TA X AT I ON

July 27, 2010 Tuesday

TRANSCRIPTIONS

BY

LLB

III

2010

Page |1
Ms.

Emery Tiu

L. Allowable Deductions

All Income
Less: Exclusions from Gross Income /
Exemption
_________________________________________
Gross Income
Less: Deductions
_________________________________________
Taxable Income

Distinguish deduction from exemption and deduction from exclusion. Or are they the same?
o

First off, we have to know that all wealth which flows to our hands to know whether its an income
or a capital. If its an income, you list down all your income but you exclude those which are listed
as exclusions from gross income or any item which the law exempts from taxation to arrive at
gross income because this is income. In order to arrive at a taxable income in which the income
tax rate will be computed, we have to know the deductions allowed.

She said that the difference between a exemption and deductions is that deductions are those
items allowed by law to reduce the gross income in order to arrive at a taxable income. Exclusions
are these items are already, off-hand, already identified by law as an exempt income whether it be
included in the list of exclusions of gross income under Section 32b or in separate special laws.
Diba what did we say about exemptions, these are immunities from future taxes to which you
could have been liable had there been no law granting its exclusion.

Now, if you identified all income, you exclude all the exclusions, this is the one which we were
asked to memorize, the exclusions from gross income are those exemptions granted so that you
will know which are covered by gross income. But not all gross income are subject because there
are deductions allowed.

Is deduction an income that is not taxable? The distinction there really is when you say exemption,
its an income that is not taxable. There is an inflow towards you, but there is a law saying that
that income which flew into your hands is not taxable. But deduction, although it reduces the
income, in order to arrive at a taxable income, is not an income. Deduction is an expense. Its an
outflow of your wealth. Thats why you are allowed to deduct expenses.

When you engage in a business, you have income, you have proceeds but you are not
entirely taxable on the proceeds, you are allowed to deduct expenses which you have
incurred.

In the same way, that deduction is not the same as exclusion. Exclusions are just like exemptions, they are
income or inflows to the tax payer. But because of the provision of the tax code, it is not subject to income
see. Now, you will see that in order to arrive at a taxable income, you always deduct exclusions and
exemptions. It is the act of deduction but it is not an expense, its an income.

Now there are principles that you need to know to guide you whether you can deduct a certain item from
your gross income. What are these?
o

The basic principles that would guide you in determining whether an item is allowed to be
deducted is:

1. The taxpayer or you seeking for deduction must be able to pin point some specific
provision of the law authorizing you to deduct and

2. Prove that you are entitled to the deduction authorized because you satisfy all the
conditions required.

3. All deductions are always strictly construed against the tax payer. That is the 3 rd
principle.

4. An additional requirement for the deductibility of an expense is not when a tax is

required to be withheld by you, as the payer of the expense, you should have withheld the
tax, otherwise, you cannot deduct the expense.

Let me put it in simple terms. If you have a business and you rent a place, a
boutique perhaps in ayala at Php100k per month, per space. The law requires you

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Emery Tiu

to withhold 5% oif your rental payments and remit it to the government. So you
will only pay or give ayala Php 100k less 5% or less Php 5000. Where does the
Php5000 go? To the government. Ayala will only receive 95%. If you failed to
deduct even if you have given Ayala the full Php100k, you forgot to deduct the 5%,
you will not be allowed to deduct entirely the Php100k rent expense. Thats what
will happen if you wont satisfy the requirement of the deductibility of taxes on
expenses.

What are the deductions that may be allowed or what are the different kinds of deductions that may be
allowed on the different kinds of tax payers?
a. Personal and Additional Deductions/Exemptions Section 35
b. Itemized Deductions Section 34A K and 34M
c. Optional Standard Deduction of 40% of the Gross income is the deduction which an
individual other than a non-resident alien, or a corporation, subject to income tax, may elect in an
amount not exceeding 40% of his gross sales or gross receipts, as the case may be, on a
corporation, in an amount not exceeding 40% of its gross income, in lieu of taking itemized
deductions.
Itemized deductions, these are expenses incurred in line with your business or profession. Optional
standard deductions, which is in view of itemized deductions and number 3, that you can deduct in order
to arrive at your taxable income is the personal and additional deductions.
o
o
o

I am not saying that for you as a taxpayer, everything will be applicable. But these are (shes saying about
number 4, then does not continue here.)

2. 50,000

25,000 /child

SM

All Income
Less: Exclusions from Gross Income / Exemption / Personal and Additional Exemptio
_________________________________________
Gross Income

1. expense

in lieu

2.

4.

Any of
the deductions
claimed
by a deductions
tax payer will
fall under Standard
any of these
categories.
It may be an
Less:
Deductions
(itemized
/ Optional
Deduction
/ Premiums
onitemized
deduction
or expenses or in lieu of that an optional standard deduction at a fixed rate of 40% of your gross
HIH Insurance
income.
Or you can claim, if you are an individual tax payer, you can also claim the personal and additional
_________________________________________
exemptions
in Income
lieu of family and living expenses.
Taxable
o

What are the personal and additional exemptions as mentioned before? Php 50,000 for Single,
head of the family or married, the personal exemption. Php 25,000 additional exemption for every
dependent child that you have, legitimate, illegitimate, acknowledged or legally adopted. So if you
compute your income tax due, you may be able to claim anyone of these, but not all of these.
Because optional standard deduction is only in lieu of itemized.

We will discuss this fully in outline number 3 and 4. After we have the deductible expenses, you
can now have your taxable income multiplied by your tax rate.

L. Non-deductible Items

Would all your expenses incurred be deductible? If you engage in business and you had incurred expenses
of Php1M but your sales proceeds is only Php500,000. Are you guaranteed that you can claim your Php1M
expenses? There are non-deductible items identified by the Tax Code.

Sale
Php 500,000.00
Expenses
(Php
1,000,000.00)

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2010

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Emery Tiu

What are the non-deductible items? Not all expenses that you paid for or have incurred may be allowed as
deduction in the computation of your taxable income. Let us identify what are the items that you have
spent for but are totally non-deductible items.
1. Personal living or family expenses
2. Amount paid for new buildings or permanent improvements, or betterment to increase the value of
any property or estate;
3. Any amount expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made;
4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any
person financially interested in any trade or business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or indirectly a beneficiary under such policy
5. Losses from sales or exchanges of property directly or indirectly
a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal
descendants)
b) Except in case of distributions in liquidation, between an individual and a corporation more
than 50% in value of the outstanding stock of which is owned directly, by or for such an
individual
c) Except in case of distributions in liquidation, between 2 corporations more than 50% in
value of the outstanding stock of each of which is owned directly or indirectly, by or for same
individual, if either one of such corporation is a personal holding company or a foreign personal
holding company
d) Between the grantor and a fiduciary of any trust
e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a
grantor with respect to each trust
f) Between a fiduciary of trust and a beneficiary of such trust

(1) Personal living or family expenses

o

Why non-deductible?

1. Its not related to the business. It is personal and for the family.

2. The personal exemption of Php 50,000 for single and married individual and additional
exemption for every child already child already approximates your personal and family
living expenses for the entire year. That is why personal and family living expenses are
non-deductible items.

(2) Amount paid for new buildings or permanent improvements, or betterment to increase the value of any
property or estate;
o

This simply means to say that when you spend for something as a property or estate for the
business, it is not deductible in the year that you have spent for it or paid for it.

Give me an example. Amount paid for new building or permanent improvements are nondeductible items period.

Example, if you open up a business and you purchased a new building used to house your
operations, is that expense not deductible from your income? It is not deductible in the
year you spent for it.

If you spent Php100M in purchasing a building, you are not allowed to deduct the full Php100M in
the year of purchase, or in the year of construction but it will deductible as an allowance over the
years of its estimated time. So if a building is constructed costing PHp100M and it is expected to
have a life, useful for another 100 years from the time that it is finished from construction, then it
is just but proper and reasonable to spread out the value of Php100M over the useful years of 100.
So it is deductible based on depreciating effect or the value of depreciation for years. So it will
diminish its value, Php1M every year. Because after every year, its estimated life reduces by 1 year
so the effect is to deduct it not 1 time but over the estimated life of that property or asset or even
if its not a new building, so long as its a major improvement, a betterment, which increases the
life of an existing asset, it will not be deductible outright but only deductible over its life.

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2010

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Emery Tiu

It is reasonable because if you deduct in the first year that you bought it, you deduct Php100M.
And your sales is only PHp2M, you lose Php98M. Whereas, if you spread out the expense over 100
years, you will benefit each and every Php1M every year as an expense.

If we will come across an exemption wherein non-stock, non-profit education institutions like San
Carlos can actually deduct in the 1 st year of purchasing building the entire Php1M. Why does the
BIR allow this? Because schools are not taxable. Even if we deduct the entire Php100M of
purchasing it, nothing will ever change. Even if we deduct it the next year. Schools are not, nonstock, non-profit educational institutions, are not taxable. So the effect is different. IN normal
businesses and abnormal businesses.

(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made
o

No. 3 is it the same as No. 2? If you have a motor vehicle or delivery van in your business to
deliver your items and you change the headlight or you change the mirror, can you deduct the
expense outright or should you spread out the value of the repair? You can deduct outright.

No. 3 are major repairs which extends the life of an existing asset which requires an apportionment
of the expenses over the number of years that the assets life has been extended or the propertys
life has been extended.

(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any
person financially interested in any trade or business carried on by the taxpayer, individual or corporate,
when the taxpayer is directly or indirectly a beneficiary under such policy
o

The company took out a life insurance policy over your life as its most important employee. Every
year the company pays premiums amounting to PHp100,000 over the life insurance policy. Is the
Php100,000 premium a deductible business expense? You are the president of the company.

Lets have an illustration: Company A gets a life insurance policy over your life,
Php100,000 premiums over a year. The Php100,000 premium is used to satisfy the
requirement of the life insurance taken by the company over your life and it is paid to an
insurance company, Company B. This is an expense of the company. The assets of the
company is decreased by Php100,000 every year just to pay the premiums of your life
insurance policy. Can we claim this as an expense deductible from income of Company A
who spent for it?

Premium

Beneficiary

Deductible?

Php 100,000

Company A

Php 100,000

Estate of U as employee

If a company takes out an insurance policy over the life of its employees, take note
of who the beneficiary is. Its only here that the one spending for the premium is
the company itself, so its losing money because its paying for something.

Can this be a deductible expense? So it can be a tax

taxes, so the tax liability of Company A will be reduced,
beneficiary is. Now if the company made itself as
deductible because the law says it is not deductible if
indirectly the beneficiary under the policy.
o

benefit in the payment of

you have to know who the
the beneficiary, it is not
the taxpayer is directly or

Who is the taxpayer referred to in this section? Company A. The tax payer
who took the life insurance policy is the beneficiary itself, not deductible.

The principle behind that because it is merely transferring money from Company A
to the insurance company and go back to Company A when the employee dies. It is
merely transfer of money but will revert back to the company upon the happening
of the event insured.

But if the beneficiary is another person other than the tax payer himself, it is
deductible, because the proceeds will not revert to the coffers of the company.

But take note, the designation of the company may be direct designation or indirect. If its
traceable then it is a indirect designation in favor of the company, still it is not taxable.

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2010

Page |5
Ms.

Emery Tiu

5. Losses from sales or exchanges of property directly or indirectly

First, we have to know whether losses are deductible expenses? Yes.

Example, if you engage in the buy and sell of motor vehicles. If you have sold 10 motor
vehicles in a year, 7 were sold at a profit, 3 were sold at a loss, the losses incurred by the 3
transactions can be offsetted against the gains out from the 7 transactions. So generally
losses are deductible items.

If the 7 motor vehicles were sold for Php7M, your capital was only Php4M, Php3M is
taxable income. If the 3 other vehicles were sold for were sold for Php1M, and
puhunan is Php3M, you lost Php2M, since you own this 1 business, you will only be
liable for tax for Php 1M, losses are deductible expenses so long as it is incurred in
relation to your business.

Example, if you are in the manufacture of milk or production of milk, along the way some
will evaporate, losses are incurred. From the cows milk, if it directly spills. But losses are
deductible except for losses found in Section 36, and it says losses from sales or
exchanges of property between members of a family.

a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal
descendants),

Example: This motor vehicle, you sold it to your sister. Puhunan is Php3M, but the 7 you
sold it to your classmates, if you sold this to your sister, is the Php2M, deductible as an
expense? No.

Why are losses or exchanges of sales between you and your sister not deductible losses?
Because transactions between family members are for the most part not entered into an
honest transaction unlike entering into a transaction with a 3 rd person or 3rd party, you may
sell this one for Php10 to someone else but you can actually dispose it to your sister for
Php1M.

So losses are not real in cases between family members. And even if it is real losses but
because you entered it with a family member, it is not deductible.

b) Except in case of distributions in liquidation, between an individual and a corporation more

than 50% in value of the outstanding stock of which is owned directly, by or for such an individual

Company A

U
Loss: Php 2M
Deductible

Company A sold a
3M, the company
PHp2M deductible
mention if you are

parcel of land to you, selling price is Php1M, cost to the company is Php
lost Php2M from the transaction entered with you. Is the transaction
from the income of Company A? Yes. Because in this case there is no
a stockholder of the company and for what share.
60%
U

10%
V

10%
W
10%
X
10%
Y

Company A

U
Loss: Php 2M
Not Deductible

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Emery Tiu

Company A is owned by a 5 stockholders (Corporation must be atleast 5 stockholders). You

are the owner of 60% of Company A. V, W, X, Y are owners of 10% of the shares. If you are
an owner of Company A by 60%, can the company deduct the Php2M from its income? No.

Why? Because if a company wishes to avoid paying taxes, it can actually enter into
simulated losses or transactions by selling properties to any of its controlling stockholders.
But in order for it to be a non-deductible sale class, the individual with whom the company
entered into with a transaction must be a controlling stock holder, meaning he owns more
than half or more than 50% of the business itself.

If Company A sold the land for Php1M costing PHp3M to any of V, W, X and Y, it is still
deductible loss. Why? Because these stockholders are not controlling stockholders.

When the transaction that we are looking into is between a company and an individual, the
requirement is that the individual must be a direct stockholder.

c) Except in case of distributions in liquidation, between 2 corporations more than 50% in value
of the outstanding stock of each of which is owned directly or indirectly, by or for same individual,
if either one of such corporation is a personal holding company or a foreign personal holding
company

How about corporation to corporation?

Give me an illustration for number 3.

What does no. 3 prohibit? Transactions between corporations.

Company A

Company B
Loss: Php 2M
Deductible

Corporation A sold a land for Php1M costing Php3M, suffering a loss of Php2M. To whom
was it sold? Corporation B. Is the loss of Php2M deductible? As a rule, if you have no other
fact, these are the only facts given the general rule is losses incurred are deductible losses.

But if we dig into the ownership, say for example:

60%
U

10%
V

60%
U

10%
W

10%
V

10%
W

10%
X

10%
X

10%
Y

10%
Y

Company A

Company B
Land GSP
Cost
Loss

Php 1,000,000
3,000,000
Php 2,000,000

***NOT DEDUCTIBLE

U, V, W, X and Y, and Company B is also owned by U, V, W, X and Y, and the shares are
given as shown, still deductible? No. Because the ownership is more than 50%. The law
provides that if for example that this transaction is entered into between 2 corporations
whereby ownership is held directly or indirectly by more than 50% for the same individual
is not deductible loss.

So Company A is owned by more than 50% by U, Company B is owned more than 60% by
the same individual, so the controlling interest in both corporations is U, the same
individual, therefore, it is covered by non-deductible lsoses.

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10%
V

LLB

III

2010

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Ms.

Emery Tiu

Let me change the facts:

60%
U

BY

10%
U

10%
W

10%
V

10%
W

10%
X

10%
X

10%
Y

60%
Y

Company A

Company B
Land GSP
Cost
Loss

Php 1,000,000
3,000,000
Php 2,000,000

***DEDUCTIBLE

Deductible or not? U owns 60%, Y owns 60% on the other company. Is the loss deductible?
Yes. In this case, it is not the same individual who is owning both corporations or
controlling both corporations, the loss is deductible.

Let me change again the facts:

60%
U

10%
V

10%
U

10%
W

10%
V

10%
W

10%
X

10%
X

10%
Y

10%
Y

Company A

Company B
Land GSP
Cost
Loss

Php 1,000,000
3,000,000
Php 2,000,000

50%
Company Z
99.99% owned by U

***NON-DEDUCTIBLE

In this case, if I put in there are 5 owners, individual owners and the 6 th owner is Z
Corporation, but Z Corporation is owned 100% by U, deductible or not? Okay, lets go to
your first corporation, we retained ownership 60% controlled by U, Company B, the buyer
of the land is owned by 10% by U, V, W, X, Y. The remaining 50% is owned by a
corporation, Corporation Z. If a corporation owns a corporation, there is ultimately an
individual owning it. You have to key in the ownership of all levels of the corporation. It so
happened that Z corporation is 99.99% owned by U.

60%
U

Is the loss deductible or not? Is this covered by transactions which are not arms
length? Arms length because the law says owned by individual directly or
indirectly. This is a case of 2 corporations entering into a sale transaction of a real
10%
10% are
10%owned by the same individual although
property
but both corporations
10% The other one indirectly.
10%
V
U
V
indirectly.
W

More than 50%

or indirectly. You say U owns
10% is held by the same individual directly
10%
this majority;X its more than 50%. Is U owning or
X controlling this corporation? Yes,
indirectly. How indirectly? U owns 10%. U owns the entire 50% through another
corporation,10%
therefore, Us ownership is: 10% 10%
+ 50% = 60%. More than 50% of
Y
Y
both corporations
is owned by the same individual.
Therefore, we can say that the
into an arms
Company Atransaction is not enteredCompany
B length.

Let me change the facts again:

Land GSP
Cost
Loss
***DEDUCTIBLE

Php 1,000,000
3,000,000
Php 2,000,000

50%
Company Z
60% owned by U
40% owned by A

Therefore, Us share is:

60% of the 50% share=
30%
Plus: share in Co. B =
10%

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Emery Tiu

Z Corporation owns 50% of Company is owned by U and A. 60% for U, 40% for A. IS the
loss deductible? Does U control corporation B? No. But then U has more than 60% of
Company Z? Diba this is a corporation owned by a corporation. But you know that this
corporation is owned by other stockholders. So how much of the share does U own? 60% of
50% is 30% plus 10%, U owns only 40%.

The ownership of U here is more than 50% direct control over Z Corporation. But in
Company B, U only directly control Company B by 10%. U owns 10% directly and
indirectly by 30% of Company B through owning B by 60%. 60% of 50% if 30%. So
the 30% of Company B is owned by U through this corporation and another 10%
that is a total of 40%

Does it satisfy the requirement for non-deductibility? NO, therefore the loss is
deductible.

This is what you call a grandfather rule in determining ownership of the

corporation. It is grandfather in a sense because you with start with Company A
here and its owned by another Company C, owned by another Company C, to the
extent that you determine the ownership, the vast ownership of the individual, that
is the grandfather rule in Corporation Code.

If its family-owned, there are still distribution of interest and control. You still use the
number of ownership that he has in his corporation. That is based on SEC because there is
an annual report that needs to be submitted to the SEC, stating who the owners are and
what percentages of the stocks they are holding.

d) Between the grantor and a fiduciary of any trust

e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor
with respect to each trust

f) Between a fiduciary of trust and a beneficiary of such trust

The other non-deductible losses from sales or exchanges of property, the reason why it is
non-deductible because it refers to one and the same, it simply a temporary transfer. The
grantor of the trust and the fiduciary of the trust, these are second transfers so it refers to
one and the same.

N. General Principles of Income Taxation in the Philippines Section 23.

This is a very important provision for income tax.

What are the general principles of income taxation?

1. A resident citizen is taxable on all income derived from sources within and without the Philippines.
2. A non-resident citizen is taxable only on income derived from sources within the Philippines.
Sec. 22(E) enumerates who are non-resident citizens
3. An overseas contract worker is taxable only on income from sources within the Philippines; a
seaman who is a citizen of the Philippines and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged exclusively in the international trade shall
be treated as an overseas contract worker.

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4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived
from sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within and without the
Philippines
6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only
on income derived from sources within the Philippines.

Individuals are classified into resident citizens, taxable for income within and without. Second
classification, is non-resident citizen taxable only for income within. Third classification, they are taxable
only for income derived within. For non-resident aliens engaged in trade or business, are taxable only for
income within the Philippines.

How about overseas contract workers? Taxable for income derived within the Philippines.
o

Why are they not taxable within and without?

When they are non-residents for the year, they are only taxable within.

All of those taxpayers are taxable only from income within EXCEPT for 2 types which are taxable on
their worldwide income. What are the 2 taxpayers which are taxable from income within and income
without?

Only resident citizens and domestic corporations are taxable on income within and income
without, while all the rest are taxable only if they earn income having situs within the
Philippines.

So bottom line is determining the situs of the income important for all types of taxpayers?
What is the purpose why do we have to determine the situs of the income?
o

Purpose: so that we will know if we have taxing jurisdiction over that income.
Determining the situs of income is important because we would want to know if the
income of those taxpayers that we have just mentioned are income within, and
definitely, taxable in the Philippines.

But not all taxpayers would the situs of income really matter. What type of
taxpayer is situs irrelevant? Resident citizen and domestic corporation because
they are taxable on income within and without. So, situs of income is not important
in so far as domestic corporations and resident citizens are concerned, they are
taxable wherever their income has situs. Therefore, if you have a question before
you that says, the individual taxpayer is a resident citizen or a domestic
corporation it is actually taxable on income within and without. So, situs is
irrelevant unless we make it more complicated in applying exemptions in tax
treaties.

But as a rule, situs is only important in so far as determining whether the income
of non-resident citizens, aliens and foreign corporations are concerned because
these types of taxpayers are taxable on income within the Philippines.

Is an immigrant a resident citizen? What is his classification as a taxpayer, resident citizen or nonresident citizen? (not answered by Atty. Tiu)

What are the general principles of income taxation in the Philippines?

A resident citizen is taxable on all income derived from sources within and without the
Philippines

A non-resident citizen is taxable only on income derived from sources within the Philippines.

An overseas contract worker is taxable only on income from sources within the Philippines; a
seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in the
international trade shall be treated as an overseas contract worker.

An alien individual whether a resident or not of the Philippines is taxable only on income
derived from sources within the Philippines

A domestic corporation is taxable on all income derived from sources within and without the
Philippines

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P a g e | 10
Ms.

Emery Tiu

A foreign corporation whether engaged or not in trade or business in the Philippines is taxable
only on income derived from sources within the Philippines.

Individual Income Taxation

Taxable Individuals
A. Resident Citizen

Who is a resident citizen? What is the taxability of a resident citizen?

Resident citizens are citizens of the Philippines residing therein.

They are subject to the schedular rates of 5%-32% tax on income derived from sources within
and without the Philippines.

Prime example: all of us are citizens here unless you claim otherwise.

B. Non-resident Citizen

Who is a non-resident citizen? Assuming you are working and your company sent you off abroad under
an assignment contract for 2 years. He left today, will he be considered a non-resident citizen for tax
purposes? He is still a citizen, yes. His employer is a domestic corporation. He was sent to Korea for 2
years, he left this morning. Is he a resident citizen or non-resident citizen? When is a citizen considered
a non-resident citizen? (Ms. Tiu said she wants the enumeration found in Sec. 22 of the Tax Code, she
said that we have to memorize this Sec. re who are non-resident citizen)

Sec. 22(E), the term nonresident citizen means:

o

(1) A citizen of the Phils. who establishes to the satisfaction of the Commissioner the
fact of is physical presence abroad with a definite intention to reside therein

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.

(3) 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.

(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside permanently in
the Philippines shall likewise be treated as a nonresident citizen for 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.

(5) The taxpayer shall submit proof to the Commissioner 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 purpose of this Section.

Illustration (1st scenario):

WITHIN SITUS

January 1, 2010

5 months and 4
days
Less than 183 days
WITHOUT SITUS

July 27, 2010

ABROAD
WITHOUT SITUS

December 31, 2010

WITHOUT SITUS

December 31, 2011

WITHIN SITUS

July 26, 2012

December 2012

HOMECOMING

2010 RESIDENT
CITIZEN
TAXABLE FOR
BOTH

NON-RESIDENT
EXEMPT

CONSIDERED NONRESIDENT

He does not qualify under No. 1 and No. 2.

Let us go to No. 3. A citizen of the Phils. who works and derives income from
abroad and whose employment requires him to be physically present abroad
most of the time during the taxable year.

TA X AT I ON

TRANSCRIPTIONS

BY

LLB

III

2010

P a g e | 11
Ms.

Emery Tiu

Most of the time is interpreted to mean 183 days abroad or more

physically present.
Did he go abroad for employment? Yes but not on a permanent basis
because his contract is fixed for 2 years, January 1, 2010. He left this
morning, July 27, 2010. By December 31, 2010, he spent 5 months
and 4 days, which is definitely less than 183 days. He is not abroad
most of the time, so for 2010, he is considered a resident citizen.
For December 31, 2011, he is abroad. He is a non-resident citizen.
Now, this is established that he is a resident citizen for the entire
2010. Why? He was not abroad most of the time during year. So, his
salary from January to July has situs within. His salary from July to
December has situs without because he is abroad. Is this taxable for
2010? Yes, both income is taxable. As a resident citizen, regardless
where your income is earned whether it has situs within or without,
definitely, it is taxable in the Philippines.
Now for 2011, he is a non-resident citizen because his employment
requires him to be physically present most of the time during the
year. Is this an income within or without? It is income without, hence,
not taxable in the Philippines. A non-resident citizen is only taxable
for income within, so, in this case, this is not taxable.
How about 2012? He came back and continued employment with his
local company, December 31, 2012. Is this income within or without?
Is this taxable? He is considered non-resident, under category no. 4.
o

2nd scenario:
5 months and 4
days
Less than 183 days
WITHOUT SITUS

WITHIN SITUS

January 1, 2010

July 27, 2010

2010 RESIDENT
CITIZEN
TAXABLE FOR
BOTH

ABROAD
WITHOUT SITUS

December 31, 2010

WITHOUT SITUS

December 31, 2011

NON-RESIDENT
EXEMPT

WITHIN SITUS

June 26, 2012

December 2012

LESS THAN 183

HOMECOMING
days
here
CONSIDERED NONRESIDENT STILL

He is still considered non-resident citizen (from Dec. 31, 2011 to June 26, 2012). As
a returning non-resident citizen, from the start of the year to the date of arrival,
any income earned without or outside the Philippines is not taxable. Because for
this period, he is considered as a non-resident citizen. This is where he is a
considered as a hybrid non-resident citizen, half and half. You cannot consider him
as entirely as non-resident nor as resident citizen for the entire year but the
requirement there to apply the rules of hybrid personality, he must have returned
as a non-resident the year before. If he is a resident citizen the year before. So, lets
cut this short, wala ni nga year, what is the year immediately before this one, the
rule will not apply because he must be a returning non-resident citizen.

Diba the first type of non-resident is easymust be able to establish the fact of his
physical presence abroad to the Commissioner of Internal Revenue and he has a
definite intention to reside therein.

No. 2 is also easyhe must be an immigrant or permanently employed abroad.

No. 3 is much more complicated because his employment abroad requires him to
be physically present most of the time during the year which requires 183 days or
more.

The 4th only applies to a citizen who was previously, the year before, is considered
as non-resident whether 1st, 2nd, or 3rd category. Any of those 1st 3 categories nonresident citizen comes back to the Philippines to reside permanently here, then, he

TA X AT I ON

TRANSCRIPTIONS

BY

LLB

III

2010

P a g e | 12
Ms.

Emery Tiu

will have a portion of the year as non-resident citizen and, after the date of arrival,
resident citizen. Any income during that time from without is already taxable.

Remember the rules, this is important that he be considered non-resident here

because all his income from abroad during this time will always be considered as
non-taxable in the Philippines because his classification is a returning non-resident.
But, from the day of arrival until Dec. 31, he is already classified as resident
citizen, and if he has income in any day or any month during this period, he goes
abroad to perform, to sing, or whatever, even if it is income without but he is
already classified as resident citizen, it means to say that everything here is
taxable. But on the other hand, only those income within is taxable.

As a returning non-resident the year before, even if he returns January 3 here, not
most of the time during the year, his income from January 1 to January 3 abroad is
non-resident citizen, income without, therefore exempt.

(Atty Tiu was asked what returning is?) His coming back, definitely, to reside in
the Philippines. But for him to avail for the 4 th category of non-resident citizen taxfree, he must have been a non-resident the previous year or years.

Say, if you have a relative who stayed abroad for many years, comes back to the
Philippines as balikbayan and stayed here for 6 months, went back to the US for 1
month then came back again for the rest year. If you take the entire year he stayed
here for more than 183 days, is he resident citizen because he stayed here most of
the time? NO because he is not returning back to reside here, only on a vacation.
So, it does not take his status as a non-resident for staying here most of the time.
An immigrant is an immigrant, unless he decides to come back, he will not be
considered as a resident citizen.

(Q: asked what if the employee is asked to go abroad near the end of the taxable
year) If you are required to go abroad on a 2 year contract, make sure that you
leave the Philippines before June 30, so that you will be considered as non-resident
citizen so that you income abroad will not be taxable.

(Q: what is our measure of most of the time?) 183 days or more in a given year
whether continuous, in succession, or in the aggregate. You add out the days.
Basta, you have a definite purpose of going there but not for permanent stay.

(Q: in the 1st category, when is the reckoning point?) for category 1 and 2, the day
that you left.

How about a seaman who is working in a vessel? Would all of them be considered
as non-resident citizen?
A seaman is not categorized as non-resident (1) although he is physically
present abroad, he does not intend to reside in the vessel for his entire life;
(2) he is not an immigrant and his employment is not permanent, its per
contract basis. So, he is under category no. 3.
In order that they be classified non-resident citizen under category no. 3, 2
requirements must be complied with, (1) they must stay abroad most of
the time abroad during the year, meaning 183 days or more; and (2) the
vessel within which they are working must be engaged exclusively in
international trade. Otherwise, they do not qualify as non-resident citizen
and their income, even if they earn it working in the vessel, it will be
considered as taxable within and without as resident citizens. Why again?
They dont qualify as immigrants or permanent employees abroad. All
overseas contract workers including seaman, its contractual. Its not a
permanent employment.

C. Resident Alien

Who is a resident alien?

A resident alien is an individual whose residence is here in the Philippines but is not a citizen of
the Philippines.

When can you be considered a resident? If you marry a Filipina?

You will be considered a resident if you are not considered as a mere transient or if he lives in
the Philippines and has no definite intention of his stay here.

TA X AT I ON

TRANSCRIPTIONS

BY

LLB

III

2010

P a g e | 13
Ms.

Emery Tiu

There is no number of days as a benchmark, or number of months, number of years to say

whether an alien here in the Philippines is definitely considered as resident or not. Unlike in
non-resident citizen, theres a number of days. Resident(?mao ni iyang giingon pero murag
non-resident alien iyang pasabot. Check lang ) alien engaged in trade or not engaged in
trade, you have 183 day rule but for an alien to be considered as resident, there is no exact
measure or length of stay that he has to establish in the Philippines.

So long as he is not a mere visitor, transient, or sojourner in the Philippines and so long as he
has definite intention to reside here or his visit requires an extended stay in order to establish
or satisfy a purpose for which he is coming to the Philippines, making the Philippines as a
temporary home country, he will be considered as a resident alien. In some part of the
discussions in the book, you will see there one year but that one year has not been established
by any law. It is just a discussion of an opinion or ruling by a SC decision but in more cases
than not, the SC does not really give a number of years for length of stay. It just says, so long
as he has a definite purpose of staying in the Philippines, and making the Philippines as his
home country, then, he can be considered a resident alien. In one case, it says that the length
of stay is indicative of the intention of an alien. If he had stayed here in the Phils. for more than
a year, he may already be considered as a resident alien.

D. Non-resident alien

What about a non-resident alien? Definitely not a citizen, not even a resident alien. But for some
purpose he happens to be in the Philippines earning some form of money or income. Who is a nonresident alien?

There are two classifications of non-resident alien:

o

(1) one that is engaged in trade or business

(2) one that is not engaged in trade of business

If there is an alien or foreigner, say, you went to Boracay alone and youve met a foreigner. During
your conversation, you learn that he has been in Boracay for half of the year. He came to Boracay,
January 1 and you met him yesterday (July 26; stayed around 204 days already in the Philippines,
almost 7 months), can you consider him a non-resident alien not engaged in trade or business. So, his
stay is more than half of the year. He did nothing in Boracay except surf and dive. Is he of the 1 st type
or the 2nd type? During almost those 7 months, he earned a minimum amount in teaching how to
scuba dive.

Those non-resident aliens who stayed in the Philippines continuously or in the aggregate for
more than 180 days regardless of what they are doing in the Philippines, they are considered
as non-resident aliens engaged in trade or business. The number of days is used to classify
whether the non-resident alien is engaged in trade or business or not. The reason why we
have to qualify or distinguish them, although both of them have really no definite purpose in
staying in the Philippines if you have a definite purpose of staying, you may already be
categorized as resident alien, for those having no definite intention or purpose of staying here,
you use the 180 day rule.

And using the 180 day rule is for purposes of what? Why do we have to distinguish not engage
or engage when both of them have are non-resident aliens with no intention for staying here?
Why is there a need?
o

Both of them are taxable only on income within. Insofar as their income are earning,
there is no difference. If Mr. A who stayed here 180 days and Mr. B who stayed here
179 days, they both earn the same income, they are both taxable on income earned
within the Philippines. Why do we have distinguish them?

They are subject to different tax rates.

A resident citizen and a non-resident citizen, a resident alien and a nonresident alien engaged in trade or business, otherwise those staying more
than 180 days in a given year, aggregate or continuous, would be taxed at
the same rate of 5%-32%. Only non-resident aliens who have stayed 180
days or less will be taxed at a different rate of 25% and without the benefit
of deductions because they are taxed on all incomes.

So in our example before whenever a performing artist does a concert here

in the Philippines for 1 night, the entire income that they earn is taxed at a
fixed rate of 25% without the benefit of any deductions not even his plane
ticket cost, but it is shouldered by the producer.

TA X AT I ON

Special Employees

Who are special employees?

LLB

III

2010

P a g e | 14
Ms.

Special employees are those employees employed in special corporations and special
corporations are the following:
o

(1) Regional Area Headquarters (RAHQ) of multinational corporations, defined in Sec.

22

(2) Regional Operating Headquarters (ROHQ) of Multinational Corporations, defined in

Sec. 22

(3) Offshore banking units

(4) Petroleum service contractors

What is the difference between the two, (1) and (2)?

o

RAHQ is established for the purpose of overseeing. They do not earn income. They do
not operate to earn income while ROHQ may be performing services and activities in
favor of the other corporations related to the multinational companies located within
the Asia-Pacific region.

For example, Chevron is related to Caltex. Chevron established a ROHQ wherein

employees of that headquarters will perform services (accounting, auditing, financing,
administration services) for and in behalf of all other Caltex located within the AsiaPacific region. Its operational and it is earning income but would all employees of
Chevron be considered as special employees? What makes them special? Why are
they called special employees?

BY

Emery Tiu

E.

TRANSCRIPTIONS

No, not all would be considered special employees. They are special because
they are subject to a preferential tax rate of 15% on their salaries, honorarium,
wages, emolument, remunerations and other similar income.

Can a Filipino be a special employee?

The general rule is only alien employees occupying managerial, supervisory,

technical positions can be special employees. Only in cases where no alien
individual can fill up that requirement would a Filipino individual be allowed to
become a special employee subject to the preferential, special tax rate of only
15%.

That is so special because, normally, Filipino individuals or alien individuals

employed in corporations not among those special corporations will be taxed
at a rate of 5%-32%, and you know that managerial positions already demand
a higher salary where you would be covered a bracket of 32%. Indeed, 15% is
special.

We have RAHQ, ROHQ of multinational corporations, offshore banking units in

the Philippines and petroleum service contractors. These are the only
corporations who can employ special employees.

If you are a special employee, you are a Filipino, and you have and income on the side, will all your
income from employment and other income, say for example, from business be subject to the
preferential rate of 15%?

No. If you are a Filipino individual, the rule is special employees would only be allowed
preferential treatment of salaries, honorarium, wages, emolument, remunerations, those
entirely related to the employment of the special corporation. If he has earned income as an
employee of a special corporation occupying managerial and technical position, then, any
income which he earned from selling sandwiches, coffee etc. during break time will not be
covered by the 15%, it will be taxed 5%-32%.

But what is the special rule for Filipinos occupying technical/ managerial positions in these
special corporations? Do they have the option to be taxed at 5%-32% instead of 15%?
o

A circular (Revenue Memorandum 41-2009) has been issued by the BIR, if in case we
talk about of Filipinos employed in these special corporations availing of the special
rate of 15%, their positions must be managerial and highly technical position, not OR,
in order for them to be entitle to 15% or at a regular rates of 5%-32%.

TA X AT I ON

TRANSCRIPTIONS

BY

LLB

III

2010

P a g e | 15
Ms.

Emery Tiu

While normally we employ expatriate employees, these are alien individuals employed
in managerial confidential or highly technical positions.

F.

Estates and Trusts

Is an estate an individual? Why is it included in taxable individuals? When a natural person dies, how
many taxable persons do we have? Diba, persons, it can be juridical or natural? At the point of death, if
you are the BIR, how many taxable persons do you see?

There are twothe dead person or his income during his lifetime, during the calendar year. If a
person dies today, he is supposed to have income January 1 until yesterday. From today, he
will have estate as a taxable individual. You have two separate taxable persons at the time of
death.

August 3, 2010
1.

Alien individuals employed in multinational corporations are subject to the preferential rate of 15% on
compensation income so long as they are occupying managerial and technical positions. True or False?
False. Multinational Corporation is generic. Multinational Corporation is simply a foreign corporation
or entity engaged in international trade. When you say regional operating headquarters, regional area
headquarters of a multinational corporation, thats what makes an employee a special employee given a
preferential rate of 15%.
We said that there are only four corporations who can hire special employees subject to the special
rate of 15% and they are regional operating headquarters of multinational corporations, regional area
headquarters of multinational corporations, petroleum service contractors and subcontractors and lastly,
the offshore banking units. If we simply say alien individuals employed in a multinational corporation, its
as if they are simply employed in a resident foreign corporation engaged in international trade or as simple
as that. To become a regional area headquarter or regional operating headquarter, it requires a special
registration.

2.

How about estates, trusts, are they considered as individual tax payers for tax purposes? Yes.

3.

If youre saying that they shall be treated the same as individuals, so what are the tax rates applicable to
these estates and trusts? How about the estate itself? Is it subject to income tax?
This is not the cemetery class. Mr. X died, he left an estate, a set of property. While the property is
under judicial settlement, it will bear income or fruits. To which amount, is it the estate or the fruits that
the estate is subject to income tax? It is the fruits that are subject to income tax. Okay, only the outer
layer is subject to estate income tax.
What about the estate itself left by the decedent, is it subject to income tax? No. Why? Because its
not an income, it is a capital and subject to estate tax. There is a difference between the estate tax of 520% and estate income tax of 5-32%. Income tax as we have learned is always subject to an income. Only
one instance is income tax subject to capital and what is that again? On the capital gains or rather the
presumed gains on a sale of a capital asset which is a real property located in the Philippines. So do not
tax the estate left by the decedent, simply tax the income generated by the estate during settlement.
Whenever a person dies, there are two persons subjected to tax: (1) the decedent himself his income from
January up to his income is subject to income tax. Upon death and until the settlement is finished, it will be
the income generated unless distributed is subject to estate income tax.

4.

Is the estate allowed personal exemption? Say for example this is 2010, Mr. X died August 3, today, can
the income tax return of Mr. X claim the personal exemption? How about the estate? Can the estate claim
during the same year personal exemption?
The individual person can claim the personal exemption on his income from January until the point
of death. The estate under settlement from the point of death until the end of the same year is another
personality, distinct from the person himself who died. Therefore, personal exemption is as well allowed to
the estate. But of course, the following year, if the estate is not yet settled, still under judicial settlement,
the following year, youDIED
dontON:
speak of Mr. X anymore. His personality has ceased at the time of death. He
August 3,
could no longer earn income,
only the estate
be considered as a tax payer, the year after death and
X will
X
X
2010
X
years after that.
X
X
ESTATE PER SE:
X
MR. X
Estate of Mr. X.
Illustration:
Subject to Estate
X
X
X
Tax
X
X
JANUARY DEATH
Subject to Income Tax
FRUITS:
as an individual
Subject to Income
Tax
CAN CLAIM PERSONAL EXEMPTIONS? Yes, for both.
PHP 50,000 during time alive
an estate

Php 20,000 as

TA X AT I ON

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BY

LLB

III

2010

P a g e | 16
Ms.

Emery Tiu

5.

Personal exemption is how much?

P50,000

6.

Can the estate claim additional exemption for a dependent amounting to P25,000 the additional
exemption?
The P25,000 is only in reference to a dependent child or children. Exemption is P50,000 basic
class, I think I placed there last page of this outline, estates and trusts number 3, exemption allowed to
estate and trust fifty (P50,000) right? But the problem is that when I looked into the tax code, that section
62 using RA 8424, its only P20,000 because in 1998 when 8424 took effect, personal exemption was only
P20,000. When was it raised again to P50,000? Only in 2008, RA 9504, remember the illustration I gave
you in retroactive application? Its just that, that same law, RA 9504 did not amend section 62 which is the
personal exemption allowed to estates and trusts. So, I think since this is an exemption and strictly
construed against the estate tax payer, we still retain the P20,000 exemption although it is not
reconcilable. Still, we maintain the P20,000 not the P50,000 which replaces this. Again, for the reason that
Section 62 of the tax code has not been specifically amended by RA 9504 which increase the personal
exemption from P20,000 to P50,000.

Lets go to different types or categories of income that individual taxpayer may earn.
7.

What is compensation income?

(Cant hear Ms. Tans voice) Based on Dimaampaos book, it is defined as all remuneration for
services rendered by an employee for his employer unless specifically excluded under the Tax Code.

8.

When is there employee-employer relationship?

Apply the four-fold test

9.

For tax purposes, can a compensation in kind be subject to income tax? Or is it always compensation in
cash? Or does the labor code allow compensation to be given in kind?
Under the labor code its not allowed but for tax purposes class, compensation may be given in
cash or in kind. Lifeblood doctrine, the government does not only look at cash compensation to be taxed
but in any form that the person employee is benefited from his employment or services that he has
rendered. Everything will be taxable as a rule.

10. Give me an example of a compensation in kind.

Promissory notes.
How can an employee have a promissory note as an income?
Even if its not in cash yet, it can be considered as realized on the part of the employee as he has
already rendered services, then it will be subject to tax.
What else?
Stocks.
What about stocks? What is a Stock option?
Instead of giving salary, they are given with stocks, shares of stocks.
What do you think why the company would give an employee a share of stock? What would that make the
employee if he gets hold of stocks of the company?
In some cases, companies in order to build loyalty and in order to retain the employees in its
employ would be offering stock options to its employees. Now, if the offer of the stock option is not more
favorable than that offered to third persons not employees to the company, so if its offered at 100 and

TA X AT I ON

TRANSCRIPTIONS

BY

LLB

III

2010

P a g e | 17
Ms.

Emery Tiu

sold to outsiders at 100 as well, theres no income to speak of. The only time that the employee will be
subjected to income tax is when the stock option is more favorable than 3 rd person. Say for example, the
fair market value per share of the company is 1000 and it is sold to the employee at 100. The 900
difference is simply an income which can be connected to the services that has been rendered by the
employee to the employer.
What other compensation in kind do we have?
Cancellation of indebtedness weve discussed that already before.
What else?
Tax liability of the employee paid by the employer.
Can you illustrate?
Lets say for example, you were hired P10,000 a month. Do you expect to get P10,000 a month?
No. because this P10,000 is entirely subject to income tax because its her income.
In the example that she has given, tax liability of the employee being shouldered or payed by the
employer is when the example is when the employer promised to give her clean P10,000 without any tax
deduction. It may so happens that she may get P10,000 without any deduction, the employer is actually
shouldering the tax of the entire income. So, the tax of the entire income is somewhere, let say, P2,500 to
the BIR, P10,000 to the pocket of the employee. The employee does not concern himself with how much
the employer will be paying so long as he gets free of tax. You will learn later how to gross this tax, how to
compute the tax. Anyway, so long as the employer promises the employee of a salary that is already free
of tax, the employer is actually shouldering the tax, its as if the portion shouldered by the employer is still
net income of the employee. In fact, in this case, how much is really the compensation of the employee? Is
it P10,000 or P12,500? Its P12,500. Its just that P2,500 went directly to the tax authority. And I think we
have also in our outline, premiums paid by the employer to life insurance policy of the employee weve
discussed this, right? (Class: yes)
Illustration:

TAX
PHP 2,500.00

SALARY:
PHP 10,000.00

ACTUAL COMPENSATION: Php

12,500.00
11. If a property is given to the employee, what is the taxable base?
If you are given a parcel of land by your employer class, the basis for taxation is the fair market
value of the property given.
12. Now, what is the doctrine of cash equivalent? How is this related to what we have discussed a while ago?
For tax purposes class, were looking at the fixed amount on which the tax will be imposed. If the
income goes to the tax payer or employee in the form of property or any other kind other than the
standard of measure of value which is cash, then there must be equivalent to every property that is given.
For every value received by the tax payer or employee as a benefit for being hired or as compensation for
service rendered, there will be an equivalent tax on that income, even if it is received in kind. So, the
equivalent value of the property of the property or benefit received will be taxable as a rule. Thats as a
rule because we will encounter some exceptions to the rule.
13. Now if youre an employee Ms. Gingoyon and you are allowed to stay in the condominium units, for which
you actually dont get housing allowance in cash. You only have free stay in that condominium unit. Is that
an income?
Yes. If you will be allowed to stay free of charge in a particular, like residential place, apartment,
etc. Regardless whether you received something in cash or not for that stay, it will be taxable because you
are benefited. In your own person, you dont need to shell out money in order to stay in that place.
Therefore, how will it be taxed if your stay in the condominium unit which is a value of P50,000 the leasing
rate which is per month, then the P50,000 value will be subject to tax, regardless of your status in the
company whether you are the janitor or president of the company, it will be subject to tax. But, who pays
is something else.

TA X AT I ON

TRANSCRIPTIONS

BY

LLB

III

2010

P a g e | 18
Ms.

Emery Tiu

You mentioned of fringe benefit, what is it?

Fringe benefit is any good or services or benefits given by the employer to the employee, except
for rank and file employees.
So, bottom line, who gets fringe benefits? Say for example, this is ABC Corporation, everyone of us here
are employees of ABC Corporation, rank-and-file and not rank-and-file. Everyone is given a chance to stay
in the condominium unit, 1 unit each. Is everybody earning income here?
Yes. It is settled class that everyone is actually earning income in some form. Although it is not in
cash, it is the free stay valued at P50,000/month had they stayed in another area.
My question is since it is settled that everyone is earning income in some form, would we, all of us, be
subject to tax on the income that we have earned in kind?
Yes
Non rank-and file that side and rank-and file, P50,000/month in kind - free stay, P15,000/month in kind. If
you want to ask how much is the cash compensation, P10,000 lang in cash because youre rank and file.
P100,000 in cash because youre not rank-and-file. Now this is taxable, taxable. Is this taxable?
This will be given, the cash from the cash compensation will be given through you ATM account or
in cash, net of your taxes. But how will this be regulated? So, youre saying this is taxable for the rank-andfiles here, if the tax of this amount is P10,000, you will receive nothing na, because the P10,000 will be
collected from you, agree?
This level, the cash that is received both rank-and-file and not rank-file is considered as salary. This
level naman beyond your salary, we call that benefit in kind. Some benefits are in cash if youre given
Christmas bonuses. But benefits in kind are treated differently if received by a rank-and-file and benefit by
a not rank-and-file, this is specifically called fringe benefit.
These are ordinary benefits. Both are income, differently termed, these are benefits received by
the rank-and-file employee. These are specifically called fringed benefits received by non rank-and-file
employees. Now, usually you couldnt imagine rank-and-file, getting of these, di ba? But for illustration
purpose, lets say they are also given that kind of benefit. Now, will this be subject to tax?
Doctrine of cash equivalent, will it be subject to tax? Yes. This salary will be subject to tax of which
we call as withholding tax on wages, salary or compensation. Its the ordinary tax on the salary. This one
will be subject to the ordinary tax on salary as well but how about this? Is this subject to ordinary tax on
the salary? No. Subject to what? Fringe benfits tax. And fringe benefits tax is what? Final tax. What is the
effect if its a final tax? Ms. Cuevas answers.
Fringe benefits tax works this way. Ill show how this is really unfair to this line. Fringe benefits are
perks given to those given occupying managerial and supervisory positions. And for that whatever benefit
is given to them which is usually not available to rank-and-file, it is subject to final tax which we call as the
tax on fringe benefit. Being subject to final tax, the word final means that the benefit itself is already taxed
with finality. And if it is taxed with finality, it is no longer considered in the income of the non rank-and-file
to be subjected to the ordinary withholding tax on salaries. So, this is separately taxed. But because its a
perk or benefit to those occupying higher positions, it is the employer who shoulders the tax. Whatever
benefit is given to the employee, a corresponding is paid by the employer to the government.
How about those given to rank-and-file? Sige its an apartment lang at P5,000 not a condominium unit, is
this a fringe benefit?
No. there will never be a fringe benefit if the recipient is a rank-and-file employee. They dont
receive perks. Not being a fringe benefit, it is not subject to the final tax which we call as fringe benefits
tax. Not being subject to tax with finality, it simply means that the compensation in kind given to rank-andfile will be considered in his salary it will be considered as a part of the salary of the rank-of-file subject to
the ordinary withholding tax on wage. So, in this case class, P15,000 will be subject to withholding tax
instead of the P10,000 because the employees as well receiving P5,000 in kind.
In this case naman, the basic only is subject to tax by the will be shouldered by the employee
while the P50,000 perk will be covered by the employer. The tax at P15,000 is higher than the taxed at
P10,000. The non rank-and-file is actually enjoying this kind of benefit free from tax. It is really best to be a
non rank-and-file employee. You can receive different kinds of fringe benefit.
Illustration:

RANK AND FILE EMPLOYEE

SALARY

TAXABLE?
Subject to WTW/C/S

Amount
Cash Php
10,000

NON-RANK AND FILE EMPLOYEE

Amount
Cash Php
100,000

TAXABLE?
Subject to
WTW/C/S

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BENEFIT

Subject to WTW/C/S

Kind Php
50,000

Kind Php
50,000

Subject to FBT

ORDINARY BENEFIT FRINGE BENEFIT

14. What are the different kinds of fringe benefits?
Housing, expense account, vehicle of any kind, household personnel, interest on loan at less than
market rate, membership fees, dues and other expenses borne by the employer in social and athletic clubs
or other similar organizations, expenses for foreign travel, holiday and vacation expenses, educational
assistance to the employee or his dependents, and life or health insurance and other non-life insurance
premiums or similar accounts in excess of the law allows.
15. If you are an employee, non rank-and-file and you are allowed to stay at a staff house within the company
premises. Example in Ormoc, is it Ormoc wherein theres Californian Energy Plant the powerplant. Theres
an administration building, dispensed in territory there are staff house. If you are allowed to stay in of the
staff houses, is it considered as fringe benefits subject to fringe benefits tax?
Housing benefits as a rule is subject to fringe benefits tax if the recipient is a non rank-and-file
employee but there are exceptions:
1. If the housing allowance or benefit is for the convenience of the employer. Example, if youre a doctor
and your work is 24hrs. call of duty. You hired a driver which you housed, you dont want him to stay
inside your house. You simply rented out the place beside your house. Is that for the convenience of
the employer? Yes. But the driver is not a rank-and-file but it is just for illustration.
2. When your place rented out is within 50meters from company premises. Now, if your place of stay is
within 50meters from company premises, then it is exempt from fringe benefits tax. So, if ever you get
to be an employer years from now and you want to give housing allowances or housing benefits of
your staff or manager, make sure that you get something that is near.
If its 50meters whether it is for convenience or not. For the convenience, no meters required
or no standards. But the 50meter whether or not for the convenience but bottom line its usually for
the convenience why he is required to stay near the premises.
But there is an exemption to that by virtue of the BIR Ruling the taxpayer requested an
exemption from fringe benefits tax despite the distance longer than 50meters is when the place is
hazardous to health of the employees, so it can be 100meters.
3. Youre on travel and you are allowed or given housing benefit for 3 months or less in the area wherein
you are assigned.
16. Now, the listings here Ms. Cuevas, is it exclusive or are there other benefits that can be subject to fringe
benefits tax not listed in this enumeration?
Yes. Primarily because it says but not limited to the following. Although there are two views class,
there are some discussions which says these are their only benefits subject to fringe benefits tax but there
has already been a BIR Ruling saying that the stock options given by Globe Telecom to its officers are
subject to fringe benefits tax to the extent of the difference between the fair market value of the stocks
and the offer price to its officers.
17. Give me an example wherein you will be subject to fringe benefits tax on a vehicle assistance or motor
vehicle in relation to motor vehicle benefits.
For example if the manager lives away from the workplace, for example Lapu-Lapu and then the
place of work is in Minglanilla. So, the employer has given the employee or issued the employee a vehicle
for the benefit of the employee so that it would be easy for the employee to travel.
18. In that case, is that subject to fringe benefits tax?
Yes. In that case, it will be subject to fringe benefit tax.
19. Is it necessary that the ownership of the vehicle be given to the employee so that there will be fringe
benefits tax due on the assistance given.
I think it is not necessary that the ownership is given to his employee as long as the employee is
having or is enjoying the benefit of that vehicle which can be subject o fringe benefits tax. Okay. There are
many types of benefits in so far as vehicle is concerned. The company may give the employee directly a
motor vehicle is entirely fringe benefits. Sometimes, the company may subsidize 50% of the purchase
price of the vehicle and 50% is the fringe benefit. In some case, the company allows only not transfer of
ownership, only allows the employee to use the vehicle exclusively still it is subject to fringe benefits tax.
How will it be computed? Of course the monthly amortization or the monthly depreciation value of the
vehicles or in case where there may be fringe benefits in the vehicle assistance where the employer leases

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or rents out the motor vehicle for the use of the employee himself, for his own. Exception to that rule even
if he is using the motor vehicle of your employer, it is not subject to fringe benefits tax, if you use it for car
pooling or you allow others to use it as well. So what you have to do class, if ever you will be assigned a
motor vehicle, as if lang others may use it.
If it is for the use as if for everyone, its for the convenience for the employer necessary for the
business. Ang shifting lang for this one to this one is the status of the employee.
How do they declare such.. that its for own use lang or departments use?
Through the policy of the company, so long as you have documentation of the company that this is
for the everyone, that would suffice. The BIR will not be following your car around if its park outside your
house at night, etc.
How about the gasoline?
It is still subject to fringe benefits tax under the expense account. If youre given transportation
allowance as a president, gasoline allowance, cellular phone allowances, etc. it will fall under expense
account unless class, you are required to liquidate that by submitting receipts at the end of the year. A
cellular would require the listing of the calls that you made whether its for business and personal. Ang
gasoline naman I dont know lang how will you make charges that this is personal, this is business.
Probably, the best way is 50% is business, 50% is taxable nalang. But I know you can secure receipts from
your friends.
For expenses usually you are given by your employer transporation allowances, gasoline
allowance, call allowances, representation and meal allowances like P100,000 a month. Now it will be
taxable except if:
1. You will be required to liquidate the amount by submitting receipts, issued in the name of the
company, not in your name.
20. What about household personnel subject to fringe benefits tax?.
So apart from given a free stay in the condominium unit, a free motor vehicle will be given, a
driver, a helper. The amount paid to those helpers, drivers, etc. will be subject to fringe benefits tax. Youre
being given a good life, its a perk. But if the drivers, the maid, if the driver example falls under the payroll
of the company itself na, the amount given is not subject to fringe benefit tax because his salary is already
subject to withholding tax. Whatever you get from the company, the BIR can always says its taxable.
21. If the company grants you a loan at 0% interest, now the 12% will be assumed by the BIR as the legal not
charged by the company to you, 12% of the loan value of the principal will be subject to fringe benefits
even if you did receive nothing. If the rate is lower than 12%, say perhaps at 2%, is there fringe benefit?
Yes. If theres a difference in the interest rate granted to the employer against the legal rate of
12%, it has not been changed - the 12% for tax purposes remains the same. So the difference between the
12% and the 2% granted lowered 2% granted by your company, the 10% even if it is theoretical interest
will be subject to fringe benefits tax. Say for example, you made a loan, a loan from the company so that
you can buy a motor vehicle, 50% of the motor vehicle has been subsidized by the company. There are
actually 2 kinds of benefits there, the fringe benefit on the subsidized portion of the vehicle and the fringe
benefit on the interest for gone by your company granting you 0% loan or a loan at a lower interest.
22. If the company, youre the manager of the company and the company enrolled you in a masteral class
Ateneo, will the tuition fee paid by the company be subject to fringe benefits tax? It was in your favor, you
were the one enrolled.
As a rule, the assistance granted by the employer to the employee will be subject to fringe benefits
tax if the employee is not rank-and-file. But there are exceptions, if it is in relation or in line with the
position held by the employee himself or would actually redound to the benefit of the employer and it has
to be supported by a contract wherein the employee will stay in the company for a number of years, its
what you call as lock in contract.
I have experienced this before when I was in SGV and I gave them the idea that I will be studying
while working, they offered to shoulder the expenses for schooling but on the condition that I will stay in
the company for 7 years after graduation - 7 years in Cebu or 4 years in Manila. SO if thats the case, when
you will still be required by the employer to stay with the company and the assistance really education is
in support of the.. is in favor of the company because it is in line of the position you are holding, its not
subject to fringe benefits tax.
23. But what about like schools are granting the teachers or professors free education for their children, the
dependents of the employees, up to lets say three children, okay lang if San Carlos, but what if Cebu
International School, tuition fee is this much, is it subject to fringe benefit tax?
Remember that the burden on taxes of fringe benefits falls on the employer class not employee.
The employees, non rank-and-file, receiving actually a benefit free of tax.

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In order for them to avoid paying fringe benefits tax on educational assistance granted to the
dependents, not the employees:
1. Getting the assistance must be competitive in nature so it should not be given arbitrary to all
dependents of the non-rank-and-file employees. It must go through stages, competition between the
dependents.
2. The dependents must actually maintain a grade required by the corporation employer otherwise if
those two conditions does not existence in an educational assistance granted to dependents, it will be
subject to fringe benefits tax.
In our quiz, which of the benefits are subject to fringe benefits tax: a.) group health insurance taken by the
employer in favor of the employees. Is it subject to fringe benefit tax? Life or health insurance?
All group life insurances, all hospitalization insurance will not give rise to fringe benefit tax nor
ordinary tax on rank and file employees because for the reason that these group life insurance or health
insurances are never directed specifically to one employee. The insurance is for free for all to those who
will become covered by the insurance because when given like a disability etc.
And we have other kinds of benefit as well: Membership fees in a golf club, etc. those in social, health or
athletic clubs as well as foreign travels and vacation expenses.
24. How will we compute the fringe benefits tax? For illustration I found in some reviewers they put
emphasis on grossed up monetary value. Did you happen to chance upon what grossed up monetary
value is? In ordinary salaries or compensation or wage that you received, whatever is stated in the
employment contract thats your salary, you dont expect to get everything because the component of
that is for taxes based actually on the 5 to 32 percent tax that youre paying. SO this is your basic
salary.

32% of GMV of Fringe Benefit

32% of

___________________

If youre given a fringe benefit as a non rank and file employee, the fringe benefit that you received is
already net of the tax. Why? Because it will be the employer who will shoulder the tax. So your entire
benefit, if ever a fringe benefit is given you, is not only that which you have received but as well the
value of the tax that is shouldered by your employer.

Its just like your salary, your salarys 100,000 a month, you get 85,000 net, 15,000 goes to the BIR.
How much is really your salary? Your benefit? 100,000. The same with fringe benefit. If you received
50,000 and youre no longer required to pay tax on the 50,000, your benefit is something bigger than
the 50,000. And that is fringe benefits plus the tax shouldered by the employer equals your entire
benefit or entire compensation or perk that you received.

Salary
Php 100,000.00
LESS Tax (5%-32%)
=
Net Pay
Fringe Benefit
50,000.00 tax at 32% of GMV of Php 50,000 (net pay is Php
50,000)
25. So how would the employer compute the fringe benefits tax? The fringe benefits tax is a 32 percent
tax on the grossed up monetary value of your fringe benefit. So applying this formula to this fringe

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benefit, it will be 32 percent on the grossed up value of 50,000. Your grossed up value is simply fringe
benefit plus tax. So grossed up value.

Again. So if you get hired and under your contract you will be paid 100,000 a month salary, it will be
reduced of tax on the 100,000 computed at 5-32 % based on your agreed compensation. You will only
get net. So if youre already covered by the highest bracket of 32% so now you will only get 70,000 a
month. But if youre given a fringe benefit of free stay in a condominium unit valued at 50,000 per
month, you will not be taxed at 50,000. You will not be subjected to tax on the 50,000 with the BIR
deducting 32% of 30 days stay. The BIR cannot get tax in kind, its always monetary. So whatever the
benefit youre receiving as fringe benefit, its entirely net na. so this is net already. This is the reverse.

26. So how does the employer compute for the tax on the 50,000 by grossing it up. Grossing it up means
to say that the net is brought to the gross. Simply the net pay brought to the gross by adding the tax.
So how is grossing up done?

There is already a formula. 50,000 divided by 68% equals grossed up monetary value times 32%
fringe benefit equals your fringe benefit tax. The 50,000 free stay is already free of tax on your part.
But someone else is paying for that tax. How will the employer pay the tax? The employer will simply
compute the fringe benefits tax at the rate of 32%, not 5-32 %. 32% because you are already
assumed to be occupying the highest bracket being a manager or supervisor. Automatically it is 32 %
of the grossed up value.
So if you are receiving net and you want to gross it up, simply divide by 68% , which is the gross less
the tax . Its as if, if you divide a value at the amount by 68%, its as if that value is only 68 percent
(???). You will arrive at 100%.

How to compute Gross Marked Up Value:

GMV Formula :
Above)

Php 50,000

(Example

68%
_________
GMV
X
32%
________
FBT

Example, you have a deposit of 1million. In the passbook, you saw that there is an interest of 1000 for
one month. Youre given interest income. Then beside there is tax of 20% which is 200. How much did
you receive? 800 only. 800 is 80 % after the tax has been deducted. If you want to gross up the 800
net interest, how do you do the grossing up? Simply divide it by 80%. What did you receive in
percentage, its 80% so divide it by 80%.

In this example, when you receive a fringe benefit, its only 68% so in order to get the full 100% value
of what youre receiving including the tax that has been shouldered by your employer, divide it by
68%. Its as if 50.000 is only 60% of the whole picture. How much if you divide 50,000 by 68%? (I
dont know the answer)You get the full value. How much will your employer pay to the BIR? 32% of the
grossed up value.

27. Ill illustrate that in simpler terms. If youre given a household helper, to live with you in the
condominium unit, and the company is paying the household helper for 6,800 a month, how much is
your fringe benefit?

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GMV Formula

Php 6,800

68%
_________
Php 10,000 (Fringe Benefit plus Tax)
X
32% (Fringe Benefit Tax)
________
Php 3,200.00

How much did you really get:

Php 6,800
+
3,200
_________
Php 10,000

What is your fringe benefit is the 6800 net. How will the employer pay the tax? Will the employer
simply compute the 32% directly on the 6800? No, because this is net. You gross it up by dividing it by
68%. 6800 is only 68% of the entire value of the benefit you are getting. So if you gross it up, it is
10,000. So you received this benefit plus the tax. This is what you are really getting from the company.
6800 worth of services per month plus the tax that the BIR is collecting from the employer.

Since fringe benefit is computed at 32%, how much is the tax paid to the government every month?
32% of the GMV? 3,200. Double check, how much benefit did you really get from the employer? 6800,
the presence of your maid plus the tax that is paid , total of 10,000. Its simple algebra (??). This is
really more burdensome. Why? Its computed by grossing up. What you received is grossed up.

Question: Are we going to compute in the exam?

Tiu: If therell be computation, it is for illustration lang.

28. The reason why its 32% is because the highest rate that is imposed on employees is 32%. What
happens if the employee is a special alien employee subject to 15%? And that special employee is
given a housing benefit of 85,000 rates per month? Do we use the 32% fringe benefits tax on a special
employee?

NO. for special employees, income derived by special employees, what is used is 15%.

If its a special employee, the fringe benefits tax is 15% of the GMV. For ordinary mortals just like us,
our fringe benefit will be computed at 32% of the GMV by our employer. But if we belong to special
employees, since your special, get special rate. 15%. Special employees are subject to 15%
preferential rate on their income. Only insofar as its related to their employment, not other income.
But because they are subject to special rate of 15%, the FBT on their benefits is also computed at 15%,
not the 32%.

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29. Therefore, if the special employee is getting a monthly housing benefit, free stay in a 10 bedroom unit,
what is the GMV of 85,000 for special employee? How do you gross it up?

SPECIAL EMPLOYEE: FBT 15% of GMV

GMV Formula :
Php 85,000 Housing
Benefit

85%
__________
Php 100,000
X
15%
__________
Php 15,000

True Value:
Php
Stay)

85,000 (Net Free

+

(FBT)

15,000

_________
Php 100,000

85,000 times 85%. 85% because the 15% there is the fringe benefit tax. The GMV is 100,000. How
much will the government pay? If youre a special employee, the FB that youll be receiving is only
subject to a lower rate of 15%.if you want to know what is the true value of the benefit received, you
have to gross it up by adding the tax component of the benefit. You should use 85%, not 68%. 68% is
the difference between the full benefit minus the tax. This is only 85% of what youre getting because
15% is the tax. Therefore you gross it up by 85%, youll get the full benefit of 100,000 which is actually
the 15% tax plus the free stay in the condominium unit.

30. That is not all. There is another alien individual subject to special rate to a flat rate of 25%. Who are
these individuals?

Non resident aliens who are not engaged in business or trade are subject to a flat rate of 25%. Who are
non resident aliens who are not engaged? Those who are transient or sojourners and they stay here for
180 days or less. I love days, so in the exam, you should know 180 days or less.

Non resident aliens not engaged in trade or business, their FBT is not 32%, not 15%, but 25% of the
GMV. If youre computing for the grossed up of a non resident alien not engaged in trade or business,
what is your divisor? 75% here. And 25% here.

NON-RESIDENT ALIEN: FBT 25% of GMV

GMV Formula :
Php 75,000 Housing
Benefit

75%
__________
Php 100,000
X
25%
__________
Php 25,000

True Value:
Php
Stay)
(FBT)

75,000 (Net Free

+

25,000

_________
Php 100,000

Whenever you are given a benefit that qualifies as FB, never mind the tax. Its the employer who
computes for the tax. You will not be concerned of being deducted of any tax, not even your basic
salary will be deducted of FBT. But for bar purposes and this class, you should know whos liable and
whos not. When you should liable for the payment of tax, etc, and who are these concerned people.

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31. Now, not all benefits are taxable. There are benefits which are exempt from tax. What are these?

Rank and file employees benefits Why are these not subject to FBT? For rank and file, it will be
included in their computation of their ordinary income. FBT applies only to non rank and file
employees.

32. de minimis benefits What are de minimis benefits? They are those benefits that are small
amount/value and given to promote goodwill. Example. Rice allowance. Clothing allowance. If youre
given a clothing allowance, without limit, for Prada clothing brand, is that de minimis? Not anymore,
does not fall within the definition that it should be in small amount. When you say de minimis, these
are benefits of relatively small value. So you will know that when you are given a rice allowance, its
your basic need. But if the rice given to you is jasmine rice, its no longer exempt, because its no
longer a small value. What is de minimis in so far as rice allowance is concerned? only 1500 in value,
whether given in cash or kind. Only to the extent of 1500. Clothing allowance, de minimis would only
be up to the extent of 4000 per year. You dont expect to change wardrobe every month.

Rice as De Minimis Benefit

Php
Less
Benefit)
Php

2,000
1,500

(Value of the Rice)

(Allowed De Minimis

500 (Taxable)

Note if excess is taxable:

If NRF: subject to fringe benefit tax
If RF: subject to ordinary income
tax

Take Note can still use exclusions on benefits worth at least Php 30,000:
Example:
Php 10,000
Php 30,000
=
Php 20,000
13th Month Pay
Exclusions allowed (So include the Php 500 under this
exclusion to be exempted)

Example, rice allowance per month is 2000. What is considered de minimis is only 1500 per month. So
the 500 per month is actually taxable, not the entire 2000. But you remember in exclusions from gross
income, wherein it says there , 13th month pay and other benefits not exceeding 30,000 during the
entire year, will be exempt. So if your salary is only 10,000, your 13 th month pay is 10,000. Usually
thats how its computed, if its 20,000 thats the 14 th month. So if your 13th month pay is 10,000, the
free space is 20,000 - to use for exemption- for other allowances which does not qualify under de
minimis.

If a rank and file employee receives this benefit, he has to pay the tax on the excess. If the employee
who receives is non rank and file, it is the company who will shoulder the tax by grossing this up.

When you say de minimis, its defined as benefits of small value. Benefits of relatively small value it
has already been put into writing. So if its rice allowance, its 1500 per month. If its uniform, 4000 per
annum. Laundry allowance, 300 per month. Medical allowance to the dependents of the employees,

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its 1500 per year in cash. Dependents. But medical benefits to the employee himself which should not
be in cash is 10,000 per annum, to be de minimis. See the disparity. If its the dependent, medical
allowance its 1500 per year, if its the employee its 10,000 per year in kind. He has to submit official
receipts for medicines and it does not include vitamins. Christmas bonus of 5000 per annum is exempt
and it is not included in the 30,000 package. Achievement, loyalty awards may be exempt to the
extent of 10,000 so long as its given in kind. What youll have to do is if you are to be awarded for
not being late the entire year- no tardiness award- 10,000 because the maximum is 10,000, if its
given in cash to you, its taxable. If rank and file- taxable, youll receive only around 7000. If youre non
rank and file, you may get the 10,000, the company will gross it up and pay FBT. What youll have to
do is to not receive it in 10,000 cash. Negotiate with the employer that you want this item from a store,
valued at 10,000, let the company buy it for you and give it to you as an award. The law says tangible
property, not including tax.

Benefits given to non rank and file are exempt fringe benefits. Theyre exempt from FBT, but it does
not mean that its not subject to the ordinary tax on rank and file employees. Because the nature of
the exemption in number one is the recipient, the type of tax. The tax is still there but it cannot be FBT
because their status is non rank and file. But for de minimis benefits, the exemption goes into the
benefit itself, whoever the recipient is. So its exempt whether received by rank and file or non rank
and file employees. It depends on the exemption.

33. Another exempt fringe benefit : Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefits plan- So what is this really? Does it include the
premiums paid by the employer on a life insurance policy on the life of its president?

No.

What does it refer to? What type of plans?

We have mentioned before, whenever a company takes out a life insurance policy over the life of its
president or key personnel, we have to know who the beneficiary is for purposes of knowing whether it
becomes income on the part of the insured.

Probably youll remember this. Two sides of the spectrum. Premiums as income and premiums as
exempt. Same type of privilege. Two insurance policies taken out by one company over the same
person. But the first company beneficiary is the company itself. In the second one the administrator of
the estate. 100K premiums per year (first insurance), 50K premiums per year (second insurance). How
much was paid every year? 150,000 as premiums. Premiums may or may not be considered as income
on whose part? The employee. Can it be considered as an expense or not an expense on whose part?
The employer.

Number one, is the 100K premium paid by the employer an income on the part of the employee if the
beneficiary is the company itself? Simple recall. Theres always logic in the principle behind why its
subject to tax. The company took out two insurance companies. Beneficiaries different, two premium
payments. This same premium is something to the employee and something to the employer. This is a
benefit to the one who was insured and an expense because it is an outflow for the one who insured it.
Question, is it deductible expense on the employer and is it a taxable income on employee? This was
discussed in Section 32 B, life insurance proceeds in section 36, non-deductible. Since the employee
was insured, but it was the company who was the beneficiary, is it really an income on the employee
that is taxable? No, because it will redound to the company itself.

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If the beneficiary is the administrator, it is taxable income on the part of the employee.

BEN = Company =
BEN = Employee or Administrator =
year

Benefit of

Php 100,000 / year

Php 50,000 /

PREMIU
M

INCOME
Employee
Amount

COMPANY

Php 100,000

EMPLOYEE /
ADMINISTRATOR

Php 100,000

Taxable?
Not
Taxable
Taxable

EXPENSE
Employer
Amount
Php 100,000
Php 100,000

TAXABLE?
Not
deductible
Deductible

Is this what is meant by the 3rd exemption on fringe benefit? NO.

This is not meant by the 3rd Exemption in the outline under
fringe benefit.
What is meant by the 3rd exemption is the exemption on the
group insurance.
There were outflows of cash, 150,000, is it deductible expense on the part of the company if the
beneficiary is the company itself? 100,000 is not deductible. Why? It is the return of capital. If the
beneficiary is the administrator, can the company deduct the premiums as expense? Yes, deductible.
If its not an income that is taxable on the part of the employee, it is not an expense deductible on the
part of the employer. If it is taxable as income on the part of the employee, it is deductible on the part
of the employer.
In relation to exempt fringe benefits, this is what we are looking. Premium payments are income to the
employee- If the beneficiary is the employee himself. Is this the one that is exempt in our outline?
Premium contributions by the employer for the benefit of the employee in a life insurance policy? Is it
exempt? Taxable. Not the one referred to.

Our discussion before did not really distinguish what type of tax will be collected by the BIR if this
taxable. Now we know, If he is non rank and file, he is subjected to FBT. But if he is rank and file,
subjected to ordinary tax rates. So this is exempt. What is exempt is, this was in the quiz, contributions
made by the employer on insurance policies, whether for retirement, insurance, health, hospitalization
for the group of employees. The reason is why it is not taxable the outflows of the employer does not
(Student: does not directly benefit the specific employee) There is no specific benefit received by the
employee because the policy taken is a group retirement, group insurance or health or group
hospitalization insurance.

34. Next item. Employers convenience rule. Exempt because it is required by the nature of the trade,
business or profession of the company or employer. It is for the convenience of the employer, it just
part of the expenses of the company. Therefore it is not really redounding to the benefit of the
employee- rank and file or non rank and file.

35. And there is another item, FB which are authorized or exempted from tax under special laws. The catch
all provision. (Student): there is a law which specifies that such benefit may not be subject to FBT.

Were done with fringe benefits.

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36. Expenses for foreign travel becomes subject to FBT only if it is not for business purposes. And for you
to be able to prove that its for business purposes and for the company to avoid the FBT, the company
should present a letter of invitation from abroad. Its the requirement under the regulations, a letter of
invitation. So that if you have an employee and he wants to go abroad for vacation, just make sure he
makes some side trip for business purposes. The airfare, allowances are exempt. The round trip tickets
for abroad is not really that cheap, its expensive if not Asia. Its entirely exempt from FBT if its for
business purposes, unless the flight taken is first class. So even if its for business purpose, if the flight
is first class, its taxable to the extent of 30%. Why? You dont really travel first class for business.

Were done with the first category, compensation income. We said that all types of compensation for
service rendered whether given in cash or in kind are as a rule subject to tax, unless if it is exempt.

37. Second type is Business/Professional Income.

So, if an employee can earn compensation from working, an employee can also earn business or
professional income from an activity and it is also subject to 5-32%. It is not really interesting it will
become interesting when we come to corporate taxation.

BUSINESS TAX: 5% 32%

38. Lets go to the third. What is the third of income that can be earned by an individual? Passive income.
What is passive income?

Whats opposite of passive? Active. Is this active income? (Compensation income) Yes. Is this active
income? (Professional income) Yes.

What is passive income as opposed to active income? When you come across an income wherein there
is no active participation on the part of income earner to generate the fund, like interest income on
bank deposit, thats passive income. You put the money there and you let it grow. You dont really
engage in a business, trade or profession and you dont get employed to get that interest. That is an
example of a passive income. There are many kinds of passive income. Opposite of course is active,
those that you really venture into regular activities to come up with the money.

We said that compensation income and business income is subject to the regular rates of 5-32%
applicable to individuals as a rule. Is passive income covered by the 5-32% rate? Passive income is not
covered by the same rate. What is the method of taxing a passive income? Passive income, is
subjected to final tax.

Passive incomes are subjected to final taxes. What is a final tax? Sometimes its called final
withholding tax, sometimes final income tax. There is always the word final. Final is always attached to
the word (tax?) PASSIVE. What is final income tax? Final income tax is a (Final tax is a particular tax
made separately from the income tax) you have no idea? Next question.

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39. Give me a passive income. Royalties. Give me an example of a royalty that derives royalty income.
Software. When you purchase a software that is not off-shelf but rather customized and there is a
transfer of technical know-how or technical knowledge, it will require the payment of royalty fees. If
you pass on some technical knowledge for the manufacture of this microchip or item, it will be subject
to royalty fees. Being a royalty fee, royalty income that is passive income, just pass on the knowledge
and it will generate royalty fee. Its a passive income subject to final tax.

Now, how will it be taxed?

Witholds
Technical Knowledge (TKH)

HE

iPUD

Earns Income
Royalty Income

You pay ROYALTY FEES

This is U. This is HE. HE transferred technical know-how. You are to pay royalty fees for the knowledge
he transferred to you where you can generate iPud. Who is earning income here? HE. He has royalty
income. Its a passive income. After he transferred the knowledge, he generates funds royalty fees
based on a certain percentage of the sales you generated from selling it.

Who will pay the tax?

What did we say of passive incomes? Passive incomes are subject to final tax. And final tax is
remember taxation at source? There are two types of taxation at source. Creditable withholding tax
and final withholding tax. Final withholding tax is only imposed on passive incomes. Now, there is what
we call as withholding mechanism. The income earner is no longer required to reflect the passive
income as part of his income at the end of the year, because it has already been subjected with finality
through the final tax withheld by the who will withhold the tax?

Passive incomes are those incomes generated from inactivity, those you dont venture into as a
business, etc. passive incomes are incomes which are not considered as part of your business at the
end of the year or as part of compensation income. Whenever a passive income is generated and
earned by U, it is expected that it will be withheld of final tax by the payor. When the final tax is
withheld by the payor, example, royalty is subject to 20% if the income earner is RC, NRC, RA. When a
passive income has been withheld of tax, the effect is it is already taxed with finality. The tax
withheld is constituted as the full and final payment , forget about the income after it is earned. You
dont have to consider it as part of the other income and recomputed the tax again. Its not part of the
income at the end of the year, not part of your withholding tax of your income tax return. Because it is
taxed at every time the income is earned. Remember pay as you earn system, remember taxation at
source? The source of the income itself at the time it is earned, is subject to tax.

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40. You sought for a franchise of Julies bakeshop. You pay a franchise fee, just like royalty fees based on
the sales that you generate for selling. The fee payments that you made on a regular basis to Julies
bakeshop for the franchise that you got- is it subject to withholding tax as a passive income?

No.

HE Reports such
income as income
subject to 5% 32% income tax.

Sought for Julies Bakeshop Franchise

HE

You pay FRANCHISE FEES

Instead
NOT SUBJECT TO ROYALTY TAX!
Not all realties are subject to passive
income tax.

Why not? Is Julies bakeshop engaged in a business extending franchises? Yes. Therefore, if any
royalties are paid to Julies is that a royalty income that is passive on the part of Julies or active
income? Active income. Being an active income, will it be subject to the final tax of 20%? No. Are you
required to withhold the tax? No. so what will Julies do with the payments that you made? It will form
part of the 5-32% tax of Julies. Point is, not all royalties are passive income. If the income earner of a
royalty is really engaged in extending royalties, franchises and other intangible assets, then it is no
longer passive. Its not inactivity. The business itself is extending franchises, it will not be considered
as passive income, therefore no final taxes, therefore the one paying the royalty is not expected to
withhold equivalent to at the end of the year, the payment simply forms part of business income
subject to 5-32%.

41. This is a royalty payment that you are making for a technical know-how. Really passive. But you are a
NRA. You obtain 1 million in royalties every year. Passive income. Is it subject to 20% final tax?

Non resident foreign corporation-NETB, you got technical know-how from a domestic corporation. Is it
subject to the final withholding tax of 20%? Youre engaged in business abroad but you are classified in
the Philippines as not engaged in trade and
business. Is your payment to the domestic corporation subject to 20% withholding tax?

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NRFC

Technical Knowledge

Domestic Corp.

Domestic Corp.
declares it as
income subject to
income tax.

HE

Royaltee Fees

iPUD

Instead
NOT SUBJECT TO ROYALTY TAX!
Not an income within for the Non-Resident
Foreign Corp.

A. Can you really do the withholding from abroad? If the one paying who is expected to withhold is not
from here, is abroad, not registered with the BIR, there can be no withholding. The government of the
Philippines cannot compel this one to withhold. Even if passive income, no withholding because there
is no withholding agent. What the domestic corporation will do is simply declare by itself the income
and be subjected to (rates).

So it simply means that the passive income subject to final tax must be an income that is paid by one
who can be considered a withholding agent in the Philippines. Payment in the Philippines, in short.
AUG. 10, 2010 Tuesday
-

Situation: Mr. X is a legal consultant of A corporation. He was given as part of his compensation
package housing allowance. Is that subject to fringe benefits tax (FBT)?
o NO, since FBT would only be applicable to fringe benefits granted to managerial or supervisory
employees.
o Can FBT arise in a non-employer-employee relationship?

FBT can only arise in a fringe benefit which is granted in an ER-EE relationship. If no
ER-EE relationship exists, no FBT would be due but whatever is the benefit received by
that independent contractor would be taxable on the part of the contractor by
declaring it as part of his gross income.

How do we compute FBT?

o 32% final tax of the grossed-up monetary value (GMV)
o And how is GMV derived?

Refer to last-meetings discussion

Is FBT a final tax?

o YES.
o What is a final tax? Is there a relation between a final tax and passive income?

YES, since passive income is subject to final tax.

Is fringe benefit subject to FBT, which is a final tax? YES.

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Therefore, fringe benefit is a passive income?

Fringe benefit is not a passive income because its earned through continuous
activity or services rendered by the employee, who is a non-rank-and-file
employee

Passive income is an income derived from an activity in which the taxpayer

does not materially participate or an income from inactivity and passive
income is subject to final tax.

As we have said also, a final tax constitutes as the full and final settlement or
payment of the tax due from the payee on such particular income.

So whenever a passive income is earned by the person, whom we call as payee

of that passive income, any final tax that has been imposed already on that
income is considered as the full and final settlement. No need for that payeetaxpayer to declare that passive income as part of his gross income at the end
of the year in filing the ITR (income tax return) because its already paid of
final taxes.

How is the final tax collected by the government on a passive income?

o By a withholding agent final tax is withheld
o Is final tax the same as final withholding tax?

Final income tax is the tax itself that is imposed on a passive

income. But when you say that its a final withholding tax, it is
the mode and manner of collecting the taxes.

Whose obligation is it to withhold the taxes?

The payor is the one obligated to withhold the final tax

on the passive income that is paid to the payee.

Payee is the one who is going to receive the passive

income

So the obligation to withhold the tax, the one

constituted as the withholding agent by the
government, is the payor and in case he fails to
withhold the taxes, who has a liability to the
government? Against whom can the government run
after?
o Example: If there is A and B. B is the one
earning the passive income and A is the
withholding agent. A paid 100K royalties to B.
Whose obligation is it to withhold? A. But the
income-earner is? B. In case no withholding is
made, the 20% is not withheld on the gross,
(Remember: the final tax is imposed based on
the gross amount without benefit of any
deduction for personal exemption, even if B is
an individual no deduction for passive
income). Now in case A forgets to withhold the
20% final tax on the royalty payments to B,
from whom can the BIR seek collection of
taxes, surcharges, penalties?

as
withhold
ing
agent

Royalties
Php 100,000

Passive
Income
Earner

If A failed to withhold 20% of the royalty, A

will pay:
20% + 25% surcharge+20% interest per
annum

Under the Tax Code, every person

paying a passive income that needs to
be withheld of tax is designated as a

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withholding agent by the government

and is imposed with personal liability
for the payment of taxes in cases of
non-withholding.

So
the
consequences
for
nonwithholding is that the withholding
agent becomes liable for surcharge and
interests and liable for conviction to a
penalty equal to the amount of taxes
not withheld.

So in this case, if Mr. A failed to

withhold the 20% final tax on the 100K,
how much is A liable to the
government? 20% of 100K, which is
20K plus surcharge of 25% plus interest
running from the date he should have
withheld the tax until the date he
settles it with the BIR. So if its like 3
years from now, 3 years of 20%
interest per annum.
When does the obligation to withhold the tax arise?

At the point when the income is earned

Example: Based on the royalty contract, the 100K is

payable on Dec. 31, 2010. But effectivity of the
contract and the transfer of technical knowledge
started Aug. 10, 2010. But the 100K is actually paid on
January 31, 2011, when should Mr. A, the payor,
withhold the tax and remit it to the government? When
is it earned? When is the withholding tax due? If the
contract be terminated tomorrow and you have
remitted the tax already, do you think BIR will refund
you for that?
o Withholding of final taxes on passive income
shall be made at the time the passive income
is paid or payable whichever comes first.
o When you say payable, it must be due and
demandable.

1 Year:
Payable on December
31, 2010
Effective: August 10,
2010
Paid: January 31, 2011

as
withhold
ing
agent

Royalties
Php 100,000

Therefore, it must be
paid on December 31,
What is taxation at source? 2010
What are the 2 types of taxation at source?
o
o

Passive
Income
Earner

Taxation at source is taxing it from the source of income from the point it is earned
2 types of taxation at source or manners of collecting taxes:

Final withholding tax (FWT)

Creditable withholding tax (CWT)

Both are withholding taxes, the payor, who pays the income to the payee, has
the obligation to withhold.

Difference:
o 1. Its just that if its a FWT, the income that must be withheld of tax is
passive income while a CWT, its ordinary income ordinary in the
sense that its part of business, trade or profession.
o 2. In a FWT, the amount of tax withheld is constituted as the full and
final payment of tax so that the passive income will never form part of
the gross income of the taxpayer at the end of the year. (Remember: In

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passive income, you simply forget about it right after it has been
withheld of tax because it has been fully paid and finally paid of taxes;
no longer part of the gross income at the end of the year; final
settlement of taxes happen at the point where income is paid or
payable, whichever comes first). While in CWT, whatever taxes
withheld under the CWT system is a tax which equals or approximates
the tax due on the ordinary income earned by the payee.

Example: Whenever a deduction is required to be withheld of

tax, the payor should withhold, otherwise, he is not allowed to
claim it as a deduction, such as rent expense. Rent expense
should be withheld of 5% CWT. So the rent expense of the
payor is the rent income of the payee and the rent income of
the payee is simply an ordinary income. Is an ordinary income
of rent by the payee part of his gross income at the end of the
year? YES. Is he liable for tax to 5-32% as an individual at the
end of the year? YES. But can the BIR wait at the end of the
year for the payee to declare the tax and pay the tax? NO.

CWT and FWT are simply collection schemes or the manner of

how the BIR collects the taxes. In CWT, it simply means to say
that the BIR is advancing the collection of taxes from the
ordinary income for which the final settlement of taxes will
happen at the end of the year. In FWT, the full and final
settlement of the taxes happened at the point where the
income is paid or payable, whichever comes first.

At the end of the year, the tax, which has been withheld under
the CWT system applicable to ordinary income, will simply be
off-setted against the total tax due.

Example: 100K monthly rent. His income at the end of the year
is 1.2M. Assuming, the tax due is 350K. How much was
withheld under the CWT mechanism of 5% per month? 5% of
100K is 5,000 over a period of 12 months, which is 60K. The
BIR already got 60K through the CWT mechanism. Every
month, 5,000. But the word creditable means it will be credited
against the tax due at the end of the year, which is 60K. So,
you only have to pay 290K at the end of the year.

However, in passive income, this type of income, do

not include them in your ordinary income because its
already collected fully and its already finally settled at
the time that the income is paid or payable.

In the FWT system, there is no need to include the passive

Taxation At income
Sourceas2part of the ITR of the taxpayer and no need to pay
taxes at the end of the year. Whatever was withheld is already
Kinds:
the final taxes. No other approximation or computation at the
Final Withholding Tax
Creditable Withholding Tax
end of the year.

1. Passive Income

1. Ordinary Income

2. Full and Final Settlement

2. Tax which equals or approximates with the

ordinary income

3. No longer part of gross

income

3. Part of Gross Income End of the Year, the tax

withheld will simply be offsetted against the total
tax due.
Example shown below

Computation of Tax Withheld:

Rent Income per month
100,000.00
5% of 100,000 (amount withheld)
5,000.00
X 12 months
x
12

Example:
Php

Rent Income per month

Php 100,000
x
12
1,200,000.00
Tax

Due

60,000.00

Less:
Tax
60,000.00
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In CWT system, the withholding agent is still liable in case of failure to withhold taxes since he is
statutory taxpayer. However, the ordinary income earner will declare it at the end of the year. If the
withholding agent can prove to the BIR that the ordinary income earner fully declared the income and
paid the tax without deducting any withholding tax (because there was really no credits no
withholding made), the withholding agent can escape paying the basic withholding tax that he failed to
withhold. What he only needs to pay is the interest. Why interest? Because the BIR failed to get hold
the money on the monthly basis. Tax payment was only made by the ordinary income earner at the
end of the year, which is different from FWT system since a passive income earner is not required to
file an ITR and make a part of his gross income the passive income. The CWT system is much tedious
since you have to get the records of the ordinary income earner just so to prove that he actually and
fully paid the taxes thereon.

Question: If the rent payment is 100K, how much must the payee declare in his gross income? The full
100K or the 95K net already of the 5% withholding tax?
o Another distinction between CWT and FWT is that any income earned by an ordinary income
earner has to declare it as part of his gross income at the end of the year when he files his ITR.
o Must he declare the full income of 100K or the net after tax withheld, meaning 100K or 95K
only after the 5% had been withheld of tax?

In all cases, an ordinary income earner must declare the full amount, whether there
has been withholding or not because the BIR has to determine the correct tax at the
end of the year. The question will be did he have any credits for which a CWT has been
withheld.

Is your salary or compensation subject to FWT or CWT?

o It is still a form of CWT since as you earn income monthly, the taxes that have been withheld
would be accumulated and considered as part of annualizing your total income for the calendar
year.

PASSIVE INCOME
-

Royalties
o Are all royalties subject to final tax of 20%? What is covered by royalties subject to final tax?

Royalties is subject to 20% final tax except in the case of literary works, books and
musical compositions, which are subject to 10% final tax.

Lets say there is a royalty income earned by Mr. A. It did not arise from literary works
nor books and musical compositions. Is it automatically subject to 20% final tax?

Criteria is:
o 1. It must not be among those special royalties earned (literary works,
books and musical compositions)
o 2. It must be a passive income
o 3. It must be derived from sources within the Philippines

Otherwise, if royalty income, is derived from sources abroad,

regardless of who the payee is, the Philippines has no control
over the withholding agent, thus, it is not covered by the FWT.

So the first thing we have to look into is that:

Is the royalty income a passive income? We can only say its passive income if
the income-earner or payee is not in the business of extending royalties.
o Example of a business in the habit of extending royalties: JULIES
BAKESHOP you pay franchise fee upfront but your sales will be
covered by royalty payments, a certain percentage of your sales you
will have to pay it to JULIES or even MCDONALDS or JOLLIBEE. They
are in the habit of extending franchises, therefore, it becomes an
ordinary income for their part. We dont have to withhold the final tax
since JOLLIBEE, MCDONALDS and JULIES BAKESHOP will simply declare
it as part of its gross income at the end of the year subject to the
ordinary income tax rates.

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Second thing to consider is that passive income of royalties must be derived

from sources within the Philippines, which it has jurisdiction over the
withholding agent.
o REASON: If there is no jurisdiction over the withholding agent, the
Philippines cannot enforce him to withhold the tax and cannot run after
him in case of non-withholding.
o If that happens, even if the royalty income is categorized as a passive
income, if the withholding agent is from outside and the income earner
is a resident citizen (Remember: a resident citizen as income earner is
taxable from sources within and without), so if its a resident citizen
who is the one earning the royalty income but it so happens that the
payor is NRA-NETB, a person over which the Philippines has no
jurisdiction, then no need for that NRA to withhold the FWT. Simply, the
taxpayer will have to declare as part of his income.
NOTE: A RA is taxed similarly as a RC while a NRA-ETB is taxed similarly as a RC and as a RA. You will
see that they have the same withholding tax rates if these persons (RA and NRA-ETB) earn the royalty
income within the Philippines.
NOTE: NRA-NETB is subject to a flat rate of 25% on all its income except:
o Gain on sale of shares of stock in any domestic corporation
o Gain on sale of real property located in the Philippines (Sec. 25)

Royalties, all others

Royalties, LW, B, MC
Prizes
Winnings, exc PCSO
and Lotto
Interest, Regular
Interest, FCDU
Interest, LT, TF, DS
Dividends
Shares in a TP
-

Prizes
o

RC (within or
without)
20%
10%
20%
20%

NRC
(within)
20%
10%
20%
20%

RA
(within)
20%
10%
20%
20%

NRA-ETB
(within)
20%
10%
20%
20%

NRA-NETB
(within)
25%
25%
25%
25%

20%
7.5%
10%
10%

20%
10%
10%

20%
7.5%
10%
10%

20%
20%
20%

25%
25%
25%
25%

Are prizes passive income?

REMEMBER: In exclusions from gross income, we have two types of prizes and awards:

1. Those given in recognition of education, literary, civic, religious, charitable

achievements so long as you did not actively participate and that no future
services that have to be rendered

2. Those given in sports competitions duly sanctioned by the National Sports

Association of the Philippines and the Philippine Olympic Committee
o
These are exclusions from gross income and becomes only taxable if
you do not satisfy all the requisites and if you do not satisfy all the
requisites, you fall under this passive income while you are not in a
habit of joining contests unless you make it a business.
Example: You joined Mr. Pogi in USC. You won 20K, subject to final tax?

Is that passive income? YES

Subject to final tax? YES

If your prize is only 10K? Not subject to final tax but subject to income tax

If your prize is exceeding 10K, it will be subject to final tax of 20%, whoever the payor
is will withhold the tax. So that SM, if you win 100K, you only expect to receive 80K
because it will be withheld of 20% final tax.

But for smaller prizes, 10K and below, no tax shall be withheld but since it still an
income, an inflow of wealth, you have to consider this as part of your gross income at
the end of the year computed of the 5-32% tax. You do not say that it is not taxable
since everything is taxable as prizes and awards unless it falls under the exclusions
from gross income.

20% Final Withholding

Tax
Php 10,0005% - 32% Income
Tax

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Winnings
o Situation: You won 1M abroad, subject to final tax?

Not subject to final tax. So long as prizes and winning are not given on account of
services rendered (future or past; since it is already considered as compensation
income where situs is where the services are rendered), it will be considered as having
situs in the place where it is given. If its given in the US, it will have situs abroad. If
youre the recipient and a resident citizen, it is taxable actually but since the
withholding agent is not within the Philippines, the income is derived from sources
outside the Philippines, there is no final tax to be withheld. It would only be subject to
the ordinary tax in the Philippines. It will form part of the gross income of the taxpayer
at the end of the year, not final tax.

Are all winnings having situs in the Philippines subject to final tax? NO, since winnings
from PCSO and Lotto are not subject to any tax

If you win super lotto, 100M, you will be free of taxes.

Interests
o If you have a bank deposit in Sweden and it is earning interest, is it subject to final tax in the
Philippines?

NO since only sources from within the Philippines interest having situs in the
Philippines.

We have what we call interest income coming from the expanded foreign currency
deposit unit system (FCD) in foreign currency. Is it subject to the same rate as 20% and
25% for NRA-NETB?

NO. Foreign currency deposit unit system (FCDU), example: You invest and
you deposit in dollars under the FCDU system (RA 8424). RC and RA will be
subjected to FWT of 7.5% but for those non-residents, whether citizen or
aliens, will be considered as exempt because the expanded foreign currency
deposit unit system is considered as an extension from outside.

Interest from long-term deposits, trust funds and deposit substitutes

Since its long term, it will be exempt. (Remember: In exclusions from gross
income, when it has a maturity period of 5 years or more, it will not be subject
to any withholding tax by the financial institution) but this will be taxable if
preterminated time deposits.
o Example: If 5-year time deposit. Youre not going to be withheld of the
20% final tax no tax. Whatever promise of interest, you will get in full.
But once you preterminate it along the way before it matures 5 years,
you will be withheld of tax. Correspondingly, if its less than 3 years at
the time you preterminated it, it will be subject to 20% FWT, just like a
regular withholding tax. If you preterminate it 3 years to less than 4
years, 12%. If you preterminate it more than 4 years but less than 5
years, only 5%.

Interest, LT, TF, DS

RC (within or
without)
-

NRC (within)
-

RA
(within)
-

NRA-ETB
(within)
-

NRA-NETB
(within)
25%

If Preterminated:

4 less than 5 years: 5%

3 less than 4 years: 12%
Less than 3 years: 20%

Dividends
o Example: There is a company who is going to declare the profits to its stockholders 5
stockholders of different status. Is the dividend going to be declared by Company B subject to
final tax?

Would all dividends declared by a corporation, cash or property, be subject to final tax
in the Philippines? YES, but the corporation or Company B must be a domestic

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corporation since the dividends will have Philippine situs and will have a Philippine
withholding agent.
Why can we not subject to final tax the dividends declared by a foreign corporation as
a rule?
What dividends will be subject to final tax?

1. Dividends declared by a domestic corporation since domestic corporations

declaring dividends, the dividends will have Philippine situs and will have a
Philippines withholding agent.

2. Taxable partnerships which are domestic

3. Joint stock companies, joint consortiums which are considered as

corporations and domestic
o You do not restrict yourself to looking at domestic corporations only but
you have as well taxable partnerships, other corporations,
associations, which declare dividends so long as it is domestic, the
dividend having situs in the Philippines will be subject to Philippine
final tax.
Having situs in the Philippines and having a domestic Philippine withholding agent, is
the dividends of the 5 stockholders subject to final tax? YES.
NRA-NETB is subject to 25% final tax on all income derived from sources within the
Philippines except capital gains from sale of shares of stock in a domestic corporation
and capital gains from sale of real property located in the Philippines.
NRA-ETB is subject to 20% final tax
Dividends paid by a domestic corporation is subject to final tax in the Philippines.
How about dividends paid by a foreign corporation? Is that subject to Philippine final
tax?

Remember: Situs of income taxation as regards dividends

As a rule, dividends given by a foreign corporation, if its really foreign (not

operational in the Philippines), will not be covered by Philippine final tax. But if
the foreign corporations operations is more than 85% in the Philippines, it is
considered as a domestic corporation. If more than 50%, partly taxable in the
Philippines. If it is less than 50%, situs is abroad, therefore, not covered of
1 Resident Corporation:
Philippine final tax.
10%

Company B
Must be a
domestic
Corporation

2 Non- Resident Citizen

10%

5 Resident Alien: 10 %

4 Non-Resident Alien Not

Engaged in Trade or
Business: 25%

5 Resident Alien

Comp. B Now
a foreign corp.
Follow the rule
on situs on
dividend
income
4 Non- Resident Alien Not
Engaged in Trade or
Business

3 Non-Resident Alien
Engaged in Trade or
Business: 20%
1 Resident Corporation

2 Non- Resident Citizen

3 Non- Resident Alien

Engaged in Trade or
Business

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Share in a Partnership
o Is the partnership obligated to withhold final tax?

Any income that will be distributed or to be distributed by a partnership other than a

general professional partnership, it will be treated as a profit distributed by a
corporation.

For tax purposes, a taxable partnership is taxed similarly as a corporation so any profit
distribution by the partnership will be taxed similarly as a corporation.

Taxable partnership does not include general professional partnership.

Therefore, the share in a taxable partnership will be considered as dividend, thus, such
partnership is considered a corporate taxpayer.

CAPITAL GAINS
-

Is a capital gains tax a final tax?

o Capital gains derived from sale of shares of stock and capital gains derived from the sale of
real property are subject to capital gains tax (CGT). You do not call it withholding tax.
o What are the 3 types of capital assets?

1. Sale of shares of stock subject to CGT

2. Sale of real property not used in trade or business subject to CGT

3. All others which are not considered as ordinary assets subject to ordinary tax
o Is capital gains an ordinary income, meaning, is that an income derived from an ordinary
activity?

NO, so that CGT is a final tax. Every time that it is collected by the government, no
withholding involved just like fringe benefits. But its a final tax in the sense that the
capital gains from the shares of stock sold and real property sold is an activity that is
not made often. Its capital asset its not in relation to any business.
o Example: Corporation B. You are a stockholder. You have 1K shares, which you bought at
1.00/share. The total value of the shares is 1K. You sold it to your seatmate for 2.00/share. Did
you earn income? YES, 1K, and such income is called capital gains. Is it subject to CGT? YES.

What if the corporation issuing the shares is a foreign corporation? Sec. 24 (c) of the
Tax Code. Since it does not come within the ambit of capital gains tax all shares
issued by a domestic corporation, thus, shares of stock in a foreign corporation will
not be covered by the 5% CGT in the first 100K nor 10% on any excess but will still be
considered an income because its an inflow of wealth, it will be taxable at the end of
the year using the ordinary tax rate of 5-32%.

So automatically, every time its not an exclusion from gross income, such income is
always taxable. The question will be is it final tax, CGT, or ordinary tax.

Lets say Corporation B is a domestic corporation. For the 5% CGT and 10% CGT to
apply, it must be shares sold by a stockholder to another person and the shares must
be issued by a domestic corporation. The manner of selling is also important. The
share must not be listed through local stock exchange and must not be traded through
local stock exchange (local stock exchange Philippine stock exchange). If both exist,
listed in the stock exchange and traded in the stock exchange, it will be covered by
Sec. 127 on the stock transaction tax (STT) of of 1% of the gross selling price.

For the 5% or 10% to apply, the stocks sold must not be listed and traded in the stock
exchange because if it is listed and traded, it will be covered by another provision of
the Tax Code, which is Sec. 127 on stock transaction tax.

What happens if the stocks that you sold to your seatmate is listed in the stock
exchange but you did not sell it in the stock exchange, instead, you sold it personally
to her? Is it covered by STT or CGT? Listed but not sold through the stock exchange?
CGT. STT of of 1% of the gross selling price is very restrictive. It will only apply if it is
both listed and traded in the stock exchange. If its listed but not traded in the stock
exchange (over-the-counter sale), automatically, the CGT of 5% or 10% will apply.

In CGT, if no gains derived, no tax. However, in STT, whether or not you derived a
gain/profit, since the basis is the gross selling price, it will be subject to STT.

Stockholder 1000 @ 1.00/share=

2.00/share=

Company B
Domestic
Corporation

Php 1,000.00
2,000.00
___________
Php
1,000.00 Capital

Gains

- If both traded and listed through the local stock exchange, follow Section 127
STT: of 1% of GSP.
- If listed but sold personally (meaning not either listed or traded), follow the rule

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AFTER BREAK
-

The provision of 5 and 10% CGT is different from STT. The of 1% STT on the gross selling price would
only apply if the shares being sold by you as the stockholder to another person is both listed and
traded in stock exchange. Absent any of the requirements of listed and traded, even if its listed but
not traded or totally not listed in the stock exchange, meaning its not a public corporation, with more
reason not traded in the stock exchange, you apply the 5% and 10%.
Corporation means domestic corporation. No foreign corporation.
5% if the CG is 100K or less and 10% if more than 100K
When you say capital gain, that is only the gain after you deduct the cost of the shares that you have
sold.
Example: 1M shares at 1.00/share so you actually bought it at 1M and you sold it to your seatmate at
2.00/share so you have 2M gross selling price, not listed, not traded. How much is the CG? 1M. How
much is the tax due to the government?
o The law provides that the CG of 100K or less is subject to 5% CGT. Any excess over 100K CG is
subject to 10%. Therefore, first 100K (5%) 5K. The excess of 900K (10%) 90K. Thus, the tax
due is 95K.
o You dont categorize your income automatically to 10% if the CG is more than 100K. Always,
its 5% for the first 100K.

Stockholder 1,000,000 @ 1.00/share= Php 1,000,000.00

Cost
2.00/share=
2,000,000.00
Sold it to
Company B
seatmate
Domestic
______________
Corporation
Php 1,000,000.00
Capital
Gains
Tax Due on Php 1,000,000:
Rule on Capital Gains:
1st Php 100,000
= Php
5% (100,000 or less Capital
5,000
Gains)
Excess Php 900,000 = Php 90,000
10% (Over 100,000 Capital
Tax Due
Gains)
Php 95,000.00
-

Now, change of facts. You own 200K shares. You bought it at 1.00/share. Cost is 200K. You sold it at
2.00/share so youre gross selling price if 400K. So that the CG is 200K. How much is the tax due?
o First 100K (5%) 5K plus excess of 100K (10%) 10K = a total of 15K

Company B
Domestic
Corporation

Stockholder 200,000 @
1.00/share= Php 200,000.00
Cost
2.00/share=
400,000.00
Gross
Selling Price
______________
Php 200,000.00
Capital
Gains

Tax Due on Php 200,000:

1st Php 100,000
= Php
5,000
Excess Php 100,000 = Php 10,000
Tax Due
You sold the preceding transaction today, Aug. 10. Tomorrow,
Aug. 11, you had another transaction.
Php 15,000.00

You sold 300K shares at 1.00 each. So cost is 300K. You sold it at 2.00 so the gross selling price is
600K, not listed, not traded. CG is 300K. What is your liability to the government? This is your
transaction no. 2 during the calendar year.

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The 5%-10% rule is made to apply to all capital gains transaction on sale of shares of stock
during the calendar year by.. So he can only avail one time of the first 5% on the first 100K.
Any subsequent sales, if its already beyond the 100K, automatically 10%. But you dont have
to tell the BIR that that is your second transaction.
The point is, during the calendar year, avail of the 5%-10% only one time. If your first
transaction has only 50K CG, automatically 5%. 2 nd transaction, you still have free 50K for 5%
and the rest is 10% until the end of the year.

ON AUGUST 10, 2010: You

traded:
Stockholder 200,000 @
1.00/share= Php 200,000.00
Cost
2.00/share=
400,000.00
Gross
Selling Price
______________
Php 200,000.00
Capital
Gains

Company B
Domestic
Corporation

Tax Due on Php 200,000:

1st Php 100,000
= Php
5,000
Excess Php 100,000 = Php 10,000
Tax Due
Php 15,000.00
Then, ON AUGUST 11, 2010: You traded
again:

Company B
Domestic
Corporation

Tax Due on Php 300,000:

Total Php 300,000
= Php 300,000
X
10%
Tax Due
If youre a broker of shares, will you be covered by 5 and
10%?
Php
30,000
o
o

Stockholder 300,000 @
1.00/share= Php 300,000.00
Cost
2.00/share=
600,000.00
Gross
Selling Price
______________
Php 300,000.00
Capital
Gains

NO, since a broker is engaging in business of trading shares of stock, therefore, his taxability
would be covered by ordinary tax rates of 5-32%
If you are in the business of selling shares of stock, its no longer passive income, its no longer
capital income because it becomes youre ordinary transaction subject to the ordinary tax
rates of 5-32% as an individual.

What if Corporation B issuing the shares as a foreign corporation, will it be subject to Philippine tax of 5
and 10%?
o NO since it is not a domestic corporation. Not being a domestic corporation, foreign
corporations have situs outside the Philippines and only resident citizens are taxable within
and without. Therefore, resident citizens receiving gains from sale of shares of stock issued by
a foreign corporation would be taxable at the rate, not 5 and 10%, but 5-32%. All others, RA,

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NRA-ETB, NRA-NETB, no tax on shares sold by a foreign corporation because situs is without, as
a rule.
Capital gains on sales of real property

Capital Gains on Real Property Considered as

-

Would all sale of real property be subject to the CGT of 6%?

o NO, since if the sale of real property is part of his real estate business then it will never be
subject to CGT since a person or corporation engaged in real estate business is ordinarily
engaged in real estate transactions, therefore, their real properties shall be considered as
ordinary assets not subject to CGT. What is subject to CGT is only capital gains from capital
assets.
If you are in a manufacturing business and you sell your parcel of land in which you utilized it for
manufacturing plant or factory, is it subject to CGT of 6% or is it subject to the ordinary rate of 5-32%?
o The subject parcel of land is an ordinary asset. Being an ordinary asset, it does not satisfy the
requirement that for 6% CGT to apply, it must be imposed on the sale of real property
considered as capital asset. Capital assets are those which are not ordinary assets. Real
properties used in business are considered as ordinary assets. Therefore, the sale of the
subject parcel of land is subject to the ordinary rate of 5-32%.
Example of real property, that is considered as a capital asset subject to the 6% CGT
o Residential lot is a capital asset. If he decides to sell it, it will be subject to the 6% CGT on the
gross selling price or the zonal value, whichever is higher.
o Zonal value can be derived by the (found in Sec. 6 of the Tax Code) BIR or Local Assessor
o There are 3 choices, whichever is higher:

1. Gross selling price as decided by the parties

2. Fair market value (FMV), may be the zonal value by the Local Assessor

3. FMV by the BIR Commissioner

Whichever is higher of these three, it will be the basis of the 6% CGT,

regardless of any income earned, meaning, even if you sell your capital asset
of real property at a loss, because the basis is the gross selling price or FMV,
whichever is higher. There is at all times a basis on which the tax will be
imposed on. There could be no 0 gross selling price or no 0 FMV, otherwise, it
becomes a donation if its 0 gross selling price.
o The FMV the price at which the seller is not obligated to sell and the buyer is not obligated to
buy. This type of FMW is not part of the choices.

Basis of Capital Gains Tax:

Gross Selling Price
parties
Fair Market Value
Fair Market Value
Fair Market Value
-

Decided by the
Local Assessor
Section 6
Local Assessor

6%
Capital Gains
Tax

This is the price you are not obligated to sell and not
obligated to buy

Situation: You have a residential lot in the US. You also have a principal residence with a house (home)
in the Philippines. You sold both properties. Will you be subject to the 6% CGT on both properties?
o Residence assumes that you have a family inside. (home)

Requirements to be exempt from CGT on sale of principal residence:

1. Proceeds are fully utilized in acquiring or constructing a new principal

residence within 18 months from the date of sale or disposition
o What happens if you dont utilize the entire proceeds from the sale of
the residential home to construct another house?

If the proceeds of the sale of your principal residence is not

fully utilized to construct or acquire another principal residence
within 18 months, the difference or the excess will be subject
to the CGT.

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2. Historical cost or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired
o This simply means that whatever the value of the principal residence
that you sold, it will still be the value of the new house constructed. So
subsequently, your new house that you constructed, the cost is the old
cost or the historical cost of your new house. It will have a bearing
because if you sell it subsequently, the cost will still be way below
because its based on the old property.

3. Notice to the Commissioner of Internal Revenue shall be given within 30

days from the date of sale or disposition

4. This exemption can only be availed of once every 10 years

5. If the proceeds of the sale were not fully utilized, the portion of the gain
presumed to have been realized from the sale or disposition shall be subject to
CGT
If you intend to sell your principal residence, it will be exempted from the 6% CGT on the
following conditions:

1. Your principal residence is certified to as your principal residence by the barangay in

your area

2. It must be located in the Philippines

3. The proceeds derived in the sale must be used to acquire or construct a new
principal residence within 18 months.

4. Notify the Bureau within 30 days that you are availing of the exemption

Reasonable because in every capital gains sale of real property or shares of

stock, you have to file the CGT return within 30 days

5. Historical cost or adjusted basis of the real property sold or disposed shall be carried
over to the new principal residence built or acquired

6. Availed of only once every 10 years

How about the residential lot sold abroad? Subject to 6% CGT or 5-32% ordinary tax rates?

Subject to the ordinary tax rates of 5-32%

For 6% CGT to apply:

1. It must be a real property

2. The real property must be classified as a capital asset (not used in trade or
business; not primarily sold)

3. It must be located in the Philippines

Anything that is located abroad and is sold, even if its a real property considered as a
capital asset, will be subject to 5-32% if the seller is a RC.

But if the residential lot is located abroad and the seller is NRA, not subject to any
Philippine tax since he is only taxed from sources within.

What if its a RA selling residential lot located in his home country? NO, since
situs of real property is where such property is located so if its a real property
located abroad, only resident citizens will be taxable for its sale. All other
taxpayers, who are only taxable for sources within the Philippines, would not
be taxable on a residential lot sold and located abroad.
GR: All real properties considered as capital assets located in the Philippines is subject to 6%
CGT on the gross selling price or FMV, whichever is higher.

E:

1. Sale involves principal residence provided the requisites are complied with

2. Property is located abroad

3. If the buyer of the real property is the government, political subdivisions or

GOCCs, in which case, the seller will have the option of being taxed at 6% or
the graduated rates of 5-32% as an individual taxpayer.
Which do you prefer? Based on the 6% CGT of gross selling price or FMV or graduated rates of
5-32%?

Example: Gross selling price or FMV is 10M. Cost is 9M. You have 1M profit. Do you
want to be taxed at 6% or 5-32% if you are given an option when the buyer is the
government?

If you are selling at a loss, then go to 5-32% because such tax rate is based on
the profit (net taxable income)

But if you are selling at a higher gain, go for 6% CGT.

But if youre gain is just minimal, you compute. 6% of 1M, you are expected to
pay 600K. 5-32% of 1M, you are expected to pay 285K.

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FMV =
Php
10,000,000.00
Cost =
9,000,000.00
Php
1,000,000.00

If based on the CGT of 6%:

10,000,000 @ 6% = 600,000
If Based on the graduated rate:
Php FIRST 500,000 @ 32% =
160,000
EXCESS OF 500,000 @ 25% =
125,000

Categories of income that an individual taxpayer may

earn:
285,000
o 1. Compensation income for services rendered
o 2. Income from business, trade or profession
o 3. Passive income due to material inactivity of the taxpayer
o 4. Capital gains on sales of shares of stock which is not listed in the local stock exchange or
even if listed, so long as its not traded through the local stock exchange
o 5. Capital gains on sales of real property considered as capital assets and located in the
Philippines
o 6. Other income

a. Rent income other than royalties

b. Interest income other than interest income on bank deposit

c. Dividend income

d. Income from other sources and this may include:

d.1. Bad debts recovered

d.2. Illegal gains derived from gambling

d.3. Tax refunds

d.4. Compensation for private property expropriated by the government for

public use

d.5. Damages

d.6. cancellation of indebtedness

Cancellation of indebtedness
o If it must be without rendition for services, past or future, it may be considered as a donation
or gifts subjected to donors tax, thus excluded from gross income, thus, not subject to income
tax.
o If service will be rendered, it will be considered as a compensation and subject to income tax

Bad debts recovered and tax refunds

o They may be subject to income tax.
o If the bad debts, at the time that it was claimed as an expense, has benefited the taxpayer by
paying less due to the availment of the expense, the recovery of that will be considered as an
income to offset the expense that you have claimed prior.
o If at the time of claiming the bad debts as an expense did not benefit tax wise the taxpayer,
when it is subsequently recovered, the bad debts will not be taxable.
o BAD DEBTS unpaid debts
o Example: Lets say that youre Mr. A. You have extended a loan of 100K to Mr. B. Mr. B failed to
pay. You are in the business of selling cosmetics. Mr. B was judicially declared insolvent so that
Mr. A could no longer collect. In 2009, you had 1M net income before deducting the credit that
you have extended to Mr. A. Cosmetics you delivered to Mr. B to sell, he failed to pay. So you
considered bad debts as an expense. If you 100K as an expense, you actually will be paying
tax only on the 900K. But your tax was reduced to the extent of the tax on the 100K expense
for the unpaid debts. In 2011, Mr. B won the lotto so that he paid you 100K. You receive 100K.
Is that 100K that you recovered from Mr. B taxable or not?

Taxable because at the time you decided that you can no longer collect the 100K, you
deducted it as an expense benefiting you from being taxed on the 100K. Instead of
being taxed of 1M, it is only 900K because you claimed the 100K as an expense.

When the bad debts was recovered, it will be considered as taxable because it
benefited you at the time you deducted the expense.

What are the requirements to be able to deduct bad debts as an expense?

1. The indebtedness must be entirely worthless.

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2. The indebtedness must no longer be collectible after taking legal steps to

recover it.

MR. A

MR. B (Declared
Insolvent)
Php 100,000.00

Failed to pay

2009: Mr. A decided to deduct it as

bad debt:
Net Income
Php 1,000,000
Bad Debt Deduction
(100,000)
900,000
X
5% - 32%
TAX DUE
o

2011: MR. B PAID:

Paid
100,000

Php

THIS IS
TAXABLE!

If you have only 100K net income, then you deducted the bad debts of 100K as an expense,
will the subsequent recovery of the bad debts be taxable?

YES, since you benefited. Youre net income before the bad debts is 100K but because
you deducted the bad debts of 100K, you did not pay any tax. Instead of paying tax on
the 100K net income, you deducted the 100K bad debts, you did not pay any tax. You
were benefited to the extent of the tax on the 100K, therefore, any subsequent
recovery is taxable.

Next Scenario: Same as Mr. A as creditor and Mr. B as declared

insolvent:
2009: Mr. A decided to deduct it as
bad debt:
Net Income
Php 100,000
Bad Debt Deduction
(100,000)
--- 0 --X
5% - 32%
NO TAX DUE
o

2011: MR. B PAID:

Paid
100,000

Php

SUBSEQUENT RECOVERY IS
TAXABLE!

But if you are actually operating at a negative loss, you will deduct the bad debts which was
worthless and uncollectible. Will the subsequent recovery be taxable?

NO, since you were not benefited. Whether or not you deducted the 100K bad debts,
still you will not be paying any tax because you were at a loss prior to you availing the
expense deduction on bad debts.

A subsequently recovered bad debts can only be made taxable at the time of recovery
if such bad debts benefited the individual at the time of payment as an expense.

Next Scenario: Same as Mr. A as creditor and Mr. B as declared

insolvent:
2009: Mr. A decided to deduct it as
bad debt:
Net Income
Php (100,000)
Bad Debt Deduction
(100,000)
--- 0 --X
5% - 32%
NO TAX DUE

2011: MR. B PAID:

Paid
100,000

Php

SUBSEQUENT RECOVERY IS NOT TAXABLE!

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Say for example: Your net income is 50K. At this time, you decided to deduct the bad debts
because its already worthless and uncollectible. Will the subsequent recovery of 100K be
taxable?

YES, but only partial because the benefit was also partial. You wipe out only 50K for the
year so youll only be taxable 50K when its recovered.

Next Scenario: Same as Mr. A as creditor and Mr. B as declared

insolvent:
2009: Mr. A decided to deduct it as
bad debt:
Net Income
Php 50,000
Bad Debt Deduction
(100,000)
--- 0 --X
5% - 32%
NO TAX DUE
Entitlement to deductions
-

2011: MR. B PAID:

Paid
100,000

Php

FIRST Php
500,000:
NOT TAXABLE!

2nd Php
500,000:
TAXABLE!

Taxpayers, the 4 of them (RC, NRC, RA, NRA-ETB), they are all allowed to claim deductions.
The NRA-NETB is subject to the flat rate of 25% on gross income without the benefit of any deductions.
How about special employees?
o Special employees are subject to the flat rate of 15% - no business income, otherwise, if they
have business income, they will still be covered to the 5-32% or the 25% flat rate.
What are the deductions allowed to the individuals if an individual is simply working without earning
business income, employed?
o Personal and additional exemptions
o Kinds of personal exemption:

1. Basic personal exemption 50K

What status do you have to be if you want to claim 50K personal exemption? Is
it regardless of being single or married? YES. Do we still have head of the
family? NO.

Every individual taxpayer, whether hes actually working as an employee or

engaged in business, every one of us is entitled to basic personal exemption of
50K, regardless of our status whether single or married.

2. Additional exemption 25K for every qualified dependent, but not to exceed 4

Who is allowed to claim additional exemption? Those taxpayers who have

qualified dependents but not to exceed 4

Qualified dependents refers only to the legitimate, illegitimate or legally

adopted children of the taxpayer
o The child is:

i. living with the taxpayer

ii. Chiefly dependent upon the taxpayer for support

iii. Not more than 21 years of age

iv. Not married

v. not gainfully employed or, even though over 21 years old,

incapable of self support because of mental or physical defect

If you are 21 years of age, is there by any chance he be considered as a

qualified dependent?
o YES if you are incapable of self-support because of mental or physical
defect.

Every person having a qualified dependent is allowed to claim additional

exemption of 25K up to the maximum of 4.

A qualified dependent is a child, whether legitimate, illegitimate or legally

adopted, who must not be more than 21 years of age, living with the taxpayer
claiming the exemption, chiefly dependent on the latter for support, not

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gainfully employed (he can be employed but if its not gainful employment, he
can still qualify as a dependent), not married.
If you lack any of the above requirements, you will be taken out from the list of
qualified dependents.
Can a senior citizen being taken cared of by a taxpayer be considered a
dependent?
o Senior citizen someone who is at least 60 years old and earning along
the poverty line of not more than 60K.
o Senior citizens cannot be treated as a qualified dependent since
dependents only pertain to children. So additional exemption would
only refer to children.
o SEE TABLE: refer to outline

Basic Personal
Additional
Exemption
Children)

(Only

to

RC

NRC

RA

NRA-ETB

NRA-NETB

X
X

Only these 3 are allowed to claim additional

exemption!

A NRA-ETB can only claim basic personal exemption of 50K if his home country allows Filipinos not
residing in that home country to also claim personal exemption. But in so far as the amount of
exemption is concerned, how much will the NRA-ETB be allowed?
o Lifeblood doctrine. If the home country of the NRA-ETB grants similar personal exemptions to
Filipinos not residing in that home country in an amount of not more than 50K, lets say for
example 20K only for Filipinos there, then the NRA-ETB can only claim 20K as personal
exemption. If the Filipino can claim 100K, then the NRA-ETB can only claim 50K. All in favor of
the government.

Situation: You have a child who was born on January 1, 1989. If you file your ITR for 2010, can you
claim your child as a qualified dependent?
o Here the child is almost 22 by the end of December 2010. Taking into consideration your
income from Jan. 1 to Dec. 31, 2010, can you claim your child as 25K additional exemption?
YES. Status-at-the-end-of-the-year rule. Whatever changes in the status of the child at the end
of the year, whether it be a death, a birth or marriage, everything in favor of the taxpayer will
have to be construed. Everything is made as if he was born earlier or later.

You have a child born on: January 1, 1989

Can claim on 2010?
Note: By the end of December 2010 almost
22 years old.
January 1 ------------------------- December
31, 2010
Covered as Additional Dependent
o

If such child got married on Dec. 31, 2010, can you still claim for the additional exemption?

YES. There wouldnt be any difference. All in favor of the taxpayer. But the subsequent
year 2011, automatically, such child is no longer part of the qualified dependent since
he is more than 21 and hes already married.

January 1 ------------------------- December 31, 2010 (Your child got Married

on Dec. 31, 2010)
Covered as Additional Dependent

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NOTE: The requirement for you to be able to claim as qualified dependent, he must be living with you,
not necessarily everyday in your house. He may stay away during the course of studying law, for
example. You are still considered as living with your parents. AND chiefly dependent so that your
allowances would have to come from them.
o So if there is a slight deviation such as when youre living with them but chiefly dependent
from someone else, then you will not be covered by the qualified dependents.

Who can claim the deduction of 25K? Both spouses?

o The default for claiming the deduction is the husband in case both are working.
o But if only one is working, automatically claiming the additional exemption belongs to the
working spouse.
o But can the husband waive his right to claim the additional exemption in case both are
working? YES

Is it automatic waiver? Or what are the requirements for waiving?

For a husband to relinquish his right in claiming the additional exemption

against his gross income, the husband must explicitly put into writing his
waiver and inform the BIR and his employer and the wifes employer in order
for the wife to validly claim the additional exemption.

What is the other deduction allowed to a purely employed individual?

o Premiums on health and hospital insurance
o Here, who took the insurance?

Employee, not employer

For the premium payments deductible, the insurance should be taken by the employee
himself. So if youre the employee right now, you have an insurance policy on health
and hospitalization. You took it out on your own. Inform your employer that you will
deduct 2,400 so long as your family income is not more than 250K.
o Can all individuals claim as deduction the premium payments on health and hospital
insurance?
o So I am an employee and I take out a health and hospital insurance for which I am paying 100K
annual premiums, can I deduct it from my gross compensation income in USC?

NO, since we must have to consider the limitations:

i. premium payments deducted must not be more than 2,400 a year (i.e. 200 a
month)

ii. The immediate family of the taxpayer must have an income of not more
than 250K a year
o This refers to minimum wage income earners
o If you have still your father, mother and youre single, and your father
is earning 100K a year, your mother is earning 100K a year, and youre
earning 100K a year, thats a total of 300K. You can no longer qualify
deducting the 2,400 premiums a year

iii. The claimant must be the spouse claiming the additional exemption
o What spouse?

In default, the husband if both are working but if only one is

working, the employee-spouse. If husband validly waives, then
its the wife.

The deductions of personal and additional exemptions plus the premiums on health and hospital
insurance are deductible from the compensation income of an individual who is purely employed
o What if he engages in business having purely business income and/or engaged in business and
still employed (mixed income), can he avail of the said deductions?

Personal and additional exemptions

Premiums on health and hospital insurance

Itemized deductions

Say for example youre a businesswoman. You have a sole proprietorship. What
deductions can you avail of?

Personal and additional exemptions

Premiums on health and hospital insurance

Itemized deductions those expenses incurred in relation to trade, business or

profession

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Is the itemized deductions available to all types of classes of individual

taxpayers engaged in business?

So long as the individual is engaged in trade or business, he

can claim itemized deductions but only to the extent of the
expenses incurred in relation to trade, business or profession
and incurred in the Philippines for those taxable of income from
sources within.

If your taxable as a RC on global income, then it is rightful that

you also claim the global expense as well. But if youre a RA or
a NRA-ETB, who is taxable from income only within, then only
the expenses incurred within the Philippines is offsettable
against such income.

Exceptions to claiming itemized deductions:

Individual taxpayers earning purely compensation

income since personal and family living expenses are
non-deductible items

NRA-NETB since they are taxed on their gross income

without benefit of deduction

Aliens employed by Regional Area HQs, Regional

Operating HQs, Offshore Banking Units, Petroleum
Service Contractors & Subcontractors because they are
only taxable on their compensation income except
when they are engaged in business

What is optional standard deduction (OSD)?

o A standard deduction available to individuals except NRA, in an amount not exceeding 40% of
the gross income, in lieu of itemized deductions.
o It is a fixed percentage at 40% allowed as a deduction against the gross income of certain
taxpayers without any regard of whether actually expenses have been incurred or not. Its
arbitrary rate of 40%.
o Proof of substantiation for such expense of 40% deduction is not necessary. So automatically,
40% of your gross income is deductible if you opt for OSD.
o If you are a taxpayer having a business, sole proprietorship. You opted for OSD in filing your 1 st
quarter ITR. You realized 2nd quarter or 3rd quarter or annual, when you try to consolidate
everything, that your actual expenses supported by official receipts and invoices is way higher
than the 40% OSD. Can you choose itemized deduction at the end of the year?

1st
40% OSD

2nd

3rd
Revocable?

4th

NO. The OSD of 40%, once you opt to go for OSD during the 1 st quarter, it becomes
irrevocable during the entire year, regardless of whether you actually incurred
expenses at the end of the year 90% of your gross income, you can no longer change
your option.
Although, the default is always itemized deduction. Without indicating that you choose
OSD of 40%, automatically the BIR will go for itemized deduction.
Who are allowed to claim OSD?

RC, NRC and RA.

NRA are not allowed to claim OSD.

RC
NRC
RA

Itemized Deduction

Optional Standard Deduction

Corporations, can they claim OSD?

YES, except non-resident corporations

NRA-ETB

NRA-NETB
X
X