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Capital sum recoverable thru depreciation allowances - a reasonable allowance for the deterioration of
property arising out of its use or employment or its
- The capital sum to be replaced by depreciation non-use in the business, trade or profession shall be
allowances is the cost or other basis of the property in permitted only when such property is located in the
respect of which the allowance is made. Philippines.
- 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
DEPLETION the development stage of mine or deposit of a
particular mining property.
- Refers to the exhaustion of natural resources owing to - Development expenditures – include all capital
production or severance. expenditures paid or incurred during the development
- The allowance for depletion is based on the theory that
stage of the mine or other natural deposit.
the extraction of minerals gradually exhausts the
capital investment in the mineral deposit. Limitation of cost depletion
- In computing taxable income, there shall be allowed as
deduction, in the case of mines, a reasonable allowance - The basis for cost depletion mineral deposits does not
for depletion thereof not to exceed the market value in include:
the mine of the product thereof which has been mined 1. Amounts recoverable thru depreciation, thru
and sold during the year for which the return is made. deferred expenses thru deductions other than
- In determining the amount, three factors are essential: depletion
1. The basis of the property 2. The residual value of improvements at the end of
2. The estimated total recoverable units in the operation.
property - Such basis does include exploration and development
expenses incurred on mining properties or area other
3. The number of units discovered during the taxable
year. than those presently being mined. These expenses shall
- Minerals – all naturally occurring inorganic substances be treated as deferred expenses.
- The annual allowable cost depletion shall not exceed
in solid, liquid or any intermediate state including coal.
- Mining or to mine – to extract, remove, utilize minerals the market value as used for purposes of imposing the
and includes operations necessary for that purpose. mining ad valorem taxes in the mine of the product
thereof which has been mined and sold during the year
Who may avail of the cost of depletion for which the return and computation are made.
- The allowable cost depletion deduction shall be limited
- Annual depletion deductions are allowed only in mining only to the extent of the capital invested in the
entities which own an economic interest in mineral particular mining property.
deposits.
- Capital invested in the particular mining shall include
- Economic interest is possessed in every case in which the accumulated exploration and development
the taxpayer has acquired by investment any interest in expenditures and expenditures incurred on the ongoing
mineral, in place and secures, by any form of legal mine exploration and development on the same mining
relationship, such as, but not limited to, operating are which –
agreement and service contract agreement, income 1. Increases the value of the mine
from the extraction of mineral, to which it must look for 2. Decreases the cost of production of mineral units
a return of capital. 3. Restores property to its previous condition or in
Basis of Cost of Depletion making good the exhaustion thereof for which an
allowance is or has been made.
- The adjusted cost of basis of the mining property being - No further deduction for cost depletion shall be
mined allowed when the sum of the cost depletion equals the
- The adjusted cost basis shall be the accumulated cost of adjusted basis of the property plus allowable
exploration and development expenses incurred on the capital additions.
mining properties minus accumulated cost depletion - Actual commercial production – shall mean the stage of
that should have been deducted as of the same date of mining operation attained by a mine in which mineral
same property. or mineral products of marketable grade and quantity
- Exploration expenditures – expenditures paid or have been produced and sold to local and/or foreign
incurred for the purpose of ascertaining the existence, markets.
location, extent, quality of any deposit for ore or other
mineral, and paid or incurred before the beginning of Manner of computation of cost depletion
- Computed by dividing the adjusted cost basis by the - Positive ore shall mean the full tonnage computed
number of units of minerals remaining as of the taxable with good mining practice from dimensions
year and by multiplying the depletion unit so revealed in outcrops, branches, underground
determined by the number of units of minerals sold workings and drill holes and for which the grade is
within the taxable year. computed from results of detailed sampling.
- Number of units of minerals remaining as of the taxable 2. The probable or prospective ores and mineral
year is the number of units of minerals remaining at the deposits, which include ores and minerals that are
end of the period to be recovered from the property believed to exist on the basis of good evidence
plus the number of units sold within the taxable year. although not actually known to occur on the basis
- The number of units sold within the taxable year is of existing development. Such probable or
1. In case of taxpayer reporting income on the cash prospective ores or minerals may be estimated:
basis, include units for which payments were a. As to quantity, only in case they are extensions
received within the taxable year although extracted of known deposits or are new bodies or masses
or sold prior to the period and exclude units sold whose existence is indicated by geological
but not paid for in the taxable year. surveys or other evidence to a high degree of
2. In case of taxpayer reporting income on the accrual probability
method, include all units extracted and sold during b. As to grade, only in accordance with the best
the period, whether paid for or not, but does not indications available as to richness.
include units with respect to depletion deductions - Probable or prospective ore shall mean the ore for
which are allowed or allowable prior to the taxable which tonnage and grade are computed partly from
year. specific measurement, samples and partly from
- In the case of natural gas or oil wells, the taxpayer may projection for a reasonable distance on geologic
computed the cost depletion in respect of such evidence.
property for the taxable year by multiplying the
adjusted cost basis of the property by a fraction, the Records to be kept
numerator of which is equal to the number of cubic - Every taxpayer claiming and making a deduction for
feet or barrels of oil recovered during the year and the depletion of mineral property shall keep a separate
denominator of which is equal to the expected account for each and every area in his books of
recoverable number of cubic feet of gas or barrels of oil accounts in which shall be accurately recorded the cost
at the end of the taxable year plus the number of cubic or other basis of such property and thereafter to be
feet of gas or barrels of oil recovered during the year. debited by any and all capital additions.
Determination of mineral content of deposits remaining - In addition, the taxpayer must assemble, segregate and
as of the taxable year have readily available at his principal place of business,
all supporting data which were used in compiling the
- The mineral contents remaining as of the taxable year summary statement required to be attached to the
pertains to the estimated mineral products reasonably income tax return to be filed.
known or on good evidence believed to have existed in
place as of the end of the taxable year, the estimate of Basis of depreciation of improvements
determination of which was made according to the - There shall be allowed as a deduction a reasonable
method current in the industry and in the light of the allowance for depreciation of improvements including,
most accurate and reliable information obtainable. but not limited to, mining and milling equipment.
- The estimated mineral products remaining as of the
taxable year shall include both quantity and grade: Aggregation or combination of separate properties
1. The positive ores and mineral deposits, which
- In the case of mining companies with several mining
include ores and minerals blocked out and
properties, it may aggregate into one operating unit,
developed or assured in the usual conventional
several mining properties for purposes of determining
meaning.
the adjusted cost basis recoverable thru depletion - Mean the gross income from operations less allowable
subject to the following conditions: deductions which are necessary or related to mining
1. All contiguous areas included in a single concession operations.
grant or in separate concession grants may be
Depletion of oil and gas wells and mines deductible by a
constituted as a single operating unit
2. Operating mineral interests which are nonresident alien individual or foreign corporation
geographically widespread may not be treated as - Shall be authorized only in respect to oil and gas wells
parts of the same operating unit or mines located within the Philippines.
3. Undeveloped operating mineral unit may be
aggregated only with those interests with which it CHARITABLE AND OTHER CONTRIBUTIONS
will be operated as a unit when it reaches the
- Requisites
production stage.
1. The contribution must have been actually made to
Intangible costs in petroleum operations. entities specified by law
2. The contribution must have been made within the
- Refers to any cost incurred in petroleum operations taxable year
which in itself has no salvage value and which is 3. It must be evidenced by adequate receipts and
incidental to and necessary for the drilling of wells and records
preparation of wells for the production of petroleum. 4. For contributions other than money, the amount
- Any intangible exploration, drilling and development shall be based on the acquisition cost of the
expenses allowed as a deduction in computing taxable property not the fair market value at the time of
income during the year shall not be taken into the contribution
consideration in computing the adjusted cost basis for 5. For contributions subject to statutory limitations,
the purpose of computing allowable cost depletion. the same must not exceed 10% in the case of
Election to deduct exploration and development individuals engaged in business or profession or 5%
in case of corporations of the said taxpayer’s
expenditures
taxable income before deducting the charitable
- In computing taxable income from mining operations, contributions.
the taxpayer may, at his option, deduct exploration and
development expenditures accumulated as cost of Contributions subject to statutory limits
adjusted basis for cost depletion as of date of - The following donations or contributions are subject to
prospecting, as well as exploration and development limitations of not exceeding 10% (in case of individuals)
expenditures paid or incurred during the taxable year: or to 5% (in case of corporations) based on the
Provided, That the total amount of deductible for taxpayer’s gross income derived from trade, business or
exploration and development expenditures shall not practice of profession computed without first deducting
exceed 25% of the taxable income from mining the contributions:
operations computed without the benefit of any tax 1. Contributions for non-priority activities or gifts
incentives under existing laws. actually paid or made within the taxable year to, or
- The actual exploration and development expenditures for the use of the Government of the Philippines or
minus 25% of the taxable income from mining shall be any of its agencies or any political subdivision
carried forward to the succeeding years until fully thereof exclusively for public purposes, or
deducted. 2. Donations, contributions or gifts actually paid or
- This election by the taxpayer is irrevocable and shall be made within the taxable year to accredited non-
binding in succeeding taxable years. profit corporations organized and operated
exclusively for religious, charitable, scientific, youth
Net income from mining operations
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 3. The level of administrative expense of which
inures to the benefit of any private stock holder or shall, on an annual basis and in no case to
individual shall be allowed limited deductibility in exceed 30% of the total expenses
an amount not in excess of 10% for an individual 4. The assets of which, in the event of
donor, and 5% for a corporate donor, of the dissolution, would be distributed to another
donor’s taxable income derived from trade, NGO organized for similar purpose or
business or practice of profession as computed purposes, or to the state for public purpose, or
without the benefit of this deduction. to another NGO to be used in such manner as
- The amount deductible is the actual contribution or the in the judgment of a court shall best
statutory limit computed, whichever is lower. accomplish the general purpose for which the
dissolved organization was organized
Contributions/donations deductible in Full 5. Only to the extent of the acquisition cost (not
1. Donations to the Government the fair market value) of the property, if the
- Including fully-owned government corporations, contribution is other than money, shall be
exclusively to finance, to provide for, or to be used allowed full deductibility
in undertaking priority in education, health, youth - Donations and gifts made in favor of accredited non-
and sports development, human settlements, stock, non-profit corporations/NGOs shall be
science and culture, and in economic development exempted from the donor’s tax; Provided, however,
according to a national Priority Plan determined by That not more than 30% of the said donations and
the NEDA in consultation with appropriate gifts for the taxable year shall be used by such
government agencies, including its regional accredited non-stock, non-profit corporations/NGOs
development councils and private philanthropic institutions qualified done-institution for
persons and institutions. administration purposes.
2. Donations to certain foreign institutions or Utilization requirements
international organizations
- The subject donations must be fully deductible in - Amounts set aside for specific project must have the
pursuance of or in compliance with agreements, prior approval of the Commissioner in writing
treaties, or commitments entered into by the - Amounts set aside shall be evidenced by book entries
Government of the Philippines and the foreign and documents showing evidence of deposits or
institutions or international organizations or in investments, including investment of the funds so set
pursuance of special laws. aside, or other documents that the Commissioner may
3. Donations to accredited non-stock, non-profit require.
corporations/NGOs
Accreditation of non-stock, non-profit
1. Organized and operated exclusively for
scientific, research, educational, character- corporations/NGOs by the accrediting Entity
building and youth and sports development, - The accrediting entity shall examine, evaluate and
health, social welfare, cultural or charitable accredit non-stock, non-profit corporations and NGOs
purposes, or combination thereof, no part of as a prerequisite for their registration with the BIR as
the taxable income of which inures to the qualified-donee institutions.
benefit of any private individual - Newly-organized and existing non-stock, non-profit
2. Which, not later than 15th day of the third corporations and NGOs shall apply with the
month after the close of the accredited NGO’s Accrediting Entity for accreditation and submit to a
taxable year in which contributions are process of examination and evaluation.
received, makes utilization directly for the - The accrediting Entity shall evaluate and accredit
active conduct of the activities constituting the NGOs by using a set of major criteria.
purpose or function for which it is organized
and operated Certificate of donations
- All credited NGOs are required to issue a certificate of 1. Research or development expenditures were paid
donation in such form as prescribed by the BIR, on or incurred in connection with the taxpayer’s
every donation or gift they receive. trade, business or practice of profession
2. The same had been paid or incurred during the
Notice of donations taxable year as ordinary and necessary expenses
- The donor, on the hand, should give a notice for 3. The same had not been charged to the capital
every donation worth over P1M to the RDO where his account
lace of business is located within 30 days after the Amortization of certain research and development
receipt of the Certificate of Donation attaching to the
expenditures
said notice the copy of the Certificate of Donation
issued to him by the accredited NGO. - The following research and development expenditures
may be treated as deferred expenses:
Date and place of filing 1. The same had been paid or incurred by the
- By the donors – at the time of filing their income tax taxpayer in connection with his trade, business or
returns. practice of profession
- By the accredited NGO – not later than 15th day of the 2. The same was not treated as an ordinary and
4th month after the close of its taxable year in order necessary expense
to maintain its status as an accredited NGO. 3. The same was chargeable to capital account but
- File in the RDO where the place of business of the not chargeable to property of a character which is
donor or donee is located. subject to depreciation or depletion
4. The deduction is ratably distributed over a period
Contributions to a candidate in an election not allowed as of not less than 60 months beginning with the
deduction from gross income of a taxpayer. month in which the taxpayer first realized the
benefits from such expenditures.
- Because the said expense is not directly attributable
to, the development, management, operation and/or Limitations on deduction
conduct of a trade, business or profession.
1. The expenditure shall not apply to the acquisition
Monitoring and verification of the annual information or improvement of land or for the improvement of
return property to be used in connection with research
and development of a character which is subject
- May be examined by the BIR annually for purposes of
to depreciation and depletion
ascertaining compliance with the conditions where
2. For any expenditure paid or incurred for the
which they have been granted tax exemptions or tax
purpose of ascertaining the existence, location,
incentives, and their tax liability, if any.
extent, or quality of any deposit of ore or other
mineral, including oil or gas.
RESEARCH AND DEVELOPMENT
PENSION TRUSTS
- Research is original and planned investigation
- A trust established or maintained by the er to provide
undertaken by the taxpayer with the prospect of
for the payment of reasonable pensions to its ees.
gaining new scientific or technical knowledge and
understanding, while development is the application Pension trust contributions
of research findings or other knowledge to a plan or
design for the production of new or substantially - A deduction applicable only to the er on account of its
improved materials, devices, products, processes, contribution to a private pension plan for the benefit
systems or services before the start of commercial of its ees.
production or use. - This deduction is purely business in character.
- Entitled only to personal exemption, but not to Losses which are not deductible from the gross income.
additional exemption, in an amount equal to the - Designed to avoid sham or pretended sales or
exemptions allowed by the income tax law in the exchanges designed to create losses so as to enable the
country which he is a citizen or allowed to citizens of taxpayer to deduct the same from gross income and
the Philippines who are also nonresidents in that
consequently fall under a lower bracket.
country, but not to exceed personal exemption of
P50,000. Rationale for the prohibition from deductibility of capital
- The exemption allowed to nonresident aliens is a losses from ordinary gains
reciprocal one; that is, it is only allowed if the country
of said nonresident aliens allowed similar exemptions - Designed to forestall the shifting of deductions from an
to Filipinos who are considered as non-residents of area subject to lower taxes to an area subject to a
such country but deriving income from sources therein. higher taxes, thereby unnecessarily resulting in leakage
- If the nonresident alien individual is not engaged in of tax revenues.
trade or business in the Philippines, he will not be WHAT CONSTITUTEES AS GROSS INCOME FOR
allowed to claim any personal exemption because his INSURANCE COMPANIES
income tax is subject to the final withholding tax of 25%
based on the gross income.
- Consists of their income from all sources within the
taxable year, except as otherwise provided by the
statute.
- 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 or certificate or other evidences of indebtedness
been realized from the sale, exchange or disposition of issued by any corporation, including the government,
real property located in the Philippines, classified as with interest coupons or in registered form, any loss
capital asset, including pacto de retro sales and other resulting from such sale shall not be subject to the
forms of conditional sales, by individuals, including limitation, and shall not be included in determining the
estates and trusts, regardless of whether he suffers a applicability of such limitation to other losses.
loss than a gain, the basis of which is the zonal value of
the property or the gross selling price, whichever is Rationale for the rule prohibiting the deduction of capital
higher. losses from ordinary gains.
Net capital gain distinguished from net capital loss. - To insure that only costs or expenses incurred in
earning the income shall be deductible for income tax
- Net capital gains – the excess of the gains from sales purposes consonant with the requirement of the law
or exchanges of capital assets over the losses from that only necessary expenses are allowed as
such sales or exchanges. It is added to the ordinary deductions from gross income.
gain. - This is also the reason why all non-business connected
- Net capital loss – the excess of the losses from sales or expenses, like personal, living and family expenses, are
exchanges of other capital assets over the capital gains not allowed as deduction from gross income.
from such sales or exchanges. It is not deductible from
Net capital loss carry over (NCLCO) vis-à-vis net operating
the ordinary gain.
loss carry over (NOLCO).
Long term capital gain distinguished from short term
capital gain; Percentages taken into account; Holding NCLCO NOLCO
Can be availed of only by Available to both individuals
Period rule
individual taxpayer. and corporate taxpayers.
- In computing net capital gain, net capital loss, and net Covers only one year May be deducted from the
period. gross income for the next
taxable income in the case of individual taxpayers, the
three consecutive years.
ff percentages of capital gains or loss shall be A capital asset transaction. An ordinary asset
recognized and taken into account upon the sale or transaction.
exchange of a capital asset depending on the actual Directly governed by the Directly governed by the
holding period. Tax Code only. Tax Code and by the
- Short-term capital gain – 100% of the capital gains or Investment Incentives Act.
loss is taken into account, if the capital asset has been
held for not more than 12 months
Retirement bonds
- Long-term capital gain – 50% of the capital gains or
loss is taken into account, if the capital asset has been - For income tax purposes, amounts received by the
held for more than 12 months. holder upon the retirement of bonds, debentures,
notes or certificates or other evidences of indebtedness
Capital loss limitation rule applicable to both
issued y any corporation with interest coupons or in
corporations and individuals.
registered form, shall be considered as amounts
- G.R. Capital losses from sales or exchanges of capital received in exchange thereof.
assets are allowed only to the extent of the gains from
Taxation of shares redeemed for cancellation or
such sales or exchanges.
retirement.
- The net capital loss is not deductible in arriving at the
taxable net income inasmuch as capital losses are - When preferred shares are redeemed at a time when
allowed only to the extent of capital gains. the issuing corporation is still in its going concern and is
- XPN. In a bank or trust incorporated under the laws of not contemplating in dissolving or liquidating its assets
the Philippines, a substantial part of whose business is and liabilities, capital gain or capital loss upon
the receipt of deposits, sells any bond, debenture, not redemption shall be recognized on the basis of the
difference between the amount/value received at the - For income tax purposes, a short sale is not deemed to
time of redemption and the cost of the preferred be consummated until the delivery of property to
shares. cover the short sale.
- The capital gain or loss derived shall be subject to the
DETERMINATION OF GAIN OR LOSS IN EXCHANGE OF
regular rates.
- This section does not cover the situation where a PROPERTY
corporation voluntarily buys back its own shares, in - The amount of income derived or loss sustained from
which it becomes treasury shares. Stock transaction tax an exchange of property is the difference between eh
applies, if listed and traded in the local stock exchange. market value at the time of the exchange of the
Otherwise, it is subject to 5% or 10% net capital gains property received in exchange of and the original cost,
tax. or other basis, of the property exchanged.
Taxation of surrender of shares by the investor upon Basis for determining gain or loss from sale or disposition
dissolution of the corporation and liquidation of assets of property
and liabilities of said corporation.
1. If the property is acquired by purchase – basis is
- Upon surrender by the investor of the shares in the cost of the property acquired on or after
exchange for cash and property distributed by the March 1, 1913
issuing corporation upon its dissolution and liquidation 2. If the property is acquired by inheritance – basis is
of all assets and liabilities, the investor shall recognize the fair market price or value as of the moment of
either capital gain or loss upon such surrender of shares death of the decedent
computed by comparing the cash and fair market value 3. If the property is acquired by donation – basis is
of property received against the cost of the investment the cost in the hands of the donor or the last
in shares. previous owner who did not acquire it by
- The capital gain or loss shall be subject to the regular donation. If the basis, however, is greater than the
income tax. fair market value of the property at the time of
donation, then, for purposes of determining loss,
Short sales
the basis shall be such fair market value.
- Refer to any sale of a security which the seller does not 4. If the property is acquired for less than an
own or any sale which is consummated by the delivery adequate consideration in money or money’s
of a security borrowed by, or for the account of the worth – basis shall be the amount paid by the
sellers. transferee for the property
- A person shall be deemed to own a security if: 5. If the property was acquired thru previous tax-free
1. He or his agent has title to it exchange, the basis of stock or securities received
2. He has purchased or has entered into an by the transferor is the same as the basis of the
unconditional contract, binding on both parties property, stock or securities exchanged or
thereto, to purchase it and has not yet received it transferred. Basis of the property transferred in
3. He owns a security convertible into or the hands of the transferee – same as it would be
exchangeable for it and has tendered such security in the hands of the transferor.
for conversion or exchange - The property received as boot refers to the money
4. He has an option to purchase or acquire it and has received and other property received in excess of
exercised such option the stock or securities received by the transferor
5. He has rights or warrants to subscribe to it and has on a tax-free exchange.
exercised such rights or warrants provided however
that a person shall be deemed to own securities Recognition of gain or loss in exchange of property
only to the extent he has a net long position in such - GR. the entire amount of the gain or loss on the sale
securities. or exchange of properties should be recognized.
When short sale is deemed consummated.
- XPN. If in pursuance to a plan merger or 2. Donor’s tax – the transferor is not subject to
consolidation: donor’s tax, regardless whether the value of the
1. A corporation exchanges property solely for stocks property transferred exceeds the par/stated value
in a corporation of the transferee shares issued to the transferor,
2. A shareholder exchanges stock in a corporation for there being no intent to donate on the part of the
the stock of another corporation transferor.
3. A security holder of a corporation exchanges his 3. Value-Added Tax – the VAT shall not apply to
securities in such corporation solely for stock or goods or properties which are originally intended
securities in another corporation for sale or for use in the course of business.
4. The transfer is made by a person, acting alone or - XPN. The exchange of goods or properties
together with others, not exceeding four persons including the real estate properties used in
5. As a result of the exchange, the transferor, alone business or held for sale or for lease by the
or together with others, not exceeding four, gains transferor, for shares of stocks, whether resulting
control of the transferee. in corporate control or not, is subject to VAT.
4. Documentary Stamp Tax – in the case of tax-free
The following are the tax consequences of a tax-free exchange of properties for shares or shares for
exchange of property for shares of stock of a controlled shares, said exchange shall be exempt.
corporation:
INVENTORIES
1. Income tax – The transferor shall not recognize
any gain or loss on the transfer of the property to - Two tests for which inventory must conform
the transferee. The transferor will not be subject 1. It must conform as nearly as possible to the best
to capital gains tax, income tax, or to creditable accounting method in the trade or business; and
withholding tax on the transfer of such property to 2. It must clearly reflect the income.
the transferee. Neither may the transferor - Inventory rules cannot be uniform but must give effect
recognize a loss, if any, incurred in the transfer. to trade customs which come within the scope of the
- Control – means ownership of stocks in a best accounting practice in the particular trade or
corporation possessing at least 51% of the total business.
voting power of all classes of stocks entitled to - In order to clearly reflect income, the inventory
vote. practice should be consistent from year to year.
- The assumption of liabilities or the transfer of - Inventories should be recorded in a legible manner,
property that is subject to a liability does not properly computed and summarized, and should be
affect the non-recognition of gain or loss, since the preserved as a part of the accounting record of the
total amount of such liabilities does not exceed taxpayer.
the basis of the property transferred. If the - Inventory losses which are allowable as tax deduction
amount of the liabilities assumed plus the amount are:
of the liabilities to which the property is subject 1. Losses from the sale of excess or obsolete raw
exceed the total amount of the adjusted basis of materials
the property transferred pursuant to such 2. Losses from production of initial batches of new
exchange, then such excess shall be considered as products
a gain from the sale or exchange of a capital asset 3. Production losses from reprocessing of stocks
or of property which is not a capital asset, as the returned for reconditioning.
case may be. - Inventory valuation method adopted by the taxpayer
- The transferee is not subject to income tax on its should be applied from year to year.
receipts of the property as contribution to its
capital, even if the value of such property exceeds Rationale behind the power of the State to tax persons,
the par value or stated value of the shares issued properties and business within its jurisdiction.
to the transferor. - Based on the theory that the tax laws of a state can
have no extraterritorial operation.
- Violation of the constitutional provision that no person section does not apply to income from the sale of
shall be deprived of his property without due process property produced by the taxpayer within and sold
of law. without the Philippines or produced by the taxpayer
without and sold within the Philippines.
Classification of income as to sources 7. Sale of shares of stock of domestic corporation –
1. Within the Philippines within the Philippines, regardless of where the said
2. Without the Philippines shares are sold. The transfer by a nonresident alien or
3. Partly within and partly without the Philippines a foreign corporation to anyone of any share of stock
issued by a domestic corporation sold thru a foreign
Gross income from sources within the Philippines stock exchange shall still be subject to Philippine
income tax and shall not be affected or made in its
1. Interest income – interest on bonds or notes or
book unless:
other interest-bearing obligations of residents,
a. The transferor has filed with the Commissioner a
corporate or otherwise.
bond conditioned upon the future payment by him
2. Dividends
of any income tax that may be due on the gains
a. From domestic corporation
derived from such transfer, or
b. From a foreign corporation unless less than
b. The Commissioner certified that the taxes, if any,
50% of its gross income for the 3-year period
due on the gain realized from such sale or transfer
ending with the close of its taxable year
have been paid.
preceding the declaration of such dividends,
or for such part of such period as it has been GROSS INCOME FROM SOURCES WITHOUT THE PHIL
in existence was derived from sources within
the Philippines; but only in an amount which 1. Interests other than those derived from sources
bears the same ratio to such dividends as the within the Philippines
gross income from all sources. 2. Dividends other than those derived from sources
- In the case of dividends derived from a foreign within the Philippines
corporation, the same is subject to the 50% rule, 3. Compensation for labor or personal services
i.e., if the 3-year period preceding the declaration performed without the Philippines
of such dividend, the ratio of such corporation’s 4. Rentals or royalties from property located without
Philippines gross income to the world gross the Philippines or from any interest in such
income is property including rentals or royalties for the use
i. Less than 50% - then the income is considered or for the privilege of using without the
derived entirely without Philippines, patents, copyrights, secret processes
ii. If 50% or more – then the income is and formulas, goodwill, trademarks, trade brands,
considered derived within. franchises and other like properties;
3. Services – includes compensation for labor or personal 5. Gains, profits and income from the sale of real
services performed within the Philippines regardless of property located without the Philippines.
the residence of the payor, of the place in which the INCOME FROM SOURCES PARTLY WITHIN AND
contract for service was made, or of the place of
PARTLY WITHOUT THE PHILIPPINES
payment.
4. Rentals and royalties – the income arising from the - The taxable income may first be computed by
rental of property whether tangible or intangible, deducting the expenses, losses or other deductions
located within the Philippines, or from the use of apportioned or allocated thereto and a ratable part of
property, whether tangible or intangible, located any expense, loss or other deduction which cannot be
within the Philippines. definitely be allocated to some items or classes of
5. Sale of real property – those located in the Philippines gross income; and the portion of such taxable income
6. Sale of personal property – in the country where the attributable to sources within the Philippines may be
personal property is sold. The country in which sold determined by the processes and formulas of general
means the place where the property is marketed. This 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 - If the taxpayer does not regularly employ a method of
accounting which clearly reflects his income, the
Accounting Periods computation shall be made in such manner as in the
- Taxable year or taxable accounting period – the opinion of the Commissioner clearly reflects it.
calendar year or the fiscal year ending during such Essentials of a standard accounting method in order to
calendar year, upon the basis of which the taxable
truly reflect a taxpayer’s taxable income
income under Title II of the Tax Code is computed.
- In all cases in which the production, purchase, or sale
Different taxable accounting periods of merchandise of any kind is an income-producing
- G.R. the accounting period of a taxpayer is a period of factor, inventories of the merchandise on hand should
12 months: be taken at the beginning and end of the year and
1. Calendar accounting year - taxable period used in computing the taxable income of the year.
adopted by individuals or corporations using the - Expenditures made during the year should be properly
calendar year, which is a period of 12 months classified as between capital and income
starting from Jan. 1 to Dec. 31. - In any case in which the cost of capital assets is being
- If the taxpayer had no annual accounting period, recovered thru deductions for wear and tear,
or does not keep books, or if the taxpayer is an depletion or obsolescence, any expenditure (other
individual, the taxable income shall be computed than ordinary repairs) made to restore the property or
on the basis of the calendar year. prolong its useful life should be added to the property
2. Fiscal accounting period – taxable period adopted account or charged against the appropriate reserve
by corporations using the fiscal year, which is a and not to current expenses.
period of 12 months ending on the last day of any
Different accounting methods under the Tax Code
month other than December.
- In no instance shall individual taxpayers be 1. Cash Accounting Method – all items of income
authorized to establish a fiscal year as basis for actually received during the year shall be
filing their returns and computing their income. accounted for in such taxable year and the
- But a taxpayer may have a taxable period of less corresponding expenses actually paid shall also be
than 12 months. claimed as deductions during the year.
3. Short accounting period – adopted by a taxpayer 2. Accrual accounting method – income, gains and
in the case of a return made for a fractional part of profits are included in the gross income when
a year or which is a period of less than 12 months. earned regardless of whether or not actually
- Occurs when a taxpayer, with the approval of the received, and the expenses are allowed as
Commissioner, changes the basis of computing deductions from the gross income when actually
taxable income. It may also occur when a taxpayer incurred, although not yet paid. This is allowed
dies, or is newly organized, or a corporation is because expenses not being claimed as deductions
dissolved at any time during the year after the by a taxpayer in the current year when they are
beginning of the calendar year or fiscal year. incurred cannot be claimed as deduction from
income for the succeeding year.
Accounting Methods 3. Installment payment basis method – a method
- Comprise of a set of rules for determining when and considered appropriate when collections extends
how to report income and deductions. over relatively long periods of time and there is a
- The accounting method for tax purposes must be one strong possibility that full collection will not be
generally employed in keeping the taxpayer’s books, made. As customers make installment payments,
provided that the method clearly reflects the income. the seller recognizes the gross profit on sale in
- In case of conflict between the Tax Code and that of proportion to the cash collected. In order that
the generally accepted accounting principles, the payments may be considered as on installment
provisions of the Tax Code and its IRR shall prevail. payment basis, the initial payments in the year of
sale should not exceed 25% of the gross selling 1. Fixing of a right to income or liability to pay
price. 2. The availability of the reasonable accurate
4. Deferred payment basis method – a method being determination of such income or liability.
applied by real estate dealers in their sale of real - The test does not demand that the amount of income
properties, which, although the mode of payment or liability be known absolutely, only that a taxpayer
being employed is on the installment basis, the has at his disposal the information necessary to
said sale shall be considered as on a cash basis compute the amount with reasonable accuracy.
when the initial payments in the year of sale of the - The basis of accrual system of accounting is that
real properties exceed 25% of the gross selling obligations incurred in the normal course of business
price. will be discharged in due course; that the deductions
5. Percentage-of-completion-basis method – a have been paid or accrued, or paid and accrues, in
method applicable in the case of a building, order to be accruable in the taxable year, a valid
installation or construction contract covering a obligation upon which the profit or loss, in case of
period in excess of one year whereby gross income deduction, is to be determined must have existed in
derived from such contract may be reported upon the year in which the obligation became binding and
the basis of percentage of completion or progress enforceable.
of work.
Change of accounting period
Period in which items of gross income included
- A taxpayer who changes the method of accounting
- In case of death of a taxpayer, gains, profits, and employed in keeping his books shall, before computing
income are to be included in the gross income for the his income upon such new method for purposes of
taxable year in which they are received by the taxation, secure the consent of the Commissioner.
taxpayer, unless they are included as of a different - Application for permission to change the method of
period in accordance with the approved method of accounting employed and the basis upon which return
accounting followed by him. is made shall be filed within 90 days after the
- If the taxpayer is keeping books of accounts on the beginning of the taxable year to be covered by the
cash basis, income earned is taxable in the year of return.
actual receipt. - An individual cannot change his accounting period
- If his books of accounts and records are kept on the from calendar year to fiscal year because he is only
accrual basis, income is taxable in the year it is earned, allowed to use the calendar year.
irrespective of the year in which it is actually received. - A corporation, including a duly registered GPP, who
desires to change its accounting shall at any time not
Meaning of the terms paid and incurred and paid or less than 60 days prior to the beginning of the
accrued proposed new accounting period submit a written
- The terms will be construed according to the method application to the Commissioner.
of accounting upon the basis of which the taxable - The certification approving the adoption of a new
income is computed by the taxpayer. accounting period must be released within 30 working
- In case of the death of a taxpayer, there shall be days from the date of receipt of the complete
allowed as deduction for the taxable period in which documentary requirements.
falls the date of his death, amounts accrued up to the Final or adjusted returns for a period of less than 12
date of his death if not otherwise properly allowable in
months
respect of such period or a prior period.
- GR. No return can be made for a period of more than
All-events-test 12 months
- The accrual of income and expense is permitted when - A separate return for a fractional part of a year is
the all-events-test has been met. required whenever there is a change, with the
- The all-events-tests requires approval of the Commissioner, on the basis of
computing taxable income from one taxable year to 1. An individual whose gross income does not exceed
another. his total personal and additional exemptions as
dependents
Accounting for long-term contracts 2. An individual with respect to pure compensation
- Percentage-of-completion basis income derived from sources within the
Philippines, the income tax on which has been
Installment basis correctly withheld.
3. An individual whose sole income has been
- The income of a dealer in a personal property on the
subjected to final withholding tax
installment plan may be ascertained by taking as
4. A minimum wage earner or an individual exempt
income that proportion of the total payments received
from income tax
in the taxable year from installment sales which the
5. Senior citizens who are considered as minimum
total or gross profit realize or to be realized on the
wage earners
total installment sales made during each year bears to
the total contract price of all such sales made during Taxation of marginal Income Earners
that respective year.
- The income from a casual sale or casual disposition of - Marginal income earners – refer to individuals not
personal property (other than property of a kind which otherwise deriving compensation as an ee under an
should be properly be included in inventory) may be er-ee relationship but who are self-employed and
reported on the installment basis only if the sales price deriving gross sales/receipts not exceeding P100,000
exceeds P1,000 and the initial payments do not exceed during any 12 month period. The activities of such are
25% of the selling price. considered principally for subsistence or livelihood.
- The term initial payment does not include the - They are exempt from VAT and any percentage tax.
amounts received by the vendor in the year of sale - They are not required to pay any registration although
from the disposition to a third person of notes given they are required to register as taxpayers for being a
by the vendee as part of the purchase price which are possible income tax and withholding tax filers.
due and payable in subsequent years. - They are required to file the annual income tax return
reflecting income from whatever source.
RETURNS AND PAYMENT OF TAX - Any individual not required to file an income tax
return may nevertheless be required to file an
- The following individuals are required to file income
information return.
tax return
1. Filipino citizen residing in the Philippines Income tax returns of individuals for the preceding
2. Filipino citizen residing outside the Philippines on taxable year shall be filed in duplicate by the ff persons:
his income from sources within the Philippines
3. Alien residing in the Philippines on income derived 1. A resident citizen – on his income for all sources
in the Philippines 2. A nonresident citizen – on his income derived from
4. Nonresident alien engaged in trade or business or sources within the Philippines
in the exercise of a profession in the Philippines 3. A resident alien – on his income from all sources
5. A citizen of the Philippines and any alien individual within the Philippines
engaged in business or practice of profession 4. A nonresident alien engaged in trade or business
within the Philippines, regardless of the amount of in the Philippines – on his income derived from
gross income sources within the Philippines.
6. An individual earning purely compensation income In case of individuals subject to capital gains tax:
but who is currently employed by two or more
employers at any time during the taxable year. 1. From the sale or exchange of shares of stock not
traded thru a local stock exchange, the return
Individuals not required to file income tax 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 Philippines, shall render, in duplicate, a true and
stock transactions of the preceding year accurate quarterly income tax return and final or
2. From the sale or disposition of real property, the adjustment return.
return should be filed within 30 days following - A corporation which has received a charter but has
each sale or other disposition. never perfected its organization, and which has
transacted no business and had no income from any
Return of Husband and Wife source, may upon presentation of the facts to the
- Those who do not derive income purely from Commissioner be relieved from the necessity of
compensation, shall file a return for the taxable year making a return so long as it remains in an
to include the income of both spouses, but where it is unorganized condition.
impracticable for the spouses to file one return, each - A domestic corporation is required to file income tax
spouse may file a separate return of income but the returns 4 times for income earned during a single
returns so filed shall be consolidated by the Bureau for taxable year. Reason: to endure the timeliness of
the purposes of verification for the taxable year. collection to meet the budgetary needs of the
government; to ease the burden on the taxpayer by
Returns of minors and persons with disability. providing it with an installment payment scheme,
rather than requiring payment of the tax on a lump-
- If he is unable to make his own return, the return may
sum basis after the end of the year.
be made by the ff:
- GR. stockholders cannot be held liable for the unpaid
1. His duly authorized agent or representative
taxes of a dissolved corporation. XPN. If it appears that
2. By the guardian
the corporate assets have been passed into their
3. Other person charge with the care of his person,
hands.
property, the principal and his representative or
guardian assuming the responsibility of making the Reasons for the grant of extension to file returns
return and incurring penalties for erroneous, false
or fraudulent returns - The Commissioner may grant, in meritorious cases
4. In the case of income of unmarried minors derived 1. Destruction of books of accounts and other
from property received form living parent, said records of the taxpayer thru fire, flood or typhoon
income shall be included in the return of the and the said books and other records are in the
parents, except: process of reconstruction;
a. When the donor’s tax has been paid on such 2. Epidemic, pestilence or other calamities prevailing
property; in specific sectors of the country where the
b. When the transfer of such property is exempt taxpayer resides or where the principal business is
from donor’s tax. being conducted. Sickness or illness of the
accountant, bookkeeper or the manager or
The fact that an individual’s named is signed to a file proprietor of the business shall not be considered
return shall be prima facie evidence for all purposes that a reasonable cause.
the return was actually signed.
Returns of receivers, trustees in bankruptcy or assignees
Return of individuals with concurrent employers
- Must make returns of income for such corporations,
- At any time during the taxable year shall file an partnerships or associations covering each year or part
income tax return regardless of whether she is an of the year during which they are in control.
MWE or regardless of whether her personal and
additional exemption does not exceed his total wages. Returns of GPPs
CORPORATION RETURNS - Are not subject to income tax, but are required to file
returns of their income for the purpose of furnishing
- Every corporation subject to tax, except foreign information as to the share in the gains or profits
corporations not engaged in trade or business in the
which each partner shall include in his individual - A withholding agent is any person or entity who is
return. required to deduct and remit the taxes withheld to the
- They are required to render a return of their earnings, government.
profits and income, setting forth the items of gross 1. In general, any juridical person, whether engaged
income and the deductions allowable, and the names or not in trade or business;
and addresses, TIN and shares of each of the partners 2. An individual, with respect to payments made in
who would be entitled to the net earnings, profits, and connection with his trade or business.
income, is distributed. - Insofar as taxable sales, exchanges or transfers of real
property are concerned, the buyers, WON engaged in
PAYMENT AND ASSESSMENT OF INCOME TAX FOR trade or business, are constituted as withholding
INDIVIDUALS AND CORPORATIONS agents.
- The total amount of income shall be paid at the time - The tax withheld is considered a part of the
the return is filed, such tax to be paid by the person consideration agreed upon between the seller and the
subject thereto. buyer resulting, therefore, to a net take to the seller of
- Installment payment of income tax allowed only to only the difference between the agreed
individuals. consideration/selling price and the tax withheld.
- Interest on income tax is not punitive in nature but 3. All government offices, including GOCCs, as well as
compensatory; it is a compensation to the State for well provincial, city and municipal governments
the delay in the payment of the tax. and barangays.
4. All individuals, juridical persons and political
WITHHOLDING TAX-AT-SOURCE parties, with respect to their income payments
made as campaign expenditures and/or purchase
- Withholding tax is a method of collecting in advance
of goods and services intended as campaign
income tax and business tax of certain taxpayers who
contributions.
are liable to pay income tax or business tax in the
Philippines. Duties and obligations of the withholding agent
- In the operation of the withholding tax system, the
payee is the taxpayer, the person on whom the tax is 1. To register as a withholding agent within 10 days
imposed, while the payor, a separate entity, acts no after acquiring such status with the RDO having
more than an agent of the government for the jurisdiction where his business is located.
collection of the tax in order to ensure its payment. 2. To deduct and withhold taxes.
- If the payor who is duty bound to withhold the tax fails 3. To remit the tax withheld
to withhold and to remit the said tax to the 4. To file annual information return
government, the said expenses of the payor shall 5. To issue withholding tax certificates to recipient of
generally be disallowed as deduction from the gross income payments subject to the withholding.
income. Income which may be subjected to the withholding tax at
3-Fold purpose of the withholding tax system source
1. To provide the taxpayer with a convenient way of - Only fixed or determinable annual or periodical
paying his tax liability income is subject to withholding.
2. To ensure the collection of tax - The statute subjects interest, dividends, rents, salaries,
3. To improve the government’s cashflow wages, premiums, annuities, compensations,
- The withholding agent is liable only insofar as he failed remunerations, and emoluments, including royalties,
to perform his duty to withhold the tax and remit the to withholding tax at source.
same to the government. - Income is fixed when it is to be paid in amounts
definitely pre-determined.
Who are constituted as withholding agent - It is determinable whenever there is a basis of
calculation by which the amount to be paid may be
ascertained.
Time of withholding - The income recipient is still required to file an income
tax return.
- When the income payment is paid or payable or
accrued or the income payment is accrued or recorded Kinds of creditable withholding tax system
as an expense or asset, whichever is earlier.
1. Expanded withholding tax
Kinds of withholding tax-at-source 2. Withholding tax on compensation or wages
3. Withholding tax on interest from tax-free
1. Withholding of final tax on certain incomes
covenant bonds
2. Withholding of creditable tax at source
3. Withholding tax on interest from tax-free Expanded Withholding Tax
covenant bonds.
- A kind of creditable withholding tax, which is
Concept of the final withholding tax system prescribed to be withheld both by the government and
private payors from the different items of income
- The amount of income tax withheld by the withholding payments to sellers/suppliers residing in the
agent is constituted as a full and final payment of the Philippines on their sale of goods and service, which is
income tax due from the payee on the said income. creditable against the income tax due of the said
- In case of the payor’s failure to withhold the tax or payees/sellers/suppliers for the taxable year
incase of underwithholding, the deficiency tax shall be
quarter/year.
collected from the payor.
- The payee is not required to file an income tax return Conditions in order that income payment may be
for the particular income. subjected to EWT
- The finality of the withholding tax is limited only to the
1. The income payment must be paid or payable by a
payee’s income tax liability on the particular income, it
does not extend to the payee’s other tax liability on taxpayer who is residing in the Philippines
2. The recipient of the income who is liable to
income.
income tax must also be residing or has business in
Rationale for the withholding of final tax on income the Philippines
payment to nonresident aliens not engaged in trade or 3. The income is fixed or determinable at the time of
business in the Philippines payment
4. The income is one listed under the consolidated
- Subject to final withholding tax
withholding tax regulations
- At 25%
- Designed to enable the government to collect the A nonresident foreign corporation not doing business in
proper and correct tax on incomes derived from the the Philippines retained by a domestic corporation to do
Philippines by aliens outside the taxing jurisdiction. the advertising of its product abroad paid thru outward
remittances is not subject to EWT.
Government as withholding agent
- The fees paid by a domestic corporation to a
- Before making any money payment to private nonresident foreign corporation are not subject to
individuals, corporations, partnerships and/or EWT since they are not subject to the Philippine
associations on account of each purchase of goods and income tax.
services shall deduct final withholding tax due on the - Expanded withholding taxes are only imposed on
gross money payments thereof. income payments to persons residing in the
Concept of creditable withholding tax system Philippines.
- Taxes withheld on certain income payments are When the obligation of withholding agent to deduct and
intended to equal or at least approximate the tax due withhold the tax arise
of the payee on said income.
- 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 - Income upon which any creditable tax is required to
payor’s books and which comes first. be withheld at source shall be included in the return of
- The term payable refers to the date the obligation its recipient.
becomes due, demandable or legally enforced. - The excess of the withheld tax over the tax due on his
return shall be refunded to him subject to the
Persons exempted from being subjected to the EWT authority of the Commissioner to refund taxes.
1. National government agencies and its - The taxes withheld by the withholding agents shall be
instrumentalities, including provincial, city, maintained in separate accounts and should not be
municipal governments and barangays except commingled with any other funds of the withholding
GOCCs agent. They shall be considered as a trust fund held for
2. Persons enjoying exemption of income taxes government until they are remitted.
pursuant to the provisions of any law, general or - Every person who is required to withhold the tax from
special. the compensation of an ee is liable for the payment of
such tax to the BIR. Such liability stays even if the ee
Withholding tax on compensation or wages subsequently pays the tax.
- Any income payment which is otherwise deductible
- Also a form of creditable withholding tax which is
shall be allowed as deduction from the payor’s gross
withheld from individuals receiving compensation
income only if it is shown that the income tax required
income.
to be withheld has been paid to the Bureau.
- No withholding of tax shall be required where the
income received by an ee does not exceed the TAX ON PROFITS COLLECTIBLE FROM THE OWNER
statutory minimum wage.
- Income tax not otherwise collectible from taxpayers
Withholding tax on interest of tax-free covenant bonds chargeable to his duly authorized representative.
1. Any part of the income of a trust is, or in the - Means all remuneration for services performed by an
discretion of the grantor or of any person not ee for his er under an er-ee relationship, unless
having a substantial adverse interest in the specifically excluded by the Code.
distribution of such part of the income may be - The name by which the remuneration for services is
held or accumulated for future distribution to the designated is immaterial.
grantor;
Remunerations not considered as compensation income
2. Any apart of the income of a trust may, or in the
discretion of the grantor or of any person not 1. Remuneration paid for agricultural labor.
having a substantial adverse interest in the G.R. Remuneration for services which constitute
disposition of such part of the income, be agricultural labor and paid entirely in products of
distributed to the grantor; or the farm where the labor is performed is not
3. Such part of the income of the trust shall be subject to withholding tax.
included in computing the taxable income of the XPN. Subject to withholding tax
grantor/trustor. a. Services performed in connection with
- The term in the discretion of the grantor means in the forestry, lumbering or landscaping, because
discretion of the grantor, either alone or in the term agricultural labor does not include
conjunction with any person not having a substantial the same.
adverse in the disposition of the part of the income in b. Remuneration paid entirely in products of the
question. farm where the labor is performed be an ee of
any person in connection with any of the
Fiduciary Returns
following activities is excepted as
- In order that a fiduciary relationship may exist, it is remuneration for agricultural labor:
necessary that a legal trust be created. i. The cultivation of soil;
ii. The raising, shearing, feeding, caring for, farmer or farmer-members of such
training, or management of livestock, bees, organization or group.
poultry, or wildlife; or 2. Remuneration for domestic services. Not subject
iii. The raising or harvesting of any other to withholding.
agricultural or horticultural commodity. 3. Remuneration for casual labor not in the course of
c. The remuneration paid entirely in products of an er’s trade or business.
the farm where the labor is performed for the 4. Compensation for services by a citizen or resident
following services in the employ of the owner of the Philippines for a foreign government or an
or tenant or other operator of one or more international organization.
farms is not considered remuneration,
provided the major part of such services is Payroll period
performed on a farm. - The period of services for which a payment of
i. Services performed in connection with the compensation is ordinarily made to an ee by his er.
operation, management, conservation,
improvement, or maintenance of any such Employee
farms or its tools or equipment; or
- An individual performing services under an er-ee
ii. Services performed in salvaging timber, or
relationship.
clearing land brush and other debris left by a
hurricane. Employer
d. Remuneration paid entirely in products of the
farm where labor is performed by an ee in the - Any person for whom an individual performs or
employ of any person In connection with any performed any service, of whatever nature, under an
of the following operations is not considered er-ee relationship.
as remuneration without regard to the place
Withholding tax on compensation income
where such services are performed;
i. The making of copra, stripping of abaca, - A method of collecting the income tax at source upon
etc.; receipt of the income.
ii. The hatching of poultry; - The er is constituted as the withholding agent.
iii. The raising of fish; - No withholding of tax shall be required on the SMW,
iv. The operation or maintenance of ditches, including holiday pay, night shift differential and
canals, reservoirs, or waterways used hazard pay of MWEs in the private/public sectors.
exclusively for supplying or storing water for
farming purposes; and The tax withheld by the ers from the compensation
v. The production or harvesting of crude gum income of the ees is considered as the tax aid by the
from a living tree or the processing of such recipient of the income.
crude gum into gum spirits or turpentine The tax deducted and withheld at source on
and gum resin, provided such processing is compensation income shall neither be allowed as a
carried on by the original producer of such deduction from the er’s gross income or from the
crude gum. recipient’s gross compensation income.
e. Remuneration paid entirely in products of the The creditable tax withheld at source, however. Is
farm where labor is performed by an ee in the allowable as a credit against the tax imposed by the
employ of a farmer or a farmer’s cooperative, NIRC to the recipient of the income.
organization or group in the handling, Any excess of the tax withheld at source, over the tax
planting, drying, pacing, packaging, processing, ascertained to be due on the income tax return shall
freezing, grading, storing or delivering to be refunded or automatically credited, at the
storage or to market or to carrier for taxpayer’s option, to the recipient of the income.
transportation to market, of any agricultural
Any excess of the tax which was withheld on
or horticultural commodity produced by such
compensation over the tax due from the taxpayer shall
be returned not later than July 15 of the following OBUs and Petroleum Service contractors and sub-
year. contractors.
Refunds made after such time shall earn interest at The following are liabilities of the er for the tax:
the rate of 6% per annum, starting after the lapse of 1. In general, the er shall be responsible for the
the 3 month period up to the date when the refund is withholding and remittance of the correct amount
made. of tax required by deducting and withholding from
The withholding exemptions to which an ee is entitled the compensation income of his ees.
depends upon his status and the number of 2. The er, who required to collect, account for and
dependents qualified for additional exemptions. remit any tax imposed by the NIRC, who willfully
Individual taxpayers regardless of status are entitled to fail to collect such tax, or account for and remit
P50K personal exemption. such tax or willfully assist in any manner to evade
An individual, whether single or married, shall be any payment thereof, shall in addition to other
allowed an additional exemption of P25K for each penalties, to a penalty equal to the amount of the
qualified dependent child, provided that the total tax not collected nor accounted for or remitted.
number of dependents for which additional 3. Any er/withholding agent who fails or refuses to
exemptions may be claimed shall not exceed 4 refund excess withholding tax not later than Jan
dependents. 25 of the succeeding year shall, in addition to any
Taxpayer who died during the taxable year may still penalties, be liable to the total amount of refund
claim personal and additional exemption for himself which was not refunded to the ee resulting from
and his dependents. any excess of the amount withheld over the tax
If the spouse or any of the dependents dies or if any of actually due on their return.
such dependents marries, becomes 21 years old or The following are the violations that may be
becomes gainfully employed during the taxable year, committed by the er/withholding agent relative to
the taxpayer may still claim the same exemptions as if withholding taxes on compensation and its year-end
such happened at the close of such year. adjustment:
Where both husband and wife are each recipients of 1. Non-withholding of tax
compensation either from the same or different ers, 2. Under withholding
taxes to be withheld on the ff basis: 3. Non-remittance
a. The husband shall be deemed the proper claimant 4. Underremittance
of the additional exemption in respect to any 5. Late remittance
dependent children, unless he explicitly waives his 6. Failure to refund excess taxes withheld to its ees.
right in favor of his wife in the application for Liabilities of the ee for the tax. Where an ee fails or
registration or in the withholding exemption refuses to file an application of refistration or
certificate. certificate to update of exemption and the er’s and
b. In general, taxes shall be withheld from the wages ee’s information, together with the attachments, or
of the wife in accordance with the schedule for a willfully supplies false or inaccurate information
married person without any qualified dependent. thereunder after due written notice by the er, the tax
Compensation for services rendered in the Philippines otherwise to be withheld by the er shall be collected
paid to nonresident aliens engaged in trade or from him including penalties or additions to the tax
business shall also be subject to withholding tax on from the due date of remittance until the date of
compensation just like a resident alien. payment.
There shall also be imposed a final withholding tax of Where the ee, after due written notice form the er,
15% on the salaries, annuities, compensation, willfully fails or refuses to file the application for
remuneration and other emoluments, such as registration, or the certificate of update of exemption
honoraria and allowances paid to its alien ees and the er’s and ee’s information, whichever is
occupying managerial and technical positions and applicable, or willfully supplies false and inaccurate
Filipino ees occupying similar positions by ROHQs, information, the excess taxes withheld by the er shall
not be refunded to the ee but shall be forfeited in 3. The amount of tax due from the ee at the end of
favor of the government. the year equals the amount of tax withheld by the
Persons having control of the payment of wages or er.
salaries are authorized to deduct and withhold upon 4. The ee’s spouse also complies with all 3 conditions
such wages or salaries the withholding tax due stated above.
thereon. In this case, the garnishees are the persons 5. The er files an annual information return
owning debts due to the er or in possession or control 6. The er issues BIR Form No. 2316 to each ee.
of credits to which the er are entitled. Accordingly, Persons not qualified for substituted filing of the ITR
they are authorized to deduct and withhold the 1. Individuals deriving compensation income from
income tax due from the backwages, allowances and two or more ers concurrently or successively at
benefits to be paid to ees, and are respectively liable anytime during the taxable year.
for such deductions. 2. Ees deriving compensation income, regardless of
In order to ensure the collection of the appropriate the amount, whether from a single or several ers,
withholding taxes on wages, garnishees of a judgment during the calendar year, the income tax of which
award in a labor dispute are constituted as has not been withheld correctly resulting to
withholding agents with the duty of deducting the collectible or refundable return.
corresponding withholding tax on wages due thereon 3. Individuals deriving other non-business, non-
in an amount equivalent to 5% of the portion of the profession-related income in addition to
judgment award representing the taxable backwages, compensation income not otherwise subject to a
allowances and benefits. final tax.
Failure of the withholding agent of compensation 4. Individuals receiving purely compensation income
income to remit withholding taxes is tantamount to from a single er, although the income tax of which
non-payment of taxes by payee. has been correctly withheld, but whose spouse
Substituted filing is when the er’s annual return may falls under paragraphs a, b and c above.
be considered as the substitute ITR of the ee inasmuch 5. Nonresident aliens engaed in trade or business in
as the information provided in his income tax return the Philippines deriving purely compensation
would exactly be the same information contained in income, or compensation income and other non-
the er’s annual return. business, non-profession related income.
Under substituted filing, an individual taxpayer Constructive receipt of Compensation Theory.
although required under the law to file his income tax Compensation is constructively paid when it is
return, will no longer have to personally file his own credited to the account of or set apart for an ee so
income tax return but instead the er’s annual that it may be drawn upon by him at any time
information return filed with be considered as the although not then actually reduced to possession.
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