13 - TAXATION LAW Flashcards

Question

Explain the concept of income from whatever source derived

Answer 1

The words "income from any source whatever" disclose a legislative policy to include all income not expressly exempted within the class of taxable income under the law. [CIR v. BOAC] The definition of "gross income" is broad enough to include all passive incomes subject to specific rates of final taxes. [CIR v. PAL]

Answer 2

NIRC Sec. 31. Taxable Income Defined - The term 'taxable income' means the pertinent items of gross income specified in this Code, less deductions, if any authorized for such types of income by this Code or other special laws.

Answer 3

Sources of income subject to tax are: 1. Compensation Income 2. Fringe Benefits 3. Professional Income 4. Income from Business 5. Income from Dealing in Property 6. Passive Investment Income 7. Annuities, Proceeds from Life Insurance or Other Types 8. Prizes and Awards 9. Pensions, Retirement Benefit, Separation Pay 10. Capital Assets vs. Ordinary Assets - Sections 39 to 40

Answer 4

Compensation INcome is all remuneration for services performed by an employee for his or her employer under an EE-ER relationship, unless specifically excluded by the NIRC. The name by which the remuneration for services is designated is immaterial. Likewise, the basis upon which the remuneration is paid, ie. piece-work, percentage of profits, or paid hourly, daily, weekly, monthly or annually is immaterial. Generally compensation is paid in money but it may be paid in kind. In case it is paid in kind, the FMV of the thing taken in payment is the amount to be included as compensation income.

Answer 5

Other forms of compensation income 1. Living quarters or needs 2. Facilities and privileges of relatively small value 3. Tips and gratuities 4. Pensions, retirement and separation pay 5. Fixed or variable transprotation, representation and other allowances 6. Vacation and sick leave allowances NOTE: there are general rules and exceptions as to when these forms of compensation are considered taxable

Answer 6

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 in the Code). NOTE: Taxes on fringe benefits for rank-and-file employees are not subject to income tax

Answer 7

When the fringe benefit is required by the nature of, or necessary to the trae, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer, the same is not subject to tax. E.g. allowances for rental and utilities granted by a corp to its pres for hte latter to be lodgd in a spacious house to be able to entertain guests is for the employer's convenience considering the president's high executive position and social standing.

Answer 8

Tax Base for FBT is the grossed-up monetary value which is computed by dividing the value of the fringe benefit with 65% or .65. Tax Rate is 35%. Thus once the grossed-up monetary value of the FBT is determined, we multiply 35% to it to get the fringe benefit tax.

Answer 9

FBT is treated as a final income tax on the employee; hence it is withheld and paid by the employer on a CALENDAR QUARTERLY BASIS. The ER is a mere withholding agent.

Answer 10

The ff. are excluded from fringe benefit tax: 1. Fringe benefits which are authorized and exempted from tax under special laws 2. Contribution 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 promulgated by the SOF upon reco by the CIR

Answer 11

de minimis benefits are facilities and privileges of relatively small value furnished or offered by an employer to his employees. These are not considered compensation subject to income tax (and consequently withholding tax) if these are offered or furnished by the employer as means of promoting health, goodwill, contentment, or efficiency of the employees

Answer 12

Income derived by professionals from the practice of their respective profession without the presence of an EE-ER relationship is considered professional income and included in gross income. A professional is a person formally certified by a professional body belonging to a specific profession by virtue of having completed a required examination or course of studies and/or practice, whose competence can only be measured against an established set of standards. Professional also includes a person who engages in some art or sport for money, as a means of livelihood rather than as a hobby. E.g. doctors, lawyers, artists, singers, athletes, etc.

Answer 13

In the case of manufacturing, merchandising, or mining business, gross income means the Total Sales Less: Cost of Goods Sold Add: Any Income from other sources =GROSS INCOME In determining gross income, do not subtract depreciation, depletion, selling expenses or losses, or for items ordinarily used in computing the COGS.

Answer 14

Income by self-employed individuals is considered as business income. A self-employed individual is a sole proprietor or an independent contractor who reports income earned from self-employment. S/he controls who s/he works for, how the work is done, and when it is done.

Answer 15

For income from dealings in property, it is essential to determine first whether the property is a capital asset or ordinary asset. The classification of the property will determine the applicable tax.

Answer 16

All assets which are not ordinary assets are capital assets. Under the NIRC, Capital assets are property held by the taxpayer (whether or not connected with his trade or business) but does NOT include: 1. Stock in trade of the taxpayer; 2. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the year; 3. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; 4. Property used in trade or business of a character which is subject to allowance for depreciation; and 5. Real property used in trade or business.

Answer 17

Passive investment income: 1. Interest income 2. Long-term deposit or investment certificate 3. Rent income 4. Dividend Income 5. Royalty Income

Answer 18

1. Debt cancellation in exchange of service - debt cancellation is compensation 2. payment of just compensation in expropriation because it is a sale 3. Taxes which were previously taken as deductions to gross income but which were subsequently refunded or credited shall be included as part of the gross income in the year of receipt to the extent of the income tax benefit of said deduction 4. 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 5. Consequential damages representing loss of earning capacity 6. Income from illegal sources

Answer 19

All taxpayers may avail of exclusions as the NIRC did not limit it to any kind of taxpayer

Answer 20

Exclusions - the removal of otherwise taxable items from the reach of taxation. Simply, an item is not included as part of gross income Deductions - subtraction from income for tax purposes, or an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due Tax Credits - It is an amount subtracted directly from one's total tax liability. It is an allowance against the tax itself, or a deduction from what is owed by a taxpayer to the government.

Answer 21

Exclusions from gross income under NIRC: 1. Proceeds from life insurance 2. Amount received as return of premium 3. Gifts, bequests, and devises because they are not products of capital or industry and are subjected to donor's tax 4. Compensation for injuries or sickness 5. Income exempt from treaty 6. Retirement benefits, pensions, gratuities, etc. 7. Miscellaneous items

Answer 22

1. income received by foreign entities owned, established, or financed by foreign governments, from investment in loans, stock, bonds, or other domestic securities 2. income derived from any public utility or exercise of governmental function, accruing to the Philippine Government 3. Prizes and awards for recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement provided recipient was selected without his participation and there is no return service required; 4. Prizes and awards from sports held in Philippines or abroad and sanctioned by a national sports association; cash incentives granted by Gov't to winning national athletes under RA 10699 are also excluded from gross income 5. 13th month pay and other benefits that do not exceed P90,000 6. GSIS, SSS, PhilHealth contributions from individuals 7. Gains realized from the same or exchange or retirement of bonds, debentures, or other certificate of indebtedness with a maturity of MORE THAN 5 YEARS 8. Gains realized by the investor upon redemption of shares of stock in a mutual fund company 9. Income derived from the following transactions pursuant to RA 7076 - sale of gold to BSP by registered small scale miners and accredited traders ; and sale of gold by registered small scale miners to accredited traders for eventual sale to the BSP

Answer 23

Deductions are allowed in computing taxable income subject to income tax under: 1. Income tax on individuals - Section 24(A) 2. Income Tax on NRA-EITB - Section 25(A) 3. Income Tax on General Professional Partnerships - Section 26 4. Income Tax on Domestic Corporations - Section 27(A) 5. Income Tax on Proprietary Educational Institutions - Section 27(B) 6. Income Tax on GOCCs - Section 27(C); and 7. Income Tax on Resident Foreign Corporations - Section 28(A)(1) Deductions not allowed 1. Taxpayers earning compensation under an employer-employee relationship are not allowed to use any deductions (Sec. 34 NIRC). Thus, only individuals with gross income from business or the practice of professions, and corporations can apply deductions (itemized or optional standard) on their gross incomes.

Answer 24

Deductions are either itemized deductions or optional standard deductions (OSD). Itemized deductions are generally expenses and losses related to trade or business or the practice of a profession. This is the focus of Section 34. Optional Standard Deductions (OSD) is provided under Section 34(L) of the NIRC. It is a deduction allowed in lieu of itemized deduction. Taxable Individuals under Section 24 may avail of OSD of an amount not exceeding 40% of gross sales or gross receipts. EXCEPT non-resident aliens; they cannot avail of OSD. Domestic corporations taxable under Section 27(A) may avail of OSD of an amount not exceeding 40% of gross income Resident Foreign Corporations taxable under Section 28(A)(1) may avail of an amount not exceeding 40% of gross income. Gross income is defined by Section 32 of the NIRC.

Answer 25

The itemized deductions are: 1. Expenses 2. Interest 3. Taxes 4. Losses 5. Bad Debts 6. Depreciation 7. Depletion 8. Charitable and other contributions 9. Research and development 10. Pension Trusts

Answer 26

Kinds of business expenses deductible: 1. Compensation for personal services - note: specific rules for deduction of bonuses as compensation 2. Traveling expense 3. Entertainment, amusement, and recreation (EAR) expenses 4. Advertising and promotional expenses - advertising to stimulate current sales vs. advertising to stimulate future sales 5. Rent expense 6. Cost of materials and Supplies 7. Repairs - must neither add material value to the property or appreciable prolong its useful life because these are capitalizable and should be charged to the depreciation of the useful life of the asset 8. Labor training expenses - certain conditions required for enterprise-based trainees

Answer 27

Requisites: (a) The expense must be ordinary and necessary (b) They must have been paid or incurred during the taxable year (c) They must have been paid or incurred IN CARRYING ON OF THE TRADE OR BUSINESS OF THE TAXPAYER (d) They must be supported by receipts, records or other pertinent papers

Answer 28

Requisites for the deductability of interest expense: 1. There must be indebtedness 2. There should be an interest expense paid or incurred upon such indebtedness 3. The indebtedness must be that of the taxpayer 4. The indebtedness must be connected with the taxpayer's trade, business, or exercise of profession 5. The interest expense must have been paid or incurred be for the taxable year 6. The interest must have been stipulated in writing 7. The interest must be legally due 8. The interest payment arrangement must not be between related parties 9. The interest must not be incurred to finance petroleum operations 10. The interest msut not be treated as capital expenditure

Answer 29

Interested parties mentioned under Section 36B of the NIRC: 1. Between member of a family 2. Between two corporations more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual, except in the case of distributors in liquidation 3. between two corporations more than 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 corporation, a personal holding company or a foreign personal holding company, except in case of distributors in liquidation 4. Between grantor and a fiduciary and beneficiary of such trust 5. Between 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 6. Between fiduciary of a trust and beneficiary of such trust

Answer 30

GR: Taxes paid or incurred within the during the taxable year, whether national or local, shall be allowed as deduction EXCEPT: 1. Philippine income tax 2. Income, war profit, and excess profit taxes imposed by authority of a foreign country provided the taxpayer chooses to take a foreign tax credit 3. Estate and donor's tax 4. Special assessments 5. Taxes on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering 6. Final taxes, being in the nature of income tax 7. Taxes paid on capital assets that are subject to a final tax, such as real property, the disposition of which is subject to the presumed capital gains tax

Answer 31

Tax Benefit Rule - Taxes allowed as deduction from ross income, 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.

Answer 32

TILE-C 1. Payments must be for taxes and not for amounts representing surcharge or penalties incident to delinquency 2. Paid or incurred during the taxable year in connection with taxpayer's trade, business or profession 3. Tax must be imposed by law on and payable by the taxpayer 4. Taxes must not be specifically excluded by law from being deducted from the taxpayer's gross income 5. In the case of NRA-ETB and a RFC, the taxes for which deduction is claimed must be connected with income from sources within the Philippines

Answer 33

No. To be deductible Losses must be: 1. Actually sustained during the taxable year 2. Not compensated by insurance or other forms of indemnity 3. Incurred in trade, profession or business 4. Not claimed as a deduction for estate tax 5. Evidenced by closed and completed transactions

Answer 34

It must be final and ascertained that a loss has occured

Answer 35

Kinds of Losses: 1. Casualty Losses 2. Capital Losses 3. Losses from Wash Sales of Stocks or Securities 4. Wagering Losses 5. Abandonment Losses 6. Net Operating Loss Carry-Over

Answer 36

Taxpayer must file a declaration of loss filed with the BIR within 45 ays after the date of occurrence of casualty or robbery, theft or embezzlement; and Proof of the elements of the loss clamied such as the actual nature and occurence of the event and the amount of loss Casualty Loss is the loss of property connected with trade, business or profession of the taxpayer arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

Answer 37

GR: Losses from sales or exchanges of stock or securities are deductible (NIRC Sec 34(4)(a)) XPN: Loss from wash sales is not deductible XPN to XPN: (a) If the taxpayer is a dealer in securities and the transaction from which the loss resulted was made in the Ordinary course of business of such dealer, the loss from wash sales is deductible in full; (b) Short sales transactions; and (c) Gains in wash sales as such gains are taxable What are wash sales of stocks? A wash sale is a fictitious kind of sale, and is a transaction where there is no genuine change in actual ownership of the shares or securities. Presumption of wash sales: If within a period of 30 days before the sale, and 30 days after the sale (61 days in total), the taxpayer acquires or enters into an option to purchase substantially the same/identical stocks or securities.

Answer 38

Wagering loss shall only be allowed to the extent of the gains from such transactions. What is a wager? A wager is where the parties agree that they shall gain or lose, upon the happening of a uncertain event, in which they have no interest except that arising from the possibility of such gain or loss.

Answer 39

In the event a contract area where petroleum opertions are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as deductions. What if in case a producing well is subsequently abandoned? Its unamortized costs, as well as undepreciated 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

Answer 40

Any individual (including estates and trusts) engaged in trade or business or in the exercise of profession; and Domestic and resident foreign corporations subject / to the regular income tax or preferential tax rates under the nIRC

Answer 41

It is the excess of allowable deduction over gross income of the business in a taxable year

Answer 42

Period of entitlement: 1. The deduction may be claimed for the next three (3) consecutive taxable years immediately following the year of such loss 2. However, due to the COVID-19 pandemic, the business or enteprise which incurred net operating loss for taxable years 2020 and 2021 may be allowed to carry-over the NOL for the next 5 consecutive taxable years immediately following the year of such loss 3. For mines other than oil and gas wells, NOLCO incurred in any of the first 10 years of operation may be carried over as a deduction from taxable income for the next 5 years immediately following the year of such loss

Answer 43

No, if the change of ownership is substantial. NOLCO shall be allowed only if there has been no substantial change in the ownership of the business in that: (a) Not less thatn 75% in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or (b) Not less than 75% of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons.

Answer 44

Principles in the application of NOLCO: 1. NOLCO of the taxpayer shall not be transferred or assigned to another person, whether directly or indirectly, such as, but not limited to, the transfer or assignment thereof through a merger, consolidation or any form of business combination of such taxpayer with another person 2. An individual who claims optional standard deduction (OSD) shall not simultaneously claim deduction of the NOLCO 3. NOLCO shall be availed of on a "first-in, first-out" basis 4. Any person who is exempt from income tax, or enjoying preferential tax treatment pursuant to the provisions of special laws, shall nto be allowed a NOLCO deduction 5. A corporation cannot enjoy the benefit of NOLCO for as long as it is subject to minimum corporate income tax (MCIT) in any taxable year.

13 - TAXATION LAW Flashcards

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