Tax On Income n. Taxpayer – anyone subject to tax.
Title II, NIRC o. Terms “including” and “includes” when used in a
CHAPTER I. Definitions
Sec. 22:
a. Person – an individual, trust, estate, or corporation
b. Corporation – shall include partnerships, no matter
how created or organized;
DOES NOT include general professional partnerships
and joint-ventures or consortiums formed for the
purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal, and other
energy operations pursuant to an operating or
consortium agreement under a service contract with
the government;
General Professional Partnerships – formed for the
sole purpose of exercising their common profession,
no part of income is derived from any trade or
business.
c. Domestic Corporation – those created or organized
in or under Philippine laws.
d. Foreign Corporation – those not domestic
e. Nonresident Citizen:
1. Citizen who establishes to the Commissioner his
physical presence abroad with intention to reside
therein;
2. Citizen who leaves during the taxable year to
reside abroad;
3. Citizen who works and earns from abroad,
employment requires his physical presence
abroad;
4. Those nonresident citizens who return to the
Philippines during the taxable year, shall be
considered nonresident citizens with respect to
income earned from abroad until the date of
arrival.
5. Taxpayer shall submit proof to the Commissioner
of his intention to leave or return to the Philippines.
f. Resident Alien – aliens deemed residing in the
Philippines.
g. Nonresident Alien – aliens not deemed residing in the
Philippines.
h. Resident Foreign Corporation – FC engaged in trade
or business w/in the Philippines.
i. Nonresident Foreign Corporation – FC not engaged
in trade or business w/in the Philippines.
j. Fiduciary – any person acting in a fiduciary capacity;
e.g. guardian, trustee, executor, receiver.
k. Withholding Agent – any person required to deduct
and withhold any tax under Sec. 57.
l. Shares of Stock – includes shares of stock, warrants
a/o options to purchase shares, as well as units of
participation in a partnership( except GPPs), joint
stock companies, joint account, joint ventures
taxable as corporations, recreation or amusement
clubs, mutual fund certificates.
m. Shareholder – holder of shares of stock, warrant a/o
option to purchase shares, as well as a holder of a
unit of participation
definition under this Title shall not be deemed to
exclude other thins otherwise within the meaning of
the term defined.
p. Taxable Year – the calendar year or fiscal year
ending during such calendar year, upon the basis of
which the net income is computed. In case of a
return made for a fractional part of a year, “taxable
year” includes the period for which such return is
made.
q. Fiscal Year – an accounting period of 12 mos. ending
on the last day of any month other than December.
r. “Paid and incurred” and “Paid or accrued” shall be
construed based on the method of accounting used.
s. Trade or Business – includes public office.
t. Securities – shares of stock, rights to subscribe or to
receive such shares.
Includes bonds, debentures, notes, certificates, other
evidence of indebtedness issued by a corporation,
including those issued by the gov’t
u. Dealer in Securities – a merchant of stocks or
securities, whether individual, partnership, or
corporation, w/ an established place of business, and
regularly engaged in the purchase and resale of
securities to customers with a view to gains and
profits.
v. Bank – means every banking institution as defined in
Section 2 of RA 337 (General Banking Act); may be
commercial, thrift, rural, development, or a
specialized government bank.
w. Non-bank financial intermediary – defined in Sec.
2(d) of RA 337, authorized by the BSP to perform
quasi-banking activities.
x. Quasi-banking activities – borrowing funds from
twenty (20) or more personal or corporate lenders at
any one time, through the issuance, endorsement, or
acceptance of debt instruments or any kind other
than deposits for the borrower’s own account.
y. Deposit Substitutes – an alternative form of obtaining
funds from the public, 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.
The term “public” means borrowing from twenty (20)
or more individual or corporate lenders at any one
time.
z. Ordinary Income – includes any gain from the sale or
exchange of property which is not a capital asset or
property described in Section 39(A)(1).
Ordinary Loss – includes any loss from the sale or
exchange of property which is not a capital asset.
aa. Rank and File Employees – all employees who are
holding neither managerial nor supervisory positions
bb. Mutual Fund Company – an open-end and close-
end investment company as defined under the
Investment Company Act.
cc. Trade, business, or profession – shall not include
performance of services by the taxpayer as an
employee.
 dd. Regional or Area Headquarters – a branch  Sec. 24(B) – Passive Income
established in the Philippines by multinational  Sec. 24(C) – Capital Gains from Sale of
companies and which headquarters do not earn or Shares of Stock not Traded in the Stock
derive income from the Philippines and which act as Exchange
supervisory, communications, and coordinating  Sec. 24(D) – Capital Gains from Sale of Real
center for their affiliates, subsidiaries, or branches in Property
the foreign markets.  Applicable to
ee. Regional Operating Headquarters – a branch 2. Rate:
established in the Philippines by multinational INCOME RATE
companies which are engaged in any of the Income <= P10k 5%
following services: general administration and P10k < Income <= P30k P500 + 10%*(income – P10k)
planning, business planning and coordination; P30k < Income <= P70k P2.5k + 15%*(income – P30k)
sourcing and procurement of raw materials and P70k < Income <= P140k P8.5k + 20%*(income – P70k)
components; corporate finance advisory services; P140k < Income <= P250k P22.5k + 25%*(income – P140k)
marketing control and sales promotion; training and P250k < Income <= P500k P50k + 30%*(income – P250K)
personnel management; logistic services; research P500k < Income P125k + 32%*(income – P500k)
and development services and product
 Subject to Sec. 51(D), the husband and wife
development; technical support and maintenance;
shall separately compute their individual
data processing and communication; and business
income. Provided, if any income cannot be
development.
definitely or attributed to one of them, the
ff. Long-Term Deposit or Investment – shall refer
same shall be divided equally between the
certificate of time deposit or investment in the form of
spouses.
savings, common or individual trust funds, deposit  Provided, that minimum wage earners shall
substitutes, with a maturity period of not less than five be exempt from payment of income tax on
(5) years, in the form prescribed by the BSP and their taxable income. Provided, further,
issued by banks only. holiday, overtime, NSD, and hazard pay
gg. Statutory Minimum Wage – shall refer to the rate fixed received by such MWE are likewise exempt.
by the Regional Tripartite Wage and Productivity
Board. (B) Rate of Tax on Certain Passive Income of Individuals:
hh. Minimum Wage Earner – a worker in the private 1. Interests, Royalties, Prizes, and Other Winnings
sector paid the statutory minimum wage; or to an derived from sources w/in the Philippines:
employee in the public sector with compensation
SOURCE RATE
income of not more than the statutory minimum
Interest from any currency bank deposit
wage in the non-agricultural sector where he/she is
Royalties
assigned.
Prizes > P10k 20%
CHAPTER II Winnings (except from Philippine Charity
Sweepstakes and Lotto)
Sec. 23: General Principles of Income Taxation in the Royalties on books and other literary works, 10%
Philippines: and musical compositions
INCOME SOURCE Prizes <= P10k Sec. 24(A)
TAXPAYER Interest income under the expanded foreign 7.5%
W/IN W/OUT
Resident Citizen ∕ ∕ currency deposit system (except nonresident
Nonresident Citizen ∕ X individuals)
Citizen – Overseas Contract Worker ∕ X Interest income from long-term deposits EXEMPT
Resident/Nonresident Alien ∕ X Provided, if pre-terminated:
Domestic Corporation ∕ ∕  4 yrs. <= T < 5 yrs. 5%
Foreign Corporation – engaged or  3 yrs. <= T < 4 yrs. 12%
∕ X  T < 3 yrs. 20%
not in trade and business in Phils.
2. Cash and/or Property Dividends from Domestic
 Nonresident Citizen – citizen who stays abroad for 183 Corporations:
days or more, and such stay must be continuous. A final tax at the following rates:
 Resident Alien – one who stays in Phil for more than 12  6% beginning on January1, 1998
months since arrival.  8% beginning on January 1, 1999
 Nonresident alien engaged in business or trade – one  10% beginning on January 2, 2000
who stays in Phil for an aggregate period of more than shall be imposed upon the cash and/or property
180 days in a taxable year. dividend actually or constructively received by
 Nonresident alien NOT engaged in business or trade – an individual from a domestic corporation, or
stays in Phil for 180 days or less. from a joint stock company, insurance and
CHAPTER III mutual fund companies, regional operating
headquarters, or on the share of the distributable
Sec. 24. Income Tax Rates: net income after tax of a partnership (EXCEPT
(A) Rates of Income tax on Citizens and Resident Aliens: professional partnerships).
1. Rate applicable ONLY to “taxable income” (as
defined in Sec. 31) and NOT to:
 (C) Capital Gains from Sale of Shares of Stock of
Domestic Corporations Not Traded in the Stock
Exchange:
A final tax shall be 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, not disposed of
through stock exchange; at the following rates:
 Not over P100k - 5%
 Any amount in excess of P100k - 10%
Under Sec. 127(A), if stocks are disposed through the
stock exchange, a tax rate of ½ of 1% of the gross
selling price or gross value in money of the shares
sold, disposed or exchanged shall be paid by the
seller.
(D) Capital Gains from Sale of Real Property Located
w/in the Philippines:
1. General Rule:
 6% of the Gross Selling Price; OR
 6% of the Fair Market Value
whichever is higher.
(B) NRA NOT Engaged in Business or Trade –
 Income from all sources within the Philippines
shall be levied a tax equal to 25% of such
income; EXCEPT capital gains which shall be
taxed pursuant to Sec. 24(C) & (D)
(C) Alien employed by Regional or Area Headquarters
and Regional Operating Headquarters Established in
the Philippines
15% on Gross Income received as salaries, wages,
compensation, honoraria, allowances, etc.
Provided, same tax treatment is given to Filipinos
occupying the position as those aliens.
(D) Alien Individual Employed by Offshore Banking Units –
15% on Gross Income received as salaries, wages,
compensation, honoraria, allowances, etc.
Provided, same tax treatment is given to Filipinos
occupying the position as those aliens.

Provided, when real property is sold to the
government or any of its political subdivisions,
agencies, or to GOCCs, tax liability may be
determined by Sec. 24(A) or Sec. 24(D)(1) at the
option of the taxpayer.
2. Exception:
Sale shall be exempt when the following concurs:
 Sale by natural person of his principal
residence;
 Income is used in acquiring or constructing
new residence within 18 calendar months from
sale; and
 Taxpayer notifies the Commissioner within 30
days from sale or disposition of his intention to
avail of the exemption.
Provided, such exemption can be availed of only
once every 10 years.
Provided, if income from sale is not fully utilized,
tax liability shall be computed as follows:
 For instance, 10% of the income from sale was
not utilized for acquiring/constructing new
residence then:
[(GSP or FMV, whichever is higher)x10%) x 6%
Sec. 25. Tax on Nonresident Alien Individual
(E) Alien Individual Employed by Petroleum Service
Contractor and Subcontractor –
15% on Gross Income received as salaries, wages,
compensation, honoraria, allowances, etc.
Provided, same tax treatment is given to Filipinos
occupying the position as those aliens.
 Any income earned from all other sources w/in the
Philippines by aliens under (C), (D), and (E) shall be
subject to the pertinent income tax, as the case may
be, imposed under this Code.
Sec. 26. Tax Liability of Members of General Professional
Partnerships.
A general professional partnership shall NOT be subject to
income tax. The persons engaging in business as partners
shall be liable for income tax in their separate and
individual capacities.
Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income
of the partnership.

(A) NRA Engaged in Business or Trade w/in Phils. (NRAEBT)

1. NRAEBT – an NRA who shall come to the Phils. And
stays for an aggregate period of more than 180
days during any calendar year shall be deemed
NRAEBTs.
 Taxed in the same manner as individual and
resident aliens; Sec. 24(A)(2): 5% - 32%.
2. Cash/Property Dividends; Interests, Royalties, Prizes,
and other Winnings – shall be taxed in the same
manner as individual citizens and resident aliens.
(Same as Sec. 24 EXCEPT for “Cash/Property
Dividends”, which shall be taxed at 20%);
3. Capital Gains – Same as Sec. 24(C) & (D)
SUMMARY OF TAX ON PERSONS
TAXPAYER
RESIDENT NONRESIDENT ALIEN
ENGAGED IN NOT ENGAGED IN
INCOME CITIZEN ALIEN CITIZEN BUSINESS OR BUSINESS OR
TRADE TRADE
SOURCE OF INCOME (WITHIN OR WITHOUT PHILIPPINES)
WITHOUT WITHIN WITHIN WITHIN WITHIN WITHIN
Taxable Income Income <= P10k………………….5%
P10k < Income <= P30k………… P500 + 10%*(income – P10k)
P30k < Income <= P70k………… P2.5k + 15%*(income – P30k)
P70k < Income <= P140k………. P8.5k + 20%*(income – P70k)
P140k < Income <= P250k…….. P22.5k + 25%*(income – P140k)
P250k < Income <= P500k…….. P50k + 30%*(income – P250K)
P500k < Income…………………. P125k + 32%*(income – P500k)
Prizes <= P10k
Interest Income
Royalties
Winnings (Except 20%
PCS/Lotto)
Prizes > P10k 25%
Royalties on books,
musical composition, 10%
etc.
Interest Income
Long Term
 T > 5 yrs. EXEMPT
 4 yrs.<= T <5 yrs. 5% - 5%
 3 yrs.<= T <4 yrs.
 T < 3 yrs.
32% 12%
20%
Cash/Property
Dividends 10% 20%
Interest EFCDS 7.5% N/A
Capital Gains: Real 6% of Gross Selling Price of Fair Market Value, whichever is higher.
Property **EXCEPTION: Income used to acquire new residence w/in 18 months.
Capital Gains: Shares
of Stock of Domestic On the Net Capital Gains <= P100k : 5%
Corporations Not Any amount in excess of P100k : 10%
Traded in Stock **Sale, Disposal, Exchange thru Stock Exchange: ½ of 1% of Gross Selling Price [Sec. 127(A)]
Exchange
--- SPECIAL ALIEN INDIVIDUALS ---
***GROSS INCOME Aliens employed by Regional or Area HQ and Regional Operating HQ
from salaries, wages, Aliens employed by Offshore Banking Units 15%
compensation, etc. Aliens employed by Petroleum Service Contractor and Subcontractor

***Provided, the same tax treatment is given to Filipinos occupying positions as those of the aliens.
CHAPTER IV
Sec. 27. Rates of Income Tax on Domestic Corporations.
(A) General Rule – 30% of the taxable income, derived
during the taxable year from all sources within and
without the Philippines, of Domestic Corporations.
EXCEPTION: Provided, corporations have the option
to be taxed at 15% of gross income when its ratio of
cost of sales to gross sales or receipts from all sources
does not exceed 55%. Election of such option shall
be irrevocable for three (3) consecutive taxable
years during which the corporation is qualified for the
scheme.
o For those engaged in the sale of service – gross
receipts less returns, allowances, discounts.
 Cost of Goods Sold – includes all business expenses
directly incurred to produce the merchandise
o For trading concern – includes invoice cost of
goods sold, plus import duties, freight.
o For manufacturing concern – includes all costs of
production, such as raw materials, labor and
manufacturing overhead, freight cost, and
insurance
(B) Proprietary Educational Institutions and Hospitals –
which are non-profit: 10% on taxable income EXCEPT
those under Subsection (D)—passive income.

 Gross Income – gross sales less sales returns, discounts, EXCEPTION: Provided, if gross income from unrelated
and allowances and cost of goods sold. business or activity exceeds 50% of the total gross
 income, it shall be subject to Subsection (A)—30% of
the taxable income.
(C) Government-Owned or Controlled Corporations,
Agencies, Instrumentalities:
EXEMPTED from tax:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation
(PHIC/Philhealth)
4. Philippine Charity Sweepstakes Office (PCSO)
 All others shall pay taxes as are imposed upon
corporations engaged in a similar business, industry,
or activity
(D) Tax Rate on Passive Income:
SOURCE
Interest from deposits or any yield from
Deposit Substitutes and Trust Funds, etc. from
sources w/in Philippines
Royalties
Interest income under the expanded foreign
currency deposit system
Capital Gains from Sales of Shares of Stock
Not Traded in the Stock Exchange
 Capital Gains <= P100k
 Any amount in excess of P100K
Income derived by depository banks from
foreign currency transactions with
nonresidents, offshore banking units, local
commercial banks, branches of foreign banks
under the EFCDS.-----------------------------------------
 HOWEVER, interest income from foreign
currency loans granted to residents
Intercorporate Dividends received from
Domestic Corporations
Capital Gains from Exchange/Disposition of
Real Property NOT Actually used in the
business of a corporation
Interest income from long-term deposits
Provided however, if terminated:
 4 yrs. <= T < 5 yrs.
 3 yrs. <= T < 4 yrs.
 T < 3 yrs.
(E) Minimum Corporate Income Tax:
1. Beginning on the fourth taxable year: 2% of the
gross income shall be imposed when the same is
higher than the tax due under Sec. 27(A).
2. Excess of the MCIT over the normal tax shall be
carried forward and credited against the normal
income tax for the three (3) immediately
succeeding taxable years.
3. Relief from MCIT – Secretary of Finance may
suspend imposition of MCIT on corporations
which suffer losses on account of prolonged
labor dispute, force majeure, or legitimate
business reverses.
4. Gross Income defined:
 Gross Income – gross sales less sales returns,
discounts, and allowances and cost of goods
sold.
o For those engaged in the sale of service –
gross receipts less returns, allowances,
discounts, and cost of services.
 Cost of Services – all direct costs and
expenses incurred to provide the services
including (a) salaries, employee benefits,
consultants, specialist; and (b)cost of
facilities used in providing the service.
PROVIDED, in case of banks, cost shall
include interest expense.
 Cost of Goods Sold – includes all business
expenses directly incurred to produce the
merchandise
o For trading concern – includes invoice cost of
RATE goods sold, plus import duties, freight.
o For manufacturing concern – includes all
costs of production, such as raw materials,
20% labor and manufacturing overhead, freight
cost, and insurance
7.5%
Sec. 28 Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations:
1. General Rule: Corporations organized,
5%
authorized, and existing under foreign laws,
10%
engaged in trade or business within the
Philippines, shall be subject to income tax of 30%
of the taxable income derived in the preceding
taxable year from all sources w/in the Philippines.
EXEMPT
EXCEPTION: Provided, resident foreign
corporation corporations have the option to be
10% taxed at 15% of gross income under the same
EXEMPT conditions provided in Sec. 27(A).
6% of GSP 2. MCIT – as defined in Sec. 27(E) shall be imposed
or FMV, on resident foreign corporations under the same
whichever conditions.
is higher
EXEMPT 3. International Carriers – shall pay a tax of 2.5%
(2½%) on its “Gross Philippine Billings” (GPB).
5% (a) International Air Carriers – GPB = amount of
12%
gross revenue derived from the carriage of
20%
persons, baggage, cargo, and mail
originating from Phil. in a continuous flight,
regardless of the place of sale or payment of
the ticket.
Provided, tickets revalidated and/or indorsed
outside Phil for part of GPB is passenger
boards from any point in the Phil.
Provided further, where flight originates from
Phil, but transhipment occurs outside Phil,
only the aliquot portion corresponding to the
leg flown from Phil shall form part of GPB.
(b) International Shipping – GPB = gross revenue
for passenger, cargo, or mail originating from
 Phil regardless of place of sale or payment of
the passage or freight documents.
4. Offshore Banking Units – Income derived by OBU
from foreign currency transactions with
nonresidents, other OBUs, local commercial
banks, branches of foreign banks are EXEMPTED.
HOWEVER, interest income from foreign currency
loans granted to residents OTHER THAN OBUs,
local commercial banks, foreign banks are
SUBJECT TO 10% final tax.
5. Tax on Branch Profit Remitances – 15% of the
profits applied of earmarked for remittance.
PROVIDED, interests, dividends, rents, royalties,
compensation for technical services, gains,
profits, income, received from sources w/in shall
not be treated as branch profits UNLESS
effectively connected with its trade or business in
the Philippines.
6. Regional or Area HQ – shall not be subject to
income tax;
Regional Operating HQ - 10% of their taxable
income.
7. Tax on Passive Income of Resident Foreign Corps.
SOURCE
Interest from deposits or any yield from
Deposit Substitutes and Trust Funds, etc. from
sources w/in Philippines
Royalties
Interest income under the expanded foreign
currency deposit system
Capital Gains from Sales of Shares of Stock of
a Domestic Corporation Not Traded in the
Stock Exchange
 Capital Gains <= P100k
 Any amount in excess of P100K
Income derived by depository banks from
foreign currency transactions with
nonresidents, offshore banking units, local
commercial banks, branches of foreign banks
under the EFCDS.-----------------------------------------
 HOWEVER, interest income from foreign
currency loans granted to residents
Intercorporate Dividends received from
Domestic Corporations
Capital Gains from Exchange/Disposition of
Real Property NOT Actually used in the
business of a corporation
Interest income from long-term deposits
Provided however, if preterminated:
 4 yrs. <= T < 5 yrs.
 3 yrs. <= T < 4 yrs.
 T < 3 yrs.
(B) Tax on Nonresident Foreign Corporations –
1. General Rule: Foreign corporations NOT
engaged in trade or business within the
Philippines, shall be subject to income tax of 30%
of the gross income received during each year
from all sources w/in the Philippines such as
interests, dividends, rents, royalties, salaries,
premiums, or other profits and income.
2. Nonresident Cinematographic Film Owner,
Lessor, or Distributor – 25% of gross income from
all sources w/in Philippines.
3. Nonresident Owner/Lessor of Vessels Chartered
by Philippine Nationals – 4½% (4.5%) of gross
rentals from leases or charters to Filipino citizens
or corporations, approved by the MIA.
4. Nonresident Owner/Lessor of Aircraft Machineries
and Other Equipment – 7½% (7.5%) of gross
rentals
5. Tax on Passive Income of Nonresident Foreign
Corporations:
SOURCE RATE
Interest on Foreign Loans 20%
Intercorporate Dividends received from 15%
Domestic Corporations; Provided, that the
country where nonresident FC is domiciled
shall allow a credit against the tax due form
the nonresident FC equivalent to 15%.
Capital Gains from Sales of Shares of Stock
RATE Not Traded in the Stock Exchange
 Capital gains <= P100k 5%
 Any amount in excess of P100K 10%
20%
Sec. 29 Imposition of Improperly Accumulated Earnings Tax
7.5%
(A) GENERAL RULE: A tax of 10% is imposed upon
improperly accumulated income.
5% (B) Tax on Corporations subject to IAET
1. General Rule – IAET applies to all corporations
10% formed for the purpose of avoiding income tax
by permitting earnings/profits to accumulate
instead of being divided/distributed.
2. EXCEPTIONS – NOT applicable to:
EXEMPT (a) Publicly-held corporations;
(b) Banks and non-bank financial intermediaries;
10% (c) Insurance companies
EXEMPT
(C) Evidence of Purpose to Avoid Income Tax
6% of GSP 1. Prima Facie Evidence – the fact that the
or FMV, corporation is a mere holding or investment
whichever company shall be prima facie evidence of
is higher purpose to avoid tax
EXEMPT
2. Evidence Determinative of Purpose – the fact
5% that earnings are allowed to accumulate
12% beyond the reasonable needs of the business
20% shall be determinative of the purpose to avoid
the tax, UNLESS the corporation by clear
preponderance of evidence proves the contrary.
 (E) Non-stock corps or assocs. exclusively for religious,
(D) Improperly Accumulated Taxable Income charitable, scientific, athletic, or cultural purposes; no
part of its income or assets shall belong or inure to the
Sec. 30 Exemptions from Tax on Corporations benefit of any of its members;
(F) Business league, chamber of commerce, not
(A) Labor/agricultural/horticultural orgs. not organized for organized for profit;
profit; (G) Civic league organization – not for profit, but for
(B) Mutual savings bank; promotion of social welfare;
(C) Beneficiary society, order or association operating for (H) Nonstock, non-profit educational institution;
the exclusively benefit of its members such as (I) Government educational institution;
fraternities or a mutual aid association providing (J) Farmers’ or other mutual insurance companies,
benefits exclusively to their members and/or their mutual utility companies of purely local character;
dependents; (K) Farmers’ or growers’ assocs. organized and operated
(D) Cemetery company owned and operated as sales agent of the products of its members.
exclusively for its members;
SUMMARY OF TAX ON CORPORATIONS
INCOME DOMESTIC CORPORATION RESIDENT FOREIGN NONRESIDENT FOREIGN
CORPORATION CORPORATION

General Rule 30%

OPTION to be taxed at 15% of Gross Income;

WHEN: ratio of cost of sales to gross sales or receipts does not N/A
exceed 55%;
 Election of such option IRREVOCABLE for 3 yrs.
MINIMUM CORPORATE INCOME TAX
 Beginning on the 4th taxable year, a tax of 2% of the gross income
shall be imposed when it is greater than the normal income tax. N/A
 Any excess of the MCIT over the NCIT shall be credited against the
NCIT for next 3 succeeding years.
Proprietary Educational International Carriers: 2% of the Nonresident Owner/Lessor of
Institutions and Hospitals w/c are Gross Philippine Billings (gross Aircraft Machineries and
nonprofit: Other Equipments:
TAXABLE INCOME

revenue derived from carriage

10% of Taxable Income
Provided, if income from
unrelated business or activities
exceeds 50% of the total gross
Exceptions:
income, GENERAL RULE shall
apply.
EXEMPTED CORPORATIONS:
1. GSIS
2. SSS
3. Philhealth
4. PCSO
5. Local water districts
of persons, baggage, cargo,
mail, from any port or point in 7½% of gross rentals
Phil. regardless of the place of
purchase or payment.)
Offshore Banking Units: Nonresident Owner/Lessor of
 Income derived from foreign Vessels Chartered by
currency transactions with Philippine Nationals:
nonresidents, OBUs, local
commercial banks, branches 4½% of gross rentals from
of foreign banks: EXEMPTED leases or charters to Filipino
 Interest income from foreign citizens or corporations
currency loans granted to
residents: 10%
Tax on Branch Profit Nonresident Filmowner,
Remittances: 15% of the total Lessor, or Distributor:
profits applied for remittance. 25% of gross income.
Regional or Area HQ – EXEMPT

Regional Operating HQ – 10%

PASSIVE INCOME
Interest
Royalties
20% 30%
Interest Income
under EFCDS
7.5% EXEMPT
Capital Gains from
Capital Gains <= P100k: 5%
Sales of Shares of
Stock Not traded in Any amount in excess of P100k: 10%
Stock Exchange **Sale, Disposal, Exchange thru Stock Exchange: ½ of 1% of Gross Selling Price [Sec. 127(A)]

Intercorporate 30%; or 15% if corporation

Dividends EXEMPT is allowed a tax credit of 15%
in its country of domicile
Capital Gains on
6% of Gross Selling Price OR
Sale of Real Property
NOT used in business Fair Market Value
of corp. Whichever is higher.
Interest Income from
Long-Term Deposits
EXEMPT 30%
If terminated:
 4 yrs. <= T < 5 yrs. 5%
 3 yrs. <= T < 4 yrs. 12%
 T < 3 yrs. 20%
 CHAPTER V
Sec. 31 Taxable Income – means the pertinent items of
gross income less the deductions and/or personal and
additional exemptions, if any, authorized for such types of
income.
CHAPTER VI
Sec. 32 Gross Income:
(A) Gross Income – all income derived from whatever
source, including but not limited to:
1. Compensation for services;
2. Gross income derived from business, trade, or
exercise of profession;
3. Gains from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes/Winnings;
10. Pensions; and
11. Partner’s share from the net income of general
professional partnership.
Sec. 33 Special Treatment of Fringe Benefit
(B) Exclusions (exempt from taxation):
1. Life insurance
2. Amount received by insured as return of
premium;
3. Gifts, Bequests, and Devises; Provided, income
from such property shall be included in gross
income;
4. Compensation for Injuries or Sickness – Amounts
received from Accident or Health Insurance,
including damages received by suit or
agreement on account of such injuries.
5. Income exempt under treaty
6. Retirement Benefits, Pensions, Gratuities:
(a) Retirement benefits under RA 7641 or under
private benefit plans maintained by the
employer; Provided, employee served for at
least 10 yrs., and is not less than 50 yrs. old
upon retirement;
(b) Any amount received by the employee or his
heirs as a consequence of separation by
reason of death, sickness, disability, or any
cause beyond the control of the employee;
(c) Social security benefits, retirement gratuities,
pensions, and similar benefits, private or
public;
(d) Payments of benefits to veterans;
(e) Benefits received from SSS;
(f) Benefits received from GSIS
7. Miscellaneous items:
(a) Income derived by Foreign Government
(b) Income derived by the Government or its
Subdivisions;
(c) Prizes and Awards – primarily in recognition of
religious, charitable, scientific, educational,
artistic, literary, or civic achievement, iff:
(i) Recipient selected w/o any action on his
part;
(ii) Recipient not required to render
substantial future services as a condition
to receiving the prize
(d) Prizes and Awards in Sports Competitions –
granted to athletes in local and international
competitions sanctioned by their national
associations
(e) 13th Month Pay and other benefits – received
by employees in private and public entities
for a maximum of P30k, which covers:
(i) Benefits of public employees under RA
6686 (Xmas bonus);
(ii) Benefits under PD 851 (13th Month Pay);
(iii) Benefits NOT covered by PD 851;
(iv)Other benefits such as productivity
incentives and Xmas bonus; Provided,
P30k ceiling may be increased by the
Sec. of Finance.
(f) GSIS, SSS, Philhealth, Pag-Ibig premiums,
Union dues;
(g) Gains from sale of Bonds, Debentures, and
other Certs. Of Indebtedness with a maturity
of more than 5 yrs.
(h) Gains from redemption of shares in mutual
funds;
(A) Imposition of Tax – 32% of the grossed up monetary
value of fringed benefit granted by the employer to
the employee (EXCEPT rank-and-file employees)
unless the benefit is required by the nature of or
necessary to the business or trade of the employer.
 The tax imposed is payable by the employer
through Withholding Tax [Sec. 57(A)]
 Grossed Up Monetary Value:
(Actual Value)/68%
 PROVIDED, fringe benefits granted to employees
under Subsections (B),(C),(D), and (E) of Sec. 25
shall be taxed at the applicable rates; and the
grossed up value shall be: (Actual Value)/(100% –
applicable rate)
eg. Subsection (B) – Nonresident Alien: 25%; thus:
FBT = [(Actual Value)/(75%)]*25%
(B) Fringe Benefit – any good, services, or other benefit
granted in cash/kind to an employee (EXCEPT rank-
and-file) such as, but not limited to:
1. Housing;
2. Expense Account;
3. Vehicles;
4. Household personnel;
5. Difference on loan interest between market
interest and lower interest granted by employer;
6. Membership fees, dues, expenses for the
employee in social athletic clubs or similar
organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to employee or
dependents;
10. Life or health insurance or other insurance
premiums in excess of what the law requires;
(C) Fringe Benefits NOT Taxable:
 1. FB exempted under special laws; A. EXPENSES:
2. Employer contributions to retirement, insurance,
and hospitalization benefit plans; (1) Ordinary and Necessary Trade, Business, or Professional
3. Benefits given to rank-and-file employees; Expenses
4. De minimis benefits – facilities or privileges
furnished to employees that are of relatively small (a) All ordinary and necessary expenses paid or
value and are offered or furnished merely as a incurred during the taxable year which are directly
means of promoting the health, goodwill, attributable to the development, management,
contentment, or efficiency of his employees, operation and/or conduct of trade, business, or
such as: profession, including:
(a) Monetized unused vacation leave credits not i. Salaries, wages, compensation for services
exceeding 10 days during the year, and actually rendered, including grossed-up
monetized value of leave credits paid to monetary value of fringe benefits;
public employees and officials; ii. Travel expenses, here and abroad, while away
(b) Medical cash allowance to dependents of from home in pursuit of trade, business, or
employee limited to P750 per semester; profession;
(c) Rice subsidy less than P1.5k/mo; iii. Rentals and/or other payments required for the
(d) Uniform/clothing allowance less than continued use or possession, for the purpose of
P4k/annum; trade, business, or profession, of property to
(e) Actual yearly medical benefits not which the taxpayer has no title other than
exceeding P10k/annum; lessee, user or possessor
(f) Laundry allowance <= P300/mo; iv. Entertainment, Amusement, and Recreation
(g) Employee achievement awards such as for Expenses directly connected to the
length of service, which must not be development, management, and operation of
monetary and the value does not exceed the trade, business, or profession, OR are
P10k/annum, and which does not related to or in furtherance of the conduct of
discriminate in favor of highly paid his trade, business, or profession NOT to exceed
employees; ceilings as the Secretary of Finance may
(h) Gifts given during Christmas and major prescribe; PROVIDED, any expense for
celebrations not exceeding P3k/annum; entertainment, amusement, or recreation that
(i) Flowers, fruits, books, given to employees is contrary to law shall not be deductible.
under special circumstances such as
marriage, birth of a baby, etc; (b) To be allowed as deductions, the taxpayer SHALL
(j) Daily meal allowance not exceeding 25% of substantiate with sufficient evidence the (i) amount
the minimum wage of expenses; and (ii) the direct connection or
relation of the expenses to the trade, business or
CHAPTER VII profession.
ALLOWABLE DEDUCTIONS
(c) Bribes, Kickbacks, and other similar payments
SEC. 34 DEDUCTIONS FROM GROSS INCOME made directly or indirectly to public officials or
officials/employees of GOCCs SHALL NOT be
 For taxpayers earning compensation arising from deductible.
employer-employee relationship, only deductions under
Subsection (M): Premium Payments on Health and/or (2) Expenses Allowed to Private Educational Institutions
Hospitalization Insurance of an Individual are allowed.  PEIs have the option of either (a) to deduct
expenditures otherwise considered as capital outlays
 Otherwise, the ff. are the allowable deductions: of depreciable assets incurred for the expansion of
(A) EXPENSES school facilities; or (b) to deduct allowance for
(B) INTEREST depreciation under Subsection (F).
(C) TAXES
(D) LOSSES B. INTEREST:
(E) BAD DEBTS
(F) DEPRECIATION (1) General Rule: Interest paid/incurred on indebtedness in
(G) DEPLETION OF OIL AND GAS WELLS AND MINES connection with the business, trade, or profession.
(H) CHARITABLE AND OTHER CONTRIBUTIONS PROVIDED, the allowable deduction for interest
(I) RESEARCH AND DEVELOPMENT expense SHALL be reduced by THIRTY THREE PERCENT
(J) PENSION TRUSTS (33%) of the interest income subjected to final tax
(K) ADDITIONAL REQUIREMENTS FOR DEDUCTIBLE
PAYMENTS  Intended to prevent tax arbitrage or the use of
(L) OPTIONAL STANDARD DEDUCTION back-to-back loans to take advantage of the
(M) PREMIUM PAYMENTS ON HEALTH AND/OR significant difference in tax rates resulting to profit
HOSPITALIZATION INSURANCE through tax savings.
(2) Exceptions:
(a) NO DEDUCTION ALLOWED if within the taxable year a
taxpayer reporting income on cash basis incurs
indebtedness where interest is discounted;
PROVIDED, the interest expense shall be allowed as
a deduction in the year the indebtedness is paid;
PROVIDED FURTHER, in case of periodic
amortizations, the interest which corresponds to the
amount of the principal amortized during the year
shall be deducted as interest in such taxable year;
(b) NO DEDUCTION ALLOWED if the taxpayer and the
creditor are persons specified under Section 36(B);
(1) Members of the Family – shall include
brothers/sisters (full/half-blood), spouse,
ancestors, and lineal descendants;
(2) An Individual and a Corporation – where more
than 50% of the outstanding stock is owned by
the individual;
(3) Between Two (2) Corporations – where more than
50% of the outstanding stock of each corp. is
owned, directly/indirectly, by or for the same
individual, if either one of the corporation is a
personal holding company or a foreign personal
holding company;
(4) Between the Grantor and a Fiduciary of any Trust;
(5) Between the Fiduciaries of Different Trusts
Granted by the same individual;
(6) Between the Fiduciary and the Beneficiary of a
Trust;
(c) If indebtedness is incurred to finance petroleum
exploration.
(3) Optional Treatment of Interest Expense – Interest
incurred to acquire property used in trade, business, or
profession may be allowed as deduction OR as
capital expenditure subject to depreciation.
C. TAXES:
(1) General Rule: Taxes paid or incurred in connection with
the trade, business, or profession are deductible;
EXCEPT:
(a) Income tax;
(b) Income taxes imposed by foreign country; EXCEPT if
the taxpayer DOES NOT signify in his return his desire
to have to any extent the benefits under
Paragraph (3) of this subsection;
(c) Estate and donor’s taxes; and
(d) Special Assessments
PROVIDED, taxes deducted, when refunded or
credited, shall be included in the gross income in the
year of receipt to the extent of the income tax benefit
of said deduction.
(2) Limitations on Deductions – In the case of a non-resident
alien engaged in trade or business or a resident foreign
corporation, the deductions for taxes under Par. (1) of
Subsection (C) shall be allowed ONLY if and to the
extent that they are connected with income from
sources w/in.
(3) Credit Against Tax for Taxes of Foreign Countries – If the
taxpayer signifies his desire to have the benefits of this
paragraph, the tax imposed by this title shall be
credited with:
(a) In the case of a Citizen or Domestic Corporation,
the amount of taxes paid or incurred during the
taxable year to any foreign country; and
(b) In the case of a member of a general professional
partnership or a beneficiary of an estate or trust, his
proportionate share of taxes of the partnership or
the estate or trust paid or incurred during the
taxable year, IF his distributive share of the income
is reported for taxation.
 Aliens and Foreign Corporations not entitled to the
same credits
(4) Limitations on Credit:
(a) If the ratio of INCOMEF.C. : INCOMETOTAL = X : Y,
Then credit allowed should not exceed X/Y of the
total tax due.
Ex. INCOMEF.C. = P10,000.00, and
INCOMETOTAL = P50,000.00, therefore ratio is 1 : 5.
Thus, if TAXF.C. = P1,000.00 but TAXDUE = P4,000.00,
then not the entire P1,000.00 shall be credited to
the TAXDUE and instead shall be limited to 1/5 of the
tax due or only P800.00 shall be allowed as credits.
(b) If the ratio of INCOMEOUTSIDE : INCOMETOTAL = A : B,
Then CREDITTOTAL should not exceed A/B of the total
tax due.
 The limitation which allows the lower amount to be
deducted shall be applied.
(5) Adjustments on Payment of Incurred Taxes – If taxes
paid differ from amounts claimed as credits, or if any
tax paid is refunded, the taxpayer SHALL notify the
Commissioner, who shall redetermine the amount of
tax due for the year/s affected.
 Any deficiency shall be paid upon demand by the
Commissioner, while any excess shall be credited or
refunded.
 In the case of tax incurred but not paid, the
Commissioner as a condition precedent to the
allowance of credit may require the taxpayer to give a
bond, conditioned upon the payment by the taxpayer
of any amount of tax found due upon any such
redetermination, and such further conditions as the
Commissioner may require.
(6) Year in which credit is taken. – The credits may, at the
option of the taxpayer and irrespective of the method
of accounting employed, be taken in the year in which
the taxes of the foreign country were incurred (not in the
year paid) subject to Sec. 24(C)(5). If the taxpayer elects
said option, the credits for all subsequent years shall be
taken upon the same basis.
(7) Proof of Credits – The credits shall be allowed only if the
taxpayer establishes to the Commissioner the following:
(a) Total income derived from sources without;
(b) Income derived from each country, the tax paid or
incurred and claimed as credit,
(c) All other info necessary for verification and
computation of credits
D. LOSSES:
(1) In General: Losses actually sustained during the taxable
year NOT compensated by insurance or other forms of
indemnity shall be allowed as deductions:
(a) If incurred in trade, profession, or business;
(b) Property connected with trade, profession, or
business, if loss arises from fires, storms, shipwreck, or
other casualties, or from robbery, theft, or
embezzlement.
 Secretary is authorized to promulgate rules and
regulations prescribing, among other things, the
time and manner of submission of declaration of
loss sustained: PROVIDED, the time limit shall not be
less than 30 days nor more than 90 days from date
of discovery of loss.
(c) No loss shall be deducted if at the time of filing of
the return such loss has been claimed as a
deduction for estate tax purposes in the estate tax
return.
(2) Proof of Loss – In the case of a nonresident alien or
foreign corporation, the losses deductible shall be
those actually sustained during the year incurred in
business, trade, or exercise of a profession conducted
within the Philippines
(3) Net Operating Loss Carry-over:
 means the excess of allowable deductions over the
gross income of the business in a taxable year.
 The net operating loss for any taxable year immediately
preceding the current taxable year, which had not
been previously offset as a deduction shall be carried
over as a deduction from gross income for the next
three (3) years: PROVIDED, any net losss incurred in a
taxable year during which the taxpayer was exempt
from tax shall NOT be deductible; PROVIDED FURTHER,
net operating loss carry-over shall be allowed ONLY if
there has been no substantial change in the ownership
of the business or enterprise in that:
(i) If a corporation, NOT LESS THAN 75% in nominal value
of outstanding issued shares is held by or on behalf
of the same persons; OR
(ii) NOT LESS THAN 75% of the paid up capital is held by
or on the behalf of the same persons
 For mines other than oil and gas wells, a net loss
incurred during any of the first 10 years may be carried
over as a deduction for the next 5 years immediately
following the year of loss. The entire amount of loss shall
be carried over to the first of the 5 years, and any
portion which exceeds the taxable income shall be
deducted in the next of the remaining 4 years.
(4) Capital Losses –
(a) Limitation – Losses from sales or exchanges of
capital assets shall be allowed only to the extent
provided in Section 39 (Capital Gains and Losses);
(b) Securities becoming worthless:
 Securities – shares of stock, rights to subscribe or to
receive such shares.
Includes bonds, debentures, notes, certificates,
other evidence of indebtedness issued by a
corporation, including those issued by the gov’t
(Sec. 22(T))
 If securities become worthless during the taxable
year and are capital assets, the loss shall be
considered as a loss from the sale or exchange, on
the last day of such taxable year, of capital assets.
(5) Losses from Wash Sales –
 Sec. 38:
(a) Loss claimed to have been sustained from sale or
disposition of shares or securities where it appears
that within a period beginning 30 days before and
ending 30 days after such sale, the taxpayer has
acquired or entered into a contract or option to
acquire substantially the identical stock or securities,
then NO DEDUCTION for the loss shall be allowed.
EXCEPTION: when loss is claimed by a dealer in stock
w/ respect to a transaction made in the ordinary
course of business.
(b) If the amount of stock or securities acquired is LESS
than that sold or disposed, then the particular shares
or securities, the loss from the sale of which is not
deductible, shall be determined under the rules and
regulations prescribed by the Secretary of Finance.
(c) If the amount of stock or securities acquired is NOT
LESS than that sold or disposed, then the particular
shares or securities, the acquisition of which resulted
in the non-deductibility of the loss, shall be
determined under the rules and regulations
prescribed by the Secretary of Finance.
(6) Wagering Losses – allowed only to the extent of the
gains from such transactions. Thus, if there are no
wagering gains, wagering losses cannot be deducted.
(7) Abandonment Losses –
(a) When petroleum operations undertaken in an area
are partially or wholly abandoned, all accumulated
exploration and development expenditures
pertaining thereto shall be allowed as a deduction.
In all cases, notices of abandonment shall be filed
w/ the Commissioner.
 (b) In case a producing well is abandoned, the
unamortized costs of equipment, as well as the
undepreciated costs of equipment directly used
therein shall be allowed as a deduction in the year
such well is abandoned. PROVIDED, in case the well
is reentered or the equipment is restored into
service, the said costs shall be included as part of
the gross income in the year of resumption or
restoration.
E. BAD DEBTS:
(1) In General – Debts due to the taxpayer actually
ascertained and charged off within the taxable year
EXCEPT those not connected with profession, trade, or
business, and those entered between:
1) Members of the Family – shall include brothers/sisters
(full/half-blood), spouse, ancestors, and lineal
descendants;
2) An Individual and a Corporation – where more than
50% of the outstanding stock is owned by the
individual;
3) Between Two (2) Corporations – where more than
50% of the outstanding stock of each corp. is owned,
directly/indirectly, by or for the same individual, if
either one of the corporation is a personal holding
company or a foreign personal holding company;
4) Between the Grantor and a Fiduciary of any Trust;
5) Between the Fiduciaries of Different Trusts Granted by
the same individual;
6) Between the Fiduciary and the Beneficiary of a Trust;
(Sec. 26(B))
 PROVIDED, recovery of bad debts previously deducted
in the preceding years shall be included as part of the
gross income in the year of recovery to the extent of
the income tax benefit of said deduction.
(2) Securities becoming worthless – only in the case of a
taxpayer other than a bank or trust company
incorporated under Philippine laws, a substantial part of
whose business is the receipt of deposits.
F. DEPRECIATION:
(1) General Rule – There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion,
wear and tear of property used in the trade or business.
(2) Use of Certain Methods and Rates:
(a) Straight-Line Method:
 Allowance for depreciation is constant;
Deduction = Cost – Salvage or Scrap Value
Estimated Useful Life
(b) Declining Balance Method:
 Scrap value is neglected; by the end of the
estimated useful life of the property, its value shall be
equal to zero.
 Uses a fixed rate not exceeding twice the rate for the
straight line method; such rate is multiplied to the
current value and the product is the allowance for
depreciation;
 The amount of the allowance for depreciation is then
deducted from the current value of the property to
arrive at the depreciated value, which shall be the
basis for the determination of the depreciation
allowance for the next year;
 At the final year of the estimated useful life, the
depreciation allowance shall be equal to the entire
current depreciated value of the property.
Example:
Value of property = 100,000.00 with estimated useful
life of 5 years.
Straight-Line Method Rate = 1 / (Estimated Useful Life)
= 1/5 or 20%
Declining Balance Rate – fixed rate not exceeding
twice the Straight Line Method Rate: eg. 40%
Year 1: 100,000.00 x 40% = 40,000.00
Year 2: 60,000.00 x 40% = 24,000.00
Year 3: 36,000.00 x 40% = 14,400.00
Year 4: 21,600.00 x 40% = 8,640.00
Year 5: 12,960.00;
(c) Sum-of-the-Years-Digit Method:
 Rate = Remaining Years / Sum of the Years;
Example:
Estimated useful life is 4 years;
Rate = Remaining years / 4 + 3 + 2 + 1 = Years / 10
Therefore, depreciation allowance is computed as
follows:
Year 1: (4/10) x Value of Property
Year 2: (3/10) x Value of Property
Year 3: (2/10) x Value of Property
Year 4: (1/10) x Value of Property
(3) Agreement as to Useful Life on Which Depreciation is
Based – When the taxpayer and Commissioner shall
agree in writing specifically dealing with the useful life
and rate of depreciation of any property, the rate so
agreed upon shall be binding on both the taxpayer
and the gov’t in the absence of facts and
circumstances not taken into consideration during the
adoption of such agreement.
 The responsibility to establish existence of facts and
circumstances shall rest with the party initiating
modification. Any change in the rate and useful life
shall not be effective for taxable years prior to the year
when change is initiated:
 PROVIDED, however, where the taxpayer has adopted
such useful life and depreciation rate for any asset
without any written objection on the part of the
Commissioner, the aforesaid useful life or rate shall be
binding.
(4) Depreciation of Properties used in Petroleum Operations:
 Allowance for depreciation shall be allowed under the
straight-line or declining balance method at the option
of the service contractor.
 If the contractor initially elects the declining balance
method, it may at any subsequent time shift to the
straight line method.
 Useful life = 10 years, or such shorter life as may be
permitted by the Commissioner.
 Properties NOT USED DIRECTLY in the production of
petroleum shall be depreciated under the straight-line
method with an estimated useful life of 5 years.
(5) Depreciation of Properties used in Mining Operations –
other than petroleum shall be computed as follows:
 At the normal rate of depreciation if the expected life is
10 years or less; or
 Depreciated over any number of years between 5
years and the expected life if the latter is more than 10
years
(6) Depreciation Deductible by Nonresident Aliens Engaged
in Trade or Business or Resident Foreign Corporations –
reasonable allowance for depreciation shall be
allowed only when the property is located in the
Philippines.
G. DEPLETION OF OIL AND GAS WELLS AND MINES:
(1) In General – reasonable allowance for depletion or
amortization computed in accordance with the cost-
depletion method shall be granted;
PROVIDED, when the allowance shall equal the capital
investment, no further allowance shall be granted;
PROVIDED, further, after production in commercial
quantities has commenced, intangible exploration and
drilling costs: (a) shall be deductible in the year
incurred if such for non-producing wells; or (b) shall be
deductible in full in the year paid or incurred or, at the
option of the taxpayer, may be capitalized and
amortized if such expenditures are for producing wells
in the same contract area.
 Depletion of Oil and Gas Wells and Mines Deductible
by a Nonresident Alien or Foreign Corporation –
allowed only for depletion of oil and gas wells located
within the Philippines.
H. CHARITABLE AND OTHER CONTRIBUTIONS:
(1) In General – deductions allowed for contributions or gifts
to or for the use of the gov’t or any of its agencies,
political subdivisions, exclusively for public purposes, or
to accredited domestic corporations or associations
organized and operated exclusively for religious,
charitable, scientific, youth and sports development,
cultural or educational purposes, or for the rehabilitation
of veterans, or to social welfare institutions, or to NGOs
no part of the net income of the recipient inures to the
benefit of any private shareholder or individual;
 LIMITATION: NOT to exceed 10% in the case of an
individual, and 5% in the case of a corporation, of the
taxpayer’s taxable income as computed prior to the
deduction of contributions
(2) Contributions Deductible in Full:
(a) Donations to the Gov’t – including fully-owned
government corporations, exclusively to finance or
to be used in priority activities in education, health,
youth and sports development, human settlements,
science and culture, and economic development
according to the NEDA National Priority Plan;
otherwise, it is subject to limitations.
(b) Donations to Certain Foreign Institutions or
International Organizations – which are fully
deductible pursuant to agreements, treaties, or
commitments entered into by the Gov’t and
institutions or organizations.
(c) Donations to Accredited NGOs – defined as non-
profit domestic corporations:
1. Organized/operated EXCLUSIVELY for scientific,
research, educational, youth and sports
development, health, social welfare, cultural, or
charitable purposes, no part of the net income of
which inures to the benefit of any private
individual;
2. The contribution is utilized not later than the 15th
day of the third month after the close of the
NGO’s taxable year, unless the period is
extended by the Secretary.
“Utilization” means expenses made to
accomplish one or more of the purposes for
which the NGO was created, or for the
acquisition of properties used directly in carrying
out said purposes.
3. The NGO’s administrative expenses shall not
exceed 30% of its total expenses.
4. In case of dissolution of the NGO, the assets
should be distributed to another non-profit
domestic corporation organized for similar
purpose, or to the state for public purpose, or to
another organization in the discretion of the
court.
(3) Valuation: The amount deductible for contributions
other than money shall be based on the cost of
acquisition of the property, not FMV.
I. RESEARCH AND DEVELOPMENT:
(1) In General: Expenses for R&D may be treated as
ordinary and necessary expenses not chargeable to a
capital account, allowed as a deduction during the
taxable year paid or incurred.
(2) Amortization of Certain R&D Expenses: At the option of
the taxpayer, the following R&D expenses may be
treated as deferred expenses:
 (a) Those paid or incurred in connection with trade,
business, or profession;
(b) Those NOT treated as expenses under Sec. 34(I)(1);
(c) Those chargeable to capital account but not
chargeable to property subject to depreciation or
depletion.
 The deferred expenses shall be allowed as
deductions ratably distributed over a period NOT LESS
THAN 60 MONTHS.
(3) Limitations – The ff. are not deductible as R&D expenses:
(a) Expenditures for the acquisition or improvement of
land or property used in connection with R&D subject
to depreciation and depletion.
(b) Expenditures for ascertaining the existence, location,
extent, or quality of ores, minerals, including oil or gas.
J. PENSION TRUSTS:
 In addition to contributions deducted under Sec.
34(A)(1), a reasonable amount paid into such trust shall
be deductible if:
(1) Such amount has not been previously deducted; AND
(2) Such amount is apportioned in equal portions over a
period 10 consecutive years beginning in the year of
payment.
K. ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY OF
CERTAIN PAYMENTS:
Any amount paid or payable which is deductible shall may
be allowed ONLY if it is shown that the tax required to be
deducted or withheld therefrom has been paid to the BIR.
L. OPTIONAL STANDARD DEDUCTION:
 In lieu of all deductions, an individual other than a non-
resident alien, domestic corporations, and resident
foreign corporations not subject to special tax treatment,
may elect a standard deduction of 40% of the gross sales
or receipts, or gross income.
 The taxpayer MUST signify in the return of the intention to
elect the OSD, such election when made shall be
irrevocable for the taxable year then the return is made
M. PREMIUM PAYMENTS ON HEALTH AND/OR
HOSPITALIZATION INSURANCE OF AN INDIVIDUAL TAXPAYER:
 Premiums NOT TO EXCEED P2,400.00 a year per family
paid during the taxable year for health and/or
hospitalization insurance by the taxpayer for himself and
his family shall be allowed as a deduction.
 PROVIDED, the family has a gross income of NOT MORE
THAN P250,000.00.
 PROVIDED, further, that in the case of married taxpayers,
the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
SEC. 35. ALLOWANCE FOR PERSONAL EXEMPTION FOR
INDIVIDUAL TAXPAYER
(A) In General – There shall be allowed a basic personal
exemption of P50,000.00 for every individual taxpayer;
 In the case of married taxpayers where only one
derives gross income, only the said spouse shall be
allowed the exemption.
(B) Additional Exemptions – There shall be allowed an
additional exemption of P25,000.00 for each
dependent not exceeding 4.
 Additional exemptions may be claimed by only one
of the spouses in case of married individuals;
 For legally separated spouses, additional exemptions
shall be claimed by the spouse who has custody of
the dependents; PROVIDED, the total amount of
exemptions shall not exceed P100,000.00
(C) Change of Status:
 In case of marriage or increase in dependents, the
taxpayer may claim the corresponding personal and
additional exemptions in full for such year.
 In case of death of the taxpayer, the estate may
claim the personal and additional exemptions in full
for such year.
 In case a dependent dies, marries, or turns 21, or
becomes gainfully employed, the taxpayer may still
claim the additional exemptions in full for year.
(D) Personal Exemption Allowable to Nonresident Alien
Individual – A nonresident alien engaged in trade or
business, or in the exercise of a profession in the
Philippines shall be entitled to personal exemption
equal to the exemptions allowed to Filipinos in the
alien’s country; but NOT TO EXCEED the exemptions
allowed to citizens and resident in the Philippines.
SEC. 36. ITEMS NOT DEDUCTIBLE
(A) General Rule – The ff. are not deductible:
(1) Personal, living, and family expenses;
(2) Amounts paid for new buildings or permanent
improvements made to increase the value of any
property or estate;
(3) Expenses in restoring property or in making good the
exhaustion thereof;
(4) Premiums on any life insurance covering the life of an
officer or employee when the taxpayer is directly or
indirectly a beneficiary under such policy;
(B) Losses from Sales or Exchanges of Property – No losses
shall be deductible in the following sales or exchanges
between:
(1) Members of the Family – shall include brothers/sisters
(full/half-blood), spouse, ancestors, and lineal
descendants;
(2) An Individual and a Corporation – where more than
50% of the outstanding stock is owned by the
individual;
(3) Between Two (2) Corporations – where more than
50% of the outstanding stock of each corp. is
owned, directly/indirectly, by or for the same
individual, if either one of the corporation is a
personal holding company or a foreign personal
holding company;
(4) Between the Grantor and a Fiduciary of any Trust;
(5) Between the Fiduciaries of Different Trusts Granted
by the same individual;
(6) Between the Fiduciary and the Beneficiary of a Trust;

SEC. 37. SPECIAL PROVISIONS REGARDING INCOME AND
DEDUCTIONS OF INSURANCE COMPANIES, DOMESTIC OR
FOREIGN
(A) Special Deductions – Net additions required by law to
reserve funds and the sums other than dividends paid
on policy and annuity contracts may be deductible;
PROVIDED, released reserve funds shall be treated as
income;
(B) Mutual Insurance Companies – Such portions of the
premium deposits returned to the policy holders shall
be deductible;
(C) Mutual Marine Insurance Companies – Amounts repaid
to policy holders on account of premiums previously
paid by them and the interest thereon.
(D) Assessment Insurance Companies – Actual deposits of
sums with the officers of the gov’t pursuant to law as
additions to guarantee or reserve funds are deductible.
SEC. 38. LOSSES FROM WASH SALES OF STOCK OR SECURITIES
(a) Loss claimed to have been sustained from sale or
disposition of shares or securities where it appears that
within a period beginning 30 days before and ending
30 days after such sale, the taxpayer has acquired or
entered into a contract or option to acquire
substantially the identical stock or securities, then NO
DEDUCTION for the loss shall be allowed. EXCEPTION:
when loss is claimed by a dealer in stock w/ respect to
a transaction made in the ordinary course of business.
(b) If the amount of stock or securities acquired is LESS than
that sold or disposed, then the particular shares or
securities, the loss from the sale of which is not
deductible, shall be determined under the rules and
regulations prescribed by the Secretary of Finance.
(c) If the amount of stock or securities acquired is NOT LESS
than that sold or disposed, then the particular shares or
securities, the acquisition of which resulted in the non-
deductibility of the loss, shall be determined under the
rules and regulations prescribed by the Secretary of
Finance.
SEC. 39. CAPITAL GAINS AND LOSSES
(A) Definitions:
1. Capital Assets – property held by the taxpayer,
whether or not connected with his trade or
business, but DOES NOT INCLUDE:
 Stock in trade;
 Property which would be included in the inventory
in on hand at the close of the taxable year;
 Property held primarily for sale in the ordinary
course of business OR used in the trade or business,
which are subject to depreciation; or
 Real property used in trade or business
2. Net Capital Gain – excess of the gains from sales of
capital assets over the losses
3. Net Capital Loss – excess of the losses from sales or
exchange of capital assets over the gains
(B) Percentage Taken into Account – in the case of a
taxpayer other than a corp, the ff. rules shall apply:
1. If property has been held for not more than 12 mos,
100% of the gain or loss shall be taken into
account;
2. If property has been held for more than 12 mos,
only 50% of the gain or loss shall be considered.
(C) Limitation on Capital Losses – Losses from sales or
exchanges of capital assets shall be allowed only to
the extent of the gains from such sales or exchanges.
(D) Net Capital Loss Carry-Over – If any taxpayer, other
than a corporation, sustains in any taxable year a net
capital loss, such loss shall be treated in the succeeding
taxable year as a loss from the sale or exchange of
capital asset held for not more than 12 mos.,
 100% of the capital loss carry-over shall be treated
as a loss in the succeeding taxable year
SEC. 40. DETERMINATION OF AMOUNT AND RECOGNITION
OF GAIN OR LOSS
(A) Computation of Gain or Loss –
 Gain: excess of the amount realized over the basis or
adjusted basis
 Loss: excess of the basis or adjusted basis over the
amount realized
 Amount Realized: the sum of money PLUS FMV of
property received in exchange for the property sold
or disposed
(B) Basis for Determining Gain or Loss –
(1) The COST thereof if such property was acquired by
purchase;
(2) FMV as of date of acquisition if by inheritance;
(3) If acquired as a gift: same as the basis of the last
owner who acquired it not as a gift; EXCEPT if the
FMV at the time it was given as gift is lower, then
the basis shall be the FMV;
(4) If the property was acquired for less than an
adequate consideration, the basis shall be the
amount paid;
(C) Exchange of Property –
(1) General Rule: Upon the sale or exchange of
property, he entire amount of the gain or loss shall
be recognized.
(2) EXCEPTIONS: No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation:
(a) A CORPORATION exchanges property solely for
stock in another corporation, where BOTH are
party to a merger or consolidation;
(b) A SHAREHOLDER exchanges stock in a
corporation solely for stock of another
corporation, where BOTH are party to a merger
or consolidation;
(c) A SECURITY HOLDER of a corporation
exchanges such securities solely for stock OR
securities in another corporation, where BOTH
are party to a merger or consolidation;
 NO GAIN OR LOSS shall be recognized if property
is transferred to a corporation in exchange for
 stock, as a result of which, the transferor, alone or
together with others not exceeding 4 persons,
gains control of the corporation.
(3) Exchange Not Solely in Kind:
(a) If an individual, a shareholder, a security holder
receives not only stock or securities but also
money and/or property, THE GAIN, IF ANY, BUT
NOT THE LOSS shall be recognized but in an
amount NOT in excess of the sum of money
and FMV of the property received.
(b) If the transferor corporation receives not only
stock but also money and/or property, then (i)
of the corporation distributes the money or
property in pursuance to a plan of merger or
consolidation, no gain shall be recognized; but
(ii) if the corporation does not distribute it, THE
GAIN, IF ANY, BUT NOT THE LOSS shall be
recognized but in an amount NOT in excess of
the sum of money and FMV of the property
received.
X---------------------------------------------X
CHAPTER VIII
ACCOUNTING PERIODS AND
METHODS OF ACCOUNTING
SEC. 43. GENERAL RULE (Accounting Periods)
 Taxable income shall be computed on the basis of the
taxpayer’s annual accounting period in accordance with
the method of accounting regularly employed.
 Accounting period may be:
o Calendar Year – January 1 to December 31
o Fiscal Year – a period of 12 months ending on the last
day of any month other than December
SEC. 44. PERIOD IN WHICH ITEMS OF GROSS INCOME
INCLUDED
 All items of gross income shall be included in the taxable
year received, unless it is permitted to be accounted for
as of different accounting period.
SEC. 45. PERIOD FOR WHICH DEDUCTIONS AND CREDITS
TAKEN
 The deductions allowed shall be taken for the taxable
year in which “paid or incurred” or “paid or accrued”
unless in order to clearly reflect the income, the
deductions should be taken as of a different accounting
period.
SEC. 46. CHANGE OF ACCOUNTING PERIOD
 If a taxpayer, OTHER THAN AN INDIVIDUAL, changes its
accounting period, the net income shall be computed
on the basis of the new accounting period subject to the
provisions of Sec. 47.
SEC. 47. FINAL OR ADJUSTMENT RETURNS FOR A PERIOD OF
LESS THAN 12 MONTHS
(A) Returns for Short Period Resulting from Change of
Accounting Period – A separate final or adjustment
return shall be made as follows:
 Fiscal to Calendar Year – for the period between the
close of the last fiscal year and the following
December 31.
 Calendar to Fiscal Year – for the period between
close of the last calendar year and the date
designated as the close of the fiscal year.
 Fiscal Year to Another Fiscal Year – for the period
between the close of the former fiscal year and the
date designated as the close of the new fiscal year
SEC. 48. ACCOUNTING FOR LONG-TERM CONTRACTS
 “Long-Term Contracts” – means building, installation or
construction contracts covering a period in excess of one
(1) year.
 Persons whose gross income is derived in whole or in part
from such contracts shall report such income upon the
basis of percentage of completion.
SEC. 49. INSTALLMENT BASIS
(A) Sales of Dealers in Personal Property – A person who
regularly sells personal property on instalment may
return as income in any taxable year that proportion of
the instalment payments actually received in that year,
which the gross profit to be realized when payment is
completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personalty – In the
casual sale or casual disposition of personalty for a
price exceeding Php1,000.00 or sale of real property, if
initial payments do not exceed 25% of the selling price,
the income may be returned on the basis and in the
manner prescribed in Sec. 49(A).
(C) Sales of Real Property Considered as Capital Assets by
Individuals – The individual may pay the capital gains
tax in instalments.
(D) Change from Accrual to Installment Basis –
SEC. 50. ALLOCATION OF INCOME AND DEDUCTIONS
 In the case of 2 or more organizations owned or
controlled by the same interests, the Commissioner is
authorized to distribute, apportion, or allocate gross
income or deductions between or among such
organizations if such is necessary to prevent evasion of
taxes or clearly reflect the income of such organizations.
CHAPTER IX
RETURNS AND PAYMENT OF TAX
SEC. 51. INDIVIDUAL RETURNS
(A) Requirements:
(1) The following are required to file an income tax
return (Sec. 51 (4) ITR filed shall be in duplicate):
(a) Resident citizens;
(b) Non-resident citizens on income from sources
within;
(c) Resident aliens on income from sources within;
(d) Non-resident aliens engaged in business or
trade in the Philippines.
(2) The following shall NOT be required to file an
income tax return:
(a) Individual whose gross income does exceed his
total personal and additional exemptions;
(b) Purely compensation earners, when income
tax thereon has been correctly withheld.
 EXCEPT an individual deriving compensation
concurrently from 2 or more employers at any
time within the taxable year.
(c) Individual whose sole income has been
subjected to final withholding tax;
(d) Minimum wage earner
(3) Nevertheless, those not required to file ITRs may be
required to file information returns.
(B) Where to File
 Authorized agent bank;
 Revenue District Officer;
 Collection Agent;
 Duly Authorized Treasurer of the city/municipality in
which the individual has his legal residence or
principal place of business.
 Or if there be no legal residence of principal place of
business within Phil., with the Office of the
Commissioner.
(C) When to File –
(1) On or before 15th day of April of each year.
(2) As to tax on capital gains:
(a) Shares of stock not traded in local stock
exchange – within 30 days after each
transaction AND a final consolidated return on
or before April 15
(b) Real Property – within 30 days following each
sale.
(D) Husband and Wife – Married individuals who DO NOT
derive income from purely compensation shall file a
return to include income of both spouses. BUT WHERE IT
IS IMPRACTICABLE, each spouse may file separate
returns but such shall be consolidated.
SEC. 52. CORPORATE RETURNS
(A) Every corporation subject to tax shall file in duplicate a
true and accurate quarterly income tax return and final
or adjustment return. The return shall be filed by the
Pres, VP, or other principal officer, such return shall be
sworn to by such officer and the treas. or asst. treas.
(B) Taxable Year – May either be calendar or fiscal year:
Provided, the corporation may not change its
accounting period without prior approval.
(C) Return of Corporation Contemplating Dissolution or
Reorganization – Every corporation shall, within 30 days
after the adoption of a resolution or plan for dissolution,
render a correct return to the Commissioner under
oath.
The dissolving corporation shall, prior to the issuance of
a Certificate of Dissolution, secure a certificate of tax
clearance from the BIR.
(D) Return on Capital Gains Realized from Sale of Shares of
Stock not Traded in the LSE – file a return within 30 days
after each transaction and a final consolidated return
of all transactions on or before the 15th day of the 4th
month following the close of the taxable year.
(E) The Commissioner may, in meritorious cases, grant a
reasonable extension of time for the filing of returns.
SEC. 54. RETURNS OF RECEIVERS, TRUSTEES IN BANKRUPTCY
OR ASSIGNEES
 Where there are receivers, trustees in bankruptcy or
assignees operating the property or business of a
corporation, such receivers, trustees, or assignees shall
make returns as and for such corporation and any tax
due shall be assessed and collected as if assessed
directly against the corporation/organization.
SEC. 55. RETURNS OF GENERAL PROFESSIONAL PARTNERSHIPS
 Every GPP shall file in duplicate, a return of its income,
setting forth the items of gross income, allowable
deductions, and the names, TIN, addresses, and shares of
each partner.
SEC. 56. PAYMENT AND ASSESSMENT OF ONCOME TAX FOR
INDIVIDUALS AND CORPORATIONS
(A) Payment of Tax –
(1) General Rule – The total amount of tax imposed
shall be paid by the person subject thereto at the
time the return is filed.
(2) Installment Payment – When tax due exceeds
Php2,000.00¸ the taxpayer OTHER THAN A
CORPORATION may pay the tax in 2 equal
installments, the first installment shall be paid upon
the filing of the return, the second installment shall
be paid on or before July 15 following the close of
the calendar year.
(3) Payment of Capital Gains Tax – Payment shall be
made at the time of filing of the return;
PROVIDED, if the seller submits proof of intention to
avail of exemption, no payments shall be required;
PROVIDED, FURTHER, if case the taxpayer fails to
qualify, the tax due shall immediately become due
and payable subject to penalties;
PROVIDED, FINALLY, if the seller has paid the tax
due then submits such proof of intent within 6
months from registration of the document
transferring the property, he shall be entitled to a
refund upon verification of his compliance with the
requirements for exemption.
(B) Assessment and Payment of Deficiency Tax – The
Commissioner shall examine and assess the correct
amount of the tax. The tax or deficiency so discovered
shall be paid upon notice and demand.
Deficiency is:
1. The amount by which the tax due exceeds the
amount as shown in the return.
2. Or if no amount is shown in the return or no return is
filed, the amount by which the tax due exceeds
the tax previously assessed or collected.
SEC. 57. WITHHOLDING OF TAX AT SOURCE
(A) The final tax on passive income shall be withheld by the
payor-corporation and/or person and be paid
pursuant to Sec. 58.
(B) The Secretary may require the withholding of creditable
tax on the items of income payable to natural or
juridical persons. Ex: Income tax on salaries
SEC. 58. RETURNS AND PAYMENT OF TAXES WITHHELD AT
SOURCE
(A) Quarterly Returns and Payments of Taxes – Taxes
deducted and withheld by withholding agents shall be
covered by a return and paid to:
 Authorized agent bank;
 Revenue District Officer;
 Collection Agent;
 Duly Authorized Treasurer of the city/municipality in
which the withholding agent has his legal residence
or principal place of business, OR if the withholding
agent be a corporation, where the principal office is
located.

Taxes deducted and withheld shall be held in trust by

the withholding agent for the government.

The return for final withholding tax shall be filed and the
payment made within 25 days from the close of each
calendar quarter, while return for creditable
withholding tax shall be filed and payment made not
later than the last day of the month following the close
of the quarter during which withholding was made.

(B) Statement of Income Payments Made and Taxes

Withheld – every withholding agent shall furnish each
recipient a written statement showing the income or
other payments made by the withholding agent during
the quarter or year, and the amount of tax withheld
simultaneously upon payment at the request of the
payee, but not later than:
 20th day following the close of the quarter for
corporate payees;
 March 1 of the following year for creditable
withholding taxes of individual payees; and
 January 31 of the succeeding year for final
withholding taxes.

(C) Annual Information Return – Every withholding agent

shall submit to the Commissioner an annual information
return containing the list of payees, payments, amounts
withheld, and other pertinent information on or before:
 March 1 of the following year for creditable
withholding taxes of individual payees; and
 January 31 of the succeeding year for final
withholding taxes.

(D) Income of Recepient – Income upon which creditable

tax has been withheld shall be included in the return of
the recipient but the excess of the amount of tax
withheld over the tax due on his return shall be
refunded to him. If the tax withheld is less than the tax
due, the deficiency shall be paid upon notice and
demand.

(E) No document transferring property shall be registered

by the ROD unless the Commissioner or his authorized
representative has certified that such transfer has been
reported and the capital gains or creditable
withholding tax, if any, has been paid.