

XXX

Tax still payable/(refundable)

(bir form 1701)

XXX

ITEMIZED DEDUCTIONS (Sec.34 NIRC of 1997) A. Expenses (1) Ordinary and Necessary Trade, Business or Professional Expenses. (a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. (B) Interest. (1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or

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business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax: Provided, That effective January 1, 2009, the percentage shall be thirty-three percent (33%). (2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or Section 36 (B) Losses from Sales or Exchanges of Property - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or

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(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust; (c) If the indebtedness is incurred to finance petroleum exploration. (3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. INTEREST EXPENSE LIMITATIONS The limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer for as long as, during the taxable year, there is an interest expense incurred on one side and an interest income earned on the other side, which interest income had been subjected to final withholding tax. REQUISITES FOR DEDUCTIBILITY OF INTEREST EXPENSE (rr 31-09) There must be indebtedness; There should be an interest expense paid or incurred upon such indebtedness; The indebtedness must be that of the taxpayer‘ The indebtedness must be connected with the taxpayer‘s trade, business or exercise of profession The interest expense must have been paid or incurred during the taxable year; The interest must have been stipulated in writing; The interest must be legally due; The interest payment arrangement must not be between related taxpayers as mandated in Sec. 34(B) (2) (b), in relation to Sec. 36(B), both of the Tax Code of 1997.  The interest must not be incurred to finance petroleum operations; and  In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure. RULES ON THE DEDUCTIBILITY OF INTEREST EXPENSE The general rule is that the amount of interest expense paid or incurred within a taxable year on indebtedness in connection with the taxpayer‘s trade, business or exercise of profession shall be allowed as deduction from the taxpayer‘s gross income.

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However, the amount of interest expense paid or incurred by a taxpayer in connection with his trade business or exercise of a profession from an existing indebtedness shall be reduced by an amount equal to the percentage of the interest income earned which has been subjected to final withholding tax depending on the year when the interest income was earned. (rr 31-09) Based on the regulation, the deduction from interest expense is equal to 33% of interest income subjected to final tax, and that portion of the said expense will be non-deductible in income tax computation. ILLUSTRATION: Normal Corporate Income Tax Rate 30% Less: Final Tax Rate 20% Difference 10% (NCIT Rate less FT Rate divided by NCIT Rate) 10%/30% NCIT = 33.33%

Interest Expense – [Interest income (gross) x 33.33%] = Deductible Interest Expense Example#1 Bulutonggoy deposited with the bank 1m and he borrowed money from ABC Company 2M @6% per annum, how much is the interest income and interest expense of Bulutonggoy? Interest income is :

Amount of loan Annual interest rate Annual gross interest income % received on gross interest income Net Interest Income

1,000,000.00 x12% 120,000.00 x80% 96,000.00

Interest income is :

2,000,000.00 X6% 120,000.00

Amount of loan Annual interest rate

Annual interest

How much interest expense can Bulutonggoy claim as deduction from his business income? Can he claim 120,000.00? No, the interest allowable to Bulutonggoy is only 80,400 computed as follows: Interest expense Less: 33%x120,000.00 Allowable interest expense deduction

120,000.00 39,600.00 80,400.00

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Example#2 Carlo Corrales incurred an interest expense amounting to 20,000.00 and earned interest income of 8,000.00 net of 20% final withholding tax. How much will be the deductible expense? Interest expense shall be reduced by the benefit on interest income hence the formula would be: Interest expense - [gross interest income x 33%] = Allowable Interest Expense. To substitute: 20,000.00 – [8,000.00/.80= 10,000.00 x 33% =] 3,300 = 16,700.00

Analysis of Interest Expense Limitation when there is Interest Arbitrage In the preparation of the annual ITR, one of the areas often confused about is the deductibility of interest expense. Interest expense is the cost of borrowing or using another person‘s (real or artificial person) money in the conduct of trade or business. Borrowing funds to support the business operation is a normal and ordinary business activity that the interest or cost of borrowing is treated as an ordinary business expense. Section 34(A)(1) of the National Internal Revenue Code (NIRC) allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in the conduct of the trade or business. However, under Section 34(B)(1) of the NIRC (as amended by RA No. 9337), the taxpayer‘s otherwise allowable deduction for interest expense should be reduced by 33% of the interest income subjected to final tax. The forgoing limitation on interest expense was added to the present tax law to minimize the use of tax arbitrage scheme. Tax arbitrage refers to any investment which generates a profit because one part of the transaction is taxed differently from the other part. In the Philippine setting, any high income taxpayers resort to various forms of tax arbitrage available under the National Internal Revenue Code (NIRC). Tax arbitrage generates income through similar transactions being differently taxed. The same transactions but different tax rates or tax exposure. Some investors will get a loan from a foreign country that offers minimum interest rate and would invest this in countries that offer high interest rates. It is profiting from moving capital from one hand to another, this is a highly speculative activity that is market influenced. For example, in 2016, RB Trading borrowed money from a foreign bank amounting to P100, 000 with 5% annual interest then immediately deposited in the local depository bank that offers same interest per annum. The loan costs the corporation 5,000.00 interest while the bank deposit gives the corporation 4,000.00 interest income.

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The 5,000 expense would mean a 30 % income through tax savings because the income subject to tax has been reduced by 5,000.00 so the BIR gave the corporation 1,500 tax benefits in essence. However, the 5, 000 interest income on bank deposit was subjected to 20% final tax so in effect RB Corporation gave the BIR 20% tax, therefore, the BIR is shortchanged by 10% tax in this scheme. If we are going to apply the formula on the interest expense limit, the advantage taken by the RB Trading will be given back to the BIR. Hence, instead of allowing RB Trading 5,000.00 interest expense deduction, it will be allowed only 3,350 [5,000.00 – 1,650.00 (33% of gross interest income)] and the tax would be increased by 10%. With limit, RB Trading Income Tax liability is: 100,000.00 – 3,350.00= 96,650.00 x 30%

= 28,995.00

To illustrate let us assume that RB Trading has business income of 100,000.00 exclusive of the interest income. With limit, RB Trading Income Tax liability is: without limit: 100,000.00 – 5,000.00=95,000.00 x 30%= 28,500.00 Difference Divide by the amount of interest income

495.00 5,000.00 = .099 or 10%

The percentage recovered is equal to .0999 or 10%, and this is the advantage being run after by the BIR from those taxpayers who are using the Interest Arbitrage scheme. BIR RMC 31-2009, reiterated the provision of Revenue Regulation No. 132000, that the limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date when the interest bearing loan and the date when the investment was made, as long as during the taxable year, there is an interest expense incurred on one side and an interest income earned on the other side, which interest income had been subjected to final withholding tax. Try answering the following exercises to apply the principles on deductibility of Interest Expense and apply the limit in case there is Interest Arbitrage. 1.

Camote Cute earned interest income from loans to co-employees amounting to P100,000 and incurred interest expense on a loan from a bank amounting to P200,000 can he deduct the entire interest expense of P200,000 from its taxable gross income?

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2.

John Djaran earned interest income from money market placements amounting to P100,000 and incurred interest expense on a loan from a bank amounting to P200,000. How much can be claimed as interest expense?

3.

Yippie Yehey earned interest income from money market placements amounting to P300,000 and incurred interest expense on a loan from a bank amounting to P100,000, how much interest expense can be allowed as his deduction from gross income?

4.

Mr Goodah, father of Mr. Goodie the debtor, lent P1,000,000 for the latter‘s personal business, earning Mr. X interest income amounting to P50,000 during the current taxable year. How much can be claimed as Interest expense?

5.

Kumareng Kheng purchased a machinery on installment costing P5,000,000 and incurred interest amounting to P200,000 in financing the purchase. She has chosen to add the amount of the interest to the value of the machinery which she expects to use for ten years. How much interest expense can she claim?

6.

Maanne Hung, reporting on a cash basis her business operations, borrowed from Jackpot Co. P5, 000,000 payable in lump sum after 2 years with interest deducted in advance amounting to P700, 000. Can she claim the entire amount of P700, 000 as interest expense on the year the said interest expense was deducted from her loan?

7.

Khoto Moto who is also reporting transactions on a cash basis borrowed from Loan Shark Company the amount of 3,000.000 with discounted interest amounting to 360,000.00. He added the value of the interest on the cost of the machine he purchased out of the money he loaned. Can he claim the 300,000.00 as deduction from his gross income?

8.

Khoto Nyahyan who bought a warehouse on through financing amounting to 3,000,000.00 for which he pays 30,000.00 monthly interest, how much interest expense can he claim as deduction from his gross income?

9.

Khoto Mhoyan borrowed money from Pahardan Corporation to buy a truck for his hauling business. He was able to get a 5,000.000.00 loan but the truck only cost him 2,000,000.00. He placed the remaining 3,000,000 in the bank which earns an interest of 12% per annum, how much interest expense can he claim?

10.

Fhorro Khoto purchased a money counter machine on installment costing P5, 000,000 and incurred interest amounting to P200,000 in financing the purchase. His excess capital is deposited with Banco de Guro and earned 59,000.00 how much is his allowable interest expense?

(C) Taxes. (1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except:

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(a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. (3) Credit against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and

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(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. (5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall re-determine the amount of the tax for the year or years affected, and the amount of tax due upon such re-determination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. (7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: (a) The total amount of income derived from sources without the Philippines; (b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits. Taxes whether local, national or foreign, paid or incurred within the taxable year in connection with the taxpayer‘s profession, trade or business, shall be allowed as deduction form his/her gross income Examples of Taxes that are Deductible: 1. Percentage taxes 2. Excise taxes 3. Documentary stamp taxes

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4. Local business taxes 5. Import duties 6. BIR Registration fees 7. Registration fees of vehicles or automotive used in business 8. Occupation tax or professional license fees 9. Community tax 10.Income taxes paid to foreign countries which are not claimed as tax credits Note: The taxes above should be related to your business or practice of profession to be claimed as deductions Examples of Taxes which are Non-deductible: 1. Philippine income tax 2. Income taxes paid to foreign countries which are claimed as tax credits 3. Estate tax 4. Donor‘s tax 5. VAT 6. Surcharge and compromise tax penalties 7. Interest on unpaid taxes (interests and penalties on delinquent taxes are not deductible expense either as interest expense or as taxes) 8. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed, Special Assessments. 9. Taxes that are not related to your business or practice of profession (D) Losses. (1) In General. - Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: (a) If incurred in trade, profession or business; (b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss. (c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return.

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(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and. (4) Capital Losses. (a) Limitations. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39 of the Tax Code. (b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (5) Losses from Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as provided in Section 38. (6) Wagering Losses. - Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. (7) Abandonment Losses. (a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner. (b) In case a producing well is subsequently abandoned, the un-amortized costs thereof, as well as the un-depreciated costs of equipment directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is re-entered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be. (E) Bad Debts. – . Bad debts expense is only deductible when actually ascertained to be worthless and charged off within the taxable year. Recovery of bad debts previously allowed 154

as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (F) Depreciation. – Depreciation is generally computed on a straight-line basis, although any reasonable method may be elected if the aggregate amount of depreciation, plus salvage value at the end of the useful life of the property, will equal the cost of the property. Depreciable Assets used in petroleum operations may be depreciated over a period of ten years using the straight-line or declining-balance method, at the option of the service contractor. Those used in mining operations with expected life of more than ten years may be depreciated over any number of years between five years and their expected life. (1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. (2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: (a) The straight-line method;

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(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F) (1); (c) The sum-of-the-years-digit method; and (d) Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. (3) Agreement as to Useful Life on Which Depreciation Rate is Based. Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement: Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines. (G) Depletion of Oil and Gas Wells and Mines.A cost depletion allowance is available as follows: For oil and gas wells, depletion is based on actual reduction in flow and production ascertained, not by flush flow, but by the settled production or regular flow. For mines, depletion is allowable up to an amount not to exceed the market value, as used for purposes of imposing the mining ad valorem taxes, of the products mined and sold during the year. (1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the allowance for depletion shall equal the capital invested no further

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allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. 'Intangible costs in petroleum operations' refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection. Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. (2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. 'Net income from mining operations', as used in this Subsection, shall mean gross income from operations less 'allowable deductions' which are necessary or related to mining operations. 'Allowable deductions' shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation. In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas. The term 'exploration expenditures' means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of

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ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit. The term 'development expenditures' means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. - In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines. (H) Charitable and Other Contributions. (1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. (2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full: (a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;

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(b) Donations to Certain Foreign Institutions or International Organizations. donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; (c) Donations to Accredited Nongovernment Organizations. -The term 'nongovernment organization' means a non-profit domestic corporation: (1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net [31] income of which inures to the benefit of any private individual; (2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; (3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and (4) The assets of which, in the event of dissolution, would be distributed to another non-profit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period 159

to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. (3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (I) Research and Development. (1) In General. - A taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. (2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses: (a) Paid or incurred by the taxpayer in connection with his trade, business or profession; (b) Not treated as expenses under paragraph (1) hereof; and (c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. (3) Limitations on Deduction. - This Subsection shall not apply to:

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(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and (b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas. (J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A)(1) of this Section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1)has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made.

Rules of Deductibility of Expenses As a general rule, the requisites for the deductibility of an expense are: 1. the expense must be ordinary and necessary; 2. it must have been paid or incurred during the taxable year; 3. it must have been paid or incurred during the conduct of the trade or business of the taxpayer; and 4. it must be supported by receipts, records or other pertinent papers.

In case the claimed expense is subject to withholding tax an additional requirement is that the withholding tax on the amount paid as expense must have been withheld and remitted to the Bureau of Internal Revenue. For the accrual of expenses, a deduction can be made when the liability of the expense becomes fixed, rather than contingent or estimated, and the amount of the liability can be determined with reasonable accuracy. The propriety of an accrual must be judged by the fact that a taxpayer knew, or can reasonably be expected to have known, at the closing of its books for the taxable year, the amount of expenses to be accrued. The accrual method of accounting largely presents a question of fact such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction.(Commissioner of Internal Revenue v. Isabela Cultural Corp., G.R. No. 172231.February 12, 2007).

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BUSINESS INCOME TAX DUE DEDUCTIONS-Tax credits/withholding taxes for business income

BUSINESS INCOME

COMPUTATION OF INCOME TAX PAYABLE Gross Income

XXX

Less: Allowable Deductions Optional Standard Deduction/

Xxx /

Itemized Deduction

xxx

Net Income

XXX XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

XXX

Taxable Income

XXX

Apply tax rates

0-32% XXX

Tax due Less: Taxes paid in advance Income tax payments (bir form 1701 Q)

xxx

Creditable w/holding tax (bir form 2307)

xxx

XXX

Tax still payable/(refundable)

(bir form1701)

XXX

The computation of actual amount payable to the BIR must be Tax Due minus Tax Credits. Tax credits for business income includes quarterly income tax payments and if subject to expanded withholding tax then it includes creditable withholding tax also. Quarterly income tax payments for the 3 quarters will serve as tax credits for the annual income tax. The monthly creditable taxes withheld if there were any will likewise be deducted from the tax due to arrive at the tax payable, if tax due is greater than tax credits; or tax refundable if the tax due is lesser than the tax credits.

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INDIVIDUALS EARNING BUSINESS INCOME HAVE TWO KINDS OF ADVANCED TAX TAX PAYMENTS OR TAX CREDITS 1. THE QUARTERLY TAX PAYMENTS in the quarterly

Income tax returns filed on the three quarters before the end of the taxable year, and 2. THE CREDITABLE WITHHOLDING TAX if the goods or

services being sold or offered are subject to the expanded withholding tax, the monthly taxes withheld by the payors as evidenced by properly remitted withholding taxes will be credited at the end of the taxable year. Quarterly Income Tax Payments for Business Income Quarterly Income Tax Return for Self-employed Individuals, Estates, and Trusts (Including Those with both Business and Compensation Income)

Description This return BIR Form No. 1701Q shall be filed in triplicate by the following individuals regardless of amount of gross income:

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1) A resident citizen engaged in trade, business, or practice of profession within and without the Philippines. 2) A resident alien, non-resident citizen or non-resident alien individual engaged in trade, business or practice of profession within the Philippines. 3) A trustee of a trust, guardian of a minor, executor/administrator of an estate, or any person acting in any fiduciary capacity for any person, where such trust, estate, minor, or person is engaged in trade or business. Filing Date 1st qtr

On or before April 15 of the current taxable year

2nd qtr

On or before August 15 of the current taxable year

3rd qtr

On or before November 15 of the current taxable year

CODAL PROVISION ON THE QUARTERLY PAYMENT OF INCOME TAX: CHAPTER XII (RA 8424) QUARTERLY CORPORATE INCOME TAX ANNUAL DECLARATION AND QUARTERLY PAYMENTS OF INCOME TAXES SEC. 74. Declaration of Income Tax for Individuals. (A) In General. - Except as otherwise provided in this Section, every individual subject to income tax under Sections 24 and 25(A) of this Title, who is receiving selfemployment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. In general, 'self-employment income' consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax. The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration filed during the taxable year under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in Subsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid on August 15 and November 15 of the current year, respectively. The fourth

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installment shall be paid on or before April 15 of the following calendar year when the final adjusted income tax return is due to be filed. (C) Definition of Estimated Tax. - In the case of an individual, the term 'estimated tax' means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates. Sample of Computation Of Quarterly Income Tax Due And Payable

Example: Let us assume the following financial information of Mammy Ganda, single and Filipino Citizen has the following quarterly income information for the year 1016.

Gross sales: Cost of Sales: Expenses

1st Qtr. P 300,000.00 P 180,000.00 P 60,000.00

2nd Qtr. 450,000.00 280,000.00 140,000.00

3rd Qtr. 600,000.00 380,000.00 200,000.00

COMPUTATION OF TAXABLE NET INCOME: Gross sales P 300,000.00 P 750,000.00 P 1,350,000.00 Less: Cost of sales & Expenses 240,000 660,000.00 1,240,000.00 Net Income 60,000.00 90,000.00 90,000.00 Less: Personal Exemption Additional Exemption Health/Hosp. Premiums Taxable Net Income 60,000.00 90,000.00 90,000.00 COMPUTATION OF TAX DUE & PAYABLE First Quarter: Taxable Net Income: Tax due: on 30,000.00 ……………………… plus excess of 30,000@ 15% (30,000.00x 15%) Tax Payable or (refundable) for the 1st qtr

4th Qtr. 750,000.00 480,000.00 270,000.00

P2,050,000.00 1,990,000.00 60,000.00 50,000.00

10,000.00

60,000.00 2,500.00 4,500.00 7,000.00

Second Quarter Taxable Income 2nd qtr. Tax due: on 70,000……………………………………… 8,500.00 plus [excess of 20,000 @ 20% (20,000x20%)]……… 4,000.00 Total tax due for the 2nd quarter ………………………… 12,500.00 Less: Tax paid in the first quarter…….…………………… 7,000.00 Tax Payable or (refundable) for the 2nd qtr.…………………….…….

90,000.00

5,500.00

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Taxable Income 3rd qtr. Tax due: on 70,000……………………………………… 8,500.00 plus [excess of 20,000 @ 20% (20,000x20%)]………… 4,000.00 Total tax due for the 3rd quarter ……………………….… 12,500.00 Tax paid in the previous quarter First qtr. 7,000.00 nd 2 qtr. 5,500.00 12,500.00 Tax Due for the 3rd qtr ……………………………………………………… Fourth Quarter/annual income tax return Gross sales Less Cost and Expenses Net income for the year Less: Personal Exemption Net taxable income Computation of Tax Due: Tax due on 10,000.00 Less: Tax paid on previous quarters First quarter 7,000.00 Second quarter 5,500.00 Third quarter __0___ Tax payable/(refundable)

90,000.00

___0_____

2,050,000.00 1,990.000.00 60,000.00 50,000.00 10,000.00

500.00

12,500.00 ( 12,000.00 )

Note: 1. The personal and additional exemptions of the taxpayer are only claimed on the computation of annual income tax return.. 2. If there is compensation income, this need not be reported in the Quarterly Income Tax Return. The same shall be reported in the Annual Income Tax Return only. OTHER DEDUCTIONS FROM TAX DUE Creditable Withholding Taxes (Expanded) shall likewise be deducted from the income tax due from individual if the income is subject to any of those included in the Expanded Withholding Tax Regulation. These creditable withholding taxes shall be deducted from the income tax due for the pertinent period. If the taxpayer is engaged in the sale of the following goods or services, his income is reduced by the amount of creditable withholding tax.

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1.

2. 3.

4. 5.

6.

Professional fees / talent fees for services rendered by the following: Those individually engaged in the practice of profession or callings such as lawyers, certified public accountants, doctors of medicine, architects, engineers and all other professionals who have undergone licensure examinations regulated by the Professional Regulations Commission, Supreme Court, etc. Professional entertainers such as but not limited to actors and actresses, singers, lyricist, composers and emcees Professional athletes including basketball players, pelotaris and jockeys Directors and producers involved in movies, stage, radio, television and musical productions Insurance agents and insurance adjusters Management and technical consultants Bookkeeping agents and agencies Other recipient of talent fees Fees of directors who are not employees of the company paying such fees whose duties are confined to attendance at and participation in the meetings of the Board of Directors Professional fees, talent fees, etc. for services of taxable juridical persons Rentals: Rental of real property used in business Rental of personal properties in excess of P 10,000 annually Rental of poles, satellites and transmission facilities of billboards Cinematographic film rentals and other payments Income payments to certain contractors General engineering contractors General building contractors Specialty contractors Other contractors such as transportation contractors, janitorial, security, messengerial, advertising, labor recruiting agencies, computer programmers, etc. Income distribution to the beneficiaries of estates and trusts

167

7.

8. 9. 10.

11. 12. 13.

14. 15.

16. 17. 18. 19. 20 21. 22.

23.

24.

Gross commission or service fees of customs, insurance, stock, real estate, immigration and commercial brokers and fees of agents of professional entertainers Income payments to partners of general professional partnerships Payments made to medical practitioners Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset Additional income payments to government personnel from importers, shipping and airline companies or their agents Certain income payments made by credit card companies Income payments made by the top 20,000 private corporations to their purchase of goods and services from their local/resident suppliers other than those covered by other rates of withholding Payments by government offices on their purchase of goods and services, from resident suppliers other than those covered by other rates of withholding Commission, rebates, discounts and other similar considerations paid/granted to independent and exclusive distributors, medical/technical and sales representatives and marketing agents and sub-agents of multi-level marketing companies. Tolling fees paid to refineries Payments made by pre-need companies to funeral parlors Payments made to embalmers by funeral parlors Income payments made to suppliers of agricultural products (suspension not yet lifted) Income payments on purchases of mineral, mineral products and quarry resources On gross amount of refund given by MERALCO to customers with active as classified by MERALCO; Interest income on the refund paid through direct payment or application against customers‘ billing by other electric Distribution Utilities in accordance with the rules embodied in ERC Resolution No. 8 series of 2008 dated June 4, 2008 governing the refund of meter deposits which was approved and adopted by ERC in compliance with the mandate of Article 8 of the Magna Carta for Residential Electricity Consumers and Article 3.4.2 of DSOAR exempting all electricity consumers, whether residential or non-residential from the payment of meter deposit. Income payments made by the top 5,000 individual taxpayers to their purchase of goods and services from their local/resident suppliers other than those covered by other rates of withholding Income payments made by political parties and candidates of local and national elections of all their campaign expenditures, and income payments made by individuals or juridical persons for their purchases of goods and services intended to be given as campaign contribution to political parties and candidates.

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This withholding tax form shall be attached to the Income Tax Return

Problem #1. Teodoro Plata is a resident citizen, married taxpayer with a legitimate child, illegitimate child and a legitimate acknowledged natural child all below 21 years of ages, living with and fully dependent upon him for chief support, has the following business data for the taxable year 2016 as follows: Items of Income and Expenses from Philippine sources a. Gross income from rental b. Royalty income on books c. Dividend income from a foreign corporation d. gain from sale of business assets e. Income exempt from income tax h. Income subject to final income tax

P2, 950,000 150,000 12,000 60,000 50,000 15,000

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i. Business expenses j. Personal family and living expenses k. Quarterly income payments for the year l. Annual health insurance premiums paid

700,000 165,000 79,250 30,000

Determine the taxable net income and income tax due: A. If he uses itemized deductions, and B. Optional Standard Deduction A. If the taxpayer uses itemized deductions First-

Determine the kind of taxpayer, in the problem, Teodoro Plata is a resident citizen, therefore all his income within and without the Philippines are taxable, considering that he has only income from the Philippine sources allthe items listed will be considered for further analysis.

Second-

Determine all the exclusions from the gross income or part of passive income. What are the income items in the given problem which are not included in the computation of gross income because they are included in the exclusions or part of the passive income?

Analysis:    

Third-

Royalty income from books (item -b) is subject to final tax Gain from sale of business assets (item -d) is subject to capital gains tax Income subject to final tax (item- h) is not part of gross business income Income exempt from income tax (item -e) is not a taxable income

Determine what the allowable expenses are and whether the taxpayer uses OSD or itemized deductions and whether his dependents are qualified and whether the allowance for health insurance premium payments can be claimed as deductions.

Analysis:    

Fourth-

Personal and family expenses (item –j) are not considered Allowable business expenses All children are qualified dependent children and entitled to 25,000 each Health insurance premium payments cannot be deducted because the Gross family income exceeded 250,000 Determine the quarterly income tax payments made during the year and whether the business income is subject to the expanded withholding tax

170

Analysis:   

Fifth-

the taxpayer has quarterly income tax payment of 49,150, therefore it has paid a total tax of 237,750 for the first 3 quarters. the taxpayer is a lessor therefore he is subject to a monthly creditable withholding tax of 5% per month based on gross rental income, 2,950,000 x.05% =147,500 Proceed with the computation using the following formula:

COMPUTATION OF INCOME TAX PAYABLE

BUSINESS INCOME

Gross Income

XXX

Less: Itemized Deductions Interest expense [Sec. 34 B]

xxx

Taxes expense [Sec. 34 C]

xxx

Losses [Sec. 34 D]

xxx

Bad Debts [Sec. 34 E]

xxx

Depreciation expense [Sec. 34 F]

xxx

Depletion [Sec. 34 G]

xxx

Charitable Contribution [Sec. 34 H]

xxx

Research and Development Cost [Sec. 34 I]

xxx

Pension Trust Contributions [Sec. 34 J]

xxx

Other expenses in general [Sec. 34 A]

xxx

Net Income

XXX XXX

Less: Allowance/Exemption Personal Exemption

50,000

Additional Exemption (100,000 max)

25,000

Health/hosp. premium payments

2,400

XXX

Taxable Income

XXX

Apply tax rates

0-32%

Tax due

XXX

Less: Taxes paid in advance Income tax payments (bir form 1701 Q)

xxx

Creditable w/holding tax (bir form 2307)

xxx

XXX

171

COMPUTATION OF INCOME TAX PAYABLE

BUSINESS INCOME

Tax still payable/(refundable)

(birform 1701)

Gross income (items a and c) Less: Allowable deductions/itemized deductions (item i) Net Income Less: Personal exemptions P 50,000.00 Additional exemptions ( 3 x 25,000) 75,000.00 Total allowable deductions Taxable Net Income

XXX

P2,962,000 700,000 P2,262,000

125,000 P2,137,000

Computation of tax due using the following table: First identify the bracket that covers the amount of 2,137,000 in the table below. It is in bracket no. 7, over 500,000 without limit. Then look for the tax on the 500,000 and apply the rate in bracket no.7 to the excess on 500,000.

1 2 3 4 5 6 7

OVER

NOT OVER

TAX DUE IS

PLUS

P0 10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

P0 500.00 2,500.00 8,500.00 22,500.00 50,000.00 125,000.00

5% 10% 15% 20% 25% 30% 32%

WITHOUT LIMIT

The tax due will be : On 500,000 On excess @ 32 %( 2,137,000-500,00x32%)

P 125,000 523,840

Tax due Less: Quarterly income tax payments Creditable withholding tax Tax still payable or (refundable)

OF EXCESS OVER P0 10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

684,840 237,750 147,500

385,250 263,950

COMPUTATION OF INCOME TAX OF THE ESTATES AND TRUSTS Income of Estates and Trusts are taxable in the same manner as income from trade or business. Same allowable deductions are applicable in the computation of net income. However in the computation of taxable income, only personal exemption of P20,000.00 is allowed.

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3. Computation of Income Tax on Passive Income

PASSIVE INCOME

COMPUTATION OF INCOME TAX PAYABLE Gross Income

XXX

Apply tax rates

0-25%

Tax due Tax still payable/(refundable)

XXX (bir form 2306) XXX

The tax rates to be used in the computation of tax on passive income are 0-20% as shown in the previous formula on the computation of taxes. As mentioned Passive Income is subject to final withholding tax, meaning upon receipt of this income the taxpayer is not required to include this income in his annual income tax return because the tax collected from this kind of income has been fully withheld by the payor. The computation of the tax on passive income is the easiest computation to do, however, the various tax rates for the different kinds of passive income should be memorized in order to apply the correct tax rate. The computation of taxes on passive income is so simple because the gross income is only multiplied by an appropriate tax rate. There are no expenses or allowable deductions to be considered because the tax is computed based on the gross amount of the income. The difficulty however lies in remembering the tax rate applicable to a specific passive income. Below is the table showing the different passive income and the rates applicable to certain types of individual taxpayers.

Passive Income Tax Rates For Individuals A. For Residents and Citizens Passive Income

Rate

1. Interest from currency deposits, trust funds and deposit substitutes

20%

2. Interest Income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates Upon pre termination before the fifth year , there should be

Exempt

173

imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof: Holding Period

- Four (4) years to less than five (5) years

5%

- Three (3) years to less than four (4) years

12%

- Less than three (3) years

20%

3. Interest Income of Foreign Currency Deposit

7.5%

4. Cash and Property Dividends - To individuals from Domestic Corporations

10 %

- To Domestic Corporations from Another Domestic Corporations

0%

5. On capital gains presumed to have been realized from sale, exchange or other disposition of real property (capital asset)

6%

6. On capital gains for shares of stock not traded in the stock exchange - Not over P100,000

5%

- Any amount in excess of P100,000

10%

7. Royalties (on books as well as literary & musical composition)

10%

- In general

20%

8. Prizes (P10,000 or less )

5%

- In excess of P10,000

20%

9. Winnings (except from PCSO and lotto)

20%

10.Compensation Income/Gross Income* *For Filipinos or aliens holding managerial, supervisory, or technical positions in regional headquarters of a multinational corporation

15%

11.Informer‘s Reward * An informer is a person who has been instrumental discovering people who have been violating the tax code, or smuggling goods. His reward is subject to 10% tax* 12.Fringe benefits granted to employees with managerial or supervisory positions are subject to the fringe benefits tax. The grossed-up monetary value of fringe benefits is derived by dividing the monetary value of these fringe benefits by 68%. The grossed-up monetary value is then multiplied by 32%. The value derived is the amount to be withheld by the employer as fringe benefits tax.**

10%

32%* on grossed up

174

* INFORMER’S REWARD Republic Act Number 2338, of Informer‘s Reward Law was enacted to help the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) run after tax cheats, tax evaders and smugglers. This law awards fifteen percent (15%) of the amount recovered to any person who voluntarily gives definite information to the BIR and BOC on any tax fraud or smuggling case which results to the recovery of revenues, surcharges or fees and/or conviction of the guilty party. However, this law was modified when the Tax Reform Act of 1997 (RA 8424) was enacted. Section 282 thereof provides that only a mere ten percent (10%) reward or Pl Million, whichever is lower, shall be given to any tax informer. Requisites informer's reward, (on fraudulent tax returns) 1. voluntarily filed confidential information under oath with the Law Division of the BIR alleging therein specific violations constituting fraud 2. information must not yet be in possession of BIR or refer to a case already pending or previously investigated by BIR 3. informer must not be a government employee or a relative of the government employee within the 6th degree of consanguinity 4. information must result to collection of revenues and/or fines and penalties What is a fringe benefit tax? Fringe benefit tax (FBT) is a final withholding tax on the grossed-up monetary value of the fringe benefit granted by the employer to an employee who holds a managerial or supervisory position (i.e., except rank and file employees). FBT is treated as a final income tax on the employee which shall be withheld and paid by the employer on a calendar quarterly basis. ***What is a fringe benefit? Fringe benefit means any good, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries to employees (except rank and file employees) such as, but not limited to the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;

175

(7) Expenses for foreign travel; (8) Holiday and vacation expenses; NIRC of 1997 (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. The following employee benefits are not covered by Fringe Benefit Tax: 1.

Fringe benefits which are authorized and exempted from income tax under the Code or under special law. Separation benefits which are given to employees who are involuntarily separated from work are not subject to FBT.

2

Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;

3

Benefits given to the rank and file, whether granted under a collective bargaining agreement or not ;( this is part of the other benefits taxable as ordinary income)

4.

De minimis benefits

5.

Benefits granted to employee as required by the nature of, or necessary to the trade, business or profession of the employer

6

Benefits granted for the convenience of the employer

Although the benefit may be exempt from FBT, it may, however, still form part of the employee‘s gross compensation income which is subject to income tax, which is required to be covered by the withholding tax on wages. How to compute the Fringe Benefit tax? The final withholding tax on fringe benefit shall be computed based on the taxable grossed-up monetary value multiplied by the applicable tax rate. A. The Grossed-Up Monetary Value. In general, for citizen, resident alien, and non-resident alien engaged in trade or business in the Philippines – 68% For non-resident alien not engaged in trade or business in the Philippines – 75% For alien or Filipino individuals employed by Foreign Petroleum Service Contractors/ Subcontractors, Offshore Banking Units and Regional or Area

176

Headquarters and Regional Operating Headquarters of Multinational Companies occupying executive/managerial and technical positions – 85% B. Applicable Tax Rates The fringe benefit tax shall be imposed at the following rates: In general – 32% For non-resident alien individual who is not engaged in trade or business in the Philippines – 25% For alien or Filipino individuals employed by Foreign Petroleum Service Contractors/Subcontractors, Offshore Banking Units and Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies occupying executive/managerial and technical positions – 15%

Sample computation of Fringe Benefit Tax Example/Question: Vakhlush Company (a domestic employer/company) granted Carlolong Bulotonggoy (a Filipino branch manager), in addition to his basic salaries, Php 4,000 cash per quarter for his personal membership fees at Kalawang Barbel Gym (a fitness and athletic club). How much is the FBT that Vakhlush Company should withhold and remit to BIR per quarter? Computation/Answer: Monetary value of fringe benefit: Php 4,000 Percentage divisor applicable: 68% Fringe benefit tax rate: 32% FBT= (Monetary value of fringe benefit/68%) x 32% FBT= (Php 4,000/68%) x 32% FBT= Php 5,882.35 x 32% FBT= Php 1,882.35 BIR Form used to file Fringe Benefit & How to File Fringe Benefit Tax Return What is the form used to file Fringe Benefits Tax? BIR Form No. 1603 – Quarterly Remittance Return of Final Income Taxes Withheld on Fringe Benefits Paid to Employees Other than rank and file employees Who Are Required To File? Every withholding agent/payor who is either an individual or non-individual required to deduct and withhold taxes on fringe benefits furnished to employees other than rank and file employees subject to Final Withholding Tax Form to be used in filing the Passive Income Tax

177

May 21, 1998 January 1, 1998 REVENUE REGULATIONS NO. 03-98 (note: the computations here should be adjusted to include in the computation the P82,000.00 statutory limitation on the exclusion from gross compensation income, instead of the P30,000.00 provided in the CTRP) SUBJECT : Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits TO

:

All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 33 of the National Internal Revenue Code of 1997, these Regulations are hereby promulgated to govern the collection at source of the tax on fringe benefits which have been furnished, granted or paid by the employer beginning January 1, 1998. SEC. 2.33.

SPECIAL TREATMENT OF FRINGE BENEFITS

(A) Imposition of Fringe Benefits Tax — A final withholding tax is hereby imposed on the grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees as defined in these Regulations, whether such employer is an individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities except when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the following rates: Effective January 1, 1998

-

34%

Effective January 1, 1999

-

33%

178

Effective January 1, 2000

-

32%

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the employee which shall be withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of the fringe benefit by the following percentages and in accordance with the following schedule: Effective January 1, 1998

-

66%

Effective January 1, 1999

-

67%

Effective January 1, 2000

-

68%

The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee, pursuant to the provisions of this Section. Coverage — These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory employees and not to the rank and file. The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. "Supervisory employees" are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. Moreover, these regulations do not cover those benefits properly forming part of compensation income subject to withholding tax on compensation in accordance with Revenue Regulations No. 2-98. Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these Regulations. Determination of the Amount Subject to the Fringe Benefit Tax — In general, the computation of the fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of the proportion or percentage of the benefit which is subject to the fringe benefit tax. That the Tax Code allows for the cases where only a portion (i.e. less than 100 per cent) of the fringe benefit is subject to the fringe benefit tax is clearly stated

179

in Section 33 (a) of R.A. 8424 which stipulates that fringe benefits which are "required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail joint benefits to the employer and employee, the portion which shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are defined under these rules and regulations. Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as follows: (1) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for. (2) If the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real Property Values). (3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property. Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or business in the Philippines — A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%). Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company; (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines; and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees. — A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five per cent (85%). Taxation of fringe benefit received by employees in special economic zones — Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above.

180

(B) Definition of Fringe Benefit — In general, except as otherwise provided under these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; NIRC of 1997 (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. For this purpose, the guidelines for valuation of specific types of fringe benefits and the determination of the monetary value of the fringe benefits are give below. The taxable value shall be the grossed-up monetary value of the fringe benefit. (1)

Housing privilege —

(a) If the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. (b) If the employer owns a residential property and the same is assigned for the use of his employee as his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the market value of the land and improvement, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. ```

181

The monetary value of the housing fringe benefit is equivalent to the following: MV = [5%(FMV or ZONAL VALUE] X 50% WHERE: MV = MONETARY VALUE FMV = FAIR MARKET VALUE (c) If the employer purchases a residential property on installment basis and allows his employee to use the same as his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the acquisition cost, exclusive of interest. The monetary value of fringe benefit shall be fifty per cent (50%) of the value of the benefit. (d) If the employer purchases a residential property and transfers ownership thereof in the name of the employee, the value of the benefit shall be the employer's acquisition cost or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the fringe benefit shall be the entire value of the benefit. (e) If the employer purchases a residential property and transfers ownership thereof to his employee for the latter's residential use, at a price less than the employer's acquisition cost, the value of the benefit shall be the difference between the fair market value, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to Sec. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher, and the cost to the employee. The monetary value of the fringe benefit shall be the entire value of the benefit. (f) Housing privilege of military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force shall not be treated as taxable fringe benefit in accordance with the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible from the military camp so that they can be readily on call to meet the exigencies of their military service. (g) A housing unit which is situated inside or adjacent to the premises of a business or factory shall not be considered as a taxable fringe benefit. A housing unit is considered adjacent to the premises of the business if it is located within the maximum of fifty (50) meters from the perimeter of the business premises. (h) Temporary housing for an employee who stays in a housing unit for three (3) months or less shall not be considered a taxable fringe benefit. (2)

Expense account —

182

(a) In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee. (b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits except only when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the said employee. (c) Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer. (d) Representation and transportation allowances which are fixed in amounts and are regular received by the employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same shall be considered as taxable compensation income subject to the tax imposed under Sec. 24 of the Code. (3)

Motor vehicle of any kind —

(a) If the employer purchases the motor vehicle in the name of the employee, the value of the benefit is the acquisition cost thereof. The monetary value of the fringe benefit shall be the entire value of the benefit, regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. (b) If the employer provides the employee with cash for the purchase of a motor vehicle, the ownership of which is placed in the name of the employee, the value of the benefits shall be the amount of cash received by the employee. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer, unless the same was subjected to a withholding tax as compensation income under Revenue Regulations No. 2-98. (c) If the employer purchases the car on installment basis, the ownership of which is placed in the name of the employee, the value of the benefit shall be the acquisition cost exclusive of interest, divided by five (5) years. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. (d) If the employer shoulders a portion of the amount of the purchase price of a motor vehicle the ownership of which is placed in the name of the employee, the value of the benefit shall be the amount shouldered by the employer. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. 183

(e) If the employer owns and maintains a fleet of motor vehicles for the use of the business and the employees, the value of the benefit shall be the acquisition cost of all the motor vehicles not normally used for sales, freight, delivery service and other nonpersonal used divided by five (5) years. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. The monetary value of the motor vehicle fringe benefit is equivalent to the following: MV = [(A)/5] X 50% where: MV = Monetary value A = acquisition cost (f) If the employer leases and maintains a fleet of motor vehicles for the use of the business and the employees, the value of the benefit shall be the amount of rental payments for motor vehicles not normally used for sales, freight, delivery, service and other non-personal use. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. (g) The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as business use and not be subject to the fringe benefits tax. (h) The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe benefit. The value of the benefit shall be measured based on the depreciation of a yacht at an estimated useful life of 20 years. (4) Household expenses — Expenses of the employee which are borne by the employer for household personnel, such as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for homeowners association dues, garbage dues, etc.) shall be treated as taxable fringe benefits. (5)

Interest on loan at less than market rate

(a) If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%), such interest foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe benefit. (b) The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation. (c) This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%) starting January 1, 1998.

184

(6) Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs or other similar organizations. — These expenditures shall be treated as taxable fringe benefits of the employee in full. (7)

Expenses for foreign travel —

(a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit tax. (b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidenced by official communications from business associates abroad indicating the purpose of the meetings. Business conventions shall be evidenced by official invitations/communications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee. (c) Travelling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee. (8) Holiday and vacation expenses — Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe benefits. (9)

Educational assistance to the employee or his dependents —

(a) The cost of the educational assistance to the employee which are borne by the employer shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or profession, and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business. (b) The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the

185

assistance was provided through a competitive scheme under the scholarship program of the company. (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows — The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit, except the following: (a) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282, as amended) or under the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar contributions arising from the provisions of any other existing law; and (b) the cost of premiums borne by the employer for the group insurance of his employees. (C) Fringe Benefits Not Subject to Fringe Benefits Tax — In general, the fringe benefits tax shall not be imposed on the following fringe benefits: (1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not; (4)

De minimis benefits as defined in these Regulations;

(5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or (6)

If the grant of the fringe benefit is for the convenience of the employer.

The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall not be interpreted to mean exemption from any other income tax imposed under the Code except if the same is likewise expressly exempt from any other income tax imposed under the Code or under any other existing law. Thus, if the fringe benefit is exempted from the fringe benefits tax, the same may, however, still form part of the employee's gross compensation income which is subject to income tax, hence, likewise subject to a withholding tax on compensation income payment. The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following:

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(1) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year; (2) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month; (3)

Rice subsidy of P350 per month granted by an employer to his employees;

(4)

Uniforms given to employees by the employer;

(5)

Medical benefits given to the employees by the employer;

(6)

Laundry allowance of P150 per month;

(7) Employee achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding one-half (½) month of the basic salary of the employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees; (8)

Christmas and major anniversary celebrations for employees and their guests;

(9) Company picnics and sports tournaments in the Philippines and are participated exclusively by employees; and (10) Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc. (D) Tax Accounting for the Fringe Benefit Furnished to the Employee and the Fringe Benefit Tax Due Thereon. — As a general rule, the amount of taxable fringe benefit and the fringe benefits tax shall constitute allowable deductions from gross income of the employer. However, if the basis for computation of the fringe benefits tax is the depreciation value, the zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code or the fair market value as determined in the current real property tax declaration of a certain property, only the actual fringe benefits tax paid shall constitute a deductible expense for the employer. The value of the fringe benefit shall not be deductible and shall be presumed to have been tacked on or actually claimed as depreciation expense by the employer. Provided, however, that if the aforesaid zonal value or fair market value of the said property is greater than its cost subject to depreciation, the excess amount shall be allowed as a deduction from the employer's gross income as fringe benefit expense. Illustrations on fringe benefit furnished or granted by the employer to an employee (other than a rank-and-file employee) (1) During the year 1998, ABC Corporation paid for the monthly rental of a residential house of its branch manager (Mr. Dela Cruz) amounting to P66,000.00.

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In this case, the monthly taxable grossed-up monetary value of the said fringe benefit furnished or granted to its branch manager (Mr. Dela Cruz) shall be P50,000.00, computed as follows: Monthly rental for the residential house

P66,000.00

Grossed-up monetary benefit granted (P66,000.00 divided by 66% factor for calendar year 1998 times 50% taxable portion)

P50,000.00

Fringe benefit tax due thereon (34%)

P17,000.00

ABC Corporation shall take up in its books of accounts the P66,000.00 fringe benefit furnished to Mr. Dela Cruz, under account title "Fringe Benefit Expense" and the amount of 17,000.00 under the account title "Fringe Benefit Tax Expense". The aforesaid amounts shall be fully allowed as deductions from the gross income of ABC Corporation and shall be taken up in the said employer's books of accounts as follows: Debit: Fringe Benefit Expense

P66,000

Debit: Fringe Benefit Tax Expense

P17,000

Credit:

Cash

P83,000

To record fringe benefit expense and fringe benefit tax paid on rental of the residential property furnished to Mr. Dela Cruz for his residential use. (Note: If the fringe benefit expense of P66, 000.00 has already accrued but not yet paid, use the account title "fringe benefit payable". If the fringe benefit tax has already accrued but not yet paid, use the account title "fringe benefit tax payable"). (2) XYZ Corporation owns a condominium unit. During the year 1998, the said corporation furnished and granted the said property for the residential use of its Assistant Vice-President. The fair market value of the said property as determined by the Commissioner pursuant to Section 6(E) of the Code amounts P10,000,000.00 while its fair market value as shown in its current Real Property Tax Declaration amounts to P8,000,000.00. In this case, the higher fair market value of P10,000,000.00 as determined by the Commissioner shall be used in computing the monetary of the fringe benefit so furnished or granted to said employee and the fringe benefit tax due thereon shall be computed as follows: Monthly rental value of the property (P10,000,000 times 5% thereof times 50% divided by 12 months)

P20,833.33

Grossed-up monetary value thereof as fringe benefit

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(P20,833.33 divided by 66% factor for calendar year 1998)

P31,565.66

Fringe Benefit tax due thereon (34%)

P10,732.32

In general, under this illustration, the XYZ Corporation shall not further claim deduction for allowing its Assistant Vice-President the use of its residential property since the cost for the use thereof has already been recovered as deduction from its gross income under "Depreciation Expense". However, since the fringe benefit tax in the amount of P10,732.32, assumed and paid by XYZ corporation has not as yet been recovered by way of deduction from gross income, the same shall be allowed as a deduction from its gross income. XYZ Corporation shall take up the foregoing in its books of accounts, as follows: Debit: Fringe Benefit Tax Expense

P10, 732.32

Credit: Cash/Fringe Benefit Tax Payable

P10, 732.32

To record fringe benefit tax expense for the residential property furnished to employees. However, if the cost of the aforesaid condominium unit subject to depreciation allowance (example: its acquisition cost is only P7,000,000.00) is lesser that its fair market value as determined by the Commissioner (i.e. P10,000,000.00), the excess amount (i.e. P3,000,000.00) shall be amortized throughout the remaining estimated useful life of the residential property used in computing the said employer's depreciation expense and allowed as a deduction from the said employer's gross income as fringe benefit expense. Thus, if the remaining estimated useful life thereof during the year 1998 is fifteen (15) years, its monthly amortization shall be computed as follows: Monthly amortization (P3, 000,000.00 divided by 15 years divided by 12 months) P16,666.67 In this case, XYZ Corporation shall take up the foregoing in its books of accounts as follows: Debit: Fringe benefit expense

P16, 666.67

Debit: Fringe benefit tax

P10, 732.32

Credit: Income constructively realized

P16, 666.67

Credit: Cash/Fringe benefit tax payable

P10, 732.32

To record fringe benefit and fringe benefit tax expenses and income constructively realized from the use of company-owned residential property furnished to employees. REVENUE REGULATION 2-98 WAS MODIFIED BY REVENUE REGULATION No 122001 and 11-2010. Revenue Regulation No. 11-2010 is hereby included: REPUBLIC OF THE PHILIPPINES

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DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE October 26, 2010 SUBJECT : Section

REVENUE REGULATIONS NO. 11-2010 Further Clarifying the Term “Managerial and Technical Positions” Under 2.57.1(D) of Revenue Regulations (RR) No. 2-98, as Amended, by RR No. 122001, Implementing Section 25(C) of the National Internal Revenue Code of 1997 (Tax Code), as Amended and Modifying for this Purpose Revenue Memorandum Circular (RMC) No. 41-09 Including Guidelines on Availment of the Fifteen Percent (15%) Preferential Income Tax Rate for qualified Filipino personnel employed by Regional or Area Headquarters (RHQs) and Regional Operating Headquarters (ROHQs) of multinational companies

TO : All Revenue Officials and Personnel and Others Concerned SECTION 1. Background. - On July 23, 2009 Revenue Memorandum Circular (RMC) No. 41-09 was issued essentially defining the terms managerial and/or technical positions of Filipino personnel employed by Regional or Area Headquarters (RHQs) and Regional Operating Headquarters (ROHQs) of multinational companies. The phrase ―managerial and technical positions‖ appears in Section 2.57.1(D) of Revenue Regulations (RR) No. 2-98, as amended by, among others, RR No. 12-2001, implementing Section 25(C) of the Tax Code. Thus: ―(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. – A final withholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding agent from the gross income received by every alien individual occupying managerial and technical positions in regional or area headquarters and regional operating headquarters and representative offices established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances, except income which is subject to fringe benefits tax, from such regional or area headquarters and regional operating headquarters. The same tax treatment shall apply to Filipinos employed and occupying the same positions as those aliens employed by regional or area headquarters and regional operating headquarters of multinational companies, regardless of whether or not there is an alien executive occupying the same position. Provided, that such Filipinos shall have the option to be taxed at either 15% of gross income or at the regular rate on their taxable income in accordance with the Tax Code of 1997, if the employer (Regional or Operating headquarters/Regional or Area headquarters) is governed by Book III of E.O. 226, as amended by R.A. No. 8756. In case the Filipino opted to be taxed at the regular tax rate under Sec. 24 of the Tax Code of 1997, the provisions of Sec. 2.79(A) to (D) of Revenue Regulations No. 2-98 shall apply.

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The term ―multinational company‖ means a foreign firm or entity engaged in international trade with its affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.‖ (emphasis supplied) In defining the term ―managerial employee‖, RMC No. 41-09 cited Philippine Appliance Corp. vs. Laguesma, 226 SCRA 730 (1993) and Villuga vs. NLRC, 225 SCRA 537 (1993). RMC No. 041-09 also defined the term ―technical position‖ as being limited only to positions that are highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired. Finally, the language of RMC No. 41-09 implied that in order to enjoy the fifteen percent (15%) final income tax rate on their gross compensation income, Filipino nationals in ROHQs or RHQs must be employed in a managerial and highly technical position. Thus, the issuance of RMC No. 41-09 has resulted in some confusion among the tax treatment of Filipinos employed by ROHQs or RHQs. These regulations are therefore being issued to clarify the provisions of Section 2.57-1(D) of RR No. 2-98, as amended. SECTION 2. Who are qualified. – Filipinos employed by ROHQs or RHQs in a managerial or technical position shall have the option to be taxed at either fifteen percent (15%) of their gross income or at the regular income tax rate on taxable compensation income in accordance with Section 24 of the Tax Code, if the employer is governed by Book III of Executive Order (EO) No. 226, as amended by Republic Act (RA) No. 8756. All other employees are considered as regular employees who are subject to the regular income tax rate on their taxable compensation income. SECTION 3. – Eligibility to the 15% Preferential Tax Rate. – Filipinos exercising the option to be taxed at fifteen percent (15%) preferential rate for occupying the same managerial or technical position as that of an alien employed in an ROHQ or RHQ must meet all the following requirements: (a) Position and Function Test. - The employee must occupy a managerial position or technical position AND must actually be exercising such managerial or technical functions pertaining to said position; (b) Compensation Threshold Test - In order to be considered a managerial or technical employee for income tax purposes, the employee must have received, or is due to receive under a contract of employment, a gross annual taxable compensation of at least PhP 975,000.00 (whether or not this is actually received); Provided that, a change in compensation as a consequence of which, such employee subsequently receiving less than the compensation threshold stated in this section shall, for the calendar year when the change becomes effective, result in the employee being subject to the regular income tax rate.

191

Beginning December 31, 2013 and on December 31 every three years thereafter, the compensation threshold shall be adjusted to its present value using the Philippine Consumer Price Index (CPI), as published by the National Statistics Office. The adjusted compensation, shall take effect not earlier than the first day of the calendar month immediately following the issuance of a corresponding Revenue Memorandum Circular (RMC) on the matter. For clarity in the implementation hereof, the formula for determining the adjusted compensation threshold shall be: Adjusted threshold amount

=

Previous threshold amount

x

______CPI for the current year________ CPI for the previous revaluation year

(c) Exclusivity Test – The Filipino managerial or technical employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual personnel. Exclusivity means having just one employer at a time. SECTION 4. Gross Compensation. - Under Section 2.78.1(A) of RR No. 2-98, as amended, gross compensation includes salaries, wages, emoluments and honoraria, allowances, commissions and fees (including director‘s fees if the director is at the same time an employee of the employer), taxable bonuses, and fringe benefits (except those that are subject to fringe benefits tax). Section 2.79(B)(3) of RR No. 2-98, as amended, categorizes taxable compensation income into regular taxable compensation income and supplementary compensation income. Under the said regulations, regular taxable compensation income includes basic salary, fixed allowances for representation, transportation and other allowances paid to an employee per payroll period. Supplementary compensation is defined by the same regulations as payments made to an employee in addition to the regular compensation such as commission, overtime pay, taxable bonus and other taxable benefits, with or without regard to a payroll period. For purposes of determining the compensation threshold under Section 3(b) of these regulations, gross compensation shall not include retirement and/or separation pay/benefits (whether or not taxable), as well as items considered as de minimis benefits. Provided that the foregoing shall be considered in determining the income tax due at the time of the employee's retirement or separation. SECTION 5. Manner of Computation of Tax - At the start of the year or at the start of the employee‘s employment, as the case may be, it is important to determine whether the employee shall receive, or is due to receive under a contract of employment, a gross annual compensation equivalent to or above the compensation threshold stated in Section 3(b) of these regulations. The determination should, as far as practicable, include both regular taxable compensation income and supplementary compensation income.

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The withholding tax regime applicable to employees who opted to subjected to the fifteen percent (15%) final withholding tax rate is different from the withholding tax on compensation imposable on regular employees. This is primarily evidenced by the reporting requirements for final withholding tax (BIR Form No. 1601-F), applicable to employees subject to the final withholding tax of fifteen percent (15%), as differentiated from the reporting requirements for withholding tax on compensation (BIR Form No. 1601-C). Consequently, where an employee who is subject to the fifteen percent (15%) final withholding tax rate works for more than one employer which are both ROHQs or RHQs at any one time in a taxable year, then such employers need not annualize the employees compensation. The annualized withholding method as provided under Section 2.79(B)(5)(b) of RR No. 2-98, as amended, will only apply the case of employees, having more than one employer in a calendar year, whose income is subject withholding tax on compensation. On the other hand, when during the same year, an employee is subject to both the fifteen percent (15%) final withholding tax rate and the regular income tax rate, then the employer under whom the employee is subject to the regular income tax rates shall annualize that employee‘s compensation that was subject to the regular income tax rates. The determination of whether or not the employee qualifies for the final withholding tax rate of fifteen percent (15%) is shall be made on a yearly basis.In cases where the total compensation cannot be determined at the start of the year or employment, the option to be taxed at fifteen percent (15%) cannot be exercised. EXAMPLE 1: At the start of the year, Mr. A, a Filipino holding a managerial position in an RHQ, receives a monthly salary and cost of living allowance in the amount of PhP70,000.00 and PhP7,000.00 respectively. His employment contract also states that he may receive a performance bonus at the end of the year which amount is not presently determinable. Since Mr. A is due to receive, under an employment contract, a regular taxable compensation income of PhP994,000.00 composed of PhP840,000.00 (PhP70,000.00 x 12 months) basic pay, PhP70,000.00 13th month pay and PhP84,000.00 (PhP7,000.00 x 12 months) cost of living allowance, placing him above the compensation threshold of PhP975,000.00, then he has the option to be taxed at the rate of 15% of his gross income or at the regular income tax rate. Since the employer knows that the annual gross compensation of the employee is above the compensation threshold of PhP975,000.00 at the start of the year, then the employer may, at the option of the employee, withhold income tax at the rate of 15% of gross income. It is immaterial that he may receive a bonus of an indeterminate amount because his regular compensation income already places him above the compensation threshold of PhP975,000.00. Thus, the employer should, in addition to the other reportorial requirements stated in Section 7 hereof, accomplish the Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1601-F) and the Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF).

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EXAMPLE 2: At the start of the year, Mr. A, a Filipino employed by an ROHQ, receives a monthly salary and cost of living allowance in the amount of PhP65,000.00 and PhP5,000.00 respectively. His employment contract also states that he may receive a performance bonus at the end of the year which amount is not presently determinable. Since Mr. A’s regular compensation income of PhP905,000.00 composed of PhP780,000.00 (PhP65,000.00 x 12 months) basic pay, PhP65,000.00 13th month pay and Php60,000.00 (PhP5,000.00 x 12 months) cost of living allowance, is below the compensation threshold of PhP975,000.00 then his employer shall, on every pay period from the start of the year withhold from Mr. A income tax at the regular rate of withholding tax on compensation. However, if at the end of the year Mr. A receives a performance incentive bonus of PhP100,000.00, thus making his annual gross compensation income total PhP1,005,000.00 and he opts to be taxed at the rate of 15% of his gross income, his employer shall make the necessary adjustments to the income tax rate. More particularly: a.

The employer shall refund to the employee the excess of the tax withheld at the regular rate of withholding tax on compensation over the tax required to be withheld at the rate of 15% of gross income;

b.

The adjustment for the excess tax withheld at the regular income tax rate shall be reflected in the Monthly Remittance Return of Income Taxes Withheld on Compensation (BIR Form No. 1601-C) for the month of December;

c.

The tax required to be withheld at the rate of 15% of gross income shall be reported in the Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1601-F) for the month of December; and

d. The adjustments will also be summarized in the Annual Information Return of Income Taxes Withheld on Compensation (BIR Form No. 1601-C) and Final Withholding Taxes (BIR Form No. 1604-CF). The above requirement shall be in addition to the other reportorial requirements stated in Section 7 herein. The resulting aggregate excess remittance by the ROHQ/RHQ of withholding compensation (WC) shall be credited and applied in the succeeding month/s withholding tax remittances (WC) only until fully applied and utilized. EXAMPLE 3:

Mr. A, a Filipino employed by a regional area headquarters in the Philippines begins his employment on June 1. His employment contract stipulates that he shall receive an annual compensation of PhP975,000.00 inclusive of 13thmonth pay. At the end of the year, he would have received only Php568,750.00, composed of PhP525,000.00 (PhP975,000.00/13 x 7 months) basic pay and PhP43,750.00 (PhP975,000.00/13 x 7/12 months) 13thmonth pay. However, since his 194

employment contract states that he shall receive an annual compensation of PhP975,000.00, whether he actually receives this or not, then his employer shall, at the option of Mr. A, withhold income tax at the rate of 15% of actual gross compensation received. EXAMPLE 4: Mr. A, a Filipino employed by a regional area headquarters in the Philippines begins his employment at the start of the year. His contract stipulates that he shall receive an annual compensation of PhP988,000.00, inclusive of 13th month pay. Since this amount is above the compensation threshold his employer shall, at the option of Mr. A, withhold income tax at the rate of 15% of gross income. However, at the end of June, Mr. A leaves his job for employment with another ROHQ. At this time, Mr. A would have received total compensation of Php494,000.00 composed of PhP456,000.00 (988,000.00/13 x 6 months) basic pay and PhP38,000.00 (988,000.00/13 x 6/12 months) 13th month pay. Mr. A has the option to be taxed at 15% of gross income for his employment under his first employment because Mr. A was due to receive, under a contract of employment, an amount in excess of the compensation threshold of PhP975,000.If under his second employment with another ROHQ within the same year, Mr. A‘s annual compensation is below the threshold, then the regular income tax rates will apply to his compensation under his second employment. There is no need for the second employer to consolidate Mr. A's income from his previous employer (where Mr. A qualified for the tax rate of 15% of gross income) which was under a different tax regime. EXAMPLE 5:

Mr. A, a Filipino employed by a regional area headquarters in the Philippines begins his employment at the start of the year. His contract stipulates that he shall receive an annual compensation of PhP988,000.00. Since this amount is above the compensation threshold criteria, his employer shall, at the option of Mr. A, withhold income tax at the rate of 15% of gross income. However, at the end of June, for one reason or another (e.g. reduction of compensation due to business reverses), Mr. A‘s compensation is reduced such that his annual compensation will be reduced to an amount that is less than the compensation threshold. In this case, while the final withholding tax rate was applied to Mr. A during the year, an adjustment should be made at the end of the year subjecting the entire annual compensation of Mr. A to the regular income tax rates. The employer should make the necessary adjustments at the end of the year in the following forms: 1. 2. 3.

BIR Form No. 1601-C for the correct taxes to be withheld at the regular income tax rates; and BIR Form No. 1601-F for excess taxes withheld and for over-remittance; Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604- CF).

195

The resulting excess remittance of fifteen percent (15%) final withholding tax, if any shall be credited and applied in the succeeding month/s fifteen percent (15%) final withholding tax only under ATC Code WI 320 and not against any other form of final tax remittances. Crediting shall be allowed only against the same type of final tax (ATC Code WI 320) until fully applied and utilized. EXAMPLE 6: Mr. A, Filipino employed by a ROHQ is a manager of the companyfor a long time now. His contract stipulates that he shall receive an annual compensation of PhP888,000.00. During the year, he received an increase in his salary which brings him now to more than the annual compensation threshold of Php975,000. Because of the salary increase, he is now qualified to exercise the option to be taxed at the rate of 15% of his gross income. If Mr. A opts to be subject to the 15% preferential rate, he shall be covered by said 15% rate from the effectivity of his salary increase. However, his previous compensation (prior to the salary increase) shall remain to be subjected to the regular income tax rate. The same rules apply in instances of promotions made during the year where a promotion or change in job assignment qualifies the Filipino manager or technical employee to exercise the option to be taxed at 15% preferential rate. EXAMPLE 7: Mr. A is an employee of ROHQ 1 at the start of the year. His annual gross compensation meets the compensation threshold at the beginning of the year. During the year, Mr. A is employed by ROHQ 2. His new contract provides for a gross annual compensation that meets the compensation threshold. In this case, Mr. A is subject to the final withholding tax rate of 15% of gross income for both the ROHQ 1 and ROHQ 2. However, there is no need to annualize Mr. A‘s income from either ROHQ 1 or 2 because the annualized withholding tax method does not apply to the final withholding tax regime. Mr. A will not be required to file an annual ITR consolidating his income for the year under both employment which is subject to final withholding tax. EXAMPLE 8: Mr. A is an employee of ROHQ 1 at the start of the year. His annual gross compensation is below the compensation threshold at the beginning of the year. During the year, Mr. A is employed by ROHQ 2. His new contract provides for a gross annual compensation that meets the compensation threshold. For ROHQ 1, the applicable tax rate would be the regular tax on compensation income. For ROHQ 2, at the option of Mr. A, the applicable tax rate would be the final withholding tax rate of 15% of gross income. There is no need for ROHQ 2 to consolidate Mr. A's income from his previous employer (ROHQ 1) since this was covered under a different tax regime. However, if Mr. A, did not opt to be taxed using the 15% preferential rate, he will be subjected to regular income tax rate on compensation in which case there is a need to consolidated compensation earnings from ROHQ1 and ROHQ2 for a proper year-end adjustments on compensation.

196

EXAMPLE 9: Mr. A is an employee of ROHQ 1 at the start of the year. His annual gross compensation meets the compensation threshold at the beginning8of the year. During the year, Mr. A is employed by ROHQ 2. His new contract provides for a gross annual compensation that is below the compensation threshold. For purposes of ROHQ 1, at the option of Mr. A, the applicable tax rate would be the final tax of 15% of gross income. For purposes of ROHQ 2, the applicable tax rate would be the regular income tax on compensation income. ROHQ 2 shall be required to annualize such regular income but there is no need for ROHQ 2 to consolidate Mr. A's income from ROHQ 1, since this was covered under a different tax regime. EXAMPLE 10: At the start of the year, Mr. A is an employee of ROHQ 1. His annual gross compensation at ROHQ 1 did not meet the compensation threshold at the beginning of the year. During the year, Mr. A left ROHQ 1 and transferred to ROHQ 2. His new contract provides for a gross annual compensation that is likewise below the compensation threshold. For purposes of ROHQ 1, the applicable tax rate would be the regular income tax rates. For purposes of ROHQ 2, the applicable tax rate would still be the regular income tax on compensation income. However, ROHQ 2 shall be required to annualize such regular income for purposes of making a year-end adjustment for withholding on compensation. Even if the total compensation income of Mr. A, when annualized, would exceed the compensation threshold, Mr. A's income would still remain under the regular income tax regime and will not change to the 15% final income tax regime. EXAMPLE 11: Mr. A is a long-serving employee of an ROHQ. He is an executive secretary to the General Manager for which he receives an annual compensation of PhP988,000.00. Even if Mr. A‘s annual gross compensation is above the compensation threshold of PhP975,000.00, he does not qualify for the rate of 15% on gross income because he is neither exercising managerial nor technical functions. EXAMPLE 12: Mr. A, a Filipino employed by a regional area headquarters in the Philippines receives a monthly salary and cost of living allowance in the amount of PhP65,000.00 and PhP5,000.00, respectively. His employment contract also states that he may receive a performance bonus at the end of the year the amount is not yet presently determinable. Since Mr. A‘s regular compensation income of PhP905,000.00 composed of PhP780,000.00 (PhP65,000.00 x 12 months) basic pay, PhP65,000.00 13th month pay, and Php60,000.00 (PhP5,000.00 x 12 months) cost of living allowance, is below the compensation threshold of PhP975,000.00,

197

then his employer shall, on every pay period from the start of the year, withhold from Mr. A income tax at the regular rate of withholding tax on compensation. During the year, Mr. A either retires, or is separated from work. He receives a retirement or separation pay of PhP100,000.00, thus making his annual gross compensation income for the year in the total amount of PhP1,005,000.00. Notwithstanding that Mr. A‘s annual gross compensation now exceeds the compensation threshold, Mr. A shall be subject to income tax at the regular rate of withholding tax on compensation, since retirement and/or separation pay, whether or not subject to tax, shall not be considered in determining whether an employee meets the compensation threshold. SECTION 6. Imposition of Fringe Benefits Tax. - The determinant test whether a Filipino employee has the option to avail of the fifteen percent (15%) preferential rate as a manager or technical employee is independent of the criteria in the imposition of fringe benefits tax under Section 33 of the Tax Code, as implemented by Revenue Regulations No. 3-98, as amended. Pursuant to Revenue Regulations No. 3-98, the term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. On the other hand, the Labor Code of the Philippines, as amended, defines "MANAGERIAL EMPLOYEE" as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees; while "SUPERVISORY EMPLOYEES" are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. Inasmuch as the option to be subject to fifteen percent (15%) preferential rate and the coverage of fringe benefits tax are independent of each other, there would be instances where a Filipino employee shall enjoy a fifteen percent (15%) preferential rate as a technical employee but may not be covered by the fringe benefits tax not being a supervisory employee. SCENARIO 1: Mr. A is a General Manager of an ROHQ. He is expected to receive an annual compensation of PhP988,000.00. He will likewise receive PhP200,000 fringe benefits for the year. Mr. A‘s annual gross compensation is above the compensation threshold of PhP975,000.00, he opted for the fifteen percent (15%) final preferential rate. As he opted for the fifteen percent (15%) final preferential tax rate, his fringe benefits shall likewise be subjected to the fifteen percent (15%) tax rate which shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five percent (85%). SCENARIO 2: Mr. B, is a General Manager of an ROHQ, is expected to receive an annual compensation of PhP888,000.00. He will likewise receive PhP100,000 fringe benefits for the year.

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Mr. B‘s annual gross compensation is below the compensation threshold of PhP975,000.00. The fringe benefits subject to fringe benefits tax are not included in determining gross compensation as defined under Section 4 of these regulations; thus, he does not qualify for the rate of fifteen percent (15%) final preferential income tax rate on gross income but the same will be subjected to regular income tax rate. Moreover, being a manager, a fringe benefits tax of thirty two percent (32%) shall be imposed on the grossed-up monetary value of his fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by sixty eight percent (68%). SCENARIO 3: Mr. C is a long-serving employee of an ROHQ. He is an executive secretary to the General Manager for which he is receiving an annual compensation of PhP988,000.00. He is likewise receiving PhP100,000 fringe benefits. Even if Mr. C‘s annual gross compensation is above the compensation threshold of PhP975,000.00, he does not qualify for the rate of fifteen percent (15%) on gross income because he is neither exercising managerial nor technical functions. Thus, he is subject to the regular income tax on both his compensation income and fringe benefits. SCENARIO 4: Mr. D is a technical employee for which he receives an annual compensation of PhP988,000.00. He likewise receives PhP100,000 fringe benefits for the year. Mr. D‘s annual gross compensation is above the compensation threshold of PhP975,000.00, hence he is qualified for the rate of fifteen percent (15%) on gross income. However, he is not subject to fringe benefits tax as he is neither exercising managerial or supervisory function, thus he is subject to the fifteen percent (15%) preferential income tax rate on both his compensation and fringe benefits. SECTION 7.

Reporting Requirements. – For a Filipino managerial or technical employee to have the option to be taxed at fifteen percent (15%) of his or her gross income, it shall no longer be necessary for the RHQ or ROHQ to file a request for ruling with the BIR National Office. Instead, the RHQ or ROHQ must file the following documents with the Revenue District Office having jurisdiction over it or, for ROHQs or RHQs that are considered large taxpayers, with the LT Assistance Division/LT Regulatory Division/LTDOs: a. Declaration of Employees‘ Availment of the 15% Preferential Tax Rate of every qualified employee (BIR Form No. 1947 herein attached as Annex "A") Declaration of Employees‘ Availment of the 15% Preferential Tax Rate shall be filed within 15 days from the date of effectivity of this Revenue Regulations, for employees currently employed with ROHQ or RHQ or within 15 days from the

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date of employment for those who will just be employed. Thereafter, the filing shall only be made whenever there are changes in the employment status of the employee (i.e. change of employer, change in salary package, promotion) in which case the newly accomplished BIR Form must be submitted not later than January 31st of the succeeding year. b. Employer‘s sworn declaration, stating under oath: i. the names of its employees who received, or are due to receive, under an employment contract, a gross annual compensation equivalent to or more than PhP 975,000.00 or its adjusted amount; ii. the inclusive dates for the relevant calendar year when the employee received, or are due to receive, gross annual compensation equivalent to or more than PhP 975,000.00 or its adjusted amount; iii. that the employees received compensation solely from the ROHQs or RHQs and not from the company of which it is a branch, or from any other entity which may be an affiliate or subsidiary of the said company; and iv. that such employees exercise managerial or technical functions. c. Employee‘s sworn declaration, stating under oath: i. his complete name, Taxpayer Identification Number (TIN); ii. job title and brief job description and responsibility; iii. the equivalent amount of gross annual compensation which he received or is due to receive must be at least PhP 975,000.00 or its adjusted amount; iv. the inclusive dates of the calendar year when he received or is due to receive gross annual compensation of at least PhP975,000.00 or its adjusted amount; v. that he is exclusively employed by the ROHQ or RHQ; vi. that he does not have any other employer other than the ROHQ orRHQ; vii. that he does not receive compensation from sources other than theROHQ or RHQ where he is employed; and viii. that he exercises managerial or technical functions. The declarations mentioned in subsections b & c above must be submitted not later than January 31st of the succeeding year. d. Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No. 1601-F) and Annual Information Return of Income Taxes Withheld on

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Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) shall be filed within the applicable time periods and in the manner set forth in Sections 2.58(A)(1)&(2) and 2.83.2 of RR No. 2-98, as amended. The employer‘s Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) shall have an additional schedule to reflect declaration of information pertaining to employees covered by the fifteen percent (15%) preferential tax regime. The revised format of BIR Form 1604-CF shall be covered by a separate Revenue Memorandum Order (RMO). In case of failure to file any of the requirement stated under this Section or the filing of false information, the regular income tax shall be imposed on the employee. SECTION 8. Penalty Clause. – Any person who willfully files a declaration, return or statement containing information which is not true and correct as to every material matter shall, upon conviction, be subject to the penalties prescribed for perjury under the Revised Penal Code. Moreover, any and all applicable criminal offense (e.g. tax evasion) under the National Internal Revenue Code, as amended, shall be charged against any person who is discovered to have committed any false declaration or misrepresentation. SECTION 9. Transitory Provisions. – In as much as this regulations was issued later in the year, the following transitory provisions shall apply: a. Coverage: The transitory provision shall cover compensation payments made from January 1, 2010. b. Deadline for Adjustments: All affected taxpayers are allowed to make necessary adjustments in their withholding tax remittances (withholding tax on compensation or fifteen percent (15%) final withholding tax on compensation) without penalties, but in no case beyond January 31, 2011. However, compliance to existing rules and regulations on the availment of abatement of penalties should be complied by the ROHQ/RHQ. c. Manner of declaring adjustments: To properly segregate and isolate adjustments to be made on withholding tax on compensation or fifteen percent (15%) final withholding tax, all taxpayers affected are required to file an amended BIR Form 1601C and/or BIR Form 1601F to cover adjustments necessary as a result of these regulations. d. Rules / Guidelines in changes in classification of employee:1. For employees qualified and opted to avail the fifteen percent (15%) preferential rate under these regulations but was covered by regular withholding tax on compensation: The employer is required:

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a). To re-compute the appropriate fifteen percent (15%) final tax on compensation paid from January 1, 2010. b). File amended BIR Forms 1601-F to reflect the monthly adjustments covering the fifteen percent (15%) final tax on compensation paid to qualified/availing Filipino individuals from January 1, 2010 and every month thereafter. Please note that the appropriate ATC Code to be used in BIR Form 1601-F should be WI 320 for payments to qualified Filipinos or aliens employed in an RHQ or ROHQ. c) File amended BIR Forms 1601-C to correct the monthly declarations for withholding tax on compensation from January 1, 2010 and every month thereafter. d). Refund to the employee concerned any differential withholding tax made (regular withholding compensation for the regular income tax vis-avis fifteen percent (15%) final tax on compensation). e). The resulting aggregate excess remittance by the ROHQ/RHQ of withholding compensation (WC) shall be credited and applied in the succeeding month/s withholding tax remittances (WC) until fully utilized. 2. For employees not qualified to avail the fifteen percent (15%) preferential rate but was still subjected thereto instead of the regular withholding tax on compensation: The employer is required: a). To re-compute for appropriate withholding tax on compensation on salary payments made from January 1, 2010. b). File amended BIR Forms 1601-C to correct the monthly declarations for withholding tax on compensation from January 1, 2010 and monthly thereafter. c). File amended BIR Forms 1601-F to reflect the monthly adjustments covering the fifteen percent (15%) final tax on compensation paid to qualified/availing Filipino individuals from January 1, 2010 and monthly thereafter. Please note that the appropriate ATC Code to be used in BIR Form 1601-F should be WI 320 for payments to qualified Filipinos or aliens employed in RHQ or ROHQ. d). The resulting excess remittance of fifteen percent (15%) final withholding tax shall be credited and applied in the succeeding month/s fifteen percent (15%) final withholding tax only under ATC Code WI 320 and not against any other form of final tax remittances. Crediting shall be allowed only against the same type of final tax (ATC Code WI 320), i.e. only for transactions covered by the transitory provisions of these regulations and only until fully applied and utilized. 3. For employees who are no longer in the employ of the ROHQ or RHQ, i.e. all those managerial or technical employees no longer working with the current ROHQ or RHQ at the time of approval of these regulations, their original withholding tax classification (regular or fifteen percent (15%) final tax as the case maybe, made by the ROHQ or RHQ's payroll master) shall be deemed correct and shall no longer be re-evaluated or reclassified in accordance with these regulations. 4. The employer must file a Sworn listing of compensation payment subjected to adjustment as a result of these regulations following the herein listing format:

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Schedule 1: Employees Previously covered by WC now covered by WF Name of Employee

Original Declaration Period Covered (original declaration)

Amount of Compensation originally subjected to withholding on compensation

Adjustment Original Regular Withholding Tax on Compensation actually remitted

Adjusted 15% FT on Compensation

Schedule 2: Employees Previously covered by WF now covered by WC Name of Employee

Original Declaration Period Covered (original declaration)

Amount of Compensation originally subjected to 15% withholding on compensation

Adjustment Original 15% FBT Withholding Tax on Compensation actually remitted

Adjusted Regular withholding on Compensation

Schedule 3: Employees no longer working with the ROHQ or RHQ and not reclassified or re-evaluated Name of Employee Period Covered (original declaration)

Original Declaration Amount of Compensation originally subjected to 15% FT withholding on compensation

Amount of Compensation originally subjected to regular withholding on compensation

SECTION 10. Repealing Clause. – All Orders, memoranda and other revenue issuances inconsistent with these regulations are hereby revoked, modified or amended accordingly. SECTION 11. Effectivity. - These Revenue Regulations shall take effect immediately.

B. Passive Income For Non-Resident Alien Individuals Non-resident alien engaged in trade or business is subject to passive income tax in the same manner as residents and citizens (except on income from foreign currency deposits where the NRAETB is not subject to 7.5% final tax and income of cinematographic film rentals to which NRAETB is subject to 25% final tax and receipts of property and cash dividends from a domestic corporation which is subject to 20% final tax

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instead of 10%) Non-resident alien not engaged in trade or business is subject to a final tax of 15% and 25% on their gross income from sources derived within the Philippines. 1) Who are the non-resident aliens not engaged in trade or business in the Philippines, subject to 15% final tax? NRA-NETB employed by the following are subject to 15% a. Offshore Banking Units b. Petroleum Contractors and sub-contrators c. Regional Operating Headquarters of Multinational Corporations d. Regional Area Headquarters of Multinational Corporations e. Filipinos employed by the above mentioned entities are likewise given the preferential rate of 15% at the option of the said Filipino individual taxpayer*. *REVENUE REGULATIONS NO. 12-2001 SECTION 2. Final Withholding Tax on Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. – Sec. 2.57.1(D) of Revenue Regulations No. 2-98 (RR 2-98), as amended, is hereby further amended to read as follows: “(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. xxx xxx xxx The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by regional or area headquarters and regional operating headquarters of multinational companies, regardless of whether or not there is an alien executive occupying the same position. Provided, that such Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the Tax Code of 1997 if the employer (Regional Operating Headquarters/Regional or Area Headquarters) is governed by Book III of E. O. 226 as amended by R. A. 8756. In case the Filipino opted to be taxed at the regular tax rate under Section 24 of the Tax Code of 1997, the provisions of Section 2.79 (A) to (D) of Revenue Regulations No. 2-98 shall apply. xxx xxx xxx” 2. Who are the non-resident aliens not engaged in trade or business subject to 25% final tax? NRA-NETB whose employment is not any of those mentioned in describing NRANETB subject to 15% final tax are subject to the 25% final tax End of Discussion-see practice exercises below and in the following pages 204

END OF CHAPTER TESTS K. COMPUTATION OF INCOME TAX OF AN ESTATE Problem 1. In April of 2013 Mr. Bonay died. The following data pertain to his estate and heirs. He was survived by his daughter and his son. Mr. Bonay‘s Estate is under settlement in court because the two siblings did not want to agree on the partition. Atty. Ladores is the administrator of the properties of Mr. Bonay Gross Income of the estate Allowed Deduction on estate‘s income Income from estate distributed to the son, after 15% EWTAS Income from estate distributed to the daughter, before EWTAS

Compensation Income Business Income Deductible Business Expenses Interest Income on bank deposit in Philippines Dependent children

P480,000 246,000 45,000 75,000

Daughter

Son

P450,000 P517,000 319,000 26,000 4

300,000 186,500 8,200 2

Compute for the following 1. taxable net income of daughter 2. taxable net income of son 3. taxable net income of the estate Problem 2. Mr. Artemio Norberte Sr. passed away on March 15, 2016. He was survived by his wife, Viring and son, Junior. The pertinent data on his property/estate at the time of his death are as follows: 1. Cash in Bank P 250,000 2. Apartments and a lot in Makati 2,400,000 3. Jewelries 30,000 4. Share of stock of domestic corporation 300,000 5. Furniture and home appliance 600,000 6. Loans receivable 50,000 7. Rental income on the real property 296,000 8. Interest income on bank deposit 25,000 9. Interest income on loan receivable 4,500 10. Depreciation expense and deductible charges on the real property 75,000 11. Income from the estate credited/distributed to the heirs, before 15% EWTAS 80,000 Compute the (a) (b)

taxable income and income tax due from the estate of Artemio

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L. COMPUTATION OF INCOME TAX OF A TRUST Problem: A contract of trust was executed on a certain property between Mr. Alex Mulach and Mr. X (trustee) for the benefit of Nino Mulach. The property held in trust had the following transaction for the year 2016. a. Gross Income b. Allowed expenses c. Income given to Alex d. Income credited to Nino Personal Data ofa. Business income b. Business expenses c. Income from trust

P1, 750,000 385,000 65,000 95,000 Alex P 980,000 525,000 65,000

Nino P 495,000 210,000 95,000

Compute for the taxable income and income tax due for the following: 1. Trust 2. Mr. Alex Mulach 3. Nino Mulach M. COMPUTATION OF INCOME TAX OF PARTNERS IN A GENERAL PROFESSIONAL PARTNERSHIP Problem:

The following are the financial data for the year 2016 of Corrales, Valdez and Nartatez a general professional partnership of CPAs. CVNPartnership

a. Gross Income P975,000 b. Allowed Deduction 300,000 c. Drawing Accounts e. Profit and Loss Ratio

Corrales P850,000 710,000 30,000 2:

Valdez

Nartatez

P1,050,000 920,000 40,000 6:

510,000 250,000 20,000 2

Compute for the following: 1.

Taxable income and income tax due of CVN Partnership

2.

Taxable income and income tax due of Corrales, Valdez and Nartatez for their annual income tax return.

N. COMPUTATION OF BUSINESS INCOME A single non-resident alien, with a tax consultancy firm, and with six (6) children dependents, showed us the following data in the current year 2013:

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Business Income in Philippines P890, 000.00 Business Income in Singapore 470,000.00 Business Expenses in Philippines 710,000.00 Business Expenses in Singapore 320,000.00 25% of the income earned in Philippines is exempt from income tax 15% of the business expenses in Philippines is disallowed as deduction His country grants Filipino citizens not residing therein, allowed personal exemption as follows: For married persons P45, 000.00 for single person P25, 000.00 For head of family 30,000.00 for each child 20,000.00 Compute the taxable net income and income tax due. O. QUARTERLY PAYMENT OF INCOME TAX Problem . Ms. Patricia Sandel is a lessor of commercial building, she has three (3) lessees who are engaged in selling of furnitures. Her first lessee pays a rent of 10,000.00 per mo., the second lessee 15,000.00 per mo. and the third 20,000.00. For the 1st quarter of the year she paid electricity amounting to 30,000 for the spaces occupied by the lessee, same with second quarter and 3rd quarter. On the 2nd quarter, she paid real property tax for the building and lot amounting to 60,000.00 for the whole year of 2016. There were no other transactions for the year except that the lessees deduct 5% creditable withholding tax on their payments to Ms. Sandel. Compute for the quarterly income tax due from the 1st quarter to the 3rd quarter, under the following assumption: a. Miss Patricia Sandel uses Optional Standard Deduction b. Miss Patricia Sandel uses Itemized Deductions P. COMPUTATION OF TAXABLE COMPENSATION and BUSINESS INCOME 1. The following data in the current year belong to an individual who is both a selfemployed, having his own bling bling store business, and likewise an accountantemployee of Avon Company; From Phil. From Abroad 1.Employment Income P480, 000.00 P510, 600.00 2. Business Income 940,000.00 620,000.00 3. Other Income 120,500.00 40,500.00 4. Business Expenses 610,500.00 520,000.00 Compute the taxable net income and income tax due, assuming the taxpayer is a: a. Resident citizen, single with his young brother and a legally adopted son who is 23 years old as dependents. b. Non-resident citizen engaged in business in the Philippines with a live-in partner (common law wife) and their recognized natural child as dependents.

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2. A parent and child, resident citizens, provided us the following data for the year 2016: Father Son Compensation Income P 390, 000.00 P 0 Business Income 560,000.00 200,000.00 Other Income 20,000.00 15,000.00 Business Expenses 400,000.00 130,000.00 Civil Status widower single Dependent Children three none Health Hospitalization Insurance Premium 2,450.00 4,560.00 In January of this year, the father gave as a birthday gift to his son a house and lot worth P850, 000. Said property realized a rental income of P64, 000 during the year. The donor‘s tax return was not filed and the gift tax was not yet paid as of the end of the year. Determine the taxable net income and income tax due for each of them. 3.

A married couple, with eight qualified dependent children, gave us their data in the year 2016:

Compensation Income of husband Compensation Income of wife Business Income of husband Business Income of wife Other Income Business Expenses of husband Business Expenses of wife Other Business Expenses Health Hospitalization Insurance payments

P180, 000.00 170,000.00 870,000.00 320,000.00 40,000.00 640,000.00 190,000.00 75,000.00 3,800.00

Determine the taxable net income and income tax due for each of the spouses. 4. A married taxpayer with a legitimate child, illegitimate child and a senior citizen dependents, furnished us his business date for the taxable year 2016 as follows: Items of Income and Expenses Philippines America a. Gross profit from sales P 950,000 P800,000 b. Royalty income on books 150,000 200,000 c. Dividend income from a foreign corporation 12,000 5,000 d. Gain from sale of business assets 60,000 15,000 e. Income exempt from income tax 50,000 0 h. Income subject to final income tax 15,000 7,500 i. Business expenses 700,000 650,000 i. Non-deductible business expenses (included in letter i) 35,000 48,000 j. Personal family and living expenses 165,000 35,000 Determine the taxable income and income tax due

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CHAPTER IV- WITHHOLDING TAXES ON INCOME AND TAX CREDITS WITHHOLDING TAX – Withholding Tax is not a Tax. A withholding tax, also called a retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. The amount of withholding tax on income payments other than employment income is usually a fixed percentage. A withholding tax on individual‘s compensation is an amount of tax, which is taken in advance from taxpayers‘ income. It is part of the income tax which would have been due on or before April 15 of the following year.

Withholding Tax System The withholding tax system or the method of collecting the tax in advance or upon the receipt of income by the tax authority is an important feature of the income tax administration in the Philippines. It is designed to ensure the continuous and steady collection of revenues for the government. Among the advantages of this scheme are: (1)

it makes tax administration more efficient by improving the collection of tax revenues;

(2)

it encourages tax compliance and minimizes tax evasion and avoidance practices;

(3)

it relieves the taxpayer from financial difficulties in raising the entire amount of tax when it falls due; and

(4)

it provides the government a continuous cash flow to finance its services.

At present, the withholding tax is applied on the following: a.

Employment income;

b.

Dividends from a domestic corporation;

c.

Royalties (in general and those on books, other literary works and musical compositions);

d.

Share in the distributable net income after tax of a partnership;

e.

Interest income (Philippine currency bank deposits and deposit substitutes, longterm deposits pre-terminated before the fifth year, and foreign currency bank deposits);

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f.

Prizes exceeding P10,000 and winnings (except sweepstakes and lotto winnings)

g.

Gains from sale of shares of stock and real property classified as capital asset;

h.

Informer‘s reward;

i.

Other fixed or determinable gains, profit and income;

j.

Income derived from contracts from service contractors engaged in petroleum operations;

k.

Disposition of real property classified as capital asset to the government or any of its political subdivisions;

l.

Gross income by nonresident cinematographic film owners, lessors or distributors;

m.

Professional fees and talent fees; n. Rentals of real property used in business;

o.

Income payments made to resident individuals and corporate cinematographic film owners, lessors or distributors;

p.

Income payments made to general engineering, building, specialty and other contractors;

q.

Commissions paid to certain brokers and agents;

r.

Commissions of independent and exclusive distributors, medical/technical and sales representatives, and marketing agents of multi-level marketing companies;

s.

Income distributed to the beneficiaries of estates and trust (except such income subject to FWT and tax exempt income);

t.

Income payments to partners of general professional partnerships ( GPPS);

u.

Additional income of government personnel from importer, shipping and airline companies, or their agents;

v.

Payments made by the government to its local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax (except any single purchase of P10,000 and below);

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w.

Payments made to embalmers for services rendered to funeral companies;

x.

Payments made by pre-need companies to funeral parlors;

y.

Payments made to suppliers of agricultural products;

z.

One-half of the gross amount paid by credit card companies to any business entity representing the sales of goods/services to cardholders;

aa.

Amount paid to the seller/owner for the sale, exchange or transfer or real property classified as ordinary asset; and

bb.

MERALCO Payments as refund arising from Supreme Court Case GR No. 14814 and interest income on the refund of meter deposit

History of Withholding Tax System in the Philippines The withholding tax system was first proposed on May 2, 1950 under House Bill (HB) No. 1127.2. The two main justifications for the proposal were that: ―first, it will provide a convenient manner for meeting the employee‘s income tax liability on wages and, second, it will assure the Government of the collection of the income tax on wages which otherwise would have been lost or substantially reduced through failure of the employees concerned to file the corresponding income tax returns. The proponents deemed it necessary to put the system in place for the reason that there are a large number of cases where an employee fails to file an income tax return (ITR) and/or pay the income tax for the ―simple reason that he/she did not set aside from his/her income sufficient amounts to meet his/her tax liability payable the following year. Withholding of the tax on wages when these are earned was seen as the solution to the problem. In addition, an approximately P 18 million in additional income tax was expected to be collected by the system. The authors also noted that the system is already in force and is receiving the full cooperation of all concerned in other countries with modern tax collection methods such as the United States, Great Britain and Australia and is commonly referred to as ‗pay-asyou-earn‘ (PAYE) or ‗pay-as-you-go‘ (PAYG). The Philippines adopted the system four months after it was introduced by virtue of Republic Act (RA) No. 5905 which took effect on January 1, 1951. TWO KINDS OF WITHHOLDING TAX SYSTEM 1. Creditable withholding tax (CWT) is system when the tax withheld from income payments is allowed to be credited against the taxpayer‘s final tax liability which is then adjusted accordingly. The amount withheld is only an estimate of the income tax that should be paid. In this regard, the payee is still required to file an income tax return on that particular income but needs to pay only the difference between the estimated amount

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withheld and the actual amount of tax due. The CWT includes the expanded withholding tax and compensation income tax. Incomes that are subject to the CWT are incomes from employment (compensation income), and fees such as professional fees, talent fees, rental income, service income, etc. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature. 2. Final withholding tax (FWT) is a system of withholding wherein the payer withholds an amount from the payee‘s income which is the full satisfaction of the tax liability, and pays this amount to the government on behalf of the payee. The payee then no longer needs to file an income tax return for this income. The FWT is usually applicable to income from dividends, interest, royalties, capital gains from sale of property, etc., and income of foreign companies and their employees. It is to be noted however, that in the case of individual taxpayers with only one employer, their withholding tax on compensation becomes a final tax for the reason that the amount of tax that is withheld from the taxpayer is equal to the amount of tax that is due him or her for the year. Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. The finality of then Withholding tax is limited only to then payee‘s income tax liability on the particular income. It does not extend to the payee‘s other tax liability on income, such as when the said income is further subject to a percentage tax. For example, if a bank receives income subject to final withholding tax, the same shall be subject to a percentage tax. http://www.ntrc.gov.ph/images/journal/j20110304b.pd

Withholding Taxes Collected under the Tax Code 1. Withholding Tax on Compensation is the tax withheld from income payments to individuals arising from an employer-employee relationship. Under the withholding tax system, the person or the organization that pays the income is given the responsibility of withholding the tax from the income payments and then remitting the same to the government. The tax should be withheld when income is paid or becomes payable , whichever comes first. Thus the obligation to withhold a tax starts on the date when the salary of an employee is payable, and not on the date when it is actually paid.

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2. Expanded Withholding Tax is a kind of withholding tax which is prescribed on certain income payments and is creditable against the income tax due of the payee for the taxable quarter/year in which the particular income was earned. 3. Final Withholding Tax is a kind of withholding tax which is prescribed on certain income payments and is not creditable against the income tax due of the payee on other income subject to regular rates of tax for the taxable year. Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the particular income subjected to final withholding tax. 4. Withholding Tax on Government Money Payments (GMP) - Percentage Taxes is the tax withheld by National Government Agencies (NGAs) and instrumentalities, including government-owned and controlled corporations (GOCCs) and local government units (LGUs), before making any payments to non-VAT registered taxpayers/suppliers/payees 5. Withholding Tax on GMP - Value Added Taxes (GVAT) - is the tax withheld by National Government Agencies (NGAs) and instrumentalities, including governmentowned and controlled corporations (GOCCs) and local government units (LGUs), before making any payments to VAT registered taxpayers/suppliers/payees on account of their purchases of goods and services. WITHHOLDING TAXES ON INCOME 1. Withholding tax on Compensation is the tax withheld from individuals receiving purely compensation income. During early implementation of the Withholding on compensation, the amounts withheld were just a portion of the annual income tax, but with the regulation on making even returns or annualizing the withholding taxes, full amount of the income tax on compensation are already withheld at the end of the year thereby there will be no more tax to be paid on or before April 15 which is the deadline for the filing of the Annual Income Tax Returns. 2. Expanded Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is creditable against the income tax of the payee for the taxable year. The taxes so withheld are not complete satisfaction or full payment of the income tax due. There are still taxes remaining to be paid at the end of the year. 3. Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is not creditable against the income of the payee for the taxable year. Income Tax withheld constitutes the full and final payment of the income tax due from the payee on the said income, hence the income and the withholding taxes need not be reported in the Annual Income Tax Returns. 4. Withholding Tax on Government Money Payments is the withholding of taxes by the government agencies, before making any payments for their transactions with the private individuals, corporations, partnerships and/or associate

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FILING AND COMPUTATION OF WITHHOLDING TAXES 1. Withholding On Compensation Monthly Remittance of Taxes Withheld on Compensation Tax Form- BIR Form 1601-C: Monthly Remittance Return of Income Taxes Withheld on Compensation Who Are Required To File Every registered withholding agent on compensation, which includes, but not limited to the following: 1) Individuals engaged in business or practice of profession with employees subject to income tax 2) All Juridical persons (e.g., Corporations, general partnerships, associations, etc.) whether or not engaged in business. 3) Government Agencies and Instrumentalities (e.g.,NGAs, GOCCs, etc.), including local government units (LGUs) Documentary Requirements/Attachments to the tax return: 1) For amended return, proof of remittance and the return previously filed. 2) For those with advance payments, BIR Form No. 0605 3) For Private Sector, copy of the list of MWEs who received hazard pay submitted to the DOLE Regional/Provincial Offices-Operations Division/Unit, for the return period March, June, September and December, if applicable. 4) For Public Sector, copy of Department of Budget and Management (DBM) circular/s or equivalent on MWEs allowed to receive hazard pay, for the return period March, June, September and December, if applicable. 5) Electronic Tax Remittance Advice (eTRA) previously Tax Remittance Advice (TRA) for National Government Agencies (NGAs) as required under DOF-DBM Joint Circular No. 12000A and RR 1-2013. Deadline for Filing and Payment Filing Via EFPS Group A - Fifteen (15) days following end of the month Group B - Fourteen (14) days following end of the month Group C - Thirteen (13) days following end of the month

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Group D - Twelve Group E - Eleven

(12) days following end of the month (11) days following end of the month

Payment via EFP On or before the fifteenth (15th) day of the month following the month withholding was made, except for taxes withheld for the month of December which shall be paid on or before January 20 of the succeeding year. Provided however that, in the case of NGAs, all returns must be electronically filed (e-filed) and payment of the tax due must also be made on the same day the return is e-filed which shall be on or before the 10th day following the month in which withholding was made, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the succeeding year. Manual Filing and Payment On or before the tenth (10th) day of the month following the month the withholding was made, except for taxes withheld for the month of December which shall be filed and paid on or before January 15 of the succeeding year.

REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE July 08, 2008

REVENUE REGULATIONS NO. 10 – 2008 SUBJECT: Implementing Pertinent Provisions of Republic Act No. 9504, “An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as The National Internal Revenue Code ” Relative to the Withholding of Income Tax on Compensation and Other Concerns. TO : All Internal Revenue Officers and Others Concerned Pursuant to Secs. 244 and 245 of the National Internal Revenue Code of 1997, as amended, in relation to the implementation of Republic Act No. 9504, amending Secs. 22, 24, 34, 35, 51 and 79 of Republic Act No. 8424, as amended, these Regulations are hereby promulgated to amend Sections 2.78.1(A), 2.78.1(B), 2.79 (A), (B), (F), (I), 2.79.1 and 2.79.2, 2.80, and 2.83 of Revenue Regulations No. 2-98 (RR 2-98), as amended, with respect to the withholding tax on compensation income, increase of personal and additional exemptions, compensation received by minimum wage earners (MWEs) and other concerns.

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SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as follows: “Sec. 2.78.1. Withholding of Income Tax on Compensation Income.(A) Compensation Income Defined. – xxx

xxx xxx

xxx xxx

(3) Facilities and privileges of relatively small value. — Ordinarily, facilities and privileges (such as entertainment, medical services, or so-called "courtesy‖ discounts on purchases), otherwise known as "de minimis benefits," furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. The following shall be considered as "de minimis" benefits not subject to income tax, hence, not subject to withholding tax on compensation income of both managerial and rank and file employees: (a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees; (b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; (c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,500.00; (d) Uniforms and clothing allowance not exceeding P4,000.00 per annum; (e) Actual yearly medical benefits not exceeding P10,000.00 per annum; (f) Laundry allowance not exceeding P300.00 per month; (g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; (h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum;

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(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and (j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. The amount of ‗de minimis‘ benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000.00 ceiling of ‗other benefits‘ excluded from gross income under Section 32(b)(7)(e) of the Code. Provided that, the excess of the ‗de minimis‘ benefits over their respective ceilings prescribed by these regulations shall be considered as part of ‗other benefits‘ and the employee receiving it will be subject to tax only on the excess over the P30,000.00 ceiling ( Note: this is amended by Republic Act No. 10653 as implemented in RR 3-2015, increasing the ceiling to P80,000). Provided, further, that MWEs receiving ‗other benefits‘ exceeding the P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the SMW. Any amount given by the employer as benefits to its employees, whether classified as ―de minimis‖ benefits or fringe benefits, shall constitute as deductible expense upon such employer. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Bureau of Internal Revenue. xxx

xxx

xxx

(B) Exemptions from Withholding Tax on Compensation.- The following income payments are exempted from the requirements of withholding tax on compensation: xxx

xxx

xxx

(13) Compensation income of MWEs who work in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where he/she is assigned. The aforesaid income shall likewise be exempted from income tax ‗Statutory Minimum Wage‘ (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The

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RTWPB of each region shall determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income tax for this purpose. Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise be covered by the above exemption. Provided, however, that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00 ( now 80,000), taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently, from withholding tax.( Note: In a 56-page decision dated Jan. 24,2 017 the high tribunal, voting unanimously in full court, nullified Sections 1 and 3 of Revenue Regulations (RR) No. 10-2008 ―as they disqualify MWEs who earn purely compensation income from the privilege of the MWE exemption in case they receive bonuses and other compensation-related benefits exceeding the statutory ceiling of P30,000.‖ The high court also ruled that the provision 3 which rules on the ―prorated application of the personal and additional exemptions under R.A. 9504 for taxable year 2008, and for the taxable year 2008, and for the period of applicability for the MWE exemption to begin only on [July 6, 2008].‖

MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax. .( Note: In a 56page decision dated Jan. 24,2 017 the high tribunal, voting unanimously in full court, nullified Sections 1 and 3 of Revenue Regulations (RR) No. 10-2008 ―as they disqualify MWEs who earn purely compensation income from the privilege of the MWE exemption in case they receive bonuses and other compensation-related benefits exceeding the statutory ceiling of P30,000. (NOW 80,000)‖ The high court also ruled that the provision 3 which rules on the ―prorated application of the personal and additional exemptions under R.A. 9504 for taxable year 2008, and for the taxable year 2008, and for the period of applicability for the MWE exemption to begin only on [July 6, 2008].‖

For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, diseaseinfested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax and consequently, to withholding tax.

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In case of hazardous employment, the employer shall attach to the Monthly Remittance Return of Withholding Tax on Compensation (BIR Form No. 1601C) for return periods March, June, September and December a copy of the list submitted to the nearest DOLE Regional/Provincial Offices – Operations Division/Unit showing the names of MWEs who received the hazard pay, period of employment, amount of hazard pay per month; and justification for payment of hazard pay as certified by said DOLE/allied agency that the hazard pay is justifiable. The NWPC shall officially submit a Matrix of Wage Order by region (Annex ―A‖), and any changes thereto, within ten (10) days after its effectivity to the Assistant Commissioner, Collection Service, for circularization in the BIR. Any reduction or diminution of wages for purposes of exemption from income tax shall constitute misrepresentation and therefore, shall result to the automatic disallowance of expense, i. e. compensation and benefits account, on the part of the employer. The offenders may be criminally prosecuted under existing laws. (14) Compensation income of employees in the public sector with compensation income of not more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, applicable to the place where he/she is assigned . The aforesaid income shall likewise be exempted from income tax. The basic salary of MWEs in the public sector shall be equated to the SMW in the non-agricultural sector applicable to the place where he/she is assigned. The determination of the SMW in the public sector shall likewise adopt the same procedures and consideration as those of the private sector. Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE in the public sector shall likewise be covered by the above exemption. Provided, however, that a public sector employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently, from withholding tax. MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax.

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For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, diseaseinfested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax and consequently to withholding tax. In case of hazardous employment, the employer shall attach to the Monthly Remittance Return of Withholding Tax on Compensation (BIR Form No. 1601C) for return periods March, June, September and December a copy of Department of Budget and Management (DBM) circular/s, or equivalent, as to who are allowed to receive hazard pay. SECTION 2. Section 2.78.5 shall be inserted to RR 2-98, as amended, to read as follows: “Sec. 2.78.5. Computation of Wages .The basis of the computation of the minimum wage rates prescribed by law shall be the normal working time of eight (8) hours a day. The computation of wages shall be in accordance with the Collective Bargaining Agreement (CBA), if any, or the provisions of the Labor Code as implemented. Unless otherwise amended or repealed by subsequent pertinent laws, rules and regulations, the holiday pay, overtime pay, night shift differential and hazard pay shall be understood to be computed based on such agreement or labor law provisions. In the determination of the minimum wage on a monthly basis, the withholding agent shall be guided by the prevailing minimum wage as reflected in the latest Matrix of Wage Order and its own policy on whether employees are (a) not considered paid on Saturdays and Sundays or rest days, (b) not considered paid on Sundays or rest days, (c) considered paid on rest days, special days and regular holidays, or (d) required to work every day including Sundays or rest days, special days and regular holidays. The resulting number of days in the above enumerated categories is referred to as the factor or number of working/paid days in a year. (Annex ―B‖) On the first classification, the monthly SMW is computed by multiplying the applicable daily wage rate by the factor of 261 days and divide the same by twelve; the semi-monthly at one-half (1⁄2) of the monthly rate and the weekly SMW is arrived at by spreading the annual minimum basic wage over fifty-two (52) weeks. Thus, on a P382.00 minimum daily wage in Metro Manila, the monthly SMW is P8, 308.00, the semi-monthly at P4, 154.00 and weekly at P1, 917.00. On the second category, the monthly SMW is computed by multiplying the applicable daily wage rate by the factor of 313 days and divide the product by twelve. Hence, on a P382.00 minimum daily wage, the monthly SMW is P9, 964.00, the semimonthly at P4, 982.00 and weekly at P2, 300.00.

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On the third classification, the monthly SMW is computed by multiplying the applicable daily wage rate by the factor of 365 days, divided by twelve. Thus, on a 382 minimum daily wage, the monthly SMW is P11, 619.00, the semi-monthly at P5, 810.00 and weekly at P2, 681.00. On the fourth classification, the monthly SMW is computed by multiplying the applicable daily wage rate by the factor of 392.5 days, divided by twelve. Hence, on a 382 minimum daily wage, the monthly SMW is P12, 495.00, the semi-monthly at P6, 247.00 and weekly at P2, 883.00.‖ SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as follows: “Sec. 2.79. INCOME TAX COLLECTED AT SOURCE ON COMPENSATION INCOME. (A) Requirement of Withholding. – Every employer must withhold from compensation paid an amount computed in accordance with these Regulations. Provided, that no withholding of tax shall be required on the SMW, including holiday pay, overtime pay, night shift differential and hazard pay of MWEs in the private/public sectors as defined in these Regulations. Provided, further, that an employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00(Now 80,000), taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently, shall be subject to withholding tax. (NOTE: In a 56-page decision dated Jan. 24, the high tribunal, voting unanimously in full court, nullified Sections 1 and 3 of Revenue Regulations (RR) No. 102008 ―as they disqualify MWEs who earn purely compensation income from the privilege of the MWE exemption in case they receive bonuses and other compensation-related benefits exceeding the statutory ceiling of P30,000.‖ The high court also ruled that the provision 3 which rules on the ―prorated application of the personal and additional exemptions under R.A. 9504 for taxable year 2008, and for the taxable year 2008, and for the period of applicability for the MWE exemption to begin only on [July 6, 2008].‖

(B) Computation of Withholding Tax on Compensation Income in General. – The procedures provided herein below shall govern the computation of withholding tax on the taxable compensation income of the employees. Provided, however, that taxable fringe benefits received by employees other than the rank and file, as defined in the Labor Code of the Philippines, as amended, shall be subject to a Fringe Benefits Tax, instead of the

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rates prescribed in the Revised Withholding Tax Tables pursuant to Sec. 24(A) of the Code, as amended. (1) Use of Withholding Tax Tables. – In general, every employer making payment of compensation shall deduct and withhold from such compensation a tax determined in accordance with the prescribed Revised Withholding Tax Tables (Annex ―C‖) which shall be used starting January 1, 2009. There are four (4) withholding tax tables prescribed in these regulations, as follows: (a) Monthly Tax Table – to be used by employers using the monthly payroll period; (b) Semi-Monthly Tax Table – to be used by employers using the semi-monthly payroll period; (c) Weekly Tax Table – to be used by employers using the weekly payroll period; (d) Daily Tax Table – to be used by employers using the daily payroll period .If the compensation is paid other than daily, weekly, semi-monthly or monthly, the tax to be withheld shall be computed as follows: (a) Annually – use the annualized computation referred to in Sec. 2.79(B)(5)(b)of these Regulations; (b) Quarterly and semi-annually – divide the compensation by three (3) or six (6) respectively, to determine the average monthly compensation. Use the monthly withholding tax table to compute the tax, and the tax so computed shall be multiplied by three (3) or six (6) accordingly. For the year 2008, however, being the initial year of implementation of RA 9504, there shall be a transitory withholding tax table for the period from July 6 to December 31, 2008 (Annex ―D‖) determined by prorating the annual personal and additional exemptions under RA 9504 over a period of six months. Thus, for individuals, regardless of personal status, the prorated personal exemption is P25,000, and for each qualified dependent child (QDC), P12,500. (2) Components of the Withholding Tax Table. – (a) Each tax table is grouped into Tables A and B. A – Table for employees with no QDC B – Table for employees with QDC (b) The columns in the Tables reflect the following:

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1st column – reflects the exemption status of employee represented by letter symbols. (refer to the explanation of the legend of symbols in letter (d) below) 2nd column – reflects the total amount of personal and additional exemption, in pesos, to which an employee is entitled. (c) Column numbers 1 to 8 reflect the portion of the amount of taxes to be withheld on the amount of compensation of the employees. Every amount in all the columns within Tables A and B represent the compensation level. (d) Legend of symbols – The symbols used in the new withholding tax table represents the following: Z – Zero exemption (a) Employee with multiple employers simultaneously, with respect to second, third, etc., employer; and (b) Employee who fails to file Application for Registration (BIR Form No.1902); S – Single, legally separated spouses/widow/widower; ME – Married employee who is not legally separated; The numerals (1-4) affixed to the status symbols ―ME‖ and ―S‖ represent the number of qualified legitimate, illegitimate, or legally adopted children. Exemption - means the amount of exemption in thousand pesos an employee is entitled to claim as a deduction from gross compensation income in accordance with the status and number of qualified dependent children. (3) Steps to determine the amount of tax to be withheld. Step 1. Determine the total monetary and non-monetary compensation paid to an employee for the payroll period, segregating gross benefits which include thirteenth (13th) month pay, productivity incentives, Christmas bonus, other benefits, received by the employee per payroll period, and employees‘ contributions to SSS, GSIS, HDMF, PHIC, and union dues. Gross benefits which are received by officials and employees of both public and private entities in the amount of thirty thousand pesos (P30, 000) now 80,000.00 and less shall be exempted from income and withholding taxes. The 13th Month Pay is equivalent to the total basic salary earned during the year divided by 12 months.

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Step 2. Segregate the taxable from the non-taxable compensation income paid to the employee for the payroll period. The taxable income refers to all remuneration paid to an employee not otherwise exempted by law from income tax and consequently from withholding tax. The non-taxable income are those which are specifically exempted from income tax by the Code or by other special laws as listed in Sec. 2.78.1 (B) hereof (e.g. benefits not exceeding P30,000, non-taxable retirement benefits and separation pay). Step 3. Segregate the taxable compensation income as determined in Step 2 into regular taxable compensation income and supplementary compensation income. Regular compensation includes basic salary, fixed allowances for representation, transportation and other allowances paid to an employee per payroll period. Supplementary compensation includes payments to an employee in addition to the regular compensation such as commission, overtime pay, taxable retirement pay, taxable bonus and other taxable benefits, with or without regard to a payroll period. Representation & Transportation Allowance (RATA) granted to public officers and employees under the General Appropriations Act and the Personnel Economic Relief Allowance (PERA) which essentially constitute reimbursement for expenses incurred in the performance of government personnel‘s official duties shall not be subject to income tax and consequently to withholding tax. Step 4. Use the appropriate tables mentioned under Section 2.79(B)(1) for the payroll period: monthly, semi-monthly, weekly or daily, as the case may be. Step 5. Fix the compensation level as follows: (i) Determine the line (horizontal) corresponding to the status and number of qualified dependent children using the appropriate symbol for the taxpayer status. (ii) Determine the column to be used by taking into account only the total amount of taxable regular compensation income. The compensation level is the amount indicated in the line and column to which the regular compensation income is equal to or in excess, but not to exceed the amount in the next column of the same line. Step 6. Compute the withholding tax due by adding the tax predetermined in the compensation level indicated at the top of the column, to the tax on the excess of the total regular and supplementary compensation over the compensation level, which is computed by multiplying the excess by the rate also indicated at the top of the same column/compensation level.

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(4) Sample Computations on the use of the Withholding Tax Tables: EXAMPLE I: Mr. A, single with no dependent, receives P12,000.00 (net of SSS/GSIS,PHIC,HDMF employee share only) as monthly regular compensation and P5,000.00 as supplementary compensation for January 2009 or a total of P17,000.00. COMPUTATION: Using the monthly withholding tax table (Revised Withholding Tax Tables beginning January 1, 2009), the withholding tax for January 2009 is computed by referring to Table A line 2 S of column 5 (fix compensation level taking into account only the regular compensation income of P12, 000.00 which shows a tax of P708.33 on P10,000.00 plus 20% of the excess of P2,000.00 (P12,000.00 less P10,000.00) plus P5,000.00 supplementary compensation. Regular compensation

P12, 000.00

Less: compensation level (line A-2 Column 5)

10,000.00

Excess

P 2,000.00

Add: Supplementary compensation

5,000.00

Total

P 7,000.00

Tax on P10, 000.00

P

Tax on excess (P7, 000 x 20%) Withholding tax for January 2009

708.33 1,400.00

P 2,108.33

EXAMPLE II: Mr. B, married with three (3) qualified dependent children receives P12, 000.00 (net of SSS/GSIS,PHIC,HDMF employee share only) as regular semi-monthly compensation. Mrs. B, his wife, is also employed. Mr. B did not waive his right in favor of the wife to claim for the additional exemptions. COMPUTATION: Using the semi-monthly withholding tax tables (Revised Withholding Tax Tables beginning January 1, 2009), the withholding tax due is computed

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by referring to Table B line 3 ME3 of column 6 which shows a tax of P937.50 on P11,042 plus 25% of the excess (P12,000 – 11,042 = P958.00) Total taxable compensation

P12, 000.00

Less: compensation level (line B-3 Column 6)

11,042.00

Excess

P 958.00

Tax on P11, 042

P 937.50

Tax on excess (P958 x 25%) Semi-monthly withholding tax

239.50 P1,177.00

EXAMPLE III: For the month of August 2008, Mrs. C, married with three qualified dependent children, with a basic salary equivalent to the SMW, receives P9,964.00 (P382/day x 313 days ÷ 12) as statutory monthly minimum wage plus other compensation such as commission of P10,000, transportation allowance of P2,000, hazard pay of P1,000, overtime pay of P5,000 and night shift differential pay of P2,000.00. Compute the withholding tax of Mrs. C for the month of August 2008 using the Revised Transitional Withholding Tax Table for the period July 6 to December 31 2008. COMPUTATION: Statutory Minimum Wage

P 9,964.00

Gross Benefits Hazard pay

1,000.00

Overtime Pay

5,000.00

Night Shift Differential

2,000.00

Sub-total

8,000.00 P17,964.00

Taxable compensation 226

Commission*

10,000.00

Transportation allowance*

2,000.00

12,000.00

Total Taxable Compensation Income

P29,964.00

Regular compensation

P 9,964.00

Less: Compensation level (line B-3 column 4)

7,708.00

Excess

P 2,256.00

Add: Supplementary compensation (8,000 + 12,000)

20,000.00

Total

P 22,256.00

Tax on P9,964.00 (Line B3, col. 4)

P 208.33

Tax on excess (P22,256.00 x 15%)

3,338.40

Withholding tax for the month of August 2008

P 3,546.73

*An employee who receives compensation other than the SMW, holiday, overtime, night shift differential and hazard pay shall not enjoy the privilege of being a minimum wage earner, and his entire earnings are no longer considered exempt. (This however has been modified by a recent supreme court ruling stating that there is nothing in the law that diminishes the exemption from taxes of the minimum wage) (5) Use of Exceptional Computations (a) Cumulative average method – If in respect of a particular employee, the regular compensation is exempt from withholding tax because the amount thereof is below the compensation level, but supplementary compensation is paid during the calendar year or the supplementary compensation is equal to or more than the regular compensation to be paid; or the employee was newly hired and had a previous employer/s within the calendar year, other than the present employer doing this cumulative computation, the present employer shall determine the tax to be deducted and withheld in accordance with the cumulative average method provided hereunder:

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Step 1. Add the amount of taxable regular and supplementary compensation to be paid to an employee for the payroll period subject of computation to the sum of the taxable regular and supplementary compensation since the beginning of the current calendar year including the compensation paid by the previous employers within the same calendar year, if any; Step 2. Divide the aggregate amount of compensation computed in step 1 by the number of payroll period to which the amount relates; Step 3. Compute the tax to be deducted and withheld on the cumulative average compensation determined in Step No. (2) in accordance with the withholding tax table; Step 4. Multiply the tax computed in Step No. (3) by the number of payroll period to which it relates; Step 5. Determine the excess, if any, of the amount of tax computed in Step No. (4) over the total amount of tax already deducted and withheld from the beginning payroll period to the last payroll period, including that withheld by the previous employer/s within the calendar year, if any. The excess, as computed, shall be deducted and withheld from the compensation to be paid for the last payroll period of the current calendar year. The cumulative average method, once applicable to a particular employee at any time during the calendar year, shall be the same method to be consistently used for the remaining payroll period/s of the same calendar year. EXAMPLE IV: The regular compensation is exempt from withholding tax but supplementary compensation (commission) is paid during the calendar year. Employee A, married, with three (3) qualified dependents (ME3), received the following compensation beginning January, 2009. Total Regular Supplementary Compensation Compensation Compensation January P 8,500.00 P 15,000.00 P 23,500.00 February P 8,500.00 P 15,000.00 P 23,500.00 March P 8,400.00 P 15,500.00 P 23,900.00 Month

COMPUTATION: For Jan. P 23,500.00 + 0 For Feb. P 23,500.00 + 23,500.00 For Mar. P 23,500.00 + 23,500.00 + 23,900.00 For Jan. P 23,500.00/1 For Feb. P 47,000.00/2 For Mar. P 70,900.00/3

= P23,500.00 = P47,000.00 = P70,900.00 = P23,500.00 = P23,500.00 = P23,633.33

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For January Tax on P22, 083.00(Line B.3, Col. 6) Tax on excess (P1, 417.00 x 25%) Tax on P23, 500.00 For February Tax on P22, 083.00 (Line B.3, Col. 6) Tax on excess (P1, 417.00 x 25%) Tax on P23, 500.00 For March Tax on P22, 083.00 (Line B.3, Col.6) Tax on excess (P1, 550.33 x 25%) Tax on P23, 633.33 For Jan. P 2,229.25 x 1 For Feb. P 2,229.25 x 2 For Mar. P 2,262.58 x 3 . For Jan. P 2,229.25 – 0 For Feb. P 4,458.50 – 2,229.25 For Mar. P 6,787.74 – 4,458.50

=P 1,875.00 =P 354.25 = P 2,229.25 = P 1,875.00 = P 354.25 = P 2,229.25 =P 1,875.00 = 387.58 =P 2,262.58 =P 2,229.25 =P 4,458.50 =P 6,787.74 =P 2,229.25 =P 2,229.25 =P 2,329.24

EXAMPLE V: Supplementary compensation is equal to or more than the regular compensation received: Employee B, married with three (3) qualified dependents (M3) whose spouse is also employed, received the following compensation beginning January, 2009 Total Regular Supplementary Compensation Compensation Compensation January P 11,000.00 P 11,000.00 P 22,000.00 February P 11,000.00 P 11,500.00 P 22,500.00 March P 11,000.00 P 12,000.00 P 23,000.00 Month

COMPUTATION: 1. For Jan. P 22,000.00 + 0 For Feb. P 22,000.00 + 22,500.00 For Mar. P 22,000.00 + 22,500.00 + 23,000.00 2. For Jan. P 22,000.00/1 For Feb. P 44,500.00/2 For Mar. P 67,500.00/3 3. For January Tax on P16,250.00(Line B.3, Col. 5) Tax on excess (P5,750.00 x 20%) Tax on P22,000.00 For February Tax on P22,083 (Line B.3,Col. 6)

=P =P =P =P =P =P

22,000.00 44,500.00 67,500.00 22,000.00 22,250.00 22,500.00

=P =P =P

708.33 1,150.00 1,858.33

=P

1,875.00

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Tax on excess (P167 x 25%) Tax on P22,250.00 For March Tax on P22,083 (Line B.3, Col.6) Tax on excess (P417 x 25%) Tax on P22,500.00 4. For Jan. P 1,858.33 x 1 For Feb. P 1,916.75 x 2 For Mar. P 1,979.25 x 3 5. For Jan. P 1,858.33 – 0 For Feb. P 3,833.50 - 1,858.33 For Mar. P 5,937.75 – 3,833.50

=P =P

41.75 1,916.75

=P =P =P =P =P =P =P =P =P

1,875.00 104.25 1,979.25 1,858.33 3,833.50 5,937.75 1,858.33 1,975.17 2,104.25

EXAMPLE VI: A newly hired employee with previous employer within the calendar year 2009.Employee C, single, was hired by Z Company on July 6, 2009. Her total taxable income per month is P 15,000.00. She was previously employed by X Company from January to June 30, 2009 with a monthly taxable income of P 13,000.00 or P 13,000.00 x 6 months = P 78,000 for 6 months. Per BIR Form No. 2316 (Certificate of Compensation Payment/Tax Withheld) issued by the previous employer, which was presented by Employee C to her present employer, the total tax withheld is P 7,849.98. In computing for the tax withheld on the compensation of Employee C starting the month of July 6, 2000, Z Company shall use the cumulative average method. Month

July 6 Aug Sept Oct Nov Dec

Present Compensation Income P 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00 P 90,000.00

Total Previous Income P 78,000.00

P78,000.00

Total Taxable Income P 93,000.00 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00 P168,000.00

COMPUTATION: Step 1 – For July 6 P 15,000.00 + P 78,000.00 For Aug. P 93,000.00 + P 15,000.00 For Sep. P 93,000.00 + P 15,000.00 + P 15,000.00 For Oct. P 93,000.00 + P 15,000.00 + P 15,000.00 + P 15,000.00 For Nov. P 93,000 + P 15,000 + P 15,000 + P 15,000+ P 15,000 Step 2 – For July 6 P 93,000.00/7 For Aug. P 108,000.00/8

=P =P =P =P =P

93,000.00 108,000.00 123,000.00 138,000.00 153,000.00

=P =P

13,285.71 13,500.00

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For Sep. P 123,000.00/9 For Oct. P 138,000.00/10 For Nov. P 153,000.00/11

Step 3 – For July 6 P 13,285.71 Tax On P 10,000.00 Tax On Excess (P 3,285.71 x 20%) Tax on P 13,285.71 For August P 13,500.00 Tax On P 10,000.00 Tax On Excess (P 3,500.00 x 20%) Tax on P 13,500.00 For Sept. P 13,666.67 Tax On P 10,000.00 Tax On Excess (P 3,666.67 x 20%) Tax on P 13,666.67 For October P13,800.00 Tax on P10,000.00 Tax on excess (P3,800.00 x 20%) Tax on P13,800.00 For November P13,909.09 Tax on P10,000.00 Tax on excess (P3,909.09 x 20%) Tax on P13,818.18 Step 4 – For July 6 P1,365.47 x 7 For August 1,408.33 x 8 For September 1,441.66 x 9 For October 1,468.33 x 10 For November 1,490.15 x 11 Step 5 – For July 6 P 9,558.29 – P 7,849.98 For August 11,266.64 – P 9,558.29 For September 12,974.94 – P 11,266.64 For October 14,683.30 – P 12,974.94 For November 16,391.65 – P 14,683.30

=P =P =P

13,666.67 13,800.00 13,909.09

=P =P =P

708.33 657.14 1,365.47

=P =P =P

708.33 700.00 1,408.33

=P =P =P

708.33 733.33 1,441.66

=P =P =P

708.33 760.00 1,468.33

=P =P =P

708.33 781.82 1,490.15

=P =P =P =P =P

9,558.29 11,266.64 12,974.94 14,683.30 16,391.65

=P =P =P =P =P

1,708.31 1,708.35 1,708.30 1,708.36 1,708.35

(b) Annualized withholding tax method. – (1) When the employer-employee relationship is terminated before the end of the calendar year; and (2) when computing for the year-end adjustment, the employer shall determine the amount to be withheld from the compensation on the last month of employment or in December of the current calendar year in accordance with the following procedures:

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Step 1. Determine the taxable regular and supplementary compensation paid to the employee for the entire calendar year. Refer to steps 1 to 3 of Sec. 2.79 (B)(3), as amended, using as basis the compensation received for the calendar year. Step 2. If the employee has previous employment/s within the year, add the amount of taxable regular and supplementary compensation paid to the employee by the present employer doing the annualized computation to the taxable compensation income received from previous employer/s during the calendar year. (i) When the employer-employee relationship is terminated before December – The taxable regular and supplementary compensation income shall be the amount paid since the beginning of the current calendar year to the termination of employment. (ii) Year-end adjustment – The taxable regular and supplementary compensation income shall be the amount paid since the beginning of the current calendar year to December; (iii) Taxable fringe benefits received by employees holding managerial or supervisory positions shall be subject to a final fringe benefit tax as prescribed in Section 2.79 (D) of RR 2-98, as amended. Hence, the same shall not form part of the taxable supplementary compensation, of managers and supervisors, subject to the withholding tax tables. Step 3. Deduct from the aggregate amount of compensation computed in Step No. (2) the amount of the total personal and additional exemptions of the employee; Step 4. Deduct the amount of premium payments on Health and/or Hospitalization Insurance of employees who have presented evidence that they have paid during the taxable year premium payments (the deductible amount shall not exceed P2,400 or P200 per month whichever is lower) and that their family‘s total gross income does not exceed P250,000 for the calendar year. For purposes of substantiating the claim of insurance expense and determining the aggregate family income, the policy contract shall be presented to the employer together with the original official receipt of the premium payment for the current year, BIR Form No. 2316 for the current year or Certificate of Gross Income for the Current Year (Annex ―E‖) issued by the employer/s of the nuclear family. Total family income includes primary income and other income from sources received by all members of the nuclear family, i.e. father, mother, unmarried children living together as one household, or a single parent with children. A single person living alone is considered as a nuclear family.

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The spouse claiming the additional exemptions for the QDC shall be the same spouse to claim the deductions for premium payments. Step 5. Compute the amount of tax on the difference arrived at in Step 4, in accordance with the schedule provided in Sec. 24 (A) of the Code, as follows: OVER 1 2 3 4 5 6 7

P0 10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

NOT OVER

TAX DUE IS

PLUS

10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

P0 500.00 2,500.00 8,500.00 22,500.00 50,000.00 125,000.00

5% 10% 15% 20% 25% 30% 32%

WITHOUT LIMIT

OF EXCESS OVER P0 10,000.00 30,000.00 70,000.00 140,00.00 250,000.00 500,000.00

Step 6. Determine the deficiency or excess, if any, of the tax computed in Step 5 over the cumulative tax already deducted and withheld since the beginning of the current calendar year. The deficiency tax (when the amount of tax computed in Step 5 is greater than the amount of cumulative tax already deducted and withheld or when no tax has been withheld from the beginning of the calendar year) shall be deducted from the last payment of compensation for the calendar year. If the deficiency tax is more than the amount of last compensation to be paid to an employee, the employer shall be liable to pay the amount of tax which cannot be collected from the employee. The obligation of the employee to the employer arising from the payment by the latter of the amount of tax which cannot be collected from the compensation of the employee is a matter of settlement between the employee and employer. The excess tax (when the amount of cumulative tax already deducted and withheld is greater than the tax computed in Step 5) shall be credited or refunded to the employee not later than January 25 of the following year. However, in case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year. In return, the employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer is fully repaid. EXAMPLE VII: (Use of annualized computation when employer-employee relationship was terminated before December) – a) Mr. D, single with a qualified dependent brother receives P18,000 as monthly regular compensation starting January 1, 2008. On June 1, 2008, he filed his resignation effective

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June 30, 2008 and was not reemployed for the rest of the year. The tax withheld from January to May was P15,208.75. COMPUTATION: Total compensation received from January 1 to May 31, 2008 Add: Compensation to be received on June Gross compensation Jan-June Less: Personal Exemption (HF old exemption) Net Taxable Compensation Tax Due Less: Tax Withheld from Jan to May To be refunded to Mr. D *Tax on P70,000.00 Tax on excess (P13,000 x 20%) Tax on P83,000.00

P 90,000.00 18,000.00 108,000.00 25,000.00 P 83,000.00 P 11,100.00* 15,208.75 (P 4,108.75) P 8,500.00 2,600.00 P11,100.00

b) Mr. Z, single with a qualified dependent brother receives P18, 000 as monthly regular compensation starting January 1, 2008. On June 1, 2008, he filed his resignation effective June 30, 2008 and was subsequently reemployed on July 6, 2008. The BIR Form 2316 he gave to his new employer showed that the amount he received from his previous employer was P108, 000 and a tax withheld of P11, 100. His withholding tax from the new employer amounted to P15, 000. COMPUTATION: Total compensation received from Previous employer Add: Compensation from new employer Gross compensation Less: Personal Exemption (HF) Net Taxable Compensation

P108, 000.00 115,000.00 223,000.00 37,500.00 P185, 500.00

Tax Due Less: Tax Withheld (11,100 + 15,000) To be deducted from Mr. Z

P 33,875.00* 26,100.00 P 7,775.00

*Tax on P140,000.00 Tax on excess (P45,500 x 25%) Tax on P185,500.00

P 22,500.00 11,375.00 P 33,875.00

c) Mr. Y, single with a qualified dependent brother, had his first job on July 2008. He receives P18, 000 as monthly regular compensation. The tax withheld was P12, 083.75

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COMPUTATION: Total compensation received from July to November 2008 Add: Compensation to be received in December Gross compensation Less: Personal Exemption (pro-rated) Net Taxable Compensation Tax Due Less: Tax Withheld To be refunded to Mr. Y *Tax on P70,000.00 Tax on excess (P500 x 20%) Tax on P83,000.00

P 90,000.00 P 18,000.00 P 108,000.00 P 37,500.00 P 70,500.00 P 8,600.00* P 12,083.75 (P 3,483.75) P 8,500.00 P 100.00 P 8,600.00

EXAMPLE VIII: (Year-end adjustments computation) – For taxable year 2009, WTD Corporation (Full exemption per RA 9504 shall be used for calendar year 2009) has the following employees: 1. Mr. E, married with two qualified dependent children who received the following compensation for the year: Basic Monthly Salary Overtime Pay for November Thirteenth Month Pay Other Benefits Withholding tax (Jan – Nov)

P45,000.00 P5, 000.00 P45,000.00 P12,000.00 P98,082.00

2. Mr. F, married, whose wife is also employed, with two qualified dependent children, received for the year: Basic Monthly Salary Thirteenth Month Pay Other Benefits Withholding tax (Jan – Nov)

P16,500.00 P16,500.00 P16,500.00 P12,924.23

Mr. G, single, who was hired on July 6, 2009 received the following: Basic Monthly Salary Thirteenth Month Pay Monthly Salary from Previous Employer (Jan-June) Withholding tax – Previous employer Present employer

P 20,000.00 P 20,000.00 P 6,000.00 P 2,899.68 P 17,500.50

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He paid for the year an annual premium on health and hospitalization insurance amounting to P2, 400.00. 4. Mrs. H, married, whose husband is also working received the following: Basic Monthly Salary Thirteenth Month Pay (8/12 x 35,000.00) Other Benefits Withholding tax (Jan – Nov)

P35,000.00 P23,333.33 P20,000.00 P57,333.36

She resigned effective August 31, 2009.19 COMPUTATION OF WITHHOLDING TAX FOR DECEMBER 2009 1. Mr. E

Compensation

Received For the Year Non- Taxable

Basic Salary (45,000 x 12mos)

P540,000

Overtime (Nov.) 13thmonth pay Other benefits Totals

5,000 45,000 12,000 P602,000

Total Gross Compensation Less: Personal exemption Additional exemption Taxable Compensation Tax Due Less: Tax withheld from Tax to be collected * Tax Due is computed by

Compensation Basic Salary

Taxable

P540,000 P30,000

15,000 12,000 P572,000

P30,000

P572,000.00 P50,000.00 50,000.00 250,000

50,000.00

222,000 x 30%

66,600.00

Previous months in December 2009 using the rates

Received For the Year 198,000

prescribed

100,000.00 472,000.00 116,600.00* 98,082.27 P 18,517.73 in Sec. 24 (A), NIRC

Non- Taxable

Taxable P198,000 236

13thmonth pay Other benefits Totals

16,500 16,500 P231,000

16,500 13,500 30,000

3,000* 201,000

* Excess of 13thmonth pay and other benefits over the P30, 000.00 ceiling under Sec. 32(b)(7)(e).( now 82,000.00- using present law, the other benefits will all be tax exempt)

2. Mr. F Gross Compensation Less: Personal exemption Additional exemption

P201,000.00 (ME2

100,000.00 P 101,000.00

Taxable Compensation Tax Due Less: Tax withheld from Tax to be collected

P14,700.00 12,924.23 P 1,775.77

Previous months in December 2009

3. Mr. G, Single Computation of withholding tax for December Compensation from previous employer (Jan. to June) Compensation from present employer ( July 6 to Dec ) Total taxable compensation (Jan. to Dec.) Less: Personal exemptions Premium payments on health and hospitalization Insurance Net taxable compensation Tax Due Less: Taxes Withheld – ** Previous employer ***Present employer Amount to be refunded in December

36,000 120,000 156,000 50,000 * 2,400

2,899.68 17,500.50

52,400 P103,600.00 P 15,220.00

20,400.18 (P 5,180.18)

* Premium payment on health and/or hospitalization shall be allowed considering that gross compensation amounted to P156,000 only and did not exceed P250,000.00. ** Refer to Certificate of Compensation Payment /Tax Withheld (BIR Form No. 2316) issued by previous employer. *** Taxes withheld from July 6 to December 31, 2008 computed by the present employer using the cumulative computation.

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4. Mrs. H, married (computation of tax upon resignation): Basic Monthly Salary Thirteenth Month Pay 8/12 x 35,000 Other Benefits

P P P

35,000.00 23,333.33 20,000.00

She resigned effective August 31, 2009. Compensation Basic Salary 13thmonth pay Other benefits Totals

Received For the Year P280,000.00 23,333.33 20,000.00 P323,333.33

Non- Taxable

Taxable P280,000.00

P23,333.33 6,666.67 30,000.00

Total Compensation Less: Personal and additional exemptions Net taxable compensation income Tax Due (Jan. to August 31, 2009) Less: Tax withheld (Jan-August 31, 2009) Excess tax withheld, to be refunded in August

13,333.33 P293,333.33 P293,333.00 50,000.00 P243,333.33 P 48,333.33 57,333.36 (P 9,000.03)

EXAMPLE IX: (Year-end adjustments computation) – For taxable year 2008, WTD Service Company employed Mr. J, married with two qualified dependent children. He received the following compensation for the year: Basic Monthly Salary (excluding SSS/HDMF/PHIC employee‘s share) Overtime Pay per month Hazard Pay per month Thirteenth Month Pay given Dec 2008 Other Benefits given Dec. 2008

P

45,000.00 5,000.00 2,000.00 45,000.00 12,000.00

COMPUTATION: Total Compensation (681,000 – 30,000 non-taxable benefits)* Less: Personal Additional exemptions Net taxable compensation income Tax Due* 500,000 77,000 x 32%

P 651,000.00 41,000.00 33,000.00 125,000.00 24,640.00

74,000.00 577,000 149,640.00

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Less: Tax withheld from previous months (Jan-Nov) Tax to be collected in December 2008

136,609.93 P 13,030.07

* Exempt from taxation per Sec. 32(B)(7)(e) of the Tax Code, as amended re: 13 thmonth pay and other benefits not exceeding P30,000.

The annualized computation done for each employee shall be reflected by the employer at the alphabetical list attached to BIR Form No. 1604-CF. c) If the compensation is paid other than daily, weekly, semi-monthly or monthly, compute the tax to be deducted and withheld as follows: a) Annually – refers to computation on annualized income b) Quarterly and semi-annually – divide the compensation by three (3) or six (6) respectively, to determine the average monthly compensation. Use the monthly withholding tax table to compute the tax, and the tax so computed shall be multiplied by three (3) or six (6), accordingly; c) Bi-weekly – divide the compensation by two (2) to determine the average weekly compensation. Use the weekly withholding tax table to compute the tax, and the tax so computed shall be multiplied by two (2); d) Miscellaneous – if compensation is paid irregularly, or for a period other than those mentioned above, divide the compensation by the number of days22 of 37from last payment to day of payment (excluding Sundays and holidays). Use the daily tax table, the tax so computed shall be multiplied by the number of days. (C)

xxx

xxx

xxx

(D)

xxx

xxx

xxx

(E)

xxx

xxx

xxx

(F) Requirement for Deductibility. - The provisions of Sec 2.58.5 of RR 2- 98, as amended, shall apply. Provided, that compensation income where no income taxes were withheld pursuant to Section 2.79(A) of these regulations, shall be allowed as deduction from an employer‘s gross income when the required employees withholding statement (BIR Form No. 2316) have been issued to subject employees in accordance with Sec. 2.83.1 of RR 2-98, as amended. Provided, further, that the Alphabetical List of the subject employees, including MWEs, shall be submitted under BIR Form No. 1604-CF in accordance with Sec. 2.83.2 of RR 2-98, as amended. (G)

xxx

xxx

xxx

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(H)

xxx

xxx

xxx

(I) Right to Claim Withholding Exemptions. – An employee receiving compensation shall be entitled to withholding exemptions as provided in the Code, as amended. In order to receive the benefit of such exemptions, the employee must file the Application for Registration (BIR Form No. 1902), upon employment, or a Certificate of Update of Exemption and of Employer‘s and Employee‘s Information (BIR Form No. 2305), in case of updates on changes in his exemption. The withholding exemption to which an employee is entitled depends upon his status and the number of dependents qualified for additional exemptions. Each employee shall be allowed to claim the following amount of exemptions, with respect to compensation paid on or after July 6, 2008. (1) Personal and additional exemptions. – (a) Basic personal exemptions. – Individual taxpayers regardless of status are entitled to P50,000 personal exemption. (b) Additional exemptions for taxpayers with dependents. – An individual, whether single or married, shall be allowed an additional exemption of Twenty Five Thousand Pesos (P25, 000) for each qualified dependent child, provided that the total number of dependents for which additional exemptions may be claimed shall not exceed four (4) dependents. The additional exemptions for QDC shall be claimed by only one of the spouses in the case of married individuals. A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than23 of 37twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. The husband shall be the proper claimant of the additional exemption for qualified dependent children unless he explicitly waives his right in favor of his wife in the Application for Registration (BIR Form No. 1902) or in the Certificate of Update of Exemption and of Employer‘s and Employee‘s Information (BIR Form No. 2305), whichever is applicable. Provided, however, that where the spouse of the employee is unemployed or is a non-resident citizen deriving income from foreign sources, the employed spouse within the Philippines shall be automatically entitled to claim the additional exemptions for children.

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Every employer should ascertain whether or not a child being claimed is a qualified dependent under the provisions of these Regulations. If the employee should have additional dependent(s), as defined above, during the taxable year, he may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. Provided, that in 2008, the pro-rated personal and additional exemptions shall apply as stated in the regulations. The personal and additional exemptions herein above stated shall apply after the transitory period. EXAMPLE X: Mr. M got married on July 20, 2008, when his girlfriend was four (4) months pregnant. On December 26, 2008, the wife gave birth to twins. Earnings from January 1 to July 5, 2008 is P150,000.00 and for the rest of 2008, he earned P200,000.00 more. The tax due for 2008 is computed as follows: Compensation Income (January 1-July 5, 2008) Compensation Income (July 6 to December 31, 2008) Total Compensation for 2008 Less: Personal Exemption P41,000.00 Additional Exemption (16,500 x2) 33,000.00 Taxable Compensation Income Tax Due: 250,000.00 266,000.00 x 30% Total

P 150,000.00 200,000.00 350,000.00 74,000.00 P276,000.00 P 50,000.00 7,800.00 P 57,800.00

‖SECTION 4. Section 2.79 (1) and 2.79.2 of RR 2-98, as amended, is hereby amended to read as follows: ―Sec. 2.79.1 Application for Registration for Individuals Earning Compensation Income (BIR Form No. 1902) – The application for registration of employees shall be accomplished by both employer and employee relating to the following information and other requirements: (A) Employee

241

-(1) Name/Taxpayer‘s Identification Number (TIN)/ Address of employee/other information required as stated in BIR Form No. 1902; (2) Status of employee whether SINGLE/ legally separated/ widow or widower with no dependent child or married; (3) Status of spouse of the employee. – If the employee is legally married, the Name/ TIN, if any, of the spouse and whether said spouse is employed, unemployed, employed abroad, or is engaged in trade or business should be indicated on the application; (4) Qualified dependents – Name and date of birth of qualified dependent/s child(ren); (5) Claimant of exemption for children. – The husband is the proper claimant of additional exemptions for qualified dependent children. However, the wife shall claim full additional exemption for children in the following cases: (a) Husband is unemployed; (b) Husband is a non-resident citizen deriving income from foreign sources; (c) The husband waives his right to claim the exemptions of children (waiver should be for all children) in a sworn statement to be attached to his Application for Registration (BIR Form No. 1902) and that of his wife‘s, in accordance with the procedures prescribed in this Section; (6) Required forms and attachments – Upon filing the Application for Registration (BIR Form No. 1902) or Certificate of Update of Exemption and of Employer‘s and Employee‘s Information (BIR Form No. 2305), whichever is applicable, the taxpayer is required to attach any of the following documents to establish the status of the taxpayer, if applicable, to the application: (a) Marriage Contract; (b) Birth Certificate of each qualified dependent child(ren), certified by the Local Civil Registry Office/National Statistics Office (NSO)/equivalent document issued by a government office previously requiring certified copy showing the name of parent/s and the name of the QDC with birth25 of 37date (e.g. passport of QDC as certified by company‘s Human Resource Officer) ;(c) Certificate of employment of the husband if he is working abroad; (d) Sworn Declaration and Waiver of Right to Claim Exemptions of Qualified Dependent Child(ren) by the Husband (Annex ―F‖) in case wife is claiming the additional exemptions of the children;

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(e) Medical Certificate of qualified dependent child, if physically/mentally incapacitated; (f) Court decision of legal adoption of children;( g) Death Certificate; and(h) Other documentary evidence, where the above documents are not available. (7) Concurrent multiple employments. – An employee who is employed concurrently by two or more employers within the same period of time during the taxable year shall file the Application for Registration (BIR Form No. 1902) with his main employer (employer to whom the said employee renders his services for most of his time during the taxable year) and shall furnish a copy of the duly received Application with his secondary employers (2nd, 3rd, etc. employers). The employed husband and wife shall each file a separate application with their respective employers; (8) Successive multiple employment – An employee who transferred to another employer during the taxable year, shall furnish his new Employer with a Certificate of Update of Exemption and of Employer‘s and Employee‘s Information (BIR Form No. 2305) indicating therein his previous employments during the taxable year (name of employer/s, address/es, TIN/s and the date/s of his separation) and attach to the said certificate, a copy of the Certificate of Compensation Payment /Tax Withheld (BIR Form No. 2316) for compensation payment with or without withholding tax for the calendar year issued by previous employer/s. For an employee with successive employment beginning July 6, 2008 to December 31, 2008, the employer/s for the second semester shall apply the pro-rated exemption prevailing for the first semester ending July 5, 2008 based on BIR Form No. 2316 issued by the previous employer which was submitted by the employee and the pro-rated exemption prevailing for the second semester ending December 31, 2008 in the computation of year-end adjustment; (9) Mixed income. – An individual receiving a combination of compensation and business/professional income shall first deduct the allowable personal and additional exemptions from compensation income, only the excess therefrom can be deducted from business or professional income. In the case of husband and wife, the husband shall be the proper claimant of the additional exemptions unless he waives it in favor of his wife. (B) Employer. – The employer with whom the Application for Registration (BIR Form No. 1902) is filed, must indicate the date of receipt thereon and accomplish Part V of the said Application pertaining to Employer‘s Information such as TIN, Employer‘s Registered Name, and other relevant information.

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(C) Procedures for the filing of the Application for Registration (BIR Form No. 1902)(1) All employers shall require their employees to accomplish in triplicate the Application for Registration BIR Form 1902 (Original copy- RDO; Duplicate- employer; Triplicate- employee) described above as follows: (a) New employee/s shall accomplish and file the Application for Registration for Individuals Earning Compensation Income (BIR Form No, 1902) within ten (10) days from the date of employment; (b) In case of changes in the information data in the Application for Registration (BIR Form No. 1902) previously submitted by the employee, consisting of changes in status and personal and additional exemptions, employment/working status of the spouse of the employee, multiple employment status and amount of compensation income, a Certificate of Update of Exemption and of Employer's and Employee's Information (BIR Form No. 2305) reflecting the changes, together with the required documents/ evidence of changes must be submitted to the employer within ten (10) days after such change. The employer shall then make the necessary adjustments on the withholding tax of the employee based on the new information; (2) The employer shall transmit all copies of the Application for Registration (BIR Form No. 1902) or Certificate of Update of Exemption and of Employer‘s and Employee‘s Information (BIR Form No. 2305), whichever is applicable, (after accomplishing the portion of Employer‘s information of either forms) to the RDO where the employer is registered within thirty (30) days following its receipt from the employee. The RDO or his duly authorized representative, where the employer is registered, shall receive and stamp the three copies. The triplicate copy duly stamped received by the BIR shall be given to the employee. (3) The employer shall review the exemptions of the employees and shall, in the computation of taxes required to be withheld on the compensation of employees, apply the correct and applicable exemptions as provided in these regulations. (4) In case the husband waives his right to claim the additional exemptions of children in favor of his wife, he shall accomplish a Sworn Declaration and Waiver of Right to Claim Exemptions of Qualified Dependent Child(ren) by the Husband (Annex ―F‖) in accordance with the following procedures: (a) Fill up three (3) copies of the prescribed waiver form.

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(b) Submit the waiver form together with the BIR Form No. 1902 to his employer within ten (10) days from employment, for acknowledgement in the space provided for that purpose. The employer of the husband shall: (i) After filling up the acknowledgement portion of the waiver form, retain the duplicate copy of the form and furnish the employee the original and triplicate copies for submission to the employer of the wife and for file of the employee, respectively .(ii) Stop deductions of additional exemptions for qualified dependent children from the husband‘s compensation income starting the following month. The employer of the wife shall, upon receipt of copy of the waiver form duly acknowledged by the employer of the husband, start deducting additional exemptions for children from the wife‘s income on the month when the employer of the husband stopped deducting the exemptions of children from the husband‘s income. (c) The employed husband and wife shall apply the waiver in the computation of their respective taxable income in the income tax return required to be filed by them following the procedure for filing the waiver under Section 2.79.1 (C)(4) of these regulations, that is, the husband shall not deduct exemptions of children from his compensation income because he has waived the same (exemptions of children) in favor of his wife who will now deduct said exemptions from her income in computing her tax due. Waiver exercised during the calendar year shall be made only once in a calendar year and shall take effect for the present calendar year and succeeding year/s until revoked by the husband. Any waiver/ revocation of such waiver shall take effect only starting the succeeding calendar year. In no case should an employer of the wife deduct exemptions of children from the wife‘s income unless the waiver by the husband has been duly acknowledged by the employer of the husband. Registration of employees receiving purely compensation income shall be at the RDO having jurisdiction over the employee‘s place of assignment considering that the employee submits application for registration/exemption updates to their employer. In cases of multiple employments, it shall be at the RDO where the main employer is registered.

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Sec. 2.79.2 Failure to file Application for Registration (BIR Form No. 1902) or Certificate of Update of Exemption and of Employer‘s and Employee‘s Information (BIR Form No. 2305). – Where an employee, in violation of these regulations either fails or refuses to file an Application for Registration (BIR Form No. 1902) together with the required attachments, the employer shall withhold the taxes prescribed under the Schedule for Zero Exemption of the Revised Withholding28 of 37Tax Table. In case of failure to file the Certificate of Update of Exemption and of Employer‘s and Employee‘s Information (BIR Form No. 2305) together with the attachments, the employer shall withhold the taxes based on the reported personal exemptions existing prior to the change of status and without reflecting any change. Any refund or under withholding that shall arise due to the violations shall be covered by the penalties prescribed in Section 80 of the NIRC, as amended. ”SECTION 5. Section 2.80 of RR 2-98, as amended, is hereby further amended to read as follows: “Section 2.80. LIABILITY FOR TAX (A) Employer. – (1) In general, the employer shall be responsible for the withholding and remittance of the correct amount of tax required by deducting and withholding from the compensation income of his employees. If the employer fails to withhold and remit the correct amount of tax, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable. (2) The employer who is required to collect, account for and remit any tax imposed by the NIRC, as amended, who willfully fails to collect such tax, or account for and remit such tax or willfully assist in any manner to evade any payment thereof, shall in addition to other penalties provided for in the Code, as amended, be liable, upon conviction, to a penalty equal to the amount of the tax not collected nor accounted for or remitted. (3) Any employer/withholding agent who fails, or refuses to refund excess withholding tax not later than January 25 of the succeeding year shall, in addition to any penalties provided in Title X of the Code, as amended, be liable to a penalty equal to the total amount of refund which was not refunded to the employee resulting from any excess of the amount withheld over the tax actually due on their return. (B) Employee. – Where an employee fails or refuses to file the Application of Registration or Certificate of Update of Exemption and of Employer‘s and

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Employee‘s Information (BIR Form No. 2305) together with the attachments or willfully supplies false or inaccurate information thereunder after due written notice by the employer, the tax otherwise to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment. On the other hand, where the employee, after due written notice from the employer, willfully fails or refuses to file the Application for Registration or the Certificate of Update of Exemption and of Employer‘s and Employee‘s Information, whichever is applicable, or willfully supplies false and inaccurate information, the excess taxes withheld by the employer shall not be refunded to the employee but shall be forfeited in favor of the government. xxx

xxx

xxx.

SECTION 6. Section 2.83 of RR 2-98, as amended, is hereby further amended to read as follows: “Sec. 2.83. STATEMENTS AND RETURNS Section 2.83.1. Employees Withholding Statements (BIR Form No. 2316). – In general, every employer or other person who is required to deduct and withhold the tax on compensation including fringe benefits given to rank and file employees, shall furnish every employee from whose compensation taxes have been withheld the Certificate of Compensation Payment /Tax Withheld (BIR Form No. 2316) on or before January 31 of the succeeding calendar year, or if employment is terminated before the close of such calendar year, on the day on which the last payment of compensation is made. Failure to furnish the same shall be a ground for the mandatory audit of payor‘s income tax liabilities (including withholding tax) upon verified complaint of the payee. Employers of MWEs are still required to issue BIR Form No. 2316 (June 2008 version) to the MWEs on or before January 31 of the following year. The employer shall furnish each employee with the original and duplicate copies of BIR Form No. 2316 showing the name and address of the employer; employer‘s TIN; name and address of the employee; employee‘s TIN; amount of exemptions claimed amount of premium payments on health and/or hospitalization insurance not exceeding P2,400.00, if any; the sum of compensation paid including the non-taxable benefits; the amount of statutory minimum wage received by MWEs; Overtime pay, holiday pay, night shift differential pay and hazard pay received by MWEs; the amount of tax due; the amount of tax withheld during the calendar year and such other information as may be required. The statement must be signed by both the employer or other authorized officer and the employee, and 247

shall contain a written declaration that it is made under the penalties of perjury. If the employer is the Government of the Philippines, its political subdivision, agency or instrumentality or government-owned or controlled corporation, the statement shall be signed by the duly designated officer or employee. The Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) shall contain a certification to the effect that the employer‘s filing of BIR Form No. 1604-CF shall be considered as a substituted filing of the employee‘s income tax return to the extent that the amount of compensation and tax withheld appearing in BIR Form No. 1604CF as filed with the BIR is consistent with the corresponding amounts indicated in BIR Form No. 2316. It shall be signed by both the employee and employer attesting to the fact that the information stated therein has been verified and is true and correct to the best of their knowledge. However, the withholding agents/employers are required to retain copies of the duly signed BIR Form No. 2316 for a period of three (3) years as required under the NIRC. Where the employee is a MWE defined under RA 9504 whose income is exempt from income tax and, consequently, from withholding tax, BIR Form No. 2316 shall show the sum of non-taxable SMW paid including the non-taxable benefits such as holiday pay, overtime pay, night shift differential pay and hazard pay earned30 of 37during the calendar year and such other information as may be required. Provided, that the applicable box for MWEs under BIR Form No. 2316 (June 2008 version) are sufficiently filled-up. This serves as proof of financial capacity for purposes of loans, and for other purposes with various government agencies. Separated/terminated employees within the period from January 1 to July 5, 2008, where the total exemptions (e.g. married-P32, 000) used in the annualized computation were likewise shown in the issued BIR Form 2316, shall be reported by the employer under the alphalist of terminated employees with date of termination/separation. For those with changes in exemptions, such as that of having an additional dependent child, or for those with successive employment for taxable year 2008, the applicable apportioned exemption for January 1 to July 5, 2008 shall be applied for the first semester and the applicable apportioned exemption for July 6 to December 31, 2008 shall be applied for the second semester. The employee who is qualified for substituted filing of income tax return under these regulations shall no longer be required to file income tax return (BIR Form No. 1700) since BIR Form No. 1604-CF with alphalists of employees shall be considered a substituted return filed by the employer. BIR Form No. 2316, duly

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certified by both employee and employer, shall serve the same purpose as if a BIR Form No. 1700 had been filed, such as proof of financial capacity for purposes of loan, credit card, or other applications, or for the purpose of availing tax credit in the employee‘s home country and for other purposes with various government agencies. This may be used for purposes of securing travel tax exemption, when necessary. However, information referring to the certification, appearing at the bottom of BIR Form No. 2316, shall not be signed by both the employer and the employee if the latter is not qualified for substituted filing. In which case, BIR Form No. 2316 furnished by the employer to the employee shall be attached to the employee‘s Income Tax Return (BIR Form Nos. 1700 or 1701 in the case of mixed income earners) to be filed on or before April 15 of the following year. In case of successive employments during the taxable year, an extra copy of BIR Form No. 2316 shall be furnished by the employee, duly certified by his previous employer/s and by him, to his new employer. Section 2.83.2. Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) – Every employer or other persons required to deduct and withhold the tax is required to file with the Large Taxpayers Assistance Division (LTAD)/ Large Taxpayers District Office (LTDO)/RDO where the payor/employer is registered as Withholding Agent on or before January 31 of the following year an Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF, to be submitted with the alphabetical list of employees/payees. (A) The Annual Information Return of Income Taxes Withheld on Compensation must show among others, the following: (1) Withholding Agent‘s registered name, address and Taxpayer‘s Identification Number (TIN). (B) The alphabetical list of employees must show the following: (1) Name and TIN of employees; (2) Gross compensation paid by present and previous employers for the calendar year; (3)

(a) Taxable 13th month pay/ other benefits for the rank and file employees;

(b) Taxable fringe benefits for managerial employees;

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(4) Non-taxable 13th month pay/ other benefits (Present employer); (5) Non-taxable statutory minimum wage; (6) Non-taxable holiday pay, overtime pay, night shift differential pay and hazard pay (minimum wage earners only); (7) (a) For 2008, Amount of Exemptions (January 1 to July 5, 2008) and Amount of Exemptions (July 6 to December 31, 2008); (b) For 2009 and thereafter, Amount of Exemptions; (8) Amount of premium payments on health and/or hospitalization insurance not exceeding P2, 400.00, if any; (9) Tax required to be withheld computed in accordance with Sec. 24 (A) of the Code; (10) Tax withheld by all present employers for the calendar year; and(11) Adjustment, if any. (C) The alphabetical list of employees shall be prepared indicating, among others, separate listings of the following: (1) Employees Separated/Terminated before December 31 of the taxable year(indicate date of separation/termination); (2) Employees whose compensation income are exempt from withholding tax. BUT subject to income tax; (3) Employees whose total compensation income are exempt from withholding tax and not subject to income tax (indicate if MWE); (4) Employees as of December 31 of the taxable year with no previous employment within the year; (5) Employees as of December 31 of the taxable year with previous employment within the year; (6) Employees who received Fringe Benefits subjected to Fringe Benefit Tax; (7) Alien employees subject to withholding tax. Employers with centralized accounting system, or those mandated to consolidate remittances (e.g. large taxpayers), shall prepare alphalists on a regional basis or per branch

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office, due to the identification of SMW per region where the employee is assigned, which shall be submitted to the BIR where the head office is located. In cases where no information was provided by a previous employer, such fact shall be stated in BIR Form No. 1604-CF and the present employer shall not be liable to any penalties. Section 2.83.3 Requirement for list of payees – In addition to the manually prepared alphabetical list of employees and list of payees and income payments subject to creditable and final withholding taxes which are required to be attached as integral part of the Annual Information Returns (BIR Form No. 1604CF/ 1604E), Monthly Remittance Returns (BIR Form No. 1601C etc.), the withholding agent may submit soft copy in 3.5inch floppy diskettes/CD or email: [email protected], containing the said alphalists. However, taxpayers, whose number of employees or income payees are ten (10) or more, are mandatorily required to submit the said lists in 3.5-inch floppy diskettes/CD or email: [email protected] using the existing CSV data file format, together with the manually prepared alphabetical list. In order to comply with this format, the withholding agents shall have the option to use any of the following: 1. Excel format provided under Revenue Regulations No. 7-2000, as amended, following the technical specifications required by the BIR; 2. Their own extract program that shall meet the technical specifications required by the BIR; or 3. Data Entry Module using Visual FoxPro that will be available upon request or by downloading from the BIR‘s web site at http://www.bir.gov.ph with the corresponding job aid. For those who would choose either option 1 or 2, such taxpayers shall use a validation module developed by the BIR, which can be downloaded from the BIR website. In any case, the withholding agents are required to save the same to a secondary storage as back up for a period of three (3) years from submission of the diskette, as aforementioned, for future reference. For withholding agents classified as large taxpayers and excise taxpayers falling within the jurisdiction of the Large Taxpayers Service and/or Large Taxpayers District Office, the Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) and the Annual Information Return of Creditable Income Taxes Withheld (Expanded)/ Income Payments Exempt from Withholding Tax (BIR Form No. 1604-E) shall be submitted to the Large Taxpayers Assistance Division, Large Taxpayers District Offices or Excise Taxpayers Assistance 251

Division, as the case may be. For other withholding agents, the aforesaid annual returns shall be submitted to their respective Revenue District Offices. BIR Form No. 1604-CF shall be submitted on or before January 31 of the succeeding year while BIR Form No. 1604-E shall be filed on or before March 1 of the following year. Only diskettes/CD/email: [email protected] readable and virus free files upon submission shall be considered as duly filed ―Alphabetical List of Employees/ Payees‖ by the employer. Violation hereof, shall be a ground for the mandatory audit of violator‘s income tax liabilities (including withholding tax). Diskettes/CDs must be uploaded by the above- mentioned offices within fifteen (15) days from receipt. The manually prepared (hard copy for below 10 employees/payees) alphabetical list of employee shall be filed in triplicate copies (two copies for the BIR) to be stamped ―received‖ by the BIR-Large Taxpayers Assistance Division, Large Taxpayers District Office or the Excise Taxpayers Assistance Division, or the Revenue District Office where the payor/employer is registered as Withholding Agent. Manually filed alphalists must be encoded and uploaded by the above- mentioned offices within thirty (30) days from receipt. xxx

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Section 2.83.4. Substituted Filing of Income Tax Returns by Employees Receiving Purely Compensation Income. – Individual taxpayers receiving purely compensation income, regardless of amount, from only one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly by the said employer (tax due equals tax withheld) shall not be required to file BIR Form No. 1700. In lieu of BIR Form No. 1700, the Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) (hard copy) filed by their respective employers, duly stamped ―received‖ by the BIR, shall be tantamount to the substituted filing of income tax returns by said employees. The following individuals, however, are not qualified for substituted filing and therefore, still required to file BIR Form No. 1700 in accordance with existing regulations: (A)

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xxx

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(B)

xxx

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xxx

(C) Minimum wage earners including employees of the government of the Philippines, or any political subdivisions, agencies or instrumentalities, with Salary Grades 1 to 3 whose income were not subjected to withholding tax but subject to income tax from January 1 to July 5, 2008 .(D)

xxx

xxx

xxx

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(E)

xxx

xxx

xxx

(F)

xxx

xxx

xxx

In case of married individuals who are still required to file returns under existing provisions of the law, i.e., in those instances not covered by the substituted filing of returns, only one return for the taxable year shall be filed by either spouse to cover the income of the spouses, which return shall be signed by the husband and wife, unless it is physically impossible to do so, in which case signature of one of the spouses would suffice. Employees not qualified for substituted filing but are required to file the Income Tax Return shall file the same not later than April 15 of the year immediately following the taxable year. Provided, that employees with previous/successive employer/s within the taxable year shall furnish their new employer with BIR Form No. 2316 issued by the previous employer/s. Section 2.83.5. Registration as withholding agent. – Any person who makes payment or expects to make payment of compensation in the amount exceeding the statutory minimum wage, to any single employee shall register by filing in duplicate, with the Revenue District Office (RDO) of the city or municipality where his legal residence or place of business is located, an Application for Registration as a withholding agent using the form prescribed by the Bureau not later than ten (10) days after becoming an employer. Sec. 2.83.6.

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Sec. 2.83.7.

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”SECTION 7. TRANSITORY PROVISIONS In the implementation of these Regulations, the following provisions shall apply during the transition period: 1. For taxable year 2008, all employees with change in status and number of qualified dependent children shall accomplish and file the Certificate of Update of Exemption and of Employer‘s and Employee‘s Information (BIR Form No. 2305), for employees already registered with the BIR, reflecting the changes in information, if any/Application for Registration (BIR Form No. 1902) for35 of 37those with no TIN reflecting the claimed exemption, together with the required documents/evidence of exemption. The same must be submitted to their employers not later than October 31, 2008 The employers shall transmit both the original & duplicate copies of BIR Form No. 2305 on or before November 28, 2008 (after accomplishing the portion of employer‘s

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information) to the RDO where the employee is registered. For those who shall register for the first time, BIR Form No. 1902 shall be submitted to the RDO either of the principal/head office of employment/place of business or place of residence of the employee-taxpayer at the option of the latter. In both cases, the employer shall furnish a copy of the duly received BIR Form No. 2305/1902 to the LTAD/LTDO/RDO having jurisdiction over the principal/head office of the employer, in case of centralized payroll process, or to the LTAD/LTDO/RDO having jurisdiction over the branch office, in case of decentralized payroll process. For those with no change of status and number of qualified dependents, it is incumbent with employer to change in their records the new amount of personal and additional exemptions of such employees. 2. The withholding tax from July 6 to December 31, 2008 shall be computed using the Revised Transitional Withholding Tax Table (Annex ―D‖). 3. The personal and additional exemptions applicable for calendar year 2008 shall be as follows: a) For the period from January 1 to July 5, 2008, single taxpayers are entitled to P10, 000.00, head of the family at P12, 500.00, each married individual at P16, 000.00, and for each qualified dependent child, not exceeding 4 children, P4, 000.00, computed on a pro-rata basis of the full-year exemptions under the old law. b) For the period from July 6 to December 31, 2008, the pro-rated personal exemption shall be P25, 000.00, regardless of status, and P12, 500 for each qualified dependent child, not exceeding 4 children, as additional exemption. Towards the end of 2008 and using the annualized withholding tax method, withholding agents are required to undertake/conduct the final year-end adjustments consolidating the compensation data for the entire year of 2008 but taking into consideration the following transitory personal and additional exemptions, which are rounded off for administrative ease: January 1 to July 5

July 6 to December,31

Total

P 10,000

P 25,000

P35, 000

Head of the family

12,500

25,000

37,500

Married

16,000

25,000

41,000

Personal exemption Single

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Additional exemption for Every QDC

4,000

12,500

16,500

Employers are required to ensure that tax due is equal to the tax withheld for the year-end adjustment computation. Submit BIR Form No. 1604-CF on or before January 31, 2009. 5. The alphabetical list for 2008 shall be analyzed by the concerned LTAD/LTDO/RDO by comparing the compensation figures reported in 2007 as against 2008 to ensure that there is no diminution in the compensation structure of employees. 6. MWEs whose compensation earned from January 1 to July 5, 2008 were not subjected to withholding tax but are, after considering the relevant exemptions, still subject to income tax, shall be required to file an income tax return covering the period from January 1 to July 5, 2008, on or before April 15, 2009. SECTION 8. REPEALING CLAUSE All existing rules and regulations or parts thereof which are inconsistent with the provisions of these Regulations are hereby modified, amended or revoked. SECTION 9. EFFECTIVITY These Regulations shall take effect beginning July 6, 2008.

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End of Discussion-see practice exercises below and in the following pages

END OF CHAPTER TESTS WITHHOLDING TAX A.

Identify the following:-

1.

_________________________ also called a retention tax is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government.

2.

________________________ is a system or the method of collecting the tax in advance or upon the receipt of income by the tax authority is an important feature

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of the income tax administration in the Philippines. It is designed to ensure the continuous and steady collection of revenues for the government. 3.

________________________ is system when the tax withheld from income payments is allowed to be credited against the taxpayer‘s final tax liability which is then adjusted accordingly. The amount withheld is only an estimate of the income tax that should be paid. In this regard, the payee is still required to file an income tax return on that particular income but needs to pay only the difference between the estimated amount withheld and the actual amount of tax due.

4.

________________________ is a system of withholding wherein the payer withholds an amount from the payee‘s income which is the full satisfaction of the tax liability, and pays this amount to the government on behalf of the payee. The payee then no longer needs to file an income tax return for this income.

5.

________________________ the tax withheld from individuals compensation income.

6.

_______________________ shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).

7.

______________________ means the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life.

8.

______________________ the amount of statutory limit for the incentives and other benefits which is excluded from the computation of gross compensation income.

9.

______________________ the Supreme Court declared that their income, basic, overtime, hazard, nightshift differential and holiday pay shall be exempt from income tax and consequently exempt from withholding tax.

receiving purely

Problem 1. Mr. A, single with no dependent, receives P12,000.00 (net of SSS/GSIS,PHIC,HDMF employee share only) as monthly regular compensation and P5,000.00 as supplementary compensation for January 2016 or a total of P17,000.00. Problem 2. For the month of August 2016, Mrs. C, married with three qualified dependent children, with a basic salary equivalent to the SMW, receives P9, 964.00 (P382/day x 313 days ÷ 12) as statutory monthly minimum wage plus other compensation such as commission of P10, 000, transportation allowance of P2, 000, hazard pay of P1, 000, overtime pay of P5, 000 and night shift differential pay of P2, 000.00. Compute the

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withholding tax of Mrs. C for the month of August 2016 using the Revised Transitional Withholding Tax Table for the period July 6 to December 31 2016. Problem 3. The regular compensation is exempt from withholding supplementary compensation (commission) is paid during the calendar year.

tax

but

Employee A, married, with three (3) qualified dependents (ME3), received the following compensation beginning January, 2016. Month

Regular Compensation

Supplementary Compensation

Total Compensation

January February March

P 8,500.00 P 8,500.00 P 8,400.00

P 15,000.00 P 15,000.00 P 15,500.00

P 23,500.00 P 23,500.00 P 23,900.00

Problem 4. Supplementary compensation is equal to or more than the regular compensation received: Employee B, married with three (3) qualified dependents (M3) whose spouse is also employed, received the following compensation beginning January, 2016 Month

Regular Compensation

Supplementary Compensation

Total Compensation

January

P 11,000.00

P 11,000.00

P 22,000.00

February

P 11,000.00

P 11,500.00

P 22,500.00

March

P 11,000.00

P 12,000.00

P 23,000.00

Problem 5. A newly hired employee with previous employer within the calendar year 2009.Employee C, single was hired by Z Company on July 6, 2009. Her total taxable income per month is P 15,000.00. She was previously employed by X Company from January to June 30, 2009 with a monthly taxable income of P 13,000.00 or P 13,000.00 x 6 months = P 78,000 for 6 months. Per BIR Form No. 2316 (Certificate of Compensation Payment/Tax Withheld) issued by the previous employer, which was presented by Employee C to her present employer, the total tax withheld is P 7,849.98. In computing for the tax withheld on the compensation of Employee C starting the month of July 6, 2000, Z Company shall use the cumulative average method.

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TAX CREDITS AND TAX CREDITS CERTIFICATES The creditable withholding tax should not be confused with the Tax Credits. Creditable withholding taxes can be applied only on the taxable year for which withholding was made and. Excess withholding tax cannot be assigned and there is no need for certification from the Commissioner of Internal Revenue for it usage or application on future taxes except the certificate of withholding of creditable tax in bir form no. 2307. Three kinds of Tax Credits 1. Tax credits from creditable withholding tax 2. Tax credit for which there was issued Tax Credit Certificate issued by the Secretary of Finance of his representative. 3. Tax credit from taxes paid to foreign country when the taxpayer did not claim the taxes so paid as part of his tax expenses.  1.

Tax credit from creditable withholding tax- ( see discussion on the kinds

of withholding taxes). Here is the list of Income subject to creditable withholding tax found in the BIR form 2307

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 2. Tax credit for which there was issued Tax Credit Certificate issued by the Secretary of Finance of his representative Article 21 of E.O. 226 defines a tax credit as follows: ARTICLE 21. “Tax credit‖ shall mean any of the credits against taxes and/or duties equal to those actually paid or would have been paid to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his representative, or the Board, if so delegated by the Secretary of Finance. The tax credit certificates including those issued by the Board pursuant to laws repealed by this Code but without in any way diminishing the scope of negotiability under their laws of issue are transferable under such conditions as may be determined by the Board after consultation with the Department of Finance. The tax credit certificate shall be used to pay taxes, duties, charges and fees due to the National Government; Provided, That the tax credits issued under this Code shall not form part of the gross income of the grantee/transferee for income tax purposes under Section 29 of the National Internal Revenue Code and are therefore not taxable: Provided, further, That such tax credits shall be valid only for a period of ten (10) years from date of issuance. Under Article 39 (j) of the Omnibus Investment Code of 1987, tax credits are granted to entities registered with the Bureau of Investment (BOI) and are given for taxes and duties paid on raw materials used for the manufacture of their export products. A TCC is defined under Section 1 of Revenue Regulation (RR) No. 5-2000, issued by the BIR on 15 August 2000, as follows: Tax Credit Certificate — means a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit, the money value of which may be used in payment or in satisfaction of any of his internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by the provisions of these Regulations. RR 5-2000 prescribes the regulations governing the manner of issuance of TCCs and the conditions for their use, revalidation and transfer. Under the said regulation, a TCC may be used by the grantee or its assignee in the payment of its direct internal revenue tax liability.It may be transferred in favor of an assignee subject to the following conditions: 1) the TCC transfer must be with prior approval of the Commissioner or the duly authorized representative; 2) the transfer of a TCC should be limited to one transfer only; and 3) the transferee shall strictly use the TCC for the payment of the assignee‘s direct internal revenue tax liability and shall not be convertible to cash.[A TCC is valid only for 10 years subject to the following rules: (1) it must be utilized within five (5) years from the date of issue; and (2) it must be revalidated thereafter or be otherwise considered invalid.

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 3. Tax Credits on Taxes Paid outside the Philippines when the taxpayer did not claim the taxes as deductible expense. When a tax is paid to a foreign country for income on sources derived from such country, the taxpayer who is a citizen of the Philippines may opt to use that tax as a deduction from gross income or as tax credit. When used as a deduction from gross income, the entire amount is deducted from gross income as Tax Expense, however, if the tax so paid is claimed as tax credit, only that portion which is within the limitation on tax credit may be deducted not from the gross income but from the Philippine income tax due. Note that when claimed as tax credit, the amount is deducted from the tax due and not from the gross income, this limit is necessary so that there will be no occasion where the taxpayer will pay too little tax or get a tax refund because he paid more taxes to a foreign country or countries. The limitation in the tax credit as provided in Chapter VII, Sec. 34, paragraph 4 of Subsection C, is computed as follows: First, compute for the tax due from income from sources within and without the Philippines; Second, compute for the tax credit limit set forth in subparagraph (a) of Par. 4 of Subsection C, The limit is that the tax credit to be taken will be the part of income tax that represents the proportion of the income from foreign country has on the entire income of the taxpayer in relation with Philippine income tax. Illustration: Manny Pacquiao who is a resident citizen, married with 4 qualified dependent children, earned income from boxing in Las Vegas in 2016 from where he received Net Income of 1,000,000.00 and for which he paid tax of P300,000.00. If in 2016 he has a Net income of 3,000,000.00 from the Philippines, his tax credit will be computed as follows: First, compute for the Philippine income tax The income tax that Manny has to pay for his income from Philippine sources would be [(1,000,000+3,000,000.00=4,000,000- 150,000*= net taxable income of P3, 850,000.00; tax on 500,000.00= P125,000 + (32% x 3,350,000 ) Philippine Income Tax of 1,197,000.00 (*Manny has 50,000.00 personal and 100,000.00 additional exemptions) Second, get the proportion of the net income from Las Vegas with the total net income of Manny Pacquiao and multiply it with the Philippine income tax to get the tax credit limit, which is as follows: Net Income from Las Vegas/ Net Income from all sources x Philippine Income Tax (P1, 000,000.00/4,000,000.00)=25%x P1, 197,000.00 = P299, 250.00 Third, compare the amount of the income tax paid to foreign country (Las Vegas) with the tax credit limit computed above, and claim as tax credit that which is lower. Manny paid income tax to Las Vegas P300, 00.00, therefore the tax credit limit will be P299, 250.00 261

Fourth, compute for the tax payable using the tax credit limit Tax due from all income less: Tax Credit Tax Payable

1,197,000.00 299,250.00 897,750.00

What if Manny Pacquiao has income from more than 2 countries, how would tax credits be computed?  Subparagraph (b) of paragraph 4 of Sec. 34 subsection C shall apply .The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. The 2nd proportion would then be, total taxable income from other countries/total taxable income from the world To illustrate, let us further assume that Manny Pacquiao, other than his income from Las Vegas, he also has income from Mexico amounting to 5,000,000.00 and for which he paid 500,000.00 income taxes. How much would be the tax credit limit allowed to Manny Pacquiao for 2016? The Computation will be as follows: Let us again first, compute for the tax due from Manny Pacquiao : Net Income: Philippines

P 3,000,000.00

Las Vegas

1,000,000.00

Mexico

5,000.000.00

Total Net Income

P 9,000,000.00

Tax due on all income: Total Net Income Less: Personal Exemption Additional Exemption Net Taxable Income

P 9,000,000.00 P

50,000.00 100,000.00

150,000.00 P 8,850,000.00

Computation of Tax Due:

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Tax on 500,000.00

125,000.00

On excess (P8, 850,000.00-500,000.00x32%) Tax due from all income

2,672,000.00 P 2,797,000.00

1. Tax Credit for Las Vegas: (a) 1,000,000.00/9,000,000 x 2,797,000.00

P 310,777.74

(b) tax paid to Las Vegas

300,000.00

(c) lower between tax credit and tax paid to Las Vegas

P 300,000.00

2. Tax Credit for Mexico (using the same formula for Las Vegas) (a) P5,000,000.00/P9,000,000.00x 2,797,000.00

P1,553,888,70

(b) tax paid to Mexico

500,000.00

(c) lower between tax credit and tax paid to Mexico

500,000.00

3. Total Tax Credit Limit on total of individual tax credit limits 1(b)

P 300,000.00

2(b)

500,000.00

Total of individual tax credit limits

P 800,000.00*

*This amount should be compared with the tax credit limit on the aggregate net income outside the Philippines.

4. Computation of the tax credit on the aggregate income outside the Philippine: Total Net Income outside the Philippines Total World Net Income x Tax Due on World = Tax Credit on Aggregate Income Outside the Philippines

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To substitute: P6, 000,000.00 / 9,000,000.00 x P2, 797,000.00= P1,864,666.40 5. Compare # 3 with #4 and apply whichever is lower (in this illustration #3, P800, 000.00 is lower than P1,864,666.40) in the computation of tax payable. Tax due from income within and without the Philippines

P 2,797,000.00

Less: Tax credits on all income without the Philippines Tax Payable

800,000.00 P 1,997,000.00

Note: Net Loss in any country will be deducted from the total foreign income Use the following problems to exercise: 1.

Regine Velasquez is a resident citizen with 3 qualified dependent children. She is a professional singer in the Philippines and has engagements abroad. During 2016 Regine has the following income data: Income within the Philippines

300,000.00

Income in Saudi Arabia

200,000.00

Income in USA

400,000.00

Net Loss in Cambodia

250,000.00

Taxes paid to foreign countries: Saudi Arabia USA Cambodia 2.

80,000.00 120,000.00 -0-

Compute for the tax payable if Amor Propio single with 4 dependent love children, who is a resident citizen has the following data for 2016: Net income within the Philippines

P 200,000.00

Net income in the USA

400,000.00

Net Income in Austria

500,000.00

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Foreign taxes amount to P50, 000.00 for USA and P100,000.00 for Austria 3.

How much tax will Deo Magsino, a resident citizen married with 3 qualified dependent children, pay for his 2016 income tax if he has the following income information? Net income from the Philippines Net income from Dubai Tax paid to Dubai

P 550,000.00 250,000.00 60,000.00

Note: Tax credits under this Section is allowed only on citizens and domestic corporations. Below is the codal provision on the computation of tax credit allowed on citizens who paid income tax to foreign country or countries: Tax Code -Chapter VII-Allowable Deductions SEC. 34. Deductions from Gross Income. (C) Taxes. -(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except: (a) xxx; (b) xxx; (c) xxx (d) xxx (2) xxx. (3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or

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incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income (note:, taxable income is that portion of your gross income which is subject to taxation by the governing authority, less any allowable itemized or standardized deductions. Net taxable income is taxable income minus personal and additional exemption and hospitalization and health insurance premium payments, if applicable) for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. (5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall re-determine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. (7) Proof of Credits. - The credits provided in Subsection (C) par. (3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: (a) The total amount of income derived from sources without the Philippines;

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(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits.

End of Discussion-see practice exercises below and in the following pages

END OF CHAPTER TESTS TAX CREDITS Answer the following questions: 1.

What are the 3 kinds of tax credits?

2.

Compute for the tax credit limits on the taxes paid abroad for the following taxpayers: Regine Velasquez is a resident citizen with 3 qualified dependent children. She is a professional singer in the Philippines and has engagements abroad. During 2016 Regine has the following income data: Income within the Philippines Income in Saudi Arabia Income in USA Net Loss in Cambodia Taxes paid to foreign countries: Saudi Arabia USA Cambodia

3.

300,000.00 200,000.00 400,000.00 250,000.00 80,000.00 120,000.00 -0-

Compute for the tax payable if Amor Propio single with 4 dependent love children, who is a resident citizen has the following data for 2016: Net income within the Philippines

P 200,000.00

Net income in the USA

400,000.00

Net Income in Austria

500,000.00

Foreign taxes amount to P50, 000.00 for USA and P100, 000.00 for Austria.

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4.

How much tax will Deo Magsino, a resident citizen married with 3 qualified dependent children, pay for his 2016 income tax if he has the following income information? Net income from the Philippines Net income from Dubai Tax paid to Dubai

P 550,000.00 250,000.00 60,000.00

5.

A married resident, a sole proprietor, had the following business data in the year 2016: Philippines Italy Gross profit from sales P650,000 P450,000 Deductible business expenses 400,000 300,000 Non-deductible business expenses 125,000 63,500 Interest income on trade receivables 15,000 20,000 Interest income on bank deposits 7,500 5,000 Prizes, winnings from contest in Philippines 65,000 25,000 Dividend income from foreign corporations 5,000 10,000 Income tax paid in the year 0 45,000 Excess tax credit in prior year 15,600 Determine the following items: 1. If a resident alien, the taxable net income, total income tax credit allowed are? 2. If a resident citizen, the income tax due before and after the tax credits are? 3. If a resident citizen and the income tax abroad is treated as deductible business expense, the taxable net income and income tax due after tax credits are?

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CHAPTER V- REMEDIES OF THE GOVERNMENT AND TAXPAYERS Part One- Levy, Assessment and Collection of Taxes The Taxing power of the State is not illimitable and every taxpayer has some rights to protect himself from the excesses of the government agents in enforcing the power. The BIR can typically resolve tax disputes and liabilities through formal remedies. A protest or a claim for tax refund is always an available remedy in appropriate cases. A taxpayer may file a protest if he believes that the BIR has erroneously or excessively assessed him of tax liabilities, on in case of over-payment, he may file a claim for a tax refund. To understand these rights however, we must first learn the procedures in audit and documentation in the BIR. There are 3 stages of the Taxation Process 1. LEVY-imposition of the tax by the legislature. 2. ASSESSMENT- official determination of the tax due from the taxpayer. The computation of the amount of taxes to be collected from the taxpayers. 3. COLLECTION- enforcement of the authority to demand the amount of charges from the taxpayer. 1. Levy Issues on the imposition of taxes are resolved through a Judicial Inquiry. Any taxpayer may petition the Court to determine his rights and obligations under a certain tax law if he would be adversely affected by its implementation, and so with the government. Only questions of law are involved in the levy or imposition stage. It is in the assessment and collection stages that there are a lot of issues and controversies to be resolved because it is in these stages where questions of facts and of law are involved. 2. Assessment of Taxes SUMMARY OF PROCEDURES IN THE AUDIT OF INCOME TAX RETURNS FIRST-

The taxpayer files the income tax return on or before April 15 of the following year of the period for which the return was filed.

SECOND-

The BIR will classify all the returns filed for the period and if the return so filed was chosen as subject to audit, within 3 years from April 15 or from the date it was actually filed if it was filed after the deadline, a

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Letter of Authority (L.A.) shall be issued for the verification of truthfulness of the declarations made in the return. The taxpayer should look at the date of the Letter of Authority to determine if it is still valid because to be valid a Letter of Authority must be served within 30 from the date indicated in the said authority, however, the examiner if refused service can effect revalidation of the said L.A. and once revalidated, the taxpayer must accept it. The taxpayer should also take note of the year for which the L.A. was issued; he should take note of the statutes of limitation for the assessment of taxes. If the prescriptive period has passed he is no longer compelled to expose himself to the rigors of investigation, however, this right to prescription may be waived. THIRD-

Within 60 days from date of receipt of L.A., the taxpayer shall present to the Revenue Officer named in the L.A., all documents necessary for the conduct of investigation.

FOURTH-

The Revenue Officer will conduct the investigation based on submitted documents within 120 days from date of receipt of the said documents, and if he fails to finish the investigation within the said allotted time, he should submit a progress report to the Head Office and surrender the L.A. for revalidation.

FIFTH-

After the investigation and the Revenue Officer has determined the total amount of deficiency taxes, he shall effect the issuance of Notice of Preliminary Conference (NPC) or Notice of Informal Conference (NIC) (NOTE: Revenue Regulation (RR) No. 18-2013, dated November 28, 2013 which took effect on December 15, 2013, removed the necessity of notice for preliminary conference). The taxpayer is given 15 days from date of receipt of the above mentioned notice, to present his side and arguments on the findings of the Revenue Officer. The Revenue Officer will take note of the issues and arguments so that he can justify his next action. The Revenue Officer may set aside his findings on the case if the taxpayer can present a satisfactory explanation against the deficiency, but if the taxpayer fails to do so, the RO can proceed to the next step, the issuance of the Pre- Assessment Notice.

SIXTH-

The Revenue Officer should effect the issuance to the taxpayer of the Preliminary Assessment Notice (PAN) and the taxpayer should act on this within 15 days from date of receipt thereof. The taxpayer may either: a) pay the tax deficiencies indicated in the Assessment Notice or b) protest the assessment if he has reasonable ground to believe that the assessment is baseless, hence illegal or he can present satisfactory evidence to dispute the assessment.

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However, a Preliminary Assessment Notice (PAN) shall not be required in any of the following cases, in which case, issuance of the formal Assessment Notice for the payment of the taxpayer‘s deficiency tax liability shall be sufficient: 1. When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or 2. When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or 3. When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year. A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who fails to respond to a Pre-Assessment Notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the Taxpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course. The formal letter of demand calling for payment of the taxpayer‘s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void. Jeopardy Assessment An investigation done without following the guidelines set forth by the Commissioner is a jeopardy assessment. A jeopardy assessment is a special immediate assessment of an alleged tax deficiency levied under Tax Code when the BIR believes that delay may jeopardize collection of the claim. .A Jeopardy Assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in the RO‘s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the Taxpayer‘s failure to: a. Comply with audit and investigation requirements to present his books of accounts and/or pertinent records, or b. Substantiate all or any of the deductions, exemptions or credits claimed in his return.

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SEVENTH-

If the taxpayer fails to act on the above notice as required, the Revenue Officer shall effect the issuance of the Final Letter of Demand (FLD) or Final Assessment Notice (FLN). Within 30 days from date of receipt of the Assessment Notice, the taxpayer may, whichever is appropriate to his case, request for re-investigation or reconsideration. If the taxpayer fails to file a valid protest against the FLD/FAN within the 30day period, the deficiency tax assessment shall become final, executory and demandable, and no request for reconsideration or reinvestigation shall be granted. Both types of protests may involve questions of fact, or of law or of both.

The decision (known as the Final Decision on Disputed Assessment or FDDA) of the Commissioner or his duly authorized representative shall clearly state (a) the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based; and (b) that the same is his final decision. Service of Notices to Taxpayers. While the old rules required service of notices to the taxpayer either through personal delivery or registered mail, the new rules have expanded the allowed modes of service. Under the new rules, the PAN, FLD/FAN and FDDA may be served by the CIR or his duly authorized representative through: (i) Personal service at the registered or known address of the taxpayer, or ―wherever he may be found,‖ (ii) Substituted service, where the taxpayer is not present at the registered or known address, or refuses to accept the notice, or (iii) by Mail. In case a taxpayer refuses to receive the notice, the revenue officers concerned shall bring a barangay official and two disinterested witnesses (meaning, persons other than employees of the BIR), so that they may personally observe and attest to such act of refusal. Service to the tax agent or practitioner shall be deemed service to the taxpayer. A request for reconsideration Is a plea for the re-evaluation of the deficiency tax assessment on the basis of existing records, without need of additional evidence. If the taxpayer files a request for reconsideration, the requirement to submit relevant supporting documents within the 60-day period will not apply, since the taxpayer is, by definition, requesting the reconsideration of the assessment on the basis of previously submitted documents or records already existing with the BIR examiners. After filing the protest, the next step would be for the taxpayer to wait for the BIR‘s decision. The BIR has 180 days to render its decision, counted from the date of filing of the protest, On the other hand, a request for reinvestigation is defined as a plea for the reevaluation of the assessment on the basis of newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. The taxpayer is required to state in his protest (1) the nature of the protest (whether it is one for reconsideration or reinvestigation) specifying newly-discovered or additional evidence he intends to present if it is for reinvestigation, 272

(2) the date of the assessment notice, and (3) the applicable law, rules and regulations, or jurisprudence on which his protest is based. If the taxpayer files a request for reinvestigation, he is required to submit all relevant supporting documents (meaning, those which he are necessary to support the legal and factual bases in disputing the tax assessment) within 60 days from filing the protest/request for reinvestigation; if he fails to do so within the 60-day period, the assessment shall become final. After the 60 day period, the taxpayer will then be barred from disputing the correctness of the assessment by introducing newly-discovered or additional evidence, and the BIR shall issue its Final Decision on Disputed Assessment (FDDA). If the taxpayer was able to present to the Revenue Officer all the required documents for the reinvestigation, he (RO) should conduct it within 180 days and render his decision based on his findings on the case and shall communicate these through a written notice to the taxpayer. If the taxpayer disagrees with decision of the Commissioner‘s representative, he has 30 day from date of notice of decision. to appeal the case to the Commissioner if it is a Regional Case or to the Court of Tax Appeals if it is a National Case If there are several issues in the FLD/FAN and the taxpayer disputes or protests only some of them, the assessment relating to the undisputed issue(s) shall become final, executory and demandable. Moreover, if the taxpayer disputes or protests issues in the FLD/FAN but he fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest, the issues shall be considered undisputed and the related assessment shall likewise become final, executory and demandable. In both cases, the BIR shall issue a collection letter requiring the taxpayer to pay the deficiency tax or taxes on these undisputed items. If the taxpayer fails to pay the demands of the BIR, the BIR may exercise collection enforcement measures such as the service of a warrant of distraint/garnishment. If, say, the Regional Director fails to act on the protest within the 180-day period, the taxpayer may likewise appeal to the CTA but must do so within 30 days after the expiration of the 180-day period. Alternatively, he may choose to wait until the Commissioner‘s duly authorized representative renders a final decision (or until the Commissioner decides on the subsequent reconsideration of this decision) before resorting to a judicial appeal at the CTA. Delinquency Interest The new rules provide that in case of late payment of a deficiency tax assessed, the taxpayer shall be liable for the 20% delinquency interest prescribed under the Tax Code. (R.R. 18-2013) SECTION 3. Amendment. — Section 5 of RR 12-99 is hereby amended by modifying

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Section 5.5 thereof which provides for modes of procedures in computing for the tax and/or applicable surcharge. In cases of late payment of a deficiency tax assessed, the taxpayer shall be liable for the delinquency interest provided under Section 249 (C)(3) of the 1997 National Internal Revenue Code, as amended. Section 5.5 of RR 12-99 shall now read as follows: “5.5 Late payment of a deficiency tax assessed. – In general, the deficiency tax assessed shall be paid by the taxpayer within the time prescribed in the notice and demand; otherwise, such taxpayer shall be liable for the delinquency interest incident to late payment. Illustration 1: Assuming that during the calendar year 1997, the deficiency income tax assessment against XYZ CORPORATION, in the amount of P304, 771.67, is not paid by June 30, 1999, the deadline for payment of the assessment, and assuming further that this assessment has already become final and collectible. In this case, such corporation shall be considered late in payment of the said assessment. Assuming, further, that the corporation pays its tax assessment only by July 31, 1999, the delinquency interest for late payment shall be computed as follows: Calendar Year 1997 Income tax due per investigation Less: Income tax paid per return Deficiency income tax Add: 50% surcharge for filing a fraudulent or false return (P175,000.00 times 50%) 20% int. p.a. from 4-15-98 to 7-31-99 (P175,000.00 times .258630) Total amount due Add: 20% delinquency interest p.a. from 7-1-99 to 7-31-99 Basic Tax Surcharge 20% int. p.a. from 4-15-98 to 6-30-99 Total (P304, 771.67 times .0166667) Total amount due (excluding suggested compromise penalty for late payment)

P350, 000.00 P175, 000.00 —————— P175, 000.00

P 87,500.00 P 45,260.27 —————— P307, 760.27

175,000.00 87,500.00 42,271.67 ————— 304,771.67 P5, 079.54 __________ P312,839.81 ==========

Illustration 2: Based on the immediately preceding Illustration, assuming that the calendar year 1997 deficiency income tax assessment against XYZ CORPORATION, in the amount of P304, 771.67, is not paid by June 30, 1999, the deadline for payment of the

274

assessment but is instead timely protested. Assuming further that after exhaustion of all administrative remedies, the assessment was sustained, hence it became final, executory and demandable on July 1, 2000. However, payment was made by the taxpayer only on June 30, 2002. In this case, such corporation shall be considered late in payment of the said assessment. The civil penalties for late payment shall be computed as follows: Calendar Year 1997 Income tax due per investigation Less: Income tax paid per return Deficiency income tax Add: 50% surcharge for filing a fraudulent or false return (P175, 000.00 times 50%) 20% int. p.a. from 4-15-98 to 6-30-2002 (P175, 000.00 times .841644) Total amount due Add:

20% delinquency interest p.a. from 7-2-2000 to 6-30-2002 Basic Tax Surcharge 20% int. p.a. from 4-15-98 to 7-1-00 (.4427397) Total (P339,979.45 times .3989041)

Total amount due (excluding suggested compromise penalty for late payment)

P350, 000.00 P175, 000.00 —————— P175, 000.00 87,500.00 P147, 287.70 —————— P409, 787.70

175,000.00 87,500.00 77,479.45 ————— 339,979.45 P135, 619.20 ___________ P545, 406.90 ===========

Illustration 3: Assuming that in calendar year 1997, XYZCORPORATION filed a false or fraudulent return and was assessed of deficiency basic income tax amounting to Php100, 000. Assuming further that XYZ CORPORATION timely protested the said assessment. After exhaustion of all administrative remedies, the assessment was upheld and became final, executory and demandable on April 15, 2001. However, payment was made by the taxpayer only on April 15, 2003. In this case, such corporation shall be considered late in payment of the said assessment. The civil penalties for late payment shall be computed as follows: Calendar Year 1997 Total deficiency income tax assessment

P100,000.00

Add: 50% surcharge for filing a fraudulent or false return

P 50,000.00

20% interest p.a. from 4-15-1998

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to 4-15-2003 (P100,000 x 20% x 5)

P100,000.00

Delinquency Interest 20% interest p.a. from 4-15-2001 to 4-15-2003 Basic Tax

100,000.00

Surcharge

50,000.00

20% int. p.a. from 4-15-98 to 4-15-01

60,000.00 ——————

Total

210,000.00

(P210,000.00 x 20% x 2)

P 84,000.00

Total Amount Due As of April 15, 2003 (excluding suggested compromise penalty for late payment)

____________ P334,000.00

3. Collection of Taxes As a rule, assessment shall precede collection, except when the unpaid tax is a tax due per return as in the case of a self-assessed tax under the pay-as-you-file system in which case collection may be instituted without the need of assessment. After an assessment has been made and the taxpayer failed to make the necessary payment, the rights of the government ripen shall collect the tax. Once an assessment becomes final and demandable, the Government may employ any, or all, of the following remedies for the collection of delinquent accounts: 1. Distraint of personal property; 2. Levy of real property belonging to the Taxpayer; 3. Civil Action; and 4. Criminal Action.

TAX CODE CHAPTER II-CIVIL REMEDIES FOR COLLECTION OF TAXES SEC. 205. Remedies for the Collection of Delinquent Taxes. - The civil remedies for the collection of internal revenue taxes, fees or charges, and any increment thereto resulting from delinquency shall be: (a) By distraint of goods, chattels, or effects, and other personal property of whatever character, including stocks and other securities, debts, credits, bank accounts and interest in and rights to personal property, and by levy upon real property and interest in rights to real property; and (b) By civil or criminal action.

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Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes: Provided, however, That the remedies of distraint and levy shall not be availed of where the amount of tax involve is not more than One hundred pesos (P100). The judgment in the criminal case shall not only impose the penalty but shall also order payment of the taxes subject of the criminal case as finally decided by the Commissioner. The Bureau of Internal Revenue shall advance the amounts needed to defray costs of collection by means of civil or criminal action, including the preservation or transportation of personal property distrained and the advertisement and sale thereof, as well as of real property and improvements thereon. 1. Distraint Distraint of personal property involves the seizure by the Government of personal property - tangible or intangible - to enforce the payment of taxes, followed by the public sale of such property, if the Taxpayer fails to pay the taxes voluntarily. Kinds of Distraint a. Actual- there is taking of possession of the personal property out of the taxpayer into that of the government; b. Constructive- the owner is merely prohibited from disposing of his property. SEC. 206. Constructive Distraint of the Property of a Taxpayer. - To safeguard the interest of the Government, the Commissioner may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject to tax, or is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property or to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him. The constructive distraint of personal property shall be affected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same ;in any manner whatever, without the express authority of the Commissioner. In case the taxpayer or the person having the possession and control of the property sought to be placed under constructive distraint refuses or fails to sign the receipt herein referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnessed, leave a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint. SEC. 207. Summary Remedies. – (A) Distraint of Personal Property. - Upon the failure of the person owing any delinquent tax or delinquent revenue to pay the same at the time required, the

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Commissioner or his duly authorized representative, if the amount involved is in excess of One million pesos (P1,000,000), or the Revenue District Officer, if the amount involved is One million pesos (P1,000,000) or less, shall seize and distraint any goods, chattels or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property of such persons ;in sufficient quantity to satisfy the tax, or charge, together with any increment thereto incident to delinquency, and the expenses of the distraint and the cost of the subsequent sale. A report on the distraint shall, within ten (10) days from receipt of the warrant, be submitted by the distraining officer to the Revenue District Officer, and to the Revenue Regional Director: Provided, That the Commissioner or his duly authorized representative shall, subject to rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, have the power to lift such order of distraint: Provided, further, That a consolidated report by the Revenue Regional Director may be required by the Commissioner as often as necessary. SEC. 208. Procedure for Distraint and Garnishment. - The officer serving the warrant of distraint shall make or cause to be made an account of the goods, chattels, effects or other personal property distrained, a copy of which, signed by himself, shall be left either with the owner or person from whose possession such goods, chattels, or effects or other personal property were taken, or at the dwelling or place of business of such person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and note of the time and place of sale. Stocks and other securities shall be distrained by serving a copy of the warrant of distraint upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the corporation, company or association, which issued the said stocks or securities. Debts and credits shall be distrained by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The warrant of distraint shall be sufficient authority to the person owning the debts or having in his possession or under his control any credits belonging to the taxpayer to pay to the Commissioner the amount of such debts or credits. Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government. SEC. 209. Sale of Property Distrained and Disposition of Proceeds. - The Revenue District Officer or his duly authorized representative, other than the officer referred to in Section 208 of this Code shall, according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two (2) public places in the municipality or city where the distraint is made, specifying; the time and place of sale and the articles distrained. The time of sale shall not be less than twenty (20) days after notice. One place

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for the posting of such notice shall be at the Office of the Mayor of the city or municipality in which the property is distrained. At the time and place fixed in such notice, the said revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction, to the highest bidder for cash, or with the approval of the Commissioner, through duly licensed commodity or stock exchanges. In the case of Stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and a copy thereof furnished the corporation, company or association which issued the stocks or other securities. Upon receipt of the copy of the bill of sale, the corporation, company or association shall make the corresponding entry in its books, transfer the stocks or other securities sold in the name of the buyer, and issue, if required to do so, the corresponding certificates of stock or other securities. Any residue over and above what is required to pay the entire claim, including expenses, shall be returned to the owner of the property sold. The expenses chargeable upon each seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending; the sale, and no charge shall be imposed for the services of the local internal revenue officer or his deputy. SEC. 210. Release of Distrained Property upon Payment Prior to Sale. - If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. SEC. 212. Purchase by Government at Sale upon Distraint. - When the amount bid for the property under distraint is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the national Government for the amount of taxes, penalties and costs due thereon. Property so purchased may be resold by the Commissioner or his deputy, subject to the rules and regulations prescribed by the Secretary of Finance, the net proceeds therefrom shall be remitted to the National Treasury and accounted for as internal revenue. 2. Levy Levy of real property refers to the same act of seizure, but in this case of real property, and interest in or rights to such property in order to enforce the payment of taxes. As in the distraint of personal property, the real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy. Levy is a summary administrative remedy involving seizure of real property to enforce payment of taxes. A written notice of levy, containing a description of the property upon which levy is made, the name of the taxpayer and the amounts of the tax and penalty due from them is served upon the taxpayer.

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Tax Code CHAPTER II-CIVIL REMEDIES FOR COLLECTION OF TAXES SECTION 205(B) Levy on Real Property.- After the expiration of the time required to pay the delinquent tax or delinquent revenue as prescribed in this Section, real property may be levied upon, before simultaneously or after the distraint of personal property belonging to the delinquent. To this end, any internal revenue officer designated by the Commissioner or his duly authorized representative shall prepare a duly authenticated certificate showing the name of the taxpayer and the amounts of the tax and penalty due from him. Said certificate shall operate with the force of a legal execution throughout the Philippines. Levy shall be affected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds for the province or city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question. In case the warrant of levy on real property is not issued before or simultaneously with the warrant of distraint on personal property, and the personal property of the taxpayer is not sufficient to satisfy his tax delinquency, the Commissioner or his duly authorized representative shall, within thirty (30) days after execution of the distraint, proceed with the levy on the taxpayer's real property. Within ten (10) days after receipt of the warrant, a report on any levy shall be submitted by the levying officer to the Commissioner or his duly authorized representative: Provided, however, That a consolidated report by the Revenue Regional Director may be required by the Commissioner as often as necessary: Provided, further, That the Commissioner or his duly authorized representative, subject to rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, shall have the authority to lift warrants of levy issued in accordance with the provisions hereof. SEC. 213. Advertisement and Sale. - Within twenty (20) days after levy, the officer conducting the proceedings shall proceed to advertise the property or a usable portion thereof as may be necessary to satisfy the claim and cost of sale; and such advertisement shall cover a period of a least thirty (30) days. It shall be effectuated by posting a notice at the main entrance of the municipal building or city hall and in public and conspicuous place in the barrio or district in which the real estate lies and; by publication once a week for three (3) weeks in a newspaper of general circulation in the municipality or city where the property is located. The advertisement shall contain a statement of the amount of taxes and penalties so due and the time and place of sale, the name of the taxpayer against whom taxes are levied, and a short description of the property to be sold. At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the taxes, penalties and interest. If he does not do so, the sale shall proceed and shall be held either at the main entrance of the municipal building or city hall, or on the premises to be sold, as the officer conducting the proceedings shall determine and as the notice of sale shall specify.

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Within five (5) days after the sale, a return by the distraining or levying officer of the proceedings shall be entered upon the records of the Revenue Collection Officer, the Revenue District officer and the Revenue Regional Director. The Revenue Collection Officer, in consultation with the Revenue district Officer, shall then make out and deliver to the purchaser a certificate from his records, showing the proceedings of the sale, describing the property sold stating the name of the purchaser and setting out the exact amount of all taxes, penalties and interest: Provided, however, That in case the proceeds of the sale exceeds the claim and cost of sale, the excess shall be turned over to the owner of the property. The Revenue Collection Officer, upon approval by the Revenue District Officer may, out of his collection, advance an amount sufficient to defray the costs of collection by means of the summary remedies provided for in this Code, including; the preservation or transportation in case of personal property, and the advertisement and subsequent sale, both in cases of personal and real property including improvements found on the latter. In his monthly collection reports, such advances shall be reflected and supported by receipts. SEC. 214. Redemption of Property Sold. - Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have the right of paying to the Revenue District Officer the amount of the public taxes, penalties, and interest thereon from the date of delinquency to the date of sale, together with interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of purchase to the date of redemption, and such payment shall entitle the person paying to the delivery of the certificate issued to the purchaser and a certificate from the said Revenue District Officer that he has thus redeemed the property, and the Revenue District Officer shall forthwith pay over to the purchaser the amount by which such property has thus been redeemed, and said property thereafter shall be free from the lien of such taxes and penalties. The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption. SEC. 215. Forfeiture to Government for Want of Bidder. - In case there is no bidder for real property exposed for sale as herein above provided or if the highest bid is for an amount insufficient to pay the taxes, penalties and costs, the Internal Revenue Officer conducting the sale shall declare the property forfeited to the Government in satisfaction of the claim in question and within two (2) days thereafter, shall make a return of his proceedings and the forfeiture which shall be spread upon the records of his office. It shall be the duty of the Register of Deeds concerned, upon registration with his office of any such declaration of forfeiture, to transfer the title of the property forfeited to the Government without the necessity of an order from a competent court. Within one (1) year from the date of such forfeiture, the taxpayer, or any one for him may redeem said property by paying to the Commissioner or the latter's Revenue Collection Officer the full amount of the taxes and penalties, together with interest thereon and the costs of sale, but if the property be not thus redeemed, the forfeiture shall become absolute.

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SEC. 216. Resale of Real Estate Taken for Taxes. - The Commissioner shall have charge of any real estate obtained by the Government of the Philippines in payment or satisfaction of taxes, penalties or costs arising under this Code or in compromise or adjustment of any claim therefore, and said Commissioner may, upon the giving of not less than twenty (20) days‘ notice, sell and dispose of the same of public auction or with prior approval of the Secretary of Finance, dispose of the same at private sale. In either case, the proceeds of the sale shall be deposited with the National Treasury, and an accounting of the same shall rendered to the Chairman of the Commission on Audit. The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected. Sec. 217 Tax Code Chapter II-Civil Remedies For Collection Of Taxes.

4. Tax Lien Tax Lien is an involuntary charge on a tax payer's property arising from nonpayment of income, property, or other taxes. Tax liens take precedence over all other liens on a property and (in case of liquidation) must be satisfied first . http://www.businessdictionary.com/definition/tax-lien.html

A Tax lien attaches for as long as the deficiency taxes and surcharges have not been paid. The Bureau of Internal Revenue issues a tax lien to protect the interest of the government as stated in the Tax Code. If any person, corporation, partnership, joint-account (cuentas en participacion), association or insurance company liable to pay an internal revenue tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner until paid, with interests, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer: Provided, That this lien shall not be valid against any mortgagee purchaser or judgment creditor until notice of such lien shall be filed by the Commissioner in the office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located . Sec. 219 Tax Code Chapter II-Civil Remedies For Collection Of Taxes.

Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the Bureau of Internal Revenue but no civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in court without the approval of the Commissioner. Sec. 220 Tax Code Chapter IICivil Remedies For Collection Of Taxes.

5. Civil Action After the assessment made by the Commissioner of Internal Revenue has become final and executory for failure of the taxpayer to dispute the same and appeal the disputed assessment to the Court of Tax Appeals, the government may institute civil actions to

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collect internal revenue taxes in the Regional Trial Court and the Metropolitan Trial Court, City and municipal courts. Civil action is a lawsuit brought to enforce, redress, or protect rights of Government—. A civil remedy or action is generally separate form a criminal remedy, although in certain situations the civil and criminal remedy may be related. Civil remedies require the cooperation of the victim (State) and are voluntary. 6. Criminal Action A Criminal action maybe pursued by the authorities for the collection of delinquent taxes. An assessment of a tax deficiency is not necessary to a criminal prosecution for tax evasion. The crime is complete when the violator has knowingly and willfully filed a fraudulent return or neglected to file a return with intent to evade the tax. If the taxpayer is acquitted, the government may still collect the tax in a civil action, because the payment of a tax is an obligation imposed by statute and does not arise from a criminal act. When a person commits a wrong against someone else, this wrong can give rise to civil liability or both criminal and civil liability. For example, if an individual fails to income tax due to inadvertence, he has failed to perform a duty to the State; therefor the State in a Civil Action may compel him to pay the taxes he failed to pay. However, if a taxpayer did not pay the tax because he declared a net loss from his business when in fact he generated an income therefrom, then he is criminally liable because of the presence of fraud and likewise civilly liable for the payment of taxes. The appropriate action to be filed is not only the demand for the payment of taxes but also for the penalty for fraud. The civil action merely corrects the wrong done but does not penalize the doer, in the criminal action, both the wrong done and the doer are being corrected. The filing of a civil action does not carry with it the filing of the criminal action, but the civil action is deemed instituted with the filing of the civil action. No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code. Sec. 218 Tax Code Chapter II-Civil Remedies For Collection Of Taxes. Where an assessment was made, the period for collection by judicial action or by distraint or levy is within 5 years after the date of assessment. Where no assessment was made and a return was filed, and the same is not false or fraudulent, the period for collection by a proceeding in court is within 3 years after the return was due or filed whichever is later, except: Where a return required to be filed was not filed, or even if filed the same is false or fraudulent, and made with the intent to evade the tax, the period is ten years after discovery of the omission to file the return or from the discovery of the falsity or fraud. The other exception relative to the prescriptive periods for assessment is also applicable. Where the government makes another assessment on the basis of a reinvestigation requested by the taxpayer, or a revised assessment because of an

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amended return or as a result of a reinvestigation asked for by the taxpayer, the period is counted from the last assessment or the last revised assessment. Where the action is brought to enforce a compromise agreement into between the commissioner and the taxpayer, the prescriptive period is ten years from the time the cause of action accrues as fixed in the civil code. PRESCRIPTIVE PERIOD FOR COLLECTION OF TAXES Time of Collection or Time to File an Action (If the Return filed was not false or fraudulent and with prior assessment , the collection shall be instituted within 5 years from the date of assessment, either by summary proceedings of distraint and levy or by judicial proceedings only. The collection of taxes without prior assessment shall be within 3 years from the date of filing the return or from the last day required by law for filing, if the return was filed on or before such last day, by judicial proceedings only. If the Return filed was false or fraudulent with intent to evade the tax or no return is filed. The collection, if with prior assessment should be made within 5 years from the date of assessment, either by summary proceedings of distraint and levy or judicial proceedings. If the collection of taxes is without prior assessment, it must be within 10 years after the discovery of the falsity, fraud or omission to file the return, by judicial proceedings only. Waiver of the Right to Prescription Any internal revenue tax, which has been assessed within the period agreed upon by the taxpayer and the CIR, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the 5 years prescriptive period to collect. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. If the government tries to collect by any of the above remedies beyond the prescriptive periods, the taxpayer may claim defense of prescription of the right of the government to collect. The defense of prescription, however, if not raised , is deemed waived. CHAPTER II CIVIL REMEDIES FOR COLLECTION OF TAXES SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer has agreed in writing to

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its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) -year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree. The running of the prescriptive period however, is suspended when: a. When the CIR is prohibited from making assessment or beginning distraint or levy or a proceeding in court and for 60 days thereafter, such as when there is a pending petition for review in the CTA from the decision on a protested assessment, the filing of such petition interrupts the running of the prescriptive period for collection. The filing of criminal case against the taxpayer, however, does not suspend the prescriptive period; the criminal action for the tax violation is entirely separate and distinct from the civil action; b. When the taxpayer is out of the Philippines; c. When the warrant of distraint and levy is duly served; d. When the taxpayer cannot be located in the address given by him in the return (except if the taxpayer informs the CIR of any change in address); and e. When the taxpayer requests for reconsideration of reinvestigation which is granted by the CIR. CHAPTER II CIVIL REMEDIES FOR COLLECTION OF TAXES SEC. 223. Suspension of Running of Statute of Limitations. - The running of the Statute of Limitations provided in Sections 203 and 222 on the making of assessment and the beginning of distraint or levy a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided, that, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household

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with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines.

Part Two- Penalties Imposed for the Violations of the Provisions of the Tax Code The NIRC imposes civil and criminal penalties for violations of the NIRC. A. Civil Penalties 1. Surcharge a). There shall be imposed a penalty of 25% surcharge of the amount due in the following: i). Failure to file any return and pay the tax due thereon as required under the Tax Code; ii). Filing a return with an internal revenue officer other than those with whom the return is required to be filed, unless authorized by the Commissioner; iii). Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or iv). Failure to pay the full or part of the amount of the tax shown on any return required to be filed under the Tax Code, or the full amount of tax due for which no return is required to be filed. b). A 50% surcharge shall be imposed on the tax due or on the deficiency tax in case of: i). Willful neglect to file a return within the period prescribed by the Tax Code; or ii). In case a false or fraudulent return is willfully made; When is a Return Considered Fraudulent? A return is considered fraudulent when: o There is substantial under-declaration of taxable sales, receipts or income; or o There is substantial overstatement of deductions as determined by the CIR False or fraudulent return is willfully filed when the taxpayer failed to report sales, receipts of income in an amount exceeding 30% of that declared per return, or when he claimed deductions in an amount exceeding 30% of actual deductions. The taxpayer who commits any of these acts shall be liable for substantial understatement of income or overstatement of deductions, thus making the filed return false or fraudulent. 2. Interest There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, from the date prescribed for the payment until the amount is fully paid. The interest is hereby classified as follows:

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a.

Deficiency interest- any deficiency in the tax due shall be subject to 20% interest, which shall be assessed and collected from the date prescribed for its payment until the full payment thereof.

b.

Delinquency interest- Delinquency interest at the rate of 20% shall be imposed in case of failure to pay: i). the amount of the tax due on any return to be filed, or; ii). the amount of the tax due or which no return is required; iii). A deficiency tax, or any surcharge or interest thereon on the date so required.

Interest on extended payment – if any person required to pay the tax is qualified and elects to pay the tax on installment under the provisions of the Tax Code, but fails to pay the tax or any installment thereof, or any part of such amount of installment on or before the date prescribed for its payment, or where the CIR has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assesses and collected interest at the rate of 20% per annum on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid. 3. Compromise Penalties Compromise penalty refers to a certain amount of money which the taxpayer pays to compromise a tax violation and avoid criminal prosecution Accordingly, a taxpayer may offer a compromise penalty lower than the prescribed amount but which may only be accepted upon approval by the BIR Commissioner or the concerned deputy commissioner/assistant commissioner or regional director. In the same way, the schedule of compromise penalties shall not prevent these BIR officials from accepting a compromise amount higher than what is prescribed. Certain acts or violations commonly resorted to by taxpayers to evade payment of tax had been deleted from the coverage for falling under the definition of fraudulent means. These include misrepresentation, willful failure to submit annual alpha list of payees and employees in the prescribed format, willful falsification of any report or statement on any examination or audit, knowingly making false entry in the books of accounts, keeping of two or more sets of books of accounts, willful attempt to evade any tax obligations, deliberately using fake receipts, letters of authority, and unlawful divulgence of any confidential information regarding the business. Cases involving fraud would be referred to the concerned division having jurisdiction over the case for the institution of the corresponding criminal action. Some of the violations which can be subject of compromise penalty include failure to register; failure to pay and display the annual registration fee; failure to withhold taxes; failure to refund excess taxes withheld; any omission by a corporation which is penalized

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under the Tax Code; removal of liquor or tobacco products under false name or brand; and unlawful possession of imported articles subject to excise tax. SCHEDULE OF COMPROMISE PENALTIES Revenue Memorandum Order No. 7-2015 dated 22 January 2015 The Commissioner of Internal Revenue (―CIR‖) has issued Revenue Memorandum Order No. 7-2015 (“the Order”) dated 22 January 2015 to adopt and implement a uniform application of The compromise penalties involving violations of the Tax Code, to update the Schedule of Compromise Penalties specified under RMO No. 19-2007, and to delete from the coverage of RMO No. 19-2007 acts commonly resorted as means of tax evasion. The Order reiterates the following policies and guidelines prescribed under RMO No. 19-2007: 1. In criminal violations of the Tax Code that does not involve the commission of fraudulent acts; the compromise penalties imposed in the ―Revised Schedule of Compromise Penalties‖ (Annex A of this Order) shall be strictly followed. 2. Certain acts/violations commonly resorted to by taxpayers as means of tax evasion are deleted from the coverage of compromise penalties. 3. Cases involving fraud shall be referred to the concerned Division for the institution of criminal action. 4. In no case shall the compromise penalty differ in amount from those specified in Annex A above, except when duly approved by the CIR, concerned Deputy Commissioner, or the Regional Directors. 5. Compromise penalties should not form part of assessment notice reflecting deficiency basic tax, surcharge and interest. It should appear in a separate assessment notice/demand letter as the amount suggested to the taxpayer to pay in lieu of criminal prosecution. 6. Compromise penalties are only amounts suggested in settlement of criminal liability and may not be imposed or exacted upon the taxpayer. Where a taxpayer refuses to pay suggested penalty, the case shall be referred to the appropriate office for criminal action. 7. The Schedule of Compromise penalties shall not prevent the CIR or his duly authorized representative from accepting a compromise amount higher than what is provided for. 8. All other Orders which are inconsistent herewith are repealed or revoked accordingly. The Order shall take effect immediately following its publication in a newspaper of general circulation on 24 March 2015.

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B.

Criminal Liabilities  A taxpayer who fails to file a return, supply correct information or who fails to pay the tax, or who fails to withhold and remit the tax, or who fails to refund excess taxes withheld on compensation shall be punished for a fine not less than Ten thousand pesos (10,000.00) a suffer imprisonment of not less than one (1) year but not more than ten (10) years.  In case of Corporations, the penalty shall be a fine of not less than fifty thousand pesos (50,000.00) but not more than One hundred thousand pesos (100,000.00). The responsible corporate officer or employee shall suffer the penalty by the NIRC upon conviction.  . In case of a person carries on any business for which an annual registration fee is imposed, without paying the tax due thereon as required by law shall upon conviction, be punished by a fine of not less than five thousand pesos (5,000.00) but not more than twenty thousand pesos (20,000.00) and suffer imprisonment of not less than six (6) months but not more than two (2) years.

 Any person, whose property is placed under constructive distraint, who sells or in any other manner disposes of the same shall, upon conviction, suffer:

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A fine of not less than twice the value of the property sold or disposed of. However, the amount of fine shall not, be less than Five thousand pesos (5,000.00) or a penalty of imprisonment of not less than two years and one day but not more than Four (4) years; Or both fine and imprisonment as previously mentioned.  Any person who willfully attempts in any manner to evade or defeat any tax impose under the Tax Code shall in addition to the penalties provided by law, be punished by a fine of not less than Thirty Thousand (30,000.00) pesos but not more than One hundred thousand pesos and suffer imprisonment of not less than two years but not more than four years.  A taxpayer who willfully fails to pay any internal revenue tax at the time or times required by law or regulation; fails t pay internal revenue tax at the time or time required by law; willful failure/failure to make/file any return, keep records or supply information at the time or times required by law; willful failure/failure to withhold or remit or withheld takes at the times required by law; Failure to keep or preserve records required by law; Criminal liability shall be a fine of not less than 10,000.00 and imprisonment for not less than one year but not more than 10 years.  A person who engages on any business for which an annual registration is imposed without paying the tax required shall be punished by a fine of not less than Five thousand (5,000.00) pesos but not more than Twenty thousand (20,000.00) pesos and suffer imprisonment of not less than six (6) months but not more than two (2) years. C. Deportation of Aliens- any alien who: 1. knowingly and fraudulently evades the payment of any internal revenue tax or

2. willfully refuses to pay such tax and its accessory penalties after the decision on the tax liability rendered by the Commissioner of Internal Revenue, or the CTA or any competent judicial tribunal shall have become final and executory, is subject to deportation. The penalty of deportation is not a bar to any proceeding taken by the government to enforce collection of tax delinquency. D. Other Remedies Available to the government  Forfeiture  Suspension of Business Operations  Enforcement of Administrative Sanctions

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REMEDIES OF THE TAXPAYER A taxpayer who is not satisfied with the findings of the revenue officer may file an administrative protest against assessment before payment of the assessed tax/es; or may claim for refund filed with the Commissioner, if there has been payment. If the Commissioner affirms the findings of the revenue officer after protest, the taxpayer may:  Appeal to the CTA Division within 30 days from receipt of decision on the protest or from the lapse of 180 days due to inaction of the Commissioner otherwise it will be final and executory.  Appeal to the CTA en Banc within 15 days from the receipt of the decision of CTA via petition for review.  Appeal to the SC within 15 days from the receipt of the decision of the CTA under Rule 45.  By way of Special Civil Action under Rule 65.  Action to contest forfeiture of chattel, at any time before the sale or destruction thereof; Action for damages against revenue officer by reason of any act done in the performance of his office.  By Injunction to be issued by the CTA if the collection may jeopardize the interest of the government or the taxpayer. (Note: No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the NIRC.[Section 218, NIRC], however the CTA may suspend or restrain the collection of the tax when, in its opinion, the collection of the tax may jeopardize the interest of the government and/or the taxpayer. [Section 11, RA 1125]). Requisites for injunction a.

That the collection of the tax may jeopardize the interest of the government and/or the taxpayer.

b.

That the taxpayer is willing to deposit the amount equal to the taxes assessed or to file a bond amounting to not more than twice the value of the tax being assessed.

c.

That the CTA may issue an injunction only in the exercise of its appellate jurisdiction. End of Discussion-see practice exercises in the following pages 302

END OF CHAPTER TESTS TAX REMEDIES Answer the following questions: 1.

What are the Three (3) stages of the Taxation Process? Explain your answer.

2.

Explain the procedure of the Audit Process conducted on Annual Income Tax Return

3.

Explain the following terms: a. Notice of Preliminary Conference b. Jeopardy Assessment c. Request for Reconsideration d. Notice of Assessment e. PAN(Preliminary Assessment Notice) f.

Request for Reinvestigation

g. Final Decision on Disputed Assessment(FDDA) h. Final Letter of Demand/Final Assessment Notice(FLD/FAN) ENCIRLCLE YOUR CHOSEN ANSWER (ENCIRCLE ONLY ONE) 1.

Mia, a compensation income earner, filed her income tax return for the taxable year 2007 on March 30, 2008. On May 20, 2011, Mia received an assessment notice and letter of demand covering the taxable year 2007 but the postmark on the envelope shows April 10, 2011. Her return is not a false and fraudulent return. Can Mia raise the defense of prescription? a. No. The 3 year prescriptive period started to run on April 15, 2008, hence, it has not yet expired on April 10, 2011. b. Yes. The 3 year prescriptive period started to run on April 15, 2008, hence, it had already expired by May 20, 2011. c. No. The prescriptive period started to run on March 30, 2008, hence, the 3 year period expired on April 10, 2011. d. Yes. Since the 3-year prescriptive period started to run on March 30, 2008, it already expired by May 20, 2011.

2.

The actual effort exerted by the government to effect the exaction of what is due from the taxpayer is known as a. assessment. b. levy. 303

c. payment. d. collection. 3.

On July 31, 2011, Esperanza received a preliminary assessment notice from the BIR demanding that she pays P180,000.00 deficiency income taxes on her 2009 income. How many days from July 31, 2011 should Esperanza respond to the notice? a. b. c. d.

4.

The BIR could not avail itself of the remedy of levy and distraint to implement, through collection, an assessment that has become final, executory, and demandable where a. b. c. d.

5.

180 days. 30 days. 60 days. 15 days.

the subject of the assessment is an income tax. the amount of the tax involved does not exceed P100.00. the corporate taxpayer has no other uncollected tax liability. the taxpayer is an individual compensation income earner.

On March 30, 2005 Miguel Foods, Inc. received a notice of assessment and a letter of demand on its April 15, 2002 final adjustment return from the BIR. Miguel Foods then filed a request for reinvestigation together with the requisite supporting documents on April 25, 2005. On June 2, 2005, the BIR issued a final assessment reducing the amount of the tax demanded. Since Miguel Foods was satisfied with the reduction, it did not do anything anymore. On April 15, 2010 the BIR garnished the corporation's bank deposits to answer for the tax liability. Was the BIR action proper? a. Yes. The BIR has 5 years from the filing of the protest within which to collect. b. Yes. The BIR has 5 years from the issuance of the final assessment within which to collect. c. No. The taxpayer did not apply for a compromise. d. No. Without the taxpayer‘s prior authority, the BIR action violated the Bank Deposit Secrecy Law.

6.

Spanflex Int‘l Inc. received a notice of assessment from the BIR. It seasonably filed a protest with all the necessary supporting documents but the BIR failed to act on the protest. Thirty days from the lapse of 180 days from the filing of its protest, Spanflex still has not elevated the matter to the CTA. What remedy, if any, can Spanflex take? a. It may file a motion to admit appeal if it could prove that its failure to appeal was due to the negligence of counsel. b. It may no longer appeal since there is no BIR decision from which it could appeal.

304

c. It may wait for the final decision of the BIR on his protest and appeal it to the CTA within 30 days from receipt of such decision. d. None. Its right to appeal to the CTA has prescribed. 7.

Anion, Inc. received a notice of assessment and a letter from the BIR demanding the payment of P3 million pesos in deficiency income taxes for the taxable year 2008. The financial statements of the company show that it has been suffering financial reverses from the year 2009 up to the present. Its asset position shows that it could pay only P500,000.00 which it offered as a compromise to the BIR. Which among the following may the BIR require to enable it to enter into a compromise with Anion, Inc.? a. b. c. d.

8.

Jeopardy assessment is a valid ground to compromise a tax liability a. b. c. d.

9.

Anion must show it has faithfully paid taxes before 2009. Anion must promise to pay its deficiency when financially able. Anion must waive its right to the secrecy of its bank deposits. Anion must immediately deposit the P500,000.00 with the BIR.

involving deficiency income taxes only, but not for other taxes. because of doubt as to the validity of the assessment. if the compromise amount does not exceed 10% of the basic tax. only when there is an approval of the National Evaluation Board.

As a general rule, within what period must a taxpayer elevate to the Court of Tax Appeals a denial of his application for refund of income tax overpayment? a. Within 30 days from receipt of the Commissioner‘s denial of his application for refund. b. Within 30 days from receipt of the denial which must not exceed 2 years from payment of income tax. c. Within 2 years from payment of the income taxes sought to be refunded. d. Within 30 days from receipt of the denial or within two years from payment.

10.

What is the effect on the tax liability of a taxpayer who does not protest an assessment for deficiency taxes? a. The taxpayer may appeal his liability to the CTA since the assessment is a final decision of the Commissioner on the matter. b. The BIR could already enforce the collection of the taxpayer's liability if it could secure authority from the CTA. c. The taxpayer's liability becomes fixed and subject to collection as the assessment becomes final and collectible. d. The taxpayer's liability remains suspended for 180 days from the expiration of the period to protest.

11.

There is prima facie evidence of a false or fraudulent return where the a. tax return was amended after a notice of assessment was issued. b. tax return was filed beyond the reglementary period. 305

c. taxpayer changed his address without notifying the BIR. d. deductions claimed exceed by 30% the actual deductions. 12.

What should the BIR do when the prescriptive period for the assessment of a tax deficiency is about to prescribe but the taxpayer has not yet complied with the BIR requirements for the production of books of accounts and other records to substantiate the claimed deductions, exemptions or credits? a. b. c. d.

13.

The taxpayer seasonably filed his protest together with all the supporting documents. It is already July 31, 2011, or 180 days from submission of the protest but the BIR Commissioner has not yet decided his protest. Desirous of an early resolution of his protested assessment, the taxpayer should file his appeal to the Court of Tax Appeals not later than a. b. c. d.

14.

Call the taxpayer to a conference to explain the delay. Immediately conduct an investigation of the taxpayer's activities. Issue a jeopardy assessment coupled with a letter of demand. Issue a notice of constructive distraint to protect government interest.

August 31, 2011. August 30, 2011. August 15, 2011. August 1, 2011.

Which of the following are NOT usually imposed when there is a tax amnesty? a. b. c. d.

Civil, criminal, and administrative penalties Civil and criminal penalties Civil and administrative penalties Criminal and administrative penalties

15

For filing a false and fraudulent tax return, a surcharge is imposed. Which of the following is correct? a. 50% as administrative penalty b. 50% as criminal penalty c. 25% plus 50% d. 25% as criminal penalty

16

A 50% penalty is imposed on tax liability in case of a. Failure to file the return on time. b. Failure to pay the tax on time. c. Willful neglect to file the return on time. d. Failure to pay deficiency tax.

17.

Which of the following is not subject to 25% penalty? a. Failure to file the return on time b. Filing a return with an unauthorized person. c. Failure to pay deficiency tax. d. Willful neglect to file the return within the time prescribed.

306

18.

Which of the following does not constitute civil penalty? a. Interest on extended payment. b. Deficiency interest c. Delinquency interest d. Imprisonment for not less than 10 years

19.

Income tax due on 2016 income P50,000 Withholding tax 5,000 Date of filing and payment July 15, 2017 The income tax due including penalties and interest is: a. P72,250 c. 76,125 b. 69,750 d. 58,500

20.

The income tax return for taxable year 2016 of Gil reflects an income tax of P120,000. How much tax is the payable by Gil, including penalties and interest, if he decides to file the return and pay the tax on June 30,2017? a. P155,000 c. 153,000 b. 153,750 d. 183,000

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CHAPTER VI- COMPLIANCE REQUIREMENTS RETURNS AND PAYMENT OF TAX (per RA8424) SEC. 51. Individual Return. (A) Requirements. (1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return: (a) Every Filipino citizen residing in the Philippines; (b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and (d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines. (2) The following individuals shall not be required to file an income tax return; (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income; (b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return; (c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and (d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. (3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (4) The income tax return shall be filed in duplicate by the following persons: (a) A resident citizen - on his income from all sources; (b) A nonresident citizen - on his income derived from sources within the Philippines; (c) A resident alien - on his income derived from sources within the Philippines; and (d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within the Philippines.

308

(B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner. (C) When to File. (1)

The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.

(2)

Individuals subject to tax on capital gains; (a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and (b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition.

(D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. (E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax. (F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns. (G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him. Filing of Annual Income Tax Return A return is a statement of the taxpayer's income and deductions. It is a written report of the taxpayer‘s extends as well as the nature of his income, whether from

309

business or trade, exercise of his profession or one arising from an employer-employee relationship, including his claims for deductions/exemptions. A return is required to be filed by every taxpayer and must substantially comply with the requirements of the law namely: 1. The return must be filed in good faith and must not be false or fraudulent. 2. The return must cover the entire period/taxable year. 3. It must contain pertinent information as to the nature of the income of taxpayer together with claims for deductions/credits. The following individual taxpayers are required to file the annual income tax return. a. Every Filipino Citizen residing in the Philippines; b. Every Filipino Citizen residing outside the Philippines with respect to his income from sources within the Philippines; c. Every Resident Alien with respect to his income from sources within the Philippines and d. Every non-resident alien engaged in trade or business or in the exercise of a profession in the Philippines on his income within the Philippines. How do married individuals file their returns? Married individuals are also required to file joint returns to include income of both spouses, computing separately their income tax due. However, if it is impracticable to file one return, each spouse may file a separate return of income but the return so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. If any income cannot be definitely attributed to one spouse, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. Illustration of computation of income of husband and wife 1. Resident alien husband and wife with 3 dependent children. 2. Salary and allowances of husband arising from employment: salary of PHP

750,000.00, living allowances of PHP 100,000.00 3. Teaching salary of wife: PHP 120,000.00 4. Gross dividend income from investment in shares of stock of a domestic

corporation of PHP 15,000.00 5. Interest of P40, 000 on peso bank account. 6. Capital gain on sale of shares of stock P25, 000.00 7. Winnings from lotto P250,000.00 310

8. Taxes withheld by employer of husband, 178,140.00 and by employer of wife,

3,400.00

Tax computation

Husband (PHP)

Wife (PHP)

Gross income: (2)(3) Salary

750,000.00

Living allowances

100,000.00

Total income

125,000.00

850,000.00

120,000.00

Allowance for Personal and Additional Exemption: (1) Personal exemption

( 50,000.00

)

Additional exemption for dependent children (3)

( 75,000.00

)

Total Personal and Additional Exemption

(125,000.00

)

Net taxable income

725,000.00

( 50,000.00 )

(50,000.00 )

75,000.00

Tax due: On first 500,000 On remainder of 225,000.00 at 32%

125,000.00 72,000.00

On first 70,000

8,500.00

On remainder of 5,000 at 20%

1,000.00

Total tax due

197,000.00

9,500.00

Less: Tax withheld by employer per Form 2316 (8)

Net tax payable

(178,140.00

18,860.00

) (

3,400.00 )

6,100.00

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The following items were not included in the income tax return because they are subject to final tax:

Interest on peso bank account (5)

40,000.00

Capital gain on sale of shares of stock (6)

25,000.00

Dividend income (4)

15,000.00

Winnings from lotto (7)

250,000.00

1. The additional exemption for dependent children is to be claimed by the husband unless he explicitly waives the right in favor of his wife. Personal exemption is 50,000.00 each and 25,000.00 for each qualified dependent child. 2. For individuals receiving salary and other allowances from one employer only, the tax due is usually equal to tax withheld since the employer is required to compute and withhold the total tax due on the employee's compensation earned during the year, using the annual graduated income tax table, before paying the last salary for the year. The above illustration however did not assume the annualized withholding tax to show the effects of withholding tax on tax due. 3. The above individual tax calculation also applies to all residents and citizens. It is also applicable to income of non-resident aliens engaged in trade or business in the Philippines for their Philippine-source income, except that personal and additional exemptions are subject to the rule of reciprocity.

Who are not required to file income tax returns? The following individuals, on the other hand, are not required to file an income tax return: a) An individual whose gross income does not exceed his total personal and additional exemptions. However, Filipino citizens engaged in business or in the practice of their profession within or without are required to file their income tax return as well as aliens engaged in business or in the practice of profession within the Philippines. b) An individual with respect to income derived from an employer-employee relationship, where the income thereon has been correctly withheld by the employer as the withholding agent. However, an individual whose pure compensation income derived within the Philippines exceeds Sixty Thousand (60,000.00) pesos shall file an income tax return. Further, an employee having two or more concurrent employers shall also file an income tax return. 

An individual whose income has been subjected to final withholding tax;



All other individuals who may be exempted by law from filing a return.

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Where and When to File the Return Generally, the return shall be filed in the city or municipality where the taxpayer has his legal residence or place of business in the Philippines. The same must be filed with any of the following: 1. An authorized agent bank; 2. The Revenue District Officer; 3. Collection Agent or 4. Duly Authorized Treasurer of the Municipality or City 5. With the Commissioner in case the taxpayer has no legal residence or place of business in the Philippines. In case of taxpayers whose income arises from an employer-employee relationship or those engaged in trade or business or in the exercise of profession in the Philippines, the Annual Income tax return must be filed on or before the fifteenth (15th) day of April of each year covering the income for the preceding year. The individual taxpayer who is engaged in trade or business or practice of profession is also required to file his quarterly income tax return as explained in Chapter III. In case of individuals subject to capital gains tax, the return must be filed: a) within thirty days (30) after the sale of stocks not traded through a local stock exchange and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; b) within thirty days from the sale or disposition of real property following each sale or transaction. When should taxes be paid? In general, the tax is to be paid at the time the return is to be filed. Where the tax due is in excess of Two Thousand (2,000.00) pesos, the individual taxpayer may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed, the whole of the unpaid tax becomes due and payable, together with the penalties and delinquency.

313

Below are the Compliance Requirements found in the BIR Website Who Are Required To File Income Tax Returns? 1.

Individuals 

   

 

Resident citizens receiving income from sources within or outside the Philippines o employees deriving purely compensation income from 2 or more employers, concurrently or successively at anytime during the taxable year o employees deriving purely compensation income regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return o self-employed individuals receiving income from the conduct of trade or business and/or practice of profession o individuals deriving mixed income, i.e., compensation income and income from the conduct of trade or business and/or practice of profession o individuals deriving other non-business, non-professional related income in addition to compensation income not otherwise subject to a final tax o individuals receiving purely compensation income from a single employer, although the income of which has been correctly withheld, but whose spouse is not entitled to substituted filing o marginal income earners Non-resident citizens receiving income from sources within the Philippines Aliens, whether resident or not, receiving income from sources within the Philippines Estates and trusts engaged in trade or business Annual Income Tax For Individuals Earning Purely Compensation Income (Including Non-Business/Non-Profession Related Income) and For Marginal Income Earners Tax Form BIR Form 1700 - Annual Income Tax Return (For Individual Earning Purely Compensation Income Including Non-Business/Non-Profession Related Income)

Documentary Requirements     

1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316) 2. Waiver of the Husband‘s right to claim additional exemption, if applicable 3. Duly approved Tax Debit Memo, if applicable 4. Proof of Foreign Tax Credits, if applicable 5. Income Tax Return previously filed and proof of payment, if filing an amended return for the same taxable year

Procedures  

1. Fill-up BIR Form 1700 in triplicate. 2. If there is payment:

314

Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District Office where you are registered and present the duly accomplished BIR Form 1700, together with the required attachments and your payment. In places where there are no AABs, proceed to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer located within the Revenue District Office where you are registered and present the duly accomplished BIR Form 1700, together with the required attachments and your payment. Receive your copy of the duly stamped and validated form from the teller of the AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer. 

3. For "No Payment" Returns including refundable returns, and for tax returns qualified for second installment: Proceed to the Revenue District Office where you are registered or to any Tax Filing Center established by the BIR and present the duly accomplished BIR Form 1700, together with the required attachments. Receive your copy of the duly stamped and validated form from the RDO/Tax Filing Center representative.

Deadline 

On or before the 15th day of April of each year covering taxable income for the preceding taxable year

A. Annual Income Tax for Self-Employed Individuals, Estates and Trusts (Including Those with Mixed Income, i.e., Compensation Income and Income from Business and/or Practice of Profession) Tax Form 

BIR Form 1701 - Annual Income Tax Return (For Self-Employed Individuals, Estates and Trusts Including Those With Both Business and Compensation Income)

Documentary Requirements 1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316), if applicable 2. Certificate of Income Payments not Subjected to Withholding Tax (BIR Form 2304) if applicable 3. Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable 4. Waiver of the Husband‘s right to claim additional exemption, if applicable

315

5. Duly approved Tax Debit Memo, if applicable 6. Proof of Foreign Tax Credits, if applicable 7. Income Tax Return previously filed and proof of payment, if filing an amended return for the same year 8. Account Information Form (AIF) or the Certificate of the independent CPA with Audited Financial Statements if the gross quarterly sales, earnings, receipts or output exceed P 150,000.00 9. Proof of prior year‘s excess tax credits, if applicable Procedures 1. Fill-up BIR Form 1701 in triplicate copies. 2. If there is payment: • Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District Office where you are registered and present the duly accomplished BIR Form 1701, together with the required attachments and your payment. • In places where there are no AABs, proceed to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer located within the Revenue District Office where you are registered and present the duly accomplished BIR Form 1701, together with the required attachments and your payment. • Receive your copy of the duly stamped and validated form from the teller of the AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer 3. For "No Payment" including refundable/ creditable returns, returns with excess tax credit carry over, and returns qualified for second installment: • Proceed to the Revenue District Office where you are registered or to any established Tax Filing Centers established by the BIR and present the duly accomplished BIR Form 1701, together with the required attachments. • Receive your copy of the duly stamped and validated form from the RDO/Tax Filing Center representative. Deadline 

Final Adjustment Return or Annual Income Tax Return - On or before the 15th day of April of each year covering income for the preceding year

316

B. Account Information Form For Self-Employed Individuals, Estates And Trusts (Including Those With Mixed Income , I.E., Compensation Income and Income from Business and/or Practice of Profession) Tax Form 

BIR Form 1701 AIF - Account Information Form For Self-Employed Individuals, Estates and Trusts (Including those with Mixed Income, i.e., Compensation Income and Income from Business and/or Practice of Profession) and Estates and Trusts (Engaged in Trade or Business)



NOTE: Pursuant to Revenue Memorandum Circular No. 6 – 2001, corporations, companies or persons whose gross quarterly sales, earnings, receipts or output exceed P 150,000.00 may not accomplish this form. In lieu thereof, they may file their annual income tax returns accompanied by balance sheets, profit and loss statement, schedules listing income-producing properties and the corresponding income therefrom, and other relevant statements duly certified by an independent CPA.

Documentary Requirements 

None

Procedures 1. Accomplish BIR Form 1701 AIF in triplicate. 2. Attach the same to BIR Form 1701. Deadline 

Same deadline as BIR Form 1701 - On or before the 15th day of April of each year covering taxable income for the preceding year

C. Quarterly Income Tax For Self-Employed Individuals, Estates And Trusts (Including Those With Mixed Income, I.E., Compensation Income and Income from Business and/or Practice of Profession) Tax Form 

BIR Form 1701Q - Quarterly Income Tax Return For Self-Employed Individuals, Estates and Trusts (Including those with both Business and Compensation Income)

Documentary Requirements 1. Certificate of Income Tax Withheld at Source (BIR Form 2307), if applicable

317

2. Certificate of Income Payments not Subjected to Withholding Tax (BIR Form 2304) if applicable 3. Duly approved Tax Debit Memo, if applicable 4. Previously filed return, if an amended return is filed for the same quarter Procedures 1. Fill-up BIR Form 1701Q in triplicate. 2. If there is payment:  



Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District Office where you registered and present the duly accomplished BIR Form 1701 Q, together with the required attachments and your payment. In places where there are no AABs, proceed to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer located within the Revenue District Office where you are registered and present the duly accomplished BIR Form 1701Q, together with the required attachments and your payment. Receive your copy of the duly stamped and validated form from the teller of the AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer.

3. For "No Payment" Returns including refundable/ creditable returns with excess tax credit carry over and returns qualified for second installment: 

Proceed to the Revenue District Office where you are registered or to any Tax Filing Center established by the BIR and present the duly accomplished BIR Form 1701Q, together with the required attachments.

Receive your copy of the duly stamped and validated form from the RDO/Tax Filing Center representative. Deadlines   

• April 15 – for the first quarter • August 15 – for the second quarter • November 15 – for the third quarter

End of Discussion-see attachments in the following pages

318

APPENDIX REVENUE REGIONS AND REVENUE DISTRICT OFFICES OF THE PHILIPPINES

Attachment No. 1 REVENUE REGIONS IN THE PHILIPPINES Revenue Region No. 1 CALASIAO Revenue Region No. 2 CORDILLERA ADMINISTRATIVE REGION Revenue Region No. 3 TUGUEGARAO CITY Revenue Region No. 4 CITY OF SAN FERNANDO, PAMPANGA Revenue Region No. 5 CALOOCAN CITY Revenue Region No. 6 CITY OF MANILA Revenue Region No. 7 QUEZON CITY Revenue Region No. 8 MAKATI CITY Revenue Region No. 9A CaBaMiRo (Cavite-Batangas-Mindoro-Romblon) Revenue Region No. 9B LaQueMar (Laguna-Quezon-Marinduque) Revenue Region No. 10 LEGAZPI CITY Revenue Region No. 11 ILOILO CITY Revenue Region No. 12 NEGROS ISLAND REGION Revenue Region No. 13 CEBU CITY Revenue Region No. 14 TACLOBAN CITY Revenue Region No. 15 ZAMBOANGA CITY Revenue Region No. 16 CAGAYAN DE ORO CITY Revenue Region No. 17 BUTUAN CITY Revenue Region No. 18 KORONADAL CITY Revenue Region No. 19 DAVAO CITY

319

Attachment no. 2 REVENUE DISTRICT OFFICES IN THE PHILIPPINES RDO CODE

DISTRICT OFFICE

001

Laoag, Ilocos Norte

002

Vigan, Ilocos Sur

003

San Fernando, La Union

004

Calasiao, West Pangasinan

005

Alaminos, West Pangasinan

006

Urdaneta, East Pangasinan

007

Bangued, Abra

008

Baguio City

009

La Trinidad, Benguet

010

Bontoc, Mt. Province

011

Tabuk, Kalinga-Apayao

012

Lagawe, Ifugao

013

Tuguegarao, Cagayan

014

Bayombong, Nueva Vizcaya

015

Naguilan, Isabela

016

Cabarroguis, Quirino

17A

Tarlac, Tarlac City

17B

Paniqui, Tarlac

018

Olongapo City

019

Subic Bay Metropolitan Authority

020

Balanga, Bataan

21A

North Pampanga

21B

South Pampanga

320

022

Baler, Aurora

23A

North Nueva Ecija

23B

South Nueva Ecija

024

Valenzuela City

25A

Plaridel, Bulacan

25B

Marilao, Bulacan

026

Malabon, Navotas

027

Caloocan City

028

Novaliches

029

San Nicolas, Tondo

030

Binondo

031

Sta. Cruz

032

Quiapo-Sampaloc-Sta. Mesa-San Miguel

033

Intramuros-Ermita-Malate

034

Paco-Pandacan-Sta. Ana-San Andres

035

Romblon

036

Puerto Princesa

037

San Jose, Occidental Mindoro

038

North Quezon City

039

South Quezon City

040

Cubao

041

Mandaluyong

042

San Juan

43A

East Pasig

43B

West Pasig

044

Taguig-Pateros

321

045

Marikina

046

Cainta/Taytay

047

East Makati

048

West Makati

049

North Makati

050

South Makati

051

Pasay City

052

Paranaque

53A

Las Pinas City

53B

Muntinlupa City

54A

Trece Martirez City, South Cavite

54B

Bacoor, North Cavite

055

San Pablo City

056

Calamba, Laguna

057

Binan, Laguna

058

Batangas City

059

Lipa City

060

Lucena City

061

Gumaca, Quezon

062

Boac, Marinduque

063

Calapan, Oriental Mindoro

064

Talisay, Camarines Norte

065

Naga City

066

Iriga City

067

Legaspi City

068

Sorsogon, Sorsogon

322

069

Virac, Catanduanes

070

Masbate, Masbate

071

Kalibo, Aklan

072

Roxas City

073

San Jose, Antique

074

Iloilo City

075

Zarraga, Iloilo City

076

Victorias City, Negros Occidental

077

Bacolod City

078

Binalbagan, Negros Occidental

079

Dumaguete City

080

Mandaue City

081

Cebu City North

082

Cebu City South

083

Talisay, Cebu

084

Tagbilaran City

085

Catarman, Northern Samar

086

Borongan, Eastern Samar

087

Catbalogan, Western

088

Tacloban City

089

Ormoc City

090

Maasin, Southern Leyte

091

Dipolog City

092

Pagadian City, Zamboanga del Sur

93A

Zamboanga City

93B

Zamboanga Sibugay

323

094

Isabela, Basilan

095

Jolo, Sulu

096

Bongao, Tawi-Tawi

097

Gingoog City

098

Cagayan de Oro City

099

Malaybalay, Bukidnon

100

Ozamis City

101

Iligan City

102

Marawi City

103

Butuan City

104

Bayugan, Agusan del Sur

105

Surigao City

106

Tandag, Surigao del Sur

107

Cotabato City

108

Kidapawan, North Cotabato

109

Tacurong, Sultan Kudarat

110

General Santos City

111

Koronadal, South Cotabato

112

Tagum, Davao del Norte

113A West Davao City 113B East Davao City 114

Mati, Davao Oriental

115

Digos, Davao del Sur

122

Large Taxpayers Division - Makati

123

Large Taxpayers Division – Cebu

324