PART 2:
SECTION 59. Gross
income of a corporation in liquidation. — When a corporation is dissolved, its
affairs are usually wound up by a receiver or trustee in dissolution. The
corporate existence is continued for the purpose of liquidating the assets and
paying the debts, and such receiver or trustee stands in the stead of the corporation
for such purposes. Any sales of property by them are to be treated as if made
by the corporation for the purpose of ascertaining the gain or loss.
SECTION 60. Gross
income of foreign corporations. — The gross income of a foreign corporation
subject to tax consists of its gross income from sources within the
Philippines. Gross income from sources within the Philippines, as applied to
foreign corporations, shall include interest received on bonds, notes, or other
interest-bearing obligations issued by residents, corporate or otherwise, as
well as income derived from dividends on the capital stock or from the net
earnings of domestic or resident foreign corporations, joint stock companies,
associations, or insurance companies, dividends from other foreign corporations
to the extent provided in Section 37 of the Code, and likewise income from
rentals and royalties from all sources within the Philippines.
(Section 29(b) of the Code)
SECTION 61. Exclusions
from gross income. — The term "gross income" as used in the Act does
not include those items of income exempted by statute or by fundamental law.
Such tax-free income should not be included in the income tax return unless
information regarding it is specifically called for. The exclusion of such
income should not be confused with the reduction of gross income by the
application of allowable deductions.
SECTION 62. Proceeds
of insurance. — The proceeds of life-insurance policies, paid by reason of the
death of an insured to his estate or to any beneficiary (individual,
partnership, or corporation, but not a transferee for a valuable
consideration), directly or in trust, are excluded from the gross income of the
beneficiary. It is immaterial whether the proceeds are received in a single sum
or in installments. If, however, such proceeds are held by the insurer under an
agreement to pay interest thereon, the interest payments must be included in
gross income. Amounts received (other than amounts paid by reason of the death
of the insured and interest payments on such amounts) under a life insurance,
endowment, or annuity contract are excluded from gross income but, if such
amounts (when added to amounts received before the taxable year under such
contract) exceed the aggregate premiums or consideration paid (whether or not
paid during the taxable year) then the excess shall be included in gross
income. However, in the case of a transfer for a valuable consideration, by
assignment or otherwise, of a life insurance, endowment, or annuity contract,
or any interest therein, only the actual value of such consideration and the
amount of the premiums and other sums subsequently paid by the transferee are
exempt from taxation.
SECTION 63. Amounts
received as compensation for injuries or sickness. — The amounts received by an
insured or his estate or beneficiaries through accident or health insurance or
under workmen's compensation acts as compensation for personal injuries or
sickness are excluded from the gross income of the insured, his estate, and
other beneficiaries. Any damages recovered by suit or agreement on account of
such injuries or sickness are similarly excluded from the gross income of the
individual injured or sick, if living, or of his estate or other beneficiaries
entitled to receive such damages, if dead.
SECTION 64. Gifts
and bequests. — Property received as a gift or received under a will or
testament or through legal succession, is exempt from the income tax, although
the income therefrom or income derived from its investment, sale, or otherwise
is not. An amount of principal paid under a marriage settlement is a gift.
Neither alimony nor an allowance based on a separation agreement is taxable
income.
(Section 30(a) of the Code)
SECTION 65. Business
expenses. — Business expenses deductible from gross income include the ordinary
and necessary expenditures directly connected with or pertaining to the
taxpayer's trade or business. The cost of goods purchased for resale, with
proper adjustment for opening and closing inventories, is deducted from gross
sales is computing gross income. Among the items included in business expenses
are management expenses, commissions, labor, supplies, incidental repairs,
operating expenses of transportation, equipment used in the trade or business,
traveling expenses while away from home solely in the pursuit of a trade or
business, advertising and other selling expenses, together with insurance
premiums against fire, storm, theft, accident, or other similar losses in the
case of a business, and rental for the use of business property. A taxpayer is
entitled to deduct the necessary expenses paid in carrying on his business from
his gross income from whatever source.
SECTION 66. Traveling
expenses. — Traveling expenses as ordinarily understood, include transportation
expenses and meals and lodging. If the trip is undertaken for other than
business purposes, the transportation expenses are personal expenses, and the
meals and lodging are living expenses, and therefore, not deducible. If the
trip is solely on business, the reasonable and necessary traveling expenses,
including transportation expenses, meals and lodging, become business instead
of personal expenses.
(a) If,
then, an individual, whose business requires him to travel receives a salary as
full compensation for his services, without reimbursement for traveling
expenses, or is employed on a commission basis with no expense allowance, his
traveling expenses, including the entire amount expended for meals and lodging,
are deductible from gross income.
(b) If
an individual receives a salary and is also repaid his actual traveling
expenses, he shall include in gross income, the amount so repaid and may deduct
such expenses.
(c) If
an individual receives a salary and also an allowance for meals and lodging, as
for example, a per diem allowance in lieu of subsistence, the amount of the
allowance should be included in gross income and the cost of such meals and
lodging may be deducted therefrom.
A payment for the use of a sample room at a
hotel for the display of goods is a business expense. Only such expenses as are
reasonable and necessary in the conduct of the business and directly
attributable to it may be deducted. A taxpayer claiming the benefit of the
deductions referred to herein must attach to his return a statement showing (1)
the nature of the business in which he is engaged; (2) the number of days away
from home during the taxable year on account of business; (3) the total amount
of expenses incident to meals and lodging while absent from home and business
during the taxable year; (4) the total amount of other expenses incident to
travel and claimed as a deduction.
Claim for the deductions referred to herein
must be substantiated, when required by the Commissioner of Internal Revenue by
record showing in detail the amount and nature of the expenses incurred.
SECTION 67. Cost
of materials. — Taxpayers carrying materials and supplies on hand should
include in expenses the charges for materials and supplies only to the amount
that they are actually consumed and used in operation during the year for which
the return is made, provided that the cost of such materials and supplies has
not been deducted in determining the net income for any previous year. If a
taxpayer carries incidental materials or supplies on hand for which no record
of consumption is kept or of which physical inventories at the beginning and
end of the year are not taken, it will be permissible for the taxpayer to
include in his expenses and deduct from gross income the total cost of such
supplies and materials as were purchased during the year for which the return
is made, provided the net income is clearly reflected by this method.
SECTION 68. Repairs.
— The cost of incidental repairs which neither materially add to the value of
the property nor appreciably prolong its life, but keep it in an ordinarily
efficient operating condition, may be deducted as expense, provided the plant
or property account is not increased by the amount of such expenditure. Repairs
in the nature of replacement, to the extent that they arrest deterioration and
appreciably prolong the life of the property should be charged against the
depreciation reserves if such account is kept.
SECTION 69. Professional
expenses. — A professional may claim as deductions the cost of supplies used by
him in the practice of his profession, expenses paid in the operation and
repair of transportation equipment used in making professional calls, dues to
professional societies and subscriptions to professional journals, the rent
paid for office rooms, the expenses of the fuel, light, water, telephone, etc.;
used in such offices, and the hire of office assistants. Amounts currently
expended for books, furnitures, and professional instruments and equipment, the
useful life of which is short, may be deducted. But amounts expended for books,
furniture, and professional instruments and equipment of a permanent character
are not allowable as deductions.
SECTION 70. Compensation
for personal services. — Among the ordinary and necessary expenses paid or
incurred in carrying on any trade or business may be included a reasonable
allowance for salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments purely for service. This
test and its practical application may be further stated and illustrated as
follows:
(1) Any
amount paid in the form of compensation, but not in fact as the purchase price
of services, is not deductible. (a) An ostensible salary paid by a corporation
may be a distribution of dividend on stock. This is likely to occur in the case
of a corporation having few shareholders, practically all of whom draw
salaries. If in such a case the salaries are in excess of those ordinarily paid
for similar services, and the excessive payment correspond or bear a close
relationship to the stockholdings of the officers or employees, it would seem
likely that the salaries are not paid wholly for services rendered, but that
the excessive payments are a distribution of earnings upon the stock. (b) An
ostensible salary may be in part payment for property. This may occur, for
example, where a partnership sells out to a corporation, the former partners
agreeing to continue in the service of the corporation. In such a case it may
be found that the salaries of the former partners are not merely for services,
but in part constitute payment for the transfers of their business.
(2) The
form or method of fixing compensation is not decisive as to deductibility.
While any form of contingent compensation invites scrutiny as a possible
distribution of earnings of the enterprise, it does not follow that payments on
a contingent basis are to be treated fundamentally on any basis different from
that applying to compensation at a flat rate. Generally speaking, if contingent
compensation is paid pursuant to a free bargain between the employer and the
individual made before the services are rendered, not influenced by any
consideration on the part of the employer other than that of securing on fair
and advantageous terms the services of the individual, it should be allowed as
a deduction even though in the actual working out of the contract it may prove
to be greater than the amount which would ordinarily be paid.
(3) In
any event the allowance for compensation paid may not exceed what is reasonable
in all the circumstances. It is in general just to assume that reasonable and
true compensation is only such amount as would ordinarily be paid for like
services by like enterprises in like circumstances. The circumstances to be
taken into consideration are those existing at the date when the contract for
services was made, not those existing at the date when the contract is
questioned.
SECTION 71. Treatment
of excessive compensation. — The income tax liability of the recipient in
respect of an amount ostensibly paid to him as compensation, but not allowed to
be deducted as such by the payer, will depend upon the circumstances of each
case. Thus, in the case of excessive payments by corporations, if such payments
correspond or bear a close relationship to stockholdings, and are found to be
distribution of earnings or profits, the excessive payments will be treated as
dividend. If such payments constitute payment for property, they should be
treated by the payer as a capital expenditure and by the recipient as part of
the purchase price.
SECTION 72. Bonuses
to employees. — Bonuses to employees will constitute allowable deductions from
gross income when such payments are made in good faith and as additional
compensation for the services actually rendered by the employees, provided such
payment, when added to the stipulated salaries, do not exceed a reasonable
compensation for the service rendered. It is immaterial whether such bonuses
are paid in cash or in kind or partly in cash and partly in kind. Donations
made to employees and others, which do not have in them the element of
compensation or are in excess of reasonable compensation for services, are not
deductible from gross income.
SECTION 73. Pensions,
compensation for injuries. — Amounts paid for pensions to retired employees or
to their families or others dependent upon them, or on account of injuries
received by employees, and lump-sum amounts paid or accrued as compensation for
injuries, are proper deductions as ordinary and necessary expenses. Such
deductions are limited to the amount not compensated for by insurance or
otherwise. When the amount of the salary of an officer or employee is paid for
a limited period after his death to his widow or heirs, in recognition of the
services rendered by the individual, such payments may be deducted. Salaries
paid by employers to employees who are absent in the military, naval or other
service of the Government, but who intend to return at the conclusion of such
service, are allowable deductions. (See Section 118 of these regulations,
relative to pension trust.)
SECTION 74. Rentals.
— Where a leasehold is acquired for business purposes for a specified sum, the
purchaser may take as a deduction in his return an aliquot part of such sum
each year, based on the number of years the lease has to run. Taxes paid by a
tenant to or for a landlord for business property are additional rent and
constitute a deductible item to the tenant and taxable income to the landlord,
the amount of the tax being deductible by the latter. The cost borne by a
lessee in erecting buildings or making permanent improvements on ground of
which he is lessee is held to be a capital investment and not deductible as a
business expense. In order to return to such taxpayer his investment of
capital, an annual deduction may be made from gross income of an amount equal
to the cost of such improvements divided by the number of years remaining of
the term of lease, and such deduction shall be in lieu of a deduction for
depreciation. If the remainder of the term of lease is greater than the
probable life of the buildings erected, or of the improvements made, this
deduction shall take the form of an allowance for depreciation.
SECTION 75. Expenses
of farmers. — A farmer who operates a farm for profit is entitled to deduct
from gross income as necessary expenses all amounts actually expended in the
carrying on of the business of farming. The cost of ordinary tools of short
life or small cost, such as hand tools, including shovels, rakes, etc., may be
included. The cost of feeding and raising livestock may be treated as an
expense deduction, in so far as such cost represents actual outlay, but not
including the value of farm produce grown upon the farm or the labor of the
taxpayer. Where a farmer is engaged in producing crops which take more than a
year from the time of planting to the process of gathering and disposal,
expenses deducted may be determined upon the crop basis, and such deductions
must be taken in the year in which the gross income from the crop has been
realized. The cost of farm machinery, equipment, and farm buildings represents
a capital investment and is not an allowable deduction as an item of expense.
Amounts expended in the development of farms, orchards, and ranches, prior to
the time when the productive state is reached may be regarded as investments of
capital. Amounts expended in purchasing work, breeding or dairy animals are
regarded as investments of capital, and may be depreciated unless such animals
are included in an inventory in accordance with Section 149 of these
regulations. The purchase price of transportation equipment even when wholly
used in carrying on farm operations, is not deductible but is regarded as an
investment of capital. The cost of gasoline or fuel, repairs, and upkeep of the
transportation equipment if used wholly in the business of farming is
deductible as an expense; if used partly for business purposes and partly for the
pleasure or convenience of the taxpayer or his family, such cost may be
apportioned according to the extent of the use for purposes of business and
pleasure or convenience, and only the proportion of such cost justly
attributable to business purposes is deductible as a necessary expense. If a
farm is operated for recreation or pleasure and not on a commercial basis, and
if the expenses incurred in connection with the farm are in excess of the
receipt therefrom, the entire receipts from the sale of products may be ignored
in rendering a return of income, and the expenses incurred, being regarded as
personal expenses, will not constitute allowable deduction.
SECTION 76. When
charges are deductible. — Each year's return, so far as practicable, both as to
gross income and deductions therefrom, should be complete in itself, and
taxpayers are expected to make every reasonable effort to ascertain the facts
necessary to make a correct return. The expenses, liabilities, or deficit of
one year cannot be used to reduce the income of a subsequent year. A taxpayer
has the right to deduct all authorized allowances and it follows that if he
does not within any year deduct certain of his expenses, losses, interests,
taxes, or other charges, he can not deduct them from the income of the next or
any succeeding year. If it is recognized, however, that particularly in a going
business of any magnitude there are certain overlapping items both of income
and deduction, and so long as these overlapping items do not materially distort
the income, they may be included in the year in which the taxpayer, pursuant to
a consistent policy, takes them into his accounts. Judgments or other binding
judicial adjudication, on account of damages for patent infringement, personal
injuries, or other cause, are deductible from gross income when the claim is so
adjudicated or paid, unless taken under other methods of accounting which
clearly reflect the correct deduction, less any amount of such damages as may
have been compensated for by insurance or otherwise: If subsequent to its
occurrence, however, a taxpayer first ascertains the amount of a loss sustained
during a prior taxable year which has not been deducted from gross income, he
may render an amended return for such preceding taxable year including such
amount of loss in the deduction from gross income and may in proper cases file
a claim for refund of the excess tax paid by reason of the failure to deduct
such loss in the original return. A loss from theft or embezzlement occurring in
one year and discovered in another is ordinarily deductible for the year in
which sustained.
SECTION 77. Expenses
allowable to non-resident aliens and foreign corporations. — The expenses
allowable to a non-resident alien or a foreign corporation consist of only such
expenses as are incurred in carrying on any business or trade conducted within
the Philippines exclusively.
(Section 30(b) of the Code)
SECTION 78. Interest.
— Interest paid or accrued within the taxable year on indebtedness may be
deducted from gross income, except that interest on indebtedness incurred or
continued to purchase bonds and other securities, the interest upon which is
exempt from tax, is not deductible. Interest paid by the taxpayer on a mortgage
upon real estate of which he is the legal or equitable owner, even though the
taxpayer is not directly liable upon the bond or not secured by such mortgage,
may be deducted as interest on his indebtedness.
In the case of a non-resident alien
individual or foreign corporation, the allowable deduction will be the
proportion of such interest which the amount of gross income from sources
within the Philippines bears to the amount of gross income from all sources
within and without this country; however, to avail of this deduction, such non-resident
alien individual or foreign corporation shall include in the return all the
information necessary for its calculation.
Interest paid by a corporation on scrip
dividends is an allowable deduction. So-called interest on preferred stock,
which is in reality a dividend thereon, can not be deducted in computing net
income. In the case of banks and loan or trust companies, interest paid within
the year on deposits or on moneys received for investment and secured by
interest-bearing certificates of indebted issued by such hank or loan or trust
company may be deducted from gross income.
SECTION 79. Interest
on capital. — Interest calculated for cost-keeping or other purposes on account
of capital or surplus invested in the business, which does not represent a
charge arising under an interest-bearing obligation, is not allowable deduction
from gross income.
(Section 30(c) of the Code)
SECTION 80. Taxes
in general. — As a general rule, taxes are deductible with the exception of
those with respect to which the law does not permit deduction. However, in the
case of a non-resident alien individual and a foreign corporation, deduction is
allowed only if and to the extent that the taxes for which deduction is claimed
are connected with income from sources within the Philippines.
Import duties paid to the proper customs
officers, and business, occupation, license, privilege, excise and stamp taxes
and any other taxes of every name or nature paid directly to the Government of
the Philippines or to any political subdivision thereof, are deductible.
The
word "taxes" means taxes proper and no deductions should be allowed
for amounts representing interest, surcharge, or penalties incident to
delinquency. Postage is not a tax. Automobile registration fees are considered
taxes. Taxes are deductible as such only by the person upon whom they are
imposed. Thus the merchants' sales tax imposed by law upon sales is not
deductible by the individual purchaser even though the tax may be billed to him
as a separate item.
In computing the net income of an
individual no deduction is allowed for the taxes imposed upon his interest as
shareholder of a bank or other corporation, which are paid by the corporation
without reimbursement from the taxpayer. The amount so paid should not be
included in the income of the shareholder.
In the case of corporate bonds or other
obligations containing a tax-free covenant clause the corporation paying a tax
or any part of it, for someone else pursuant to its agreement is not entitled
to deduct such payment from gross income on any ground.
SECTION 81. Income
tax imposed by the Government of the Philippines. — The law does not permit the
deduction of the income tax paid to or accrued in favor of the Government of
the Philippines, and in no case may the taxpayer avail of such deduction.
SECTION 82. Income,
war-profits, and excess-profits taxes imposed by the authority of a foreign
country. — Income, war-profits, and excess-profits taxes imposed by the
authority of a foreign country (including the United States and possessions
thereof) are allowed as deductions only if the taxpayer does not signify in his
return his desire to have to any extent the benefits of the provisions of law
allowing credits against the tax for taxes of foreign countries. In the case of
a citizen of a foreign country residing in the Philippines whose income from
sources within such foreign country is not subject to income tax, only that
portion of the taxes paid to such foreign country which corresponds to his net
income subject to the Philippine income tax shall be allowed as deduction.
SECTION 83. Estate,
inheritance, and gift taxes: taxes assessed against local benefits. — Estate,
inheritance, and gift taxes are not deductible.
So-called taxes, more properly assessments,
paid for local benefits, such as street, sidewalk, and other like improvements,
imposed because of and measured by some benefit inuring directly to the
property against which the assessment is levied, do not constitute an allowable
deduction from gross income. A tax is considered assessed against local
benefits when the property subject to the tax is limited to the property
benefited. Special assessments are not deductible, even though an incidental
benefit may inure to the public welfare. The taxes deductible are those levied
for the general public welfare, by the proper taxing authorities at a like rate
against all property in the territory over which such authorities have
jurisdiction. When assessments are made for the purpose of maintenance or
repair of local benefits, the taxpayer may deduct assessments paid as an
expense incurred in business, if the payment of such assessments is necessary
to the conduct of his business. When the assessments are made for the purpose
of constructing local benefits, the payments by the taxpayer are in the nature
of capital expenditures and are not deductible. Where assessments are made for
the purpose of both construction and maintenance or repairs, the burden is on
the taxpayer to show the allocation of the amounts assessed to the different
purposes. If the allocation can not be made, none of the amounts so paid is
deductible.
SECTION 84. Analysis
of credit for taxes: — If the taxpayer signifies in his return his desire to
claim a credit for taxes, the basis of such credit, in the case of a citizen of
the Philippines, whether resident or non-resident, and in the case of a
domestic corporation, is as follows: (a) The amount of any income, war-profits,
and excess-profits taxes paid or accrued during the taxable year to any foreign
country; and (b) an individual's proportionate share of any such taxes of which
he is a partner or of an estate or trust of which he is a beneficiary paid or
accrued during the taxable year to a foreign country if his distributive share
of the income of such partnership or trust is reported for taxation under Title
II of the Code.
In the case of an alien resident of the
Philippines who signifies in his return his desire to claim a credit for such
taxes the basis of the credit is as follows: (a) The amount of any such taxes
paid or accrued during the taxable year to any foreign country if the foreign
country of which such alien resident is a citizen or subject, in imposing such
taxes, allows a similar credit to citizens of the Philippines residing in such
country; and (b) his proportionate share of any such taxes of a partnership of
which he is a partner or an estate or trust of which he is a beneficiary paid
or accrued during the taxable year to any foreign country if his distributive
share of the net income of such partnership or trust is reported for taxation
under Title II of the Code, and if the foreign country of which such alien
resident is a citizen or subject, in imposing such taxes, allows a similar
credit to citizens of the Philippines residing in such country.
If a taxpayer signifies in his return his
desire to claim credit for taxes, such action will be considered to apply to
income, war-profits, and excess-profits taxes paid to all foreign countries
(including the United States and possessions thereof), and no portion of any
such taxes shall be allowed as a deduction from gross income.
SECTION 85. Meaning
of terms. — The "amount of any income, war-profits, and excess-profits
taxes paid or accrued during the taxable year" means taxes proper (no credit
being given for amounts representing interest or penalties) paid or accrued
during the taxable year on behalf of the taxpayer claiming credit.
"Foreign country" means any foreign state or political subdivision
thereof, or any foreign political entity, which levies and collects income,
war-profits, or excess-profits taxes, and includes the United States or any
political subdivision thereof.
SECTION 86. Conditions
of allowance of credits. — If the taxpayer signifies in his return his desire
to claim credit for income, war-profits, or excess-profits taxes paid other
than to the Philippines, the income tax return must be accompanied by the
appropriate form prescribed by the Commissioner of Internal Revenue. The form
must be carefully filled in with all the information there called for and with
the calculations of credits there indicated, and must be duly signed and sworn
to or affirmed. If credit is sought for taxes already paid the form must have
attached to it the receipt for each such tax payment. If credit is sought for
taxes accrued, the form must have attached to it the return on which each such
accrued tax was based. This receipt or return so attached must be either the
original, a duplicate original, a duly certified or authenticated copy, or a sworn
copy. In case only a sworn copy of a receipt or return is attached, there must
be kept readily available for comparison on request the original, a duplicate
original, or a duly certified or authenticated copy. If the receipt of the
return is in a foreign language, a certified translation thereof must be
furnished by the taxpayer. Any additional information necessary for the
determination of the amount of income derived from sources without the
Philippines and from each foreign country shall, upon the request of the
Commissioner of Internal Revenue, be furnished by the taxpayer.
In the case of a credit sought for a tax
accrued but not paid, the Commissioner of Internal Revenue may in addition
require as a condition precedent to the allowance of credit a bond from the
taxpayer. It shall be in such sum as the Commissioner of Internal Revenue may
prescribe, and shall be conditioned for the payment by the taxpayer of any
amount of tax found due upon any redetermination of the tax made necessary by
such credit proving incorrect, with such further conditions as the Commissioner
of Internal Revenue may require. This bond shall be executed by the taxpayer,
or the agent or representative of the taxpayer, as principal, and by sureties
satisfactory to and approved by the Commissioner of Internal Revenue.
If it is the desire of the taxpayer to
claim as a credit and not as a deduction accrued income, war-profits, and
excess profits taxes imposed by the authority of any foreign country or
possession of the United States but at the time the return is made it is
impossible to estimate the amount of such taxes that may have accrued for the
period for which the return is made, the form required under this section may
be filed at a later date but a credit cannot be allowed for such taxes unless
the taxpayer signifies in his return his desire to have to any extent the
benefits of Section 30(c) (3) to (9).
SECTION 87. Redetermination
of tax when credit proves incorrect. — In case credit has been given for taxes
accrued, or a proportionate share thereof, and the amount that is actually paid
on account of such taxes, or a proportionate share thereof, is not the same as
the amount of such credit, or in case any tax payment credited is refunded in
whole or in part, the taxpayer shall immediately notify the Commissioner of
Internal Revenue. The Commissioner of Internal Revenue will thereupon
redetermine the amount of the tax of such taxpayer for the year or years for
which such incorrect credit was granted. The amount of tax, if any, due upon
such redetermination shall be paid by the taxpayer upon notice and demand by
the Commissioner of Internal Revenue. The amount of tax, if any, shown by such
redetermination to have been overpaid shall be credited or refunded to the
taxpayer in accordance with the provisions of Section 309 of the Code.
SECTION 88. Countries
which do or do not satisfy the similar credit requirements. — A country
satisfies the similar credit requirement of Section 30(c)(3)(B), as to income
tax paid to such country, either by allowing to citizens of the Philippines
residing in such country a credit for the amount of income taxes paid to the
Philippines. A country does not satisfy the similar credit requirement of
Section (30)(c)(3)(B) if it does not allow any credit to citizens of the
Philippines residing in such country for the amount of income taxes paid to the
Philippines, or if such country does not impose any income taxes. If the
country of which a resident alien is a citizen or subject does not allow to a
Filipino citizen residing in such country a credit for taxes paid by such citizen
to another foreign country, no credit is allowed to such resident alien for
taxes paid by him to such foreign country.
SECTION 89. When
credit for taxes may be taken. — The credit for taxes provided by Section
(30)(c)(3) to (9) may ordinarily be taken either in the return for the year in
which the taxes accrued or in which the taxes were paid, dependent upon whether
the accounts of the taxpayer are kept and his returns filed upon the accrual
basis or upon the cash receipts and disbursements basis. Section 30(c)(6)
allows the taxpayer, at his option and irrespective of the method of accounting
employed in keeping his books, to take such credit for taxes as may be
allowable in the return for the year in which the taxes accrued. An election
thus made must be followed in returns for all subsequent years, and no portion
of any such taxes will be allowed as a deduction from gross income.
SECTION 90. Domestic
corporation owning a majority of the stock of foreign corporation. — In the
case of a domestic corporation which owns a majority of the voting stock of a
foreign corporation from which it receives dividends in any taxable rear, the
credit for foreign taxes includes not only the income, war profits and
excess-profits taxes paid or accrued during the taxable year to any foreign
country by such domestic corporation, but also income, war-profits and
excess-profits taxes deemed to have been paid determined by taking the same
proportion of any income, war-profits, and excess-profits taxes paid or accrued
by such controlled foreign corporation to any foreign country upon or with
respect to the accumulated profits of such foreign corporation from which such
dividends were paid, which the amount of any such dividends received bears to
the amount of such accumulated profits. The amount of taxes deemed to have been
paid is limited, however, to an amount of the tax against which the credit for
foreign taxes is taken, which the amount of such dividends bears to the amount
of the entire net income of the domestic corporation in which such dividends
are included. If dividends are received from more than one controlled foreign
corporation, the limitation is to be computed separately for the dividends
received from each controlled foreign corporation. If the credit for foreign taxes
includes taxes deemed to have been paid, the taxpayer must furnish the same
information with respect to the taxes deemed to have been paid as it is
required to furnish with respect to the taxes actually paid or accrued by it.
Taxes paid or accrued by a controlled foreign corporation are deemed to have
been paid by the domestic corporation for purposes of credit only.
SECTION 91. Non-resident
aliens and foreign corporations not allowed credits against the tax. —
Non-resident aliens and foreign corporations may not claim credits against the
tax from taxes of foreign countries.
SECTION 92. Limitation
on credit for foreign taxes. — The amount of credit for foreign taxes shall be
subject to the following limitations:
(a) The
amount of the credit in respect to the tax paid or accrued to any country shall
not exceed the same proportion of the tax against which such credit is taken,
which the taxpayer's net income from sources within such country taxable under
Title II bears to his entire net income for the same taxable year; and
(b) The
total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's net income from
sources without the Philippines taxable under Title II bears to his entire net
income for the same taxable year.
(Section 30(d) of the Code)
SECTION 93. Losses
by individuals. — Losses sustained by individuals during the year not
compensated for by insurance or otherwise are fully deductible (except by
non-resident aliens) —
(a) If
incurred in a taxpayer's trade; or
(b) If
incurred in any transaction entered into for profits; or
(c) Of
property not connected with the trade or business if arising from fires, storm,
shipwreck, or other casualty, or from robbery, theft or embezzlement. No loss
shall, however, be allowed as a deduction if at the time of filing of the
return, such loss has been claimed as deduction for estate or inheritance tax
purposes in the estate or inheritance tax return.
SECTION 94. Losses
by corporations. — Domestic corporations may deduct losses actually sustained
and charged off within the year and not compensated for by insurance or
otherwise.
SECTION 95. Losses
by non-resident alien and foreign corporation. — Non-resident aliens and
foreign corporations are allowed only losses sustained in business or trade
conducted within the Philippines, losses of property within the Philippines
arising from fires, storms, shipwreck, or other casualty and from robbery,
theft, or embezzlement, and losses actually sustained in transactions entered
into for profit in the Philippines, although not connected with their trade or
business, not compensated by insurance or otherwise.
SECTION 96. Losses
generally. — Losses must usually be evidenced by closed and completed
transactions. Proper adjustment must be made in each case for expenditures or
items of loss properly chargeable to capital account, and for depreciation,
obsolescence, amortization, or depletion. Moreover, the amount of the loss must
be reduced by the amount of any insurance or other compensation received, and
by the salvage value, if any, of the property. A loss on the sale of
residential property is not deductible unless the property was purchased or
constructed by the taxpayer with a view to its subsequent sale for pecuniary
profit. No loss is sustained by the transfer of property by gift or death.
Losses sustained in illegal transactions are not deductible.
SECTION 97. Voluntary
removal of buildings. — Loss due to the voluntary removal or demolition of old buildings,
the scrapping of old machinery, equipment, etc., incident to renewals and
replacements will be deductible from gross income. When a taxpayer buys real
estate upon which is located a building, which he proceeds to raze with a view
to erecting thereon another building, it will be considered that the taxpayer
has sustained no deductible expense on account of the cost of such removal, the
value of the real estate, exclusive of old improvements, being presumably equal
to the purchase price of the land and building plus the cost of removing the
useless building.
SECTION 98. Loss
of useful value. — When through some change in business conditions, the
usefulness in the business of some or all of the capital assets is suddenly
terminated, so that the taxpayer discontinues the business or discards such
assets permanently from use of such business, he may claim as deduction the
actual loss sustained. In determinating the amount of the loss, adjustment must
be made, however, for improvements, depreciation and the salvage value of the
property. This exception to the rule requiring a sale or other disposition of
property in order to establish a loss requires proof of some unforeseen cause
by reason of which the property has been prematurely discarded, as, for example,
where an increase in the cost or change in the manufacture of any product makes
it necessary to abandon such manufacture, to which special machinery is
exclusively devoted, or where new legislation directly or indirectly makes the
continued profitable use of the property impossible. This exception does not
extend to a case where the useful life of property terminates solely as a
result of those gradual processes for which depreciation allowance are
authorized. It does not apply to inventories or to other than capital assets.
The exception applies to buildings only when they are permanently abandoned or
permanently devoted to a radically different use, and to machinery only when
its use as such is permanently abandoned. Any loss to be deductible under this
exception must be charged off in the books and fully explained in returns of
income.
SECTION 99. Shrinkage
in value of stocks. — A person possessing stock of a corporation can not deduct
from gross income any amount claimed as a loss merely on account of shrinkage
in value of such stock through fluctuation of the market or otherwise. The loss
allowable in such case is that actually suffered when the stock is disposed of.
If stock of a corporation becomes worthless, its cost or other basis determined
in accordance with these regulations may be deducted by the owner in the
taxable year in which the stock became worthless, provided a satisfactory
showing of its worthlessness be made, as in the case of bad debts.
SECTION 100. Losses of farmers. — Losses incurred in the operation of farms
as business enterprises are deductible from gross income. If farm products are
held for favorable markets, no deduction on account of shrinkage in weight or
physical value or by deterioration in storage shall be allowed, except as such
shrinkage may be reflected in an inventory if used to determine profits. The
total loss by storm, flood, or fire of a prospective crop is not a deductible
loss in computing net income. A farmer engaged in raising and selling stock,
cattle, sheep, horses, etc., is not entitled to claim as a loss the value of
animals that perish from among those animals that were raised on the farm,
except as such loss is reflected in an inventory if used. If livestock has been
purchased after March 1, 1913, for any purpose, and afterwards dies from
disease, exposure, or injury, or is killed by order of the authorities, the
actual purchase price of such stock, less any depreciation allowable as a
deduction in computing net income, with respect to such perished, livestock,
and also any insurance or indemnity recovered, may be deducted as a loss. The
actual cost of other property (with proper adjustment for depreciation), which
is destroyed by order of the authorities, may in like manner be claimed as a
loss; but if reimbursement is made in whole or in part on account of stock
killed or property destroyed, the amount received shall be reported as income
for the year in which reimbursement is made. The cost of any feed, pasturage,
or care which has been deducted as an expense of operation shall not be
included as part of the cost of the stock for the purpose of ascertaining the
amount of a deductible loss. If gross income is ascertained by inventories, no
deduction can be made for livestock or products lost during the year, whether
purchased for resale, produced on the farm, as such losses will be reflected in
the inventory by reducing the amount of livestock or products on hand at the
close of the year. If an individual owns and operates a farm, in addition to
being engaged in another trade, business or calling, and sustains a loss from
such operation of the farm, then the amount of loss sustained may be deducted
from gross income received from all sources, provided the farm is not operated
for recreation or pleasure.
SECTION 101. Capital losses; losses on wash sales of stock or securities. —
Losses on sales or exchanges of capital assets are allowed to the extent
provided in section 34 of the Code. If any securities which are capital assets
become worthless during the taxable year, the loss resulting therefrom shall be
considered as a loss from the sale or exchange, on the last day of such taxable
year, of capital assets. Losses on "wash sales" of stock or
securities are treated in section 33 of the Code.
(Section 30 (e) of the Code)
SECTION 102. Bad debts. — Where all the surrounding circumstances indicate
that a debt is worthless, and the debt is charged off on the books of the
taxpayer within the year, the same may be allowed as a deduction in computing
net income. There should accompany the return a statement showing the propriety
of any deduction claimed for bad debts. Before a taxpayer may charge off and
deduct a debt, he must ascertain and be able to demonstrate, with a reasonable
degree of certainty, the uncollectibility of the debt. Any amount subsequently
received on account of a bad debt previously charged off and allowed as a
deduction for income tax purposes, must he included in gross income for the
taxable year in which received. In determining whether a debt is worthless the
Commissioner of Internal Revenue will consider all pertinent evidence,
including the value of the collateral, if any, securing the debt and the
financial condition of the debtor.
Where the surrounding circumstances
indicate that a debt is worthless and uncollectible and that legal action to
enforce payment would in all pro-ability not result in the satisfaction of
execution on a judgment, a showing of those facts will be sufficient evidence
of the worthlessness of the debt for the purpose of deduction. Bankruptcy is
generally an indication of the worthlessness of at least a part of an unsecured
and unpreferred debt. Actual determination of worthlessness in bankruptcy is
sometimes possible before and at other times only when a settlement in
bankruptcy shall have been had. Where a taxpayer ascertained a debt to be
worthless and charged it off in one year, the mere fact that bankruptcy
proceedings instituted against the debtor are terminated in a later year,
confirming the conclusion that the debt is worthless, will not authorize
shifting the deduction to such later year. If a taxpayer computes his income
upon the basis of valuing his notes or accounts receivable at their fair market
value when received, which may be less than their face value, the amount
deductible for bad debts in any case is limited to such original valuation.
SECTION 103. Examples of bad debts. — Worthless debts arising from unpaid
wages, salaries, rents, and similar items of taxable income will not be allowed
as a deduction unless the income such items represent has been included in the
return of income for the year in which the deduction as a bad debt is sought to
be made or in a previous year. Only the difference between the amount received
in distribution of the assets of a bankrupt and the amount of the claim may be
deducted as a bad debt. The difference between the amount received by a
creditor of a decedent in distribution of the assets of the decedent's estate
and the amount of his claim may be considered a worthless debt. A purchaser of
accounts receivable which can not be collected and are consequently charged off
the hooks as bad debt is entitled to deduct them, the amount of deduction to be
based upon the price he paid for them and not upon their face value.
Where under foreclosure of a mortgage, the
mortgagee buys the mortgaged property and credits the indebtedness with the
purchase price, the difference between the purchase price and the indebtedness
will not be allowable as a deduction for a bad debt, for the property which was
security for the debt stands in the place of the debt. The determination of
loss in such case is deferred until the disposal of the property.
SECTION 104. Securities becoming worthless. — If any securities which are
capital assets are ascertained to be worthless and charged off within the
taxable year, the loss resulting therefrom shall, except in the case of a bank
or trust company incorporated under the laws of the Philippines or of the
United States a substantial part of whose business is the receipt of deposits,
be considered as a loss from the sale or exchange, on the last day of such
taxable year, of capital assets.
(Section 30(f) of the Code)
SECTION 105. Depreciation. — A reasonable allowance for the exhaustion, wear
and tear, and obsolescence of property used in the trade or business may be
deducted from gross income. For convenience such an allowance will usually be
referred to as depreciation, excluding from the term any idea of a mere
reduction in market value not resulting from exhaustion, wear and tear, or
obsolescence. The proper allowance for such depreciation of any property used
in the trade or business is that amount which should be set aside for the
taxable year in accordance with a reasonable consistent plan whereby the aggregate
of the amount so set aside, plus the salvage value, will, at the end of the
useful life of the property in business, equal the basis of the property. Due
regard must also be given to expenditures for current upkeep.
SECTION 106. Depreciable property. — The necessity for a depreciation
allowance arises from the fact that certain property used in the business
gradually approaches a point where its usefulness is exhausted. The allowances
should be confined to property of this nature. In the case of tangible
property, it applies to that which is subject to wear and tear, to decay or
decline from natural causes, to exhaustion and to obsolescence due to the
normal progress of the art, as where machinery or other property must be
replaced by a new invention, or due to the inadequacy of the property to the
growing needs of the business. It does not apply to inventories or to stock in
trade, nor to land apart from the improvements or physical development added to
it. It does not apply to bodies of minerals which through the process of
removal suffer depletion. Property kept in repair may, nevertheless, be the
subject of a depreciation allowance. The deduction of an allowance for
depreciation is limited to property used in the taxpayer's trade or business.
No such allowance may be made in respect to automobiles or other transportation
equipment used solely for the pleasure, a building used by the taxpayer solely
as his residence, nor in respect of furniture or furnishings therein, personal
effects, or clothing; but properties and costumes used exclusively in a
business, such as theatrical business, may be the subject of a depreciation
allowance.
SECTION 107. Depreciation of intangible property. — Intangibles, the use of
which in the trade or business is definitely limited in duration, may be the
subject of a depreciation allowance. Examples are patents, copyrights, and
franchises. Intangibles, the use of which in the business or trade is not so
limited, will not usually be a proper subject of such an allowance. If however,
an intangible asset acquired through capital outlay is known from experience to
be of value in the business for only a limited period, the length of which can
be estimated from experience with reasonable certainty, such intangible asset
may be the subject of a depreciation allowance, provided the facts are fully
shown in the return or prior thereto to the satisfaction of the Commissioner of
Internal Revenue.
SECTION 108. Capital sum recoverable through depreciation allowances. — The
capital sum to be replaced by depreciation allowances is the cost or other
basis of the property in respect of which the allowance is made. To this amount
should be added from time to time the cost of improvements, additions, and
betterment and from it should be deducted from time to time the amount of any
definite loss or damage sustained by the property through casualty, as
distinguished from the gradual exhaustion of its utility which is the basis of
the depreciation allowance. Where the lessee of real property erects buildings,
or makes permanent improvements which become part of the realty and income has
been returned by the lessor as a result thereof, as provided in Section 49 of
these regulations, the capital sum to be replaced by depreciation allowance is
the same as though no such buildings had been erected or such improvements
made. No depreciation deduction will be allowed in the case of property which
has been amortized to its scrap value and is no longer in use.
SECTION 109. Method of computing depreciation allowance. — The capital sum to
be replaced should be charged off over the useful life of the property, either
in equal annual installments or in accordance with any other recognized trade
practice, such as an apportionment of the capital sum over units of production.
Whatever plan or method of apportionment is adopted must be reasonable and must
have due regard to operating conditions during the taxable period. While the
burden of proof must rest upon the taxpayer to sustain the deductions taken by
him, such deductions must not be disallowed unless shown by clear and
convincing evidence to be unreasonable. The reasonableness of any claim for
depreciation shall be determined upon the conditions known to exist at the end
of the period for which the return is made. If it develops that the useful life
of the property will be longer or shorter than the useful life as originally
estimated under all the then known facts, the portion of the cost or other
basis of the property not already provided for through depreciation allowances
should be spread over the remaining useful life of the property as reestimated
in the light of the subsequent facts, and depreciation deductions taken
accordingly.
SECTION 110. Obsolescence. — With respect to physical property the whole or
any portion of which is clearly shown by the taxpayer as being affected by
economic conditions that will result in its being abandoned at a future date
prior to the end of its normal useful life, so that depreciation deductions
alone are insufficient to return the cost (or other basis) at the end of its
economic term of usefulness, a reasonable deduction for obsolescence, in
addition to depreciation, may be allowed in accordance with the facts obtaining
with respect to each item of property concerning which a claim for obsolescence
is made. No deductions for obsolescence will be permitted merely because, in
the opinion of a taxpayer, the property may become obsolete at some later date.
This allowance will be confined to such portion of the property on which
obsolescence is definitely shown to be sustained and can not be held applicable
to an entire property unless all portions thereof are affected by the
conditions to which obsolescence is found to be due.
SECTION 111. Depreciation of patent or copyright. — In computing depreciation
allowance in the case of a patent or copyright, the capital sum to be replaced
is the cost or other basis of the patent or copyright. The allowance should be
computed by an apportionment of the cost or other basis of the patent or
copyright over the life of the patent or copyright since its grant, or since
its acquisition by the taxpayer, or since March 1, 1913, as the case may be. If
the patent or copyright was acquired from the Government, its cost consists of the
various Government fees, cost of drawings, experimental models, attorney's
fees, development or experimental expenses, etc., actually paid. Deprecation of
a patent can be taken on the basis of the fair market value as of March 1,
1913, only when affirmative and satisfactory evidence of such value is offered.
Such evidence should whenever practicable be submitted with the return. If the
patent becomes obsolete prior to its expiration, such proportion of the amount
on which its depreciation may be based as the number of years of its remaining
life bears to the whole number of years intervening between the basic date when
it legally expires may be deducted, if permission to do so is specifically
secured from the Commissioner of Internal Revenue. Owing to the difficulty of
allocating to a particular year the obsolescence of a patent, such permission
will be granted only if affirmative and satisfactory evidence that the patent
became obsolete in the year for which the return is made is submitted to the
Commissioner of Internal Revenue. The fact that depreciation has not been taken
in prior years does not entitle the taxpayer to deduct in any taxable year a
greater amount for depreciation than would otherwise be allowable.
SECTION 112. Depreciation of drawings and models. — Where a taxpayer has
incurred expenditures in his business for designs, drawings, patterns, models,
or work of an experimental nature calculated to result in improvement of his
facilities or his product, if the period of usefulness of any such asset may be
estimated from experience with reasonable accuracy, it may be the subject of
depreciation allowances spread over such estimated period of usefulness. The
facts must be fully shown in the return or prior thereto to the satisfaction of
the Commissioner of Internal Revenue. Except for such depreciation allowances
no deduction shall be made by the taxpayer against any sum so set up as an
asset except on the sale or other disposition of such asset at a loss or on
proof of a total loss thereof.
SECTION 113. Charging off depreciation. — A depreciation allowance, in order
to constitute an allowable deduction from gross income, must be charged off.
The particular manner in which it shall be charged off is not material, except
that the amount measuring a reasonable allowance for depreciation must be
either deducted directly from the book value of the assets or preferably
credited to a depreciation reserve account, which must be reflected in the
annual balance sheet. The allowances should be computed and charged off with
express reference to specific items, units, or groups of property, each item or
unit being considered separately or specifically included in a group with
others to which the same factors apply. The taxpayer should keep such records to
each item or unit of depreciable property as will permit the ready verification
of the factors used in computing the allowance for each year for each item,
unit, or group.
SECTION 114. Depreciation in the case of farmers. — A reasonable allowance
for depreciation may be claimed on farm buildings (other than a dwelling
occupied by the owner), farm machinery, and other physical property. A
reasonable allowance for depreciation may also be claimed on live stock
acquired for work, breeding, or dairy purposes, unless they are included in an
inventory used to determine profits in accordance with these regulations. Such
depreciation should be based on the cost or other basis and the estimated life
of the live stock. If such live stock be included in an inventory no
depreciation thereof will be allowed, as the corresponding reduction in their
value will be reflected in the inventory.
SECTION 115. Statement to be attached to return. — To each return in which
depreciation charges are claimed, there should be attached a statement showing
the item, unit, or group of depreciable property, the cost price or its market
value as of March 1, 1913, if acquired prior to that date, the rate of charge,
amount previously deducted, and the amount claimed in the return. These data must
agree with those appearing in the books of the taxpayer.
(Section 30(g) of the Code)
SECTION 115-A-1. General Circular V-332, January 6, 1961 — Who is entitled
to deduct depletion. — In order to be entitled to percentage depletion
allowance, the taxpayer must have an economic interest in the property. To
acquire an economic interest, the taxpayer must have a capital investment in
the property and not a mere economic advantage. The taxpayer must have acquired
at least, by investment, any interest in oil or gas or mineral in place, and
secures, by any form of legal relationship, income derived from the extraction
of the oil, gas or mineral, to which he must look for a return of his capital.
Thus the parties entitled to share in oil or mineral extracted, or the gross
proceeds therefrom (including the parties to a lease providing for royalty
payments of stated amounts per unit mined) have economic interests in the oil
or minerals in place. That is, they, as owners of the rights in oil or other
mineral in place, share the income from production, and the depletion
allowances thereon are regarded as designed to permit tax-free recovery of at
least their capital investments in such property rights.
SECTION 115-A-2. Basis for depletion. — On oil or gas wells the percentage
depletion allowance is fixed at 27 1/2% of gross income while on mines, the
percentage depletion allowance varies in accordance with the class of minerals.
The gross income basis is the amount remaining after deducting therefrom rents or
royalties paid or incurred by the taxpayer in respect to the property. In both
cases, the total percentage depletion allowance shall in no case exceed 50% of
the net income or profit.
Illustration
Subject: Oil and gas wells (1) (2)
Gross income after deducting rents and
royalties P100.00 P100.00
27 1/2% thereof 27.50 27.50
Net income or net profit 50.00 70.00
50°/ of net income or net profit 25.00 35.00
Allowance depletion 25.00 27.50
Under column (1) P25.00 is the allowance
depletion because the allowable percentage cannot exceed 50% of the net profit
or net income. Under column (2), the allowable depletion is P27.50 because it
does not exceed 50% of either the net income or net profit.
SECTION 115-A-3. Definition of terms. — For purposes of the depletion
allowance for oil and gas wells and mines, the following terms and phrases
shall have the meaning indicated:
(a) Gross
income. — Gross income means the "gross income from the property".
The gross income in the case of gas and oil wells is the amount for which the
taxpayer sells the oil and gas in the immediate vicinity of the well. If the
oil and gas are not sold on the property but are manufactured or converted into
a refined product prior to sale, the gross income from the property shall be
assumed to be equivalent to the representative market or field price (as of the
date of sale) of the oil and gas before conversion or transportation.
"Gross income from the property"
means, in the case of mines, the gross income from mining. The gross income
from mining consists of the proceeds from the sales of ores or minerals
extracted from the mining property. Where ores are sent abroad where the
ordinary treatment processes are applied or where they are refined and where
they are sold, the actual cost of ocean freight as well as insurance, should be
deducted from the actual selling price for gross income purposes. Also where
minerals or mineral products are sold or consigned abroad by the lessee or
owner of the mine under C.I.F. terms, the actual cost of ocean freight and
insurance should be deducted.
(b) Mining.
— The term "mining" includes not merely the extraction of the ores or
minerals from the ground but also the ordinary treatment process normally
applied by mine owners or operators in order to obtain the commercially
marketable mineral product or products, and so much of the transportation of
ores or minerals (whether or not by common carrier) from the point of
extraction from the ground to the plants or mills in which the ordinary
treatment processes are applied thereto as is not in excess of 50 miles unless
the Commissioner of Internal Revenue finds that the physical and other
requirements are such that the ore or mineral must be transported a greater
distance to such plants or mills.
(c) Extraction
of the ores or minerals from the ground. — The term "extraction of the
ores or minerals from the ground" includes the extraction by mine owners
or operators of ores or minerals from the waste or residue of prior mining.
Thus income derived from the working over of tailings, piles or culm banks is
included in determining "gross income from the property". The length
of time between the prior mining and extraction of ores or minerals from the
waste or residue of such mining is immaterial. Whether the waste or residue
results from the application of ordinary treatment processes or from the
process of removal from the ground, income derived therefrom is within the term
"gross income from the property". To be included in "gross
income from the property", income derived from the extraction of ores or
minerals from the waste or residue of prior mining must come from such
extraction by the mine owner or operator himself.
(d) Ordinary
treatment processes. — The term "ordinary treatment processes"
includes the following:
(1) In
the case of coal-cleaning, breaking, sizing, dust-allaying, treating to prevent
freezing, and loading for shipment;
(2) In
the case of sulfur recovered by the Frasch process — pumping to vats, cooling,
breaking, and loading for shipment;
(3) In
the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and minerals
which are customarily sold in the form of a crude mineral product — sorting, concentrating; and sintering to
bring to shipping grade and form, and loading for shipment;
(4) In
the case of lead, zinc, copper, gold, silver, or fluorspar ores, potash, and
ores which are not customarily sold in the form of the crude mineral
product-crushing, grinding, and beneficiation by concentration (gravity,
flotation, amalgamation, electrostatic, or magnetic) cyanidation, leaching,
crystallization, precipitation (but not including as an ordinary treatment
process electrolytic deposition, roasting, thermal or electric smelting, or
refining), or by substantially equivalent processes, or extraction of the
product or products from the ore, including the furnacing of quicksilver ores;
and
(5) The
pulverization of talc, the burning of magnesite, and the sintering and
modulizing of phosphate rock.
(e) Net
income or net profit. — "Net income" or "net profit" means
the taxpayer's taxable income from the property. Net income or net profit
(computed without allowance for depletion) means the "gross income from
the property" less the allowable deductions attributable to the mineral
property upon which the depletion is claimed and the allowable deductions
attributable to the treatment processes insofar as they relate to the product
of such property, including overhead and operating expenses, development costs
properly charged to expense, depreciation, taxes, losses sustained, etc.
Deductions not directly attributable to particular properties or processes
shall be fairly allocated.
(f) Property.
— For the purpose of computing the depletion allowance in the case of mines and
wells, the term "property" means each separate interest owned by the
taxpayer in each mineral deposit in each separate tract or parcel of land.
If a taxpayer owns two or more separate
operating mineral interests which constitute part or all of an operating unit,
he may elect to form (a) one aggregation of, and to treat as one property, any
two or more of such interests and (b) to treat as a separate property each such
interest which he does not elect to include within the aggregation referred to
in (a). Separate operating mineral interests which constitute part or all of an
operating unit may be aggregated whether or not they are included in contiguous
tracts or parcels. A taxpayer may not elect to form more than one aggregation
of operating mineral interests within any one operating unit. Such election may
be made by the taxpayer by the giving of notice of such election to the
Commissioner of Internal Revenue not later than the time prescribed for filing
of the return and any such election so made shall be binding upon the taxpayer
for all subsequent taxable years, except that the Commissioner of Internal
Revenue may consent to a different treatment of the interest with respect to
which the election has been made.
SECTION 115-A-4. Depletion deductible by non-resident aliens or foreign
corporations. — A non-resident alien individual or a foreign corporation is
entitled to an allowance for depletion of oil and gas wells or mines located in
the Philippines. (Gen. Cir. V-332 implements Sec. 30(g), Tax Code, as amended
by R.A. 2698)
(Section 30(h) of the Code)
SECTION 116. When contributions or gifts may be deducted. — Contributions or
gifts within the taxable year are deductible to an aggregate amount not in
excess of 6 per centum, in the case of an individual, and 3 per centum, in the
case of a corporation, of the taxpayer's taxable net income, if actually paid
or made to or for the use of the Government of the Philippines or any political
subdivision thereof for exclusively public purposes or to domestic corporations
or associations organized and operated exclusively for religious, charitable,
scientific, athletic, cultural or educational purposes, or to societies for the
prevention of cruelty to children or animals, provided that no part of the net
income of which inures to the benefit of any private stockholders or
individual.
In connection with claims for deductions,
there shall be stated on returns of income the name and address of each
organization to which a gift was made and the approximate date and the amount
of the gift in each case. Where the gift is other than money, the basis for
calculation of the amount thereof shall be the fair market value of the
property at the time of the gift. Contributions or gifts paid or made to
corporations or associations specified in the law will only be allowed as
deduction when the taxpayer attaches to his return the receipt duly signed by
the responsible officer of the corporations or associations to which the
contributions or gifts has been paid or made. If desired, said receipt will be
returned to the taxpayer after they have served their purpose.
(Section 30(i) of the Code)
SECTION 117. Allowance of deductions and credits. — Unless a non-resident
alien individual shall file or cause to be filed with the Commissioner of
Internal Revenue, a true and accurate return of income from all sources,
corporate, or otherwise, within the Philippines, regardless of amount, the tax
shall be collected on the basis of the gross income (not the net income) from
sources within the Philippines. In case of failure to file such return, the
Commissioner of Internal Revenue will cause a return of income to be made and
include therein the income of such non-resident alien from all source
concerning which he has information, and he will assess the tax and collect it
from one or more of the sources of income of such non-resident alien within the
Philippines, without allowance for deductions or credit. (Cf. effect of Sec.
22(b) as amended by R.A. 2343.)
(Section 30(j) of the Code)
SECTION 118. Payments to employees' pension trusts. — An employer who adopts
or has adopted a reasonable pension plan, actuarially sound, and who
establishes, or has established, and maintains a pension trust for the payment
of reasonable pensions to his employees shall be allowed to deduct from gross
income reasonable amounts paid to such trust, in accordance with the pension
plan (including any reasonable amendment thereof), as follows:
(a) If
the plan contemplates the payment to the trust, in advance of the time when
pensions are granted, of amounts to provide for future pensions payments, then
(1) reasonable amounts paid to the trust during the taxable year representing
the pension liability applicable to such year, determined in accordance with
the plan, shall be allowed as a deduction for such year as an ordinary and
necessary business expense, and in addition (2) one-tenth of a reasonable
amount transferred or paid to the trust during the taxable year to cover in
whole or in part the pension liability applicable to the years prior to the
taxable year, or so transferred or paid to place the trust on a sound financial
basis, shall be allowed as a deduction for the taxable year and for each of the
nine succeeding taxable years.
(b) If
the plan does not contemplate the payment to the trust, in advance of the time
when pensions are granted, of amounts to provide for future pension payments,
then (1) reasonable amounts paid to the trust during the taxable year
representing the present value of the expected future payments in respect of
pensions granted to employees retired during the taxable year shall be allowed
as deduction for such year as an ordinary and necessary business expense, and
in addition (2) one tenth of a reasonable amount transferred or paid to the
trust during the taxable year to cover in whole or in part the present value of
the expected future payments in respect of pensions granted to employees
retired prior to the taxable year, or so transferred or paid to place the trust
on a sound financial basis, shall be allowed as a deduction for the taxable
year and for each of the nine succeeding taxable years.
(Section 30(k) of the Code)
SECTION 118-A. Optional standard deduction. — In lieu of the deductions allowed
under this section an individual, other than a non-resident alien, may elect a
standard deduction. Such optional standard deduction shall be in the amount of
one thousand pesos or in an amount equal to ten per centum of his gross income,
whichever is the lesser. Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction he shall be considered as
having availed himself of the deductions allowed in the preceding subsection.
The Secretary of Finance shall prescribe the manner of the election. Such
election when made in the return shall be irrevocable for the taxable year for
which the return is made.
(Section 31 of the Code)
SECTION 119. Personal, living, and family expenses. — Personal, living, and
family expenses are not deductible. Insurance paid on a dwelling owned and
occupied by a taxpayer is a personal expense and not deductible. Premiums paid
for life insurance by the insured are not deductible. In the case of a
professional man who rents a property for residential purposes, but
incidentally receives his clients, patients, or callers in connection with his
professional work (his place of business being elsewhere), no part of the rent
is deductible as a business expense. If however, he uses part of the house for
his office, such portion of the rent as is properly attributable to such office
is deductible. Where the father is legally entitled to the services of his
minor children, any allowances which he gives them, whether said to be in
consideration of services or otherwise, are not allowable deductions in his
return of income. Alimony, and an allowance paid under a separation agreement
are not deductible from gross income.
SECTION 120. Capital expenditures. — No deduction from gross income may be
made for any amounts paid out for new buildings or for permanent improvements
or betterments made to increase the value of the taxpayer's property, or for
any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance for depreciation or depletion or other allowance
is or has been made. Amounts expended for securing a copyright and plates,
which remain the property of the person making the payments, are investments of
capital. The cost of defending or perfecting title to property constitutes a
part of the cost of the property and is not a deductible expense. The amount
expended for architect's services is part of the cost of the building.
Commissions paid in purchasing securities are a part of the cost of such
securities. Commissions paid in selling securities are an offset against the
selling price. Expenses of the administration of an estate, such as court
costs, attorney's fees, and executor's commissions, are chargeable against the
"corpus" of the estate and are not allowable deductions. Amounts to
be assessed and paid under an agreement between bondholders or shareholders of
a corporation, to be used in a reorganization of the corporation, are
investments of capital and not deductible for any purpose in return of
income.
In the case of a corporation, expenses for
organization, such as incorporation fees, attorney's fees and accountants'
charges, are ordinarily capital expenditures; but where such expenditures are
limited to purely incidental expenses, a taxpayer may charge such items against
income in the year in which they are incurred. A holding company which
guarantees dividends at a specified rate on the stock of a subsidiary
corporation for the purpose of securing new capital for the subsidiary and
increasing the value of its stockholdings in the subsidiary may not deduct
amounts paid in carrying out this guaranty in computing its net income, but
such payments may be added to the cost of its stock in the subsidiary.
SECTION 121. Premiums on life insurance of employees. — Any amounts paid for
premiums on any life insurance policy covering the life of an officer or
employee or of any person financially interested in the business of the
taxpayer when the taxpayer is directly or indirectly a beneficiary under such
policy are not deductible.
SECTION 122. Losses from sales or exchanges of property. — No deduction is
allowed in respect of losses from sales or exchanges of property, directly or
indirectly —
(a) Between
members of a family. As used in Section 31, the family of an individual shall
include only his brothers and sisters (whether by the whole or half blood),
spouse, ancestors, and lineal descendants;
(b) Except
in the case of distributions in liquidation, between an individual and a
corporation more than fifty per centum in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual;
(c) Except
in the case of distributions in liquidation, between two corporations more than
50 per cent in value of the outstanding stock of each of which is owned,
directly or indirectly, by or for the same individual, if either one of such
corporations with respect to the taxable year of the corporation preceding the
date of the sale or exchange was, under the law applicable to such taxable
year, a personal holding company or a foreign personal holding company;
(d) Between
a grantor and a fiduciary of any trust;
(e) Between
the fiduciary of a trust and the fiduciary of another trust, if the same person
is a grantor with respect to each trust; or
(f) Between
a fiduciary of a trust and a beneficiary of such trust.
(Section 32 of the Code)
SECTION 123. Gross income of insurance companies. — In general, the gross
income of insurance companies consists of their total revenue from the
operation of the business and of their income from all other sources within the
taxable year, except as otherwise provided by the statute. Gross income
includes net premiums (that is, gross premium less returned premiums on
policies not taken), investment income, profits from the sale of assets, and
all gains, profits, and income reported to the Insurance Commissioner, except
income specifically exempt from tax. A net decrease in reserve funds required
by law within the taxable year must be included in the gross income to the
extent that such funds are released to the general uses of the company and
increase its free assets. Any net decrease in reserves shall be added to the
gross income, unless the company shall show that such decrease resulted from
the application of reserves to the purposes for which they were established.
SECTION 124. Gross income of life insurance companies. — A life insurance
company shall not include in gross income such portion of any actual premiums
received from any individual policyholder as is paid back or credited to or
treated as an abatement of premium of such policyholder within the taxable
year. (a) "Paid back" means paid in cash. (b) "Credited to"
means held to the credit of, including dividends applied to pay renewal
premiums, to purchase additional paid-up insurance or annuities, or to shorten
the endowment or premium-paying period. It does not include dividends
provisionally ascertained and apportioned upon deferred dividends policies.
Dividends provisionally ascertained, apportioned, or credited on deferred
dividends policies can not be excluded or deducted from gross income for the
reason that the assured has no vested or enforceable right in them and can not
at the time of the ascertainment, apportionment, or credit, not until the
maturity of the policy, avail himself of such dividends; and in the event of
the death of the assured prior to the expiration of the deferred dividend
period, the amount so ascertained, apportioned, or credited lapses. (c)
"Treated as an abatement of premium" means of the premium for the
taxable year. Where the dividend paid back is in excess of the premium received
from the policyholder within the taxable year there may be excluded from gross
income only the amount of such premium received, and where no premium is
received from the policyholder within the taxable year the company is not
entitled to exclude from its premiums received from other policyholders an
amount in respect to such dividend payment. (See changes in Sec. 24(b), Tax
Code.)
SECTION 125. Gross income of mutual insurance companies. — The gross income
of mutual insurance companies (other than life) consists of their total revenue
from the operation of the business and of their income from all other sources
within the taxable year, except as otherwise provided by the statute. Premiums
received by mutual marine insurance companies which are paid out for
reinsurance should be eliminated from gross income and the payments for
reinsurance, from disbursement. Deposit premiums on perpetual risks received
and returned by mutual fire insurance companies should be treated in the same
manner, as no reserve will be recognized covering liability for such deposits.
The earnings on such deposits, including such portion, if any, of the premium
deposits as are not returned to the policyholders upon cancellation of the
policies, must be included in the gross income.
SECTION 126. Deductions allowed insurance companies. — Insurance companies
are entitled to the same deductions from gross income as other corporations,
and also to the deduction of the net addition required by law to be made within
the taxable year to reserve funds and of the sums other than dividends paid
with the taxable year on policy and annuity contracts. "Paid"
includes "accrued" or "incurred" (construed according to
the method of accounting upon the basis of which the net income is computed)
during the taxable year, but does not include any estimate for losses incurred
but not reported during the taxable year. As payments on policies there should
be reported all death, disability and other policy claims (other than dividends
as above specified) paid within the year, including fire, accident and
liability losses, matured endowments, annuities, payments on installment
policies and surrender values actually paid.
SECTION 127. Special deductions allowed mutual insurance companies. — Mutual
insurance companies (other than mutual life and mutual marine insurance
companies), which require their members to make premium deposits to provide for
losses and expenses, are allowed to deduct from gross income the aggregate
amount of premium deposits returned to their policyholders or retained for the
payment of losses, expenses, and reinsurance reserves. In determining the
amount of premium deposits retained by a mutual fire or mutual casualty
insurance company for the payment of losses, expenses, and reinsurance
reserves, it will be presumed that losses and expenses have been paid out of
earnings and profits other than premiums to the extent of such earnings and
profits. If, however, any portion of such amount is applied during. the taxable
year to the payment of losses, expenses, or reinsurance reserves, or which a
separate allowance is taken, then such portion is not deductible; and if any
portion of such amount for which an allowance is taken is subsequently applied
to the payment of expenses, losses, or reinsurance reserves, then such payment
can not be separately deducted. The amount of premium deposits retained for the
payment of expenses and losses and the amount of such expenses and losses, may
not both be deducted. A company which invests part of the premium deposits so
retained by it in interest-bearing securities may, nevertheless, deduct such
part, but not the interest received on such securities. A mutual fire insurance
company which has a guaranty capital is taxed like other mutual fire insurance
companies. A stock fire insurance company operated on the mutual plan to the
extent of paying dividends to certain classes of policyholders, may make a
return on the same basis as a mutual fire insurance company with respect to its
business conducted on the mutual plan.
SECTION 128. Special deductions allowed mutual marine insurance companies. —
Mutual marine insurance companies should include in gross income the gross
premiums collected and received by them less amounts paid for reinsurance. They
may deduct from gross income amounts repaid to policyholders on account of
premiums previously paid by them together with the interest actually paid upon
such amounts between the date of ascertainment and the date of payment thereof.
The remainder of the premiums accordingly forms part of the net income of the
company, except to the extent that it is subject to then deductions allowed
such insurance companies and other corporations.
SECTION 129. Net addition to reserve funds. — All policy premiums on which net
addition to reserve is computed, must be included in gross income. Insurance
companies may deduct from gross income the net addition required by law to be
made within the taxable year to reserve funds. When the reserve at the end of
the year is less than at the beginning of the year there is a "released
reserve", and the amount so released must be included in gross income. In
the case of assessment insurance companies, whether domestic or foreign, the
actual deposit of sums with the officers of the Government of the Philippines,
pursuant to law, as addition to guaranty or reserve funds shall be treated as
being payments required by law to reserve funds. In the case of life insurance
companies, the net addition to the "reinsurance reserve" and the
"reserve for supplementary contracts", and in the case of fire,
marine, accident, liability, and other insurance companies, the net addition to
the "unearned premium reserves", and only such other reserves as are
specifically required by the statute will be allowed as deductions.
This comment has been removed by a blog administrator.
ReplyDeletePlease do not advertise your firm in my blog. You are free to create your own blog. Thanks.
ReplyDeleteIn case your earned income exceeds a certain sum of money you will be liable to pay income tax. To get the figures right and to compute your income tax in the most efficient manner you should look to hiring an income tax lawyer that is well qualified to handle different issues related to the deductions from income as well as who can address other issues such as getting rebates in the case of the individual taxpayer... car insurance quotes
ReplyDelete