Llamado - Income Taxation - Expanded
Llamado - Income Taxation - Expanded
Llamado - Income Taxation - Expanded
If the
change is from one fiscal year to another fiscal year, a
References: 1. Mamalateo, Victorino C., Philippine separate final or adjustment return shall be made for
Income Tax. Manila: Rex Bookstore, Inc. 2010 Edition. the period between the close of the former fiscal year
and the date designated as the close of the new fiscal
2. National Internal Revenue Code of 1997.
year.
Mandaluyong City: National Book Store, July 2009
Edition. (B) Income Computed on Basis of Short Period .
Where a separate final or adjustment return is made
I. INTRODUCTION (Mamalateo, pp. 1-10)
under Subsection (A) on account of a change in the
A. Income Tax Systems accounting period, and in all other cases where a
separate final or adjustment return is required or
1. Global Tax System permitted by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
2. Schedular Tax System
Commissioner, to be made for a fractional part of a year,
3. Semi-schedular or semi-global tax system then the income shall be computed on the basis of the
period for which separate final or adjustment return is
B. Features of the Philippine Income Tax Law made.
1. Direct tax
C. Criteria in Imposing Philipppine Income tax Madrigal v. Rafferty (38 Phil 414)
1. Calendar Year
SECTION 47. Final or Adjustment Returns for a Period of Secs. 43 45, 50, NIRC
Less than Twelve (12) Months.
SECTION 43. General Rule. The taxable income shall
(A) Returns for Short Period Resulting from Change of be computed upon the basis of the taxpayer's annual
Accounting Period. If a taxpayer, other than an accounting period (fiscal year or calendar year, as the
individual, with the approval of the Commissioner, case may be) in accordance with the method of
changes the basis of computing net income from fiscal accounting regularly employed in keeping the books of
year to calendar year, a separate final or adjustment such taxpayer; but if no such method of accounting has
return shall be made for the period between the close of been so employed, or if the method employed does not
the last fiscal year for which return was made and the clearly reflect the income, the computation shall be
following December 31. If the change is from calendar made in accordance with such method as in the opinion
year to fiscal year, a separate final or adjustment return of the Commissioner clearly reflects the income. If the
shall be made for the period between the close of the taxpayer's annual accounting period is other than a
last calendar year for which return was made and the fiscal year, as defined in Section 22(Q), or if the taxpayer
has no annual accounting period, or does not keep 2. Claim of Right doctrine or Doctrine of ownership,
books, or if the taxpayer is an individual, the taxable command, or control
income shall be computed on the basis of the calendar
year. 3. Economic benefit test / Doctrine of proprietary
interest
SECTION 44. Period in which Items of Gross Income
Included . The amount of all items of gross income 4. Severance Test
shall be included in the gross income for the taxable
14
year in which received by the taxpayer, unless, under
methods of accounting permitted under Section 43, any
such amounts are to be properly accounted for as of a
different period. In the case of the death of a taxpayer,
there shall be included in computing taxable income for
III. KINDS OF TAXPAYERS
the taxable period in which falls the date of his death,
amounts accrued up to the date of his death if not A. Individual Taxpayers (Mamalateo, pp. 21-37)
otherwise properly includible in respect of such period
or a prior period. 1. Citizens
SECTION 45. Period for which Deductions and Credits a. Resident citizens
Taken . The deductions provided for in this Title shall
be taken for the taxable year in which 'paid or accrued' b. Non-resident citizens
or 'paid or incurred', dependent upon the method of
"(1) A citizen of the Philippines who establishes
accounting upon the basis of which the net income is
to the satisfaction of the Commissioner the fact
computed, unless in order to clearly reflect the income,
of his physical presence abroad with a definite
the deductions should be taken as of a different period.
intention to reside therein.
In the case of the death of a taxpayer, there shall be
allowed as deductions for the taxable period in which "(2) A citizen of the Philippines who leaves the
falls the date of his death, amounts accrued up to the Philippines during the taxable year to reside
date of his death if not otherwise properly allowable in abroad, either as an immigrant or for
respect of such per employment on a permanent basis.
SECTION 50. Allocation of Income and Deductions. In "(3) A citizen of the Philippines who works and
the case of two or more organizations, trades or derives income from abroad and whose
businesses (whether or not incorporated and whether or employment thereat requires him to be
not organized in the Philippines) owned or controlled physically present abroad most of the time
directly or indirectly by the same interests, the during the taxable year.
Commissioner is authorized to distribute, apportion or
allocate gross income or deductions between or among "(4) A citizen who has been previously
such organization, trade or business, if he determines considered as nonresident citizen and who
that such distribution, apportionment or allocation is arrives in the Philippines at any time during the
necessary in order to prevent evasion of taxes or clearly taxable year to reside permanently in the
to reflect the income of any such organization, trade or Philippines shall likewise be treated as a
business.iod or a prior period. nonresident 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.
2. Aliens
Sec. 44, RR 2
a. Resident aliens
c. Distinction between tax accounting and financial
accounting b. Non-resident aliens
C. Tests in determining income (Mamalateo, pp. 79-81) i. 180 day rule: physically present abroad most of the
time during the taxable year
1. Realization Test
ii. NRA engaged in trade or business in the Philippines
ii. Professional fee of GPP exempt from expanded (11) Partner's distributive share from the net
withholding tax income of the general professional partnership.
(4) Interests;
Sec. 32(A), NIRC
(5) Rents;
4. Professional Income
(6) Royalties;
5. Income from dealings in property (Mamalateo, pp.
(7) Dividends; 302 333)
Sec. 32 (A, 3) NIRC such sales or exchanges. If a bank or trust
company incorporated under the laws of the
Rodriguez v. Collector (28 SCRA 1119) Philippines, a substantial part of whose
business is the receipt of deposits, sells any
Gonzales v. CTA (14 SCRA 71)
bond, debenture, note, or certificate or other
Gutierrez v. CTA (101 Phil 173) evidence of indebtedness issued by any
corporation (including one issued by a
i. Type of properties government or political subdivision thereof),
with interest coupons or in registered form, any
aa. ordinary assets
loss resulting from such sale shall not be subject
bb. capital assets to the foregoing limitation and shall not be
included in determining the applicability of
What is capital asset such limitation to other losses.
(1) One hundred percent (100%) if the ii. Types of gains from dealings in property
capital asset has been held for not more
than twelve (12) months; and aa. Ordinary income v. capital gain
(2) Fifty percent (50%) if the capital Sec. 39, NIRC and Sec. 22 (Z), NIRC
asset has been held for more than
twelve (12) months; SECTION 39. Capital Gains and Losses.
(C) Limitation on Capital Losses. Losses from (A) Definitions. As used in this Title
sales or exchanges of capital assets shall be
(1) Capital Assets. The term 'capital
allowed only to the extent of the gains from
assets' means property held by the
taxpayer (whether or not connected (E) Retirement of Bonds, Etc. For purposes of
with his trade or business), but does not this Title, amounts received by the holder upon
include stock in trade of the taxpayer or the retirement of bonds, debentures, notes or
other property of a kind which would certificates
properly be included in the inventory
of the taxpayer if on hand at the close SECTION 22. Definitions. When used in this Title:
of the taxable year, or property held by
(Z) The term 'ordinary income' includes any
the taxpayer primarily for sale to
gain from the sale or exchange of property
customers in the ordinary course of his
which is not a capital asset or property
trade or business, or property used in
described in Section 39(A)(1). Any gain from the
the trade or business, of a character
sale or exchange of property which is treated or
which is subject to the allowance for
considered, under other provisions of this Title,
depreciation provided in Subsection (F)
as 'ordinary income' shall be treated as gain
of Section 34; or real property used in
from the sale or exchange of property which is
trade or business of the taxpayer.
not a capital asset as defined in Section 39(A)(1).
(2) Net Capital Gain. The term 'net The term 'ordinary loss' includes any loss from
capital gain' means the excess of the the sale or exchange of property which is not a
gains from sales or exchanges of capital capital asset. Any loss from the sale or exchange
assets over the losses from such sales or of property which is treated or considered,
exchanges. under other provisions of this Title, as 'ordinary
loss' shall be treated as loss from the sale or
(3) Net Capital Loss. The term 'net exchange of property which is not a capital
capital loss' means the excess of the asset.
losses from sales or exchanges of
capital assets over the gains from such
sales or exchanges.
(1) Interest from Deposits and Yield or (5) Capital Gains Realized from the Sale,
any other Monetary Benefit from Exchange or Disposition of Lands
Deposit Substitutes and from Trust and/or Buildings. A final tax of six
Funds and Similar Arrangements, and percent (6%) is hereby imposed on the
Royalties. A final tax at the rate of gain presumed to have been realized
on the sale, exchange or disposition of of the amount realized therefrom over the basis or
lands and/or buildings which are not adjusted basis for determining gain, and the loss shall be
actually used in the business of a the excess of the basis or adjusted basis for determining
corporation and are treated as capital loss over the amount realized. The amount realized
assets, based on the gross selling price from the sale or other disposition of property shall be
or fair market value as determined in the sum of money received plus the fair market value of
the property (other than money) received;
iv. Income from dealings in capital asset subject to Sec. 59, NIRC
special rules
Commissioner v. Wander Phils. (160 SCRA 573)
aa. Dealings in real property situated in the Philippines
ee. Disguised dividend
Rev. Regs. 07-03
Sec. 55, RR 2
Sec. 32(A)(6)
Rev. Regs. 6-2008
Sec. 42(A)(4)
shares listed and traded in the stock exchange
d. Rental income
shares not listed and traded in the stock exchange
D. Situs/Sources of Income (Mamalateo, pp. 64-74) a. Income derived by the government or its political
subdivision from the exercise of any essential
1. Meaning of situs of income governmental function
2. Classification of income as to source
Com. V. Mitsubishi Metal (181 SCRA 214) VI. COSTS, DEDUCTIONS AND PERSONAL
EXEMPTIONS (Mamalateo, pp. 178-277)
h. Interest income from long term deposit or investment
A. Deductions from Gross Income, General Rules (Sec 34)
Note: Exemption applies only to individual taxpayers 3. Deductions must be supported by adequate receipts or
except non-resident alien not engaged in trade or invoices (except for optional standard deduction)
business. They are taxed at 25%.
B. Return of Capital (Cost of Sales/Services)
For corporate taxpayers no exemption
1. Sale of inventory of goods by manufacturers and
i. Retirement benefits, pensions, gratuities, etc. dealers of properties
ii. Separation pay for causes beyond control of employee 1. Business expenses (Sec. 65, RR 2)
j. Winnings/Prizes
CIR v. General Foods (Phils.), Inc. (401 SCRA 545)
i. Philippine Charity Sweepstakes and lotto winnings
Paid and incurred during taxable year
iii. Prizes and awards / religious / charitable / scientific / Sec. 34(A), NIRC
artistic / literary
Secs. 70-73 RR2
e. Rentals and/or other payments for use or possession d. Treatment of special assessment
of property (Sec. 74, RR 2)
e. Tax Credit v. Deduction
f. Repairs and Maintenance (Sec. 68, RR 2)
cc. Interest expense incurred to acquire property for use Collector v. Goodrich (21 SCRA 1336)
in trade/business/profession
PRC v. CA (256 SCRA 667)
3. Taxes
6. Depreciation
Sec. 110-115, RR2 The following may claim OSD in lieu of itemized
deductions
a. Definition
a. Individuals
b. Requisites for deductibility
i. Resident Citizen
c. Methods of computing depreciation allowance
ii. Non-resident citizen
i. Straight-line method
iii. Resident Alien
ii. Declining-balance method
iv. Estates and Trusts
iii. Sum-of-the-years-digit method
b. Corporations
a. Definition
a. Definition