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Constitutional Limitations
1. Provisions directly affecting taxation
2. Provisions indirectly affecting taxation
Section 2 – Powers and Duties of the BIR Commissioner’s exclusive and original jurisdiction
The 4 powers and duties of the BIR: to interpret the provisions of the Tax Code and to
1. Assessment and collection of all national issue revenue issuance
internal revenue taxes, fees, and charges The CIR shall have the exclusive and original
2. Enforcement of all forfeitures, penalties, jurisdicition to recommend to the Sec. of Finance the
and fines connected therewith promulgation of revenue regulations, issuance of BIR
3. Execution of judgments in all cases decided rulings and other revenue issuances:
in its favor by the Court of Tax Appeals
(CTA) and the ordinary courts Revenue regulation
4. Give effect to and administer the Formal interpretation of the Tax Code
supervisory and police powers conferred to These are issuances signed by the Secretary
it by the Code or other laws of Finance, upon recommendation of the
Commissioner of Internal Revenue, that specify,
The Bureau of Internal Revenue is under the prescribe or define rules and regulations for the
direct control and supervision of the Secretary of effective enforcement of the provisions of the
Finance National Internal Revenue Code (NIRC) and related
statutes.
Section 3. Chief Officials of the Bureau of Internal
Revenue. Revenue Memorandum Orders (RMOs)
1. Commissioner of Internal Revenue – chief These are issuances that provide directives
of the BIR, and or instructions; prescribe guidelines; and outline
2. 4 assistant chiefs to be known as Deputy processes, operations, activities, workflows,
Commissioners methods and procedures necessary in the
implementation of stated policies, goals, objectives,
However, in real life there are 6 deputy plans and programs of the Bureau in all areas of
commissioners with the following functions: operations, except auditing.
a. Operation
b. Legal Revenue Memorandum Rulings (RMRs)
c. Resource Management These are rulings, opinions and
d. Information interpretations of the Commissioner of Internal
e. Prosecution Revenue with respect to the provisions of the Tax
f. Special Concerns Code and other tax laws, as applied to a specific set
of facts, with or without established precedents, and
Commissioner of Internal Revenue – Cesar Dulay which the Commissioner may issue from time to
time for the purpose of providing taxpayers guidance
Powers of the Commissioner on the tax consequences in specific situations. BIR
Rulings, therefore, cannot contravene duly issued
Section 4. RMRs; otherwise, the Rulings are null and void ab
1st par: To interpret tax laws (Sec. 4, par. 1) initio.
The power to interpret the
provisions of the NIRC and other tax law Revenue Memorandum Circular (RMCs)
shall be under the exclusive and original These are issuances that publish pertinent
jurisdiction of the Commissioner, subject to and applicable portions, as well as amplifications, of
the review of the Sec. of Finance laws, rules, regulations and precedents issued by the
BIR and other agencies/offices.
2nd par: To decide
a. Disputed assessment, BIR Rulings
b. Refunds of internal revenue taxes, fees These are official position of the CIR to
or other charges, queries raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax A. Examination of Returns and Determination
laws. of Tax Due
The lack of consent of taxpayer does not D. Authority to Terminate Taxable Period
imply that the data gathered is erroneous or false The Commissioner can terminate the
(CIR vs. Raul Gonzales) taxable period when:
1. Taxpayer is retiring from business
Section 6. Power of the commissioner to Make subject to tax
Assessments and Prescribe Additional 2. Taxpayer is intending to leave the
Requirements for Tax Administration and Philippines
Enforcement 3. Taxpayer is intending to remove
his property therefrom or to hide
or conceal his property, or
4. Taxpayer is performing any act 1. doubtful validity of his tax –
tending to obstruct the taxpayer can pay a minimum 40%
proceedings for the collection of of his tax
the tax for the past or current 2. financial incapacity to pay tax
quarter or year or to render the liability
same totally or partly ineffective
The Commissioner shall declared G. Authority to Accredit and Register Tax
the tax period of such taxpayer Agents
terminated at any time and shall send H. Authority of the Commissioner to
the taxpayer of notice of such decision, Prescribe Additional Procedural or
together with the request for Documentary Requirements
immediate payment of the tax for the
period. Section 7. Authority of the Commissioner to
Delegate Power
E. *Authority of the Commissioner to
Prescribe Real Property Values General Rule: The Commissioner may delegate the
The Commissioner is authorized to power vested in him under the NIRC to any or such
divide the Philippines into different zone or subordinate officials with the rank equivalent to a
areas and xxx determine the fair market division chief or higher
value of real properties located in each
zone or area. xxx Exception: The Commissioner cannot delegate the
following power:
For purposes of computing any 1. The power to recommend the promulgation
internal revenue tax, the value of the of rules and regulations by the Secretary of
property shall be, whichever is higher of: Finance
1. The fair market value as determined by 2. The power to issue rulings of first
the Commissioner; or impression or to reverse, revoke or modify
2. The fair market value as shown in the any existing ruling of the BIR
schedule of values of the Provincial and 3. The power to compromise or abate any tax
City Assessors liability
4. The power to assign or to reassign internal
F. Authority of the Commisisoner to Inquire revenue officers to establishment where
into Bank Deposit Accounts and Other articles subject to excise tax are produced
Related Information Held by Financial or kept
Institutions
Q. When can CIR inquired from bank Ruling of first impression – official ruling of CIR on a
deposits? query raised by a taxpayer
The Commissioner is authorized to
inquire into the bank deposits of and other
related information held by financial Section 13. Authority of a Revenue Officer
institutes of: Letter of Authority
1. A decedent to determine his gross The issuance of a letter of authority by the
estate; and Revenue Regional Director authorized a Revenue
2. Any taxpayer who has filed an Officer assigned to perform assessment functions to:
application for compromise of his 1. Examine taxpayers within the jurisdiction of
tax liability by reason of financial the district in order to collect correct
incapacity to pay his tax liability amount of tax, or
3. A specific taxpayer/s subject of a 2. To recommend the assessment of any
request for the supply of tax deficiency tax due in the same manner
information from a foreign
authority pursuant to an The assessment is void when the Revenue Officer
international convention or had no letter of authority
agreement on tax matters to which
the Philippines is a signatory or Section 21. Sources of Revenue
party of The following taxes, fees and charges are
deemed to be national internal revenue:
Q. When can taxpayers apply for the 1. Income tax;
compromise? 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 "Nonresident alien" means an individual
whose residence is not within the Philippines and
Chapter 1 Definitions who is not a citizen thereof. (G)
**Section 23. General Principles of Income Taxation Note: Simply put, one rate for all types of
in the Philippines. - Except when otherwise provided gross income.
in this Code:
A. A citizen of the Philippines residing therein 2. Schedular Tax System
is taxable on all income derived from Where there are different tax
sources within and without the Philippines; treatments of different types of income so
B. A nonresident citizen is taxable only on that a separate tax return is required to be
income derived from sources within the filed for each type of income and the tax is
Philippines; computed on a per return or per schedule
C. An individual citizen of the Philippines who basis.
is working and deriving income from abroad
as an overseas contract worker is taxable Note: Simply put, varying taxes are imposed
only on income derived from sources within on passive income.
the Philippines: Provided, That a seaman
who is a citizen of the Philippines and who 3. Semi-Schedular or Semi-Global Tax System
receives compensation for services All compensation income, business
rendered abroad as a member of the or professional income, capital gain and
complement of a vessel engaged exclusively passive income not subject to final tax, and
in international trade shall be treated as an other income are added together to arrive
overseas contract worker; at the gross income, and after deducting
D. An alien individual, whether a resident or the sum of allowable deductions, the
not of the Philippines, is taxable only on taxable income is subjected to one set of
income derived from sources within the graduated tax rates or normal corporate
Philippines; income tax. With respect to such income
E. A domestic corporation is taxable on all the computation is global.
income derived from sources within and For those other income not
without the Philippines; and 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
Different tax base for graduated tax rates and 8% income tax rates
Tax option Tax Base
Graduated rates Taxable income
8% income tax rate Gross sales/receipts and other non-
operating income to be reduced by
P250,000
Q. What will happen if the taxpayer’s gross (Although remember that Bar exam do not ask
receipts/sales and other non-operating income regarding tax schedule. Mostly ask is if the income
exceed the P3,000,000 VAT threshold? 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
C. Mixed Income Earners or those who earn (Do not fret too much just combined what you
income from both compensation and from self- learned in A and B. AJA!)
employment.
The treatment of mixed income The total income tax liability of
earner is just the combination of (A) the mixed income earner is the sum of the
Compensation earner and (B) Self employed liability for compensation income and
individual. liability for the income from business or
practice of profession.
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 taxable. They are taxed from the income
abroad (without the Philippines)? sourced worldwide.
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 Capital gain tax only applies to the sale or
Philippines. disposition of the following:
1. Shares of stock of a domestic corporation
2. For resident citizens – passive income that not traded through local the local stock
come from outside the Philippines are exchange; and
2. Sale of real property in the Philippines
which is held as capital asset
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
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? Who are exempt from capital gains tax?
1. Individual taxpayer, whether citizen 1. Dealers in securities (in terms of CGT for
or alien shares of stock)
2. Corporate taxpayer, whether 2. Investors in shares of stock in a mutual fund
domestic or foreign company, as defined in Section 22(BB), and
3. Other taxpayers not falling under (1) Section 2(s) of RR 6-2008, in connection
and (2) such as estate, trust, trust with the gains realized by said investor
funds and pension funds, among upon redemption of said shares of stock in a
others. (RR 6-2008) 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)
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
NIRC TRAIN
Taxable income received from all sources within the Philippines Graduated tax rate on income tax [same as
Sec. 24 2(a)]
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
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. 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.
Imposition of MCIT
Tax Rate: MCIT of 2% of gross income as of the end
of taxable year
Example:
Year 4 Year 5
MCIT 200 300
Normal 100 400
Tax Payable 200 400
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.
Tax Rate
International carrier doing business in the 2.5% of Gross Philippine
Philippines billings
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)
Tax Rate
Air carrier with flight operations in the Philippines 2.5% of Gross Philippine
billings
Air carrier with flights originating from any point or port in the
Philippines irrespective of the place where passage document (unless subject to a
are sold or issued. different tax rate under a
tax treaty)
It is considered engaged in business as an international air carrier
in the Philippines
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)
Section 28 (A)(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational
Companies
Tax Rate
Regional or area headquarters Not subject to income tax
Regional operating headquarters 10% of their taxable income
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
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
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
Operations – refer to its regular activities which 5. The purchase of goods or services for
must be exclusively for charity 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;
Meaning of “Non-stock”
1. It means no part of its income is 6. When upon dissolution and dissatisfaction
distributable as dividends to its members, of all liabilities, its remaining assets are
trustees, or officers, and distributed to its trustees, organizers,
2. That any profit obtained as an incident to its officers or members.
operation shall, whenever necessary or
proper, be used for furtherance of the Its assets must be dedicated to its
purposes for which the corporation was exempt purposes.
organized (RMC 51-14)
Accordingly, its constitutive
Meaning of “Non-profit” documents must expressly provide
It means no part of its net income or asset that in the event of dissolutions, its
accrues to or benefits any member or specific assets shall be distributed to one or
person, with all the net income or asset devoted to more entities formed for the
the institution’s purposes and all its activities purpose/purposes similar to its own,
conducted not for profit (RMC 51-14) or to the Philippine government for
public purposes (RMC 51-14)
No inurements to trustees etc… to be exempt
In order for a non-stock and/or non-profit Non-stock, non-profit corporations who are exempt
corporation/association/organization to be exempt under Sec. 30 are still liable for the following taxes:
based on Sec. 30, its earnings or assets shall not 1. Income derived from any of their real
inure to the benefit of any of its trustees, organizers, properties (such as rental payment from
officers, members or any specific person. their building premises)
2. Any activity conducted for profit regardless
The following are Inurements: of disposition thereof
1. Payment of compensation, salaries, or 3. Interest income from any bank deposits or
honorarium to its organizers; yield on deposit substitutes (final tax of
20%)
2. Payment of exorbitant or unreasonable 4. If it is foreign currency deposit, final tax of
compensation to its employees; 7.5% (Dept. Order 149-95, 1995)
5. They shall also be withholding agents for
3. Provisions of welfare aid and financial their employee’s compensation income
assistance to its members. subject to withholdin tax (RMC 76-2003)
An organization is not exempt from Sec. 30 (G) To be exempt from income tax civic
income tax if its principal activity is to league or organization
receive and manage funds associated 1. It must be organized for non-profit,
with savings or investment programs, 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)
2. Gross Income Derived from the Conduct of Trade Rents deposited by tenants in a bank
or Business or Exercise of Profession account because the lessor refused to accept the
same are considered income of the lessor. The lessor
Business income is the gross income is deemed to have constructively received the rents.
derived from the conduct of trade or business or the (Limpan Investment vs. CIR)
exercise of a profession.
Improvements by lessees
In the case of manufacturing, merchandising or When a lessee erects a building or makes
other business, gross income means improvement per agreement with the lessor, the
lessor may report the income therefrom upon either
Total Sales of the following, at his option:
Less: Cost of goods solds
Add: All income from incidental and outside sources 1. Outright method – at the time when such
Gross Income building or improvements are completed,
the fair market value of such building or
3. Gains derived from dealings in property improvement
Gains or loss on sale or exchange of 2. Spread out method – the lessor may spread
property is recognized when the property received over the life of the lease the estimated
in exchange is essentially different from the property depreciated value of such building or
disposed and the property received has market improvement at the termination of the
value. lease and report the income for each of the
adequate part.
(In sale or exchange of real or personal
property, distinguish first between ordinary versus Lease is terminated
capital assets because capital assets have special If the lease is terminated, and it is not
rules governing them.) through purchase by the lessor, so that the lessor
comes into possession of the time property prior to
Expropriation of property - taxable the time originally fixed, the lessor is considered to
Considering that there is a material gain not receive additional income for that year (if the value
excluded by law arising from expropriation of of the building exceeds the amount already reported
property which is realized out of a closed and 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 When a corporation was dissolve and in
dividend which is taxable income, the measure of process of complete liquidation, and its shareholders
income is the fair market value of the shares of stock surrendered their stock to it and paid the sums in
received. question to them in exchange, a transaction took
place, which was no different in its essence from a
Sale of stock received as dividends sale of the same stock to a third party who paid
Once the recipient sells the stock dividend, therefore. (Wise v. Meer)
he may realize gain or loss. This gain or loss is
treated as arising from the sale or exchange of a (to be continued… p. 135)
capital asset. (Sec. 253, RR 2-1940)
8. Annuities
Stock declaration and subsequent redemption
If after the stock dividend declaration, a An annuity refers to a sum of money
corporation cancels or redeems the same in such payable yearly or at a regular intervals.
time and manner as to make the distribution/
redemption essentially equivalent to a distribution of If part of the annuity payment represents
a taxable dividend, the amount received shall be interest, then it is a taxable income. If the annuity is
considered as a taxable dividend (10% final tax for a return of premium, it is not taxable.
individuals) (Sec. 254, RR 2-1940)
Note: Life insurance annuities are excluded from
gross income
Reason why corporation do this:
So that the shareholder will avoid paying 9. Prizes and Winnings
tax. Remember, stock dividends are not taxable, but General Rule: Prizes and winnings are taxable
cash dividends are subject to 10% final tax for
individuals. So corporations declare stock dividends, Exception: The prizes, awards and winning received
and then redeem them (by giving their shareholders in the following are not taxable.
cash) to go around the tax. But because of the law,
their subsequent redemptions are now taxable. 1. Amounts received as prizes and awards
made primarily in recognition of religious,
Hence, when the corporation cancels or charitable, scientific, educational, artistic,
redeems stock issued as a dividend at such time and literary, or civic achievement are not
such manner as to make the distribution and taxable and excluded from gross income if:
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable a. The recipient was selected without any
dividend, the amount so distributed in redemption action on his part to enter the contest
or cancellation of the stock shall be considered as or proceeding; and
taxable income to the extent that it represents a b. The recipient is not required to render
distribution of earnings or profits (CIR v. CA, GR No. substantial future services as a
108576) condition to receiving the prize or
award
Liquidating dividends – Taxable
2. All prizes and awards granted to athletes in
When corporation distributes all its local and international sports competitions
properties or assets in complete liquidation, the gain and tournaments, whether held in
realized from this is taxable. Philippines or abroad, and sanctioned by
their national sports association
Computation is based on Sec. 39 (b) or (c) of the Tax
Code. 3. Those that are in the nature of gifts
Recovery of bad debts previously written off – Compensation for loss of income and exemplary
taxable damages which represent loss of capital – taxable
Recovery of bad debts previously charged
off is taxable to the extent of income tax benefit of Moral damages, reimbursement, for hospital bills,
the said deduction. return of capital/property – not taxable
The following are also excluded from gross income: Bequest – something which is bequeathed by virtue
1. GSIS, SSS, Medicare, Pag-ibig, union dues of a will usually in the form of personal property
and other contributions
2. Gains from sale of bonds, debentures or Devise – is a gift of real property given by virtue of a
other certificate of indebtedness with will
maturities of more than five years.
3. Gains from redemption of shares in mutual Property received as a gift or received
funds under a will or testament or through legal
4. Interest received by a non-resident succession, is exempt from income tax
individual or a non-resident corporation
from deposits with depository banks under Exception: the income therefrom or income
the expanded foreign currency deposit unit derived from its investment or sale shall be included
5. Intercompany dividends (resident/domestic in the gross income
corporation from domestic corporations)
6. De minimis benefits received by employees 4. Compensation for Injuries or Sickness
7. Those under special laws (PCSO and lotto
winnings) The amounts received by an insured or his
8. Personal Equity and Retirement Account estate or beneficiaries through accident or health
(PERA) contribution insurance or under workmen’s compensation for
personal injuries or sickness are excluded from the
Exclusions from Gross Income 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 2. The separation from the service of the
under existing CBA or other agreements; official or employee must not be asked for
2. This is given in the absence of retirement or initiated by him
plan or agreement proving for retirement 3. The separation was not of his own making
benefits 4. Whether or not the separation is beyond
3. The retiring employee has served at least the control of the official or employee shall
five (5) years in the said establishment; be determined on the basis of the prevailing
4. That he is not less than 60 years of age but facts and circumstances and shall be duly
not more than 65, which is declared as the established by the employer by competent
compulsory retirement age; and evidence which should be attached to the
5. He shall be entitled to retirement pay monthly return for the period in which the
equivalent to at least ½ month salary for amount paid due to the involuntary
every years, a fraction of at least 6 months separation was made
being considered as one whole year. 5. Amounts received by reason of involuntary
separation remain exempt from income tax
A2. Retirement benefits received under a even if the official or the employee at the
reasonable private benefit plan time of separation, had rendered less than
In order to avail of the exemption, with 10 years of service and/or is below 50 years
respect to retirement benefits under a reasonable of age
private benefit plan, the following requirements
must be met: But any payment made by an employer to
1. The plan must be reasonable an employee on account of dismissal, constitutes
2. The benefit plan must be approved by the compensation regardless of whether the employer is
BIR legally bound by contract, statute, or otherwise, to
3. The retiring official or employee has been in make such payment. Hence it is not exempt from
the service of the same employer for at gross income.
least years
4. The retiring official or employee is not less C. Benefits received from the US Veterans
than 50 years of age at the time of his Administration
retirement D. Social security benefits, retirement gratuities,
5. The benefits shall be availed of by an official pensions and similar benefits from foreign
or employee only once. government agencies
E. SSS benefits
Reasonable private benefit plan F. GSIS benefits
It means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for 7. Miscellaneous Items
the benefit of some or all of his officials or
employees, wherein contributions are made by such A. Income derived by foreign government
employer for the officials or employees, or both, for Income earned by foreign governments in
the purpose of distributing to such officials and the Philippines from deposits/investments to be
employees the earnings and principal of the fund exempt, the income should be received by:
thus accumulated, and wherein its is provided in said 1. foreign governments,
plan that at no time shall any part of the corpus or 2. financing institutions owned, controlled, or
income of the fund be used for, or be diverted to, enjoying refinancing from foreign
any purpose other than for the exclusive benefit of governments, and
the said officials and employees 3. international or regional financial
institutions established by foreign
B. Amount received by an official or employee from governments
the employer
B. Income derived by the government or its political
Requisites in order that the separation pay may be subdivisions
excluded from gross income Income derived by the government will be
1. The amount received by an official or exempt from tax:
employee or by his heirs from the employer 1. The income should accrue to the
should be due to: government, and
a. Death, 2. It must be derived:
b. Sickness, a. From any public utility or
c. Physical disability, or b. From the exercise of any essential
d. Any causes beyond the control of governmental function.
said employee or official
C. Prizes and awards in recognition of achievements
E. 13th Month pay and other benefits
Amounts received as prizes and awards
made primarily in recognition of religious, charitable, The gross benefits received by officials and
scientific, educational, artistic, literary, or civic employees of public and private entities in the form
achievement are not taxable and excluded from of 13th month pay and other benefits are excluded
gross income if: from the gross income for income tax purposes to
1. The recipient was selected without any the extent of:
action on his part to enter the contest or NIRC TRAIN
proceeding; and P82,000 P90,000
2. The recipient is not required to render
substantial future services as a condition to Any excess will be included in the gross
receiving the prize or award income per income tax return as part of gross
compensation income.
D. Prizes and awards in sports competition
The amount of the de minimis benefits
All prizes and awards granted to athletes in given to employees shall also be excluded from the
local and international sports competitions and gross income for income tax purposes.
tournaments, whether held in Philippines or abroad,
and sanctioned by their national sports association.
The benefits above are exempted from All other benefits given by employers which
FBT, however, it may still form part of the are not included in the enumeration shall not be
considered “de minimis” benefits, and hence, shall B. Interest – in connection with the taxpayer’s
be subject to income tax and withholding tax on trade, business or profession
compensation income (RR 5-2011) C. Taxes – in connection with the taxpayer’s
trade, business or profession
The amount of de minimis benefits within D. Losses – actually sustained during the
its ceiling is exempt from fringe benefit tax up to the taxable year and not compensated by
ceiling. Any excess over the ceiling of the de minimis insurance or other indemnity
benefits shall be part of the “other benefits” exempt E. Bad debts
up to (NIRC – P82,000; TRAIN – P90,000). Anything in F. Depreciation
excess of P82,000 or P90,000 will be taxable. G. Depletion of Oil and Gas Wells and Mines
H. Charitable and other Contributions
De minimis benefit I. Research and Development
J. Pension Trust
w/in P82k or P90k Not w/in P82k or P90k Taxpayers Allowed to Claim the Allowable
Deductions
Not Taxable Taxable These deductions are applicable only in
computing the taxable income of the following
Any amount given by the employer as taxpayers derived from trade or business or practice
benefits, whether de minimis or others, shall be of profession:
deductible as business expense (RR 10-2008). 1. Individual resident and nonresident citizens
2. Individual resident aliens
3. Nonresident alien individual engaged in
trade or business within the Philippines
Chapter VII 4. General professional partnerships and
Allowable Deductions partners thereof
5. Domestic corporations
Sec. 34. Deductions from Gross Income 6. Resident foreign corporations in general
The following are allowed as deduction
(except for taxpayers earning compensation from Taxpayers NOT Allowed to Claim the Allowable
personal services under an e-e relationship): Deductions
A. Expenses 1. Taxpayers earning compensation income
1. Ordinary and Necessary Trade, arising from personal services rendered
Business or Professional Expenses under an employer-employee relationship
i. Salaries, wages and other forms 2. Alien individuals employed by the RHQs or
of compensation ROHQs of multinational companies
ii. Travel expenses in pursuit of 3. Alien individuals employed by OBUs
trade, business, profession 4. Alien individuals employed by petroleum
iii. Rentals for purposes of trade, service contractors and subcontractors
business, profession 5. International carriers
iv. Entertainment, amusement and 6. Offshore banking units
recreation expenses directly 7. Branches of foreign corporations on the
connected with trade, business profits remitted to their head offices
or operation 8. Regional or Area Headquarters (RHQs)
2. Expenses Allowable to Private 9. Regional Operating Headquarters (ROHQs)
Educational Institutions 10. Nonresident foreign corporation
Itemized Deductions
These are expenses and losses related to 1. Salaries and other forms of compensation for
trade or business or the practice of profession. personal services actually rendered
Itemized deductions refers to items Sec. 34 The test for deductibility in the case of
A-J. compensation payments is whether they are:
a. Reasonable, and
Sec. 34. A. Expenses b. Payments purely for service
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 Bonuses
profession shall be deducted from gross income, Bonuses to employees made in good faith
including a reasonable allowance for: and as additional expenses compensation for
1. Salaries, wages and other forms of services actually rendered by the employees are
compensation deductible, provided such payments, when added to
2. Travel expenses in pursuit of trade, the stipulated salaries, do not exceed a reasonable
business, profession compensation for services rendered (Kuenzle &
3. Rentals for purposes of trade, business, Streiff v. CIR)
profession
4. Entertainment, amusement and recreation Conditions for the deduction of bonuses:
expenses directly connected with trade, 1. The payment of the bonuses is in fact
business or operation compensation
2. It must be for personal services actually
Requisites for the deductibility of ordinary and rendered, and
necessary trade, business or professional expenses: 3. The bonuses when added to the stipulated
1. Expense must be ordinary and necessary salaries, do not exceed a reasonable
2. Must have been paid or incurred during the compensation for services rendered
taxable year
3. Must have been paid or incurred in carrying Fringe Benefits Expenses
on the trade/business The company can deduct the amount of the
4. Must be supported or substantiated by grossed-up monetary value of the fringe benefit
receipts, records or other pertinent papers given to the managers or supervisors as fringe
5. Amount must be reasonable benefit expense provided that the said fringe benefit
6. If subject to withholding tax, the same had been subjected to the final withholding tax.
should be properly withheld and remitted
to the BIR thru the AABs 2. Travelling/Transportation Expenses
7. Must be legitimately paid or not in the form Travelling expenses include transportation
of bribe, kickbacks and other similar expenses and meals and lodging incurred solely on
payments business, to be deductible. If the trip is taken for
other than business purposes, it is not deductible.
Meaning of “ordinary and necessary” expenses
Essential requisites for deductibility of
Ordinary – when it is normal in relation to the travelling/transportation expenses
business of the taxpayer. It need not be recurring or 1. Expense must be reasonable and necessary
habitual payments. 2. It must have been paid or incurred during
the taxable year
Necessary – when it is appropriate and helpful in the 3. It must be paid or incurred while away from
development of the taxpayer’s business. home
4. It must be paid or incurred in the conduct of
trade or business or exercise of profession Representation expenses
5. It must be substantiated with sufficient It shall refer to the expenses incurred by a
evidence such as official receipts taxpayer in connection with the conduct of his trade,
business or exercise of profession:
4. Rental Expense 1. in entertaining , providing amusement and
recreation to, or meeting with a guest/s
Essential requisites for deductibility of rental 2. at a dining place, place of amusement,
expenses country club, theater, concert, play,
1. Rental must be ordinary and necessary sporting event and similar events or places
2. It is required as a condition for the
continued use or possession of the property If the taxpayer is the registered member of
being leased a country, golf or sports club, the presumption is
3. The taxpayer has not taken or is not taking that the expenses are fringe benefits subject to the
title to the property or has no equity other FBT unless the taxpayer can prove that these are
than that of a lessee, user or possessor actually representation expenses.
4. Rentals should be subject to the expanded
withholding tax of rental charge, net of VAT Entertainment facilities
if any It shall refer to:
5. It must have been paid or incurred during 1. a yacht, vacation home, or condominium;
the taxable year and
6. It must be paid or incurred in carrying trade 2. any similar item of real or personal property
or business or practice of profession used by the taxpayer primarily for the
7. It must be substantiated by official receipts, entertainment, amusement or recreation of
records or other pertinent papers guests or employees
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 Losses are not to be claimed in sales of stock or
assets during the year result in a net capital loss, securities if:
such loss cannot be deducted from his ordinary 1. Within a period of 30 days before the sale,
income, inasmuch as capital losses are allowable and 30 days after the sale (61 days in total)
only to the extent of capital gains. 2. The taxpayer acquires or enters into an
option to purchase substantially the
Securities considered as worthless same/identical stocks or securities
It refers to shares of stock when offered for
sale or requested for share of redemption, no Losses are allowed only if the taxpayer is a
amount can be realized by the owner of the share. stockbroker and the sale was made in the regular
course of business.
Securities becoming worthless, which are
capital assets, shall be considered as loss from the Example: Jaime buy shares in Fraser Corp. He sells
sale or exchange of capital assets on the last day of the shares at a loss. Twenty days from the sale, he
such taxable year. buys shares in Fraser Corp. again. The loss will not be
allowed as deduction
Losses from wash sales of stocks or securities
Wagering Losses
Wash sales of stocks or securities – is a sale Wagering losses are allowed only to the
or other disposition of stock or securities where the extent of gains from such transaction.
taxpayer has acquired or has entered into a contract
or option to acquire substantially identical stocks or Abandonment losses in petroleum operations
securities within a 61-day period, beginning 30 days 1. In the event a contract area where
before the sale and ending 30 days after the sale. petroleum operations are undertaken is
partially or wholly abandoned, all
accumulated exploration and development 6. If they are recovered, they should be
expenditures pertaining thereto shall be included as part of gross income in the year
allowed as a deduction of recovery
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)
An individual/corporation can either elect: If the individual uses the cash basis, the OSD
1. Itemized deduction (Sec. 34 A-J), or shall be based on gross receipts during the taxable
2. Optional standard deduction (Sec. 34 L) year.
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.
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)
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)
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.
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 Determination of Amount and Recognition
of Loss
Sec. 40A
Gain – it is the excess amount realized over the basis
for determining gain
Sec. 40 B
Basis for Determining Gain or Loss from Sale or Disposition of Property
(RR 8-2001)
Mode of Acquisition Cost of Basis
1. Acquired by purchase The actual cost
2. By inheritance Fair market value
3. By gift The same as if it would be in the
hands of the donor or the last
preceding owner,
It is the place of activity creating the income 6. Sale of Personal Property. - gains; profits and
which is controlling, and not the place of business or income from the sale of personal property, as
residence of a corporation. determined in Subsection (E) of this Section.
Gross Income from Sources within the Philippines Gross Income from Sources without the Philippines
1. Interests other than those derived from
1. Interests. - including interests on bonds, notes sources within the Philippines;
or other interest-bearing obligation: 2. Dividends other than those derived from
a. The loan was used here in the sources within the Philippines;
Philippines 3. Compensation for labor or personal services
b. The debtor is in the Philippines performed without the Philippines;
2. Dividends
4. Rentals or royalties from property located 3. Short accounting period – an accounting
without the Philippines or from any interest in period wherein a return is made for a
such property; and fractional part of a year or which is a period
5. Gains, profits and income from the sale of real of less than 12 months.
property located without the Philippines.
This occurs:
Income From Sources Partly Within and Partly a. When a taxpayer, with approval of
Without the Philippines. CIR, changes from fiscal to calendar
year, vice versa or from one fiscal year
Gains, profits and income derived from the to another fiscal year; or
purchase of personal property within and its sale b. When taxpayer dies; or
without the Philippines, or from the purchase of c. When a corporation is newly
personal property without and its sale within the organized or dissolved at any time
Philippines shall be treated as derived entirely form during the year after the beginning of
sources within the country in which sold: Provided, the calendar or fiscal year.
however, That gain from the sale of shares of stock
in a domestic corporation shall be treated as derived Accounting Methods under the Tax Code
entirely form sources within the Philippines
regardless of where the said shares are sold.(BAR) 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.
General Rule: The accounting period of a taxpayer is Section 46. Change of Accounting Period.
a period of 12 months, such as: If a taxpayer, other than an individual,
changes his accounting period from fiscal year to
1. Calendar accounting period – a period of calendar year, from calendar year to fiscal year, or
12 months starting from Jan. and ending on from one fiscal year to another, the net income shall,
Dec. 21. (adopted by individual or with the approval of the Commissioner, be
corporation) computed on the basis of such new accounting
period, subject to the provisions of Section 47.
2. Fiscal accounting period – a period of 12
months ending on the last day of any month Sec. 47. Final or Adjustment Returns for a Period of
other than December. (only corporation) Less than 12 Months
Exception: But a taxpayer may have a taxable period When Short Period return required to be filed
of less than 12 months No return can be made for a period of more
than 12 months.
the work under the contract but not yet so applied.
A separate return for a fractional part of a If upon completion of a contract, it is found that the
year is required whenever there is a change, with the taxable net income arising thereunder has not been
approval of the Commissioner, on the basis of clearly reflected for any year or years, the
computing taxable income from one taxable year to Commissioner may permit or require an amended
another taxable year. return.
Individuals whose sole income is subject to final Every corporation subject to the
withholding tax tax herein imposed are required to file:
1. Those whose income consists solely of 1. quarterly income tax return and
royalties, interest, prizes, winnings, 2. final or adjustment return, on or before
dividends, etc., and the share in a April 15
partnership or association, joint venture, or
consortium taxable as corporation except: Foreign corporations not engaged in trade or
2. Aliens employed by ROHQs with respect to business in the Philippines (subject to final
their compensation income withholding tax)
3. Aliens employed by OBUs with respect to
their compensation income A corporation may used either calendar
4. Aliens employed by foreign service year or fiscal year basis for filing
contracts and subcontractors engaged in
petroleum exploration, with respect to their Sec. 58. D. Income of Recipient
compensation income Income upon which any creditable
Substitution Filing tax is required to be withheld at source
This is applicable only when: under Section 57 shall be included in the
1. An individual receiving purely compensation return of its recipient but the excess of the
income from only 1 employer, and amount of tax so withheld over the tax due
2. Tax on such income is correctly withheld on his return shall be refunded to him
subject to the provisions of Section 204; if
Q. Where to file? the income tax collected at source is less
1. Authorized agent bank than the tax due on his return, the
2. Revenue district officer difference shall be paid in accordance with
3. Collection agent the provisions of Section 56.
4. Duly authorized city treasurer where he is (2014, BAR, right of redemption)
legally residing
5. Office of the Commissioner Income withheld:
a. excess of tax due – refunded
b. less than tax due – difference paid
Q. When to file?
On or before April 15 of each year covering
the income for the preceding taxable year.
Example: (class)
Option:
1. refund,
2. carry-over