TAXATION

INCOME TAX
GENERAL PRINCIPLES Purpose of taxation (R3PEP)
Taxation. An incidental and destructive power of the State, unlimited in its Revenue
range, by which the sovereign raises revenue to defray government expenses Regulation
by way of apportionment to those privileged to enjoy its benefits. Reduction of social inequality
Principles of a sound tax system Promotion of general welfare
Fiscal adequacy. Sources should be sufficient to meet demand for Encourage economic growth through incentives and exemptions
public expenditures Protectionism
Theoretical justice. Tax burden should be in proportion to tax General rule: The Constitution does not prohibit double taxation
payers ability to pay Except: When it amounts to direct duplicate taxation; when both taxes are
Administrative feasibility. Tax laws should be capable of imposed: (JAPPSC)
convenient, just and effective implementation Within the same jurisdiction
Doctrine of Imprescriptibility of tax laws. In absence of a specific provision, By the same authority
tax laws shall not prescribe. They shall only be repealed by subsequent laws For the same purposes
Statute of limitations. Assessment of tax liability prescribes 3 years from the During the same period
date of filing of the return or from expiry of period prescribed to file such. On the same subject matter
Doctrine of equitable recoupment. Refers to a case where taxpayer has Of the same kind or character
claim for refund but fails to file claim due to prescription. Taxpayer is allowed Usual methods to avoiding double taxation:
to credit refund to existing tax liability. Not allowed in the Philippines due to
Reciprocal exemption by law or treaty
lifeblood theory.
Allowing tax credit for foreign taxes
Doctrine of set-off. Applies when government and taxpayer are mutual
Allowing deduction for foreign taxes
creditors and debtors of one another. Not allowed in the Philippines due to
Reduction of local tax rate
the different nature of taxes and debts, and public policy is better served.
Tax pyramiding. Imposing a tax on a tax.
Direct tax. Demanded from person intended to pay the tax.
Tax exemptions. A grant of immunity to particular persons from a tax upon
Indirect tax. Demanded from one person with the expectation that he can
property or excise, which they are generally obliged to pay. They are
shift the burden to someone else.
generally construed against the claimant since they are, in essence, a
Final withholding tax. Constitutes final settlement of tax liability.
derogation of sovereignty.
Expanded withholding tax. Constitutes advance payment of tax liability.
Tax laws. Statutes levying taxes are construed strictly against the
Nature of taxation
government, because burdens are not imposed, nor presumed to be
Necessary attribute of sovereignty
imposed beyond what the statutes clearly import. Construction of a statute
Legislative in character. Power to:
by those administering it is not binding is not binding on their successors.
o Determine
Tax avoidance. Tax saving device within the means sanctioned by law, used
Nature
by the taxpayer in good faith and at arms length.
Object
Tax evasion. Scheme used outside of those lawful means, which subjects the
Extent
taxpayer to civil or criminal liability. Elements: (UBI)
Coverage
Unlawful act or omission
Apportionment
Bad faith
Situs
Method Intent to pay less than what he legally owes
o Grant exemptions LIMITATIONS
o Provide remedies Inherent. Those which exist despite the absence of an express provision of
the Constitution. (PITED)
Cannot be delegated. Except:
o To local legislative bodies Must be for a public purpose at inception
o To the President International comity
o When only in respect to administration or Territorial jurisdiction
implementation Exemption of government entities (except GOCC)
Subject to constitutional and inherent limitations Cannot be delegated. Except:
Stages of taxation (LAP) o To local legislative bodies
1. Levy. Enactment of law by Congress o To the President
2. Assessment and collection. Implementation of the law o When only in respect to implementation
3. Payment. Compliance by the taxpayer Constitutional
THEORIES BEHIND TAXATION Due process clause
Lifeblood theory. The existence of the government is a necessity; it cannot o Substantive due process. Statute free from ambiguity
exist without a means to pay its expenses; and for those means, the o Procedural due process. Notice and hearing
government has the right to compel those under its jurisdiction to contribute Equal protection clause. Subject to reasonable classification:
in the form of taxes. o Substantial distinction
Benefits-protection theory. Every person who is able must contribute his o Germane to the purpose of the law
share to the running of the government. For its part, the government is also o Not limited to existing conditions
expected to respond in the form of tangible and intangible benefits. o Apply equally to all members of such class
Expresses the symbiotic relationship between the taxpayer and government. Uniform and equitable. All taxable articles of the same class shall
Characteristics of taxes (PIPFALL) be taxed at the same rate
Payable in money Non-impairment of contractual obligations. Levying statues that
Imposed by the State with the principle of territoriality alter relative rights of the parties with each other are prohibited.
Personal to the taxpayer Unilateral tax exemptions may be revoked at will, but when
Forced charge exemption is founded on valuable consideration, revocation
Assessed in accordance with the rule of apportionment constitutes impairment.
Levied by legislature Freedom of religion
Levied for public purpose Freedom of the press
 Properties for religious, charitable and educational purposes are KINDS OF TAXPAYERS
exempt. Real property tax only. The test is usage of the property, Citizens. See criteria for imposing income tax
not ownership. Exemption extends to incidental and necessary Aliens. See criteria for imposing income tax
real properties. Estates and trusts. Taxed in the same manner as persons, except that the
Revenue used actually, directly and exclusively for religious, income distributed to the heirs or beneficiaries shall be considered an
charitable, and educational purposes are exempt. Exemption not allowable deduction
automatic, must show: Co-ownerships. Individual co-owners report their share of the income from
o Certification of interest income from passive the property owned in common.
investments, which are not subject to final withholding In the event of co-ownership resulting from death, the co-ownership of
tax inherited properties is automatically converted into an unregistered
o Certification of exclusive actual, direct and exclusive partnership from the moment that the said properties are used as a common
utilization fund to derive profit. However, if the transaction isolated transactions,
o Board resolution for the funded project where there is no habituality, there is no basis to support the formation of an
Revenue bills must originate from the House of Representatives, unregistered partnership.
but Senate may amend Partnerships. Treated as a corporation subject to income tax
Statute granting tax exemption requires concurrence of majority General professional partnerships. Not considered a separate taxable entity.
of all members of Congress Partners are liable for individual income tax
Every bill must embrace only one subject Domestic corporations
Joint ventures. Elements:
INCOME AND WITHHOLDING TAX Contribute either property or industry
Income tax. Direct tax on all income, actual or presumed, that the taxpayer Profits must be shared
received during the taxable year Joint proprietary interest and mutual control over the subject
Taxable income. In order to be taxable, following requisites: matter
There is income, gain or profit Single business transaction
It is realized during the taxable year Note: Joint ventures for the purpose undertaking a construction or
It is not exempt from income tax energy-related project are not taxable entities.
Income tax systems Resident foreign corporations. However, Philippine branch of a foreign
Global. Total allowable deductions and exemptions are deducted from the corporation is merely an extension of the head office. Income from branch
gross income to arrive at the net taxable income. All items are reported in sourced within is subject to income tax
one income tax return filed at least annually.
Schedular. Different types of income are subject to different tax rates. GROSS INCOME
Separate tax returns are filed by the taxpayer depending of the type of Gross income. All income from whatever source derived, including but not
income received. limited to: (CBP-CRAP-DRIPP)
Semi-schedular/global. Compensation and passive income not subject to Compensation income
final withholding tax are added together to arrive at gross income. The Business income
allowable deductions and exemptions are then deducted to arrive at taxable Professional income
income. However, passive income subject to final withholding tax and capital Capital gains
gains from the sale of capital assets are subject to different tax rates and Rent
returns. Annuities
Criteria for imposing income tax Prizes and winnings
Citizenship principle. Resident citizen is subject to income tax from sources Dividends
within and without the Philippines, while non-resident citizen only from Royalties
sources within. Non-resident include: Interest
Physically abroad with the intention to reside therein Pensions
Immigrants on a permanent basis from the time they depart from Partners income in GPP
the Philippines Net income. Also referred to as taxable income. Gross income less
Employees of a foreign entity on a permanent basis from the time deductions and exemptions.
they depart from the Philippines Income vs. capital. Income is any wealth which flows into the taxpayer other
OFWs who spend at least 183 days abroad than the return of capital, while capital constitutes the investment which is
Residence principle. Resident alien is subject to income tax from sources the source of the income.
within the Philippines.
Source principle. Non-resident alien is subject to income tax from sources
within the Philippines. Income is deemed to be sourced within when it is
earned from services rendered in the Philippines.
Non-resident alien doing business in the Philippines. One who
spends more than 180 days in the country. Taxed in the same
manner as a resident citizen on sources within. Thus, he is allowed
deductions and personal exemptions, the latter being subject to
the rule on reciprocity.
Employees entitled to preferential tax rates
Regional headquarters of multinational corporations
Offshore banking units
Foreign service contractors engaged in petroleum operations
When is income taxable
There is income
It is realized during the taxable year
It is not exempt from income tax
Source rules:
Interest: residence of the debtor
Dividends: residence of the corporation paying
Services: place of performance. If there is no accurate segregation
for compensation performed, the amount shall be determined on
apportionment of time basis
International shipping lines and air carriers. Gross Philippine billings
means gross revenue from persons, cargo or mail originating from the
Philippines up to the final destination, regardless of the place of sale of
passage or freight.
In the case of transhipment, only the portion of the cost from the
Philippines to the point of transhipment. Sale of tickets in the
Philippines by an off-line carrier (those without any flight operations in
the country) is treated as income from whatever source.
Rentals and royalties: location of the property or interest therein
Sale of real property: location of real property
Sale of personal property
o Produced within, sold without and vice versa: partly
within, partly without
o Purchase within, sold without and vice versa: country
where sold
o Shares of stock of a domestic corporation: within
Tests in determining income
Realization test. No income until there is a separation from
capital of something of exchangeable value. The transmutation
results in the receipt of income.
Claim of right doctrine. A taxable gain is conditioned on the
presence of a claim of right to such gain and the absence of an
unconditional obligation to return such.
Income from whatever source. All income not expressly excluded
or exempted from taxable income, irrespective of voluntariness
and its source, is taxable.
Economic benefit test. Any economic benefit that increases net
worth, whatever the mode, is taxable.
COMPENSATION INCOME
All remuneration for services performed under an employer-employee
relationship, unless expressly excluded by the law.
Elements of an employer-employee relationship:
Power to select
Payment of wages
Power to dismiss
Power to control
Items not considered compensation income:
Agricultural labor paid entirely in the farms produce
Domestic service in a private home
Casual labor not in the course of employers trade
Services for a foreign government or international organization
Fringe benefits. Any benefit furnished by an employer to an employee.
Managerial and supervisory employees: fringe benefit tax is
withheld by employer, who is then liable to remit it and deduct
such as a business expense.
Rank-and-file: fringe benefits are treated as part of compensation
BUSINESS INCOME
Continuity of commercial dealings incidental to the pursuit of commercial
gain. In the case of manufacturing, merchandising and mining, it means the
total sales, less cost of goods sold, plus income from outside investments.
Rental income is business income.
Exchange of real property classified as ordinary assets is business income.
PROFESSIONAL INCOME
Fees received by a professional in the practice of his profession, provided
there is no employer-employee relationship between him and his clients.
CAPITAL GAINS
General types of capital assets:
Shares of stock in a domestic corporation
o If transferor is a dealer, shares are ordinary assets,
subject to income tax
o If transferor is not a dealer, shares are capital assets:
If shares are listed and traded in the local
stock exchange, exempt from income tax.
Subject to stock transaction tax.
If shares are not listed, or listed but not
traded, subject to capital gains tax.
Note: Intracorporate dividend. Stock is transferred from one
corporation to another. Transaction not taxable.
Real property. Gain is determined by either selling price or zonal
value of the property, whichever is higher
o If transferor is a dealer, property is ordinary asset,
subject to income tax.
o If transferor is not a dealer:
If used in trade or business, property is
ordinary asset, subject to income tax.
If not used in trade or business, property is
capital asset, subject to capital gains tax.
Other types of assets. Holding period rules: (applicable only to
individual tax payers)
o Long-term. Held for more than 12 months. Only 50% of
long-term capital assets are subject to income tax.
o Short-term. Held for 12 months or less. 100% of short-
term capital assets are subject to income tax.
INTEREST INCOME
Interests received are included in gross income, unless exempt from tax or
subject to final withholding tax
Interest income from Philippine currency deposits. Subject to local
income tax
Interest income on foreign currency deposits. Bank outside
Philippines, deposit made by nonresident, alien, or foreign
corporation, not subject to local income tax. Otherwise, subject.
Interest income from traditional loans by local banks. Subject to
income tax. Exempt from withholding tax.
Discounts are treated in the same manner as interest income
Interest income from long-term investments of individuals are
exempt. Long-term investments are those for 5 years and over.
Pre-terminate, final income tax shall be imposed.
Interest income from long-term investments of corporations are
taxable.
Interest on foreign loans extended by nonresident foreign
corporations is subject to income tax.
DIVIDEND INCOME
Corporate profit set aside, declared and ordered by the directors to be paid
to stockholders on demand or at a fixed time. Until the dividend is declared,
the profits belong to the corporation, not to the stockholders.
Cash dividend. Disbursement to the stockholder of the corporations
accumulated earnings.
Stock dividend. Payable in reserve or additional stock of the corporation.
Involves no disbursement, since stockholders do not receive an actual
dividend, but only a certificate of stock.
General rule: Stock dividends are exempt from income tax. They are
considered unrealized gain, and as such cannot be considered income, but
rather capital.
Exception: If the dividend gives the stockholder an interest different from
what his former holdings represented, i.e. increase in interest.
ROYALTY INCOME
Where a person pays royalty to another for the use of its intellectual
property rights, considered passive income subject to final withholding tax
OTHER INCOME FROM ANY SOURCE WHATSOEVER DEDUCTIONS
Discloses the legislative intent to include all income not expressly exempted Exclusions vs. deductions. Exclusions refer to a flow of wealth not treated as
by law, irrespective of the its voluntariness or the source. part of gross income, while deductions are amounts which the law allows to
be deducted to arrive at net income. Exclusions are amounts received, while
PRIZES AND AWARDS deductions are amounts paid. Both are construed strictly against the
Prizes and awards received within the Philippines are subject to final claimant.
withholding tax. Except if 10,000 or less. Types of deduction
Prizes and awards for the recognition of religious, charitable, scientific, Itemized deductions
education, artistic, literary or civic achievement is excluded if the recipient: Optional standard deductions
Was selected without any action on his part Special deductions
Is not required to render substantial future service as a condition
Prizes and awards granted to athletes in sports competitions, whether held BUSINESS EXPENSES
within or without the Philippines, are exempt if sanctioned by their national Conditions
sports associations Ordinary and necessary
Prizes and awards received by professional athletes are no longer exempt as o Ordinary. Normal in relation to the type of business
they were earned in the exercise of their profession or occupation o Necessary. Appropriate or helpful for the development
of the business
EXCLUSIONS FROM GROSS INCOME (MAGPAIR) o Expenses in connection with the creation of goodwill
Refer to income not included because: are considered capital expenditures
Represent a return of capital Incurred during the taxable year
Subject to another kind of internal revenue tax o Satisfaction of the all events test:
Income that are expressly exempt from income tax by: Fact of liability has been determined by
o Constitution events which have already occurred
o Statute Amount of liability is determined with
o Treaty reasonable accuracy
Proceeds of life insurance. Because it is a contract of indemnity; it is Incurred in the conduct of trade
compensatory in nature Supported by adequate receipts
Amounts received under life insurance, endowment or annuity. Only the Not contrary to law, public policy or morals
excess of the aggregate premiums and interest payments shall be subject to Tax required to be withheld is remitted
income tax
Property acquired by gift, bequest, devise or decent. Because they are INTEREST
subject to another kind of internal revenue tax Amount paid by the debtor for the use of money. Interest expense incurred
Amounts received through accident and health insurance. Compensatory in connection with the taxpayers trade shall be allowable deduction
Income exempt under treaty Interest expense on capital expenditure may, at the taxpayers option, be:
Retirement, benefits, pensions and gratuities. Retirement benefits received Treated as deduction in full in the year incurred; or
in accordance with a reasonable private benefit plan is exempt if: Treated as a capital expenditure, in which case the taxpayer may
Retiree is not less than 50 years old claim the periodic amortization as the deduction
In the service of the same employer for at least 10 years Conditions
Benefit availed of only once Valid and existing indebtedness
Separation pay for causes beyond the control of the employee. Exempt Indebtedness is that of the taxpayer
Terminal leave pay. Commutation of leave credits. Exempt Interest is legally due and stipulated
Retirement benefits from foreign government agencies. Exempt Indebtedness is connected with the taxpayers business
Miscellaneous items The arrangement must not be between related taxpayers
Income derived from Philippine investments by foreign Deduction of interest expense must not be expressly disallowed
governments, and financial institutions controlled and/or Amount of interest deducted must not exceed the limits set forth
established by such by law (Interest arbitrage rule. See below)
Income derived by the government from a public utility
13th month pay and other gross benefits are exempt up to 30,000 Amt loaned * interest rate = interest expense
GSIS, SSS, Pag-ibig and PhilHealth contributions Interest income * 33% = - interest arbitrage
= deductable interest expense
RETURN OF CAPITAL TAXES
Sale of inventory of goods. Cost of goods manufactured (manufacturers) and General rule: All national or local taxes
cost of goods sold (dealers) are deductable from gross sales Except:
Sale of stock in trade. Real estate and security dealers are required to deduct Philippines income tax
total cost specifically identifiable to the real property or stocks sold Foreign income tax
Sale of services. Since no inventory or stocks in trade, entire gross receipts Estate and donors tax
are treated as income
Special assessments on real property
Electric energy consumption tax
Conditions
Payment for taxes
Taxes are imposed by law
Taxes are not specifically excluded by law
Incurred during the taxable year
Incurred in the conduct of trade
LOSSES PERSONAL EXEMPTIONS
Classes Basic personal exemption. 50,000
Incurred in trade Additional exemption. Maximum of 4 dependent children. 25,000 each.
Incurred in any transaction entered into for profit, although not Not more than 21 years old or any age if incapable of self-support
connected with trade Unmarried
Casualty losses, although not connected with trade. Destruction Not gainfully employed
of property resulting from an identifiable event of sudden, Living with the taxpayer
unexpected or unusual nature Deductions vs. personal exemptions. Deductions are expenses incurred in
Conditions the conduct of trade, while personal exemptions are arbitrary amounts for
Loss must be that of the taxpayer personal expenses. Deductions can be claimed by all taxpayers, while
Incurred within the taxable year personal exemptions can only be claimed by individuals
Incurred in the conduct of trade Status-at-the-end-of-the-year rule. Whatever the taxpayers status at the
Evidenced by a closed transaction end of the calendar year shall be used for purposes of determining his
Not claimed as a deduction for estate tax personal and additional exemptions. Change of status generally benefits, but
Not compensated by insurance does not prejudice the taxpayer.
In case of casualty loss, reported within 45 days
TAX BASES AND RATES
BAD DEBT Tax bases can be grouped into:
Debt resulting from the worthlessness of amount due to the taxpayer. In Compensation, business, professional income, capital gains not
order to be considered a bad debt, taxpayer should show that during the subject to final tax, passive income not subject to final tax, and
taxable year of the deduction, a situation developed which it became evident other income
that there remained no practical, but only vaguely theoretical, prospect that Capital gains subject to final tax
the debt would ever be paid Passive income subject to final tax
Tax benefit rule. Taxpayer is obliged to declare as taxable income the
recovery of bad debts in the year collected to the extent of the tax benefit INDIVIDUALS
enjoyed by him when the bad debts were claimed as deduction Tax bracket Tax rate
Not over 10,000 5%
DEPRECIATION 10,001 30,000 500+ 10% excess 10,000
Gradual diminution in the useful value of tangible property resulting from 30,001 70,000 2,500 + 15% excess 30,000
wear and tear and normal obsolescence, and the amortization of value of 70,001 140,000 8,500 + 20% excess 70,000
intangible assets, the use of which is limited in duration. It cannot go beyond 140,001 250,000 22,500 + 25% excess 140,000
the cost of acquisition and cannot be based on appraisal value 250,001 500,000 50,000 + 30% excess 250,000
Conditions Over 500,000 125,000 + 32% excess 500,000
Allowance must be reasonable. Must be computed through:
o Straight-line method DOMESTIC CORPORATIONS
o Declining balance method General rule: 30% of taxable income (normal corporate income tax) or 2% of
o Sum-of-years-digit method gross income (MCIT, imposable on the 4th year of operation)
o Other methods prescribed by the Secretary Except: Non-profit hospital and educational institutions, 10% of taxable
Property must be used in trade income. Provided that gross income from unrelated trade does not exceed
Incurred within the taxable year 50% of total gross income
Purpose of the MCIT
CHARITABLE CONTRIBUTIONS Prevent over-claiming of deductions
Conditions Ensure minimum contribution to support the government
Made to the Philippine government or accredited domestic Grounds for valid suspension of MCIT
corporation or association specified by law Force majeure
Incurred within the taxable year Prolonged labor dispute
Not exceed 10% (individual) or 5% (corporation) of taxable
income before charitable contributions RESIDENT FOREIGN CORPORATIONS
Evidenced by receipts 30% of taxable income on sources within
Based on acquisition cost Preferential tax rate for resident foreign corporations
International carriers. 2.5% of GPB
OPTIONAL STANDARD DEDUCTIONS Offshore banking units. 10% of income derived from transactions
May be claimed in lieu of itemized deductions with Philippine residents
Conditions Regional headquarters. 10% of taxable income sourced within
Claimant must be a citizen or resident alien Preferential tax rate for non-resident foreign corporations
Intention to avail must be expressed in the tax return Cinematographic film owner. 25% of gross income sourced within
Such availment is irrevocable for the taxable year Lessor of vessels chartered by Filipinos. 4.5% of gross rentals
Limited to 40% of gross income Lessor of aircraft, machines or other equipment. 7.5% of gross
Proof of expenses not required rentals
Interest income on foreign loans. 20% final withholding tax
NON-DEDUCTABLE EXPENSES Dividends received from domestic corporations. 15% final
Personal expenses withholding tax
Amount paid for permanent improvements Net capital gains realized by non-resident foreign corporation
Amount paid for restoration of property from disposition of stock in a domestic corporation. Final
Premiums paid on life insurance withholding tax of:
Losses for exchanges of property between related parties o 5% of net capital gains, if not over 100,000
o 10% of net capital gains, if over 100,000
GAINS FROM SALE OF PROPERTY
Excess of the amount realized over the basis or adjusted basis.
Amount realized shall be the sum of money received plus the fair market
value (other than money) received
Basis shall be:
Acquisition cost
Fair market value as of date of acquisition
If acquired by gift, the basis shall be the same as the last
preceding owner by whom it was not acquired by gift. For loss, if
basis is greater than fair market value, latter shall prevail
Acquired for less than adequate consideration, acquisition cost
paid by the transferee
Adjusted basis shall be the original cost plus amounts spent for improvement
Transfer for inadequate consideration. Is deemed as a gift. Except: When
sold for a bona fide business purpose. What is important is the showing of
donative intent on the part of the seller
Nature of property
If ordinary asset, use either individual or corporate tax rate
If capital asset, 6% of actual consideration or fair market value,
whichever is higher
ORDINARY AND CAPITAL ASSETS
Ordinary assets. Include:
Stock in trade, included in inventory
Property held by taxpayer for sale
Property used in trade, subject to depreciation
Real property used in trade
Capital assets. All else
Loss limitation rule. A capital loss can only be deducted from capital gains
but never from an ordinary gain.
TAX-FREE EXCHANGES
No gain or loss in the following circumstances
Merger or consolidation
o Corp A, property > Corp B, stock
o Shareholder A, stock > Corp B, stock
o Security holder A, securities > Corp B, stock or
securities
Property transferred to corporation in exchange for stock, which
as a result of such exchange maximum of 5 persons gain control
of the corporation
Sale of principal residence
Dwelling house, including land where situated, where husband and wife or
an unmarried individual, and members of his family reside. Character of
permanency must be present; individual intends to return to the dwelling,
whenever he is absent
Where ownership of land and house belongs to a different person, only
house shall be treated as principal residence
Where owned by several co-owners and actually used as principal residence
by one or more, property shall be treated as principal residence of co-
owner/s actually using the same to the extent of their share
When exempt from capital gains tax:
Proceeds of the sale of principal residence are fully utilized in the
acquisition of new principal residence within 18 months
Commissioner is duly notified within 30 days of taxpayers
intention to avail of the exemption
Tax exemption can be availed only once every 10 years
ACCOUNTING METHODS AND PERIODS
There is no uniform method of accounting prescribed for all taxpayers.
Taxpayer may adopt such methods as are in his judgment best suited to his
purpose. If the method that clearly reflects his income, it is to be followed
with respect. In case of conflict, tax code prevails over generally accepted
accounting principles
Cash receipts and disbursements method. Income is realized
upon actual or constructive receipt, and expenses are deductible
only upon actual payment thereof, regardless of the period in
which service is rendered or expense is incurred
Accrual method. Income is accounted for in the period it is
earned, regardless if received or not; expenses are accounted for
in the period they are incurred, regardless if paid or not
o Income is recognized when the requirements for the
realization principle are met:
Earning process is complete
Exchange has taken place
o All events test is followed for expenses
Fact of liability has been determined by
events which have already occurred
Amount of liability is determined with
reasonable accuracy
Installment method. Appropriate when collections of income
extend over long periods of time and there is a strong possibility
that full collection may not be made. As customers pay
installments, seller recognizes profit in proportion to the
collection during the year
Percentage of completion method. Applicable in the case of
building , installation or construction contract covering a period in
excess of 1 year. Gross income reported upon basis of percentage
of completion of contract. Basis:
o Cost incurred compared with estimated total
o Work performed compared with estimated total
Crop year basis
General rule: All income received during the year shall be included
computation of gross income
Income which is credited or set aside for the taxpayer and may be drawn at
any time is deemed received during the year it was credited
Except: Under permitted accounting methods, such amounts are to be
properly accounted for during a different period
General rule: Deductions must be taken for the year in which they were paid
or incurred
Except: Under permitted accounting methods, such amounts are to be
properly accounted for during a different period
FILING OF RETURNS
Exemption from income tax does not mean an exemption from filing ITR
Individuals deriving purely compensation income. Exempt from filing ITR if,
substituted filing of tax returns are filed by the employer:
Employee receives purely compensation income
From only one employer
Tax due is equal to tax withheld
Individual deriving purely trade, business or professional income or mixed
income. Must file quarterly ITR and annual ITR
Domestic corporation and resident foreign corporation. Must file quarterly
corporate ITR and annual corporate ITR
Computation for quarterly and annual ITR made on a cumulative basis
WITHHOLDING TAXES
Method of collecting income tax in advance of the income of the recipient.
The amount withheld constitutes a full and final payment of the income tax
due from the recipient. The liability for the payment of tax withheld lies
solely on the withholding agent.
Since it is considered as advance payment, it follows that all persons exempt
from income tax are also exempt from withholding tax
Creditable withholding tax. Taxes withheld are intended to equal or at least
approximated the tax due. Recipient is still required to file ITR, report the
income, and pay the difference between tax withheld and tax due.
Withholding agent. In application of the territoriality principle, must be
resident of the Philippines
In general, any juridical person
An individual, payments made in connection with trade
All government offices and GOCCs
Bases for withholding tax
Based on gross income, for expanded withholding tax
Based on gross selling price or fair market value, whichever is
higher, for creditable withholding tax