2. SOURCE RULES
• INTERESTS – residence of the debtor or obligor (place of
contract is immaterial)
• DIVIDENDS – residence of the corporation paying the dividend
• SERVICES – Place of performance of the service
• CIR V. MARUBENI
• ONLINE VS. OFFLINE AIR CARRIER
• RENTAL AND ROYALTIES – location or use of the property or
interest in such property
• SALE OF REAL PROPERTY – Location of real property
3. TYPES OF GROSS INCOME
• COMPENSATION INCOME
• INCOME FROM TRADE OR BUSINESS / PROFESSIONAL INCOME
• GAINS IN DEALINGS IN PROPERTY
• PASSIVE INCOME
• OTHER INCOME
4. COMPENSATION INCOME
• All remuneration for services performed by an employee for
his employer under an Employer-Employee Relationship
• 4 elements: Control test.
• The income recipient is the person liable to pay the income
tax, but, to facilitate collection:
• income tax for compensation income is withheld by Employer.
• IS WITHHOLDING TAX A SEPARATE TAX?!?
• DOCTORS IN HOSPITALS? – Employees versus contractors?
• If only single income, from one employer, and income is
correctly withheld, FORM 2316 is sufficient. (Substituted
Filing) – N.B. Starting January 2019, withholding tax will only
be up to 15%
5. COMPENSATION INCOME
• MINIMUM WAGE EARNERS – exempt
• Benefits not considered wages, and beyond “de minimis” and the
90K threshold are taxable
• BACKWAGES, ALLOWANCES, BENEFITS AWARDED IN LABOR
DISPUTE?
• Backwages? Taxable
• Moral, Exemplary Damages? Not taxable
• FRINGE BENEFITS?
• RANK AND FILE – pays for the income tax on the fringe benefits
(Sec 24A)
• MANAGERIAL EMPLOYEE – FRINGE BENEFIT TAX (35% GROSSED
UP MONETARY VALUE OF FRINGE BENEFIT)
• DE MINIMIS FRINGE BENEFITS ARE EXCLUDED
6. FRINGE BENEFITS
1. DE MINIMIS BENEFITS? - Excluded
1. i.e., Monetized SL/VL, rice allowance 1500/month, laundry
allowance not exceeding 300/month, uniform and clothing
allowance 5K/year, Xmas gift and major anniversary
celebrations not exceeding 5K/year
2. Benefits for the Convenience of the Employer – Excluded
2. MEALS – taken when required to be on duty during the meal
period
3. LODGING – if the employee must accept the lodging on the
employer’s business premises as a condition for his
employment
3. Other Benefits? CEILING – P 90,000 – (RA 10963)
4. Stock Option Plans? – difference in fair value and option
price – only if realized gain
7. COMPENSATION INCOME:
BAR QUESTION
Nutrition Chippy Corporation gives all its employees (rank and
file, supervisors and managers) one sack of rice every month
valued at P800 per sack. During an audit investigation made by
the BIR, the BIR assessed the company for failure to withhold
the corresponding withholding tax on the amount equivalent to
the one sack of rice received by all the employees.
Is there a legal basis for the assessment made by the BIR?
Explain your answer.
8. COMPENSATION INCOME:
SEPARATION PAY
• EXEMPT IF
• Received because of death, sickness,
physical disability
• Or any cause beyond the control of the said
official or employee
9. BAR QUESTION (2017)
The Board of Directors of Sumo Corporation, a company
primarily engaged in the business of marketing and distributing
pest control products, approved the partial cessation of its
commercial operations, resulting in the separation of 32 regular
employees. Only half of the affected employees were notified of
the board resolution.
Rule on the taxability of the separation pay and indemnity that
will be received by the affected employees as the result of their
separation from service. Explain your answer. (3%)
10. COMPENSATION INCOME:
RETIREMENT BENEFITS
• EXEMPT IF:
• Terminal Leave Pay (unused sick leave/ vacation leave credits)
• SSS BENEFITS
• GSIS BENEFITS
• RECEIVED UNDER R.A. NO. 4917 (with a retirement Plan)
• Reasonable -50-10-ONCE
• RECEIVED UNDER RA. NO. 7641 (without a retirement plan)
• CBA or
• (OPTIONAL) 60-5-1/2 OR
• (MANDATORY) 65-5-1/2
11. BAR QUESTION (2018)
Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to
various KSl-affiliated corporations:
1. from 1999 to 2004 as Vice President of K-Gold Inc.,
2. from 2004 to 2007 as Vice President of KPB Bank;
3. from 2007 to 2011 as CEO of K-Com Inc.;
4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim served as CEO for
seven years until his retirement last December 12, 2017 upon reaching the
compulsory retirement age of 60 years.
All the corporations mentioned are majority-owned in common by the Koh family
and covered by a BIR-qualified multiemployer-employee retirement plan (MEE RP),
under which the employees may be moved around within the controlled
group (i.e., from one KSI subsidiary or affiliate to another) without loss of seniority
rights or break in the tenure. Kim was well-loved by his employer and colleagues,
so upon retirement, and on his last day in office, KSI gave him a Mercedes Benz car
worth PhP 5 million as a surprise, with a streamer that reads: "You'll be missed.
Good luck, Sir Kim."
• (a) Are the retirement benefits paid to Kim pursuant to the MEERP taxable?
(2.5%)
• (b) Which internal revenue tax, if any, will apply to the grant of the car to Kim by
the company? (2.5%)
12. GAINS IN DEALINGS IN
PROPERTY
• CAPITAL ASSETS VERSUS ORDINARY ASSETS
• CAPITAL ASSETS
• Property held by the taxpayer, but does NOT include:
• Stock in trade of the taxpayer
• Other property of a kind which would properly be included in the
inventory of the taxpayer (inventoriable property)
• Property held by the taxpayer primarily for sale to customers in the
ordinary course of trade or business
• Depreciable property
• Real property used in trade or business of the taxpayer
13. GAINS IN DEALINGS IN PROPERTY
• WHY DISTINGUISH?
• IF CAPITAL ASSET, the tax treatment is different from gains in
dealings in ordinary assets, which are lumped in the “basket” of
global income.
• If capital asset, the gains may be subject to either:
• CAPITAL GAINS TAX – 6% OF GROSS SELLING PRICE / FMV (IF REAL
PROPERTY LOCATED IN THE PHILS)
• CAPITAL GAINS TAX – SHARES OF STOCK OF A DOMESTIC
CORPORATION– NOT LISTED IN THE LOCAL STOCK EXCHANGE
• - 15% OF NET CAPITAL GAIN
• ORDINARY CAPITAL GAIN WHICH IS
• OFFSET AGAINST ORDINARY CAPITAL LOSS
• SUBJECT TO HOLDING PERIOD RULE(FOR INDIVIDUALS)
• SUBJECT TO NET CAPITAL LOSS CARRYOVER
14. CAPITAL GAINS TAX: LAND
• LOCATED IN THE PHILS
• Final Capital Gains tax of 6% based on the gross selling price or
current fair market value, whichever is higher, imposed on
presumed capital gains realized from the sale.
• File a Final Capital Gains Tax Return within 30 days after each
sale, exchange, transfer or other disposition of real property
• LOCATED OUTSIDE THE PHILS
• Treated as a capital asset (Rules on Ordinary Capital Gain or Loss will
apply)
• REAL PROPERTY CLASSIFIED AS “ORDINARY ASSETS”
• Treated as ordinary gross income
• Subject to a creditable withholding tax
15. CAPITAL GAINS: LAND
• PRINCIPAL RESIDENCE
• Exempted from CGT if:
• Proceeds fully utilized within 10 years
• CIR notified within 30 days from sale
• Availed of once every 10 years
16. EXERCISES
• What is the tax treatment of the following transactions?
• A, a resident citizen, engaged in the practice of law, sold the following
properties: 1) residential house and lot in the Philippines; 2) building
and lot in Iligan City used as law office; 3) a condominium unit in Hong
Kong; 4) car used to travel to and from the office, to meet clients, to go
to court, etc. The car is reflected as an asset of the law office; 5) shares
of stock in SMPH, a stock traded in the Philippine stock exchange; 6)
shares of stock in ABC Corporation, a closely held family corporation
belonging to his family; 7) shares of stock in Nike, a blue chip stock
traded in the New York stock exchange; 6) various bags and jewelries for
personal use.
• Will the holding period matter in some or all of these transactions?
Explain.
• If A is a dealer of real estate instead, will this change your answer?
• If A is a dealer in stocks, will this change your answer?
17. BAR QUESTION (2018)
• Klaus, Inc., a domestic, VAT-registered corporation engaged in
the land transportation business, owns a house and lot along
Katipunan St., Quezon City. This property is being used by
Klaus, lnc.'s president and single largest shareholder, Atty.
Krimson, as his residence. No business activity transpires there
except for the company's Christmas party which is held there
every December. Atty. Krimson recently grew tired of the long
commute from Katipunan to his office in Makati City and
caused the company to sell the house and lot. The sale was
recorded in the books of Klaus, Inc. as investment in real
property.
XXX
• (b) Is the sale subject to 6% capital gains tax or regular
corporate income tax of 30%? (2.5%)
18. CAPITAL GAINS TAX: SHARES
OF STOCK
1. SHARE OF STOCK – DOMESTIC CORPORATION – NOT
TRADED
• 15% OF NET CAPITAL GAIN
2. SHARES OF STOCK DOMESTIC CORPORATION – TRADED IN
THE STOCK EXCHANGE
1. NO CAPITAL GAINS TAX, ONLY LOCAL STOCK TRANSACTION TAX
3. SHARE OF STOCK – FOREIGN CORPORATION
1. RULES ON ORDINARY CAPITAL GAIN OR LOSS
19. BAR QUESTION (2018)
• Spouses Konstantino and Karina are Filipino citizens and are principal
shareholders of a restaurant chain, Karina's, Inc. The restaurant's principal office
is in Makati City, Philippines.
• Korina's became so popular as a Filipino restaurant that the owners decided to
expand its operations overseas. During the period 2010-2015 alone, it opened
ten (10) stores throughout North America and five (5) stores in various parts of
Europe where there were large Filipino communities. Each store abroad was in
the name of a corporation organized under the laws of the state or country in
which the store was located. All stores had identical capital structures: 60% of
the outstanding capital stock was owned by Karina's, Inc., while the remaining
40% was owned directly by the spouses Konstantino and Korina.
• Beginning 2017, in light of the immigration policy enunciated by US President
Donald Trump, many Filipinos have since returned to the Philippines and the
number of Filipino immigrants in the US dropped significantly. On account of
these developments, Konstantino and Karina decided to sell their shares of stock
in the five (5) US corporations that were doing poorly in gross sales. The spouses'
lawyer-friend advised them that they will be taxed 5% on the first PhP100,000
net capital gain, and 10% on the net capital gain in excess of PhP100,000.
• Is the lawyer correct? If not, how should the spouses Konstantino and Karina be
taxed on the sale of their shares? (5%)
20. CAPITAL GAIN: OTHER
PROPERTIES
• Holding period Rule
• 50% of capital gain is recognized if property is held for more than
one year
• Net capital loss carryover
• Net capital loss is not recognized but carried over to the next
period
21. PASSIVE INCOME
• INTEREST INCOME
• From currency bank deposit yield
• From other sources
• DIVIDEND INCOME
• Cash dividend
• Paid by domestic corp
• Paid by foreign corp
• Stock dividend
• ROYALTIES
• Paid by domestic corp
• Books, literary works,
• Other royalties
• Paid by foreign corp
