Tax Law G. Income Taxation

Question 1

G. Income Taxation
1. Kinds of Taxpayers – Section 23

Answer 1

The Philippines’ National Internal Revenue Code (NIRC) as amended by TRAIN Laws RA 11256 & RA 11346 classifies taxpayers into two main categories:

1. Individual Taxpayers:**

A) Resident citizens:** These are Filipino citizens who are either:
* Physically residing in the Philippines for at least 183 days in a calendar year.
* Not considered residents of any other country even if they stay in the Philippines for less than 183 days.
* Example: John, a Filipino citizen, works abroad but maintains a home in the Philippines and visits his family for 4 months every year. He is considered a resident citizen and must pay taxes on his worldwide income.

B) Non-resident citizens:** These are Filipino citizens who do not meet the residency test. They are only taxed on income sourced from the Philippines.
* Example: Maria, a Filipino citizen, works and resides permanently in Singapore. She is considered a non-resident citizen and would only pay Philippine taxes if she owns a rental property in the Philippines.

C) Resident aliens:** These are foreign citizens who are either:
* Physically residing in the Philippines for at least 183 days in a calendar year.
* Engaged in trade or business in the Philippines.
* Example: David, an American citizen, works for a multinational company in the Philippines for two years. He is considered a resident alien and must pay taxes on his Philippine-sourced income.

D) Non-resident aliens:** These are foreign citizens who do not meet the residency test or engaged in trade or business in the Philippines. They are only taxed on income sourced from the Philippines.
* Example: Li Mei, a Chinese citizen, comes to the Philippines for a two-week vacation. She is considered a non-resident alien and wouldn’t be taxed unless she wins the lottery during her visit.

2. Non-Individual Taxpayers:**

A - Corporations:** These are business entities registered with the Securities and Exchange Commission (SEC). They are taxed on their net income earned globally if they are domestic corporations (registered in the Philippines) or on their Philippine-sourced income if they are foreign corporations.
* Example: Mega Corp, a Philippine corporation, has branches in several countries. They are taxed on their global profits in the Philippines.

B- Partnerships:** These are business arrangements where two or more people pool their money, property, or labor to earn a profit. They are not subject to income tax themselves, but the individual partners are taxed on their share of the partnership’s profits.
* Example: ABC Construction, a partnership between two engineers, is not taxed as a separate entity. However, each partner will pay tax on the income they receive from the partnership.

C- Estates and Trusts:** These are legal entities that hold assets for the benefit of others. They may be subject to income tax depending on the nature of their income and activities.
* Example: Mr. Santos leaves a trust fund for his children in his will. The trust may be taxed on any income it generates from investments.

It’s important to note:
* This is a simplified overview, and there are specific rules for different types of income and taxpayers.
* Consulting a tax professional is recommended to determine your specific tax obligations under the NIRC.

Question 2

G. Income Taxation

3. Situs of Income Taxation – Section 42

Answer 2

Summary of Philippine Income Tax Situs Rules (RA 9160)

The Philippines taxes income based on its source (situs of taxation). Here’s a breakdown of the key points:

A.
Income from Sources WITHIN the Philippines (Taxable):
* Interests: Earned from Philippine sources or residents (individuals or corporations).
* Dividends: From domestic corporations or foreign corporations if at least 50% of their income comes from the Philippines in the past 3 years. The taxable portion is based on the ratio of the foreign corporation’s Philippine income to its total income.
* Services: Compensation for work performed in the Philippines.
* Rentals and Royalties: From property located in the Philippines or for using intellectual property (patents, trademarks, etc.) or other rights within the Philippines.
* This includes technical advice, assistance related to scientific or commercial undertakings, and use of media like films or videotapes.
* Sale of Real Property: Gains from selling real estate located in the Philippines.
Example:** An employee receives a salary for working in a Philippine office - This income is taxable in the Philippines.

B.
Income from Sources OUTSIDE the Philippines (Generally Not Taxable):
* Interests: Earned from non-Philippine sources or non-residents.
* Dividends: From foreign corporations that derive less than 50% of their income from the Philippines in the past 3 years.
* Services: Compensation for work performed outside the Philippines.
* Rentals and Royalties: From property located outside the Philippines or for using intellectual property rights outside the Philippines.
* Sale of Real Property: Gains from selling real estate located outside the Philippines.
Example:
A Filipino freelancer works remotely for a US company - This income is generally not taxable in the Philippines.

C.
Income PARTLY Within and PARTLY Outside (Apportionment):
* Income from selling personal property produced in one country and sold in another needs to be apportioned between the two countries based on formulas set by the government.
* Gains from buying and selling personal property within the same country (Philippines or abroad) are considered sourced entirely from that country.
* An exception is selling shares of stock in a Philippine corporation, which is always considered sourced from the Philippines regardless of where the sale happens.
Example:
A company manufactures furniture in the Philippines and sells it in the US - The profit needs to be apportioned between the Philippines (production) and the US (sale) based on government guidelines.

• Important Notes:
• These are simplified explanations. Refer to RA 9160 and BIR regulations for detailed rules.
• Expenses related to earning income can be deducted from gross income to determine taxable income.
• Special rules may apply to non-resident aliens and foreign corporations.

Question 3

G. Income Taxation
4. Gross Income

a. Definition of Gross income; Concept of Income from Whatever Source Derived
– Section 32

EXPLAIN GROSS INCOME

Answer 3

Understanding Gross Income in the Philippines (RA 9160)

Gross income, in the Philippines, refers to all income you earn, regardless of the source. Here’s a breakdown of the key points:

A.
What’s Included in Gross Income?
* Most earnings: This includes salaries, wages, commissions, fees, business income, property gains, interest, rents, royalties, dividends, and partnership distributions.
* Examples: Your salary, rental income from an apartment you own, profit from selling stocks.

B.
What’s Excluded from Gross Income?
* Specific benefits: This includes life insurance payouts (except interest earned), inheritances, gifts, some health insurance benefits, and government retirement benefits.
* Examples: Life insurance benefit paid to your family after your passing, a gift of money you receive from a friend.

• Important Notes:
• Income earned from foreign sources might be taxable in the Philippines depending on specific rules (see Situs of Income Taxation).
• There are limitations on some exclusions, like the exemption for a maximum amount on 13th month pay and other benefits.
• Refer to RA 9160 and BIR regulations for detailed rules and exceptions.

Question 4

G. Income Taxation
4. Gross Income

(income subject to tax)

b. Sources of Income Subject to Tax – Section 24; R.R. No. 2-98, as
amended
i. Compensation Income
ii. Fringe Benefits
iii. Professional Income
iv. Income from Business
v. Income from Dealings in Property
vi. Passive Investment Income
vii. Annuities, Proceeds from Life Insurance or Other Types
viii. Prizes and Awards
ix. Pensions, Retirement Benefit, Separation Pay
x. Capital Assets vs. Ordinary Assets – Sections 39-40

EXPLAIN 1-9

Answer 4

Here’s a breakdown of the kind of taxes to be paid for each income category in the Philippines, based on BIR regulations:

i. Compensation Income** | Income Tax | Salaries, wages, commissions, bonuses, allowances (taxed according to graduated tax rates)

ii. Fringe Benefits** | Income Tax | Company car, mobile phone plan, health insurance paid by employer (may be subject to FBT on top of regular income tax)

iii. Professional Income** | Income Tax | Earnings from practicing a profession (e.g., doctor, lawyer, engineer) (taxed according to graduated tax rates)

iv. Income from Business** | Income Tax | Profits from sole proprietorships, partnerships, or corporations (taxed according to graduated tax rates for individuals or income tax for corporations)

v. Income from Dealings in Property** | Income Tax (Capital Gains Tax may apply) | Profits from selling real estate, stocks, or other capital assets (regular income tax applies; capital gains tax may be imposed on the net gain depending on the asset type and holding period)

vi. Passive Investment Income** | Income Tax | Dividends from stocks, interest on savings accounts, rental income from properties (taxed according to regular income tax rates)

vii. Annuities, Proceeds from Life Insurance (except interest)** | Income Tax (may be exempt) | Regular pay-outs from retirement plans, life insurance benefit pay-out to beneficiaries (generally exempt from income tax; interest earned on the proceeds might be taxable)

viii. Prizes and Awards (with exceptions)** | Income Tax | Winnings from contests, raffles, or games of chance (may be exempt if for recognition of achievement and no future services required; otherwise, taxed as regular income)

ix. Pensions, Retirement Benefits, Separation Pay (with exceptions)** | Income Tax (may be exempt) | Monthly pensions from SSS, GSIS, or private companies, retirement packages, separation pay upon leaving a job (may be exempt up to a certain amount; excess amount taxed as regular income)

Note: This is a general overview, and specific tax rates or exemptions might vary depending on the details of each income type. It’s always recommended to consult a tax professional for personalized advice.

Question 5

G. Income Taxation
4. Gross Income

c. Exclusions from Gross Income – Section 32(B)

Answer 5

Exclusions from Gross Income under Section 32(B) of the Philippine Tax Code

The Philippine tax code exempts certain types of income from taxation. Here’s a summary of the key exclusions under Section 32(B) with examples:

1. Life Insurance Proceeds:
   Generally, the payout received by beneficiaries upon the death of the insured is exempt. However, interest earned on these proceeds is taxable.
   Example:
   If you receive Php 1 million as life insurance payout after your parent’s passing, it’s tax-free. But if you choose to keep the money with the insurer and earn Php 20,000 interest annually, that interest income is taxable.
2. Gifts, Bequests, and Inheritances:
   The value of property received as a gift, inheritance, or bequest is generally not taxable. However, any income generated from that property (e.g., rent from inherited property) becomes taxable.
   Example:
   If you inherit a house from a relative, inheriting the house itself is exempt. But if you rent out the house, the rental income you receive will be subject to tax.
3. Compensation for Injuries or Sickness:
   Amounts received through accident or health insurance, or under worker’s compensation, for personal injuries or sickness are exempt. Additionally, any damages received due to such injuries or sickness (through lawsuit or settlement) are also exempt.
   Example:
   If you receive Php 500,000 from your health insurance company due to a medical procedure, it’s not taxable.
4. Specific Retirement Benefits and Pensions:
   * Government and Private Retirement Plans: Retirement benefits received under specific government programs or private employer plans with at least 10 years of service and a minimum retirement age of 50 might be exempt (up to a certain limit).
   * Social Security and GSIS Benefits: Benefits received from the Social Security System (SSS) and Government Service Insurance System (GSIS) are generally exempt.
   * Benefits from Foreign Governments: Pensions or similar benefits received by Filipino residents from foreign government agencies are exempt.
   Example:
   If you retire from government service after 15 years and receive a Php 1 million retirement gratuity, it might be exempt under specific conditions. However, your monthly SSS pension would likely be fully exempt.
5. Miscellaneous Exemptions:
   * Income of Foreign Governments and Institutions: Income derived from investments or deposits in the Philippines by foreign governments, specific financing institutions, or international financial institutions established by foreign governments is exempt.
   * Government Income from Public Utilities: Income generated by the government from essential government functions or public utilities is not taxable.
   * Prizes and Awards: Prizes and awards for religious, charitable, scientific, educational, artistic, literary, or civic achievements are exempt, provided there’s no action taken to enter the competition and no requirement for future services in exchange for the prize.
   * Specific Employee Benefits: A portion of the 13th month pay, benefits under Presidential Decree No. 851 (amended), productivity incentives, and Christmas bonuses received by government and private employees might be exempt, with a capped amount.
   * GSIS, SSS, Medicare, and Pag-Ibig Contributions: Employee contributions to social security programs and union dues are not considered taxable income.
   * Gains from Specific Long-Term Investments: Gains from selling bonds, debentures, or other similar financial instruments held for more than five years might be exempt.
   * Mutual Fund Gains: Gains realized upon redeeming shares in a qualified mutual fund company might be exempt.

Question 6

G. Income Taxation
4. Gross Income

d. Deductions from Gross Income – Sections 34 and 36
i. Itemized Deductions
ii. Optional Standard Deduction
iii. Non-deductible Items

Answer 6

Here’s a brief explanation of the three concepts related to deductions from gross income in the Philippines under R.A. No. 8424 (Tax Code), as amended by R.A. No. 10963:

i. Itemized Deductions:
Taxpayers can choose to itemize their deductions, meaning they list and claim specific allowable expenses incurred throughout the year. These expenses can reduce their taxable income, potentially lowering their tax liability. Examples of itemized deductions include medical expenses, interest payments on qualified loans, and charitable contributions, subject to specific limitations.

ii. Optional Standard Deduction:
Instead of itemizing deductions, taxpayers can opt for a simpler approach by claiming a standard deduction. This is a fixed amount established by law that automatically reduces taxable income without requiring detailed record-keeping of individual expenses. The standard deduction is generally more beneficial for taxpayers with lower overall itemizable deductions.

iii. Non-deductible Items:
The Tax Code also specifies certain expenses that are not allowed as deductions. These non-deductible items include personal expenses like clothing, entertainment, and commuting costs. Additionally, expenses considered lavish or unreasonable, fines and penalties incurred, and capital expenditures (investments that create a lasting benefit) are generally not deductible.

Question 7

G. Income Taxation
5. Taxable Individuals – R.A. No. 8424, as amended
a. Resident Citizens, Non-Resident Citizens, and Resident Aliens
b. Non-Resident Aliens Engaged in Trade or Business
c. Non-Resident Aliens Not Engaged in Trade or Business
d. Substituted Filing

Answer 7

Here’s a breakdown of the four income tax concepts under R.A. No. 8424 (Tax Code) and Philippine Tax Law, explained in two sentences each:

a. Resident Citizens, Non-Resident Citizens, and Resident Aliens:**

• Resident Citizens: Filipinos who are either domiciled (permanent home) in the Philippines or have lived there for more than 183 days in a calendar year are considered resident citizens. They are taxed on their worldwide income.
• Non-Resident Citizens: Filipinos who are not considered resident citizens are taxed ONLY on their Philippine-sourced income.
• Resident Aliens: Foreigners who are staying in the Philippines for an extended period (generally exceeding 183 days) are considered resident aliens. They are taxed on their worldwide income derived from sources within the Philippines.

b. Non-Resident Aliens Engaged in Trade or Business:**

Non-resident aliens who conduct business activities in the Philippines are subject to income tax on their income SOURCED FROM those business activities WITHIN the Philippines. This includes income from sales, services, or other business transactions carried out in the country.

c. Non-Resident Aliens Not Engaged in Trade or Business:**

Non-resident aliens who DONT Conduct business in the Philippines are generally TAXED ONLY on their Philippine-sourced income. This can include passive income like interest earned on Philippine bank deposits, rentals from Philippine property, or royalties from intellectual property used in the Philippines.

d. Substituted Filing:**

When a resident citizen or resident alien receives income from a Philippine corporation or other withholding agent, a portion of the income tax might be withheld at source.
Substituted filing ALLOWS the taxpayer to FILE an income tax return and claim any excess tax withheld as a credit or refund. This ENSURES the taxpayer pays the correct amount of tax after considering all income sources.

Question 8

G. Income Taxation
5. Taxable Individuals – R.A. No. 8424, as amended
a. Resident Citizens, Non-Resident Citizens, and Resident Aliens

Question 9

G. Income Taxation
5. Taxable Individuals – R.A. No. 8424, as amended

b. Non-Resident Aliens Engaged in Trade or Business

Question 10

G. Income Taxation
5. Taxable Individuals – R.A. No. 8424, as amended

c. Non-Resident Aliens Not Engaged in Trade or Business

Question 11

G. Income Taxation
5. Taxable Individuals – R.A. No. 8424, as amended

d. Substituted Filing

Question 12

G. Income Taxation
6. Taxable Corporations – R.A. No. 11534
a. Domestic Corporations and Resident Foreign Corporations –
b. Non-Resident Foreign Corporations
c. General Professional Partnerships

Answer 12

Here’s a breakdown of the three corporation types under Philippine tax law, considering R.A. No. 11534 (CREATE Act) and related jurisprudence:

a. Domestic Corporations and Resident Foreign Corporations:

1) Domestic Corporations:
These are corporations organized or incorporated under Philippine laws, regardless of the nationality of the shareholders. They are taxed on their worldwide income at the current corporate income tax (CIT) rate (gradually reducing under CREATE).
2) Resident Foreign Corporations:
These are foreign corporations registered to do business in the Philippines and considered resident based on specific criteria (e.g., having their principal place of business in the Philippines). They are also taxed on their worldwide income at the CIT rate.

b. Non-Resident Foreign Corporations:

These are foreign corporations not registered to do business in the Philippines. They are generally only subject to Philippine income tax on their income SOURCED FROM THE PHILIPPINES. This can include income from Philippine branches, sales of goods or services to Philippine residents, or royalties from intellectual property used in the Philippines. The tax rate applied can be a fixed withholding tax or the regular CIT rate depending on the specific income type.

c. General Professional Partnerships (GPPs):

GPPs are not technically corporations but are relevant for tax purposes. They are partnerships formed by professionals to practice their professions jointly. GPPs themselves are not subject to income tax. However, the individual partners are TAXED ON THEIR SHARE of the GPP’s income, reported in their personal income tax returns.

Question 13

G. Income Taxation
6. Taxable Corporations – R.A. No. 11534
a. Domestic Corporations and Resident Foreign Corporations –
R.A. No. 8424, as amended, sec. 27
i. Itemized Deductions
ii. Optional Standard Deduction
iii. Minimum Corporate Income Tax

Question 14

G. Income Taxation
6. Taxable Corporations – R.A. No. 11534

b. Non-Resident Foreign Corporations

Question 15

G. Income Taxation
6. Taxable Corporations – R.A. No. 11534

c. General Professional Partnerships

Question 16

H. Withholding Taxes; Concept (R.A. No. 8424, as amended, sec. 76)

Question 17

I. Transfer Taxes
1. Estate Tax; Basic Principles and Concepts

Question 18

I. Transfer Taxes

2. Donor’s Tax; Basic Principles and Concepts

Question 19

J. Value-Added Tax (VAT) (R.A. No. 8424, as amended; R.R. No. 16-2005, as
amended)
1. Concept

Question 20

J. Value-Added Tax (VAT) (R.A. No. 8424, as amended; R.R. No. 16-2005, as
amended)

2. Elements of VATable Transactions

Question 21

J. Value-Added Tax (VAT) (R.A. No. 8424, as amended; R.R. No. 16-2005, as
amended)

3. Destination Principle and Cross-Border Doctrine

Question 22

J. Value-Added Tax (VAT) (R.A. No. 8424, as amended; R.R. No. 16-2005, as
amended)

4. Transactions Deemed Sale Subject to VAT

Question 23

J. Value-Added Tax (VAT) (R.A. No. 8424, as amended; R.R. No. 16-2005, as
amended)

5. Zero-Rated Transactions

Question 24

J. Value-Added Tax (VAT) (R.A. No. 8424, as amended; R.R. No. 16-2005, as
amended)
6. VAT-Exempt Transactions

Question 25

J. Value-Added Tax (VAT) (R.A. No. 8424, as amended; R.R. No. 16-2005, as
amended)

7. Input and Output VAT

Question 26

J. Value-Added Tax (VAT) (R.A. No. 8424, as amended; R.R. No. 16-2005, as
amended)

8. VAT Refund or Credit – Section 112

Question 27

K. Tax Remedies
1. Government
a. Assessment of Internal Revenue Taxes
i. Requisites of a Valid Assessment
ii. False Returns, Fraudulent Returns, Non-Filing of Returns
b. Collection of Delinquent Taxes
i. Requisites
ii. Civil action for Collection
iii. Criminal action for Collection
iv. Injunction – R.A. No. 8424, as amended, sec. 218; R.A.
No. 9282, as amended, sec. 11
c. Statute of Limitations

Question 28

K. Tax Remedies
1. Government
a. Assessment of Internal Revenue Taxes
i. Requisites of a Valid Assessment
ii. False Returns, Fraudulent Returns, Non-Filing of Returns

Question 29

K. Tax Remedies
1. Government

b. Collection of Delinquent Taxes
i. Requisites
ii. Civil action for Collection
iii. Criminal action for Collection
iv. Injunction – R.A. No. 8424, as amended, sec. 218; R.A.
No. 9282, as amended, sec. 11

Question 30

K. Tax Remedies
1. Government

c. Statute of Limitations

Question 31

K. Tax Remedies
2. Taxpayer’s Remedies
a. Administrative
b. Judicial

Question 32

2. Taxpayer’s Remedies

c. Compromise and Abatement of Taxes

Question 33

2. Taxpayer’s Remedies

d. Refund of Tax Erroneously or Illegally Collected – R.A. No.
8424, sec. 229

Question 34

K. Tax Remedies
3. Civil Penalties
a. Tax Delinquency, Tax Deficiency
b. Surcharge

Question 35

K. Tax Remedies

4. Compromise Penalty

Question 36

Challenging MCQs on Situs of Income Taxation (Bar Prep)

Scenario 1: Global E-commerce and Content Creation

A Filipino YouTuber creates engaging travel vlogs from around the world. He earns income through advertisements displayed on his videos and through affiliate marketing links. Most of his viewers are from the Philippines.

Question 1:

Where is the YouTuber’s income sourced for tax purposes?

A. Entirely in the Philippines because he is a Filipino citizen.
B. Entirely outside the Philippines because he travels and films internationally.
C. In the Philippines for ad revenue and the source country for affiliate income.
D. It depends on the specific location featured in each vlog.

Answer 36

Answer: C. In the Philippines for ad revenue and the source country for affiliate income.

Legal Reasoning:

• Ad revenue is likely considered sourced in the Philippines because most viewers are there. Advertisers target audiences, and the benefit (income) arises where the viewers are located.
• Affiliate income is more complex. It depends on the nature of the affiliate program. If the income is a commission for sales referred from viewers in the Philippines, it might also be sourced in the Philippines. However, if the commission is based on sales to viewers globally, the income would likely be sourced in the countries where those sales occur. (Option A and B are incorrect)
• The specific location in each vlog is not the deciding factor; it’s the viewer location for ads and the sales location for affiliate income. (Option D is incorrect)

Question 37

Scenario 2: Overseas Work and Online Investments

A Philippine engineer works remotely for a Singaporean tech company. He also invests in US stocks through an online brokerage platform.

Question 2:

How is the engineer’s income taxed in the Philippines?

A. Only his stock market earnings are taxable in the Philippines.
B. All his income is taxable in the Philippines because he’s a Filipino citizen.
C. Only his salary from Singapore is taxable in the Philippines.
D. None of his income is taxable in the Philippines.

Answer 37

Answer: C. Only his salary from Singapore is taxable in the Philippines.

Legal Reasoning:

• The engineer’s salary is sourced in Singapore, the location where he performs the work. (Option B is incorrect)
• Gains from stock sales generally follow the situs of the stock itself. Since US stocks are involved, they are likely sourced outside the Philippines and not taxable there. (Option A is incorrect)
• There might be specific reporting requirements for overseas investments, but the capital gains themselves wouldn’t be subject to Philippine income tax in this scenario. (Option D is an oversimplification)

These MCQs highlight the complexities of situs of income taxation, especially with digital work and international activities. Understanding the concepts of source of income and residency is crucial for proper tax compliance.

Question 38

Challenging MCQs on Gross Income and Exclusions (Bar Prep)

Scenario: A popular Filipino influencer receives a significant amount of brand deals and endorsements on social media. She argues that the products she promotes are often gifts, and the income from these endorsements shouldn’t be considered taxable.

Question 1:

Can the influencer exclude the value of the products she receives for endorsements from her gross income?

A. Yes, because the products are essentially gifts from the brands.
B. Yes, if the products are not directly related to her online persona.
C. No, the value of the products received for endorsements is considered taxable income.
D. No, but she can deduct the cost of creating the content promoting the products.

Answer 38

Answer: C. No, the value of the products received for endorsements is considered taxable income.

Legal Reasoning:

• While gifts are generally excluded from gross income, the influencer receives these products in exchange for promoting them on her social media platform. This creates a business relationship and the value of the products becomes taxable income. (Option A is incorrect)
• The relevance of the products to her online persona doesn’t change the taxable nature of the income. (Option B is incorrect)
• Option D is partially correct; she might have deductible expenses, but the income itself is taxable.

Question 39

Question 2:

The influencer also receives a substantial cash payment for a one-time collaboration with a clothing brand to design a limited edition clothing line. How should this income be classified for tax purposes?

A. It’s ordinary income and fully taxable.
B. It might be considered capital gain if the clothing line appreciates in value.
C. It could be partially exempt as a prize or award for artistic achievement.
D. The tax treatment depends on whether she retains ownership of any part of the clothing line.

Answer 39

Answer: A. It’s ordinary income and fully taxable.

Legal Reasoning:

• The cash payment for designing the clothing line is compensation for services rendered, making it ordinary income. (Option B is irrelevant; capital gains apply to selling assets)
• The exemption for prizes and awards (Option C) requires specific criteria, unlikely to be met in this business collaboration.
• Ownership of the clothing line (Option D) might have future implications, but the initial payment is still taxable income.

Question 40

Question 3:

Let’s say the influencer donates a portion of her endorsement income to a recognized charitable organization. Can she deduct this amount from her gross income?

A. Yes, charitable donations are fully deductible without any limit.
B. Yes, but only up to a certain percentage of her gross income.
C. No, deductions for charitable donations are not allowed for influencer income.
**D. No, unless the charity is specifically focused on promoting social media influencers.

Answer 40

Answer: B. Yes, but only up to a certain percentage of her gross income.

Legal Reasoning:

• The Philippines allows deductions for charitable donations to qualified institutions, UP to a SPECIFIC percentage of the taxpayer’s gross income. (Option A is incorrect; there are limits)
• The influencer can deduct the donation, but she needs to comply with the established limitations. (Options C and D are incorrect)

These MCQs highlight the importance of understanding the distinction between taxable income, excluded benefits, and deductible expenses for influencers and other individuals earning income through non-traditional means. Remember, tax laws can be complex, so consulting a tax professional is always recommended.

Question 41

G. Income Taxation
4. Gross Income

a. Definition of Gross income; Concept of Income from Whatever Source Derived
– Section 32

EXPLAIN Concept of Income from Whatever Source Derived

Answer 41

The Philippines taxes income you earn regardless of the source (income from whatever source derived). This means almost everything you get financially counts towards your gross income.

Here’s a breakdown:

• Included Income:
  Salaries, wages, commissions, business income, property gains (selling a house or car for profit), interest on savings, rent from properties you own, royalties for creative works, dividends from stocks, and partnership profits.
  Examples:
  Your salary, rental income from an apartment, profit from selling stocks.

There are some exceptions though:

• Excluded Income:
  Generally, gifts, inheritances, some health insurance benefits, and government retirement benefits are not taxed.
  Examples:
  Life insurance payout to your family after your passing, a gift of money you receive from a friend.

Remember:
* There might be limitations on exclusions, like a maximum amount for tax-free 13th month pay.
* Income earned abroad might still be taxable in the Philippines depending on specific rules.
* Consult a tax professional for complex situations.

Question 42

Question 1:

A Filipino singer gains international fame and earns significant income from concert tours worldwide. Is this income taxable in the Philippines?

A. No, because the concerts are held outside the Philippines.
B. Yes, only if the income is specifically from concerts held in the Philippines.
C. Yes, all the income from concerts is taxable in the Philippines.
D. It depends on the specific contracts for each concert venue.

Answer 42

Answer: C. Yes, all the income from concerts is taxable in the Philippines.

Legal Reasoning:

• The Philippines follows the “residence-based” taxation system. Filipinos are generally taxed on their worldwide income regardless of the source (income from whatever source derived principle). (Option A and B are incorrect)
• Concert tours generate income from services rendered (singing performances). The location of the concert venue is not a deciding factor. (Option D is irrelevant)

Question 43

Question 2:

A Philippine corporation operates a chain of clothing stores across the country. They also recently opened a branch office in Singapore to manage their online sales in Southeast Asia. How will the corporation’s income be taxed in the Philippines?

A. Only income from Philippine stores will be taxed.
B. Only income from online sales will be taxed.
C. All income will be taxed in the Philippines.
D. The income will be taxed proportionally based on the location of each store and online sale.

Answer 43

Answer: C. All income will be taxed in the Philippines.

Legal Reasoning:

• The income from the Philippine stores is clearly taxable as income derived from conducting business within the Philippines. (Option A is incorrect)
• Income from the Singapore branch office might be subject to separate taxation in Singapore depending on their tax laws. However, the Philippine corporation will likely still need to report all income worldwide to the BIR in the Philippines. (Option B is partially correct)
• The concept of situs of income taxation might be relevant when determining the exact taxable amount in the Philippines if there are significant expenses or activities outside the country. However, all income will still be reported initially. (Option D is a bit complex but not entirely applicable here)

Question 44

G. Income Taxation
4. Gross Income

(income subject to tax)

b. Sources of Income Subject to Tax – Section 24; R.R. No. 2-98, as
amended
i. Compensation Income
ii. Fringe Benefits
iii. Professional Income
iv. Income from Business
v. Income from Dealings in Property
vi. Passive Investment Income
vii. Annuities, Proceeds from Life Insurance or Other Types
viii. Prizes and Awards
ix. Pensions, Retirement Benefit, Separation Pay
x. Capital Assets vs. Ordinary Assets – Sections 39-40

EXPLAIN # 10

Answer 44

Capital Assets vs. Ordinary Assets: Taxation in the Philippines

The distinction between capital assets and ordinary assets is crucial when determining the taxes you pay on gains from selling them in the Philippines.

A.
Capital Assets:**
* Generally held for long-term investment or personal use (More than TWO years).
* Examples: Land, buildings, stocks (held for more than two years), collectibles (paintings, antiques).

Taxes on Capital Gains from Capital Assets:

• Capital Gains Tax (CGT): A separate tax imposed on the net gain (selling price minus acquisition cost) from selling capital assets. The current rate is 6% of the gross selling price or current fair market value, whichever is higher.
• Documentary Stamp Tax (DST): A tax on the transfer of ownership of real property (land and buildings). The rate is 1.5% of the actual consideration or current fair market value, whichever is higher.
• Illustration:
• You sell a piece of land you purchased 5 years ago for Php 2 million for Php 3 million.
• Capital Gains Tax (CGT): 6% x Php 3 million (selling price) = Php 180,000
• Documentary Stamp Tax (DST) (assuming actual consideration): 1.5% x Php 3 million = Php 45,000

B.
Ordinary Assets:
* Typically held for short-term purposes or used in the course of business.
* Examples: Inventory for businesses, supplies, short-term investments (stocks held for less than two years), personal property like used cars.

Taxes on Gains from Ordinary Assets:
1. Income Tax:
The gain from selling ordinary assets is considered part of your regular income and taxed according to the progressive income tax rates. This can range from 0% to 35% depending on your total taxable income for the year.
2. Value Added Tax (VAT):
A tax on the sale of goods and services. The standard VAT rate is 12% of the selling price. This tax may not apply in all cases of ordinary asset sales, so it’s important to consult a tax professional.

Illustration:
* You sell office furniture used in your business for Php 10,000. You purchased it for Php 5,000 a year ago.
* Income Tax: The Php 5,000 gain is added to your other income and taxed according to your income tax bracket. (Let’s say your bracket is 25%)
* Income Tax = Php 5,000 (gain) x 25% = Php 1,250
* VAT (may or may not apply, consult a tax professional): 12% x Php 10,000 (selling price) = Php 1,200

• Key Points:
• Holding period (ownership duration) is a significant factor in determining whether an asset is capital or ordinary.
• Capital gains tax rate is generally lower than income tax rates.
• Always consult a tax professional for specific situations and potential exemptions.

Question 45

Challenging MCQs on Capital Assets vs. Ordinary Assets (Philippines Bar Exam)

Question 1 (Capital Assets):

A Filipino investor purchased shares of a promising tech startup two years ago for Php 100,000. Due to a recent surge in the company’s popularity, the investor decides to sell their shares for Php 500,000. How will the income from this sale be taxed in the Philippines?

A. Subject to Income Tax at the investor’s marginal income tax rate.
B. Subject to Capital Gains Tax at a rate of 6%.
C. Exempt from taxation as it’s a domestic company.
D. Taxed based on a combination of Capital Gains Tax and Income Tax.

Answer 45

Answer: B. Subject to Capital Gains Tax at a rate of 6%.

Legal Reasoning:

• The shares of stock are considered capital assets as they were held for more than two years (long-term investment).
• The Philippines imposes a separate Capital Gains Tax (CGT) on the net gain from selling capital assets.
• The current CGT rate is 6% of the gross selling price or current fair market value, whichever is higher. (Option A and D are incorrect)
• The fact that it’s a domestic company doesn’t change the applicability of CGT. (Option C is incorrect)

Question 46

Question 2 (Ordinary Assets):

A company known for its handcrafted furniture recently decided to clear out its inventory of display furniture from its showrooms. These furniture pieces were originally purchased for Php 20,000 each and have been used for display purposes for a year. The company is selling them at a discounted price of Php 15,000 each. How will the income from this sale be taxed in the Philippines?

A. Subject to Capital Gains Tax at a rate of 6%.
B. Subject to Income Tax at the company’s marginal income tax rate.
C. Exempt from taxation as it’s a sale of used items.
D. Not taxable since the furniture is sold at a loss.

Answer 46

Answer: B. Subject to Income Tax at the company’s marginal income tax rate.

Legal Reasoning:

• The display furniture is considered ordinary assets as they are used in the company’s business operations (not held for long-term investment).
• The gain or loss from selling ordinary assets is part of the company’s regular income and is taxed according to the income tax rates. (Option A and C are incorrect)
• Selling the furniture at a loss doesn’t automatically exempt the transaction from taxation. The company can only claim the loss for tax purposes if it meets specific accounting and tax code requirements. (Option D is partially correct)

Question 47

Challenging MCQs on Exclusions from Gross Income (Philippines Tax Code)

Question 1: Esports and Recognition

A Filipino professional gamer recently won a prestigious international esports tournament with a significant cash prize. The tournament is known for its focus on promoting teamwork, strategy, and good sportsmanship. Would the prize money be considered taxable income in the Philippines?

A. Yes, all esports winnings are taxable income.
B. No, the prize money is exempt under the recognition award exclusion.
C. It depends on the specific contract signed with the tournament organizer.
D. The gamer needs to consult a tax professional for a definitive answer.

Answer 47

Answer: B. No, the prize money is exempt under the recognition award exclusion.

Legal Reasoning:

Section 32(B)(7)(c) of the Philippine Tax Code exempts prizes and awards for religious, charitable, scientific, educational, artistic, literary, or civic achievement. Esports competitions can be considered to promote good sportsmanship and strategic thinking, potentially falling under the “civic achievement” category.

• Option A is incorrect. The exclusion specifically applies to recognition awards.
• Option C is irrelevant. The general tax code provisions take precedence over any specific terms in a tournament contract.
• Option D is partially true, but the answer can be determined based on the tax code itself.

Question 48

Question 2: Influencers and Brand Deals

A popular social media influencer received a large sum of money and luxury goods from a clothing brand in exchange for promoting their new clothing line on their social media platforms. Does this income count towards the influencer’s taxable income?

A. No, gifts in kind (luxury goods) are not taxable.
B. Yes, all income received, including the value of the luxury goods, is taxable.
C. Only the cash amount is taxable; the luxury goods are not considered income.
D. The taxability depends on the influencer’s agreement with the brand.

Answer 48

Answer: B. Yes, all income received, including the value of the luxury goods, is taxable.

Legal Reasoning:

Section 32(A)(1) of the Philippine Tax Code defines gross income as “all income derived from whatever source.” The value of the luxury goods received is considered a form of compensation for the influencer’s services.

• Option A is incorrect. While gifts are generally exempt, this applies more to personal gifts, not those received for business purposes.
• Option C is partially correct. The cash is clearly taxable, but the luxury goods also have a fair market value that needs to be included in income.
• Option D is irrelevant. The general tax code provision applies here.

Question 49

Question 3: Online Learning and Scholarships

Due to the pandemic, a local university decided to offer online scholarships to deserving students for the entire academic year. The scholarships cover tuition fees, books, and a monthly stipend for living expenses. Are any parts of this scholarship considered taxable income for the students?

A. Only the monthly stipend is taxable; tuition and books are exempt.
B. The entire scholarship amount is taxable income for the student.
C. No part of the scholarship is taxable income for the student.
D. The taxability depends on the specific terms and conditions of the scholarship.

Answer 49

Answer: C. No part of the scholarship is taxable income for the student.

Legal Reasoning:

Section 32(B)(5) of the Philippine Tax Code exempts scholarships. This exemption applies to scholarships that cover educational expenses like tuition fees, books, and even reasonable living allowances.

• Option A is partially correct. The living stipend might be scrutinized, but tuition and books are clearly exempt.
• Option B is incorrect. Scholarships are specifically excluded from gross income.
• Option D is partially true, but the general exclusion for scholarships applies here, regardless of specific terms.

Question 50

Challenging MCQs on Deductions from Gross Income (Philippines) - Bar Exam Prep

Question 1: Work-From-Home Expenses and the Pandemic

Due to the COVID-19 pandemic, many companies shifted to a work-from-home setup. A Filipino taxpayer employed by a local company claims expenses for their high-speed internet connection and ergonomic office chair as deductions against their salary income. Can these expenses be deducted?

A. Yes, both internet and office chair expenses are fully deductible as work-from-home necessities.
B. No, these expenses are considered personal expenses and are not deductible.
C. Only the internet expense is deductible; the office chair is a capital expenditure.
D. The deductibility depends on whether the employer reimburses the expenses.

Answer 50

Answer: C. Only the internet expense is deductible; the office chair is a capital expenditure.

Legal Reasoning:

Section 34(a) of the Tax Code allows deductions for ordinary and necessary expenses paid or incurred during the taxable year in connection with a trade or business.

• Internet expenses can be considered ordinary and necessary for a work-from-home setup.
• The office chair, while potentially beneficial, is likely considered a capital expenditure as it’s a durable good with a useful life exceeding one year.

Question 51

Question 2: Medical Expenses and Overseas Treatment

A Filipino taxpayer seeks to deduct the medical expenses incurred for their cancer treatment in a prestigious hospital abroad. The treatment was unavailable in the Philippines. Are these medical expenses deductible?

A. Yes, all medical expenses, regardless of location, are deductible.
B. No, medical expenses for treatment abroad are generally not deductible.
C. Deductibility depends on the specific medical condition and if pre-approved by the BIR.
D. The taxpayer can deduct the expenses if they itemize and meet specific limitations.

Answer 51

Answer: D. The taxpayer can deduct the expenses if they itemize and meet specific limitations.

Legal Reasoning:

Section 34(a)(1)(i) of the Tax Code allows deductions for medical expenses paid for the taxpayer, spouse, and qualified dependents. However, there are limitations on the amount deductible.

• The taxpayer can choose to itemize and claim these medical expenses, but they must meet specific percentage thresholds of their Adjusted Gross Income (AGI).
• Treatment abroad might be allowed if necessary and unavailable locally, but proper documentation is crucial.

Question 52

Question 3: Charitable Donations and Influencers

A popular social media influencer makes a significant donation to a local charity that supports underprivileged children. The influencer films the donation and posts it on their social media platforms, generating significant positive publicity for themselves and the charity. Can the influencer deduct the full amount of the donation?

A. Yes, all charitable donations to qualified institutions are deductible.
B. No, the donation might be considered a form of advertising and not fully deductible.
C. The deductibility depends on the influencer’s relationship with the charity.
D. The influencer can only deduct the cost of creating the social media post about the donation.

Answer 52

Answer: B. No, the donation might be considered a form of advertising and not fully deductible.

Legal Reasoning:

Section 34(a)(1)(ii) of the Tax Code allows deductions for contributions or gifts to qualified donees like charitable institutions. However, there are limitations.

• The influencer’s act of filming and publicizing the donation might be seen as seeking a personal benefit (advertising) that could reduce the allowable deduction. The BIR might scrutinize such transactions to determine the true intent behind the donation.

Note: These MCQs are designed to challenge your understanding of exceptions and the potential for the Bureau of Internal Revenue (BIR) to scrutinize deductions. In real-world scenarios, consulting a tax professional is always recommended for personalized advice.

Question 53

Challenging MCQs on Taxable Corporations in the Philippines (Bar Exam Prep)

Question 1: E-commerce and Foreign Companies

A popular US-based online retail giant recently announced plans to expand its operations in the Philippines by establishing a local warehouse and fulfillment center. How will the company be taxed in the Philippines?

A. It will not be taxed in the Philippines as it’s a foreign company.
B. It will be taxed on all its global income at the Philippine corporate income tax rate.
C. It will be considered a non-resident foreign corporation and taxed only on Philippine-sourced income.
D. It will be taxed as a domestic corporation if it incorporates a subsidiary in the Philippines.

Answer 53

Answer: C. It will be considered a non-resident foreign corporation and taxed only on Philippine-sourced income.

Legal Reasoning:

Based on the scenario, the company is not registering to do business in the Philippines but establishing a warehouse for local fulfillment. This suggests it might not meet the criteria for residency under R.A. No. 11534 (CREATE Act).

• Option A is incorrect. Foreign corporations with Philippine-sourced income are subject to tax.
• Option B is incorrect. Only domestic corporations and resident foreign corporations are taxed on worldwide income.
• Option D is partially correct. Incorporating a subsidiary would make it a domestic corporation, but the scenario suggests a different approach.

Question 54

Question 2: Taxation and Mergers & Acquisitions

A large Philippine conglomerate recently acquired a controlling interest in a Vietnamese company. Will the Philippine conglomerate be taxed on the profits generated by the Vietnamese company?

A. Yes, the Philippine conglomerate will be taxed on the Vietnamese company’s worldwide income.
B. No, the Philippine conglomerate will not be taxed on the Vietnamese company’s foreign income.
C. The taxability depends on whether the Vietnamese company is registered in the Philippines.
D. The conglomerate needs to consult a tax professional for a definitive answer.

Answer 54

Answer: B. No, the Philippine conglomerate will not be taxed on the Vietnamese company’s foreign income.

Legal Reasoning:

Generally, Philippine corporations are taxed on their worldwide income. However, the concept of “tax sovereignty” comes into play. Vietnam likely taxes companies operating within its borders. The Philippines wouldn’t typically tax income already taxed by another country (double taxation).

• Option A is incorrect. The tax applies to worldwide income, but not if already taxed elsewhere.
• Option C is irrelevant. The residence of the acquired company is key, not its registration in the Philippines.
• Option D highlights the importance of professional advice, but the general principle applies here.

Question 55

Question 3: Esports and Legal Structures

A group of Filipino professional gamers decided to form a professional esports team. What type of legal structure would minimize their tax liability while ensuring proper management and profit-sharing?

A. Sole Proprietorship (individual ownership) is the simplest structure with minimal tax complexities.
B. A General Professional Partnership (GPP) allows profit-sharing but might not be ideal for attracting investors.
C. A Corporation offers limited liability and potential investor benefits, but comes with higher tax formalities.
D. The most tax-efficient structure depends on the specific revenue model and future plans.

Answer 55

Answer: D. The most tax-efficient structure depends on the specific revenue model and future plans.

Legal Reasoning:

Each legal structure has its advantages and disadvantages regarding taxation and management.

• Option A offers minimal tax complexities, but exposes owners to full liability and might not be ideal for attracting sponsorships or investments.
• Option B allows for profit-sharing but might not be suitable for attracting significant investments due to unlimited liability for partners.
• Option C offers limited liability and potential investor benefits, but comes with higher formation and compliance costs.

The most tax-efficient structure depends on factors like revenue sources, projected income, and future growth plans. Consulting a lawyer and tax professional is crucial for the esports team to make an informed decision.