BAD DEBTS
taxpayer’s books of accounts”
- Refer to those debts resulting from the worthlessness
or uncollectibility, in whole or in part, of amounts due
the taxpayer by others, arising from money lent or
from uncollectible amounts of income from goods sold
or services rendered actually ascertained to be
worthless and charged off within the taxable year.
Requisites for deductibility of bad debts
1. There must be an existing indebtedness fur to the
taxpayer which must be valid and legally
demandable
2. The same must be connected with the taxpayer’s
trade, business or practice of profession
3. The same must not be sustained in a transaction
entered into between parties enumerated under
Section 36(b) of the Tax Code
4. The same must be actually charged off in the
books of accounts of the taxpayer as of the end of
the taxable year
5. The same must be actually ascertained to be
worthless and uncollectible as of the end of the
taxable year and even in the future.
Meaning of the phrase “actually ascertained to be
worthless”
- A debt is not worthless simply because it is doubtful
value or difficult to collect.
- Worthless is determined upon the exercise of sound
business judgment.
- Depends upon the particular facts and the
circumstances of the case.
- A taxpayer may not postpone a bad debt deduction on
the basis of a mere hope of ultimate collection or
because of a continuance of attempts to collect notes
which have long become overdue, and where there is
no showing that the surrounding circumstances differ
from those relating to other notes which were charged
off in a prior year.
- A reasonable possibility of recovery will permit the
account to be carried along notwithstanding that the
probabilities are that the debt may not be collected at
all.
- Good faith does not require that the taxpayer be an
incorrigible optimist but on the other hand, he may
not be unduly pessimistic.
Meaning of the phrase “actually charged off from the
- The amount of money lent by the taxpayer, in the
course of his business, trade or profession, to his
debtor had been recorded in his books of account as a
receivable has actually become worthless as of the
end of the taxable year, that the said receivable has
been cancelled and written-off from the said
taxpayer’s books of account.
- A mere recording in the taxpayer’s books of account of
estimated uncollectible accounts does not constitute a
write-off of the said receivable, hence, shall not be a
valid basis for its deduction as a bad debt expense.
When there is a reasonable degree of certainty
- Before a taxpayer may charge off and deduct a debt,
he must ascertain and be able to demonstrate with
reasonable degree of certainty the uncollectibility of
the bad debts.
- In no case may a receivable from an insurance or
surety company be written-off from the taxpayer’s
books and claimed as bad debts deduction unless such
company has been declared closed due to insolvency
or for any such similar reason by the Insurance
Commissioner.
Tax Benefit Rule or the Equitable Doctrine of Tax Benefit
in case of recovery of bad debts
- The recovery of bad debts previously allowed as
deduction in the preceding year/s shall be included as
part of the taxpayer’s gross income in the year of such
recovery to the extent of the income tax benefit of
said deduction. Reason: considered as mere return of
capital.
Rules in allowing bad debts as deduction from gross
income
- Where all the surrounding circumstances indicate that
a debt is worthless, and the debt is charged off on the
books of the taxpayer within the year, the same may
be allowed as a deduction in computing taxable
income.
- Before a taxpayer may charge off and deduct a debt,
he must ascertain and be able to demonstrate, with
reasonable degree of certainty, the uncollectibility of
the debt.
- If a taxpayer computes his income upon the basis of
valuing his notes or accounts receivable at fair market
value when received, which may be less than their
face value, the amount deductible for bad debts in any
case is limited to such original valuation.
Other factors to determine whether a bad debt is already
worthless
1. The debtor has been adjudged bankrupt or
insolvent
2. The debtor has no property nor visible income
3. The collateral shares have already become
worthless
4. There are many debtors with small amounts of
debts and further action on the accounts would
entail expenses exceeding the amounts sought to
be collected.
Reserves for bad debts are not allowed as deduction
from gross income
- Bad debts must be charged off during the taxable year
to be allowed as deduction to gross income.
Advances cannot be claimed as deduction from gross
income
- Deductions for income tax purposes partake of the
nature of tax exemptions and are strictly construed
against the taxpayer, who must prove by convincing
evidence that he is entitled to the deduction claimed.
- There is a need to substantiate the assertion that the
advances were subsisting debts that could be
deducted from the gross income.
When worthless securities are deductible from gross
income as bad debts
- Worthless securities which are ordinary assets are not
allowed as deduction from gross income because loss
is not realized.
- However, if these worthless securities are capital
assets, and charged off within the taxable year, the
owner is considered to have incurred a capital loss
from the sale or exchange of capital assets, as of the
last day of the taxable year and, therefore, deductible
to the extent of the capital gains.
- This rule is not true in the case of banks or trust
companies incorporated under the laws of the
Philippines.
DEPRECIATION
- A reasonable allowance for the exhaustion, wear and
tear, and obsolescence of property used in the trade
or business may be deducted from gross income.
- Depreciation excludes any idea of a mere reduction in
market value resulting from wear and tear or
obsolescence.
- The proper allowance for such depreciation of any
property used in the trade or business for such
depreciation of any property used in the trade or
business is that amount which should be set aside for
the taxable year in accordance with a reasonable
consistent plan whereby the aggregate of the amount
so set aside, plus the salvage value, will, at the end of
the useful life of the property in business, equal the
basis of the property.
- In case of property held by one person for life with
remainder to another person, the deduction shall be
computed as if the life tenant were the absolute
owner of the property and shall be allowed to the life
tenant.
- In the case of property held in trust, the allowable
deduction shall be apportioned between he income
beneficiaries and the trustees in accordance with the
pertinent provisions of the instrument creating the
trust, or in the absence of such provisions, on the basis
of the trust income allowable to each.
When obsolescence may be allowed to be deducted from
gross income, in addition to depreciation
- With respect to physical property the whole or any
portion of which is clearly shown by the taxpayer as
being affected by economic conditions that will result
in its being abandoned at a future date prior to the
end of its normal useful life, so that depreciation
deductions alone are insufficient to return the cost at
the end of its economic term of usefulness, a
reasonable deduction for obsolescence, in addition to
depreciation, may be allowed.
- No deductions for obsolescence will be permitted
merely because, in the opinion of a taxpayer, the
property may become obsolete at some later date.
Depreciable property
- The necessity for a depreciation allowance arises from
the fact that certain property used in the business
 gradually approaches a point where its usefulness is
exhausted.
- This does not apply to inventories of to stock in trade,
nor to land apart from the improvements or physical
development added to it.
- It does not apply to bodies of minerals which try the
process of removal suffer depletion.
Requisites for deductibility of allowance for depreciation
1. It must be sustained by the person who owns or
who has a capital investment in the property
2. It must be reasonable in that the amount of
depreciation must be in accordance with the
depreciation method being adopted by the
company
3. The property being depreciated is being used in
the trade or business
4. The allowance for depreciation must be charged
off during the taxable year
5. The property must have a limited useful life
6. The allowance for depreciation should not exceed
the cost of the property
7. The schedule of the allowance must be attached
to the return.
Depreciation expense on vehicles, and other expenses
incurred thereon
- It cannot be presumed that the purchase of a vehicle is
a purchase of a property used in business.
- Guidelines:
1. No deduction from gross income for depreciation
shall be allowed unless the taxpayer substantiates
the purchase with sufficient evidence, which must
contain the following:
a. Specific motor vehicle identification number
b. Total price
c. The direct connection or relation of the
vehicle to the development, management,
operation and/or conduct of the trade or
business or profession of the taxpayer
2. Only one vehicle for land transport is allowed for
the use of an official or ee, the value of which
should not exceed 2.4M.
3. No depreciation shall be allowed for yachts,
helicopters, airplanes and/or aircrafts, and land
vehicle which exceed the above threshold amount,
unless the taxpayer’s main line of business is
transport operations or lease of transportation
equipment and the vehicles purchased are used in
the said operations.
4. All maintenance expenses on account of non-
depreciable vehicles for taxation purposes are
disallowed in its entirety.
5. All maintenance expenses incurred on non-
depreciable vehicles are likewise disallowed for
taxation purposes.
How to charge off depreciation
- A depreciation allowance, in order to constitute an
allowable deduction from gross income must be
charged off.
- The particular manner in which is shall be charged off
is not material, except that the amount measuring a
reasonable allowance for depreciation must be either
deducted directly from the book value of the assets or
preferably credited to a depreciation reserve account,
which must be reflected in the annual balance sheet.
Statement to be attached to return
- There should be attached a statement showing the
item, unit, or group of depreciable property, the cost
price, the rate of charge, amount previously deducted,
and the amount claimed in the return.
- These data must agree with those appearing the in the
books of the taxpayer.
No depreciation may be allowed on the appraisal
increase of fixed assets
- The income tax does not allow depreciation of an asset
beyond its acquisition cost.
- Reason: deductions from the gross income are
privileges, not matters of right.
- The idea of profit on the investment made has never
been the underlying reason for the allowance of a
deduction for depreciation.
Methods of computing allowance for depreciation
- The proper allowance for depreciation of any property
used in trade or business refers to the reasonable
allowance for the exhaustion, wear and tear, including
reasonable allowance for obsolescence of said property
- Methods
1. Straight-line method – to the effect that the rate
and the base are constant.
Cost of property – salvage value = A for D
 Useful life of the property
2. Declining-balance method – the fixed percentage of
diminishing book value method is to the effect that
the rate of yearly depreciation remains the same
but the base upon which the rate is applied
diminishes year to year.
Cost – Depreciation X rate = A for D
Estimated useful life
3. Sum of the years digit method – the capital sum to
be replaced should be charged off over the useful
life of the property.
Nth period X Cost – Salvage value = A for D
Sum of all the years digits
4. Any other method which may be prescribed by the
SOF upon recommendation of the CIR.
- Method adopted must be reasonable.
- The reasonableness of any claim for depreciation shall
be determined upon the condition known to exist at
the end of the period for which the return is made.
- If it develops that the useful life will be longer or
shorter, the portion of the cost or other basis of the
property not already provided for thru depreciation
allowances should spread over the remaining useful life
of the property as re-estimated in the light of the
subsequent facts.
Agreement as to the useful life on which the depreciation
rate is based
- Taxpayer and the CIR, binding.
- The responsibility of establishing the existence of such
facts and circumstances shall rest upon the party
initiating modification.
Capital sum recoverable thru depreciation allowances
- The capital sum to be replaced by depreciation
allowances is the cost or other basis of the property in
respect of which the allowance is made.
- To this amount should be added from time to time the
cost of improvements, additions, and betterment and
from it should be deducted from time to time the
amount of any definite loss or damage sustained by the
property thru casualty, as distinguished from the
gradual exhaustion of its utility which is the basis of the
depreciation allowance.
- Where the lessee of the real property erects
improvements, and income has been returned by the
lessor as a result thereof, the caital sum to be replaced
by depreciation allowance is the same as though no
such improvement was made.
- No depreciation deduction will be allowed in case of
property which has been amortized to its scrap value
and is no longer in use.
Depreciation of properties used in petroleum operations
- An allowance for depreciation in respect of all
properties related to production of petroleum initially
placed in service in a taxable year shall be allowed
under the straight-line or declining-balance method of
depreciation at the option of the service contractor.
- If the service contractor initially elects the declining-
balance method, it may at any subsequent date, shift to
the straight-line method.
- The useful life of properties used shall be 10 years or
such shorter life as may be permitted by the CIR.
- Properties not used directly shall be depreciated under
the straight-line method on the basis of an estimated
useful life of 5 years.
Depreciation of properties used in mining operations
- Shall be computed as follows
1. At the normal rate of depreciation if the expected
life is 10 years or less
2. Depreciated over any number of years between 5
years and the expected life if the latter is more than
10 years, and the depreciation thereon allowed as
deduction from taxable income
Depreciation deductible by nonresident aliens
engaged in trade or business in the Philippines
- a reasonable allowance for the deterioration of
property arising out of its use or employment or its
non-use in the business, trade or profession shall be
permitted only when such property is located in the
Philippines.
 DEPLETION
- Refers to the exhaustion of natural resources owing to
production or severance.
- The allowance for depletion is based on the theory that
the extraction of minerals gradually exhausts the
capital investment in the mineral deposit.
- In computing taxable income, there shall be allowed as
deduction, in the case of mines, a reasonable allowance
for depletion thereof not to exceed the market value in
the mine of the product thereof which has been mined
and sold during the year for which the return is made.
- In determining the amount, three factors are essential:
1. The basis of the property
2. The estimated total recoverable units in the
property
3. The number of units discovered during the taxable
year.
- Minerals – all naturally occurring inorganic substances
in solid, liquid or any intermediate state including coal.
- Mining or to mine – to extract, remove, utilize minerals
and includes operations necessary for that purpose.
Who may avail of the cost of depletion
- Annual depletion deductions are allowed only in mining
entities which own an economic interest in mineral
deposits.
- Economic interest is possessed in every case in which
the taxpayer has acquired by investment any interest in
mineral, in place and secures, by any form of legal
relationship, such as, but not limited to, operating
agreement and service contract agreement, income
from the extraction of mineral, to which it must look for
a return of capital.
Basis of Cost of Depletion
- The adjusted cost of basis of the mining property being
mined
- The adjusted cost basis shall be the accumulated
exploration and development expenses incurred on the
mining properties minus accumulated cost depletion
that should have been deducted as of the same date of
same property.
- Exploration expenditures – expenditures paid or
incurred for the purpose of ascertaining the existence,
location, extent, quality of any deposit for ore or other
mineral, and paid or incurred before the beginning of
the development stage of mine or deposit of a
particular mining property.
- Development expenditures – include all capital
expenditures paid or incurred during the development
stage of the mine or other natural deposit.
Limitation of cost depletion
- The basis for cost depletion mineral deposits does not
include:
1. Amounts recoverable thru depreciation, thru
deferred expenses thru deductions other than
depletion
2. The residual value of improvements at the end of
operation.
- Such basis does include exploration and development
expenses incurred on mining properties or area other
than those presently being mined. These expenses shall
be treated as deferred expenses.
- The annual allowable cost depletion shall not exceed
the market value as used for purposes of imposing the
mining ad valorem taxes in the mine of the product
thereof which has been mined and sold during the year
for which the return and computation are made.
- The allowable cost depletion deduction shall be limited
only to the extent of the capital invested in the
particular mining property.
- Capital invested in the particular mining shall include
the accumulated exploration and development
expenditures and expenditures incurred on the ongoing
mine exploration and development on the same mining
are which –
1. Increases the value of the mine
2. Decreases the cost of production of mineral units
3. Restores property to its previous condition or in
making good the exhaustion thereof for which an
allowance is or has been made.
- No further deduction for cost depletion shall be
allowed when the sum of the cost depletion equals the
cost of adjusted basis of the property plus allowable
capital additions.
- Actual commercial production – shall mean the stage of
mining operation attained by a mine in which mineral
or mineral products of marketable grade and quantity
have been produced and sold to local and/or foreign
markets.
Manner of computation of cost depletion
- Computed by dividing the adjusted cost basis by the
number of units of minerals remaining as of the taxable
year and by multiplying the depletion unit so
determined by the number of units of minerals sold
within the taxable year.
- Number of units of minerals remaining as of the taxable
year is the number of units of minerals remaining at the
end of the period to be recovered from the property
plus the number of units sold within the taxable year.
- The number of units sold within the taxable year is
1. In case of taxpayer reporting income on the cash
basis, include units for which payments were
received within the taxable year although extracted
or sold prior to the period and exclude units sold
but not paid for in the taxable year.
2. In case of taxpayer reporting income on the accrual
method, include all units extracted and sold during
the period, whether paid for or not, but does not
include units with respect to depletion deductions
which are allowed or allowable prior to the taxable
year.
- In the case of natural gas or oil wells, the taxpayer may
computed the cost depletion in respect of such
property for the taxable year by multiplying the
adjusted cost basis of the property by a fraction, the
numerator of which is equal to the number of cubic
feet or barrels of oil recovered during the year and the
denominator of which is equal to the expected
recoverable number of cubic feet of gas or barrels of oil
at the end of the taxable year plus the number of cubic
feet of gas or barrels of oil recovered during the year.
Determination of mineral content of deposits remaining
as of the taxable year
- The mineral contents remaining as of the taxable year
pertains to the estimated mineral products reasonably
known or on good evidence believed to have existed in
place as of the end of the taxable year, the estimate of
determination of which was made according to the
method current in the industry and in the light of the
most accurate and reliable information obtainable.
- The estimated mineral products remaining as of the
taxable year shall include both quantity and grade:
1. The positive ores and mineral deposits, which
include ores and minerals blocked out and
developed or assured in the usual conventional
meaning.
- Positive ore shall mean the full tonnage computed
with good mining practice from dimensions
revealed in outcrops, branches, underground
workings and drill holes and for which the grade is
computed from results of detailed sampling.
2. The probable or prospective ores and mineral
deposits, which include ores and minerals that are
believed to exist on the basis of good evidence
although not actually known to occur on the basis
of existing development. Such probable or
prospective ores or minerals may be estimated:
a. As to quantity, only in case they are extensions
of known deposits or are new bodies or masses
whose existence is indicated by geological
surveys or other evidence to a high degree of
probability
b. As to grade, only in accordance with the best
indications available as to richness.
- Probable or prospective ore shall mean the ore for
which tonnage and grade are computed partly from
specific measurement, samples and partly from
projection for a reasonable distance on geologic
evidence.
Records to be kept
- Every taxpayer claiming and making a deduction for
depletion of mineral property shall keep a separate
account for each and every area in his books of
accounts in which shall be accurately recorded the cost
or other basis of such property and thereafter to be
debited by any and all capital additions.
- In addition, the taxpayer must assemble, segregate and
have readily available at his principal place of business,
all supporting data which were used in compiling the
summary statement required to be attached to the
income tax return to be filed.
Basis of depreciation of improvements
- There shall be allowed as a deduction a reasonable
allowance for depreciation of improvements including,
but not limited to, mining and milling equipment.
Aggregation or combination of separate properties
- In the case of mining companies with several mining
properties, it may aggregate into one operating unit,
several mining properties for purposes of determining
 the adjusted cost basis recoverable thru depletion
subject to the following conditions:
1. All contiguous areas included in a single concession
grant or in separate concession grants may be
constituted as a single operating unit
2. Operating mineral interests which are
geographically widespread may not be treated as
parts of the same operating unit
3. Undeveloped operating mineral unit may be
aggregated only with those interests with which it
will be operated as a unit when it reaches the
production stage.
Intangible costs in petroleum operations.
- Refers to any cost incurred in petroleum operations
which in itself has no salvage value and which is
incidental to and necessary for the drilling of wells and
preparation of wells for the production of petroleum.
- Any intangible exploration, drilling and development
expenses allowed as a deduction in computing taxable
income during the year shall not be taken into
consideration in computing the adjusted cost basis for
the purpose of computing allowable cost depletion.
Election to deduct exploration and development
expenditures
- In computing taxable income from mining operations,
the taxpayer may, at his option, deduct exploration and
development expenditures accumulated as cost of
adjusted basis for cost depletion as of date of
prospecting, as well as exploration and development
expenditures paid or incurred during the taxable year:
Provided, That the total amount of deductible for
exploration and development expenditures shall not
exceed 25% of the taxable income from mining
operations computed without the benefit of any tax
incentives under existing laws.
- The actual exploration and development expenditures
minus 25% of the taxable income from mining shall be
carried forward to the succeeding years until fully
deducted.
- This election by the taxpayer is irrevocable and shall be
binding in succeeding taxable years.
Net income from mining operations
- Mean the gross income from operations less allowable
deductions which are necessary or related to mining
operations.
Depletion of oil and gas wells and mines deductible by a
nonresident alien individual or foreign corporation
- Shall be authorized only in respect to oil and gas wells
or mines located within the Philippines.
CHARITABLE AND OTHER CONTRIBUTIONS
- Requisites
1. The contribution must have been actually made to
entities specified by law
2. The contribution must have been made within the
taxable year
3. It must be evidenced by adequate receipts and
records
4. For contributions other than money, the amount
shall be based on the acquisition cost of the
property not the fair market value at the time of
the contribution
5. For contributions subject to statutory limitations,
the same must not exceed 10% in the case of
individuals engaged in business or profession or 5%
in case of corporations of the said taxpayer’s
taxable income before deducting the charitable
contributions.
Contributions subject to statutory limits
- The following donations or contributions are subject to
limitations of not exceeding 10% (in case of individuals)
or to 5% (in case of corporations) based on the
taxpayer’s gross income derived from trade, business or
practice of profession computed without first deducting
the contributions:
1. Contributions for non-priority activities or gifts
actually paid or made within the taxable year to, or
for the use of the Government of the Philippines or
any of its agencies or any political subdivision
thereof exclusively for public purposes, or
2. Donations, contributions or gifts actually paid or
made within the taxable year to accredited non-
profit corporations 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 non-government
 organizations, no part of the net income of which
inures to the benefit of any private stock holder or
individual shall be allowed limited deductibility in
an amount not in excess of 10% for an individual
donor, and 5% for a corporate donor, of the
donor’s taxable income derived from trade,
business or practice of profession as computed
without the benefit of this deduction.
- The amount deductible is the actual contribution or the
statutory limit computed, whichever is lower.
Contributions/donations deductible in Full
1. Donations to the Government
- Including fully-owned government corporations,
exclusively to finance, to provide for, or to be used
in undertaking priority in education, health, youth
and sports development, human settlements,
science and culture, and in economic development
according to a national Priority Plan determined by
the NEDA in consultation with appropriate
government agencies, including its regional
development councils and private philanthropic
persons and institutions.
2. Donations to certain foreign institutions or
international organizations
- The subject donations must be fully deductible in
pursuance of or in compliance with agreements,
treaties, or commitments entered into by the
Government of the Philippines and the foreign
institutions or international organizations or in
pursuance of special laws.
3. Donations to accredited non-stock, non-profit
corporations/NGOs
1. Organized and operated exclusively for
scientific, research, educational, character-
building and youth and sports development,
health, social welfare, cultural or charitable
purposes, or combination thereof, no part of
the taxable income of which inures to the
benefit of any private individual
2. Which, not later than 15th day of the third
month after the close of the accredited NGO’s
taxable year in which contributions are
received, makes utilization directly for the
active conduct of the activities constituting the
purpose or function for which it is organized
and operated
3. The level of administrative expense of which
shall, on an annual basis and in no case to
exceed 30% of the total expenses
4. The assets of which, in the event of
dissolution, would be distributed to another
NGO organized for similar purpose or
purposes, or to the state for public purpose, or
to another NGO to be used in such manner as
in the judgment of a court shall best
accomplish the general purpose for which the
dissolved organization was organized
5. Only to the extent of the acquisition cost (not
the fair market value) of the property, if the
contribution is other than money, shall be
allowed full deductibility
- Donations and gifts made in favor of accredited non-
stock, non-profit corporations/NGOs shall be
exempted from the donor’s tax; Provided, however,
That not more than 30% of the said donations and
gifts for the taxable year shall be used by such
accredited non-stock, non-profit corporations/NGOs
institutions qualified done-institution for
administration purposes.
Utilization requirements
- Amounts set aside for specific project must have the
prior approval of the Commissioner in writing
- Amounts set aside shall be evidenced by book entries
and documents showing evidence of deposits or
investments, including investment of the funds so set
aside, or other documents that the Commissioner may
require.
Accreditation of non-stock, non-profit
corporations/NGOs by the accrediting Entity
- The accrediting entity shall examine, evaluate and
accredit non-stock, non-profit corporations and NGOs
as a prerequisite for their registration with the BIR as
qualified-donee institutions.
- Newly-organized and existing non-stock, non-profit
corporations and NGOs shall apply with the
Accrediting Entity for accreditation and submit to a
process of examination and evaluation.
- The accrediting Entity shall evaluate and accredit
NGOs by using a set of major criteria.
Certificate of donations
- All credited NGOs are required to issue a certificate of
donation in such form as prescribed by the BIR, on
every donation or gift they receive.
Notice of donations
- The donor, on the hand, should give a notice for
every donation worth over P1M to the RDO where his
lace of business is located within 30 days after the
receipt of the Certificate of Donation attaching to the
said notice the copy of the Certificate of Donation
issued to him by the accredited NGO.
Date and place of filing
- By the donors – at the time of filing their income tax
returns.
- By the accredited NGO – not later than 15th day of the
4th month after the close of its taxable year in order
to maintain its status as an accredited NGO.
- File in the RDO where the place of business of the
donor or donee is located.
Contributions to a candidate in an election not allowed as
deduction from gross income of a taxpayer.
- Because the said expense is not directly attributable
to, the development, management, operation and/or
conduct of a trade, business or profession.
Monitoring and verification of the annual information
return
- May be examined by the BIR annually for purposes of
ascertaining compliance with the conditions where
which they have been granted tax exemptions or tax
incentives, and their tax liability, if any.
RESEARCH AND DEVELOPMENT
- Research is original and planned investigation
undertaken by the taxpayer with the prospect of
gaining new scientific or technical knowledge and
understanding, while development is the application
of research findings or other knowledge to a plan or
design for the production of new or substantially
improved materials, devices, products, processes,
systems or services before the start of commercial
production or use.
Requisites
1. Research or development expenditures were paid
or incurred in connection with the taxpayer’s
trade, business or practice of profession
2. The same had been paid or incurred during the
taxable year as ordinary and necessary expenses
3. The same had not been charged to the capital
account
Amortization of certain research and development
expenditures
- The following research and development expenditures
may be treated as deferred expenses:
1. The same had been paid or incurred by the
taxpayer in connection with his trade, business or
practice of profession
2. The same was not treated as an ordinary and
necessary expense
3. The same was chargeable to capital account but
not chargeable to property of a character which is
subject to depreciation or depletion
4. The deduction is ratably distributed over a period
of not less than 60 months beginning with the
month in which the taxpayer first realized the
benefits from such expenditures.
Limitations on deduction
1. The expenditure shall not apply to the acquisition
or improvement of land or for the improvement of
property to be used in connection with research
and development of a character which is subject
to depreciation and depletion
2. For any expenditure paid or incurred for the
purpose of ascertaining the existence, location,
extent, or quality of any deposit of ore or other
mineral, including oil or gas.
PENSION TRUSTS
- A trust established or maintained by the er to provide
for the payment of reasonable pensions to its ees.
Pension trust contributions
- A deduction applicable only to the er on account of its
contribution to a private pension plan for the benefit
of its ees.
- This deduction is purely business in character.
Normal Cost
- Refers to the contributions during the taxable year
into the pension plan to cover the pension liability
accruing during the taxable year.
- Allowed as an ordinary and necessary business
expense.

Past service cost

- Refers to the amount in excess of the above

contribution (covering pension liability pertaining to
old ees which accrued during the years previous to
the establishment of the pension trust).
- It represents 1/10th of the reasonable amount paid by
the er to the trust during the taxable year to cover in
whole or in part the pension liability applicable to the
years prior to the taxable year, or so paid to place the
trust in a sound financial basis.
- Allowed as a deduction if:
1. Such amount has not yet been allowed as a
deduction
2. Said amounts had been apportioned in equal
parts over a period of 10 consecutive years
beginning with the year in which the payment is
made.

Requisites for deductibility of Past service cost

1. The er must have established a pension or

retirement plan to provide for the payment of
reasonable pensions to his ees;
2. The pension plan is reasonable and actually sound;
3. It must be funded by the er
4. The amount contributed must no longer be
subject to the control and disposition of the er;
5. The payment has not yet been allowed as a
deduction;
6. The deduction is apportioned in equal parts over a
period of 10 consecutive years beginning with the
year in which the transfer of payment is made;
and
7. The er shall be allowed to deduct from gross
income reasonable amounts paid to such trust, in
accordance with the pension plan
OPTIONAL STANDARD DEDUCTION
- Who may avail, in lieu of the itemized deduction
1. Individuals and taxable estates and trusts, except
individuals earning pure income and non resident
aliens
2. Corporations, except nonresident foreign
corporations.
Requisites for individuals who want to avail of the OSD
1. The individual is a citizen or a resident alien
2. The taxpayer’s income is not pure compensation
income
3. The individual signifies in his return filed for the
first quarter his intention to elect OSD as
deduction, otherwise, he is considered as having
availed of the itemized deductions
4. The election to avail OSD is irrevocable for the
year in which made; however, he can change to
itemized deductions in succeeding years if he opts
to
5. The OSD allowed shall be a maximum of 40% of
gross sales or gross receipts during the taxable
year.
Determination of the amount of OSD for individuals
- The OSD allowed to individual taxpayers shall be a
maximum 40% of the gross sales or gross receipts
during the taxable year.
- If the individual is on the accrual basis of accounting
for his income and deductions, the OSD shall be based
on the gross sales during the taxable year.
- If the individual employs the cash basis of accounting
for his income and deductions, the OSD shall be based
on his gross receipts during the taxable year.
- For other individuals allowed by law to report their
income and deductions under a different method of
accounting other than cash and accrual method of
accounting, the gross sales or gross receipts shall be
determined in accordance with said acceptable
method of accounting.
Requisites for corporations who want to avail of the OSD
1. The corporation is a domestic or a resident foreign
corporation.
2. The corporation signifies in his return filed for the
first quarter his intention to elect OSD as
deduction, otherwise, it is considered as having
availed of the itemized deductions.
3. The election to avail OSD is irrevocable for the
year in which it is made; however, it can change to
itemized deductions in succeeding years if it opts
to.
4. The OSD allowed shall be a maximum of 40% of
gross income during the taxable year.
Determination of the amount of OSD for corporations
- The OSD allowed shall be in an amount not exceeding
40% of their gross income.
- Gross income – the gross sales less sales returns,
discounts and allowances and cost of goods sold.
- Passive income – not included.
Determination of the OSD for GPPs and Partners of GPPs
- Like corporations.
- The net income determined by either claiming the
itemized deduction or OSD from the GPP’s income is
the distributable net income from which the share of
each partner is to be determined.
Claim of the partners of GPP of their deductions from
their share in the taxable income of the GPP
- Rules
1. If the GPP availed of the itemized deduction in
computing its net income, the partners may still
claim itemized deductions; Provided, That in
claiming itemized deductions, the partner is
precluded from claiming the same expenses
already claimed by the GPP.
- Is the GPP claimed itemized deductions, the
partners comprising it can only claim itemized
deductions which are in the nature of ordinary and
necessary expenses for the practice of profession
which were not claimed by the GPP in computing
its net income or distributable net income during
the year.
- The OSD is in lieu of the items of deductions
claimed by the GPP and the items deduction
claimed by the partners.
2. If the GPP avails of OSD in computing its net
income, the partners comprising it can no longer
claim further deduction from their share in the
said net income.
PREMIUM PAYMENTS ON HEALTH AND/OR
HOSPITALIZATION INSURANCE
- This represents an amount of premium on health
and/or hospitalization insurance paid by an individual
taxpayer for himself and/or for the members of his
family during the taxable year.
Requisites for deductibility of premium payments on HHI
from gross income
1. Hospitalization insurance must actually have been
taken by the individual for himself and/or for the
members of his family.
2. The individual availing either earns pure
compensation or earning business income or
engaged in the practice of profession.
3. The gross income of the family of the individual
does not exceed P250,000 for the taxable year.
4. The amount of the premium deductible does not
exceed P2,400 per family or P200 per month
5. In case of married individuals, only the spouse
claiming additional exemption shall be entitled to
this deduction.
Who may avail
1. Individual taxpayers earning purely compensation
income during the year
2. Individual taxpayers engaged in business or in the
practice of profession whether availing of itemized
or OSD during the taxable income.
PERSONAL EXEMPTIONS
- An arbitrary amount allowed for personal living, or
family expenses of an individual taxpayer.
- Allowed only to citizens of the Philippines and to
resident aliens and non resident aliens in certain cases.
- P50,000
Persons qualified to claim basic personal exemptions
1. The claimant must be a citizen or a resident alien.
2. Nonresident aliens engaged in trade or business
only by way of reciprocity but not to additional
exemptions.
3. The individual claiming basic personal exemption
must be earning income for the taxable year.
4. The amount allowed for each individual who earns
income is P50,000, regardless of whether the
individual is single or married.
5. In the case of married individuals, where only one
of the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption.
Amount of additional exemption of individuals
- Each legitimate, illegitimate and legally adopted child,
not exceeding 4, is entitled to an additional
exemption of P25,000, if apart from being a minor (21)
and not gainfully employed, they are unmarried, living
with and dependent upon the parent for their chief
support.
Persons qualified to claim additional exemptions.
1. The claimant may be married or unmarried for as
long as he has a qualified dependent child.
2. The claimant must be a citizen or a resident alien.
3. In case of married individuals, the proper claimant
is the husband, except when there is an express
waiver by the husband in favor of his wife.
4. The wife automatically claims the additional
exemptions in the ff instances:
a. The husband has no income or unemployed
b. The husband is a nonresident citizen working
abroad
c. In case she is legally separated and she has the
custody of the qualified child or children.
Individual benefactor of senior citizen not allowed to
claim additional exemption
- Regardless of WON an individual is a benefactor of a
senior citizen, he shall only be entitled to a personal
exemption of P50,000.
- The senior citizen does not fall within the meaning of
the term dependent under the Tax code that would
entitle the benefactor to claim the additional personal
exemption.
Right to claim withholding exemptions
- An employee receiving compensation shall be entitled
to withholding exemptions.
Meaning of the term dependent for purposes of
additional exemption
 1. Legitimate, illegitimate, legally adopted or foster
child of the taxpayer
2. Chiefly dependent for support upon and living
with the taxpayer
3. Such dependent is not more than 21 years of age
4. Such dependent is unmarried and not gainfully
employed
5. Except if such dependent, regardless of age, is
incapable of self-support because of mental or
physical defect.
Employer should ascertain WON a child being claimed is a
qualified dependent.
- If the ee should have additional dependents during the
taxable year, he may claim the corresponding
additional exemption, in full for such year.
Status-at-the-end-of-the-year rule.
- Whatever is the individual taxpayer’s status at the end
of the calendar year may be used for determining his
basic personal and additional exemptions.
- For purposes of filing the income tax return in a
particular year, the taxpayer, who changed his civil
status during the year can still use his old civil status,
or he may opt to use his new status in his income tax
return.
Limit of the basic personal exemption allowed to a
nonresident alien individual engaged in trade or business
in the Philippines.
- Entitled only to personal exemption, but not to
additional exemption, in an amount equal to the
exemptions allowed by the income tax law in the
country which he is a citizen or allowed to citizens of
the Philippines who are also nonresidents in that
country, but not to exceed personal exemption of
P50,000.
- The exemption allowed to nonresident aliens is a
reciprocal one; that is, it is only allowed if the country
of said nonresident aliens allowed similar exemptions
to Filipinos who are considered as non-residents of
such country but deriving income from sources therein.
- If the nonresident alien individual is not engaged in
trade or business in the Philippines, he will not be
allowed to claim any personal exemption because his
income tax is subject to the final withholding tax of 25%
based on the gross income.
ITEMS AND EXPENSES WHICH ARE NON-DEDUCTIBLE
FROM THE GROSS INCOME.
- G.R. In computing the taxable income, no deduction
shall in any case be allowed in respect to:
1. Personal, living or family expenses
2. Amount paid out for new buildings or permanent
improvements, or betterments made to increase
the value of any property or estate; except in the
case of intangible drilling and development costs
incurred in petroleum operations.
3. Amount expended in restoring property or in
making food the exhaustion thereof for which an
allowance of depreciation or depletion is or has
been made
4. Premiums paid on life insurance policy covering the
life of any officer or ee, or of any person financially
interested in any trade or business carried on by
the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under
such policy
5. Interest expense and bad debts from sales of
property between related parties.
6. Losses from sales or exchanges of property
between related parties.
Personal, living, and family expenses which are not
deductible from gross income.
- They are deemed covered by personal and additional
exemption.
Losses which are not deductible from the gross income.
- Designed to avoid sham or pretended sales or
exchanges designed to create losses so as to enable the
taxpayer to deduct the same from gross income and
consequently fall under a lower bracket.
Rationale for the prohibition from deductibility of capital
losses from ordinary gains
- Designed to forestall the shifting of deductions from an
area subject to lower taxes to an area subject to a
higher taxes, thereby unnecessarily resulting in leakage
of tax revenues.
WHAT CONSTITUTEES AS GROSS INCOME FOR
INSURANCE COMPANIES
- Consists of their income from all sources within the
taxable year, except as otherwise provided by the
statute.

Deductions allowed to insurance companies

- They are entitled to same deductions as other

corporations, and also to the deductions of the net
addition required by law to be made within the taxable
year on policy and annuity contracts.

Gross income of mutual insurance companies.

- Consists of their total revenue from the operation of

the business and of their income from all other sources
within the taxable year, except as otherwise provided
by the statute.
- Mutual insurance companies, other than mutual life
and mutual marine insurance companies, which require
their members to make premium deposits to provide
for losses and expenses, are allowed to deduct from
gross income the aggregate amount of premium
deposits returned to their policyholders or retained for
the payment of losses, expenses, and reinsurance
reserves.
- Mutual marine companies should include in gross
income the gross premiums collected and received by
them less amounts paid for reinsurance. They may
deduct from gross income amounts repaid to
policyholders on account of premiums previously paid
by them together with the interest actually paid upon
such amounts between the date of ascertainment and
the date of payment thereof.
WASH SALES OF STOCKS AND SECURITIES CAPITAL ASSETS VIS-À-VIS ORDINARY ASSETS

- A sale or other disposition of stocks or securities - Capital asset – all properties not being used for trade
where it appears that within a period beginning 30 or business.
days before the date of such sale or disposition and - Ordinary asset – all properties that are being used
ending 30 days after such date, the taxpayer has primarily or for sale in the ordinary course of trade or
acquired or has entered into a contract or option to business. (those included in the inventory, primarily
acquire, substantially identical stock or securities. for sale, subject to the allowance for depreciation)
- Not deductible loss. - In the case of a taxpayer not engaged in the real estate
- XPN: may be deductible in the following case: business, real properties, whether land, building, or
1. If the claim is made by a dealer in stock and other improvements, which are used or being used or
securities; and have been previously used in the trade or business of
2. With respect to a transaction made in the ordinary the taxpayer shall be considered as ordinary assets.
course of the business of such dealer in stock or - Properties classified as ordinary asset for being used in
securities. business by a taxpayer engaged in business other an
real estate business are automatically converted into
Purposes of wash sales of stock or securities capital asset upon showing of proof that the same
- To prevent taxpayers from selling stock or securities to have not been used in business for more than 2 years
establish a loss deduction and then immediately prior to the consummation of the taxable transactions
repurchasing the same or substantially the same involving said properties.
securities. Capital gains distinguished from ordinary gains.
Rules on losses from wash sales of stock and securities
Capital Gains Ordinary Gains
Sources of capital gains are Sources of ordinary gains
- Where more than one loss is claimed to have been
sales or exchanges of are sales or exchanges of
sustained within the taxable year from the sale or
capital assets. ordinary assets.
other disposition of stock and securities, the Capital gains are generally Ordinary gains generally
provisions of this section shall be applied to the losses profits from sale of assets come from assets
in the order in which the stock or securities the not stock in trade. constituting stock in trade.
disposition of which resulted in the respective losses Basis of capital gains tax is Basis of the ordinary tax is
were disposed of (beginning with the earliest on the presumed gain. on the actual gain.
disposition). If the order of disposition of stock or Excess of gains from sales All sales or exchanges of
or exchanges of other ordinary assets should be
securities disposed of at a loss on the same day cannot
capital assets (i.e., other included in the gross
be determined, the stock or securities will be than capital gains from income.
considered to have been disposed of in the order in sales or exchanges of shares
which they were originally acquired. of stock and real properties
which are considered as
Basis of stock or securities acquired in wash sales capital assets) over the
capital losses from such sale
- In the sale or other disposition of stocks or securities, or exchanges should be
the acquisition of which resulted in the non- included in the gross
deductibility of the loss from the sale or other income.
disposition of substantially identical stock or
securities, the basis shall be the basis of the
Actual gain distinguished from presumed gain.
substantially identical stock or securities so sold or
disposed of, increased or decreased, as the case may - Actual gain – the gain actually or constructively
be by the difference, if any, between the rice at which derived from the sale of assets/properties treated as
the stock or securities was acquired and the price at ordinary assets in excess of the cost to the taxpayer.
which such substantially identical stock or securities
were sold or otherwise disposed of.
- Presumed gain – the capital gain presumed to have
been realized from the sale, exchange or disposition of
real property located in the Philippines, classified as
capital asset, including pacto de retro sales and other
forms of conditional sales, by individuals, including
estates and trusts, regardless of whether he suffers a
loss than a gain, the basis of which is the zonal value of
the property or the gross selling price, whichever is
higher.
Net capital gain distinguished from net capital loss.
- Net capital gains – the excess of the gains from sales
or exchanges of capital assets over the losses from
such sales or exchanges. It is added to the ordinary
gain.
- Net capital loss – the excess of the losses from sales or
exchanges of other capital assets over the capital gains
from such sales or exchanges. It is not deductible from
the ordinary gain.
Long term capital gain distinguished from short term
capital gain; Percentages taken into account; Holding
Period rule
- In computing net capital gain, net capital loss, and net
taxable income in the case of individual taxpayers, the
ff percentages of capital gains or loss shall be
recognized and taken into account upon the sale or
exchange of a capital asset depending on the actual
holding period.
- Short-term capital gain – 100% of the capital gains or
loss is taken into account, if the capital asset has been
held for not more than 12 months
- Long-term capital gain – 50% of the capital gains or
loss is taken into account, if the capital asset has been
held for more than 12 months.
Capital loss limitation rule applicable to both
corporations and individuals.
- G.R. Capital losses from sales or exchanges of capital
assets are allowed only to the extent of the gains from
such sales or exchanges.
- The net capital loss is not deductible in arriving at the
taxable net income inasmuch as capital losses are
allowed only to the extent of capital gains.
- XPN. In a bank or trust incorporated under the laws of
the Philippines, a substantial part of whose business is
the receipt of deposits, sells any bond, debenture, not
or certificate or other evidences of indebtedness
issued by any corporation, including the government,
with interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the
limitation, and shall not be included in determining the
applicability of such limitation to other losses.
Rationale for the rule prohibiting the deduction of capital
losses from ordinary gains.
- To insure that only costs or expenses incurred in
earning the income shall be deductible for income tax
purposes consonant with the requirement of the law
that only necessary expenses are allowed as
deductions from gross income.
- This is also the reason why all non-business connected
expenses, like personal, living and family expenses, are
not allowed as deduction from gross income.
Net capital loss carry over (NCLCO) vis-à-vis net operating
loss carry over (NOLCO).
NCLCO NOLCO
Can be availed of only by Available to both individuals
individual taxpayer. and corporate taxpayers.
Covers only one year May be deducted from the
period. gross income for the next
three consecutive years.
A capital asset transaction. An ordinary asset
transaction.
Directly governed by the Directly governed by the
Tax Code only. Tax Code and by the
Investment Incentives Act.
Retirement bonds
- For income tax purposes, amounts received by the
holder upon the retirement of bonds, debentures,
notes or certificates or other evidences of indebtedness
issued y any corporation with interest coupons or in
registered form, shall be considered as amounts
received in exchange thereof.
Taxation of shares redeemed for cancellation or
retirement.
- When preferred shares are redeemed at a time when
the issuing corporation is still in its going concern and is
not contemplating in dissolving or liquidating its assets
and liabilities, capital gain or capital loss upon
redemption shall be recognized on the basis of the
 difference between the amount/value received at the
time of redemption and the cost of the preferred
shares.
- The capital gain or loss derived shall be subject to the
regular rates.
- This section does not cover the situation where a
corporation voluntarily buys back its own shares, in
which it becomes treasury shares. Stock transaction tax
applies, if listed and traded in the local stock exchange.
Otherwise, it is subject to 5% or 10% net capital gains
tax.
Taxation of surrender of shares by the investor upon
dissolution of the corporation and liquidation of assets
and liabilities of said corporation.
- Upon surrender by the investor of the shares in
exchange for cash and property distributed by the
issuing corporation upon its dissolution and liquidation
of all assets and liabilities, the investor shall recognize
either capital gain or loss upon such surrender of shares
computed by comparing the cash and fair market value
of property received against the cost of the investment
in shares.
- The capital gain or loss shall be subject to the regular
income tax.
Short sales
- Refer to any sale of a security which the seller does not
own or any sale which is consummated by the delivery
of a security borrowed by, or for the account of the
sellers.
- A person shall be deemed to own a security if:
1. He or his agent has title to it
2. He has purchased or has entered into an
unconditional contract, binding on both parties
thereto, to purchase it and has not yet received it
3. He owns a security convertible into or
exchangeable for it and has tendered such security
for conversion or exchange
4. He has an option to purchase or acquire it and has
exercised such option
5. He has rights or warrants to subscribe to it and has
exercised such rights or warrants provided however
that a person shall be deemed to own securities
only to the extent he has a net long position in such
securities.
When short sale is deemed consummated.
- For income tax purposes, a short sale is not deemed to
be consummated until the delivery of property to
cover the short sale.
DETERMINATION OF GAIN OR LOSS IN EXCHANGE OF
PROPERTY
- The amount of income derived or loss sustained from
an exchange of property is the difference between eh
market value at the time of the exchange of the
property received in exchange of and the original cost,
or other basis, of the property exchanged.
Basis for determining gain or loss from sale or disposition
of property
1. If the property is acquired by purchase – basis is
the cost of the property acquired on or after
March 1, 1913
2. If the property is acquired by inheritance – basis is
the fair market price or value as of the moment of
death of the decedent
3. If the property is acquired by donation – basis is
the cost in the hands of the donor or the last
previous owner who did not acquire it by
donation. If the basis, however, is greater than the
fair market value of the property at the time of
donation, then, for purposes of determining loss,
the basis shall be such fair market value.
4. If the property is acquired for less than an
adequate consideration in money or money’s
worth – basis shall be the amount paid by the
transferee for the property
5. If the property was acquired thru previous tax-free
exchange, the basis of stock or securities received
by the transferor is the same as the basis of the
property, stock or securities exchanged or
transferred. Basis of the property transferred in
the hands of the transferee – same as it would be
in the hands of the transferor.
- The property received as boot refers to the money
received and other property received in excess of
the stock or securities received by the transferor
on a tax-free exchange.
Recognition of gain or loss in exchange of property
- GR. the entire amount of the gain or loss on the sale
or exchange of properties should be recognized.
- XPN. If in pursuance to a plan merger or
consolidation:
1. A corporation exchanges property solely for stocks
in a corporation
2. A shareholder exchanges stock in a corporation for
the stock of another corporation
3. A security holder of a corporation exchanges his
securities in such corporation solely for stock or
securities in another corporation
4. The transfer is made by a person, acting alone or
together with others, not exceeding four persons
5. As a result of the exchange, the transferor, alone
or together with others, not exceeding four, gains
control of the transferee.
The following are the tax consequences of a tax-free
exchange of property for shares of stock of a controlled
corporation:
1. Income tax – The transferor shall not recognize
any gain or loss on the transfer of the property to
the transferee. The transferor will not be subject
to capital gains tax, income tax, or to creditable
withholding tax on the transfer of such property to
the transferee. Neither may the transferor
recognize a loss, if any, incurred in the transfer.
- Control – means ownership of stocks in a
corporation possessing at least 51% of the total
voting power of all classes of stocks entitled to
vote.
- The assumption of liabilities or the transfer of
property that is subject to a liability does not
affect the non-recognition of gain or loss, since the
total amount of such liabilities does not exceed
the basis of the property transferred. If the
amount of the liabilities assumed plus the amount
of the liabilities to which the property is subject
exceed the total amount of the adjusted basis of
the property transferred pursuant to such
exchange, then such excess shall be considered as
a gain from the sale or exchange of a capital asset
or of property which is not a capital asset, as the
case may be.
- The transferee is not subject to income tax on its
receipts of the property as contribution to its
capital, even if the value of such property exceeds
the par value or stated value of the shares issued
to the transferor.
2. Donor’s tax – the transferor is not subject to
donor’s tax, regardless whether the value of the
property transferred exceeds the par/stated value
of the transferee shares issued to the transferor,
there being no intent to donate on the part of the
transferor.
3. Value-Added Tax – the VAT shall not apply to
goods or properties which are originally intended
for sale or for use in the course of business.
- XPN. The exchange of goods or properties
including the real estate properties used in
business or held for sale or for lease by the
transferor, for shares of stocks, whether resulting
in corporate control or not, is subject to VAT.
4. Documentary Stamp Tax – in the case of tax-free
exchange of properties for shares or shares for
shares, said exchange shall be exempt.
INVENTORIES
- Two tests for which inventory must conform
1. It must conform as nearly as possible to the best
accounting method in the trade or business; and
2. It must clearly reflect the income.
- Inventory rules cannot be uniform but must give effect
to trade customs which come within the scope of the
best accounting practice in the particular trade or
business.
- In order to clearly reflect income, the inventory
practice should be consistent from year to year.
- Inventories should be recorded in a legible manner,
properly computed and summarized, and should be
preserved as a part of the accounting record of the
taxpayer.
- Inventory losses which are allowable as tax deduction
are:
1. Losses from the sale of excess or obsolete raw
materials
2. Losses from production of initial batches of new
products
3. Production losses from reprocessing of stocks
returned for reconditioning.
- Inventory valuation method adopted by the taxpayer
should be applied from year to year.
Rationale behind the power of the State to tax persons,
properties and business within its jurisdiction.
- Based on the theory that the tax laws of a state can
have no extraterritorial operation.
- Violation of the constitutional provision that no person
shall be deprived of his property without due process
of law.
Classification of income as to sources
1. Within the Philippines
2. Without the Philippines
3. Partly within and partly without the Philippines
Gross income from sources within the Philippines
1. Interest income – interest on bonds or notes or
other interest-bearing obligations of residents,
corporate or otherwise.
2. Dividends
a. From domestic corporation
b. From a foreign corporation unless less than
50% of its gross income for the 3-year period
ending with the close of its taxable year
preceding the declaration of such dividends,
or for such part of such period as it has been
in existence was derived from sources within
the Philippines; but only in an amount which
bears the same ratio to such dividends as the
gross income from all sources.
- In the case of dividends derived from a foreign
corporation, the same is subject to the 50% rule,
i.e., if the 3-year period preceding the declaration
of such dividend, the ratio of such corporation’s
Philippines gross income to the world gross
income is
i. Less than 50% - then the income is considered
derived entirely without
ii. If 50% or more – then the income is
considered derived within.
3. Services – includes compensation for labor or personal
services performed within the Philippines regardless of
the residence of the payor, of the place in which the
contract for service was made, or of the place of
payment.
4. Rentals and royalties – the income arising from the
rental of property whether tangible or intangible,
located within the Philippines, or from the use of
property, whether tangible or intangible, located
within the Philippines.
5. Sale of real property – those located in the Philippines
6. Sale of personal property – in the country where the
personal property is sold. The country in which sold
means the place where the property is marketed. This
section does not apply to income from the sale of
property produced by the taxpayer within and sold
without the Philippines or produced by the taxpayer
without and sold within the Philippines.
7. Sale of shares of stock of domestic corporation –
within the Philippines, regardless of where the said
shares are sold. The transfer by a nonresident alien or
a foreign corporation to anyone of any share of stock
issued by a domestic corporation sold thru a foreign
stock exchange shall still be subject to Philippine
income tax and shall not be affected or made in its
book unless:
a. The transferor has filed with the Commissioner a
bond conditioned upon the future payment by him
of any income tax that may be due on the gains
derived from such transfer, or
b. The Commissioner certified that the taxes, if any,
due on the gain realized from such sale or transfer
have been paid.
GROSS INCOME FROM SOURCES WITHOUT THE PHIL
1. Interests other than those derived from sources
within the Philippines
2. Dividends other than those derived from sources
within the Philippines
3. Compensation for labor or personal services
performed without the Philippines
4. Rentals or royalties from property located without
the Philippines or from any interest in such
property including rentals or royalties for the use
or for the privilege of using without the
Philippines, patents, copyrights, secret processes
and formulas, goodwill, trademarks, trade brands,
franchises and other like properties;
5. Gains, profits and income from the sale of real
property located without the Philippines.
INCOME FROM SOURCES PARTLY WITHIN AND
PARTLY WITHOUT THE PHILIPPINES
- The taxable income may first be computed by
deducting the expenses, losses or other deductions
apportioned or allocated thereto and a ratable part of
any expense, loss or other deduction which cannot be
definitely be allocated to some items or classes of
gross income; and the portion of such taxable income
attributable to sources within the Philippines may be
determined by the processes and formulas of general
apportionment prescribed by the SOF.
- Gains, profits and income from the sale of personal
property produced by the taxpayer within and sold
without the Philippines, or produced by the taxpayer
without and sold within the Philippines, shall be
treated as derived partly from sources without the
Philippines.
- Gains, profits and income derived from the purchase
of personal property within and its sale without the
Philippines, or from the purchase of personal property
without and its sale within the Philippines shall be
treated as derived entirely from sources within the
country in which sold.
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
Accounting Periods
- Taxable year or taxable accounting period – the
calendar year or the fiscal year ending during such
calendar year, upon the basis of which the taxable
income under Title II of the Tax Code is computed.
Different taxable accounting periods
- G.R. the accounting period of a taxpayer is a period of
12 months:
1. Calendar accounting year - taxable period
adopted by individuals or corporations using the
calendar year, which is a period of 12 months
starting from Jan. 1 to Dec. 31.
- If the taxpayer had no annual accounting period,
or does not keep books, or if the taxpayer is an
individual, the taxable income shall be computed
on the basis of the calendar year.
2. Fiscal accounting period – taxable period adopted
by corporations using the fiscal year, which is a
period of 12 months ending on the last day of any
month other than December.
- In no instance shall individual taxpayers be
authorized to establish a fiscal year as basis for
filing their returns and computing their income.
- But a taxpayer may have a taxable period of less
than 12 months.
3. Short accounting period – adopted by a taxpayer
in the case of a return made for a fractional part of
a year or which is a period of less than 12 months.
- Occurs when a taxpayer, with the approval of the
Commissioner, changes the basis of computing
taxable income. It may also occur when a taxpayer
dies, or is newly organized, or a corporation is
dissolved at any time during the year after the
beginning of the calendar year or fiscal year.
Accounting Methods
- Comprise of a set of rules for determining when and
how to report income and deductions.
- The accounting method for tax purposes must be one
generally employed in keeping the taxpayer’s books,
provided that the method clearly reflects the income.
- In case of conflict between the Tax Code and that of
the generally accepted accounting principles, the
provisions of the Tax Code and its IRR shall prevail.
- If the taxpayer does not regularly employ a method of
accounting which clearly reflects his income, the
computation shall be made in such manner as in the
opinion of the Commissioner clearly reflects it.
Essentials of a standard accounting method in order to
truly reflect a taxpayer’s taxable income
- In all cases in which the production, purchase, or sale
of merchandise of any kind is an income-producing
factor, inventories of the merchandise on hand should
be taken at the beginning and end of the year and
used in computing the taxable income of the year.
- Expenditures made during the year should be properly
classified as between capital and income
- In any case in which the cost of capital assets is being
recovered thru deductions for wear and tear,
depletion or obsolescence, any expenditure (other
than ordinary repairs) made to restore the property or
prolong its useful life should be added to the property
account or charged against the appropriate reserve
and not to current expenses.
Different accounting methods under the Tax Code
1. Cash Accounting Method – all items of income
actually received during the year shall be
accounted for in such taxable year and the
corresponding expenses actually paid shall also be
claimed as deductions during the year.
2. Accrual accounting method – income, gains and
profits are included in the gross income when
earned regardless of whether or not actually
received, and the expenses are allowed as
deductions from the gross income when actually
incurred, although not yet paid. This is allowed
because expenses not being claimed as deductions
by a taxpayer in the current year when they are
incurred cannot be claimed as deduction from
income for the succeeding year.
3. Installment payment basis method – a method
considered appropriate when collections extends
over relatively long periods of time and there is a
strong possibility that full collection will not be
made. As customers make installment payments,
the seller recognizes the gross profit on sale in
proportion to the cash collected. In order that
payments may be considered as on installment
payment basis, the initial payments in the year of
 sale should not exceed 25% of the gross selling
price.
4. Deferred payment basis method – a method being
applied by real estate dealers in their sale of real
properties, which, although the mode of payment
being employed is on the installment basis, the
said sale shall be considered as on a cash basis
when the initial payments in the year of sale of the
real properties exceed 25% of the gross selling
price.
5. Percentage-of-completion-basis method – a
method applicable in the case of a building,
installation or construction contract covering a
period in excess of one year whereby gross income
derived from such contract may be reported upon
the basis of percentage of completion or progress
of work.
Period in which items of gross income included
- In case of death of a taxpayer, gains, profits, and
income are to be included in the gross income for the
taxable year in which they are received by the
taxpayer, unless they are included as of a different
period in accordance with the approved method of
accounting followed by him.
- If the taxpayer is keeping books of accounts on the
cash basis, income earned is taxable in the year of
actual receipt.
- If his books of accounts and records are kept on the
accrual basis, income is taxable in the year it is earned,
irrespective of the year in which it is actually received.
Meaning of the terms paid and incurred and paid or
accrued
- The terms will be construed according to the method
of accounting upon the basis of which the taxable
income is computed by the taxpayer.
- In case of the death of a taxpayer, there shall be
allowed as deduction for the taxable period in which
falls the date of his death, amounts accrued up to the
date of his death if not otherwise properly allowable in
respect of such period or a prior period.
All-events-test
- The accrual of income and expense is permitted when
the all-events-test has been met.
- The all-events-tests requires
1. Fixing of a right to income or liability to pay
2. The availability of the reasonable accurate
determination of such income or liability.
- The test does not demand that the amount of income
or liability be known absolutely, only that a taxpayer
has at his disposal the information necessary to
compute the amount with reasonable accuracy.
- The basis of accrual system of accounting is that
obligations incurred in the normal course of business
will be discharged in due course; that the deductions
have been paid or accrued, or paid and accrues, in
order to be accruable in the taxable year, a valid
obligation upon which the profit or loss, in case of
deduction, is to be determined must have existed in
the year in which the obligation became binding and
enforceable.
Change of accounting period
- A taxpayer who changes the method of accounting
employed in keeping his books shall, before computing
his income upon such new method for purposes of
taxation, secure the consent of the Commissioner.
- Application for permission to change the method of
accounting employed and the basis upon which return
is made shall be filed within 90 days after the
beginning of the taxable year to be covered by the
return.
- An individual cannot change his accounting period
from calendar year to fiscal year because he is only
allowed to use the calendar year.
- A corporation, including a duly registered GPP, who
desires to change its accounting shall at any time not
less than 60 days prior to the beginning of the
proposed new accounting period submit a written
application to the Commissioner.
- The certification approving the adoption of a new
accounting period must be released within 30 working
days from the date of receipt of the complete
documentary requirements.
Final or adjusted returns for a period of less than 12
months
- GR. No return can be made for a period of more than
12 months
- A separate return for a fractional part of a year is
required whenever there is a change, with the
approval of the Commissioner, on the basis of
 computing taxable income from one taxable year to
another.
Accounting for long-term contracts
- Percentage-of-completion basis
Installment basis
- The income of a dealer in a personal property on the
installment plan may be ascertained by taking as
income that proportion of the total payments received
in the taxable year from installment sales which the
total or gross profit realize or to be realized on the
total installment sales made during each year bears to
the total contract price of all such sales made during
that respective year.
- The income from a casual sale or casual disposition of
personal property (other than property of a kind which
should be properly be included in inventory) may be
reported on the installment basis only if the sales price
exceeds P1,000 and the initial payments do not exceed
25% of the selling price.
- The term initial payment does not include the
amounts received by the vendor in the year of sale
from the disposition to a third person of notes given
by the vendee as part of the purchase price which are
due and payable in subsequent years.
RETURNS AND PAYMENT OF TAX
- The following individuals are required to file income
tax return
1. Filipino citizen residing in the Philippines
2. Filipino citizen residing outside the Philippines on
his income from sources within the Philippines
3. Alien residing in the Philippines on income derived
in the Philippines
4. Nonresident alien engaged in trade or business or
in the exercise of a profession in the Philippines
5. A citizen of the Philippines and any alien individual
engaged in business or practice of profession
within the Philippines, regardless of the amount of
gross income
6. An individual earning purely compensation income
but who is currently employed by two or more
employers at any time during the taxable year.
Individuals not required to file income tax return
1. An individual whose gross income does not exceed
his total personal and additional exemptions as
dependents
2. An individual with respect to pure compensation
income derived from sources within the
Philippines, the income tax on which has been
correctly withheld.
3. An individual whose sole income has been
subjected to final withholding tax
4. A minimum wage earner or an individual exempt
from income tax
5. Senior citizens who are considered as minimum
wage earners
Taxation of marginal Income Earners
- Marginal income earners – refer to individuals not
otherwise deriving compensation as an ee under an
er-ee relationship but who are self-employed and
deriving gross sales/receipts not exceeding P100,000
during any 12 month period. The activities of such are
considered principally for subsistence or livelihood.
- They are exempt from VAT and any percentage tax.
- They are not required to pay any registration although
they are required to register as taxpayers for being a
possible income tax and withholding tax filers.
- They are required to file the annual income tax return
reflecting income from whatever source.
- Any individual not required to file an income tax
return may nevertheless be required to file an
information return.
Income tax returns of individuals for the preceding
taxable year shall be filed in duplicate by the ff persons:
1. A resident citizen – on his income for all sources
2. A nonresident citizen – on his income derived from
sources within the Philippines
3. A resident alien – on his income from all sources
within the Philippines
4. A nonresident alien engaged in trade or business
in the Philippines – on his income derived from
sources within the Philippines.
In case of individuals subject to capital gains tax:
1. From the sale or exchange of shares of stock not
traded thru a local stock exchange, the return
should be filed within 30 days after each
transaction and final consolidated return on or
 before April 15 of each taxable year covering all
stock transactions of the preceding year
2. From the sale or disposition of real property, the
return should be filed within 30 days following
each sale or other disposition.
Return of Husband and Wife
- Those who do not derive income purely from
compensation, shall file a return for the taxable year
to include the income of both spouses, but where it is
impracticable for the spouses to file one return, each
spouse may file a separate return of income but the
returns so filed shall be consolidated by the Bureau for
the purposes of verification for the taxable year.
Returns of minors and persons with disability.
- If he is unable to make his own return, the return may
be made by the ff:
1. His duly authorized agent or representative
2. By the guardian
3. Other person charge with the care of his person,
property, the principal and his representative or
guardian assuming the responsibility of making the
return and incurring penalties for erroneous, false
or fraudulent returns
4. In the case of income of unmarried minors derived
from property received form living parent, said
income shall be included in the return of the
parents, except:
a. When the donor’s tax has been paid on such
property;
b. When the transfer of such property is exempt
from donor’s tax.
The fact that an individual’s named is signed to a file
return shall be prima facie evidence for all purposes that
the return was actually signed.
Return of individuals with concurrent employers
- At any time during the taxable year shall file an
income tax return regardless of whether she is an
MWE or regardless of whether her personal and
additional exemption does not exceed his total wages.
CORPORATION RETURNS
- Every corporation subject to tax, except foreign
corporations not engaged in trade or business in the
Philippines, shall render, in duplicate, a true and
accurate quarterly income tax return and final or
adjustment return.
- A corporation which has received a charter but has
never perfected its organization, and which has
transacted no business and had no income from any
source, may upon presentation of the facts to the
Commissioner be relieved from the necessity of
making a return so long as it remains in an
unorganized condition.
- A domestic corporation is required to file income tax
returns 4 times for income earned during a single
taxable year. Reason: to endure the timeliness of
collection to meet the budgetary needs of the
government; to ease the burden on the taxpayer by
providing it with an installment payment scheme,
rather than requiring payment of the tax on a lump-
sum basis after the end of the year.
- GR. stockholders cannot be held liable for the unpaid
taxes of a dissolved corporation. XPN. If it appears that
the corporate assets have been passed into their
hands.
Reasons for the grant of extension to file returns
- The Commissioner may grant, in meritorious cases
1. Destruction of books of accounts and other
records of the taxpayer thru fire, flood or typhoon
and the said books and other records are in the
process of reconstruction;
2. Epidemic, pestilence or other calamities prevailing
in specific sectors of the country where the
taxpayer resides or where the principal business is
being conducted. Sickness or illness of the
accountant, bookkeeper or the manager or
proprietor of the business shall not be considered
a reasonable cause.
Returns of receivers, trustees in bankruptcy or assignees
- Must make returns of income for such corporations,
partnerships or associations covering each year or part
of the year during which they are in control.
Returns of GPPs
- Are not subject to income tax, but are required to file
returns of their income for the purpose of furnishing
information as to the share in the gains or profits
 which each partner shall include in his individual
return.
- They are required to render a return of their earnings,
profits and income, setting forth the items of gross
income and the deductions allowable, and the names
and addresses, TIN and shares of each of the partners
who would be entitled to the net earnings, profits, and
income, is distributed.
PAYMENT AND ASSESSMENT OF INCOME TAX FOR
INDIVIDUALS AND CORPORATIONS
- The total amount of income shall be paid at the time
the return is filed, such tax to be paid by the person
subject thereto.
- Installment payment of income tax allowed only to
individuals.
- Interest on income tax is not punitive in nature but
compensatory; it is a compensation to the State for
the delay in the payment of the tax.
WITHHOLDING TAX-AT-SOURCE
- Withholding tax is a method of collecting in advance
income tax and business tax of certain taxpayers who
are liable to pay income tax or business tax in the
Philippines.
- In the operation of the withholding tax system, the
payee is the taxpayer, the person on whom the tax is
imposed, while the payor, a separate entity, acts no
more than an agent of the government for the
collection of the tax in order to ensure its payment.
- If the payor who is duty bound to withhold the tax fails
to withhold and to remit the said tax to the
government, the said expenses of the payor shall
generally be disallowed as deduction from the gross
income.
3-Fold purpose of the withholding tax system
1. To provide the taxpayer with a convenient way of
paying his tax liability
2. To ensure the collection of tax
3. To improve the government’s cashflow
- The withholding agent is liable only insofar as he failed
to perform his duty to withhold the tax and remit the
same to the government.
Who are constituted as withholding agent
- A withholding agent is any person or entity who is
required to deduct and remit the taxes withheld to the
government.
1. In general, any juridical person, whether engaged
or not in trade or business;
2. An individual, with respect to payments made in
connection with his trade or business.
- Insofar as taxable sales, exchanges or transfers of real
property are concerned, the buyers, WON engaged in
trade or business, are constituted as withholding
agents.
- The tax withheld is considered a part of the
consideration agreed upon between the seller and the
buyer resulting, therefore, to a net take to the seller of
only the difference between the agreed
consideration/selling price and the tax withheld.
3. All government offices, including GOCCs, as well as
well provincial, city and municipal governments
and barangays.
4. All individuals, juridical persons and political
parties, with respect to their income payments
made as campaign expenditures and/or purchase
of goods and services intended as campaign
contributions.
Duties and obligations of the withholding agent
1. To register as a withholding agent within 10 days
after acquiring such status with the RDO having
jurisdiction where his business is located.
2. To deduct and withhold taxes.
3. To remit the tax withheld
4. To file annual information return
5. To issue withholding tax certificates to recipient of
income payments subject to the withholding.
Income which may be subjected to the withholding tax at
source
- Only fixed or determinable annual or periodical
income is subject to withholding.
- The statute subjects interest, dividends, rents, salaries,
wages, premiums, annuities, compensations,
remunerations, and emoluments, including royalties,
to withholding tax at source.
- Income is fixed when it is to be paid in amounts
definitely pre-determined.
- It is determinable whenever there is a basis of
calculation by which the amount to be paid may be
ascertained.
Time of withholding
- When the income payment is paid or payable or
accrued or the income payment is accrued or recorded
as an expense or asset, whichever is earlier.
Kinds of withholding tax-at-source
1. Withholding of final tax on certain incomes
2. Withholding of creditable tax at source
3. Withholding tax on interest from tax-free
covenant bonds.
Concept of the final withholding tax system
- The amount of income tax withheld by the withholding
agent is constituted as a full and final payment of the
income tax due from the payee on the said income.
- In case of the payor’s failure to withhold the tax or
incase of underwithholding, the deficiency tax shall be
collected from the payor.
- The payee is not required to file an income tax return
for the particular income.
- The finality of the withholding tax is limited only to the
payee’s income tax liability on the particular income, it
does not extend to the payee’s other tax liability on
income.
Rationale for the withholding of final tax on income
payment to nonresident aliens not engaged in trade or
business in the Philippines
- Subject to final withholding tax
- At 25%
- Designed to enable the government to collect the
proper and correct tax on incomes derived from the
Philippines by aliens outside the taxing jurisdiction.
Government as withholding agent
- Before making any money payment to private
individuals, corporations, partnerships and/or
associations on account of each purchase of goods and
services shall deduct final withholding tax due on the
gross money payments thereof.
Concept of creditable withholding tax system
- Taxes withheld on certain income payments are
intended to equal or at least approximate the tax due
of the payee on said income.
- The income recipient is still required to file an income
tax return.
Kinds of creditable withholding tax system
1. Expanded withholding tax
2. Withholding tax on compensation or wages
3. Withholding tax on interest from tax-free
covenant bonds
Expanded Withholding Tax
- A kind of creditable withholding tax, which is
prescribed to be withheld both by the government and
private payors from the different items of income
payments to sellers/suppliers residing in the
Philippines on their sale of goods and service, which is
creditable against the income tax due of the said
payees/sellers/suppliers for the taxable year
quarter/year.
Conditions in order that income payment may be
subjected to EWT
1. The income payment must be paid or payable by a
taxpayer who is residing in the Philippines
2. The recipient of the income who is liable to
income tax must also be residing or has business in
the Philippines
3. The income is fixed or determinable at the time of
payment
4. The income is one listed under the consolidated
withholding tax regulations
A nonresident foreign corporation not doing business in
the Philippines retained by a domestic corporation to do
the advertising of its product abroad paid thru outward
remittances is not subject to EWT.
- The fees paid by a domestic corporation to a
nonresident foreign corporation are not subject to
EWT since they are not subject to the Philippine
income tax.
- Expanded withholding taxes are only imposed on
income payments to persons residing in the
Philippines.
When the obligation of withholding agent to deduct and
withhold the tax arise
- At the time an income payment is paid or payable, or
when the income payment has accrued or recorded as
 an expense or asset, whichever is applicable, in the
payor’s books and which comes first.
- The term payable refers to the date the obligation
becomes due, demandable or legally enforced.
Persons exempted from being subjected to the EWT
1. National government agencies and its
instrumentalities, including provincial, city,
municipal governments and barangays except
GOCCs
2. Persons enjoying exemption of income taxes
pursuant to the provisions of any law, general or
special.
Withholding tax on compensation or wages
- Also a form of creditable withholding tax which is
withheld from individuals receiving compensation
income.
- No withholding of tax shall be required where the
income received by an ee does not exceed the
statutory minimum wage.
Withholding tax on interest of tax-free covenant bonds
- Withholding is required of a tax of 30% in the case of
interest upon bonds, obligations or securities issued by
domestic or resident foreign corporations, containing
a so-called tax-free covenant clause, payable either to
citizens or aliens, where the owner of such interest
income does not file with the withholding agent a
signed notice claiming the benefit of personal
exemption.
- Subject to the exception just mentioned, withholding
taxes take place in all cases of payments of interest
upon tax-free covenant bonds or other securities
regardless of the place where such bonds or securities
are issued or marketed and the interest thereupon
paid.
- Not required in the case of a citizen or resident alien
individual files with the withholding agent when
presenting interest coupons for payment, not later the
Feb. 1 following the taxable year, an ownership and
exemption certificate on the requisite form claiming a
personal exemption or credits for dependents.
RETURNS AND PAYMENT OF TAXES WITHHELD AT
SOURCE
- Income upon which any creditable tax is required to
be withheld at source shall be included in the return of
its recipient.
- The excess of the withheld tax over the tax due on his
return shall be refunded to him subject to the
authority of the Commissioner to refund taxes.
- The taxes withheld by the withholding agents shall be
maintained in separate accounts and should not be
commingled with any other funds of the withholding
agent. They shall be considered as a trust fund held for
government until they are remitted.
- Every person who is required to withhold the tax from
the compensation of an ee is liable for the payment of
such tax to the BIR. Such liability stays even if the ee
subsequently pays the tax.
- Any income payment which is otherwise deductible
shall be allowed as deduction from the payor’s gross
income only if it is shown that the income tax required
to be withheld has been paid to the Bureau.
TAX ON PROFITS COLLECTIBLE FROM THE OWNER
- Income tax not otherwise collectible from taxpayers
chargeable to his duly authorized representative.
ESTATES AND TRUSTS
Income of estates and trusts which are subject to income
tax
- The income tax imposable upon individuals shall apply
to the income of estates or of any kind of property
held in trust, including:
1. Income accumulated in trust
a. For the benefit of unborn or unascertained
persons or persons with contingent interest:
and
b. Income accumulated or held for future
distribution under the terms of the will or
trust.
2. Income which is to be distributed currently be the
fiduciary to the beneficiaries
3. Income collected by a guardian of an infant which
is to be held or distributed as the court may direct
4. Income received by the estates of deceased
persons during the period of administration or
settlement of the estate
5. Income which, in the discretion of the fiduciary,
may be either distributed tot eh beneficiaries or
accumulated.
But the income of the ees’ trust is exempt from income
tax
- The income of the ees’ trust which forms part of a
pension, stock bonus or profit-sharing plan of an er for
the benefit of some or all of his ees shall be exempt
from income tax if the following conditions are met:
1. The contributions are made to the trust by such er,
or ees, or both;
2. Such contributions are made for the purpose of
distributing to such ees the earnings and principal
of the fund accumulated by the trust in
accordance with the plan;
3. Under the trust instrument, it is impossible, (in the
taxable year and at any time thereafter prior to
the satisfaction of all liabilities with respect to ees
under the trust) for any part of the corpus or
income to be used for, or diverted to, purposes
other than for the exclusive benefit of his ees; and
4. The same is duly registered as such with the BIR.
- Purpose: to encourage the formation of private plan
outside SSS.
- Tax exemption is likewise enjoyed by the income of
the pension trust. Otherwise, taxation of those
earnings would result in a diminution of accumulated
income and reduce whatever the trust beneficiaries
would receive out of the trust fund.
- The income of the trust funds shall be exempt from
payment of final withholding tax.
Instances when ees’ trusts may be taxed.
1. Mere resolution setting aside every month a
reserve fun to pay pensions for all the present and
future ees, without evidence that the pension plan
is actuarially sound.
2. Any amount actually distributed tot eh ee or
distributee of an ees’ trust shall be taxable to the
ee in the year in which so distributed to the extent
that it exceeds the amount contributed by such ee
or distributee.
- A foundation existing for the purpose of holding title
to, and administering, the tax exempt Ees’ Trust Fund
established for the benefit of the ees, has the
personality to claim tax refunds due to the Ees’ Trust
Fund.
Other trusts which are exempt from income tax.
1. Revocable trust. The trust itself is exempt but the
trustor/grantor is subject to the payment of the
income tax of the trust.
2. Trust, the income of which, in whole or in part,
may be held or distributed for the benefit of the
grantor. If part of the income of the trust is to be
held or distributed for the benefit of the grantor,
the same should be included in the grantor’s
return.
The following income taxes are payable when a person
who owns property dies:
1. Income tax of the decedent when he was still
alive, to cover the period beginning January up to
the time of his death;
2. Estate income if the estate is under administration
or judicial settlement.
When income of estates and trusts taxable to fiduciaries.
- Fiduciary is a term which applies to all persons or
corporations that occupy positions of peculiar
confidence towards others such as trustees, executors,
or administrators; and a fiduciary, for income tax
purposes, is any person or corporation which holds in
trust an estate of another person/s.
- GR. the income tax of estate or trust shall be
computed upon the taxable income of the estate or
trust and shall be paid by the fiduciary.
- Where under the terms of a will or deed, the trustee
may, in his discretion, distribute the income or
accumulate it, the income is taxed to the trustee,
irrespective of the exercise of his discretion. The
imposition of the tax is not affected by the fact that an
ultimate beneficiary may be a person exempt from
tax.
- The income of a trust which is to be accumulated or
held for future distribution must be returned by and
will be taxed to the trustee.
When income of estate and trust taxable to beneficiaries.
1. A trust, the income of which is to be distributed
annually or regularly
2. An estate of a decedent the statement of which is
not the object of judicial testamentary or intestate
proceedings; and
 3. Properties held under a co-ownership or tenancy
in common, the income is taxable directly to the
beneficiary.
Rules in the consolidation of income of two or more
trusts.
1. There are two or more trusts which derive income
2. The creator of the trust in each instance is the
same person, and the beneficiary in each instance
is the same.
3. The income of the said trust should be
consolidated.
4. Where the creator of the trust in each instance is
the same person and the beneficiary in each
instance is the same, the tax due on the
consolidated income will be collected from the
trustees in proportion to the taxable income of the
respective trusts.
5. When the creator of the trust in each instance is
the same person and the trustee in each instance
is the same but the beneficiaries are different, the
trustee should make a separate return for each of
the trusts in his hands.
6. When a trustee holds trust created by different
persons for the benefit of the same beneficiary, he
should also make a return for each trust
separately.
7. Where a trustor/grantor created two or more
trusts in favor of the same beneficiary appointing
two or more trustees, the trustees should each
make a separate return for each trust. However,
the Commissioner will consolidate the taxable
incomes, allowing only one absolute exemption of
P20,000.
8. The income tax computed on the consolidated
taxable income shall be allocated between several
trusts in proportion to their respective taxable
income.
Computation of taxable income of estates or trusts.
G.R. The taxable income of the estate or trust shall be
computed in the same manner and on the same basis as in
the case of an individual
XPN.
1. Allowable deductions:
a. The amount of the income of the estate or
trust for the taxable year which is to be
distributed currently by the fiduciary to the
beneficiaries shall be allowed as deduction in
computing the taxable income of the estate or
trust
b. The amount of the income collected by a
guardian and infant which is to be held or
distributed as the court may direct shall also
be allowed as deduction in computing the
taxable income.
c. However, the said amounts so allowed as a
deduction shall be included in computing the
taxable income of the beneficiaries, whether
or not distributed to them.
2. Additional allowable deductions
a. There shall be allowed an additional deduction
in computing the taxable income of the estate
or trust the amount of the income of the
estate or trust for its taxable year, which is
properly paid or credited during such year to
any legatee, heir or beneficiary. This applies in
cases of:
i. Income received by estates of deceased
persons during the period of
administration or settlement of the estate;
and
ii. Income which, in the discretion of the
fiduciary, may either be distributed to the
beneficiary or accumulated.
b. However, the amount so allowed as a
deduction shall be included in computing the
taxable income of the legatee, heir or
beneficiary.
3. No deductions allowed. In the case of trust
administered in a foreign country:
a. The deductions mentioned in Subsections A
and B of Section 61 shall not be allowed.
b. The amount of any income included in the
return of said trust shall not be included in
computing the income of the beneficiaries.
c. The income of the trust, undiminished by any
amount distributed to the beneficiaries shall
be taxed to the trustee.
4. Personal exemption allowed. – P20,000
Casasola believes that the personal exemption of
estates and trusts should be P50,000 since they
are taxed like an individual.
The term period of administration and settlement of the
estate is the period required by the executor or
administrator to perform the ordinary duties pertaining
to administration, in particular, the collection of assets
and the payment of debts and legacies.
Tax consequences during the period of administration
and settlement of the estate.
1. Estates during the period of administration have
but one beneficiary and that beneficiary is the
estate.
2. No taxable income is realized from the passage of
property to the executor or administrator on the
death of the decedent, even though it may have
appreciated in value since the decedent acquired
it.
3. In the event of delivery of property in kind to a
legatee or distributee, no income is realized.
4. Where, however, prior to the settlement of the
estate, the executor or administrator sells the
property of the decedent’s estate for more than
the appraised value placed upon it at the death of
the decedent, the excess is income, taxable to the
estate.
5. Where the property is sold after the settlement of
the estate by the devisee, legatee or heir at a price
greater than the appraised value placed upon it at
the time he inherited the property from the
decedent, he is taxable individually on the profit
derived.
6. An allowance paid a widow or heir out of the
corpus of the estate is not deductible from gross
income.
Effects of distribution to heirs of the income of the
estate.
- Distribution to the heirs during the taxable year of the
income of the estate is deductible from the taxable
income of the estate since the distributed income shall
form part of the respective heir’s taxable income.
- Where no such distribution to the heirs is made during
the taxable year when the income is earned, and such
income is subjected to income tax payment by the
estate, the subsequent distribution thereof is no
longer taxable on the part of the recipient.
Effects of termination of judicial settlement where the
heirs still do not divide the property.
- If the heirs contribute to the estate money, property
or industry with intention to divide the profits
between or among them, an unregistered partnership
is formed and the estate becomes liable for the
payment of corporate income tax.
- If the heirs, without contributing money, property or
industry to improve the estate, simply divide the fruits
thereof between or among themselves, a co-
ownership is created and individual income tax is
imposed on the income received by each of the heirs,
payable in their separate and individual capacity.
Exemption allowed to estates and trusts.
- Each beneficiary is entitled to but one personal
exemption, no matter how many trusts he may receive
income.
- No additional exemption is allowed to the income of
estates and trusts.
Revocable Trust
- A trust where the title can revert back to the grantor
anytime.
- It is not taxable itself as separate entity because the
income forms part of the income of the grantor.
- Paid by the grantor
Requisites of a revocable trust
1. The power to revert in the grantor title to any part
of the corpus of the trust is vested in the grantor
at any time either alone or in conjunction with any
person not having a substantial adverse interest in
the disposition of such part of the corpus or the
income therefrom; or
2. The power to revert in the grantor title to any part
of the corpus of the trust is vested in the grantor
at any time in any person not having a substantial
adverse interest in the disposition of such part of
the corpus or the income therefrom;
3. The income of such part of the trust shall be
included in computing the taxable income of the
grantor, and thus the grantor/trustor shall be the
one subject to the income tax.
Irrevocable Trust
- A trust irrevocable both as to corpus and to income.
- Requisites:
 1. The trust itself, through the trustee or fiduciary, is
liable for the payment of the income tax
2. It is taxed exactly in the same way as estates
under judicial settlement and its status as an
individual is that of the trustor.
3. The distribution of the trust income during the
taxable year to the beneficiaries is deductible from
the taxable income of the trust.
When estate and trust may be taxable as a separate
entity
- The estate of the decedent is taxable as a separate
entity when it is already subject to a judicial
proceeding.
- A trust is taxable as a separate entity if the trust is
irrevocable and the grantor has no more control over
the corpus of the trust. If there is a condition that
provides that a portion does not convert the
irrevocable trust to a revocable trust, but that portion
is a taxable income of the grantor.
Requisites when income shall be considered for the
benefit of the grantor
1. Any part of the income of a trust is, or in the
discretion of the grantor or of any person not
having a substantial adverse interest in the
distribution of such part of the income may be
held or accumulated for future distribution to the
grantor;
2. Any apart of the income of a trust may, or in the
discretion of the grantor or of any person not
having a substantial adverse interest in the
disposition of such part of the income, be
distributed to the grantor; or
3. Such part of the income of the trust shall be
included in computing the taxable income of the
grantor/trustor.
- The term in the discretion of the grantor means in the
discretion of the grantor, either alone or in
conjunction with any person not having a substantial
adverse in the disposition of the part of the income in
question.
Fiduciary Returns
- In order that a fiduciary relationship may exist, it is
necessary that a legal trust be created.
- Fiduciaries are required to make returns of income of
the trust when the gross income of the person, trust
or estate for whom or which they act amounts of
P20,000 or more and will be subject to all the
provisions of law which apply to individuals.
Income tax return by receiver
- A receiver who stands in the place of an individual or
corporation must render a return of income and pay
the tax for his trust, but a receiver of only part of the
property of an individual or corporation need not.
Fiduciaries to be indemnified against claims for taxes
paid.
- Fiduciaries are indemnified against the claims or
demands of every beneficiary for all payments of taxes
which they shall be required to make and they shall
have credit for such payments in any accounting they
make as such fiduciaries.
WITHHOLDING ON WAGES
Compensation Income
- Means all remuneration for services performed by an
ee for his er under an er-ee relationship, unless
specifically excluded by the Code.
- The name by which the remuneration for services is
designated is immaterial.
Remunerations not considered as compensation income
1. Remuneration paid for agricultural labor.
G.R. Remuneration for services which constitute
agricultural labor and paid entirely in products of
the farm where the labor is performed is not
subject to withholding tax.
XPN. Subject to withholding tax
a. Services performed in connection with
forestry, lumbering or landscaping, because
the term agricultural labor does not include
the same.
b. Remuneration paid entirely in products of the
farm where the labor is performed be an ee of
any person in connection with any of the
following activities is excepted as
remuneration for agricultural labor:
i. The cultivation of soil;
 ii. The raising, shearing, feeding, caring for,
training, or management of livestock, bees,
poultry, or wildlife; or
iii. The raising or harvesting of any other
agricultural or horticultural commodity.
c. The remuneration paid entirely in products of
the farm where the labor is performed for the
following services in the employ of the owner
or tenant or other operator of one or more
farms is not considered remuneration,
provided the major part of such services is
performed on a farm.
i. Services performed in connection with the
operation, management, conservation,
improvement, or maintenance of any such
farms or its tools or equipment; or
ii. Services performed in salvaging timber, or
clearing land brush and other debris left by a
hurricane.
d. Remuneration paid entirely in products of the
farm where labor is performed by an ee in the
employ of any person In connection with any
of the following operations is not considered
as remuneration without regard to the place
where such services are performed;
i. The making of copra, stripping of abaca,
etc.;
ii. The hatching of poultry;
iii. The raising of fish;
iv. The operation or maintenance of ditches,
canals, reservoirs, or waterways used
exclusively for supplying or storing water for
farming purposes; and
v. The production or harvesting of crude gum
from a living tree or the processing of such
crude gum into gum spirits or turpentine
and gum resin, provided such processing is
carried on by the original producer of such
crude gum.
e. Remuneration paid entirely in products of the
farm where labor is performed by an ee in the
employ of a farmer or a farmer’s cooperative,
organization or group in the handling,
planting, drying, pacing, packaging, processing,
freezing, grading, storing or delivering to
storage or to market or to carrier for
transportation to market, of any agricultural
or horticultural commodity produced by such
farmer or farmer-members of such
organization or group.
2. Remuneration for domestic services. Not subject
to withholding.
3. Remuneration for casual labor not in the course of
an er’s trade or business.
4. Compensation for services by a citizen or resident
of the Philippines for a foreign government or an
international organization.
Payroll period
- The period of services for which a payment of
compensation is ordinarily made to an ee by his er.
Employee
- An individual performing services under an er-ee
relationship.
Employer
- Any person for whom an individual performs or
performed any service, of whatever nature, under an
er-ee relationship.
Withholding tax on compensation income
- A method of collecting the income tax at source upon
receipt of the income.
- The er is constituted as the withholding agent.
- No withholding of tax shall be required on the SMW,
including holiday pay, night shift differential and
hazard pay of MWEs in the private/public sectors.
 The tax withheld by the ers from the compensation
income of the ees is considered as the tax aid by the
recipient of the income.
 The tax deducted and withheld at source on
compensation income shall neither be allowed as a
deduction from the er’s gross income or from the
recipient’s gross compensation income.
 The creditable tax withheld at source, however. Is
allowable as a credit against the tax imposed by the
NIRC to the recipient of the income.
 Any excess of the tax withheld at source, over the tax
ascertained to be due on the income tax return shall
be refunded or automatically credited, at the
taxpayer’s option, to the recipient of the income.
 Any excess of the tax which was withheld on
compensation over the tax due from the taxpayer shall
 be returned not later than July 15 of the following
year.
 Refunds made after such time shall earn interest at
the rate of 6% per annum, starting after the lapse of
the 3 month period up to the date when the refund is
made.
 The withholding exemptions to which an ee is entitled
depends upon his status and the number of
dependents qualified for additional exemptions.
 Individual taxpayers regardless of status are entitled to
P50K personal exemption.
 An individual, whether single or married, shall be
allowed an additional exemption of P25K for each
qualified dependent child, provided that the total
number of dependents for which additional
exemptions may be claimed shall not exceed 4
dependents.
 Taxpayer who died during the taxable year may still
claim personal and additional exemption for himself
and his dependents.
 If the spouse or any of the dependents dies or if any of
such dependents marries, becomes 21 years old or
becomes gainfully employed during the taxable year,
the taxpayer may still claim the same exemptions as if
such happened at the close of such year.
 Where both husband and wife are each recipients of
compensation either from the same or different ers,
taxes to be withheld on the ff basis:
a. The husband shall be deemed the proper claimant
of the additional exemption in respect to any
dependent children, unless he explicitly waives his
right in favor of his wife in the application for
registration or in the withholding exemption
certificate.
b. In general, taxes shall be withheld from the wages
of the wife in accordance with the schedule for a
married person without any qualified dependent.
 Compensation for services rendered in the Philippines
paid to nonresident aliens engaged in trade or
business shall also be subject to withholding tax on
compensation just like a resident alien.
 There shall also be imposed a final withholding tax of
15% on the salaries, annuities, compensation,
remuneration and other emoluments, such as
honoraria and allowances paid to its alien ees
occupying managerial and technical positions and
Filipino ees occupying similar positions by ROHQs,
OBUs and Petroleum Service contractors and sub-
contractors.
 The following are liabilities of the er for the tax:
1. In general, the er shall be responsible for the
withholding and remittance of the correct amount
of tax required by deducting and withholding from
the compensation income of his ees.
2. The er, who required to collect, account for and
remit any tax imposed by the NIRC, who willfully
fail to collect such tax, or account for and remit
such tax or willfully assist in any manner to evade
any payment thereof, shall in addition to other
penalties, to a penalty equal to the amount of the
tax not collected nor accounted for or remitted.
3. Any er/withholding agent who fails or refuses to
refund excess withholding tax not later than Jan
25 of the succeeding year shall, in addition to any
penalties, be liable to the total amount of refund
which was not refunded to the ee resulting from
any excess of the amount withheld over the tax
actually due on their return.
 The following are the violations that may be
committed by the er/withholding agent relative to
withholding taxes on compensation and its year-end
adjustment:
1. Non-withholding of tax
2. Under withholding
3. Non-remittance
4. Underremittance
5. Late remittance
6. Failure to refund excess taxes withheld to its ees.
 Liabilities of the ee for the tax. Where an ee fails or
refuses to file an application of refistration or
certificate to update of exemption and the er’s and
ee’s information, together with the attachments, or
willfully supplies false or inaccurate information
thereunder after due written notice by the er, the tax
otherwise to be withheld by the er shall be collected
from him including penalties or additions to the tax
from the due date of remittance until the date of
payment.
 Where the ee, after due written notice form the er,
willfully fails or refuses to file the application for
registration, or the certificate of update of exemption
and the er’s and ee’s information, whichever is
applicable, or willfully supplies false and inaccurate
information, the excess taxes withheld by the er shall
 not be refunded to the ee but shall be forfeited in
favor of the government.
 Persons having control of the payment of wages or
salaries are authorized to deduct and withhold upon
such wages or salaries the withholding tax due
thereon. In this case, the garnishees are the persons
owning debts due to the er or in possession or control
of credits to which the er are entitled. Accordingly,
they are authorized to deduct and withhold the
income tax due from the backwages, allowances and
benefits to be paid to ees, and are respectively liable
for such deductions.
 In order to ensure the collection of the appropriate
withholding taxes on wages, garnishees of a judgment
award in a labor dispute are constituted as
withholding agents with the duty of deducting the
corresponding withholding tax on wages due thereon
in an amount equivalent to 5% of the portion of the
judgment award representing the taxable backwages,
allowances and benefits.
 Failure of the withholding agent of compensation
income to remit withholding taxes is tantamount to
non-payment of taxes by payee.
 Substituted filing is when the er’s annual return may
be considered as the substitute ITR of the ee inasmuch
as the information provided in his income tax return
would exactly be the same information contained in
the er’s annual return.
 Under substituted filing, an individual taxpayer
although required under the law to file his income tax
return, will no longer have to personally file his own
income tax return but instead the er’s annual
information return filed with be considered as the
substitute ITR of the ee inasmuch as the information in
the er’s return is exactly the same information
contained in the ee’s return.
 Non-filing is applicable to certain types of individual
taxpayers who are not required under the law to file
an income tax return.
 The ee who is qualified for substituted filing of income
tax return shall no longer be required to file income
tax return.
 Persons qualified for substituted filing of income tax
returns
1. The ee who receives purely compensation income
during the taxable year
2. The ee who receives the income only form one er
in the Philippines during the taxable year
3. The amount of tax due from the ee at the end of
the year equals the amount of tax withheld by the
er.
4. The ee’s spouse also complies with all 3 conditions
stated above.
5. The er files an annual information return
6. The er issues BIR Form No. 2316 to each ee.
 Persons not qualified for substituted filing of the ITR
1. Individuals deriving compensation income from
two or more ers concurrently or successively at
anytime during the taxable year.
2. Ees deriving compensation income, regardless of
the amount, whether from a single or several ers,
during the calendar year, the income tax of which
has not been withheld correctly resulting to
collectible or refundable return.
3. Individuals deriving other non-business, non-
profession-related income in addition to
compensation income not otherwise subject to a
final tax.
4. Individuals receiving purely compensation income
from a single er, although the income tax of which
has been correctly withheld, but whose spouse
falls under paragraphs a, b and c above.
5. Nonresident aliens engaed in trade or business in
the Philippines deriving purely compensation
income, or compensation income and other non-
business, non-profession related income.
 Constructive receipt of Compensation Theory.
Compensation is constructively paid when it is
credited to the account of or set apart for an ee so
that it may be drawn upon by him at any time
although not then actually reduced to possession.