B. Rates and Computation
1. Meaning of taxable income................................................... 332 2. Graduated rates of tax on gross income of citizens and resident aliens ...................................................... 333 3. Individuals earning purely compensation income ............. 334 4. Self-employed individuals earning income purely from self-employment or practice of profession ................. 336 5. 8% income tax rate option ................................................... 337 6. Availment of the 8% Option ................................................ 339 7. Comparison of the salient features between the graduated and 8% income tax rates .......................... 340 8. Individuals earning income both from compensation and from self-employment ........................................ 344 9. Summary ............................................................................... 348 10. Progressive scheme of taxation ........................................... 350 11. Income tax rates on nonresident alien individual ............. 350 12. Passive incomes subject to final income tax rates ............. 351 13. Interest income from long-term deposits or investment certificates ............................................... 352 14. Tax treatment of interest income on other transactions ................................................................ 356 15. Separate computation of income tax of spouses.................. 360 16. Computation of tax on nonresident citizens and resident aliens ..................................................... 362 17. Optional standard deduction by individual taxpayer ........ 363 18. Rates of tax on nonresident aliens ...................................... 364 19. Meaning of ‘‘engaged in trade or business’’ ......................... 365 20. Income of nonresident taxpayers not engaged in business in the Philippines ........................................ 366 21. Computation of tax on nonresident aliens ......................... 367
THE LAW ON INCOME TAXATION
9. Partnership and co-ownership ............................................. 417 10. Rules on deductions for GPPs ............................................. 418 11. Rules on deposits made by clients and advances made by GPP for expenses.......................................... 418 12. Rules where deposits/advances received by taxpayers other than GPPs.................................... 425
Chapter X. — Taxation of Corporations A. Domestic and Foreign Corporations
Chapter XII. — Taxation of Estates and Trusts
1. Definition of terms ................................................................ 428 2. Taxable estates and trusts ................................................... 429 3. Gross income of estates and trusts ...................................... 429 4. Taxable income of estates and trusts .................................. 430 5. Trust administered in a foreign country ............................. 430 6. Computation of the tax......................................................... 431 7. Consolidation of income of two or more trusts .................... 431 8. To whom income of estates and trusts taxable ................... 432 9. Income received by estates ................................................... 433 10. Revocable trusts.................................................................... 434 11. Income for benefit of grantor ................................................ 434 12. Exemption from tax of employees’ trust income ................. 435
9. Tax on international carriers ............................................... 382 10. Tax of offshore banking units .............................................. 383 11. Tax on transactions under the expanded foreign currency deposit system.............................................. 383 12. Dividends received by a nonresident foreign corporation from a domestic corporation ................... 384 13. Distinctions as to manner of tax computation between domestic and foreign corporations............... 385 14. Optional standard deduction by corporation....................... 385 15. Minimum corporate income tax on domestic corporations ................................................................. 388 16. Carry forward of excess minimum corporate income tax.................................................................... 389 17. Relief from the tax under certain conditions....................... 390 18. Definition of terms ................................................................ 390 19. Quarterly and yearly payment of the tax............................ 392 20. Accounting treatment of the excess minimum corporate income tax ................................................... 393 21. Determination of the minimum corporate income tax for insurance companies ............................................. 395 22. MCIT and regular income tax ............................................. 397 xv 1. Definition of corporation ....................................................... 370 2. Organizations or associations treated as corporations....... 370 3. Classification of corporations ............................................... 372 4. Corporations liable to tax ..................................................... 373 5. Tax on domestic corporations............................................... 373 6. Incomes subject to final tax .................................................. 377 7. Intercorporate dividends ..................................................... 378 8. Tax on foreign corporations.................................................. 379
Chapter XIII. — Accounting Methods
A. Methods of Accounting
20. Installment sales of real property by individuals ............... 449 21. Filing of returns of installment payments and payment of the tax ............................................... 450 22. Deferred payment sale of real property not on installment plan............................................... 450 23. Repossession on deferred payment sale .............................. 452 24. Change from accrual to installment method....................... 452 25. Accounting methods for long-term contracts ...................... 452 26. Changes in accounting method ............................................ 454 xvii 1. Basic rules ............................................................................. 437 2. General rule and exceptions................................................. 437 3. Essential requirements in keeping accounting records...... 438 4. Methods of accounting .......................................................... 438 5. Definition of cash basis ......................................................... 439 6. Cash basis taxpayers ............................................................ 439 7. Exceptions to the cash basis................................................. 440 8. Reporting of income by the lessor on improvements made by lessee ............................................................. 440 9. Constructive receipt of income ............................................. 441 10. Definition of accrual basis .................................................... 442 11. Exceptions to the accrual basis ............................................ 443 12. The essence of accrual .......................................................... 443 13. Rule on deductions under accrual method .......................... 444 14. Definition of hybrid method ................................................. 445 15. When hybrid method not applicable.................................... 445 16. Definition of crop year basis ................................................. 446 17. Definition of installment method ......................................... 447 18. Persons entitled to use installment method........................ 448 19. Definition of terms ................................................................ 449
B. Exempt Corporations
1. Definition of exemption from taxation ................................. 398 2. Underlying principles justifying grant of exemption ................................................................ 399 3. Corporations exempt from income tax................................. 399 4. Characteristics and nature of exempt corporations ........... 400 5. Tests in determining exemption ......................................... 408 6. Inurement of benefit prohibition .......................................... 409 7. Taxation of exempt organizations ...................................... 410 8. Certificate of tax exemption ................................................ 412
Chapter XI. — Taxation of Partnerships and Partners
1. Definition of partnership ...................................................... 413 2. Essential elements of a partnership .................................... 413 3. Cl assification of partnerships .............................................. 413 4. Classification of general partnerships for purposes of taxation .................................................................... 414 5. Tax liability of partnerships and partners .......................... 414 6. Determination of distributive share of partner in net income ............................................................... 416 7. How distributive shares of partners reported..................... 416 8. Tax consequences of partnerships considered as corporations ............................................................ 417
B. Inventories
1. Definition of inventory .......................................................... 455 2. Need for inventories ............................................................. 455 3. What inventories should include ......................................... 456 4. Requirements for use of inventories .................................... 456 5. Consistency in use of inventory ........................................... 456 6. Change in inventory method................................................ 457 7. Bases of valuation................................................................. 457 8. Recording of inventories ....................................................... 457 9. Valuation of particular goods ............................................... 457 10. Prohibited methods............................................................... 458 11. Inventories at cost price ....................................................... 459
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