Tax Supplemental Reviewer - Assets.kpmg

kpmgVAT Exempt Transactionscontribution of each member does not exceed Fifteenthousand pesos (P15,000) and regardless of theaggregate capital and net surplus ratably distributedamong the members;(O) Export sales by persons who are not VAT-registered;(P) Sale of real properties not primarily held for sale tocustomers or held for lease in the ordinary course of tradeor business, or real property utilized for low-cost andsocialized housing as defined by R.A. No. 7279,otherwise known as the Urban Development and HousingAct of 1992, and other relatedlaws, residential lot valued at One million five hundredthousand pesos (P1,500,000) and below, house and lot,and other residential dwellings valued at Two million fivehundred thousand pesos (P2,500,000) and below:Provided, that beginning January 1, 2021, the VATexemption shall only apply to sale of real properties notprimarily held for sale to customers or held for lease inthe ordinary course oftrade or business, sale of real property utilized forsocialized housing as defined by R.A. No. 7279, sale ofhouse and lot, and other residential dwellings withselling price of not more than Two million pesos(P2,000,000):(Q) Lease of a residential unit with a monthly rental notexceeding Fifteen thousand pesos (P15,000);(R) Sale, importation, printing or publication of books andany newspaper, magazine, review or bulletin whichappears at regular intervals with fixed prices forsubscription and sale and which is not devoted principallyto the publication of paid advertisements;(S) Transport of passengers by international carriers;(T) Sale, importation or lease of passenger or cargovessels and aircraft, including engine, equipment andspare parts thereof for domestic or internationaltransport operations;(U) Importation of fuel, goods and supplies by personsengaged in international shipping or air transportoperations: Provided, that the fuel, goods, and suppliesshall be used for international shipping or air transportoperations;(V) Services of bank, non-bank financial intermediariesperforming quasi-banking functions, and other non-bankfinancial intermediaries;(W) Sale or lease of goods and services to senior citizensand persons with disability, as provided under R.A. Nos.9994 (Expanded Senior Citizens Act of 2010) and 10754(An Act Expanding the Benefits and Privileges of Personswith Disability), respectively;(X) Transfer of property pursuant to Section 40(C)(2) of theNIRC, as amended;VAT Exempt Transactions(Y) Association dues, membership fees, and otherassessments and charges collected by homeownersassociations and condominium corporations;(Z) Sale of gold to the BSP;(AA) Sale of drugs and medicines prescribed for diabetes,high cholesterol, and hypertension beginning January 1,2019;(BB) Sale or lease of goods or properties or theperformance of services other than the transactionsmentioned in the preceding paragraphs, the gross annualsales and/or receipts do not exceed the amount of Threemillion pesos (P3,000,000).5

kpmgGENERAL PRINCIPLESQ: What is Taxation and differentiate this from thepower of Eminent Domain and Police PowerA: It is the power by which the sovereign raisesrevenue to defray the expenses of the government. It isa way of apportioning the cost of the governmentamong those who in some measure are privileged toenjoy its benefits and must bear its burden. It isdescribed as an inherent power of the sovereign albeitdestructive which interferes with the personal andproperty rights of the people and takes from them aportion of their property for the support of thegovernment 2.On the other hand, Police Power is the power of theState to enact laws in relation to persons and propertyso as to promote public health, public moral, publicsafety and general welfare of the people. This is thepower of the state to regulate to promote the public’sgeneral welfare.Lastly, the power of Eminent Domain is the power ofthe State or those to whom the power has beendelegated to take private property for public use uponpaying the owner a just compensation to beascertained according to law.Q: What are the basic principles of a sound tax systemA:1. Fiscal Adequacy – the source of governmentfunds must be sufficient to answer for the needsof the public.2. Administrative Feasibility – tax laws andregulations should be capable for convenient,efficient and just execution and administration.3. Theoretical Justice – taxpayers’ burden shouldbe proportionate to the taxpayers’ ability to pay2Source: Paseo Realty & Development Corporation v. Court of Appeals,G.R. No. 1199286, 31 October 2004Q: Requisites for a valid taxA: The following are the requisites of a valid tax:1. A forced charge, imposition or contribution whichoperates ad infinitum or independent ofcontractual assent;2. Assessed in accordance with some reasonablerule of apportionment which conforms with themandate of the constitution to evolve aprogressive tax system which must be based onthe taxpayer’s ability to pay.3. Imposed by the State within its jurisdiction4. Levied through the legislative body of the statethrough laws5. Levied for a public purpose6. Personal to the taxpayer7. Not infringe on the inherent and constitutionallimitations of the power of taxationQ: May Congress under the 1987 constitution abolishthe power to taxA: No. Congress cannot abolish such power but canonly provide guidelines and limitations on the localgovernment’s power to tax.Q: Distinguish tax evasion from tax avoidanceA: Tax evasion is a scheme used outside of lawfulmeans to escape from one’s tax liabilities and, whenresorted to, may result to civil and criminal liabilities.Tax avoidance pertains to tax saving measures withinthe means sanctioned by laws and regulations.Q: May taxes be subject of set off or compensationclaims that individuals may have against thegovernmentA: No. The government and taxpayers are not mutualdebtors and creditors of each other. Also, claim fortaxes is not such debt, demand, contract or judgmentas is allowed to be set off. Debts are due to thegovernment in its corporate capacity while taxes aredue to the government in its sovereign capacity 3.3Source: United Airlines Inc. v. Commissioner of Internal Revenue, G.R.No. 178788, 29 September 2010 citing Philex v. Commissioner or InternalRevenue6

kpmgQ: Equitable recoupmentA: A common law concept wherein tax refund claimsbarred by prescription may be set off against a currentassessment. This is inapplicable in the Philippinessince the tax authorities are particular withprescriptive periods in successfully obtaining a taxrefund.Q: Differentiate tax amnesty, tax compromise and taxexemptionA: Tax amnesty pertains to a general portion orintentional overlooking by the State of its Authority toimpose penalties on persons otherwise guilty ofevasion or violation of a tax rule or regulation. It is anabsolute waiver by the Government of its right tocollect what should have been due. On the other hand,a tax compromise is an agreement whereby thetaxpayer offers to pay something less than what is dueand the government accepts it as a full settlement ofhis tax liability.Tax exemption is a grant of immunity to particularpersons or corporations or entities from a particularclass from a tax which such persons generally withinthe same state or taxing district are obliged to pay.These exemptions should be expressly granted. Theseare not favored and are strictly construed against thetaxpayer 4.4Source: Surigao Consolidated Mining v. Commissioner or InternalRevenue, G.R. No. L-14878, 26 December 1963.5Source: Commissioner of Internal Revenue (CIR) vs. COL Financing Group,Inc., CTA EB Case No. 1187, 30 June 2015NATIONAL TAXATION (AS AMENDEDBY R.A. No. 10963)TAXING AUTHORITYQ: Do the Commissioner of Internal Revenue (CIR)’srulings / rules have an inherent retroactive applicationA: No. The NIRC, specifically Section 246 thereof,prohibits retroactive rulings stating that anyrevocation, modification or reversal of any of the rulesand regulations shall not be given retroactiveapplication, if prejudicial to the taxpayers. This rule,however, is subject to three exceptions: (a) If thetaxpayer deliberately misstates or omits material factsfrom his return or any document required by the BIR; (b)If the facts subsequently gathered by the BIR arematerially different from the facts on which the rulingis based; or (c) If the taxpayer acted in bad faith 5.Q: Do Local Government Units have the same taxingpower as the National GovernmentA: No. The power to tax is inherent to the State. Whilemunicipalities, provinces, cities and barangays areterritorial and political subdivisions of the Republic ofthe Philippines, these jurisdictions, per se, do notnecessarily equate to the sovereign. Th power of aprovince to tax is limited to the extent such power isdelegated to it by either the Constitution or Statute 6.6Source: Pelizloy Realty Corporation v. The Province of Benguet, G.R. No.183137, 10 April 20137

kpmgINCOME TAXATIONQ: Definition of “income tax”A: Income tax is a direct tax imposed on actual orpresumed income – gross or net – realized by ataxpayer during a given taxable year 7.Q: Nature of income taxA: Income tax is generally regarded as an excise tax,levied upon the right of a person or entity to receiveincome or profits.Q: General principles of income taxationA: Except when otherwise provided in the NIRC:1. A citizen of the Philippines residing therein istaxable on all income derived from sources withinand without the Philippines;2. A nonresident citizen is taxable only on incomederived from sources within the Philippines;3. An individual citizen of the Philippines who isworking and deriving income from abroad as anoverseas contract worker is taxable only onincome from sources within the Philippines:Provided, that a seaman who is a citizen of thePhilippines and who receives compensation forservices rendered abroad as a member of thecomplement of a vessel engaged exclusively ininternational trade shall be treated as an overseascontract worker;4. An alien individual, whether a resident or not ofthe Philippines, is taxable only on income derivedfrom sources within the Philippines;5. A domestic corporation is taxable on all incomederived from sources within and without thePhilippines; and,6. A foreign corporation, whether engaged or not intrade or business in the Philippines, is taxable onlyon income derived from sources within thePhilippines.Q: Criteria in imposing Philippine income taxA:1. Citizenship Principle – A citizen of thePhilippines residing in the Philippines is taxable onall income derived from sources within andwithout the Philippines while a nonresident citizenis taxable only on income derived from sourceswithin the Philippines;2. Residence Principle – All income derived bypersons residing in the Philippines, whethercitizens or aliens, whether domestic or foreigncorporations, shall be subject to income tax on theincome derived from sources within thePhilippines.3. Source principle – All income derived fromsources within the Philippines shall be subject toincome tax.Q: Types of Philippine income taxesA:1.2.3.4.5.6.7.8.9.10.Graduated income tax on individualsNormal corporate income tax on corporationsMinimum corporate income tax on corporationsSpecial income tax on certain corporationsCapital gains tax on sale or exchange of unlistedshares of stock of a domestic corporationclassified as a capital assetCapital gains tax on sale or exchange of realproperty located in the Philippines and classifiedas capital assetFinal withholding tax on certain passiveinvestment incomesFringe benefit taxBranch profit remittance tax; andTax on improperly accumulated earnings.Q: Definition of “taxable period”A: “Taxable period” means the calendar year, or thefiscal year ending during such calendar year, upon thebasis of which the net income is computed under theNIRC. It includes, in the case of a return made for a7Source: Abakada Guro Party List vs. Ermita, G.R. Nos. 168056, 168207,168461, 168463, & 168730, 01 September 20058

kpmgfractional part of a year, the period for which suchreturn is madeQ: Kind of taxpayersA:1. Individual Taxpayersa. Resident citizens – A citizen of the Philippinesresiding in the Philippines.b. Nonresident citizen – means:i. A citizen of the Philippines who establishes tothe satisfaction of the Commissioner the factof his physical presence abroad with adefinite intention to reside therein.ii. A citizen of the Philippines who leaves thePhilippines during the taxable year to resideabroad, either as an immigrant or foremployment on a permanent basis.iii. A citizen of the Philippines who works andderives income from abroad and whoseemployment thereat requires him to bephysically present abroad most of the timeduring the taxable year.iv. A citizen who has been previously consideredas nonresident citizen and who arrives in thePhilippines at any time during the taxableyear to reside permanently in the Philippinesshall likewise be treated as a nonresidentcitizen for the taxable year in which he arrivesin the Philippines with respect to his incomederived from sources abroad until the date ofhis arrival in the Philippines.v. The taxpayer shall submit proof to theCommissioner to show his intention ofleaving the Philippines to reside permanentlyabroad or to return to and reside in thePhilippines as the case may be.c.Resident aliens – individuals whose residence iswithin the Philippines and who is not a citizenthereof.d. Nonresident aliens – individuals whoseresidence is not within the Philippines and who isnot a citizen thereof.e. Minimum Wage Earner – a worker in the privatesector paid the statutory minimum wage, or anemployee in the public sector with compensationincome of not more than the statutory minimumwage in the non-agricultural sector where he/sheis assigned.2. Corporations – include partnerships, no matterhow created or organized, joint-stock companies,joint accounts, associations, or insurancecompanies (does not include general professionalpartnerships and a joint venture or consortiumformed for the purpose of undertakingconstruction projects or engaging in petroleum,coal, geothermal and other energy operationspursuant to an operating or consortium agreementunder a service contract with the Government).a. Domestic corporations – those created ororganized in the Philippines or under its laws.b. Foreign corporations – corporations which arenot domestic.i.Resident foreign corporations – foreigncorporations engaged in trade or businesswithin the Philippines.ii. Nonresident foreign corporations –foreign corporations not engaged in trade orbusiness within the Philippines3. General Professional Partnerships (GPP) –partnerships formed by persons for the solepurpose of exercising their common profession, nopart of the income of which is derived fromengaging in any trade or business.4. Estates and Trusts – An estate is created byoperation of law, when an individual dies, leavingproperties to his compulsory or other heirs, whilea trust is a legal arrangement whereby the ownerof property transfers ownership to a person who isto hold and control the property belonging to theowner’s instructions, for the benefit of adesignated person.9

kpmgQ: Definition of “income” A: Income is the gain derived from capital, from labor,or from both combined, provided it be understood toinclude profit gained through a sale or conversion ofcapital assets 8.Q: Nature of incomeA: Income a flow of services rendered by that capitalby the payment of money from it or any other benefitrendered by a fund of capital in relation to such fundthrough a period of time 9.Q: When is income recognizedA: Under the realization principle, revenue is generallyrecognized when both of the following conditions aremet: (1) the earning process is complete or virtuallycomplete; and, (2) an exchange has taken place. Thisprinciple requires that revenue must be earned beforeit is recorded 10.Q: When is income taxableA: The following requisites must be present: (1) thereis income, gain or profit; (2) the income, gain or profitis received or realized during the taxable year; and, (3)The income, gain or profit is not exempt from incometax.Q: What are the tests in determining whether incomeis earned for tax purposesA: Realization/Severance Test – There is notaxable income until there is a separation fromcapital of something of exchangeable value,thereby supplying the realization or transmutationwhich would result in the receipt of income. 8Source: Fisher vs. Trinidad, G.R. No. 17518, 30 October 1922Source: Madrigal vs. Rafferty, G.R. No. 12287, 07 August 1918Q: What are tax-free exchangesA: General Rule: Upon the sale or exchange ofproperty, the entire amount of the gain or loss, as thecase may be, shall be recognized.Exception: No gain or loss shall be recognized if inpursuance of a plan of merger or consolidation –1. A corporation, which is a party to a merger orconsolidation, exchanges property solely for stockin a corporation, which is a party to the merger orconsolidation; or2. A shareholder exchanges stock in a corporation,which is a party to the merger or consolidation,solely for the stock of another corporation also aparty to the merger or consolidation; or3. A security holder of a corporation, which is a partyto the merger or consolidation, exchanges hissecurities in such corporation, solely for stock orsecurities in another corporation, a party to themerger or consolidation; or4. If property is transferred to a corporation by aperson in exchange for stock or unit ofparticipation in such a corporation of which as aresult of such exchange said person, alone ortogether with others, not exceeding four (4)persons, gains control of said corporation:Provided, that stocks issued for services shall notbe considered as issued in return for property.Q: What is the doctrine of situs of taxationA: No state may tax anything not within its jurisdictionwithout violating the due process clause of theconstitution. The taxing power of a state does notextend beyond its territorial limits, but within such10Source: Manila Mandarin Hotels, Inc. vs. Commissioner of InternalRevenue, C.T.A. Case No. 5046, 24 March 1997109Economic Benefit Test – Any economic benefitto the employee that increases his net worth,whatever may have been the mode by which it iseffect, is taxable.Claim of Right Doctrine – a taxable gain isconditioned upon the presence of a claim of right

Not over P250,000 0% Over P250,000 but not over P400,000 20% of the excess over P250,000