INCOME AND WITHHOLDING TAXES

Atty. Vic C. Mamalateo

July, 2011 Ateneo Law School

 INCOME TAX (TITLE II, NIRC)

BASICTAX PRINCIPLES
LIFEBLOOD THEORY
Taxation is the rule; exemption, the exception. In case of doubt, tax income or
disallow deductions and tax credits.
Taxes are imposed by law (e.g., NIRC), while financial accounting are based on g
enerally accepted accounting standards. In case of conflict between tax rules an
d accounting rules, the former shall prevail.

INCOME TAX
INCOME TAX
Tax on all yearly profits arising from property, professions, trades or offices,
or as a tax on a persons income, emoluments, profits and the like (Fisher v. Tri
nidad). Income tax is a direct tax on taxable actual or presumed income (gross o
r net) of a taxpayer received, accrued or realized during the taxable year.
WITHHOLDING TAX
It is not an internal revenue tax but a mode of collecting income tax in advance
on income of the recipient of income thru the payor of income. [NOTE: Sec. 21,
NIRC enumerates various internal revenue taxes.] There are 2 types of withholdin
g taxes, namely: (1) final withholding tax; and (2) creditable withholding tax,
including expanded withholding tax.

FEATURES OF INCOME TAX

It is a direct tax. It is a progressive tax, since the tax base increases as the
tax rate increases. It is founded on the ability to pay of taxpayer. Phil adopt
ed the most comprehensive system in imposing income tax. Phil follows the semi-g
lobal or semi-schedular income tax system. It is of American origin. Decisions o
f U.S. tax authorities have peculiar and persuasive effects for the Phil.

INCOME TAX SYSTEMS

GLOBAL TAX SYSTEM
Compensation income not subject to FWT Business and/or professional income Capit
al gains not subject to FWT Passive investment income not subject to FWT Other i
ncome not subject to FWT
SCHEDULAR TAX SYSTEM
Compensation income subject to FWT Capital gains subject to FWT Passive investme
nt income subject to FWT Other income subject to FWT
The Philippines adopted the semi-global or semi-schedular tax system. Either the
global or schedular system, or both systems, may apply on income of a taxpayer.
You apply the schedular tax system only when the income, gain or profit is subj
ect to FWT.

FINAL WITHHOLDING TAX

Income payment is listed in Sec 57(A), NIRC, as subject to FWT. FWT withheld by
the payor of income (e.g., 20% FWT on interest income on bank deposits) represen
ts FULL payment of income tax due on such income of the recipient. Income payee
(or recipient of income) does not report income subjected to FWT in his income t
ax return, although income is reflected in his audited financial statements for
the year. However, he is not allowed to claim any tax credit on income subjected
to FWT. Withholding agent (payor of income) files the withholding tax return, w
hich includes the FWT deducted from the income of payee, and pays the tax to the
BIR. There is no Certificate of Tax Withheld issued to income payee. No Certifi
cate of Tax Withheld (BIR Form 2307) is attached to the income tax return of rec
ipient of income because he does not claim any tax credit in his tax return.

CRITERIA IN IMPOSING INCOME TAX

Citizenship principle
For Filipino citizens and domestic corporations, who are entitled to Philippine
government protection wherever they are situated.
Residence principle
For alien individuals and foreign corporations
Source principle
For alien individuals and foreign corporations

TYPES OF INCOME TAX

1. 2. 3. 4. Graduated income tax on individuals; Normal corpo
corporations (RCIT); Minimum corporate income tax on corporations (MCIT); Specia
l income tax on certain corporations (e.g., private educational institutions; fo
reign currency deposit units; international carriers) 5. Capital gains tax on sa
le or exchange of unlisted shares of stock of a domestic corporation classified
as a capital asset; 6. Capital gains tax on sale or exchange of real property lo
cated in the Philippines classified as a capital asset; 7. Final withholding tax
on certain passive investment incomes; 8. Final withholding tax on income payme
nts made to non-residents (individual or corporation); 9. Fringe benefit tax (FB
T); 10. Branch profit remittance tax (BPRT); and 11. Tax on improperly accumulat
ed earnings (IAET).

FORMULA
GLOBAL SYSTEM Gross sales Less: Cost of sales Gross income Less: Deductions
(for ind.) Net taxable income Multiplied by applicable rate (graduated or flat)
Income tax due Less: Creditable WT Balance SCHEDULAR SYSTEM Gross selling price
or fair market value, whichever is higher times applicable tax rate = Tax due (r
eal property) Gross selling price less cost or adjusted basis = Capital gain tim
es applicable tax rate = Tax due (shares of dom corp) Gross income times applica
ble rate = Tax due (passive inv income; income paid to nonresident person)

KINDS OF TAXPAYERS
INDIVIDUAL, including estate and trust
CITIZEN
Resident (RC) Taxable on worldwide income Non-resident immigrant, permanent work
er, OFW (seamen)
ALIEN
Resident Non-resident
Engaged in trade or business (more than 180 days in the Phil) Not engaged in tra
de or business (180 days or less stay in Phil)
CORPORATION, including partnership DOMESTIC (DC) Taxable on worldwide income
FOREIGN Resident (e.g., Phil branch of foreign corporation) Non-resident
Law of incorporation RULE: All taxpayers are taxed only on income from sources w
ithin the Phil, except RC and DC.
TEST FOR TAX PURPOSES:

PARTNERSHIPS
EXEMPT General professional partnership (GPP) Joint venture undertaking construc
tion activity or energyrelated activities with operating contract with the gover
nment TAXABLE Partnerships, no matter how created or organized RULES: If taxable
, partnership is taxed like a corporation. If taxable partnership derives net in
come during the year, the entire net income is deemed received by the partners i
n the year it was earned by the partnership. If GPP adopts itemized deductions d
uring the year, partners must use itemized deductions during the same year.

RESIDENT FOREIGN CORPS

TAXABLE: RCIT & BPRT
Ordinary branch of a foreign corporation in the Phil: 30% x net income from sour
ces within the Phil PEZA- & SBMA-registered branch of foreign corporation is exe
mpt from 15% BPRT Regional operating headquarters (ROHQ): 10% x net income from
sources within the Phil Offshore banking unit (OBU) and foreign currency deposit
unit (FCDU) [ING Bank Manila v. CIR]: 10% x gross interest income on forex loan
to residents Foreign international carriers by air or water: 2.5% x GPB Foreign
contractor or sub-contractor engaged in petroleum operations in the Phil: 8% x
gross income from sources within the Phil
EXEMPT: Not engaged in trade or business in the Phil
Representative office Regional headquarters (RHQ)

JOINT VENTURE
Lease of properties under common management
Three sisters borrowed money from their father and bought twenty-four (24) piece
s of real property that they leased to various tenants for over fifteen years an
d derived rentals therefrom. They appointed their brother to manage their proper
ties and to collect and receive rents. The court ruled that a taxable partnershi
p was formed. There were series of transactions where petitioners purchased twen
ty-four lots, showing that the purpose was not limited to the conservation of th
e common fund or even the properties acquired by them. The character of habitual
ity peculiar to business transactions engaged in for the purpose of gain was pre
sent. The properties were leased out to tenants for several years. Moreover, the
term corporation includes organizations that are not necessarily partnerships in th
e technical sense of the term as well as partnerships, no matter how created or
organized. This qualifying expression clearly indicates that a joint venture nee
d not be undertaken in any of the standard forms, or in conformity with the usua
l requirements of the law on partnerships, in order that one could be deemed con
stituted for purposes of the tax on corporations (Evangelista vs. Collector, 102
Phil. 140). When a father and son purchased a lot and building, entrusted the a
dministration of the building to an administrator and divided equally the net in
come, there is a taxable partnership (Reyes vs. Commissioner, 24 SCRA 198).

JOINT VENTURE
Insurance pool or clearing house
An insurance pool or clearing house, composed of 41 non-life insurance corporati
ons, whose role was limited to its principal function of allocating and distribu
ting the risks arising from the original insurance among the signatories to the
treaty or the members of the pool on their ability to absorb the risks ceded as
well as the performance of incidental functions, such as records, maintenance, c
ollection and custody of funds, and which did not insure or assure any risk in i
ts own name, was treated as a partnership or association subject to tax as a cor
poration. Article 1767 of the Civil Code recognizes the creation of a contract o
f partnership when two or more persons bind themselves to contribute, money, prop
erty, or industry to a common fund, with the intention of dividing the profits a
mong themselves. Its requisites are mutual contribution to a common stock, and a
joint interest in the profits (AFISCO Insurance Corp et al. vs. Commissioner, G
.R. No. 112675, Jan. 25,
1999).

JOINT VENTURE
Agreement to manage and operate mine denominated as Power of Attorney

Philex Mining Corporation entered into an agreement denominated as Power of Atto

rney with Baguio Gold Mining Corporation to manage and operate the latters mining
claim. In managing the project, Philex made advances of cash and property. The
mine suffered continuing losses resuling in Philexs withdrawal as manager and ces
sation of mine operations. A Compromise with Dation in Payment was executed by the
parties, where Baguio Gold admitted its liabilities to Philex and agreed to pay
the same. Philex wrote off in the books the remaining outstanding indebtedness
of Baguio Gold by charging a portion of the amount to allowances and reserves th
at were set up in 1981 and a portion to the 1982 operations. The amount allocate
d to 1982 was deducted from the 1982 gross income as loss on settlement of receiv
ables. The BIR disallowed the deduction for bad debt and assessed Philex deficien
cy taxes because the advances are Philexs investment in a partnership with Baguio
Gold for the exploitation and development of the mine.

JOINT VENTURE
The totality of the circumstances and the stipulations in the parties agreement i
ndubitably lead to the conclusion that a partnership was formed between the part
ies. First, it does not appear that Baguio Gold was unconditionally obligated to
return the advances made by Philex under the agreement. Second, the Tax Court c
orrectly observed that it was unlikely for a business corporation to lend hundre
ds of millions to another corporation with neither security nor collateral or a
specific deed evidencing the terms and conditions of such loans. The parties als
o did not provide for a specific maturity date for the advances to become due an
d demandable, and the manner of payment was unclear. Third, the strongest indica
tion that Philex was a partner is the fact that it would receive 50% of the net
profits as compensation under the agreement (Philex Mining Corporation vs. Commiss
ioner, G.R. No. 148187,
Apr. 16, 2008).

SOURCES OF INCOME

Interest Interest from sources within Phil and interest on bonds and obligations
of residents, corporate or otherwise Dividend From domestic corporation and fro
m foreign corporation, unless less than 50% of gross income of foreign corporati
on for 3 years prior to declaration of dividends was derived from sources within
the Phil, in which case, apply only ratio of Phil-source income to gross income
from all sources Services Place where services are performed, except in case of
international air carrier and shipping lines which are taxed at 2.5% on their G
ross Phil Billings. Revenues from trips originating from the Phil are considered
as income from sources within the Philippines, while revenues from inbound trip
s are treated as income from sources outside the Philippines. Rentals and royalt
ies Location or use of property or property right in Phil Sale of real property
Located in the Philippines Sale of personal property Located in the Philippines
Gain from sale of shares of stocks of a domestic corporation is ALWAYS treated a
s income from sources within the Philippines. Other intangible property Mobilia
sequuntur personam (e.g., gain from sale of shares of stocks of a foreign corpor
ation)

GROSS INCOME
SALE OF GOODS Gross Sales Less: Cost of Sales: Beg. Inventory
+ Purchases Total available for sale - Ending inventory Cost of Sales
SALE OF SERVICES Gross Revenue Less: Cost of Service consisting of all direct co
sts and expenses
Gross income Times 2% MCIT
Gross income Timex 2% MCIT

INCOME
INCOME means cash or its equivalent coming to a person within a
specified period, whether as payment for services, interest or profit from inves
tment. It covers gain derived from capital, from labor, or from both combined, i
ncluding gain from sale or conversion of capital assets. Return of capital is ex
empt from income tax. Capital, labor, or property is the tree; income is the fru
it. Capital is the fund, income is the flow of fund. To be taxable, there must b
e income, gain or profit; gain is received, accrued or realized during the year;
and it is not exempt from income tax under the Constitution, treaty or law.
Mere increase in the value of property does not constitute taxable income. It is
not yet realized during the year. Transfer of appreciated property to the emplo
yee for services rendered is taxable income.

TEST IN DETERMINING INCOME

Realization test
There must be separation from capital of something of exchangeable value (e.g.,
sale of asset)
Claim of right doctrine
CIR v. Javier, 199 SCRA 824 (bank erroneously paid $1 M, instead of $1,000)
Economic benefit test
Stock option given to the employee
Income from whatever source
All income not expressly exempted from income, irrespective of voluntary or invo
luntary action of taxpayer in producing income

NATURE OF INCOME
COMPENSATION INCOME
Existence of employer-employee relationship
BUSINESS AND/OR PROFESSIONAL INCOME
NO employer-employee relationship
CAPITAL GAIN
Real property in the Phil and shares of stock of domestic corporation Other sour
ces of capital gain
PASSIVE INVESTMENT INCOME
Interest, dividend, and royalty income
OTHER INCOME
Prizes and winnings All other income, gain or profit not covered by the above cl
asses

COMPENSATION INCOME
Compensation income falling within the meaning of statutory minimum wage(SMW) unde
r R.A. 9504, effective July 6, 2008, as implemented by Revenue Regulations No. 1
0-2008 dated July 8, 2008, shall be exempt from income tax and withholding tax.
Holiday pay, overtime pay, night shift differential pay, and hazard pay earned b
y Minimum Wage Earner (MWE) shall likewise be covered by the above exemption, pr
ovided that an employee who receives/earns additional compensation such as commi
ssions, honoraria, fringe benefits, benefits in excess of the allowable statutor
y amount of P30,000, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shal
l not enjoy the privilege of being a MWE and, therefore, his/her entire earnings
are not exempt from income tax and withholding tax.

COMMISSION INCOME
Commissions paid for marketing services rendered abroad for a Philippine company
is considered foreign-source income. The source of the income is the property,
activity or service that produced the income. Place where services are rendered
determine taxation. The fact that recipient of commission income is President an
d majority stockholder of the Philippine company does not alter the source of in
come. There are only two ways by which the President and other members of the Bo
ard can be granted compensation apart from reasonable per diems: (1) when there
is a provision in the by-laws fixing their compensation; and (2) when the stockh
olders agree to give it to them. If none of these conditions are present, commis
sion income cannot be automatically attributed to petitioners position in the com
pany (Juliane Baier-Nickel vs. CIR, GR No.
156305, Feb. 17, 2003)

Documents faxed to Philippine company bearing instructions as to sizes, designs

and fabrics to be used in finished products and sample sales orders relayed to c
lients abroad are not enough to show services were performed abroad. Said docume
nts must show that instructions or orders ripened into concluded or collected sa
les in Germany (CIR v. Baier-Nickel, GR No. 153793, Aug 29, 2006).

ONSHORE AND OFFSHORE INCOME

Construction and installation works were subcontracted and done in the Philippin
es by a Phil corporation; hence, income is from sources within the Philippines.
However, some pieces of equipment and supplies for NDC project and ammonia stora
ge tanks and refrigeration units were completely designed and engineered in Japa
n. All services for the design, fabrication, engineering and manufacture of mate
rials and equipment under Japanese Yen portion were made and completed in Japan;
hence, exempt from Phil income tax. Service income from turn-key contract on a
project in the Phil is divisible (CIR v. Marubeni Corp, GR No. 137377, Dec 18, 2
001).

GROSS PHIL BILLINGS

INTERNATIONAL AIR CARRIER
On outbound trip: Flight from Phil to foreign destination, income is treated as
from Philippine sources; hence, subject to 2.5% on GPB
Continuous and uninterrupted flight If transhipment of passenger in another coun
try on another foreign airline takes place: GPB tax applies only on aliquot port
ion of revenue on Philippine leg (Phil to foreign country)
On inbound trip: Flight from foreign country to the Phil, income is treated as f
rom foreign sources; hence, exempt from Phil income tax
INTERNATIONAL SHIPPING LINE
From Phil to final foreign destination: entire income is taxable, even if transh
ipment of cargoes took place in another country From foreign country to Phil: ex
empt

CAPITAL GAINS
3 TYPES OF CAPITAL GAINS
Capital gain from sale of real property located in the Phil Capital gain from sa
le of shares of stocks of a domestic corporation Other types of capital gains
Sale of real property located in the Phil
Seller is not engaged in real estate business
The law presumes that the seller realizes a profit from sale of capital asset; h
ence, despite the loss from sale, seller has to pay the 6% CGT.

SALE OF REAL PROPERTY

The tax base is gross selling price or fair market value, whichever is higher Ap
ply the 6% capital gains tax, if the seller is a resident citizen, an alien indi
vidual (resident or non-resident), or a domestic corporation. If the seller is a
foreign corporation (resident or non-resident), the asset in the Phil is a capi
tal asset, but the gain from sale is subject to the global tax system of taxatio
n. If the real property is located abroad, the gain from sale is exempt from Phi
l income tax, unless the seller is a resident citizen or a domestic corporation.
If the seller is a resident citizen and capital asset is the principal residenc
e of the seller, the sale may be exempt from the 6% CGT, provided that the condi
tions provided for in the law are complied with by the seller.

SALE OF REAL PROPERTY

Seller is a person engaged in real estate business Real property is an ordinary
asset; hence, any gain (selling price less cost or adjusted basis) from sale is
taxed under the global tax system. The transaction is subject to the expanded wi
thholding tax, such tax to be withheld by the buyer of the property and remitted
to BIR. The withholding tax is creditable against the income tax of the seller.
The 6% capital gains tax on the transaction is not applicable thereon.

SALE OF SHARES OF DOMESTIC CORPORATION

Seller is a dealer in securities
Dealer in securities is a person regularly engaged in the buy and sale of securi
ties for his own account. He sells property and looks at profits from sale of sh
ares or securities. A stockbroker is a middleman between the seller and buyer of
stocks or securities. He is a seller of services and his income is commission.
Shares are ordinary assets of seller; selling price less cost or adjusted basis
equals gain; gain from sale is subject to global tax system of income taxation.
Transaction involving listed shares traded in local stock exchange is not covere
d by Sec 127(A), NIRC (stock transaction tax), by express provision of law.

SHARES OF DOMESTIC CORPORATION

Seller is an investor who is not a dealer in securities If shares are listed and
traded in a local stock exchange, apply of 1% stock transaction tax on gross se
lling price or gross value in money. Sale is exempt from income tax. If shares a
re listed but not traded in a local stock exchange (or over-the-counter), or the
shares are unlisted, the net capital gain (selling price less cost or adjusted
basis), if any, is subject to the capital gains tax computed as follows: 5% on f
irst P100,000 net capital gain; and 10% on any amount in excess of P100,000

SHARES OF DOMESTIC CORPORATION

CGT return is filed within 30 days from date of sale. Every sale must be covered
by a separate CGT return and the tax paid upon filing of the return. All transa
ctions during the year are consolidated and the annual return shall be filed not
later than April 15 of the following year, but only one P100,000 is subject to
5% and the balance of net capital gain for the year is subject to 10%. Net capit
al gain = Total capital gains from sales of shares of domestic corporation durin
g the year less total capital losses during the same year.

OTHER CAPITAL ASSETS

INDIVIDUAL
If capital asset is long-term (holding period is over 12 months), only 50% of ga
in is subject to income tax, using the global tax system. If gain is short-term,
100% of gain is subject to income tax under the global tax system.
CORPORATION
Regardless of holding period, the entire gain or loss is taxable or deductible.

INTEREST INCOME
TYPES OF INTEREST INCOME
Subject to FWT: Interest income on bank deposits, deposit substitutes, trust and
other similar arrangements
20% FWT peso deposit with bank 7.5% FWT foreign currency deposit with OBU/FCDU
NOT subject to FWT but subject to global tax system: All other interest income o
r financing income not covered above Exempt income:
Long-term deposit or investment (5 years or more) by individuals in the form of
trust funds, deposit substitutes, IMA and other investments prescribed by BSP
Taxable income:
Preferential tax rate Pre-termination of long-term deposit by individual : 20%,
1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5 yrs); and
interest on foreign loan (20%) Regular tax rate All other cases

TAX ON OBU/FCDU
Final tax on interest income from loans to resident borrower is a direct liabili
ty of FCDU Failure of local borrower to withhold and remit the final withholding
tax does not exempt OBU/FCDU on onshore interest income (ING Bank v CIR, 2005).
The withholding agent-borrower may also be assessed deficiency withholding tax
as penalty for failure to withhold (RCBC v. CIR, CTA Case 2004).

DIVIDEND INCOME
REQUISITES FOR DIVIDEND DECLARATION
Presence of positive retained earnings No prohibition to declare dividend in loa
n agreement Declaration of dividend by Board of Directors
TYPES OF DIVIDENDS
Taxable
Cash dividend Property dividend
Exempt
Stock dividend (except when there is change in proportionate interest among stoc
kholders, or there is subsequent cancellation or redemption of shares declared a
s stock dividend, which is essentially equivalent to cash dividend)
NOTE: Liquidating dividend represents distribution of corporate assets to stockh
olders. Gain from surrender of shares are treated as ordinary income.

DIVIDEND INCOME
Intra-corporate dividend: Exempt from tax
Corporation paying dividend: Domestic corporation Recipient of dividend: Another
domestic corporation or resident foreign corporation
Dividend paid to non-resident foreign corporation
Corporation paying dividend: Domestic corporation Recipient of dividend
Foreign head office makes direct investment in Phil company: 15% FWT on gross di
vidend income Phil branch of foreign corporation makes investment in Phil compan
y: Exempt from income tax
Tax-sparing provision
If country of residence of the foreign corporation does not impose income tax on
dividend paid by a domestic corporation, impose 15% FWT only

DIVIDEND INCOME
While there is transfer of the shares of stock/securities to the Borrower pursua
nt to the Securities Borrowing and Lending (SBL) Agreement, the Lender retains c
ertain rights accruing to the shares of stock/securities lent, such as the right
to receive cash, stock dividends or interest which the Borrower is obliged to m
anufacture or reimburse to the Lender during the borrowing period. These cash, s
tock dividends or interest which the Borrower is required to manufacture or reim
burse to the Lender are otherwise referred to as "Manufactured Dividends or Bene
fits". The Lender may likewise retain voting rights over the loaned shares of st
ock/securities while in the possession of the Borrower, if mutually agreed upon
by the parties. Receipt of the Manufactured Dividends or Benefits shall not be a t
axable income of the Lender since it just represents dividends/other benefits th
at the lender would have received had the share not been loaned pursuant to SBL
agreement. However, the payment of such amount by the Borrower shall not be a ta
x deductible expense. On the other hand, the receipt of cash dividend from the i
ssuing company by the Borrower or Buyer shall be subject to the provisions of ex
isting laws (e.g., final withholding tax of 10% on gross dividend paid to a citi
zen).

OTHER INCOME
Income from any source whatever The words income from any source whatever disclose
s a legislative policy to include all income not expressly exempted from the cla
ss of taxable income under our laws (Madrigal vs. Rafferty, supra; Commissioner
vs. BOAC). The words income from any source whatever is broad enough to cover gain
s contemplated here. These words disclose a legislative policy to include all in
come not expressly exempted within the class of taxable income under our laws, i
rrespective of the voluntary or involuntary action of the taxpayer in producing
the gains (Gutierrez vs. Collector, CTA Case 65, Aug.
31, 1955).

Any economic benefit to the employee whatever may have been the
is effected is taxable. Thus, in stock options, the difference
market value of the shares at the time the option is exercised
rice constitutes additional compensation income to the employee
.
Smith, 324 U.S. 177).

mode by which it
between the fair
and the option p
(Commissioner vs

EXCLUSIONS
Life insurance proceeds Amount received by insured as return of premium Gifts,
equests and devises Compensation for injuries or sickness Income exempt under tr
eaty Retirement benefits, pensions, gratuities
R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)
Interest income of employee trust fund or accredited retirement plan is exempt f
rom FWT (CIR v. GCL Retirement Plan, 207 SCRA 487)
Amount received as a consequence of separation because of death, sickness or oth
er physical disability or for any cause beyond the control of employee
Miscellaneous items
Income of foreign government Income of government or its political subdivisions
from any public utility or exercise of governmental function

INCOME OF RETIREMENT FUND

COA alleged that DBP is actual owner of the trust fund and its income because:
DBP made the contribution to the Fund Trustees of the Fund are merely administra
tors DBP employees only have an inchoate right to the Fund

DBP responded that the Trustees received and collected income and profit from th
e Fund and they maintained separate books for that purpose. The principal and in
come will not revert to DBP, even if trust is subsequently modified or terminate
d. SC ruled that the beneficiaries of the Fund are the DBP officials and employe
es who will retire. It is not always necessary that the beneficiaries should be
named or even be in existence at the time the trust is created in his favor, pro
vided they are sufficiently certain or identifiable. The Salary Loan Program did
not terminate the trust to the Funds trustee. That the DBP Board of Directors co
nfirms the approval of the SLP by the Funds trustees does not make the fund prope
rty of DBP (DBP v. COA, 2004).

EXCLUSIONS
Miscellaneous items
Prizes and awards
In recognition of religious, charitable, artistic, literary achievement, etc. (H
e did not enter contest and is not required to render substantial future service
s) Granted to athletes in local and international sports competitions, sanctione
d by their national sports associations
13th month pay and other benefits (up to P30,000) Gains from sale of long-term (
5 years and 1 day) bonds, debentures and other certificates of indebtedness Gain
s from redemption of shares in mutual fund

GAIN v. INTEREST
Gains cannot include interest, since it clearly refers to gains from the sale of
bonds, debentures and other certificates of indebtedness. Whereas the term gains
includes interest in its general sense, this rule cannot be applied to Section 32(
B)(7)(g) of the Tax Code in the specific sense. Section 32(A) of the Tax Code de
fines gross income and it is clear that there is a distinction between gains derive
d from dealings in property and interests. Gains realized from the sale or exchange
or retirement of bonds, debentures and other certificate of indebtedness would fa
ll under the category of gains derived from dealings in property. On the other han
d, interests would include interest from bonds, debentures and other certificate o
f indebtedness. Only citizens, resident aliens and non-resident aliens engaged i
n trade or business are exempt from income tax on interest from long-term deposi
t or investment. On the other hand, domestic and resident foreign corporations a
re subject to a 20% final tax on such interest. If Congress intended to exempt i
nterest from bonds, debentures and other certificates of indebtedness under Sect
ion 32(B)(7)(g) of the Tax Code, it would have done so in clear and specific ter
ms (Nippon Life Insurance Company vs. Commissioner, CTA Case No. 6142, Feb 4, 20
02). After all, exemptions are construed strictly against the taxpayer and liber
ally in favor of the government.

DE MINIMIS BENEFITS
EXEMPT DE MINIMIS BENEFITS, REGARDLESS OF RECIPIENT (RANK AND FILE, OR MANAGERIA
L OR SUPERVISORY) a. Monetized unused vacation leave credits of private employee
s not exceeding ten (10) days during the year and the monetized value of leave c
redits paid to government officials and employees; b. Medical cash allowance to
dependents of employees not exceeding P750.00 per employee per semester or P125
per month; c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg rice per month
amounting to not more than P1,500.00; d. Uniforms and clothing allowance not exc
eeding P4,000.00 per annum; e. Actual yearly medical benefits not exceeding P10,
000.00 per annum; f. Laundry allowance not exceeding P300.00 per month;

DE MINIMIS BENEFITS
g. Employees achievement awards (e.g., for length of service or safety achieveme
nt, which must be in the form of a tangible personal property other than cash or
gift certificate, with an annual monetary value not exceeding P10,000.00 receiv
ed by the employee under an established written plan which does not discriminate
in favor of highly paid employees; h. Gifts given during Christmas and major an
niversary celebrations not exceeding P5,000.00 per employee per annum; i. Flower
s, fruits, books, or similar items given to employees under special circumstance
s (e.g., on account of illness, marriage, birth of a baby, etc.); and j. Daily m
eal allowance for overtime work not exceeding twenty-five percent (25%) of the b
asic minimum wage. The amount of de minimis benefits conforming to the ceiling her
ein prescribed shall not be considered in determining the P30,000.00 ceiling of o
ther benefits provided under Sec. 32(b)(7)(e) of the Tax Code. However, if the em
ployer pays more than the ceiling prescribed by these regulations, the excess sh
all be taxable to the employee receiving the benefits only if such excess is bey
ond the P30,000.00 ceiling. Any amount given by the employer as benefits to its
employees, whether classified as de minimis benefits or fringe benefits, shall c
onstitute as deductible expense upon such employer.

EXEMPT ASSOCIATIONS
The phrase any of their activities conducted for profit does not qualify the word p
roperties.-- The phrase any of their activities conducted
for profit does not qualify the word properties. This makes income from the propert
y of the organization taxable, regardless of how that income is used whether for
profit or for lofty non-profit purposes. Thus, the income derived from rentals
of real property owned by the Young Mens Christian Association of the Philippines
, Inc. (YMCA), established as a welfare, education and charitable non-profit cor
poration, is subject to income tax. The rental income cannot be exempted on the
solitary but unconvincing ground that said income is not collected for profit bu
t is merely incidental to its operation. The law does not make a distinction. Wh
ere the law does not distinguish, neither should we distinguish. Because taxes a
re the lifeblood of the nation, the Court has always applied the doctrine of str
ict interpretation in construing tax exemptions. YMCA is exempt from the payment
of property taxes only but not income taxes because it is not an educational in
stitution devoting its income solely for educational purposes. The term education
al institution has acquired a well-known technical meaning. Under the Education A
ct of 1982, such term refers to schools. The school system is synonymous with fo
rmal education which refers to the hierarchically structured and chronologically
graded learnings organized and provided by the formal school system and for whic
h certification is required in order for the learner to progress through the gra
des or move to higher levels (Commissioner vs. Court of Appeals and YMCA of the
Phils., G.R. No. 124043, Oct. 14, 1998).

DEDUCTIONS
KINDS OF DEDUCTIONS
Itemized Deductions Optional Standard Deductions Special Deductions

ITEMIZED DEDUCTIONS
Business expenses, incl. research and development Interests Taxes Losse
ts Depreciation Depletion Charitable contributions Contributions to pension trus
t Health or hospitalization premium

DEDUCTIONS
BUSINESS EXPENSES

1. The expense must be ordinary and necessary; 2. Paid or incurred during the ta
xable year; 3. In carrying on or which are directly attributable to the developm
ent, management, operation and/or conduct of the trade, business or exercise of
profession; 4. Supported by adequate invoices or receipts; 5. Not contrary to la
w, public policy or morals. Operating expenses of an illegal or questionable bus
iness are deductible, but expenses of an inherently illegal nature, such as brib
ery and protection payments, are not. 6. The tax required to be withheld on the
amount paid or payable is shown to have been paid to the BIR.

DEDUCTIONS
An expense is ordinary when it connotes a payment, which is normal in relation to
the business of the taxpayer and the surrounding circumstances. An expense is nec
essary where the expenditure is appropriate or helpful in the development of taxp
ayers business or that the same is proper for the purpose of realizing a profit o
r minimizing a loss. P9.4 M paid in 1985 for advertising a product was staggerin
g incurred to create or maintain some form of goodwill for the taxpayers trade or
business or for the industry or profession of which the taxpayer is a member. Good
will generally denotes the benefit arising from connection and reputation, and ef
forts to establish reputation are akin to acquisition of capital assets. Therefo
re, expenses related thereto are not business expenses but capital expenditures
(CIR vs. General Foods Phi.,
GR No. 143672, Apr. 24, 2003).

DEDUCTIONS
TEST OF REASONABLENESS OF BONUS There is no fixed test for determining the reaso
nableness of a given bonus as compensation. This depends upon many factors, one
of them being the amount and quality of the services performed with relation to
the business. Other tests suggested are payment must be made in good faith, the
character of the taxpayers business, the volume and amount of its net earnings, i
ts locality, the type and extent of the services rendered, the salary policy of
the corporation, the size of the particular business, the employees qualification
s and contributions to the business venture, and general economic conditions. Ho
wever, in determining whether the particular salary or compensation payment is r
easonable, the situation must be considered as a whole. Ordinarily, no single fa
ctor is decisive (C.M.
Hoskins & Co., Inc. vs. Commissioner, L-24059, Nov. 28, 1969; Pacific Banking Co
rp. vs. Commissioner, CTA Case 1667, Oct 29, 1970).

Bonuses that are out-and-out gifts, are gratitude and are not deductible.

DEDUCTIONS
Legal and accountants fees for prior years were not billed in corresponding years
(1984-1985). It was paid by taxpayer in succeeding year (1986) when it was bill
ed by the lawyer and accountant. Taxpayers uses accrual method of accounting. Ac
crual of income and expense is permitted when the all events test has been met. Th
is test requires (1) fixing a right to income or liability to pay, and (2) the a
vailability of reasonably accurate determination of such income or liability. It
does not, however, demand that the amount of income or liability be known absol
utely; it only requires that a taxpayer has at its disposal the information nece
ssary to compute the amount with reasonable accuracy, which implies something le
ss than an exact or completely accurate amount. Moreover, deduction takes the na
ture of tax exemption; it must be construed strictly against the taxpayer (Commi
ssioner vs. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007).

DEDUCTIONS
Entertainment, amusement and recreation expenses are subject to limitation % of n
et sales for sellers of goods 1% of net sales for sellers of services Club dues
for membership in social or athletic clubs to promote business of corporation pa
id by the corporation are deductible from gross income. However, they will be tr
eated as fringe benefits subject to FBT on the part of the employer. FBT paid by
employer is deductible as business expense of the corporation. Rental expenses
include leasehold acquired for business purposes and cost of improvements introd
uced by lessee to be allocated over the term of the lease. Realty taxes paid by
lessee for business property is part of rental expenses.

DEDUCTIONS
Directors Fees If not officer or employee of corporation, report it as other inco
me subject to 10% EWT. If director is also an officer of the corporation, apply
CWT on compensation income upon the directors fees, together with salaries. Commi
ssion Income If there is no employer-employee relationship between broker and pa
yor of income, treat it as business income subject to 10/15% EWT. If there is em
ployer-employee relationship, commission income is treated as part of CWT on com
pensation income.

DEDUCTIONS

INTEREST EXPENSE
1. 2. 3. 4. 5. There must be a valid and existing indebtedness; The indebtedness
(unconditional obligation to pay) must be that of the taxpayer; The interest mu
st be legally due and stipulated in writing; The interest expense must be paid o
r incurred during the taxable year; The indebtedness must be connected with the
taxpayer s trade, business or exercise of profession; 6. The interest payment ar
rangement must not be between related taxpayers as mandated in Section 34(B)(2)(
b), in relation to Section 36(B), of the Tax Code; 7. The interest is not expres
sly disallowed by law to be deducted from the taxpayers gross income (e.g., inter
est on indebtedness to finance petroleum operations); and 8. The amount of inter
est deducted from gross income does not exceed the limit set forth in the law. I
n other words, the taxpayers otherwise allowable deduction for interest expense s
hall be reduced by forty-two percent (42%) of the interest income subjected to f
inal tax beginning November 1, 2005 under R.A. 9337, and that effective January
1, 2009, the percentage shall be thirty-three percent (33%) [Sec. 34(B)(1), NIRC
].

DEDUCTIONS
Deficiency or delinquency interest
Deficiency or delinquency interest on unpaid taxes is not deductible as tax, but
taxpayer is allowed to deduct the same as interest.
Interest expense on capital expenditures
At the option of the taxpayer, interest expense on capital expenditure incurred
to acquire property used in trade, business or exercise of profession may be ded
ucted in full in the year incurred, or may be treated as capital expenditure sub
ject to amortization. However, taxpayer cannot claim interest expense both as de
duction and part of cost of asset.

DEDUCTIONS
TAXES
1. Payments must be for taxes; 2. Taxes are imposed by law upon the taxpayer;
Taxes must be paid or accrued during the taxable year in connection with the ta
xpayers trade, business or profession; and 4. Taxes are not specifically excluded
by law from being deducted from the taxpayers gross income.

DEDUCTIONS
The word taxes means taxes proper and no deduction should be allowed for amounts r
epresenting interest, surcharge or penalties. Interest on taxes is not deductibl
e as taxes, but as an item of interest. Fines and penalties for violations of la
w are not deductible as taxes. Only the person upon whom taxes are imposed may c
laim them as deduction, except: (1) Taxes upon an individual upon his interest a
s shareholder of corporation which are paid by corporation without reimbursement
; and (2) Corporate bonds or other obligations containing a tax-free covenant cl
ause, the corporation paying the tax or any part of it for someone else (Sec. 80
, RR 2).

DEDUCTIONS
DEDUCTIBLE TAXES
All taxes, national and local, paid or accrued during the year in connection wit
h trade, business or exercise of profession is deductible. Examples: professiona
l tax, documentary stamp tax, other percentage tax, excise tax, real property ta
x, etc.
NON-DEDUCTIBLE TAXES 1. Philippine income tax
2. Foreign income tax 3. Estate and donors taxes 4. Special assessments on real p
roperty 5. Electric energy consumption tax under B.P. 36. 6. VAT Foreign income
tax paid may be credited against the Phil income tax due, subject to limitation
(e.g., Federal income tax of M Pacquiao).

DEDUCTIONS
LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79) 1. The loss must be that
of the taxpayer; 2. The loss is actually sustained and charged off within the ta
xable year; 3. The loss is evidenced by a closed and completed transaction (fixe
d by identifiable events or when insurance recovery was definitely established);
4. The loss is not claimed as a deduction for estate tax purposes; 5. The loss
is not compensated for by insurance or otherwise; 6. In the case of an individua
l, the loss must be connected with his trade, business or profession, or incurre
d in any transaction entered into for profit though not connected with his trade
, business or profession; and 7. In the case of casualty loss, it has been repor
ted to the BIR within forty-five days from date of occurrence of the loss.

DEDUCTIONS
Bad Debt Theory
Loss from theft or embezzlement occurring in the year and discovered in another
year is deductible in the year in which sustained. However, where the taxpayer h
ad no means of determining the actual date of embezzlement, a loss was sustained
in the year of discovery. The rule is now modified by the bad debt theory, which
holds that since embezzlement creates a debtor-creditor relationship, a loss is
deductible as bad debt in the year the right of recovery becomes worthless.
NOLCO
Net operating loss of one year may be carried over and deducted from gross incom
e for the next succeeding 3 years, provided that no substantial change in the ow
nership of the business or enterprise (not less than 75%) takes place.

DEDUCTIONS
BAD DEBTS 1. There must be an existing indebtedness due to the taxp
st be valid and legally demandable; 2. The same must be connected with the taxpa
yer s trade, business or practice of profession; 3. The same must not be sustain
ed in a transaction entered into between related parties enumerated under Sec. 3
6(B) of the Tax Code of 1997; 4. The same must be actually charged off the books
of accounts of the taxpayer as of the end of the taxable year; and 5. The same
must be actually ascertained to be worthless and uncollectible as of the end of
the taxable year.

DEDUCTIONS
In the case of banks, the BSP thru the Monetary Board shall ascertain the worthl
essness and uncollectibility of the bad debts and approve in writing the writing
off of bad debts from the books, without prejudice to the CIRs determi-nation of
the worthless and uncollectibility of debts. In no case shall a receivable from
an insurance or surety company be written off from taxpayers books and claimed a
s bad debt deduction, unless such company has been declared closed due to insolv
ency or for any similar reason by the Insurance Commission.

DEDUCTIONS
TAX BENEFIT RULE
The taxpayer is obliged to declare as taxable income any subsequent recovery of
bad debts in the year they were collected to the extent of the tax benefit enjoy
ed by the taxpayer when the bad debts were written off and claimed as deduction
from gross income. It also applies to taxes previously deducted from gross incom
e but which were subsequently refunded or credited by the BIR. He has to report
income to the extent of the tax benefit derived in the year of deduction.

DEDUCTIONS
DEPRECIATION 1. The allowance for depreciation must be reasonable; 2. It must be
for property arising out of its use in the trade or business, or out of its not
being used temporarily during the year; 3. It must be charged off during the ta
xable year from the taxpayers books of accounts; 4. Depreciation shall be compute
d on the basis of historical cost or adjusted basis. While financial accounting
allows computation based on appraised value, recovery of investment for tax purp
oses shall be limited to historical cost. Depreciation for the year = Cost less
salvage value divided by the estimated useful life (number of years) of the asse
t Book value of the asset = Cost or adjusted basis less accumulated depreciation
.

DEDUCTIONS
CHARITABLE CONTRIBUTIONS 1. The charitable contribution must actually be paid or
made to the Philippine government or any political subdivision thereof exclusiv
ely for public purposes, or any of the accredited domestic corporation or associ
ation specified in the Tax Code; 2. It must be made within the taxable year; 3.
It must not exceed 10% (individual) or 5% (corporation) of the taxpayers taxable
income before charitable contributions (whether deductible in full or subject to
limitation); 4. It must be evidenced by adequate receipts or records; and 5. Th
e amount of charitable contribution of property other than money shall be based
on the acquisition cost of said property (Sec. 34(H), NIRC). The limitation is i
mposed to prevent abuse of donating paintings and other valuable properties and
claiming excessive deductions therefrom.

DEDUCTIONS
D. Optional Standard Deduction Privilege is available only to citizens or reside
nt aliens as well corporations subject to the regular corporate income tax; thus
, non-resident aliens and non-resident foreign corporations are not entitled to
claim the optional standard deduction. Standard deduction is optional; i.e., unl
ess taxpayer signifies in his/its return his/its intention to elect this deducti
on, he/it is considered as having availed of the itemized deductions; Such elect
ion when made by the qualified taxpayer is irrevocable for the year in which mad
e; however, he can change to itemized deductions in succeeding year(s);

DEDUCTIONS
Amount of standard deduction is limited to 40% of taxpayers gross sales or receip
ts (in the case of an individual) or gross income (in the case of a corporation)
. If the individual is on the accrual basis of accounting for his income and ded
uctions, OSD shall be based on the gross sales during the year. If he employs th
e cash basis of accounting, OSD shall be based on his gross receipts during the
year. It should be noted that cost of sales or cost of services shall not be all
owed to be deducted from gross sales or receipts. A general professional partner
ship (GPP) may claim either the itemized deductions or in lieu thereof, the OSD
allowed to corporations in claiming the deductions in an amount not exceeding 40
% of its gross income. The net income determined by either the itemized deductio
n or OSD from the GPPs gross income is the distributable net income from which th
e share of each share is to be ascertained. Proof of actual expenses is not requ
ired; hence, he is not also required to keep books of accounts and records with
respect to his deductions during the year.

DEDUCTIONS
NON-DEDUCTIBLE ITEMS
1. Personal, living or family expenses; 2. Any amount paid out for new buildings
or for permanent improvements, or betterments made to increase the value of any
property or estate. This Subsection shall not apply to intangible drilling and
development costs incurred in petroleum operations, which are deductible under S
ubsection (G)(1) of Section 34 of this Code. 3. Any amount expended in restoring
property 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 lif
e of any officer or employee, or of any person financially interested in any tra
de or business carried on by the taxpayer, individual or corporate, when the tax
payer is directly or indirectly a beneficiary under such policy 5. Losses from s
ales or exchanges of property between related parties

PERSONAL EXEMPTIONS
RA 8424: Jan 1, 1998 Single and estate or trust P20,000 Head of family P25,000
arried P32,000 For each child, not to exceed 4 P8,000 RA 9504: July 6, 2009 Indi
vidual, whether single, HOF, or married P50,000 For each child, not to exceed 4
P25,000 Law exempts income of minimum wage earners and increases OSD from 10% to
40% of gross sales or receipts, for individuals, and of gross income, for corpo
rations.

PERSONAL EXEMPTIONS
Status-at-the-end-of-the-year rule Status-at-the-end-of-the-year rule which means
that whatever is the status of the taxpayer at the end of the calendar year shal
l be used for purposes of determining his personal and additional exemptions gen
erally applies. A change of status of the taxpayer during the taxable year gener
ally benefits, but does not prejudice, him. Thus, if he marries at the end of th
e year, he shall be entitled to personal exemption of P32,000/P50,000. If a chil
d is born at any time during the calendar year, even on the last day of the year
, the taxpayer is entitled to claim his child as a dependent entitling him to de
duct additional exemption of P8,000/P25,000 for that year. On the other hand, if
one of his qualified dependent children dies during the year, the law considers
that the child died on the last day of the year; hence, he is entitled to claim
the full amount of additional exemption of P8,000/P25,000 for the deceased chil
d for the year.

TAX BASES AND RATES

COMPENSATION INCOME Gross compensation income less PAE times graduated rates Gro
ss compensation income of employees of RHQ, ROHQ, OBU/FCDU, and petroleum contra
ctors times 15% Grossed-up monetary value of fringe benefits times taxable rate
times 32% = FBT
FRINGE BENEFITS

TAX BASES AND RATES

BUSINESS AND/OR PROFESSIONAL INCOME
Corporations (see formula opposite here) Individuals:
There is no MCIT. Deduct applicable PAE. Apply graduated rates of 5% to 32% Pay
IT on two equal installments, provided amount is more than P2,000.

Gross sales Less: Cost of sales or services Gross income Multiplied by: 2% MCIT
Gross income Less: Deductions Net income Multiplied by: 35% RCIT Less: CWT Balan
ce

TAX BASES AND RATES

CAPITAL ASSETS
A. REAL PROPERTY IN THE PHILIPPINES Consideration or FMV, whichever is higher ti
mes 6% = CGT. Sale of principal residence is exempt from CGT, provided condition
s are satisfied
B. SHARES OF STOCKS OF DOMESTIC CORPORATION
Listed and traded in local stock exchange: GSP times of 1% = Stock transaction t
ax Listed but traded over the counter or unlisted shares: Gross selling price le
ss cost or adjusted basis = Capital gain or loss times 5%/10% = CGT Include in g
lobal tax system, but longterm capital gain or loss shall be taxable or deductib
le only at 50% thereof.

C. OTHER CAPITAL ASSETS

TAX BASES AND RATES

PASSIVE INCOME A. Interest 20% FWT (peso deposit) and deposit substitute 7.5% FW
T (foreign exchange deposit) Long-term deposits (5 years of more) of individuals
: exempt Others: Global system 10% FWT Citizen 20% FWT Resident alien engaged in
trade 25% FWT NRANE 0% -- DC & RFC 35%, unless tax sparing provision applies -NRFC
B. Dividend

TAX BASES AND RATES

C. Royalty 10% FWT books, literary works and musical compositions (citizen) 20%
FWT general rate (NRAE, DC & RFC) 25% FWT NRANE 35% FWT NRFC NRFC
25% x gross income: NR cinema film owner, lessor or distributor 4.25% x gross in
come: NR owner or lessor of vessels 7.5% x gross income: NR lessor of aircraft,
machineries and other equipment
D. Rental income

BRANCH PROFIT REMITTANCE TAX

Branch profit of the Phil. branch used as additional capital investment of the f
oreign head office in the Philippine branch, pursuant to the requirements of the
Bangko Sentral ng Pilipinas, is considered as profit constructively remitted ab
road. Branch profit remittance tax (BPRT) applies not only when the profit is ac
tually remitted but also when such profit is constructively remitted to the head
office abroad
(ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, Mar. 11, 2002)
BPRT does not apply on profits remitted by an enterprise registered with PEZA or
SBMA and other freeport zones. Tax base of BPRT is the amount of profit earmark
ed for remittance to its head office abroad.

NATURE OF ASSET
ORDINARY ASSET Inventory if on hand at end of taxable year Stock in trade held p
rimarily for sale or for lease in the course of trade or business Asset used in
trade or business, subject to depreciation Real property used in trade or busine
ss
CAPITAL ASSET (Sec 38A)
All other assets, whether or not used in trade or business, other than the above
assets

ORDINARY v. CAPITAL ASSETS

Who is seller of asset? Person is habitually engaged in real estate business Pre
sumption or proof when habitually engaged in real estate business 6-transaction
rule Person is not habitually engaged in real estate business Nature of asset so
ld? If it forms part of stock primarily for sale or it is being used in trade or
business, ordinary asset Otherwise, capital asset

ORDINARY v. CAPITAL ASSETS

Type of capital asset sold? If CA is used as principal residence of seller who i
s a citizen or alien who resident or non-resident but engaged in trade in the Ph
il, sale is exempt from 6% CGT, provided other conditions are present. Otherwise
, sale is taxable. Tax base, tax rate, and gain or loss from sale CA located in
the Phil 6% CGT; CA located abroad Global tax system. Basis is FMV or GSP, which
ever is higher. Seller pays the 6% CGT, but buyer does not withhold the FWT. In
OA, tax base is net income and rate of tax depends on whether seller is individu
al or corporation; it is subject to EWT provisions.

ORDINARY v. CAPITAL ASSETS

Cost or adjusted basis upon subsequent sale This is not material, if asset sold
is capital asset, because tax base is GSP/FMV, whichever is higher. This is impo
rtant, if asset sold is ordinary asset, because tax base is net income. Donors ta
x on sale for insufficient consideration If CA, no donors tax due. If OA, there i
s donors tax due per Sec 100, NIRC. Filing of tax return If CA, within 30 days fr
om date of sale If OA, within 45/60 days from close of quarter

EXCHANGE OF PROPERTY
GENERAL RULE
The entire gain or loss shall be recognized.
EXCEPTIONS:
No gain or loss shall be recognized at the time of the transaction on tax-free e
xchanges of property under Sec 40(2), NIRC: a. Merger or consolidation b. Exchang
e of property for shares of stocks, as a result of which, he together with four
others gains control of the corporation

ACCOUNTING METHODS
Cash method Accrual method
All events test; amounts received in advance are not treated as revenue of the p
eriod in which received but as revenue of future periods in which earned (Manila
Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar 24, 1997).
Installment sales
Sale on the installment plan
Initial payments do not exceed 25% of GSP
Deferred payment sale, not on the installment plan
Initial payments exceed 25% of GSP
Percentage of completion Crop year method

FILING OF TAX RETURN

SUBSTITUTED FILING OF ITR: No individual income tax return for the year will be
filed by the employee concerned, and the employer is the one that files the retu
rn for him
Applies only to individuals With only one (1) employer Who correctly withholds t
he income tax on compensation income paid to the employee and remits the same to
the BIR
Substituted filing of return does not apply when the conditions above are not me
t, such as when the individual has (a) two or more employers, (b) mixed incomes,
correct WT was not deducted from compensation income, etc.

FILING OF TAX RETURN

Individual deriving mixed income, or purely business/ professional income, or ot
her income must file his quarterly income tax returns (BIR Form 1700 Q) and annu
al income tax return (BIR Form 1700 ) as follows: Period Due Date for Filing
urn
Q1 Return Q2 Return Q3 Return Annual Return
April 15 of same year August 15 of same year November 15 of same year April 15 o
f the following year

FILING OF TAX RETURN

A domestic corporation and resident foreign corporation shall file quarterly cor
porate income tax return (BIR Form 1702 Q) and annual corporate income tax retur
n (BIR Form 1702 as follows:
Q1 Return Q2 Return Q3 Return Annual Return May 31 of same year August 31 of sam
e year November 30 of same year April 15 of the following year (if on calendar y
ear), or 15th day of the fourth month following the close of the fiscal year (if
on fiscal year).

Computation of the quarterly and annual tax returns of individuals (except those
receiving purely compensation income) and corporations shall be made on the cum
ulative basis; i.e., gross income and deductions are consolidated and the income
tax liability is computed on the consolidated net income, and the income taxes
paid for the preceding quarter(s) are credited against the consolidated income t
ax due.

WITHHOLDING TAX
An income payment is subject to the expanded withholding tax, if the following c
onditions concur: a. An expense is paid or payable by the taxpayer, which is inc
ome to the recipient thereof subject to income tax; b. The income is fixed or de
terminable at the time of payment; c. The income is one of the income payments l
isted in the regulations that is subject to withholding tax; d. The income recip
ient is a resident of the Philippines liable to income tax; and e. The payor-wit
hholding agent is also a resident of the Philippines.

WITHHOLDING TAX

EXEMPT FROM EWT
1. National government and its instrumentalities, including provincial, city or
municipal governments and barangays, except government-owned or controlled corpo
rations; 2. Persons enjoying exemption from payment of income taxes pursuant to
the provisions of any law, general or special, such as but not limited to the fo
llowing: a. Sales of real property by a corporation which is registered with and
certified by HLURB or HUDCC as engaged in socialized housing project where the
selling price of the house and lot or only the lot does not exceed P180,000 in M
etro Manila and other highly urbanized areas and P150,000 in other areas; b. Cor
porations registered with the BOI, PEZA, and SBMA, enjoying exemption from incom
e tax under E.O. 226, R.A. 7916, and R.A. 7227; c. Corporations which are exempt
from income tax under Section 30 of the Tax Code, such as GSIS, SSS, PHIC, PCSO
, and PAGCOR; d. General professional partnerships; and e. Joint ventures or con
sortium formed for the purpose of undertaking construction projects or engaging
in petroleum, coal, geothermal and other energy operations f. International carr
iers (by air or water) subject to 2.5% Gross Phil Billings

WITHHOLDING TAX
1. Professional fees for services rendered by individuals; and professional ente
rtainers and athletes, and directors:
If gross income for current year exceeds P720,000 If gross income for current ye
ar does not P720,000 - 10% - 15%
2. If recipient of professional fees, talent fees, etc. is a juridical person:
If gross income for current year exceeds P720,000 If gross income for current ye
ar does not P720,000 Real properties Personal properties of P10,000 per payment;
P10,000 shall not apply when accumulated rental to same lessor exceeds or is re
asonably expected to exceed P10,000 within a year Poles, satellites and transmis
sion facilities Billboards - 10% - 15% - 5%

3. Rental income

- 5% - 5% - 5%

WITHHOLDING TAX
4. Gross payments to resident individuals and corporate cinem
ers, lessors, or distributors 5. Gross payments to contractors 6. Income distrib
ution to beneficiaries 7. Income payments to certain brokers and agents 8. Incom
e payments to partners of general professional partnerships: If gross income for
current year exceedsP720,000 If otherwise 9. Professional fees paid to medical
practitioners If gross income for current year exceedsP720,000 If otherwise 10.
Gross additional payments to government personnel from importers, shipping and a
irline companies, or their agents 11. One-half of gross amounts paid by any cred
it card company in the Philippines 5% 2% 15% 10%
- 15% - 10% - 15% - 10%
- 15%
1%

WITHHOLDING TAX

12. Income payments made by any Top 20,000 Corp Supplier of goods Supplier of se
rvices 13. Income payments made by government to its local/resident supplier of
goods and services other than those covered by other rates of withholding taxes
Supplier of goods Supplier of services 14. Commissions of independent and exclus
ive distributors, and marketing agents of companies 15. Tolling fees paid to ref
ineries 16. Payments made by pre-need companies to funeral parlor 17. Payments m
ade to embalmers 18. Income payments made to suppliers of agricultural products
19. Income payments on purchases of minerals, mineral products and quarry resour
ces 20. MERALCO refund to customers With active contracts With terminated contra
cts
- 1% - 2%
- 1% - 2%
10% 5% 1% 1% 1%
- 10% - 25% - 32%

REFUND
A taxpayer must do two things to be able to successfully make a claim for the ta
x refund of withholding tax on compensation income: (a) declare the income payme
nts it received as part of its gross income and (b) establish the fact of withho
lding. The amounts of total taxes withheld for each redundant employees cannot b
e verified against the Summary of Gross Compensation and Taxes Withheld for 1995
due to the fact that this summary enumerates the amounts of income taxes withhe
ld on per district/area basis. The SGV certification cannot be appreciated in PL
DTs favor as the courts cannot verify such claim. Besides, the documents from whi
ch SGV traced the Alpha List to the Monthly Remittance Returns of Income Taxes h
ave not been presented to the court, and this is fatal to PLDT . Also, the cash
salary vouchers for the rank and file employees do not have acknowledgment recei
pts (PLDT v. CIR, GR 157264, Jan 31, 2008).

REFUND
Requisites of claim for refund are:
Claim was filed within 2 years under Sec. 230, NIRC; Income upon which taxes wer
e withheld were included in the return of the recipient; and Fact of withholding
is established by a copy of statement (BIR Form 1743.1) duly issued by payor (w
ithholding agent) to payee, showing amount paid and amount of tax withheld (RR 6
-85).

CTA found above requisites were satisfied. Findings of facts of CTA are entitled
to great weight and will not be disturbed on appeal, unless it is shown that th
e lower court committed gross error in the appreciation of facts. Failure of res
pondent to indicate its option in its annual ITR to avail itself of either tax r
efund or tax credit is not fatal to its claim for refund.
Sec. 76, NIRC offers two options: refund or tax credit. The options are alternat
ive and the choice of one precludes the other. However, in Philam Asset Mgt v. C
IR, this Court ruled that failure to indicate a choice will not bar a valid requ
est for refund, should this option be chosen by the taxpayer later on. The requi
rement is only for the purpose of easing tax administration, particularly the se
lf-assessment and collection aspects.

REFUND
Failure of respondent to present in evidence the 1998 ITR is not fatal to its cl
aim for refund.
CTA denied claim for 1997 tax credit of PERF because it failed to submit its 199
8 ITR. PERF attached its 1998 ITR to its motion for reconsideration. The ITR is
part of the records of the case and clearly showed that income taxes were not cl
aimed as tax credit in 1998. Technicalities should not be used to defeat substan
tive rights, especially those that have been held as a matter of right. The CAs r
eliance on Rule 132, Sec. 34 of Rules of Evidence is misplaced. This provision s
hould be taken in the light of RA 1125; proceedings therein shall not be governe
d strictly by technical rules of evidence. No one shall unjustly enrich oneself
at the expense of another. This applies not only to individuals but to the State
as well. In the field of taxation where the State exacts strict compliance upon
its citizens, the State must likewise deal with taxpayers with fairness and hon
esty. The harsh power of taxation must be tempered with evenhandedness (CIR v. P
ERF Realty Corp., GR 163345, July 4, 2008).

REFUND
Tax refunds or credits are not founded principally on legislative grace but on t
he legal principle which underlies all quasi-contracts, abhorring a persons unjus
t enrichment at the expense of another. The dynamic of erroneous payment of tax
fits to a tee the prototypic quasi-contract, which covers not only mistake in fa
ct but also mistake in law. The government is not exempt from the application of
solutio indebiti. Indeed, the taxpayer expects fair dealing from the government
, and the latter has the duty to refund without any unreasonable delay what it h
as erroneously collected (CIR v. Fortune Tobacco Corp, GR
167274, July 21, 2008).

 END OF PRESENTATION Atty. Vic C. Mamalateo Mobile: 0918-9037436 Email: vicmamala

teo@yahoo.com vic.mamalateo@vcmlaw.com.ph