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Chapter1

Theory of Taxation- government’s necessity for funding


Basis of Taxation- mutuality support between the people and the government
Income Taxation- Ability to Pay Theory
1. Vertical Theory- Gross Concept- one’s ability to pay is directly
proportional to the level of his tax base
2. Horizontal Theory- Net Concept- requires consideration of the
particular circumstance of the taxpayer
Inherent Power of State: Taxation Power(MI), Police Power(MS), Eminent
Domain(I)
Poll, Personal, Community or Residency tax- Non-Imprisonment
 Basic Community Tax but not on Additional Community
Tax=TaxEvasion=Imprisonment
Absolute Majority- requirement in approving tax exemption law
Relative Majority- requirement in withdrawing tax exemption law
Impact of Taxation or Legislative Act of Taxation- enactment of tax laws by
Congress
Incidence of Taxation or Administrative Act of Taxation- assessment of tax
liabilities of
taxpayer and collection
Tax Law- Implemented by the Administrative branch
Situs- Place of Taxation
Marshall Doctrine- “The Power to tax involves the power to destroy”
Holme’s Doctrine- “Taxation power is not the power to destroy while court sits”
Prospectivity of Tax Laws- An ex post facto law or a law that retroacts is
prohibited
Vague Tax Laws or No Tax Law- construed against the government
Vague Exemption Laws or No Exemption Law- construed against the taxpayer
Escapes from Taxation
A.Result to loss of government revenue
1. Tax Evasion or Tax Dodging- act that tends to illegally reduce or avoid
payment of tax
2. Tax Avoidance or Tax minimization- reduces taxes by any legally
permissible means
3. Tax Exemption or Tax Holiday- immunity or privilege from being taxed
B. Do Not result to loss of government revenue
1. Shifting(Forward,Backward,Onward)- transferring tax burden to another
taxpayer
2. Capitalization- pertains to the adjustment of the value of an asset caused by
change in TR
3. Transformation- elimination of losses to form savings to compensate for
tax imposition

Tax Amnesty- Absolute Forgiveness(Retrospectively)- (Requires Payment)


general pardon granted by the government for erring taxpayers to give them chance
to reform and enable them to have a fresh start to be a part of the society with a
clean slate. Covers both Civil and Criminal Liabilities.
Tax Condonation- Tax Remission(Prospectively)- (No payment Required)
forgiveness of the tax obligation under certain justifiable grounds. Covers Civil
Liabilities

Assessment- should be made within 3 years from the due date of filing of the
return or from the actual filing whichever is later
Collection- should be made within 5 years from the date of the assessment
Appropriation, Revenue or Tariff Bills- shall originate exclusively in the House
of Representative, but the Senate may propose or concur with amendments
Direct Double Taxation is Discouraged
Chapter 2
Tax- is an enforced proportional contribution levied by the lawmaking body of the
state to raise
revenue for public purpose
Tax Laws- will prevail against GAAP
Tax Administration (BIR)- refers to the management of the tax system
BIR= 1 Commissioners and 4 Deputy Commissioners
BOC= 1 Commissioner and 5 Deputy Commissioners and 14 District
Collectors
BOI= 5 full-time governors and DTI secretary
PEZA= 1 Director General and 3 Deputy Directors
Statutory Taxpayer- is the person named by law to pay the tax
Economic Taxpayer- the one who actually pays the tax
Principle of a Sound Tax System (Adam Smith)
1. Fiscal Adequacy- the sources of the government funds must be sufficient to
cover cost
2. Theoretical Justice or Equity- “Ability to Pay Theory”
3. Administrative Feasibility- tax laws should be capable of efficient and
effective
administration to encourage compliance
Large Taxpayers- (LTS) Large Taxpayer Service
Non-Large Taxpayers- (RDOs) Revenue District Offices
Large Taxpayers: Vat & Percentage Tax = at least
200k/Quarter
Withholding, Income, Documentary Stamp, Excise = at least 1M
tax paid
Gross Receipts or Sales = 1 Billion
total annual
Net Worth = 300M
Gross Purchases = 800M
Chapter 3
Return on Capital- increases net worth and subject to income tax (Recovery of
lost Profit)
- Proceeds of crop or livestock insurance, Guarantee Payments,
Indemnity received from patent infringement suits
Return of Capital- maintains net worth, not taxable (Recovery of lost Capital)
Infinite Value- Life, Health, Human Reputation = Return of Capital
FV-SP = Subject to Transfer Tax
SP-Cost= Income Tax
Non-Resident- Citizens staying abroad for a period of at least 183 days
Resident- Aliens who stayed in the Philippines for more than 1 year
NRA-ETB- Aliens who are staying in the Philippines 181days-1year
NRA-NETB- Aliens who are staying in the Philippines not more than 180 days
Penalties for Late Filing or Payment of Tax
1. Surcharge
a. 25% of the basic tax for failure to file or pay deficiency tax on time
b. 50% for willful neglect to file and pay taxes
2. Interest- 20% per annum
3. Compromise Penalty- is an amount paid in lieu of criminal prosecution over
a tax violation

Chapter 4
Mutually Exclusive- tax schemes in income taxation
Passive Income- earned with very minimal or even without active involvement of
the taxpayer
Ex. Interest Income from banks, Dividend from domestic corporation,
Royalties
Active Income- earned with considerable degree of effort from the taxpayer
Ex. Compensation, Business, Professional Income
Ordinary Assets- assets used directly in the business, trade or profession
Fiscal Accounting Period- available only to corporate income taxpayer
Deadline of Filing ITR- 15th day of the month following the close of taxable year
of the taxpayer
April 15 next year- Deadline of ITR who are using calendar year
Dissolution of business(Deadline):For Individual - April 15 next year
For Corporation – 30d from the cessation of
activities or 30d from the approval of merger by SEC
Change of Accounting Period (Corporate Taxpayer)- + 3.5months kung kailan
mag eend yung new accounting period
Termination of the Accounting Period of the taxpayer by CIR- Payable
IMMEDIATELY
Hybrid Basis- combination of accrual basis, cash basis or other methods of
accounting
Installment Method- Gross Income is recognized in proportion to the collection.
1. Dealer of Personal property on the sale of properties they regularly sell
2. Dealer of Real properties, only if their initial payment does not exceed 25%
of the SP
3. Casual sale of Non-Dealers in property, real or personal when their price
exceeds 1,000
and their Initial Payment does not exceed 25% of the SP
Initial Payment- total payments by the buyer in cash or property in the year the
sale was made
Selling Price= Cash received/receivable + FMV of property received/receivable +
Mortgaged
assumed by the buyer
Contract Price- amount receivable in cash or other property from the buyer.
- Usually the Selling Price if there is no mortgage
- SP – Mortgage assumed by the buyer
Gross Income = (Collection/Contract Price) x Gross Profit

Mortgage or Indebtedness exceed tax basis for property sold:


- Contract Price = SP – Mortgage + Excess (Mortgage-Tax basis)
- Initial Payment = Downpayment + Installment (during the year) +
Excess (M-Tb)
- Any Collection from the contract including the excess mortgage is Gross
Income
Income from Leasehold Improvement:
1. Outright Method
2. Spread-out Method

Cost of improvement x (Excess UL


over Lease Term/UL of the improvement)

Chapter 5 – Final Income Taxation


Passive Income Subject to Final Tax RC/R NR NR DC/ NRF
A A- A- RFC C
/NR ET NET
C B B
1. Interest Income or Yield:
Short-term Deposits - less than 5 20% 20 25 20 30%
years % % %
Long-term Deposits (Inv. Cert.)- 5 years and EX EX 25 20 30%
above % %
2. Tax on Pretermination of Long-term
Deposits:
2.99 years and below ( Holding Period) 20% 20 25 20 30%
% % %
3-3.99 years 12% 12 25 20 30%
% % %
4-4.99 years 5% 5% 25 20 30%
% %
5years or more 0% 0% 25 20 30%
% %
3. Foreign Currency Deposit (All non resident
are exempt)
FCDU/OBU Depository Bank 7.5% EX EX 7.5 EX
%
EFCDU/OBU Bank 10% EX EX 10 EX
%
Interest Income on Foreign Loans - - - - 20%
Tax-free Covenant Bonds 30% 30 30 - -
% %
4. Dividend Income
Domestic Corporation 10% 20 25 EX 15%
% % S
Real Estate Investment Trust (REIT) (NRC 10% 10 10 EX 10%
is Exempt) % %
Foreign Corporation Regular Income Tax
Share in NI of taxable partnership,Joint 10% 20 25 10 30%
Vent,Co-ownership % % %
5. Royalties (Passive)
Book, Literarary works and Muscal 10% 10 25 20 30%
Compositions(Printed) % % %
Cinematographic Films and similar works 20% 25 25 20 25%
% % %
Other Sources 20% 20 25 20 30%
% % %
Active Royalties RIT 25 RIT 30%
%
6. Prizes
10,000 and below RIT 25 RIT 30%
%
10,001 and above 20% 25 RIT 30%
%
7. Winnings
In General 20% 25 RIT 30%
%
PCSO and Lotto winnings EXEMPT
8. Informer’s Tax Reward (1million or the 10%
amount recovered whichever is lower)
9. Rental of Vessels 25 4.5%
%r r
10. Rentals of Aircraft, Machineries and other 25 7.5%
equipments %r r
11. Special Aliens ( NRA-NETB employed in 15% on GI from their
RHQ,OBU) employees
12. Income Payments to Subcontractors of 8% of GI
Petroleum
Stock Dividend- not taxable. If sold or disposed, taxable
- Subsequent cancellation and redemption (Taxable)
- Substantial alteration in ownership in the corporation (Taxable)
Liquidating Dividend – subject to RIT if the dividend exceeds the cost of the
investment
REIT- a publicly listed corp. established principally for of owning income-
generating real estate asset
BIR Form 1601-F- FWT Return
Entities Exempt from Final Income Tax, CGT and RIT
1. Foreign government and foreign GOCC
2. International mission or organizations with tax immunity
3. General Professional Partnership
4. Qualified Employee Trust Fund
Chapter 6- Capital Gains Tax
Ordinary Gain – subject to RIT
Capital Gain – subject to RIT or CGT
Pactro de retro sales- sales with buyback agreement
Capital Gains subject to CGT
1. Capital gains on the sale of DOMESTIC STOCKS sold DIRECTLY to
buyer
2. Capital gains on the sale of REAL PROPERTIES not used in the business
Not Subject to CGT
1. Treasury Share Premium
2. Exhanges of stocks for services
3. Redemption of shares in a mutual fund
4. Worthlessness of stocks
5. Redemption of stocks by the issuing corporation
6. Gratuitous transef of stocks

Sale of Domestic Stocks through PSE


- Subject to Stock Transaction Tax of .5% of the SELLING PRICE
Sale of Domestic Stocks DIRECTLY to buyer
Net Gain up to 100,000 5%
Excess net gain abouve 10%
100,000
Net Capital Gain=Selling Price – (Basis of stocks disposed+Selling
Expenses+Documentary Stamp Tax)
Capital Gains Tax Payable = Annual Capital Gains tax due – Transactional
capital gains taxes paid
Capital Gains Tax Refundable = Transactional Capital Gains taxes paid –
Annual Capital gains tax due
Wash Sales- occurs within 30days before and 30days after the sale ( 61-day
period)
- Capital losses on wash sales by non-dealers in securities are not
deductible agains capital gain
- Wash sales is not applicable to to dealers in securities
Tax Free Exhanges:
1. Merger or Consolidation
2. Initial Acquisiton of Control- not exceeding 4 persons
3. Echange not solely for stocks- taxable yung hindi stocks
Control- ownership of stocks in a corporation possessing 51% or more of the total
voting power of all
classes of stocks entitled to vote
Sales of Stocks Ex-dividend- the seller is entitled to the dividend
Sales of Stocks Dividend-on – the buyer shall receive the dividend
- Capital Gain = Selling Price – (Cost and Expenses + Dividend receivable
net of tax)
Sale of Real Property Classified as Capital Asset
- 6% of the SELLING PRICE or FAIR VALUE whichever is higher
- Fair Value = Zonal(land) or Assessed Value(land and improvement)
whichever is higher
Foreign Corporation- Not subject to CGT
Switch from CGT to RIT- a. Seller is individual b. The buyer is the government
or GOCC
Sale of PRINCIPAL RESIDENCE for acquisition of New Principal
Residendce- Exemp from CGT
- Within 18 months dapat naka acquire kana ng bahay
- Can be availed once in every 10 years
- New tax Basis = Basis of old residence + Additional Cost
- Hindi lahat pinamibili ng bahay= Allocate- Yung pinambili exempt, yung
hindi taxable
Doc. Stamp Tax for stocks sold directly to buyer - P.75 for every 200 of the PAR
VALUE of the stocks sold
Doc. Stamp Tax on the Sale of Real Properties- Gross Selling Price or Fair Marker
Value whichever is higher
- P15 for every 1,000
- If the government is a party to the sale, the basis is the Consideration
Paid

Chapter 7- Introduction to Regular Income Tax


Gross Income xx
Less: Allowable Deduction xx
Personal Deduction xx
Taxable Income xx

Excluded Income- traces their origin from NIRC


Exempt Income- traces their origin from the NIRC or Special Laws
Allowable Deductions- pertains to costs or expenses of earnings items of gross
income
- Applicable only to Corporations and for individuals who are self
employed or engaged in business or exercise of a profession
- Deducted to gross income to get the Net Income
Personal Exemptions- deductions in lieu of personal, family and cost of living
expenses
- Applicable only to Individual taxpayer
- Deducted only to get the Taxable Income
Rank and File Managerial or
Supervisory
Regular Pay Compensation Income Compensation Income
Fringe Benefits Compensation Income Fringe Benefit

Sales- Sale of goods – Accrual Basis


Fees- Sale of service – Accrual Basis
Receipts- Cash Basis
Revenue/Sales- arises from Primary Operation of the business
Other Income- arises from the incidental or secondary operations of the business
Non-Operating Income:
1. Gains from dealings in Properties
2. Income Distribution from a GPP, taxable trust or estate or from an exempt
joint venture
3. Casual Active Income
4. Passive Income not subject to final tax

Total Revenue=Revenue + OI (for Individual) – basis of OSD


Total Gross Income- (for Corporation) – basis of OSD
NRA-NETB – subject to 25% Final Tax on GROSS INCOME
Special Aliens/Special Employees- subject to 15% Final tax on Gross Income
from employment

Chapter 8- Exclusions from the Gross Income

Proceeds of Life Insurance Policy- interest payment is included in Gross Income


Amount Receive by the insured as a return of premium
- Pag nabuhay yung gain taxable
- Pag pinasa yung magbebenefit yung gain taxable dun sa bagong
beneficiary
- Pag yung employer or yung corporation yung beneficiary= not taxable
Gifts, Bequests and Devises or Descents
Compensation for injuries and sickness
Income Exempt under treaty
Retirement Benefits, Pensions, Gratuities and Other Benefits
1. The employer maintains a reasonable Private Benefit Plan- “trusteed plan”
2. The retiring official or employee is working in the company for 10 years
(cumulative)or more
3. The employee should be 50years of age at the time of retirement
4. First time of availment of retirement benefit exemption
Separation or Termination- should be “beyond the control of the employee”
Social Security Benefits, Retirement Gratuities and other similar benefits
from foreign government
United States Veterans Administration (USVA)
Social Security System Benefits
GSIS Benefits
Prizes and Awards in Sports Competition
13th Month pay and other benefits not exceeding 82,000
Gains from sale of bonds, debentures or other certificates of indebtedness
with a maturity of more
than 5 years
Gains realized from redemption of shares in a mutual Fund company by the
investor
Other Exempt Income
1. Minimum wage earners- holiday, overtime, night shift differential and
hazard pay (HHON)
2. Income of BMBE Enterprises Act- total asset excluding land should not
exceed 3million
3. Income of Cooperatives
4. Income of Non-stock, non-profit entities
5. Income of Qualified employee trust funds

Cooperatives- if it transacts purely with its members are exempt from ALL taxes
and fees
- Accumulate reserve and Undivided savings should not exceed
10,000,000
Non-Stock and Non-Profit Entities- Exempt. Unrelated=Taxable
Qualified Employees’ Trust Fund- Exempt
Chapter 9- Inclusions in Gross Income
1. Compensation Income
2. Gross Income from the conduct of trade, business or exercise of a
profession
3. Gains from Dealings in Properties
- Ordinary losses are deductions against Gross Income
- Net Capital gains are included in the Gross Income
- Net Capital loss is not an item of deduction against gross income
4. Interest Income: From lending activities, from bonds and promissory notes and
bank deposits abroad
5. Rents- it should be unrestricted or restricted to be applied in future years or
upon termination of lease
- Excluded if it constitutes a loan or is a security deposit
6. Royalties- active royalties earned within or outside the Philippines
6. Dividends- declared by Foreign Corporation
7. Prizes and Winnings- earned abroad or the amount is 10,000 and below
8. Pensions- if they fail to meet the requirement
9. Partner’s share from NI of GPP/Exempt Joint Ventures and Exempt Co-
ownership
10. Income distribution from taxable estate or trusts
11. Farming Income
12. Recovery of past deductions (NOLCO-3years)
13. Reimbursement of Expenses
14. Cancellation of indebtedness for a consideration

Chapter 10- Compensation Income

Not Considered Employees


- Consultants, Directors without management function, Talents and Artists
on TV or Radio Broadcast = Their income is business or professional
income
Minimum Wage Earner- 5,000/month or 60,000 per year, whichever is higher
- The employee must not have other income aside from their minimum
wage
Special Aliens- subject to 15% final income tax on Gross Income
- Managerial or Technical Position in a:
1. RHQ or ROHQ
2. OBU- division of foreign bank which is authorized to transact in
foreign currencies
3. Petroleum Service Contractors/Subcontractors

Option for Filipino Employees to be classified as special aliens (Requirements)


1. Position and Function Test – Managerial or in Technical Position
2. Compensation Threshold – Taxable income is 975,000 and more
3. Exclusivity Test – not consultant or contractual personnel and is solely
employed in ROHQ

Exempt Benefit of Minimum Wage Earners


1. Hazard Pay
2. Holiday Pay
3. Overtime Pay
4. Night Shift Differential Pay
5. Basic Minimum Wage

De Minimis Benefits

1. Monetized unused vacation leave for private employees not exceeding


10days
2. Monetized unused vacation and sick leave credits paid to government
official or employees
3. Medical Cash Allowance to dependents- 750/semester or 125/month
4. Rice Subsidy- 1,500 or 1 sack of 50-kg rice per month not more than 1,500
5. Uniform and Clothing Allowance – 5,000 per year
6. Actual Medical Assistance- 10,000 per year
7. Laundry Allowance- 300/month
8. Employee Achievement award- tangible property other than cash or GC.
10,000/year
9. Gifts during Christmas and Major Anniversary celebration- 5,000 per
employee
10.Daily meal allowance for OT work and night shift- 25% of basic
minimum wage
11.Benefits received by an employee by virtue of a Collective Bargaining
Agreement (CBA) and Productivity Incentive Schemes- should not
exceed 10,000 (CBA + PIS)
Rank and File- 13th month pay and other benefits – taxable de minimis
Managerial and Supervisory- Final Fringe Benefit – taxable de minimis
Terminal Leave pay or Commutation of unused leave credits (Involuntary)- de
minimis=10days
Necessity of the Employer
- (RATA) Representation and Transportation Allowance
- (PERA) Personal Economic Relief Allowance

Classification of Gross Taxable Compensation Income


1. Regular Compensation- fixed remunerations
a. Basic Salary
b. Fixed allowance (Cost of living allow, fixed housing and transportation
allowance)
2. Supplemental Compensation- performance-based pays
a. HHON – if not a minimum wage earner
b. Holiday Pay & Commission
c. Fees including director’s fees
d. Emoluments and honoraria
e. Taxable Retirement and Separation Pay
f. Value of living quarters or meals
g. Gains on exercise of stock options- (Market Price – Exercise Price) x No.
of shares
h. Profit sharing and taxable bonuses
3. 13th month pay and other benefits- incentive
pays
- Up to 82,000 = Excess = Supplemental
Compensation
- 1month salary + 5k = Government
employees
- 1month salary = Private employees
Other Benefits
a. Christmas bonus of private employees
b. Cash gifts other than Christmas or anniversary gifts of private employees
c. Additional Compensation Allowance (ACA) of government personnel
d. 14th month pay, 15th month pay, etc.
e. Other Fringe benefits of rank and file employees

Compensation in Kind- taxable at fair value of the consideration received


- Shares = FV of the shares at the date services was provided
Chapter 11- Fringe Benefit Tax

Categories of Fringe Benefit subject o Final Tax


1. Management Perquisites Benefits- management perks
2. Employee Personal expenses
3. Taxable de Minimis benefits

Hybrid Expenses- expenses partly for business and partly for employee’s
incentive
- 50% of the expense is subject to Fringe Benefit Tax
Ex. Housing benefits in the form of rental accomodation
Allowing an employee free use of business property (Depreciation)
Example of FBT the employee in social and Atletic
1. Housing Benefits clubs
2. Expense Account
3. Vehicles of any kind 7. Expense for foreign travel
4. Household personnel, such as maid 8. Holiday and vacation expenses
or drivers 9. Educational assistance to the
5. Interest, for the difference between employee or his dependents
market rate (12%) and the actual 10. Life or health and other non-life
intereset granted insurance premiums or similar
6. Membership fees, dues and other accounts in excess of what law allows
expenses borne by the employer for
Characteristics of FBT
1. Final Tax
2. Tax upon Managerial and Supervisory
employees
3. Paid by the employer
4. Grossed-up tax
5. Due Quarterly: Manual- OoB the 10th day of the month following the quarter
- OoB the 15th day of the month following the quarter
Rules on Valuation of Fringe Benefits
1. Given in cash ir paid for in cash – monetary value is the amount paid for in cash
(50% rental payment)
2. Given in kind – book value or fair value whichever is higher
- Transfer of ownership = 100%
3. Free use – 50% of the rental value or if none the depreciation value is used
- 20 years for Real Properties
- 5 years for Moveable Properties
4. Owned by the employer and assigns the same for use of his employee as his
usual place of residence
- 5% of whichever is higher of the zonal or assessed value of the land
improvement
- Monetary Value=50% of the annual value of the benefit
5. The Employer purhases residential property on installment basis and allows his
employee to use the
same as his usual place of residence
- 5% of the Acquisition cost, exlusive of interest
- Monetary Value=50% of the annual value of the benefit
6. Purchase car on installment basis- 20% of the acquisition cost then divide by 4
7. Aircrafts including helicopters – use in the business- not subject to FBT
8. Yachts- considered as immovable by virtue= 20 years= Automatic 100%
9. Expenses for Foreign Travel
- In land travel expenses- Food, beverages and local transportation except
lodging=300$/day=Exempt
- Economy and business class airplane are exempt
- For first class ticket, 30% of ticket is presumed a fringe benefit

Chapter 12- Dealings in Properties

Dealings in Properties- involve the sale, exhanges and other disposition of


properties such as ordinary
assets or capital assets
Dealings in Ordinary Assets & Dealings in Capital Assets, other than domestic
stocks and real properties
- Subject to RIT
Ordinary Gain- Taxable in Full Ordinary Loss- Taxable
in Full
Capital Losses- deductible only up to the exetend of capital gains from dealings in
capital assets
Net Capital Gain- item of gross income
Net Capital Loss- not an item of deductions against gross income

Holding Period Rule (INDIVIDUAL Taxpayer) for Capital Asset


1. 1 year and below = 100% of the capital gain or loss is recgonized
2. More than 1 year = 50% of the capital gain or loss is recognized
Corporate Taxpayer- No Holding Period Rule = 100% of the capital gain or loss
is recognized
Net Capital Loss Carry Over- applicable to Individual taxpayers
- Carry Over for 1 year only
Limit 1- Net Income at incurrence of capital loss
Limit 2- Net Capital gain in the following year
Determination of Tax Basis
1. Acquisition Cost- Capital Assets, Non depreciable ordinary asset such as land
2. Depreciated Cost- for depreciable Ordinary assets
Donation- tax basis on the hand of the donor/the last preceding owner or
FMV at the date of gift
Inheritance- Fair Value of the property at the date of the decedent
Merger- when one corporation acquires all or substantially all of the
properties(80%) of another corp.
Consolidation- when two or more corporation merged to form one corporation

Chapter 13- Principles of Deduction

Business- habitual engagement in a commercial activity involving the regular sale


of goods and services
- Includes Exercise of a Profession and Self
Employment
Business Expense- benefit only the Current account
period
Capital Expenditures- expenses that benefit Future
accounting period
Depreciation Methods:
1. Straight line method- (Acquisition Cost – Salvage Value) /UL
2. SYD method- Depreciable Cost x (Remaining UL/ n(n+1)/2
3. Declining Balance Method- salvage value is initially
ignored in computing depreciation expense but
is considered in the terminal year. Dep’n rate x
200% or 150%

Property Repair and Improvement


1. Significantly increase the value or prolong the UL=
Capitalized
- actual cost should be capitalized not to exceed the appreciation value
2. Restore the value or functionality= Outright Expense
Chapter 13-A- Regular Allowable Itemized Deductions
1. Interest Expenses- Arbitrage Limit or Arbitrage
Cap = 33%
- interest income subject to final tax
- Thrift banks are exempt from arbitrage limit
2. Taxes paid- Except: (Non-deductible taxes)
a. FIT, CGT, RIT
b. Foreign Income Tax, if claimed as tax credit
c. Estate tax and Donor’s Tax
d. Special Assessment- capitalizable as cost of the land
e. Business Taxes (VAT) (Percentage, Excise, FBT) = Deductible
f. Surcharges or Penalties on delinquent taxes
3. Foreign Income Tax- Can be claimed as: (Only RC and DC can claim this)
a. Deduction- Dinededuct agad yung foreign tax paid bago i multiply sa 30%

b. Tax Credit- claimed as tax credit


Foreign Tax Credit=(Foreign/World) x Philippine IT Due – (World x 30%)
FTC= Actual Foreign Income Tax paid or yung nasolve whichever is LOWER
4. Losses – Ordinary Losses=Deductible in full
Capital Losses =Deductible up to the extent of the Capital Gain
5. Bad Debts- Accrual Method- Loss of income & Loss of Capital are deductible
Cash Basis- Only Loss of Capital is deductible
6. Depreciation
7. Depletion- Stages: Exploration, Development, Commercial Production
a. Improvement of Tangible Properties- subject to depreciation
1. Petroleum Operations- Directly used- 10 years or shorter: Indirectly- 5
years
2. Mining Operation- if 10 years or less= normal dep’n if not: Choose
between 5-10years
b. Intangible Exploration, Drilling and Development Cost
- Before Commercial Production- capitalized as cost of the wasting assets
- After Commercial Production:
a. Non-Producing wells or mines – deducted in the period incurred- 25% or
less of the NI
b. Producing wells or mines- Capitalized and amortized using Cost-
Depletion Method or
Deducted in the Period incurred
Tax Basis of Wasting Assets x (Units Extracted/Total Estimated Units)
Total Estimated Units= Units extracted for the year + Estimated Remaining
Units
8. Charitable and Other Contribution
a. Fully Deductible- Education, Health, Youth and Sports Development,
Human Settlements
Culture and Sports and Economic Development
b. Partially Deductible- Non-accredited non-government organizations or
to DC
- 10% of Net Income before deduction of any contribution for Individual
- 5% of Net Income before deduction of any contribution for Corporations
9. Contribution to Pension Trusts
a. Defined Contribution Plan- deductible expense is the amount
contributed by the Employer
- employer is obligated to make certain amounts of contribution on a regular
basis
b. Defined Benefit Plan- employer guarantees the amount of benefits to the
employee
Current Service cost- deductible in full
Past Service cost- amortized over a period of 10 years
10. R&D Costs: Related to Capital Accounts- deducted through depreciation
expense
Not Related to Capital Accounts: Outright Expense or Deferred Expense
(not less than 60mos)
Entertainment, Amusement and Recreation Expense (EAR)
a. Seller of Goods or Properties- .5% of Net
Sales
b. Seller of Services - 1% of Net Revenues
Chapter 13-B- Special Allowable Itemized Deductions & NOLCO
Special Expenses under NIRC & Special Laws
1. Income Distribution from a taxable estate or trust
2. Net Transfer to Reserve fund and payment to policies and annuity contracts of
insurance company
- Non-Life insurance = 40% of their Gross premium, less returns and
cancellation for risks
- Marine Cargo risks = amount of premium on insurance during the last 2
months
3. Dividend Distribution of REIT- mandate to distribute 90% of its distributable
income as dividends
4. Transfer to Reserve Fund of Cooperatives- 10% of Net Income
5. Senior Citizen or Elderly- Resident Filipino Citizen aged 60 years old and
above
- 20% Discount (Gross Sales) on certain establishments
- Pag Receipts or Cash Basis- Grossed-up first
6. Disable Persons- same as senior citizen
Deduction Incentives under Special Laws
1. Additional claimable compensation expense of Senior Citizen employees
- 15% of the total amount paid as salaries and wages to senior citizens
Requites- Employment shall continue for at least 6mos & Taxable Income= do
not exceed poverty level
2. Additional claimable compensation expense for PWD
-25% of the total amount paid as salaries and wages to disable persons
3. Cost of Facilities Improvement for Disabled Persons
-50% of the direct cost of the improvements or modifications
4. Additional Training Expense under Jewelry Industry Development Act of 1998
-50% of the expense incurred in training schemes approved by TESDA
5. Adopt-A-School Act: Priority Activities- 100%(RAD) + 50%(SAD) = allowed
for public school only
Non-Priority Activities- 5% (RAD)of NI before contribution
+ 50% (SAD)
6. Expanded Breastfeeding Promotion act of 2009
- Nursing employees- should be granted break intervals of not less than 40
minutes
- 200% of the actual amount incurred (100%RAD) + (100%SAD)
7. Free Legal Assistance -60 hours’ mandatory free legal assistance
- 10% of Gross Income or Amount that could have been collected for the
performance
Net Operating Loss- excess of allowable deductions over the gross income from
Business or exercise of
a profession
NOLCO= Gross Income (Subject to RIT) – (Total allowable deductions excluding
NOLCO from prior Requisites: years and Deduction
Incentives under Special Laws)
1. Taxpayer must not be exempt from income tax during the taxable year
2. There has been no substantial change in the ownership of the business
Substantial Change= a change of at least 75% of either PIC or Nominal Value of
the Outstanding share
NOLCO for Mining Companies- 5 years
NOLCO of the Acquirer- deductible
NOLCO of the Acquiree- not deductible
13-C- Optional Standard Deduction

OSD- is a proxy of Itemized Deduction

Mandated to use Itemized Deduction:


1. Exempt GOCCs and non-stock, non-profit corporation with no taxable income
2. Those with income subject to special/preferential tax rates
3. Those with income subject to RCIT/RIT and special/preferential tax
4. Exempt Individuals with no other taxable income
5. NRA-ETB

Individual- 40% of Total Sales/Revenues/Receipts/Fees (NET SALES)


- (Net Sales + Other Income) x 40%
Corporation- 40% of Gross Income – (NET)Can Claim COGS or Cost of Sales
- ((Net Sales – Cost of Sales) + All Other Income) x 40%
- Applies to GPP: Itemized: Itemized

Chapter 14- Regular Income Taxation: Individuals


Types of Personal Exemptions:
1. Basic Personal Exemption- Single, Head of the Family, Married = 50,000
Taxable Estate or Trust = 20,000
2. Additional Personal Exemption- 25,000/ dependent. Maximum of (FOUR)4
- If Silent=Husband, unless he waived his right in favor of his wife
3. Premium for Health & Hospitalization Insurance
- 200/month or 2,400/year- FAMILY Income=should not exceed
250,000/year
- claimable by the spouse who actually paid the premiums
Requisite of Claimable Dependents:
1. A legitimate, legally adopted, recognized natural or illegitimate child including
Foster Child and PWD
2. Living with the taxpayer and dependent upon him as Chief support (Principal or
Main-more than 50%)
3. Not more than 21 years old, unmarried and not gainfully employed
4. Regardless of age, if incapable of self-support because of mental or physical
defect
5. Disabled persons within 4th degree of consanguinity or affinity, regardless of
age, who are not gainfully
employed and chiefly dependent to the taxpayer

NRA-ETB- can only claim Basic Personal exemption


- Can claim Additional Personal exemption subject to reciprocity
- Can claim whichever is lower between the exemption in the Philippines
and his country
- Cannot claim PHHI
Taxable Estate- judicial settlement or administration
- Income distribution by the estate is a special deduction
Irrevocable Trust- separate and distinct taxable entity
Not taxpayer- Extra-judicial settlement & Revocable Trust

Chapter 15-A – Special Corporation

Corporation- excludes GPP and Joint-ventures or consortium formed for the


purpose of undertaking
construction project or engaging in petroleum, coal, geothermal and other
energy operations
NRFC- 30% Final Tax on Philippine Gross Income
Exempt Domestic Corporation:
1. Exempt non-profit corporation under NIRC
- Non-Stock Non-Profit Education Institution- revenues that are Actually,
Directly and Exclusively for educational institution are exempt ( Kahit
galing pa sa unrelated activities)
2. GOCCs
- GSIS, SSS, PHIC, Local Water Districts, PCSO
3. Government Agencies and Instrumentalities
4. Cooperatives:
a. Transacts only with members- Exempt from taxes (10% Reserve Fund)
b. Transacts with both members and non-members:
- 10million & below accumulated reserves = Exempt
- More than 10million- subject to income tax, VAT, Percentage tax
(transaction to Non-members)
Special Domestic Corporation
1. Private Educational Institution & Non-Profit Hospitals Private
Hospital= 30% Tax rate
- 10% tax on world taxable income subject to Pre-Dominance test
- Pre-Dominance test=51%or more (Gross Income) of unrelated
activities=subject to 30% tax rate 2. FCDU (Short Term) & EFCDU (Short &
Long term)
- Income from non-forex transaction= subject to RIT
3. PEZA or BOI-Registered Enterprises- enjoys income tax holidays or income tax
exemptions
- Pioneer firms= 6years exempt (can be extended up to 10 years)
- Non-pioneer firms= 4 years exempt (can be extended up to 10 years)
- subject to 5% of Gross Income Earned- 3% for national government, 2%
for the city
4. TIEZA- subject to 5% of Gross Income Earned
Special Resident Foreign Corporation
1. OBU & EFCDU
2. RAH or RHQ & ROHQ- exempt from all local taxes
- RHQ- Exempt ROHQ-subject to 10% of taxable income
3. International Carriers- General rule= 2.5% of Gross Philippine Billings
(Reciprocity rule)
- Outbound flights-departure-originating from the Philippines
- 48-hour rule- if exceeded, taxable, except when there is force majeuree
- 48-hour rule is not applicable pag nagbago yung carrier= taxable yung new
carrier
- Foreign currency translation- BSP or BAP rate
4. PEZA-registered foreign corporation
Special Non-Resident Foreign Corporation- Subject to 30% Final tax, generally
1. NR cinematographic film owner, lessor or distributor- 25% Final tax
2. NR lessor of vessels chartered by Philippines Nationals- 4.5% Final tax on
Gross rentals
3. NR owner or lessor of aircraft, machineries and other Equipment
- 7.5% final tax on rentals, charters and other fees

Lessor Cinema Vessels Aircraft


Other
Films Equipme
nts
Domestic 30% 30%WT 30%WTI 30%WTI
WTI I
Resident Foreign 30%PTI 2.5%GP 2.5%GP 30%PTI
B B
Non-resident foreign 25%PG 4.5%PG 7.5%PGI 7.5GPGI
I I

Chapter 15-B- Regular Corporation


Domestic Corporation-may opt to be taxed either:
a. Corporate Gross Income tax- 15% of Gross Income (3 years lock in
period)
Requisites: 1. Tax effort ratio of 20% of GNP
2. 40% of income tax collection to total tax revenues
3. Vat tax effort of 4% of GNP
4. .9% ratio to the total Consolidated Public Sector Financial
Position
Cost Ratio Limit= Shall not exceed 55%
b. Regular Corporate Income tax subject to MCIT – (imposed on the 4th year
of the business)
MCIT- 2% of the total gross income subject to RIT
- Excess of MCIT to the RCIT can be carry over in the next three years
(FIFO)
Improperly Accumulated Earnings Tax (IAET)
- 10% penalty tax on the improper accumulation of corporate earnings
beyond the need of the business. It is intended to defeat the 10% dividend
tax
- For Domestic Corporation ONLY
IAET= (Taxable Income – CIT due + NOLCO+ Passive income (net) + CG (net) +
Exempt income
- Dividends declared – Reasonable Appropriation) x 10%
- new (+ RE prior year – amount that may be retained (100% of Paid up
capital)) x 10%
Exempt from IAET- Publicly held corp, Finance companies, Banks, Insurance
companies, GPP
taxable partnership, taxable and non-taxable joint ventures,
Ecozone (PEZA)
- Deadline= within 15days from the end of the following year
Branch Profit Remittance Tax
- 15% based on the total profits applied
- Net Profit (Excluding income subject to Final tax) x earmarked %age x
15%
BIR FORMS
BIR Form 1601-E- Expanded Withholding Tax (On or before 10th day of the ffg.
month)
BIR Form 1601-C – Withholding tax on compensation (On or before 10th day of
the ffg. month)
BIR Form 1601-F- FWT Return(On or before 10th day of the ffg. month)
BIR Form 1707 – Transactional CGT (Deadline of filing- 30days after the sale)
BIR Form 1707-A- Annual CGT On or before the 15th day of the fourth month
BIR Form 1706 – 6% CGT ( Real Property) due within 30days after the sale
BIR Form 1700- Tax return for Pure Compensation Earner
BIR Form 1701- Tax return for self-employed individuals, estates and trust and
mixed income earners
BIR Form 1701Q- (Quarterly) Individual taxpayers engaged in business or
practice of profession
BIR Form 1702Q- (Quarterly) Corporation
BIR Form 1702-RT – Corporation subject to Regular Income Tax
BIR Form 1702-EX – Exempt Corporation with no taxable income
BIR Form 1702-MX – Corporation with income subject to multiple income tax
rates