Taxation Reviewer
Basic Principles of Taxation
Taxation
It is an inherent power of the sovereign
exercised through legislature to impose burdens
upon subjects and objects within its jurisdiction for
revenue in order to support their existence and carry
out their legitimate objectives.
It is the power by which the sovereign
raises revenue to defray the expenses of the
government. It is a way of apportioning the cost of
government among those who in some measure are
privileged to enjoy its benefit and must bear its
burden.
Purposes of Taxation
1. Revenue-raising
2. Non-revenue raising
Revenue raising
The primary purpose of taxation is to
provide funds or property with which to promote
the general welfare and protection of its citizens.
Non-revenue/Special/Regulatory
Taxation is often employed as a device for
regulation by means of which certain effects or
conditions envisioned by governments may be
achieved. Thus, taxation can:
1. Strengthen anemic enterprises or provide
incentive to greater production through
grant of tax exemptions or the creation of
conditions conducive to their growth.
2. Protect local industries against foreign
competition or decreased to encourage
foreign trade.
3. On imported goods, as a bargaining tool by
setting tariff rates first at a relatively high
level before trade negotiations are entered
into with another country.
4. Halt inflation in periods of prosperity to
curb spending power; ward off depression
in periods of slump to expand business.
5. Reduce inequalities in wealth and incomes,
as for instance, the estate, donor's and
income taxes, their payers being the
recipients of unearned wealth or mostly in
the higher income brackets.
6. Taxes may be levied to promote science and
invention (see RA. No. 5448) or to finance
educational activities (see RA. No. 5447) or
to improve the efficiency of local police
forces in the maintenance of peace and
order through grant of subsidy (see RA.No.
6141).
7. As an implement of the police power to
promote the general welfare.
General secondary purpose or non-revenue
1. Sumptuary or regulatory purpose to
implement police power objectives for the
protection of health, safety, and morals;
2. Compensatory purpose to promote the
general welfare through economic
development or to implement the social
justice objectives of the government; and
3. To implement the power of eminent
domain.
Nature of the Power of Taxation
a. inherent in sovereignty
b. essentially a legislative function
c. subject to constitutional and inherent
limitations
1. Inherent in sovereignty
Power to tax is essential to the
existence of every government. It exists
apart from constitutions and without being
expressly conferred by the people. Hence, it
can be exercised by the government even if
the Constitution is entirely silent on the
subject.
Without taxes the state’s very
existence would be imperiled for lack of
funds to perform the essential obligations
of the state.
2. Essentially a legislative function
The power to tax is peculiarly and
exclusively legislative and cannot be
exercised by the executive or judicial branch
of the government. Hence, only Congress,
our national legislative body, can impose
taxes.
Taxation is a legislative power
because it involves the promulgation of
rules. Taxation is a set of rules, who pays
the tax, how much tax is to be paid, to
whom it should be paid and when the tax
should be paid.
3. Subject to constitutional and inherent
limitations
These limitations are those
provided in the fundamental law or implied
therefrom, while the rest spring from the
nature of the taxing power itself although
they may or may not be provided in the
Constitution
Characteristics of Taxation
1. Taxation as an attribute of sovereignty
2. Taxation is legislative in character
 3. Taxation is generally imprescriptible (basis: even if a tax should destroy a business, such fact
lifeblood theory) alone could not invalidate the tax.
4. Taxation does not have any retroactive
effect (tax laws are prospective in nature) The power of taxation is sometimes called
5. Taxation is subservient to the non- the “power to destroy.” Therefore, it should be
impairment clause exercised with caution to minimize the injury to the
6. Taxation may be exercised jointly with proprietary rights of a taxpayer. It must be exercise
police power fairly, equally and uniformly, lest the tax collector kill
7. The power is unlimited the “hen that lays the golden egg.” In order to
maintain the general public’s trust and confidence in
Scope of Legislative Power to Tax the government, this power must be used justly and
Subject to the constitutional and inherent limitation, not treacherously.
the legislature has the discretion to determine the
incidence of the power to tax: Taxation vs. Police Power
Taxation Police power
1. The subjects or objects to be taxes Purpose
Refer to the coverage and the kind Taxation is for revenue Police power is for
or nature of the tax. They may be persons, general welfare
whether natural or juridical; property, Amount
whether real or personal, tangible or The amount of tax The license fee should
intangible; businesses, transactions, rights, collected is unlimited not exceed cost of
or privileges. A state is free to select the regulation
subject of taxation and it has been Compensation
repeatedly held that inequalities which The enjoyment of public The feeling of having
result from a singling out of one particular services done something good
class for taxation or exemption infringe no for society in general
constitutional limitation so long as such Property taken
exemption is reasonable and not arbitrary Generally money Any property, other
than money, which is
2. The purpose or object of the tax so long as the source of the danger
it is a public purpose to health, safety or
morals
3. The amount or rate of the tax. What is done with property taken
As a general rule, the legislature
Taxation is constructive Police power is
may levy a tax of any amount or rate it sees
because the money destructive. The
fit.
collected is spent for property taken is usually
infrastructure or destroyed
4. The manner, means, and agencies of
providing public services
collection of the tax.
Relation to non-impairment clause
These refer to the administration
Taxation is inferior to Police power is superior
of the tax or the implementation of tax
non-impairment clause to non-impairment
laws. The legislature possesses the sole
clause
power to prescribe the mode or method by
Scope
which the tax shall be collected, and to
designate the officers through whom its will It interferes with It regulates both
shall be enforced as well as the remedies property rights property and liberty
which the State or the taxpayer may avail in rights
connection therewith. Surrender
Taxation may be Police power could not
The Power to Tax involves the Power to Destroy bargained away through bargained away
This principle is pertinent only when there is a contract such that if the
no power to tax a particular subject and has no government issues a tax-
relation to a case where such right to tax exists. exempt bond, it could
not withdraw the
According to Chief Justice John Marshall, exemption because it
"the power to tax involves the power to destroy." To would violate the non-
say, however, that the power to tax is the power to impairment clause
destroy is to describe not the purposes for which the
taxing power may be used but the extent to which it
may be employed in order to raise revenues. Thus,
Taxation vs. Eminent Domain pay its expenses; and that for those means it has the
Taxation Eminent Domain right to compel all citizens and property within its
Who could exercise limits to contribute.
Taxation could be Eminent domain may be
exercise by legislative exercised by private Jurisdiction over Subject and Object
department and in entities The jurisdiction referred to is basically
certain cases the territorial in character. Unless the state could
President and local exercise jurisdiction over persons and property, then
government it could not enforce and implement tax measures.
Property taken
Generally money It is property usually land Principles of Sound Tax System
1. Fiscal adequacy – the revenues generated
Court intervention by taxation should be sufficient to meet the
No court intervention is Court intervention is needs of government
required in taxation usually required in 2. Administrative feasibility – tax laws should
taxation be easily implemented in order to assure
the smooth flow into the treasury of the
Theory and Basis of Taxation fiscally adequate amounts.
1. Lifeblood theory 3. Theoretical justice – the tax should be
2. Benefits-protection theory (symbiotic collected on the basis of the ability to pay
relationship) through a progressive system of taxation.
3. Necessity Theory
Q. Will the violation of the principles of sound tax
Lifeblood Theory system render the tax invalid?
Taxes are the lifeblood of the government No. However, if the theoretical justice is
and should be collected without hindrance. violated it will invalidate the tax.
The existence of the government is a
necessity; it cannot exist nor endure without the Three stages or aspects of taxation
means to pay its expenses; and for those means, the 1. Levy – the enactment of a law by Congress
government has the right to compel all its citizens imposing a tax
and property within its limits to contribute in the 2. Assessment and collection – the act of
form of taxes. administration and implementation of the
tax law by the executive department
Concepts that flow from lifeblood theory through the administrative agencies
1. Collection of taxes may not be enjoined by 3. Payment – the act of compliance by the
injunction taxpayer, including such options, schemes
2. Taxes could not be the subject of or remedies as may be legally available to
compensation and set-off him
3. A valid tax may result in destruction of the
taxpayer’s property Scope and Limitations of Taxation
4. Taxation is an unlimited and plenary power
Scope of the Power of Taxation
Benefits-Protection Theory As a general rule, the power to tax is an
Taxes are what we pay for civilized society. incident of sovereignty and is unlimited in its range,
Without taxes, the government would be paralyzed acknowledging in its very nature no limits, so that
for lack of the motive power to activate and operate security against its abuse is to be found only in the
it. Hence, despite the natural reluctance to responsibility of the legislature which imposes the
surrender part of their hard-earned income to the tax in the constituency who are to pay.
government, every person who is able to must Inherent Limitations on the Power of Taxation
contribute his share in the running of the These are part and parcel of taxation and
government. The government, for its part, is originate from the very nature of taxation
expected to respond in the form of tangible and 1. The tax imposed should be for public
intangible benefits intended to improve the lives of purpose
the people and enhance their moral and material 2. The power to tax is limited to the territorial
values. jurisdiction of the taxing government
3. The power to tax is inherently legislative
NECESSITY THEORY 4. There should be no improper delegation of
The power of taxation proceeds upon the taxing power
theory that the existence of government is a 5. Exemption of government entities is
necessity; that is cannot continue without means to recognized
 6. Observance of international comity such Excise Tax
that property of foreign sovereign are not Income Source of income,
subject to taxation Nationality or
Residence of taxpayer
Public purpose Donor’s Tax Location of property,
The proceeds of the tax must be used (a) for Nationality or
the support of the State or (b) for some recognized Residence of taxpayer
objects of government or directly to promote the Estate Location of property,
welfare of the community. Nationality or
Residence of taxpayer
Test in determining public purpose VAT Where transaction is made
1. Duty Test Others
Whether the thing to be furthered Poll, capitation or Residence of taxpayer
by the appropriation of public revenue is Community Tax
something which is the duty of the State as
a government to provide. Inherently Legislative
The legislature wields the power
2. Promotion of General Welfare Test 1. To define what tax shall be imposed
Whether the proceeds of the tax (nature/kind)
will directly promote the welfare of the 2. Why it should be imposed (object/purpose)
community in equal measure 3. How much tax shall be imposed
(amount/rate)
3. Character of the Direct Object of the 4. Against whom (or what) it shall be imposed
Expenditure (coverage/subject)
It is the essential character of the 5. And where it shall be imposed (situs/place)
direct object of the expenditure which must
determine its validity as justifying a tax and No Improper Delegation
not the magnitude of the interests to be General Rule: the power to tax is purely
affected nor the degree to which the legislative, and which the central legislative body
general advantage of the community, and cannot delegate either to the executive or judicial
thus the public welfare, may be ultimately department of the government without infringing
benefited by their promotion. Incidental upon the theory of separation of powers.
advantage to the public or to the State,
which results from the promotion of private
enterprises or business, does not justify Exception: Delegation of power to tax is allowed in
their aid with public money. the following cases:
1. To local governments in respect of
Territorial matters of local concern to be
The power of taxation could be exercised exercised by the local legislative bodies
only within the territorial boundaries of the taxing thereof
authority. This is in consonance with the precept
that protection could only be given within the 2. When allowed by the Constitution.
territorial boundaries of the taxing authority. The Congress may, by law,
authorize the President to fix within
Situs of Taxation (Place of Taxation) specified limits, and subject to such
Kinds of Tax Situs limitations and restrictions as it may
Property Tax impose, tariff rates, import and export
Real property Where it is located quotas, tonnage and wharfage dues,
Tangible Where the property is located and other duties and imposts within
personal although the owner resides in the framework of the national
property another jurisdiction development program of the
Intangible Gen. Rule: Domicile of the owner Government.
personal Delegation of legislative powers to
property Exceptions: the President is permitted in Sec. 23(2)
1. When the property has and 28(2) of Article VI of the
acquired a business situs Constitution
in another jurisdiction; or
2. When the law provides 3. When the delegation relates merely to
for the situs of the administrative implementation that
subject of tax may call for some degree of
 discretionary powers under a set of
sufficient standards expressed by law
or implied from the policy and purpose
of the Act
4. Delegation to the people at large
The power to tax being an inherent
attribute of sovereignty could be
exercised directly through people
initiative and referendum.
Delegation to the President
a. Delegation of tariff powers by Congress
b. Delegation of emergency powers
c. Delegation to enter into executive
agreements and to ratify treaties which
may contain tax exemptions
Exemption of Government Entities
If the taxing authority is the National government
General Rule: Agencies and
instrumentalities of the government are exempt
from tax
Exception: When it chooses to tax itself
If the taxing authority is the local government unit
RA 7160 expressly prohibits the LGUs from
levying tax on the National Government, its agencies
and instrumentalities and other LGUs
International Comity
Comity is the respect accorded by nations
to each other because they are sovereign equals.
The power of taxation is an act of
sovereignty. Out of respect for equal sovereign
nations, the Philippines does not tax the incomes of
foreign government earned in the Philippines.
The rule of international law that a foreign
government may not be sued without its consent so
that it is useless to impose a tax which could not be
collected.
Constitutional Limitations
1. Provisions directly affecting taxation
2. Provisions indirectly affecting taxation
Provisions Directly Affecting Taxation
1. Prohibition against imprisonment for non-
payment of poll tax
Art. III, Sec, 20: No person shall be
imprisoned for debt or non-payment of a
poll tax.
2. Uniformity and equality of taxation
Taxes
It is an enforced proportional contributions
from persons and property levied by the law-making
body of the State by virtue of its sovereignty for the
support of the government and all public needs.
Q. Can a person not pay taxes on the ground that
payment of taxes will render him impoverished or
poor?
No. The obligation to pay tax is involuntary
and mandatory.
Q. Can a person resist from payment of taxes?
No, provided that the tax is for public
purpose.
Attributes or Characteristics of Taxes
1. It is a forced charge, imposition or
contribution.
2. It is assessed in accordance with some
reasonable rule of apportionment which
means that conformably with the
constitutional mandate for Congress to
evolve a progressive tax system, taxes must
be based on taxpayer’s ability to pay.
3. It is a pecuniary burden payable in money
4. It is levied on persons, property, rights, acts,
privileges or transactions
5. It is imposed by the State on persons,
property or excises within its jurisdiction
6. It is levied by the legislative body of the
State
7. It is levied for a public purpose
8. It is personal to the taxpayer
Requisites of valid tax
1. It should be within the jurisdiction
2. It is levied for public purpose
3. It is uniform and equitable
4. It does not violate the inherent and
constitutional limitation
(NOTE: General Principles NOT Finished)
 The National Internal Revenue Code of the Philippines
(RA No. 8424, as amended)
Included with TRAIN
Section 1
Be aware of the taxable year
2017 and prior – NIRC will apply
2018 onwards – TRAIN will apply
Section 2 – Powers and Duties of the BIR
The 4 powers and duties of the BIR:
1. Assessment and collection of all national
internal revenue taxes, fees, and charges
2. Enforcement of all forfeitures, penalties,
and fines connected therewith
3. Execution of judgments in all cases decided
in its favor by the Court of Tax Appeals
(CTA) and the ordinary courts
4. Give effect to and administer the
supervisory and police powers conferred to
it by the Code or other laws
The Bureau of Internal Revenue is under the
direct control and supervision of the Secretary of
Finance
Section 3. Chief Officials of the Bureau of Internal
Revenue.
1. Commissioner of Internal Revenue – chief
of the BIR, and
2. 4 assistant chiefs to be known as Deputy
Commissioners
However, in real life there are 6 deputy
commissioners with the following functions:
a. Operation
b. Legal
c. Resource Management
d. Information
e. Prosecution
f. Special Concerns
Commissioner of Internal Revenue – Cesar Dulay
Powers of the Commissioner
Section 4.
1st par: To interpret tax laws (Sec. 4, par. 1)
The power to interpret the
provisions of the NIRC and other tax law
shall be under the exclusive and original
jurisdiction of the Commissioner, subject to
the review of the Sec. of Finance
2nd par: To decide
a. Disputed assessment,
b. Refunds of internal revenue taxes, fees
or other charges,
c. Penalties imposed in relation thereto,
or
d. Other matters arising in the NIRC, or
portions thereof
Is vested with the Commissioner, subject to the
appellate jurisdiction of the Court of Tax Appeals
(CTA) – expanded jurisdiction of CTA
Commissioner’s exclusive and original jurisdiction
to interpret the provisions of the Tax Code and to
issue revenue issuance
The CIR shall have the exclusive and original
jurisdicition to recommend to the Sec. of Finance the
promulgation of revenue regulations, issuance of BIR
rulings and other revenue issuances:
Revenue regulation
Formal interpretation of the Tax Code
These are issuances signed by the Secretary
of Finance, upon recommendation of the
Commissioner of Internal Revenue, that specify,
prescribe or define rules and regulations for the
effective enforcement of the provisions of the
National Internal Revenue Code (NIRC) and related
statutes.
Revenue Memorandum Orders (RMOs)
These are issuances that provide directives
or instructions; prescribe guidelines; and outline
processes, operations, activities, workflows,
methods and procedures necessary in the
implementation of stated policies, goals, objectives,
plans and programs of the Bureau in all areas of
operations, except auditing.
Revenue Memorandum Rulings (RMRs)
These are rulings, opinions and
interpretations of the Commissioner of Internal
Revenue with respect to the provisions of the Tax
Code and other tax laws, as applied to a specific set
of facts, with or without established precedents, and
which the Commissioner may issue from time to
time for the purpose of providing taxpayers guidance
on the tax consequences in specific situations. BIR
Rulings, therefore, cannot contravene duly issued
RMRs; otherwise, the Rulings are null and void ab
initio.
Revenue Memorandum Circular (RMCs)
These are issuances that publish pertinent
and applicable portions, as well as amplifications, of
laws, rules, regulations and precedents issued by the
BIR and other agencies/offices.
BIR Rulings
These are official position of the CIR to
queries raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax
laws.
They are administrative interpretation of
the tax laws as applied and implemented by the BIR.
These can be relied upon by the taxpayer unless
otherwise determined by Court or modified or
revoked by a subsequent ruling or opinions.
Q. Who signs the BIR ruling?
The law division of the BIR is the one who
issue BIR ruling
Q. If the BIR ruling is adverse against the taxpayer
where shall he appeal?
When the taxpayer received an adverse
ruling. He should appeal to Sec. of Finance then CTA.
5 cases under the exclusive appellate jurisdiction of
the CTA
1. Decision of CIR
2. Decision of CBAA
3. Decision of Sec. of Finance regarding
custom cases
4. Decision of Sec. of DTI
5. aaa
Section 5. Power of the Commissioner to Obtain
Information, and to Summon, Examine and Take
Testimony of Persons
Q. Can BIR access information from 3rd party without
consent of the taxpayer?
Yes.
Q. But how about the Data Privacy Act?
Sec. 19 Non-applicability – The immediately
preceding sections are not applicable if the
processed personal information are used only for the
needs of scientific and statistical research and, on
the basis of such, no activities are carried out and no
decisions are taken regarding the data subject:
Provided, That the personal information shall be held
under strict confidentiality and shall be used only for
the declared purpose. Likewise, the immediately
preceding sections are not applicable to processing
of personal information gathered for the purpose
of investigations in relation to any criminal,
administrative or tax liabilities of a data subject.
The lack of consent of taxpayer does not
imply that the data gathered is erroneous or false
(CIR vs. Raul Gonzales)
Section 6. Power of the commissioner to Make
Assessments and Prescribe Additional
Requirements for Tax Administration and
Enforcement
A. Examination of Returns and Determination
of Tax Due
The Commissioner or his duly authorized
representative may authorize
1. the examination of any taxpayer and
2. the assessment of the correct amount
of tax
The examination may be done
notwithstanding any law requiring prior
authorization of any government agency or
instrumentality
Period to amend or change:
The return, statement or
declaration filed to any office cannot be
withdrawn.
However, the return, statement or
declaration may be modified, changed or
amended within 3 years from the date of
the filing
But the return, statement or
declaration filed cannot be amended if
there is a notice of audit or investigation of
such RSD to the taxpayer.
B. Failure to Submit Required Returns,
Statements, Reports and Other Documents
Q.When does CIR can assess the proper tax
on the best evidence obtainable?
1. When a report required for assessment
is not forthcoming within the time fixed
by law or rules and regulation
2. When there is a reason to believe that
any such report is false, incomplete or
erroneous
Best Evidence Obtainable – it refers to
book, record or information obtain from
any person other than person subject of
investigation or any officer or GOCCs
C. Authority to Conduct Inventory-Taking,
Surveillance and to Prescribe Presumptive
Gross Sales and Receipts
D. Authority to Terminate Taxable Period
The Commissioner can terminate the
taxable period when:
1. Taxpayer is retiring from business
subject to tax
2. Taxpayer is intending to leave the
Philippines
3. Taxpayer is intending to remove
his property therefrom or to hide
or conceal his property, or
 4. Taxpayer is performing any act
tending to obstruct the
proceedings for the collection of
the tax for the past or current
quarter or year or to render the
same totally or partly ineffective
The Commissioner shall declared
the tax period of such taxpayer
terminated at any time and shall send
the taxpayer of notice of such decision,
together with the request for
immediate payment of the tax for the
period.
E. *Authority of the Commissioner to
Prescribe Real Property Values
The Commissioner is authorized to
divide the Philippines into different zone or
areas and xxx determine the fair market
value of real properties located in each
zone or area. xxx
For purposes of computing any
internal revenue tax, the value of the
property shall be, whichever is higher of:
1. The fair market value as determined by
the Commissioner; or
2. The fair market value as shown in the
schedule of values of the Provincial and
City Assessors
F. Authority of the Commisisoner to Inquire
into Bank Deposit Accounts and Other
Related Information Held by Financial
Institutions
Q. When can CIR inquired from bank
deposits?
The Commissioner is authorized to
inquire into the bank deposits of and other
related information held by financial
institutes of:
1. A decedent to determine his gross
estate; and
2. Any taxpayer who has filed an
application for compromise of his
tax liability by reason of financial
incapacity to pay his tax liability
3. A specific taxpayer/s subject of a
request for the supply of tax
information from a foreign
authority pursuant to an
international convention or
agreement on tax matters to which
the Philippines is a signatory or
party of
Q. When can taxpayers apply for the
compromise?
1. doubtful validity of his tax –
taxpayer can pay a minimum 40%
of his tax
2. financial incapacity to pay tax
liability
G. Authority to Accredit and Register Tax
Agents
H. Authority of the Commissioner to
Prescribe Additional Procedural or
Documentary Requirements
Section 7. Authority of the Commissioner to
Delegate Power
General Rule: The Commissioner may delegate the
power vested in him under the NIRC to any or such
subordinate officials with the rank equivalent to a
division chief or higher
Exception: The Commissioner cannot delegate the
following power:
1. The power to recommend the promulgation
of rules and regulations by the Secretary of
Finance
2. The power to issue rulings of first
impression or to reverse, revoke or modify
any existing ruling of the BIR
3. The power to compromise or abate any tax
liability
4. The power to assign or to reassign internal
revenue officers to establishment where
articles subject to excise tax are produced
or kept
Ruling of first impression – official ruling of CIR on a
query raised by a taxpayer
Section 13. Authority of a Revenue Officer
Letter of Authority
The issuance of a letter of authority by the
Revenue Regional Director authorized a Revenue
Officer assigned to perform assessment functions to:
1. Examine taxpayers within the jurisdiction of
the district in order to collect correct
amount of tax, or
2. To recommend the assessment of any
deficiency tax due in the same manner
The assessment is void when the Revenue Officer
had no letter of authority
Section 21. Sources of Revenue
The following taxes, fees and charges are
deemed to be national internal revenue:
1. Income tax;
2. Estate and donor’s taxes;
3. Value-added tax;
4. Other percentage taxes;
5. Excise taxes;
6. Documentary stamp taxes; and
7. Such other taxes as are or hereafter may be
imposed and collected by the BIR
 Title II
Tax on Income
Chapter 1 Definitions
Sec. 22 Definitions
"Corporation" shall include partnerships, no
matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not
include general professional partnerships and a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
Government.
"General professional partnerships" are
partnerships formed by persons for the sole purpose
of exercising their common profession, no part of
the income of which is derived from engaging in any
trade or business. (B)
Memorize!!!
"Nonresident citizen" means:
1. A citizen of the Philippines who establishes
to the satisfaction of the Commissioner the
fact of his physical presence abroad with a
definite intention to reside therein.
2. A citizen of the Philippines who leaves the
Philippines during the taxable year to reside
abroad, either as an immigrant or for
employment on a permanent basis.
3. A citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the time
during the taxable year.
4. A citizen who has been previously
considered as nonresident citizen and who
arrives in the Philippines at any time during
the taxable year to reside permanently in
the Philippines shall likewise be treated as a
nonresident citizen for the taxable year in
which he arrives in the Philippines with
respect to his income derived from sources
abroad until the date of his arrival in the
Philippines.
5. The taxpayer shall submit proof to the
Commissioner to show his intention of
leaving the Philippines to reside
permanently abroad or to return to and
reside in the Philippines as the case may be
for purpose of this Section. (E)
"Resident alien" means an individual whose
residence is within the Philippines and who is not a
citizen thereof. (F)
"Nonresident alien" means an individual
whose residence is not within the Philippines and
who is not a citizen thereof. (G)
"Resident foreign corporation" applies to a
foreign corporation engaged in trade or business
within the Philippines (H)
“Nonresident foreign corporation' applies
to a foreign corporation not engaged in trade or
business within the Philippines. (I)
“Taxable year" means the calendar year, or
the fiscal year ending during such calendar year,
upon the basis of which the net income is computed
under this Title. 'Taxable year' includes, in the case
of a return made for a fractional part of a year under
the provisions of this Title or under rules and
regulations prescribed by the Secretary of Finance,
upon recommendation of the commissioner, the
period for which such return is made. (P)
"Dealer in securities" means a merchant of
stocks or securities, whether an individual,
partnership or corporation, with an established place
of business, regularly engaged in the purchase of
securities and the resale thereof to customers; that
is, one who, as a merchant, buys securities and re-
sells them to customers with a view to the gains and
profits that may be derived therefrom.
"Ordinary income" includes any gain from
the sale or exchange of property which is not a
capital asset or property described in Section 39(A)
(1). Any gain from the sale or exchange of property
which is treated or considered, under other
provisions of this Title, as 'ordinary income' shall be
treated as gain from the sale or exchange of
property which is not a capital asset as defined in
Section 39(A)(1). The term 'ordinary loss' includes
any loss from the sale or exchange of property which
is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered,
under other provisions of this Title, as 'ordinary loss'
shall be treated as loss from the sale or exchange of
property which is not a capital asset. (Z)
"Rank and file employees" shall mean all
employees who are holding neither managerial nor
supervisory position as defined under existing
provisions of the Labor Code of the Philippines, as
amended. (AA)
"Regional or area headquarters" shall
mean a branch established in the Philippines by
multinational companies and which headquarters do
not earn or derive income from the Philippines and
which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries,
or branches in the Asia-Pacific Region and other
foreign markets. (DD)
“Regional operating headquarters" shall
mean a branch established in the Philippines by
multinational companies which are engaged in any
of the following services: general administration and
planning; business planning and coordination;
sourcing and procurement of raw materials and
components; corporate finance advisory services;
marketing control and sales promotion; training and
personnel management; logistic services; research
and development services and product
development; technical support and maintenance;
data processing and communications; and business
development. (EE)
“Statutory minimum wage” earner shall
refer to rate fixed by the Regional Tripartite Wage
and Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the
Department of Labor and Employment (DOLE) (GG)
“Minimum wage earner” shall refer to a
worker in the private sector paid the statutory
minimum wage; or to an employee in the public
sector with compensation income of not more than
the statutory minimum wage in the non-agricultural
sector where he or she is assigned (HH)
Chapter II
General Principles
**Section 23. General Principles of Income Taxation
in the Philippines. - Except when otherwise provided
in this Code:
A. A citizen of the Philippines residing therein
is taxable on all income derived from
sources within and without the Philippines;
B. A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
C. An individual citizen of the Philippines who
is working and deriving income from abroad
as an overseas contract worker is taxable
only on income derived from sources within
the Philippines: Provided, That a seaman
who is a citizen of the Philippines and who
receives compensation for services
rendered abroad as a member of the
complement of a vessel engaged exclusively
in international trade shall be treated as an
overseas contract worker;
D. An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
E. A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
F. A foreign corporation, whether engaged or
not in trade or business in the Philippines, is
taxable only on income derived from
sources within the Philippines.
Notes:
Resident citizen (RC) Within and without
Nonresident citizen (NRC) Within
Resident Alien (RA) Within
Nonresident Alien (NRA) Within
Domestic Corporation (DC) Within and without
Foreign Corporation (FC) Within
(Bar exam 2015 (boxer), 2016 (Patrick) RC; 2015 (Mr.
B seller, buyer) NRC)
Income
All wealth which flows to the taxpayer other
than a mere return of capital
Income Tax
A 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 like.
Income Tax Systems
1. Global Tax System
All items of gross income,
deductions and personal and additional
exemptions, if any, are reported in one
income tax return, and one set of tax rates
are applied on the tax bases
Note: Simply put, one rate for all types of
gross income.
2. Schedular Tax System
Where there are different tax
treatments of different types of income so
that a separate tax return is required to be
filed for each type of income and the tax is
computed on a per return or per schedule
basis.
Note: Simply put, varying taxes are imposed
on passive income.
3. Semi-Schedular or Semi-Global Tax System
All compensation income, business
or professional income, capital gain and
passive income not subject to final tax, and
other income are added together to arrive
at the gross income, and after deducting
the sum of allowable deductions, the
taxable income is subjected to one set of
graduated tax rates or normal corporate
income tax. With respect to such income
the computation is global.
For those other income not
mentioned above, they remain subject to
 different sets of tax rates and covered by Chapter III
different returns. Tax on Individuals
Note: The Philippines follows a semi-schedular and ******Section 24. Income Tax Rates
semiglobal tax system.
A. Rates of Income Tax on Individual Citizens and
Test on Taxability of Income Individual Resident Aliens of the Philippines
1. Flow of Wealth Test
The determining factor for the Rates of Tax on Taxable Income of Individuals
imposition of income tax is whether any The graduated tax rates on taxable income
gain was derived from the transaction. of individuals are not part of the Bar exam according
to Atty. Rada. But remember the cut-off income
2. Realization Test subject to tax (see table below).
Unless the income is deemed
"realized," there is no taxable income.
NIRC TRAIN
Not over P10,000 Not over P250,000 has
3. Economic-Benefit Principle Test
subject to 5% rate 0% rate
Flow of wealth realized is taxable
only to the extent that the taxpayer is
Husband and Wife
economically benefited.
Husband and wife shall compute separately
their individual tax income based on their respective
Requisites for Income to be Taxable
total taxable income.
1. There must be a gain or profit.
2. The gain must be realized or received.
If any income of married individuals cannot
3. The gain must not be excluded by law or
be definitely attributed to or identified income
treaty from taxation.
exclusively by either spouses, the same shall be
divided equally between the spouses for the purpose
Criteria in Imposing Philippine Income Tax
of determining their respective taxable income.
1. Citizenship or nationality principle
A citizen of the Philippines is
Minimum Wage Income Earner
subject to Philippine income tax
Minimum wage earners shall be exempt
a. on his worldwide income, if he resides
from payment of income tax on their taxable
in the Philippines
income.
b. only on his Philippine source income, if
he qualifies as a non-resident citizen
The following received by minimum wage earner are
where his foreign-source income shall
exempt from income tax:
be tax-exempt.
1. Holiday pay
2. Overtime pay
2. Residence or domicile principle
3. Night shift differential pay
An alien is subject to Philippine
4. Hazard pay
income tax because of his residence in the
Philippines. A resident alien is liable to pay
Rules regarding Minimum Wage Earner
Philippine income tax only from his income
1. A minimum wage earner who receives
from Philippine sources but is tax-exempt
taxable income in excess of the minimum
from foreign-source income
wage will be taxed on the excess, but the
minimum wage earner will not lose his/her
3. Source of income principle
status as such. Workers who receive the
An alien is subject to Philippine
statutory minimum wage as their basic pay
income tax because he derives income from
remain minimum wage earners.
sources within the Philippines. Thus, a non-
resident alien or non-resident foreign
2. The receipt of other income during the year
corporation is liable to pay Philippine
does not disqualify them as minimum wage
income tax on income from sources within
earners. But the taxable income they
the Philippines
receive other than as MWEs may be
subjected to other appropriate taxes.
Hence, bonuses and other benefits
above the statutory limit (P82,000
– NIRC, P90,000 – TRAIN) are
taxable.
Categories of Individual Taxpayer
NIRC TRAIN
The NIRC only have one rule for an individual TRAIN classify the individual taxpayers into 3 different
taxpayer. It did not classify the taxpayer into categories:
different categories.
1. Individuals earning purely compensation income
The individual taxpayer is subjected to only 2. Purely Self employed individuals or engaged in
graduated rates. (Sec. 24 (A)(2)) business or profession
3. Mixed income earners – earning both
compensation income and income from business
or profession

TRAIN Rules for How TRAIN Taxes Different Individual Taxpayer

Kind of Taxpayer Rules on Taxing Them
Compensation Income Earner Graduated tax rates

Purely Self Employed Individuals He has two options to avail of:

engaged in business or practice of
profession (whose gross sales/
receipts do not exceed the VAT
threshold [P3M])
1. Graduated tax rates and VAT or Percentage Tax, or
2. 8% tax on gross sales/receipts and other non-operating income in
excess of P250,000 (in lieu of graduated income tax rate and
percentage tax)

Mixed Income Earner Compensation Income from business

income
They earn both from: Graduated tax Gross sales exceeds Graduated tax rates and VAT
1. Compensation income rates the VAT threshold
2. Income from business or Gross sales does not The taxpayer has the option to
practice of profession exceeds the VAT either avail of:
threshold
1. Graduated tax rates and
VAT/Percentage tax, or

2. 8% tax on gross sales/receipts

and other non-operating
income in excess of P250,000
(in lieu of graduated income
tax rate and percentage tax)

Purely compensation income earner are

TRAIN Discussion of the Different Taxpayers
A. Individual earning purely compensation
income – taxed under the graduated rates
Compensation income – all remuneration for
services performed by an employee for his employer
under an employer-employee relationship.
Compensation includes salaries, wages,
emoluments, and honoraria, allowances,
commissions, director’s fees where the director is
also an employee (RR 8-2018)
As long as there is an employer-employee
relationship, remuneration arising from it will be
considered compensation income.
taxed according to his/her taxable income and tax
bracket (graduated tax rates)
Taxable income is the individual’s gross
compensation income less non-taxable income
benefits like 13th month pay and other benefits like
de minimis benefits and employee’s share in the SSS,
GSIS, PHIC, Pag-ibig contributions and union dues
(RR 8-2018)
Taxable income = Gross compensation – non-taxable
income benefits
B. Self employed individuals earning income
purely from self-employment or practice of
profession whose gross sales/receipts and other
non-operating income do not exceed
P3,000,000 (VAT threshold)

Self employed individuals have two choices:
a. Graduated rates, or
b. 8% income tax rate
Self employed individual is a sole proprietor or an
independent contractor who reports income earned
from self employment
Professional is a person formally certified by a
professional body belonging to a specific profession
(like a lawyer or director).
It also refers to a person who engages in
some art or sport for money as a means of
livelihood, rather than a hobby (like a professional
boxer or a professional artist).
Different tax base for graduated tax rates and 8% income tax rates
Tax option
Graduated rates
8% income tax rate
Gross receipts include all kinds of deposits.
However, returnable deposits or deposits held in
trust and record as Liability are excluded (RMC 50-
2018)
The following are not allowed to avail the 8% tax
rate
1. Purely compensation income earners (they
used graduated tax rates);
2. VAT registered taxpayers, regardless of
their gross sales/receipts and other non-
operating income;
3. Non-VAT registered taxpayers whose gross
sales/receipts and other non-operating
income exceeded the P3,000,000 VAT
threshold;
4. Taxpayer subject to other percentage taxes
(except those under Sec. 116);
5. Partners of a general professional
partnership since their distributive share
from the GPP is already net of costs and
expenses; and
6. Individuals enjoying income tax exemption
(such as those registered as Barangay
Micro-Business Enterprises) (RMC 50-2018)
Q. What will happen if the taxpayer’s gross
receipts/sales and other non-operating income
exceed the P3,000,000 VAT threshold?
An insurance agent, management and
technical consultant, and recipients of professional
and talent fees are also considered professionals (RR
8-2018)
Rules on availing the 8% tax rate
1. The first P250,000 is not subject to tax, since
what is taxed is anything in excess of
P250,000
2. If the taxpayer choose the 8% tax rate, he will
not be liable for the 3% percentage tax under
Sec. 116 because the 8% tax rate is in lieu of
the 3% percentage tax.
3. The taxpayer must signify his or her intention
to use the 8% tax rate in the 1 st quarter of the
percentage/ income tax return. Otherwise, he
or she is deemed considered to have chosen
the graduated tax rates.
Tax Base
Taxable income
Gross sales/receipts and other non-
operating income to be reduced by
P250,000
The taxpayer will be automatically
subjected to the graduated rates and can no longer
use the 8% income tax rates. He will also be subject
to other business taxes, if any.
Illustration: Taxpayer exceed the VAT threshold
midyear
Gross sales/receipts from January to June:
P2,500,000
The taxpayer avail the 8% tax rate: P2,500,000 x
8% = P200,000
Tax due: P200,000
However, he has gross sales/receipts in July of
P5,000,000
He will be automatically subjected to
graduated tax rates and business tax (VAT)
because his gross sales exceed the P3,000,000 VAT
threshold.
(Atty. Rada did not continue the computation)
Let’s assume he has P1,000,000 allowable
deduction
Taxable income = Gross Income – Deduction
(remember TRAIN: no exemptions na)
Gross Income: P5,000,000
Deduction: -P1,000,000
Income taxable: P4,750,000
(Although remember that Bar exam do not ask
regarding tax schedule. Mostly ask is if the income
is taxable or not) Computation was done for
illustration purposes (RJRS note and computation)
 VAT paid but the taxable income of January to
Tax due: P4,000,000 subject to graduated rate June will be subjected to the percentage tax (3%).
Tax due graduated rate P5,000,000 gross
Tax schedule: taxable income over P2,000,000 but sales/receipts: P1,130,000
not over P2,000,000 Tax due 8% tax rate P2,500,000 gross
Tax due: P490,000 +32% of the excess over sales/receipts: -P200,000
P2,000,000
P930,000
Tax due: P490,000 + 32% x (P4,750,000 –
P2,000,000) Taxable income from January to June will be
Tax due: P1,130,000 subject to Percentage tax of 3%
P2,500,000 x 3% = P75,000
The 8% tax rate on gross sales/receipts paid
from January to June will be deducted from the

Illustration again: Difference of Taxing Self Employed Individual in NIRC and TRAIN
Note: Self employed individual in NIRC is taxed by: Graduated tax rate + VAT or Percentage Tax

Self Employed NIRC TRAIN

Graduated tax rate Graduated tax rate +PT 8% tax rate
+VAT/PT
Sales 1,000,000 1,000,000 1,000,000
Less: Cost of Sales 500,000 500,000
Allowable Deduction 200,000 200,000
Personal Exemption 50,000
Additional Exemption 100,000
250,000
Taxable Net Income 150,000 300,000 750,000
22,500 + 25% x 20% x (300,000 -250,000) 750,000 x 8% =
(150,000-140,000) = = 10,000

PT = gross sales x 3% PT = gross sales x 3%

1,000,000 x 3% = 30,000 1,000,000 x 3% = 30,000

25,000 + 30,000 = 10,000 + 30,000 =

Tax Due 55,000 40,000 60,000

C. Mixed Income Earners or those who earn
income from both compensation and from self-
employment.
The treatment of mixed income
earner is just the combination of (A)
Compensation earner and (B) Self employed
individual.
(Do not fret too much just combined what you
learned in A and B. AJA!)
The total income tax liability of
the mixed income earner is the sum of the
liability for compensation income and
liability for the income from business or
practice of profession.

Different rules on 8% tax rate

Self employed Entitled to the P250,000 reduction
Mixed income earner Not entitled to the P250,000 reduction because this
has already been applied in computing the income tax
on compensation (RMC 50-2018)
FINAL INCOME TAX
Passive income is usually subject to final tax. The income from passive sources is not used in
determining the gross income for graduated tax rate of an individual.

Section 24(B) Rate of Tax on Certain Passive Incomes on Citizens and Resident Aliens

Tax Rate on Certain Passive Income on Certain Passive Income on FINAL TAX
Citizens and Resident Aliens NIRC TRAIN
1. Interest under the expanded foreign currency deposit system 7.5% 15%
(RR 10-98)
(Non-resident (Non-resident
Non-resident citizens – exempt aliens engaged in aliens engaged in
trade/business – trade/business –
exempt) exempt)
2. Interest on any current bank deposit, yield or other monetary
benefits from deposit substitute, trust fund and similar 20%
arrangements
3. Royalties generally 20%
4. Royalties from books, literary works and musical composition 10%
5. Prizes exceeding P10,000 20%
6. Prizes P10,000 or less Graduated
income tax rate
7. Winnings 20%
8. PCSO and Lotto winnings Exempt Exempt only
winnings
amounting to
P10,000 or less
9. Interest on long-term deposit or investment in banks (with Exempt
maturity of five years or more)
10. Pre-termination of long Less than 3 years 20%
term deposit 3 years to less than 4 years 12%
4 years to less than 5 years 5%
11. Dividend from a domestic corporation, or from a joint stock 10%
company, insurance or mutual fund company, and regional
operating headquarters of multinational company or share in (vs. 20% for non-
the distributive net income after tax of a partnership (except a resident aliens
general professional partnership), joint stock or joint venture or engaged in
consortium taxable as corporation trade/business)
 But what about dividends from foreign corporation for resident citizens?
The income from foreign corporation enters into graduate income tax rate
(Sec. 24(a)). For resident aliens, they are not taxed since their income is
derived from abroad.

The income sources in Sec. 24(B) are derived within the Philippines.

Q. What happens if the passive income is sourced
abroad (without the Philippines)?
1. For aliens –the passive income from
abroad is not taxable in the Philippines.
Royalties and other income must come
from within the Philippines since they are
only taxed from sources within the
Philippines.
2. For resident citizens – passive income that
come from outside the Philippines are
taxable. They are taxed from the income
sourced worldwide.
Capital gain tax only applies to the sale or
disposition of the following:
1. Shares of stock of a domestic corporation
not traded through local the local stock
exchange; and
 2. Sale of real property in the Philippines
which is held as capital asset

Note: sale and disposition of other capital assets

refer to Sec. 39

Section 24(C) Capital Gains from Sale of Shares of Stock Not Traded in Stock Exchange
Capital Gains from Sale of Stock Tax Rate
NIRC TRAIN
1. On sale of shares of stock of Capital gains not 5%
a domestic not traded over P100,000 of the net capital gains 15%
through a local stock of the net capital
exchange and held as capital Capital gains in 10% gains
assets excess of P100,000 of the net capital gains

2. Shares of stock are listed and traded through the ½ of 1% 6/10 of 1%

local stock exchange (Sec. 127) of the gross selling of the gross selling
price or gross value in price or gross value
money of the shares of in money of the
stock (Stock shares of stock
Transaction Tax) (Stock Transaction
Tax

Implications on shares of stock listed and traded in the stock exchange from those that are not
Kind of Shares of Stock Tax Base Implication of the tax base
Listed and Traded Gross selling price or The tax is imposed whether
gross value there was gain or not
Not traded Capital gains Subject to tax if there is only
gain

Who are liable for capital gains tax?
1. Individual taxpayer, whether citizen
or alien
2. Corporate taxpayer, whether
domestic or foreign
3. Other taxpayers not falling under (1)
and (2) such as estate, trust, trust
funds and pension funds, among
others. (RR 6-2008)
Who are exempt from capital gains tax?
1. Dealers in securities (in terms of CGT for
shares of stock)
2. Investors in shares of stock in a mutual fund
company, as defined in Section 22(BB), and
Section 2(s) of RR 6-2008, in connection
with the gains realized by said investor
upon redemption of said shares of stock in a
mutual fund company and
3. All other persons, whether natural or
juridical, who are specifically exempt from
national internal revenue taxes under
existing investment incentives and other
special laws (RR 6-2008)

Section 24 (D) Capital Gains from Sale of Real Property

No amendment.
Sale, Exchanges, or Transfers or Real Final Tax
Properties Classified as Capital Assets
Sale of real property in the Philippines
Sale to the Government or to the GOCCs
6% of, whichever is higher:
1. Gross selling price,
2. FMV by Commissioner (zonal value)
3. FMV by Provincial or City Assessor (value in tax
declaration)
6% of, at taxpayer’s option:
1. Gross selling price/ current market value; or
2. Normal income tax rate
 The historical cost of the old principal
residence shall be carried over to the cost basis
of the new residence.

If there is no full utilization, the taxpayer shall

be liable for the deficiency capital gains tax of
the utilized portion.

The 6% capital gains tax otherwise due must be

Conditions to be exempt from CGT of 6% on the
sale, exchange or disposition of a PRINCIPAL
RESIDENCE
1. Sale or disposition of principal residence by
a natural person
2. The proceeds of the sale will be used in the
acquisition or construction of new principal
residence
3. The acquisition or construction is within 18
calendar months from the date of sale or
disposition
4. The taxpayer notified the Commissioner
within 30 days of his intention to avail the
exemption
5. Tax exemption can only be used only once
every 10 years
deposited in escrow with an authorized agent
bank, and can only be released when sufficient
proof is shown that the proceeds have been
fully utilized within 18 months (RR 13-1999)
Principal residence
It is the dwelling house, where the husband
or wife or unmarried individual resides; actual
occupancy is not interrupted or abandoned by
temporary absence due to travel, studies or work
abroad.
If the ownership of the land and the
dwelling house belong to different persons, only the
dwelling house shall be treated as principal
residence.
It is not necessarily the family home (RR 14-
2000)

Payment of CGT on foreclosure of mortgage

Mortgagor exercises his right of redemption No capital gains tax shall be imposed.
within one year
There is no capital gains derived and no transfer of property was
realized
Mortgagor does not redeem There will be capital gains based on the bid price of the highest
bidded. (RR 4-99)

If the mortgagee is a bank, then it is the mortgagee bank that will pay the capital gains, not the seller.
Section 25. Tax on Non-Resident Alien Individual

Non-resident Alien Doing Business in the Philippines

An alien individual who stayed in the Philippines for a period of more than 180 days during any calendar
year

NIRC TRAIN
Taxable income received from all sources within the Philippines Graduated tax rate on income tax [same as
Sec. 24 2(a)]

Final Tax of Nonresident Aliens Engaged in Business

TRAIN did not seem to amend the passive income rates of non-resident alien engaged in trade, business
or exercising profession in the Philippines

Tax Rate on Certain Passive Income on Nonresident Aliens Engaged in Final Tax
Trade, Business or Exercising a Profession NIRC
1. Interest under the expanded foreign currency deposit system (RR exempt
10-98)
2. Interest on any current bank deposit, yield or other monetary 20%
benefits from deposit substitute, trust fund and similar
arrangements
3. Royalties generally 20%
4. Royalties from books, literary works and musical composition 10%
5. Prizes exceeding P10,000 20%

Tax Rate on Certain Passive Income on Nonresident Aliens Engaged in Final Tax
Trade, Business or Exercising a Profession NIRC
6. Prizes P10,000 or less Graduated
income tax rate
7. Winnings 20%
8. PCSO and Lotto winnings exempt
9. Interest on long-term deposit or investment in banks (with exempt
maturity of five years or more)
10. Pre-termination of long term Less than 3 years 20%
deposit 3 years to less than 4 years 12%
4 years to less than 5 years 5%
11. Dividend from a domestic corporation, or from a joint stock 20%
company, insurance or mutual fund company, and regional
operating headquarters of multinational company or share in the
distributive net income after tax of a partnership (except a general
professional partnership), joint stock or joint venture or
consortium taxable as corporation
 But what about dividends from foreign corporation for
non-resident citizens?
For non-resident aliens, they are not taxed since the
income is derived from abroad.
12. Gross income from cinematographic films and similar works 25%
Sec. 25 (A)(3) Capital Gains
In capital gains, TRAIN amended the tax on shares of stock not traded through stock exchange

Capital Gains from Sale of Stock (same with residents, and Tax Rate
non-resident aliens engaged in business) NIRC TRAIN
On sale of shares of stock of a Capital gains not 5%
domestic not traded through a local over P100,000 of the net capital gains 15%
stock exchange and held as capital of the net capital
assets Capital gains in 10% gains
excess of P100,000 of the net capital gains

Sale, Exchanges, or Transfers or Real

Properties Classified as Capital Assets
Sale of real property in the Philippines
Sale to the Government or to the GOCCs
Final Tax
6% of, whichever is higher:
1. Gross selling price,
2. FMV by Commissioner (zonal value)
3. FMV by Provincial or City Assessor (value in tax
declaration)
6% of, at taxpayer’s option:
1. Gross selling price/ current market value; or
2. Normal income tax rate

Section 25 (B) Non-resident Alien Not Engaged in Trade or Doing Business in the Philippines
Non-resident aliens not engaged in business are taxed 25% on their entire income within the Philippines

Their capital gains – same as Sec. 24 (C) and (D) see above tables.

Sec. 25 (C-E) Special Aliens

Special Aliens Tax Rate
NIRC TRAIN
1. Employed by regional or area headquarter and 15% on gross income
regional operating headquarter of multinational
companies established in the Philippines by
multinational Graduated income
2. Employed by offshore banking units 15% on gross income tax rate
3. A permanent resident of a foreign country but 15% of salaries, wages,
who is employed and assigned in the Philippines annuities, compensation,
by a foreign service contractor or subcontractor remuneration and other
engaged in petroleum operations in the emoluments
Philippines

NIRC For Filipinos to exercise the option to be

The same tax treatment shall apply to taxed 15% preferential rate for occupying the same
Filipinos employed and occupying the same position positions as aliens employed in ROHQs or RHQs,
as those of aliens. Filipinos must occupy managerial or technical
positions (RR 11-2010)
 Income earned from all other sources
within the Philippines by the special alien employees Corporations include:
shall be subject to the pertinent income tax imposed 1. Partnerships, no matter how created or
by the Code. organized;
2. Joint-stock companies;
TRAIN The President vetoes the preferential 3. Joint accounts
treatment of aliens in Sec. 25 (C-E) 4. Associations; and
Revenue Regulations No. 8-2018 5. Insurance companies

Section 4. C. The preferential income tax

rate under Subsection (C), (D), and (E) of Section 25
shall no longer be applicable without prejudice to
the application of preferential tax rates under
existing international tax treaties, if warranted. Thus,
all concern employees of the regional or area
headquarter and regional operating headquarters of
multinational companies, offshore banking unit and
petroleum service contractor and subcontractor
shall be subject to the regular income tax rate under
Section 24(A)(2)(a) of the Tax Code.
Sec. 26. Tax Liability of Members of General
Professional Partnerships
Next time
Chapter IV
Tax on Corporations
Corporations do not include:
1. General professional partnership
2. Joint venture (not incorporated) or
consortium formed for the purpose of
undertaking construction projects, or
engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating or consortium agreement under a
service contract with the government.
Classifications of Corporation
1. Domestic Corporations – those which are
incorporated in the Philippines
2. Non-resident Foreign Corporation

Sec. 27 Rates of Income Tax on Domestic Corporations

Tax Rate of Domestic Corporations

General
If Minimum Corporate Income 2% of gross income, or
Tax (MCIT) applies
Gross income tax (GIT)
30% of taxable income from all sources within
and outside the Philippines, or
15% of the gross income if the following
conditions are met:
1. Tax effort ratio of 20% of GNP
2. Ratio of 40% of income tax
collection to total tax revenues
3. VAT tax effort of 4% of GNP, and
4. 0.9% ration of the Consolidated
Public Sector Financial Position
(CPSFP) to GNP

The option to be taxed based on gross 5. Gross income tax (GIT)

income shall be available only to firms whose ratio of
cost sales to gross sales or receipts from all sources
does not exceed 55%.
Election of the gross income tax option by
the corporation shall be irrevocable for three
consecutive years
Domestic corporations are subject to any or some
of the following:
1. Capital gains tax
2. Final tax on passive income
3. Normal tax
4. Minimum corporate income tax (MCIT)
6. Improperly accumulated earnings tax (IAET)
Sec. 27(B) Proprietary Educational Institutions and
Hospitals
Proprietary educational institution
1. It is any private school maintained and
administered by private individuals or
groups.
2. With an issued permit to operate from
DECS or CHED or TESDA
A proprietary hospital is also given a special tax rate.

Proprietary likewise means “private” (CIR
vs. St. Lukes Medical Center)
Non-profit means no net income or asset
accrues to or benefits any member or specific
person, with all the net income or asset devoted to
the institution’s purposes and all its activities
conducted not for profit. (CIR vs. St. Lukes Medical
Center)
Hospitals and educational institutions that
fail to meet the above definition of “proprietary”
and “non-profit” shall be taxed as regular
corporation (RMC 67-2019)
Unrelated trade, business or other activity
1. Any trade, business or other activity
2. The conduct of which is not substantially
related to the exercise or performance by
such institution of its primary purpose of
function
not exceed 50% of its total gross
income
However, income derived from trade,
business or other activity is still taxable
B. Non-stock, non-profit educational
institutions
1. All revenues (and assets) used
actually, directly and exclusively
for educational purposes are
exempt (Art. XIV, Sec. 4[3], 1987
Constitution)
2. Assets used actually, directly and
exclusively for educational
purposes are likewise exempt from
real property tax
Income from cafeterias, canteens and
bookstores are also exempt if they are owned and
operated by the educational institutions and are
located within the school premises (RMC 76-2003).

Predominance Test/Theory Sec. 27(C)Government-owned or Controlled

If the gross income from unrelated trade, Corporations, Agencies or Instrumentalities
business or other activity exceeds 50% of the gross
income of the school, then the entire taxable income General Rule: GOCC’s, agencies or
shall be subject to the regular corporate income tax instrumentalities shall pay the same tax rate upon
rate of 30% their taxable income upon corporations or
Tax Rate of Proprietary Educational Institutions and associations engaged in similar business industry or
Hospitals activity
Proprietary and Non-profit 10% on their taxable
income (except
passive income)
Gross income from 30% on their entire Exception: The following are exempt:
unrelated trade, business or taxable income Exempt GOOCs
other activity exceeds 50% NIRC TRAIN
of the gross income of the 1. GSIS 1. GSIS
institution 2. SSS 2. SSS
3. Philippine 3. Philippine
Health Health
Summary of Rules on Educational Institutions Insurance Insurance
Corporation Corporation
A. For private educational institutions (PHIC) (PHIC)
Entitled to reduced rate of 10% corporate 4. Local water 4. Local water
income tax if: districts districts
1. The proprietary educational 5. Philippine
institution is non-profit, and Charity
2. Its gross income from unrelated Sweepstakes
trade, business, or activities does Office (PCSO)

Sec. 27 (D) Passive Income of Domestic Corporation

Tax Rate on Passive Income of Domestic Final Tax

Corporation NIRC TRAIN
1. Interest under the expanded foreign 7.5% 15%
currency deposit (Sec. 27 (D)(1))
2. Royalties derived from Philippines 20%

Royalties abroad? Enter the taxable income

 30% tax rate
3. Interest on currency band deposit and yield 20%
or any other monetary benefit from deposit
substitutes, trust fund and similar
arrangement
4. Dividend from domestic corporation exempt
(intercorporate dividend) (Sec. 27 (D)(4))

Intercorporate dividends Reason: Law assumes that the dividends received

Dividends received by a domestic will be injected to the capital, which will eventually
corporation from another domestic corporation shall be taxed when the corporation gets income from the
not be subject to tax. use of the capital.

Sec. 27 (D)(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System
No amendments

Tax Rate of Banks on Income Derived under the Expanded FCD System Final Tax
1. Income derived by a depository bank from foreign currency Exempt
transactions with non-residents, OBUs, local commercial banks,
foreign banks authorized by BSP
2. Interest income from foreign currency loans granted by a bank
under expanded foreign system to residents other than OBUs or 10%
other depository banks under the expanded system

Any income of non-residents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.

Sec. 27 (D) (2) (5) Capital Gains

Capital Gains on Sale or Disposition of Shares of Stock

Capital Gains from Sale of Stock Tax Rate
NIRC TRAIN
1. On sale of shares of stock of Capital gains not 5%
a domestic not traded over P100,000 of the net capital gains 15%
through a local stock of the net capital
exchange and held as capital Capital gains in 10% gains
assets excess of P100,000 of the net capital gains

2. Shares of stock are listed and traded through the ½ of 1% 6/10 of 1%

local stock exchange (Sec. 127) (or 0.005%) of the of the gross selling
gross selling price or price or gross value
gross value in money of in money of the
the shares of stock shares of stock
(Stock Transaction Tax) (Stock Transaction
Tax

Sale, Exchanges, or Transfers or Real Properties Final Tax

Classified as Capital Assets
Sale of real property in the Philippines held as
capital assets and not actually used in business
(only applies to land and/or building)
Sale to the Government or to the GOCCs
6% of, whichever is higher:
1. Gross selling price,
2. FMV by Commissioner (zonal value)
3. FMV by Provincial or City Assessor (value in
tax declaration)
6% of, at taxpayer’s option:
1. Gross selling price/ current market value; or
2. Normal income tax rate
Read the payment of CGT on foreclosure of
mortgaged property

Sec. 27 (E) Minimum Corporate Income Tax on

Domestic Corporation

Imposition of MCIT
Tax Rate: MCIT of 2% of gross income as of the end
of taxable year

Gross income includes all items of gross

income enumerated under Sec. 32(A), except those
income exempt from income tax and income subject
to final withholding tax

Period to start: Beginning on the fourth taxable year

immediately following the year in which the
corporation commenced its business operations
Business commenced from the
moment it is registered in the BIR

On the 4th taxable year, the domestic corporation is

taxed by whichever is higher:
1. Normal tax of 30%
2. MCIT of 2%

When to imposed MCIT: When the MCIT is greater

than the normal tax of 30%

Example:
Year 4 Year 5
MCIT 200 300
Normal 100 400
Tax Payable 200 400

Carry Forward of Excess Minimum Tax

Any excess of the MCIT over the normal tax
of a year shall be carried forward and credited
against the normal tax rate for the three
immediately succeeding taxable years.

For the carry forward to apply, the normal tax should

be higher than the minimum corporate income tax.
Compute both first; then apply either the
MCIT or normal tax rate, whichever is
higher.
Example:
MCIT Normal Tax Excess
Tax Payable MCIT
Year 4 50,000 10,000 50,000 (40,000)
Year 5 50,000 10,000 50,000 (40,000),
(40,000)
Year 6 50,000 10,000 50,000 (40,000),
(40,000),
(40,000)
Year 7 50,000 10,000 50,000 (40,000),
(40,000),
(40,000)
Year 8 20,000 100,000 100,000 (20,000)
-100,000
 =
0
Distinction between Normal Tax and MCIT

Relief from MCIT

1. Losses on account of prolonged labor
dispute
Losses arising from a strike staged by
employees which lasted for more than six
months within a taxable period and which
has caused the temporary shutdown of
business operations

2. Force majeure
a. Any cause due to an irresistible
force as by “act of God”
b. Also includes armed conflicts such
as war or insurgency.

3. Legitimate business reverses

Includes substantial losses due to fire,
robbery, theft or embezzlement, or other
economic reasons

MCIT is implemented on domestic and resident

foreign corporations
1. whenever they have zero or negative
taxable income, or
2. when MCIT is greater than the normal
income tax due (RR 9-1998)

Exempted from the MCIT

1. Resident foreign corporations engaged in
business as international carriers
2. Resident foreign corporations engaged in
business as offshore banking units
3. Resident foreign corporations engaged in
business as regional operating headquarters
4. Firms that are taxed under a special income
tax regime (like those under PEZA or other
economic zones)
5. Proprietary Education Institutions
6. Non-profit hospitals
7. Depositary banks under the FCDU
8. REIT (Real Estate Investment Trusts) (RA
9856)
9. Non-resident foreign corporations

Sec. 28(A). Rates of Income Tax on Foreign

Corporations
TRAIN did not amend Sec. 28

Foreign corporation – one which is not organized or

incorporated in the Philippines. It may be a:
1. Resident foreign corporation, or
 2. Non-resident foreign corporation engages in business in the Philippines, then it will be
considered a resident foreign corporation.

Resident foreign corporation – a foreign corporation

engaged in business in the Philippines.

A foreign corporation can engage in

business in the Philippines only after it had
registered with, and had been allowed by, the
regulatory agencies of the Philippine government to
engage in business in the Philippines.

However, even without the license, if the

facts show that the foreign corporation actually
Tax Rate of Foreign Resident Corporations
General 30% of taxable income from all sources within
and outside the Philippines, or
If Minimum Corporate Income 2% of gross income, or
Tax (MCIT) applies
Gross income tax (GIT) 15% of the gross income if the following
conditions are met:
1. Tax effort ratio of 20% of GNP
2. Ratio of 40% of income tax
collection to total tax revenues
3. VAT tax effort of 4% of GNP, and
4. 0.9% ration of the Consolidated
Public Sector Financial Position
(CPSFP) to GNP

Sec. 28 (A) (3) Special Rule on International Carriers

Tax Rate
International carrier doing business in the 2.5% of Gross Philippine
Philippines billings

(except different tax rate

Under RA 10378, international carriers
doing business in the Philippines may avail of a
preferential rate or exemption from tax based:
1. tax treaty or international agreement to
which the Philippines is a signatory or
2. the basis of reciprocity such that an
international carrier whose home country
grants income tax exemption to Philippine
carriers
International air carrier – refers to
a. foreign airline corporation doing business in
the Philippines
b. having been granted landing rights in any
Philippines port
c. to perform international air transportation
services/activities or flight operations
anywhere in the world.
d. subject to the Gross Philippine Billings Tax
of 2.5%
under tax treaty)
Doing business – no specific criterion
As long as there was continuity of conduct
an intention to establish a continuous business and
not one of a temporary character, then you are
doing business in the Philippines.
Gross Philippine Billings refers to:
a. Gross revenue derived from carriage of
persons, excess baggage, cargo and mail
b. Originating from the Philippines in a
continuous and uninterrupted flight
c. Irrespective of the place of sale or issue and
the place of payment of the ticket or
passage document
Provided:
1. Form part of the Gross Philippine Billings
a. that tickets revalidated, exchanged
and/or indorsed to another
international airline
b. if the passenger boards a plane in a
port or point in the Philippine
 2. Only the aliquot portion of the cost of the
ticket corresponding to the leg flown from
the Philippines to the point of
transshipment form part of the GPB
a. that for a flight which originates
from the Philippines
b. but transshipment of passenger
takes place at any port outside the
Philippines on another airline
International shipping refers to
a. foreign shipping corporation doing business
in the Philippines
b. having been granted landing rights in any
Philippine port
c. to perform international shipping
services/activities or shipping operations
anywhere in the world
d. subject to the Gross Philippine Billings Tax
of 2.5%
Gross Philippine Billings (under international
shipping) means
1. gross revenue whether for passenger, cargo
or mail
2. originating from the Philippines up to final
destination
3. regardless of the place of sale or payments
of the passage or freight documents.
Included in the Gross Philippine Billings
1. Gross revenue from passage of persons
2. Excess baggage
3. Cargo and mail originating from the
Philippines in a continuous and
uninterrupted flight
Excluded in GPB
1. Non-revenue passengers
2. Refunded tickets
In case of passengers’ flight from any point in
the Philippines and back, that portion of revenue
pertaining to the return trip to the Philippines is NOT
include as part of the GPB (RR 15-2002)
Air carrier with flight operations in the Philippines
Air carrier with flights originating from any point or port in the
Philippines irrespective of the place where passage document
are sold or issued.
It is considered engaged in business as an international air carrier
in the Philippines
Offline air carrier
1. without flight operations in the Philippines
2. but have a branch office or sales agent in the Philippines
Different Kinds of International Air Carriers
1. Off-line carrier – refers to an international
air carrier having no flight operations to and
from the Philippines (RR 15-2002)
2. On-line carrier – refers to an international
carrier having or maintaining flight
operations to and from the Philippines (RR
15-2002)
Different Flights of International Air Carrier
1. Off-line flights –refer to flight operations
between ports or points outside the
territorial jurisdiction of the Philippines,
without touching a port of point situated in
the Philippines, except:
a. When in distress, or
b. Due to force majeure
2. On-line flights – refer to flight operations
carried out or maintained by an
international air carrier between ports or
points in the territorial jurisdiction of the
Philippines and any port or point outside
the Philippines
3. Chartered flight – refer to the flight
operations which includes operations
between ports or points situated in the
Philippines and points outside the
Philippines, which includes block charter,
placed under the custody and control of a
charterer by a contract/charter for rent or
hire relating to a particular airplane.
Tax Rate
2.5% of Gross Philippine
billings
(unless subject to a
different tax rate under a
tax treaty)
Not subject to GPB
But income is subject to
30% normal corporate
 It is not considered engaged in business as an international income tax
carrier in the Philippines

business in the Philippines and their income from

Taxes imposed on “off-line international carrier
without any flight operations in the Philippines”
with general sales agents in the Philippines
The taxability of the income of the “off-line
international carrier without any flight operations in
the Philippines” but with an independent sales agent
or a liaison office in the Philippines depends upon
the locus of the activity, property or service giving
rise thereto.
The Philippines have jurisdiction over the
sales of tickets in the Philippines by the general sales
agents of off-line air carriers because the sale of the
tickets is the activity that produces the income. The
situs of the source of payment is in the Philippines.
Off-line air carriers having general sales
agents in the Philippines are engaged in or doing
sales of passage documents here is income from
within the Philippines.
In the instant case, the offline carrier is
covered by the general rule regarding the resident
foreign corporation.
General rule: Resident foreign corporations
shall be liable for a 30% income tax on their
income from within the Philippines
Except: Resident foreign corporations
engaged that are international carriers that
derive income from carriage of persons,
excess baggage, cargo, and mail originating
from the Philippines which shall be taxed at
2.5% of the GPB.

Section 28 (A) (4) Special Rule for Offshore Banking Units

Taxation of Income of Offshore Banking Units Tax Rate

Income derived by OBUs authorized by the BSP from foreign currency Exempt from all taxes
transactions with
1. nonresidents,
2. other OBUs,
3. local commercial banks ,
4. branches of foreign banks authorized by BSP to transact business
with OBUs

Income of non-residents, whether individual or corporations, from Exempt from income tax
transactions with OBUs
Net income from such transactions (transactions with OBUs) 30% regular corporate income tax
payable by banks
Interest income derived from foreign currency loans granted to residents Final withholding tax of 10%
(other than OBUs or local commercial banks, including local branches of
foreign banks that may be authorized by BSP to transact business with
OBUs)

Offshore banking unit (OBU) Deposits (referred to herein) – funds in foreign

A branch of a foreign bank which is currencies which are accepted and held by an OBU in
authorized by the Bangko Sentral ng Pilipinas (BSP) the regular course of business, with the obligation to
to transact offshore banking business in the return an equivalent amount to the owner thereof,
Philippines. with or without interest.

Offshore banking refer to the conduct of banking

transactions in the foreign currencies involving the
receipt of funds principally from external sources
and utilization of such funds.
Foreign currency deposit unit (FCDU) – is a
department of a local bank or in an existing local
branch of a foreign bank which is authorized by the
BSP to operate under the expanded foreign currency
deposit system.
Gross offshore income
All income arising from transactions
allowed by the BSP to conducted by and between
1. in the case of an OBU with another OBU or
with an expanded FCDU or with a non-
resident
 2. in the case of an expanded FCDU with
another expanded FCDU or with an OBU or
with a non-resident
Gross onshore income
All income arising from transactions
allowed by the BSP conducted by and between an
offshore bank with another offshore bank or with an
FCDU or with a non-resident (RR 10-1976)
Section 28 (A)(5) Special Rule on Branch Profit Remittance Tax
Branch Profit Remittance Tax (BRPT)
Any profit remitted by a branch to its head office
Base for the BRPT
It is the total profits applied for remittance
or earmarked for remittance without any deduction
for the tax component (not the profit actually
remitted abroad)
The following are not branch profits
1. Interests,
2. Dividends,
3. Rents,
4. Royalties,
5. Payment for technical services,
6. Salaries and wages premiums
7. Annuities, emoluments or other fixed or
determinable annual, periodic or casual
gains
Section 28 (A)(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational
Companies
Regional or area headquarters
Regional operating headquarters
Regional or Area Headquarters (RHQs)
Shall mean a branch established in the
Philippines by multinational companies and which
headquarters do not earn or derive income from the
Philippines and which act as supervisory,
communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets.
RHQs exempt from tax
1. Do not earn or derive income from within
the Philippines, and
The following are included in computing the gross
onshore income of OBUs and FCDUs:
1. gross interest income arising from foreign
currency loans and advances and
investments with residents
2. fees, commissions and other charges which
are integral parts of the income from
foreign currency loan transactions are
exempt. They are not being included in
computing the final tax (RR 14-1977).
Tax Rate
15% tax of the total profits applied or earmarked for
remittance without any deduction for the tax component
Except: those registered with PEZA
8. Profits, income and capital gains received
by a foreign corporation
unless the same are effectively connected with the
conduct of its trade or business in the Philippines.
Meaning of “effectively connected with the conduct
of its trade or business in the Philippines”
The Court ruled that only profits remitted
abroad by a branch office to its head office which are
effectively connected with its trade or business in
the Philippines are subject to the 15% branch profit
remittance tax. To be effectively connected, it is not
necessary that the income be derived from the
actual operation of taxpayer corporation’s trade or
business; it is sufficient that the income arises from
the business activity in which the corporation is
engaged.
Tax Rate
Not subject to income tax
10% of their taxable income
2. Do not participate in any manner in the
management of any subsidiary or branch
office they might have in the Philippines
3. Do not solicit or market goods whether on
behalf of their mother company or their
branches
“Regional operating headquarters" 5. marketing control and sales
Shall mean a branch established in the promotion;
Philippines by multinational companies which are 6. training and personnel
engaged in any of the following services: management;
1. general administration and 7. logistic services;
planning; 8. research and development services
2. business planning and and product development;
coordination; 9. technical support and
3. sourcing and procurement of raw maintenance;
materials and components; 10. data processing and
4. corporate finance advisory communications; and
services; 11. business development

Sec. 28(A)(7). Passive Income of Foreign Resident Corporation

Tax Rate on Passive Income of Resident Foreign Corporation Final Tax

1. Interest under the expanded foreign currency deposit 7.5%
(Sec. 28 (A)(7a))
2. Royalties derived from Philippines 20%

Royalties abroad? Exempt (only taxed from sources

within the Philippines)
3. Interest on currency band deposit and yield or any other 20%
monetary benefit from deposit substitutes, trust fund
and similar arrangement
4. Dividend from domestic corporation (intercorporate Exempt
dividend) (Sec. 28 (A)(7d))

Tax Rate of Banks on Income Derived under the Expanded FCD System Final Tax
(Sec. 28(A)(7b))
1. Income derived by a depository bank from foreign currency transactions Exempt
with non-residents, OBUs, local commercial banks, foreign banks
authorized by BSP
2. Interest income from foreign currency loans granted by a bank under
expanded foreign system to residents other than OBUs or other 10%
depository banks under the expanded system

Any income of non-residents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.

Sec. 28(A)(7c). Capital Gains from Sale of Shares of Stock Not Traded

Capital Gains Tax Rate

1. On sale of shares of stock of a
domestic not traded through
a local stock exchange and
held as capital assets
2. On sale of real property in the Philippines
Capital gains not over 5%
P100,000 of the net capital gains
Capital gains in 10% of the net capital gains
excess of P100,000
No provisions for sale capital gains
for sale or realty.
Hence, it will be subject regular
corporate income tax rate

Section 28 (B)(1) Income Tax on Nonresident Foreign Corporation

Tax Rate
 Non-resident foreign corporation 30% on the gross income derived from all
sources within the Philippines

Except
1. reinsurance premiums
2. capital gains from sales of shares
of stock not traded in stock
exchange

Non-resident foreign corporation – foreign

corporation not engaged in trade or business within
the Philippines

Section 28 (B)(2)(3)(4) Special Nonresident Foreign Corporations

Special Nonresident Foreign Corporation Tax Tax Base
Rate
Cinematographic film owner, lessor or distributor 25% Gross income from the
Philippines
Owner or lessor of vessels chartered by Philippine 4.5% Gross rentals, lease or charter
nationals fees from Filipino citizens or
corporations
Owner or lessor of aircraft, machineries, and other 7.5% Gross rentals or fees from the
equipment Philippines

Section 28 (B)(5)Tax on Certain Passive Incomes Received by a Nonresident Foreign Corporation

Tax on Passive Incomes of a Nonresident Foreign Tax Rate

Corporation
Interest on foreign loans 20%
Dividend from domestic corporations (inter-corporate 15%
dividends)

This is subject to the condition that the country in which

the non-resident foreign corporation is domiciled allows
a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in
the Philippines equivalent to 15%. If they don’t the
dividends will be taxed at 30% of the gross income

earned by its Philippine branch which is

Nonresident foreign corporation which transacted considered as a resident foreign corporation
thru its branch office in the Philippines by investing exempt from the intercorporate dividends tax
in the shares of stock of a domestic corporation received from a domestic corporation.
subject to tax on intercorporate dividends

While the general rule is that a foreign

corporation is the same juridical entity as its
branches office in the Philippines, however, when
the corporation transacts business in the Philippines
directly and independently of its branch, the
taxpayer would be the foreign corporation itself and
subject to the dividends tax similarly imposed on the
nonresident foreign corporation under Sec. 28(B)(5)
(b). Conditions for the 15% preferential tax rate on the
intercorporate dividends
Attributable Rule – the dividends attributable to The foreign corporation must show that the
the Head Office of the nonresident foreign country of origin grants a tax credit to the
corporation would not qualify as dividends nonresident foreign corporation, taxes deemed to
have been paid in the Philippines equivalent to at
least 15% against the tax due from the said
nonresident foreign corporation.
The prerequisite must be strictly complied
with because the 15% tax rate is a concession in the
nature of a tax exemption vis-à-vis the normal rate
of 30% on corporation.
the 15% tax on dividends. It is the amount
of tax foregone by the Philippine
government in favor of the nonresident
foreign corporation the purpose of which is
to encourage foreign investors to conduct
business in the country

Tax Sparing Rule – which connotes that the

15% represents the difference between the
regular income of 30% on corporation and
Sec. 28(A)(7c). Capital Gains from Sale of Shares of Stock Not Traded

Capital Gains Tax Rate

1. On sale of shares of stock of a Capital gains not over 5%
domestic not traded through a local P100,000 of the net capital gains
stock exchange and held as capital
Capital gains in excess 10% of the net capital gains
assets
of P100,000
No provisions for sale capital
gains for sale or realty.
2. On sale of real property in the Philippines
Hence, it will be subject to
30% regular corporate
income tax rate

Summary of the Tax Rates on Special Corporation

Special Corporations
Tax Rate Tax Base
Nonresident cinematographic film owner, lessor 25% Gross income from the
or distributor Philippines
Nonresident owner or lessor of vessels chartered 4.5% Gross rentals, lease or charter
by Philippine nationals fees from the Philippines
Nonresident owner or lessor of aircraft, 7.5% Gross rentals or fees from the
machineries, and other equipment Philippines
Proprietary educational institution and non-profit 10% Taxable income from all sources
hospital
Resident international carrier 2.5% Gross Philippine Billings
Regional operating headquarters of multinational 10% Philippine Taxable income
corporation

There is no MCIT for special corporations

Section 29. Imposition of Improperly Accumulated Earning Tax

Improperly Accumulated Earning Tax Tax Rate

Every corporation that permits earnings and 10% of improperly accumulated
profits to accumulate instead of being divided or taxable income
distributed

Concept of IAET imposed a tax equal to 10% of the improperly

Every corporation formed or availed for the
purpose of avoiding income tax with respect to its
shareholders of any other corporations, by
permitting earnings and profits to accumulate
instead of being divided or distributed shall be
accumulated taxable income.
IAET is imposed in the nature of penalty to
the corporation for the improper accumulation of its
earnings, and as form of deterrent to the avoidance
of tax upon shareholders who are supposed to pay
dividends tax on the earnings distributed to them by
the corporation.
Who are Covered by IAET
All domestic corporations which are
classified as closely held corporations
Closely held corporations – is one where at least
50% in value of the outstanding capital stock or at
least 50% of the total combined voting power of all
classes of stock is owned directly or indirectly by not
more than 20 individuals (RR 2-2001)
Determination if a corporation is a closely held
corporation (Look at stock-ownership)
1. If stock not owned by individual, it will be
considered to be owned proportionately by
its shareholders
2. If it is a family and partnership ownership,
an individual shall be considered to own the
stock for his family members or partners
3. If there is an option to acquire stocks, it
shall be considered as being owned by the
person with the option (BIR Ruling 25-02)
Who are Not Covered by IAET
1. Publicly held corporations
2. Banks and other financial institutions
3. Insurance companies
4. Taxable partnerships
5. General professional partnerships
6. Non-taxable joint ventures
7. Enterprises registered with the PEZA or with
the BCDA or with other special economic
zones (RR 2-2001)
Determination of the improperly accumulated
taxable income (Sec. 29[D])
The term 'improperly accumulated taxable income'
means taxable income' adjusted by:
1. Income exempt from tax;
2. Income excluded from gross income;
3. Income subject to final tax; and
4. The amount of net operating loss carry-over
deducted;
And reduced by the sum of:
1. Dividends actually or constructively paid;
and
2. Income tax paid for the taxable year.
Reasonable Needs of the Business
An accumulation of earnings or profits
(including undistributed earnings or profits of prior
years) is unreasonable if it is not necessary for the
purpose of the business, considering all the
circumstances of the case.
Reasonable needs of the business – means the
immediate needs of the business. If the corporation
cannot prove this, then it is not an immediate need.
In order to determine whether profits are
accumulated for the reasonable needs of the
business as to avoid the surtax upon the
shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of
the accumulation, not the subsequently declared
intentions which are merely the product of
afterthought. (Manila Wine Merchants v. CIR)
Immediacy Test – the reasonable needs
means the immediate needs of the business
including the reasonably anticipated needs.
The burden proof is with the corporation (RR
2-2001)
(What is surtax?)
The following are considered reasonable needs
1. Allowance for the increase of accumulated
earning up to 100% of the paid-up capital;
2. Earnings reserved for building, plant, or
equipment acquisitions as approved by the
Board of Directors (expansion,
improvement, and repairs);
3. Earnings reserved for compliance with any
loan or obligation established under a
legitimate business agreement (debt
retirement);
4. In case of subsidiaries of foreign
corporations in the Philippines, all
undistributed earning intended or reserved
for investments in the Philippines; and
5. Earnings required by law to be retained. (RR
2-2001)
Determination of Purpose to Avoid Income Tax
Prima facie evidence of IAE
1. The fact that any corporation is a mere
holding company or investment company
Holding or investment company –
refer to a corporation having
practically no activities except
holding property, and collecting
the income therefrom or investing
the same
2. The fact that the earnings or profits of a
corporation are permitted to accumulate
beyond the reasonable needs of the
business
3. Investment of substantial earning in
unrelated business or in stock or securities
of an unrelated business
4. Investments in bonds and other long term
securities
 5. Accumulations of earning in excess of 100%
of paid up capital.
Tax-Exempt Corporations
Section 30. Exemptions from Tax on Corporations.
The following organizations shall not be taxed under
this Title in respect to income received by them as
such:
A. Labor, agricultural or horticultural
organization not organized principally for
profit;
B. Mutual savings bank not having a capital
stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit;
C. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or
mutual aid association or a nonstock
corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to
the members of such society, order, or
association, or nonstock corporation or
their dependents;
D. Cemetery company owned and operated
exclusively for the benefit of its members;
E. Nonstock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation
of veterans, no part of its net income or
asset shall belong to or inures to the
benefit of any member, organizer, officer
or any specific person;
F. Business league chamber of commerce, or
board of trade, not organized for profit and
no part of the net income of which inures to
the benefit of any private stock-holder, or
individual;
G. Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare;
H. A nonstock and nonprofit educational
institution;
I. Government educational institution;
J. Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of
a purely local character, the income of
which consists solely of assessments, dues,
and fees collected from members for the
sole purpose of meeting its expenses; and
K. Farmers', fruit growers', or like association
organized and operated as a sales agent for
the purpose of marketing the products of its
members and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by them;
Notwithstanding the provisions in the
preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from
any of their properties, real or personal, or from
any of their activities conducted for profit
regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.
Notes:
General rule: Tax exempt corporations are
not subject to income tax on income received by
them from undertakings which are essential to or
necessarily connected with the purposes for which
they were organized and operated.
Exception: They are subject to income tax on income
of whatever kind and character from:
1. Any of their properties, real or personal, or
2. From any of their activities (unrelated)
conducted for profit, regardless of the
disposition made of such income
Exception to exception: However, this does not
apply to non-stock, non-profit educational
institutions, because the Constitution clearly states
that its revenues, as long as actually, directly, and
exclusively used for educational purposes, are
exempt.
Hence, no matter the source of the
revenue, as long as its actually, directly and
exclusively used for education purposes, it will be
exempt from income tax.
Sec. 30 (E) For non-stock corporations or
associations organized and operated exclusively for
religious, charitable, scientific, athletic or cultural
purposes…
For it to be exempted from income tax:
1. It must be organized and operated for one
or more the specified purposes; and
2. No part of its incomes must inure to the
benefit of private individuals
Charitable institutions
It provide free goods and services to the
public which would otherwise fall on the shoulders
of the government
Requisites of charitable institutions to be exempt:
It must be:
1. A non-stock corporation or association
2. Organized exclusively for charitable
purposes;
 3. Operated exclusively for charitable
purposes; and
4. No part of its net income or asset shall
belong to or inure to the benefit of any
member, organizer, officer of any specific
person.
Meaning of “exclusively”
It means it must be both organized and
operated exclusively for its charitable purposes
Organized – refers to its corporate form, as
shown by its articles of incorporations, by-laws,
etc
Operations – refer to its regular activities which
must be exclusively for charity
Meaning of “Non-stock”
1. It means no part of its income is
distributable as dividends to its members,
trustees, or officers, and
2. That any profit obtained as an incident to its
operation shall, whenever necessary or
proper, be used for furtherance of the
purposes for which the corporation was
organized (RMC 51-14)
Meaning of “Non-profit”
It means no part of its net income or asset
accrues to or benefits any member or specific
person, with all the net income or asset devoted to
the institution’s purposes and all its activities
conducted not for profit (RMC 51-14)
No inurements to trustees etc… to be exempt
In order for a non-stock and/or non-profit
corporation/association/organization to be exempt
based on Sec. 30, its earnings or assets shall not
inure to the benefit of any of its trustees, organizers,
officers, members or any specific person.
The following are Inurements:
1. Payment of compensation, salaries, or
honorarium to its organizers;
2. Payment of exorbitant or unreasonable
compensation to its employees;
3. Provisions of welfare aid and financial
assistance to its members.
An organization is not exempt from
income tax if its principal activity is to
receive and manage funds associated
with savings or investment programs,
including pension or retirement
programs.
Exception: This does not cover a
society, order, association or non-stock
corporation under Sec. 30(C) providing
for the payment of life, sickness,
accident and other benefits exclusively
to its members or their dependents;
4. Donation to any person or entity
Except: donations made to other
entitities formed for the
purpose/purposes similar to its
own;
5. The purchase of goods or services for
amounts in excess of the fair market value
of such goods or value of such services from
an entity in which one or more of its
trustees, officers or fiduciaries has an
interest;
6. When upon dissolution and dissatisfaction
of all liabilities, its remaining assets are
distributed to its trustees, organizers,
officers or members.
Its assets must be dedicated to its
exempt purposes.
Accordingly, its constitutive
documents must expressly provide
that in the event of dissolutions, its
assets shall be distributed to one or
more entities formed for the
purpose/purposes similar to its own,
or to the Philippine government for
public purposes (RMC 51-14)
Non-stock, non-profit corporations who are exempt
under Sec. 30 are still liable for the following taxes:
1. Income derived from any of their real
properties (such as rental payment from
their building premises)
2. Any activity conducted for profit regardless
of disposition thereof
3. Interest income from any bank deposits or
yield on deposit substitutes (final tax of
20%)
4. If it is foreign currency deposit, final tax of
7.5% (Dept. Order 149-95, 1995)
5. They shall also be withholding agents for
their employee’s compensation income
subject to withholdin tax (RMC 76-2003)
Sec. 30 (G) To be exempt from income tax civic
league or organization
1. It must be organized for non-profit,
2. It must be exclusively operated for
promotion of social welfare
 Note: Clubs which are organized and
operated exclusively for pleasure, recreation and
other non-profit purposes are subject to income tax
(RMC 35-2012)

Sec.30 (H) Exempt non-stock, non-profit

educational institution (refer to Sec. 27(B))

Revenues of non-stock and non-profit educational

institution are exempt from taxes:
1. It must proved that it is classified as a non-
stock, non-profit educational institution,
and
2. The income is actually, directly and
exclusively used for educational purposes.

Income from dormitories, canteens and bookstores

The income is not totally exempt from
taxation unless there is evidence to show actual,
direct and exclusive used of such income for
educational purposes.
Interest income on bank deposits and yields from
deposit substitutes
The interest income on bank deposits and
yields from deposit substitutes are not automatically
exempt from taxation. There must be a showing that
the income included in the school’s annual
information return and duly audited financial
statements together with:
1. Certification from depository banks as to
the amount of interest income earned from
passive investments not a subject to the
20% final withholding tax;
2. Certification of actual, direct and exclusive
utilization of said income for educational
purposes;
3. Board resolution on proposed project to be
funded out of the money deposited in
banks or placed in money market
placements, which must be used actually,
directly and exclusively for educational
purposes.

Meaning of “actually, directly and exclusively used

for educational purposes”
The phrase “actually, directly and
exclusively used for educational purposes” is not
limited to property actually indispensable therefor
but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said
purposes, such as in the case of hospitals, school for
training nurses, a nurses’ home property used to
provide housing facilities for interns, resident
doctors, superintendents, and other members of the
hospital staff, and recreational facilities of students.
 Chapter V
Taxable Income

Sec. 31. Taxable income

NIRC TRAIN
It means the pertinent items of gross income specified It means the pertinent items of gross income specified
in this Code, less the deductions and/or personal and in this Code, less the deductions xxx
additional exemptions xxx

Gross income Gross income

- Deductions - Deductions
- Personal exemptions (for individuals) Taxable income
Taxable income

Computation of taxable income must be in a fixed

period
Individual – calendar year, period is twelve
months ending December 31st of every year
Corporation – option to choose:
1. Calendar year
2. Fiscal year, period is twelve
months ending in any date
other than December 31st of
every year Income vs. Capital
Capital Income
GROSS INCOME (Sec. 32) Capital constitutes the Income is any wealth
Gross income means all income derived investments which is the which flows into the
from whatever source, including (but not limited to) source of income taxpayer other than a
the following items: return of capital
1. Compensation for services in Capital is fund Income is flow
whatever form paid, including, but Capital is wealth Income is the service of
not limited to fees, salaries, wages, wealth
commissions, and similar items; Capital is the tree Income is the fruit
2. Gross income derived from the
conduct of trade or business or the Gross Income vs. Net Income/Taxable Income
exercise of a profession; Gross Income Net Income/ Taxable
3. Gains derived from dealings in Income
property;
All income derived from NIRC: Net income refers
4. Interests;
whatever sources, to gross income less
5. Rents;
whether derived from allowable deductions
6. Royalties;
legal or illegal sources and/or personal and
7. Dividends;
(Jueteng, drugs) additional expenses
8. Annuities;
TRAIN: Net income refers
9. Prizes and winnings;
to gross income less
10. Pensions; and
allowable deductions
11. Partner's distributive share from the
net income of the general
1. Compensation for Services whatever Form Paid
professional partnership.

Compensation means all remuneration for
services performed by an employee for his employer
under an employer-employee relationship, unless
specifically excused by the Code.
Remuneration for services constitutes
compensation even if the relationship of employer
and employee does not exist any longer at the time
when payment is made between the person in
whose employ the services had been performed and
individual who performed them.
Compensation or wage which is subject to
withholding tax on compensation does NOT include
remuneration paid to the following:
1. For agricultural labor paid entirely in
products of the farm where labor is
performed
2. For domestic service in a private home
3. For casual labor not in the course of the
employer’s trade or business; or
4. For services by a citizen or resident of
the Philippines for a foreign
government or an international
organization.
2. Gross Income Derived from the Conduct of Trade
or Business or Exercise of Profession
Business income is the gross income
derived from the conduct of trade or business or the
exercise of a profession.
In the case of manufacturing, merchandising or
other business, gross income means
Total Sales
Less: Cost of goods solds
Add: All income from incidental and outside sources
Gross Income
3. Gains derived from dealings in property
Gains or loss on sale or exchange of
property is recognized when the property received
in exchange is essentially different from the property
disposed and the property received has market
value.
(In sale or exchange of real or personal
property, distinguish first between ordinary versus
capital assets because capital assets have special
rules governing them.)
Expropriation of property - taxable
Considering that there is a material gain not
excluded by law arising from expropriation of
property which is realized out of a closed and
completed transaction gains derived therefrom are
part of the gross income which are taxable.
4. Interest
Interest defined to be compensation
allowed by law or fixed by the parties for the use or
forbearance of money or as damages for its
detention.
Note: interest income which are already subject to
final tax (such as those in passive income
charts/table) need not be included in the
computation for gross income for a taxpayer’s
annual income tax return.
5. Rents
The amount paid for the use or lease or
enjoyment of property (whether real or personal) is
rental income to the owner of the property.
Rents deposited by tenants in a bank
account because the lessor refused to accept the
same are considered income of the lessor. The lessor
is deemed to have constructively received the rents.
(Limpan Investment vs. CIR)
Improvements by lessees
When a lessee erects a building or makes
improvement per agreement with the lessor, the
lessor may report the income therefrom upon either
of the following, at his option:
1. Outright method – at the time when such
building or improvements are completed,
the fair market value of such building or
improvement
2. Spread out method – the lessor may spread
over the life of the lease the estimated
depreciated value of such building or
improvement at the termination of the
lease and report the income for each of the
adequate part.
Lease is terminated
If the lease is terminated, and it is not
through purchase by the lessor, so that the lessor
comes into possession of the time property prior to
the time originally fixed, the lessor is considered to
receive additional income for that year (if the value
of the building exceeds the amount already reported
as income)
 No appreciation value due to causes other 7. Dividends
than premature termination of the lease shall be
included. Dividends are any distribution whether in
cash or in other property in the ordinary course of
Building is destroyed business even if extraordinary in amount, made by:
If the building is destroyed before the a. Domestic or resident foreign corporation
expiration of the lease, the lessor is entitled to b. Joint stock corporation
deduct as loss for the year when such destruction c. Partnership
occurred the amount previously reported as income, d. Joint account
less any salvage value to the extent that such loss e. Association
was not compensated by insurance. f. Insurance company

If useful life is less than remaining term of To the shareholders or members out of its earnings
lease, lessor will not repost any income, since he’ll or profits.
get it full depreciated anyway.
The Supreme Court held in CIR v. Goodyear,
that the cash amounts given by a domestic
corporation to a foreign shareholder for the
redemption of shares were not dividends as these
were not distribution out of its earnings or profits.
Different treatment for Leases and Conditional When the corporation receives dividends,
Sales which are tax-free (like intercorporate dividends), it
Lease Conditional Sales becomes taxable as dividends when it distributes the
The amount paid for the This will be treated as same to its shareholders.
lease shall be considered sale; hence the rules on
part of gross income. gains from the sale of General Rule: Cash and property dividends are
assets will apply and taxable. Stock dividends are not taxable.
Prepaid leases are these gains will be
reported as taxable treated as income. Property Dividends – Taxable
income in the year when
the prepayment is Ex: Rent to own scheme These are considered income in the amount
received. of the full market value as when received by the
stockholder.
6. Royalties
They are taxed 10% or 20% (if NRAEB).
Royalties are any payment of any kind
received as consideration for the use or right to use: If it was paid in stock of another
1. Any patent, trademark, design or model; corporation, it is not a stock dividend. It is still
2. Secret formula or process; considered property dividend.
3. Industrial, commercial or scientific
equipment; The valuation is the market value at the
4. Information concerning industrial, time the dividend becomes payable. For shares of
commercial or scientific experience. stock of another corporation given as dividends, it is
the market value when the shares of stocks are
Royalty is a valuable property that can be developed received.
and sold on a regular basis for a consideration.
Stock Dividends – Not Taxable
a. Any gain derived therefrom is considered as
an active business income subject to the Except: when the stock dividend causes
normal income tax. It is a special form of change in the corporate identity or a change in the
rental income for the use of intangible nature of the shares issued whereby the
property. proportional interest of the stockholder after the
distribution is essentially different from his former
b. However, when a person pays royalty to interest
another for the use of its intellectual
property, such as copyrights, patents, A stock dividend constitutes income if it
trademark, such royalty is a passive income gives .the shareholder an interest different from
of the owner thereof subject to withholding that which his former stock represented.
tax.
 When a stockholder receives a stock
dividend which is taxable income, the measure of
income is the fair market value of the shares of stock
received.
Sale of stock received as dividends
Once the recipient sells the stock dividend,
he may realize gain or loss. This gain or loss is
treated as arising from the sale or exchange of a
capital asset. (Sec. 253, RR 2-1940)
Stock declaration and subsequent redemption
If after the stock dividend declaration, a
corporation cancels or redeems the same in such
time and manner as to make the distribution/
redemption essentially equivalent to a distribution of
a taxable dividend, the amount received shall be
considered as a taxable dividend (10% final tax for
individuals) (Sec. 254, RR 2-1940)
Reason why corporation do this:
So that the shareholder will avoid paying
tax. Remember, stock dividends are not taxable, but
cash dividends are subject to 10% final tax for
individuals. So corporations declare stock dividends,
and then redeem them (by giving their shareholders
cash) to go around the tax. But because of the law,
their subsequent redemptions are now taxable.
Hence, when the corporation cancels or
redeems stock issued as a dividend at such time and
such manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption
or cancellation of the stock shall be considered as
taxable income to the extent that it represents a
distribution of earnings or profits (CIR v. CA, GR No.
108576)
Liquidating dividends – Taxable
When corporation distributes all its
properties or assets in complete liquidation, the gain
realized from this is taxable.
Computation is based on Sec. 39 (b) or (c) of the Tax
Code.
When a corporation distributes all of its
assets in complete dissolution, there is no dividend
income to the shareholder receiving the liquidating
dividend. There is, instead, a sale or exchange of
property. Any gain realized or loss sustained by the
stockholder, whether individual or corporate, is
taxable income or deductible loss, as the case may
be (Sec. 265, RR 2-1940).
When a corporation was dissolve and in
process of complete liquidation, and its shareholders
surrendered their stock to it and paid the sums in
question to them in exchange, a transaction took
place, which was no different in its essence from a
sale of the same stock to a third party who paid
therefore. (Wise v. Meer)
(to be continued… p. 135)
8. Annuities
An annuity refers to a sum of money
payable yearly or at a regular intervals.
If part of the annuity payment represents
interest, then it is a taxable income. If the annuity is
a return of premium, it is not taxable.
Note: Life insurance annuities are excluded from
gross income
9. Prizes and Winnings
General Rule: Prizes and winnings are taxable
Exception: The prizes, awards and winning received
in the following are not taxable.
1. Amounts received as prizes and awards
made primarily in recognition of religious,
charitable, scientific, educational, artistic,
literary, or civic achievement are not
taxable and excluded from gross income if:
a. The recipient was selected without any
action on his part to enter the contest
or proceeding; and
b. The recipient is not required to render
substantial future services as a
condition to receiving the prize or
award
2. All prizes and awards granted to athletes in
local and international sports competitions
and tournaments, whether held in
Philippines or abroad, and sanctioned by
their national sports association
3. Those that are in the nature of gifts
10. Pensions
Pension is a gratuity granted as a favor or
reward or one paid under given conditions to a
person following retirement from service or to
surviving dependents.
Note: Pensions and retirement benefits under RA
7641 are excluded from gross income.
11. Share in GPP’s income
Although the GPP is exempt from income
tax as an entity, the partner’s distributive share in
the net income of the GPP is included in the gross
income of the partner.
Each partner shall report as gross income
his distributive share, actually or constructively
received, in the net income of the partnership in his
individual return.
12. Gross Income From Whatever Source Derived
The law imposes a tax on income from
whatever source which means that “it includes
income whether coming from legal or illegal
sources.”
The theory underlying the taxability of the
income derived from illegal sources is based upon
the principle that an unlawful or prohibited business
is not exempt from the payment of taxes that it
would have to pay if it were a lawful business.
It has been held that the phrase “income
from whatever source derived” indicates a legislative
policy to include all income not expressly exempted
within the class of taxable income under laws.
Income from illegal sources such as jueteng or
gambling – taxable
Income from swindling activities – taxable
Recovery of bad debts previously written off –
taxable
Recovery of bad debts previously charged
off is taxable to the extent of income tax benefit of
the said deduction.
Tax benefit rule – if a taxpayer had declared bad
debts in previous years and it was subsequently
recovered, it is taxable if it amounts to income. If
it did not result to income, it is not taxable.
Cancellation or forgiveness of debts
Cancellation or forgiveness of debt may
amount to:
1. Payment of income – taxable
Example: An individual performs services
for creditor who, in consideration thereof
cancels the debt, income to the amount of
debt is realized by the debtor as
compensation for his services.
2. Payment of dividends – taxable
Example: A corporation to which a
stockholder is indebted forgives the debt
3. Gift – exempt
Example: A creditor merely desires to
benefit a debtor and without any
consideration therefor cancels the debt
Expropriation
Acquisition by the Government of private
properties through expropriation, said properties
being justly compensated, is embraced within the
meaning of the term “sale” “disposition of property”
and the proceeds should be included in the gross
compensation (Gutierrez vs. Collector)
Doctrine of Involuntary Dealings
If property (as result of its destruction, in
whole or in part, theft or seizure, or an exercise of
the power of requisition or condemnation or the
threat or imminence thereof) is compulsorily or
involuntarily converted into property similar to the
property so converted, or into money, which is
forthwith in good faith expended in the acquisition
of other property, or in the establishment of a
replacement fund, no gain or loss shall be
recognized. If any part of the money is not so
expended, the gain shall be recognized, but in an
amount not in excess of the money so expended.
Damages
Damages may or may not be considered
taxable income, depending on the nature of the
damages.
Compensation for loss of income and exemplary
damages which represent loss of capital – taxable
Moral damages, reimbursement, for hospital bills,
return of capital/property – not taxable
Sec. 32 (B) Exclusions from Gross Income
The following shall not be included in gross income:
1. Life insurance
2. Amount received by insured as return of
premium
3. Gifts, bequests, and devises
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities,
etc.
a. Retirement benefits received under RA
7641 and those under reasonable
private benefit plan
b. Separation pay or benefits for death,
sickness, disability or any cause beyond
the control of official or employee
c. Benefits received from the US Veterans
Administration
 d. Social security benefits, retirement
gratuities, pensions and similar benefits
from foreign government agencies
e. SSS benefits
f. GSIS benefits
7. Miscellaneous items
a. Income earned by foreign governments
in the Philippines from deposits or
investments
b. Income earned by the Philippine
government
c. Prizes and awards in recognition
primarily in recognition of religious,
charitable, scientific, educational,
artistic, literary or civic achievement
d. Prizes and awards in sport competition
e. 13th month pay and other benefits
Except if the proceeds are held by the insurer under
an agreement to pay interest thereon. Only the
interest payments are included in the gross income.
2. Amount Received by Insured as Return of
Premium
Only the actual value of such consideration
and the amount of the premiums and other sums
subsequently paid by the transferee are exempt
from taxation.
But if the amounts received exceed the
aggregate premiums or considerations paid then the
excess shall be included in gross income.

3. Value of property acquired by gift, bequest and

devises

The following are also excluded from gross income:
1. GSIS, SSS, Medicare, Pag-ibig, union dues
and other contributions
2. Gains from sale of bonds, debentures or
other certificate of indebtedness with
maturities of more than five years.
3. Gains from redemption of shares in mutual
funds
4. Interest received by a non-resident
individual or a non-resident corporation
from deposits with depository banks under
the expanded foreign currency deposit unit
5. Intercompany dividends (resident/domestic
corporation from domestic corporations)
6. De minimis benefits received by employees
7. Those under special laws (PCSO and lotto
winnings)
8. Personal Equity and Retirement Account
(PERA) contribution
Exclusions from Gross Income
Bequest – something which is bequeathed by virtue
of a will usually in the form of personal property
Devise – is a gift of real property given by virtue of a
will
Property received as a gift or received
under a will or testament or through legal
succession, is exempt from income tax
Exception: the income therefrom or income
derived from its investment or sale shall be included
in the gross income
4. Compensation for Injuries or Sickness
The amounts received by an insured or his
estate or beneficiaries through accident or health
insurance or under workmen’s compensation for
personal injuries or sickness are excluded from the
gross income.

They are items of income which are not 5. Income Exempt under Tax Treaty
included in the taxable income.
International Convention or Tax Treaty – shall only
Exclusions from Gross Deductions from Gross refer to the Double Taxation Convention (DTCs) or
Income Income Double Taxation Agreements (DTAs) negotiated
They are actually They are expenses between the Philippines and other Contracting
income received or and other allowable States or jurisdiction for the avoidance of double
earned by the taxpayer deductions as provided taxation and the prevention of fiscal evasion with
but is not taxable as for by the law which are respect to taxes on income.
income because of the incurred for engaging in
exemption provided by trade or business or 6. Retirement benefits, pensions or gratuities
law or by tax treaties exercise of profession.
A1. Retirement benefits under RA No. 7641
1. Proceeds of Life Insurance Paid to the Heirs In order to avail of the exemption of the
retirement benefits under RA 7641 from private
It is considered as a mere return of capital, employers without any retirement plans, the
thus it is excluded. following conditions must be met:
 1. The retirement benefits must be received
under existing CBA or other agreements;
2. This is given in the absence of retirement
plan or agreement proving for retirement
benefits
3. The retiring employee has served at least
five (5) years in the said establishment;
4. That he is not less than 60 years of age but
not more than 65, which is declared as the
compulsory retirement age; and
5. He shall be entitled to retirement pay
equivalent to at least ½ month salary for
every years, a fraction of at least 6 months
being considered as one whole year.
A2. Retirement benefits received under a
reasonable private benefit plan
In order to avail of the exemption, with
respect to retirement benefits under a reasonable
private benefit plan, the following requirements
must be met:
1. The plan must be reasonable
2. The benefit plan must be approved by the
BIR
3. The retiring official or employee has been in
the service of the same employer for at
least years
4. The retiring official or employee is not less
than 50 years of age at the time of his
retirement
5. The benefits shall be availed of by an official
or employee only once.
Reasonable private benefit plan
It 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
B. Amount received by an official or employee from
the employer
Requisites in order that the separation pay may be
excluded from gross income
1. The amount received by an official or
employee or by his heirs from the employer
should be due to:
a. Death,
b. Sickness,
c. Physical disability, or
d. Any causes beyond the control of
said employee or official
2. The separation from the service of the
official or employee must not be asked for
or initiated by him
3. The separation was not of his own making
4. Whether or not the separation is beyond
the control of the official or employee shall
be determined on the basis of the prevailing
facts and circumstances and shall be duly
established by the employer by competent
evidence which should be attached to the
monthly return for the period in which the
amount paid due to the involuntary
separation was made
5. Amounts received by reason of involuntary
separation remain exempt from income tax
even if the official or the employee at the
time of separation, had rendered less than
10 years of service and/or is below 50 years
of age
But any payment made by an employer to
an employee on account of dismissal, constitutes
compensation regardless of whether the employer is
legally bound by contract, statute, or otherwise, to
make such payment. Hence it is not exempt from
gross income.
C. Benefits received from the US Veterans
Administration
D. Social security benefits, retirement gratuities,
pensions and similar benefits from foreign
government agencies
E. SSS benefits
F. GSIS benefits
7. Miscellaneous Items
A. Income derived by foreign government
Income earned by foreign governments in
the Philippines from deposits/investments to be
exempt, the income should be received by:
1. foreign governments,
2. financing institutions owned, controlled, or
enjoying refinancing from foreign
governments, and
3. international or regional financial
institutions established by foreign
governments
B. Income derived by the government or its political
subdivisions
Income derived by the government will be
exempt from tax:
1. The income should accrue to the
government, and
2. It must be derived:
a. From any public utility or
b. From the exercise of any essential
governmental function.
C. Prizes and awards in recognition of achievements
Amounts received as prizes and awards
made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic
achievement are not taxable and excluded from
gross income if:
1. The recipient was selected without any
action on his part to enter the contest or
proceeding; and
2. The recipient is not required to render
substantial future services as a condition to
receiving the prize or award
D. Prizes and awards in sports competition
All prizes and awards granted to athletes in
local and international sports competitions and
tournaments, whether held in Philippines or abroad,
and sanctioned by their national sports association.
The national sports association referred to
is the Philippine Sports Commission thru its
Philippine Olympic Committee.
Sec. 33. Special Treatment of Fringe Benefit
Imposition of Fringe Benefit Tax (Final tax)
NIRC
FBT rate 32% on the grossed up monetary
value of fringe benefits
Determination
of grossed up Actual monetary value/68% =
monetary Grossed up monetary value
value
Fringe Benefit Grossed up Monetary value x 32% =
Tax FBT
Special Cases of FBT
Special Cases For FBT
Received by non-resident alien not engaged in
trade or business
Received by alien or FIlipino employed by a
ROHQ or RAHQ
Received by employees in special economic
zones
Fringe Benefits
It means any good, service or other benefit
furnished or granted in cash or in kind by an
employer to an individual employee (except rank
and file employees) such as, but not limited to, the
following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver
and others;
E. 13th Month pay and other benefits
The gross benefits received by officials and
employees of public and private entities in the form
of 13th month pay and other benefits are excluded
from the gross income for income tax purposes to
the extent of:
NIRC TRAIN
P82,000 P90,000
Any excess will be included in the gross
income per income tax return as part of gross
compensation income.
The amount of the de minimis benefits
given to employees shall also be excluded from the
gross income for income tax purposes.
TRAIN
35% on the grossed up monetary
value of fringe benefits
Actual monetary value/65% =
Grossed up monetary value
Grossed up Monetary value x 35% =
FBT
FBT Grossed up Monetary Value
25%
15%
25% or 15%
(depends)
5. Interest on loan at less than 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 travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or
his dependents; and

10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows.
Fringe Benefit Tax
 It is a final income tax
 Imposed on the managerial/supervisory
employee
 Withheld by the employer who files the
return and remits the tax within 25 days
from close of each calendar year
Fringe Benefits Not Taxable
1. Fringe benefits which are authorized and
exempted from tax under special laws;
2. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit plans;
3. Benefits given to the rank and file
employees, whether granted under a
collective bargaining agreement or not; and
4. De minimis benefits
5. Benefits granted to employees as required
by the nature of, or necessary to the trade,
business or profession of the employer
6. Benefits granted for the convenience of the
employer
Convenience of Employer Rule
The benefit shall not be subject to FBT
when the:
1. Benefits granted to employees is required
by the nature of, or necessary to the trade,
business or profession of the employer
2. Benefits granted for the convenience of the
employer
Benefits granted for the convenience of the
employer
1. Housing privilege of military officers inside
or near the military camps;
2. A housing unit situated inside or at most 50
meters from the perimeter of the business
premises;
3. Temporary housing of an employee for 3
months or less;
4. Expenses of the employee which are
reimbursed by the employer which are”
a. Receipted under the name of the
employer and
b. Not personal expenses of the
employee;
5. Business expenses which are paid for by the
employer for the foreign travel of his
employees in connection with business
meetings or conventions (RR 3-1998)
The benefits above are exempted from
FBT, however, it may still form part of the
employee’s gross compensation income which is
subject to income tax (RR 3-1998)
Read Ingles p. 220-221
De Minimis Benefits
These are facilities and privileges of
relatively small value furnished or offered by an
employer to his employee.
These are not considered compensation
subject to income tax (and consequently withholding
tax) if these are offered or furnished by the
employer as means of promoting:
a. Health,
b. Goodwill,
c. Contentment, or
d. Efficiency of employees (RR 8-2000)
The following are de minimis benefits (both
managerial, supervisory, and rank and file
employees). These are exempt from tax:
1. Monetized unused vacation leave credits of
private employees not exceeding 10 days
per year.
2. Monetized value of vacation and sick leave
credits paid to government officials and
employees (RR 5-2011)
3. Medical cash allowance to dependents of
employees, not exceeding P1,500 per
employee per semester or P250/month (RR
11-2018)
4. Rice subsidy of P2,000 or 1 sack of 50kg rice
per month amounting to not more than
P2,000 (RR 11-2018)
5. Uniform and clothing allowance not
exceeding P6,000/month (RR 11-2018)
6. Actual yearly medical benefits not
exceeding P10,000/month
7. Laundry allowance not exceeding
300/month
8. Employee achievement awards for length of
service or safety achievement in the form of
tangible property (other than cash or gift
certificate) with value not exceeding
P10,000
9. Gifts given during Christmas and major
anniversaries not exceeding P5,000/year
10. Daily meal allowance for overtime work,
not exceeding 25% of the basic minimum
wage
11. Benefits received by an employee by virtue
of a collective bargaining agreement and
productivity incentive schemes provided
the total annual monetary value from both
CBA and productivity schemes combined do
not exceed P10,000 (RR 1-2015)
All other benefits given by employers which
are not included in the enumeration shall not be
considered “de minimis” benefits, and hence, shall
be subject to income tax and withholding tax on
compensation income (RR 5-2011)
The amount of de minimis benefits within
its ceiling is exempt from fringe benefit tax up to the
ceiling. Any excess over the ceiling of the de minimis
benefits shall be part of the “other benefits” exempt
up to (NIRC – P82,000; TRAIN – P90,000). Anything in
excess of P82,000 or P90,000 will be taxable.
De minimis benefit
Not w/in DMB ceiling w/in DMB ceiling
Included in FBT FBT Exempt
w/in P82k or P90k Not w/in P82k or P90k
Not Taxable Taxable
Any amount given by the employer as
benefits, whether de minimis or others, shall be
deductible as business expense (RR 10-2008).
Chapter VII
Allowable Deductions
Sec. 34. Deductions from Gross Income
The following are allowed as deduction
(except for taxpayers earning compensation from
personal services under an e-e relationship):
A. Expenses
1. Ordinary and Necessary Trade,
Business or Professional Expenses
i. Salaries, wages and other forms
of compensation
ii. Travel expenses in pursuit of
trade, business, profession
iii. Rentals for purposes of trade,
business, profession
iv. Entertainment, amusement and
recreation expenses directly
connected with trade, business
or operation
2. Expenses Allowable to Private
Educational Institutions
Deductions and Exemptions Allowed to Taxpayers
Kind of Taxpayers
NIRC
1. Individuals earning pure 1. Personal
compensation Exemptions
2. Premium
health/hospitalizations insurance
2. Individuals deriving income 1. Itemized deductions (Sec. 34, A-J),
B. Interest – in connection with the taxpayer’s
trade, business or profession
C. Taxes – in connection with the taxpayer’s
trade, business or profession
D. Losses – actually sustained during the
taxable year and not compensated by
insurance or other indemnity
E. Bad debts
F. Depreciation
G. Depletion of Oil and Gas Wells and Mines
H. Charitable and other Contributions
I. Research and Development
J. Pension Trust
Deductions
These are the amounts allowed by law to
reduce the gross income to taxable income.
Taxpayers Allowed to Claim the Allowable
Deductions
These deductions are applicable only in
computing the taxable income of the following
taxpayers derived from trade or business or practice
of profession:
1. Individual resident and nonresident citizens
2. Individual resident aliens
3. Nonresident alien individual engaged in
trade or business within the Philippines
4. General professional partnerships and
partners thereof
5. Domestic corporations
6. Resident foreign corporations in general
Taxpayers NOT Allowed to Claim the Allowable
Deductions
1. Taxpayers earning compensation income
arising from personal services rendered
under an employer-employee relationship
2. Alien individuals employed by the RHQs or
ROHQs of multinational companies
3. Alien individuals employed by OBUs
4. Alien individuals employed by petroleum
service contractors and subcontractors
5. International carriers
6. Offshore banking units
7. Branches of foreign corporations on the
profits remitted to their head offices
8. Regional or Area Headquarters (RHQs)
9. Regional Operating Headquarters (ROHQs)
10. Nonresident foreign corporation
Allowable Deductions
TRAIN
and Additional
payments on TRAIN removed personal
exemption and premium
payments on health and
 from trade or business or or
profession 2. Optional Standard Deduction (Sec.
34, L)
3. Personal exemptions
4. Premium
health/hospitalization insurance
3. Corporation (except 1. Itemized deductions (Sec. 34, A-J),
nonresident foreign or
corporation) 2. Optional Standard Deduction (Sec.
34, L)
Itemized Deductions
These are expenses and losses related to
trade or business or the practice of profession.
Itemized deductions refers to items Sec. 34
A-J.
Sec. 34. A. Expenses
All the ordinary and necessary expenses
paid or incurred during the taxable year in carrying
on or which are directly attributable to, the
development, management, operation and/or
conduct of the trade, business or exercise of a
profession shall be deducted from gross income,
including a reasonable allowance for:
1. Salaries, wages and other forms of
compensation
2. Travel expenses in pursuit of trade,
business, profession
3. Rentals for purposes of trade, business,
profession
4. Entertainment, amusement and recreation
expenses directly connected with trade,
business or operation
Requisites for the deductibility of ordinary and
necessary trade, business or professional expenses:
1. Expense must be ordinary and necessary
2. Must have been paid or incurred during the
taxable year
3. Must have been paid or incurred in carrying
on the trade/business
4. Must be supported or substantiated by
receipts, records or other pertinent papers
5. Amount must be reasonable
6. If subject to withholding tax, the same
should be properly withheld and remitted
to the BIR thru the AABs
7. Must be legitimately paid or not in the form
of bribe, kickbacks and other similar
payments
Meaning of “ordinary and necessary” expenses
Ordinary – when it is normal in relation to the
business of the taxpayer. It need not be recurring or
habitual payments.
Necessary – when it is appropriate and helpful in the
development of the taxpayer’s business.
hospitalization insurance
payments on
1. Salaries and other forms of compensation for
personal services actually rendered
The test for deductibility in the case of
compensation payments is whether they are:
a. Reasonable, and
b. Payments purely for service
Bonuses
Bonuses to employees made in good faith
and as additional expenses compensation for
services actually rendered by the employees are
deductible, provided such payments, when added to
the stipulated salaries, do not exceed a reasonable
compensation for services rendered (Kuenzle &
Streiff v. CIR)
Conditions for the deduction of bonuses:
1. The payment of the bonuses is in fact
compensation
2. It must be for personal services actually
rendered, and
3. The bonuses when added to the stipulated
salaries, do not exceed a reasonable
compensation for services rendered
Fringe Benefits Expenses
The company can deduct the amount of the
grossed-up monetary value of the fringe benefit
given to the managers or supervisors as fringe
benefit expense provided that the said fringe benefit
had been subjected to the final withholding tax.
2. Travelling/Transportation Expenses
Travelling expenses include transportation
expenses and meals and lodging incurred solely on
business, to be deductible. If the trip is taken for
other than business purposes, it is not deductible.
Essential requisites for deductibility of
travelling/transportation expenses
1. Expense must be reasonable and necessary
2. It must have been paid or incurred during
the taxable year
3. It must be paid or incurred while away from
home
 4. It must be paid or incurred in the conduct of
trade or business or exercise of profession
5. It must be substantiated with sufficient
evidence such as official receipts
4. Rental Expense
Essential requisites for deductibility of rental
expenses
1. Rental must be ordinary and necessary
2. It is required as a condition for the
continued use or possession of the property
being leased
3. The taxpayer has not taken or is not taking
title to the property or has no equity other
than that of a lessee, user or possessor
4. Rentals should be subject to the expanded
withholding tax of rental charge, net of VAT
if any
5. It must have been paid or incurred during
the taxable year
6. It must be paid or incurred in carrying trade
or business or practice of profession
7. It must be substantiated by official receipts,
records or other pertinent papers
Expenses under lease agreements
Where a leasehold is acquired for business
purposes for a specified sum, the purchaser may
take as a deduction in his return an aliquot part of
such sum each year, based on the number of years
the lease has to run.
Taxes paid by a tenant to or for a landlord
for business property are additional rent and
constitute a deductible item to the tenant and
taxable income to the landlord, the amount of the
tax being deductible by the latter.
Leaseholds improvement
The cost borne by a lessee in erecting
buildings or making permanent improvement on
ground which he is a lessee is held to be a capital
investment and not deductible as a business
expense.
In order to return to such taxpayer his
investment of capital, an annual deduction may be
made from gross income of an amount equal to the
cost of such improvements divided by the number of
years remaining of the term of lease, and such
deduction shall be in lieu of a deduction for
depreciation if the remainder of the term of lease is
greater than the probable life of the building
erected, or of the improvements made, and this
deduction shall take form of an allowance for
depreciation.
5. Entertainment, Amusement and Representation
Expenses
Representation expenses
It shall refer to the expenses incurred by a
taxpayer in connection with the conduct of his trade,
business or exercise of profession:
1. in entertaining , providing amusement and
recreation to, or meeting with a guest/s
2. at a dining place, place of amusement,
country club, theater, concert, play,
sporting event and similar events or places
If the taxpayer is the registered member of
a country, golf or sports club, the presumption is
that the expenses are fringe benefits subject to the
FBT unless the taxpayer can prove that these are
actually representation expenses.
Entertainment facilities
It shall refer to:
1. a yacht, vacation home, or condominium;
and
2. any similar item of real or personal property
used by the taxpayer primarily for the
entertainment, amusement or recreation of
guests or employees
To be considered as an entertainment facility, it
must be owned or form part of the taxpayer’s trade,
business, or profession for which he claims
depreciation or rental expenses.
A yacht is considered as:
1. Entertainment facility – its use is not
restricted to specified employees or guest
2. Fringe benefit – its use is restricted to
specified employees or guests
Requisites for the deductibility of entertainment,
amusement and recreation expenses
1. It must be paid or incurred during the
taxable year
2. The amount must be reasonable
3. It must be paid or incurred in the conduct of
trade or business or exercise of profession
4. It must not be contrary to laws, morals,
good customs, public policy or public order
5. It must not in the form of bribe, kickbacks
and other similar payments
6. It must not exceed the ceiling
7. It must be substantiated by official receipts,
records or documents
8. The appropriate amount of withholding tax,
if applicable, should have been withheld
therefrom and paid to the BIR
Ceiling for Entertainment, Amusement and
Representation Expenses
Ceiling
Taxpayers engaged in sale of goods or 0.5% of
properties net sales
Taxpayers engaged in sale of services, 1% of net
including exercise of profession and use or revenue
lease of properties
Excluded from Entertainment, Amusement and
Representation Expenses
1. Those that are treated as compensation or
fringe benefits
2. Expenses for charitable and fund raising
events
3. Expenses for bona fide meeting of
stockholders, partners or directors
4. Expenses for attending or sponsoring an
employee to a business league or
professional organization meeting
5. Expenses for events organized for
promotion, marketing and advertising
including concerts, conferences, seminar,
workshops, convention, etc
6. Other expenses of a similar nature
The above items may still qualify as deductions
under other provisions of Sec. 34.
6. Minor or Ordinary Repairs and Maintenance
The cost of incidental repairs is deducted as
expenses when it:
1. Does not materially add to the value of the
property
2. Does not appreciably prolong its life
3. But keep it in an ordinarily operating
condition, and
4. The plant or property account is not
increased by the amount of such
expenditures
Repairs in the nature of replacement, to the
extent that they arrest deterioration and appreciably
prolong the life of the property or prolong the life of
the property or increase its value are capital
expenditures and should be charged/debited against
the depreciation reserves, if such account is kept
(Sec. 68, RR. 2)
7. Cost of Materials and Supplies
Taxpayers carrying materials and supplies
on hand should include in expenses the charges of
materials and supplies only to the amount that they
are actually consumed and used in operation during
the year for which the return is made, provided the
cost has not been deducted in determining the net
income for any previous year.
If a taxpayer carries incidental materials or
supplies on hand for which no record of
consumption is kept or of which physical inventories
at the beginning and end of the year are not taken, it
will be permissible for the taxpayer to include in his
expenses and deduct from the gross income the
total cost of such supplies and materials as were
purchased during the year for which the return is
made, provided the net income is clearly reflected
by this method (Sec. 67, RR 2)
8. Advertising Expenses and other Selling Expenses
Advertising is generally of two kinds:
1. Advertising to stimulate the current sale of
merchandise or use of services – deductible
as business expense
2. Advertising designed to stimulate the future
sale of merchandise or use of services –
spread out over a reasonable period of
time.
The second kind involves expenditures
incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayer’s trade or
business or for the industry or profession of which
the taxpayer is a member.
Professional Expenses
The following are allowed as deductions:
1. The cost of supplies
2. Expenses paid in the operation and repair of
transportation equipment used in making
professional class
3. Due to professional societies and
subscription to professional journals
4. Rent paid for offices
5. Expenses for utilities on offices
6. Expenses for hiring of office assistants
7. Books, furniture, and professional
equipments with a short useful life
Those with a permanent character
are not allowed as deductions.
Private Educational Institutions
They are allowed to deduct expenditures
otherwise considered as capital outlays of
depreciable assets incurred for the expansion of
school facilities, or
They are allowed to capitalize the
expenditure, and claim deduction by way of
depreciation.
Other business expenses allowed by special laws as
deductions
1. Discounts granted by establishments for
senior citizens and PWDs (RR 1-2009, RR 7-
2010)
2. Expenses incurred by a private health and
non-health facility, establishment, or
institution in complying with the Expanded
Breastfeeding Promotion Act of 2009 – up
to twice the actual amount incurred (RA
10028)
3. Expenses incurred in training schemes
pursuant to the Jewelry Industry
 Development Act of 1998 – additional 50%
of actual amount incurred (RA 8502)
4. Expenses incurred for adopting a school
based on the Adopt-a-School program –
additional 50% of the actual amount
incurred (RA 8525)
5. A lawyer or professional partnerships
rendering actual free legal services shall be
entitled to an allowable deduction from the
gross income, whichever is lower:
a. the amount that could have been
collected for the actual free legal
services rendered or
b. up to 10% of the gross income derived
from the actual performance of the
legal profession (RA 9999)
Bribes, Kickbacks and Other Similar Payments
Payments in the form of bribes or kickbacks
are not allowed as deductions from gross income.
It is paid to official or employees:
1. National government, LGUs, GOOCs, or
2. Foreign government,
3. Private corporation, GPP or similar entity.
The official or employee who received the
said amount as bribe would be liable for income tax.
All income, from legal or illegal sources, are taxable.
Sec. 34. B. Interest
Interest Expense
It refers to the payment for the use or
forbearance or detention of money, regardless of
the name it is called or denominated.
Requisites for deductibility of interest expense
1. There must be an indebtedness
2. There should be an interest expense paid or
incurred upon the indebtedness (incurred –
it was due and demandable)
3. The indebtedness must be that of the
taxpayer
4. It must be connected with the taxpayer’s
trade, business, or profession
5. The interest expense must have been paid
or incurred during the taxable year
6. The interest must have been stipulated in
writing
7. The interest must be legally due
8. The interest payment arrangement must
not between related taxpayers
9. The interest must not be incurred to finance
petroleum operations
10. In case the interest was incurred to acquire
property used in trade, business or
profession, it was not treated as capital
expenditure
11. That the allowable deduction for interest
expense shall be reduced by 33% of the
interest income subjected to the final tax,
and
12. The interest is not expressly disallowed by
law to deducted from gross income
Rules on deductibility of interest expense
General Rule: In general, the amount of interest paid
or incurred within a taxable year on indebtedness in
connection with the taxpayer's profession, trade or
business shall be allowed as deduction from gross
income
Exception: The amount of interest expense
paid or incurred by a taxpayer in connection with his
trade, business or exercise of a profession from an
existing trade, business or exercise of a profession
from an existing indebtedness shall be reduced by
an amount equal to 33% of the interest income
earned which had been subjected to the final tax.
Tax Arbitrage Rule
The interest expense deduction shall be
reduced by 33% of the interest income earned which
has been subjected to the final tax.
This is applicable when:
1. There is a debt
2. It incurred an interest expense
3. It also earned an interest income
4. The interest income is subjected to final
withholding tax
Example: Company A obtained a loan from Lending
Corporation B in connection with operation of its
business. Company A deposit the loan to Bank C.
Assume that Company A’s taxable net income for the
year 2009 before the deduction of the interest
expense is P1,000,000. For the year 2009, the loan
derived an interest income from said deposit with
Bank C amounted to P180,000 which P36,000 is
withheld as final tax. Its interest expense amounted
to P150,000 on the loan obtained from Lending
Corporation B in the same year.
Net income before P1,000,000
interest expense
Less: Interest expense P150,000
Less: 33% of the 33% x
interest income from P180,000 =
deposit (33% x
P180,000) P59,400
Deductible interest
expense 90,600
Taxable income 909,400
Income tax due (30%) 909,400 x
30% =
P272,820
Note: if there is no interest income, the whole
interest expense is deductible from gross income
Example: In the previous illustration, there is no
interest income only interest expense the tax due
will be P255,000 instead of P272,820
Net income before interest
expense P1,000,000
Less: Interest expense P150,000
Taxable income P850,000
Income tax due (30%) 850, 000 x 30%
= 4. Taxes must be those allowed and not
P255,000
The law effectively cancelled out the tax
arbitrage advantage. Corporations before would
borrow money and use the interest they had to pay
on the loan as a deduction, even if they reinvested
the money elsewhere and got interest income from
their investment.
Interest is NOT Deductible
1. Both the taxpayer and the person to whom
the interest was paid are related taxpayers:
a. Members of a family,
b. An individual and a corporation where
more than 50% of the outstanding
capital stock of the corporation is
owned by the individual;
c. Two corporation were more than 50%
of the outstanding stock is owned by
the other or by the same individual;
d. Between grantor and fiduciary of any
trust;
e. Between fiduciary of a trust and the
beneficiary
2. If the indebtedness is incurred to finance
petroleum exploration
3. If within the taxable year an individual
taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest
is paid in advance through discount or
otherwise
Optional Treatment of Interest Expense
At the option of the taxpayer, interest
incurred to acquire property used in trade business
or exercise of a profession may be allowed as a:
1. Outright deduction – a deduction in full in
the year when incurred, or
2. Treated as a capital expenditure – the
taxpayer may claim only as a deduction the
periodic amortization/ depreciation of such
expenditure.
The taxpayer can only choose one.
Sec. 34. C. Taxes
Taxes paid or incurred within the taxable
year in connection with the taxpayer's profession,
trade or business, shall be allowed as deduction
Requisites for deductibility of taxes
1. Taxes must be paid or incurred in
connection with the taxpayer’s trade or
business or exercise of profession
2. Tax must be imposed by law directly on the
taxpayer
3. Taxes must be paid or incurred during the
taxable year
disallowed to be deducted from gross
income under Sec. 34C
5. Taxes must be duly substantiated with
official receipts.
The following taxes are not deductible from gross
income
1. Philippine income tax (but the grossed-up
monetary value of the FBT can be
deducted)
2. Estate tax
3. Donor’s tax
4. Special assessment
5. Income tax imposed by a foreign country
for income sourced outside the Philippines
(but it shall be allowed if the taxpayer does
not signify his desire to enjoy any benefits
of the tax credit for taxes paid to foreign
countries)
6. Stock transaction tax
7. VAT
8. Income, war profits, and excess profits
taxes imposed by the authority of a foreign
country are allowed as deductions only if
the taxpayer does not signify in his return
his desire to have any extent the benefits of
the provisions of law allowing credits
against the tax for taxes of foreign countries
(Sec. 82, RR 2-1940)
Tax Benefit Rule
The recovery of amounts deducted in prior
years would result to income. However, where the
deduction did not result in tax benefit, the
subsequent recovery is not taxable income.
Limitations on deductions
Nonresident alien individuals engaged in
trade or business in the Philippines and resident
foreign corporations shall only be allowed to deduct
the taxes deductible from gross income if and to the
extent that they are connected with their income
from sources within the Philippines
Tax Credit – Atty. Rada did not discuss this. I wonder
why, even the previous topics regarding tax credits
were not discussed. Read Ingles p. 166-167
Sec. 34 D. Losses
Losses actually sustained during the taxable
year and not compensated for by insurance or other
forms of indemnity shall be allowed as deductions:
a. If incurred in trade, profession or business;
b. Of property connected with the trade,
business or profession, if the loss arises
from fires, storms, shipwreck, or other
casualties, or from robbery, theft or
embezzlement.
Types of Losses
1. Casualty losses
2. Net operating loss carry over (NOLCO)
3. Capital losses and securities becoming
worthless
4. Special losses
a. Losses from wash sales of stocks or
securities;
b. Wagering losses; and
c. Abandonment losses
Casualty Losses
The complete or partial destruction of
property resulting from an identifiable event of
sudden, unexpected or unusual nature such as those
arising from fire, storm, shipwreck, or other casualty,
or from theft or robbery.
It denotes accidents, some sudden invasion
by hostile agency, and excludes progressive
deterioration.
Requisites for deductibility of casualty losses
1. A taxpayer engaged in trade or business
may entitled to claim casualty losses
incurred for properties actually used in the
business enterprise that were damaged and
reported as losses in the appropriate
declaration filed with the BIR.
2. Properties that shall be reported as casualty
losses must have been properly reported as
part of the taxpayer’s assets in the
taxpayer’s accounting records and financial
statements in the year immediately
preceding the occurrence of the loss, with
the costs of acquisitions clearly established
and recorded.
3. The recovery of casualty losses through
insurance claims shall be governed by the
guidelines set forth in RR 12-77. The
amount of loss that shall be compensated
by insurance coverage should not be
claimed as deductible loss;
4. A required substantiation of casualty losses
arising from typhoons and other natural
disasters
5. It must be evidenced by a declaration of
loss filed within 45 days with the BIR from
the date of discovery of the casualty or
robbery, theft or embezzlement.
Net Operating Loss Carry-over (NOLCO)
Net operating Loss – shall mean the excess
of allowable deduction over gross income of the
business in a taxable year.
Net operating loss carry-over – the net
operating losses which have not been previously
offset as deduction from gross income shall be
carried over as deduction from gross income for the
next three (3) consecutive taxable years immediately
following the year of such loss.
Requisites for availment of NOLCO
1. The taxpayer was not exempt from income
tax in the year the loss was incurred
2. There has been no substantial change in
the ownership of the business or enterprise
a. wherein at least 75% of the nominal
value of outstanding issued shares is
held by or on behalf of the same
persons if the business in the name of
the corporation; or
b. at least 75% of the paid up capital of
the corporation is held by or on behalf
of the same person
3. The net operating losses which have not
been previously offset as deduction from
gross income shall be carried over as
deduction from gross income for the next
three (3) consecutive taxable years
immediately following the year of such loss.
4. For mines, other than gas and wells, a net
operating loss without the benefit of
incentives provided for by the Omnibus
Investment Code may be carried over as
deduction for the next five years
immediately following the year of loss.
Taxpayers entitled to deduct NOLCO from gross
income
1. Any individual engaged in trade or business
or in the exercise of his profession; and
2. Domestic and resident foreign corporation
subject to the normal income tax or
preferential tax rates on their taxable
income shall be entitled to deduct from its
gross income for the current year its
accumulated net operating losses for the
immediately preceding three (3)
consecutive taxable years
 Taxpayers NOT entitled to Deduct NOLCO from 4. SBMA-registered enterprise
gross income 5. Foreign corporation engaged in
1. OBUs for a foreign banking corporation or international shipping or air carriage
FCDU of a domestic banking corporation business in the Philippines
2. Enterprise registered with the BOI enjoying 6. Any person, natural or juridical, enjoying
the Income Tax Holiday Incentive exemption from income tax (RR 14-2001)
3. PEZA-registered enterprise

Example of NOLCO: p. 174

2013 2014 2015 2016 2017

Gross Income 300 700 800 800 800
Less: deductions 900 600 850 720 450
Net loss 600 50
Net income 100 80 350
Less:
NOLC From 2013 100 80
O From 2015 50
Taxable Income O 0 0 0 300
Capital Losses

Capital Losses (refer to Sec. 39) Losses from wash sale are not deductible
Losses from sales or exchange of capital from gross income
assets.
Except: if it is a loss incurred by a dealer in
Limitations on deductibility of capital losses securities in the ordinary course of business
Capital losses from sales or exchanges of
capital assets are deductible only to the extent of
capital gains from such sales or exchange of capital
assets of both corporations and individuals.

If the dealings of the taxpayer in capital
assets during the year result in a net capital loss,
such loss cannot be deducted from his ordinary
income, inasmuch as capital losses are allowable
only to the extent of capital gains.
Securities considered as worthless
It refers to shares of stock when offered for
sale or requested for share of redemption, no
amount can be realized by the owner of the share.
Securities becoming worthless, which are
capital assets, shall be considered as loss from the
sale or exchange of capital assets on the last day of
such taxable year.
Losses from wash sales of stocks or securities
Wash sales of stocks or securities – is a sale
or other disposition of stock or securities where the
taxpayer has acquired or has entered into a contract
or option to acquire substantially identical stocks or
securities within a 61-day period, beginning 30 days
before the sale and ending 30 days after the sale.
Losses are not to be claimed in sales of stock or
securities if:
1. Within a period of 30 days before the sale,
and 30 days after the sale (61 days in total)
2. The taxpayer acquires or enters into an
option to purchase substantially the
same/identical stocks or securities
Losses are allowed only if the taxpayer is a
stockbroker and the sale was made in the regular
course of business.
Example: Jaime buy shares in Fraser Corp. He sells
the shares at a loss. Twenty days from the sale, he
buys shares in Fraser Corp. again. The loss will not be
allowed as deduction
Wagering Losses
Wagering losses are allowed only to the
extent of gains from such transaction.
Abandonment losses in petroleum operations
1. In the event a contract area where
petroleum operations are undertaken is
partially or wholly abandoned, all
 accumulated exploration and development
expenditures pertaining thereto shall be
allowed as a deduction
2. In case a producing well is subsequently
abandoned, the unamortized costs thereof,
as well as the undepreciated costs of
equipment directly used therein , shall be
allowed as a deduction in the year such
well, equipment or facility is abandoned by
the contractor
Cases when NO Loss Can Be Recognized
1. Loss on the sale of real property considered
as capital asset
2. Loss sustained by the transfer of property
by gift
3. Loss sustained by the transfer of property
by death
4. Losses sustained by illegal transaction
5. Losses claimed as deduction from the gross
estate for estate tax purposes can no longer
be claimed as deduction from gross income
for income tax purposes.
6. Losses in transactions between related
taxpayers
7. In the case of merger, consolidation, or
control of securities (where no gains are
recognized either); and
8. Losses in exchanges not solely in kind under
Sec. 40(C)(2)
Sec. 34 E. Bad Debts
Bad debts shall refer to those debts
resulting from worthlessness or uncollectibility, in
whole or in part, of amounts due by the taxpayer by
others, arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered actually ascertained to be worthless and
charged off within the taxable year.
Requisites for deductibility of bad debts
1. There must be an existing indebtedness due
to the taxpayer which must be valid and
legally demandable;
2. The same must be connected with the
taxpayer’s trade, business or practice of
profession
3. The same must not be sustained in a
transaction entered into between related
parties
4. The same must be actually charged off in
the books of accounts of the taxpayer as of
the end of taxable year; and
5. The same must be actually ascertained to
be worthless and uncollectible as of the end
of the taxable year and even in the future.
6. If they are recovered, they should be
included as part of gross income in the year
of recovery
To prove worthlessness
The taxpayer must prove that he exerted
diligent efforts to collect, such as:
1. Sending statement of accounts
2. Sending of collection letters
3. Giving the account to a lawyer for collection
4. Filing a collection case
Tax Benefit Rule
The recovery of bad debts previously
allowed as deduction in the preceding year or years
shall be included as part of the taxpayer’s gross
income in the year of such recovery to the extent of
the income tax benefit of said deduction.
Example: Tax benefit rule for bad debts
2016 taxable income before bad P100,000
debts
Bad debts in 2016 P170,000
Taxable income 100k- 170k
0
Bad debts recovered in 2017 P130,000
Q. How much should be reported in 2017 as gross
income? (How much did I benefit from the bad debt
I recorded as deduction in 2016?)
Ans: P100,000. This is the amount the
taxpayer benefited from because he did not need to
pay the P100,000 in 2016 since the bad debt fully
covered it.
Securities becoming worthless
They are considered to be a loss from sale
of capital assets on the last day of the taxable year
except for a bank or trust company.
Sec. 34 F. Depreciation
Depreciation is the gradual diminution in
the useful value of the tangible property resulting
from wear and tear and normal obsolescence.
A reasonable allowance for depreciation of
property used in trade or business is deductible.
If the taxpayer and the Commissioner come
to an agreement of the useful life on which the
depreciation will be based, this agreement will be
considered binding.
Requisites for deductibility of “allowance for
depreciation” from gross income
1. The allowance for depreciation must be
sustained by the person who owns or who
has capital investment in the property
2. The allowance for depreciation must be
reasonable in that the amount of
depreciation must be in accordance with
the depreciation method being adopted
3. The property being depreciated is being
used in trade or business
4. The allowance for depreciation must be
charged off during the taxable year.
5. The property must have a limited useful life
6. The allowance for depreciation should not
exceed the cost of the property.
7. The schedule of the allowance must be
attached to the return
Depreciation expense on vehicles
For vehicles:
1. only one vehicle for land transportation is
allowed for the use of an official or
employee
2. the value of which should not exceed
P2,400,000
3. the purchase of the vehicle is substantiated
with sufficient evidence
For yachts, helicopters, airplanes and/or aircraft
and land vehicles which exceed the threshold
amount:
No depreciation allowed unless the
taxpayer’s main line of business is transport
operations or lease of transportation equipment and
the vehicles purchased are used in said operations.
(RR 12-2012)
Certain cases of depreciation
Property used directly in 10 years (straight line/
production of petroleum declining method)
Property used indirectly 5 years (straight line)
in production of
petroleum
Properties used in If expected life is 10
mining operations years or less – normal
depreciation
If expected life is more
than 10 years – notify
the CIR
For non-resident aliens A reasonable rate is
engaged in trade or allowed only on
business or resident properties located in the
foreign corporations Philippines
Depreciation is allowed on tangible
property and intangible property.
Amortization of intangibles is the periodic
process of allocating cost of an intangible (goodwill,
right of lease, patent, trademark, zombie rights) is
deductible.
Sec. 34 G. Depletion of Oil and Gas Wells and Mines
Depletion refers to the exhaustion of
natural resources owing to production or severance.
Annual depletion deductions are allowed
only to mining entities which own an economic
interest in mineral deposit.
(economic interest means capital investment in the
mineral deposit)
Limitation of cost depletion
The allowable cost depletion deduction
shall be limited only to the extent of the capital
invested in the particular mining property.
When the allowance for depletion equals
the capital invested, no further allowance shall be
granted.
After production in commercial quantities
has commenced, certain intangible exploration and
development drilling costs:
a. shall be deductible in the year incurred if
such expenditures are incurred for non-
producing wells and/or mines, or
b. shall be deductible in full in the year paid or
incurred or at the election of the taxpayer,
may be capitalized and amortized if such
expenditures incurred are for producing
wells and/or mines in the same contract
area.
Depletion of oil and gas wells and mines by a NRA
or foreign corporation
The allowance for depletion is limited to oil
wells and mines in the Philippines
Sec. 34 H. Charitable and Other Contributions
Requisites for deductibility of charitable and other
contributions
1. The contribution must have been actually
made to entities specified by law
2. The contribution must have been made
within the taxable year
3. It must be evidenced by adequate receipts
or records
 4. For contributions other than money, the
amount shall be based on the acquisition
cost of the property not the fair market
value at the time of the contribution
5. For contributions subject to statutory
limitations, the same must not exceed 10%
in the case of individuals or 5% in case of
corporation of the said taxpayer’s taxable
income before deducting the charitable
contributions.
The amount that can be deducted should
not exceed:
10% - individuals, or
5% - corporations
Of the taxpayer’s taxable income derived
from trade, business, or profession before the
deduction for contributions and donations.

Statutory Limitations to Contributions

Example: Computation of the statutory limit of amount of deductible from the gross income of the donors
If the gross income of an individual taxpayer is P300,000 and his allowable deductions total to P100,000
and his charitable donation to an accredited NGO is P50,000.

First step:
Gross income P300,000
Less: Allowable Deduction 100,000
Taxable Income 200,000

Second step:
Allowable deductible donation 20,000*
(10% of P200,000 taxable income)
Even if the actual donation is P50,000
Plus: P50,000 allowable deduction 100,000
Total allowable deduction 120,000
(Plus charitable donation)

Third step:
Gross Income P300,000
Less: Total allowable deduction P120,000
Taxable income P180,000
*The amount deductible, whichever is lower, is
1. actual contribution, or
2. statutory limit computed
social welfare, cultural or charitable
Contributions/Donations Deductible in FULL purposes, or a combination thereof, no
part of the net income of which inures
1. To government to the benefit of any private individual;
Exclusively to finance activities in
education, health, youth, and sports b. Utilize the contributions not later than
development, human settlements, science 15th day of the 3rd month after the close
and culture, and in economic development of the taxable year when the donations
according to NEDA (government priority were received
activities)

2. To certain foreign institutions or

international organization
In pursuance of agreements, c.
treaties, or commitments entered by the
Phil. government and foreign institutions or
international organization, or special laws
d.
3. To accredited non-stock, non-profit
corporations/NGO
a. Organized and operated exclusively for
scientific for scientific, research,
educational, character-building and
youth and sports development, health,
The level of administrative expense
shall in no case to exceed 30% of the
total expenses; and
The assets of which, in the event of
dissolution, would be distributed to
another nonprofit domestic
corporation organized for similar
purpose or purposes, or to the state for
public purpose, or according to court’s
judgment

It is the Philippine Council for NGO Certification
which accredits NGO.
4. Special laws
a. Gifts and donations to the University
of the Philippines shall be exempt
from donor’s tax and the same shall
be allowable as a deduction up to
150% of the value of donation (RA
9500)
b. Contributions to the National Book
Trust Fund shall be exempt from
donor’s tax and the same shall be
allowable as a deduction up to 150%
of the value of donation (RA 9521)
c. Donations to foster child agencies
are allowed as deductions to the
extent of the amount donated (RA
10165)
Contributions/Donations PARTIALLY Deductible
1. To the government exclusively for public
purpose
2. To accredited domestic corporations which
are organized and operated exclusively for
religious, charitable, scientific, youth and
sports development, cultural or educational
purposes, or for the rehabilitation of
veterans, no part of the net income of
which inures to the benefit of any private
individual
3. To social welfare institutions
4. To non-accredited NGOs
Sec. 34. I. Research and Development
Requisites for the charging of research and
development expenditure
1. Research or development expenditures
which are paid or incurred by him during
the taxable year in connection with his
trade, business or profession as ordinary
and necessary expenses
2. It was not chargeable to capital account
3. The expenditures shall be treated as
deduction during the taxable year when
paid or incurred.
Limitations on Deductions
Deductions on research and development
expenditure will not apply to the following:
1. Any expenditure for the acquisition or
improvement of land, or for the
improvement of property to be used in
connection with research and development
of a character which is subject to
depreciation and depletion; and
2. Any expenditure paid or incurred for the
purpose of ascertaining the existence,
location, extent, or quality of any deposit of
ore or other mineral, including oil or gas
Sec. 34. J. Pension Trust
Pension Trust
It is a trust established or maintained by the
employer to provide for the payment of reasonable
pensions to its employees
Pension Trust Contribution
It refers to the contribution during the
taxable year into the pension plan to cover the
pension liability accruing during the taxable year.
It is allowed as deduction under Sec. 34. A1.
as an ordinary and necessary business expense.
Two Kinds of Deduction for Employer
1. Sec. 34. A. 1 – contributions to such trust to
cover the pension liability during the year
2. Sec. 34. J – Reasonable amount paid to the
trust in excess of such contribution
Requisites for Deductibility of Pension Trust
1. The amount paid to the trust is reasonable
2. It must not have been previously allowed as
deduction (double deduction)
3. It must be apportioned in equal parts over a
period of 10 consecutive years, beginning
with the year in which the payment is
made.
Sec. 34. K. Additional Requirements for
Deductibility of Certain Payments
General Rule: Taxpayers who claim
deductions for expenses, the amount of which are
subject to withholding tax, must prove that said
deductions were in fact subject to proper
withholding.
If no withholding was made, then claimed
deductions will not be allowed.
Exceptions: No deductions shall be allowed,
notwithstanding payments of withholding tax, at the
time of the audit investigation or reinvestigation or
reconsideration in cases where no withholding of tax
was made in accordance (RR 12-2013).
 Thus, withhold and pay before audit
investigation or reinvestigation/reconsideration to
be able to claim deduction.
Kind of Taxpayer
Individual
Corporation
An individual/corporation can either elect:
1. Itemized deduction (Sec. 34 A-J), or
2. Optional standard deduction (Sec. 34 L)
There is no need to substantiate with receipts
if the taxpayer availed of OSD.
Who may avail of OSD
1. Citizen, resident or non-resident
2. Resident alien
3. Domestic corporation
4. Resident foreign corporation
5. Partnerships, and
6. Taxable estate and trust
Non-resident aliens and non-resident
foreign corporation cannot claim OSD.
Requisites for Individuals who wants to avail OSD
1. The individual is a citizen or a resident alien;
2. The taxpayer’s income is not pure
compensation income;
3. The individual signifies in his return filed for
the first quarter his intention to elect OSD
as deductions, otherwise, he is considered
as having availed of the itemized
deductions;
4. The election to avail OSD is irrevocable for
the year in which made; however, he can
change to itemized deductions in
succeeding years if he opts to;
5. The OSD allowed shall be a maximum of
40% gross sales or gross receipts during the
taxable year.
If the individual uses the accrual basis of
accounting for his income and deductions, the OSD
shall be based on gross sales during the taxable year.
Sec. 34. L. Optional Standard Deduction (OSD)
Optional Standard Deduction
(in lieu of itemized deduction)
Not exceeding 40% of gross sales or
gross receipts
Not exceeding 40% of gross income
If the individual uses the cash basis, the OSD
shall be based on gross receipts during the taxable
year.
Requisites for Individuals who wants to avail OSD
1. The corporation is a domestic or resident
foreign corporation;
2. The corporation signifies in his return filed
for the first quarter his intention to elect
OSD as deductions, otherwise, it is
considered as having availed of the itemized
deductions;
3. The election to avail OSD is irrevocable for
the year in which made; however, it can
change to itemized deductions in
succeeding years if he opts to;
4. The OSD allowed shall be a maximum of
40% gross income during the taxable year.
Gross Income = (Gross Sales – Cost of
goods/services)
The following are not allowed to use OSD (must
used itemized deduction)
A. For corporations
1. Those exempt under Tax Codes such as tax
exempt corporations (Sec. 30) and GOOCs
 (Sec.27[C]), and other special laws with no 3. Those with income subject to income tax
other taxable income; under Sec. 24 and also with income subject
2. Those with income subject to special or to special/preferential tax rates
preferential rates; and
3. Those with income subject to income tax
under Sec. 27(A) and Sec. 28(A)(1) and also
with income subject to special/preferential
tax rates

B. Individuals
1. Those exempt under Tax Codes and other
special laws with no other taxable income;
2. Those with income subject to special or
preferential rates; and
Example:
Suppose a retailer of goods, whose accounting method is under the accrual basis, has a gross sales of
P1,000,000 with a cost of sales amounting to P800,000. The computation of the OSD

Individual Corporation
Gross sales P1,000,000 P1,000,000
Less: Cost of goods solds 800,000
Basis of OSD 1,000,000 200,000
x OSD rate (40%) 0.40 0.40
OSD amount P400,000 P80,000

If the taxpayers opts to use OSD in lieu of the itemized deduction allowed, the taxable net income is:

Individual Corporation
Gross sales P1,000,000 P1,000,000
Less: Cost of goods solds 800,000
Gross sales/Gross income 1,000,000 200,000
Less: OSD amount 400,000 80,000
Taxable income P600,000 P120,000
GPP itself or the partners comprising the
Special Rule on GPPs and Choice of Deduction partnership.

NIRC: Thus, if the GPP avails the OSD, then the

If the GPP availed of itemized deduction,
the partners are not allowed to claim the OSD from
their share in the net income because the OSD is a
proxy for all items of deductions allowed in arriving
at a taxable income. The partners can claim itemized
deductions which have yet to be claimed by GPP.
partners may not.
(RJ question: So, under TRAIN, the partners are now
allowed to claim itemized deduction, if the GPP
avails OSD?)

If the GPP avails of OSD, the partners

comprising it can no longer claim further deduction
from their share of the net income. (RR 2-2010)

Summary
GPP avails itemized Partners can claim
deduction itemized deductions not
claimed by GPP
GPP avails of OSD Partners can no longer
claim any deductions

TRAIN:
A GPP and the partners comprising such
partnership may only use OSD once, either by the
Sec. 34. M. Premium Payments on Health and/or Hospital Insurance of an Individual Taxpayer*
Sec. 35. Personal Exemptions*

*TRAIN repealed personal exemption and premium payments on health and hospitalization insurance. (Sec. 24
increase the exempt income up to P250,000)

Individual Taxpayer Allowable Deductions

1. Individuals earning pure
compensation
2. Individuals deriving income
from trade or business or
profession
NIRC TRAIN
1. Personal and Additional Exemptions No deductions
(Sec. 35)
2. Premium payments on
health/hospitalizations insurance (Sec.
34 M)
1. Itemized deductions (Sec. 34, A-J), or 1. Itemized deductions
2. Optional Standard Deduction (Sec. (Sec. 34, A-J), or
34, L) 2. Optional Standard
3. Personal exemptions Deduction (Sec. 34, L)
4. Premium payments on
health/hospitalization insurance

4. The amount of the premium deductible

(RJRS note: Sec. 34 M and Sec. 35 will still be a part
of the reviewer albeit the same is repealed by TRAIN.
Better safe than sorry!!!)
Sec. 34 M. Premium payments on health/hospital
insurance
does not exceed P2,400 per family or P200
per month during the taxable year
5. In case of married individuals, only the
spouse claiming additional exemptions be
entitled to this deductions

Premiums deductible does not exceed

P2,400 per family

Gross income of family does not exceed

P2,500

Requisites for the deductibility

1. Hospitalization insurance must actually
have been taken by the individual for Sec. 35. Personal Exemptions
himself and/or for the members of his
family Personal Exemption P50,000
2. The individual availing either earns pure Additional Exemption P25,000 for each
compensation income or earning business dependent not
income or engaged in the practice of exceeding four
profession
3. The gross income of the family of the Person qualified to claim basic personal exemptions
individual does not exceed P250,000 for the 1. The claimant must be a citizen, resident or
taxable year nonresident, or a resident alien
 2. Non resident alien engaged in trade or
business are entitled to basic personal
exemptions only by way of reciprocity but
not to additional exemptions
3. The individual claiming basic personal
exemption must be earning income for the
taxable year
4. The amount allowed for each individual
who earns income is P50,000, regardless of
whether the individual is single or married.
5. In the case of married individuals, where
only one of spouse is deriving gross
income, only such spouse shall be allowed
the personal exemption
Persons qualified to claim additional exemptions
1. The claimant may be married or unmarried
as long as he has a qualified dependent
child
2. The claimant must be a citizen, whether
resident or non-resident citizen, or a
resident alien
3. In case of married individuals, the proper
claimant is the husband, except if there is
an express waiver by the husband in favor
of his wife
4. The wife automatically claims the additional
exemption in the following instances:
a. The husband has no income or
unemployed
b. The husband is a nonresident
citizen working abroad like OFW
or seaman
c. In case of legal separation and she
has custody of the child.
Meaning of “dependent” in Additional Exemptions
A 'dependent' means
1. a legitimate, illegitimate or legally adopted
or foster child of the taxpayer
2. chiefly dependent for support upon and
living with the taxpayer
3. S/He is not more than twenty-one (21)
years of age,
4. S/He is unmarried and not gainfully
employed or
5. Regardless of age, s/he is incapable of self-
support because of mental or physical
defect.
Status-at-the-end-of-the-year Rule
It provides that whatever is the individual
taxpayer’s status at the end of the calendar year
may be used for determining his basic personal and
additional exemptions.
If the taxpayer marries or should have
additional dependent(s) the taxpayer may claim the
corresponding additional exemption, as the case
may be, in full for such year.
If the taxpayer dies during the taxable year,
his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he
died at the close of such year.
If the spouse or any of the dependents dies
or if any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully
employed during the taxable year, the taxpayer may
still claim the same exemptions as if the spouse or
any of the dependents died, or as if such dependents
married, became twenty-one (21) years old or
became gainfully employed at the close of such year.
Sec. 36. Items Not Deductible
General Rule: In computing the taxable income, no
deduction shall in any case be allowed in respect to:
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or
for permanent improvements made to
increase the value of any property or
estate;
3. Any amount spent in restoring property
(major repairs) or in making good the
exhaustion thereof for which an allowance
is or has been made; or
4. Premiums paid on any life insurance policy
covering the life of any officer or employee
when the taxpayer is directly or indirectly a
beneficiary under such policy.
5. No deductions when the transaction is
between related taxpayers:
a. Losses from sales or exchanges of
property
b. Interest expense
c. Bad debts
6. Losses due to merger, consolidation, or
control securities where no gain or loss are
recognized
7. Exchanges not solely in kind
8. Illegal transactions

Sec. 39. Capital Gains and Losses
Capital assets – all properties of a taxpayer other
than ordinary assets
Examples of capital assets:
1. Personal property not used in trade or
business
2. Movable properties in one’s residence,
vehicles, appliances, furniture, jewelry,
Thorin’s sculpture, securities held by one by
way of investment
3. Real property not used in trade or business
4. Residential house and lot, idle land not used
in business operations.
Ordinary assets – all properties of a taxpayer other
than capital assets. These are assets that are being
used primarily or for sale in the ordinary course of
trade or business.
Example of ordinary assets
1. Stock in trade of the taxpayer;
2. 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;
3. Property held by the taxpayer primarily for
sale to customers in the ordinary course of
his trade or business;
4. Property used in the trade or business, of a
character which is subject to the allowance
for depreciation; and
5. Real property used in trade or business of
the taxpayer
Guidelines in determining whether real property is
a capital or ordinary asset (RR 7-2003)
A. Those engaged in real estate business, the
following are ordinary assets:
1. All real properties acquired by real estate
dealer
2. All real properties acquired by real estate
developer whether developed or
undeveloped
3. All real properties held for sale or lease in the
ordinary course of business or which would be
properly included in the inventory
4. All real properties acquired for lease or rent
5. All real properties acquired in the ordinary
course of business by a taxpayer habitually
engaged in the sale of real estate
B. Those not engaged in the real estate business
Real property being used or have been used
in the trade or business are considered ordinary
assets
C. For exempt corporations
Real property used in exempt transaction
shall not be considered for business purposes, and
thus are capital asset
Change of the Nature of the Property
Q. Can the nature of the property change from
ordinary to capital asset?
Changing from real estate business to a non- NO
real estate business
Ceasing operations of the real estate NO
business
The properties acquired by the real estate NO
business are abandoned
The properties acquired by the real estate NO
business become idle
Involuntary transfer (expropriation or NO
foreclosure)
Real estate business transfers the property YES
to an ordinary person
The nature of the property can change in
the hands of the buyer/transferee. Hence, if Richard
buys a lot from a real estate dealer, the lot becomes
a capital asset (from ordinary) in the hands of Pedro.
Q. Can the nature of the property, held by those not Capital gains or loss are always considered
engaged in real property estate, change from at 100%
ordinary asset to capital asset?
Yes, provided they show proof that the Holding Period Rule
same have not been used in business for more than In computing net capital gain, net capital
two years (prior to the taxable transaction) loss, net taxable income in the case of individual
taxpayers, the following percentages of capital gains
Capital gains vs. Ordinary gains or loss shall be recognized and taken into account
upon the sale or exchange of a capital asset
Capital gains Ordinary gains depending on the actual holding period
Sources of capital gains Sources of ordinary gains
are sales or exchanges of are sales or exchanges of 1. Short term capital gain – 100% of the capital
capital assets ordinary assets gains or loss is taken into account, if the capital
Capital gains are Ordinary gains are asset has been held for not more than 12
generally profits from generally profits from months; and
sale of assets not stock assets constituting stock
in trade in trade 2. Long term capital gain – 50% of the capital
Basis of capital gains tax Basis of the ordinary tax gains or loss is taken into account, if the capital
is on the presumed gain is the actual gain asset has been held for more than 12 months
Excess of gains from All sales or exchanges of
sales or exchanges of ordinary assets should Computation of net capital gain of individual in case
other capital assets (i.e. be included in the gross of long term capital gain
other than capital gains income Ordinary Net income P10,000
from sales or exchanges Net capital gain P5,000
of shares of stock and At 50% P2,500
real properties which are Taxable net capital P2,500
considered as capital gains
assets) over the capital Taxable net income P12,500
losses from such sale or
exchanges should be Computation of net capital loss of individual in case
included in the gross of long term capital gain
income Ordinary Net income P10,000
Net Capital Gain Net capital loss P5,000
It refers to the excess of the gains from At 50% P2,500
sales or exchanges of capital assets over the losses Net capital loss P2,500
from such sales or exchanges. It is added to the Taxable net income P10,000
ordinary gain.
Capital Loss Limitation Rule
Net Capital Loss General rule: Capital losses from sales or
It refers to the excess of the losses from exchanges of capital assets are allowed only to the
sales or exchanges of other capital assets over the extent of the gains from such sales or exchanges.
capital gains from such sales or exchanges. It is not This applies to both individual and corporation.
deductible from ordinary gain.
!Capital losses are allowable only to the
Corporations extent of capital gains.

Example: Roger, engaged in buying and selling goods, having an ordinary net income of P50,000, capital gains of
P30,000 and a capital loss of P20,000 from sales of capital assets held for more than 12 months, taxable net
income is:
Ordinary net income P50,000
Gain from sales of capital assets P30,000
50% of capital gains P15,000
Loss from sales of capital assets P20,000
50% of capital loss P10,000
Taxable net capital gains P5,000
Taxable net income P55,000
Example: Brianna, engaged in buying and selling goods, having an ordinary net income of P50,000, capital gains of
P10,000 and a capital loss of P30,000 from sales of capital assets held for more than 24 months, taxable net
income is
Ordinary net income P50,000
Gain from sales of capital assets P10,000
50% of capital gains P5,000
Loss from sales of capital assets P30,000
50% of capital loss P15,000
Net capital loss P10,000*
Taxable net income P50,000
*the net capital loss of P10,000 is not deductible in arriving at the taxable net income inasmuch
as capital losses are allowed only to the extent of capital gains
1. First, determine if the asset is a capital asset or
an ordinary asset. (If it is an ordinary asset, the
rules below will not apply)

2. Second, keep in mind that these rules do not

apply to:
a. Real property with a capital gain tax,
and (6%)
Exception to Limitations on Capital Loss b. Shares of stock of a domestic
The limitation on capital loss does not apply corporation not traded in the stock
to a bank or trust company incorporated under the exchange with a capital gain tax (15%
laws of the Philippines, a substantial part of whose TRAIN)
business is the receipt of deposits, sells any bond, (They are already subject to specific final
debenture, note, or certificate, or other evidence of tax rates)
indebtedness issued by any corporation (including
one issued by a government or political subdivision 3. The transaction on the capital asset should be a
thereof), with interest coupons or in registered form. sale or exchange

Net Capital Loss Carry Over 4. (Holding period rule) In the case of an individual
If any taxpayer, other than a corporation, taxpayer, the following percentages of the gain
sustains in any taxable year a net capital loss, such or loss shall be taken into account in computing
loss (in an amount not in excess of the net income net capital gain, net capital loss and net income
for such year) shall be treated in the succeeding (percentage into account):
taxable year as a loss from the sale or exchange of a a. 100% of the gain/loss, if the asset has
capital asset held for not more than twelve (12) been held for not more than 12 months
months. (See example next page) b. 50% of the gain/loss, if the asset has
been held for more than 12 months
Net Capital Loss Carry Over (NCLCO) vs. Net
Operating Loss Carry Over (NOLCO) For corporations, capital gains and losses
are always considered at 100%
NCLCO NOLCO
Can be availed of only by Available to both 5. Losses from the sales or exchanges of capital
individual individuals and assets shall be allowed only to the extent of the
corporation gains from such sales or exchanges (limitations
Covers only a one year May be deducted from on capital loss)
period the gross income for the
next three (3) 6. (Net capital loss carry-over) If any taxpayer,
consecutive taxable other than a corporation, sustains in any taxable
years year a net capital loss, such loss in an amount
A capital asset An ordinary asset not in excess of the net income (taxable income)
transaction transaction shall be treated in the succeeding taxable year
Directly governed by the Directly governed by the as a loss from the sale or exchange of a capital
Tax Code only Tax Code and by the asset held for not more than twelve (12)
Investment Incentive Act months.

Rules on Capital Gains and Loss

Example: Capital Loss Carry-Over (Only individuals) (STUDY THIS!)
2010 – Net income from business P1,000
Dividends received 750
Interest earned 500
Capital gains – on capital assets held for 8 5,000
months
Capital losses – on capital assets held for 9 10,000
months

2011 – Net income from business 2,000

Interest earned 200
Capital gains – on capital assets held for 15 5,000
months

In 2010, his taxable income is computed as

follows:
Income from business, dividends, and interest 2,250
Capital gains and losses
Capital gains 5,000
Less: Capital losses 10,000
Net capital loss carried over to 2011 (5,000)
Net income subject to tax 2,250

In 2011, his taxable income is computed as

follows:
Income from business and interest 2,200
Capital gains and losses
Capital gains 5,000
50% 2,500
Less: capital loss carried over from 2010 2,250
Net capital gain 250
Net income subject to tax 2,450

The net capital loss of P5,000 sustained in 2010 and carried over in 2011 is
reduced to P2,250 for the reason that the net income from business and other sources
(not including capital gain), for the year is only P2,250.

The loss carried over is such loss not in excess of the taxable income.

Sec. 40 B
Basis for Determining Gain or Loss from Sale or Disposition of Property
(RR 8-2001)
Mode of Acquisition
1. Acquired by purchase
2. By inheritance
3. By gift
4. Acquired for less than an
adequate consideration in money
or its worth
5. If acquisition cost is increased by
the amount of improvements that
materially added to the value of the
property or prolong its life less
accumulated depreciation
6. Acquired under a previous free-
tax exchange
Example: Fraser sold a ruby worth P100M to Randall
Inc, in exchange for P110M cash, P20M worth of
stocks and P5M property. How much is the gain for
Fraser? What about the loss for Randall Inc?
Get the amount realized P135 M
first (cash +stock+property)
Deduct the basis P100M (worth of ruby)
Gain P35M (for Fraser),
loss of P35M for Randall
Sec. 40. C. Tax Free-Exchanges
Sec. 40 Determination of Amount and Recognition
of Loss
Sec. 40A
Gain – it is the excess amount realized over the basis
for determining gain
Loss – it is the excess of the basis for determining
loss over the amount realized
Amount realized – it is the sum of money received
plus the fair market value
Cost of Basis
The actual cost
Fair market value
The same as if it would be in the
hands of the donor or the last
preceding owner,
But if the basis is greater than the
FMV, then the basis shall be the
FMV (whatever is lower)
Amount paid by the transferee fro
the property
Adjusted basis of 1 to 4
Substituted basis
General rule: The sale or exchange or property, the
entire amount of the gain or loss, as the case may
be, shall be recognized.
Exception. - No gain or loss shall be
recognized if in pursuance of a plan of merger or
consolidation:
1. In a m/c, a corporation exchanges property
solely for stock in a corporation, which is a
party to the merger or consolidation; or
2. In a m/c, a shareholder exchanges stock in a
corporation solely for the stock of another
corporation also a party to the merger or
consolidation; or

3. In a m/c, a security holder of a corporation
exchanges his securities in such
corporation, solely for stock or securities in
such corporation, a party to the merger or
consolidation.
4. If property is transferred to a corporation
by a person in exchange for stock or unit of
participation in such a corporation of which
as a result of such exchange said person,
alone or together with others, not
exceeding four (4) persons, gains control of
said corporation but the stocks issued for
services shall not be considered as issued in
return for property. (BAR)
Sec. 42. Income from Sources Within the
Philippines
This section is relevant to taxpayers who
are taxed only on their income from the Philippines:
1. Nonresident citizen
2. Resident alien
3. Resident alien engaged in trade or business
4. Resident foreign corporation
5. Nonresident foreign corporation
Source of Income
It is the property, activity or service that
produced the income.
It is the place of activity creating the income
which is controlling, and not the place of business or
residence of a corporation.
Gross Income from Sources within the Philippines
1. Interests. - including interests on bonds, notes
or other interest-bearing obligation:
a. The loan was used here in the
Philippines
b. The debtor is in the Philippines
2. Dividends
a. from a domestic corporation; and
b. from a foreign corporation,
unless less than 50% of the gross
income of the foreign corporation for the
three-year period ending with the close of
its taxable year preceding the declaration of
such dividends (amount will be based on
the same ratio to dividends as the gross
income of the corporation for such period
derived from sources within the Philippines
bears to its gross income from all sources)
3. Services. - Compensation for labor or personal
services performed in the Philippines;
4. Rentals and royalties. - from property located in
the Philippines or from any interest in such
property for:
a. the use of any copyright, patent, design
or model, plan, secret formula or
process, goodwill, trademark, trade
brand or other like property or right;
b. the use of any industrial, commercial or
scientific equipment;
c. the supply of scientific, technical,
industrial or commercial knowledge or
information;
d. the supply of services by a nonresident
in connection with the use of property
or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus
purchased from such nonresident
person;
e. technical advice, assistance or services
rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or
scheme; and
f. the use of motion picture films, films
for tv, tapes for radio broadcast
5. Sale of Real Property. - gains, profits and
income from the sale of real property located in
the Philippines; and
6. Sale of Personal Property. - gains; profits and
income from the sale of personal property, as
determined in Subsection (E) of this Section.
Gross Income from Sources without the Philippines
1. Interests other than those derived from
sources within the Philippines;
2. Dividends other than those derived from
sources within the Philippines;
3. Compensation for labor or personal services
performed without the Philippines;
 4. Rentals or royalties from property located
without the Philippines or from any interest in
such property; and
5. Gains, profits and income from the sale of real
property located without the Philippines.
Income From Sources Partly Within and Partly
Without the Philippines.
Gains, profits and income derived from the
purchase of personal property within and its sale
without the Philippines, or from the purchase of
personal property without and its sale within the
Philippines shall be treated as derived entirely form
sources within the country in which sold: Provided,
however, That gain from the sale of shares of stock
in a domestic corporation shall be treated as derived
entirely form sources within the Philippines
regardless of where the said shares are sold.(BAR)
Chapter VIII
Accounting Periods and Methods of Accounting
(RJ note – terms included were the ones Atty. Rada
mentioned during class)
Taxable year or taxable accounting period
It means the calendar year or the fiscal year
ending during such calendar year.
Different Taxable Accounting Periods
General Rule: The accounting period of a taxpayer is
a period of 12 months, such as:
1. Calendar accounting period – a period of
12 months starting from Jan. and ending on
Dec. 21. (adopted by individual or
corporation)
2. Fiscal accounting period – a period of 12
months ending on the last day of any month
other than December. (only corporation)
Exception: But a taxpayer may have a taxable period
of less than 12 months
3. Short accounting period – an accounting
period wherein a return is made for a
fractional part of a year or which is a period
of less than 12 months.
This occurs:
a. When a taxpayer, with approval of
CIR, changes from fiscal to calendar
year, vice versa or from one fiscal year
to another fiscal year; or
b. When taxpayer dies; or
c. When a corporation is newly
organized or dissolved at any time
during the year after the beginning of
the calendar or fiscal year.
Accounting Methods under the Tax Code
1. Cash accounting method – all items of income
actually received during the year shall be
accounted for in such taxable year and the
corresponding expenses actually paid shall also
be claimed as deductions during the year.
Thus, income is realized upon actual or
constructive receipt of cash or its equivalent
while expenses are deductible only upon actual
payment, regardless of the taxable year when
the service is performed or the expense is
incurred.
2. Accrual accounting method – income, gains and
profits are included in the gross income when
earned regardless of whether or not actually
received, and the expenses are allowed as
deduction from the gross income when actually
incurred, although not yet paid.
All-Events Test
The accrual of income and expenses is
permitted when the following are met:
1. Fixing of a right to income or liability to pay
2. The availability of the reasonable accurate
determination of such income or liability
Section 46. Change of Accounting Period.
If a taxpayer, other than an individual,
changes his accounting period from fiscal year to
calendar year, from calendar year to fiscal year, or
from one fiscal year to another, the net income shall,
with the approval of the Commissioner, be
computed on the basis of such new accounting
period, subject to the provisions of Section 47.
Sec. 47. Final or Adjustment Returns for a Period of
Less than 12 Months
When Short Period return required to be filed
No return can be made for a period of more
than 12 months.

A separate return for a fractional part of a
year is required whenever there is a change, with the
approval of the Commissioner, on the basis of
computing taxable income from one taxable year to
another taxable year.
The change is from:
a. Fiscal year to calendar year
b. Calendar year to fiscal year
c. One fiscal year to another fiscal year
Sec. 47. Accounting for Long-term Contracts
Long-term Contracts – it means building, installation
or construction contracts covering a period in excess
of 1 year.
Percentage-of-completion basis method
It is a method applicable for long-term
contracts whereby gross income derived from such
contract may be reported upon the basis of
percentage of completion.
In determining the percentage of
completion of a contract, generally one of the
following methods is used:
1. The costs incurred under the contract as of
the end of the tax year are compared with
the estimated total contract costs; 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.
The return should be accompanied by a
return certificate of architects or engineers showing
the percentage of completion during the taxable
year of the entire work performed under contract.
There should be deducted from such gross income
all expenditures made during the taxable year on
account of the contract, account being taken of the
material and supplies on hand at the beginning and
end of the taxable period for use in connection with
Q. Who are not required to file income tax returns?
NIRC
1. An individual whose gross income does not
exceed his total personal and additional
exemptions
2. An individual with respect to pure
compensation and income tax on which has
been correctly withheld
3. An individual whose sole income has been
subjected to final withholding tax*
4. Minimum wage earners
5. Individuals exempt from income tax
the work under the contract but not yet so applied.
If upon completion of a contract, it is found that the
taxable net income arising thereunder has not been
clearly reflected for any year or years, the
Commissioner may permit or require an amended
return.
Sec. 49. Installment Basis
Installment basis method
It is a method considered appropriate when
collection extends over a long periods of time and
there is a strong possibility that full collection will
not be made. As customers make installment
payments, the seller recognizes the gross profits on
sale in proportion to the cash collected.
Chapter IX
Returns and Payments of Tax
Sec. 51. Individual Return (BAR)
Q. Who are required to filed income tax returns?
1. Every Filipino citizen residing in the
Philippines;
2. Every Filipino citizen residing outside the
Philippines, on his income from sources
within the Philippines;
3. Every alien residing in the Philippines, on
income derived from sources within the
Philippines;
4. Every nonresident alien engaged in trade or
business or in the exercise of profession in
the Philippines;
5. A citizen of the Philippines and any alien
individual engaged in business or practice of
profession within the Philippines regardless
of the amount of gross income; and
6. An individual earning purely compensation
income but who is concurrently employed
by two or more employers at any time
during the taxable year.
TRAIN
1. Individuals whose taxable income does not
exceed P250,000
(but those engaged in business or
practice of profession must still file
regardless of their gross income)
2. Individual who are purely compensation
income earners and income tax on which has
been correctly withheld
(but those with 2 or more employees at
any time during the taxable year must still
fine their ITR)
3. An individual whose sole income has been
subjected to final withholding tax
4. Minimum wage earners

Individuals whose sole income is subject to final
withholding tax
1. Those whose income consists solely of
royalties, interest, prizes, winnings,
dividends, etc., and the share in a
partnership or association, joint venture, or
consortium taxable as corporation
2. Aliens employed by ROHQs with respect to
their compensation income
3. Aliens employed by OBUs with respect to
their compensation income
4. Aliens employed by foreign service
contracts and subcontractors engaged in
petroleum exploration, with respect to their
compensation income
Substitution Filing
This is applicable only when:
1. An individual receiving purely compensation
income from only 1 employer, and
2. Tax on such income is correctly withheld
Q. Where to file?
1. Authorized agent bank
2. Revenue district officer
3. Collection agent
4. Duly authorized city treasurer where he is
legally residing
5. Office of the Commissioner
Q. When to file?
On or before April 15 of each year covering
the income for the preceding taxable year.
Individual subject to capital gains tax:
1. Sale stocks thru a local stock exchange – file
a return within 30 days after each
transaction and a final consolidated return
on or before April 15 of each year covering
all stock transaction of the preceding
taxable year; and
2. Sale of real property – within 30 days
following each sale or disposition
Husband and wife
Married individuals who do not
derive income purely from compensation
a. file a return for the taxable year to include
the income of both spouses,
b. where it is impracticable for the spouses to
file one return, each spouse may file a
separate return of income
c. the separate returns so filed shall be
consolidated by the Bureau for purposes of
verification for the taxable year.
Sec. 52. Corporate Returns
5. Individual exempt from income tax
Every corporation subject to the
tax herein imposed are required to file:
1. quarterly income tax return and
2. final or adjustment return, on or before
April 15
except: Foreign corporations not engaged in trade or
business in the Philippines (subject to final
withholding tax)
A corporation may used either calendar
year or fiscal year basis for filing
Sec. 58. D. Income of Recipient
Income upon which any creditable
tax is required to be withheld at source
under Section 57 shall be included in the
return of its recipient but the excess of the
amount of tax so withheld over the tax due
on his return shall be refunded to him
subject to the provisions of Section 204; if
the income tax collected at source is less
than the tax due on his return, the
difference shall be paid in accordance with
the provisions of Section 56.
(2014, BAR, right of redemption)
Income withheld:
a. excess of tax due – refunded
b. less than tax due – difference paid
Sec. 78. Final Adjustment Return
Three options available under Sec. 76 to settle
income tax liabilities
The taxpayer is given 3 options to settle his
income tax liabilities if the sum of its quarterly tax
payments made during the taxable year is not equal
to the total tax due on the entire taxable income of
that year:
1. Pay the balance of tax still due
2. Carry-over the excess credit
3. Be credited or refunded the amount paid
Irrevocability rule
“once exercised, the option to
carry-over is irrevocable”
Once a corporation exercises the option to
carry-over and apply the excess quarterly income tax
against the tax due for the taxable quarters of the
succeeding taxable years, such option is irrevocable
for that taxable period. Having chose to carry-over
the excess quarterly income tax, the corporation
cannot thereafter choose to apply for a cash refund
or for the issuance of a tax credit certificate for the
amount representing such overpayment.

Example: (class)

2017 Tax due P100,000

Tax paid P200,000
Excess Tax P100,000

Option:
1. refund,
2. carry-over

2018 Tax due P200,000

Tax paid P50,000
Tax still due P150,000
2017 carry-over P100,000
P50,000