Professional Documents
Culture Documents
GR: employed Alien individual (EXPATS), occupying managerial, technical and supervisory positions; considered as Special employee
therefore, subjected to 15%.
EXC: employed Filipino, 2 conditions must concur:
1. Occupying managerial OR technical positions.
2. No other alien can occupy such position (other than the Filipino)
The employed Filipino has the option to be taxed at either:
1. fifteen percent (15%) of their gross income or
2. at the regular income tax rate on taxable compensation income in accordance with the Tax Code.
Multinational company - 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.
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.
THREE TEST FOR 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:
1) 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;
2) 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);
To determine the compensation received or is due to be received by the employee, you look at the employment contract of
such employee.
o EXAMPLE: An employed Filipino is paid P100,000 per month x 12 months = P1.2 million. Thats already above the
threshold of P975,000. This Filipino employee can now exercise the option of paying the 15% preferential tax rate.
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.
For purposes of determining the compensation threshold under this regulation, gross compensation shall not include
1. retirement and/or separation pay/benefits (whether or not taxable)
2. de minimis benefits.
3) 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.
Must not be a mixed employee, i.e., you should not be earning other income e.g. from you own business.
There is no employer-employee relationship in consultancy.
Take Note:
1) Its the employee, not the employer, who exercises 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.
2) This revenue regulation (No. 11-2010) only mentions Filipinos working in an ROHQ or RHQ. The presumption is, this
regulation does not apply to Filipinos employed in Offshore Banking Units or Petroleum Service Contractors.
Manner of Computation of Tax
At the start of the year or at the start of the employees 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.
Gross compensation includes regular compensation and supplemental compensation.
At the beginning of the year, the expected gross annual taxable compensation which the employee would receive for such
calendar year should be submitted to BIR .
1. Otherwise, you cannot claim the 15% preferential tax rate. Rather, you are subject to the normal income tax rate of
5%-32%.
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
Can Mr. A exercise his option to be taxed at the 15% preferential rate?
Yes, 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.
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. As 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: 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;
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 13th month 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) 13th month pay. However, since his 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.
o You can still avail of the 15% preferential tax rate even if you started working in the middle of the year for as long as
the amount of annual compensation that you will receive in your employment contract is above the threshold of
P975,000
EXAMPLE 5: What if during the year the ROHQ sustained losses such that the salary of the Filipino employee is decreased. Can
he still avail of the 15% preferential tax rate? 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. As 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.
Refer to Revenue Regulation No. 11-2010 for more examples.
V. FRINGE BENEFITS
Definition
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;
ANNUAL VALUE of
BENEFIT
5% of FMV of land
improvements
5% of acquisition
cost excluding
interest
Atty A: Please familiarize the Monetary Value of Benefit for each case.
*Exceptions:
I.
Housing privilege of officials of AFP, Philippine Navy and Philippine Air Force;
- Take note walaI Philippine National Police ha..
II.
A housing unit which is situated inside or within the maximum of fifty (50) meters from the perimeter of the business
premises or factory.
- Exception: wherein the EE is still exempted of the housing privileged of up to 100 meters if ERs factory is hazardous.
III.
Temporary housing for an employee who stays in a housing unit for three (3) months or less.
- Applies to transient EE, like he is in Manila for training etc.
Atty A: take note that other than compensation income is what we call as fringe benefit. Compensation income is subject to 5% to
32% graduated income tax while the fringe benefit is given to managerial or supervisory EE subject to fringe benefit tax of 32%,
which is a final tax.
b. Expense account
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.
1) Business expenses
1. Related to the business of the employer.
2. Common in law firms or auditing firms: Having a lunch meeting with clients.
3. GR: Not subject to the Fringe Benefits Tax, provided:
1. It is duly receipted.
2. The receipt is under the name of the employer.
4
5
6
7
Acquisition Cost
d. Household personnel
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.
GR: Subject to Fringe Benefit Tax
EXC: Not subject to FBT when:
1. these household personnel are already included in the payroll or alphalist of the employer; or
2. provided for the convenience of the employer.
1. this seldom happens because the convenience of the employer rule usually applies to de minimis benefit.
e. Interest on loan at less than market rate
No revenue regulation coming from BIR adopting the 6% per annum as the legal interest. In the essay exams, use the 12%
interest per annum but kindly indicate that the legal interest has already been lowered to 6%.
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.
o Example: X obtains a loan from his employer B with an interest of 8%. The difference between the legal interest of 12%
and the 8% interest paid by X, which is 4%, is subject to Fringe Benefits Tax.
The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation.
This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%) starting January
1, 1998.
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.
f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar
organizations
3.
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. 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.
Not subject to fringe benefit tax
1) Cost of airplane ticket which are:
i. economy class
ii. business class
2) 70% of the cost of first class airplane ticket
Atty A: Take note that premiums on life insurance are excluded from taxation. Do not confuse it with letter j, which contains a
qualification in excess of what the law allows.
3. COMPUTATION OF FRINGE BENEFITS TAX
A final withholding tax paid by the employer.
Take note: Fringe Benefit Tax does not apply to rank and file employees.
a.
b.
c.
i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
j) 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;
To benefit the call center agents, nurses and other employees working on a graveyard shift.
TAKE NOTE: All other benefits given by employers which are not included in the above enumeration shall not be considered as "de
minimis" benefits, and hence, shall be subject to income tax as well as withholding tax on compensation income.
Atty A: The old revenue regulation used to include Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc as de minimis benefit.
These do not form part of the P30k.
What forms part of the P30k are the excesses of the items enumerated above.
Now taxable as ordinary compensation.
Illustration: Employee E is given a sack of Jasmin rice worth P3,000 by Employer R. The excess of P1,500 will be added to the P30k
other benefits threshold. (Any amount in excess of the P30k threshold is now subject to ordinary tax *5%-32%].)
What you will prioritize in your P30k is the 13th month pay. For example, your monthly pay is P20,000, so your annual pay is
P240,000. Your 13th pay - which is more or less equivalent to your 1 month salary provided you work from January to December
P20,000 will now be added to the P30k along with the excess P1,500 rice subsidy. Since the sum does not exceed the P30k, it is not
subject to the ordinary income tax.
Annual Income:
Monthly Income:
Annual rice allowance:
P240,000
P20,000
P3,000
Amount exceeding:
P1,500
13th month pay:
P20,000
Total
P21,500
Not subject to ordinary tax since the amount does not
exceed the P30k threshold.
Annual Income:
Monthly Income:
Annual rice allowance:
P360,000
P30,000
P3,000
Amount exceeding:
P1,500
13th month pay:
P30,000
Total
P31,500
The excess of P1,500 will now be subject to ordinary
tax. This will be added to your annual gross income.
To avoid confusion, add first the 13th month pay to the P30k threshold, then add the excess to the de minimis benefit. Once it
exceeds the P30k threshold, it will now be subject to ordinary income tax.
b. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefits plan
Pertains to the group insurance, group retirement, or group hospitalization benefit plan.
Exempted from fringe benefit tax because there is no direct benefit given to the employee, rather its the group of
employees who will benefit from it.
This is different from Section 32(b) Exclusions from Gross Income, where the employer takes a life insurance on the life of
its key employee, e.g., the president.
o Take note of the two perspective: Premiums as income on the part of the employee and premiums as an expense
on the part of the employer.
o If the beneficiary of the life insurance is the company itself, it is not considered as an income on the part of the
employee. It follows that the employer cannot deduct it as an expense. However, if the beneficiary is the estate or
administrator of the employee, its considered as an income on the part of the employer, and is deductible on the
part of the employer.
o Take note: This is not applicable on Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefits plan because this pertains to group life insurance whereas Section 32(b)
which pertains to specific life insurance.
C. Employers convenience rule
For the benefit to be exempted from the FBT:
1) 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.
Example: Mr. X employs Mr. Y as his driver. Mr. Y is given P5,000 monthly wage, and board and lodging worth P3,000. Is the P3,000
taxable as fringe benefit? It depends. If the employer has his own trade or business, the P3000 is exempted from the FBT, under the
presumption that it is necessary and for the convenience of the employer. However, if the employer is not engage in any trade,
business or profession, the P3,000 is taxable.
d. FB which are authorized or exempted from tax under special laws
2. Business or Professional Income
If the individual taxpayer is also earning business income or professional income, he is allowed to make deductions for his
expenses.
3. Passive Income
There is no active participation on the part of income earner to generate the fund, like interest income on bank deposit.
Subject to final tax and is withheld by the payor.
Payor must at least be registered with the BIR.
o If the payor is from abroad, there is no more withholding. It will simply form part of the ordinary income of the
individual taxpayer.
Types of Passive Income
This is usually an isolated or one-off transaction.
1. Interest from currency deposits, trust funds and deposit substitutes (20%)
2. Royalties (Special royalty: books as well as literary & musical composition) (10%)
Royalties other than those mentioned above are generally subject to 20% final income tax.
For Non-Resident Alien - Not Engaged in Trade or Business (NRA-NETB), they are subject to a flat rate of 25% of the gross
income derived from all sources within the Philippines.
o Those who are transient or sojourners and they stay here FOR 180 DAYS OR LESS.
Payor of the royalty withholds the final tax (10% or 20%, depending on the source of the royalty).
When you pass on some technical knowledge for the manufacture of this microchip or item, it will be subject to royalty fees.
This is usually an isolated or one-off transaction.
o Example: X obtained technical knowledge from Y, a software developer. In consideration thereof, X paid royalty fees to
Y. X, as payor and as the withholding agent of the government, is obliged under the law to withhold 20% of the royalty
fee. If X fails to withhold the amount of the final tax, he cannot claim deductions for royalties and expenses.
However, if the income-earner of a royalty e.g., Belgian Waffle, is really engaged in extending royalties, franchises and other
intangible assets, then it is no longer passive. Its not inactivity. The business itself is extending franchises, it will not be
considered as passive income, therefore no final taxes, therefore the one paying the royalty is not expected to withhold
equivalent to at the end of the year, the payment simply forms part of business income of Belgian Waffle, subject to 5-32%.
When it comes to musical compositions, it would depend on whether the income earner is engaged in selling musical
compositions for a living or it is simply an isolated transaction.
o One-time transaction: it is considered a passive income and the payor is obliged to withhold the final tax equivalent to
10%.
o Engaged in the business of selling musical: income forms part of his business income and the payor is not obliged to
withhold the final tax.
Take note: that the passive income subject to final tax must be an income that is paid by one who can be considered a
withholding agent in the Philippines. Payment in the Philippines, in short. If the one paying who is expected to withhold is not
from here, is abroad, not registered with the BIR, e.g. an NRA-NETB, there can be no withholding. The government of the
Philippines cannot compel this one to withhold. Even if passive income, no withholding because there is no withholding agent.
What the domestic corporation or resident citizen will do is simply declare by itself the royalty fees as part of its ordinary
income.
3. Prizes (exceeding P10,000) (20%)
If the prize does exceed P10,000, it is not subject to final tax. However, it will form part of your gross income subject to 5%-32%
ordinary tax.
If the price exceeds of P10,000, it is now subject to final withholding tax of 20%.
o Example: X won a prize worth P20,000 in a raffle draw and there no statement that it is inclusive of tax, then
automatically 20% of the prize will be withheld by the organizer of the raffle draw as payment of your final tax, unless
the prize came from PCSO or lotto which is exempted from final withholding tax.
Take note: These are not included under this category:
1) 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.
2) 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.
4. Winnings (except from PCSO and lotto) (20%)
o Example: W won a car in a raffle draw and there is a statement that it is exclusive of tax, X will be obliged the organizer
to pay 20% of the value of the car as final withholding tax for this passive income.
5. Interest Income of Foreign Currency Deposit (7.5%)
This only applies to resident citizens and resident aliens.
o Does not apply to NRC (0%) and NRA (0%).
6. Cash and Property Dividends
To Individuals from Domestic Corporations (10%)
o Applies only to resident citizens, non-resident citizen, and alien.
o Non-resident aliens engaged in trade or business who receives these dividends are subject to 20%.
o Non-resident aliens not engaged in trade or business who receives these dividends are subject to a flat rate of 25%
To Domestic Corporations from Another Domestic Corporations (0%)
To Individuals from Foreign Corporations:
a. If the income derived from the Philippines is more than 85%, it is considered as a domestic corporation. You follow the rule
on domestic corporation. (within)
b. If the income derived from the Philippines is more than 50%, its pro rata. Only the income coming from the Philippines will
be subjected to passive income tax rate. (allocation)
c. If the income derived from the Philippines is 50% or less, it is not subject to passive income tax. However, if the earner is a
RC, he will declare such dividend as part of his ordinary income. (without)
7. On capital gains presumed to have been realized from sale, exchange or other dispositions or real property (capital asset) (6%)
8. On capital gains for shares of stocks not traded in the stock exchange
- Not over P100,000 (5%)
- Any amount in excess of P100,000 (10%)
9. 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 (Exempt)
Termination after the fifth year: it is exempt from tax.
o In our previous discussion we know that one of the items excluded form gross income are those gains derived
from or other certificate of indebtedness with a maturity of more than five (5) years.
o This does not include corporate and treasury bonds because these two do not fall under the definition of longterm deposit or investment certificate which refers to certificate of time deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes, investment management accounts and other
investments. (Sec 22 ff of the Tax Code)
Termination before the fifth year: it is subject to tax.
Upon pre-termination before the fifth year, there should be 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%)
Take note: the pre-termination rule above applies only to resident citizens, non-resident citizens, resident alien and non-resident
alien engaged in trade or business. A non-resident alien not engaged in trade or business is subject to a flat rate of 25% tax
regardless of whether or not there was pre-termination.
RC
w/in or w/o
10%
NRC
w/in
10%
RA
w/in
10%
NRA-ETB
w/in
10%
NRA-NETB
w/in
25%
20%
20%
20%
20%
25%
20%
20%
20%
20%
20%
20%
20%
20%
25%
25%
20%
20%
20%
20%
25%
7.5%
--
7.5%
--
--
5%
12%
20%
10%
5%
12%
20%
10%
5%
12%
20%
10%
5%
12%
20%
20%
A non-resident
alien not
engaged in
trade or
business is
subject to a
flat rate of
25% tax
regardless of
whether or not
there was pretermination.
25%
10%
10%
10%
20%
25%
i. Taxation at Source
- Withholding: refers to the means and method of collecting the income taxes.
a)
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.
The withholding agent is the payor, unless the payor is a non-resident alien not engaged in trade or business. In such
cases, it will simply be declared as an ordinary income by the income-earner.
Not deducted from the income tax due.
You will fill up a separate BIR Form.
Example: Passive income like royalties.
Deduct the total amount withheld from the income tax due. Ideally, the income tax due must be equal to the total creditable
withholding tax which results in zero income tax payable.
o If the amount withheld is lesser than the income tax due, it will result in a positive income tax payable.
Withholding Tax on Compensation is the tax withheld from income payments to individuals arising from an employer-employee
relationship.
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.
o Payments to MERALCO.
o Rent payments.
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.
Withholding Tax on GMP Value Added Taxes (GVAT) 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 VAT registered taxpayers/suppliers/payees on account of their purchases of goods and services.
P1,000,000
P1,500,000
P500,000
P1,000,000
P2,000,000
P1,000,000
IV.
All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real property
shall be considered as ordinary assets.
Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own
account as a principal and holding himself out as a full or part-time dealer in real estate.
Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building
houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account
and offering them for sale or lease.
Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a
principal and holding himself out as lessor of real properties being rented out or offered for rent.
Note: Registration with HLURB and HUDCC as a real estate dealer, developer shall be sufficient for a taxpayer to be considered as
habitually engaged in the sale of real estate.
Rules on Transactions involving Real Properties:
a. A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond
the taxpayers control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of
the property change its character previously established as a business property. [Sec 3-a-4 of RR 7-2003]
Example: youre engaged in the real estate business and you purchase a property to be used in your real estate
business. Eventually your business incurred losses and you cease the operation of your business. You were not able
to sell such property. Insofar as that property is concerned, it is considered an ordinary asset.
b. In the case of a taxpayer not engaged in the real estate business, real properties, whether land, building, or other
improvements, which are used or being used or have been previously used in the trade or business of the taxpayer shall be
considered as ordinary assets.
Example: youre into the merchandising business and you purchased a lot for your business and constructed a
building to be used in your business. Insofar as the property and building is concerned, it is considered as an
ordinary asset because real property used in trade or businesses are part of your ordinary asset. If you sell this
properties, you are subject to ordinary tax.
c. In the case of a taxpayer who changed its real estate business to a non-real estate business, real properties held by these
taxpayers shall remain to be treated as ordinary assets.
d. In the case of tax payers who originally registered to be engaged in the real estate business but failed to subsequently
operate, all real properties acquired by them shall continue to be treated as ordinary asset.
e. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly
being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on
abandoned and became idle, shall continue to be treated as ordinary assets. Provided however, that properties classified as
ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are
automatically converted into capital assets upon showing of proof that the same have not been used in business for more
than two (2) years prior to the consummation of the taxable transactions involving said properties.
f. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the
hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined
in accordance with the following rules:
Real property transferred through succession or donation to the heir or donee who is not engaged in the real
estate business with respect to the real property inherited or donated, and who does not subsequently use such
property in trade or business, shall be considered as a capital asset in the hands of the heir or donee.
Real property received as dividend by the stockholders who are not engaged in the real estate business and who
do not subsequently use such real property in trade or business shall be treated as capital assets in the hands of
the recipients even if the corporation which declared the real property dividend is engaged in real estate business.
The real property received in an exchange shall be treated as an ordinary asset in the hands of the case of a taxfree exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate
business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property in
exchange.
In the case of involuntary transfers of real properties, including expropriation or foreclosure sale, the
involuntariness of such sale shall have no effect on the classification of such real property in the hands of the
involuntary seller, either as capital asset or ordinary asset, as the case may be.
c.
Conditionally Exempt from Payment of CGT insofar as the sale of your Principal Residence:
1.
The proceeds of the sale of the Principal Residence have been fully utilized in acquiring or constructing new principal
residence within 18 calendar months from the date of sale or disposition. [includes transferring to a condo unit.]
To prove such property is your principal residence, you may need to obtain a certification from your barangay
chairwoman.
Take note: CGT of 6% FMV or selling price, whichever is higher. Cost is not deducted from the FMV or selling price
when multiplied by the rate of 6% to get the CGT of the capital asset; cost is only deducted if it is classified as
ordinary asset.
The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence
built or acquired;
The Commissioner has been duly notified, through prescribed return, within 30 days from the date of sale or disposition of
the persons intention to avail of the tax exemption
Exemption was availed only once every ten years; and
If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized
from the sale or disposition will be subject to CGT.
The portion not utilized will not subject to CGT.
Determine total proceeds of the sale and the cost of the new principal residence.
In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the
agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or managers check in interestbearing account with an Authorized Agent Bank AAB under an Escrows Agreement between the concerned Revenue
District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest
yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition
thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferors new principal residence within
18 calendar months from the date of sale or disposition. The date of sale or disposition of a property refers to the date of
notarization of the document evidencing the transfer of said property.
2.
3.
4.
5.
6.
f.
Certificate Authorizing Registration CAR is a certification issued by the Commissioner or his duly authorized representative
attesting that the transfer and conveyance of land, building/improvements or shares of stock arising from sale, barter, or
exchange have been reported and the taxes due inclusive of the documentary stamp tax have been fully paid.
When dealing or transferring with capital assets, the CGT should be paid within 30 calendar days from the date of
transfer, e.g. if the Deed of Sale is dated August 1, then by August 30 you should have already paid your CGT,
otherwise you will be subjected to penalties by the BIR.
Upon payment of CGT, a Certificate Authorizing Registration will be issued by the BIR in your favor.
When you transfer a capital asset, you will also be paying the documentary stamp tax.
Summary:
- Fringe Benefit Tax: final withholding tax; withholding agent: employer
- Passive Income Tax: final withholding tax; withholding agent: GR payor EXC: payor is outside the jurisdiction of the PHI.
- Capital Gains Tax: final tax; no withholding; you will file a separate form with the BIR.
5. Other Income
a.
2.
The indebtedness must no longer be collectible after taking legal steps to recover it. (debtor declared
insolvent)
When is the recovery of a bad debt considered a taxable income?
If the bad debts, at the time that it was claimed as an expense/deduction, has benefited the taxpayer by
paying less due to the availment of the expense/deduction, the recovery of that will be considered as an
income to offset the expense that you have claimed prior.
Bad debts recovered are considered as a TAXABLE income when there is a benefit on the recovery.
There is a BENEFIT when the bad debts was previously declared as a DEDUCTION in your income tax return. This is because
by doing so there will be a reduction to your income tax payable.
NOTE: Provided this causes a reduction to you tax payable, if you deducted it and there is no reduction in tax payable there is no
benefit and therefore is not taxable.
WATCH OUT: DOUBTFUL ACCOUNTS are not yet considered as bad debts for taxation purposes.
TAX BENEFIT RULE:
Doctrine: Bad Debts are taxable upon recovery when you have benefited from it previously.
Ex.
You have a collectible collect ka no payment file an action for small claim no reply from the other party no choice but
declare the debt as bad debts expense let say 50K. Being an expense so you declare it as a deduction.
1st situation:
2014
Net Income w/o BDE
Less: Bad Debt Expense
Taxable Income
2015
500K
(50K)
450K
Recovered
50K
2014: you benefited from the bad debt expense to the extent of 50K.
2015: The 50K recovered is taxable because of the tax benefit rule.
2nd situation:
2014
Net Income w/o BDE
Less: Bad Debt Expense
Taxable Income
Recovered
2015
50K
(50K)
-050K
2015: the 50K is taxable income. Because you benefited for not paying taxes of the 50K in 2014.
3rd situation:
2014
Net Income w/o BDE
Less: Bad Debt Expense
Taxable Income
2015
30K
(50K)
-0-
Recovered
50K
2015: Part is taxable. Only the 30K is taxable not the entire 50k. it is because you were only able to avoid paying taxes of the 30k.
4th situation:
2014
Net Loss w/o BDE
Less: Bad Debt Expense
Taxable Income
2015
(10K)
(50K)
-0-
Recovered
50K
2015: its not anymore taxable because there was no benefit from the 2014 taxable income because there was no income but only
loss.
2. LOSS FROM GAMBLING
- take note the law says that:
o LOSS gambling are NOT DEDUCTIBLE but
o GAINS AND INFLOW are considered INCOME because taxation is source blind.
3. TAX REFUNDS
- Tax benefit rule. The tax refund will not be considered an income if you have not previously benefited form it.
- So here if you were able to make a tax deduction from your previous income tax return.
2014
Net Income w/o BDE
Less: Local Tax
Taxable Income
2015
20K
(5K)
15k
5K
2015: the 5k Refund is taxable because under the tax benefit rule you were able to declare the 5k as a deduction to the previous
year. Had you not declared it there would have been a bigger taxable income.
-
NOT ALL TAX REFUND are considered as income. Exception is if it pertains to:
o DONORs TAX,
o INCOME TAX, and
o ESTATE TAX and
o SPECIAL ASSESMENT. (DIES)
this is because this taxes are not made as deductions to your taxable income.
4. COMPENSATION for private property expropriated by the government for public use
5. DAMGES
6. CANCELLATION OF INDEBTEDNESS
-
Involves the lessor and the lesse. Let say example you lease a parcel of land. The LESSEE introduces improvements to the
lease of land like a building and there is an agreement that the building will go to the lessor at the end of the lease then it
will be considered as income taxable on the side of the lessor.
TWO METHODS of recognizing the income in leashold:
o OUTRIGHT METHOD
Upon the commencement of the lease period, it is stated in the lease agreement that any improvements
will go to the lessor at the end of the lease period then outright method is considered as income in SAME
TAXABLE year of the lessor when the improvement is transferred.
Based on the FMV @ the end of the lease term, so at the end of the lease term you add all the annual
rental income less the FMV then automatically deduct it during that year. Outright deduction on the part
of the lessor.
o SPREAD-OUT METHOD
Here you will have to consider the depreciation of the improvements and spread it out over the period
You have to take into consideration here the useful life vs the lease term then spread out to the
remaining.
Ex. THIS WILL NOT COME OUT IN THE BAR EXAM only for discussion purpose.
o SPREAD-OUT METHOD- BUILDING:
FMV of IMPROVEMENT
1M
COST
800k
Useful Life
8 years
Lease Term
5 years
1st Step: GET THE DEPRECIATION: which is COST divided by the USEFUL LIFE (COST/UL)
o 800K/8yrs = 100k
2nd Step: VALUE of the improvement @ end of the lease: which FMV less the ACCUMULATED
DEPRECIATION (total depreciation) for the entire LEASE TERM
o 100k x 5 yrs = 500k accumulated dep. For the lease term
o so 1M(FMV) 500K(Accum. Dep) = 500k
o VALUE @ end of lease term (VALET) = 500k
3rd Step: Spread-out the VALET: VALET divided by the remaining useful life (useful life less lease
term)
o 500k divided by 3 yrs (8-5) = 166,667
o so the lessor will report an annual income of 166,667.
INCOME TAX COMPUTATION
Gross Income
Less: allowable Deductions (Itemized or Optional)
Net Income
Less: Personal & Additional Exemptions
Net Taxable Income
Multiply by Tax Rate (5 to 32%)
Income Tax Due: Tax Withheld (per BIR Form 2316/2304)
Income Tax Payable
P
P
P
P
P
P
P
P
PURE COMPENSATION EARNER NO ITEMIZED DEDUCTION. Only personal and additional income.
DO NOT MEMORIZE THE INCOME TAX TABLE unless you want to TOP the BAR then by all means do so.
the tax withheld stated is the Creditable Withholding Tax and NOT FINAL WITHOLDING TAX.
TAX ON NRA-NETB
o GR: 25% on all his Gross Income
Except:
Capital Gains because if real property 6% ; Shares of stock 5-10%
DEDUCTIONS
1. Pure Compensation Income Earner
1.
Personal Exemption
For single individual or married individual judicially declared as legally separated with no
qualified dependents
For head of the family
P50,000
P50,000
P50,000
The term HEAD OF THE FAMILY is NO LONGER APPLICABLE because is absorbed in the single individual
Regardless of status anyone can claim.
Note: in case of married individuals where only one of the spouse is deriving gross income, only such spouse will be allowed
to claim the personal exemption.
2.
Additional Exemption
For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4 qualified dependents.
if silent: The husband who is deemed the head of the family unless
o he explicitly waives his right in favor of the wife
this is submitted to the employer of the husband and wife.
o he is NOT GAINFULLY EMPLOYED, if husband is self-employed go back to the GR that husband claims.
o in case of LEGAL SEPARATION the spouse who has LEGAL custody of the child or children in case of legally
separated spouses.
Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed
the maximum additional exemptions allowed by the Tax Code.
NRA
RC
NRC
RA
NRA-ETB
NRA NETB
PERSONAL
EXMEPTION
50,000
ADDITIONAL
EXEMPTION
25,000 up to first
4 QD
(subject to
RECIPROCITY RULE)
RECIPROCITY RULE:
o
o
When a Filipino as a NRA in another country, when they are given exemption then residents of that foreign
country will also be given a personal exemption.
Whichever is lower of the two, but the maximum is 50K.
Ex. 1st situation: Chinese go to Phil. Considered as NRA-ETB. Our personal exemption is 50K but in china Filipinos
are given only personal exemption of 30K. so we give that Chinese only 30k as personal exemption.
2nd situation: Chinese go to Phil. Considered as NRA-ETB. Our personal exemption is 50K but in china Filipinos are
given only personal exemption of 200K. so we give that Chinese only 50k as personal exemption.
Change of Status
o
STATUS-AT-THE-END-OF-THE-YEAR RULE
any change in the status of the tax payer within the year it will be interpreted favorably on the tax payer as if the
change of status happened at the end of the year.
Most favorable to the taxpayer.
Ex.
Dependent Child died in the middle of the year. You can still claim him or her as a additional exemption at the end
of the year. As if he or she died at the end of the year.
Dependent Child got married or got GAINFULLY employed in the middle of the year. You can still claim him or her
as a additional exemption at the end of the year. As if he or she died at the end of the year.
Other way around, wife gives birth at the end of the year it is considered as an additional exemption considered as
have been born for the entire year.
If child turn 21 during the year, still a dependent DURING THE YEAR. Considered as a dependent during the year
and turned 21 at the end of the year and therefore cannot be claimed only in the NEXT YEAR.
50K
25K per Q. Dependent up to 4.
Indicate one by one the items of your expenses in your FS supported by proofs.
Standard available to individuals where you can make a deduction of 40% of the Gross Income, EXCEPT: NRA
It is advisable to use OSD if you have a little expenses let say only 20% might as well go with OSD because it will
take out 40% instead of the 20%.
PURPOSE: generally to speed up the audit process because substantiation is not required.
In Business ITR, you file this quarterly. In default, BIR will use ITEMIZED so you have to indicate that you will be
using OSD in your ITR.
Lets say that in the first 2 quarters you have opt to go with OSD. But in the 3rd quarter you realized that your
expenses were more than 40%. Can you change to itemized in the middle of the taxable year? NO. Choosing either
OSD or ITEMIZED is IRREVOCABLE for that taxable year.
NRA
RC
NRC
RA
NRA-ETB
NRA NETB
ITEMIZED
DEDUCTION -need
to substantiate
OSD 40%
-no need
to substantiate
CORPORATIONS
ESTATE
Personal Exemption
20,000
Additional Exemption