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(Article published in the December 21, 2000 issue of TODAY, Opinion Today Section)

As the year 2000 comes to end, a small window of opportunity opens for taxpayers who are willing to take time off from their Christmas shopping in order to save some taxes-whether as a form of protest, self-defense or simply self-interest. By adroitly timing their transactions such that acts began in one year are completed only during the ensuing year or years, taxpayers can take advantage of the combined effect of two basic feature of our tax system, namely, (1) that of reckoning the basis of certain taxes on a calendar year basis and (2) that of imposing on the annual base a progressive tax rate schedule.

To illustrate: If an employee, who by the end of 2000 shall have earned a total of Php 500,000.00 in taxable compensation, receives from a bonus prior to December 31, 2000 of Php 20,000.00, his income tax liability for the whole year shall be Php 125,000 (for the Php 500,000) plus Php 6,800 (or 34% of the bonus of Php 20,000). But, if he were to receive the bonus on January 2, 2001 instead, his income tax liability for the year 2000 will be only Php 125,000. The Php 50,000 is not part of his year 2000 income but instead will be computed together with his January 2001 income. The advantage of base splitting is negligible for salaried individuals, but it can be substantial for others. As a sad commentary on our tax system, those who are advantaged significantly are often those who could afford to pay more taxes.


A classic example of year-end tax avoidance is splitting one's donation to a family member, one-half before December 31 and the other half after Janaury 1. Let us suppose that the taxpayer wants to donate the amount of Php 1,000,000 to his children. If he were to donate the entire amount to them, say on Christmas eve, then the donors tax due on the gift will be Php 44,000 since the first Php 100,000 is exempt and the next Php 900,000 is taxed at Php 44,000. However, if he were to donate only one-half on Christmas eve, and give the other half after the New Year's noche buena, on January 2001, then the total tax liability is reduced to only Php 28, 000. Why? Because splitting the gift into two calendar years, results in two separate tax events. The Php 500,000 given on Christmas eve is taxed as follows: The first Php 100,000 is exempt; the next Php 400,000 is taxed at Php 14,000. The noche buena gift is taxed exactly the same way and therefore the total taxes for the entire Php 1,000,000, as a result of its being divided into two years, is reduced from Php 44,000 to only Php 28,000. Not a bad tax break for someone may not need it.

Installment Sale

To a lesser extent, taxpayers selling property this month of December can also take advantage of splitting their taxable base for 2000 by structuring the transaction into an installment sale. Ordinarily, income on the sale of property must be reported in the year that the sale is made. However, when the sale qualifies as an installment sale, i.e. one where payment is to be made over a period of two or more calendar years, and, in case of real property, the initial payments do not exceed 25% of the selling price, Section 49 of the Tax Code permits spreading out the reporting of the gains over the payment period. Splitting the taxable gain, at the very least, results in the postponement of the payment of the full tax.

One must, however, avoid using the technique that was recently described by the Supreme Court this year as "tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of land" (Banas, Jr. v. Court of Appeals, G.R. No. 102967, February 10, 2000). In Banas, the taxpayer sold land to Ayala Investment Corporation ("Ayala") under terms of payment which required Ayala to pay not more than 25% of the selling price upon signing of the contract, and the balance to be paid in four equal annual installments earning 12% interest p.a. This technique technically qualified the transaction as an installment sale. The balance was represented by a promissory note which, however, was discounted by Ayala i.e. Ayala itself bought from the seller Ayala's own promissory note on the same day for its face value. The result was that although the sale document indicated that less than 25% of the entire purchase price was to paid during the first year and the balance was to paid in installments for the next four years, the seller nevertheless got the initial payment as well as the installment payments he was supposed to receive over four years all on the day that the contract was signed. The Supreme Court held that when the seller converted the Ayala's promissory note into cash by discounting it with Ayala itself, the seller lost entitlement to report the sale on an installment basis.

In seeking to reduce one's taxes, a taxpayer cannot be too smart for his own good. Being greedy, though exceedingly tempting, has always led and will continue to lead to the downfall of many.