TAXATION

LAW 1

INCOME TAX onwards | Notes for Atty. Llamado

0
 TAX SYSTEMS
1. Global Tax Systems
 Does not matter whether income received by TP is
classified as compensation income, business or
professional income, passive income, capital gain or
other income. All items of gross income, deductions,
and personal and additional exemption, are reported in
one ITR and one set of tax rates apply on the tax base.
2. Schedular
 Different types of income subject to different sets of
graduated or that income tax rates
3. Semi- Schedular (Philippine Tax System)
 Compensation business/ professional
 Subject to 1 type of tax
 Passive Income
 Subject to different rates of tax depending on
nature and type; exclusive listing - if not found
in the list then it falls under active income
(Compensation)
 E.g. dividends – 10% final tax,
 E.g. interest income on deposit
substitutes – 20%
FEATURES OF PHILIPPINE INCOME TAX
1. Comprehensive
 It adopts all 3 basis for imposing income tax
 Residence
 Following are taxed based on income
derived from WITHIN the Philippines
 Non-resident citizen
 Resident/Non-resident alien
 Resident/Non-resident foreign
corporations
 SITUS RULES based on source of income
 Personal & Tangible Property - place
where title to property passes
 Intangible property
a. Residence of owner
b. Residence of the corporation
giving rise to the income or
where the intangible is enjoyed
 Real Property
a. Place where real property is
located
 Services
a. Place where service is rendered/
performed
 Business/ Practice of Profession
a. Place where the privilege of
engaging in business / practice of
profession is enjoyed.
2. Semi-schedular, Semi- Global
 ALL items of income (compensation, business, practice
profession, capital gain, passive income not subject to
final withholding tax) net of allowable deduction, is
subjected to ONE set of graduated tax rates (individual)
or normal corporate income tax rate (corporation
 PASSIVE investment income subject to final tax and
capital gains tax (shares of stock of a domestic
corporation and sale of real properties) are subject to
different set of rates and covered by different tax
returns
3. Of American Origin
INCOME TAX onwards | Notes for Atty. Llamado
1
  Decisions of US courts and taxing authorities have  30% of gross income from WITHIN the Philippines for
persuasive effect on interpretation of Philippine Tax NRFC (Non-Resident Foreign Corporation)
laws/ Regulations

CRITERIA IN IMPOSITION OF PHILIPPINE TAXABLE INCOME NRFC

INCOME TAX Gross Income Gross Income
1. Citizenship or nationality principle
Selling Price Selling Price
 Resident / citizens / domestic corporation
o Worldwide income LESS: Direct Cost LESS: Direct Cost
 Non-resident citizen GROSS INCOME (SUBJ
o Income within GROSS INCOME TO 30%)
2. Residence or domicile principle LESS: Allowable LESS: Allowable
 Resident alien Deductions Deductions
o Income within LESS: Expenses
3. Source of income principle (Business) (SUBJ TO LESS: Expenses
 Non-resident citizen (NRC) 30%) (Business)
 Resident/ Non-resident alien (RA-NRA) TY = 30% (of above) TY
 Resident and Non-resident foreign Corporation (RFC /
NRFC) 3. Minimum corporation income tax (MCIT)
 Taxable on domestic corporation and RFCs
TYPES OF PHILIPPINE INCOME TAX  2% of gross income

1. Graduated income tax rates on individuals (compensation Gross Sales XXX

earners, self-employed and income from profession) and/or 8% LESS: Sales Return (XXX)
tax on gross sale/gross receipts for purely-employed and/or LESS: Discounts /
professionals where the gross sales/gross receipts 3 Million and Allowances (XXX)
below. (With TRAIN) NET SALES XXX
2. Normal Corporate income tax on corporation LESS: Cost of Goods Sold (XXX)
 30% of taxable income (worldwide) on domestic GROSS INCOME XXX
corporation Multiplied by: MCIT Rate 2%
 30% of taxable income from WITHIN the Philippines MCIT XXX
for RFC (Resident Foreign Corporation)

INCOME TAX onwards | Notes for Atty. Llamado

2
  Cost of Goods Sold: Shall include all business expenses  When imposable
directly incurred to produce the merchandise to bring  * No any income tax on 1st to 3rd year.
them to their present location and use. o Imposed beginning on the 4th taxable year
immediately following the year in which such
COGS For A COGS For corporation commenced its business operations
Cost Of Services
Trading Concern Manufacturing o When MCIT is GREATER than regular
Shall Include
Includes Concern Includes corporate income tax
Cost of Goods Sold Raw Material, Salaries and
(CGS) Direct Labor, and employee benefits *When is reckoning point of MCIT, Start of
Overhead of employees, incorporation or operations.
consultants, and
specialist MCIT
Import Duties Cost of facilities 10 years
(depreciation, rental
of equipment, cost Sales
of suppliers)
LESS: Cost
Freight in Freight Cost
Gross Income
transportation goods
LESS: Allowable
to place where sold
2% Deductions
Insurance (in transit) Insurance Other Direct Costs
TY / TL 10 years
premiums and
other costs
30%
xxx

4. Special Income Tax on Corporations

(See table)

INCOME TAX onwards | Notes for Atty. Llamado

3

4. SPECIAL INCOME TAX ON CORPORATIONS
TAX
TYPE OF TP
RATE
Proprietary Educational
1 10%
Institutions and Hospitals
Rates applied to corporations
2 GOCCs engaged in similar business, industry, or
RESIDENT FOREIGN CORPORATIONS
3 International Carrier 2.50%
4 EXEMPT
Offshore Banking Units
(OBUs)
TYPE OF PHILIPPINE INCOME TAX
TAX BASE Remarks
EXCEPTION:
Taxable Income If income from unrelated activity
EXCEEDS 50%, then 30% on taxable income
EXCEPTION:
SSS, GSIS, PHIC, PCSO, and PAGCOR
activity
 GPB for international air carrier
o Amount of gross revenue derived from
carriage of persons. Excess baggage,
cargo, and mail originating from the
Philippines, in a continuous and
uninterrupted flight, irrespective of place
Gross Philippine Billings of sale or issue and place of payment of
(GPB) ticket / passage document
 GPB for International Shipping
o Gross revenue whether for passenger,
cargo or mail originating from the
Philippines up to final destination
regardless of place of sale / payments of
passage or freight documents.
*Income from:
1. Foreign currency
transactions with NON- EXCEPT NET INCOME from such transaction as
RESIDENTS may be specified by the Secretary of Finance which
2. Other OBUs shall be subject to 30% regular income tax
3. Local commercial banks
4. Branches of foreign banks
authorized by BSP
INCOME TAX onwards | Notes for Atty. Llamado
4

Offshore Banking Units
(OBUs)
5 Regional or Area
Headquarters
Regional Operating Head
6 quarters (Branch of a
Foreign Multinational
Company)
*FCDU - FOREIGN CURRENCY DEPOSIT UNITS
*Subsidiary - becomes a Domestic Corporation
*Branch - considered a Resident Foreign Corporation
*Any interest income derived
from foreign currency loans
10% FT
granted to RESIDENTS other
(Final An OBU is a branch of a foreign bank
than, OBUs or local
Tax)
commercial banks, branches of
foreign banks
RAH:
1) Branch established in the Philippines by a
Multinational Company
EXEMPT 2) Does not earn income from the Philippines
3) Acts as supervisory, communications and
coordinating center for Multinational Company's
subsidiaries/branches in the Asia/Pacific region
ROH:
1) Branch established in the Phil. By a
Multinational Co.
2) Engaged in any of the ff. activities (Services)
(EXCLUSIVE LISTING):
a. General admin and planning
b. Business planning and coordination
10% Taxable Income
c. Sourcing and procurement of raw
mats
d. Corporate Finance advisory services
e. Marketing control and sales
Promotion
f. Training and personnel management
etc.
INCOME TAX onwards | Notes for Atty. Llamado
5
ADDITIONAL:

5.5 Branch Office 15% Total profits applied or *15% applicable if Tax Credit allowed. Treaty
earmarked for remittance Country
(without any deduction for the
tax component) to parent
company

NON-RESIDENT FOREIGN CORPORATION

Non-Resident (NR)
7 Cinematographic Film 25% Gross Income *Special Tax Rate
Owner/ Lessor/ Distributor

Gross Rentals,
Non-Resident (NR) Owner/
Lease or Charter Fees From
Lessor of Vessels chartered
8 4.50% Leases *Special Tax Rate
by Phil Nationals (Filipino
or Charters to Filipino Citizens/
Citizens or corporations)
Corporations

Non-Resident (NR) Owner/

Lessor of Aircraft,
9 7.50% Gross Rentals *Special Tax Rate
Machinery and Other
Equipment

General Rule: NFRC - 30% on Gross Income

Exception: no. 7 - 9.
*MEMORIZE SECTION 30 NIRC - EXEMPTED CORPORATIONS FROM INCOME TAX

INCOME TAX onwards | Notes for Atty. Llamado

6
5. Capital gains tax on unlisted shares of a domestic corporation
a. Before Train, 5% for the 1st 100k and (10% or 5%?) for
amount of NET CAPITAL GAIN in excess of 100k.
UNDER TRAIN: 15% of NET CAPITAL GAINS on
all. (Book Value or Net Capital Gain, whichever is higher)
6. Capital gains tax on sale/ exchange of real property located in
Philippines Classified as capital asset (*NOT ORDINARY
ASSET)
a. 6% CGT on higher of zonal (issued by BIR) or FMV (Fair
Market Value) (issued by city assessor's office) of real
property
7. Final withholding tax on certain passive investment income (e.g.
interest on deposits)
8. Final withholding tax in income payments made to non-residents
(individual or corporation) (e.g. Dividends payment to NRFC)
9. Fringe benefit tax
a. Given to supervisory and managerial employees;
b. Rank and file not included
c. Before TRAIN - 32%; UNDER TRAIN: 35%
10. Branch profit remittance tax
a. 15%
b. They are RESIDENT foreign corporation because they
have a branch
c. Pays this every time they remit to the parent company.
d. Just like dividends, the reason why our earning is because
you will share it to your stockholders. BRANCH will give
earning to PARENT.
11. Tax on improperly accumulated earnings
a. Capital Stock + APIC
i. IF SUM is more than 100%; anything in excess is
subject to improperly accumulated earnings of 10%
1. 10% based on dividend tax
b. EXCEPTION: Justifiable reasons such as expansion,
increase in Authorized Capital Stock, shown by Board
Resolution
TAXABLE PERIOD
 Taxable income of taxpayer is computed, in general, based on an
annual accounting period. Any 12-month period or for Short
Period.
1) Calendar Year- Year ending Dec 31
2) Fiscal Year – Accounting period of 12 mos. Ending on the last
day of any month other than December (other than January to
December year)
3) Short Period- for period of less than 12 mos. Short period
returns are required when there is a change in accounting
period. (If shift from Fiscal to Calendar or vice versa, file Short
Period)
a. Fiscal to Calendar- Final/ adjustment return for the
period between close of the fiscal year for which return
was made and the following Dec 31
b. Calendar to Fiscal- return for the period between the
close of the last calendar year for which return was
made and date designated as close of fiscal year
c. Fiscal to Fiscal- return from the period between the
close of the former fiscal year and date designated as
close of the new fiscal year
d. Also, in cases of dissolving corporation or corporate
mergers, short period returns required for absolved
corporations
INCOME TAX DEFINED:
 Tax on all yearly profits arising from property, professions,
trades, or offices, or as a tax on the person’s income,
emoluments, profits and the life (Fisher v Trinidad)
INCOME TAX onwards | Notes for Atty. Llamado
7
  Tax on income, whether gross or net, realized in one taxable CONCEPT OF INCOME
year TEST:
INCOME DEFINED 1) Existence of INCOME
 All wealth which flows to a TP other than a mere return of a. Distinguish CAPITAL and INCOME
capital
 An amount of money coming to a person within a specified CAPITAL INCOME
time, whether as payment for services, interest or profit from FUND: Deposit of Money Flow of Fund
investment. Unless otherwise specified, it means CASH or its  Interest from Deposit
equivalent. Income can also be thought of as a flow of the fruits (Fund of) Property existing at an Flow of services from
of one’s labor (Conwi v CTA) instant time – Building for lease fund/ Property through a
period of time.
INCOME TAX DEFINED:  Rental from lease of
 Tax on income arising from the employment of capital, labor property
and property Wealth – Shares of stock Service of Wealth
 Dividend Income
WHEN IS INCOME TAXABLE Tree - Capital, Labor, Property Fruit
 Income is taxable when the ff. conditions are present  Business income,
1) There is income, gain or profit (It exists) (Is it income or compensation from
return of capital) services, rental income
2) Income, gain, or profit is received or realized during the Return of capital not taxable - Receipt of Income taxable
taxable year; and Payment of Principal amount of  Payment of interest on
3) Income, gain or profit is not exempt from income tax loan loan by debtor

 SO, income is flow of wealth or fund derived from the

employment of capital (business income, dividends, interest
income), labor (service income, practice of profession,
compensation income) and property (gain from sale, rent)
 Examples (is it income or not and why?
o Stock dividend - no, it is not realized. It does not
increase value. It goes back to capital
o Increase in fair value of a property - no
2) Realization of Income
a. Test of Income
b. Actual vs. Constructive receipt

INCOME TAX onwards | Notes for Atty. Llamado

8
3) Income is not exempt (as provided in the Tax Code and Special
Laws)
RELATED DISCUSSIONS
4) Recognition of Income
5) Methods of accounting for table income
- Under Section 44 of the Tax Code, each TP is required to
make a return of his true income. This he must maintain such
accounting records as will enable him to do so. Any approved
standard method of accounting that reflect TPs income may be
adopted
a. Cash v Accrual Method
i. Cash method:
1. All items of Gross Income received
(actually or constructively received)
during the year shall be reported during
such taxable year, regardless of when
service is performed or good is delivered
and
2. Only expenses ACTUALLY PAID shall
be claimed as deductions during the
year, regardless if hen the expense is
incurred
ii. Accrual Method
1. Income is reported when EARNED
regardless of when received and
2. Expenses are reported when incurred
regardless of when paid
3. In the succeeding year of receipt of
payment, no additional income of
expense shall be reported by the TP
b. Installment v deferred v percentage of completion
i. Installment method
1. Considered appropriate when collections
of the proceeds of sales income and
incomes extend over relatively long
period; and
2. There is possibility that full collection
will not be made
3. Seller recognizes gross profit on sale in
proportion to the cash collected during
the year
*(Gross Profits / Contract Price) x Installment payments actually
received = Income to be reported for the year
ii. Percentage of completion
1. Applicable in the case of building,
installation or construction contract
covering period more than 1 year
2. Gross income reported based on
percentage of completion
c. Distinction between tax and financial accounting
i. TAX CODE provisions prevail if ever there are
differences between tax code provisions and
GAAP and GAAS
ii. Differences must be fully disclosed in the AFS
TEST OF DETERMINING INCOME
1) Realization Test/ Severance Test
a. No taxable income until there is separation from capital
of something of exchangeable value (e.g. Undistributed
earnings not taxable unless declared)
2) Claim of Right Doctrine or Doctrine of Ownership
a. If a TP obtains earning under a claim of right and
without restriction as to its disposition, he has received
income which he is required to include in his tax return,
INCOME TAX onwards | Notes for Atty. Llamado
9
 even though he may be claimed that he is not entitles to
retain the money, and even though he may still be
adjudged liable to restore its equivalent
3) Economic benefit test or Doctrine of Proprietary Interest
a. The power to dispose of income is equivalent of
ownership over it
b. Dominant purpose of revenue law is the taxation of
income to those who earn or otherwise create the right
to receive it and enjoy the benefit of it when paid

KINDS OF TAXPAYERS
(INDIVIDUALS)
TAXABLE ON
TYPES SUB TYPE DEFINITION/ QUALIFICATIONS TAX RATE TAX BASE
INCOME
CITIZEN
5%-32%
(OLD)

(20%/15% -
WITHIN AND Taxable income
Resident Citizen 35%) TRAIN;
WITHOUT Optional 8%
on gross
sales/receipts
Flat Rates, inc. Passive Income
NRC MEANS: 5%-32%
1. Citizen of the Philippines established (OLD)
satisfactorily to the Commissioner on
Internal Revenue the fact of (20%/15% -
Non Resident WITHIN Taxable Income
a. His physical presence abroad 35%) TRAIN;
with Optional 8%
b. Definite intention to reside on gross
therein sales/receipts

INCOME TAX onwards | Notes for Atty. Llamado

10
 2. Citizen of the Philippines leaves
Philippines during taxable year to
reside abroad, either as an
a. Immigrant
b. For employment on a permanent
basis WITHIN
3. Citizen of the Philippines
a. Works and derives income from
abroad
b. Employment requires his
physical presence abroad "most
of the time"
i. i.e. more than 183 days Flat Rates, inc. Passive Income
though not continuous
4. Citizen previously considered as
NRC and who arrives in the
Philippines AT. Any time during
taxable year to reside permanently in
Philippines
ALIENS
5%-32%
(OLD)

(20%/15% -
Taxable Income
Resident Alien WITHIN 35%) TRAIN;
Optional 8%
on gross
sales/receipts
Flat Rates Passive Income
Non-Resident *Qualifying Factor: 5%-32%
Non-Resident Alien
Alien (NRA) WITHIN (OLD) Taxable Income
(NRA)
engaged in trade of

INCOME TAX onwards | Notes for Atty. Llamado

11
 business in the If aggregate stay in Philippines during (20%/15% -
Philippines any calendar year is MORE THAN 180 35%) TRAIN;
DAYS (Does not need to be continuous) Optional 8%
on gross
sales/receipts
Flat Rates Passive Income
Non-Resident
Alien (NRA) not 25% Entire Income
engaged in trade or WITHIN
business Flat Rates Passive Income

Employees subject to
preferential Rates
(15%)
Alien employees by 15%;
RAH and ROH of
WITHIN Under TRAIN Gross Income
multinational
companies - Subject
already to
Alien employed by Graduated
WITHIN
OBUs Income Tax
Alien employs by Rates for
Foreign service WITHIN Individuals
contractor
5%-32% Taxable income
(OLD); (only allowed
WITHIN AND personal
Estates and Trust (20%/15% - exemption
WITHOUT
35%) TRAIN; =single ind.)
Flat Rates, inc. Passive Income
NOT SUBJECT
Co-ownership Per se
TO TAX

INCOME TAX onwards | Notes for Atty. Llamado

12
Co-owners
Created for sole purpose of exercising NOT SUBJECT
GPP Per Se common profession TO TAX
Taxable income
(distributive
share in GPP=
5% -32%
Gross Income-
(OLD);
net profit of
WITHIN AND
GPP Partners GPP; deemed
WITHOUT (20%/15% -
distributed to
35%) TRAIN
partners (even
without actual
distribution)
Flat Rate Passive Income
CORPORATIONS
Organized under the laws of the WITHIN AND 30% Taxable Income
Domestic Corporation Philippines WITHOUT Flat Rates, Inc Passive Income
Partnership, except WITHIN AND 30% Taxable Income
GPP WITHOUT Flat Rates, Inc Passive Income
Following elements required to constitute
a JV:
1. Each party to JV must make a
contribution (capital, service, skill,
knowledge
Joint Venture (JV) or
2. Profits must be shared among JV
Consortium
partners
3. Presence of joint proprietary interest
and right of mutual control over the
subject matter
4. Usually single business transactions

INCOME TAX onwards | Notes for Atty. Llamado

13
 EXEMPT JV or  Unincorporated JV and
Consortium  Formed for the purpose of
undertaking construction projects; or Unincorporated -
 Engaging in petroleum, coal, they won't Not taxable
geothermal, and other energy register in SEC because what is
operations pursuant to an operating or but will issue received is
consortium agreement under a service receipts. It is return on
contract with the Gov’t. considered a investment to the
 Exempt JV may become taxable if separate entity for 2 corporations.
after completion of construction tax purposes.
parties engage in the lease and/or sale
of completed units
Taxable JV or 30% Taxable Income
WITHIN and
Consortium
WITHOUT Flat Rates Passive Income
Organized under the laws of foreign
Foreign Corporations countries WITHIN
FC engaged in trade or business in the
Resident Foreign Corp Philippines WITHIN 30% Taxable Income

Non-Resident Foreign FC not engaged in trade or business in

Corp (note of rates of the Philippines WITHIN 30% Gross Income
special NRF)

INCOME TAX onwards | Notes for Atty. Llamado

14
INCOME TAX onwards | Notes for Atty. Llamado
15
 GROSS INCOME
GROSS INCOME DEFINED
 All gains, profits, and income, except (PASSIVE) income
subject to final tax and exempt income (EXCLUSIONS),
derived during a taxable year by TP from whatever source,
whether legal or illegal, and in whatever form (money,
property, or services), including, but not limited to the items
enumerated under Sec. 34 of the NIRC
 GROSS INCOME = Income without deductions (Gross
revenues - Cost of Sales)
 NET INCOME = Gross Income - Allowable Deductions
 TAXABLE INCOME = Gross Income - Allowable
Deductions
ITEMS GROSS INCOME SUBJECT TO TAX
1) Compensation income- in whatever form paid, including
but not limited to fees, salaries, wages, commissions and
similar items
They Include:
a. All kinds of allowances (living, clothing, etc.)
whether in cash, kind and other fringe benefits (e.g.
Travelling, representation expenses, bonuses, etc.)
i. EXCEPT: facilities or privileges given to
Employees (EE) if such facilities are
1. Of relativity small value
2. Are offered by Employer (ER)
merely as means of promoting the
health, goodwill, contentment or
efficiency of the EE
b. Compensation for personal services may be paid for
in money or in kind
c. Instances where there is compensation in kind
i. Compensation paid to an EE with
company’s stock - income is = FMV of the
stock at time of receipt
ii. Provision of living quarters in addition to
salary - income = rental value
iii. Promissory note or certificate of
indebtedness - income = FMV of Notes
iv. Provision of services by an individual to his/
her creditor. Who in consideration thereof
cancels/ forgives debt - income = amount of
debt cancelled
d. Income from Practice of Profession -
Under TRAIN - for individuals earning purely business
income and/or income from profession where ross
sale/receipts DO NOT EXCEED 3Million - option to
choose between graduated income tax rates vs. 8 % tax
on gross sales/receipts
2) Income from business or commercial transactions
a. In case of manufacturing/ merchandizing – gross
income means “total sales-cost of goods sold+
“income from investments and from
b. Income from long-term contracts – taxable for the
period which the income is determined
i. “Long term” contracts: building, installation,
or construction contracts covering a period
in excess of 1 year.
ii. Income is reported based on percentage of
completion.
3) Income from Sales or Dealings in property
a. GENERAL RULE: Entire amount of the gain or
loss arising from the transaction shall be taxable/
deductible, as the case may be.
INCOME TAX onwards | Notes for Atty. Llamado
16
b. IN GENERAL: the measure of gain or loss =
SELLING PRICE or CONSIDERATION - COST
OF PROPERTY (BASIS OR ADJUSTED BASIS
OF PROPERTY)
c. BASIS OF PROPERTY SOLD OR EXCHANGED
(Cost of Property) -
The basis depends primarily on manner by which
TP acquired property for sale
i. if Property acquired BY PURCHASE -
(Basis is) COST of the property (Purchase
price + expenses of Acquisition)
ii. if Property acquired by devise, bequest or
inheritance – (Basis is) FMV as of date of
acquisition or inheritance
iii. if Property acquired by GIFT / DONATION
- (Basis is) Value at the hands of donor or
last preceding owner by whom it was
acquired by gift,
*EXCEPT: if basis (or acquisition cost)
is GREATER than FMV of property at iv. Property (other than Capital asset) acquired
TIME OF GIFT, then to determine for less than adequate consideration
LOSS, the basis shall be FMV of 1. Amount paid by tranfeREE for the
property AT TIME OF GIFT. property, or
2. The transfeROR’s adjusted basis at
time of transfer, whichever is
GREATER
*Adjusted Basis - applies to properties
susceptible to depreciation

Apples only to Ordinary assets because in

ordinary assets basis will be the higher
between Acquisition Cost or Selling Price.
For Capital Gains it is not important
because it is based on which is higher

INCOME TAX onwards | Notes for Atty. Llamado

17
 between the fair market value for tax o When Stockholder (SH)
declaration, zonal value (as pegged by the receives other than stocks,
BIR), and consideration. cash, or property (#2 above)
v. Property acquired in transaction where gain o GAIN, if any shall be
or loss not recognized - Basis is substituted recognized in an amount not
basis = adjusted basis to the transferor at the in excess of sum of money
time of exchange and FMV of property
received.
GENERAL RULE: Under the rules all sales/ transfers o BOOT = CASH and
are subject to tax regardless of the type of property. PROPERTIES GIVEN BY
TOR from exchange other
d. How to measure GAIN or LOSS than TEE's shares. (cash,
i. Sale of Property other property)? - Value of
1. SELLING PRICE - COST = GAIN/ the property received - the
LOSS cost of the property given up;
ii. Exchange of Property to Property (Recognize only BOOT as
1. FMV, Prop Received - COST, the gain)
Property Given = GAIN/LOSS o Taxable Gain = FMV of
e. EXCEPTIONS to GENERAL RULE on recognition share + cash + other property
of GAIN/ LOSS (230) – (Adj. Basis) 110 =
i. Transactions where gains/ losses NOT (Gain) 120 – (Unrealized
recognized Gain)(160-110=50)=70
1. Exchange of property solely in kind
pursuant to merger o EXAMPLE1 GENERAL
2. Exchange by person of property in RULE: same as basis of
exchange for shares in corporation property transferred
where person, alone or together with
others not exceeding 4 persons, gains *Adjusted Original basis (Cost) -
control of said corporation (5 Before transfer; Substituted basis
PEOPLE TOTAL) - After transfer

 *When gain, but NOT LOSS, is Said basis shall be decreased by

recognized, but - money received and FMV of
other property received and

INCOME TAX onwards | Notes for Atty. Llamado

18
INCREASED by Gain
recognized.

ILLUSTRATION:

Property transferred (adj. bases /

Cost) -100; Exchanged for shares
=900k ??? Cash of 30k

TORgain = 120-100=20
Subs Basis Shares ??? (TOR) =
(Adj. Basis Prop) 100-30 (Cash
received) ???

INCOME TAX onwards | Notes for Atty. Llamado

19
 PARTY RECEIVES
Transferor (of property) Shares
Transferee (NEWCO) Property

MEANING PARTY INVOLVED

Acquisition
Cost of property PRIOR
Cost/ Original Transferor
the transfer
Basis
Shares now with
Cost of the shares/
Substituted Transferor; and
property AFTER the
Basis Property now with
transfer
NEWCO

When NEWCO sells

subsequently BASIS OF SP- Substituted Basis= Gains
TAX

INCOME TAX onwards | Notes for Atty. Llamado

20
 o EXAMPLE 2 GENERAL ii. Transactions where gain recognized but
RULE: NOT loss
1. Transactions between related TP
TOR (*memorize what are the instances)
Acquisition 2. Illegal transactions
Cost 1,000 f. Ordinary Asset v Capital Assets (Memorize)
FMV 5,000 i. ORDINARY ASSETS: (memorize)
Assets xxx 1. Stock in trade of the TP or other
Shares 5,000 properties of a kind which would
properly be included in the inventory
AC 1,000
of the TP (Merchandise inventory,
REAL Gain 4,000 finished goods, raw materials)
Recognized Gain 0 (Being sold)
2. Property held by the TP primarily for
sale or lease to customers in the
TOR TEE ordinary course of trade or business
Substituted Basis Shares Property (e.g. Subd. Lots held for sale by
1,00 subdivision owner)
Subject to Tax 3. Property used in trade or business
1,000 0
and subject to depreciation (office
NEWCO SELLS P2/ equipment, building)
Share: 10,000 4. Real Property used in trade or
business
(No change in
Cost (Gain was not beneficial *Categorization can change, depends on
taxable so P1000) 1,000 ownership who owns property. If entity other than
9,000 real estate, character of property can
Was subject to change. (It may automatically be
Sec. 40(C)(2) converted to Capital Asset, after 2 years)
transaction (Revenue Regulation 7- 2003) (Idle,
abandoned, not used continuous, for 2
years) (If transferee not a real estate, it
will become Capital Asset)

INCOME TAX onwards | Notes for Atty. Llamado

21
 ii. CAPITAL ASSETS (Memorize) - all
property held by TP but not including those
enumerated above
1. Short term (capital asset – one which
has been held by the TP for 12
months or less
2. Long Term (capital asset – one
which has been held by the TP for
more than 12 months
3. Ordinary Gain: gain from sale/
transfer of properties considered as
ordinary assets
4. Capital Gain / Loss – The gain of
loss derived from the sale or
exchange of capital assets
5. Net Capital Gain/ Loss carryover-
net capital gain/loss in a taxable year
which cannot be deducted from
ordinary income but which could be
carried over to the NEXT taxable
year by individual TP as a deduction
against net capital gain, up to the
amount of the not un excess of
taxable income
g. Gains from dealings in properties: Ordinary v
Capital Gain
i. SHORT TERM CAPITAL GAIN/ Loss –
gain or loss arising from sale or exchange of
capital asset held for 12 months or LESS
ii. LONG TERM CAPITAL GAIN/ LOSS:
gain/ loss arising from sale/ exchange of
capital asset held for MORE THAN 12
Months
iii. NET CAPITAL GAIN/LOSS
CARRYOVER: net capital loss in a taxable
year which cannot be deducted from
ordinary income but which would be carried
over to the NEXT taxable year by
INDIVIDUAL TP as a deduction against net
capital gain, up to the amount of the not in
excess of taxable income
h. Rules on Capital Gains/ Losses Of INDIVIDUALS:
i. Transaction involves PERSONAL
PROPERTY classified as CAPITAL ASSET
1. The percentage of gain/ loss that may
be recognized/ deducted shall be
a. 100% if the CA has been held
for 12mos. OR less
b. 50% if CA has been held for
MORE THAN 12 mo.
2. Capital losses shall be deducted only
to the extent of capital gains
3. A net capital loss in a TY in an
amount not in excess of taxable
income (for that year) shall be
deducted from the net capital gains
of the next succeeding year (ONLY);
and
4. Ordinary losses are deductible from
CAPITAL gains but NET capital
LOSS cannot be deducted from
ORDINARY gain
ii. For sale of REAL PROPERTY that is
considered CAPITAL asset
1. The HIGHEST of the zonal value
(BIR), fair market value (City
Assessor’s Office) and consideration
INCOME TAX onwards | Notes for Atty. Llamado
22
stated in the deed of sale shall be
subject to 6% (final) Capital gains
tax - can be availed of also by
corporation.
j. Other CAPITAL asset Transactions
i. Rules on capital gain/ Losses of CORPORATION
i. These rules will apply whether the
CAPITAL asset is REAL or PERSONAL
property
1. Capital gains or losses recognized
100%
2. The net capital loss carryover is not
applicable
3. Capital losses are deductible only to
the extent of capital gains
4. Ordinary losses are deductible from
capital gains but Net capital losses
cannot be deducted from ordinary
gain/ income
 Holding period not applicable.
Corporation subject to flat rate of
30% on income
 Net Capital loss carry-over not
applicable
i. Retirement of bonds
1. Amounts received by holder upon
retirement of bonds shall be
considered as capital gain/ loss
ii. Short Sales
1. A short sale takes place where seller
first makes sale of stock which he
does not own and subsequently buys
the stock to complete transaction
2. He sells the shares short in the
expectation of a decrease in value of
said shares within a reasonably short
INCOME TAX onwards | Notes for Atty. Llamado
23
 period of time. He covers his short
sale when the expected decrease in
value of shares occurs or when the
time for the return of the borrowed
shares comes
3. Gain or loss always a short-term
capital gain or loss (i.e. 100%
recognizable)
iii. Failure to exercise an option
1. Option to buy – option given to TP
to buy for which a consideration is
paid (called option money)
2. If the option is NOT exercised, the
TP who gave the option to buy will
recognize a short-term capital gain
(100% recognizable)
iv. Securities becoming worthless
1. Securities that are capital assets and
which are ascertained to be worthless
and written off, the loss resulting
therefrom in case of a TP other than
a bank/ trust co., is considered a
capital loss
2. Capital Loss not deductible from net
capital gain from sale of shares of
stock not traded in the stock
exchange (subj. To 5%. 10%)
v. Distribution in liquidation of corporation
1. The gain realized by the individual
Stockholder is subject to holding
period and subject to schedular tax
rates for individuals
a. Holding period is 12 or less
or more that 12 mo. (50 %,
100%)
2. The gain realized by a corporate SH
shall be subject to 30% regular
corporate income tax (RCIT)
k. Capital Gains Tax on sale of real property subject to
FINAL TAX of 6%
i. Liable are
1. Citizens (resident or NRA)
2. Aliens (RES or NRA, whether or not
engaged in trade/ business)
3. Estates and trusts
ii. Nature of tax – finals
iii. Exemption from tax in case of sale of
principal residence
1. Sale of principal residence
2. Proceeds fully utilized in acquiring /
constructing new principal residence
within 18months from date of sale or
disposition
3. Shall be exempt subject to the
following conditions:
a. Historical cost/ adj. basis or
RP sold shall be carried over
to the new principal residence
b. CIR shall have been duly
notified by TP within 30 days
INCOME TAX onwards | Notes for Atty. Llamado
24
 from date of sale/ disposition
of his intention to avail of tax
exemption
c. Exemption can only be
availed of ONCE every 10
years; and
d. If no full utilization of
proceeds, tax to the extent
that unutilized proceeds bears
to the gross SP
4) Interest Income
a. Arises from indebtedness, i.e. compensation for use
of money or forbearance for its use. Unless
exempted by law, interests received by TP, whether
or not usurious, are taxable;
b. Interest Income subject to FINAL TAX
* Interest Income from any currency bank
deposit or yield or any other monetary benefit
from deposit substitutes, from trust funds and
other similar arrangements - 20% Final Tax
(CITIZENS, RA, DC, RC)
* Interest Income by an individual TP, Domestic
Corporation under the expanded FCDU system -
15% Final Tax (TRAIN), Before Train 7.5%
c. Interest Income EXEMPT
* Interest from long-term deposits or
investments (with maturity of 5 years or more)
5) Rent
a. Rent- consideration for the use of property whether
real or personal property
b. Royalties – payment for use of property (copyrights,
trademarks, patents)
c. Taxes paid by LEE to the landlord are considered
additional rent and constitute income taxable to the
LOR
d. Permanent improvement made by LEE on leased
premises –where lease contract provides that LEE
will construct a permanent improvement (e.g.
Building) on rented property and after term of lease,
the improvement shall become LOR’s property,
LOR, at his option may report income on either of
the following methods:
i. At the time improvement was completed –
FMV of the improvement subject to lease
(Additional Income to the Lessor (LOR)
ii. Over the life of the lease-aliquot part/year of
the estimated depreciated value of
improvement at the termination of the lease.
*Additional Income to the Lessor (LOR)
6) Dividends
a. Kinds
i. Cash dividends
ii. Property dividend
iii. Stock dividend –not taxable if SH will be
given same interest being represented after
distribution of more shares of same
character
iv. Liquidating dividend- taxable to the extent
of difference of FMV of dividend over cost
of investment of SH
b. Rules
i. If paid by Domestic Corporation:
1. To CITIZEN/ RA/ NRA- Engaged in
Trade or Business
INCOME TAX onwards | Notes for Atty. Llamado
25
 a. 10% final withholding tax
(FWT) JAPANCO
2. To Non-Resident Alien (NRA) NOT PHILCO
(NRFC)
engaged in trade or business Gross Income 100.00 400.00
a. 25% (FWT) Dividend income 21.00
3. To Domestic/ Resident Foreign
Deductions 70.00 (300.00)
Corporation (RFC)
a. Not subject to tax Net Income 30.00 121.00
4. To Non-Resident Foreign Income Tax 9.00 42.35
Corporation (NRFC) Retained Earnings 21.00
a. 15% FWT, subject to Assumed Income Tax Rate of
condition that country of Japan 0.35
domicile of NRFC shall
allow a credit against the tax
due from the NRFC taxes I. If with Tax Sparing:
deemed to have been paid in JAPAN CO will be paid Phil. Government (Thru
the Philippines. (Represents A. PHILCO)
difference between 30%
corporate income tax in 2000
Income tax 9.00
and thereafter – 15% tax on
dividends) (Tax Sparing) Dividends tax (21*15%) 3.15
Total 12.15

B. JAPAN CO will pay Japanese Government

Income Tax 42.35

Less: 15% dividends tax 3.15
Less: 15% tax deemed paid
to Phil. Govt. 3.15
36.05

Total payments of
JAPANCO 48.20

INCOME TAX onwards | Notes for Atty. Llamado

26
II. If NO tax sparing and still 15% Total payments of JAPAN CO 51.35
JAPAN CO will be paid Phil. Government (Thru
A. PHILCO) III
Income tax 9.00 . Assuming that it is not taxed at all
Dividends tax (21*15%) 3.15 JAPAN CO will be paid Phil. Government (Thru
Total 12.15 A. PHILCO)

B. JAPAN CO will pay Japanese Government Income tax 9.00

Income Tax 42.35 Dividends tax (21*15%) 3.15
Less: 15% dividends tax 3.15 Total 12.15
Less: 15% tax deemed paid to
Phil. Govt. 0.00 B. JAPAN CO will pay Japanese Government
39.20
Total payments of JAPAN CO 51.35 Income Tax 35.00
Less: 15% dividends tax 3.15
Less: 15% tax deemed paid to
*Thus, dividends paid to JAPAN Co will be subject to Phil. Govt. 3.15
30% dividends tax 28.70

JAPAN CO will be paid Phil. Government (Thru Total payments of JAPAN CO 40.85
A. PHILCO)
Income tax 9.00
Dividends tax (21*15%) 6.30
Total 15.30

B. JAPAN CO will pay Japanese Government

Income Tax 42.35
Less: 15% dividends tac 6.30
Less: 15% tax deemed paid to
Phil. Govt. 0.00
36.05

INCOME TAX onwards | Notes for Atty. Llamado

27
IV. If Japan does not tax dividends

INCOME TAX onwards | Notes for Atty. Llamado

28
 b. If paid by foreign corporation a. 25% final (withholding tax)
i. To CIT/ Domestic unless lower tax treaty rate
Corporation 3. To NRFC
1. 32% / 30% a. 30% FWT unless lower tax
income tax treaty rate
2. Foreign ii. If paid by FOREIGN CORP
income tax 1. RC/ DC – 32% graduated tax rates
may be (in case resident Citizen) / 30%
credited (Domestic Corp.)
against Phil 2. To NRC/RA/ NRA
income tax a. Exempt (taxable on income
due from sources within)
ii. To NRC / NRA / FC following principle of
1. Exempt (Not mobilia sequuntur personam
income within (Situs of taxation of
the intangibles place of residence
Philippines) or domicile or owner)
7) Royalties 8) Prizes and awards
a. Payment received as consideration for use of, or a. GR: 20% final tax if received by CIT/ RA. NRA-
right to use, any copyright, literary, artistic or ETB
scientific work, including any patent, trademark, i. 25% FWT if received by NRA-NETB
design, model, secret formula. ii. 30% RCIT if received by DC/ RFC; 30%
b. Rules Gross Income (GI) if received by NRFC
i. If paid by DOMESTIC CORP iii. Prizes amounting to 10k or less subject to
1. To CIR/ RA/ NRA-ETB (Engaged in regular income tax rates (TYPO)?
Trade or Business)/ DC/ RFC - 20% b. EXCLUDED:
final tax, except royalty on books, i. Winnings from PCSO and lotto winnings
other literary works and musical, 10K or less
compositions received by ii. Prizes/ awards in recognition of religious,
INDIVIDUALS, at 10% final tax charitable, scientific, educational, artistic,
2. To NRA-NETB (Non-Resident literary, or civic achievement are
Alien not engaged in Trade or EXCLUDED if
Business) 1. Recipient was selected without any
action on his part to enter contest

INCOME TAX onwards | Notes for Atty. Llamado

29
 2. Recipient not required to render
substantial future services as
condition to receiving prize or award
iii. Prizes and awards granted to athletes in
local/ international sports competition
whether held locally / abroad AND provided
it is sanctioned by their national sports
association
9) Income “derived from whatever source”
a. Disclose legislative policy to include all income not
expressly exempted from taxable income
b. Examples
i. Gains arising from expropriation of property
ii. Gambling gains and income from illegal
business
iii. Compensation for damages constituting
payment for loss of expected profits.
EXCLUSIONS
Exclusions from Gross Income
EXCLUSION: Not considered at all for gross income; Not
subject to income tax
DEDUCTIONS: Items deductible from gross income
*This list is not exclusive; Special Laws provide other
exemptions
(Memorize Enumeration!)
1. Proceeds of life insurance paid to beneficiaries are
EXCLUDED from gross income
a. Proceeds are considered more as indemnity rather than
as gain or profit (insurance is contract of indemnity)
2. Amount received by Insured as return of premium
a. Amount of premium considered returned of capital
3. Gifts, bequests, and devises
a. Exempt from income tax but subject to donor’s tax or
estate tax
b. But, income from property donated/ inherited, shall be
subject to income tax
4. Compensation for injuries and sickness
a. Compensatory in nature
b. Compensation for damages is taxable if it is for
payment for loss of expected profits
5. Income exempt under treaty
a. Proceeds from international comity
b. Exempt: salaries of officials of UN assigned in the
Philippines and U.S. Citizens working in consular
offices in Philippines, exempt from all taxes on
compensation income for consular services salaries of
diplomatic officials and agents
INCOME TAX onwards | Notes for Atty. Llamado
30
6. Retirement benefits, pensions, gratuities
a. Retirement benefits received under RA# 7641 and those
received by officials/ employees of private firms,
whether individual or corporate, in accordance with
reasonable private benefit plan (must be certified by the
BIR) maintained by ER (Employer), provided that:
i. Retiring official/ employee is continuous service
of ER for at least 10 years
ii. Retiring official/ employee not less that 50 years
old
iii. The benefits granted shall be availed of by an
official employee only once
*Under RA 7641, provides for minimum benefits, the
minimum is exempt; For the excess, it is taxable (??)
b. Any amount received by an official/ employee or by his
heirs from ER as consequence of separation of such
official or EE from service of the ER because of death,
sickness, or other physical disability; or for any cause
beyond the control of such EE (Employee)/ Official
i. e.g. Redundancy, retrenchment
c. Benefits received under SSS / GSIS
7. Prizes and awards in sports competition- sanctioned by their
national sports associations
8. 13th month pay and other benefits – to the extent of 82,000
(beginning January 1, 2015) (TRAIN - to the extent of 90,000
beginning Jan. 1, 2018)
a. Includes other benefits such as productivity incentives
and bonus
b. Ceiling amounts of de minimis benefits shall not be
considered in computing for the 90K ceiling
c. Amount in excess of 90K, taxable to EE receiving
benefits (and subject to withholding tax)
*In excess of 90K, that is taxable
9. GSIS, SSS, Medicare and other contributions
10. Gains from sale of bonds, debentures and other certificates of
indebtedness
a. Gains (not interest) realized from sale/ exchange or
retirement of bonds with maturity of MORE THAN 5
years
11. Gains from redemption of shares in mutual fund
12. Income subject to Final Tax
FRINGE BENEFITS (Sec. 33)
 Any good/ service or other benefit
 Furnished or granted to an individual EE (EXCEPT rank and
file)
 Includes (but not limited to) to the following:
o Housing
o Expense Account
o Vehicle of any kind
o Household personnel (maid, driver)
o Interest on loan at less than market (difference between
market rate and actual rate granted)
o Membership fees, dues, and other expenses borne by
ER for EE in social/ athletic clubs and similar org.
o Expenses for Foreign Travel
o Holiday and Vacation expenses
o Educational assistance to EE or his dependents
o Life of health insurance and other non-life insurance
premiums in excess of what law provides.
 Imposition of FBT (Fringe Benefits Tax)
o Final withholding tax (FWT) imposed on the grossed-
up monetary value of FB (Fringe Benefits) furnished or
granted to EE by ER, except when:
INCOME TAX onwards | Notes for Atty. Llamado
31
  FB is required by nature of or necessary to the
trade/ business or profession of ER; or  Determination of Grossed –up Monetary Value (GMV)
 FB is for the convenience or advantage of the o GMV- Actual Monetary Value / 65%
ER o Represents the whole amount of income realized by EE
o Rate: 32%; TRAIN - 35% which includes Net Monetary Value received + FBT
o FBT is a final tax withheld and paid for by the ER o Deductible by employer under Sec. 34 (Ordinary and
o FBT applied only to managerial and supervisory Necessary Expenses –Salaries)
employees
o Fringe Benefits are added compensation to employees;
Fringe Benefits expense forms part of salaries EG. ER paid for foreign travel expenses of
deductions for Tax purposes; Fringe Benefits Tax form his EE totaling 100K
part of Tax deductions, also. FB Expense and FB Taxes
are both deductible for Tax Purposes; (Grossed Up Net Amount of Money
Monetary Value = FB Expense + FB Tax), therefore, Received 100,000.00
GMV is deductible from salaries. So if not in Fringe Benefit Tax 35,000.00
exceptions, withhold the GMV for Tax.
FB-GMV 132,000.00
o MV = Monetary Value

Gross Sales XXX

Less: Cost of Sales
Gross Income
Allowable Deductions (Sec.
34)
Fringe Benefit Expense
(1-35%)
1,176,470.59
Fringe Benefit Tax
 General Guidelines in Valuation of FB
XXX 1. Money- value is amount granted or paid by ER
XXX 2. Property with ownership transferred – value of FB shall
be equal to ZV or FMV, WHICHEVER is HIGHTER
3. Property without transfer of ownership – value of FB =
Depreciation value of property
800,000.00
0.65
0.32
376,470.59

Fringe Benefit (Expense

+Tax) 1,176,470.59

INCOME TAX onwards | Notes for Atty. Llamado

32
 Valuation of Housing Privileged o Residential property OWNED by ER and assigned for
o Residential Property leased by ER for use of EE- MV = EE’S use- MV = (5% of higher of ZV or FMV) x 50%
50% of value of benefit

Residential property OWNED by ER and

assigned for EE’S use - MV = (5% of
Residential Property leased by ER for used higher of ZV or FMV) x 50%
of EE- MV = 50% of value of benefit
ZV = 15,000,000
Yearly Lease 1,500,000.00 FMV = 9,000,000
Divide by 12.00
Monthly Rent 125,000.00 Higher of ZV and FMV 15,000,000.00
Multiplied by 0.50 Multiplied by 0.05
Monthly MV of Benefit 62,500.00 Annual Value of Benefit 750,000.00
Divide By 0.65 Multiplied by 0.50
Grossed-up Monetary Value 96,153.85 Annual MV of Benefit 375,000.00
Multiplied By 0.35 Divide by 0.65
FBT 33,653.85 GMV 576,923.08
Multiplied by 0.35
FB expense 62,500.00 FBT 201,923.08
FBT 33,653.85
FB expense 375,000.00
FBT 201,923.08

 Expense account- MV = 100% of personal expenses paid for or

reimbursed by ER to EE (except if receipts are in the name of
ER)
 Representation and transportation allowance –if fixed in
amounts and regularly received by EE as part of compensation
income, not taxable FB, but taxable compensation income,
subject to withholding

INCOME TAX onwards | Notes for Atty. Llamado

33
 Motor Vehicle
1. Vehicle purchased by ER in name of EE, MV =
Acquisition Cost (Fringe Benefit to Employee is the
Acquisition Cost)
2. Cash for purchase provided by ER which is registered
in the name of EE, MV = CASH received by EE
3. Fleet of motor vehicles owned and maintained by ER
for use of business and EEs, MV= (Acquisition Cost /
5) x 50%
 Taxation of FB received by certain individuals
1. FBT if 25% imposed on GMV received by NRA not
engaged in trade or business in the Philippines
o MV/ 75% = GMV x 25%
2. An FBT of 15% shall be imposed on GMV of FB
received by
a. An alien individual employed by Regional or
Area headquarters of multi-national corporation
b. An alien individual employed by off-shore
banking unit of foreign bank
c. An alien individual employed by foreign service
contractor engaged in petroleum service
operations
d. Any of its Filipino EEs employed and
occupying same position as occupied by
aforesaid EE.
 MV / 85% = GMV x 15% = FBT
 Not subject to FBT
o FB exempt as authorized by law
 If grant of FB is required by the nature of, or
necessary to trade / business/ profession of ER
 Grant of FB is for convenience of ER
 Does not mean exempt from any other form of
tax – can still be part of taxable compensation
income, and consequently to withholding tax.
o Contributions of ER for benefits of EE to retirement,
insurance and hospitalization benefits plans
o Benefits given to rank and file EE, whether or not
granted under a CBA
o De Minimis Benefits – limited to facilities or privileges
of relatively small and offered to EE to promote EEs
health, goodwill, contentment and efficiency.
o Includes:
 Monetized unused VL (Vacation Leave) credits
of private employees not exceeding 10 days
 Monetized value of VL and SL (Sick Leave)
credits to government officials
 Medical cash allowance to dependents of EEs
not exceeding 750/sem or 125/month
 Rice subsidy of 1500 or one sack of 50kg/
rice/month amounting to not more than 1500
 Uniforms and clothing allowance not exceeding
5000 per annum
 Actual medical assistance (check-up, maternity
assistance) not exceeding 10K/pa
 Laundry allowance not exceeding 300/mo
 Employees achievements awards (for length of
service which must be in the:
a) Form of tangible property, other than
cash of GC
b) With annual monetary value not
exceeding 10K
c) Received under an established written
plan
INCOME TAX onwards | Notes for Atty. Llamado
34
  Gifts during Christmas and major anniversary c. Not allowed OSD
celebrations not exceeding P3k/ EE 2) Deductions by IND0TP from business or practice of
 Daily mean allowance for OT work and profession
graveyard shift not exceeding 25% of basic a. Itemized deductions (Sec. 34 A-J, M) or OSD
minimum wage (Optional Standard Deductions) at 40% of GROSS
SALES/ RECEIPTS
DEDUCTIONS 3) Deductions by COR-TP
a. Itemized deductions (Sec. 34 A-J) or OSD at 40%
Items allowed by to be deducted from gross income to determine of GROSS Income
taxable income subject to income tax
WHO ARE ENTITLED TO AVAIL:
BASIC PRINCIPLES 1) Citizens /RA / NRA-ETB
 TP seeking deduction should point to a specific provision in 2) DC / RFC
the law authorizing the deduction 3) Taxable Partnerships
 TP must be able to prove entitlement to such deduction 4) Estates and Trusts
authorized/ allowed by law  NRA-NETB (25%) AND NRFC (30%) NOT ENTITLED
 If deduction is subject to withholding tax, and it is shown that (Deduction is after Gross Income) (Not entitled because Gross
the amount (of tax) to be deducted and withheld, has been Income is taxed; Deductions are after Gross Income)
withheld/ paid to the BIR.
o Otherwise, you cannot claim that deduction CLASS OF DEDUCTIONS
 TP may claim lesser deduction than allowed by law. 1) BUSINESS EXPENSES
Prohibited is to claim beyond what is allowed by law  Ordinary and necessary expenses paid/incurred during TY
 GR: NO MAXIMUM LIMIT (Duly incurred and attributable to directly to TP’S conduct of business or
substantiated) practice of profession
 SC, just because you have lower deduction, there is hidden  GENERALLY INCLUDES:
income o Salaries (Includes Fringe Benefits), wages, and
 If Purely Compensation Income earner, no deductions? other forms of compensation, de minimis
o Travel expenses
KINDS OF DEDUCTIONS: o Rentals and other similar payments
1) Deductions from IND-TP (Independent Tax Payer) who are o Reasonable allowance for entertainment,
purely compensation earners amusement and recreation expenses
a. Only personal and additional exemptions  REQUISITES FOR DEDUCTIBILITY
b. Premium payments on health and /or hospitalization o Expense must be ordinary and necessary
insurance

INCOME TAX onwards | Notes for Atty. Llamado

35
  Ordinary when – commonly incurred in o Reasonable and necessary
carrying on business o Incurred or paid “while away
 Commonly incurred from home”
 Not necessarily habitual o Paid/ incurred in the conduct
o Payment of legal fees for of trade/ business
protection of trademark/  Advertising and selling
patent  Marketing
 Necessary—if appropriate and helpful to the  Insurance premiums against fire, storm,
business theft, accident
o Reasonable in amount  Rental for use of business
o Substantiated by adequate proof (Official Receipt or  Utilities
other proof such as contracts etc.)
o Must not be against law. Morals, public policy, or OTHERS
public order.  Repairs
o Paid/ incurred carrying on a business or practice of  Incidental or ordinary; do not
profession: materially add to value of the
 Salaries and Wages and other Forms of property nor prolong its life.
Compensation  Repairs that prolong life of the
 REQUISITE FOR property are capital expenditures (as
DEDUCTIBILITY: distinguished from maintenance
o Reasonable repairs), subject to depreciation
o Payment for purely service  Major repairs added to Asset and
o Tax was withheld and subject to depreciation
remitted to BIR  Expenses of farmers
 Management expenses  Cash basis, not accrual
 Commissions  Entitled to deduct all amounts
 Labor actually expended in carrying on the
 Supplies business of farming, such as:
 Repairs o Cost of ordinary tools
 Transportation expenses o Cost of gasoline
 Equipment used in trade/ business o Repairs of transportation
 Travel expenses equipment
 REQUISITE FOR o Cost of feeds
DEDUCTIBILITY:

INCOME TAX onwards | Notes for Atty. Llamado

36
  Entertainment, Amusement and Recreation
Expenses
 REQUISITE FOR
DEDUCTIBILITY:
o Paid/ incurred during taxable
year
o Directly connected to
development, management
and operation of business
o Not contrary to law, morals,
good customs, public policy,
or public order
o Duty substantiated
o Ceiling
 If TP engaged in sale
of good, not more
than 0.5% of net sales
(Gross Sales –
SR&A); Sales
Returns and
Allowances
 If TP engaged in sale
of services, not more
than 1% of net
revenues (Gross
Revenue - Discounts)
2) INTEREST EXPENSES
 Compensation for the loan or forbearance of money, goods,
or credits
 GR: ANY amount of interest paid within the TY on
indebtedness in connection with TPs trade, business, or
profession may be deducted from Gross Y
 REQUISITES OF DEDUCTIBILITY
o TP must have a debt
o Debt must be connected to the trade/ business /
profession of TP
o Interest paid/incurred during TY
o Interest legally due
o Interest stipulated in writing
 Interest paid for tax delinquency is deductible
 Interest on unpaid taxes deductible
 NON-DEDUCTIBLE INTEREST
o Interest on indebtedness incurred to finance
petroleum projects
o Interest on indebtedness for purely personal reasons
o Interest on loans between related TP (Sec 36(b)
 Between members of a family- include only
brothers or sisters (whether full or half-
blood), spouse, ancestors, and lineal
descendants
 Between individual and corporation where
more than 50% of the outstanding C/S of
corporation is owned, directly or indirectly,
by or for the same individual
 Between 2 corporations - more than 50% of
the outstanding C/S of each is owned,
directly or indirectly, by or for the same
individual
 Between Grantor and Fiduciary of any trust
 Between Fiduciary of a trust and the
fiduciary of another trust if the same person
is a Grantor of both trusts
 Between a Fiduciary of a trust and a
Beneficiary of such trust
INCOME TAX onwards | Notes for Atty. Llamado
37
 Tax Arbitrage
o Amount of interest expense incurred by TP in TAX ARBITRAGE
connection with Trade/ Business / Practice of
Profession (TBP) shall be reduced by an amount = Net Income Before
33% of the interest income of TP subject to final tax Interest Expense 1,500,000.00
Interest Income subject to
FWT 150,000.00
Interest Expense 120,000.00

WITH the Limitation

Net income before

Interest Expense 1,500,000.00
Less: Interest Expense 120,000.00
Less: 33% x Interest
Income 49,500.00
70,500.00 70,500.00
Taxable Income 1,429,500.00
Income Tax Due 428,850.00

WITHOUT the Limitation

Net Income Before

Interest Expenses 1,500,000.00
Less: Interest Expenses 120,000.00
Less: 33% x Interest
Income 0.00
120,000.00 120,000.00
Taxable Income 1,380,000.00
Income Tax Due 414,000.00

INCOME TAX onwards | Notes for Atty. Llamado

38
 o PURPOSE – to discourage back-to back loans 3) TAXES
o LIMITATIONS- the amount of reduction in the  GENERAL RULE: all taxes, national or local, paid/
interest expense (that can be deducted) should only accrued within TY in connection with any Trade, Business,
apply to interest income earned from loan obtained or P are deductible.
giving rise to such interest expense  Incudes:
1. Import duties
Interest Expense 120,000.00 2. Business taxes
Less: Interest Income subj. to FT 120,000.00 3. License taxes
Multiplied by: Rate 0.33 4. Privilege taxes
Interest expense NOT deductible 39,600.00 39,600.00 5. DST
Deductible interest expense 80,400.00  Exceptions (Not Deductible) *memorize:
Multiplied by: Income Tax Rate 0.30 1. Philippine income tax
2. Foreign Income tax
TAX BENEFIT 24,120.00
3. Estate and donor’s taxes
4. Special assessment on Real Property
FT (Final Tax) on Interest Income 5. Final tax
(120,000 x 20%) 24,000.00
 In case of Non-Resident Alien and Foreign Corporation:
o Limitation on deduction
 Taxes claimed are attributable to income
within the Philippines
 Income tax refund or credit
o Should be reported as income if the tax was
previously deducted as an item of expense

 Income tax imposed by a foreign county

o Allowed as deduction only if: (This is only an
alternative to TP’s right to claim tax credit)
 TP is qualified to avail of tax credit; and
 TP does not signify in return his desire to
avail of tax credit

INCOME TAX onwards | Notes for Atty. Llamado

39
4) TAX CREDIT a. There should be an identifiable event justifying
 Distinguished from tax deduction the loss
5. Not be compensated by insurance or other form of
TAX DEDUCTION TAX CREDIT indemnity
Deducted from gross income to Deducted from income tax due 6. In case of casualty losses (arising from fire, storm,
arrive at taxable income shipwreck, or other casualty, or robbery, theft or
General Rule: Only foreign income taxed embezzlement), declaration of loss shall be filed within
 All taxes are deductive may be claimed as credits vs 45 days from occurrence of the casualty loss
Philippine income Tax 7. Shrinkage in value of shares or property without actual
sale, cannot be deducted as loss
 Limitation on tax credit 8. Shares becoming worthless may be deducted as loss
o For taxes paid to one country (see formula below) provided there’s proof

Net Y from FC Limit on 6) NOLCO (Net Operating Loss Carry Over)

X
Philippine
= Amount of Tax  Net Operating Loss: EXCESS of allowable deductions over
Net Y from ALL Income Tax
Credit Gross Income
Sources
 RULES:
1. Net operating Loss for a taxable ear may be carried
o Lower amount between actual tax paid to FC and
over, AS A DEDUCTION FROM GROSS INCOME,
Limit
for the next 3 CONSECUTIVE taxable years, following
Persons not entitled to tax credit:
the year of such loss
1. Resident Citizens of the Philippines
2. Any net loss incurred during TY when TP is exempt
2. Domestic corporations, which include all partnerships except
from income tax shall be allowed as deductions
General Professional Partnerships.
3. NOLCO shall be allowed as deductions only if no
* Non-resident citizens and aliens, and foreign corporations not
substantial change in ownership of business
entitled to tax credit. (Because they are taxed only within the
Philippines)  Not less than 75% in nominal value of
outstanding shares in held by or on behalf of
5) LOSSES same persons
 Conditions for deductibility:  Not less than 75% of paid-up capital of the
1. Loss sustained by TP (e.g. Loss of subsidiary is not loss corporation is held by or on behalf of the same
of parent) person
2. Actually sustained and charged off within the TY  Works for Mergers:
3. Must have been incurred in Trade/ Business/ Profession o As a consequence of the merger, you
4. Evidenced by a close and completed transaction don’t achieve the percentage of share

INCOME TAX onwards | Notes for Atty. Llamado

40
 holding. Corporation A merged with
Corporation B to create Corporation C.
If there is no substantial change in
ownership (at least 75% from Corp A)
then Corp A’s NOLCO may carry over
to surviving Corporation C.
4. An individual who claims OSD (Optional Standard
Deduction) shall not simultaneously claim NOLCO
 The 3-year period shall not be suspended if
individual is claiming OSD
o OSD is in lieu of itemized deduction.
o Why opt for OSD? Not required to show
receipts, ORs to substantiate, but taxes
are relatively higher (40%).
o Is NOLCO an itemized deduction? Yes,
that is why OSD and NOLCO cannot be
availed at the same time
5. The 3-year period shall continue to run notwithstanding
that TP liable to pay MCIT; if after the 3 year period
there is still NOLCO, another fresh 3 year period (?)
6. NOLCO: First-in, first-out basis
 Same as MCIT
 If MCIT higher than RCIT, you cannot claim
NOLCO (If paying MCIT and not RCIT). -
MCIT is based on Gross Income.
*Income Tax Holiday means not subject to income tax
 TP entitled to deduct NOLCO
1. Individuals (including estates and trusts
2. Domestic Corporations
3. Resident Foreign Corporation subject to RCIT or
preferential tax rats (e.g. Private educational
institutions, hospitals, ROHQ)
 TP not entitled to deduct NOLCO
1. OBU foreign bank and FCDU of a domestic or foreign
banking corporation (exempt from Income Tax)
2. BOI-registered entity enjoying ITH
3. PEZA-registered entity (5% preferential tax rate)
4. Entity registered under RA 7227 (Bases Conversion and
Development Act) (e.g. SBMA-registered entities)
 Foreign corporation engaged in international shopping or
air carriage business in Philippines (2.5% on gross phil.
billings)
 An Entity enjoying exemption from income tax
7) BAD DEBTS
 Bad Debt
o Loan or debt becomes worthless or uncollectible
 Conditions for Deductibility: In General
1. Existing indebtedness
2. Connected with TP’s trade, business or profession
3. Not sustained in a transaction between related TP
Memorize
4. Actually written-off in the books of TP
5. Actually ascertained to be worthless or uncollectible at
the end of taxable period
6. Case has been filed for collection; numerous demand
letters (BIR)
 TAX BENEFIT RULE
o Recovery of bad debts previously allowed as
deduction in preceding years shall be included as
part of Gross Y in the year of recovery to the extent
of the income tax benefit of said deduction
INCOME TAX onwards | Notes for Atty. Llamado
41
  Cancellation and Forgiveness of indebtedness may amount
to
1. Payment of Income
2. Gift
3. Capital Transaction
 Performance of service in exchange for
forgiveness of debt
 Creditor cancels debt without consideration
 Corporation cancels debt of stockholder.
8) DEPRECIATION
 Depreciation
o Gradual diminution in the useful value of tangible
property used in trade or business from wear and
tear and normal obsolescence
 Requisites for Deductibility:
o Reasonable
o For property used in trade, business, or practice of
profession
o Charged off during the taxable year
9) DEPLETION
 Depletion:
o Exhaustion of natural resources like mines and
oil/gas wells as a result of production from such
mines/ wells
 Only as item of deduction by mining entities.
10) CHARITABLE AND OTHER CONTRIBUTIONS
 REQUISITES FOR DEDUCTIBILITY
1. Contribution actually paid
2. Must be made within taxable year
3. Not exceed 10% of individual’s taxable income, or 5%
of corporation’s taxable income before deducting the
contributions
 Following contributions are deductible in full (no ceiling):
o Donations made to the government or any of its
political subdivisions
o Donations to certain foreign institutions or
organizations (pursuant to treaties or special laws)
o Donations to accredited NGOs
 Organized and operated EXCLUSIVELY
for charitable, research, educational,
character-building, health, social welfare;
 The level of administrative expenses shall
not exceed 30%of the amount donated
 Assets of entity, in the event of dissolution,
shall be distributed to another non-profit
domestic corporation organized for similar
purpose/s
 No benefit should inure to the benefit of any
member
 Following contributions are deductible in full (under
special laws) *
o IRRI (International Rice Research Institute)
o Department of Science and Technology
o UP
o CCP
o National Commission on Culture
o Development Academy of the Philippines (DAP)
o IBP
o National Museum, Library, and Archives
INCOME TAX onwards | Notes for Atty. Llamado
42
11) RESEARCH AND DEVELOPMENT
 GENERAL RULE: Reported as expense when incurred
 QUALIFICATION: TP given option to defer or amortize
over a period NOT MORE THAN 60 months
o The option and period shall be IRREVOCABLE
12) PENSION TRUSTS (Not included in exam)
 REQUISITES FOR DUDUCTIBILITY
a. ER must have established a pension or
retirement plan to provide for payment of
pension to EE
b. Pension plan is reasonable and actuarially sound
c. Must be funded by the ER
d. Contributions by ER must no longer be subject
of ER’s control or disposition
e. Payment not allowed as deduction
f. Amount is apportioned in equal parts over
period of 10 consecutive years beginning with
year in which transfer or payment made.
13) OSD
 Available to both individual and corporate TPs, in lieu of
itemized deductions
 For individuals, other than purely compensation earners
and NRA,
o OSD = 40% of Gross Sales or Gross Receipts
 For Domestic Corps, and RFC,
o OSD = 40% of Gross Income
 Unless TP signifies in 1st quarter of tax return an election
to avail of OSD, assumption is itemized deduction
 If not allowed to deduct, not subject to OSD; Non-Resident
Alien not engaged in trade or business not entitled to OSD
 Election shall be irrevocable for the TY for which the
return is made
o Election is signified by checking the appropriate
box in the ITR
o TP availing of OSD in the 1st quarter, shall have to
claim OSD when he/she/it files for the annual ITR
o Conversely, TP availing of itemized deductions for
1st quarter or failed to file ITR for 1st quarter shall
have to claim itemized deductions when he/ she/ it
filed the annual ITR
 A TP opting OSD shall not be required to submit with
his/her/its ITR, his/her/its financial statements
 Corporation: Income Tax due
o 18% Gross Sale
o Why 18%?
 Individual: 18% Gross Income
14) PREMIUM PAYMENTS
 Only available to individual TPs
 Not to exceed 2,400 per family or 200/mos. Paid during the
TY for health and/ or hospitalization insurance taken by TP
for himself, including his family
 Family must have Gross Y (Gross Income) of NOT MORE
THAN 250,000/ TY
 In case of married TP, only spouse claiming additional
exemption for dependents shall be entitled to this
deduction.
Gross Y= Gross Income
INCOME TAX onwards | Notes for Atty. Llamado
43
 TAXATION OF INDIVIDUALS Philippines (From time he is away until
arrival date not taxable)
CLASSIFICATIONS OF TP 2. Aliens
1. Individuals a. Resident Aliens (RA) – on taxable income within
2. Corporations the Philippines
3. GPPs b. Non-resident Aliens (NRA)
4. Estates and Trusts (For tax purposes, these are considered a. Those engaged in trade or business (ETB)
Individual Tax Payers) — on Taxable income within the Philippines
b. Not engaged in trade or business (NETB) —
CLASSIFICATIONS OF INDIVIDUAL TP on Gross income within the Philippines - at
1. Citizens a rate of 25%
a. Resident Citizens (RC) - taxable income from
within and without
b. Non-Resident Citizens (NRC) - taxable income
from within
i. Citizens establishing to the CIR the fact of
his physical presence abroad with definite
intention to reside therein
ii. Citizen of Philippines who leaves the
Philippines during TY to reside abroad,
either as immigrant or for employment on a
permanent basis (OFW)
iii. Citizen of Philippines who works and
derives income from abroad and whose
employment thereat requires TP to be
physical present abroad most of the time
during the TY
iv. Citizen previously considered as NRC and
who arrives in the Philippines at any time
during the TY to reside permanently in the
Philippines. Citizen will be treated as NRC
for TY in which he arrives in Phil wrt
sources abroad until date of his arrival in the

INCOME TAX onwards | Notes for Atty. Llamado

44
Sources of Income Individuals*
PERSONAL EXEMPTIONS
 Fixed amount allowed as deduction from gross compensation
income and/or net business and/ or professional income, from
personal or family expenses of individual TP
 Allowed personal and additional exemptions
1. RC
2. NRC with respect to income derived within
3. RA wrt income within; NRA-ETC, only personal
exemption under certain conditions
PERSONAL / ADDITIONAL EXEMPTION FOR RC, NRC,
AND RA:
 Basic: P50,000
o In case of married TP, where only 1 is working, only
the one working can avail of PE
 Additional exemption: P25,000 for each dependent, not
exceeding 4,
o Claimed by only one of the spouses in case of married
TPs. If both spouses receiving wages, H will claim AE,
unless expressly waived in favor of W.
o In case of legally separated spouse, AE claimed only by
spouse who has custody of child/ children.
4. If spouse of any of dependents dies during TY, TP may still
claim same exemptions as if spouse/ dependent died at close of
TY
5. If any of the dependents become 21 during TY, the TP may
still claim same exemption for AW as if dependent became 21 t
close of such TY
PE OF NRA- A NRA IS ENTITLES TO PE UNDER THE FF
CONDITIONS:
1. Country of which he is citizen has income tax law
2. The income tax law of his country allows PEs to
Filipino citizens deriving income in such country
but who are not residing therein
3. He files a true and accurate return of his income
from all sources within the Philippines
4. The amount of PE allowed to NRA is lesser amount
between amount by income tax law of his country
and 50,000.

EFFECT OF CHANGE IN STATUS ON EXEMPTION

1. If TP married during the TY, he/ she may claim in full PE
(Personal Exemption) as a married person
2. In case of additional dependent children during the year, TP
may claim AE in FULL for such year
3. If TP dies during said year, his estate may still claim the PE
and AE for himself and dependents, as if TP died at close of
TY

INCOME TAX onwards | Notes for Atty. Llamado

45
TAXATION OF INDIVIDUALS
TAXATION OF INDIVIDUALS
A) If Income Is Pure Compensation Income
Gross Compensation Income (within/without)
LESS: Premium Payments (Sec 34n)
Net Income from All Sources
LESS: Personal and Additional Exemptions
Taxable Compensation Income
Multiplied by: Tax Rate
Income Tax Payable
B) If Business Income and/or Income From
Profession
Gross Sales/ Receipts/ Income (within/without)
LESS: Allowable itemized deductions or OSD at 40%
OSD
Net Income from All Sources
LESS: Personal and Additional Exemptions
Taxable Compensation Income
Multiplied by: Tax Rate
Income Tax Payable
TAXATION OF INDIVIDUALS (AFTER TRAIN)
*Change in Rates (Income (Y) of 250k or less - exempt; Prior to
TRAIN, income up to 10k - 5%)
*No personal and additional exemptions
xxx *Option to avail of 8% tax on Gross Sales / Gross Receipts in excess
(xxx) of 250k (If you avail of this, you cannot avail of OSD)
xxx - Can be availed of by purely self-employed individuals (income
(xxx) from business) and/or professionals from exercise of profession;
xxx - Whose gross sales or gross receipts and Other Operating
% Income do NOT EXCEED VAT threshold (of 3 Million);
xxx - This 8% is in lieu of the graduated income tax rates and 3%
percentage tax
- In summary:
*If gross sales or gross receipts and Other Operating
Income is 3 Million and below and not VAT-
registered:
xxx 1. subject to graduated income tax rates and 3%
percentage tax; OR
(xxx) 2. 8% tax on Gross Sales / Gross Receipts in excess of
xxx 250k;
(xxx)
xxx *If gross sales or gross receipts and Other Operating
% Income above 3 Million:
xxx 1. if VAT registered, then Graduated Income Tax
Rates and 12% VAT;
3. If not VAT registered, then Graduated Income Tax
Rates and 3% percentage tax
- Should be signified on the filing of the 1st quarter ITR and/or
Percentage Tax Return
- Cannot be availed of by:
INCOME TAX onwards | Notes for Atty. Llamado
46
 1. VAT-registered TP regardless of amount of gross
sales/receipts;
2. TP subject to other percentage taxes;
3. Partners of GPP (because their distributive share is
net of costs and expenses)
- Not required to file Financial Statement (FS) to filed Income
Tax Return (ITR);
- The deduction of 250k is only available to purely self-employed
individuals and/or professionals, not mixed income earners
- Mixed Income earners = Compensation earner +
(Business and/or Profession Income) (Refers to one
person). 250k deduction for mixed income earner
should only be deducted once.
*Removal of 15% preferential tax rate of alien individuals employed
by:
1. Regional or Area Headquarters and Regional Operating
Headquarters of multinational companies
2. Offshore banking units
3. Petroleum service contractor or subcontractor
*Net Capital Gains:
Book Value = Shareholders' Equity / no. of shares outstanding
Selling Price / Share = Book Value / Share
Selling Price = Book Value
less: Cost of Investment to Seller or Sales Cost of Seller
------------------------
= Capital Gains (This is the amount taxed)
RULES ON FILING INCOME TAX RETURNS
*Separate computation of income tax for Married Individuals
*Individuals not required to file ITR:
- Individual TP solely earning compensation income regardless
of amount from one employer
- Certificate of withholding filed by the employer duly stamped
"Received" by the BIR is tantamount to substituted filing
- Individual TP earning solely income subject to final tax
- Minimum wage income earner
*Individuals earning compensation income regardless of amount from
two or more employers not entitled to substituted filing and has to file
an ITR
*Individuals engaged in business/practice of profession required to file
Quarterly ITR on May 15, August 15, and November 15 for 1st, 2nd,
3rd quarter adjusted final ITR not later than April 15 of the following
year
*Option to Pay on 2 equal installments if tax due is more than 2,000
- 1st installment - upon filing of ITR
- 2nd installment - October 15
INCOME TAX onwards | Notes for Atty. Llamado
47
INCOME TAX onwards | Notes for Atty. Llamado
48
*Legend - Red text means it is the new rate in TRAIN

INCOME TAX onwards | Notes for Atty. Llamado

49
*Legend - Red text means it is the new rate in TRAIN TAXATION OF CORPORATIONS

See tables for types of TP (above)

INCOME TAX onwards | Notes for Atty. Llamado

50
 MCIT **NOLCO deduct from Additional Deductions in RCIT
Illustration

EXCESS  Relationship of MCIT and NOLCO for exam

OF MCIT o READ REGULATION CITED.
NORMAL
YEAR INCOME MCIT
OVER EXPIRE  If you’re paying MCIT can you or can you not use
NORMAL IN NOLCO?
TAX
INCOME  REMEMBER 3 RULES for minimum corporate income
TAX tax
2011 50,000.00 65,000.00 15,000.00 2014
2012 60,000.00 90,000.00 30,000.00 2015  EXCEPTIONS to Application of MCIT
2013 100,000.00 60,000.00 1. Domestic Corporation operating as proprietary educational
institutions subject to 10% taxable income
2. Domestic corporation engaged in hospital operations which
Compute the tax payable in 2013
are non-profit subject to tax at 10% on taxable income
NCIT 100,000.00 3. Domestic corporation engaged in business as depository
LESS: Excess in 2011 15,000.00 banks under the FDCU system
LESS: Excess in 2012 30,000.00 4. Firms taxed under a special income tax regime (PEZA,
Net Amount of Taxable BCDA)
Payable 55,000.00 - outside what they are prescribed to, subject already to
normal tax (e.g. Income Tax)
Prior computations to be used - The preferential rates are applicable only to the
activities registered with PEZA or BCDA
RCIT/NCIT MCIT
Gross Sales Gross 5. RFC engaged in business as “international carrier” subject
LESS: Cost of LESS: Cost of to 2.5% of GPB
Sales Sale 6. OBUs on their income from foreign currency transaction,
GY VS GI including interest income from foreign currency loans
LESS: AD x 2% granted to residents, subject to 10% Final Tax of such
income
NI MCIT
7. ROHQ subject to 10% tax on taxable income
x 30%
RCIT/NCIT

INCOME TAX onwards | Notes for Atty. Llamado

51
 IAET
IAET
 Improperly accumulated earnings tax of 10% IAET
o Special penalty tax for improper, unreasonable
accumulation of profit/ surplus. Not in lieu of, but in Taxable Income xxx
addition to, the RCIT xxx
ADD: Income exempt from tax
 Corporations will be compelled to distribute corporate gains/ xxx
Income excluded from gross income
earnings not necessary in business in the form of taxable dividends
Income subject to final tax xxx
 The amount that may be retained by a corporation for the
"reasonable needs of the business" shall be 100% of the paid-up Amount of NOLCO deducted xxx
capital of the corporation (excluding APIC) (APIC - Additional xxx xxx
Paid-in Capital)
 So if retained earnings is more than 100% of Paid-up capital, that LESS: Dividends actually or constructively paid (xxx)
excess is subject to IAET, unless a board resolution is presented Income tax paid for the TY (xxx)
that the Retained Earnings are for corporate expansion or for Debt. Amount reserved for reasonable needs of (xxx)
 Presumptions of Improper accumulations: business
 Corporation is a holding company (xxx) (xxx)
 Corporation is an investment co. and at anytime during the xxx
TY more than 50% of its outstanding capital stock is owned, ADD: Retained earnings from prior years xxx
directly or indirectly, by one person; and LESS: Amount that may be retained (100% of
 Corporation allows accumulated of earning or profits beyond (xxx)
paid-up capital)
the reasonable needs of business
Improperly accumulated taxable income xxx
Multiplied by: IAET Rate 10%
IAET xxx

INCOME TAX onwards | Notes for Atty. Llamado

52
 TAXATION OF PARTNERSHIPS  TAX RATE: SCHEDULAR
 Taxable Estates and Trusts:
 Partnership: an agreement to contribute money, property, or o Estates of deceased persons under administration or
industry to a common fund with the intent to divide the profits settlement
among the parties. o Trusts where the income is to be accumulated or held
 General Professional Partnership: created solely for the for future distribution by the fiduciary. (Fiduciary-
purpose of exercising common profession general term applying to all persons occupying
o No subject to tax but required to file income tax return positions of peculiar confidence, such as trustees,
and financial statements executors, or administrators)
o Partner are taxed on their distributive share in the net o Trusts where the incomes may be either accumulated or
income of the GPP, whether actually or constructively distributed at the discretion of the fiduciary
received o Trusts where the income is collected by a guardian or
o If GPP avails of itemized deductions, partners in an infant to be held or distributed as the court may
determining their income subject to tax shall also claim direct
itemized deductions (Which have not been claimed by
the GPP) TIME/ PERIOD OF FILING
o If GPP avails of OSD, partners can no longer make any
deductions on its income subject to tax (save for QTR MONTHS DEADLINE
personal and additional exemptions) 1st JFM 30-May 60 days from
 Partnerships other than GPP- taxable as a corporation.
2nd AMJ 30-Aug the close of
Distributions to partners are considered dividend distributions taxable quarter
subject to 10% final tax on dividends 3rd JAS 30-Nov
------------------------------------------------------------------------------------- Annual
ESTATES AND TRUSTS Tax OND 15-Apr
Return
 Estate– refers to all property, rights and obligations of a person
which are not extinguished by his death
 Trust– agreement under which title to a property is passed to **Revenue District Office has Jurisdiction
another for conservation or investment with the income
therefrom and ultimately the corpus (principal) to be
distributed in accordance with the directions of the creator of
the trust (grantor/ trustor) as expressed in the governing
instrument

INCOME TAX onwards | Notes for Atty. Llamado

53
ILLUSTRATION:
Long Cut
GROSS 1st Quarter 2nd Quarter
QTR SALES COS AD Gross Sales 100,000.00 Gross Sales 250,000.00
1st 100,000.00 20,000.00 20,000.00
(COS) 20,000.00 (COS) 45,000.00
2nd 150,000.00 25,000.00 20,000.00 Gross Income 80,000.00 Gross Income 205,000.00
3rd 200,000.00 30,000.00 20,000.00
4th 250,000.00 35,000.00 20,000.00 (AD) 20,000.00 (AD) 40,000.00
60,000.00 165,000.00
x Tax Rate 0.30 x Tax Rate 0.30
Computation for Tax due per quarter
Tax Due 18,000.00 49,500.00
(1st QTR) 18,000.00
Short Cut
Tax Due 31,500.00
4th Quarter
Gross
Sales 250,000.00
3rd Quarter 4th Quarter
(COS) 35,000.00
(AD) 20,000.00
Gross Sales 450,000.00 Gross Sales 700,000.00
195,000.00
(COS) 75,000.00 (COS) 110,000.00
x Tax Rate 0.30
Tax Due 58,500.00 Gross Gross
Income 375,000.00 Income 590,000.00
(AD) 60,000.00 (AD) 80,000.00
315,000.00 510,000.00
x Tax Rate 0.30 x Tax Rate 0.30
94,500.00 153,000.00
(1st QTR) 18,000.00 (1st QTR) 18,000.00
(2nd QTR) 31,500.00 (2nd QTR) 31,500.00
Tax Due 45,000.00 (3rd QTR) 45,000.00
Tax Due 58,500.00

INCOME TAX onwards | Notes for Atty. Llamado

54
 Summary (By Source of Income)

Domestic Corporation Resident Foreign Corporation Non-Resident Foreign Corporation

Sources of Income All Sources within and Within the Philippines Within the Philippines
without
1. Income Tax
Tax Base Net Income Net Income Gross Income
Tax Rate 30 % 30% 30%
(effective Jan. 2009) (effective Jan. 2009) (effective Jan. 2009)
2. Interest Income from
a. Bank Deposits 20% 20% 30%
b. Foreign Currency Deposit Units (FCDU) 15% 15% exempt
3. Royalties 20% 20% 30%
4. Capital Gains from sales of shares (of a 15% of Net Capital 15% of Net Capital Gains 15% of Net Capital Gains
domestic corporation) not traded in the stock Gains
exchange
5. Intercorporate dividends from a domestic exempt exempt 30%
corporation
6. Income for a depositary bank under FCDU
from foreign currency transactions with:
a. Non-residents generally exempt generally exempt N/A

b. Residents 10% 10% N/A

Tax on Resident Foreign Corporations
6. Income of Offshore Banking Units from
foreign currency transactions with:

a. Non-residents - generally exempt -

b. Residents - 10% -
7. Regional or Area HQ - exempt -
8. Regional Operating HQ - 10% -
9. Branch Profit Remittances - 15% -
10. International Carrier on Gross Philippine - 2.5% -
Billings (GBP)

INCOME TAX onwards | Notes for Atty. Llamado

55
Tax on Non-Resident Foreign Corporations
11. Income of Non-resident
a. Owner/ Lessor/ Distributor of 25%
Cinematographic Film
b. Owner/ Lessor of vessels chartered by 4.5%
Philippine Nationals
c. Owner/ Lessor of aircraft, machineries 7.5%
and other equipment
d. from Intercorporate Division 30% / 15%
e. from Interest on foreign loans 20%

INCOME TAX onwards | Notes for Atty. Llamado

56