Tax Reviewer.docx

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Q: Define taxation. A: It is an inherent power by which the sovereign: 1. through its law-making body 2. raises income to defray the necessary expenses of government 3. by apportioning the cost among those who, in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens Q: What arethe basic principles of a sound tax system (Canons of Taxation)? A: FAT 1. Fiscal adequacy a. Revenue raised must be sufficient to meet government/public expenditures and other public needs.

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(Chavez v. Ongpin, G.R. No. 76778, June 6, 1990) 2. Administrative feasibility a. Tax laws must be clear and concise. b. Capable of effective and efficient enforcement. c. Convenient as to time and manner of payment; must not obstruct business growth and economic development. 3. Theoretical justice a. Must take into consideration the taxpayer’s ability to pay

(Ability to Pay Theory). b. Art. VI, Sec. 28(1), 1987 Constitution mandates that the

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rule on taxation must be uniform and equitable and that the State must evolve a progressive system of taxation. Q: What are the theories in taxation? A: The theories underlying the power of taxation are the following: 1. Lifeblood theory (Necessity theory) 2. Benefits-protection theory (Doctrine of Symbiotic Relationship) Q: What is the Doctrine of Prospectivity of tax laws? A: GR: Taxes must only be imposed prospectively. XPN: If the law expressly provides for retroactive imposition. Retroactive application of revenue laws may be allowed if it will not amount to denial of due process. Q: Discuss the Doctrine of Imprescriptibility.

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A: Taxes are imprescriptible as they are the lifeblood of the government. However, tax statutes may provide for statute of limitations. Q: Define double taxation. A: Otherwise described as “direct duplicate taxation”, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character. (City of Manila v. Coca Cola Bottlers Philippines, G.R. No. 181845, Aug. 4, 2009) Q: Is double taxation prohibited? A: No, there is no Constitutional prohibition against double taxation. However, direct double taxation is unconstitutional as it results in violation of substantive due process and equal protection clause. Q: What is impact of taxation? A: Otherwise known as the burden of taxation, it is the economic cost of the tax. The impact of taxation may fall on another person not statutorily liable to pay the tax. Q: What is incidence of taxation? A: The incidence of taxation is upon the person statutorily liable to pay the tax. Q: What is tax evasion? A: It is the scheme where the taxpayer uses illegal or fraudulent means to defeat or lessen payment of a tax. Q: What is meant by tax exemption? A: It is the grant of immunity, express or implied, to particular persons or corporations, from a tax upon property or an excise tax which persons or corporations generally within the same taxing districts are obliged to pay. Q: What are the principles governing tax exemptions? A: 1. Tax exemptions are highly disfavored in law. 2. Tax exemptions are personal and nontransferable. 3. He who claims an exemption must justify that the legislature intended to exempt him by words too plain to be mistaken. He must convincingly prove that he is exempted. 4. It must be strictly construed against the taxpayer. 5. Constitutional grants of tax exemptions are self-executing.

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Note: Deductions for income tax purposes partake of the nature of tax exemptions, hence, they are also be strictly construed against the taxpayer. 6. Tax exemption is generally revocable. 7. In order to be irrevocable, the tax exemption must be founded on a contract or granted by the Constitution. 8. The congressional power to grant an exemption necessarily carries with it the consequent power to revoke the same. 9. Revocation are constitutional even though the corporate do not have to perform a reciprocal duty for them to avail of tax exemptions Q: When does compensation or set-off take place? A: Compensation or set-off take place when two persons, in their own right, are creditors and debtors of each other (Article 1278, Civil Code). Q: What is the Doctrine of Equitable Recoupment? A: It is a principle which allows a taxpayer, whose claim for refund has been barred due to prescription, to recover said tax by setting off the prescribed refund against a tax that may be due and collectible from him. Under this doctrine, the taxpayer is allowed to credit such refund to his existing tax liability. A: It is an agreement between two or more persons who, to avoid lawsuit, amicably settle their differences on such terms and conditions as they may agree on. It implies the mutual agreement by the parties in regard to the thing or subject matter which is to be compromised. It is a contract whereby the parties, by reciprocal concessions avoid litigation or put an end to one already commenced. Q: When is compromise allowed? A: Compromises are generally allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering such compromise is duly authorized to do so. Q: How are tax laws construed? A: 1. Generally, no person or property is subject to tax unless within the terms or plain import of a taxing statute. 2. Tax laws are generally prospective in nature.

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3. Where the language is clear and categorical, the words employed are to be given their ordinary meaning. 4. When there is doubt, tax laws are strictly construed against the Government and liberally in favor of the taxpayer. Note: Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly provides. 5. Provisions of the taxing act are not to be extended by implication. 6. Tax laws are special laws and prevail over general laws. Q: What is meant by situs of taxation? A: It is the place or authority that has the right to impose and collect taxes. Q: What is meant by the doctrine of mobilia sequuntur personam? A: Literally, it means “Movable follows the person/owner”. However, a tangible property may acquire situs elsewhere provided it has a definite location there with some degree of permanency. Q: What is international comity? A: It refers to the respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a foreign state may not be the subject of taxation by another state. Q: Explain international comity as a limitation on the power to tax. A: The Philippine Constitution expressly adopted the generally accepted principles of international law as part of the law of the land. (Sec. 2, Art. II, 1987 Constitution) Thus, a State must recognize such generally accepted tenets of International Law that limit the authority of the government to effectively impose taxes upon a sovereign State and its instrumentalities. Q: May the government tax itself? A: Yes. One of the inherent limitations on the power of taxation is recognition of tax exemptions in favor of the government. This is premised on the concept that with respect to the government, exemption is the rule and taxation is the exception in order to reduce administrative costs. But since sovereignty is absolute andtaxationis an act of high sovereignty, the state if so minded could tax itself, including its political subdivisions. (Maceda v. Macaraeg,

G.R. No. 88291, June 8, 1993) 

Q: What are the rules on tax exemptions of government agencies or instrumentalities?

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A: 1. If the taxing authority is the National Government: GR: The government is exempt from tax. Reason: Otherwise, we would be “taking money from one pocket and putting it in another.” (Board of Assessment Appeals of Laguna

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v. CTA, G.R. No. L-18125, May 31, 1963) XPN: When it chooses to tax itself. Nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing government functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom. (MCIAA v. Marcos, G.R. No. 120082,

Sept. 11, 1996)  

Q: Are government educational institutions exempt from taxes? A: GR: They shall not be taxed with respect to their income. XPN: The income of whatever kind and character: 1. from any of their properties, real or personal, or 2. from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax imposed

(Sec. 30 [1], NIRC)  

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Q: What about the constitutional tax exemption for non-stock nonprofit educational institutions? A: All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. The Constitution provides that as long as the revenue is used ADE for educational purposes, the revenue remain tax exempt. It appears that Section 30 of the NIRC is inconsistent with the Constitution. Constitution should still prevail. (See page 26 for the illustrative

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Note: Income derived from any public utility or from the exercise of any essential governmental function accruing to the government or to any political subdivision thereof is exempt from income tax. (Sec.

32[B][7][b], NIRC) 

Q: What is meant by the term “exclusive”?

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A: It is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is defined, "in a manner to exclude; as enjoying a privilege exclusively.” Note: If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. Q: Is exclusivity synonymous with dominant use? A: No. The words "dominant use" or "principal use" cannot be substituted by the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively. Q: What is meant by “actual, direct and exclusive use of the property for religious, charitable and educational purposes”? A: It is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. Q: What is the “Flexible Tariff Clause”? A: This clause provides the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Customs Code. (Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992) Q: Is the real property tax exemption of religious organizations violative of the non-establishment clause? A: No. Neither the purpose nor the effect of the exemption is the advancement or the inhibition of religion; and it constitutes neither personal sponsorship of, nor hostility to religion. (Walz v. Tax Commission, 397 US 664) Q: Define taxes. A: These are enforced proportional contributions from persons and properties, levied by the State by virtue of its sovereignty for the support of the government and for all its public needs. (1Cooley 62). Q: What are the basic features of the present income tax system? A: Our present income tax system has the following basic features: 1. It has adopted a comprehensive tax situs by using the nationality, residence, and source rules. 2. The individual income tax system is mainly progressive in nature in that it provides graduated rates of income tax.

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Note: Corporations in general are taxed at a flat rate of 30% of net income. 3. It has retained a more schedular than global features with respect to individual taxpayers but has maintained a more global treatment on corporations. 4. Direct Tax – tax burden is borne by the income tax receipient upon whom the tax is imposed Q: Distinguish global system from schedular system of income taxation. A: Under a scheduler system, the various types or items of income (compensation, business or professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. Under the global system, all income received by the taxpayer are grouped together, without any distinction as to the type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a fixed rate. Q: What is a semi-schedular or semi-global tax system? A: A system where the compensation, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income, and after deducting the sum of allowable deductions from business or professional income, capital gain and passive income not subject to final tax, and other income, in the case of corporations, as well as personal and additional exemptions, in the case of individual taxpayers, the taxable income is subjected to one set of graduated tax rates; method of taxation under the law. Q: What are the criteria in imposing Philippine income tax? 1. Citizenship Principle – A citizen taxpayer is subject to income tax: a. On his worldwide income, if he resides in the Philippines. b. Only on his income from sources within the Philippines, if he qualifies as non-resident citizen. 2. Residence Principle – a resident alien is liable to pay income tax on his income from sources within the Philippines but exempt from tax on his income from sources outside the Philippines.

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3. Source Principle – a non-resident alien is subject to Philippine income tax because he derives income from such sources within the Philippines such as dividend, interest, rent or royalty Q: What are the two periods that may be used by the taxpayer in the computation of taxable income? A: 1. Fiscal year period – accounting period of 12 months ending on the last day of any month other than Dec. 2. Calendar year period – accounting period from Jan. 1 to Dec. 31. Q: What are the classifications of individual taxpayers A: 1. Resident Citizen (RC) – Citizens of the Philippines who are residing therein. 2. Non-resident Citizen (NRC) – a. A citizen of the Philippines who establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite intention to reside therein; b. A citizen of the Philippines who leaves the Philippines during a taxable year to reside abroad, either as an immigrant or for employment on a permanent basis; c. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year; d. A citizen who has been previously considered as NRC and who arrives in the Philippines at any time during the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines; e. The taxpayer shall submit proof to the CIR to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this section. (Sec. 22 [E], NIRC) 3. Resident Alien (RA) – An individual whose residence is within the Philippines but who is not a citizen thereof. (Sec. 22 [F], NIRC) Note: He is one who is actually present in the Philippines and not a mere transient or sojourner. Residence does not mean mere physical presence, an alien is considered a resident or non-resident depending on his intention with regard to the length and nature of his stay.

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4. Non-resident Alien (NRA) – an individual whose residence is not within the Philippines and who is not a citizen thereof. (Sec. 22 [G], NIRC) Q: What are the kinds of corporation under the NIRC? A: 1. Domestic Corporation (DC) – a corporation created or organized in the Philippines or under its laws and liable for income from sources within and without the Phillipines (Sec 22[C], NIRC) 2. Resident Foreign Corporation (RFC) – a corporation which is not domestic and not engaged in trade or business in the Philippines is liable for income from sources within. Note: In order that a foreign corporation may be regarded as doing business within a State there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent and not one of a temporary character. (CIR v. BOAC, GR L-65773-74, Apr. 30, 1987) 3. Non-Resident Foreign Corporation (NRFC) – a corporation which is not domestic and not engaged in trade or business in the Philippines is liable for income from sources within. (Sec.22 [I], NIRC) 4. Special Types of Corporation – those corporations subject to different tax rates. a. Proprietary educational institutions and non-profit hospitals b. Domestic depositary bank (foreign currency deposit units) c. International carriers d. Offshore banking units e. Regional or Area Headquarters and Regional operating Headquarters of multinational companies f. Non-resident cinematographic film owners, lessors or distributors g. Non-resident owners or lessors of vessels chartered by Philippine nationals h. Non-resident lessors of aircraft, machinery and other equipment Q: What are the classifications of partnerships in so far as tax is concerned? A: 1. General Professional Partnership (GPP); 2. Business Partnership. Q: What is a co-partnership or business partnership?

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A: These are partnerships, other than GPP, whether registered or not. They are considered as corporations and therefore are taxed as corporation. Q: What is a GPP? A: A GPP is a partnership formed by persons for the sole purpose of exercising their common profession. (Sec. 22 [B], NIRC) Q: Is GPP subject to income tax? A: No, they are not subject to income tax but are required to file information returns for its income for the purpose of furnishing information as to the share in net income of the partnership which each partner should include in his individual return. Partners shall be liable for income tax in their separate and individual capacities. The share in thepartnership income is taxable to the individual partners, whether or not the share has been distributed, because the GPP itself is not taxable. Thus, there is a constructive receipt of income in case of GPPs. Q: What is income tax? A: A tax on all yearly profits arising from property, profession, trade or business, or a tax on person’s income, emoluments, profits and the like. (Fisher v. Trinidad, GR L-19030. Oct. 20, 1922) Q: What is the basis of income tax? A: Income tax is based on income, either gross or net, realized in one taxable year. Q: What is the nature of income tax? A: It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but on the privilege of receiving said income or profit. Q: What is income? A: It refers to all wealth which flows into the taxpayer other than as mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. (Sec. 36, RR No.2) Income is a flow of service rendered by capital by payment of money from it or any benefit rendered by a fund of capital in relation to such fund through a period of time. (Madrigal v. Rafferty, GR 12287, Aug. 8, 1918) Q: What is gross income taxation?

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A: It is a system of taxation where the income is taxed at gross. The taxpayer und What is the definition of “gross income” under the NIRC? A: Except when otherwise provided, gross income means all income derived from whatever source, including (but not limited to) to the following items: [CG2I- R2DAP3] 1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and similar items; 2. Gross income derived from the conduct of trade or business or the exercise of a profession; 3. Gains derived from dealings in property; 4. Interests; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities 9. Prizes and winnings; 10. Pensions; and 11. Partner’s distributive share from the net income of the general professional partnership. (Sec. 32 [A], NIRC) Q:What is net income taxation? A: It is a system of taxation where the income subject to tax may be reduced by allowable deductions. Q: What is taxable income or net income? A: All pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. Q: What is compensation income? A: It includes all remuneration for services rendered by an employee for his employer unless specifically excluded under the NIRC. (Sec. 2.78.1, RR 2-98) Q: Define fringe benefit. A: Fringe benefit is any good, service or other benefit furnished or granted by an employer in cash or in kind in addition to basic salaries, to an individual employee, except a rank and file employee, such as but not limited to: HEV-HIM-HEEL

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1. Housing 2. Expense account 3. Vehicle of any kind 4. Household personnel such as maid, driver and others 5. Interest on loans at less than market rate to the extent of the difference between the market rate and the actual rate granted 6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations 7. Expenses for foreign travel 8. Holiday and vacation expenses; 9. Educational assistance to the employee or his dependents 10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows (Sec. 33 [B], NIRC; Sec. 2.33 [B], RR 3-98) Q: What comprises business income? A: It refers to income derived from merchandising, mining, manufacturing and farming operations. Note: Business is any activity that entails time and effort of an individual or group of individuals for purposes of livelihood or profit. Q: What is professional income? A: It refers to the fees received by a professional from the practice of his profession, provided that there is no employer-employee relationship between him and his clients. Q: Distinguish "capital asset" from "ordinary asset". A: The term capital asset is defined by an exclusion of all ordinary assets. Thus, those properties not specifically excluded in the statutory definition constitutes capital assets, the profits or losses on the sale or the exchange of which are treated as capital gains or capital losses. Conversely, all those properties specifically excluded are considered as ordinary assets and the profits or losses realized must have to be treated as ordinary gains or ordinary losses. Accordingly, "Capital assets" includes property held by the taxpayer whether or not connected with his trade or business, but the term does not include any of the following, which are consequently considered as "ordinary assets": [SOUR] 1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year

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2. Property held by the taxpayer primarily for sale to customers in the Ordinary course of trade or business 3. Property Used in the trade or business of a character which is subject to the allowance for depreciation provided in the NIRC 4. Real property used in trade or business of the taxpayer Q: Distinguish ordinary gain from capital gain. A: Ordinary gain is a gain derived from the sale or exchange of ordinary assets such as SOUR while Capital gain is a gain derived from the sale or exchange of capital assets or property not connected with the trade or business of the taxpayer other than SOUR. Q: Differentiate capital gain from capital loss. A: Capital Gain includes the gain derived from the sale or exchange of an asset not connected with the trade or business. Capital Loss is the loss that may be sustained from the sale or exchange of an asset not connected with the trade or business. Capital loss may not exceed capital gains when used as a deduction to income Q: Define “passive income.” A: Passive income refers to income derived from any activity on which the taxpayer has no active participation or involvement. Q: What is meant by “income subject to final tax?” Give at least two examples of income of resident individuals that is subject to the final tax. A: Income subject to final tax refers to an income wherein the tax due is fully collected through the withholding tax system. Under this procedure, the payor of the income withholds the tax and remits it to the government as a final settlement of the income tax due on said income. The recipient is no longer required to include the item of income subjected to "final tax" as part of his gross income in his income tax returns. Examples of income subject to final tax are dividend income, interest from bank deposits, royalties. Q: What is interest income? A: It is the amount of compensation paid for the use of money or forbearance from such use. Q: How is interest income taxed? A: Interest income is considered as passive income subject to final tax.

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Q: What is dividend income? A: Dividend income is a corporate profit set aside, declared and distributed by the board of director of a corporation to be paid to stockholders on demand or at a fixed time. Q: How is dividend income taxed? A: Dividend income is considered as passive income subject to final tax. Q: What are royalties? A: Royalties are sums of money paid to a creator or a participant in an artistic work, based on individual sales of the work. In order to receive royalties, the work must generally have a copyright or patent. Q: What is rental income and what is its scope? A: Rental income is a fixed sum, either in cash or in property equivalent, to be paid at a definite period for the use or enjoyment of a thing or right. All rentals derived from lease of real estate or personal property, of copyrights, trademarks, patents and natural resources under lease. Q: When is prepaid rent taxable? A: Prepaid or advance rental is taxable income to the lessor in the year received, if received under a claim of right and without restriction as to its use, regardless of method of accounting employed. Q: What is an annuity? A: It refers to the periodic installment payments of income or pension by insurance companies during the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration of capital paid by him. The portion representing return of premium is not taxable while that portion that represents interest is taxable. Q: What is the meaning of prizes and winnings for the purposes of income taxation? A: It refers to amount of money in cash or in kind received by chance or through luck and are generally taxable except if specifically mentioned under the exclusion from computation of gross income under Sec. 32[B] of NIRC. Q: What is pension?

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A: It refers to amount of money received in lump sum or on staggered basis in consideration of services rendered given after an individual reaches the age of retirement. Q: When is pension taxable? A: Pension being part of gross income is taxable to the extent of the amount received except if there is a BIR approved pension plan Q: Is the income of GPP taxable? A: GPP is not taxable as an entity but the partner’s share in the net income of GPP is included in his gross income. Q: How do we compute the distributive share of each partner in the net income of a GPP? A: For purposes of computing the distributive share of each partner, the net income of the partnership shall be computed in the same manner as a corporation. (Sec. 26, NIRC) Each partner shall report as gross income in his return, his distributive share in the net income of the GPP, whether actually or constructively received. Q: Define deductions from gross income. A: Deductions from gross income refer to items or amounts authorized by law to be subtracted from pertinent items of gross income to arrive at the taxable income. Q: What are the requisites for deductibility of expenses (in general)? A: D-STROWN 1. Paid or incurred During the taxable year; 2. The expense must be Substantiated by proof; (substantation rule) 3. The expense must be incurred in Trade or business carried on by the taxpayer; 4. The expense must be Reasonable; 5. The expense must be Ordinary and necessary; 6. If subject to Withholding taxes, proof of payment to BIR; and 7. Expenses must Not be against public policy, public moral or law such as bribes, kickbacks, for immoral purposes. Q: What is ordinary expense? A: It is any expense that is normal or usual in relation to the taxpayer’s business and the surrounding circumstances. (General Electric [P.I.] Inc. v. Collector, CTA Case 1117, July 14, 1963) Q: What is necessary expense?

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A: Necessary expense is one which is appropriate and helpful in the development of taxpayer’s business and is intended to minimize losses or to increase profits. (Ibid.) Q: How is interest as a deduction from gross income defined? A: Interest shall refer to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the amount paid for the borrower’s use of money during the term of the loan, as well as for his detention of money after the due date for its repayment. (Sec. 2 [a], RR 132000) Q: What is Tax Benefit Rule? A: Taxes allowed as deductions, when refunded or credited shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (Sec. 34 C [1], NIRC). Q: What are considered “losses” for purposes of deductions from gross income? A: Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity. (Sec. 34 D [1], NIRC) Q: What is NOLCO? A: It is the excess of allowable deductions over gross income of business for any taxable year which had not been previously offset as deduction from gross income. Q: What are bad debts? A: Bad debts refer to debts resulting from the worthlessness or uncollectibility, in whole or in part, of amount due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec. 2, RR 5-99) Q: What is optional standard deduction (OSD)? A: The OSD is a scheme whereby a taxpayer is given the option to deduct from his gross revenue or gross income a lump sum equivalent to a percentage of such gross revenue or gross income for purposes of computing the net taxable income on which the income tax rate will be applied. Note: This is in lieu of the itemized deduction where the taxpayer lists down all his expenses and the corresponding amounts incurred to determine the amount of allowable deductions. Q: How much is allowed as OSD?

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A: The optional standard deduction is an amount not exceeding: 1. 40% of the gross sales or gross receipts of a qualified individual taxpayer; or 2. 40% of the gross income of a qualified corporation. (Sec. 34 [L], NIRC) Q: Differentiate itemized deduction from OSD. A: Itemized Deduction must be substantiated by receipts while OSD requires no proof of expenses incurred because the allowable deduction is 40% of gross sales or receipts or gross income as the case may be. Q: What are personal exemptions? A: These are arbitrary amounts allowed as deductions from gross income of an individualrepresenting personal, living and family expenses of the taxpayer. Q: What are the kinds of personal exemptions? A: 1. Basic Personal Exemption – the amount subtracted from gross income which is allowed for the theoretical personal, family, and living expenses of an individual taxpayer regardless of status, whether single or married individual judicially decreed as legally separated with no qualified dependents or head of the family. 2. Additional Exemptions – these are exemptions in addition to the basic personal exemptions that are granted to certain individual who have dependents that qualify them for this exemption. Q: What is taxable income? A: The term taxable income means the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. Q: How are corporations treated under normal corporate income tax (NCIT)? A: Under the normal income tax, the taxable income of a corporation during each taxable year is multiplied with the applicable rate of 30%. Note: The resulting amount should then be compared with the income tax payable using the MCIT. Whichever is higher between the two shall be the tax due. Q: To what corporations is the NCIT applicable?

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A: It is applicable to domestic and resident foreign corporations. Q: To what corporations is the minimum corporate income tax (MCIT) applicable? A: It is applicable to domestic and resident foreign corporations which are subject to regular income tax. Note: Under its charter, Philippine Airlines is exempt from the MCIT. (CIR v. Philippine Airlines, Inc., GR 180066, July 7, 2009) Q: What is the treatment under the MCIT? A: Under the MCIT, tax is imposed on a corporation at the rate of 2% based on gross income