Income Tax - Deduction Onwards

Deductions
Interest (as amended by RA 9337)

PAPER INDUSTRIES V. CA (01 DEC 1995)
Paper Industries Corporation of the Philippines (PICOP) is a Philippine Corporation
registered with the Board of Investments (BOI) as a preferred pioneer enterprise
with respect to its integrated pulp and paper mill, and as a preferred non-pioneer
enterprise with respect to its integrated plywood and veneer mills.
In 1969, 1972 and 1977 PICOP obtained loans from foreign creditors in order to
finance the purchase of machinery and equipment needed for its operations. PICOP
paid interest expenses and deducted it from its 1977 gross income. CIR disallowed
the deduction because such interest payments should have been capitalized and
claimed as depreciation deduction.
SC held that the interest expenses can be deducted. The general rule is that interest
expenses are deductible against gross income. The 1977 NIRC does not prohibit the
deduction of interest on a loan incurred for acquiring machinery and equipment.
The 1977 Tax Code is simply silent on a taxpayers right to elect one or the other tax
treatment of such interest payments. The general rule is that interest payments on a
legally demandable loan are deductible from gross income must be applied.
CIR V. VDA. DE PRIETO (30 SEP 1960)

Respondent conveyed real property to her 4 children by way of gifts. CIR assessed
the real property with donors gift tax, interest and compromises due in the amount
of 117K. Roughly 56K of it is interest on account of delinquency. This 56K was
deducted from gross income by the respondent which the CIR disallowed. Hence,
this suit.
SC held that the interest for the late payment of her donors tax is deductible from
her gross income.
RR 13-2000 (20 Nov 2000)

Requisites for Deductibility of Interest Expense
o Indebtedness
o Interest expense paid or incurred upon such indebtedness
o Indebtedness must be that of the taxpayer
o Connection with taxpayers trade, business or exercise of profession
o Paid or incurred during the taxable year
o Interest must be in writing
o Interest must be legally due
o Must not be between related taxpayers as mandated in 34(B)(2)(b), in
relation to 36(B) of Tax Code
o Must not be incurred to finance petroleum operations
o In case of interest incurred to acquire property used in trade, business or
exercise of profession, the same was not treated as capital expenditure
Rules on Deductibility of Interest Expense
o General Rule: Interest Expense deduction is allowed
o Limitation: deduction shall be reduced by the percentage of interest income
which had been subjected to withholding tax
38% beginning 01 Jan 2000 and thereafter
o Interest on unpaid taxes, connected with the business, are fully deductible
(without limitation)
o The following interest expenses are not deductible
Interest is paid in advance through discount or otherwise; such
interest can be deducted in the year the indebtedness is paid; by
analogy, interest can be deducted in amortization of indebtedness
The taxpayer is related to the creditor
Between members of the family
Between and individual and a corporation more than 50% in
value of the outstanding stock of which is owned, directly
and indirectly, by or for such individual; or
Between two corporations more than 50% in value of the
outstanding stock of each of which is owned, directly or
indirectly or indirectly, by or for the same individual;
Between the grantor and a fiduciary trust;
Between the fiduciary of a trust and the fiduciary of another
trust if the same person is a grantor with respect to each
trust;
Between a fiduciary of a trust and a beneficiary of a trust
o Optional treatment of interest expense on capital expenditure: interest
expense of CapEx can be deducted on the year when incurred.
Interest Arbitrage
BIR Ruling No. 006-00 (05 Jan 2000)
The limitation/ reduction shall apply to interest arbitrage.
Taxes
CIR V. LEDNICKY (31 JUL 1964)
Spouses Lednicky are US citizens residing in the Philippines. All the sources of their
income are derived from the Philippines. They sought to amend their income tax
return by including the income tax they paid to the US as deductions. The CIR
disallowed such amendment and claim.
The issue is whether or not foreign taxes can be claimed as deduction.
SC held that Lednicky cannot claim the deduction. Under the Tax Code, a taxpayer
has two options regarding the taxes he paid to foreign government. He may opt
either (1) to deduct or (2) to claim tax credits.
To claim as a deduction, the he must signify that his intention to claim a tax credit
and waive the deduction.
Losses
38, Tax Code: Losses from Wash Sales of Stock or Securities.
(A) In the case of any loss claimed to have been sustained from any sale or other
disposition of shares of stock or securities where it appears that within a period
beginning thirty (30) days before the date of such sale or disposition and ending
thirty (30) days after such date, the taxpayer has acquired (by purchase or by
exchange upon which the entire amount of gain or loss was recognized by law), or
has entered into a contact or option so to acquire, substantially identical stock or
securities, then no deduction for the loss shall be allowed under Section 34 unless
the claim is made by a dealer in stock or securities and with respect to a transaction
made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or
option to acquire) is less than the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or securities, the loss form the sale
or other disposition of which is not deductible, shall be determined under rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or
option to acquire which) resulted in the non-deductibility of the loss, shall be
determined under rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
RR 12-77 (06 Oct 1977)

Nature of losses allowed as deductions: fires, storms, other casualty, and from
robbery, theft or embezzlement
o Casualty is the complete or partial destruction of property resulting from an
identifiable event of a sudden, unexpected, or unusual nature
It must be declared within 45 days after occurrence by filing a sworn declaration of
loss with the nearest Revenue District Officer
Proof of loss is subject to verification; mere filing does not automatically entitle the
taxpayer to deduct the loss
Deductible amount = value of property before casualty value immediately after; it
must never exceed acquisition cost or depreciated cost
o Cost of repairs can show amount that can be deducted if:
Repairs are necessary
Cost of repairs is not excessive
Repairs do not cover more than the damage suffered
Value after repairs must not exceed original value
For total destruction, amount to be deducted is the net book value (cost less
accumulated depreciation) prior to the casualty
For livestock, acquisition cost of there is no inventory
RMO 31-2009 (16 Oct 2009)
Policies and guidelines in reporting of casualty loss due to Ondoy and Pepeng
Failure to report robbery/ theft can be held against the taxpayer but mere report is
not conclusive proof.
NOLCO (Net Operating Loss Carry-Over)

PAPER INDUSTRIES V. CA (01 DEC 1995)
Paper Industries Corporation of the Philippines (PICOP) is a Philippine
Corporation registered with the Board of Investments (BOI) as a preferred
pioneer enterprise with respect to its integrated pulp and paper mill, and as
a preferred non-pioneer enterprise with respect to its integrated plywood
and veneer mills.
PICOP entered into a merger agreement with Rustan Pulp and Paper Mills,
Inc. (RPPM) and Rustan Manufacturing Corporation (RMC). PICOP was the
surviving corporation. In effect RPPM and RMC became wholly owned
corporations of PICOP. RPPM and RMC are BOI-registered companies. RPPM
had accumulated losses of about 81M. PICOP claimed 44M of the losses as
deduction in PICOPs gross income.
CIR disallowed the deduction on two grounds. First, it was incurred by RPPM
and not PICOP. The merger took effect after the claim for the taxable year.
Second, the losses were from borrowing funds and not from RPPMs
registered operations.
SC did not allow the deduction because in effect it would permit PICOP to
purchase tax deduction and allow RPPM to peddle its accumulated
operating losses. Moreover, there is no statutory basis and it does violence
to the legislative intent of the tax incentive granted under RA 5186.
The general rule is that net operating losses cannot be carried over. Losses
must be deducted against current income in the taxable year when such
losses were incurred. Moreover, such losses may be charged off only against
income earned in the same taxable year when the losses were incurred.
In RA 5186, net operating loss carry-over is a very special incentive to be
granted only to registered pioneer enterprises and only with respect to their
registered operations.
o RA 5186: Net Operating Loss Carry-over a net operating loss
incurred in any of the first ten years of operations may be carried
over as a deduction from taxable income for the six years
immediately following the year of such loss. The entire amount of
the loss shall be carried over to the first of the six taxable years
following the loss, and any portion of such loss which exceeds the
taxable income of such first year shall be deducted in like manner
from the taxable income of the next remaining five years.

RR 14-01 (27 Aug 2001)

IRR for 34(D)(3) of the Tax Code; NOLCO deduction will not apply for any
net loss incurred in a taxable year which the corporation is exempt from
income tax and no substantial change in the ownership of the business (not
less than 75% of nominal value of outstanding issued shares or of the paid
up capital; NOLCO deduction is allowed only for the next 3 consecutive
years after the loss; different for mines, other than oil and gas wells under
EO 226 (Omnibus Investments Code of 1987)
NOLCO shall apply regardless of the change in ownership.
NOLCO cannot be transferred or assigned unless provided for.
The 75% Rule applies only in net operating losses as a result from merger or
consolidation with another person. NOLCO may only be deducted if the
transferor/ assignor gains control at least 75%.
An individual cannot claim OSD and NOLCO simultaneously. Further, OSD
shall not interrupt the 3 year period of NOLCO.
The following are not entitle to claim NOLCO deduction:
o Offshore Banking Unit of a foreign banking corporation
o Foreign Currency Deposit Unit of a domestic or foreign banking
corporation
o Enterprise registered with BOI with respect to its registered
activities enjoying the Income Tax Holiday incentive; net operating
losses on such periods cannot qualify for purposes of NOLCO.
o PEZA registered enterprise.
o BCDA registered enterprise
o Foreign corporations engaged in international shipping or air
carriage business in the Philippines
o Any person enjoying income tax exemption
NOLCO is restricted from 01 Jan 1998 onwards
BIR Ruling 30-00 (10 Aug 200)

SGV is requesting ruling for its clients Republic Cement, Fortune Cement and
Blue Circle Philippines, on the tax implications of their proposed integration
plan. There are share swaps but in effect there was no change of ownership
greater than 25% of either the nominal value of the outstanding issued
shares or of the paid-up capital.
BIR held that there is no substantial change in the ownership of Republic,
Fortune, Mindanao or Iligan.
Forex losses
BIR Ruling 206-90 (30 Oct 1990)

Porcelana Mariwasa (PMI) has existing US dollar loans from Noritake and
Toyota. They have agreed to convert the loan into pesos at the prevailing
exchange rate on 30 Jun 1989.
Such exchange rate would mean losses on the part of PMI. Hence, PMI
sought to deduct it.
BIR held that the losses cannot be deducted. Same with income that it must
first be realized before it can be taxed, the losses must also be realized. It is
deductible only for the year it is actually sustained.
BIR Ruling No. 144-85 (26 Aug 1985)
Foreign exchange losses sustained as a result of devaluation of peso vis--vis

the foreign currency, but which remittance of scheduled amortization
consisting of principal and interests payments on a foreign loan has not
actually been made are not deductible from gross income.
Bad Debts
Philex v. CIR (16 Apr 2008)
Philex entered into a contract with Baguio Gold Mining Company for the
management of Sto. Nino mine in Benguet. It stipulated that Philex would manage
the mine and have 50% share in the profits. It also stipulated that advances of Philex
shall be entitled to the retirn of a proportionate share of the mine assets.
Later on, Baguio incurred debt to Philex due to the advances made, the
compensation for the management and the liabilities assumed by Philex as
guarantor. The two entered into a compromise agreement for the payment.
Philex subsequently deducted from its gross income the amount of 112M as loss on
settlement of receivables from Baguio Gold. BIR rejected it claiming that Baguio
Gold is still existing and has not filed for bankruptcy.
SC held that the agreement was actually a partnership. Hence, there was no debtor-
creditor relationship. There was no stipulation that Baguio gold to actually repay the
petitioner for its advances. It provides that Philex is only entitled to proportionate
share in the mine assets. Further, its compensation is too big to be a salary. It was
deemed by the court as share in the profits.
Philippine Refining Company v. CA (08 May 1996)

Petitioner deducted bad debts based on the testimony of its financial adviser or
accountant (Masagana). CIR disallowed the deduction as there was no documentary
evidence.
SC denied the petition.
Requisites for worthlessness of a debt
o Valid and subsisting debt
o Debt must be actually ascertained to be worthless and uncollectible during
the taxable year
o Debt must be charged off during the taxable year
o Debt must arise from business of the taxpayer
Steps to prove diligent effort to collect debt
o Sending of statement of accounts
o Sending of collection letters
o Giving the account to a lawyer for collection
o Filing a collection case in court
Fernandez Hermanos, Inc. v. CIR (30 Sep 1969)

Fernandez Hermanos, Inc. (FHI) is a domestic corporation engaged in investments. It
was assessed for deficiency in income taxes by the BIR. Among such disallowances in
deduction is bad debt.
FHI provided cash to Palawan Manganese Mines, which is also owned by FHI. The
cash was to enable PMM to resume its mining operations. Their agreement
stipulated that PMM would pay FHI 15% of its net income in exchange for the
financial assistance. Later on, FHI assessed PMM that it can no longer pay for the
advances. Hence, it FHI deemed it as bad debt.
SC held that the financial assistance is not debt, hence it is not deductible. FHI never
expected it to be repaid. If there is no profits, PMM could not pay as stipulated in
the 15% payment from net profits. Thus, there is no debt and no bad debt. Such
advances were deemed as investments and not loans.
RR 5-99 (10 Mar 1999)

To implement Bad Debt deduction
Requisites
o Existing debt due and demandable
o Debt is connected to business
o Must not be between parties under 36(B), Tax Code
o Actual charge in the books of account
o Must be worthless and uncollectible
Tax Benefit Rule: Should a bad debt be paid, it shall be considered as part of gross
income.
Exception is the banks which the BSp, through MB, shall determine worthlessness
and uncollectibility of bad debts but must still comply with first 4 requisites.
For receivables from insurance or surety company, it must be declared closed by the
Insurance Commissioner
Depreciation
Basilan Estates, Inc v. CIR (05 Sep 1967)
Limpan Investment Corporation v. CIR (26 Jul 1966)
RR 12-2012
Depletion
Consolidated Mines v. CTA (29 Aug 1974)
Charitable and other Contributions

BIR Ruling 19-01 (10 May 2001)
Research and Development

3M Philippines v. CIR (26 Sep 1988)
Additional requirements for deductibility

RMO 38-83 (14 Nov 1983)
3.1 An amount claimed as deduction on which a tax is supposed to have
been withheld under Sections 54 and 93 shall be allowed if in the course of his
audit and/or investigation, the examiner discovers that:
3.1/1 No withholding of creditable or final tax was made but the
payee reported the income and the withholding agent/taxpayer pays
during the original audit and investigation the surcharges, interest and
penalties incident to the failure to withhold the tax.
3.1/2 No withholding of creditable or final tax was made and the
recipient-payee failed to report the income on due date thereof, but the
withholding agent pays during the original audit and investigation the
amount supposed to have been withheld, inclusive of surcharges,
interest and penalties incident to his failure to withhold.
3.1/3 The withholding agent erroneously underwithheld the tax but
pays during the original audit and investigation the difference in the
amount supposed to have been withheld, inclusive of surcharges,
interest and penalties incident to such error.
3.2 Items of deductions disallowed due to non-compliance with Section 30
(1), the deficiency income tax assessment for which had been issued before the
effectivity of this Revenue Memorandum Order may be allowed upon payment
not later than May 15, 1984 of the withholding tax required and supposed to
have been withheld and/or surcharges, interest and penalties. However, no
refund or credit arising from such re-allowance of a previously disallowed
deduction shall be granted.
Optional Standard Deduction

34 (L), Tax Code as amended by RA 9504
In lieu of the deductions allowed under the preceding Subsections, an
individual subject to tax under Section 24, other than a nonresident alien,
may elect a standard deduction in an amount not exceeding forty percent
(40%) of his gross sales or gross receipts, as the case may be.
In the case of a corporation subject to tax under Sections 27(A) and
28(A)(1), it may elect a standard deduction in an amount not exceeding
forty percent (40%) of its gross income as defined in Section 32 of this Code.
Unless the taxpayer signifies in his return his intention to elect the optional
standard deduction, he shall be considered as having availed himself of the
deductions allowed in the preceding Subsections.
o Such election when made in the return shall be irrevocable for the
taxable year for which the return is made:
o Provided, That an individual who is entitled to and claimed for the
optional standard deduction shall not be required to submit with his
tax return such financial statements otherwise required under this
Code:
o Provided, further, That except when the Commissioner otherwise
permits, the said individual shall keep such records pertaining to his
gross sales or gross receipts, or the said corporation shall keep such
records pertaining to his gross income as defined in Section 32 of
this Code during the taxable year, as may be required by the rules
and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
RR 2-2010 (18 Feb 2010)

Amended RR 16-2008
Type of deductions of GPP and partners must be the same
RR 16-2008 (26 Nov 2008) (1 to 5 only)

See de Leon pp. 147-149
Premium Payments on health and/or hospitalization insurance
Non-deductible expenses
36, Tax Code Items not deductible
(A) General Rule. In computing net income, no deduction shall in any case be
allowed in respect to
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any
property or estate;
This Subsection shall not apply to intangible drilling and
development costs incurred in petroleum operations which are
deductible under Subsection (G)(1) of Section 34 of this Code.
(3) Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made; or
(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.
(B) Losses from Sales or Exchanges of Property. In computing net income, no
deduction shall in any case be allowed in respect of losses from sales or
exchanges of property directly or indirectly
(1) Between members of a family. For purposes of this paragraph, the
family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation, between an
individual and a corporation more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation, between two
corporations more than fifty percent (50%) in value of the outstanding
stock of each of which is owned, directly or indirectly, by or for the
same individual, if either one of such corporations, with respect to the
taxable year of the corporation preceding the date of the sale or
exchange was, under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of a trust and the fiduciary of another trust if
the same person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and a beneficiary of such trust.
ESSO STANDARD EASTERN, INC. V. CIR (07 JUL 1989)
Petitioner was requesting refund of overpaid income taxes which were

denied by CTA and CIR.
Esso claimed expenses for drilling and exploration of its petroleum
concessions as deductions. This was disallowed by the CIR because the
expenses should be capitalized and it may only be deducted as a loss when a
dry hole should result. Esso amended its return and claimed refund for
the abandonment of its dry holes. CIR allowed this claim but partial amount
only.
Esso also claimed refund for margin fees it paid to the Central Bank on its
profit remittances to its New York head office. CIR disallowed the margin
fees.
Esso was later on assessed with deficiencies due to the deduction of margin
fees.
ISSUE: Whether or not margin fees are taxes NO; whether it could be
deducted - NO
SC held that margin fees are used to regulate the international reserve to
stabilize the currency. Hence, margin fees are not taxes.
SC held that Esso cannot deduct margin fees. These are expenses incurred in
the disposition of income. Further, the remittance was not made in
furtherance of its own trade or business. Esso assumed that all corporate
expenses are necessary and appropriate. It is not an ordinary and necessary
expense paid or incurred in carrying its own trade or business.
119-122, RR 2
119. Personal, living, and family expenses are not deductible. Insurance
paid on a dwelling owned and occupied by a taxpayer is a personal expense
and not deductible. Premiums paid for life insurance by the insured are not
deductible. In the case of a professional man who rents a property for
residential purposes, but incidentally receives his clients, patients, or callers
in connection with his professional work (his place of business being
elsewhere), no part of the rent is deductible as a business expense. If
however, he uses part of the house for his office, such portion of the rent as
is properly attributable to such office is deductible. Where the father is
legally entitled to the services of his minor children, any allowances which
he gives them, whether said to be in consideration of services or otherwise,
are not allowable deductions in his return of income. Alimony, and an
allowance paid under a separation agreement are not deductible from gross
income.
121. Any amounts paid for premiums on any life insurance policy covering
the life of an officer or employee or of any person financially interested in
the business of the taxpayer when the taxpayer is directly or indirectly a
beneficiary under such policy are not deductible.
Individuals
24 (as amended by RA 9504) & 25, Tax Code
See de Leon pp. 231, 237-238
Income Tax Base Rate
Not over 10K 0 5%
Over 10K but not over 30K 500 10% of the excess of over 10K
Over 30K but not over 70K 2,500 15% of the excess of over 30K
Over 500K 125,000 32% of the excess of over 500K
Separate returns for married individuals
Minimum wage earners are exempt from income tax including:
Holiday pay
Overtime pay
Night shift differential pay
Hazard pay
Tax Rate on Passive Income
20% - Interest, royalties, prizes and other winnings
10% - royalties except: books, literary works and musical
composition
Except prizes worth 10K or less
Except PCSO and lotto winnings
10% - Cash and/or property dividends
0.5% on gross selling price of stocks if through PSE
5% for first 100K; 10% in excess of 100K - Capital gains from sales of shares
of stock not traded in the exchange
6% capital from sale of real property
Except: gains were used as principal residence by natural persons
within 18 months from date of sale/ disposition
CIR must be notified within 30days
Can only be availed once every 10 years
If proceeds not fully utilized, subject to capital gains tax
Tax Rate on NRA Individual
25% NRA not engaged in trade or business
15% salaries of alien employees (including Filipinos) of:
Regional and area headquarters and regional operating
headquarters of MNC
Offshore banking units
Foreign petroleum service contractors and subcontractors
NRA, regardless of engagement, are subject to the same tax rate of citizens
on capital gains from sales of shares of stock and real property
Ordinary Income
Passive Income
22(T) to (Y), Tax Code
(T) The term 'securities' means shares of stock in a corporation and rights to
subscribe for or to receive such shares. The term includes bonds, debentures,
notes, or certificates, or other evidence of indebtedness, issued by any
corporation, including those issued by a government or political subdivision
thereof, with interest coupons or in registered form.
(U) The term 'dealer in securities' means a merchant of stocks or securities,
whether an individual, partnership or corporation, with an established place of
business, regularly engaged in the purchase of securities and the resale thereof
to customers; that is, one who, as a merchant, buys securities and re-sells them
to customers with a view to the gains and profits that may be derived
therefrom.
(V) The term 'bank' means every banking institution, as defined in Section 2 of
Republic Act No. 337, as amended, otherwise known as the General Banking
Act. A bank may either be a commercial bank, a thrift bank, a development
bank, a rural bank or a specialized government bank.
(W) The term 'non-bank financial intermediary' means a financial intermediary,
as defined in Section 2(D)(c) of Republic Act No. 337, as amended, otherwise
known as the General Banking Act, authorized by the Bangko Sentral ng Pilipinas
(BSP) to perform quasi-banking activities.
(X) The term 'quasi-banking activities' means borrowing funds from twenty (20)
or more personal or corporate lenders at any one time, through the issuance,
endorsement, or acceptance of debt instruments of any kind other than
deposits for the borrower's own account, or through the issuance of certificates
of assignment or similar instruments, with recourse, or of repurchase
agreements for purposes of relending or purchasing receivables and other
similar obligations: Provided, however, That commercial, industrial and other
non-financial companies, which borrow funds through any of these means for
the limited purpose of financing their own needs or the needs of their agents or
dealers, shall not be considered as performing quasi-banking functions.
(Y) The term 'deposit substitutes' shall mean an alternative form of obtaining
funds from the public (the term 'public' means borrowing from twenty (20) or
more individual or corporate lenders at any one time), other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the needs of
their agent or dealer. These instruments may include, but need not be limited to
bankers' acceptances, promissory notes, repurchase agreements, including
reverse repurchase agreements entered into by and between the Bangko
Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of
assignment or participation and similar instruments with recourse: Provided,
however, That debt instruments issued for interbank call loans with maturity of
not more than five (5) days to cover deficiency in reserves against deposit
liabilities, including those between or among banks and quasi-banks, shall not
be considered as deposit substitute debt instruments
RR 14-2012 (07 Nov 2012)

Prescribe proper tax treatment of interest income earnings on financial
instruments and other related transactions
Government debt instruments and securities are deemed as deposit
substitutes and liable to final withholding tax (20%, 25% or 30%)
Long-term deposit or investment are exempt from income tax under 24(B)(1)
and 25(A)(2) of NIRC of 1997, provided:
o Depositor is an individual citizen or an alien engaged in trade or
business in the Philippines
o Deposits must be under the name of the individual
o Must be evidenced by certificates
o Must be issues by banks only
o Maturity of not less than 5 years
o Must be in denominations of 10K or as prescribed by BSP
o Not terminated before 5 years otherwise tax:
5% - 4 years to less than 5 years
12% - 3 years to less than 4 years
20% - less than 3 years
o Gains from trading, forex are not covered by income tax exemption
Tax treatment of interest income from deposit/ substitutes/ trust funds
o 20% general
o 25% NRA not engaged in trade or business
o 30% NR foreign corporation unless interest income is from foreign loans
contracted on or after 01 Aug 1986 which will be 20%
Tax treatment of interest income under Expanded Foreign Currency Deposit
System
o FWT 7.5% in general
o Exempt if from non-residents whether individuals or corporations
o If joint under non-resident citizen and resident, 50% is exempt, 50%
subject to 7.5%
o Exempt if income derived by depository bank from foreign currency
transactions with non-residents, offshore banking units in the
Philippines, local commercial banks, banks under expanded foreign
currency deposit system
o 10% for others in preceding paragraph
Tax treatment of interest income from offshore banking units
o FWT 10% on foreign currency loans to residents except offshore banking
units or local commercial banks
o Exempt if income from non-residents
If not stated anywhere else, CWT of 20%
Capital Gains Tax

22(X) and 39(B), Tax Code
22 (X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or
more personal or corporate lenders at any one time, through the issuance,
endorsement, or acceptance of debt instruments of any kind other than deposits for the
borrower's own account, or through the issuance of certificates of assignment or similar
instruments, with recourse, or of repurchase agreements for purposes of relending or
purchasing receivables and other similar obligations: Provided, however, That
commercial, industrial and other non-financial companies, which borrow funds through
any of these means for the limited purpose of financing their own needs or the needs of
their agents or dealers, shall not be considered as performing quasi-banking functions.
39(B) Percentage Taken into Account. In the case of a taxpayer, other than a
corporation, only the following percentages of the gain or loss recognized upon the sale
or exchange of a capital asset shall be taken into account in computing net capital gain,
net capital loss, and net income:
(1) One hundred percent (100%) if the capital asset has been held for not more
than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve
(12) months;
SUPREME TRANSLINER, INC. V. BPI FAMILY SAVINGS BANK, INC. (23 FEB 2011)
RR 8-98 (25 Aug 1998)
RR 4-99 (09 Mar 1999)
RR 13-99 (26 Jul 1999)
RR 14-2000 (20 Nov 2000)
RR 06-2008 (22 Apr 2008)
RMC 37-2012 (03 Aug 2012)
BIR Ruling DA 029-08 (23 Jan 2008)
BIR Ruling DA 287-07 (08 May 2007)
OCWs/ Senior Citizens/ Disabled

M.E. HOLDINGS CORPORATION V. CIR & CTA (03 MAR 2008)
RR 1-2009 (09 Dec 2008)
RR 7-2010 (20 Jul 2010)
RR 1-2011 (24 Feb 2011)
Personal and additional exemptions/ PERA

35(A),(B),(C), and (D), Tax Code
RA10165, 3-5 & 22-24

RA9504
RA9505
PANSACOLA V. CIR (16 NOV 2006)
RR 17-2011 (27 Oct 2011)
Partnerships
26 & 73(D), Tax Code
o 26. Tax Liability of Members of General Professional Partnerships. A general
professional partnership as such shall not be subject to the income tax imposed under
this Chapter. Persons engaging in business as partners in a general professional
partnership shall be liable for income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the
partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
o 73. Distribution of Dividends or Assets by Corporations.
(D) Net Income of a Partnership Deemed Constructively Received by Partners.
The taxable income declared by a partnership for a taxable year which is
subject to tax under Section 27(A) of this Code, after deducting the corporate
income tax imposed therein, shall be deemed to have been actually or
constructively received by the partners in the same taxable year and shall be
taxed to them in their individual capacity, whether actually distributed or not.
RR 2-2010 (18 Feb 2010)

Regulation of OSD/ Itemized Deduction in GPPs and its Partners
GPP is not subject to income tax imposed under Title II.
GPP may claim either (1) itemized deductions under 34(A)-(J), Tax Code or (2) OSD not
exceeding 40% of its gross income.
Individual partners may still claim deductions if GPP opted for itemized deductions.
o Partner cannot claim same expenses claimed by GPP.
Individual partners may no longer claim itemized deductions if GPP opted for OSD.
GPP and its partners must have the same type of deduction.
For other sources of income outside of GPP, the mode of deduction will be based on the
GPP.
Partner must signify OSD in his first quarter income tax return.
o It is irrevocable for the whole taxable year.
o An individual who claims OSD is not required to submit financial statements
o A corporation is required to submit financial statements
Corporations
27(A) & (D), and 28, Tax Code as amended by RA 9294 & RA 9337
27(A). Rates of Income Tax on Domestic Corporations.

(A) In General. Except as otherwise provided in this Code, an income tax of thirty-
five percent (35%) is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines by every corporation, as
defined in Section 22(B) of this Code and taxable under this Title as a corporation,
organized in, or existing under the laws of the Philippines: Provided, That effective
January 1, 2009, the rate of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and expenses for the fiscal year
shall be deemed to have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by multiplying
the number of months covered by the new rate within the fiscal year by the taxable
income of the corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of
Finance, may, effective January 1, 2000, allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined herein, after the following conditions
have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose
ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five
percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for
three (3) consecutive taxable years during which the corporation is qualified under the
scheme.
For purposes of this Section, the term 'gross income' derived from business shall be
equivalent to gross sales less sales returns, discounts and allowances and cost of goods
sold. 'Cost of goods sold' shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold, including insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances and discounts.
27(D). Rates of Tax on Certain Passive Incomes.
(1) Interest from Deposits and Yield or Any Other Monetary Benefit from
Deposit Substitutes and from Trust Funds and Similar Arrangements, and
Royalties. A final tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar
arrangements received by domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however, That interest income derived
by a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7 1/2%) of such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
Exchange. A final tax at the rates prescribed below shall be imposed on net
capital gains realized during the taxable year from the sale, exchange or other
disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange:
Not over P100,000 5%
Amount in excess of P100,000 10%
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit
System. Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency deposit system units
and other depository banks under the expanded foreign currency deposit
system shall be exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest income from foreign
currency loans granted by such depository banks under said expanded system
to residents other than offshore banking units in the Philippines or other
depository banks under the expanded system shall be subject to a final tax at
the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be exempt
from income tax.
(4) Intercorporate Dividends. Dividends received by a domestic corporation

from another domestic corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands
and/or Buildings. A final tax of six percent (6%) is hereby imposed on the
gain presumed to have been realized on the sale, exchange or disposition of
lands and/or buildings which are not actually used in the business of a
corporation and are treated as capital assets, based on the gross selling price or
fair market value as determined in accordance with Section 6(E) of this Code,
whichever is higher, of such lands and/or buildings.
28. Rates of Income Tax on Foreign Corporations.

(A) Tax on Resident Foreign Corporations.
(1) In General. Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to thirty-five percent (35%)
of the taxable income derived in the preceding taxable year from all
sources within the Philippines: Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting period,

the taxable income shall be computed without regard to the specific
date when sales, purchases and other transactions occur. Their income
and expenses for the fiscal year shall be deemed to have been earned
and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount

computed by multiplying the number of months covered by the new
rate within the fiscal year by the taxable income of the corporation for
the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be granted
the option to be taxed at fifteen percent (15%) on gross income under
the same conditions, as provided in Section 27, (A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations.

A minimum corporate income tax of two percent (2%) of gross
income, as prescribed. under Section 27(E) of this Code, shall be
imposed, under the same conditions, on a resident foreign corporation
taxable under paragraph (1) of this Subsection.
(3) International Carrier. An international carrier doing business in

the Philippines shall pay a tax of two and one-half percent (2 %) on its
'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. 'Gross Philippine Billings' refers

to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective
of the place of sale or issue and the place of payment of the
ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards
a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion of the
cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of
Gross Philippine Billings.
(b) International Shipping. ''Gross Philippine Billings' means

gross revenue whether for passenger, cargo or mail originating
from the Philippines up to final destination, regardless of the
place of sale or payments of the passage or freight documents.
(4) Offshore Banking Units. The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized
by the Bangko Sentral ng Pilipinas (BSP), from foreign currency
transactions with nonresidents, other offshore banking units, local
commercial banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
with offshore banking units shall be exempt from all taxes except net
income from such transactions as may be specified by the Secretary of
Finance, upon recommendation of the Monetary Board which shall be
subject to the regular income tax payable by banks: Provided, however,
That any interest income derived from foreign currency loans granted to
residents other than offshore banking units or local commercial banks,
including local branches of foreign banks that may be authorized by the
BSP to transact business with offshore banking units, shall be subject
only to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from

transactions with said offshore banking units shall be exempt from
income tax.
(5) Tax on Branch Profits Remittances. Any profit remitted by a

branch to its head office shall be subject to a tax of fifteen percent
(15%) which shall be based on the total profits applied or earmarked for
remittance without any deduction for the tax component thereof
(except those activities which are registered with the Philippine
Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of this Code: Provided,
That interests, dividends, rents, royalties, including remuneration for
technical services, salaries, wages, premiums, annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits,
income and capital gains received by a foreign corporation during each
taxable year from all sources within the Philippines shall not be treated
as branch profits unless the same are effectively connected with the
conduct of its trade or business in the Philippines.
(6) Regional or Area Headquarters and Regional Operating

Headquarters of Multinational Companies.
(a) Regional or area headquarters as defined in Section

22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section

22(EE) shall pay a tax of ten percent (10%) of their taxable
income.
(7) Tax on Certain Incomes Received by a Resident Foreign

Corporation.
(a) Interest from Deposits and Yield or any other Monetary

Benefit from Deposit Substitutes, Trust Funds and Similar
Arrangements and Royalties. Interest from any currency
bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the
Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however, That
interest income derived by a resident foreign corporation from
a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven
and one-half percent (7 1/2%) of such interest income.
(b) Income Derived under the Expanded Foreign Currency

Deposit System. Income derived by a depository bank under
the expanded foreign currency deposit system from foreign
currency transactions with nonresidents, offshore banking units
in the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency
deposit system units and other depository banks under the
expanded foreign currency deposit system shall be exempt from
all taxes, except net income from such transactions as may be
specified by the Secretary of Finance, upon recommendation by
the Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository banks
under said expanded system to residents other than offshore
banking units in the Philippines or other depository banks under
the expanded system shall be subject to a final tax at the rate of
ten percent (10%).
Any income of nonresidents, whether individuals or

corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the
Stock Exchange. A final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation except shares sold
or disposed of through the stock exchange:
On any amount in excess of P100,000 10%

(d) Intercorporate Dividends. Dividends received by a
resident foreign corporation from a domestic corporation liable
to tax under this Code shall not be subject to tax under this
Title.
(B) Tax on Nonresident Foreign Corporation.
(1) In General. Except as otherwise provided in this Code, a foreign

corporation not engaged in trade or business in the Philippines shall pay
a tax equal to thirty-five percent (35%) of the gross income received
during each taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and
capital gains, except capital gains subject to tax under subparagraph
5(c): Provided, That effective January 1, 2009, the rate of income tax
shall be thirty percent (30%).
(2)Nonresident Cinematographic Film Owner, Lessor or Distributor.

A cinematographic film owner, lessor, or distributor shall pay a tax of
twenty-five percent (25%) of its gross income from all sources within
the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine

Nationals. A nonresident owner or lessor of vessels shall be subject
to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or
charter fees from leases or charters to Filipino citizens or corporations,
as approved by the Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other

Equipment. Rentals, charters and other fees derived by a
nonresident lessor of aircraft, machineries and other equipment shall be
subject to a tax of seven and one-half percent (7 1/2%) of gross rentals
or fees. TDEASC
(5) Tax on Certain Incomes Received by a Nonresident Foreign

Corporation.
(a) Interest on Foreign Loans. A final withholding tax at the

rate of twenty percent (20%) is hereby imposed on the amount
of interest on foreign loans contracted on or after August 1,
1986;
(b) Intercorporate Dividends. A final withholding tax at the
rate of fifteen percent (15%) is hereby imposed on the amount
of cash and/or property dividends received from a domestic
corporation, which shall be collected and paid as provided in
Section 57(A) of this Code, subject to the condition that the
country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to twenty percent (20%),
which represents the difference between the regular income
tax of thirty-five percent (35%) and the fifteen percent (15%)
tax on dividends as provided in this subparagraph: Provided,
That effective January 1, 2009, the credit against the tax due
shall be equivalent to fifteen percent (15%), which represents
the difference between the regular income tax of thirty percent
(30%) and the fifteen percent (15%) tax on dividends; AcHaTE
(c) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. A final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation, except shares sold,
or disposed of through the stock exchange:
On any amount in excess of P100,000 10%"
(1) Domestic Corporations

Ordinary Income
o Corporations are subject to income tax rate of 30% on taxable income.
o It may be lowered to 15% of gross income (Gross Income Tax Option) if:
Stated by the President
Upon recommendation of Secretary of Finance
With the following conditions
Tax effort ration 20% of GNP
A ratio of 40% of income tax collection to total tax revenues
A vat tax effort of 4% of GNP
A 0.9% ratio of the Consolodiated Public Sector Financial
Position (CPSFP) to GNP
Available only to firms with Ratio of cost of sales to gross sales or
receipts from all sources does not exceed 55%
Election of this by the corporation is irrevocable for 3 consecutive
taxable years during which the corporation is qualified
Passive Income
Interest Income and Royalties
o Final tax rate of 20% for interest income
o 20% also for royalties but from sources within the Philippines
o 7.5% for interest income if:
Derived by a domestic corporation
From a depository bank under the foreign currency deposit
system
Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange
o Final tax of:
5% for the first 100K
10% for the excess of 100K
Tax on Income derived under the Expanded Foreign Currency Deposit
o Requisites:
Income derived by a depository bank under expanded foreign
currency deposit system
From foreign currency transactions
With
Non-residents
OBU in the Philippines
Local commercial banks
o Includes branches of foreign banks authorized
by BSP to transact with expanded foreign
currency system units
Other depository banks under the expanded foreign
currency deposit
o Exempt from ALL taxes
o EXCEPTION: net income from such transactions as may be specified by
the Secretary of Finance, upon recommendation of MB to be subject to
regular income tax payable by banks
EXCEPTION TO EXCEPTION: 10% final tax rate on:
Interest income
From foreign currency loans
Granted by such depository banks under the expanded
system
To residents other than
o OBU in the Philippines or
o Other depository banks under the expanded
system
o Interest income of non-residents from transactions with depository
banks under the expanded system are exempt from income tax
Intercorporate dividends
o Dividends received by a domestic corporation from another domestic
corporation shall not be subject to tax.
Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings
o Final tax of 6% on the gain presumed to have been realized
o Applies to lands and/or buildings
Not actually used in business and
Treated as capital assets
o Based on GSP or FMV whichever is higher
Capital Gains Tax

RR 4-99 (09 mar 1999)
Relates to capital gains on foreclosed properties
If right of redemption is exercised, no capital gains tax.
If right is not exercised, it is subject to capital gains tax but is due after
one year or the expiration of the right of redemption
RR 06-2008 (22 Apr 2008)

About tax on sale, barter, exchange or other disposition of shares of
stock held as capital assets
Persons liable to the tax:
o Individual
o Corporation
o Other taxpayers such as estates, trusts, trust funds and other
pension funds
Persons not liable to the tax
o Dealers in securities (one who buys/ sells stocks on his own
account)
o Investors of mutual fund
o Other persons exempt under the law
Transaction through stock exchange
o Tax rate of 0.5% on GSP or gross value in money of the stock
sold
IPO transactions (for primary and secondary offering)
o Tax rate based on proportion of disposed shares / outstanding
shares (proportion tax rate)
Up to 25% - 4%
Over 25% but not over 33 1/3% - 2%
Over 33 1/3% - 1%
o Tax base is GSP or gross value in money of the stocks
o Determination of person liable
Primary offering issuer corporation
Secondary offering selling shareholder
Applicable when first shareholder sells at the
time of IPO
o Succeeding offering of unissued shares are not subject to this
rule but subject to DST
o Sale of another primary shareholder subsequent to the IPO shall
be tax similar to transaction through stock exchange
Transactions outside of stock exchange
o 5% for the first 100K and 10% in excess of 100K
o Tax base in net capital gains realized
Determination of selling price
Cash sale total consideration
Mixed money + FMV of property
Property only FMV
If total consideration involving property > FMV
of shares, excess is considered as gift subject to
donors tax
Determination of FMV of stocks
Last closing price if stock is traded in stock
exchange but transacted outside
Book value if not listed
If unit of participation in any association,
recreation or amusement club, it will be FMV or
bid price nearest to the date of sale as
published in newspaper whichever is higher
Taxation of surrender of shares by investor upon dissolution of the
corporation and liquidation of assets and liabilities of said corporation.
o Gain/ loss = FMV of shares cash/ property received
o If the investor is individual, rule on holding period shall apply.
Tax rate is based on the length of the holding period of the
shares.
o Gain or loss from this transaction is subject to regular income
tax rate under the Tax Code, as amended
Taxation of shares redeemed for cancellation or retirement
o Subject to regular income tax rates
o Does not apply to voluntary buy back of shares. It shall be
subject to tax on transaction through stock exchange or
transactions not listed in the stock exchange (0.5%; 5-10% rates)
Collection
o Transaction in the stock exchange
Stock broker collects
Remits to collecting bank/ RDO within 5 banking days
Submit a return every Monday to the secretary of the
stock exchange
The secretary of the stock exchange reconciles and
submits the weekly reports to the RDO on or before
every 15th of the following month
o Tax on IPO
Corporate issuer will pay to the RDO within 30 days of
the listing accompanied by a copy of the instrument of
sale
If through secondary offering, procedure is same with
transaction in the stock exchange
o Transaction outside of stock exchange
File a return within 30 days
Final consolidated return of all transactions for the
taxable year on or before the 15th day of the 4th Month
of the following taxable year
Individual calendar year
Corporate either calendar or fiscal year basis
RMC 55-2010 (28 Jun 2010)

About Build-to-Own transactions
Contractors are trustees receiving management fee which in effect, the
transfer is from trustee to the trustor and evading income tax and VAT
HLURB declared the scheme as contrary to public policy
Still subject to capital gains tax
BIR Ruling DA 455-07 (17 Aug 2007)

Regarding non-taxability of Build-to-Own
Overruled by subsequent BIR issuance
(2) Resident Foreign Corporations

28(A), Tax Code as amended by RA 9294
In general
Minimum Corporate Income Tax on resident foreign corporations
o 2% of gross income as prescribed in 27(E), under same conditions
under paragraph (1) of this Subsectui.
International carrier
OBUs
Tax on Branch Profits remittances
Regional or Area Headquarters and Regional Operating Headquarters or MNC
Tax on certain incomes received by a resident foreign corporation
o Similar to passive income under domestic corporations without
disposition of land and/or building
In general
30% of taxable income from sources within the Philippines
Has the option with Gross Income Tax Option (15%) on the same conditions
under 27(A), Tax Code
International Carrier
International carriers ding business in the Philippines - 2.5% on Gross Philippine
Billings
o Gross Philippine Billings (International Carrier)
gross revenue derived from carriage of persons, excess baggage,
cargo and mail
originating from the Philippines
in a continuous and uninterrupted flight
irrespective of the place of sale or issue and the place of
payment of the ticket or passage dopcument
PROVIDED that, ticket revalidated, exchange, and/or indorsed
to another international airline form part of the Gross Philippine
Billings if the passenger boards a plane in a port or point in the
Philippines
PROVIDED further that, if there transhipment outside the
Philippines, only a part of the cost of ticket corresponding to the
leg flown from the Philippines to the point of transhipment shall
form part of Gross Philippine Billings
o Gross Philippine Billings (International Shipping)
Must originate from the Philippines to final destination
Regardless of the place of sale or payment
AIR NEW ZEALAND V. CIR (CTA CASE, 30 JAN 2008)
CIR V. BOAC (30 APR 1987)
UNITED AIRLINES, INC. V. CIR (29 SEP 2010)
RR 15-2002 - 1-5 only
o
OBUs/ FCDUs
RR 14-2012 (07 Nov 2012)
Branch Profit Remittance Tax

BANK OF AMERICA NT & SA V. CA (21 JUL 1994)
COMPANIA GENERAL DE TABACOS DE FILIPINAS V. CIR (CTA CASE NO. 4141, 23 AUG
1993; AND 4451, 17 NOV 1993)
o cannot find
ITAD BIR Ruling No. 018-90 (23 Jun 2009)
Regional or Area Headquarters and ROHQs

22(DD) & (EE), Tax Code
(DD) The term 'regional or area headquarters' shall mean a branch
established in the Philippines by multinational companies and which
headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating center for
their affiliates, subsidiaries, or branches in the Asia-Pacific Region and
other foreign markets.
(EE) The term 'regional operating headquarters' shall mean a branch

established in the Philippines by multinational companies which are
engaged in any of the following services: general administration and
planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance
advisory services; marketing control and sales promotion; training and
personnel management; logistic services; research and development
services and product development; technical support and maintenance;
data processing and communication; and business development.
RR 11-2010 (26 Oct 2010)
(3) Nonresident Foreign Corporations

28(B) Tax, Code
GENERAL: 30% of gross income from all sources in the Philippines

Non-resident cinematographic film owner, lessor or distributor: 25% of gross
income from all sources in the Philippines
Non-resident owner or lessor of vessels chartered by Philippine nationals: 4.5%
of gross rentals, lease or charter fees from leases or charters to Filipino citizens
or corporations as approved by the Maritime Industry Authority
Non-resident owner or lessor of aircraft, machineries and other equipment:
7.5% of gross rentals or fees
Certain Incomes
o Interest on foreign loans: 20% of interest as final withholding tax
o Intercorporate dividends: 15% of cash/ property dividends received
from domestic corporation
Provided that the country in which the non-resident corporation
is domiciled, shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to 15%
It represents the difference between the regular income tax of
30% and 15% tax on dividends
o Capital gains from sale of shares of stock not traded in the Stock
Exchange
Final tax of 5% for first 100K
10% for excess of 100K
In general
CIR V. S.C. JOHNSON AND SON, INC. (25 JUN 1999)
MARUBENI CORPORATION V. CIR (14 SEP 1989) (MISSING)
N.V. REEDERIJ AMSTERDAM AND ROYAL INTEROCEAN LINES V. CIR (23 JUN 1988)
Special non-resident foreign corporations
Tax on Certain Incomes of Non-resident Foreign Corporations
Interest on foreign loans
Intercorporate dividends
28(B)(5)(b), Tax Code, as amended by RA 9337
CIR V. PROCTER & GAMBLE PHILIPPINES (02 DEC 1991)

P&G Phil declared dividends to P&G USA. P&G Phil withheld
35% as tax from the dividends. Later on, P&G Phil claimed
tax refund as it erroneously paid the tax. The tax rate should
have been 15%.
SC held that 15% tax rate on dividends should be applied to
P&G USA and it can be claimed by P&G Phil as agent.
The condition in the 28(B)(5)(b) of the tax Code meant that
the USA shall allow to P&G USA a tax credit for taxes deemed
paid in the Philippines applicable against the US taxes of P&G
USA. NIRC only requires that the foreign country shall allow
the non-resident corporation a deemed paid tax credit in an
amount equivalent to 20% (15% now) waived by the Philippines.
Further, there was a tax treaty between US and Philippines that
warranted 15%.
INTERPUBLIC GROUP OF COMPANIES V. CIR (CTA CASE NO. 7796, 21 FEB

2011)
Petitioner is a non-resident corporation based in Delaware,
USA. It owns shares of stock in McCann, a domestic corporation.
McCann declared cash dividends. McCann withheld 35% of
petitioners dividends and remitted it to the BIR.
Later on, petitioner established RHQ in the Philippines and it
was converted to ROHQ after.
Petitioner is claiming that the tax rate should be only 15%.
Petition was granted based on P&G case.
BIR Ruling DA-145-07 (08 Mar 2007)

SMIC is inquiring about the tax on cash dividends to Asia
Opportunities, a British Virgin Island corporation.
BIR held that if the country where the non-resident foreign
corporation is domiciled allows a credit against the tax due from
the non-resident corporation taxes deemed to have been paid
in the Philippines in an amount equivalent to 20% of such
dividend, or does not subject such dividend to taxation, then
dividend paid to such non-resident foreign corporation are
taxed only at the rate of 15%.
British Virgin Islands does not impose any tax on dividend
received from foreign sources. Thus, Asia Opportunities tax rate
is 15%.
Income covered by Tax Treaties

MIRANT (PHILIPPINES OPERATIONS CORPORATION V. CIR (CTA EB CASE NO.
40, 07 JUN 2005 AS AFFIRMED BY SC MINUTE RESOLUTION, 18 FEB 2008)
Petitioner is a domestic corporation based in Quezon. It is

engaged in energy business.
Petitioner withheld final taxes from VHL Enterprises and
WES World-wide Education Service, both foreign
corporations based in USA and UK respectively. Petitioner
claimed that it erroneously withheld taxes instead of 5%
expanded/ creditable withholding taxes.
There is a tax treat with US and UK that would make such
corporations treated as resident foreign corporation and be
subject to the 5% creditable withholding tax.
Petitioner contended that the 2 corporations created a
permanent establishment although there are no fixed places
of business because of the series of transactions in more
than 183 days in 12 month period.
The treaty requires that the corporation have a permanent
establishment. It includes rendition of services for more
than 183 days. Profits will only be taxable if there is
permanent establishment.
Court held that the corporations have permanent
establishment based on the services rendered.
Creation of permanent establishment does not automatically
convert the status to resident foreign corporations. Still, the
2 corporation are taxed as non-resident foreign corporations
pursuant to 28(B) of the Tax Code.
32% rate was held but Tax Code was amended to make it
30% now.
RMO 072-10 (25 Aug 2010)

Guidelines on the Processing of Tax Treaty Relief Applications
(TTRA) Pursuant to Existing Philippine Treaties
Documentary guidelines
To be filed at International Tax Affairs Division (ITAD).
Filing should always be made before the transaction.
Failure to file will have the effect of disqualifying the TTRA
under this RMO.
ITAD Ruling 102-02 (28 May 2002)

Energizer, a domestic corporation, entered into a contract with
Eveready, a non-resident corporation based in US. Energizer will
pay royalties to Eveready.
Most-favoured nation - The tax imposed on royalties derived
by a resident of the US from sources within the Philippines shall
be the lowest rate of Philippine tax that may be imposed an
royalties of the same kind paid under similar circumstances to a
resident of a third State.
The royalty payments are subject to 15% preferential tax rate
based on the gross amount pursuant to the most favoured
nation provision of the RP-US tax treaty in relation to the RP-
Netherlands tax treaty.
Withholding Tax
22(K), Tax Code
(K) The term 'withholding agent' means any person required to deduct and
withhold any tax under the provisions of Section 57.
Final Withholding Tax at Source

57(A), Tax Code
o Withholding of Final Tax on Certain Incomes. Subject to rules and
regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D),
25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a),
28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation and/or person and paid in
the same manner and subject to the same conditions as provided in Section
58 of this Code.
o 24(B)(1),
o 24(B)(2),
o 24(C),
o 24(D)(1);
o 25(A)(2),
o 25(A)(3),
o 25(B),
o 25(C),
o 25(D),
o 25(E);
o 27(D)(1),
o 27(D)(2),
o 27(D)(3),
o 27(D)(5);
o 28(A)(4),
o 28(A)(5),
o 28(A)(7)(a),
o 28(A)(7)(b),
o 28(A)(7)(c),
o 28(B)(1),
o 28(B)(2),
o 28(B)(3),
o 28(B)(4),
o 28(B)(5)(a),
o 28(B)(5)(b),
o 28(B)(5)(c);
o 33; and
o 282
CIR VS. SMART COMMUNICATION , INC. (25 AUG 2010)
o Smart entered into 3 agreements for Programming and Consultancy

Services with Prism, a non-resident corporation based in Malaysia.
o Smart withheld $137K as 25% royalty tax under RP-Malaysia Tax Treaty
thinking that it constitutes royalties.
o This was later claimed for refund through ITAD.
o Issue: whether Smart has the right to file the claim; if there is, whether
the payments to Prism constitutes business profits or royalties
o SC held that withholding agent may file a claim for refund. Pursuant to
204(c) and 209 of Tax Code, the person entitled to claim a tax refund is
the taxpayer. However, in case the taxpayer does not file a claim for
refunds, the withholding agent may file the claim. The withholding
agent will also be liable for deficiencies should the amount withheld be
less than required under the law.
o Withholding agent is agent of both the government and taxpayer. No
relationship is required.
o The 2 payments constituted business profits and 1 royalty. SDM (Service
Download Manager) is an intellectual property right and subject to 25%
withholding tax. The CM (Channel Manager) and SIM Applications
agreements must have refund.
2.57. (A) & 25.7.1., RR 2-98 (17 Apr 1998)

o IRR of Tax Code relative to the withholding on income subject to expanded
withholding tax and final withholding tax, withholding of income tax on
compensation, withholding of creditable Vat and other percentage taxes.
o 2.57. (A): Final Withholding Tax. Under the final withholding tax system
the amount of income tax withheld by the withholding agent is constituted
as a full and final payment of the income tax due from the payee on the said
income. The liability for payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to withhold the tax or in case
of under withholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax
return for the particular income.
o The finality of the withholding tax is limited only to the payee's income tax
liability on the particular income. It does not extend to the payee's other tax
liability on said income, such as when the said income is further subject to a
percentage tax. For example, if a bank receives income subject to final
withholding tax, the same shall be subject to a percentage tax.
o 2.57.1 Income Payments Subject to Final Withholding Tax. The following
forms of income shall be subject to final withholding tax at the rates herein
specified:
(A) Income payments to a citizen or to a resident alien individual;
(1)Interest from any peso bank deposit, and yield or any other
monetary benefit from deposit substitutes and from trust funds
and similar arrangements; royalties (except on books as well as
other literary works and musical compositions), prizes (except
prizes amounting to ten thousand pesos (P10,000.00) or less
which shall be subject to tax under Sec. 24 (A) of the Code) and
other winnings (except Philippine Charity Sweepstakes winnings
and lotto winnings) derived from sources within the Philippines
Twenty percent (20%).
(2)Royalties on books, as well as other literary works and

musical compositions Ten percent (10%).
(3)Interest income received by a resident individual taxpayer

from a depository bank under the Foreign Currency Deposit
System Seven and one-half percent (7.5%).
(4)Interest income from long-term deposit or investment in the

form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas which was pre-terminated by
the holder before the fifth (5th) year at the rates herein
prescribed to be deducted and withheld from the proceeds
thereof based on the length of time that the instrument was
held by the taxpayer
Holding Period Rate
Four (4) years to less than five (5) years 5%
Three (3) years to less than four (4) years 12%
Less than three (3) years 20%
(5) Cash and/or property dividends actually or constructively

received from a domestic corporation, joint stock company,
insurance or mutual fund companies or on the share of an
individual partner in the distributable net income after tax of a
partnership (except general professional partnership) or on the
share of an individual in the net income after tax of an
association, a joint account or a joint venture or consortium of
which he is a member or a co-venturer.
6% - beginning January 1, 1998
8% - beginning January 1, 1999 and
10% - beginning January 1, 2000 and thereafter
The tax on cash and property dividends shall only be

imposed on dividends which are declared from profits
of corporations made after December 31, 1997.
(6) On capital gains presumed to have been realized from the

sale, exchange or other disposition of real property located in
the Philippines, classified as capital assets, including pacto de
retro sales and other forms of conditional sales based on the
gross selling price or fair market value as determined in
accordance with Sec. 6(E) of the Code (i.e. the authority of the
Commissioner to prescribe the real property values), whichever
is higher Six percent (6%).
In case of dispositions of real property made by individuals to

the government or any of its political subdivisions or agencies or
to government-owned or controlled corporations, the tax to be
imposed shall be determined either under Section 24(A) of the
Code for normal income tax for individual citizens and residents
or under Section 24(D)(1) of the Code for the final tax on capital
gains from sale of property at six percent (6%), at the option of
the taxpayer.
(B) Income Payment to Non-resident Aliens Engaged in Trade or

Business in the Philippines. The following forms of income derived
from sources within the Philippines shall be subject to final withholding
tax in the hands of a non-resident alien individual engaged in trade or
business within the Philippines, based on the gross amount thereof and
at the rates prescribed therefor:
(1) On Certain Passive Income A tax of twenty (20%) percent
is hereby imposed on certain passive income received from all
sources within the Philippines.
(a) Cash and/or property dividend from a domestic

corporation or from a joint stock company, or from an
insurance or mutual fund company or from a regional
operating headquarter of a multinational company;
(b) Share in the distributable net income after tax of a

partnership (except general professional partnership) of
which he is a partner, or share in the net income after
tax of an association, a joint account, or a joint venture
of which he is a member or a co-venturer;
(c) Interests from any currency bank deposit and yield

or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements;
(d) Royalties (except royalties on books, as well as other

literary works and musical compositions which shall be
subject to 10% final withholding tax);
(e) Prizes (except prizes amounting to ten thousand

pesos (P10,000.00) or less subject to tax under Sec. 25
(A) (1) of the Code for the normal rates of income tax
for individuals) and other winnings (except Philippine
Charity Sweepstakes winnings and lotto winnings);
(2) Interest income derived from long-term deposit or

investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas which was pre-
terminated by the holder before the fifth (5th) year at the rates
herein prescribed to be deducted and withheld from the
proceeds thereof based on the length of time that the
instrument was held by the taxpayer
Holding Period Rate
Four (4) years to less than five (5) years 5%
Three (3) years to less than four (4) years 12%

Less than three (3) years 20%

sale exchange or other disposition of real property located in
Commissioner to prescribe zonal values), whichever is higher
Six percent (6%).

government or any of its political subdivisions or agencies or to
government-owned or controlled corporations, the tax to be
imposed shall be determined either under Section 24(A) of the
code for the normal rate of income tax for individual citizens
and residents or under Section 24(D)(1) of the Code for the final
tax on capital gains from sale of property at six percent (6%), at
the option of the taxpayer.
(C) Income Derived from All Sources Within the Philippines by a Non-
resident Alien Individual Not Engaged in Trade or Business Within the
Philippines. The following forms of income derived from all sources
within the Philippines shall be subject to a final withholding tax in the
hands of a non-resident alien individual not engaged in trade or
business within the Philippines based on the following amounts and at
the rates prescribed therefor:
(1) On the gross amount of income derived from all sources

within the Philippines by a non-resident alien individual who is
not engaged in trade or business in the Philippines as interest,
cash and/or property dividends, rents, salaries, wages,
premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual or periodic
or casual gains, profits and income and capital gains Twenty
five percent (25%).

Commissioner to prescribe the real property values), whichever
is higher Six percent (6%).

government or any of its political subdivisions or agencies or to
government-owned or controlled corporations, the tax to be
imposed shall be determined either under Sec. 24(a) of the
Code for the rates of income tax for individual citizens and
residents or under Sec. 24(D)(1) of the Code for the final tax on
capital gains from sale of property at six percent (6%), at the
option of the taxpayer.
(D) Income Derived by Alien Individuals Employed by Regional or Area

Headquarters and Regional Operating Headquarters of Multinational
Companies. A final withholding tax equivalent to fifteen percent
(15%) shall be withheld by the withholding agent from the gross income
received by every alien individual occupying managerial and technical
positions in regional or area headquarters and regional operating
headquarters and representative offices established in the Philippines
by multinational companies as salaries, wages, annuities, compensation,
remuneration, and other emoluments, such as honoraria and
allowances, except income which is subject to the fringe benefits tax ,
from such regional or area headquarters and regional operating
headquarters.
The same tax treatment shall apply to Filipinos employed and occupying
the same as those of alien employed by these multinational companies.
The term "multinational company" means a foreign firm or entity

engaged in international trade with its affiliates or subsidiaries or
branch offices in the Asia Pacific Region and other foreign markets.
(E) Income Derived by Alien Individuals Employed by Offshore Banking

Units. A final withholding tax equivalent to fifteen (15%) shall be
withheld by the withholding agent from the gross income of alien
individuals occupying managerial or technical positions in offshore
banking units established in the Philippines, as salaries, wages,
annuities, compensations, remuneration and other emoluments such as
honoraria and allowances, received from such offshore banking units.
The same tax treatment shall apply to Filipinos employed and occupying
the same positions as those of aliens who are employed by these
offshore banking units.
(F) Income of Aliens Employed by Foreign Petroleum Service Contractors
and Subcontractors. A final withholding tax equivalent to fifteen
percent (15%) shall be withheld from the gross income of an alien
individual who is a permanent resident of a foreign country but who is
employed and assigned in the Philippines by a foreign service contractor
or by a foreign service subcontractor who is engaged in petroleum
operations in the Philippines. His gross income includes salaries, wages,
annuities, compensation, remuneration and other emoluments, such as
honoraria and allowances, received from such contractor or
subcontractor.
The same tax treatment shall apply to Filipinos who are employed and
occupying the same positions as those of aliens employed by a foreign
petroleum service contractor or subcontractor.
(G) Income Payment to a Domestic Corporation. The following items

of income shall be subject to a final withholding tax in the hands of a
domestic corporation, based on the gross amount thereof and at the
rate of tax prescribed therefor:
(1) Interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust
fund and similar arrangements derived from sources within the
Philippines Twenty Percent (20%).
(2) Royalties derived from sources within the Philippines

Twenty percent (20%).
(3) Interest income derived from a depository bank under the

Expanded Foreign Currency Deposit System, otherwise known
as a Foreign Currency Deposit Unit (FCDU) Seven and one-
half percent (7.5%).
(4) Income derived by a depository bank under the Expanded

Foreign Currency Deposit System from foreign transactions with
local commercial banks including branches of foreign banks that
may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with Foreign Currency Deposit System Units
and other depository banks under the expanded foreign
currency deposit system including interest income from foreign
currency loans granted by such depository bank under the said
expanded foreign currency deposit system to residents Ten
percent (10%).
the Philippines classified as capital assets, including pacto de
accordance with Sec. 6(E) of the Code, whichever is higher Six
percent (6%).
(H) Income Payment to a Resident Foreign Corporation. The

following forms of income shall be subject to a final withholding tax in
the hands of a foreign corporation, based on the gross amount thereof
and at the rate of tax prescribed therefor:
(1) Offshore Banking Units On income derived by offshore

banking units authorized by the Bangko Sentral ng Pilipinas
(BSP) from foreign currency transactions with local commercial
banks and branches of foreign banks that may be authorized by
the BSP to transact business with offshore banking units and
other OBUs including interest income derived from foreign
currency loans granted to resident Ten percent (10%).
(2) Tax on Branch Profit Remittances On any profit remitted

by the Philippine branch of a foreign corporation to its head
office abroad based on the total profits applied or earmarked
for remittance without any deduction for the tax component
thereof except those registered with the Philippine Economic
Zones Authority (PEZA) and other companies within the special
economic zones such as Subic Bay Metropolitan Authority
(SBMA) and Clark Development Authority (CDA) Fifteen
percent (15%).
Interests, dividends, rents, royalties (including remunerations

for technical services), salaries, wages, premiums, annuities,
emoluments or other fixed or determinable annual periodic or
casual gains, profits, income and capital gains received by a
foreign corporation during each taxable year from all sources
within the Philippines shall not be considered as branch profits
unless the same are effectively connected with the conduct of
its trade or business in the Philippines.
(3) Interest on any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds
and similar arrangements and royalties derived from sources
within the Philippines Twenty percent (20%).
(4) Interest income derived from a Depository Bank under the

Expanded Foreign Currency Deposit system Seven and one-
half percent (7.5%).
(5) Income derived by a depository bank under the expanded

foreign currency deposit system from foreign currency
transactions with local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas to transact business with foreign currency deposit
system units and other depository banks under the expanded
foreign currency deposit system including interest income from
foreign currency loans granted by such depository banks under
the said expanded foreign currency deposit system to resident
Ten percent (10%).
(I) Income Derived From all Sources Within the Philippines by Non-
Resident Foreign Corporation. The following shall be subject to final
withholding tax based on the gross amount of income and at the rate of
tax prescribed therefor:
(1) In general On gross income derived from all sources

within the Philippines such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments, or other fixed or determinable annual,
periodic or casual gains, profits and income and capital gains
(except capital gains realized from sale, exchange, disposition of
shares of stock in any domestic corporation which is subject to
capital gains tax under Sec. 28(B)(5)(c) at the following rates:
34% - beginning January 1, 1998
33% - beginning January 1, 1999 and
32% - beginning January 1, 2000 and thereafter
(2) Gross income from all sources within the Philippines derived
by non-resident cinematographic film owners, lessors or
distributors Twenty five percent (25%).
(3) On the gross rentals, lease and charter fees, derived by non-
resident owner or lessor of vessels from leases or charters to
Filipino citizens or corporations as approved by the Maritime
Industry Authority Four and one-half percent (4.5%).
(4) On the gross rentals, charter and other fees derived by non-
resident lessor of aircraft, machineries and other equipment
Seven and a half percent (7.5%).
(5) Interest on foreign loans contracted on or after August 1,

1986 Twenty percent (20%).
(6) Dividends received from a domestic corporation Fifteen

percent (15%) of the cash and/or property dividends received
from a domestic corporation subject to the condition that the
country in which the nonresident foreign corporation is
domiciled (a) shall allow a credit against the tax due from the
said nonresident foreign corporation which are equivalent to
taxes deemed to have been paid in the Philippines equal to
twenty percent (20%) for 1997, nineteen percent (19%) for
1998, eighteen percent (18%) for 1999 and seventeen percent
(17%) thereafter, which represents the difference between the
regular income tax of thirty-five percent (35%) in 1997, thirty
four percent (34%) in 1998, thirty three percent (33%) in 1999,
and thirty two percent (32%) thereafter on corporations and the
fifteen percent (15%) tax on dividends as herein provided; or,
(b) does not impose any income tax on dividends received from
a domestic corporation.
(J) Fringe Benefits Granted to the Employee (Except Rank and File
Employee) . There shall be imposed a final tax of 34% beginning
January 1, 1998; 33% beginning January 1, 1999 and 32% beginning
January 1, 2000 and thereafter, on the grossed-up monetary value of
fringe benefits, granted or furnished by the employer to his employees
(except rank and file as defined in the Code). Fringe benefits however,
which are required by the nature of or necessary to the trade, business
or profession of the employer, or where such fringe benefit is for the
convenience and advantage of the employer shall not be subject to the
fringe benefits tax.
The term fringe benefit means any good, service or other benefit
furnished or granted in cash or in kind by an employer to an individual
employee (except rank and file employees) such as but not limited to,
the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent

of the difference between the market rate and actual rate
granted;
(6) Membership fees, dues and other expenses borne by

the employer for the employee in social and athletic clubs or
other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his

dependents; and
(10) Life or health insurance and other non-life insurance

premiums or similar amounts in excess of what the law allows.
Fringe benefits granted to the following employees and taxable under

Sec. 25 (B), (C), (D) and (E) shall also be subject to the fringe benefit tax
to wit:
Sec. 25(B) Non-resident alien individual not engaged in trade or

business in the Philippines.
Sec. 25(C) Alien individual employed by regional or area

headquarters and regional operating headquarters of a
multinational company, including any of its Filipino employees
employed and occupying the same position as those of its
aforesaid alien employees;
Sec. 25(D) Alien individual employed by an offshore banking

unit of a foreign bank established in the Philippines, including
any of its Filipino employees employed and occupying the same
position as those of its aforesaid alien employees;
Sec. 25(E) Alien individual employed by a foreign service

contractor and subcontractor engaged in petroleum operations
in the Philippines, including any of its Filipino employees
employed and occupying the same position as those of its
aforesaid alien employees.
The computation and the scheme for withholding the tax on

fringe benefits shall be governed by such revenue orders that
the Commissioner shall issue as guidelines and clarifications for
its proper and consistent implementation.
(K) Informer's Reward to Persons Instrumental in the Discovery of

Violations of the National Internal Revenue Code and the Discovery and
Seizure of Smuggled Goods. The following rewards shall be subject to
a final withholding tax at the rate of ten percent (10%):
(1) Those given to persons, except an internal revenue official or

employee, or other public official or employee or his relative
within the sixth degree of consanguinity, who voluntarily gives
definite and sworn information not yet in the possession of the
BIR, leading to the discovery of frauds upon the Internal
Revenue Laws or violations of any of the provisions thereof,
thereby resulting in the recovery of revenues, surcharges and
fees and/or the conviction of the guilty party and/or imposition
of any fine or penalty.
(2) Those given to an informer where the offender has offered

to compromise the violation of law committed by him and his
offer has been accepted by the Commissioner and collected
from the offender.
The amount of reward shall be equivalent to ten percent (10%)

of the revenues, surcharges or fees recovered and/or fine or
penalty imposed and collected or one million pesos
(P1,000,000.00) per case whichever is lower.
The reward shall be paid under the rules and regulations issued
by the Secretary of Finance, upon the recommendation of the
Commissioner. However, such person shall not be entitled to a
reward, should no revenue, surcharges or fees be actually
recovered or collected nor shall apply to a case already pending
or previously investigated or examined by the Commissioner or
any of his deputies or agents or examiners, or the Secretary of
Finance or any of his deputies or agents.
(3) Those given to persons instrumental in the discovery and

seizure of such smuggled goods.
The amount of reward shall be equivalent to ten percent of the
market value of the smuggled and confiscated goods or one
million pesos (P1,000,000.00) per case whichever is lower.
Creditable Withholding Tax

57(B), Tax Code
o Withholding of Creditable Tax at Source. The Secretary of Finance may, upon
the recommendation of the Commissioner, require the withholding of a tax on
the items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the rate of
not less than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the taxpayer
for the taxable year.
FILIPINAS SYNTHETIC FIBER CORPORATION VS . COURT OF APPEALS (12 OCT 1999)
o Petitioner, a domestic corporation, was assessed for deficiency in

withholding tax at source. The withholding taxes were from interest loans,
royalties and guarantee fees paid by petitioner to non-resident foreign
corporations. It claimed that the liability is at the time of accrual and not at
the time of actual payment.
o The law is silent as to when does the duty to withhold the taxes arise.It is
the right to receive income and not the actual receipt that determines when
to include the amount in gross income.
o Requisites of accrual method of accounting
o The right to receive the amount must be valid, unconditional and
enforceable
o The amount must be reasonably susceptible of accurate estimate
o There must be reasonable expectation that the amount will be paid
in due course.
o Petitioner had already deducted the interests due to the foreign
corporation as business expense for this reason, the tax is already due. The
petitioner adopted accrual method of accounting in reporting its income.
o Since petitioner has claimed it as deductions from gross income, it should
withhold the tax on interest due to foreign corporations.
2.57. (B) & 25.7.2., RR 2-98 (17 Apr 1998)
2.57. (B) Creditable Withholding Tax. Under the creditable withholding tax
system, taxes withheld on certain income payments are intended to equal or at
least approximate the tax due of the payee on said income. The income
recipient is still required to file an income tax return, as prescribed in Sec. 51
and Sec. 52 of the NIRC , as amended, to report the income and/or pay the
difference between the tax withheld and the tax due on the income. Taxes
withheld on income payments covered by the expanded withholding tax
(referred to in Sec. 2.57.2 of these regulations) and compensation income
(referred to in Sec. 2.78 also of these regulations) are creditable in nature.
25.7.2. Income Payment Subject to Creditable Withholding Tax and Rates

Prescribed Thereon. Except as herein otherwise provided, there shall be
withheld a creditable income tax at the rates herein specified for each class of
payee from the following items of income payments to persons residing in the
Philippines:
(A) Professional fees, talent fees, etc., for services rendered by

individuals On the gross professional, promotional and talent fees or
any other form of remuneration for the services of the following
individuals Ten percent (10%);
(1) Those individually engaged in the practice of professions or

callings: lawyers; certified public accountants; doctors of
medicine; architects; civil, electrical, chemical, mechanical,
structural, industrial, mining, sanitary, metallurgical and
geodetic engineers; marine surveyors; doctors of veterinary
science; dentist; professional appraisers; connoisseurs of
tobacco; actuaries; and interior decorators;
(2) Professional entertainers such as but not limited to actors

and actresses, singers and emcees;
(3) Professional athletes including basketball players, pelotaris

and jockeys;
(4) All directors involved in movies, stage, radio, television and

musical productions;
(5) Insurance agents and insurance adjusters;
(6) Management and technical consultants;
(7) Bookkeeping agents and agencies;
(8) Other recipients of talent fees;
(9) Fees of directors who are not employees of the company

paying such fees, whose duties are confined to attendance at
and participation in the meetings of the board of directors.
The amounts subject to withholding under this paragraph shall
include not only fees, but also per diems, allowances and any
other form of income payments. In the case of professional
entertainers, athletes, and all recipient of talent fees, the
amount subject to withholding tax shall also include amounts
paid to them in consideration for the use of their names or
pictures in print, broadcast, or other media or for public
appearances, for purposes of advertisements or sales
promotion.
(B) Professional fees, talent fees, etc. for services of taxable juridical
persons On the gross professional, promotional and talents fees, or
any other form of remuneration enumerated in the preceding
subparagraph for the services of taxable juridical persons Five
percent (5%).
(C) Rentals On gross rental for the continued use or possession of

real property used in business which the payor or obligor has not taken
or is not taking title, or in which he has no equity Five percent (5%).
(D) Cinematographic film rentals and other payments On gross

payments to resident individuals and corporate cinematographic film
owners, lessors or distributors Five percent (5%).
(E) Income payments to certain contractors On gross payments to the

following contractors, whether individual or corporate One percent
(1%).
(1) General engineering contractors Those whose principal

contracting business in connection with fixed works requiring
specialized engineering knowledge and skill including the
following divisions or subjects:
(a) Reclamation works;
(b) Railroads;
(c) Highways, streets and roads;
(d) Tunnels;
(e) Airports and airways;
(f) Waste reduction plants;

(g) Bridges, overpasses, underpasses and other similar
works;
(h) Pipelines and other systems for the transmission of

petroleum and other liquid or gaseous substances;
(i) Land leveling;
(j) Excavating;
(k) Trenching;
(l) Paving; and
(m) Surfacing work.
(2) General Building contractors Those whose principal

contracting business is in connection with any structure built,
for the support, shelter and enclosure of persons, animals,
chattels, or movable property of any kind, requiring in its
construction the use of more than two unrelated building trades
or crafts, or to do or superintend the whole or any part thereto.
Such structure includes sewers and sewerage disposal plants
and systems, parks, playgrounds, and other recreational works,
refineries, chemical plants and similar industrial plants requiring
specialized engineering knowledge and skills, powerhouse,
power plants and other utility plants and installation, mines and
metallurgical plants, cement and concrete works in connection
with the above-mentioned fixed works.
(3) Specialty Contractors Those whose operations pertain to

the performance of construction work requiring special skill and
whose principal contracting business involves the use of
specialized building trades or crafts. cdasia
(4) Other contractors
(a) Filling, demolition and salvage work contractors and

operators of mine drilling apparatus;
(b) Operators of dockyards;
(c) Persons engaged in the installation of water system,

and gas or electric light, heat or power;
(d) Operators of stevedoring, warehousing or
forwarding establishments;
(e) Transportation contractors which include common

carriers for the carriage of goods and merchandise of
whatever kind by land, air or water, where the gross
payments by the payor to the same payee amounts to
at least two thousand pesos (P2,000) per month,
regardless of the number of shipments during the
month ;
(f) Printers, bookbinders, lithographers and publishers

except those principally engaged in the publication or
printing of any newspaper, magazine, review or bulletin
which appears at regular intervals, with fixed prices for
subscription and sale;
(g) Messengerial, janitorial, private detective and/or

security agencies, credit and/or collection agencies and
other business agencies;
(h) Advertising agencies, exclusive of gross payments to

media;
(i) Independent producers of television, radio and stage

performances or shows;
(j) Independent producers of "jingles";
(k) Labor recruiting agencies
(l) Persons engaged in the installation of elevators,

central air conditioning units, computer machines and
other equipment and machineries and the maintenance
services thereon;
(m) Persons engaged in the sale of computer services;
(n) Persons engaged in landscaping services;
(o) Persons engaged in the collection and disposal of

garbage;
(p) TV and radio station operators on sale of TV and

radio airtime; and
(q) TV and radio blocktimers on sale of TV and radio
commercial spots.
(F) Income distribution to the beneficiaries. On income distributed to

the beneficiaries of estates and trust as determined under Sec. 60 of
the Code, except such income subject to final withholding tax and tax
exempt income Fifteen percent (15%);
(G) Income payments to certain brokers and agents. On gross

commissions of customs, insurance, real estate and commercial brokers
and fees of agents of professional entertainers Five percent (5%);
(H) Income payments to partners of general professional partnerships .

Income payments made periodically or at the end of the taxable year
by a general professional partnership to the partners, such as drawings,
advances, sharings, allowances, stipends, etc. Ten percent (10%);
(I) Professional fees paid to medical practitioners. Any amount

collected for and paid to medical practitioners by hospitals and clinics or
paid by patients to the medical practitioners through the hospital or
clinic Ten percent (10%);
(J) Gross selling price or total amount of consideration or its equivalent

paid to the seller/owner for the sale, exchange or transfer of . Real
property, other than capital assets, sold by an individual, corporation,
estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the
following schedule
Those which are exempt from a withholding
tax at source as prescribed in Sec. 2.57.5 of
these regulations Exempt
With a selling price of five hundred thousand
pesos (P500,000.00) or less 1.5%
With a selling price of more than five hundred
thousand pesos (P500,000.00) but not more
than two million pesos (P2,000,000.00) 3.0%
With selling price of more than two million pesos

(P2,000,000.00) 5.0%
A seller/transferor must show proof of registration with HLURB

or HUDCC to be considered as habitually engaged in the real
estate business.
Real property, other than capital asset, by an individual, estate,

trust, trust fund or pension fund or by a corporation who is not
habitually engaged in the real estate business Seven and one-
half percent (7.5%). LLphil
Gross selling price shall mean the consideration stated in the

sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended,
whichever is higher. In an exchange, the fair market value of the
property received in exchange, as determined in the Income Tax
Regulations shall be used.
Where the consideration or part thereof is payable on

installment, no withholding of tax is required to be made on the
periodic installment payments where the buyer is an individual
not engaged in trade or business. In such a case, the applicable
rate of tax based on the entire consideration shall be withheld
on the last installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether

a corporation or otherwise, the tax shall be deducted and
withheld by the buyer on every installment.
(K) Additional income payments to government personnel from

importers, shipping and airline companies, or their agents . On gross
additional payments by importers, shipping and airline companies, or
their agents to government personnel for overtime services as
authorized by law Fifteen percent (15%);
For this purpose, the importers, shipping and airline companies or their
agents, shall be the withholding agents of the Government;
(L) Certain income payments made by credit card companies. On the

gross amounts paid by any credit card company in the Philippines to any
business entity, whether a natural or juridical person, representing the
sales of goods/services made by the aforesaid business entity to
cardholders One half percent (1/2%);
(M) Income payments made by the top five thousand (5,000)
corporations. Income payments made by any of the top five
thousand (5,000) corporations, as determined by the Commissioner, to
their local supplier of goods One percent (1%);
(1) The term "goods" pertains to tangible personal property. It

does not include intangible personal property as well as real
property.
(2) The term "local suppliers of goods" pertains to a supplier

from whom any of the top five thousand (5,000) corporations,
as determined by the Commissioner, regularly makes its
purchases of goods. As a general rule, this term does not
include a casual purchase of goods, that is, purchases made
from non-regular suppliers and oftentimes involving single
purchases. However, a single purchase which involves one
hundred thousand pesos (P100,000.00) or more shall be subject
to a withholding tax.
(3) A corporation shall not be considered a withholding agent

for purposes of this Section, unless such corporation has been
determined and duly notified in writing by the Commissioner
that it has been selected as one of the top five thousand (5,000)
corporations.
(4) The withholding agent shall submit on a semestral basis a list

of its regular suppliers of goods to the Revenue District Office
(RDO) having jurisdiction over the withholding agent's principal
place of business on or before July 31 and January 31 of each
year.
(N) Income payments by government . Income payments, except any

single purchase which is P10,000 and below, which are made by a
government office, national or local, including government-owned or
controlled corporations, on their purchases of goods from local
suppliers One percent (1%);
A government-owned or controlled corporation which is listed as one of

the top five thousand (5,000) corporations shall withhold the tax in its
capacity as a government-owned or controlled corporation rather than
as one of the top five thousand (5,000) corporations.
RR 12-98 (14 Aug 1998)

o Amendment to Subsection (I) of 2.57.2 of RR 2-98
Sec. 2.57.2. Income payments subject to creditable withholding tax and rates
prescribed thereon. Except as herein otherwise provided, there shall be withheld
a creditable income tax at the rates herein specified for each class of payee from the
following items of income payments to persons residing in the Philippines:
xxx xxx xxx
(I) Professional fees paid to medical practitioners Any amount collected for
and paid to medical practitioners by hospitals and clinics or paid by patients to
the medical practitioners through the hospital or clinic Ten Percent (10%).
(a) It shall be the duty and responsibility of the hospital or clinic to collect from
any patient admitted by such hospital or clinic, the professional fee of the
attending medical practitioner and to withhold the tax herein prescribed. It is
the intent of these Regulations that the hospital or clinic shall, at all times,
collect the professional fee for and in behalf of the medical practitioner and to
withhold therefrom the tax herein prescribed.
(i) In general. It shall be presumed that the hospital or clinic has collected the
professional fee of the said medical practitioner and shall, accordingly, be liable
for the withholding of the tax vis-a-vis each and every patient admitted into the
hospital or clinic under the care of the said medical practitioner.
(ii) Exception. The withholding tax herein prescribed shall not apply
whenever there is proof that no professional fee has in fact been charged by the
medical practitioner and paid by his patient, Provided, however, that this fact is
shown in a sworn declaration (ANNEX A hereof) jointly executed by the medical
practitioner, the patient or his duly authorized representative, and the
administrator of the hospital or clinic. This sworn declaration shall form part of
the records of the hospital or clinic and shall constitute as part of its records and
shall be made readily available to any duly authorized Revenue Officer for tax
audit purpose, Provided, further, that the said administrator of the hospital or
clinic shall inform the Revenue District Office having jurisdiction over such
hospital or clinic about any medical practitioner who fails or refuses to execute
the sworn statement herein prescribed, within ten (10) days from the
occurrence of such event.
(b) The rules herein prescribed shall likewise apply to rendering of medical
services by medical practitioners through a duly registered professional
partnership for the practice of the medical profession provided, however, that
the rate of the withholding tax to be imposed shall be at five percent (5%),
pursuant to the provisions of Sub-section (B) of this Section ."
Return and Payment of Tax
58, Tax Code
58. Returns and Payment of Taxes Withheld at Source.
(A) Quarterly Returns and Payments of Taxes Withheld. Taxes

deducted and withheld under Section 57 by withholding agents shall be
covered by a return and paid to, except in cases where the
Commissioner otherwise permits, an authorized agent bank, Revenue
District Officer, Collection Agent, or duly authorized Treasurer of the city
or municipality where the withholding agent has his legal residence or
principal place of business, or where the withholding agent is a
corporation, where the principal office is located.
The taxes deducted and withheld by the withholding agent shall be

held as a special fund in trust for the government until paid to the
collecting officers.
The return for final withholding tax shall be filed and the payment made
within twenty-five (5) days from the close of each calendar quarter,
while the return for creditable withholding taxes shall be filed and the
payment made not later than the last day of the month following the
close of the quarter during which withholding was made: Provided, That
the Commissioner, with the approval of the Secretary of Finance, may
require these withholding agents to pay or deposit the taxes deducted
or withheld at more frequent intervals when necessary to protect the
interest of the government.
(B) Statement of Income Payments Made and Taxes Withheld. Every

withholding agent required to deduct and withhold taxes under Section
57 shall furnish each recipient, in respect to his or its receipts during the
calendar quarter or year, a written statement showing the income or
other payments made by the withholding agent during such quarter or
year, and the amount of the tax deducted and withheld therefrom,
simultaneously upon payment at the request of the payee, but not later
than the twentieth (20th) day following the close of the quarter in the
case of corporate payee, or not later than March 1 of the following year
in the case of individual payee for creditable withholding taxes. For final
withholding taxes, the statement should be given to the payee on or
before January 31 of the succeeding year.
(C) Annual Information Return. Every withholding agent required to

deduct and withhold taxes under Section 57 shall submit to the
Commissioner an annual information return containing the list of
payees and income payments, amount of taxes withheld from each
payee and such other pertinent information as may be required by the
Commissioner. In the case of final withholding taxes, the return shall be
filed on or before January 31 of the succeeding year, and for creditable
withholding taxes, not later than March 1 of the year following the year
for which the annual report is being submitted. This return, if made and
filed in accordance with the rules and regulations approved by the
Secretary of Finance, upon recommendation of the Commissioner, shall
be sufficient compliance with the requirements of Section 68 of this
Title in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any

withholding agent a reasonable extension of time to furnish and submit
the return required in this Subsection.
(D) Income of Recipient. Income upon which any creditable tax is

required to be withheld at source under Section 57 shall be included in
the return of its recipient but the excess of the amount of tax so
withheld over the tax due on his return shall be refunded to him subject
to the provisions of Section 204; if the income tax collected at source is
less than the tax due on his return, the difference shall be paid in
accordance with the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its
implementing rules and regulations are hereby considered trust funds
and shall be maintained in a separate account and not commingled with
any other funds of the withholding agent.
(E) Registration with Register of Deeds. No registration of any

document transferring real property shall be effected by the Register of
Deeds unless the Commissioner or his duly authorized representative
has certified that such transfer has been reported, and the capital gains
or creditable withholding tax, if any, has been paid: Provided, however,
That the information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, shall be annotated by the Register of Deeds in the
Transfer Certificate of Title or Condominium Certificate of Title:
Provided, further, That in cases of transfer of property to a corporation,
pursuant to a merger, consolidation or reorganization, and where the
law allows deferred recognition of income in accordance with Section
40, the information as may be required by rules and regulations to be
Commissioner, shall be annotated by the Register of Deeds at the back
of the Transfer Certificate of Title or Condominium Certificate of Title of
the real property involved: Provided, finally, That any violation of this
provision by the Register of Deeds shall be subject to the penalties
imposed under Section 269 of this Code.
Withholding on Wages
78 83, Tax Code(Withholding on Wages)
SECTION 78. Definitions. As used in this Chapter:
(A) Wages. The term 'wages' means all remuneration (other than fees
paid to a public official) for services performed by an employee for his
employer, including the cash value of all remuneration paid in any
medium other than cash, except that such term shall not include
remuneration paid:
(1) For agricultural labor paid entirely in products of the farm

where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or
business, or
(4) For services by a citizen or resident of the Philippines for a

foreign government or an international organization.
If the remuneration paid by an employer to an employee for services

performed during one-half () or more of any payroll period of not
more than thirty-one (31) consecutive days constitutes wages, all the
remuneration paid by such employer to such employee for such period
shall be deemed to be wages; but if the remuneration paid by an
employer to an employee for services performed during more than one-
half () of any such payroll period does not constitute wages, then none
of the remuneration paid by such employer to such employee for such
period shall be deemed to be wages.
(B) Payroll Period. The term 'payroll period' means a period for which
payment of wages is ordinarily made to the employee by his employer,
and the term 'miscellaneous payroll period' means a payroll period
other than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly,
semi-annual, or annual period. cdtai
(C) Employee. The term 'employee' refers to any individual who is
the recipient of wages and includes an officer, employee or elected
official of the Government of the Philippines or any political subdivision,
agency or instrumentality thereof. The term 'employee' also includes an
officer of a corporation.
(D) Employer. The term 'employer' means the person for whom an
individual performs or performed any service, of whatever nature, as
the employee of such person, except that:
(1) If the person for whom the individual performs or performed

any service does not have control of the payment of the wages
for such services, the term 'employer' (except for the purpose of
Subsection A) means the person having control of the payment
of such wages; and
(2) In the case of a person paying wages on behalf of a

nonresident alien individual, foreign partnership or foreign
corporation not engaged in trade or business within the
Philippines, the term 'employer' (except for the purpose of
Subsection A) means such person.
SECTION 79. Income Tax Collected at Source.
(A) Requirement of Withholding. Except in the case of a minimum

wage earner as defined in Section 22(HH) of this Code, every employer
making payment of wages shall deduct and withhold upon such wages a
tax determined in accordance with the rules and regulations to be
Commissioner.
(B) Tax Paid by Recipient. If the employer, in violation of the

provisions of this Chapter, fails to deduct and withhold the tax as
required under this Chapter, and thereafter the tax against which such
tax may be credited is paid, the tax so required to be deducted and
withheld shall not be collected from the employer; but this Subsection
shall in no case relieve the employer from liability for any penalty or
addition to the tax otherwise applicable in respect of such failure to
deduct and withhold.
(C) Refunds or Credits.
(1) Employer. When there has been an overpayment of tax

under this Section, refund or credit shall be made to the
employer only to the extent that the amount of such
overpayment was not deducted and withheld hereunder by the
employer.
(2) Employees. The amount deducted and withheld under

this Chapter during any calendar year shall be allowed as a
credit to the recipient of such income against the tax imposed
under Section 24(A) of this Title. Refunds and credits in cases of
excessive withholding shall be granted under rules and
regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the
taxpayer shall be returned or credited within three (3) months
from the fifteenth (15th) day of April. Refunds or credits made
after such time shall earn interest at the rate of six percent (6%)
per annum, starting after the lapse of the three-month period
to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the

Commissioner or by his duly authorized representative without
the necessity of counter-signature by the Chairman,
Commission on Audit or the latter's duly authorized
representative as an exception to the requirement prescribed
by Section 49, Chapter 8, Subtitle B, Title I of Book V of
Executive Order No. 292, otherwise known as the
Administrative Code of 1987.
(D) Personal Exemptions.
(1) In General. Unless otherwise provided by this Chapter,

the personal and additional exemptions applicable under this
Chapter shall be determined in accordance with the main
provisions of this Title.
(2) Exemption Certificates.
(a) When to File. On or before the date of

commencement of employment with an employer, the
employee shall furnish the employer with a signed
withholding exemption certificate relating to the
personal and additional exemptions to which he is
entitled.
(b) Change of Status. In case of change of status of
an employee as a result of which he would be entitled
to a lesser or greater amount of exemption, the
employee shall, within ten (10) days from such change,
file with the employer a new withholding exemption
certificate reflecting the change.
(c) Use of Certificates. The certificates filed

hereunder shall be used by the employer in the
determination of the amount of taxes to be withheld.
(d) Failure to Furnish Certificate. Where an

employee, in violation of this Chapter, either fails or
refuses to file a withholding exemption certificate, the
employer shall withhold the taxes prescribed under the
schedule for zero exemption of the withholding tax
table determined pursuant to Subsection (A) hereof.
(E) Withholding on Basis of Average Wages. The Commissioner may,

under rules and regulations promulgated by the Secretary of Finance,
authorize employers to:
(1) estimate the wages which will be paid to an employee in any

quarter of the calendar year;
(2) determine the amount to be deducted and withheld upon

each payment of wages to such employee during such quarter
as if the appropriate average of the wages so estimated
constituted the actual wages paid; and
(3) deduct and withhold upon any payment of wages to such

employee during such quarter such amount as may be required
to be deducted and withheld during such quarter without
regard to this Subsection.
(F) Husband and Wife. When a husband and wife each are recipients
of wages, whether from the same or from different employers, taxes to
be withheld shall be determined on the following bases:
(1) The husband shall be deemed the head of the family and
proper claimant of the additional exemption in respect to any
dependent children, unless he explicitly waives his right in favor
of his wife in the withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the wife in
accordance with the schedule for zero exemption of the
withholding tax table prescribed in Subsection (D)(2)(d) hereof.
(G) Nonresident Aliens. Wages paid to nonresident alien individuals

engaged in trade or business in the Philippines shall be subject to the
provisions of this Chapter.
(H) Year-end Adjustment. On or before the end of the calendar year

but prior to the payment of the compensation for the last payroll
period, the employer shall determine the tax due from each employee
on taxable compensation income for the entire taxable year in
accordance with Section 24(A). The difference between the tax due
from the employee for the entire year and the sum of taxes withheld
from January to November shall either be withheld from his salary in
December of the current calendar year or refunded to the employee not
later than January 25 of the succeeding year.
SECTION 80. Liability for Tax.
(A) Employer. The employer shall be liable for the withholding and
remittance of the correct amount of tax required to be deducted and
withheld under this Chapter. If the employer fails to withhold and remit
the correct amount of tax as required to be withheld under the
provision of this Chapter, such tax shall be collected from the employer
together with the penalties or additions to the tax otherwise applicable
in respect to such failure to withhold and remit.
(B) Employee. Where an employee fails or refuses to file the

withholding exemption certificate or willfully supplies false or
inaccurate information thereunder, the tax otherwise required to be
withheld by the employer shall be collected from him including
penalties or additions to the tax from the due date of remittance until
the date of payment. On the other hand, excess taxes withheld made by
the employer due to:
(1) failure or refusal to file the withholding exemption

certificate; or
(2) false and inaccurate information shall not be refunded to the

employee but shall be forfeited in favor of the Government.
SECTION 81. Filing of Return and Payment of Taxes Withheld. Except as the
Commissioner otherwise permits, taxes deducted and withheld by the employer
on wages of employees shall be covered by a return and paid to an authorized
agent bank, Collection Agent, or the duly authorized Treasurer of the city or
municipality where the employer has his legal residence or principal place of
business, or in case the employer is a corporation, where the principal office is
located.
The return shall be filed and the payment made within twenty-five (25) days
from the close of each calendar quarter: Provided, however, That the
Commissioner may, with the approval of the Secretary of Finance, require the
employers to pay or deposit the taxes deducted and withheld at more frequent
intervals, in cases where such requirement is deemed necessary to protect the
interest of the Government.
The taxes deducted and withheld by employers shall be held in a special fund in
trust for the Government until the same are paid to the said collecting officers.
SECTION 82. Return and Payment in Case of Government Employees. If the

employer is the Government of the Philippines or any political subdivision,
agency or instrumentality thereof, the return of the amount deducted and
withheld upon any wage shall be made by the officer or employee having
control of the payment of such wage, or by any officer or employee duly
designated for the purpose.
SECTION 83. Statements and Returns.
(A) Requirements. Every employer required to deduct and withhold a

tax shall furnish to each such employee in respect of his employment
during the calendar year, on or before January thirty-first (31st) of the
succeeding year, or if his employment is terminated before the close of
such calendar year, on the same day of which the last payment of wages
is made, a written statement confirming the wages paid by the
employer to such employee during the calendar year, and the amount
of tax deducted and withheld under this Chapter in respect of such
wages. The statement required to be furnished by this Section in
respect of any wage shall contain such other information, and shall be
furnished at such other time and in such form as the Secretary of
Finance, upon the recommendation of the Commissioner, may, by rules
and regulations, prescribe.
(B) Annual Information Returns. Every employer required to deduct

and withhold the taxes in respect of the wages of his employees shall,
on or before January thirty-first (31st) of the succeeding year, submit to
the Commissioner an annual information return containing a list of
employees, the total amount of compensation income of each
employee, the total amount of taxes withheld therefrom during the
year, accompanied by copies of the statement referred to in the
preceding paragraph, and such other information as may be deemed
necessary. This return, if made and filed in accordance with rules and
regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance
with the requirements of Section 68 of this Title in respect of such
wages.
(C) Extension of Time. The Commissioner, under such rules and

regulations as may be promulgated by the Secretary of Finance, may
grant to any employer a reasonable extension of time to furnish and
submit the statements and returns required under this Section.
2.78, RR 2-98 (17 April 1998)
SECTION 2.78. Withholding Tax on Compensation. The withholding of tax

on compensation income is a method of collecting the income tax at source
upon receipt of the income. It applies to all employed individuals whether
citizens or aliens, deriving income from compensation for services rendered in
the Philippines. The employer is constituted as the withholding agent.
SECTION 2.78.1. Withholding of Income Tax on Compensation Income.
(A) Compensation Income Defined. In general, the term

"compensation" means all remuneration for services performed by an
employee for his employer under an employer-employee relationship,
unless specifically excluded by the Code.
The name by which the remuneration for services is designated is

immaterial. Thus, salaries, wages, emoluments and honoraria,
allowances, commissions (e.g. transportation, representation,
entertainment and the like); fees including director's fees, if the director
is, at the same time, an employee of the employer/corporation; taxable
bonuses and fringe benefits except those which are subject to the fringe
benefits tax under Sec. 33 of the Code; taxable pensions and retirement
pay; and other income of a similar nature constitute compensation
income.
The basis upon which the remuneration is paid is immaterial in

determining whether the remuneration constitutes compensation.
Thus, it may be paid on the basis of piece-work, or a percentage of
profits; and may be paid hourly, daily, weekly, monthly or annually.
Remuneration for services constitutes compensation even if the
relationship of employer and employee does not exist any longer at the
time when payment is made between the person in whose employ the
services had been performed and the individual who performed them.
(1) Compensation paid in kind. Compensation may be paid in

money or in some medium other than money, as for example,
stocks, bonds or other forms of property. If services are paid for
in a medium other than money, the fair market value of the
thing taken in payment is the amount to be included as
compensation subject to withholding. If the services are
rendered at a stipulated price, in the absence of evidence to the
contrary, such price will be presumed to be the fair market
value of the remuneration received. If a corporation transfers to
its employees its own stock as remuneration for services
rendered by the employee, the amount of such remuneration is
the fair market value of the stock at the time the services were
rendered .
(2) Living quarters or meals. If a person receives a salary as

remuneration for services rendered, and in addition thereto,
living quarters or meals are provided, the value to such person
of the quarters and meals so furnished shall be added to the
remuneration paid for the purpose of determining the amount
of compensation subject to withholding. However, if living
quarters or meals are furnished to an employee for the
convenience of the employer, the value thereof need not be
included as part of compensation income.
(3) Facilities and privileges of a relatively small value.

Ordinarily, facilities and privileges (such as entertainment,
medical services, or so called "courtesy" discounts on
purchases), furnished or offered by an employer to his
employees generally, are not considered as compensation
subject to withholding if such facilities or privileges are of
relatively small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill,
contentment, or efficiency of his employees.
Where compensation is paid in property other than money, the

employer shall make necessary arrangements to ensure that the
amount of the tax required to be withheld is available for
payment to the Commissioner.
(4) Tips and gratuities. Tips or gratuities paid directly to an
employee by a customer of the employer which are not
accounted for by the employee to the employer are considered
as taxable income but not subject to withholding.
(5) Pensions, retirement and separation pay. Pensions,

retirement and separation pay constitute compensation subject
to withholding, except those provided under Subsection B of
this section.
(6) Fixed or variable transportation, representation and other

allowances
(a) IN GENERAL, fixed or variable transportation,

representation and other allowances which are received
by a public officer or employee or officer or employee
of a private entity, in addition to the regular
compensation fixed for his position or office, is
compensation subject to withholding.
(b) Any amount paid specifically, either as advances or

reimbursements for travelling, representation and other
bonafide ordinary and necessary expenses incurred or
reasonably expected to be incurred by the employee in
the performance of his duties are not compensation
subject to withholding, if the following conditions are
satisfied:
(i) It is for ordinary and necessary travelling and

representation or entertainment expenses paid
or incurred by the employee in the pursuit of
the trade, business or profession; and
(ii) The employee is required to

account/liquidate for the foregoing expenses in
accordance with the specific requirements of
substantiation for each category of expenses
pursuant to Sec. 34 of the Code. The excess of
actual expenses over advances made shall
constitute taxable income if such amount is not
returned to the employer. Reasonable amounts
of reimbursements/advances for travelling and
entertainment expenses which are pre-
computed on a daily basis and are paid to an
employee while he is on an assignment or duty
need not be subject to the requirement of
substantiation and to withholding.
(7) Vacation and sick leave allowances. Amounts of

"vacation allowances or sick leave credits" which are paid to an
employee constitute compensation. Thus, the salary of an
employee on vacation or on sick leave, which are paid
notwithstanding his absence from work, constitutes
compensation. However, the monetized value of unutilized
vacation leave credits of ten (10) days or less which were paid
to the employee during the year are not subject to income tax
and to the withholding tax .
(8) Deductions made by employer from compensation of

employee. Any amount which is required by law to be
deducted by the employer from the compensation of an
employee including the withheld tax is considered as part of the
employee's compensation and is deemed to be paid to the
employee as compensation at the time the deduction is made.
(9) Remuneration for services as employee of a nonresident

alien individual or foreign entity. The term "compensation"
includes remuneration for services performed by an employee
of a nonresident alien individual, foreign partnership or foreign
corporation, whether or not such alien individual or foreign
entity is engaged in trade or business within the Philippines. Any
person paying compensation on behalf of a non-resident alien
individual, foreign partnership, or foreign corporation which is
not engaged in trade or business within the Philippines is
subject to all provisions of law and regulations applicable to an
employer.
(10) Compensation for services performed outside the

Philippines. Remuneration for services performed outside
the Philippines by a resident citizen for a domestic or a resident
foreign corporation or partnership, or for a non-resident
corporation or partnership, or for a non-resident individual not
engaged in trade or business in the Philippines shall be treated
as compensation which is subject to tax.
A non-resident citizen as defined in these regulations is taxable

only on income derived from sources within the Philippines. In
general, the situs of the income whether within or without the
Philippines, is determined by the place where the service is
rendered.
(B) Exemptions from withholding tax on compensation. The

following income payments are exempted from the requirement of
withholding tax on compensation:
(1) Remunerations received as an incident of employment, as

follows:
(a) Retirement benefits received under Republic Act

under 7641 and those received by officials and
employees of private firms, whether individual or
corporate, under a reasonable private benefit plan
maintained by the employer which meet the following
requirements:
(i) The plan must be reasonable;
(ii) The benefit plan must be approved by the

Bureau;
(iii) The retiring official or employee must have

been in the service of the same employer for at
least ten (10) years and is not less than fifty (50)
years of age at the time of retirement; and
(iv) The retiring official or employee should not

have previously availed of the privilege under
the retirement benefit plan of the same or
another employer.
(b) Any amount received by an official or employee or

by his heirs from the employer due to death, sickness or
other physical disability or for any cause beyond the
control of the said official or employee, such as
retrenchment, redundancy, or cessation of business.
The phrase "for any cause beyond the control of the

said official or employee" connotes involuntariness on
the part of the official or employee. The separation
from the service of the official or employee must not be
asked for or initiated by him. The separation was not of
his own making. Whether or not the separation is
beyond the control of the official or employee, being
essentially a question of fact, shall be determined on
the basis of prevailing facts and circumstances. It shall
be duly established by the employer by competent
evidence which should be attached to the monthly
return for the period in which the amount paid due to
the involuntary separation was made.
Amounts received by reason of involuntary separation

remain exempt from income tax even if the official or
the employee, at the time of separation, had rendered
less than ten (10) years of service and/or is below fifty
(50) years of age.
Any payment made by an employer to an employee on

account of dismissal, constitutes compensation
regardless of whether the employer is legally bound by
contract, statute, or otherwise, to make such payment.
(c) Social security benefits, retirement gratuities,

pensions and other similar benefits received by
residents or non-resident citizens of the Philippines or
aliens who come to reside permanently in the
Philippines from foreign government agencies and
other institutions private or public;
(d) Payments of benefits due or to become due to any

person residing in the Philippines under the law of the
United States administered by the United States
Veterans Administration;
(e) Payments of benefits made under the Social Security

System Act of 1954 as amended ; and
(f) Benefits received from the GSIS Act of 1937, as

amended , and the retirement gratuity received by
government officials and employees.
(2) Remuneration paid for agricultural labor
(a) Remuneration for services which constitute

agricultural labor and paid entirely in products of the
farm where the labor is performed is not subject to
withholding. In general, however, the term,
"agricultural labor" does not include services performed
in connection with forestry, lumbering or landscaping.
(b) Remuneration paid entirely in products of the farm

where the labor is performed by an employee of any
person in connection with any of the following activities
is excepted as remuneration for agricultural labor:
(i) The cultivation of soil;
(ii) The raising, shearing, feeding, caring for,

training, or management of livestock, bees,
poultry, or wildlife; or
(iii) The raising or harvesting of any other

agricultural or horticultural commodity. The
term "farm" as used in this subsection includes,
but is not limited to stock, dairy, poultry, fruits
and truck farms, plantations, ranches, nurseries
ranges, orchards, and such greenhouse and
other similar structures as are used primarily for
the raising of agricultural or horticultural
commodities.
(c) The remuneration paid entirely in products of the

farm where labor is performed for the following
services in the employ of the owner or tenant or other
operator of one or more farms is not considered as
remuneration for agricultural labor, provided the major
part of such services is performed on a farm:
(i) Services performed in connection with the

operation, management, conservation,
improvement, or maintenance of any such
farms or its tools or equipments; or
(ii) Services performed in salvaging timber,

or clearing land brush and other debris left by a
hurricane or typhoon.
The services described in (i) above may include for

example, services performed by carpenters, painters,
mechanics, farm supervisors, irrigation engineers,
bookkeepers, and other skilled or semi-skilled workers,
which contribute in any way to the conduct of the farm
or farms, as such, operated by the person employing
them, as distinguished from any other enterprise in
which such person may be engaged. Since the services
described in this paragraph must be performed in the
employ of the owner or tenant or other operator of the
farm, the exception does not extend to remuneration
paid for services performed by employees of a
commercial painting concern, for example, which
contracts with a farmer to renovate his farm properties.
(d) Remuneration paid entirely in products of the farm

where labor is performed by an employee in the employ
of any person in connection with any of the following
operations is not considered as remuneration for
agricultural labor without regard to the place where
such services are performed:
(i) The making of copra, stripping of abaca, etc.;
(ii) The hatching of poultry;
(ii) The raising of fish;
(iv) The operation or maintenance of ditches,

canals, reservoirs, or waterways used
exclusively for supplying or storing water for
farming purposes; and
(v) The production or harvesting of crude gum

from a living tree or the processing of such
crude gum into gum spirits or turpentine and
gum resin, provided such processing is carried
on by the original producer of such crude gum.
(e) Remuneration paid entirely in products of the farm

where labor is performed by an employee in the employ
of a farmer or a farmer's cooperative, organization or
group in the handling, planting, drying, packing,
packaging, processing, freezing, grading, storing or
delivering to storage or to market or to carrier for
transportation to market, of any agricultural or
horticultural commodity, produced by such farmer or
farmer-members of such organization or group, is
excepted as remuneration for agricultural labor.
Services performed by employees of such farmer or
farmer's organization or group in handling, planting,
drying, packaging, processing, freezing, grading, storing,
or delivering to storage or to market or to carrier for
transportation to market of commodities produced by
persons other than such farmer or members of such
farmer's organization or group are not performed "as an
incident to ordinary farming operation".
All payments made in cash or other forms other than

products of the farm where labor is performed, for
services constituting agricultural labor as explained
above, are not within the exception.
(3) Remuneration for domestic services. Remuneration paid

for services of a household nature performed by an employee in
or about the private home of the person by whom he is
employed is not subject to withholding. However, the services
of household personnel furnished to an employee (except rank
and file employees) by an employer shall be subject to the
fringe benefits tax pursuant to Sec. 33 of the Code, as
amended.
A private home is the fixed place of abode of an individual or

family. If the home is utilized primarily for the purpose of
supplying board or lodging to the public as a business
enterprise, it ceases to be a private home and remuneration
paid for services performed therein is not exempted.
In general, services of a household nature in or about a private

home include services rendered by cooks, maids, butlers, valets,
laundresses, gardeners, chauffeurs of automobiles for family
use.
The remuneration paid for the services above enumerated

which are performed in or about rooming or lodging houses,
boarding houses, clubs, hotels, hospitals or commercial offices
or establishments is considered as compensation;
Remuneration paid for services performed as a private

secretary, even if they are performed in the employer's home is
considered as compensation;
(4) Remuneration for casual labor not in the course of an
employer's trade or business. The term "casual labor"
includes labor which is occasional, incidental or regular. The
expression "not in the course of the employer's trade or
business" includes labor that does not promote or advance the
trade or business of the employer.
Thus, any remuneration paid for labor which is occasional,

incidental or irregular, and does not promote or advance the
employer's trade or business, is not considered as
compensation. cdasia
EXAMPLE: A's business is that of operating a sawmill. He

employs B, a carpenter, at an hourly wage to repair his home.
B's work is irregular and he spends, the greater part of two days
in completing the work. Since B's labor is casual and is not in the
course of A's business, the remuneration paid for such services
is exempted.
Any remuneration paid for casual labor, that is, labor which is
occasional, incidental or irregular, but which is rendered in the
course of the employer's trade or business, is considered as
compensation.
EXAMPLE: E is engaged in the business of operating a

department store. He employs additional clerks for a short
period. While the services of the clerks may be casual, they are
rendered in the course of the employer's trade or business and
therefore the remuneration paid for such services is considered
as compensation.
Any remuneration paid for casual labor performed for a

corporation is considered as compensation;
(5) Compensation for services by a citizen or resident of the

Philippines for a foreign government or an international
organization. Remuneration paid for services performed as
an employee of a foreign government or an international
organization is exempted. The exemption includes not only
remuneration paid for services performed by ambassadors,
ministers and other diplomatic officers and employees but also
remuneration paid for services performed as consular or other
officer or employee of a foreign government or as a non-
diplomatic representative of such government.
(6) Damages. Actual, moral, exemplary and nominal damages
received by an employee or his heirs pursuant to a final
judgment or compromise agreement arising out of or related to
an employer-employee relationship.
(7) Life Insurance. The proceeds of life insurance policies paid

to the heirs or beneficiaries upon the death of the insured,
whether in a single sum or otherwise, provided however, that
interest payments agreed under the policy for the amounts
which are held by the insured under such an agreement shall be
included in the gross income.
(8) Amount received by the insured as a return of premium.

The amount received by the insured, as a return of premium or
premiums paid by him under life insurance, endowment, or
annuity contracts either during the term or at the maturity of
the term mentioned in the contract or upon surrender of the
contract.
(9) Compensation for injuries or sickness. Amounts received

through Accident or Health Insurance or under Workmen's
Compensation Acts, as compensation for personal injuries or
sickness, plus the amount of any damages received whether by
suit or agreement on account of such injuries or sickness.
(10) Income exempt under treaty. Income of any kind to the

extent required by any treaty obligation binding upon the
Government of the Philippines.
(11) Thirteenth (13th ) month pay and other benefits.
(a) Thirteenth (13th) month pay equivalent to the

mandatory one (1) month basic salary of officials and
employees of the government, (whether national or
local), including government-owned or controlled
corporations, and or private offices received after the
twelfth (12th) month pay; and
(b) Other benefits such as Christmas bonus, productivity

incentive bonus, loyalty award, gifts in cash or in kind
and other benefits of similar nature actually received by
officials and employees of both government and private
offices.
The above stated exclusions (a) and (b) shall cover
benefits paid or accrued during the year provided that
the total amount shall not exceed thirty thousand pesos
(P30,000.00) which may be increased through rules and
regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, after
considering, among others, the effect on the same of
the inflation rate at the end of the taxable year.
(12) GSIS, SSS, Medicare and other contributions. GSIS, SSS,

Medicare and Pag-Ibig contributions, and union dues of
individual employees.
SECTION 2.78.2. Payroll Period . The term "payroll period" means the period
of services for which a payment of compensation is ordinarily made to an
employee by his employer. It is immaterial that the compensation is not always
paid at regular intervals.
EXAMPLE: if an employer ordinarily pays the weekly wages of his employees at

the end of the week, but if for some reason a particular employee receives
payment of his salaries for the past week in the middle of the current week and
receives the remainder at the end of the same week, the payroll period is still
the calendar week; or if, instead, the employee is sent on a three (3)-week trip
by his employer and receives at the end of the trip a single compensation
payment for three (3)-week services, the payroll period is still the calendar
week, and the compensation payment shall be treated as though it were three
(3) separate weekly compensation payments. LLphil
For the purpose of determining the tax, an employee can have but one payroll
period with respect to the compensation paid by any one employer. Thus, if an
employee is paid a regular compensation for the weekly payroll and in addition
thereto is paid supplemental compensation (for example taxable bonuses)
determined with respect to a different period, the payroll period is the weekly
payroll period.
SECTION 2.78.3. Employee . The term "employee" is an individual performing

services under an employer-employee relationship. The term covers all
employees, including officers and employees, whether elected or appointed, of
the Government of the Philippines, or any political subdivision thereof or any
agency or instrumentality.
In general, the relationship of the employer and employee exists when the
person for whom services were performed has the right to control and direct
the individual who performs the services, not only as to the result to be
accomplished by the work but also as to the details and means by which the
result is accomplished. An employee is subject to the will and control of the
employer not only as to what shall be done, but how it shall be done. In this
connection, it is not necessary that the employer actually directs or controls the
manner in which the services are performed. It is sufficient that he has the right
to do so.
The right to dismiss an employee is also an important factor indicating that the
person possessing that right is an employer. Other factors or characteristics of
an employer, which may not be necessarily present in every case, are furnishing
the tools and furnishing of a place to work, to the individual who performs the
services. In general, an individual is not considered an employee if he is subject
to the control or direction of another merely on to the result to be
accomplished by the work, and not on to the means and methods for
accomplishing the result.
In general, individuals who follow an independent trade, business, or

profession, in which they offer their services to the public, are not employees.
The measurement, method or designation of compensation is also immaterial if

the relationship of employer and employee in fact exists.
No distinction is made between classes or grades of employees. Thus

superintendents, managers, and others belonging to similar levels are
employees. An officer of a corporation is an employee of the corporation. An
individual, performing services for a corporation, both as an officer and director,
is an employee subject to withholding on compensation, including director's
fees.
SECTION 2.78.4. Employer. The term employer means any person for whom
an individual performs or performed any service, of whatever nature, under an
employer-employee relationship. It is not necessary that the services be
continuing at the time the wages are paid in order that the status of employer
may exist. Thus for purposes of withholding, a person for whom an individual
has performed past services and from whom he is still receiving compensation is
an "employee".
(A) Person for whom the services are or were performed does not
have control. The term "employer" also refers to the person having
control of the payment of the compensation in cases where the services
are or were performed for a person who does not exercise such control.
For example, where compensation, such as certain types of pensions or
retirement pay, are paid by a trust and the person for whom the
services were performed has no control over the payment of such
compensation, the trust is deemed to be the "employer".
(B) Person paying compensation on behalf of a nonresident. The

term "employer" also means any person paying compensation on behalf
of a non-resident alien individual, foreign partnership, or foreign
corporation, who is not engaged in trade or business within the
Philippines.
It is the responsibility of the employer to withhold, pay, or refund the

tax and furnish the statements required under these Regulations. The
term "employer" as defined in (A) and (B) above is intended to
determine who is the withholding agent.
As a matter of business administration, certain mechanical details of the

withholding process may be handled by representatives of the
employer. Thus, in the case of a corporate employer with branch
offices, the branch manager or other representative may actually, as a
matter of internal administration, withhold the tax or prepare the
statements required under the law. Nevertheless, the legal
responsibility for withholding, paying and returning the tax and
furnishing such statements rests with the corporate employer.
An employer may be an individual, a corporation, a partnership, a trust,

an estate, a joint-stock company, an association, or a syndicate, group,
pool, joint venture, or other unincorporated organization, group or
entity. A trust or estate, rather than the fiduciary acting for or on behalf
of the trust or estate, is generally the employer.
The term "employer" embraces not only an individual and an

organization engaged in trade or business, but it also includes an
organization exempt from income tax, such as charitable and religious
organizations, clubs, social organizations and societes, as well as the
Government of the Philippines, including its agencies, instrumentalities,
and political subdivisions .
(C) Compensation paid on behalf of two or more employers. If a

payment of compensation is made to an employee by an employer
through an agent, fiduciary, or other person who has the control,
receipt, custody, or disposal of, or pays the compensation payable by
another employer to such employee, the amount of tax required to be
withheld on each compensation payment made through such agent,
fiduciary, or person shall, whether the compensation is paid separately
on behalf of each employer or paid in lump-sum on behalf of all such
employers, be determined based on the aggregate amount of such
compensation payment or payments in the same manner as if such
aggregate amount had been paid by one employer. Hence, the tax shall
be determined based on the aggregate amount of the compensation
paid.
In any such case, each employer shall be liable for the return and
payment of a pro-rata portion of the tax so determined in accordance
with the ratio of the amount contributed by each employer relative to
the aggregate of such compensation.
A fiduciary, agent, or other person acting for two or more employers

may be authorized to withhold the tax under these regulations with
respect to the wages of the employees of such employers. Such
fiduciary, agent, or other person may also be authorized to make and
file returns of the tax withheld at source on such compensation and to
furnish the receipts required under these Regulations. Application for
the authorization to perform such act should be addressed to the
Commissioner or his duly authorized representative. If such authority is
granted by the Commissioner, all provisions of the law (including
penalties) and regulations prescribed in pursuance of the law applicable
in respect of an employer for whom such fiduciary, agent or other
person acts shall remain subject to all provisions of law (including
penalties) and regulations prescribed in pursuance of the law applicable
in respect of employers.
RR 1-2006 (29 Dec 2005)

o Amendments to Sections 2.78.1(B), Section 2.79(A) and (F), 2.83.4(C) and 2.83.5
of Revenue Regulations No. 2-98, as Amended
o SECTION 2.78.1. Withholding of Income Tax on Compensation Income.
xxx xxx xxx
(B) Exemptions from withholding tax on compensation. The following

income payments are exempted from the requirement of withholding tax on
compensation:
xxx xxx xxx
(13) COMPENSATION INCOME OF INDIVIDUALS THAT DO NOT EXCEED

THE STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS
(PHP5,000.00) PER MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A
YEAR), WHICHEVER IS HIGHER."
(14) COMPENSATION INCOME OF EMPLOYEES OF THE GOVERNMENT
OF THE PHILIPPINES, OR ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES
OR INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3."
o SEC. 2.79. Income Tax Collected at Source on Compensation Income.
(A) Requirement of Withholding. Every employer must withhold from

compensations paid, an amount computed in accordance with these
regulations. PROVIDED, THAT COMPENSATION INCOME OF (1) INDIVIDUALS
THAT DO NOT EXCEED THE STATUTORY MINIMUM WAGE OR FIVE THOUSAND
PESOS (PHP5,000.00) PER MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A
YEAR), WHICHEVER IS HIGHER, AND (2) EMPLOYEES OF THE GOVERNMENT OF
THE PHILIPPINES, OR ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES OR
INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3, SHALL NOT BE SUBJECT TO
WITHHOLDING TAX.
THE AFOREMENTIONED INDIVIDUALS WHOSE COMPENSATION INCOME IS NOT

SUBJECT TO WITHHOLDING TAX SHALL REMAIN LIABLE FOR INCOME TAXES AND
SHALL CONTINUE TO FILE THEIR ANNUAL INCOME TAX RETURNS AND PAY THE
INCOME TAXES DUE THEREON, IF ANY, NOT LATER THAN APRIL 15 OF THE YEAR
IMMEDIATELY FOLLOWING THE TAXABLE YEAR.
xxx xxx xxx
(F) Requirement for Deductibility. The provisions of Sec. 2.58.5 of these

Regulations shall apply. PROVIDED, THAT COMPENSATION INCOME WHERE NO
INCOME TAXES WERE WITHHELD PURSUANT TO SECTION 2.79(A) OF THESE
REGULATIONS, SHALL BE ALLOWED AS A DEDUCTION FROM AN EMPLOYER'S
GROSS INCOME WHEN THE REQUIRED EMPLOYEES WITHHOLDING STATEMENT
(BIR FORM NO. 2316) HAVE BEEN ISSUED TO SUBJECT EMPLOYEES IN
ACCORDANCE WITH SECTION 2.83.1 OF RR 2-98. PROVIDED, FURTHER, THAT
THE ALPHABETICAL LIST OF THE SUBJECT EMPLOYEES SHALL BE SUBMITTED
UNDER SCHEDULE 7.2 OF BIR FORM NO. 1604-CF IN ACCORDANCE WITH
SECTION 2.83.2 OF RR 2-98.
o SEC. 2.83.4. Substituted Filing of Income Tax Returns by Employees Receiving

Purely Compensation Income. . . . .
xxx xxx xxx
The following individuals, however, are not qualified for substituted filing and
therefore, still required to file BIR Form No. 1700 in accordance with existing
regulations:
xxx xxx xxx

"(C) EMPLOYEES WHOSE GROSS COMPENSATION INCOME DO NOT
EXCEED THE STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS
(PHP5,000.00) PER MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A
YEAR), WHICHEVER IS HIGHER, INCLUDING EMPLOYEES OF THE
GOVERNMENT OF THE PHILIPPINES, OR ANY OF ITS POLITICAL
SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES, WITH SALARY
GRADES 1 TO 3.
o SEC. 2.83.5. Registration as Withholding Agent. Every person who makes

payment or expects to make payment of compensation in AN AMOUNT
EXCEEDING THE STATUTORY MINIMUM WAGE OR SIXTY THOUSAND PESOS
(P60,000.00) A YEAR (FIVE THOUSAND PESOS [PHP5,000.00] MONTHLY),
WHICHEVER IS HIGHER, to any single employee shall register by filing in
duplicate, with the Revenue District Office (RDO) of the City or Municipality
where his legal residence or place of business is located, an Application for
Registration as a withholding agent using the form prescribed by the Bureau not
later than ten (10) days after becoming an employer.
RMC 39-2012 (03 Aug 2012)

o Withholding Tax on Backwages, Allowances, and Benefits Received by
Employees through garnishments of Debts or Credits Pursuant to a Labor
Dispute Award
o Employers and those in control of credit must withhold the award as this forms
part of the remuneration of the employee subject to withholding tax.
Withholding Tax by Government Agencies

25.7.2. (N), RR 2-98 (17 Apr 1998)
o See CWT above
Special Rules
(1) Minimum Corporate Income Tax
27 (E), and 28 (A)(2), Tax Code
CHAMBER OF REAL ESTATE BUILDERS ASSOCIATION, INC. VS. EXECUTIVE SECRETARY (09 MAR
2010)
COMMISSIONER OF INTERNAL REVENUE VS . PHILIPPINE AIRLINES , INC. (07 JUL 2009)
RR 9-98 (25 Aug 1998) except Sec. 2.28 (E)(7) Accounting treatment as amended by RR 12-
2007 (10 Oct 2007)
(2) Improperly Accumulated Earnings Tax

Section 29, Tax Code
THE MANILA W INE MERCHANTS, INC. VS. COMMISSIONER OF INTERNAL REVENUE (20 FEB
1984)
CIR VS. TUASON (15 MAY 1989)
CYANAMID PHILIPPINES , INC. VS. CA (20 JAN 2000)
RR 2-01 (12 Feb 2001)
RMC 35-2011 (14 March 2011)
BIR Ruling 25-02 (25 Jun 2002)
(3) Fringe Benefits Tax

22(A) and 33, Tax Code
RR 3-98 (01 Jan 1998)
RR 8-00 (21 Aug 2000)
RR 10-00 (14 Dec 2000)
(4) Transfer Pricing

50, Tax Code
CIR VS. FILINVEST DEVELOPMENT CORPORATION (19 JUL 2011)
HER MAJESTY THE QUEEN VS. GLAXO SMITHKLINE INC., 2012 SCC 52 (SUPREME COURT OF
CANADA, COURT FILE 33874; OCTOBER 18, 2012)
RMC 026-08 (24 Mar 2008)
RMO 63-99 (19 Jul1999)
Special Entities
(1) Proprietary Educational Institutions and Hospitals

Section 27 (B), Tax Code
COMMISSIONER OF INTERNAL REVENUE VS . ST. LUKE S MEDICAL CENTER, INC. (26 SEP 2012)
RMC 76-03 (14 Nov 2003)
(2) GOCCs
Section 27 (C), Tax Code as amended by Republic Act 9337
Republic Act 10026
PHILIPPINE AMUSEMENT AND GAMING CORPORATION VS . BUREAU OF INTERNAL REVENUE (15

MAR 2011)
(3) Exempt Corporations
30, Tax Code
Executive Order 226, Article 39
Republic Act 7916, 23 25
Republic Act 9178
Republic Act 9593, 4 & 86-88
Republic Act 9856
DUMAGUETE CATHEDRAL CREDIT COOPERATIVE VS . CIR (22 JAN 2010)
CIR VS. G. SINCO EDUCATIONAL CORP. (23 OCT 1956)
RR 13-2011 (25 Jul 2011)
RMC 35-2012 (03 Aug 2012)
(4) Insurance Companies

37, Tax Code

Income Tax - Deduction Onwards

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Income Tax - Deduction Onwards

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Deductions

Interest (as amended by RA 9337)

CIR V. VDA. DE PRIETO (30 SEP 1960)

RR 13-2000 (20 Nov 2000)

RR 12-77 (06 Oct 1977)

NOLCO (Net Operating Loss Carry-Over)

RR 14-01 (27 Aug 2001)

BIR Ruling 30-00 (10 Aug 200)

BIR Ruling 206-90 (30 Oct 1990)

BIR Ruling No. 144-85 (26 Aug 1985)

Foreign exchange losses sustained as a result of devaluation of peso vis--vis

Philippine Refining Company v. CA (08 May 1996)

Fernandez Hermanos, Inc. v. CIR (30 Sep 1969)

RR 5-99 (10 Mar 1999)

Limpan Investment Corporation v. CIR (26 Jul 1966)

Charitable and other Contributions

Research and Development

Additional requirements for deductibility

Optional Standard Deduction

RR 2-2010 (18 Feb 2010)

RR 16-2008 (26 Nov 2008) (1 to 5 only)

Premium Payments on health and/or hospitalization insurance

ESSO STANDARD EASTERN, INC. V. CIR (07 JUL 1989)

Petitioner was requesting refund of overpaid income taxes which were

RR 14-2012 (07 Nov 2012)

Capital Gains Tax

RR 8-98 (25 Aug 1998)

RR 4-99 (09 Mar 1999)

RR 13-99 (26 Jul 1999)

RR 14-2000 (20 Nov 2000)

RR 06-2008 (22 Apr 2008)

RMC 37-2012 (03 Aug 2012)

BIR Ruling DA 029-08 (23 Jan 2008)

BIR Ruling DA 287-07 (08 May 2007)

OCWs/ Senior Citizens/ Disabled

RR 1-2009 (09 Dec 2008)

RR 7-2010 (20 Jul 2010)

RR 1-2011 (24 Feb 2011)

Personal and additional exemptions/ PERA

RA10165, 3-5 & 22-24

PANSACOLA V. CIR (16 NOV 2006)

RR 17-2011 (27 Oct 2011)

RR 2-2010 (18 Feb 2010)

27(A). Rates of Income Tax on Domestic Corporations.

(3) A VAT tax effort of four percent (4%) of GNP; and

27(D). Rates of Tax on Certain Passive Incomes.

Not over P100,000 5%

Amount in excess of P100,000 10%

Any income of nonresidents, whether individuals or corporations, from

(4) Intercorporate Dividends. Dividends received by a domestic corporation

28. Rates of Income Tax on Foreign Corporations.

In the case of corporations adopting the fiscal-year accounting period,

The corporate income tax rate shall be applied on the amount

(2) Minimum Corporate Income Tax on Resident Foreign Corporations.

(3) International Carrier. An international carrier doing business in

(a) International Air Carrier. 'Gross Philippine Billings' refers

(b) International Shipping. ''Gross Philippine Billings' means

Any income of nonresidents, whether individuals or corporations, from

(5) Tax on Branch Profits Remittances. Any profit remitted by a

(6) Regional or Area Headquarters and Regional Operating

(a) Regional or area headquarters as defined in Section

(b) Regional operating headquarters as defined in Section

(7) Tax on Certain Incomes Received by a Resident Foreign