Income Tax

1. Definition, nature, and general principles

a. Criteria in imposing Philippine income tax

CITIZENSHIP PRINCIPLE

RESIDENT CITIZENS; taxable both for income from sources within and income without the Philippines

NON-RESIDENT CITIZENS; taxable only for income from sources within the Phil

RESIDENCE PRINCIPLE

RESIDENT ALIENS; taxable only for income from sources within the Phil, and exempt from sources outside.

SOURCE PRINCIPLE

NON-RESIDENT ALIENS; are subject to Phil income tax only on income from sources within the Phil

this is despite of the fact that he never set foot in the Phil.

b. Types of Philippine income taxes

TYPES

1. Personal income tax on individuals

2. Regular corporate income tax on corporation
3. Minimum corporate income tax on corporation
4. capital gain tax (such as: [a] sale of shares of stocks of a domestic corporation by a person who is not a
dealer in securities and ; [b] on sale of real property classified as a capital asset by a person who is not
a real estate dealer or developer)
5. tax on passive investment income(such as: interest, dividend, royalty)
6. fringe benefit tax
7. branch profit remittance tax on Phil branches of foreign corporation
8. tax on improperly accumulated earning tax of corporation
9. final withholding tax on certain income.

c. Taxable period

CALENDAR METHOD
Income Tax Return, whether for an individual or for corporation, association, or partnership, are required to
be filed on December 31st of every year

FISCAL PERIOD

Corporation, association, or partnership may with the approval of the Commissioner of IR, file their returns
and compute their income on the basis of a fiscal year

- an accounting period of 12 months ending on the last day of the month other than December

DOES NOT APPLY TO - individual taxpayer

 SHORT PERIOD

an accounting period of a taxpayer for less than 12 months as when the annual accounting period of a
subsidiary is changed to conform with the annual accounting period adopted by its foreign parent company

for easy consolidation of their audited worldwide financial statements.

THIS IS AS AN EXEMPTION TO THE RULE

- that the accounting period or taxable year consist of 12 months.

d. Kinds of taxpayers

INDIVIDUAL TAXPAYERS

CITIZENS

•RESIDENT; taxable for income from sources within and without

see mamalateo's book pg, 78. may question ako.

• NON-RESIDENT; taxable only for income from sources within the Phil, and exempt for income from sources outside
the Phil.

FOR IMMIGRANTS AND EMPLOYEES OF A FOREIGN ENTITY ON PERMANENT BASIS

- treated as non-resident citizens

FOR OVERSEAS CONTRACT WORKERS

- to be deemed as non-resident citizen, he must be physically present abroad most of the time during the calendar
year (183 days).

- however, physical presence abroad need not be continuous.

ALIENS

•RESIDENT; aliens actually present in the Phil who is not mere transient or sojourner (those who comes to the Phil
for a definite urpose, which in its nature may be promptly accomplished),

but whose purpose is of such nature that an extended stay may be necessary for its accomplishment, and to that end
the alien makes his home temporarily in the Phil

AN ALIEN LOSES HIS RESIDENT STATUS

~ if he actually leaves the Phil

• NON-RESIDENT

ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES

- if the aggregate period of his stay in the Phil is more than 180 days during any calendar year.

- same tax treatment as for income incurred by Resident Alien; such as

1. entitled to deductions and exemptions

2. graduated income tax rate of 5% to 32%
3. passive investment income 20% FIT
NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES
- if the aggregate period of his stay is less than 180 days

- the tax treatment for income from sources within shall be

1. 25% GIT for compensation income, business or professional income, capital gain, passive investment income and
others Capital Gain Tax or Stock Transaction Tax for sale or exchange of shares of stocks in a domestic corp and
from real property located in the Phil.

FF EMPLOYEES ENTITLED TO PREFERENTIAL TAX RATES

alien individual employed by:

1. Regional or area headquarters and regional

operating headquarters of multinational

companies in the Phil

2. Offshore banking units established in the

Phil

3. Foreign service contractor or sub-contractor

engaged in petroleum operations in the Phil.

RATE: 15% preferential income tax rate in their gross compensation income from sources within.
- by way of FIT.

SPECIAL CLASSES OF INDIVIDUAL EMPLOYEES

FILIPINOS EMPLOYED IN MULTINATIONAL COMPANIES ALSO ENJOYS THE PREFERENTIAL TAX RATE OF
15%
- for Filipinos employed and occupying the same position as those of aliens employed by the entities mentioned
above,

Regardless of WON
- there is an alien executive occupying the same position

HOW DOES THIS WORKS

- only when Filipino employed in RHQ or ROHQ choose to be taxed at 15% preferential tax rate on their gross
income or at the graduated tax rates.

MINIMUM WAGE EARNERS

2. Income
a. Definition and nature

INCOME TAX; defined

tax on all yearly profits arising from property, professions, trades or offices or a tax on a person's income,
emoluments, profits and the like.

NATURE

A DIRECT TAX
- on actual or presumed income (gross or net) of the taxpayer received, accrued, or realized during the taxable year.

GENERAL PRINCIPLES

GEN RULE:
there must be an actual income, gain or profit

EXE:
in sale of real property located in the Phil classified as a capital asset
- presumed gain.

TAX BASE: 6% CGT ON

• the actual consideration or

• the FMV
- whichever is higher
- whether the seller makes a profit or incurs a loss from the sale.

INCOME; defined

amount of money coming to a person or corporation within a specified time, whether for payment of services, interest
or profit from investment.

Unless otherwise specified, income means cash or its equivalent.

IT INCLUDES

1. increase in inventory at the end of the

taxable year (but increase in the value of real property is merely an increase in the capital, and not as an
income)

2. transfer of appreciated to employee for services rendered; and

3. just compensation paid by government for property acquired by expropriation.

IT DOES NOT INCLUDE

1. deposit of property that does not increase

the net worth of the taxpayer

 2. increase in net worth due to correction of

errors in book entries

3. voluntary assessment by a corporation paid

by its shares

4. security deposit paid to a lessor

5. contributions by lot owners for the memorial

park care funds, and

6. loan proceeds are not income of the

borrower

NATURE

TAXABLE INCOME; defined

the pertinent items of gross income specified in the NIRC,

LESS the deductions and/or personal and additional exemptions, if any,

- authorized for such type of income by the NIRC or other special laws

b. When income is taxable

i. Existence of income
ii. Realization and recognition of income

WHEN IS INCOME TAXABLE

1. there is income, gain or profit

2. such is received, accrued or realized during

the taxable year; and

3. not exempt from income tax

RECOGNITION OF AN INCOME

income is recognized after the ff conditions has been met:

1. The earning process is complete or virtually complete; and
2. An exchange has taken place

MEANING:
the revenue must be earned before they are received, and amount received in advance are not treated as
revenue of the period in which they are earned

METHOD OF ACCOUNTING
Cash Method

all items of gross income received during the year shall be accounted for in such taxable year; and

the only expense actually paid shall be claimed as deductions during the year (regardless of the taxable year when
the services is performed or the expenses incurred).

admits both actual and constructive receipt of cash or its equivalent

Accrual Method

a method of accounting for income in the period it is earned, regardless of whether it has been received or not.

- same as for the expenses, it shall be accounted for in the period they were incurred, and not in the period they are
paid

Installment Payment

appropriate when:
- collections of the proceeds of sale and income extends over relatively long periods of time and there is strong possibility that full collection will not be
made

in here:
if installment payment has. been made, the taxpayer shall only recognize the gross profit on sale in proportion to the cash collected during the year

IN SALE OF REAL PROPERTY does not exceeds 25% of the selling price

Deferred Payment
this includes:
1. agreement of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or substantial portion of the
selling price has been paid
2. sales in which there is an immediate transfer of title, the vendor being protected by mortgage or other liens as to deferred payments

exceeds 25% of the selling price

Percentage of Completion

is applicable in case of: building, construction, installation contracts covering a period in excess of 1 year

- whereby, gross income derived from such contract may be reported upon the basis of the percentage of completion

methods in determining the percentage of completion of a contract:

1. cost incurred under the contract as of the end of the tax year are compared with the estimated total to be performed; or

2. the work performed on the contract as of the end of the tax year is compared with the estimated work to be performed.

NOTES: IN RE: PERCENTAGE METHOD

ADDED REQUIREMENT FOR LONG-TERM CONTRACT
- a contract taking more than a year for completion

certificate of the architect or engineer showing the percentage of completion during the taxable year of the entire work performed under the contract
 c. Tests in determining whether income is earned for tax purposes
i. Realization test

TEST IN DETERMINING WHETHER INCOME

IS EARNED FOR TAX PURPOSES

REALIZATION TEST

there is no taxable income until

- there is a separation from capital of something of exchangeable value, thereby supplying the realization or
transmutation which would result in the receipt of income.

IN HERE: stock dividend is not treated as an income

- as it merely represent the equity interest in the corporation that declared it.

CLAIM OF RIGHT DOCTRINE

AKA: DOCTRINE OF OWNERSHIP, COMMAND OR CONTROL

taxable gain is conditioned upon

 the presence of a claim of right to the alleged

gain and

 the absence of a definite unconditional

obligation to return or repay that which would otherwise constitute gain.

ii. Economic benefit test, doctrine of proprietary interest

1. ECONOMIC BENEFIT TEST,

AKA: DOCTRINE OF PROPRIETARY INTEREST

any economic benefit to the employee that increases his networth, whatever may have been the mode by
which it is effected, is taxable

HENCE: IN STCOK OPTION

the difference between the FMV of the shares at the time the option is exercised and the option price
constitute additional compensation income to the employee at the time of the exercise. (note: not at the time
of the grant)

iii. Severance test

1. SEVERANCE TEST
 INCOME FROM WHATEVER SOURCE
all income not expressly excluded or exempted from the class of taxable income irrespective of the voluntary
or involuntary action of the taxpayer in producing the income, and regardless of the source of income, is
taxable.

ALL EVENTS TEST

under accrual method of accounting, an expense was deductible for the taxable year in which all the events
had occurred which determined the fact of the liability and the amount thereof could be determined with
reasonable accuracy. (when performed and not when the fact of obligation to perform is determined.

d. Tax-free exchanges
e. Situs of income taxation
3. Gross income
a. Definition

GROSS INCOME; defined

income, gain, or profit subject to tax IT INCLUDES:

FOR COMPUTING NORMAL CORPORATE INCOME TAX

1. compensation for personal and

professional services

2. businessincome
3. income derived from whatever sources,

whether legal or illegal

EXE: tax exempt by Consti, tax treaty and statutes

FOR COMPUTING MINIMUM CORPORATE INCOME TAX

all items of income and profits

EXE:
1. exemptincome
2. incomesubjecttoFIT

ALSO: RR 9-98
OTHER MISCELLANEOUS INCOME
- gain from non-recurring sale of equipments

b. Concept of income from whatever source derived

c. Gross income vs. net income vs. taxable income
Gross Income – income, gain or profit subject to tax
Net Income – gross income less statutory deductions and exemptions
Taxable Income - the pertinent items of gross income specified in the NIRC, LESS the deductions and/ or personal and additional
exemptions, if any,
- authorized for such type of income by the NIRC or other special laws

d. Classification of income subject to tax

i. Compensation income

COMPENSATION INCOME

COMPENSATION; defined
all remuneration for services performed by an employee for his employer under an emp-emp relationship, unless
specifically excluded by the code.

COMPENSATION INCOME; includes

- cash value of all remuneration paid un any medium other than cash, such as; honorarium, benefits and allowance,
personal emergency relief allowance, longevity pay, subsistence allowance, hazard pay, annuities, pension, etc.

ITEMS NOT INCLUDED renumeration paid for

1. agricultural labor paid entirely in products of the farm where the labor is preformed
2. domesticserviceinprivatehome
3. casual labor not in the course of the employer's trade or business;

and

4. services by citizen or resident of

the Phil for foreign organization or

international organization

5. also those subject to GIT or FIT

and not NIT

note: FREE BOARD AND LODGING is includible in the gross income for purposes of computing the taxable income,
when:
- ie. driver of a lawyer

• if the lawyer is a corporate lawyer, the value of the board and lodging shall be included in the gross

- as the employer has no place of business where the free board and lodging may be given

• if the lawyer is self-employed, the driver shall be taxed only as to his wage, not including the value of the free board
and lodging

PROVIDED:

1. the board and lodging is given

within the premises of the place of

business of the employer; and

2. it is given as a condition of
 employment

OTHERWISE:
- the value of the board and lodging shall be included in the gross of the employer.

ii. Fringe benefits

any good, service or other benefits furnished or granted in cash or in kind by an employer to an individual employee.

EXAMPLES OF FRINGE BENEFIT, such as, but not limited to the ff:

1. housing
2. expense account (eto yung

expenses incurred by a managerial employee which he can be reimbursed)

3. vehicle of any kind

4. household personnel, such as

maid, driver and others

5. interest on loan at less than the

market rate to the extent of the difference between the market rate and actual rate granted

6. membership fees, dues and other expenses borne by the employer for the employee in social and athletic
clubs or other similar organizations
7. expenses for foreign travels
8. holiday and vacation expenses
9. educational assistance to the

employee or his dependents

10. life or health insurance and other non-life insurance premiums or similar amounts in excess of what

the law allows

SPECIAL TREATMENT OF FRINGE BENEFIT

TAX
GEN RULE: 32% fringe benefit tax

EXE:

 25% FBT: if received by NRANET/B

 15% FBT: received by an alien individual

employed by a R/AHQ, ROHQ, Offshore banking units,mor foreign petroleum service contractor or sub-
contractor, or any of their Filipino individual employees who are employed and occupying same position as
those held by the alien employees.

WHO ARE LIABLE TO PAY FOR FBT

• THE EMPLOYER; if received by managerial and supervisory employees. but allowed to the same as business
expense

• THE EMPLOYEE; for rank-and-file employees, subject to NIT and withholding. in the sense, it is not subject to FBT.

WHEN FRINGE BENEFIT IS NOT SUBJECT TO FRINGE BENEFIT TAX

1. those received by rank-and-file employees

2. required by the nature of or necessary to the trade, business or profession of the employer
3. given for the convenience or advantage of the employer
4. authorized and exempted from income tax under the code or any special laws
5. contribution of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans (but in excess, shall be subject to FBT. ie. in excess than what is
required by SSS or GSIS)
6. de minimis benefits
7. RR no 3-98: for housing units

• situated inside or adjacent to the premises of a business or factory (deemed adjacent to the
remises of the business if; it is located within the maximum 50 meters from the perimeter of the
business enterprise.

• temporary housing unit fir 3 months or less

DE MINIMUS BENEFITS; defined limited to facilities or privileges furnished or offered by an employer to his
employee that are

1. relatively of small value; and

2. offered or furnished by the employer as a means of promoting the health, goodwill, contentment, or
efficiency of his employees.

iii. Professional income

PROFESSIONAL INCOME

fees received by a professional from the practice of his profession

PROVIDED: That there is no emp-emp relationship between him and his client.
- otherwise, it is deemed compensation income.

WHY THE NEED TO DISTINGUISH AGAINST COMPENSATION INCOME

- in compensation income, no allowable deduction is allowed.

iv. Income from business

INCOME FROM TRADE OR BUSINESS

FOR MANUFACTURING, MERCHANDISING AND MINING BUSINESS

total sale
LESS: cost of goods sold
PLUS: any income from investments and from incidental or outside operations or source
NOTE: subtraction should not be made for depreciation, depletion, selling expenses or losses, or for items not
ordinarily used in computing the cost of good sold.

TRADE OR BUSINESS; defined

continuity of commercial dealings and arrangements,

and contemplates, to the extent,

 the performance of acts or works or the exercise of some of the

functions normally incident to, and

 in progressive prosecution of, commercial gain or for the purpose and object of the business

organization.

INCLUDES INCOME FROM LEASE OF REAL PROPERTY

RC, NRC, RA, NRAET/B - graduated rate NIT

NRENET/B
- 25% final withholding tax

DC
- 35% corporate tax, or 2% minimum corporate income tax, whichever is higher

NRFC
- 35% corporate tax, subject to withholding.

v. Income from dealings in property

INCOME FROM DEALINGS IN PROPERTY

TYPES OF PROPERTY

ORDINARY ASSET

1. stocks in trade of the taxpayer or other

property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year

2. property held by the taxpayer primarily for sake to customers in the ordinary course of his trade or business
3. property used in the ordinary corse of his trade or business, of a character which is subject to allowance for
depreciation
4. real property used in trade or business of the taxpayer

ie. real estate dealer

CAPITAL ASSET
those, which is not classified as an ordinary asset
in case of deed of exchange executed by the parties voluntarily and without financial consideration, both parties
(deemed 2 transactions) shall be subject to capital gain tax.
NOTE: for capital gain tax, it is payable by the seller, ordinarily. however, if without valuable consideration, both the
transferor and transferee are liable to capital gain tax.

NOTE: ordinary asset is subject to graduated income tax rates or normal corporate income tax, and expanded
withholding tax. while capital asset, for RC, NRC, Aliens (whether a resident or not) and DC, shall be subject to final
capital gain tax based on 6% of the gsp or fmv at the time of the sale, whichever is higher.

NOTE: for FC., always subject to normal corporate income tax and expanded withholding tax.

vi. Passive investment income

PASSIVE INVESTMENT INCOME

INTEREST INCOME

interest received or credited to the account of the depositor or investor are included in their gross income

UNLESS: they are exempted from tax or subject to FIT

INTEREST; defined
amount which a depository bank may pay on savings and time deposits in accordance with the rates authorized by
the BSP

DEPOSIT SUBSTITUTES; defined

an alternative form of obtaining fund from the public, other than deposits,

through the issuance, endorsement or acceptance of debt instruments for the borrower's own account,

for the purpose of

1. relending or purchasing of

receivables and other obligations,

or

2. financing their own needs or the

need of their agent or dealers.

OBTAINING FUNDS FROM THE PUBLIC;

means:
- borrowing from 20 or more individual or corporate lenders at any one time.

EX OF INSTRUMENTS

banker's acceptance, promissory notes, repurchase agreements.

NOTE: not deemed as deposit substitute debt instrument

- debt instrument issued for inter-bank call loans with maturity of not more than 5 days to cover deficiency in reserves
against deposit substitute, including those between banks and quasi-banks.
YIELD; defined
synonymous with interest
- it is the difference between the amount the lender or investor loaned or placed and the amount he received upon
maturity of the deposit substitute or debt instrument, which in no case be lower than the rate prevailing at the time of
the issuance or renewal of said debt instrument.

OTHER TRUST ARRANGEMENT; defined

on yield or income not previously subjected to FIT, pertaining to all and other trust and similar arrangements, whether
covered by a trust indenture or agreement or by an investment or portfolio management agreement or any other
similar document involving the investment or management of funds.

NOTE: discounts are treated in the same manner as interest income

INTEREST INCOME FROM PHILIPPINE CURRENCY DEPOSIT AND DEPOSIT SUBSTITUTE

• 20% FIT of gross interest income

- includes depositor enterprise registered with PEZA, SBMA, CDA and other economic zones and free port zones and
senior citizens

• 25% GIT for NRANET/B

• when exempt from tax

if the depositor is an

1. employeetrustfundor
2. accreditedretirementplan

INTEREST INCOME ON FOREIGN CURRENCY DEPOSIT

• 7.5% FWT on gross interest income from foreign currency deposit with OBU or FCDU in the Philippines.

if from sources without

- for individual (RC); subject to graduated income tax rate
- for DC; normal corporate income tax of 35%

• 10% FWT on interest income from foreign currency transaction

INTEREST INCOME FROM TRADITIONAL LOANS BY LOCAL BANKS AND OTHER CREDITORS

subject to graduated income tax rate NIT, or normal corporate income tax.

GEN RULE: not subject ti creditable withholding tax

EXE:
1. NRANET/B-25%FIT
2. NRFC-20%FIT
3. made by a Top 10,000

Corporation

INTEREST ON FOREIGN LOANS EXTENDED BY NRFC

GEN RULE:
20% FWT, exe lower rate is imposed under tax treaty.
EXE: when not taxable, if the loan is granted by:
1. foreign govt

2. financial inst owned, controlled or enjoying refinancing from foreign govt

3. int'l or regional financing institution established by governments

INTEREST INCOME FROM LONG-TERM DEPOSITS OR INVESTMENTS OF INDIVIDUALS IS EXEMPT

EXE: should the holder of the certificate pre-terminate the deposit or investment before the 5th year, a final tax shall
be imposed on the entire income and shall be deducted and withheld by the depository bank; at the ff rate

• 4yearstolessthan5years-5% • 3 years to less than 4 years - 12% • less than 3 years - 20%

NOTE: if the depositor or investor is a corporation, interest income from long term deposit is always taxable and not
subject to preferential tax rate.

DIVIDEND INCOME

DIVIDEND; defined
a corporate profit set aside, declared and ordered by the directors to be paid to the shs on demand or at a fixed time

IT COMPRISES
any distribution whether in cash or other property in the ordinary course of business, even though extraordinary in
amount made gy DC, Joint Stock Co., Partnership, Joint Account, Association, Insurance Co., to shareholders or
members out of its earnings or profits.

CASH DIVIDEND

is disbursement to shs of the accumulated earnings, and the corporation parts irrevocably with all interest therein.

- when declared and paid to the shs, such cash becomes the absolute property of the shs and cannot be reached by
creditors of the shs.

PROPERTY DIVIDEND

is a dividend payable in property, which may be investments in shares of stock of a corporation, or real property, or
some other property owned by the corporation, paying the dividend

STOCK DIVIDEND

is a dividend payable in reserve or increase of additional stock of the corporation. it involves no disbursement, and
the corporation parts with nothing to the shs who receive, not an actual dividend but a certificate of stock.

GEN RULE:
not subject to tax, as it does not constitute income, neither it confers no different interest or right than did the old.

EXE: WHEN STOCK DIVIDEND IS TAXABLE

1. if it constitute an income; when it gives a shareholder an interest different from than which his former stockholding
represented

2. subsequent cancellation and redemption of the stock dividend; equivalent to cash dividend

ROYALTY INCOME
is a valuable property that can be developed and sold in a regular basis for consideration,

GEN RULE: an ordinary income, as it is being developed and sold on a regular basis. an active income

EXE: deemed a passive income when - profit or gain received for the use of intellectual property

RENTAL INCOME
LEASE OF PERSONAL PROPERTY

vii. Annuities, proceeds from life insurance or other types of insurance

viii. Prizes and awards
ix. Pensions, retirement benefit or separation pay
x. Income from any source
e. Exclusions and exemptions
i. Rationale
ii. Taxpayers who may avail
iii. Distinguished from deductions and tax credits

EXCLUSION FROM GROSS INCOME

the items that are not included in the determination of gross income either because

1. they represent retrun of capital or are not

an income, gain or profit

2. they are subject to another kind of internal

revenue tax; or

3. they are income, gain or profit that are

expressly exempt from income tax under the Constitution, tax treaty or general or special laws.

EXCLUSION DEDUCTION
refers to flow of wealth to the taxpayer which are refers to the amount received, which the law allows to be
not treated as part of the gross income deducted from gross income in order to arrive at net income

VS. TAX CREDIT

TAXPAYER WHO MAY AVAIL OF THE EXCLUSION

EXEMPTION UNDER THE CONSTITUTION

EXEMPT FROM TAX:
income derived by national govt or its political subdivision from the exercise of any essential govt functions or from
any public utility.

NOTE: while LGU has no power to tax the National Government, but the latter may tax the former, so long as it is not
being tax for profit arising from

• the operation of public utilities and

• the exercise of essential govt

functions.
HENCE: only limited when the profit is from the exercise of proprietary functions.

EXEMPTION UNDER THE TAX CODE

PROCEEDS OF LIFE INSURANCE

EXEMPT FROM TAX

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a
single sum or otherwise,

HOWEVER
if such amounts are held by the insurer under an agreement to pay interest thereon,

the interest payments shall be included in gross income.

NOTE: the reservation of the right to designate or substitute the beneficiary for another is not important for income tax
purposes, although it is material for estate tax purposes.

RATION WHY PROCEEDS OF LIFE INSURANCE IS EXEMPT FROM TAX

- as proceeds of life insurance is really a contract of indemnity, rather than an income to the heirs or beneficiaries.

RETURN OF PREMIUM PAID

The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or
annuity contracts,

either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.

AMOUNT RECEIVED UNDER LIFE INSURANCE, ENDOWMENT OR ANNUITY CONTRACT

EXEMPT FROM TAX

amount received, other than the amount by reason of the death of the insured and interest payment on such amount,
under life insurance, endowment or annuity contract.

EXE: when taxable

if the amount received exceeds the aggregate premium or consideration paid, whether or or paid during the taxable
year,

- the excess shall be included in the gross income

NOTE:
in case of transfer for valuable consideration by assignment or otherwise, of life insurance, endowment or annuity
contract, or any interest therein

ONLY THE ACTUAL VALUE

• of such consideration and
• the amount of the premium and

other sum subsequently paid by

the transferee
- are exempt from tax.

VALUE OF THE PROPERTY ACQUIRED BY GIFT, BEQUEST, DEVISE OR DESCENT

EXE: taxable yung income from the property.

The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such
property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided
interest, shall be included in gross income.

AMOUNTS RECEIVED THROUGH ACCIDENT OR HEALTH INSURANCE

EXEMPT FROM TAX

amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation
for personal injuries or sickness,

PLUS the amounts of any damages received,

- whether by suit or agreement, on account of such injuries or sickness.

(compensation for personal injuries and damages)

NOTE: WHEN DAMAGES AWARDED BY THE COURT IS TAXABLE

 insider profit recovered by a corporation from the insider, are taxed to the corp
 when it is in the nature of compensation (ie. accrued vacation allowance or sick leave credit)

INCOME EXEMPT UNDER TAX TREATY

Income of any kind, to the extent required by any treaty obligation binding upon the Government of the
Philippines.

NOTE: for exemption to apply, it must be categorically and unmistakable expressly, and cannot be just
implied therein.

NORE: no exemption of interest on govt securities.

RETIREMENT BENEFITS, PENSIONS, GRATUITIES, ETC.

Retirement benefits received under Republic Act No. 7641

those received by officials and employees of private firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the employer:

PROVIDED,
 1. That the retiring official or

employee has been in the service of the same employer for at least 10 Years and

2. is not less than 50 years of age at the time of his retirement:

Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or
employee only once.

EXE TO EXE: when always exempt from tax: terminal leave pay
when separation is caused by:

1. death
2. sickness

3. otherphysicaldisability
4. from causes beyond the

control of the employee or official (involuntary and the cause is not initiated by him)

REASONABLE PRIVATE BENEFIT PLAN; means

a pension, gratuity, stock bonus or profit- sharing plan maintained by an employer for the benefit of some or all of his
officials or employees,

 wherein contributions are made by such employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of the fund thus accumulated, and
 wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used
for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

LIKEWISE; the ff shall be exempt

1. SSSBenefits
2. GSISbenefits
3. Payment under US veteran

Administration

4. Retirement benefit from foreign

government agencies, and other

institutions, private or public

5. separation pay for causes beyond the

control of the employee

WINNINGS, PRIZES, AWARDS

WHN EXEMPT FROM TAX

 Prizes and awards made primarily in

recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement

 PROVIDED

1. The recipient was selected

without any action on his part to enter the contest or proceeding; and

2. Therecipientisnotrequiredto render substantial future services as a condition to receiving the prize

or award.
 Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and
international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned
by their national sports associations.

REQ FOR EXEMPTION

that it must be sanction by Philippine Olympic Committee

4. Deductions from gross income

a. Concept as return of capital
b. Itemized deductions vs. Optional Standard Deduction
c. Items not deductible

DEDUCTIONS FROM GROSS INCOME

PRELIMINARY

• deduction are construed strictly against the taxpayer claiming it.

3 TYPES OF DEDUCTION FROM GROSS INCOME

1. itemized deduction in Sec. 34 (A) to (J) and

(M) available to all kinds of taxpayer engaged in trade or business or practice of profession in the Phil

2. OSD in Sec. 34 (L) available only to individual taxpayer deriving business, professional, capital gains and
passive income not subject to FIT.
3. Special deductions in Sec. 37 and 38, both of the Tax Code, and in special laws like BOI law (EO 226)

GEN RULE

1. deduction must be paid or incurred in connection with the taxpayer's trade, business or profession
2. deduction must be supported by adequate receipts or invoices
3. additional requirement to the withholding

see: requisites for deductibility of expenses

WHEN RECEIPT/ INVOICES SHALL NOT BE REQUIRED

- in case of OSD

RETURN OF CAPITAL
(COST OF SALES OR SERVICES)
the amount representing return of capital
• should be deducted from the proceeds from
sales of assets and
• should not be subject to income tax.

SALE OF INVENTORY OF GIIDS BY MANUFACTURERS AND DEALERS OF PROPERTIES

the proceeds here consist of the ff

1. the return of the capital (not taxable); and

2. the gain from sale of goods or properties

DEDUCTIBLE
• cost of goods manufactured and sold

(for manufacturers) and

• cost of sales (for dealers)

SALE OF STOCK IN TRADE BY A REAL ESTATE DEALER AND DEALER IN SECURITIES

NOT ALLOWED TO CONSIDER

the amount representing return of capital through cost of sales

RATHER
what is deducted is

THE TOTAL COST

specifically identifiable to the real property or shares of stock sold or exchanged.

EXE: WHEN ESTIMATED COST IS PROPER

- for computation of the cost of building projects on pre-sale stage.

on the theory that income tax is a tax in gross or net income.

SALE OF SERVICES

the entire gross receipts are treated as part of the income

HENCE: NO DEDUCTION, right? - as they do not take or assume any risk of loss similar to seller of inventory of
goods.

ITEMIZED DEDUCTION

IN GENERAL

FF DEDUCTIBLE ITEMS 1. expenses

2. interest
3. taxes

4. losses
5. baddebts
6. depreciation
7. charitable and other contributions 8. contribution to pension trust

EXPENSES

REQUISITES
1. it must be ordinary and necessary
2. it must be paid or incurred during the

taxable year
3. it must be paid or incurred in carrying

on or which are directly attributable to the development, management, operation and/or conduct of the trade,
business or exercise of profession

4. it must be supported by adequate invoices or receipt

5. it is not contrary to law, public policy or morals; and

6. the tax required to be withheld on the expense paid or payable is shown to have been remitted to the BIR

2 KINDS OF DEDUCTIBLE EXPENSES

1. ORDINARY EXPENSE; a payment, which is normal in relation to the business of the taxpayer and the
surrounding circumstances
2. NECESSARY EXPENSES; expenditure appropriate or helpful in the development of the taxpayer's business
or that the same is proper for the purpose of realizing a profit or minimizing a loss

NOTE: CAPITAL EXPENDITURE IS NOT DEDUCTIBLE

ie. expenses incurred in effort to establish its goodwill.

RATION: because it is not a business expense. it is a capital expenditure. haha

SUBJECT TO TEST OF REASONABLENESS

PAID AND INCURRED DURING THE TAXABLE YEAR

HENCE: expenses are deductible in the year they were incurred and not in the year that they were billed.

KINDS OF EXPENSES

1. salaries, wages and other forms of

compensation for personal services actually rendered, including the grossed-up monetary value of the fringe
benefit subjected to fringe benefit tax which tax should have been paid

2. traveling or transportation expenses

3. cost of materials
4. rentals and/ or other payments for use

or possession of property

5. repairs and maintenance

6. expenses under lease agreement
7. entertainment/ recreation expenses
8. political campaign expenses
9. training expenses

WAGES, SALARIES AND OTHER FORMS OF COMPENSATION, INCLUDING THE GROSSED-UP MONETARY
VALUE OF THE FRINGE BENEFIT SUBJECT TO FBT WHICH SHOULD HAVE BEEN PAID
3 KINDS OF EXPENSES CONTEMPLATED HERE
1. salaries and wages
2. other forms of compensation for

personal services actually rendered;

and
3. the grossed-up monetary value of

fringe benefit subject to FBT which should have been paid

OTHER KINDS OF COMPENSATION • BONUS

To be Deductible

- the bonus must arise from the personal service that had been rendered in carrying the trade or business. otherwise,
not deemed an ordinary or necessary expense

NOTES
extra bonus must be given in gf. hence, if given during the time when the company is suffering from losses, it is
deemed not normal to the business, and consequently not treated as an ordinary or necessary expense.

GROSSED-UP MONETARY VALUE OF FRINGE BENEFIT

with respect to the benefits given to managerial employees, not pursuant to trade or business

may be claimed as a deduction, provided;

- FBT (FIT) has been paid.

HENCE: Fringe Benefit can be deducted from the gross only when

1. if given in pursuit of its trade or business; or

2. even if not, if given to managerial employees and the FBT has been paid

NOTE: BRIBES, KICKBACKS AND OTHER SIMILAR PAYMENTS

- not deductible, as they are not ordinary or necessary expense to the trade, business or profession, and being
contrary to law, public policy and morals.

AAA - BASTE / ATB

THE AWESOME NOTES

TAXATION; NIRC Page 25 of 38

TRAVELING OR TRANSPORTATION EXPENSE

DEDUCTIBLE
a reasonable allowance for travel expenses, here and abroad, while away from home

in pursuit of trade, business or profession

HOWEVER: ff Sec. 34(1)(a)(ii)
- deemed fringe benefit. so follow the rules on fringe benefit whether it is deductible or not.

RENTALS AND/OR OTHER PAYMENTS FOR USE OR POSSESSION OF PROPERTY

DEDUCTIBLE
reasonable allowance for rentals and/or the payments which are required as a condition for the continued use or
possession for the purpose of trade, business or profession,

of property to which the taxpayer

 has nit taken or is not taking

title; or

 in which he has no equity other

than that of a lessee, user or possessor

REPAIR AND MAINTENANCE & COST OF MATERIALS

FF ARE NOT DEDUCTIBLE ITEMS: when treated as a capital expenditure

1. any amount paid out for new buildings

or for permanent improvements or betterment made to increase the value of any property or estate

2. any amount expended for restoring property or in making good the exhaustion thereof, for which an
allowance is or has been made

EXE: in private educational institution, where it may opt to deduct it either as:

1. expenditures otherwise considered as capital outlays of depreciable assets, incurred during the
taxable year for the expansion of school facilities; or
2. allowance for depreciation thereof.

RATION WHY ALLOWED

to give it an opportunity to expand and/or improve its facilities.

EXPENSES UNDER LEASE AGREEMENT

EXPENSES FOR PROFESSIONALS

FF ARE DEDUCTIBLE EXPENSES

1. the cost of supplies used by him or in

the practice of his profession

2. those paid in the operation and repair

of transportation equipment used in

making professional calls
3. dues to professional societies and

subscription to professional journals

4. rents paid for office rooms
5. expense of the fuel, light, water,

telephone, etc., used in such office;

and
6. hire of office assistants
7. amount of books, furniture and

professional instruments and equipment, the useful life of which is short.

HENCE: if the useful life of books, furniture and equipment is of permanent character
- not deductible.

NOTE: premium paid for insurance in malpractice is deductible. but the tuition fees for pre-bar classes and bar
examination fees is not deductible.

ENTERTAINMENT AND RECREATION EXPENSE

CONDITION OF DEDUCTIBILITY

that it is directly connected to the development, management and operation of the TB/P of the taxpayer

or, that it is directly related or in

furtherance of his TB/P

not to exceed the ceiling as he Sec of Finance may by rules and regulation prescribe, upon the recommendation of
the Commissioner;

taking into consideration

- the nature and character of the industry TB/P of the taxpayer

provided further
- that such is not contrary to LMPP

RR NO 10-2002
LIMITATION OF THE AMOUNT TO BE DEDUCTIBLE FROM THE GROSS

 IF ENGAGED IN SELLING GOODS; amount to be deducted shall not exceed .5% of the gross receipt
 IF ENGAGED IN SELLING SERVICES; amount not more than 1% of its gross receipt.

POLITICAL CAMPAIGN EXPENSES

NOT DEDUCTIBLE
- as it is not directly attributable, to the development, management, operation and/or conduct of a trade,
business or profession

TRAINING EXPENSES
 NOTE: SUBSTANTIATION REQUIREMENT no deduction from gross income shall be allowed, unless the
taxpayer shall substantiate it with sufficient evidence of

1. the amount of the expenses being

deducted; and

2. the direct connection or relation of the

expenses being deducted to the development, management, operation and/ or conduct of the TBP

FURTHERMORE: Esso vs Commissioner CONDITION FOR EXPENSES TO BE DEDUCTIBLE (BUSINESS TEST)

1. the expense must be ordinary and

necessary

2. it must be paid and incurred within taxable

year

3. paid and incurred while carrying trade or

business

INTEREST

the amount paid by a debtor to his creditor for

the use

or forbearance of money
the amount of interest expense paid or incurred within a taxable year on indebtedness in connection with the
taxpayer's trade, business or exercise of profession,
- shall be allowed as deduction from the taxpayer's gross income

REQUISITES FOR DEDUCTIBILITY

1. there must be a valid and existing indebtedness

2. the indebtedness must be that of the taxpayer

3. the interest must be legally due and stipulated in writing

4. interest expense must be paid or incurred during the taxable year

5. the indebtedness must be connected with the taxpayer's TB/P

6. theinterestpaymentarrangementmust not be between related taxpayers as expressed in Sec. 34(B)(2)(b), in re to

Sec. 36(B)

7. the interest is not expressly disallowed by law to be deducted from the taxpayer's gross income (ie. interest on
indebtedness to finance petroleum operations
8. the amount of interest deducted from gross income does not exceed the limit set forth in the law. (33%)

NON-DEDUCTIBLE INTEREST EXPENSE

• INTEREST PAID IN ADVANCE

EXE:
if the entire amount of principal obligation has been paid on the year the debt was incurred and the interest paid
- the entire amount of interest corresponding to the principal is deductible

if only a portion of the principal has been paid

- interest expense to be deducted shall only be in an amount corresponding to the amount the principal paid.

say: 1M yung utang. 20% interest. 800k yung inadvance, yung 200k represent the interest. this was incurred on 2013.
supposing at the end of 2013, debtor was only able to pay the amount of 500k. in

here, the amount deductible for the interest expense shall be

- 100k. (50% of principal obligation x interest paid)

• NO DEDUCTION SHALL BE ALLOWED BETWEEN RELATED PARTIES

THE FF ARE RELATED PARTIES

1. members of the family, brother/sister, whether full or

half blood

2. between an individual and a

corporation, in which more than 50% in value of its OCS is owned directly or indirectly by such individual

3. between grantor and fiduciary of any trust

4. between fiduciary of a trust and beneficiary of a trust, if the same person is the grantor with respect to each
trust

• IF THE INDEBTEDNESS WAS INCURRED TO FINANCE PETROLEUM OPERATION

INTEREST SUBJECT TO SPECIAL RULES

 INTEREST PAID IN ADVANCE

 INTEREST PERIODICALLY AMORTIZED
 INTEREST EXPENSE INCURRED TO ACQUIRE PROPERTY FOR USE OF TB/P

IN HERE;
OPTIONAL TREATMENT OF INTEREST EXPENSE
the taxpayer has the option to:

1. use the interest expense as a deduction; or

2. treat it as a capital expenditure subject to allowance and depreciation

SHOULD TAXPAYER OPT TO TREAT IT AS INTEREST EXPENSE

- the full amount may be deducted in the year it was incurred
 OTHERWISE; IF HE OPT IT AS CAPITAL EXPENDITURE
- he can only deduct the periodic amortization of such expenditure

NOTE: once the taxpayer elects to treat the interest as an interest expense, by deducting it to the gross income, he
can no longer apply the same as capital expenditure.

- otherwise, would constitute double tax benefits which is not authorized under the law.

• REDUCTION OF INTEREST EXPENSE/ INTEREST ARBITRAGE

TAXES

the law provides that interest expense shall be reduced by 33% of the interest interest income.

FORMULA:
Interest Income
X 33%
LESS: interest expense
interest expense allowed as deduction

QUERY: if no interest income, is the whole amount of interest expense deductible?

all taxes, national or local, paid or accrued during the taxable year in connection with TB/P of the taxpayer are
deductible from gross income.

REQUISITES FOR DEDUCTIBILITY

1. payment must be for taxes

2. taxes are imposed by law upon

the taxpayer

3. taxes must be paid or accrued

during the taxable year in connection with the taxpayer's TB/ P; and

4. taxes are not specifically excluded bylaw from being deducted from the taxpayer's gross income

NON-DEDUCTIBLE TAXES

1. Philippine income tax

2. Foreign income tax, should the

taxpayer avail of the tax credit

benefit.

3. Estateanddonor'staxes
4. Special assessments on real

property OR taxes assed against local benefits of a kind tending to increase the value of the property
assessed.

5. Electricenergyconsumptiontax
TAX CREDIT TAX DEDUCTION
gross income
LESS: deductions
NET INCOME
gross income LESS: deductions NET INCOME
X tax rate
X tax rate INCOME TAX DUE
INCOME TAX DUE
LESS: tax credit
NET INCOME TAX PAYABLE
LIMITATIONS
FOR RC AND DC
- only when they should signify in the return their desire to avail of the
said credit
- for the amount of income taxes paid or incurred by them during the
taxable year to an foreign country
LIMITATION
FOR NRAET/B
FOR ESTATE AND PARTNERSHIP - the allowed deduction for taxes shall only be up to the extent of taxes
- to avail the tax credit benefit, the distributable share of the income of incurred in connection with their income from sources within the Phil
such partnership or trust is reported for purposes of income tax.

NOTE: failure to signify to avail the tax credit benefit, barred to claim the
same.
- but may still use the tax paid in foreign country as deduction.
reduces the taxable income or net income, which serves as the basis for
reduces the tax liability itself
the tax

TREATMENT OF SURCHARGES/ INTERESTS/ FINES FOR DELINQUENCY

TREATMENT OF SPECIAL ASSESSMENT

LIMITATIONS ON TAX CREDIT

 the amount of the credit in respect to the tax paid or incurred to any country shall not exceed

the same proportion of the tax against which such credit is taken, - which the taxpayer's taxable income from
sources within such country, under this title, bears to his entire taxable income for the same taxable year.

 the the amount of the tax credit shall not exceed

the same proportion of the tax against which such credit is taken, - which the taxpayer's taxable income from
sources without the Phil taxable under (income tax) bears to his entire taxable income for the same taxable
year.

FORMULA
GROSS INCOME (PHIL) GROSS INCOME (WORLD) X income tax due in Phil
= Tax Credit


LOSSES

GENERALLY CLASSIFIED INTO

1. those incurred in trade or business for profit

2. those incurred in any transaction entered

into for profit, although not connected with

the trade or business; and

3. casualty losses that arise from fire, storm,

 shipwreck, or other casualty, or from robbery or theft, even though not connected with the trade or business
of the taxpayer.

REQUISITES FOR DEDUCTIBILITY

1. thelossesmustbethatofthetaxpayer
2. is actually sustained and charged off

within the taxable year

3. the loss is evidenced by a closed and

completed transaction

4. is not claimed as a deduction for estate

tax purposes

5. not compensated for by insurance or

otherwise

6. in case of an individual, the loss must

be connected with his TB/P, or incurred in any transaction entered into for profit through not
connected with his TB/P

7. in case of casualty loss, it has been reported to the IR within 45 days from the date of the loss

OTHER TYPE OF LOSSES

CAPITAL LOSS
losses incurred from sales or exchange of capital assets

LIMITATION ON THE AMOUNT DEDUCTIBLE

- only to the extent of gains from sale or exchange of capital assets within the same taxable year.

SECURITIES BECOMING WORTHLESS shall be deemed as loss from sale or exchange of capital assets
(treated as capital loss)

- on the last day of such taxable year.

NOTE: the securities must be a capital asset.

- hence, if it is an ordinary asset, it is not deductible from the gross.

LOSSES ON WASH SALES OF STOCKS OR SECURITIES

see sec. 38

WAGERING LOSSES
losses from wagering transaction is allowed only to the extent of the gains from such transactions

NET OPERATING LOSS CARRY-OVER

the net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable
year,

which has not been previously offset as deduction from gross income

SHALL BE CARRIED OVER AS DEDUCTION FROM THE GROSS INCOME

- for the next 3 consecutive taxable years immediately following the year of such loss

EXE: WHEN IT CAN BE CARRIED OVER EXCEEDING 3 YEARS

- the net operating loss of mines other than oil and gas wells, incurred in any of the first 10 years of operation

- can be carried over to the first of the 5 taxable years following the loss

IT SHALL NOT BE ALLOWED AS DEDUCTION WHEN

• any net loss incurred in a taxable year

during which the taxpayer was exempt

from income tax; also

• it there is a substantial change in the

ownership of the business or enterprise

THERE IS NO SUBSTANTIAL CHANGE OF OWNERSHIP WHEN

not less than 75% in nominal value of the outstanding issued shares, if the business is in the name of the corp, is
held by or on behalf of the same person

not less than 75% of the paid-up calital of the corporation, if the business is in the name of a corporation, is held by or
on behalf of the same person.

NET OPERATING LOSS; defined

the excess of allowable deduction over gross income of the business in a taxable year

DEPRECIATION

is the gradual diminution in the useful value of tangible property

resulting from wear and tear and normal obsolescence.

ALSO APPLIES IN
amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration.

REQUISITES FOR DEDUCTIBILITY

1. the allowance for depreciation must be reasonable

2. it must be for property arising out of its use in the trade or business or out of its not being used temporarily during
the year; and

3. it must be charged off during the taxable year from the taxpayer's books of account

WHO MAY CLAIM

the person who sustains an economic loss from the decrease in property value due to depreciation.
USUALLY:
the person who owns and has a capital investment in the property

LIMITATION
depreciation cannot go beyond acquisition cost of the property and cannot be based on appraisal value

METHOD OF COMPUTING DEPRECIATION ALLOWANCE

STRAIGHT-LINE METHOD; by dividing the depreciable value over the estimated useful life

DECLINING-BALANCE METHOD

SUM-OF-THE-YEARS- DIGIT METHOD

BAD DEBTS

debts resulting from the worthlessness or uncollectibility, in whole or in part, of amount due the taxpayer by others,

arising from money lent or from uncollectible amount of income from goods sold or services rendered

REQUISITES FOR DEDUCTIBILITY

1. the debt must actually be ascertained to be worthless

2. the debt must have a value when acquired or created
3. genuine creditor-debtor relationship must exist
4. it must be charged within the taxable year
5. the debt must not be between related parties
6. it must be connected with the TB/ P of the taxpayer

FACTORS TO CONSIDER WON BAD DEBT EXISTS

1. debtor has no property nor visible income

2. debtor has been adjudged bankrupt or insolvent
3. collateral shares have become worthless
4. there are numerous debtors with small amounts of debts and further action on the account would entail
expenses exceeding the amount sought to be collected.

NOTE:
unpaid wages cannot be claimed as deduction (bad debt), unless the claiming taxpayer included the same in his
gross.

EFFECT OF RECOVERY OF BAD DEBTS

TAX BENEFIT RULE

where the creditor was allowed a deduction of bad debts, but said debts are subsequently recovered,

the previous deduction of bad debt will nit be cancelled

- but the recovered amount will be added in the computation of the gross income.

CHARITABLE AND OTHER CONTRIBUTIONS

REQUISITES FOR DEDUCTIBILITY

 1. the charitable contribution must actually be paid or made to the Phil gov't or any political subdivision thereof
exclusively for public purpose, or any of accredited domestic corporation or association specified in the Tax
Code
2. it must be made within the taxable year
3. it must not exceed 10% (individual) or 5% (corporation) of the taxpayer's taxable income before charitable
contribution (whether deductible in full or partial)
4. it must be evidenced by adequate receipts or records
5. the amount of charitable contribution of property other than money shall be based on the acquisition cost of
said property.

AMOUNT THAT MAY BE DEDUCTED

FIRST: it must not exceed 10% (individual) or 5% (corporation) of the taxpayer's taxable income before charitable
contribution (whether deductible in full or partial)

SECOND: full or partial.

WHEN PARTIAL DEDUCTION if the donee is any of the ff:

1. the govt of the Philippines or any of its agencies or any political subdivision thereof, for its use exclusively for
public purpose
2. accredited DC or Assoc organized and operated exclusively for religious, charitable, scientific, youth and
sports development, cultural or educational purpose, or for rehabilitation of veterans
3. socialwelfareinstitutions;and
4. NGO

WHEN FULL DEDUCTION if the donee is any of the ff:

1. the govt of the Philippines or any of its agencies or any political subdivision thereof, including fully- owned
government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in
education, health, youth and sports development, human settlements,

Page 32 of 38

science and culture, and in economic development according to the National Priority Plan determined by NEDA

2. foreign institutions or international organization in pursuance of or in compliance with agreements, treaties,

or commitments entered into by the govt and the foreign institutions or international organizations or in
pursuance of special laws.
3. accredited NGO

PENSION TRUST CONTRIBUTION

the reasonable amount transferred or paid by the employer into the pension trusts of the employees

REQUISITES FOR DEDUCTIBILITY

1. such amount must not have been previously allowed as deduction

2. such must be apportioned in equal

parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made

DEDUCTION UNDER SPECIAL LAWS

OPTIONAL STANDARD DEDUCTION

instead of availing of the itemized deduction,
- to claim a deduction in an amount not exceeding 40% of their gross income

REQ: taxpayer must signify in his return his intention to elect the OSD

OTHERWISE: failure to elect, deemed to have chosen itemized deduction

NOTE: once election has been made, it shall be irrevocable for the taxable year for which the return was made.

WHO ARE ENTITLED TO AVAIL OSD

1. individual; exe NRANETB (so pwede lang ay yung RC, NRC, RA)
2. corporation; exe NRFCNETB (so pwede lang DC and RFC)
3. partnership;exeGPP

RATION WHY THE EXEMPTION

- because GIT applies to them, which is not subject to deductions
- as for the GPP, exempt kasi sila sa tax. individual partners yung taxable not the GPP.

PERSONAL AND ADDITIONAL EXEMPTION MINIMUM WAGE EARNERS LAW RA 9504

NOTE: FF EXEMPTION CAN ONLY BE CLAIMED BY:

1. RC
2. NRC

3. OCWandSeamen;
4. RAand
5. NRAET/B(subjecttoqualifications)

BASIC EXEMPTION IN THE AMOUNT OF Php 50,000.oo, for

1. singleindividual
2. married individual
3. head of the family

NOTE: if married individual

- if only one spouse is deriving an income, he alone can can claim the 50k exemption. if both are earning,
both can claim 50k exemption

ADDITIONAL EXEMPTIONS FOR TAXPAYERS WITH DEPENDENTS

Php 25,000.oo each

REQ:

1. only for married individual (valid)

2. allowed only foe each dependent not

exceeding 4 (so maximum ay 100k)

3. can be claimed only by one spouse, and if legally separated, can be claimed only by the spouse who has
custody over the

children
WHO IS A DEPENDENT
is a legitimate, illegitimate or legally adopted child

1. chiefly dependent upon and living with the taxpayer

2. such dependent is not more than 21 yrs of age, or regardless of age, is incapable of self-support because of
mental or physical defect

3. unmarried; and
4. not gainfully employed

BASED FROM THE FOREGOING, A FAMILY OF SIX (husband, wife and 4 dependents)
- can claim up to 200k as personal exemption

STATUS AT THE END OF THE YEAR RULE

if the change of the status will not benefit a taxpayer

- such change shall be treated as if it occurred at the close of the taxable year

HENCE: change of status of the taxpayer shall be effective only if such change will benefit the taxpayer.

ie. should the taxpayer have add a dependent in the middle of the taxable year
- may claim the corresponding exemption may be claimed in full for such taxable year

should one of the dependent die during the taxable year

- the taxpayer may still claim 25k at the close of the taxable year.

EXEMPTION CLAIMED BY NRA

REQ:
1. he must be a NRAET/B/exercise of

profession in the Phil

2. should file a true and accurate return of his

total income received by him from all

sources within the Phil

3. extent of personal exemption is equal to the

exemption allowed in the income tax law in the country of which they are subject or citizen,

• to the citizen of the Phil not residing in such country

• not exceeding 25k

NOTE: minimum wage earners are exempt from tax.

ITEMS NOT DEDUCTIBLE

GEN RULE:

not deductible in the sense that the ff items are not related to the TB/P of the taxpayer
FF ITEMS ARE NOT DEDUCTIBLE

 personal, living and family expense

 any amount paid out of new buildings or for permanent improvements, or betterment made to increase the
value of the property or estate (Capital Expenditures)

EXE: in intangible drilling and development cost incurred in petroleum operations, which are deductible.

 any amount expended in restoring property or in making good the exhaustion thereof, for which allowance is
or has been made (Major Repairs)
 premium paid on any life insurance policy covering life of any officer or employee, or of any person
financially interested in any trade or business carried on by the taxpayer, individual or corporation, when the
taxpayer is directly or indirectly a beneficiary under such policy, or when such is not normal, usual or
customary.

NOTE: this only refers to the premium paid for the life insurance of a rank- and-file employee

AS: if given to managerial and supervisory employees, such shall constitute as a fringe benefit subject to
FBT/FIT

- and the same can be deducted only after FBT/FIT has been paid.

NOTE: may case, yung ginawang beneficiary ay yung heirs nung govt employee not connected with the
company

- considered not usual or customary. wala kasing insurable interest, at yung payment ng premium would
constitute as a bribe,

 loss from sales or exchanges of property between related parties

OTHER NON-DEDUCTIBILE ITEMS

1. interest expense, bad debts, and losses from sakes of property between related parties
2. non-deductible interest, taxes and losses
3. losses from wash sales of stock or securities

5. Income tax on individuals

a. Resident citizens, non-resident citizens, and resident aliens
i. Inclusions and exclusions for taxation on compensation income
ii. Taxation of business income/income from practice of profession
iii. Taxation of passive income
iv. Taxation of capital gains v. Capital asset vs. ordinary asset
b. Income tax on non-resident aliens engaged in trade or business
c. Income tax on non-resident aliens not engaged in trade or business
d. Individual taxpayers exempt from income tax
i. Senior citizens
ii. Minimum wage earners
iii. Exemptions granted under international agreements