Chapter 9

Exempt prizes and winnings:

1.Prices received without effort to join a contest 2.Prices in athletic competitions sanctioned by their respective national sports association 3.Winnings from PCSO or lotto, not exceeding P10,000 in amount

Special considerations on rent

1. obligations of the lessor that are assumed by the lessee are additional rental income to the lessor: 2. Advance rentals are a. Item of gross income upon receipt if: i. unrestricted or ii. Restricted to be applied in future years or upon the termination of the lease b. not an item of gross income if: i. it constitutes a loan ii. it is a security deposit to guarantee payment or rent subject to contingency which may or may not happen. 3. Leasehold improvements made by the lessee on the leased property are recognized by the lessor as income using the spread-out method or outright method discussed in Chapter 4.

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME

1.Accounting Methods 2. Situs rules 3. Effect of value added tax 4. Creditable withholding tax 5. Power of the CIR to redistribute income and expenses

Transfer pricing methods

1.Comparable uncontrolled price (CUP) 2.Resale price method (RPM) 3.Cost plus method (CPM) 4.Profit split method (PSM) 5.Transactional net margin method (TNMM)

Tax Benefit

1.Directly, through reduction of taxable income in the year deduction is made. 2.Indirectly, through reduction of future taxable income through carry-over of net operating loss

OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX

1.Income distribution from taxable estate or trusts 2.Share from the net income of other pass-through entities:a.Exempt Joint Venture b.Exempt Co-ownership 3.Farming Income 4..Recovery of past deductions 5..Reimbursement of expenses 6.Cancellation of indebtedness for a consideration

Examples of interest income exempt from regular income taxation:

1.Interest income earned by landowners in disposing their lands to their tenants pursuant to the Comprehensive Agrarian Reform Law 2.Imputed Interest Income

Examples of interest income subject to regular income tax:

1.Interest income from lending activities to individuals and corporations by banks, finance companies and other lenders. 2.Interest income from bonds and promissory notes 3.Interest income from banks deposits abroad

Farming income

1.Raise and sell operation -Proceeds on the sales of livestock or farm products is included in gross income subject to RIT. -Animal raising expenses are presented as items of deductions against gross income 2.Purchase and sell operation -Gross profit from the sale (sales less cost of purchase) is included in gross income.

Accounting Methods

Accounting method has direct effect on the reportable amount of gross income subject to RIT Regardless of the accounting methods of the taxpayer, advanced income must be included in the gross income in the period received

Income Distribution from taxable estates or trusts

Any income distribution received by an heir or beneficiary from a taxable estate or trust shall be included in his gross income subject to REGULAR TAX, PROVIDED that such income must not have been subjected to final tax or CGT.

Rent

Arises from leasing properties of ANY KIND. It is a passive income but not subject to final tax; hence, it is subject to regular income tax

Creditable Withholding Tax

CWT deducted by income payors against the gross income of the taxpayer are not exclusions in gross income

Effects of Value Added Tax on Reportable Gross Income

Classification of business taxpayers in terms of VAT: 1.VAT taxpayers - if the sales or receipts exceeds P3,000,000 in the last consecutive 12-month period 2.Non-VAT taxpayers - if their sales or receipts is below the VAT threshold or are specifically designed by the law to pay percentage taxes Amount of reportable gross income shall not include the output VAT

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX 1.Compensation for services in whatever form paid

Employee benefits that are subject to regular tax However, fringe benefits received by employees or officers with managerial and supervisory position are not considered compensation income and are subject to final tax.

Recovery of past deductions

Examples of recoveries of past deductions: 1.Recovery of previously claimed bad debt expense 2.Refund of local tax expense 3.Refund of foreign tax previously claimed as deduction 4.Re-commissioning of abandoned petroleum service contracts or mining properties 5.Release of reserve funds of insurance companies 6.Interest expense which were subsequently condoned by the lender

Annuities

Excess annuity payments received by the recipient over premium paid is TAXABLE IN THE YEAR OF RECEIPT

Reimbursement of expenses

Expenses of the taxpayer that are reimbursed or paid by the customer or client constitute additional income to the taxpayer-

Partner's distributable share from the net income of the GPP

GPP are not subject to income tax because they are merely viewed as pass-through entities The partners are the ones subject to regular tax on their share in the net income of the GPP

Gains from Dealings in Properties

Gains or losses in dealing in ORDINARY ASSETS Dealings in capital assets OTHER THAN DOMESTIC STOCKS AND REAL PROPERTIES

Interest Income

Interest income OTHER than passive interest income subject to final tax It must have been ACTUALLY PAID out of an agreement to pay interest It CANNOT be imputed

Cancellation of Indebtedness

May amount to gratuity or payment of income Treatment of cancellation: 1.In consideration of service or goods - treated as income 2.As an act of gratuity - treated as gift; not as income 3.As capital transaction such as forfeiting the right to receive dividends in exchange of the debt - treated as dividend income

Pensions

Pensions and retirements that FAIL TO MEET THE EXCLUSION criteria and hence subject to regular tax.

ITEMS OF GROSS INCOME OR INCLUSION IN GROSS INCOME

Pertains to all items of income subject to taxation namely: 1.Gross income subject to FINAL TAX 2.Gross income subject to CAPITAL GAINS TAX 3.Gross income subject to REGULAR TAX

Prizes and winnings

Prizes and winnings that are exempted from final tax are not items of gross income subject to regular income tax

Refund of non-deductible expenses

Refund of the following non-deductible items is not taxable: 1.Philippine income tax 2.Estate or donor's tax 3.Income tax paid or incurred to a foreign country if the taxpayer claimed a credit for such tax in the year it was paid or incurred. 4.Stock transaction tax in disposing stocks through the PSE 5.Special assessment

Share from the net income of exempt joint ventures and co-ownerships

Same tax treatment on recognition of share in the net income of a GPP

Situs Rules

Taxpayers are taxable only on Philippine income except resident citizens and domestic corporations which are taxable on global income

The problem of unfair pricing between associated enterprises

There is a risk that the pricing of the transfer of goods and services between associated enterprises will be control in such a way to further the interest of the associated enterprises as a whole in disregard of their social responsibility on taxes.

Transfer Pricing between Associated Enterprises

There is a risk that the pricing of the transfer of goods and services between associated enterprises will controlled in such a way to further the interests of the associated enterprises as a whole

Power of the CIR to redistribute income and deductions

This is being done in the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled direclty or indirectly by the same interests This is to prevent evasion of taxes or clearly to reflect the income of any such organization

The following are subject to Regular income tax

Those that are not subject to final tax, capital gains tax, and special tax regime, and Those are not excluded or exempted by law, treaty, or contract from taxation

Transfer Pricing Guideline (RR2-2013

What are associated enterprises? -Two or more enterprises are associated if one participates directly or indirectly in the management, control, or capital of the other; or if the same persons participate directly or indirectly in the management, control, or capital of the enterprises. They are also called "related parties." Preferred transfer pricing among associated enterprises should be uncontrolled determined by free market forces also referred to as "arm's length pricing".

Effects of value added tax on reportable gross income

a. VAT taxpayers - if their sales or receipts exceeds P3,000,000 in the last consecutive 12-month period b. Non-VAT taxpayers - if their sales or gross receipts is below the VAT threshold or are specifically designated by the law to pay percentage taxes

Every VAT TAXPAYER

is mandatorily required to charge 12% output tax on their sales or receipt