Taxation-1 (Income Tax Only)

BASIC CONCEPTS IN INCOME TAXATION Tax I
I. BASIC CONCEPTS IN INCOME TAXATION
Income Tax defined as a tax on all yearly profits arising from property, professions, trades or offices, or as
tax on a persons income, emoluments, profits and the like. Income tax is a tax on the net income or the entire
income realized in one taxable year. It is levied upon corporate or individual incomes in excess of specified
amounts, less certain deductions and/or specified exceptions in cases permitted by law.
Nature of income tax

Income tax is a DIRECT TAX because the tax burden is borne by the income recipient
upon whom the tax is imposed. It is a tax demanded from the very person who, it is
intended or desired, should pay it, while indirect tax is a tax demanded in the first instance
from one person in the expectation and intention that he can shift the burden to someone
else.
Income tax is a PROGRESSIVE TAX since the tax base increases as the tax rate
increases. It is founded on the ability to pay principle and is consistent with the
Constitutional provision that Congress shall evolve a progressive tax system.
Income tax is generally regarded as an EXCISE TAX (privilege tax) and not a tax on
persons, property, funds or profits. It is really a tax on the right to earn income by an
individual or entity for government needs
Purpose(s) of Income Tax: Fiscal/Non-Fiscal

The imposition of income tax is intended to:
1. raise revenue to defray the expenses of the government;
2. offset regressive sales and consumption taxes; and together with estate tax
3. mitigate the evils arising from the inequalities of wealth by a progressive scheme of
taxation which places the burden on those best able to pay.
Income all wealth which flows to the taxpayer other than a mere return of capital. It is a flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time. It includes gain derived from the sale or other disposition of
capital assets.
It is an amount of money coming to a person/corporation within a specified time, whether as payment
for services, interest or profit from investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the fruits of one's labor. (Conwi v. Court of Tax
Appeals)
Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or
implied, of an obligation to repay and without restriction as their disposition.
Differentiated from Capital

The essential difference between capital and income is that capital is a fund; income is a flow. A
fund of property existing at an instant of time is called capital. A flow of services rendered by that
capital by the payment of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called income. Capital is wealth, while income is the
service of wealth. The Supreme Court of Georgia expresses the thought in the following figurative
language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here
used, can be defined as "profits or gains." (Madrigal v. Rafferty)
Increase in Property Value A mere increase in the value of property is NOT INCOME,
but merely unrealized increase in capital. The increase in the value of property is also known
as appraisal surplus or revaluation increment.
Classification of Income According to Source

1. Income from sources within the Philippines
2. Income from sources without the Philippines
3. Income from sources partly within and partly without the Philippines
Taxability of Income, Requisites

Income, gain or profit is subject to income tax, when the following requisites are present:
a. there is income, gain or profit
b. the income, gain or profit is received or realized during the taxable year
c. the income gain or profit is not exempt from income tax
Tests to Determine Realization of Income for Tax Purposes

Realization Test there is no taxable income until there is a separation from capital of
something of exchangeable value, thereby supplying the realization or transmutation which
would result in the receipt of income.
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GENERAL CLASSIFICATION OF TAXPAYERS
Tax I
Claim of right doctrine a taxable gain is conditioned upon the presence of a claim of
right to the alleged gain and the absence of a definite unconditional obligation to return or
repay that which would otherwise constitute a gain.
Corollary Doctrine Principle of Constructive Receipt of Income
Income which is credited to the account of or set apart for a taxpayer and
which may be drawn upon by him at any time is subject to tax for the year
during which so credited or set apart, although not then actually reduced to
possession. To constitute receipt in such case, the income must be credited to
the taxpayer without any substantial limitation or restriction as to the time or
manner of payment or condition upon which payment is to be made.
Economic benefit test any economic benefit to the employee that increases his net
worth, whatever may have been the mode by which it is effected, is taxable.
Classifications of Income Subject to Philippine Income Tax

1. Compensation Income income which is derived from the rendering of services under
an employer-employee relationship.
2. Professional Income fees derived from engaging in an endeavor requiring special
training as professional as a means of livelihood, which includes, but is not limited to, the
fees of CPAs, doctors, lawyers, engineers and the like.
3. Business Income gains or profits derived from rendering services, selling merchandise,
manufacturing products, farming and long-term construction contracts
4. Passive Income income in which the taxpayer merely waits for the amount to come in.
It includes, but is not limited to, interest income, royalty income, dividend income,
winnings and prizes.
5. Capital Gain gain from dealings in capital assets
II. GENERAL CLASSIFICATION OF TAXPAYERS
Who is a taxpayer?
Under Sec 22(N), a taxpayer is any person subject to [income] tax. Income taxpayers, with distinction based
on the amount of income subject to tax, or the applicable tax rates, or both, are classified as follows:
Primary
Sub-Classification(s)
Classification
Citizens of Residents of the Philippines
the
Not Residents of the Philippines
Philippines
Residents of the Philippines
Not Engaged in Trade or Business in the Philippines
Aliens Residents
Individuals of the Not Engaged in Trade or Business in the Philippines
Philippines
Individual Employed by Regional or Area Headquarters and Regional Operating
Special Headquarters of Multinational Companies
Classes of Individual Employed by Offshore Banking Units
Individuals Individual Employed by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the Philippines
Estates and
Trusts
Corporations Domestic Corporations
Foreign Resident Corporations
Corporations Non-resident Corporations
Special Classes Proprietary educational institutions and non-profit hospitals
of Corporations Domestic Depositary Bank (Foreign Currency Deposit Units)
Resident international carriers
Offshore Banking Units
Resident Depositary Bank (Foreign Currency Deposit Units)
Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies
Non-resident cinematographic film owners, lessors or distributors
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TAX ON INDIVIDUALS Tax I
Non-resident owners or lessors of vessels chartered by Philippine
nationals
Non-resident lessors of aircraft, machinery and other equipment
III. TAX ON INDIVIDUALS

A. Classifications of Individual Taxpayers
1. Citizens
RESIDENT a citizen is deemed as a resident of the Philippines unless he qualifies as a
non-resident under Sec. 22E of the NIRC; taxable for income derived from all sources
based on taxable (i.e., net) income
NON-RESIDENT - term "nonresident citizen" means a citizen of the Philippines who:
(1) establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(2) Leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis.
(3) Works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the
taxable year.
(4) Has been previously considered as nonresident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a non-resident citizen for the taxable
year in which he arrives in the Philippines with respect to his income derived
from sources abroad UNTIL the date of his arrival in the Philippines.
A non-resident citizen is taxable for income derived within the Philippines
based on taxable (i.e., net) income
NOTES:
The definition of a non-resident citizen should be cross-referred with Sec. 23 (c),
which provides that a citizen of the Philippines who is working and deriving income
from abroad as an OVERSEAS CONTRACT WORKER is taxable only on income from
sources within the Philippines.
NOTE FURTHER: A seaman who is a Filipino citizen and who receives
compensation for services rendered abroad as member of the complement of a
vessel engaged exclusively in international trade is treated as an overseas
contract worker.
Length of stay is indicative of intention. A citizen of the Philippines who shall have
stayed outside the Philippines for 183 days or more by the end of the year is a non-
resident citizen. His presence abroad, however, need not be continuous. [RR1-79|
2. Alien
RESIDENT - an individual whose residence is within the Philippines and who is not a
citizen thereof. An alien actually present in the Philippines who is not a mere transient or
sojourner is a resident of the Philippines for income tax purposes. A mere floating
intention indefinite as to time, to return to another country is not sufficient to constitute
him a transient. If he lives in the Philippines and has no definite intention as to his stay,
he is a resident. He is taxable for income derived within the Philippines based on
taxable (i.e., net) income
NON-RESIDENT - an individual whose residence is NOT in the Philippines and who is
not a citizen thereof.
Engaged in trade or business in the Philippines (NRAETB) - is taxable for
income derived within the Philippines based on taxable (i.e., net)
income
Not engaged in trade or business in the Philippines (NRANETB) - is taxable for
income derived within the Philippines based on gross income1
NOTES:
What makes an alien a resident or non-resident alien is his intention with regard to
the length and nature of his stay. Thus:
a. One who comes to the Philippines for a definite purpose which in its
very nature may be promptly accomplished is not a resident citizen.
b. One who comes to the Philippines for a definite purpose which in its
very nature would require an extended stay, and to that end, makes
his home temporarily in the Philippines, becomes a resident, though it
may be his intention at all times to return to his domicile abroad when
the purpose for which he came has been consummated or abandoned.
(Sec. 5, RR 2-
1
Notwithstanding the general classification of aliens into resident and non-resident for income tax purposes, note that there is
a special classification of aliens who are taxed differently. See subsection D.
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Length of stay is indicative of intention. An alien who shall have stayed in the
Philippines for more than one year by the end of the taxable year is a resident
alien.
NOTE FURTHER: An alien who shall come to the Philippines and stay for an
aggregate period of more than one hundred eighty days during a calendar
year shall be considered a non-resident alien doing business, or in the
practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays
in the Philippines for 180 days or less during the calendar year, he shall be
deemed a non-resident alien not doing business in the Philippines, regardless
of whether he actually engages in trade or business therein. (Mamalateo)
B. Three Kinds of Income

1. Capital Gains subject to Capital Gains Tax
A sale or exchange in asset gives rise to a gain or a loss on the sale. When the asset sold was
held as a capital asset, the gain or loss is called a capital gain or loss. When the asset sold was
not held as a capital asset (in other words, as an ordinary asset), the gain or loss is called an
ordinary gain or loss.
What are capital assets? The NIRC defines a capital asset in a negative way. The
law enumerates four categories of ordinary assets; hence, all assets (even if used in
trade or business) other than ordinary assets are capital assets. The FOUR
CATEGORIES OF ORDINARY ASSETS are as follows [Sec. 39]:
1. Stock in trade of the taxpayer, or other property of a kind which would properly
be included in an inventory of a taxpayer if on hand at the end of the taxable
year (example: Raw Materials Inventory, Work in Process Inventory, Office
Supplies Inventory)
2. Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business (example: Merchandise Inventory)
3. Property used in the trade or business which is subject to the allowance for
depreciation (example: Office Equipment)
4. Real property used in trade or business of the taxpayer (example: Building used
as a factory)
Succinctly, a capital asset is an asset not used in business. When an asset held is
described as an investment, it is a capital asset. Examples of capital assets are:
residential house, personal art collection, family pleasure yacht.
Are all sales / dispositions of capital assets subject to capital gains tax?
NO! Only two kinds of things held as capital assets are subject to the capital gains tax,
as follows:
1. On sale, barter, exchange or other disposition of shares of stock of a
domestic corporation not listed and traded through a local stock
exchange, held as a capital asset:
On the net capital gain:
Not over P100,000 Final Tax of 5%
On any amount in excess of P100,000 Final Tax of 10%
Key definitions
Net capital gain selling price less cost
Selling price consideration on the sale OR fair market
value of the shares of stock at the time of the sale,
whichever is HIGHER
Cost original purchase price
ILLUSTRATION: Mr. X sold directly to a buyer shares of stock of a

domestic corporation held as a capital asset. The selling price was
P200,000 at the time when the fair market value of the shares sold
was P250,000, and the cost was P100,000.
Selling price P250,000
Less: Cost 100,000
Capital Gain P150,000
On the First P100,000, at 5% P 5,000

Excess over P100,000 (P50,000), at 10% 5,000
Total Capital Gains Tax P10,000
2. On sale, exchange, or other disposition of real property in the Philippines,

held as a capital asset On the gross selling price, or the current fair market
value at the time of the sale, whichever is higher, a final tax of 6%
The capital gains tax is applied on the gross selling price, or the
current fair market value at the time of the sale, whichever is
higher. Any gain or loss on the sale is immaterial because there is
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a conclusive presumption by law that the sale resulted in a
gain (the so-called presumptive gain).
ILLUSTRATION: Mr. N sold a land and building for P2,000,000 when

the fair market value was P1,900,000 and which had a cost to him of
P2,500,000, for a loss on the sale of P500,000. The capital gain tax
is 6% of P2,000,000, or P120,000. The loss from the sale is
immaterial.
EXCEPTION (i.e., NO NEED TO PAY CAPITAL GAINS TAX): No

capital gains tax (CGT) if the following requirements are met:
a. There is a sale or disposition of their principal residence by
natural persons.
b. The proceeds of the sale are fully utilized in acquiring or
constructing a new principal residence within 18 calendar
months from the date of sale or disposition.
c. The Commissioner shall have been duly notified by the
taxpayer within 30 days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax
exemption.
d. A deposit is made of the 6% capital gain tax otherwise due, in
cash or managers check, in an interest-bearing account with
an Authorized Agent Bank (AAB), under an Escrow Agreement
between the taxpayer and the Bureau of Internal Revenue
that the same shall be released to the taxpayer when the
proceeds of the sale shall have been utilized as intended.
e. The tax exemption can only be availed of once every 10 years
If there is no full utilization of the proceeds of sale or

disposition, the portion of the gain presumed to have been realized
from the sale or disposition shall be subject to capital gains tax
(CGT). The GSP or FMV at the time of sale, whichever is higher,
shall be multiplied by a fraction which the unutilized amount bears
to the gross selling price in order to determine the taxable portion.
i.e.,
Unutilized amount x (higher of ) GSP or FMV = Taxable portion
GSP
ALTERNATIVE TAXATION: In case of a sale or other disposition of

real property to the government or any of its political subdivisions or
agencies or to government-owned or controlled corporations, the tax
shall be EITHER the year-end tax of the individual (i.e., capital
gain to be included in the computation of income subject to
schedular rates), OR the capital gain tax of 6%, at the option of
the taxpayer
What is the tax implication of sales / dispositions of capital assets NOT

subject to capital gains tax? The net capital gain or loss is included in the
computation of net income subject to the graduated rates (5% to 32%).
2. Passive Income subject to Final Tax

Certain passive income items from sources within the Philippines are subject to final tax. Final
tax means tax withheld from source, and the amount received by the income earner is net of
the tax already. The tax withheld by the income payor is remitted by him to the Bureau of
Internal Revenue. The income having been tax-paid already, it need not be included in the
income tax return at the end of the year. These passive income items are as follows:
Interest Income:
o on any currency bank deposit, yield or any other monetary benefit from deposit
substitutes, trust funds and similar arrangements - 20% final tax
o under the expanded foreign currency deposit system (EFCDS) - 7.5% final tax
for residents, exempt if non-residents
o on long-term deposit or investment certificates (LTDIC) in banks (e.g., savings,
common or individual trust funds, deposit substitutes, investment management
accounts and other investments, which have maturity of 5 years or more)
exempt
Should LTDIC holder pre-terminate LTDIC before the 5th year, a final
tax shall be imposed on the entire income based on the remaining
maturity:
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4 years to less than 5 years - 5%
3 years to less than 4 years - 12%
less than 3 years - 20%
Dividends
o cash and/or property dividends2 actually or constructively received by an
individual from
a domestic corporation
a joint stock company
insurance or mutual fund companies
regional operating headquarters of multinational companies
o share of an individual in the distributable net income after tax of a partnership
(except a general professional partnership) of which he is a partner
o share of an individual member or co-venturer in the net income after tax of an
association, a joint account, or a joint venture or consortium taxable as a
corporation
Rate 10% for residents (RC, RA) and non-resident citizens (NRC),
20% for non-resident aliens engaged in trade or business (NRAETB)
Royalties
o From books, literary works, and musical compositions 10%
o Other royalties 20%
Winnings, except Philippine Charity sweepstakes / lotto winnings 20%
Prizes exceeding P10,000 20%

o Prize, differentiated from winnings A prize is the result of an effort made
(e.g., prize in a beauty contest), while winnings are the result of a transaction
where the outcome depends upon chance (e.g., betting).
3. Other Income subject to Schedular/Graduated Tax Rates3

Income which is neither capital gain with capital gain tax, nor passive income with final tax, is
other income or residual income. On other income, the law prescribes a graduated tax. Other
income is what is included in the computations, and in the income tax return, at the end of the
year (and at the end of the first three quarters of the year if the individual had income from
business or practice of profession). It may be derived from:
1. Employer-employee relationship, which is called compensation income
2. Business or profession
3. Sale or exchange of property which is not subject to the capital gain tax
4. Incidental sources, such as interest or dividend, which is not subject to final tax (i.e.,
dividend from a foreign corporation in case of resident citizens, rent income).
The tax rates on NET ordinary or other income (schedular rates)4 are as follows:
2
A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a
distribution of earnings or profits. (Sec. 73B, NIRC) [In other words, stock dividends are generally not subject to tax as long as
there are no options in lieu of the shares of stock. On the other hand, a stock dividend constitutes income if it gives the
shareholder an interest different from that which his former stockholdings represented.]
3
Schedular tax rates apply to all classes of individuals, with the exception of non-resident aliens not engaged in trade or
business. Should NRANETB earn other income, such is subject to a 25% final tax.
4
Pro-forma computation of income subject to schedular tax rates:
Gross Compensation Income P xxx
Less: Personal Exemptions (xxx)
Health Insurance (if qualified) (xxx)
Net Compensation Income P xxx
Add: Net Business Income xxx
Net Professional Income xxx
Other Income (capital gains, rent, etc.) xxx
Net Income subject to schedular tax rates P xxx
where Net Business Income and Net Professional Income are computed as follows:
Gross Business / Professional Income P xxx
Less: Itemized Deductions [OR] Optional Standard Deduction (xxx)
Net Business / Professional Income P xxx
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Income over But less than Tax Plus of Excess
over
10,000 5%
10,000 30,000 500 10% 10,000
30,000 70,000 2,500 15% 30,000
70,000 140,000 8,500 20% 70,000
140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
500,000 125,000 32% 500,000
Rule for Married Individuals Married individuals, whether citizens, resident or

nonresident aliens, who do not derive income purely from compensation, shall file a
return for the taxable year to include the income of both spouses. [Sec 51(D)] They
compute the income tax separately on their respective incomes. The two taxes will be
added to arrive at a single income tax still due and refundable. Income which is clearly
joint, or which cannot be identified as exclusively of one spouse, will be divided
equally. [Sec 24(A)]
o EXCEPTION to the one-return rule: Where it is impracticable for the spouses to
file one return, each spouse may file a separate return of income but the
returns so filed shall be consolidated by the Bureau for purposes of verification
for the taxable year. [Sec 51(D)]
C. Deductions [from Income Subject to Schedular/Graduated Tax Rates], In General

The allowable deductions from the gross income of an individual taxpayer5 are as follows:
1. Business Expenses and Expenses from Practice of Profession deductible only from
business gross income and professional income, respectively but not from compensation
income.6 The expenses to be deducted may either be itemized deductions OR the optional
standard deduction.7
2. Special deduction for actual premium payments for health and/or hospitalization
insurance taken by an individual taxpayer provided that the following requisites are met:
a. The taxpayers family gross income does not exceed P250,000 in a taxable
year.
b. The amount deductible should only be limited to P2,400 per family or P200
per month.
In the case of married taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction.
3. Personal Exemptions are arbitrary amounts allowed by law to be deducted from income
to cover personal, living, or family expenses of the taxpayer. These deductions are allowed
on the theory that the minimum requirements of subsistence of a taxpayer should be free
from tax.
4.
Kinds:
1. Basic Personal Exemptions (BPE) varies according to the status of
taxpayer
Kind of Taxpayer Basic Personal Exemption (BPE)

Single individuals (includes widow/er) P20,000
Married individual who are P20,000
judicially decreed as legally separated,
and
with no qualified dependents
Head of Family P25,000
Each married individual * P32,000
* BUT note Sec 35(A) - In the case of married individuals where only
one of the spouses is deriving gross income, only such spouse shall
be allowed the personal exemption.
5
Remember that non-resident aliens not engaged in trade or business are taxed on gross income. They may not, therefore,
avail of these deductions.
6
Thus, the only deductions that may be claimed by individuals with compensation income only are personal exemptions and
premium payments on health and/or hospitalization insurance.
7
See Allowable Deductions from Gross Income for the detailed discussion on itemized deductions and the optional standard
deduction.
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Who is a Head of the Family? [Sec 35(A), NIRC]

1. An unmarried or legally separated man or woman with dependents
who may be
one or both parents
one or more brothers or sisters, or
one or more legitimate, illegitimate or legally adopted
children
Note: Senior Citizen Law (RA 7434 as amended by 9257) provides

in section 4 that senior citizens shall be treated as dependents
provided for in the NIRC, as amended and as such, individual
taxpayers caring for them, be they be relatives or not shall be
accorded the privileges granted by the Code insofar as having
dependents are concerned. (Meaning the persons caring for them
are entitled to claim personal exemptions as head of family.]
2. Such dependent must be living with AND dependent upon him for
chief support
Chief support principal or main support given regularly
such that withdrawal will result in destitute life for
dependent; includes situations where taxpayer is away
from home on business, or dependent is away at school
NOTE: Chief support means more than one-half of the
requirements for support. Hence, if two children contribute
equal amounts to the support of a parent, neither of them
qualify as head of the family.
3. Such brothers or sisters or children are
not more than 21 years old
unmarried and
not gainfully employed OR
regardless of age, are incapable of self-support because
of mental or physical defect.
2. Additional Exemptions (AE) depends on the number of qualified dependent

children
Amount allowed as a deduction P8,000 per dependent child, but not
to exceed four children
Who may claim additional exemptions?
1. Married Individuals Additional exemptions are claimed by only
one spouse. Generally, the spouse who is the gross compensation
earner is the claimant of the additional exemptions. Where the
husband and wife are both compensation income earners, the
husband is the proper claimant of the additional exemptions
EXCEPT if there is an express waiver by the husband in favor of his
wife, as embodied in the withholding exemption certificate. When
the spouses have business and/or professional income only, either
may claim the additional exemptions at the end of the year. The
wife claims the additional exemptions in the following instances:
i. husband has no income
ii. husband works abroad
2. Legally separated spouses Additional exemptions can be
claimed by the spouse with custody of the child or children (but
the total amount for the spouses shall not exceed the maximum of
four). [Sec 35(B), NIRC]
Who is a dependent for purposes of additional exemptions? A
legitimate, illegitimate or legally adopted child chiefly dependent upon and
living with the taxpayer:
1. not more than 21 years old, unmarried and not gainfully employed
OR
2. regardless of age, is incapable of self-support because of mental
or physical defect
NOTE: Only children may be considered dependent for purposes of
additional exemptions. Compare with dependent for purposes of
basic personal exemption.
Who may claim personal exemptions? Citizens (whether resident or non-

resident) and resident aliens are allowed to avail of basic personal and additional
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exemptions. Non-resident aliens engaged in trade or business are entitled to
basic personal exemptions only by way of reciprocity, but not to additional
exemptions. [Sec. 35, NIRC]
Limit of BPE Allowed to NRAETB: An amount equal to the exemptions
allowed by the non-resident aliens country to Filipino citizens not residing
therein but deriving income therefrom, but not to exceed the amount fixed by
NIRC.[In other words, whichever is LOWER]
ILLUSTRATION OF RECIPROCITY PRINCIPLE:

Personal Exemption for NRAETB
Personal
Foreign country Personal
exemption
If taxpayer is allows to non- exemption in the
allowed (LOWER
resident Filipinos NIRC
amount)
Single P30,000 P20,000 P20,000
Head of the
P18,000 P25,000 P18,000
Family
Married P40, 000 P32,000 P32,000
Change of Status [Sec 35(C), NIRC]

1. If taxpayer marries during taxable year, taxpayer may claim the corresponding
BPE in full for such year (i.e., no need to pro-rate the exemption).
2. If taxpayer should have additional dependent(s) during taxable year, taxpayer
may claim corresponding AE in full for such year.
3. If taxpayer dies during taxable year, his estate may still claim BPE and AE for
himself and his dependent(s) as if he died at the close of such year.
4. If during the taxable year
a. spouse dies or
b. any of the dependents dies or marries, turns 21 years old or becomes
gainfully employed
taxpayer may still claim same exemptions as if the spouse or any of the
dependents died, or married, turned 21 years old or became gainfully employed
at the close of such year.
Summary of Rules with respect to Change in Status:

Current Succeeding
Change in Status Year Year
Exemption Exemption
Married P32,000 P32,000
Dies P32,000 -
Widowed with qualified dependent
P32,000 P25,000
children
Widowed with qualified dependent not his
P32,000 P25,000
child
Widowed without dependents P32,000 P20,000
Legally separated with qualified
P25,000 P25,000
dependent children
Legally separated with qualified
P25,000 P25,000
dependent not his child
Legally separated without dependents P20,000 P20,000
Not legally separated (i.e., separation de
P32,000 P32,000
facto)
Dependent Child (maximum of four)

Born P8,000 P8,000
Reaches 21 years old (normal child) P8,000 -
Reaches 21 years old (abnormal and
P8,000 P8,000
incapable of supporting himself)
Marries P8,000 -
Gainfully employed P8,000 -
Dies P8,000 -
ILLUSTRATIONS: (Given: taxpayer in question is a resident citizen)

Change of Status Exemptions Reason
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A taxpayer, married, had P40,000 If a taxpayer died during the
living with and dependent year, his estate may claim the
upon him for support at the personal exemptions as if he
beginning of the year his died at the end of the year.
spouse, a legitimate child Thus:
(minor, single, unemployed) Basic P32,000
and a brother, 24 years old AE for child 8,000
but crippled. The taxpayer Total P40,000
died on March 20 of the year.
A taxpayer was married, with P40,000 A taxpayer whose spouse
a child, 7 years old at the and/or dependent child died
beginning of the year. The during the year may claim
wife and the child died in an personal exemptions as if the
accident on October 25 of the death took place at the close
year. of the year. Thus:
Basic P32,000
AE for child 8,000
Total P40,000
A taxpayer was married and P48,000 A taxpayer whose spouse died
had a child, 3 years old at the during the year may claim
beginning of the year. On personal exemptions as if the
May 17 of the year, another death took place at the close
child was born. His wife died of the year. A taxpayer who
giving birth to the second should have an additional
child. The second child lives. dependent during the year
may claim the additional
exemption in full for such
year. Thus:
Basic P32,000
AE for child 16,000
Total P48,000
A taxpayer was married with P40,000 If a dependent became
a qualified dependent child at gainfully employed during the
the beginning of the year. On year, the taxpayer may claim
April 1 of the year, the child the personal exemption as if
became gainfully employed. such dependent child became
gainfully employed at the end
of the year. Thus:
Basic P32,000
AE for child 8,000
Total P40,000
D. Special Classification of Individuals and Corresponding Tax Treatment [Sec 25(C), (D), (E)]
1. Alien individuals employed by:
a. Regional or Area Headquarters (RAHQ) and Regional Operating Headquarters (ROHQ)
established in the Philippines by multinational companies
o Multinational company, defined a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-
Pacific Region and other foreign markets
b. Offshore Banking Units established in the Philippines
2. Alien individuals who are permanent residents of a foreign country but who are employed and
assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor
engaged in petroleum operations in the Philippines
Tax Rate and Base - 15% of gross income received as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances
o The same tax treatment shall apply to Filipinos employed and occupying the same
positions as those of aliens employed by these multinational companies, offshore
banking units and petroleum service contractors and subcontractors.
Note that the coverage of the special classification (and the corresponding tax rate) is limited to
income received as wages. Hence, any income earned from all other sources within the
Philippines by the alien employees shall be subject to the pertinent income tax (example: sale
of real property in the Philippines is subject to 6% capital gain tax, imposed on the gross selling
price or fair market value of the property at the time of the sale, whichever is higher).
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E. Summary of Tax Bases and Tax Rates

QUICK GLANCE
RESIDENT NON-RESIDENT
CITIZEN ALIEN CITIZEN NRAETB NRANETB
CATEGORY OF INCOME
Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines
Graduated Tax Rates, except
1. Compensation / Business / Profession

Other Income, subject to
GIW 25%
2. Prizes of P10,000 or less Based on Taxable (i.e, Net) Income
for NRANETB
Schedular Income Tax Rates (Sec. 24, NIRC)

3. Proprietary, Educational / Hospital (i.e, 5% to 32%) Not
Applicable
4. Cinematographic Film and the like
GIW - 25%
5. Interest from any currency bank

deposit , etc., Royalties (other than
from books, literary works and
musical compositions), Winnings / GIW 20% Final Withholding Tax
Prizes (except prizes P10,000 and
below)
Passive Income from domestic sources,
6. Royalties from books, literary works,

musical compositions GIW 10% Final Withholding Tax
GIW 25%
subject to Final Tax
7. Interest from long-term deposit or EXEMPT; However:

investment certificates, which have a In case of pre-termination, with remaining maturity of:
maturity of 5 years or more 4 years to less than 5 years 5% on entire income
3 years to less than 4 years 12% on entire income
less than 3 years 20% on entire income
8. Cash / Property Dividends from a
domestic corporation, etc., OR share
in the distributable net income after
tax of a partnership (except a GIW 10% Final Withholding Tax GIW 20%
general professional partnership),
etc.
9. Interest (Expanded Foreign Currency

GIW 7.5% Final
Deposit System) EXEMPT
Withholding Tax
10. Winnings on Philippine Sweepstakes
/ Lotto EXEMPT
Capital Gains, subject
to Capital Gains Tax
11. Capital Gains on Sale of Shares (not Net Capital Gains within:
traded in a domestic stock exchange) Not Over P100,000 5% Final Tax
Amount in Excess of P100,000 10% Final Tax
12. Capital Gains on Sale of Real
Property in the Philippines Gross Selling Price or FMV, whichever is higher 6% Final Tax
13. Sale of Shares (traded in a domestic of 1% of the Selling Price (Stock Transaction Tax)
stock exchange) Note: Stock Transaction Tax is not an income tax, but a business
(percentage) tax
Legend: GIW Gross Income within the Philippines FMV Fair Market Value
IV. TAX ON CORPORATIONS
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TAX ON CORPORATIONS Tax I
A. Coverage of the term Corporation [Sec 22(B)] The term corporation includes partnerships, no
matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies
It does NOT include:
1. general professional partnerships (partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business)
2. joint venture or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract
with the Government.8
B. Classification of Corporations
General Types
1. Domestic Corporation (DC) - one created or organized in the Philippines or under its
laws [Sec 22(C)]
2. Foreign Corporation (FC) one that is not domestic [Sec 22(D)]
Resident Foreign Corporation (RFC) - a foreign corporation engaged in trade
or business within the Philippines [Sec 22(H)]9
Non-resident foreign coporation (NRFC) - a foreign corporation not
engaged in trade or business within the Philippines [Sec 22(I)]
Special Types
1. Proprietary educational institutions and non-profit hospitals
2. Domestic Depository Bank (Foreign Currency Deposit Units)
3. Offshore Banking Units
4. Resident Depository Bank (Foreign Currency Deposit Units)
5. Resident international carrier
6. Non-resident owner or lessor of vessel
7. Non-resident cinematographic film owner, lessor or distributor
8. Non-resident lessor of aircraft, machinery and other equipment
9. Regional/Area Headquarters & Regional Operating Headquarters of Multinational
companies
C. Scope of Taxation
QUICK GLANCE
Type of Corporation Sources of Taxable Income Allowed Business Deductions?
Domestic Corporation (DC) Within and without the Philippines Yes
Resident Foreign Corporation (RFC) Within the Philippines Yes
Non-resident Foreign Corporation Within the Philippines No*

(NRFC)
* - Ergo, non-resident foreign corporations are taxed on GROSS INCOME.
NOTE: A good example of a resident foreign corporation is the Philippine branch of a foreign
corporation duly licensed by the Securities and Exchange Commission. The Philippine branch is merely
an extension of the foreign head office (i.e., non-resident foreign corporation); hence it does not have
nor issue Philippine shares of stock. There is only one single entity to speak of. However, for income
tax purposes, only the income of the Philippine branch from sources within the Philippines is subject to
income tax, and the income of the Philippine branch as well as that of the foreign head office from
sources outside the Philippines are exempt from Philippine income tax.
- NOTE FURTHER: Marubeni Corporation v. Commissioner (177 SCRA 500) clarified the single
entity concept. As a GENERAL RULE, the head office of a foreign corporation is the same
juridical entity as its branch in the Philippines following the single entity concept. The
income from sources within the Philippines of the foreign head office shall thus be
taxable to the Philippine branch. BUT when the head office of a foreign corporation
independently and directly invested in a domestic corporation without the funds passing
8
In this case, the joint venture [as an entity] is not subject to income tax, but each member of the joint venture shall be taxable
on his/its share in the net income of the corporation. On the other hand, a joint venture constituted for purposes other than (2)
above is treated as a corporation and taxable as such.
9
The qualifier resident in the term resident foreign corporation should not be equated with the nationality of the
corporation. In determining nationality, the control test is often invoked and applied, which considers corporate nationality by
the nationality of its controlling shareholders or members. (Mamalateo, citing Winship v. Philippine Trust Co., 90 Phil 744) Thus,
for income tax purposes, a domestic corporation may be formed or organized by foreigners (as long as three of them are
residents of the Philippines as per the Corporation Code),provided that it is organized under the laws of the Philippines.
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through its Philippine branch, the taxpayer with respect to the tax on the dividend income
would be the non-resident foreign corporation itself and the dividend income shall be
subject to the tax similarly imposed on non-resident foreign corporations.
D. Tax on Domestic Corporations

Domestic corporations are subject to any or some of the following:
Capital Gain Tax
Final Tax on Passive Income
Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR] Gross Income Tax (GIT)
Improperly Accumulated Earnings Tax (IAET) [only if a domestic and closely-held
corporation]
1. Capital Gains subject to Capital Gains Tax

a. On sale, barter, exchange or other disposition of shares of stock of a domestic
corporation not listed and traded through a local stock exchange, held as a
capital asset:
[NOTE: Tax treatment is the same as that of individuals.]
b. On the sale, exchange or disposition of lands and/or buildings which are not
actually used in the business of a corporation and are treated as capital assets On the
gross selling price, or the current fair market value at the time of the sale, whichever is
higher, a final tax of 6%
NOTE: Tax treatment is the same as that of individuals.
The capital gains tax is applied on the gross selling price, or the current fair
market value at the time of the sale, whichever is higher. Any gain or loss on
the sale is immaterial because there is a conclusive presumption by law
that the sale resulted in a gain.
2. Passive Income Subject to Final Tax

Interest Income:
substitutes, trust funds and similar arrangements - 20%
o under the expanded foreign currency deposit system (EFCDS) - 7.5%
Dividends received from another domestic corporation (Intercompany Dividend)

- EXEMPT
Royalties (any kind) 20%
3. Income subject to Normal Tax [OR] Minimum Corporate Income

Tax (MCIT) [OR] Gross Income Tax (GIT)
NORMAL CORPORATE INCOME TAX RATE 35%10 of net taxable income
Tax formula for normal tax:
Gross Income (ALL income items EXCEPT passive income subject
to final tax and capital gain with capital gain tax) Pxxx
Less: Allowable deductions for expenses and losses
xxx
Taxable Income subject to normal tax Pxxx
MINIMUM CORPORATE INCOME TAX (MCIT) 2% of MCIT Gross Income

What is MCIT gross income? Gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods sold includes all business expenses
DIRECTLY incurred to produce the merchandise to bring them to their present
location and use. [Sec. 27(E)(4)]
MCIT gross income differentiated from the normal tax gross income the
latter would include other incidental income items, such as rent income, interest,
gain on sale of assets, certain tax refunds, etc.
10
Amended by Republic Act (RA) No. 9337 (dated May 24, 2005 which took effect on July 1, 2005) The 35% corporate income
tax shall be effective until December 31, 2008. Starting January 1, 2009, the tax rate shall be reduced to 30%. The Supreme
Court upheld the constitutionality of said RA in the ABAKADA vs. Ermita, G.R. 168056, dated September 1, 2005.
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e.g.,
Normal Tax Computation MCIT Computation
Sales revenue Pxxx Sales Revenue Pxxx

Less: Sales Discounts (xxx) Less: Sales Discounts (xxx)
Sales Allowances (xxx) Sales Allowances (xxx)
Net Sales Pxxx Net Sales Pxxx
Less: Cost of Goods Sold (xxx) Less: Cost of Goods Sold (xxx)
Gross Income from Sales Pxxx MCIT Gross Income Pxxx
Add Incidental Income: Less: Operating Expenses (xxx)

Rent Income xxx Net Operating Income Pxxx
Interest Income xxx
Normal Tax Gross Income Pxxx Add Incidental Income:
Rent Income xxx
Less: Allowable deductions (xxx) Interest Income xxx
Net Taxable Income Pxxx Gain on Sale of Property xxx
Net Income Pxxx
When is the MCIT computed? beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations
What amount of income tax is paid by the corporation to the BIR? Whichever
is HIGHER between the normal tax and the minimum corporate income tax.
ILLUSTRATION: E Co., a domestic trading corporation, in its fourth year of
operations had a gross profit from sales of P300,000 and net taxable
income of P100,000. How much was the income tax paid by the corporation
for the year?
MCIT (P300,000 x 2%)
P6,000
Normal income tax (P100,000 x 35%)
P35,000
Income Tax to be paid for the year (whichever is higher)
P35,000
Excess MCIT carry-forward

Any excess of the minimum corporate income tax over the normal income tax shall be
carried forward and credited against the NORMAL TAX for the three (3) immediately
succeeding taxable years. [Sec. 27(E)(2)] In the year to which carried forward, the
normal tax should be higher than the MCIT.
ILLUSTRATION: A domestic corporation had the following data on
computations of the normal tax (NT) and the minimum corporate income
tax (MCIT) for five years.
Year 4 Year 5 Year 6 Year 7 Year 8
MCIT 80,000 50,000 30,000 40,000 35,000

NT 20,000 30,000 40,000 20,000 70,000
The excess MCIT over NT carry-forward is shown below:
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Year 4 Year 5 Year 6 Year 7 Year 8
MCIT 80,000 50,000 30,000 40,000 35,000

NT 20,000 30,000 40,000 20,000 70,000

NT is higher 40,000 70,000

Less: MCIT > >
carry-
forward - (40,000) (20,000)
>
(20,000)
From Year 4
From
Year 5
From Year 7
Tax Due 80,000 50,000 - 40,000 30,000

Arrow pointing downward means that the normal tax is higher so
that there can be an excess MCIT carry-forward against it.
While only P40,000 out of P60,000 excess MCIT in Year 4 was
used in Year 6, the unused P20,000 cannot be used in Year 8
because Year 8 was beyond three years from Year 4.
Relief from MCIT The Secretary of Finance is authorized to suspend the

imposition of the minimum corporate income tax on any corporation which suffers
LOSSES:
on account of prolonged labor dispute (losses from a strike staged by
employees that lasts for more than 6 months and caused the temporary
shutdown of operations), or
because of force majeure (acts of God and other calamity; includes armed
conflicts like war or insurgency), or
because of legitimate business reverses (substantial losses due to fire,
robbery, theft or other economic reasons).
GROSS INCOME TAX (GIT) The President, upon the recommendation of the
Secretary of Finance, may allow domestic corporations the option to be taxed at fifteen
percent (15%) of gross income, after the following conditions have been satisfied:
Tax effort ratio 20% of GNP

Ratio of IT collection to total tax revenue 40%
VAT tax effort 4% of GNP
Ratio of Consolidated Public Sector Financial Position 0.9%
(CPSFP) to GNP
Ratio of the Corporations Cost of Sales to Gross Sales Does not exceed 55%
The election of the gross income tax option by the corporation shall be
irrevocable for three (3) consecutive taxable years during which the
corporation is qualified under the scheme.
Computation of GIT Gross Income Gross sales less sales returns, discounts
and allowances and cost of goods sold. Cost of goods sold shall include all
business expenses directly incurred to produce the merchandise to bring them
to their present location and use. [Sec. 27(A)]
4. Improperly Accumulated Earnings Tax (IAET) [Sec. 29, as

implemented by RR 2-2001 which prescribes rules governing the imposition
of IAET]
A. Rule There is imposed for each taxable year, in addition to other taxes, a tax equal to
10% of the improperly accumulated taxable income of domestic and closely-
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held corporations formed or availed of for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of any other corporation, by permitting
the earnings and profits of the corporation to accumulate instead of dividing them among
or distributing them to the shareholders.
B. Rationale If the earnings and profits were distributed, the shareholders would then
be liable to income tax; if the distribution were not made to them, they would incur no
tax in respect to the undistributed earnings and profits of the corporation. It is a tax in
the nature of a PENALTY to the corporation for the improper accumulation of its
earnings, and a DETERRENT to the avoidance of tax upon shareholders who are
supposed to pay dividends tax on the earnings distributed to them.
C. Exception The use of undistributed earnings and profits for the reasonable needs
of the business would not generally make the accumulated or undistributed earnings
subject to the tax. What is meant by reasonable needs of the business is
determined by the IMMEDIACY TEST.
Immediacy Test - It states that the reasonable needs of the business are the
1) immediate needs of the business; and
2) reasonably anticipated needs.
How to prove the reasonable needs of the business The corporation

should prove that there is
1) an immediate need for the accumulation of the earnings and profits; or
2) a direct correlation of anticipated needs to such accumulation of profits.
D. Composition: The following constitute accumulation of earnings for the reasonable

needs of the business: (ILL ABE)
1) ALLOWANCE for the increase in the accumulation of earnings up to 100% of
the paid-up capital of the corporation as of Balance Sheet date, inclusive of
accumulations taken from other years;
2) Earnings reserved for definite corporate EXPANSION projects or programs
requiring considerable capital expenditure as approved by the Board of
Directors or equivalent body;
3) Earnings reserved for BUILDING, PLANT or EQUIPMENT ACQUISITION as
approved by the Board of Directors or equivalent body;
4) Earnings reserved for compliance with any LOAN COVENANT or pre-existing
obligation established under a legitimate business agreement;
5) Earnings required by LAW or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its
distribution;
6) In the case of subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved for INVESTMENTS WITHIN THE
PHILIPPINES as can be proven by corporate records and/or relevant
documentary evidence.
E. Covered Corporations Only domestic and closely-held corporations are liable

for IAET.
1. Closely-held corporations are those:
a) at least 50% in value of the outstanding capital stock; or
b) at least 50% of the total combined voting power of all classes of stock
entitled to vote
is owned directly or indirectly by or for not more than 20 individuals.
Domestic corporations not falling under the aforesaid definition are,
therefore, publicly-held corporations.
2. To determine whether the corporation is closely held corporation,

insofar as such determination is based on stock ownership, the following RULES
shall be applied:
a. Stock Not Owned by Individuals. - Stock owned directly or
indirectly by or for a corporation, partnership, estate or trust shall be
considered as being owned proportionately by its shareholders,
partners or beneficiaries.
b. Family and Partnership Ownership. - An individual shall be
considered as owning the stock owned, directly or indirectly, by or for
his family, or by or for his partner. For purposes of this paragraph, the
family of an individual includes his brothers or sisters (whether by
whole or half-blood), spouse, ancestors and lineal descendants.
c. Option to Acquire Stocks. - If any person has an option to acquire
stock, such stock shall be considered as owned by such person. For
purposes of this paragraph, an option to acquire such an option and
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each one of a series of option shall be considered as an option to
acquire such stock.
d. Constructive Ownership as Actual Ownership. - Stock
constructively owned by reason of the application of paragraph (1) or
(3) hereof shall, for purposes of applying paragraph (1) or (2), be
treated as actually owned by such person; but stock constructively
owned by the individual by reason of the application of paragraph (2)
hereof shall NOT be treated as owned by him for purposes of again
applying such paragraph in order to make another the constructive
owner of such stock.
BIR Ruling 025-02 The ownership of a domestic corporation for

purposes of determining whether it is a closely held corporation or a
publicly held corporation is ultimately traced to the individual shareholders
of the parent company. Where at least 50% of the outstanding capital stock
or at least 50% of the total combined voting power of all classes of stock
entitled to vote in a corporation is owned directly or indirectly by at least 21
or more individuals, the corporation is considered as publicly held
corporation.
F. Exempt Corporations: The IAET shall not apply to the following corporations: (BIG-
PEN-T)
1. Banks and other non-bank financial intermediaries;
2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
5. General professional partnerships;
6. Non- taxable joint ventures; and
7. Enterprises that are registered:
a. with the Philippine Economic Zone Authority (PEZA) under R.A. 7916;
b. pursuant to the Bases Conversion and Development Act of 1992 under
R.A. 7227; and
c. under special economic zones declared by law which enjoy payment of
special tax rate on their registered operations or activities in lieu of
other taxes, national or local.
Words in regular letters are found in Sec. 29(B)(2) of the NIRC. Words in italics
are additions made by the revenue regulation to consolidate Sec. 29 with other
pertinent laws.
G. Computation
Years taxable income: P XX
Add: Income exempt from tax XX
Income excluded from gross income XX
Income subject to final tax XX
Amount of net operating loss carry-over(NOLCO)deducted XX
Total P XX
Less: Income tax paid/payable for the taxable year XX
Dividends actually or constructively paid/issued from
the applicable years taxable income XX
Amount reserved for the reasonable needs of the
business emanating from the covered years
taxable income XX
Improperly Accumulated Taxable Income P XX
Multiplied by IAET rate x 10%
Improperly Accumulated Earnings Tax (IAET) P XX
Words in regular letters are in the statutory formula. Words in italics are additions
made by the revenue regulation.
H. Limitation The profit that has been subjected to IAET shall no longer be subjected to
IAET in later years even if not declared as dividend. However, profits which have been
subjected to IAET, when declared as dividends, shall be subject to tax on dividends
except in those instances where the recipient is not subject thereto.
I. Declaration of Dividends from earnings For purposes of determining the source of

earnings or profits declared or distributed from accumulated income, the dividends shall
be deemed to have been paid out of the most recently accumulated profits or
surplus and shall constitute a part of the annual income of the distributee for the
year in which received pursuant to Section 73(C) of the Code. But, where the dividends
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or portion of the said dividends declared forms part of the accumulated earnings as of
December 31, 1997, or emanates from the accumulated income of a particular
year and is therefore an exemption to the proceeding statement, such fact must be
supported by a duly executed Board Resolution to that effect.
J. Period for Payment of Dividend/IAET The dividends must be declared and paid or
issued not later than one year following the close of the taxable year, otherwise,
the IAET, if any, should be paid within fifteen (15) days thereafter.
K. Determination of Purpose to Avoid Income Tax

1) The fact that a corporation is a mere holding company or investment company
shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members
A "holding or investment company" is a corporation having
practically no activities except holding property, and collecting the
income therefrom or investing the same; and
2) where the earnings or profits of a corporation are permitted to accumulate

beyond the reasonable needs of the business.
PRIMA FACIE INSTANCES of accumulation of profits beyond the
reasonable needs of a business (and therefore, indicative of purpose to
avoid income tax upon shareholders) (UBE)
1) Investment of substantial earnings and profits of the
corporation in UNRELATED BUSINESS or in stock or
securities of unrelated business;
2) Investment in BONDS and other long-term securities; and
3) Accumulation of earnings IN EXCESS OF 100% OF PAID-
UP CAPITAL, not otherwise intended for the reasonable
needs of the business.
The controlling intention of the taxpayer is that which is
manifested at the time of accumulation. A speculative and
indefinite purpose will not suffice. The mere recognition of a future
problem or the discussion of possible and alternative solutions is
not sufficient. Definiteness of plan/s coupled with action/s
taken towards its consummation is essential.
ONE LAST NOTE ON THE APPLICABILITY OF TAX RATES OF DOMESTIC CORPORATIONS: All
corporations, agencies, or instrumentalities owned or controlled by the GOVERNMENT are taxable
and shall pay such rate of tax upon their taxable income as are imposed on domestic
corporations engaged in a similar business, industry, or activity.
EXCEPTIONS (i.e, not taxable):
o Government Service Insurance System (GSIS),
o Social Security System (SSS),
o Philippine Health Insurance Corporation (PHIC),
o Philippine Charity Sweepstakes Office (PCSO) and
o the Philippine Amusement and Gaming Corporation (PAGCOR)11
Note: Exemption for PAGCOR was withdrawn by RA 9337
E. Tax on Resident Foreign Corporations

Resident foreign corporations are subject to any or some of the following:
Capital Gain Tax
Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR] Gross Income Tax (GIT)
Branch Profit Remittance Tax
10. Capital Gains subject to Capital Gains Tax On sale, barter, exchange or other disposition
of shares of stock of a domestic corporation not listed and traded through a local
stock exchange, held as a capital asset:
NOTE:
Tax treatment is the same as that of individuals and domestic corporations.
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There is no corresponding provision for resident foreign corporations regarding capital
gain tax on the sale of real property held as a capital asset. Hence, the net taxable
income from the sale of real property realized by the resident foreign corporation shall
be subject to the normal corporate income tax.

Interest Income:
substitutes, trust funds and similar arrangements - 20%
o under the expanded foreign currency deposit system (EFCDS) - 7.5%
Dividends received from a domestic corporation (Intercompany Dividend) -

EXEMPT
Royalties (any kind) 20%
12. Income subject to Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR]
Gross Income Tax (GIT) The discussion with respect to this topic (income subject to
normal tax, MCIT, or GIT) under the subheading of domestic corporations is equally applicable
to resident foreign corporations, both as to concepts and computations, except that RFCs are
taxed only on income from sources within the Philippines.
NORMAL CORPORATE INCOME TAX RATE 35%12 of net taxable income from
sources within the Philippines
MINIMUM CORPORATE INCOME TAX (MCIT) 2% of MCIT Gross Income from

sources within the Philippines. The MCIT is imposed on RFCs under the same
conditions as domestic corporations. [Sec. 28(A)(2)]
GROSS INCOME TAX (GIT) The President, upon the recommendation of the
Secretary of Finance, may allow resident foreign corporations the option to be taxed at
fifteen percent (15%) of gross income within the Philippines, under the same
conditions as domestic corporations. [Sec. 28(A)(1)]
13. Branch Profit Remittance Tax [Sec. 28(A)(5)]

Taxable transaction any profit remitted by a branch to its head office
Tax Rate and Base 15% based on the total profits applied or earmarked for
remittance without any deduction for the tax component
Non-taxable activities activities which are registered with the Philippine Economic
Zone Authority
Income NOT TREATED AS BRANCH PROFITS unless effectively connected with the
conduct of trade or business in the Philippines:
i. Interests, dividends, rents, royalties, including remuneration for technical
services
ii. salaries, wages premiums, annuities, emoluments
iii. other fixed or determinable annual, periodic or casual gains, profits, income
iv. capital gains received during each taxable year from all sources within the
Philippines
NOTES:
- The branch profit remittance tax is imposed whether the head office of the foreign
corporation is located in a tax treaty country, in a tax haven or other non-treaty country.
- The branch profit remittance tax is imposed only on the profits remitted by a Philippine
branch to the head office of a foreign corporation. Should the branch of a domestic
corporation remit profits to its head office, the transaction is not subject to the branch
profit remittance tax.
F. Tax on Nonresident Foreign Corporations

Non-resident foreign corporations are subject to any or some of the following:
Capital Gain Tax
Final Tax on [Other] Gross Income from sources within the Philippines
12
Amended by RA No. 9337 (dated May 24, 2005, effective July 1, 2005)
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1. Capital Gains subject to Capital Gains Tax On sale, barter, exchange or other disposition
of shares of stock of a domestic corporation not listed and traded through a local
stock exchange, held as a capital asset:
NOTE:
Tax treatment is the same as that of individuals and domestic/resident foreign
corporations.
There is no corresponding provision for non-resident foreign corporations regarding
capital gain tax on the sale of real property held as a capital asset. Hence, the gross
income from the sale of real property realized by the non-resident foreign corporation
shall be subject to a 35% final tax imposed on gross income from sources within the
Philippines.

Interest
o on foreign loans contracted on or after August 1, 1986 20%
o under the expanded foreign currency deposit system (EFCDS) - EXEMPT
Dividends (cash and/or property) received from a domestic corporation

(Intercorporate Dividend) 15%, AS LONG AS the country in which the nonresident
foreign corporation is domiciled allows a tax credit for taxes deemed paid in the
Philippines equivalent to 17 20%13
- 17% 20% represents the difference between the regular income tax of 32% 35%
on corporations and the 15% tax on dividends
- If the country within which the NRFC is domiciled does NOT allow a tax credit, a
final withholding tax at the rate of 32% 35% is imposed on the dividends
received from a domestic corporation. [In other words, the dividends are subject
to the third kind of tax: Final Tax on [Other] Gross Income from sources within
the Philippines.]
3. Final Tax on [Other] Gross Income from sources within the Philippines 35%of the
gross income14 received from all sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits and income, and capital
gains EXCEPT capital gains resulting from the sale of shares of stock of a domestic corporation
not listed and traded through a local stock exchange, held as a capital asset.
G. Special Types of Corporations

A. Special Type of Domestic Corporations
1. Proprietary Educational Institutions and Hospitals (Non-profit)
Tax Rate and Base 10% on net income (except on income subject to capital
gains tax and passive income subject to final tax) within and without the
Philippines
CAVEAT: If gross income from unrelated trade or business or other activity
exceeds 50% of total gross income derived from all sources, the tax rate of
35% shall be imposed on the entire taxable income.
- Unrelated trade, business or other activity any trade, business or
other activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or hospital of
its primary purpose or function.
- Proprietary educational institution any private school maintained and
administered by private individuals or groups with an issued permit to
operate from the DECS, CHED or TESDA.
2. Depository Banks (Foreign Currency Deposit Units) [Sec. 27(D)(3) as amended by RA

9294 (2004)]
Coverage of the Rule ONLY income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency transactions
with:
- nonresidents,
- offshore banking units in the Philippines,
13
Amended by RA 9337 (dated May 24, 2005, effective July 1, 2005)
14
Amended by RA 9337 (dated May 24, 2005, effective July 1, 2005)
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- local commercial banks including branches of foreign banks that may
be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units and
- other depository banks under the expanded foreign currency deposit
system
Tax Rate: Exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the regular income
tax payable by banks
- EXCEPTION: Interest income from foreign currency loans granted by
such depository banks under said expanded system to residents other
than offshore units in the Philippines or other depository banks under
the expanded system shall be subject to a final tax at the rate of 10%.
B. Special Types of Resident Foreign Corporations

1. International Carriers
Tax Rate and Base 2.5% on Gross Philippine Billings (GPB)
What is GPB?
- In the case of International Air Carriers, GPB refers to the amount of:
gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of the ticket or
passage document
gross revenue from tickets revalidated, exchanged and/or
indorsed to another international airline if the passenger
boards a plane in a port or point in the Philippines
for flights which originate from the Philippines, but
transshipment of passenger takes place at any port outside
the Philippines on another airline, the gross revenue
consisting of only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the
point of transshipment [RR 15-2002]
Air Canada vs. CIR (CTA Case No. 6572) Air Canada is a
foreign corporation with authority to operate as an off-line
carrier. The CTA held that the Air Canada is subject to income
tax as a resident foreign corporation. In order that a foreign
corporation may be regarded as doing business, there must
be continuity of conduct and intention to establish business,
such as the appointment of a local agent. A foreign airline
company selling tickets in the Philippines through their local
agents shall be considered as resident foreign corporation
engaged in trade or business in the country. The absence of
flight operations within the Philippine territory cannot alter the
fact that the income received was derived from activities
within the Philippines. The test of taxability is the source, and
the source is that activity which produced the income.
- In the case of International Shipping, GPB means:

gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage or
freight documents.
2. Offshore Banking Units authorized by the Bangko Sentral ng Pilipinas (BSP) [Sec.
28(A)(4) as amended by RA 9294 (2004)]
Coverage of the Rule ONLY income derived by offshore banking units from
foreign currency transactions with:
- nonresidents,
- other offshore banking units
business with offshore banking units
- EXCEPTION: Interest income derived from foreign currency loans
granted to residents other than offshore banking units or local
commercial banks, including local branches of foreign banks that may
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be authorized by the BSP to transact business with offshore banking
units, shall be subject only to a final tax at the rate of 10%.
3. Resident Depository Bank (Foreign Currency Deposit Units) [Sec. 28(D)(7)(b) as

amended by RA 9294 (2004)]
Coverage of the Rule ONLY income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency transactions
with:
- nonresidents,
- offshore banking units in the Philippines,
business with foreign currency deposit system units and
- other depository banks under the expanded foreign currency deposit
system
- EXCEPTION: Interest income from foreign currency loans granted by
such depository banks under said expanded system to residents other
than offshore units in the Philippines or other depository banks under
the expanded system shall be subject to a final tax at the rate of 10%.
4. Regional or Area Headquarters and Regional Operating Headquarters of Multinational

Companies
Regional or area headquarters not subject to income tax
- Regional or area headquarters a branch established in the
Philippines by multinational companies and which headquarters do not
earn or derive income from the Philippines and which act as
supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region and other
foreign markets.
Regional operating headquarters 10% of their taxable income
- a branch established in the Philippines by multinational companies
which are engaged in any of the following services:
1. general administration and planning
2. business planning and coordination
3. sourcing and procurement of raw materials and components
4. corporate finance advisory services
5. marketing control and sales promotion
6. training and personnel management
7. logistic services
8. research and development services and product development
9. technical support and maintenance
10. data processing and communications, and
11. business development.
C. Special Types of Non-resident Foreign Corporations

1. Non-resident cinematographic film owners, lessors or distributors 25% of gross income
from all sources within the Philippines
2. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals 4.5% of

gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Authority
3. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment 7.5% of

gross rentals or fees
D. Summary of Tax Bases and Rates of Special Corporations
QUICK GLANCE
Tax
Type of Corporation Tax Base
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals (Non-profit) Taxable Income from all sources 10%
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Depository Banks (Foreign Currency Deposit Units)
With respect to income derived under the expanded foreign Exempt (except that net income from
currency deposit system from certain foreign currency -
such transactions is subject to the
transactions regular income tax payable by banks)
With respect to interest income from foreign currency loans to
residents other than offshore units in the Philippines or other Amount of interest income 10%
depository banks under the expanded system
Resident Foreign Corporations
International Carriers Gross Philippine Billings 2.5%
Offshore Banking Units
With respect to income derived by offshore banking units from Exempt (except that net income from
-
certain foreign currency transactions such transactions is subject to the
regular income tax payable by banks)
With respect to interest income derived from foreign currency
loans granted to residents other than offshore banking units or
Amount of interest income 10%
local commercial banks
Resident Depository Bank (Foreign Currency Deposit Units)

With respect to income derived under the expanded foreign Exempt (except that net income from
-
currency deposit system from certain foreign currency such transactions is subject to the
transactions regular income tax payable by banks)
With respect to interest income from foreign currency loans to
residents other than offshore units in the Philippines or other Amount of interest income 10%
depository banks under the expanded system
Regional or Area Headquarters Exempt -
Regional Operating Headquarters of Multinational Companies Taxable Income from within the
10%
Philippines
Non-resident Foreign Corporations
Non-resident cinematographic film owners, lessors or distributors Gross Income from the Philippines 25%
Nonresident Owner or Lessor of Vessels Chartered by Philippine Gross Rentals, Lease and Charter Fees
4.5%
Nationals from the Philippines
Nonresident Owner or Lessor of Aircraft, Machineries and Other Gross Rentals, Charges and Fees from
7.5%
Equipment the Philippines
H. Exempt Corporations [Sec. 30] (CREB-CLEF-SMB)

The following organizations shall not be taxed in respect to income received by them as such:
1. LABOR, agricultural or horticultural organization not organized principally for profit
2. MUTUAL savings bank not having a capital stock represented by shares, and cooperative bank
without capital stock organized and operated for mutual purposes and without profit
3. A BENEFICIARY society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid
association or a non-stock corporation organized by employees providing for the payment of life,
sickness, accident, or other benefits exclusively to the members of such society, order, or
association, or non-stock corporation or their dependents
4. CEMETERY company owned and operated exclusively for the benefit of its members
5. Non-stock corporation or association organized and operated exclusively for RELIGIOUS,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no
part of its net income or asset shall belong to or inures to the benefit of any member, organizer,
officer or any specific person
6. BUSINESS league chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inures to the benefit of any private stock-holder, or individual
7. CIVIC league or organization not organized for profit but operated exclusively for the promotion
of social welfare
8. A non-stock and nonprofit EDUCATIONAL institution
9. Government EDUCATIONAL institution
10. FARMERS' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses and
11. Farmers', fruit growers', or like association organized and operated as a SALES agent for the
purpose of marketing the products of its members and turning back to them the proceeds of
sales, less the necessary selling expenses on the basis of the quantity of produce finished by
them;
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Notwithstanding the exemptions above, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such income, shall be
SUBJECT TO TAX.
Note:
RA 9178 Barangay Micro Business Enterprises (BMBEs) implemented by DO 17-04, April 20, 2004
BMBEs shall be exempt from income tax for income arising from the operations of the enterprise.
BMBE is any business entity or enterprise engaged in the production, processing or manufacturing
of products or commodities, including agro-processing trading and services, whose total assets
including those arising from loans but exclusive of land on which the particular business entitys
office, plant and equipment are situated, shall not be more that P3M.
I. Summary of Tax Bases, Tax Rates and Applicable Tax Regimes for Corporations
DOMESTIC RESIDENT NON-RESIDENT

Within the
CATEGORY OF INCOME All sources Within the Philippines
Philippines
1. Taxable Income (i.e., income other than #s 2 to 35% Normal 35% Normal
9) Tax Tax
2. Interest from any currency bank deposit , etc. GIW - 20% Final Tax 35% of Gross Income
3. Royalties GIW - 20% Final Tax
4. Interest (Expanded Foreign Currency Deposit

System) GIW - 7.5% Final Tax EXEMPT
5. Cash / Property Dividends from a domestic 15% or 35%,

corporation EXEMPT whichever is
applicable
6. Capital Gains on Sale of Shares (not traded in a Net Capital Gains within:
domestic stock exchange) Not Over P100,000 5% Final Tax
Amount in Excess of P100,000 10% Final Tax
7. Capital Gains on Sale of Land and/or Building GSP or FMV,
whichever is 35% Normal
35% of Gross Income
higher Tax
6% Final Tax
8. Sale of Shares (traded in a domestic stock of 1% of the Selling Price (Stock Transaction Tax)
exchange) Note: Stock Transaction Tax is not an income tax,
but a business (percentage) tax
TAX REGIMES APPLICABLE

Normal Tax YES, but based on
YES YES
Gross Income
Minimum Corporate Income Tax YES YES NO
Gross Income Tax YES YES NO
Improperly Accumulated Earnings Tax YES, if closely-
held NO NO
corporation
Branch Profit Remittance Tax NO YES Not Applicable
Legend:
GIW - Gross Income within the Philippines
GSP Gross Selling Price
FMV Fair Market Value
V. TAXATION OF FRINGE BENEFITS [Sec. 33 of NIRC]
I. TAXATION OF FRINGE BENEFITS [Sec. 33 of the NIRC]
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TAXATION OF FRINGE BENEFITS Tax I
A. Definition of Fringe Benefit any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee except rank and file employees (The fringe benefit
covered by Sec 33 refers to those enjoyed by managerial and supervisory employees.)
Key definitions:
Managerial employee one who is vested with the powers or prerogatives to lay down
and execute management policies and/or to hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees.
Supervisory employees those who, in the interest of the employer, effectively
recommend such managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of independent judgment.
All employees not falling within any of the above definitions are considered rank-and-file
employees.
Examples of fringe benefits:
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others
5. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents
10. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows
B. Tax Rate and Tax Base [Generally] 32% of the grossed-up monetary value (GMV)
GMV represents the whole amount of income realized by the employee.
How GMV is determined GMV is determined by dividing the actual monetary value of the
fringe benefit by 68% [100% - tax rate of 32%]. For example, the actual monetary value of
the fringe benefit is P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. The fringe benefit
tax, therefore, is P470.59 [P1470.59 x 32%].
Special Cases:
For fringe benefits received by non-resident alien not engaged in trade of business
(NRANETB), the tax rate is 25% of the grossed-up monetary value (GMV). The GMV is
determined by dividing the actual monetary value of the fringe benefit by 75% [100% -
25%].
For fringe benefits received by alien individuals and Filipino citizens employed by regional
or area headquarters, regional operating headquarters, offshore banking units (OBUs),
or foreign service contractor, the tax rate is 15% of the grossed-up monetary value
(GMV). The GMV is determined by dividing the actual monetary value of the fringe
benefit by 85% [100% - 15%].
What is the tax implication if the employer gives fringe benefits to rank-and-file
employees? Fringe benefits given to a rank-and-file employee are treated as part of his
compensation income subject to income tax and withholding tax on compensation income,
which must be withheld and deducted by his employer from the compensation income of his
employee.
C. Payor of Fringe Benefit Tax (FBT) the employer [but the law allows the employer to deduct such
tax as a business expense, in determining his taxable income]
D. Fringe Benefits which are not taxable [Sec. 33 of the NIRC, consolidated with Sec. 2.33(C) of RR
03-98] [RED CNC]
1. Fringe benefits which are authorized and EXEMPTED from tax under special laws
2. CONTRIBUTIONS of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans
3. Benefits given to the RANK AND FILE employees, whether granted under a collective
bargaining agreement or not
4. DE MINIMIS benefits
5. If the grant of fringe benefits to the employee is required by the nature of, or NECESSARY to
the trade, business, or profession of the employer
6. If the grant of fringe benefits is for the CONVENIENCE of the employer [Convenience of the
Employer Rule]
NOTES:
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De minimis benefits those which are of relatively small value are offered by the employer
as a means of promoting health, goodwill, contentment, or efficiency of his employees, such
as the following:
1. Monetized unused vacation leave credits of private employees not exceeding
ten (10) days during the year and the monetized value of leave credits paid
to government officials and employees;
2. Medical cash allowance to dependents of employees not exceeding P750
per semester or P125 per month;
3. Rice subsidy of P350 per month granted by an employer to his employees;
4. Uniforms given to employees by the employer;
5. Medical benefits given to the employees by the employer;
6. Laundry allowance of P150 per month;
7. Employee achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible personal property other
than cash or gift certificate, with an annual monetary value not exceeding one-
half () month of the basic salary of the employee receiving the award under
an established written plan which does not discriminate in favor of highly paid
employees;
8. Christmas and major anniversary celebrations for employees and their
guests;
9. Company picnics and sports tournaments in the Philippines and are
participated exclusively by employees; and
10. Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc. [as
enumerated in RR 03-98, as amended by RR 10-00]
Tax implication of de minimis benefits: EXEMPTED from tax. However, should the
amount of the benefits given be in EXCESS of the ceilings prescribed, the following
rules apply:
- If given to managerial / supervisory employees The amount in
excess of the ceiling prescribed is taxable as a fringe benefit (i.e.,
there will be a 32% tax imposed on the grossed-up monetary value of
the residual amount).
ILLUSTRATION: X Company gave one of its supervisors a laundry
allowance of P200 per month. P150 of the P200 is considered de
minimis and not taxable. However, the residual P50 per month is
considered a fringe benefit and is taxable as such. The fringe
benefits tax for the year will thus be P282.35 [{(P50 per month x
12 months) / 68%} x 32%]
- If given to rank-and-file employees The amount in excess of the
ceiling prescribed is taxable as salary or compensation income.
BIR Ruling 019-02: To be considered de minimis medical allowance, the

following conditions must concur:
1. The amount given to the EE shall be for his own medical expense;
2. The amount actually given and actually spent shall not exceed P10, 000 in
any given calendar year;
3. The EE must fully substantiate with or in his name the medical allowance to
be granted.
BIR Ruling 023-02: Meal and food allowance, although not for overtime work, is
considered de minimis if it does not exceed 25% of the basic wage. The rules and
regulations on de minimis benefits do not allow aggregation of the amounts set for
each type of benefit.
BIR Ruling 034-02 (Aug 16, 2002): Representation and Transportation Allowance
(RATA) and Personnel Economic Relief Allowance (PERA) are not subject to Income
Tax and Withholding Tax. Additional Compensation Allowance (ACA) is part of other
benefits under Sec. 32(b)(7)(e) of the Tax Code of 1997 which are excluded from
gross compensation income provided the total amount of such benefits does not
exceed P30,000. It is also not subject to withholding tax pending its formal
integration into basic pay.
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Example of Benefits Necessary to the Trade / Business of the Employer: BIR Ruling
013-02: Outstation Allowance given by the Philippine Gaming Management Corporation to its
managerial and supervisory employees (who will be away from the office site for at least 8
hours to visit the lotto franchise holders for repair and/or inspection of equipment leased by
the latter from the PCSO) intended to cover meals and trip related expenses in connection
with their off-site visit to franchise holders is clearly required by the nature of or necessary to
the trade or business of the employer and hence, not subject to the fringe benefits tax not
being part of the compensation income of the employee. It is also not subject to income tax
and consequently to withholding tax.
Examples of Convenience of the Employer Rule:

1. The value of the meals given to the employee is not taxable, if the employer provides
the meals for a substantial non-compensatory business purpose (generally, when
employee is required to be on duty during the meal period).
2. Lodging is not taxable if the employee must accept the lodging on the employers
business premises as a condition of his employment.
II. TAXATION OF PARTNERSHIPS
A. Classification of Partnerships for Tax Purposes

1. General Professional Partnerships (GPP) partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business
2. Other Partnerships (or General Co-partnerships) partnerships wherein all or part of their
income is derived from the conduct of trade or business
B. General Professional Partnerships [Sec 26]

Rules:
1. A GPP as such shall not be subject to the income tax.
2. The partners shall only be liable for income tax only in their separate and
individual capacities.
3. For purposes of computing the distributive share of the partners, the net income of the
GPP shall be computed in the same manner as a corporation.
4. Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
5. The share of a partner shall be subject to a creditable withholding income tax of
15%. (RR 2- 1998)
NOTES:
GPP is not a taxable entity The partnership is deemed to be no more than a mere
mechanism or a flow-through entity in the generation of income by, and the ultimate
mechanism distribution of such income to, respectively, each of the individual partners.
(Tan v. Commissioner [Oct. 3, 1994]) However, the partnership itself is required to file
income tax returns for the purpose of furnishing information as to the share in the gains
or profits which each partner shall include in his individual return. (RR 2- 1998)
The share of an individual partner in the net profit of a general professional partnership
is deemed to have been actually or constructively received by the partner in the
same taxable year in which such partnership net income was earned, and shall
be taxed to them in their individual capacities, whether actually distributed or
not, at the graduated income tax ranging from 5% to 32%. Thus, the principle of
constructive receipt of income or profit is being applied to undistributed profits of GPPs.
The payment [to the partners] of such tax-paid profits in another year should no longer
be liable to income tax. (Mamalateo)
ILLUSTRATIONS:
A and B, both lawyers, formed a general professional partnership in January
2002. In accordance with their agreement, they would equally divide the profit
and loss. During the year, the partnership had a net profit of P1,000,000 and
P800,000 was distributed to the partners. Under Section 26, each partner must
report an income of P500,000 (not just P400,000), representing his share in the
partnership profits, because the entire net income of the partnership is taxable
in the year earned and is deemed distributed to the partners in the same year.
The IJ partnership is a general professional partnership, with partners, Mr. I

and Mr. J, sharing equally in partnership net income or loss. The partnership
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had gross income of P600,000 an expenses of operations of P200,000 in 2001.
Partner I, who is single, had personal income of P80,000. In the same year, Mr.
J, who is married and has 5 children, had personal income of P90,000. Who
were the taxpayers and how much income tax did they pay?
- IJ Partnership had a net income in 2001, not subject to income tax,
computed as follows:
Gross Income P600,000
Less: Expenses of Operations 200,000
Net Income P400,000
- The taxable income and income tax due of Mr. I and Mr. J,
respectively, are as follows:
Partner Partner
I J
Gross Income
Share in IJ net income P200,000 P200,000
Own income 80,000 90,000
Total Gross Income P280,000 P290,000
Less: Personal Exemption
Basic Personal Exemption (20,000) (32,000)
Additional Exemption (maximum of 4 - (32,000)
children)
Taxable Income P260,000 P226,000
Income tax due (graduated rates) P53,000 P44,000
C. Other Partnerships (or General Co-partnerships)

Rules:
1. The partnership is subject to the same rules on corporations (capital gains tax, final tax
on passive income, normal tax, minimum corporate income tax [MCIT] and gross income
tax [GIT]), but is not subject to the improperly accumulated earnings tax [IAET]. The
partnership must file quarterly and year-end income tax returns.
2. The taxable income of the partnership, less the normal corporate income tax thereon, is
the distributable net income of the partnership.
3. The share of a partner in the partnerships distributable net income of a year shall be
deemed to have been actually or constructively received by the partners in the same
taxable year and shall be taxed to them in their individual capacity, whether actually
distributed or not. [Sec. 73(D)] Such share will be subjected to a final tax of 10% to be
withheld by the partnership. [Sec. 24(B)(2)]
ILLUSTRATION:
A and B organized AB Trading, a partnership that will distribute motor oils in the Philippines.
The partners agreed to distribute profits equally. In 2002, the partnership had a net profit of
P1,000,000, A (married) had personal income of P200,000, and B (single) had personal income
of P400,000. The partnership did not actually distribute the net profit to A and B. Who were the
taxpayers and how much income tax did they pay?
- AB Trading is taxable as a corporation, as follows:
Taxable Income P1,000,000
Normal Tax (P1,000,000 x 35%) P 350,000
NOTE: The profit deemed distributed to the partners is P650,000

(P1,000,000 P350,000), or P325,000 each.
- A and B are liable as follows:

Partner Partner B
A
Final Tax on Share of the Distributable Net
Income
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(P325,000 x 10%) P32,500 P32,500
Income subject to Graduated Rates:

Income (Own) P200,000 P400,000
Less: Personal Exemption (32,000)
(20,000)
Taxable Income P168,000 P380,000
Income Tax Due P29,500 P89,000
Co-ownership - There is co-ownership:

1. When two or more heirs inherit and undivided property from a decedent.
2. When a donor makes a gift of an undivided property in favor of two or more donees.
- When Co-ownership is not subject to tax When the co-ownerships activities are
limited merely to the preservation of the co-owned property. In such a case, the co-
ownership, as such, is not subject to tax. The co-owners are liable for income tax in their
separate and individual capacities.
- When Co-ownership is subject to tax When the income of the co-ownership is
invested by the co-owners in business, the co-owners have in effect constituted
themselves into a partnership. In such a case, the co-ownership shall be subject to
tax as a corporation.
For tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly he
becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were
executed for the purpose, for tax purposes, at least, an unregistered partnership is
formed. [Ona v. CIR, G.R. No. L-19342, 25 May 1972]
III. TAX ON ESTATES AND TRUSTS
A. Application of Income Tax The tax imposed upon individuals shall apply to the income of estates
or of any kind of property held in trust, including:
1. Income accumulated in trust for the benefit of unborn or unascertained person
or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;
2. Income which is to be distributed currently by the fiduciary to the beneficiaries,
and income collected by a guardian of an infant which is to be held or
distributed as the court may direct;
3. Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
4. Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries
or accumulated.
EXCEPTION The tax shall not apply to employee's trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees
(1) if contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund accumulated
by the trust in accordance with such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of the corpus or income to
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be (within the taxable year or thereafter) used for, or diverted to, purposes other than for
the exclusive benefit of his employees:
- NOTE HOWEVER: Any amount actually distributed to any employee or distributee shall
be taxable to him in the year in which so distributed to the extent that it exceeds the
amount contributed by such employee or distributee.
B. Computation and Payment of the Tax The tax shall be computed upon the taxable income of the
estate or trust and shall be paid by the fiduciary. (GENERAL RULE)
EXCEPTIONS:
1. Revocable Trusts. - Where at any time the power to revest in the grantor title to
any part of the corpus of the trust is vested
1. in the grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the
income therefrom, or
2. in any person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom,
the income of such part of the trust shall be included in computing the taxable income of
the grantor.
2. Income for Benefit of Grantor - Where any part of the income of a trust
i. is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor, or
ii. may, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to the
grantor, or
iii. is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be applied to
the payment of premiums upon policies of insurance on the life of the grantor,
such part of the income of the trust shall be included in computing the taxable income of
the grantor.
NOTE: 'In the discretion of the grantor' means in the discretion of the grantor,
either alone or in conjunction with any person not having a substantial adverse
interest in the disposition of the part of the income in question.
Consolidation of Income of Two or More Trusts - Where, in the case of two or more trusts, the creator
of the trust in each instance is the same person, and the beneficiary in each instance is the
same, the taxable income of all the trusts shall be consolidated and the tax computed on such
consolidated income, and such proportion of said tax shall be assessed and collected from each
trustee which the taxable income of the trust administered by him bears to the consolidated income of
the several trusts.
C. How Taxable Income of the Estate or Trust is Computed [Sec. 61] The taxable income of the
estate or trust shall be computed in the same manner and on the same basis as in the case of an
individual, EXCEPT that:
- (A) There shall be ALLOWED AS A DEDUCTION in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for the taxable year which
is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the
income collected by a guardian of an infant which is to be held or distributed as the court
may direct, BUT the amount so allowed as a deduction shall be included in computing
the taxable income of the beneficiaries, whether distributed to them or not. Any amount
allowed as a deduction under this Subsection shall not be allowed as a deduction under
Subsection (B) of this Section in the same or any succeeding taxable year.
- (B) In the case of income received by estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income which, in the
discretion of the fiduciary, may be either distributed to the beneficiary or accumulated,
there shall be allowed as an ADDITIONAL DEDUCTION the amount of the income of
the estate or trust for its taxable year, which is properly paid or credited during such
year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall
be included in computing the taxable income of the legatee, heir or beneficiary.
- (C) In the case of a trust administered in a foreign country, the deductions mentioned in
Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount
of any income included in the return of said trust shall not be included in computing the
income of the beneficiaries.
D. Exemption Allowed to Estates and Trusts There shall be allowed an exemption of P20,000 from
the income of the estate or trust.
E. Fiduciary Returns Guardians, trustees, executors, administrators, receivers, conservators and all
persons or corporations, acting in any fiduciary capacity, shall:
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- render, in duplicate, a return of the income of the person, trust or estate for whom or which they
act, and
- be subject to all the provisions which apply to individuals in case such person, estate or trust has
a gross income of P20,000 or over during the taxable year.
Such fiduciary or person filing the return for him or it, shall:
- take OATH that
o he has sufficient knowledge of the affairs of such person, trust or estate to enable
him to make such return and
o that the same is, to the best of his knowledge and belief, true and correct, and
- be subject to all the provisions of this Title which apply to individuals.
A return made by or for one or two or more joint fiduciaries filed in the province where such
fiduciaries reside, under such rules and regulations as the Secretary of Finance shall prescribe, shall
be sufficient compliance.
F. Fiduciaries Indemnified Against Claims for Taxes Paid Trustees, executors, administrators and
other fiduciaries are INDEMNIFIED against the claims or demands of every beneficiary for all payments
of taxes which they shall be required to make, and they shall have CREDIT for the amount of such
payments against the beneficiary or principal in any accounting which they make as such trustees or other
fiduciaries.
IV. SOURCE OF INCOME [Sec. 42]
A. Classification of Income according to Source

1. Income derived from sources within the Philippines
2. Income derived from sources without the Philippines
3. Income derived from sources partly within and partly without the Philippines
B. Basic Principles
1. Resident Citizens (RC) and Domestic Corporations (DC) are taxable on income derived from
within and without the Philippines
2. Non-resident Citizens (NRC), Non-resident Aliens (NRA), Resident Foreign Corporations (RFC)
and Non-resident Foreign Corporations (NRFC) are taxable only on income derived from within
the Philippines.
C. Gross Income From Sources Within the Philippines

The following items of gross income shall be treated as gross income from sources WITHIN the
Philippines:
1. Interests derived from sources within the Philippines, and interests on bonds, notes or other
interest-bearing obligation of residents
2. Dividends received:
a. from a domestic corporation; and
b. from a foreign corporation, UNLESS less than 50% of its gross income for the previous
3-year period was derived from sources within the Philippines [in which case it will be
treated as income partly from within and partly from without]. The income which is
considered as derived from within the Philippines is obtained by using the following
formula:
Philippine Gross Income* x Dividend = Income Within

Worldwide Gross Income*
NOTE: * of the corporation giving the dividend
3. Compensation for labor or personal services performed in the Philippines

4. Rentals and royalties from property located in the Philippines or from any interest in such
property, including rentals or royalties for
a. The use of or the right or privilege to use in the Philippines any copyright, patent, design
or model, plan, secret formula or process, goodwill, trademark, trade brand or other like
property or right;
b. The use of, or the right to use in the Philippines any industrial, commercial or scientific
equipment;
c. The supply of scientific, technical, industrial or commercial knowledge or information;
d. The supply of any assistance that is ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment of, any such property or right as is
mentioned in (a), any such equipment as is mentioned in (b) or any such knowledge or
information as is mentioned in (c);
e. The supply of services by a nonresident person or his employee in connection with the
use of property or rights belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such nonresident person;
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f. Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and
g. The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
5. Gains, profits and income from the sale of real property located in the Philippines
6. GENERAL RULE: Gains, profits and income from the sale of personal property, subject to
the following rules:
Place of PURCHASE Place of SALE Treatment**

Philippines Abroad Income from Without
Abroad Philippines Income from Within
** in other words, treated as income from the country in which sold
EXCEPTIONS:
1. Gain from the sale of shares of stock in a domestic corporation treated as derived
entirely from sources within the Philippines regardless of where the said shares are
sold.
2. Gains from the sale of personal property:
a. produced (in whole or in part) by the taxpayer within and sold without
the Philippines, or
b. produced (in whole or in part) by the taxpayer without and sold within
the Philippines
treated as derived partly from sources within and partly from sources without the
Philippines.
Allowable Deductions from Gross Income From Sources Within the Philippines
1. GENERAL RULE: From the items of gross income above, the following are allowed as
deductions:
a. expenses, losses and other deductions properly allocated to items of gross income
b. ratable part of expenses, interests, losses and other deductions effectively
connected with the business or trade conducted exclusively within the Philippines
which cannot definitely be allocated to some items of gross income
Formula for (b):
Philippine Gross Income x Unallocated Expenses = Expenses to be

Worldwide Gross Income Allocated to Income
from Within
2. EXCEPTION: No DEDUCTIONS FOR INTEREST paid or incurred abroad shall be allowed
from the item of gross income unless indebtedness was actually incurred to provide
funds for use in connection with the conduct or operation of trade or business in
the Philippines.
D. Gross Income From Sources Without the Philippines

The following items of gross income shall be treated as income from sources without the Philippines:
1. Interests other than those derived from sources within the Philippines
2. Dividends other than those derived from sources within the Philippines
3. Compensation for labor or personal services performed without the Philippines
4. Rentals or royalties from property located without the Philippines or from any interest in such
property
5. Gains, profits and income from the sale of real property located without the Philippines
Allowable Deductions to Gross Income From Sources Without the Philippines

1. expenses, losses, and other deductions properly apportioned to items of gross income
2. ratable part of any expense, loss or other deduction which cannot definitely be allocated to
some items or classes of gross income
e.g.:
Gross Income from Without the Philippines. x Unallocated Expenses = Expenses to be

Worldwide Gross Income Allocated to Incom from Without
E. Summary
QUICK GLANCE
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Item of Income Test of Source of Income
Interest Residence of the debtor
Income from Services Place of performance15
Rental Location of the property
Royalty Place of use of the intangible
Gain on Sale of Real Property Location of the property sold
Gain on Sale of Personal Property (EXCEPT: Place of sale
- Shares of a domestic corporation
- Personal property produced (in whole
or in part) by the taxpayer within and
sold without the Philippines [or vice
versa])
Gain on Sale of Domestic Shares Always income from within
Gain on sale of personal property produced Partly from without and partly from within
(in whole or in part) by the taxpayer within
and sold without the Philippines [or vice
versa]
15
Regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of
payment.
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GROSS INCOME Tax I
Dividends
a. From Domestic Corporation Income from within
b. From Foreign Corporation Income from WITHIN, IF at least 50% of its gross income
for the previous 3-year period was derived from sources
within the Philippines. [entire income considered as
income from within]
HOWEVER, if less than 50% of its gross income for the

previous 3-year period was derived from sources within
the Philippines, considered as partly within and partly
without. Income within computed using this formula:
Philippine Gross Income* x Dividend = Income Within

Worldwide Gross Income*
NOTE: * of the corporation giving the dividend
VI. GROSS INCOME
A. Basic Principles
Gross Income means all income derived from whatever source16, including (but not limited to) the
following items: (TRIP CARD GPP)
1. Gross income derived from the conduct of TRADE or business or the exercise of a
profession
2. RENTS
3. INTERESTS
4. PRIZES and winnings
5. COMPENSATION for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items
6. ANNUITIES
7. ROYALTIES
8. DIVIDENDS
9. GAINS derived from dealings in property
10. PENSIONS
11. PARTNER'S distributive share from the net income of the general professional partnership
(GPP)
The term gross income whenever used without qualification, is comprehensive, as defined
above, and is different from the limited meaning of gross income for purposes of minimum
corporate income tax or the gross income tax of corporations.
B. Supplementary Discussion on Some Items Included in Gross Income

Compensation Income income arising from an employer-employee relationship. It means
all remuneration for services performed by an employee for his employer, including the cash
value of all remuneration paid in any medium other than cash. [Sec. 78(A)] It includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances
5. Bonuses
6. Fringe Benefits of rank and file employees
It does NOT include remuneration paid:
1. For agricultural labor paid entirely in products of the farm where the labor is performed,
or
2. For domestic service in a private home, or
3. For casual labor not in the course of the employer's trade or business, or
4. For services by a citizen or resident of the Philippines for a foreign government or an
international organization. [Sec. 78(A)]
Withholding Tax on Compensation Income The income recipient (i.e., employee) is the
person liable to pay the tax income, yet to improve the collection of compensation
income of employees, the State requires the employer to withhold the tax upon payment
of the compensation income.
16
It does not include income which is excluded or exempted by law.
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GROSS INCOME Tax I
Fringe Benefits of Rank and File employees Basic Rule: Convenience of the
Employer Rule
If meals, living quarters, and other facilities and privileges are furnished to an employee
for the convenience of the employer, and incidental to the requirement of the employees
work or position, the value of that privilege need not be included as compensation.
Gains Derived From Dealings In Property Dealings in property such as sales or

exchanges may result in gain or loss. The kind of property involved (i.e., whether the property
is a capital asset or an ordinary asset) determines the tax implication and income tax
treatment, as follows:
ORDINARY ASSET CAPITAL ASSET***

Gain from sale or exchange Ordinary Gain Capital Gain
Loss from sale or exchange Ordinary Loss Capital Loss
Excess of Gains over the Losses [goes into computation of]
Net Capital Gain
Ordinary Net Income
*** (except shares of stock not listed nor traded in a local stock exchange and
real property subject to capital gains tax)
Taxable net income = Ordinary net income + net capital gains
If the asset involved is classified as ordinary, the entire amount of the gain from the
transaction shall be included in the computation of gross income [Sec 32(A)], and the
entire amount of the loss shall be deductible from gross income. [Sec 34(D)]. (See XI.
Allowable Deductions from Gross Income - Losses)
If the property sold is a capital asset (except shares of stock not listed nor traded in a
local stock exchange and real property subject to capital gains tax), the rules on capital
gains and losses apply in the determination of the amount to be included in gross
income. (See XIII Capital Gains and Losses)
Computation of Gain or Loss [Sec. 40(A)]:

Amount realized from sale or other disposition of property
Less: basis or adjusted basis
GAIN
if the result is a negative amount, there is a LOSS.
Note: Amount realized from sale or other disposition of property = sum of money
received + fair market value of the property (other than money) received
In computing the gain or loss from the sale or other disposition of property, the
BASIS shall be as follows:
1. Property acquired by purchase its cost, i.e., the purchase price plus
expenses of acquisition.
2. Property which should be included in the inventory its latest inventory
value [RR-2 sec 136]
3. Property acquired by devise, bequest or inheritance its fair market price
or value as of the date of acquisition
4. Property acquired by gift or donation the same as if it would be in the
hands of the donor or at last preceding owner by whom it was not acquired
by gift, EXCEPT that if such basis is greater than the FMV of the property at
the time of the gift then, for the purpose of determining loss, the basis shall
be such FMV
5. Property (other than capital asset) acquired for less than an adequate
consideration in moneys worth a) the amount paid by the transferee for
the property; or b) the transferors adjusted basis at the time of the
transfer whichever is greater
6. Property acquired in a transaction where gain or loss not recognized The
basis shall be that as defined in 40 (C) (5)
Interest Income e.g., Interest income from government securities such as Treasury Bills
Rental Income
Actual rent itself included in gross income (taxable)
Payments by lessee of obligations of lessor to third persons considered as
additional rent income of the lessor, and therefore included in gross income (taxable).
Thus, if the lessee paid directly to the City Government a real estate tax of P2,000 on
the property of the lessor, the tax paid by the lessee would be considered to have been
cash that changed hands two times, as follows:
Lessee Lessor Government
(1)
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GROSS INCOME Tax I
(P2,000) P2,000
(P2,000) (2) P2,000
Advance Rentals Receipt of advance rentals by the lessor may or may not constitute
taxable income to him depending on the true nature of the so-called advance rentals.
o If the advance rentals is in the nature of prepaid rent (for the lessee),
received by the lessor under a claim of right and without restriction as to
use, the entire amount is taxable income of the lessor in the year received.
o If the amount received is in the nature of a security deposit for the faithful
compliance by the lessee of the terms of the contract, there is no income to
the lessor unless the conditions which make the security deposit the
property of the lessor occur (i.e., the lessee violates the terms of the lease
agreement)
Dividends Any dividend which is not exempt from income tax, or which is not subject to final
tax, is taxable dividend included in the computation of the taxable income (gross income) in the
income tax return at the end of the year.
NOTE: Liquidating Dividend distribution of all the property of a corporation. It is strictly not
dividend income, but rather a sale of shares of stock resulting in capital gain or loss.
Annuities income derived from a capital amount paid to an insurance company. Annuities
are paid on the basis of an individual contract, which can be made by everybody.
Pensions paid for past employment services rendered.
Cancellation of debt The cancellation or forgiveness of indebtedness may have any of three
possible consequences:
1. It may amount to payment of income. If, for example, an individual performs services to
or for a creditor, who, in consideration thereof, cancels the debt, income in that amount
is realized by the debtor as compensation for personal services. The law will consider the
transaction as one where the creditor compensated the debtor for services rendered, and
the debtor paid his indebtedness out of the compensation he received.
2. It may amount to a gift. If a creditor wishes merely to benefit the debtor, and without
any consideration therefore, cancels the debt, the amount of the debt is a gift to the
debtor and need not be included in the latters report of income.
3. It may amount to a capital transaction. If a corporation to which a stockholder is
indebted forgives the debt, the transaction has the effect of a payment of dividend.
Prizes and Awards Contest prizes and awards received are generally taxable. Such payment
constitutes gain derived from labor. The EXCEPTIONS are as follows:
Prizes and awards received in recognition of religious, charitable, scientific, educational,
artistic, literary or civic achievements are EXCLUSIONS from gross income if:
a. The recipient was selected without any action on his part to enter a contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
Prizes and awards granted to athletes in local and international sports competitions and
tournaments held in the Philippines and abroad and sanctioned by their national
associations shall be EXEMPT from income tax.
Damage recovery
Compensatory damages, as constituting returns of capital, are not taxable. Thus,
amounts received as moral damages for personal actions (such as alienation of affection,
libel, slander or breach of promise to marry) are not taxable.
Recovered damages representing recoveries of lost profits are taxable, just as profits are
taxable in the regular course of business. Thus, damages recovered in patent
infringement suits are taxable.
Bad Debt Recovery

Tax Benefit Rule Bad debts claimed as a deduction in the preceding year(s) but
subsequently recovered shall be included as part of the taxpayers gross income in the year of
such recovery to the extent of the income tax benefit of said deduction. There is an income tax
benefit when the deduction of the bad debt in the prior year resulted in lesser income and
hence tax savings for the company.
ILLUSTRATION:
Case A Case B Case C
Year 1
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GROSS INCOME Tax I
Gross Income P500,000 P400,000 P500,000
Less: Allowable Deductions (before write-off
of
Uncollectible Accounts/Debts) (200,000) (480,000) (495,000)
Taxable Income (Net Loss) before write-off P300,000 (P60,000) P 5,000

Deduction for Accounts Receivable written (2,000) (2,000)
off (6,000)
Taxable Income (Net Loss) after write-off P298,000 (P62,000) (P1,000)
Year 2
Recovery of Amounts Written Off P 2,000 P 2,000 P 6,000
Taxable Income on the Recovery P - P 5,000

2,000
Explanation:
In Case A, the entire amount recovered (P2,000) is included in the
computation of gross income in Year 2 because the taxpayer benefited by
the same extent. Prior to the write-off, the taxable income was
P300,000; after the write-off, the taxable income was reduced to
P298,000.
In Case B, none of the P2,000 recovered would be recognized as gross
income in Year 2. Note that even without the write-off, the taxpayer
would not have paid any income tax anyway. The taxable income
before the write-off was actually a net loss.
In Case C, only P5,000 of the P6,000 recovered would be recognized as
gross income in Year 2. It was only to this extent that the taxpayer
benefited from the write-off. The taxpayer did not benefit from the extra
P1,000 because at this point, the P1,000 was already a net loss.
Tax Refund As a general rule, a refund of a tax related to the business or the practice of
profession, is taxable income (e.g., refund of fringe benefit tax) in the year of receipt to the
extent of the income tax benefit of said deduction (i.e., the tax benefit rule applies).
However, the following tax refunds are not to be included in the computation of gross income:
(EXCEPTIONS)
1. Philippine income tax, except the fringe benefit tax
2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit
for such tax in the year it was paid or incurred.
3. Estate and donors taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (Special assessments)
5. Value Added Tax
6. Fines and penalties due to late payment of tax
7. Final taxes
8. Capital Gains Tax
The enumeration of tax refunds that are not taxable (income) is derived from an
enumeration of tax payments that are not deductible from gross income. If a tax is not
an allowable deduction from gross income when paid (no reduction of taxable income,
hence no tax benefit), the refund is not taxable.
VII. EXCLUSIONS FROM GROSS INCOME [Sec. 32(B)]
The following are excluded from gross income: (GIRL CRM)

1. LIFE Insurance
- What is excluded: The proceeds of life insurance policies paid to heirs or beneficiaries
upon the death of the insured.
- Reason: Insurance is a contract of indemnity; hence, the proceeds should be treated as
indemnity and not as gain or income.
- HOWEVER, If such amounts are held by the insurer under an agreement to pay interest
thereon, the interest payments shall be included in gross income.
2. Amount Received by Insured as RETURN of Premium

- What is excluded: The amount received by the insured, as a return of premiums paid by
him under life insurance, endowment, or annuity contracts, either during the term or at
the maturity of the term mentioned in the contract or upon surrender of the contract.
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- Reason: This is a return of capital and not income.
- HOWEVER, if the amounts received by the insured (when added to the amounts already
received before the taxable year under such contract) exceed the aggregate premiums
or considerations paid (whether or not paid during the taxable year), then the excess
shall be included in gross income.
3. GIFTS, Bequests, and Devises

- What is excluded: The value of property acquired by gift, bequest, devise, or descent.
- Reason: These transactions are subject to transfer taxes estate or donors taxes.
- HOWEVER, income from such property, as well as gift, bequest, devise or descent
of income from any property, in cases of transfers of divided interest, shall be
included in gross income.
4. COMPENSATION for Injuries or Sickness

- What is excluded: The amounts received as compensation for personal injuries or
sickness, plus the amounts of any damages received, whether by suit or agreement, on
account of such injuries or sickness.
5. INCOME Exempt under Treaty

- What is excluded: Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.
6. RETIREMENT Benefits, Pensions, Gratuities, etc.-

a. What is excluded: Retirement benefits received under RA 7641 and those received by
officials and employees of private firms in accordance with a reasonable private benefit
plan maintained by the employer.
o REQUISITES for such retirement benefits to be excluded:
i. The retiring employee has been in the service of the same employer
for at least 10 years.
ii. The retiring employee is not less than 50 years of age at the time of
his retirement
iii. The benefits shall be availed of by an employee only once.
iv. That there be a reasonable private benefit plan as defined below.
o A 'reasonable private benefit plan' means
a pension, gratuity, stock bonus or profit-sharing plan maintained
by an employer for the benefit of some or all of his employees
wherein contributions are made by such employer for the
employees
for the purpose of distributing to such employees the earnings and
principal of the fund thus accumulated and
wherein it is PROVIDED in the plan that at no time shall any part
of the corpus or income of the fund be used for, or be diverted to,
any purpose other than for the exclusive benefit of the said
officials and employees.
b. What is excluded: Any amount received by an employee or by his heirs from the
employer as a consequence of separation of such official or employee from the
service of the employer because of
o death
o sickness or
o other physical disability or
o for any cause beyond the control of the employee (i.e., the separation of
the employee must be involuntary and not initiated by him)
c. What is excluded: The social security benefits, retirement gratuities, pensions and
other similar benefits received by resident or nonresident citizens of the Philippines or
aliens who come to reside permanently in the Philippines from foreign government
agencies and other institutions
d. What is excluded: Payments of benefits due or to become due to any person residing in
the Philippines under the laws of the United States administered by the United States
Veterans Administration
e. What is excluded: Benefits received from or enjoyed under the Social Security System
f. What is excluded: Benefits received from the GSIS, including retirement gratuity
received by government officials and employees
CASE LAW:
BIR Ruling 125-98: The phrase "shall not have availed of the privilege under
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EXCLUSIONS FROM GROSS INCOME Tax I
a retirement benefit plan of the same or another employer" found in Sec. 32 (B)
(6) (a) of the Tax Code means that the retiring official or employee must not
have previously received retirement benefits from the same or another
employer who has a qualified retirement benefit plan.
BIR Ruling 143-98: The terminal leave pay of government employees
whose employment is coterminous is exempt since it falls within the

meaning of the phrase "for any cause beyond the control of the said official or
employee" found in Sec. 32(B).
7. MISCELLANEOUS Items
a. Income Derived by Foreign Government
Income derived from (1) investments in the Philippines in domestic securities (loans,
stocks, bonds, etc.) or (2) from interest on deposits in banks in the Philippines by
i. foreign governments
ii. financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and
iii. international or regional financial institutions established by foreign governments.
b. Income Derived by the Government or its Political Subdivisions

Income derived from any public utility or from the exercise of any essential
governmental function accruing to the Government of the Philippines or to any political
subdivision thereof.
c. Prizes and Awards

Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
i. recipient was selected without any action on his part to enter the contest or
proceeding and
ii. recipient is not required to render substantial future services as a condition to
receiving the prize or award
d. Prizes and Awards in Sports Competition

All prizes and awards granted to athletes (1) in local and international sports
competitions (2) sanctioned by their national sports associations.
e. 13th Month Pay and Other Benefits

Gross benefits received by employees of public and private entities provided that the
total exclusion shall not exceed P30,000 which shall cover:
i. Benefits received by government employees under RA 6686
ii. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree)
iii. Benefits received by employees not covered by PD 851 and
iv. Other benefits such as productivity incentives and Christmas bonus
NOTE: What happens if the benefits exceed P30,000? The amount in

excess of P30,000 will be considered as compensation income.
f. GSIS, SSS, Medicare and Other Contributions

GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals
g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness

Gains realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than 5 years.
h. Gains from Redemption of Shares in Mutual Fund

Gains realized by the investor upon redemption of shares of stock in a mutual fund
company
VIII. ALLOWABLE DEDUCTIONS FROM GROSS INCOME
The term taxable income means the pertinent items of gross income specified in the National Internal
Revenue Code [Sec 32], less the deductions [Sec 34] and/or personal and additional exemptions [Sec
35], if appropriate, authorized for such types of income by the Code or other special laws. [Sec 31]
A. Basic Principles Governing Tax Deductions

Construed strictly against the taxpayer claiming it; a clear right must be established
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ALLOWABLE DEDUCTIONS FROM GROSS INCOME Tax I
He who claims it must point to the specific provision of the statute authorizing it, and he must
be able to prove that he is entitled to it.
If the exemption is not expressly stated in the law, the taxpayer must at least be within the
purview of the exemption by clear legislative intent. However, if there is an express mention in
the law or if the taxpayer falls within the purview of the exemption by clear legislative intent,
the rule on strict construction will not apply.
Unlike gross income, there is no catch-all provision for deductions.
Deductions must comply with the substantiation requirement.
B. Kinds of Deductions
1. Itemized Deductions business (or professional) expenses which are ordinary and necessary
in the conduct of business (or in the exercise of profession)
2. Optional Standard Deduction (OSD) may be taken by an individual, in lieu of itemized
deductions
REQUISITES:
1. OSD is available only to citizens or resident aliens; thus non-resident aliens
are not entitled to claim the optional standard deduction
2. The standard deduction is optional; i.e., unless the taxpayer signifies in his
return his intention to elect this deduction, he is considered as having
availed of the itemized deductions;
3. Such election, when made by the qualified taxpayer, is irrevocable for the
year in which made; however, he can change to itemized deductions in
succeeding years;
NOTE HOWEVER: Since an individual in business or in the practice
of profession is required to file quarterly income tax returns, can
he choose the Optional Standard Deduction in his quarterly returns
and then choose the itemized deductions in his annual income tax
return, or vice versa? YES, the Optional Standard Deduction or
Itemized Deductions is against the gross income of the year.
Quarterly income tax returns are only interim computations on the
taxable income for the year.
4. The amount of standard deduction is limited to ten percent (10%) of the
taxpayers gross income. [However, OSD is not available against
compensation income arising out of an employer-employee relationship.]
NOTE: The Gross Income base of OSD is
In the case of an individual in a manufacturing or
merchandising concern: gross income (or profit) from
sales [i.e., sales less cost of sales], and incidental
income, if any
In the case of an individual whose income is from the sale
of services: gross income (or profit) from sale of services
[i.e., gross receipts less direct cost of services], and
incidental income, if any
5. Proof of actual expenses is not required, but the taxpayer should keep
records pertaining to his gross income.
C. Who can avail of deductions? In general, all taxpayers except for those earning
compensation income arising from personal services rendered under an employer-employee relationship
Rules:
1. Compensation income earners can avail themselves only of the deduction in Sec 34(M),
i.e., premium payments on health and/or hospitalization insurance (in addition to the
appropriate personal exemption).
2. The following can claim ITEMIZED deductions:
a. Corporations, whether domestic or (resident) foreign
b. General Professional Partnerships
c. Individuals engaged in trade, profession or business (citizen, resident alien,
non-resident alien doing business in the Philippines)
d. Estates and trusts engaged in trade or business
e. Proprietary educational institutions and hospitals (non-profit)
f. Government-owned or controlled corporations
3. Only individuals, EXCEPT non-resident aliens, can elect between itemized
deductions and OPTIONAL STANDARD DEDUCTION.
QUICK GLANCE
The following are the deductions from gross income:

For individuals with gross compensation income only:
- Premium payments on health and/or hospitalization insurance (if
requisites are complied with)
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- Personal Exemptions
For individuals with gross income from business or practice of profession:
- Optional Standard Deduction [OR] Itemized Deductions
- Premium payments on health and/or hospitalization insurance (if
requisites are complied with)
- Personal Exemptions
For corporations, general professional partnerships, estates and trusts
engaged in business, proprietary educational institutions and hospitals
(non-profit), and government-owned or controlled corporations
- Itemized Deductions
D. Kinds of Itemized Deductions (BELT DID CPR)

1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion
8. Charitable and Other Contributions
9. Research and Development
10.Pension Trust
E. Expenses [Sec 34(A)]

Only deduction allowable Ordinary and necessary trade, business or professional
expenses.
REQUISITES FOR DEDUCTIBILITY of Business Expense: (SPOD RYN)

1. It must be ORDINARY and necessary.
Ordinary - expense which is normal in relation to the taxpayers business and
the surrounding circumstances. The expense need not be recurring.
Necessary where the expenditure is appropriate or helpful in the
development of the taxpayers business or that the same is proper for the
purpose of realizing a profit or minimizing a loss.
The two conditions must both be satisfied, so that an expense which is ordinary
but not necessary, or an expense which is necessary but not ordinary, is not
deductible from gross income. A court may decide on when an expense is, or is not,
ordinary, but as much as possible, it will refuse to substitute its judgment for that of
the taxpayer on the necessity of an expense.
2. It must be paid or incurred during the taxable YEAR.
3. It must be paid or incurred in carrying on or which are DIRECTLY attributable to, the
development, management, operation and/or conduct of the trade, business or
exercise of a profession.
4. The amount must be REASONABLE.
5. It must be SUBSTANTIATED with sufficient evidence, such as official receipts or other
adequate records, showing:
i. the amount of the expense being deducted, and
ii. the direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade, business or
profession of the taxpayer..
6. It is NOT CONTRARY to law, public policy or morals.
7. The tax required to be withheld on the amount paid or payable must have been
PAID to the BIR by the taxpayer, who is constituted as a withholding agent of the
government (for instance, withholding tax on compensation income paid to employees,
fringe benefit tax on fringe benefits given to managerial and supervisory employees,
etc.). (Sec. 2.58.5, RR 2-98 as amended by Sec. 6, RR 14-2002)
What are EXAMPLES of ordinary and necessary expenses?

1. Salaries, wages, and other forms of compensation for personal services actually
rendered, including the grossed-up monetary value (GMV) of fringe benefit furnished by
the employer to the employee.
2. Travel expenses, here and abroad, while away from home in the pursuit of trade,
business or profession
3. Rentals and/or other payments which are required as a condition for the continued use
or possession, for purposes of the trade, business or profession, of property to which the
taxpayer has not taken or is not taking title or in which he has no equity other than that
of a lessee, user or possessor
4. Entertainment, amusement and recreation expenses that are directly connected to the
development, management and operation of the trade, business or profession of the
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taxpayer, or that are directly related to or in furtherance of the conduct of his or its
trade, business or exercise of a profession
Representation Expenses refer to expenses incurred by a taxpayer in
connection with the conduct of his trade, business or exercise of profession,
in entertaining, providing amusement and recreation to, or meeting with, a
guest or guests at a dining place, place of amusement, country club, theater,
concert, play, sporting event, and similar events or places.
Ceiling on entertainment, amusement and recreation expense [Sec.
5, RR 10-2002] The amount of actual entertainment, amusement and
recreation expense paid or incurred within the taxable year by the taxpayer,
but in no case shall such deduction exceed:
- 0.5% of net sales (i.e., gross sales less sales returns/allowances and
sales discounts) for taxpayers engaged in sale of goods or properties
or
- 1.0% of net revenue (i.e., gross revenue less discounts) for
taxpayers engaged in sale of services, including exercise of profession
and use or lease of properties
Bribes, Kickbacks and Other Similar Payments No deduction shall be allowed for any
payment made, directly or indirectly, to an official or employee of the national government,
or to an official or employee of any local government unit, or to an official or employee of a
government-owned or -controlled corporation, or to an official or employee or representative of
a foreign government, or to a private corporation, general professional partnership, or a similar
entity, if the payment constitutes a bribe or kickback.
Special Case: EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL INSTITUTIONS IN

ADDITION to the expenses allowable as deductions, a private educational institution may at
its option elect either:
1. to deduct expenditures otherwise considered as capital outlays of depreciable assets
incurred during the taxable year for the expansion of school facilities, or
2. to deduct allowance for depreciation thereof
F. Interest [Sec 34(B)]

Deduction Allowable The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as
deduction from gross income.
REQUISITES FOR DEDUCTIBILITY (Sec. 34(B) as implemented by RR 13-2000): (WITTY

CReP DL)
1. There is an INDEBTEDNESS.
2. The indebtedness is that of the TAXPAYER.
3. The indebtedness is connected with the taxpayers TRADE, profession, or
business.
4. The interest must be legally DUE.
5. The interest must be stipulated in WRITING.
6. The taxpayer is LIABLE to pay interest on the indebtedness.
7. The indebtedness must have been paid or accrued during the taxable YEAR.
8. The interest payment arrangement must not be between ReLATED taxpayers as
mandated in Sec. 34(B)(2)(b), in relation to Sec. 36(B), both of the Tax Code of 1997.
9. The interest must not be incurred to finance PETROLEUM operations.
10. In case of interest incurred to acquire property used in trade, business or exercise of
profession, the same was not treated as a CAPITAL expenditure,
Limitation on Deduction The taxpayer's allowable deduction for interest expense shall be
reduced by an amount equal to 42% of the interest income subjected to final tax.17
ILLUSTRATION:
On January 15, 2005, Company A, who has a deposit account with BCD Bank, obtained a
loan from XYZ Financing Corporation in connection with the operation of its business. For the
year 2005, the interest income it derived from the said deposit with BCD Bank amounted to P
180,000 on which a final tax of P36,000 had been withheld. Its interest expense on the loan
obtained from XYZ Financing Corporation during the same year amounted to P 150,000.
What is the deductible interest expense? the taxable income and the income tax due of
Company A shall be computed as follows:
Actual Interest expense P 150,000

Less: 42 % of interest income from
17
Amended by RA 9337 (May 24, 2005)
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deposit (42% x P180,000) 75,600
Deductible interest expense P 74,400
When is the limitation not applicable? Interest incurred or paid by the

taxpayer on all its business related taxes shall be fully deductible from
gross income unpaid and shall not be subject to the limitation on deduction.
Thus, such interest expense incurred or paid shall not be diminished by the
percentage of interest income earned which had been subjected to final
withholding tax. (Sec. 4(c), RR 13-2000)
Non-deductible Interest (Sec. 34(B)(2)(b) as implemented by Sec. 4(d), RR 13-2000)

1. Interest paid in advance by the taxpayer who reports income on cash basis
Rule: Such interest shall be allowed as a deduction in the year the
indebtedness is paid.
If the indebtedness is payable in periodic amortizations, the amount of
interest which corresponds to the amount of the principal amortized or paid
during the year shall be allowed as deduction in such taxable year.
2. Interest payments made: (between Related Taxpayers [persons specified under
Section 36 (B)])
1. Between members of a family.
The family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal
descendants.
2. Between an individual and corporation more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or indirectly, by or for such
individual; or
3. Between two corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for the same
individual;
4. Between the grantor and a fiduciary of any trust;
5. Between the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust;
6. Between a fiduciary of a trust and beneficiary of such trust.
3. Interest on indebtedness incurred to finance petroleum exploration
Optional Treatment of Interest Expense At the option of the taxpayer, interest incurred
to acquire property used in trade, business or exercise of a profession may be either
(1) allowed as a DEDUCTION or (2) treated as a CAPITAL EXPENDITURE.
ILLUSTRATION:
Mr. A wanted to acquire a delivery van worth P1,000,000 for his business. To finance this, he
borrowed P1,000,000 from ABC Bank on January 1, 2005. The loan bears interest of 10%,
and both the interest and principal are payable on December 31, 2005. For income tax
purposes, how should Mr. A account for his interest expense in 2005?
ANSWER: Mr. A has two options. First, he may choose to treat the P100,000 (10% of
P1,000,000) interest expense as an outright deduction from his gross income in 2005 (which
deduction shall be subject to the limitation that it be reduced by an amount equal to 42% of
the taxpayers interest income subjected to final tax). Alternatively, he may choose to
capitalize the interest expense by incorporating its amount to the cost of the vehicle obtained
for his business. In this case, the vehicle will be recorded in his books at a cost of P1,100,000
(purchase price of P1,000,000 plus the interest expense of P100,000). The total cost of the
vehicle will then be gradually allowed as deduction from the gross income of the succeeding
taxable years as depreciation expense.
G. Taxes [Sec. 34(C)]

GENERAL RULE: All taxes, national or local, paid or incurred during the taxable year in
connection with the taxpayer's profession, trade or business, are deductible from gross income.
EXCEPTIONS:
Philippine income tax, except the fringe benefit tax
Income tax imposed by authority of any foreign country
EXCEPT when the taxpayer does NOT signify his desire to avail of the tax credit
for taxes of foreign countries, in which case the amount may be allowed as a
deduction subject to the limitations set forth by law. (Note that a taxpayer
qualified to take tax credits for foreign income taxes paid or incurred may
alternatively claim them as deductions from gross income.)
Estate and donors taxes
Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (Special Assessments)
Value Added Tax
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Fines and penalties due to late payment of tax
Final taxes
Capital Gains Tax
REQUISITES FOR DEDUCTIBILITY: (TEDY)

1. It must be paid or incurred within the taxable YEAR.
2. It must be paid or incurred in connection with the taxpayers TRADE, profession or
business.
3. It must be imposed DIRECTLY on the taxpayer.
4. It must not be specifically EXCLUDED by law from being deducted from the
taxpayers gross income.
EXAMPLES of Deductible Taxes:

Import duties
Business taxes
Occupation taxes
Privilege and license taxes
Excise taxes
Documentary stamp taxes
Automobile registration fees
Real property taxes
Limitations on Deductions In the case of a nonresident alien individual engaged in trade

or business (NRAETB) and a resident foreign corporation (RFC), the deductions for taxes shall
be allowed only if and to the extent that they are connected with income from sources
within the Philippines.
Special Treatment of Foreign Income Tax A taxpayer qualified to take tax credits for
foreign income taxes paid or incurred may alternatively claim them as deductions from gross
income.
What is tax credit? A credit for foreign income tax paid or incurred reduces the
Philippine income tax that should be paid. Tax credit is given to a taxpayer in order to
provide relief from too onerous a burden of taxation in case where the same income is
subject to foreign income tax and the Philippine income tax. In determining the tax
credit that may be allowed a taxpayer, the foreign income tax should be understood to
mean tax proper only, and no credit shall be taken for any amount paid or incurred to
the foreign country which represents interest, surcharge or penalty incident to
delinquency on the payment of the tax. In taking a tax credit:
Tax credit is taken for The foreign income tax

Tax credit is taken against The Philippine income tax
Who can claim a tax credit, and in what amount18?

1. Citizens the amount of income taxes paid or incurred during the taxable year
to any foreign country
2. Domestic Corporations the amount of income taxes paid or incurred during
the taxable year to any foreign country
3. Member of General Professional Partnership (GPP) his proportionate share of
such taxes of the general professional partnership paid or incurred during the
taxable year to a foreign country, if his distributive share of the income of such
partnership is reported for taxation
4. Beneficiary of an estate or trust his proportionate share of such taxes of the
estate or trust paid or incurred during the taxable year to a foreign country, if
his distributive share of the income of such trust is reported for taxation
Who may NOT claim a tax credit?

1. Alien individuals
2. Foreign Corporations
What are the substantiation requirements? The tax credits shall be allowed only
if the taxpayer establishes to the satisfaction of the Commissioner the following:
1. The total amount of income derived from sources without the Philippines;
2. The amount of income derived from each country, the tax paid or incurred to
which is claimed as a credit under said paragraph, such amount to be
18
Amounts are subject to the limitations (per country and overall) set forth by law.
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determined under rules and regulations prescribed by the Secretary of Finance;
and
3. All other information necessary for the verification and computation of such
credits.
What amount may be taken as a tax credit? The amount of tax credit allowed is
equivalent to the tax paid or incurred to a foreign country during the taxable year but
not to exceed the following limits:
1. [Per Country Limit] The amount of tax credit shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer's
taxable income from sources within such country bears to his entire taxable
income for the same taxable year; and
2. [Worldwide Limit] The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer's
taxable income from sources without the Philippines taxable bears to his entire
taxable income for the same taxable year.
i.e.,
1. Taxable Income per Foreign Country x Philippine income tax =
limit
Worldwide Taxable Income
2. Taxable Income for all Foreign Countries x Philippine income tax =

limit
Worldwide Taxable Income
NOTE: The second limitation applies where the taxpayer derives income
from more than one foreign country.
ILLUSTRATION:
D Co., a domestic corporation, had the following data for a year on taxable income and
income taxes paid:
Taxable Income, Country A P200,000
Taxable Income, Country B P100,000
Taxable Income, Philippines P700,000
Income Tax Paid Country A P 60,000
Income Tax Paid Country B P 38,000
What is the Philippine income tax still due, after credit for foreign income taxes? Should D
Co. choose to treat income taxes paid to foreign countries as deductions from gross income,
what is its Philippine income tax?
Answer:
Scenario A: Tax Credit option is chosen.
Step 1: Compute for total taxable income and Philippine income tax.
Taxable Income, Country B 100,000
Taxable Income, Philippines 700,000
Total Taxable Income from sources
within and without the Philippines P1,000,000
Philippine Income Tax (P1,000,000 x 32% P350,000
Step 2: Compute for Limitation A (Per Country Basis).

To get tax credit per country under Limitation A, this formula is followed:
Taxable income from foreign country x Phil. income tax = Tax credit
Taxable income from all sources
The result after applying the formula above is compared to the tax actually paid for
each foreign country. The lower of the two amounts for each foreign country will be
added to get the total tax credit allowed under Limitation A.
Amount Allowed
(Whichever is Lower)
Country A
Limitation A (200/1000 x 350,000) P 70,000 P 60,000
Actually paid to Country A 60,000
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Country B
Limitation B (100/1000 x 350,000) P 35,000 35,000
Actually paid to Country B 38,000
Tax credit allowed under Limitation P 95,000
A
Step 3: Compute for Limitation B (Overall Basis).

To get tax credit (overall basis) under Limitation B, this formula is followed:
Taxable income from sources outside the Phils. x Phil. income tax = Tax
credit
Taxable income from all sources
The result after applying the formula above is compared to the tax actually paid in
total to foreign countries. The lower of the two amounts will be added to get the
total tax credit allowed under Limitation B.
Amount Allowed
(Whichever is Lower)
Overall Limit: 300/1000 x 350,000 P 105,000
Total foreign income taxes paid 98,000
Tax credit allowed under Limitation P 98,000
B
Step 4: Compare the respective tax credits allowed under Limitation A and Limitation B. The
lower of the two amounts is the final allowable tax credit. In this case, the amount computed
under Limitation A (P95,000) is lower, thus it becomes the final allowable tax credit.
Step 5: Compute for the income tax still due.

Philippine Income tax P350,000
Less: Allowable Tax Credit 95,000
Philippine Income Tax still due P255,000
Scenario B: Deduction option is chosen.

Taxable Income, Country B 100,000
Taxable Income, Philippines 700,000
Total Taxable Income (before deduction
for foreign income tax) P1,000,000
Less: Deductions for Foreign Income Taxes
Paid
Country A P60,000
Country B P38,000 (98,000)
Net Taxable Income P902,000
Philippine Income Tax (902,000 x 35%) P315,700
H. Losses [Sec. 34(D)]

Deduction Allowable Losses actually sustained during the taxable year and not compensated
for by insurance or other forms of indemnity shall be allowed as deductions:
If incurred in trade, profession or business;
Of property connected with the trade, business or profession, if the loss arises from fires,
storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.
Extent of Losses Allowable: The entire amount of the loss, as the case may be, shall be
recognized.
REQUISITES FOR DEDUCTIBILITY: (CATT DID)

1. The loss must be that of the TAXPAYER.
The loss is personal to the taxpayer and is not transferable or usable by
another. The loss of a predecessor partnership is not deductible by a successor
corporation. The loss of the parent company may not be deducted by its
subsidiary.
2. The loss must be ACTUALLY sustained and charged off within the taxable year.
As a general rule, the loss is deductible in the year the loss happens. However,
if the loss is compensated by insurance or otherwise, the loss is postponed to a
subsequent year in which it appears that no compensation at all can be had, or
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there is a remaining net loss (or there is no full compensation). The rule is that
loss deduction will be denied, if there is a measurable right to compensation for
the loss, with ultimate collection reasonably clear. So where there is reasonable
ground for reimbursement, the taxpayer must seek his redress and may not
secure a loss deduction until he establishes that no recovery may be had. In
other words, the taxpayer must first exhaust his remedies to recover or reduce
his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187)
ILLUSTRATION: In 2001, H Company had a shipment with a cost of
P600,000 and insured against marine perils for the same amount. The
vessel carrying the property sank and the insurance company refused to
admit liability under the policy. An action was brought in court in 2002, and
the insurance company agreed to pay P500,000. The loss of P100,000 was
a proper deduction in 2002.
3. The loss is evidenced by a CLOSED and completed transaction.
There should be an identifiable event that fixes the loss. For instance, when a
loss results from a sale, the consummation of the sale is the identifiable event
that fixes the loss, and the deduction should be claimed in the year that the sale
was consummated. A sale is consummated only when there is delivery.
4. The loss is not claimed as a DEDUCTION for estate tax purposes.
The purpose is to avoid the item from being deducted twice, to the detriment of
the Government.
5. The loss must not be compensated by INSURANCE or other forms of indemnity.
6. The loss must be connected with the taxpayers TRADE, business or profession.
7. In the case of casualty loss, declaration of loss (Sworn DECLARATION of Loss) must
be filed within 45 days from the occurrence of the casualty loss. (RR 12-77)
Despite concurrence of requisites, when is loss nonetheless NOT deductible? - In

computing net income, no deductions shall in any case be allowed in respect of losses from
sales or exchanges of property directly or indirectly [between Related Taxpayers]
- The family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal
descendants.
2. Between an individual and corporation more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or indirectly, by or for such
individual; or
3. Between two corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for the same
individual;
5. Between the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust;
Obsolescence and Worthlessness

Obsolescence of property is deductible as a loss when the property has to be discarded
permanently because its usefulness is suddenly terminated.
Worthlessness may be a ground for deductibility of the value of the property as a loss
when it can be satisfactorily shown that the property had indeed become valueless.
Other Types of Losses Recognized by the Tax Code (and Corresponding Treatment)
Shrinkage in Value of Stocks A person possessing stock of a corporation cannot deduct
from gross income any amount claimed as a loss merely on account of shrinkage in value
of such stock through fluctuation of the market or otherwise. The loss allowable in such
case is that actually suffered when the stock is disposed of. If stock of a corporation
becomes worthless, its cost or other basis determined in accordance with Revenue
Regulation 2-98 may be deducted by the owner in the taxable year in which the stock
became worthless, provided a satisfactory showing of its worthlessness be made, as in
the case of bad debts.
Wagering Losses Wagering losses are deductible only to the extent of wagering gains.
Therefore, if there are no wagering gains, wagering loss cannot be deducted. [Wagering
gains and losses gains and losses from transactions where the outcome depends upon
chance.]
Loss from Wash Sales of Stocks or Securities [Sec. 38] A loss from a wash sale of
stock or securities is [generally] not deductible from gross income. A wash sale is a sale
under the following circumstances:
1. There was a sale of stock or securities at a loss.
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2. Within a period beginning thirty days before, and ending thirty days after, the
date of sale or disposition (known as the sixty-one day period), there was an
acquisition of shares or securities (or option to acquire shares or securities).
i.e.: Date of sale

-------------------------------------------- x ---------------------------
--------------------
Acquisition occurred 30 days prior to the sale OR 30 days after the sale
EITHER:
3. The acquisition, or option, should be a purchase or exchange upon which gain

or loss is recognized under the income tax law.
4. The stock or securities acquired were substantially the same as those disposed
of.
5. The taxpayer is NOT a dealer in securities.
INCOME TAX RULE: On the shares sold at a loss with covering acquisitions, NO
LOSS shall be recognized. On the shares sold at a loss with no covering acquisitions,
CAPITAL LOSS shall be recognized (See XIII. Capital Gains and Losses, for the
income tax treatment). The loss not recognized shall be adjusted into (i.e., added
to) the basis of the shares acquired within the sixty-one day period.
ILLUSTRATION:
S Co., not a dealer in securities, on December 27, 2000, sold for P90,000, 1,000
shares of common stock of ZZ Company, that it acquired on January 20, 2000 for
P110,000. On January 5, 2001, or nine days after the sale, it acquired 900 shares of
common stock of the same company for P90,000. On June 10, 2001, the latest
acquisition was sold for P120,000.
INCOME TAX IMPLICATIONS:

There would have been a loss not recognized of P18,000 on the sale of
December 27, 2000.
There would have been a gain of P12,000 on the sale of June 10, 2001.
SUPPORTING SOLUTION:
a. Determine if the sale is a wash sale YES, there is a wash sale because nine
days after the December 27, 2000 sale (or within the sixty-one day period), S.
Co. (which is not a dealer in securities) acquired shares of stock which were the
same as those disposed of.
b. Computation of loss not recognized and recognized

Acquisition Cost P110,000
Less: Selling Price 90,000
Total Loss P20,000
Number of shares sold at a loss 1,000

Less: Number of shares acquired within the 61-day period 900
Number of shares acquired with no matching acquisition 100
Loss on a wash sale, not recognized (900/1,000 * 20,000) P18,000
Capital Loss recognized (100/1,000 * 20,000) P2,000
c. Computation of basis of the shares acquired on January 5, 2001 (i.e., adjusted

cost).
Acquisition Cost P 90,000
Add: Loss not recognized 18,000
Basis of the shares acquired on January 5, 2001 P108,000
d. Computation of the gain on the sale of June 10, 2001

Selling Price P120,000
Less: Adjusted Basis 108,000
Gain on the Sale P 12,000
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What if the taxpayer is a dealer in securities, and the transaction from which the
loss resulted, was made in the ordinary course of the business of such dealer?
The loss is deductible in full.
Corporate readjustment: Merger or Consolidation19 [Sec. 40(C)]

A merger or consolidation has income tax consequences to the corporation which is a
party to the merger or consolidation, to its stockholders, and to its security holders. To
the corporation, or to its stockholders, or to its security holders, loss is not recognized
from the merger or consolidation.
ILLUSTRATION:
Y Co. was merged into Z Co. Y Co. transferred its properties with a book value of
P2,000,000 to Z Co., for which it received shares of stock of Z Co. with a fair market
value of P1,800,000. Mr. AA was a stockholder of Y Co., and he was asked to surrender
his shares in Y Co. (which he acquired at a cost of P200,000) to the company (Y Co.),
and received in return for the shares surrendered, shares of stock of Z Co. with a fair
market value of P180,000. The merger had the following tax consequences:
To Y Co.:
Fair Market Value of shares of Z Co. received P1,800,000
Less: Book Value of properties transferred 2,000,000
Loss not recognized P 200,000
To Mr. AA:
Fair Market Value of Z Co. shares received P180,000
Less: Cost of Y Co. shares surrendered 200,000
Suppose a merger or consolidation resulted in a GAIN to the corporation, or stockholder,

or security holder, will the gain be recognized? Gain will be recognized only if on the
exchange under the merger or consolidation, the taxpayer received cash or property.
The gain to be recognized should not exceed the sum of money and the fair market
value of the property received.
ILLUSTRATION:
BB Co. was merged into CC Co. Mr. DD is a stockholder of BB Co. Mr. DD was asked to
surrender his shares of stock of BB Co. (acquired by him for P100,000) to that
corporation, and in exchange, he received shares of stock of CC Co. with a fair market
value of P110,000, plus cash of P20,000. One month after the merger, Mr. DD sold his
CC Co. shares for P120,000.
INCOME TAX IMPLICATIONS:

There would have been a gain of P20,000 on the merger, and a gain of
P20,000 on the sale.
a. Computation of the gain of Mr. DD from the merger
FMV of the CC Co. shares received P110,000
Add: Cash received 20,000
Total Consideration received P130,000
Less: Cost of BB shares surrendered 100,000
Indicated Gain P 30,000
Gain to be recognized P 20,000
b. Basis to Mr. DD of the shares of CC Co. received

Basis of BB Co. shares surrendered P100,000
Less: Cash received 20,000
Balance P 80,000
Add: Gain recognized 20,000
Basis to DD of CC shares received P100,000
19
No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation -
(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation,
which is a party to the merger or consolidation; [property for stock] or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the
stock of another corporation also a party to the merger or consolidation; [stock for stock ] or
(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in
such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. [securities
for securities]
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c. Computation of the gain on the sale of BB shares
Less: Basis 100,000
Gain on the sale P 20,000
Corporate readjustment: Transfer to Controlled Corporation [Sec. 40(C)]

When a taxpayer transfers property to a corporation, in consideration of stock received
for the transfer, as a result of which transfer, the taxpayer (alone or together with others
not exceeding four [or a total of five]) gains control of the corporation20, no loss is
recognized on the transfer of property.
ILLUSTRATION:
Mr. EE transferred property to FF Co., as a result of which transfer Mr. EE acquired
control of FF Co. The property transferred had a basis to Mr. EE of P500,000, and as
consideration, he received shares of stock of FF Co. with a fair market value of
P490,000. The consequence of the transaction was:
FMV of the shares of FF Co. received P490,000
Less: Basis of the property transferred 500,000
Suppose the transfer resulted in a GAIN to the transferor, will the gain be recognized?
Gain will be recognized only if on the transfer, the taxpayer received cash or property in
addition to the shares received. The gain to recognize shall not exceed the sum of
money and fair market value of the property received.
ILLUSTRATION:
Mr. GG transferred property to HH Co., as a result of which transfer, Mr. GG acquired
control of the company. The property transferred had a basis to Mr. GG of P500,000, and
as consideration, he received shares of stock of HH Co. with a fair market value of
P550,000 plus cash of P40,000. One month after the transfer, Mr. GG sold the HH Co.
shares for P560,000.
INCOME TAX IMPLICATION:

There would have been a gain of P60,000 to Mr. GG from the sale.
a. Computation of the gain on the transfer
FMV of the HH Co. shares received P550,000
Add: Cash received 40,000
Total Consideration received P590,000
Less: Basis of the property transferred 500,000
Indicated Gain P 90,000
Gain to be recognized P 40,000
b. Basis to Mr. GG of the shares of HH Co. received

Basis of the property transferred P500,000
Less: Cash received 40,000
Balance P460,000
Add: Gain recognized 40,000
Basis to GG of HH Co. shares received P500,000
c. Computation of the gain on sale of HH Co. shares

Less: Basis 500,000
Gain on the sale P 60,000
If before the transfer to the corporation, the transferor already had

control over the corporation, the gain or loss on the transfer will be
recognized.
ILLUSTRATION:
Mr. II transferred property to JJ Co., of which he had control. The property had a
basis to him of P500,000. JJ Co. paid him with shares of stock with a fair market
value of P450,000. Will there be a loss to recognize? Yes. This transfer does not
qualify as a corporate readjustment.
Requirement for deductibility BIR Ruling 383-87 (November 25, 1987)
20
Previous to the transfer there was no control, and it was the transfer that resulted in control.
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1. Plan of reorganization should be adopted by each of the corporation shown
by acts of its duly constituted officers
o Copy of the plan
o Complete statement of the cost or other basis of all property
o Statement of the amount of stock or securities and other property
or money received from the exchange, including a statement of all
distributions or other dispositions made thereof
o Statement of the amount and nature of any liabilities assumed
upon the exchange.
2. Taxpayer (other than the corporation party to the reorganization) who
received stocks or securities and other property shall be incorporated in his
ITR for the taxable year in which the exchanges takes place a complete
statement of facts pertinent to the non-recognition of gain or loss including:
o Statement of the cost or other basis of the stock or securities

transferred in the exchange
o Statement in full amount of the stocks, securities, other property,
money including liabilities assumed upon the exchange.
Capital Losses (See XIII. Capital Gains and Losses)
Abandonment Losses
- In the event a contract area where petroleum operations are undertaken is
partially or wholly abandoned, ALL accumulated exploration and
development expenditures pertaining thereto shall be allowed as a
deduction:
o Provided, That accumulated expenditures incurred in that area prior
to January 1, 1979 shall be allowed as a deduction only from any
income derived from the same contract area.
o In all cases, notices of abandonment shall be filed with the
Commissioner.
- In case a producing well is subsequently abandoned, the unamortized costs
thereof, as well as the undepreciated costs of equipment directly used
therein, shall be allowed as a deduction in the year such well, equipment or
facility is abandoned by the contractor:
o Provided, That if such abandoned well is reentered and production is
resumed, or if such equipment or facility is restored into service, the
said costs shall be included as part of gross income in the year
of resumption or restoration and shall be amortized or depreciated,
as the case may be.
Net Operating Loss Carry-Over (NOLCO) [Sec. 34(D)] The net operating loss21 of the
business for any taxable year immediately preceding the current taxable year, which had
not been previously offset as deduction from gross income shall be carried over as a
deduction from gross income for the next three (3) consecutive taxable years22
immediately following the year of such loss.
- REQUISITES for application of NOLCO:
1. Any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction
2. A net operating loss carry-over (NOLCO) shall be allowed only if there
has been no substantial change in the ownership of the business or
enterprise.
There is no substantial change when:
1. not less than 75% in nominal value of outstanding
issued shares, if the business is in the name of the
corporation, is held by or on behalf of the same
persons; or
2. not less than 75% of the paid up capital of the
corporation, if the business is in the name of the
corporation, is held by or on behalf of the same
persons.
21
Net operating loss is the excess of allowable deductions over gross income (as defined in Sec. 32(A) of the NIRC).
22
Exception to the Three-Year Rule For mines other than oil and gas wells, a net operating loss without the benefit of
incentives provided for under the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation
may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss.
The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of
such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the
next remaining four (4) years.
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- Applicability of the 75% interest rule The 75% equity, ownership or

interest rule shall only apply to a transfer or assignment of the taxpayer's net
operating losses as a result of or arising from the said taxpayer's merger
or consolidation or business combination with another person. In case
the transfer or assignment of the taxpayer's net operating losses arises from
the said taxpayer's merger, consolidation or combination with another person,
the transferee or assignee shall NOT be entitled to claim the same as
deduction from gross income UNLESS, as a result of the said merger,
consolidation or combination, the shareholders of the transferor/assignor,
or the transferor (in case of other business combinations) gains control of
at least 75% or more in nominal value of the outstanding issued shares or
paid up capital of the transferee/assignee (in case the transferee/assignee is a
corporation) or 75% or more interest in the business of the transferee/assignee
(in case the transferee/assignee is other than a corporation). (Sec. 2.4, RR 14-
2001)
o BIR Ruling 011-02, March 27, 2002 The 75% equity,
ownership or interest rule shall only apply to a transfer or
assignment of the taxpayers net operating losses as a result of or
arising from said taxpayers merger or consolidation or business
combination with another person. [In this case,] since the transfer of
the shares by the previous stockholders were through straight
purchase and sale and not through merger, consolidation or business
combination, such transfer did not cause a substantial change in
ownership.
- Substantial Change in the Ownership of the Business or Enterprise

The term "Substantial Change in the Ownership of the Business or Enterprise"
shall refer to a change in the ownership of the business or enterprise as a result
of or arising from its merger or consolidation or combination with another
person in the manner as provided in RR 14-2001. Any change in ownership
as a result of or arising thereunder shall not be treated as a substantial
change for as long as the stockholders of the party thereto, to whom
the net operating loss is attributable, gains or retains 75% or more
interest after such merger or consolidation or combination.
o Time of Determination of Substantial Change in the
Ownership of the Business The substantial change in the
ownership of the business or enterprise shall be determined as of
the end of the taxable year when NOLCO is to be claimed as
deduction (e.g., in the case of merger or consolidation of two or
more corporations, such change shall be determined based on the
ownership of the outstanding shares of stock issued or based on
paid-up capital as of the end of the taxable year, and as a result of
or arising from the said merger or consolidation).
- By or on Behalf of the Same Persons The term "By or on Behalf of the

Same Persons" shall refer to the maintenance of ownership despite change
as when:
1. No actual change in ownership is involved in case the transfer
involves change from direct ownership to indirect ownership, or vice
versa.
ILLUSTRATION:
Facts: P Corporation owns Q Corporation that has NOLCO. P
Corporation transfers Q Corporation's shares to R Corporation in
exchange for 100% of R Corporation shares.
Held: Q Corporation's NOLCO is retained because Q
Corporation's shares arc held "by" R Corporation "on behalf of" P
Corporation, the original owner.
o No actual change in ownership is involved as in the case of merger of
the subsidiary into the parent company.
ILLUSTRATION:
Facts: X Corporation owns 100% of Y Corporation. Y Corporation
owns 100%, of Z Corporation. Z Corporation has NOLCO. Z
Corporation is merged into Y Corporation.
Held: Z Corporation's NOLCO should be retained and
transferred to Y Corporation. Prior to the merger, X Corporation
already indirectly owned Z Corporation, i.e., Z Corporation's
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shares were held "by" Y Corporation "on behalf of" X Corporation.
After the merger, X now directly owns Z Corporation [absorbed
corporation] which continues to exist in Y Corporation.
- Taxpayers Entitled to Deduct NOLCO from Gross Income. Any

individual (including estates and trusts) engaged in trade or business or in the
exercise of his profession, and domestic and resident foreign corporations
subject to the normal income tax (e.g., manufacturers and traders) or
preferential tax rates under the Code (e.g., private educational institutions,
hospitals, and regional operating headquarters)
o Special Rule in case taxpayer is an individual An individual
who claims the 10% optional standard deduction shall not
simultaneously claim deduction of the NOLCO. Further, the three-
year reglementary period shall continue to run notwithstanding the
fact that the aforesaid individual availed of the 10% optional
standard deduction during the said period.
o Special Rule in case taxpayer is a corporation Corporations
cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT
in any taxable year. The three-year reglementary period on the
carry-over of NOLCO shall continue to run notwithstanding the fact
that the corporation paid its income tax under the "Minimum
Corporate Income Tax" computation.
o EXCEPTIONS (Who are not entitled to deduct NOLCO):
1. Offshore Banking Unit (OBU) of a foreign banking
corporation, and Foreign Currency Deposit Unit (FCDU) of a
domestic or foreign banking corporation, duly authorized as
such by the Bangko Sentral ng Pilipinas (BSP);
2. An enterprise registered with the Board of Investments
(BOI) with respect to its BOI-registered activity enjoying the
Income Tax Holiday incentive. Its accumulated net
operating losses incurred or sustained during the period of
such Income Tax Holiday shall not qualify for purposes of
the NOLCO;
3. An enterprise registered with the Philippine Economic Zone
Authority (PEZA), pursuant to R.A. No. 7916, as amended,
with respect to its PEZA-registered business activity. Its
accumulated net operating losses incurred or sustained
during the period of its PEZA registration shall not qualify
for purposes of the NOLCO;
4. An enterprise registered under R.A. No. 7227, otherwise
known as the Bases Conversion and Development Act of
1992, e.g., SBMA-registered enterprises, with respect to its
registered business activity. Its accumulated net operating
losses incurred or sustained during the period of its said
registered operation shall not qualify for purposes of the
NOLCO;
5. Foreign corporations engaged in international shipping or air
carriage business in the Philippines; and
6. In general, any person, natural or juridical, enjoying
exemption from income tax, pursuant to the provisions of
the Code or any special law, with respect to its operation
during the period for which the aforesaid exemption is
applicable. Its accumulated net operating losses incurred or
sustained during the said period shall not qualify for
purposes of the NOLCO.
ILLUSTRATION OF NOLCO:
(In Pesos) 2000 2001 2002 2003 2004

Gross Income 500,000 600,000 700,000 500,000 800,000
Less: Deductions 900,000 500,000 750,000 420,000 450,000
Net Loss [OR] (400,000) (50,000)
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Net Income before 100,000 80,000 350,000
NOLCO*
Less: NOLCO

From 2000
(100,000) (80,000)

From 2002 (50,000)
Taxable Income 0 0 0 0 300,000
* - whichever is applicable
Explanation:
- The unused net operating loss of P220,000 (400,000 100,000 80,000) of
the year 2000 could not be carried over beyond 2003. The net operating loss of
2002 could be carried over to 2004, since it is within the three-year period.
- Q: As of yearend of 2004, what amount of NOLCO is available to the company
for offsetting against (potential) gross income of succeeding taxable years?
Answer: None. While there was an unused portion of the 2000 NOLCO, such
had already expired by yearend of 2003. The 2002 NOLCO (P50,000) was
completely used up in 2004. There is, therefore, no NOLCO available to the
company for year 2005 and thereafter.
I. Bad Debts [Sec. 34(E)]

Defined: debts resulting from the worthlessness or uncollectibility, in whole or in part, of
amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of
income from goods sold or services rendered. (Sec. 2, RR 5-99 as amended by RR 25-2002)
Deduction Allowed: Debts due to the taxpayer actually ascertained to be worthless and charged
off within the taxable year
Actually ascertained to be worthless In general, a debt is not worthless simply

because it is of doubtful value or difficult to collect. Worthlessness is not determined by an
inflexible formula or slide rule calculation but upon the exercise of sound business judgment.
The determination of worthlessness in a given case must depend upon the particular facts and
the circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis
of a mere hope of ultimate collection or because of a continuance of attempts to collect notes
which have long become overdue, and where there is no showing that the surrounding
circumstances differ from those relating to other notes which were charged off in a prior year.
While a mere hope probably will not justify postponement of the deduction, a reasonable
possibility of recovery will permit the account to be carried along notwithstanding that the
probabilities are that the debt may not be collected at all.
Good faith is not enough. There are two requisites before a taxpayer may
charge off and deduct a debt. He must ascertain the debt to be worthless in the
year for which the deduction is sought, and that in doing so, he acted in good
faith. However, good faith on the part of the taxpayer is not enough. He must
show also that he had reasonably investigated the relevant facts and had
drawn a reasonable inference from the information thus obtained by him.
Where a taxpayer has failed to attach to his tax returns a statement showing the
propriety of the deductions therein made for alleged bad debts, the account
written off will be disallowed. (Collector v. Goodrich International Rubber Co., 21
SCRA 1336)
- What does good faith require? Good faith does not require that
the taxpayer be an "incorrigible optimist" but on the other hand, he
may not be unduly pessimistic. Creditors do not have to wait until
some turn of the wheel of fortune may bring their debtors into
affluence. The taxpayer may strike a middle course between pessimism
and optimism and determine debts to be worthless in the exercise of
sound business judgment based upon as complete information
as is reasonably ascertainable. The taxpayer need not have perfect
discernment. (Sec. 2, RR 5-99 as amended by RR 25-02)
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"Actually charged off from the taxpayers books of accounts" This phrase means that
the amount of money lent by the taxpayer (in the course of his business, trade or profession)
to his debtor had been recorded in his books of account as a receivable has actually become
worthless as of the end of the taxable year, that the said receivable has been cancelled and
written-off from the said taxpayer's books of account. A mere recording in the taxpayer's
books of account of estimated uncollectible accounts does not constitute a write-off of the said
receivable, hence, shall not be a valid basis for its deduction as a bad debt expense. In no case
may any bad debt deduction be allowed unless the facts pertaining to the money or property
lent and its cancellation or write-off from the taxpayer's accounting records, after having been
determined that the same has actually become worthless, have been complied with by the
taxpayer. (Sec. 2, RR 5-99 as amended by RR 25-02)
EXCEPTIONS: The following are not deductible as bad debts:

1. those debts not connected with profession, trade or business
2. those sustained in a transaction entered into between family members or related
taxpayers23
REQUISITES FOR DEDUCTIBILITY: (PICU)

1. There must be an existing INDEBTEDNESS due to the taxpayer, which must be valid
and legally demandable.
2. The debt must be connected with PROFESSION, trade or business.
Only business-related bad debts are allowed as deductions from the taxpayers
gross income. Personal debts from an insolvent debtor cannot be deducted from
the creditors gross income.
3. The debt must be actually ascertained to be worthless or UNCOLLECTIBLE. (e.g.,
bankrupt debtor)
Factors to consider to ascertain uncollectibility Before a taxpayer may
charge off and deduct a debt, he must ascertain and be able to demonstrate
with reasonable degree of certainty the uncollectibility of the debt. The
Commissioner of Internal Revenue will consider ALL PERTINENT
EVIDENCE, including the value of the collateral, if any, securing the debt
and the financial condition of the debtor in determining whether a debt is
worthless, or the assigning of the case for collection to an independent
collection lawyer who is not under the employ of the taxpayer and who shall
report on the legal obstacle and the virtual impossibility of collecting the same
from the debtor and who shall issue a statement under oath showing the
propriety of the deductions thereon made for alleged bad debts. Thus, where
the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all
probability not result in the satisfaction of execution on a judgment, a
showing of those facts will be sufficient evidence of the worthlessness of the
debt for the purpose of deduction. (Sec. 3, RR 5-99 as amended by RR 25-
2002)
Other factors that may be taken into account The flight or disappearance
of the debtor, the insolvency of the debtor, or the death of the debtor with
insufficient properties to pay creditors, may indicate worthlessness of the debt.
Note: A creditor cannot deduct the debt of an insolvent debtor as long as it is
possible to proceed against the guarantor or surety who is insolvent. All efforts
must be exhausted to collect from the guarantor or surety.
4. The debt must be actually CHARGED OFF the books of accounts of the taxpayer as
of the end of the taxable year.
NOTE: The debts due a taxpayer may arise out of securities held. BUT in a case where
securities are ascertained to be worthless and charged off within the taxable year, and are
capital assets, the loss to the taxpayer (other than a bank or trust company incorporated under
the laws of the Philippines a substantial part of whose business is the receipt of deposits) will
not be treated as bad debts, but as capital loss on the last day of the taxable year
23
- The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse,
ancestors, and lineal descendants.
2. Between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for such individual; or
3. Between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or
indirectly, by or for the same individual;
5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust;
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(See XIII. Capital Gains and Losses for the income tax treatment). The date that the securities
were written off is immaterial. [Sec. 34(E)(2)]24
GENERAL RULE: The determination by the Commissioner of Internal Revenue as to the

worthlessness of bad debt is adequate.
EXCEPTIONS: There are two groups of companies that are required to submit additional
documents or to secure approval from their regulatory agencies before they are allowed
to deduct bad debts from gross income. Thus:
1. In the case of banks, the Commissioner of Internal Revenue shall determine
whether or not bad debts are worthless and uncollectible. Without prejudice to
the Commissioners determination of the worthlessness and uncollectibility of
debts, the taxpayer shall submit a Bangko Sentral ng Pilipinas (BSP) / Monetary
Board written approval of the writing off of the indebtedness from the banks'
books of accounts at the end of the taxable year.
i. Requirements for deductibility (RR5-99 March 10, 1999)
Bad debts uncollected for 6 months
Resolution by the BOD of the bank
Approval by the monetary board
2. In no case may a receivable from an insurance or surety company be
written-off from the taxpayer's books and claimed as bad debts deduction
unless such company has been declared closed due to insolvency or for any
such similar reason by the Insurance Commissioner.
Recovery of Bad Debts Previously Deducted (Tax Benefit Rule) The recovery of bad
debts previously allowed as deduction in the preceding year or years shall be included as part
of the taxpayer's gross income in the year of such recovery to the extent of the income tax
benefit of said deduction.
Example: If in the year the taxpayer claimed deduction of bad debts written-off, he
realized a reduction of the income tax due from him on account of the said deduction, his
subsequent recovery thereof from his debtor shall be treated as a receipt of realized
taxable income. Conversely, if the said taxpayer did not benefit from the deduction of
the said bad debt written-off because it did not result to any reduction of his income tax
in the year of such deduction (i.e. where the result of his business operation was a net
loss even without deduction of the bad debts written-off), then his subsequent recovery
thereof shall be treated as a mere recovery or a return of capital, hence, not treated as
receipt of realized taxable income.
J. Depreciation [Sec. 34(F)]

Defined: Depreciation is the gradual diminution of the useful value of tangible property
resulting from wear and tear and normal obsolescence. The term is also applied to amortization
of the value of intangible assets (i.e., patents), the use of which in the trade or business is
definitely limited in duration.
Deduction Allowable: There shall be allowed as a depreciation deduction a reasonable allowance

for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property
used in the trade or business. The rationale for this is that property gradually approaches a
point where its usefulness is exhausted.
What if the property is used in business and for personal purposes? Rule: The
depreciation expense must be pro-rated; only the portion attributable to business use is
deductible.
e.g.,
From the evidence, it appears that the car of the petitioner was used more for
business than for personal purposes. He was, and is until now, a law practitioner, a
law professor in two law schools and was, during the year in question, engaged in
business as an importer. He had only one car at the time. Consequently, of the
value of the depreciation of the car may be considered as business related, while
thereof represents non-deductible personal expense. The same is true as regards
the salary of petitioners driver. (Jamir v. Collector, CTA Case No. 443, November
28, 1959)
Who may take depreciation: The person who sustains an economic loss from the decrease in
property value due to depreciation gets the deduction. Ordinarily, this is the person who owns
and has a capital investment in the property.
24
ILLUSTRATION: Mr. A purchased bonds of B Co. on March 10, 2000 for P100,000 and held them as capital assets. On
February 2, 2001, B Co. was declared by the Court as insolvent, and the bonds were totally worthless. Mr. A wrote off the
bonds from his books of accounts on February 4, 2001. There is no bad debt for Mr. A. He would be considered to have a
capital loss of P100,000 for the year 2001. The holding period of the bonds was from March 10, 2000 to December 31 2001, or
more than 12 months. The capital loss would be considered at 50%, or at P50,000. (See XIII. Capital Gains and Losses for the
detailed explanation on income tax treatment of capital asset transactions.)
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When to deduct depreciation: The period of depreciation starts when the asset is placed in
service. It ends when the asset is disposed of, or its usefulness exhausted.
REQUISITES FOR DEDUCTIBILITY: (TRUCE)

1. The allowance for depreciation 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.
Depreciation is allowed not only on depreciable property that is used in the
trade, business or profession of the taxpayer, but also on depreciable property
that is not being used temporarily during the year. (Conwell Bros. Co. v.
Collector, CTA Case No. 411)
2. The asset must have a limited USEFUL life.
3. The allowance for depreciation must be REASONABLE.
4. The allowance must be CHARGED off during the taxable year from the taxpayers
books of accounts.
5. The total allowances must not EXCEED the cost of the property.
What is the appropriate useful life of the property? What rate of depreciation must be applied?
Generally, the estimated useful life is determined by the taxpayer himself.
HOWEVER, where the taxpayer and the Commissioner have entered into an agreement
in writing specifically dealing with the useful life and rate of depreciation of any property,
the rate so agreed upon shall be binding on both the taxpayer and the national
Government in the absence of facts and circumstances not taken into consideration
during the adoption of such agreement.
The responsibility of establishing the existence of such facts and circumstances
shall rest with the party initiating the modification.
General Rule: Any change in the agreed rate and useful life of the depreciable
property as specified in the agreement shall not be effective for taxable years
prior to the taxable year in which notice in writing by certified mail or registered
mail is served by the party initiating such change to the other party to the
agreement.
Exception: Where the taxpayer has adopted such useful life and depreciation rate
for any depreciable property and claimed the depreciation expenses as deduction
from his gross income, without any written objection on the part of the
Commissioner or his duly authorized representatives, the aforesaid useful life and
depreciation rate so adopted by the taxpayer for the depreciable asset.
Methods and Rates of Depreciation

1. Straight-line method
The depreciation expense deductible in each of the years of the propertys estimated
useful life is constant.
Formula:
Deduction for Depreciation = Cost Salvage Value X
Estimated Useful Life of the Property
NOTE: (Cost Salvage Value) is known as the depreciable cost.
Alternative Method:
Depreciation Rate= 1 _
Estimated Useful Life of the Property
Deduction for Depreciation = Depreciation Rate x (Cost Salvage Value)
ILLUSTRATION:
H Co. acquired a machine at a cost of P380,000. It had no scrap (or salvage) value,
and the useful life was estimated at 25 years. The depreciation expense per year is
P15,000, computed as follows:
Depreciation Expense = [(380,000 0) / 25] [OR]
= (1/25) x (380,000 0)
2. Declining-balance method, using a rate not exceeding twice the rate for straight line
method
Under this method, the depreciation allowance per year varies. Depreciation is largest in
the first year and continually decreases towards the end of the useful life of the property.
The depreciation rate under the straight-line method is first computed, and the result is
multiplied with the rate relative to the straight-line method rate. The product (the
declining balance rate) is then multiplied to the yearly declining balance of the property
(i.e., book value of the property at the start of the current year, which is equal to its
original cost minus its accumulated depreciation) to determine the deduction for
depreciation for the current year. However, in the last year of the assets estimated life,
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the depreciation is equal to the book value of the property at the start of that year (i.e.,
the amount of depreciation must be just enough to reduce the propertys book value to
zero). Note that the salvage value is ignored in the declining balance method.
ILLUSTRATION:
P Company acquired a machine on January 1, 2002 at a cost of P400,000. It had a
scrap value of P50,000, and a useful life of 4 years. The company uses the declining
balance method, at a rate of one and a half that of the straight line method.
Determine the depreciation chargeable in years 2002, 2003, 2004 and 2005.
Step 1: Compute for the depreciation rate under the straight-line method.
Straight Line Depreciation Rate = 1/Estimated Useful Life
= , or 25%
Step 2: Compute for the Declining Balance Rate (DBR).

Declining Balance Rate = Straight Line Depreciation Rate
x
Rate Relative to the Straight Line
Depreciation Rate
= x 1.5
= 37.5%
Step 3: Apply the Declining Balance Rate to the book value of the property
at the start of the current year.
Year 2002:
Book value of the property *** P400,000
Multiplied by: DBR 37.5%
Deduction for Depreciation P150,000
*** Since this is the year of the acquisition, the book value of the
property at the start of the year is equal to its original cost.
Year 2003:
Original Cost P400,000
Less: Accumulated Depreciation 150,000
Book Value of the Property, start P 250,000
of current year
Deduction for Depreciation P 93,750
Year 2004:
Less: Accumulated Depreciation
Year 2002 P150,000
Year 2003 P93,750 243,750
Book Value of the Property, start P 156,250
of current year
Deduction for Depreciation P
58,593.75
Year 2005:
Less: Accumulated Depreciation
Year 2002 P150,000
Year 2003 P93,750
Year 2004 P58,593.75
302,343.75
Book Value of the Property, start
of current year P 97,656.25
Deduction for Depreciation P

*** 97,656.25
*** The deduction for depreciation in 2005 is equal to the book value of
the property at the start of the year because the machine had a useful life
of 4 years, which ended in 2005.
3. Sum-of-the-years-digit method
Under this method, the annual depreciation is computed by applying a changing fraction
to the depreciable cost of the property (original cost reduced by the salvage value). In
the fraction, the numerator is the number of remaining years of the estimated useful life
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of the property and the denominator is the sum of the numbers representing the years of
the propertys life.
ILLUSTRATION: On January 1, 2001, J Company acquired a machine at a cost of
P105,000. It had a salvage value of P5,000, and an estimated useful life of 5 years.
The company uses the sum-of-the-years method in determining depreciation.
Determine the depreciation chargeable in years 2001, 2002, 2003, 2004 and 2005.
Step 1: Compute for the sum of the numbers representing the years of the
propertys life.
The property has an estimated useful life of 5 years. The sum, therefore, is 15 (5 +
4 + 3 + 2 + 1). This sum will be used as the denominator in the fraction.
Step 2: Compute for the depreciable cost of the property.

The depreciable cost is P100,000 (P105,000 P5,000).
Step 3: Compute for the yearly deduction for depreciation (Column D).
A B C D
(= A / (= B x C)
15)
Year Remaining Useful Life Resulting Depreciable Cost Deduction for
(Reckoning Point: Fraction Depreciation
Start of the Year)
2001 5 5/15 P105,000 P35,000
2002 4 4/15 P105,000 P28,000
2003 3 3/15 P105,000 P21,000
2004 2 2/15 P105,000 P14,000
2005 1 1/15 P105,000 P7,000
4. Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner
Special Rules:
Depreciation of Properties Used in Petroleum Operations
An allowance for depreciation in respect of all properties DIRECTLY related to
production of petroleum shall be allowed under the straight-line or declining-
balance method of depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance method,
it may shift to the straight-line method. The useful life of properties used in or
related to production of petroleum shall be ten (10) years or such shorter life as
may be permitted by the Commissioner.
Properties NOT USED DIRECTLY in the production of petroleum shall be
depreciated under the straight-line method on the basis of an estimated useful
life of 5 years.
Depreciation of Properties Used in Mining Operations An allowance for depreciation in
respect of all properties used in mining operations other than petroleum operations, shall
be computed as follows:
At the normal rate of depreciation if the expected life is ten (10) years or less;
or
Depreciated over any number of years between five (5) years and the expected
life if the latter is more than ten (10) years, and the depreciation thereon
allowed as deduction from taxable income: Provided, That the contractor
notifies the Commissioner at the beginning of the depreciation period which
depreciation rate allowed will be used.
Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business (NRAETB)
or Resident Foreign Corporations (RFC) - A reasonable allowance for the deterioration of
property arising out of its use or employment or its non-use in the business, trade or
profession shall be permitted only when such property is located in the Philippines.
J. Depletion of Oil and Gas Wells and Mines [Sec 34(G)]

Definition: Depletion is the exhaustion of natural resources due to production. It is the
reduction of cost or value of natural resources such as oil and gas wells and mines as the
resources are converted into inventories.
Deduction Allowable: A reasonable allowance for depletion computed using the cost-depletion
method shall be granted provided that the allowance for depletion shall not exceed the capital
invested.
ILLUSTRATION:
Land containing natural resources was purchased for P100,900,000. It was estimated that
the land, after exploitation of its natural resources, will have a value of P900,000. It was
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estimated that the natural resource supply was 5,000,000 tons. If withdrawal of resources
from the land in 2005 was 500,000 tons, how much was the deduction for the year?
Purchase Price P100,900,000

Less: Residual Value of the Land 900,000
Depletion Base P100,000,000
Divided by: Estimated Resource Supply, in tons 5,000,000
Depletion Base per ton P20
Multiplied by: Withdrawal of Resources in 2005, in tons 500,000
Depletion Expense, 2005 P 10,000,000
Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual Engaged
in Trade or Business or a Resident Foreign Corporation Allowance for depletion of oil and gas
wells or mines shall be authorized only in respect to oil and gas wells or mines located within
the Philippines.
K. Charitable and Other Contributions [Sec 34(H)]

REQUISITES FOR DEDUCTIBILITY: (TEE / BE)
1. The charitable contribution must actually be paid or made to the ENTITIES
specified by law (i.e., Philippine government or any political subdivision thereof
exclusively for public purposes, or any of the accredited domestic corporations or
associations specified in the NIRC).
2. It must be made within the TAXABLE year.
3. It must be EVIDENCED by adequate receipts or records.
4. Additional Requisite for Contributions Other than Money: The amount of charitable
contribution of property other than money shall be BASED on the acquisition cost of
the property (i.e., not the fair market value at the time of the contribution).
5. Additional Requisite for Contributions subject to the statutory limitation: It must not
EXCEED 10% (individual) or 5% (corporation) of the taxpayers taxable income
before charitable contributions.
Kinds of Contributions:
1. Contributions deductible in full
2. Contributions subject to the statutory limit
Contributions Deductible in Full:

1. Donations to the Government - Donations to the Government of the Philippines or to
any of its agencies or political subdivisions, including fully-owned government
corporations, exclusively to finance, to provide for, or to be used in undertaking
PRIORITY ACTIVITIES in:
education,
health,
youth and sports development,
human settlements,
science and culture, and
in economic development
according to a National Priority Plan determined by the National Economic and
Development Authority (NEDA), in consultation with appropriate government agencies,
including its regional development councils and private philanthropic persons and
institutions.
Any donation which is made to the Government or to any of its agencies or
political subdivisions not in accordance with the said annual priority plan shall be
considered a contribution subject to the statutory limit.
2. Donations to Certain Foreign Institutions or International Organizations -

Donations to foreign institutions or international organizations which are fully deductible
in pursuance of or in compliance with agreements, treaties, or commitments
entered into by the Government of the Philippines and the foreign institutions or
international organizations or in pursuance of special laws;
3. Donations to Accredited Non-government Organizations - The term "non-

government organization" means a non-profit domestic corporation:
Organized and operated exclusively for:
o scientific,
o research,
o educational,
o character-building and youth and sports development,
o health,
o social welfare,
o cultural or
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o charitable purposes, or
o a combination thereof,
no part of the net income of which inures to the benefit of any private
individual;
Which, not later than the 15th day of the third month after the close of
the accredited non-government organizations taxable year in which
contributions are received, makes utilization directly for the active conduct
of the activities constituting the purpose or function for which it is
organized and operated,
o UNLESS an extended period is granted by the Secretary of Finance;
The level of administrative expense shall, on an annual basis, not exceed
thirty percent (30%) of the total expenses; (Sec. 1, RR 13-1998) and
The assets of which, in the event of dissolution, would be distributed to:
o another nonprofit domestic corporation organized for similar purpose
or purposes, or
o to the state for public purpose, or
o would be distributed by a court to another organization to be used in
such manner as in the judgment of said court shall best accomplish
the general purpose for which the dissolved organization was
organized.
All the members of the Board of Trustees of the non-stock, non-profit
corporation, organization or NGO do not receive compensation or remuneration
for their service to the aforementioned organization. (added by Sec. 3, RR 13-
1998)
Utilization means:
i. Any amount in cash or in kind, including administrative expenses, paid or
utilized by an accredited NGO to accomplish one or more purposes for which it
was created or organized; or
ii. Any amount paid to acquire an asset used, or held for use, directly in carrying
out one or more purposes for which the accredited NGO was created or
organized; or
iii. Any amount set aside for a specific project which comes within one or more
purpose or purposes for which the accredited NGO was created, but only if at
the time such amount is set aside, the accredited NGO has established to the
satisfaction of the Commissioner of Internal Revenue that the amount will be
utilized for a specific project within a period not to exceed five (5) years, and
the project is the one which can be better accomplished by setting aside such
amount than by immediate payments of funds
iv. Any amount in cash or in kind invested in any activity related to the purpose for
which it was created or organized.
v. Any amount in cash or in kind invested in capital sustaining and generating
activities, such as but not limited to, endowment funds, trust funds, money
market placements, shares of stock and similar instruments
Provided, That, any income derived from those investments shall be
exclusively used in activities directly related to one or more purposes
for which the accredited NGO was created or organized. (Sec. 1, RR
13-1998)
Contributions subject to the Statutory Limit

1. Contributions made to the Government or any of its agencies or political subdivisions
exclusively for public purposes (contributions for non-priority activities)
2. Contributions made to accredited domestic corporation or associations

Organized exclusively for
o religious,
o charitable,
o scientific,
o youth and sports development,
o cultural or
o educational purposes or
o for the rehabilitation of veterans
3. Contributions to social welfare institutions
4. Contributions to non-government organizations

no part of the net income of which inures to the benefit of any private stockholder or
individual
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Statutory Limit: Amount deductible must not be in excess of:
10% in the case of an individual, and
5% in the case of a corporation,
of the taxpayer's taxable income derived from trade, business or profession before the
deduction for contributions and donations.
In other words, the amount deductible is the actual contribution or the statutory
limit computed, whichever is lower.
ILLUSTRATION:
N Co. had a gross income from business of P1,000,000 and allowable deductions (except
deductions for contributions) of P400,000. It made during the year a contribution that is fully
deductible of P10,000 and contributions subject to limitation of P50,000. Compute for the total
deduction for contributions and the taxable income of the company.
ANSWER: The total deduction for contributions is P40,000, and the taxable income is P560,000.
Gross Income P1,000,000

Less: Allowable Deductions (except deduction for contributions) 400,000
Taxable Income before deduction for contributions P 600,000
Multiplied by: Statutory Limit (%)
5%
Statutory Limit (in Pesos) P 30,000
Actual Contributions made (subject to limitation) P 50,000
Allowable Deduction for Contributions subject to limitation

P 30,000
(whichever is lower)
Taxable Income before deduction for contributions P 600,000

Less: Allowable Deduction for Contributions
Deductible in Full P10,000
Allowable Deduction for Contributions subject to
limitation 30,000 40,000
Taxable Income P 560,000
L. Research and Development [Sec. 34(L)]

Definition: R&D costs are for improvements of processes and formulas as well as the
development of improved or new products. As a general rule, R&D only extends from the
laboratory or drawing board to prototype status; i.e., so long as an activity still contains an
element of uncertainty/technical risk, it is within the realm of R&D. Quality control, routine
product testing, data collection, efficiency surveys, management studies, market research and
sales promotion are normally not considered R&D activities.
Tax Treatment: R&D expenditures which are paid or incurred by a taxpayer during the taxable
year in connection with his trade, business or profession may be treated EITHER as:
1. Ordinary and necessary expenses allowed as deduction during the taxable year when
paid or incurred (i.e., as an outright deduction for the full expenditure), or
2. Deferred asset (or deferred expense) which is periodically subject to amortization
At the election of the taxpayer, the following R&D expenditures may be treated
as deferred assets:
1. Those paid or incurred by the taxpayer in connection with his trade,
business or profession.
2. Those not treated as expenses.
3. Those chargeable to capital account but not chargeable to depreciable
property.
In computing taxable income, such deferred expenses shall be allowed as
deduction ratably distributed over a period of not less than sixty (60) months as
may be elected by the taxpayer (beginning with the month in which the
taxpayer first realizes benefits from such expenditures).
The taxpayer may elect this alternative not later than the time prescribed by
law for filing the return for such taxable year (April 15). The method so elected,
and the period selected by the taxpayer, shall be adhered to in computing
taxable income for the taxable year for which the election is made and for all
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subsequent taxable years UNLESS with the approval of the Commissioner, a
change to a different method is authorized with respect to a part or all of such
expenditures.
The election shall not apply to any expenditure paid or incurred during any
taxable year prior to the taxable year for which the taxpayer makes the
election.
Limitations on Deduction: The above tax treatment of R&D expenses does NOT apply to:
1. Any expenditure for the acquisition or improvement of land or the improvement of
depreciable property, used in connection with research and development.
2. Any expenditure incurred in ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral, including oil or gas.
NOTE: Cost of acquisition or improvements of property subject to depreciation or
depletion used in research and development becomes part of the cost of the asset, and
deduction from it is by way of depreciation or depletion, as the case may be.
ILLUSTRATION:
Q Co., a manufacturer of food seasoning, is continuously conducting research and
development on its product lines. In early January 2004, it completed the extension and
improvement of its research and development building at a cost of P1,000,000. The
extension has an estimated useful life of 25 years. The company also incurred an aggregate
of P1,800,000 for other research and development costs. Determine the tax treatment of the
various expenditures.
ANSWER:
The P1,000,000 cost of expansion of the building cannot be deducted as research and
development costs in 2004. However, depreciation of P40,000 may be recognized
yearly for 25 years (P1,000,000 / 25 years).
The other costs of P1,800,000 may be either:
a. An outright deduction from gross income for P1,800,000 in 2004; [OR]
b. A deferred expense of P1,800,000, from which there shall be a monthly
deduction of P1,800,000 divided by 60 months (cannot be shorter, but
can be longer), or P30,000 per month, beginning with the first month
from which benefits were acquired from the expenditure. The
aggregate of monthly deductions for a given taxable year is then
deductible from that years gross income.
M. Pension Trusts [Sec. 34(J)]

Deduction Allowable: An employer establishing or maintaining a pension trust to provide for the
payment of reasonable pensions to his employees shall be allowed as a deduction (in addition
to the contributions to such trust during the taxable year to cover the pension liability accruing
during the year, allowed as a deduction under Sec. 34(A)(1) [Ordinary and Necessary
Expenses]) a reasonable amount transferred or paid into such trust during the taxable year in
excess of such contributions
REQUISTES OF DEDUCTIBILITY: Such reasonable amount will only be allowed as a
deduction if it:
1. has not theretofore been allowed as a deduction, and
2. is apportioned in equal parts over a period of ten (10) consecutive years
beginning with the year in which the transfer or payment is made.
Background Concepts: The rules in the law on deduction for pension payments to employees
apply to a pension plan that is funded. An employer does not provide for pension for his
employees in his initial years of operations. A pension plan is usually set up after some years of
operations have gone by, when the employer is already financially capable of providing benefits
to his employees. Since the benefits from any pension plan consider the length of service of the
employee, the plan should consider the services of the employees who were already with the
employer even before the plan was set up. Such past services will require a lump sum payment
to the pension fund; this is called past-service cost. For each year after the pension plan
was set up, there should be payment to the fund for pension for the services rendered during
the year by the employees. This is called present service cost.
Present service cost deductible in full in the year transferred or paid into the trust;
covered by Sec. 34(A)(1) [Ordinary and Necessary Expenses]
Past-service cost amount so transferred is apportioned and deductible in equal parts
over a period of ten (10) consecutive years beginning with the year in which the transfer
or payment is made; covered by Sec. 34(J) [Pension Trusts]
ILLUSTRATION:
F Co. established a pension trust in 2001, transferring thereto a lump sum payment of
P500,000 to cover past services rendered by its employees. Additionally, the terms of the
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trust are such that P20,000 in pension liability would accrue yearly, covering services
rendered during the year by its employees. Determine the total deduction on account of the
pension trust allowed to F Co. from 2001 onwards.
Year Yearly Amortization of Current Liability / TOTAL

Past Service Cost Present Service Cost
(= 1/10 of P500,000)
[covered by Sec. 34(J)] [covered by Sec. 34(A)(1)]

2001 P50,000 P20,000 P70,000
2002 P50,000 P20,000 P70,000
2003 P50,000 P20,000 P70,000
2004 P50,000 P20,000 P70,000

2005 P50,000 P20,000 P70,000
2006 P50,000 P20,000 P70,000
2007 P50,000 P20,000 P70,000
2008 P50,000 P20,000 P70,000
2009 P50,000 P20,000 P70,000
2010 P50,000 P20,000 P70,000
2011- - P20,000 P20,000
N. Special Provisions Regarding Income and Deductions of Insurance Companies, Whether

Domestic or Foreign [Sec. 37]
Special Deduction Allowed to Insurance Companies. - In the case of insurance companies,
whether domestic or foreign doing business in the Philippines, the net additions, if any, required
by law to be made within the year to reserve funds and the sums other than dividends paid
within the year on policy and annuity contracts may be deducted from their gross income.
o However, the released reserve should be treated as income for the year of release.
Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability and
mutual workmen's compensation and mutual casualty insurance companies requiring their
members to make premium deposits to provide for losses and expenses, said companies shall
not return as income any portion of the premium deposits returned to their policyholders, but
shall return as taxable income all income received by them from all other sources plus such
portion of the premium deposits as are retained by the companies for purposes other than the
payment of losses and expenses and reinsurance reserves.
Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include in their
return of gross income, gross premiums collected and received by them less amounts paid to
policyholders on account of premiums previously paid by them and interest paid upon those
amounts between the ascertainment and payment thereof.
Assessment Insurance Companies.- Assessment insurance companies, whether domestic or

foreign, may deduct from their gross income the actual deposit of sums with the officers of the
Government of the Philippines pursuant to law, as additions to guarantee or reserve funds.
P. Allocation of Income and Deductions [Sec. 50] - In the case of two or more organizations, trades
or businesses (whether or not incorporated and whether or not organized in the Philippines) owned
and controlled directly or indirectly by the same interests, the Commissioner is authorized to
distribute, apportion or allocate gross income or deductions between or among such organization,
trade or business, if he determines that such distribution, apportionment or allocation is necessary in
order: (a) to prevent evasion of taxes; or (b) to clearly reflect the income of any such organizations,
trades or businesses.
IX. NON-DEDUCTIBLE EXPENSES [Sec. 36]
A. NON-DEDUCTIBLE EXPENSES [Sec. 36]

GENERAL RULE: In computing net income, no deduction shall be allowed in respect to
1. Personal, living or family expenses
Rationale: not related to conduct of trade or business
2. Any amount paid out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate
EXCEPTION: Intangible drilling and development costs incurred in petroleum
operations which are deductible under Sec. 34(G)(1)
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NON-DEDUCTIBLE EXPENSES Tax I
3. Any amount expended in restoring property or in making good the exhaustion thereof for
which an allowance [for depreciation or depletion] is or has been made (i.e., Major
Repairs)
NOTE: Nos. (2) and (3) are capital expenditures. Examples are:
a. The cost of defending or perfecting title to property constitutes a part
of the cost of the property and is not a deductible expense.
b. The amount expended for architects services is part of the cost of the
building
c. Expenditures to promote the sales of additional capital stock or the
cost, commissions and fees for obtaining stock subscriptions are capital
expenses. (Atlas Consolidated Mining Co. v. Commissioner, 102 SCRA
246)
4. Premiums paid on any life insurance policy covering the life of any officer, employee, or
person financially interested in the trade or business carried on by the taxpayer, when
the taxpayer is directly or indirectly a beneficiary under such policy.
A person is said to be financially interested in the taxpayers business, if
he is a stockholder thereof or he is to receive as his compensation a share of
the profits of the business.
ILLUSTRATION:
CASE 1 CASE 2
Officer, employee, or person Officer, employee, or person
Insured financially interested in the financially interested in the
taxpayers trade or business taxpayers trade or business
Beneficiary of
Officer, employee, or person
Life
Company financially interested in the
Insurance
taxpayers trade or business
Policy
Premium a YES (Premium is likewise a
deductible NO (covered by Sec. 36) fringe benefit on the part of
expense? the beneficiary.)
B. CAPITAL GAINS AND LOSSES [Sec. 39]

Definitions:
Net Capital Gain the excess of the gains from sales or exchanges of capital assets over
the losses from such sales or exchanges
Net Capital Loss means the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges
Holding Period the length of time the asset was held by the taxpayer
Meaning of sale or exchange requirements for capital gain

Gain or loss is recognized in a sale or exchange of property if the following conditions are
satisfied:
1. The property received in exchange is essentially different from the property
disposed of;
2. The property received has a market value
- Sale a delivery of goods for money
- Exchange a delivery of goods for goods received.
- HOWEVER, there are transactions which the law considers sales or
exchanges though they do not meet the definitions given. These are:
a. Retirement of bonds, etc.
b. Short sales of properties25
c. Failure to exercise a privilege or option to buy or sell
property;
d. Securities becoming worthless.
e. Receipt of a liquidating dividend
Percentage taken into account (Long-term / Short term) by taxpayers:

Taxpayers Other than a Corporation (i.e., individual taxpayers and taxpayers treated
as individuals, such as estates and trusts)
- 100% if the capital asset was held for not more than 12 months
- 50% if the capital asset has been held for more than 12 months
NOTE:
25
A transaction in which a speculator sells securities which he does not own in anticipation of a decline in its price. The seller intends to
cover the sale by purchasing the securities when the price declines, in which case he will make a profit.
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o GENERAL RULE: For purposes of computing capital loss and capital gain,
the actual holding period is taken into account.
o EXCEPTION: If securities become worthless during the taxable year and
are capital assets, the loss resulting therefrom shall be considered as a loss
from the sale or exchange, on the last day of such taxable year, of
capital assets. [Sec. 34(D)(4)(b)]
Corporate Taxpayers 100% of the capital gain or loss, regardless of the holding
period
Limitation on Capital Losses

GENERAL RULE: Losses from sales or exchanges of capital assets shall be allowed only
to the extent of the gains from such sales or exchanges.
SPECIAL RULE FOR BANKS AND TRUST COMPANIES: If a bank or trust company
incorporated under the laws of the Philippines, a substantial part of whose business is
the receipt of deposits or the sale of bond, debenture, note, certificate or other evidence
of indebtedness, any loss resulting from such sale shall not be subject to the
foregoing limitation and shall not be included in determining the applicability of such
limitation to other losses.
Rationale: The reason is that the securities mentioned are ordinary assets of the
bank or trust company.
Formula: (Sec. 134, RR2)

Taxable net income = Ordinary net income + net taxable capital gains
Net taxable capital gains = Gains of sales of capital assets, or 50% thereof
Losses from sales of capital assets, or 50% thereof
Net Capital Loss Carry-over: If an individual taxpayer sustains a net capital loss in a
taxable year, such loss (in an amount not in excess of the net income26 for such year) shall be
treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset
held for not more than 12 months (100% deduction).
ILLUSTRATIONS:
Mr. N, a citizen of the Philippines, married, had the following data for 2001 and 2002:
2001 2002
Net Income, Profession P 90,000 P 78,000
Interest Income from notes of clients 2,000 4,000
Capital Gain on assets:
Painting, held for 10 months 30,000
Jewelry, held for 2 years 40,000
Capital Loss on bonds, held for 3 years 70,000 -
Mr. Ns taxable income for 2001 was P60,000, and for 2002 was P65,000, computed as follows:
2001 2002
Net Income, Profession P 90,000 P 78,000
Interest Income 2,000 4,000
Ordinary Net Income P92,000 P82,000
Capital Gain (100%) P30,000
Capital Loss (50%) (35,000)
Net Capital Loss (P 5,000)
Net Capital Loss Carry-Over from 2001 (5,000)

>
Net Capital Gain [20,000 5,000] 15,000
Total P97,000
Less: Basic Personal Exemption (32,000) (32,000)
Taxable Income > P60,000 P65,000
Legend:
To determine the maximum that may be carried over to the next year: Taxable Income
26
Net Income should be understood as taxable income (Executive Order No. 37)
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>
Net Capital Loss Carry-Over from the previous year
>
Mr. O, a citizen of the Philippines, single, had the following data for 2001 and 2002:
2001 2002
Net Income, Business P 80,000 P 90,000
Interest Income from notes of clients 4,000 2,000
Capital Gain on assets:
Shares of foreign corporations, 50,000
held for 3 years
Jewelry, held for 10 months 70,000
Capital Loss on bonds, held for 4 months 120,000 -
Mr. Os taxable income for 2001 was P64,000, and for 2002 was P78,000, computed as follows:
2001 2002
Net Income, Business P 80,000 P 90,000
Interest Income 4,000 2,000
Ordinary Net Income P84,000 P92,000
Capital Loss (100%) (120,000)
Net Capital Loss (P95,000)
Net Capital Loss Carry-Over from 2001

> (64,000)
Net Capital Gain [70,000 64,000] 6,000
Total P98,000
Less: Basic Personal Exemption (20,000) (20,000)
Taxable Income > P64,000 P78,000
Legend:
> To determine the maximum that may be carried over to the next year: Taxable Income
Net Capital Loss Carry-Over from the previous year
>
P Co., a domestic corporation, had the following results of operations for a taxable year:
Ordinary Net Income P52,000

Gain on sale of capital asset, held for ten months 2,000
Gain on sale of capital asset, held for eighteen months 2,000
Loss on sale of capital asset, held for six months 1,100
Loss on sale of capital asset, held for twenty months 2,000
and in the preceding year it had a net capital loss of P1,500 and a taxable income of P60,000.
The taxable income of the corporation for the year is computed as follows***:
Ordinary net income P52,000

Gain on sale of capital asset, held for ten months (100%) P2,000
Gain on sale of capital asset, held for eighteen months (100%) 2,000
Total Capital Gains P4,000
Loss on sale of capital asset, held for six months (100%) P1,100
Loss on sale of capital asset, held for twenty months (100%) 2,000
Total Capital Loss 3,100
Net Capital Gain 900
Taxable Income P52,900
*** For corporations, capital gains and losses are always considered at 100%, and there is no
net capital loss carry-over.
SUMMARY OF RULES
For Corporations:
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1. Corporations shall recognize 100% of the capital gain or loss, regardless of the holding
period.
2. Corporations cannot carry-over net capital loss.
3. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges.
For Individuals, and Taxpayers Treated as Individuals:

1. The holding period is relevant in determining the percentage of capital gains and losses to be
taken into account, as follows:
- 100% if the capital asset was held for not more than 12 months
- 50% if the capital asset was held for more than 12 months
2. Net capital loss (in an amount not in excess of the net income for such year) shall be treated
in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for
not more than 12 months (100% deduction)
3. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges.
X. SITUS OF TAXATION [Sec. 42]
A. Gross Income From Sources Within the Philippines

Interests derived from sources within the Philippines, and interest on bonds, notes or other
interest-bearing obligations of residents, corporate or otherwise
Dividends
Compensations for labor or personal services performed in the Philippines
Rentals and royalties from property located in the Philippines of from any interest in such
property, including rentals or royalties
(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design
or model, plan, secret formula or process, goodwill, trademark, trade brand or other like
property or right;
(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific
equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge or information;
(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment of, any such property or right as is
mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any
such knowledge or information as is mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in connection with the
use of property or rights belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
Gains, profits and income from the sale of real property located in the Philippines
Gains; profits and income from the sale of personal property
B. Taxable Income From Sources Within the Philippines.

(1) General Rule. Deduct the expenses, losses and other deductions properly allocated thereto and
a ratable part of expenses, interests, losses and other deductions effectively connected with the
business or trade conducted exclusively within the Philippines which cannot definitely be allocated to
some items or class of gross income: Provided, That such items of deductions shall be allowed only if
fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be
treated in full as taxable income from sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed unless
indebtedness was actually incurred to provide funds for use in connection with the conduct or
operation of trade or business in the Philippines.
C. Gross Income From Sources Without the Philippines.

(1) Interests other than those derived from sources within the Philippines as provided in A.
(2) Dividends other than those derived from sources within the Philippines as provided in
A.
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any interest in
such property including rentals or royalties for the use of or for the privilege of using
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SITUS OF TAXATION Tax I
without the Philippines, patents, copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like properties; and
(5) Gains, profits and income from the sale of real property located without the Philippines.
D. Taxable Income From Sources Without the Philippines. - Deduct from the gross income from
sources without the Philippines the expenses, losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be
allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as
taxable income from sources without the Philippines.
E. Income From Sources Partly Within and Partly Without the Philippines.-
a. Allocated or apportioned to sources within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. Where items of gross income are separately allocated to sources within the
Philippines, there shall be deducted (for the purpose of computing the taxable income
therefrom) the expenses, losses and other deductions properly apportioned or allocated
b. thereto and a ratable part of other expenses, losses or other deductions which cannot
definitely be allocated to some items or classes of gross income. The remainder, if any, shall
be included in full as taxable income from sources within the Philippines. In the case of gross
income derived from sources partly within and partly without the Philippines, the taxable
income may first be computed by deducting the expenses, losses or other deductions
apportioned or allocated thereto and a ratable part of any expense, loss or other deduction
which cannot definitely be allocated to some items or classes of gross income; and the
portion of such taxable income attributable to sources within the Philippines may be
determined by processes or formulas of general apportionment prescribed by the Secretary
of Finance. Gains, profits and income from the sale of personal property produced (in whole
or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or
in part) by the taxpayer without and sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without the Philippines.
F. Gains, profits and income derived from the purchase of personal property within and its sale without
the Philippines, or from the purchase of personal property without and its sale within the Philippines
shall be treated as derived entirely form sources within the country in which sold: Provided, however,
That gain from the sale of shares of stock in a domestic corporation shall be treated as derived
entirely form sources within the Philippines regardless of where the said shares are sold.
a. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock
issued by a domestic corporation shall not be effected or made in its book unless:
the transferor has filed with the Commissioner a bond conditioned upon the future
payment by him of any income tax that may be due on the gains derived from
such transfer, or
the Commissioner has certified that the taxes, if any, imposed in this Title and due
on the gain realized from such sale or transfer have been paid. It shall be the duty
of the transferor and the corporation the shares of which are sold or transferred,
to advise the transferee of this requirement.
Definition of Royalties - Philamlife vs.CTA [CA GR SP 31283 April 25, 1995]

The CTA ruled that it is not the presence of any property from which one derives
rentals and royalties that is controlling, but rather it includes royalties for the supply of
scientific, technical, industrial, or commercial knowledge or information.
XI. INSTALLMENT [Sec. 49]
A. Sales of Dealers in Personal Property A person who regularly sell or otherwise disposes of
personal property on the installment plan may return as income therefrom in any taxable year that
proportion of the installment payments actually received that year, which gross profit realized or to be
realized when payment is complete of the total contract price.
FORMULA:
Gross Profit Installment payments Income to be

---------------------- X actually received = reported for the
Contract price year
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INSTALLMENT Tax I
B. Sales of Realty and Casual Sales of Personalty

1. A casual sale or other casual disposition of personal property (other than property of a kind
which would properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year) for a price exceeding One thousand pesos (P1000); or
2. A sale or other disposition of real property
In either case the initial payments muse NOT exceed 25% of the selling price
Definition: 'Initial payments' means the payment received in cash or property other than
evidences of indebtedness of the purchaser during the taxable period in which the sale or
other disposition is made.
Income Tax Treatment: Income may be return on the same basis as sales of dealers in personal
property (see section A)
C. Sales of Real Property Considered as Capital Asset by Individuals An individual who sells or
disposes of real property considered as capital asset; and is otherwise qualified to report the gain
therefrom under Subsection (B) may pay the capital gains tax in installments.
D. Tax Evasion vs. Tax Avoidance

a. CIR vs. Estate of Toda (GR 147188, September 14, 2004)
Tax Evasion a scheme used outside of those lawful means and when availed of,
it usually subjects the taxpayer to further or additional civil or criminal liabilities
Tax Avoidance tax saving device within the means sanctioned by law, used by
the taxpayer in good faith and at arms length
XII. RETURNS AND PAYMENTS OF TAX/ WITHOLDING TAXES
A. Returns and Payment of Tax

1. Individual Return (Sec. 51, NIRC)
a. Who are required to file
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income from
sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources
within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of
profession in the Philippines.
b. Those not required to file

The following individuals shall not be required to file an income tax return:
a. An individual whose gross income does not exceed his total personal and
additional exemptions for dependents under Section 35: Provided, That a
citizen of the Philippines and any alien individual engaged in business or
practice of profession within the Philippine shall file an income tax return,
regardless of the amount of gross income;
b. An individual with respect to pure compensation income, as defined in
Section 32 (A)(1), derived from sources within the Philippines, the income
tax on which has been correctly withheld under the provisions of Section 79
of this Code: Provided, That an individual deriving compensation
concurrently from two or more employers at any time during the taxable
year shall file an income tax return: Provided, further, That an individual
whose compensation income derived from sources within the Philippines
exceeds Sixty thousand pesos (P60,000) shall also file an income tax
return;
c. An individual whose sole income has been subjected to final withholding tax
pursuant to Section 57(A) of this Code; and
d. An individual who is exempt from income tax pursuant to the provisions of
this Code and other laws, general or special.
Any individual not required to file an income tax return may nevertheless be
required to file an information return pursuant to rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
SPECIAL RULES:
1. Husband and Wife Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely from compensation, shall
file a return for the taxable year to include the income of both spouses, but
where it is impracticable for the spouses to file one return, each spouse may
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RETURNS AND PAYMENTS PF TAX/ WITHOLDING TAXES Tax I
file a separate return of income but the returns so filed shall be consolidated by
the Bureau for purposes of verification for the taxable year.
2. Return of Parent to Include Income of Children The income of unmarried

minors derived from property received from a living parent shall be included in
the return of the parent, except
o when the donor's tax has been paid on such property, or

o when the transfer of such property is exempt from donor's tax.
3. Persons Under Disability If the taxpayer is unable to make his own return,
the return may be made by his duly authorized agent or representative or
by the guardian or other person charged with the care of his person or
property, the principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties provided for
erroneous, false or fraudulent returns.
4. Signature Presumed The fact that an individual's name is signed to a filed

return shall be prima facie evidence for all purposes that the return was actually
signed by him.
c. Where to file
Except in cases where the Commissioner otherwise permits, the return shall be filed:
If person has legal residence or place of business in the Philippines with an
authorized agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which such person has his
legal residence or principal place of business in the Philippines
If there be no legal residence or place of business in the Philippines with the
Office of the Commissioner.
d. When to file - The return of any individual specified above shall be filed on or
before the fifteenth (15th) day of April of each year covering income for the
preceding taxable year.
e. Where to pay (Sec. 56, NIRC)

The total amount of tax imposed by this Title shall be paid by the person subject
thereto at the time the return is filed.
When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other
than a corporation may elect to pay the tax in two (2) equal installments in which
case:
1. the first installment shall be paid at the time the return is filed and
2. the second installment, on or before July 15 following the close of the calendar
year
3. If any installment is not paid on or before the date fixed for its payment, the
whole amount of the tax unpaid becomes due and payable, together with the
delinquency penalties.
f. Capital gains on shares of stocks and real estate

FILING A RETURN
Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a local stock
exchange as prescribed under Section 24(c) shall file a return within thirty (30)
days after each transaction and a final consolidated return on or before April 15
of each year covering all stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall file a
return within thirty (30) days following each sale or other disposition.
PAYMENT
The total amount of tax imposed and prescribed shall be paid on the date the return
prescribed is filed by the person liable
o That if the seller submits proof of his intention to avail himself of the benefit of
exemption of capital gains under existing special laws, no such payments shall
be required
o That in case of failure to qualify for exemption under such special laws and
implementing rules and regulations, the tax due on the gains realized from the
original transaction shall immediately become due and payable
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o That if the seller, having paid the tax, submits such proof of intent within six (6)
months from the registration of the document transferring the real property, he
shall be entitled to a refund of such tax upon verification of his compliance with
the requirements for such exemption.
o In case the taxpayer elects and is qualified to report the gain by installments
the tax due from each installment payment shall be paid within (30) days from
the receipt of such payments.
g. Quarterly declaration of income tax (Sec. 74, NIRC)

Every individual subject to income tax under Sections 24 and 25(A) of this Title, who
is receiving self-employment income, whether it constitutes the sole source of his
income or in combination with salaries, wages and other fixed or determinable
income, shall make and file a declaration of his estimated income for the current
taxable year on or before April 15 of the same taxable year.
In general, self-employment income consists of the earnings derived by the

individual from the practice of profession or conduct of trade or business
carried on by him as a sole proprietor or by a partnership of which he is a
member.
1. Nonresident Filipino citizens, with respect to income from without the
Philippines, and nonresident aliens not engaged in trade or business in the
Philippines, are not required to render a declaration of estimated income tax.
2. The declaration shall contain such pertinent information as the Secretary of
Finance, upon recommendation of the Commissioner, may, by rules and
regulations prescribe. An individual may make amendments of a declaration
filed during the taxable year under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.
Estimated tax means the amount which the individual declared as income tax in
his final adjusted and annual income tax return for the preceding taxable year minus
the sum of the credits allowed under this Title against the said tax. If, during the
current taxable year, the taxpayer reasonable expects to pay a bigger income tax,
he shall file an amended declaration during any interval of installment payment
dates.
Return and Payment of Estimated Income Tax by Individuals The amount of

estimated income with respect to which a declaration is required shall be paid in four
(4) installments.
o The first installment shall be paid at the time of the declaration and
o The second and third shall be paid on August 15 and November 15 of the
current year, respectively.
o The fourth installment shall be paid on or before April 15 of the following
calendar year when the final adjusted income tax return is due to be filed.
h. Substituted filing for ITR of Salaried Individuals

RR 19-2002
Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316). In
general, every employer or other person who is required to deduct and withhold the
tax on compensation including fringe benefits given to rank and file employees, shall
furnish every employee from whose compensation taxes have been withheld the
Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316), on or
before January 31 of the succeeding calendar year, or if the employment is
terminated before the close of such calendar year, on the day on which the last
payment of compensation is made. Failure to furnish the same shall be a ground for
the mandatory audit of payors income tax liabilities (including withholding tax) upon
verified complaint of the payee.
The Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) shall
contain a certification to the effect that the employers filing of BIR Form No. 1604-
CF shall be considered as a substituted filing of the employees income tax
return to the extent that the amount of compensation and tax withheld appearing
in BIR Form No. 1604-CF as filed with BIR is consistent with the corresponding
amounts indicated in BIR Form No. 2316. It shall be signed by both the employee
and employer attesting to the fact that the information stated therein has been
verified and is true and correct to the best of their knowledge. However, the
withholding agents/employers are required to retain copies of the duly signed BIR
Form No. 2316 for a period of three (3) years as required under the National
Internal Revenue Code.
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The employee who is qualified for substituted filing of income tax return under these
regulations, shall no longer be required to file income tax return (BIR Form No.
1700) since BIR Form No. 1604-CF shall be considered a substituted return filed by
the employer. BIR Form No. 2316, duly certified by both employee and employer,
shall serve the same purpose as if a BIR Form No. 1700 had been filed, such as
proof of financial capacity for purposes of loan, credit card, or other applications, or
for the purpose of availing tax credit in the employees home country and for other
purposes with various government agencies. This may also be used for purposes of
securing travel tax exemption, when necessary.
However, information referring to the certification, appearing at the bottom of BIR

Form No. 2316, shall not be signed by both the employer and the employee if the
latter is not qualified for substituted filing. In which case, BIR Form No. 2316
furnished by the employer to the employee shall be attached to the employees
Income Tax Return (BIR Form No. 1700) to be filed on or before April 15 of the
following year.
i. Modes of Payment of Taxes Through Banks

RR 16-2002
SECTION 3. Modes Of Payment To Authorized Agent Banks. Aside from the
electronic payment system currently used by some taxpayers in paying their BIR
taxes, the rest shall pay their tax liabilities through any of the following modes:
a) "Overthecounter cash payment" refers to payment of tax liabilities to
authorized agent bank in the currencies (paper bills or coins) that are legal
tender in the Philippines. The maximum amount allowed per tax payment shall
not exceed ten thousand pesos (P10,000.00)
b) "Bank debit system" refers to the system whereby a taxpayer, through a
bank debit memo/advice, authorizes withdrawals from his/its existing bank
accounts for payment of tax liabilities.
The bank debit system mode is allowed only if the taxpayer has a bank
account with the AAB branch where he/it intends to file and pay his/its tax
return/form/declaration, provided said AAB branch is within the jurisdiction
of the BIR Revenue District Office (RDO)/Large Taxpayers District Office
(LTDO) where the tax payment is due and payable.
c) "Checks" refers to a bill of exchange or Order Instrument drawn on a bank
payable on demand.
The following checks are, however, not acceptable as check payments for internal
revenue taxes:
1. Accommodation checks checks issued or drawn by a party other than the
taxpayer making the payment;
2. Second endorsed checks checks issued to the taxpayer as payee who
indorses the same as payment for taxes;
3. Stale checks checks dated more than six (6) months prior to presentation to
the authorized agent bank;
4. Postdated checks checks dated a day or several days after the date of
presentation to the authorized agent bank;
5. Unsigned checks checks with no signature of the drawer;
6. Checks with alterations/erasures.
AABs accepting checks for the payment of BIR taxes and other charges must see to
it that the check covers one tax type for one return period only. Moreover, AABs
must strictly comply with the systems and procedures for the reception, processing,
clearing and accounting of the checks to be prescribed under a separate regulation.
Second indorsement of checks which are payable to the Bureau of Internal Revenue
or Commissioner of Internal Revenue is absolutely prohibited.
2. Corporation Regular Returns

a. Quarterly Income Tax (Sec. 75, NIRC)
Every corporation shall file in duplicate a quarterly summary declaration of its gross
income and deductions on a cumulative basis for the preceding quarter or
quarters upon which the income tax, shall be levied, collected and paid.

The tax so computed shall be decreased by the amount of tax previously paid
or assessed during the preceding quarters and shall be paid not later than sixty
(60) days from the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal year.
b. Final Adjustment Return (Sec. 76, NIRC)
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Every corporation liable to tax shall file a final adjustment return covering the
total taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal to the
total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable years. Once the option
to carry-over and apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed.
c. When to File (Sec. 77, NIRC)

Quarterly declaration shall be filed within sixty (60) days following the close of
each of the first three (3) quarters of the taxable year.
The final adjustment return shall be filed on or before the fifteenth (15th) day
of April, or on or before the fifteenth (15th) day of the fourth (4th) month following
the close of the fiscal year, as the case may be.
Extension of Time to File Returns The Commissioner may, in meritorious

cases, grant a reasonable extension of time for filing returns of income (or final and
adjustment returns in case of corporations)
d. Where to File (Sec. 77, NIRC)

Except as the Commissioner other wise permits, the quarterly income tax
declaration required in Section 75 and the final adjustment return required in
Section 76 shall be filed with:
o the authorized agent banks or
o Revenue District Officer or
o Collection Agent or
o duly authorized Treasurer of the city or municipality
having jurisdiction over the location of the principal office of the corporation filing
the return or place where its main books of accounts and other data from which the
return is prepared are kept.
e. When to Pay (Sec. 77, NIRC)

The income tax due on the corporate quarterly returns and the final adjustment
income tax shall be paid at the time the declaration or return is filed in a manner
prescribed by the Commissioner.
f. Capital Gains on Shares of Stock

Every corporation deriving capital gains from the sale or exchange of shares of stock
not traded thru a local stock exchange as prescribed under Sections 24 (c), 25
(A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30)
days after each transaction and a final consolidated return of all transactions during
the taxable year on or before the fifteenth (15th) day of the fourth (4th) month
following the close of the taxable year.
g. Return of Corporations Contemplating Dissolution/Reorganization

Every corporation shall, within thirty (30) days after the adoption by the corporation
of a resolution or plan for its dissolution, or for the liquidation of the whole or any
part of its capital stock, including a corporation which has been notified of possible
involuntary dissolution by the Securities and Exchange Commission, or for its
reorganization, render a correct return to the Commissioner, verified under oath,
setting forth the terms of such resolution or plan and such other information as the
Secretary of Finance, upon recommendation of the commissioner, shall, by rules and
regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the

Securities and Exchange Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and regulations prescribed by the
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Secretary of Finance, upon recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of Internal Revenue which certificate
shall be submitted to the Securities and Exchange Commission.
Sec. 244. RR-2

All corporations, partnerships, joint accounts and associations, contemplating
dissolution or retiring from business without formal dissolution, shall, within 30 days
after the approval of such resolution authorizing their dissolution, and within the
same period after their retirement from business, file their IT returns covering the
profit earned or business done by them from the beginning of the year up to the
date of such dissolution or retirement and pay the corresponding IT due thereon
upon demand of the Commissioner. In addition to the IT return, they shall also
submit within the same period the following:
(a) a copy of the resolution authorizing such dissolution;
(b) balance sheet at the date of dissolution or retirement and a profit and loss
statement covering the period from the beginning of the taxable year to the
date of dissolution or retirement;
(c) in the case of a corporation, the names and addresses of the shareholders and
the number and par value of the shares held by each; and in case of a
partnership, joint account or association, the name of the partners or members
and the capital contributed by each;
(d) the value and a description of the assets received in liquidation by each
shareholder;
(e) the name and address of each individual or corporation, other than
shareholders, if any, receiving assets at the time of dissolution together with a
description and the value of the assets received by such individuals or
corporations and the consideration if any, paid by each of them for the assets
received.
B. WITHHOLDING TAX
1. Final Withholding Tax at Source
Sec. 57. NIRC
Subject to rules and regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3),
27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of the NIRC on
specified items of income shall be withheld by payor-corporation and/or person and paid in
the same manner and subject to the same conditions as provided in Section 58 of the NIRC.
Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the
recommendation of the Commissioner, require the withholding of a tax on the items of
income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year.
Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other
similar obligations of domestic or resident foreign corporations, contain a contract or
provisions by which the obligor agrees to pay any portion of the tax imposed in this Title
upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest
without deduction for any tax which the obligor may be required or permitted to pay thereon
or to retain therefrom under any law of the Philippines, or any state or country, the obligor
shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or
other payments are payable annually or at shorter or longer periods, and whether the bonds,
securities or obligations had been or will be issued or marketed, and the interest or other
payment thereon paid, within or without the Philippines, if the interest or other payment is
payable to a nonresident alien or to a citizen or resident of the Philippines.
2. Withholding of Creditable Tax

RR 2-98
Under the creditable withholding tax system, taxes withheld on certain income payments are
intended to equal or at least approximate the tax due of the payee on said income.
The income recipient is still required to file an income tax return, to report the income and/or
pay the difference between the tax withheld and the tax due on the income.
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Taxes withheld on income payments covered by the expanded withholding tax and
compensation income are creditable in nature.
RR 12-2001
The amounts subject to withholding tax under this paragraph shall include not only
fees, but also per diems, allowances and any other form of income payments not
subject to withholding tax on compensation.
In the case of professional entertainers, professional athletes, directors involved in

movies, stage, radio, television and musical productions and other recipients of talent fees,
the amounts subject to withholding tax shall also include amounts paid to them in
consideration for the use of their names or pictures in print, broadcast, or other media or for
public appearances, for purposes of advertisements or sales proportion.
Furthermore, in order to determine the applicable tax rate (10% or 20%) to be

applied/withheld by the withholding agent, every professional entertainer, professional
athlete, director involved in movies, stage radio, television and musical productions and other
recipients of talent fees shall annually disclose his gross incomes for the current year to the
Bureau of Internal Revenue (BIR), by submitting a notarized sworn declaration thereof, copy
furnished all the current payors of the declaration duly stamped received by the BIR
(Withholding Tax Division of the National Office). The disclosure should be filed on June 30 of
each year or within fifteen (15) days after the end of the month the talent's income reaches
P720,000, whichever comes earlier. In case his total gross income is less than P72,000 as
June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the
month that his/her gross income for the current year to date reaches P720,000. The initial
disclosure after the effectivity or these Regulations shall be filed on or before September 30,
2001 or within fifteen (15) days after the effectivity of these Regulations, whichever comes
later. In case of failure to submit the annual declaration/disclosure to the BIR, the payor shall
withhold the tax at the rate of 20%.
If an individual recipient receives talent fees in addition to salaries from the same payor, the
said talent fees shall be considered as supplemental compensation and, thus, be subject to
the withholding tax on compensation."
3. Return and Payment of Tax

Sec. 58.
Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld
under Section 57 by withholding agents shall be covered by a return and paid to, except in
cases where the Commissioner otherwise permits, an authorized Treasurer of the city or
municipality where the withholding agent has his legal residence or principal place of
business, or where the withholding agent is a corporation, where the principal office is
located.
The taxes deducted and withheld by the withholding agent shall be held as a special fund in
trust for the government until paid to the collecting officers.
The return for final withholding tax shall be filed and the payment made within twenty-five
(25) days from the close of each calendar quarter, while the return for creditable
withholding taxes shall be filed and the payment made not later than the last day of the
month following the close of the quarter during which withholding was made:
Provided, That the Commissioner, with the approval of the Secretary of Finance, may require
these withholding agents to pay or deposit the taxes deducted or withheld at more frequent
intervals when necessary to protect the interest of the government.
Statement of Income Payments Made and Taxes Withheld. - Every withholding agent
required to deduct and withhold taxes under Section 57 shall furnish each recipient, in
respect to his or its receipts during the calendar quarter or year, a written statement showing
the income or other payments made by the withholding agent during such quarter or year,
and the amount of the tax deducted and withheld therefrom, simultaneously upon payment
at the request of the payee, but not later than the twentieth (20th) day following the
close of the quarter in the case of corporate payee, or not later than March 1 of the
following year in the case of individual payee for creditable withholding taxes. For
final withholding taxes, the statement should be given to the payee on or before
January 31 of the succeeding year.
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Annual Information Return. - Every withholding agent required to deduct and withhold
taxes under Section 57 shall submit to the Commissioner an annual information return
containing the list of payees and income payments, amount of taxes withheld from each
payee and such other pertinent information as may be required by the Commissioner. In the
case of final withholding taxes, the return shall be filed on or before January 31 of the
succeeding year, and for creditable withholding taxes, not later than March 1 of the
year following the year for which the annual report is being submitted. This return, if
made and filed in accordance with the rules and regulations approved by the Secretary of
Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the
requirements of Section 68 of the NIRC in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required in this Subsection.
Income of Recipient. - Income upon which any creditable tax is required to be withheld at
source under Section 57 shall be included in the return of its recipient but the excess of the
amount of tax so withheld over the tax due on his return shall be refunded to him subject to
the provisions of Section 204; if the income tax collected at source is less than the tax due
on his return, the difference shall be paid in accordance with the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its implementing rules and
regulations are hereby considered trust funds and shall be maintained in a separate account
and not commingled with any other funds of the withholding agent.
Registration with Register of Deeds. - No registration of any document transferring real

property shall be effected by the Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been reported, and the capital
gains or creditable withholding tax, if any, has been paid: Provided, however, That the
information as may be required by rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, shall be annotated by the Register of
Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided,
further, That in cases of transfer of property to a corporation, pursuant to a merger,
consolidation or reorganization, and where the law allows deferred recognition of income in
accordance with Section 40, the information as may be required by rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall
be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or
Condominium Certificate of Title of the real property involved: Provided, finally, That any
violation of this provision by the Register of Deeds shall be subject to the penalties imposed
under Section 269 of this Code.
C. Withholding on Wages
Sec. 78. Definitions.
Wages - The term 'wages' means all remuneration (other than fees paid to a public official) for
services performed by an employee for his employer, including the cash value of all remuneration
paid in any medium other than cash, except that such term shall not include remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government or an
international organization.
If the remuneration paid by an employer to an employee for services performed during one-half (1/2)
or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all
the remuneration paid by such employer to such employee for such period shall be deemed to be
wages; but if the remuneration paid by an employer to an employee for services performed during
more than one -half (1/2) of any such payroll period does not constitute wages, then none of the
remuneration paid by such employer to such employee for such period shall be deemed to be wages.
Payroll Period - a period for which payment of wages is ordinarily made to the employee by his
employer, and the term "miscellaneous payroll period" means a payroll period other than, a daily,
weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period.
Employee - any individual who is the recipient of wages and includes an officer, employee or elected
official of the Government of the Philippines or any political subdivision, agency or instrumentality
thereof. The term "employee" also includes an officer of a corporation.
Employer - means the person for whom an individual performs or performed any service, of
whatever nature, as the employee of such person, except that:
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(1) If the person for whom the individual performs or performed any service does not have control of
the payment of the wages for such services, the term "employer" (except for the purpose of
Subsection (A) means the person having control of the payment of such wages; and
(2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign
partnership or foreign corporation not engaged in trade or business within the Philippines, the
term "employer" (except for the purpose of Subsection (A) means such person.
Sec. 79. Income Tax Collected at Source

Requirement of Withholding - Every employer making payment of wages shall deduct and withhold
upon such wages a tax determined in accordance with the rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no
withholding of a tax shall be required where the total compensation income of an individual does not
exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is
higher.
Tax Paid by Recipient - If the employer, in violation of the provisions of this Chapter, fails to deduct
and withhold the tax as required under this Chapter, and thereafter the tax against which such tax
may be credited is paid, the tax so required to be deducted and withheld shall not be collected from
the employer; but this Subsection shall in no case relieve the employer from liability for any penalty
or addition to the tax otherwise applicable in respect of such failure to deduct and withhold.
Refunds or Credits -
(1) Employer. - When there has been an overpayment of tax under this Section, refund or credit
shall be made to the employer only to the extent that the amount of such overpayment was not
deducted and withheld hereunder by the employer.
(2) Employees. -The amount deducted and withheld under this Chapter during any calendar year
shall be allowed as a credit to the recipient of such income against the tax imposed under Section
24(A) of this Title. Refunds and credits in cases of excessive withholding shall be granted under
rules and regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited
within three (3) months from the fifteenth (15th) day of April. Refunds or credits made after such
time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the
three-month period to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of counter-signature by the Chairman, Commission on Audit
or the latter's duly authorized representative as an exception to the requirement prescribed by
Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292, otherwise known
as the Administrative Code of 1987.
Personal Exemptions -
In General. - Unless otherwise provided by this Chapter, the personal and additional exemptions
applicable under this Chapter shall be determined in accordance with the main provisions of this Title.
Exemption Certificate. -
(a) When to File. - On or before the date of commencement of employment with an employer, the
employee shall furnish the employer with a signed withholding exemption certificate relating to
the personal and additional exemptions to which he is entitled.
(b) Change of Status. - In case of change of status of an employee as a result of which he would be
entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days
from such change, file with the employer a new withholding exemption certificate reflecting the
change.
(c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the
determination of the amount of taxes to be withheld.
(d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or
refuses to file a withholding exemption certificate, the employer shall withhold the taxes
prescribed under the schedule for zero exemption of the withholding tax table determined
pursuant to Subsection (A) hereof.
Withholding on Basis of Average Wages - The Commissioner may, under rules and regulations
promulgated by the Secretary of Finance, authorize employers to:
(1) estimate the wages which will be paid to an employee in any quarter of the calendar year;
(2) determine the amount to be deducted and withheld upon each payment of wages to such
employee during such quarter as if the appropriate average of the wages so estimated
constituted the actual wages paid; and
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(3) deduct and withhold upon any payment of wages to such employee during ;such quarter such
amount as may be required to be deducted and withheld during such quarter without regard to
this Subsection.
Husband and Wife - When a husband and wife each are recipients of wages, whether from the same
or from different employers, taxes to be withheld shall be determined on the following bases:
(1) The husband shall be deemed the head of the family and proper claimant of the additional
exemption in respect to any dependent children, unless he explicitly waives his right in favor of
his wife in the withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero
exemption of the withholding tax table prescribed in Subsection (D)(2)(d) hereof.
Nonresident Aliens - Wages paid to nonresident alien individuals engaged in trade or business in
the Philippines shall be subject to the provisions of this Chapter.
Year-End Adjustment - On or before the end of the calendar year but prior to the payment of the
compensation for the last payroll period, the employer shall determine the tax due from each
employee on taxable compensation income for the entire taxable year in accordance with Section
24(A). The difference between the tax due from the employee for the entire year and the sum of
taxes withheld from January to November shall either be withheld from his salary in December of the
current calendar year or refunded to the employee not later than January 25 of the succeeding year.
Sec. 79. Liability for Tax

Employer - The employer shall be liable for the withholding and remittance of the correct amount of
tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and
remit the correct amount of tax as required to be withheld under the provision of this Chapter, such
tax shall be collected from the employer together with the penalties or additions to the tax otherwise
applicable in respect to such failure to withhold and remit.
Employee - Where an employee fails or refuses to file the withholding exemption certificate or
willfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld
by the employer shall be collected from him including penalties or additions to the tax from the due
date of remittance until the date of payment. On the other hand, excess taxes withheld made by the
employer due to:
(1) failure or refusal to file the withholding exemption certificate; or
(2) false and inaccurate information
shall not be refunded to the employee but shall be forfeited in favor of the Government.
Sec. 81. Filing of Return and Payment of Taxes Withheld

Except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on
wages of employees shall be covered by a return and paid to an authorized agent bank; Collection
Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal
residence or principal place of business, or in case the employer is a corporation, where the principal
office is located.
The return shall be filed and the payment made within twenty-five (25) days from the close of each
calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary
of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent
intervals, in cases where such requirement is deemed necessary to protect the interest of the
Government.
The taxes deducted and withheld by employers shall be held in a special fund in trust for the
Government until the same are paid to the said collecting officers.
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Taxation-1 (Income Tax Only)

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BASIC CONCEPTS IN INCOME TAXATION Tax I

I. BASIC CONCEPTS IN INCOME TAXATION

Nature of income tax

Purpose(s) of Income Tax: Fiscal/Non-Fiscal

Differentiated from Capital

Classification of Income According to Source

Taxability of Income, Requisites

Tests to Determine Realization of Income for Tax Purposes

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Classifications of Income Subject to Philippine Income Tax

II. GENERAL CLASSIFICATION OF TAXPAYERS

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III. TAX ON INDIVIDUALS

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B. Three Kinds of Income

ILLUSTRATION: Mr. X sold directly to a buyer shares of stock of a

On the First P100,000, at 5% P 5,000

2. On sale, exchange, or other disposition of real property in the Philippines,

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ILLUSTRATION: Mr. N sold a land and building for P2,000,000 when

EXCEPTION (i.e., NO NEED TO PAY CAPITAL GAINS TAX): No

If there is no full utilization of the proceeds of sale or

ALTERNATIVE TAXATION: In case of a sale or other disposition of

What is the tax implication of sales / dispositions of capital assets NOT

2. Passive Income subject to Final Tax

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Winnings, except Philippine Charity sweepstakes / lotto winnings 20%

Prizes exceeding P10,000 20%

3. Other Income subject to Schedular/Graduated Tax Rates3

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Rule for Married Individuals Married individuals, whether citizens, resident or

C. Deductions [from Income Subject to Schedular/Graduated Tax Rates], In General

Kind of Taxpayer Basic Personal Exemption (BPE)

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Who is a Head of the Family? [Sec 35(A), NIRC]

Note: Senior Citizen Law (RA 7434 as amended by 9257) provides

2. Additional Exemptions (AE) depends on the number of qualified dependent

Who may claim personal exemptions? Citizens (whether resident or non-

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ILLUSTRATION OF RECIPROCITY PRINCIPLE:

Change of Status [Sec 35(C), NIRC]

Summary of Rules with respect to Change in Status:

Dependent Child (maximum of four)

ILLUSTRATIONS: (Given: taxpayer in question is a resident citizen)

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E. Summary of Tax Bases and Tax Rates

1. Compensation / Business / Profession

Schedular Income Tax Rates (Sec. 24, NIRC)

5. Interest from any currency bank

6. Royalties from books, literary works,

7. Interest from long-term deposit or EXEMPT; However:

9. Interest (Expanded Foreign Currency

IV. TAX ON CORPORATIONS

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Domestic Corporation (DC) Within and without the Philippines Yes

Resident Foreign Corporation (RFC) Within the Philippines Yes

Non-resident Foreign Corporation Within the Philippines No*

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D. Tax on Domestic Corporations

1. Capital Gains subject to Capital Gains Tax

2. Passive Income Subject to Final Tax

Dividends received from another domestic corporation (Intercompany Dividend)