TAXABLE INCOME

TAX IMPLICATION
Income derived from rendering of services under an Does not cover
EE-ER relationship compensation for services
rendered by an independent
Covers salaries, wages, emoluments, honoraria, contractor.
bonuses, allowances, fringe benefits, director’s fee,
taxable pensions and retirement pay, etc. Does not cover ordinary &
necessary expenses,
Covers COLA, PERA, housing allowance, overtime pay, attorney’s fees, or income of
emergency pay, hazard pay, rice & clothing partner from GPP.
allowance, medical allowance, and grocery allowance.
Included in taxable income of EE.
COMPENSATION Covers amount of cancelled/forgiven debt made in
INCOME consideration of services rendered.
Deductible ordinary/necessary expense to the ER.
Premiums paid by ER (taxable to EE – deductible to
ER) of life insurance policy of EE whose family,
executor, admin or estate is the beneficiary.
If beneficiary is the ER, whether directly or
indirectly, not taxable to EE, not deductible to
ER.

Covers income tax paid by ER in consideration of EE’s

services.

INCOME FROM
CONDUCT OF Gains/profits derived from rendering of services,
TRADE OR selling merchandise, manufacturing products, farming “BUSINESS INCOME”
BUSINESS and long-term construction contracts.

INCOME FROM Fees derived from engaging in an endeavor requiring

EXERCISE OF special training as professional as a means of “PROFESSIONAL INCOME”
PROFESSION livelihood.
GAINS FROM
DEALINGS IN
PROPERTY

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 20% Final Tax - (to ALL depositors) Including any other monetary
• except NRA-NETB – 25% final tax benefit/yield from trust
• except depositor is EE trust fund or accredited funds and similar
Local Currency
retirement plan – exempt arrangements
• except landowner as to interest on price of land which
tenant-purchaser pays him – exempt Including Discount revenues
Interest Income 7.5 % Final Tax (if RC, RA depositor) in financing or factoring
from deposit or • except if foreign currency deposit in a bank located arrangements and issuances
deposit without – Income Tax (if RC, DC) of long-term instruments and
substitutes o except if NRC, NRA-ETB, NRA-NETB, NRFC – bonds
Foreign Currency exempt (income w/o)

(Offshore Banking Unit or • The OBU or FCDU itself is exempt from all taxes (except
Foreign Currency Deposit Unit) some transactions not exempted by the Monetary
Board)
o Except, 10% final tax on interest income from
loans granted to residents other than offshore
units in the Phils or other depositary banks (?)
INTEREST
Interest Income
INCOME
from traditional
Income Tax (to ALL depositors)
loans by LOCAL
• except NRA-NETB – 25% final tax
banks and other
• except NRFC – 20% final tax
creditors

Interest Income Exempt (RC, NRC, RA, NRA-ETB) Long-term deposit – held for
from long-term • except if NRA-NETB – 25% >/= 5 years
deposits or • except if holder of certificate pre-terminates
investments Individual depositor deposit/investment in
o less than 3 yrs – 20% final tax
o 3 yrs to < 4yrs – 12% final tax
o 4yrs to < 5yrs – 5% final tax
Corporation depositor Income Tax
Interest Income 20% final tax (to ALL depositors)
from loans by • Except if lower rate in treaties
FOREIGN (NRFC) • Except if loan is granted by foreign govt or foreign
financial institution controlled/owned by foreign govt,
etc. – exempt (?)

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 Paid by DC SITUS:
Paid to RC,NRC, RA 10% final tax If received from DC – income
within
Paid to NRA-ETB 20% final tax
Also covers:
• Dividends from a joint
Paid to NRA-NETB 25% final tax stock company, insurance
or mutual fund companies,
regional operating
Paid to DC or RFC Exempt headquarters of multi-
national companies;
15% final tax (“preferential tax rate” subject to Rule on
Cash/Property Reciprocity)
Dividend
Paid to NRFC
Otherwise, 30% corporate Income Tax

Tax Sparing Rule – 15% tax (or 30%-15%) is spared

Paid by FC If only < 50% of gross income of FC for the 3-yr preceding
declaration of dividends are derived from sources within –
only those derived from sources within are taxable within
DIVIDEND (graduated rates)
Paid to any
If >/= 50% of gross income of FC for the 3-yr preceding
declaration of dividends are derived from sources within –
taxable as income within (graduated rates)
General Rule: Exempt

Not exempt if:

• Subsequent cancellation or redemption of stock
dividend
o If source of redeemed stock dividend is the original
capital investment – exempt (mere return of capital)
Stock Dividend o If otherwise - Income Tax (treated as cash/property
dividend)
• Recipient is other than a stockholder
• Stock dividend declaration resulted to change of
interest in capital stocks of the stockholders
• Distribution of treasury stocks
• Declared in the guise of treasury stock dividend.
• Different classes of stock were issued.

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 20% final tax (to recipient) SITUS: location of the
Paid to RC, NRC, RA, NRA-ETB,
• Except books, literary works and musical compositions property or interest in such
DC, RFC
– 10% final tax property
25% final tax
Paid by DC Paid to NRA-NETB
• Except lowered rates under treaty
ROYALTY 35% final tax
INCOME Paid to NRFC • Except lowered rates under treaty
o US FC – 25%, except BOI-registered enterprise – 15%
Paid to RC, DC Income Tax
Paid by FC Paid to NRC, RA, NRA-ETB, NRA-
Exempt (income w/o)
NETB, RFC, NRFC
Income Tax SITUS: location of the
property or interest in such
Treated as additional income of lessor (part of taxable property
income of lessor):
• Obligations of the lessor is assumed/paid by the lessee
(ex. Real Property Tax);
• Permanent improvement introduced by the lessee.
• Insurance premiums paid by lessee on property.
• Dividends paid by lessee to stockholders of lessor-
corporation
RENTAL • Interest paid by lessee to holder of bonds issued by
INCOME lessor-corporation.
• Advance rentals (if lessor can use such rent w/o
restriction)
• If security of deposit only – not taxable to lessor
• if considered loan – not taxable to lessor

Excluded from gross income: (subject to different tax rate)

1. Rent paid to non-resident owner of vessels
chartered by Phil nationals – 4.5%
2. Rent paid to non-resident owner or lessor of
aircraft, machineries & other equipment – 7.5%
20% final tax If derived from sources w/o
Prize – result of
Paid to RC, NRC, RA, NRA-ETB • Except if </=P10,000 , Income Tax – not taxable
efforts
PRIZES AND • Except PCSO and lotto winnings - ?
WINNINGS Paid to NRA-NETB 25% final tax
Winning – product
of chance Paid to DC, RFC, NRFC Income Tax

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 Annuity policies sold by insurance companies which Excluded (from Income Tax) up to amount equal to
ANNUITIES provide installment payments for life or for a aggregate premiums or considerations paid (return of
guaranteed period, whichever is longer premium)
NIAT – net income after tax
If GPP: 10% final tax
SHARE of partner in Payments made to a partner
If other than GPP: subject to final tax as a “dividend”
NIAT of taxable for services rendered are
• If RC, NRC, RA – 10%
partnership taxable as compensation
• If NRA-ETB – 20%
income.
• If NRA-NETB – 25%
INFORMER’S Information on violations of
10% final tax
REWARD NIRC
Citizen or alien employed by: Covers salaries, wages,
1. Regional or area HQ and Regional Operating HQ annuities, compensation,
SPECIAL CLASSES of multi-national companies in Phils; remuneration, and other
15 % Income Tax rate
OF INDIVIDUAL EE 2. Offshore banking units established in Phils. emoluments such as
3. Foreign service contractor or sub-contractor honoraria and allowances
engaged in petroleum operations in the Phils.
International Air Carriers
2.5% of Gross Philippine Billings
International Shipping
Offshore Banking Units Exempt from all taxes (except on some transactions not
exempted by the Monetary Board)
• Except, 10% final tax on interest income from loans
SPECIAL RESIDENT
FCDU granted to residents other than offshore units in
FOREIGN
the Phils or other depositary banks (onshore
CORPORATIONS
income)
Exempt from all local taxes, fees & charges
Regional or area HQ of multi-national companies • Except real property tax on land improvements &
equipments
Regional Operating HQ of multi-national companies 10% Income Tax
If NRFC – 25% final tax
SPECIAL Cinematographic Film Owners, Lessors or Distributors
N.B. If RC, NRC, RA – Income Tax
NON-RESIDENT
If NRA-ETB, NRA-NETB – 25% final tax only covers INCOME WITHIN
FOREIGN
Owner or Lessor of Vessels Chartered by Phils
CORPORATIONS 4.5% of gross rent, lease or charter fees
Nationals
Owner or lessor of aircraft & other equipment 7.5% gross rent or fee

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 CAPITAL TRANSACTIONS
(generally subject to Income Tax, except the ff.)
If not sold/transferred by real estate dealer: SITUS: Location of real property
1. If used in trade/business – (ordinary asset ) Income Tax
2. If capital asset – 6% Capital Gains Tax (to seller) based on GSP or GSP – gross selling price (cost/loss is not deductible)
zonal value, higher
• If buyer is the govt, the seller has option to treat proceeds as HOLDING PERIOD
Sale of REAL under Income Tax (schedular) • Applies to individuals
PROPERTY • Only 50% of the capital gain is subject to capital gains tax if the
Sold/transferred by real estate dealer – (ordinary asset) – Income Tax capital asset has been held > 12 months

If proceeds of sale of principal residence is to be used to

If not sold by dealer in securities:
1. Listed/traded in SE – (capital asset) exempt from Income Tax;
subject to “transaction tax” of ½ of 1% of FMV or GSP (withheld
Sale of Shares of Stock by broker from the seller)
of a DC 2. Not listed/traded in SE – final tax (to seller) – 5% if </= P100,000
and 10% on any amount in excess of P100,000
acquire/construct new principal residence – exempt up to utilized
amount
SITUS: income within, regardless of where sold
Except – Wash Sale (taxable) ?
Except - Short Sale (treated as capital gain) ?

When sold/transferred by dealer in securities, listed or unlisted -

(ordinary assets) – Income Tax

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 FRINGE BENEFITS
Housing Exempt (from FBT) if for ER’s Convenience: e.g. General Rule: Fringe Benefits are subject to FRINGE
1. Situated w/n ER’s business premises or w/n 50m. therefrom BENEFIT TAX
2. Temporary housing units
3. Military housing units Managerial/supervisorial EE – subject to final tax (FBT)
Expense account Exempt (from FBT) if incurred in performance of his duties (ordinary/necessary to • not reported in Gross Income of EE
ER’s business) • FBT is collected from ER. ER can deduct the fringe
Motor Vehicle benefit & the FBT.
Household Personnel
Expense of EE borne by Rank & File EE
ER • reported as part of Gross Compensation Income of EE
Interest on loan If interest < 12%, the amount of interest below the 12% is subject to FBT • Fringe benefit is reported as deduction by ER.
extended by ER to EE If >/= 12 %, exempt from FBT
Membership benefit in
social/other athletic Computation:
clubs applicable rate
Expenses for foreign Exempt (from FBT): (up to $300/day) x
travel 1. If paid/incurred in connection w/ business of ER, and [ monetary value of FB
2. If substantiated by receipts/docs divided by (100% - applicable rate) ]
=
Cost of airplane ticket: FBT
1. Economic class – exempt (from FBT)
2. Business class – exempt (from FBT) up to 70%
Holiday & vacation e.g. for RA rated at 32% (schedular) w/ FB at P30,000
expenses FBT = 32% x (30,000/68%)
Educational assistance Granted to Exempt (from FBT) if
managerial/ • With written agreement that EE
supervisory EE will stay employed w/ ER w/n a The ff. are not subject to FBT:
period of time is allowed 1. Separation benefits given to EE who are
Granted to Exempt (from FBT) if involuntarily separated from work.
dependent of EE • ER adopted competitive exams 2. Contributions of the ER for the benefit of the EE to
under the scholarship program retirement, insurance & hospitalization benefit
Life/health/non- General Rule: cost of premiums paid by ER is taxable (FBT) to the EE plans.
life/accident insurance 3. Benefits given to rank & file EE.
premiums Exempt if: 4. De minimis benefits.
1. SSS 5. Benefits granted for the convenience of the ER.
2. GSIS, and similar contributions
3. Group Insurance Policy of EE

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 DE MINIMIS BENEFITS
Amount of Exemption
Medical cash benefits given to the dependent of the EE P 125/month Not subject to FBT.
Medical benefit granted to EE P 10,000/year Not taxable income.
EE's achievement award P 10,000/year
Rice subsidy/allowance P 1,500/month
Clothing/uniform benefit P 4,000/year RATA ( representation & transportation
Christmas/anniversary GIFT P 5,000/year allowance) &
PERA (personnel economic relief allowance) –
If Christmas BONUS, limited to P30,000, along with not taxable income
th
13 month pay and other benefits
Laundry Allowance P 300/month ACA (additional compensation income) – part of
Commuted/ monetized value of unused VL/SL Gov’t EE: “other benefits” (at ceiling of P30,000)
VL: exempt
SL: exempt

Private EE:
VL: exempt up to value of 10 days, excess is taxable
SL: taxable

Retiree:
Exempt from all monetized VL/SL

Fruits, books, cars, gifts on occasions of EE Reasonable amount

Daily mean allowance for overtime pay Exempt up to amount equal to 25% of basic minimum
wage

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 EXCLUSIONS FROM GROSS INCOME
Paid by reason of death of the insured Excluded from Income Tax (whoever Covers:
the beneficiary, whether revocable or 1. Group insurance,
irrevocable) 2. death benefits under the Workmen’s
Compensation Insurance

When insurance contract is transferred

LIFE INSURANCE
If revocable designation, subject to – amount excludible (by transferee) is
POLICY PROCEEDS
Estate Tax. only the amount/value of actual
If estate, executor, administrator is the consideration paid and the premiums
beneficiary, whether revocable or not, paid later by the transferee. When the
AMOUNT
subject to Estate Tax. consideration & premiums paid exceed
RECEIVED BY
If proceeds of group insurance, not the proceeds, no amount includible in
INSURED AS
subject to Estate Tax. gross income
RETURN OF
PREMIUM
Paid by reason other than death (life insurance, endowment or Excluded (from Income Tax) up to
annuity contracts) amount equal to aggregate premiums
or considerations paid (return of
premium)

Excess is included in gross income.

Donor – subject to Donor’s Tax
Donee – no Donee’s Tax; excluded
Gifts/Donation Inter Vivos from Income Tax
GIFTS,
BEQUESTS,
DEVISES, Donor/Testator – subject to Estate Tax
DONATIONS Bequests/Devises/Donation Mortis Causa Donee/Heirs – no Inheritance tax;
excluded from Income Tax
Compensation for
Hospitalization expenses – exempt
Moral damages – exempt
COMPENSATION Exemplary damages – exempt
FOR INJURIES OR Lost of anticipated profit – taxable
SICKNESS Cost of repair of damaged car –
exempt
Disability benefits - exempt
Income tax (to EE) if given in
consideration of service rendered
(whether constituting demandable debt
or not)
Income from such property is taxable.
May be received from accident or health
insurance, or under Workmen’s
Compensation Act
Also covers award for DAMAGES (thru
suit or agreement).

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INCOME EXEMPT Excluded (from Income Tax) e.g.:
UNDER TAX Income of US consular officials in the
TREATIES Phils. In connection w/ such service
Requisites: (optional retirement) Excluded (from Income Tax)
1. Under reasonable private benefit If there is an established retirement
Retirement Benefits plan, BIR-approved plan Also exempt from Estate Tax plan, its requisites are followed ?
Under RA 4917 2. Service (in same ER) >/= 10yrs
3. Age >/= 50 years old
(PRIVATE Official/EE) 4. Can be availed of by official/EE
only once in his lifetime
Retirement Benefits If there is NO established retirement Retirement benefits given to EE under
Under RA 7641 plan, excluded if: CBA or any other agreement – exempt
1. Official/EE was in service of same
ER >/= 5yrs
2. Official/EE is >/= 60 years old
Separation Pay • Must be received on account of Excluded (from Income Tax) E.g.
causes BEYOND the control of 1. Death Benefit
official/EE; otherwise, taxable 2. Physical Disability Benefit
• Regardless of age & length of 3. Sickness Benefit
service 4. Terminal Leave Pay (commutation
RETIREMENT
• May be availed of more than of VL/SL)
BENEFITS,
once 5. Social security benefits, retirement
PENSIONS,
• Includes compulsory retirement gratuities, pensions & other similar
GRATUITIES, ETC.
or retrenchment benefits received by resident
citizens and aliens from foreign
gov’t agencies or institutions,
private or public
6. Benefits due to residents under US
Veterans Admin.
7. GSIS & SSS benefits
Monetized value of For compulsory retirement: exempt
retiree’s accumulated Private EE: age >/= 60 yrs old
vacation leave, sick Gov’t EE: age >/= 65 yrs old
leave Judiciary: age >/= 70 yrs old

For optional retirement: exempt up to

value of 10 days only
• Service >/= 10 yrs
• Age >/= 50 yrs

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 Sources of Investment: loans, deposits, stocks, Dividends, Exempt (from Income Tax) Also covers (1) financing institution
INCOME DERIVED Interest Income owned, controlled or enjoying
BY FOREIGN refinancing from foreign gov’t, and (2)
GOVERNMENT regional financial institution established
by foreign gov’t
INCOME DERIVED Sources: Exempt (from Income Tax) Also covers gov’t instrumentalities, e.g.
BY THE 1. from public utility, GOCC’s
GOVERNMENT & 2. exercise of essential gov’t functions
ITS POLITICAL
SUBDIVISIONS
Primarily in recognition Requisites: Excluded (from Income Tax)
of scientific, charitable, 1. Recipient was selected w/o any
religious, artistic, action on his part to enter the Except: If he entered the contest –
literary , educational or contest or proceeding; taxable
PRIZES AND
civic achievement 2. Recipient is not required to
AWARDS
(SCRA-LEC) render substantial future services DONOR of amount used as prize is
as a condition exempt from Donor’s Tax; and can
deduct amount as deductible expense
(RA 7549)
Local or international Requisite for Exemption If not sanctioned by POC: subject to
competition; • Sport activity should be 20% final tax
Whether held in the sanctioned by the Phils. Olympic • Except if </=P10,000 , Income Tax
PRIZES AND Phils or abroad Committee
AWARDS IN If paid to NRA-NETB, 25% final tax.
SPORTS
COMPETITION If not passive income, i.e., participating
in events is profession/occupation –
Income Tax
TH
13 MONTH PAY Excluded up to aggregate amount of Also covers:
AND OTHER P30,000 1. Christmas Bonus
BENEFITS 2. Productivity Incentives
Excluded (from Income Tax) Also covers:
GSIS, SSS, AND
1. Medicare
OTHER
2. Pag-ibig
CONTRIBUTIONS
3. Union dues
GAINS FROM Excluded (from Income Tax)
REDEMPTION OF
SHARES IN
MUTUAL FUNDS

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 GAINS FROM If > 5 yrs, excluded Does not cover interest from such
SALE/EXCHANGE/ If </= 5 yrs, taxable transaction.
RETIREMENT OF
BONDS,
DEBENTURES OR
OTHER
CERTIFICATES OF
INDEBTEDNESS
1. Prizes received in charity, horse racing, sweepstakes from PCSO
2. Salaries, stipend in dollars received by non-Filipino citizens serving as staff for
1. Int’l Rice Research Institute
2. Ford Foundation Grants
3. SEAFDEC
EXEMPT UNDER
4. Population Council of New York
SPECIAL LAWS
3. Income from bonds & securities
1. For sale in int’l market
2. Issued by EPZA
4. Income derived from the installment sales of houses to their EE & workers or low-income groups in housing projects or income from rentals
thereof

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 EXEMPT CORPORATIONS/ASSOCIATIONS

General Professional Partnership All other partnerships, no matter how created or organized, are taxable.
Co-ownership Exempt when the activities are limited merely to the preservation of the co-owned property.

Co-owners are liable for income tax in their individual capacity.

Joint Venture for purpose of undertaking construction
projects
Joint consortium for purpose of engaging in petroleum, coal,
geothermal & other energy operations in accordance with
the consortium agreement with the government
GSIS General Rule: GOCC’s are taxable
SSS
Philhealth
PCSO
Regional or Area Headquarters of multi-national companies Regional OPERATING Headquarters are subject to 10% Income Tax
Under Sec 30 Labor, Agricultural or horticultural Common characteristics:
organization 1. Non-stock
Mutual savings bank No capital stock represented by 2. Non-profit
shares 3. No part of the income must
Cooperative Bank No capital stock organized inure to the benefit of a
Beneficiary society, order or Operating for the exclusive benefit particular member/individual
association of the members (ex. Fraternity) 4. For social welfare, religious,
Cemetery company Owned and operated exclusively for charitable and other non-profit
the benefit of its members purposes
Non-stock Charitable Also exempt from Property
corporation or Tax (if actually, directly, Exempt from Income Tax only on
association Organized and operated exclusively exclusively…) the income, derived as non-stock
for these purposes non-profit institution (no matter
Its Donor is exempt from where the income came from),
Donor’s Tax when such income is actually,
Cultural Its Donor is exempt from directly and exclusively USED for
Donor’s Tax its specific purpose.
Athletic
Religious Also exempt from Property THEIR INCOME OF WHATEVER KIND
Tax (if actually, directly, AND CHARACTER FROM ANY OF
exclusively…) THEIR PROPERTIES (REAL OR
13 of 23 ANALIA – INCOME TAX

Institution for
rehabilitation of
veterans
Scientific
Organization
Business League, chamber of
commerce, or board of trade
Civic league or organization
Non-stock Non-profit educational
institution
Government educational institution
Farmers’ and 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
Farmers’, fruit growers’ or like
association
PERSONAL) OR FROM ANY OF THEIR
Its Donor is exempt from ACTIVITIES CONDUCTED FOR
Donor’s Tax PROFIT REGARDLESS OF THE
DISPOSITION MADE OF SUCH
INCOME, SHALL BE SUBJECT TO
TAX.
Organized exclusively for the
promotion of social welfare
Actually, directly & exclusively used Also exempt from Property
for educational purpose Tax (if actually, directly,
exclusively…)
Its Donor is exempt from
Donor’s Tax
Actually, directly & exclusively used Also exempt from Property
for educational purpose Tax; (if actually, directly,
exclusively…)
Its Donor may be exempt
from Donor’s Tax
Income consists solely of
assessments, dues, and fees
collected from members for the sole
purpose of meeting its expenses
Organized as a sales agent for the
purpose of marketing the products
of its members and turning back to
them the proceeds of sale, less the
necessary selling expenses on the
basis of the quantity of produce
finished by them
14 of 23 ANALIA – INCOME TAX
Private NON-STOCK NON-PROFIT PRIVATE Also exempt from Property Private educational institution
educational EDUCATIONAL INSTITUTION Tax (if actually, directly, which deviates from its purely
institutions exclusively…) educational purpose and activity is
Assets and revenues used directly, treated like any DC.
actually and exclusively for private Its Donor is exempt from
educational purposes Donor’s Tax
PROPRIETARY PRIVATE EDUCATIONAL Same with non-profit hospitals 10% preferential tax rate if
INSTITUTIONS gross income from unrelated
activity < 50% of total gross
Not used directly, actually and income from all sources
exclusively for private educational
purposes Otherwise, 30% corporate
income tax
Agricultural multi- Registered with the Cooperative Exempt from Income Tax on
purpose Dev’t Authority transactions with members
cooperative and non-members within 10
years from date of
registration. After 10 years,
exempt only on business
transactions with members.
National Housing Covers all fees and charges of any
Authority kind, local or national
Bangko Sentral ng Covers all national, provincial,
Pilipinas municipal and city taxes for a
period of 5 years

Also exempt from

documentary stamp
PEZA-registered Exempt within 6 or 4 yrs from
enterprises date of commercial operation,
depending if activities are
considered pioneer or non-
pioneer
Barangay Micro Exempt from income tax for
Business income arising from the
Enterprises operation of its enterprise

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 DEDUCTIONS AND PERSONAL/ADDITIONAL EXEMPTIONS
Individuals Business expenses Deductible only from gross business Itemized deductions or
income optional standard deduction (up to 40% of gross
sales/receipts)

Not deductible on purely compensation income earner.

Expenses from practice of Deductible only from gross ☺
profession professional income
Not applicable to NRA-NETB since he is subject to 25%
final tax on income from sources within
Premium payments for Requisites: Amount deductible is P
health and/or • Taxpayer’s family gross income 2,400 per family (P
hospitalization insurance </= P250,000/year 200/month)
(special deduction) • If taxpayer is married, deduction
can be claimed by spouse
claiming additional exemption
Personal exemptions BASIC PERSONAL EXEMPTION P 50,000 each individual Allowed for RC, NRC, RA, NRA-ETB (w/ reciprocity)
taxpayer
• Intended as substitute
for disallowance of ADDITIONAL EXEMPTION P 25,000 for each Allowed for RC, RA.
deduction for dependent child of
personal, living or taxpayer (up to 4 only) Husband is the proper claimant. Except if husband is
family expenses. 1. Unemployed,
2. Working abroad, or
3. Explicitly waived his right for ALL dependents

If legally separated, can be availed of by spouse having

custody of child/children. Claim by both spouses must
not exceed 4.
Corporation Itemized deduction, or
Optional standard deduction (up to 40% of gross income)

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 ITEMIZED DEDUCTIONS FROM GROSS INCOME
Requisites of Deductibility Requisites of Deductibility
Ordinary/ 1. Must be ordinary and necessary Compensation for 1. Personal service is actually rendered
Necessary expense personal service 2. Compensation paid is for such service
expenses 2. Incurred within the taxable year 3. Reasonable
3. Reasonable
4. Paid connection with the conduct of Covers:
trade/business, or exercise of • Salaries, wages, commissions, professional fees, VL pay, retirement pay,
profession; or attributable to the and other
dev’t, mgmt or operation of the • Bonuses are deductible if paid in good faith as addt’l compensation &
trade/business or profession subjected to withholding tax
5. Substantiated w/ adequate proof • Pensions & compensation for injuries are deductible if not compensated
6. If subject to withholding tax, such for by insurance, etc.
should have been previously withheld • Grossed-up monetary value of fringe benefit is deductible as long as FBT
and remitted on time to BIR on it has been paid.
7. Not contrary to law, public policy or • Housing and meals
morals

Business expenses
• Courtesy discounts
Travelling 1. Incurred while away from location of EE’s principal place of employment
expenses 2. In the pursuit of trade/business
*extraordinary repairs are capital
expenditures. Covers:
• Transportation, meals, lodging
Rent expenses 1. Made as a condition to the continued use or possession of property
2. Taxpayer has not taken or Is not taking title to the property or has no equity
other than that of a lessee, user or possessor
3. Property must be used in trade/business
4. Subjected to withholding tax of 5%, otherwise, not deductible
Entertainment, • Does not constitute a bribe, kickback or other similar payments
amusement &
recreation If engaged in sale of goods/properties, </= 0.5% of net sales
expenses If engaged in sale of service, </= 1% of net revenues
If engaged in both – ?
Cost of material &
supplies
Repair expenses Minor repair expenses only.
Major repair expenses are not deductible.

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 Miscellaneous Covers:
expenses • Amortization of organization costs over the life of the corpo
• Costs of defending a civil suit affecting the business
• Advertising & promotional expenses.
Interests 1. There is an indebtedness by the General rule: the entire amount shall be allowed as a deduction from the taxpayer’s gross income
taxpayer
2. Interest is legally due Limitation:
3. Interest is stipulated in writing • amount of deductible interest shall be reduced by 33% of the interest income earned subjected to
4. Interest expense incurred during final withholding tax
taxable year
5. Connected with trade/business/ Covers:
profession • Interest on taxes, e.g. delinquency or deficiency interest (fines, penalties, surcharges are not
6. Not between related taxpayers deductible)
7. Interest is not expressly disallowed by • Interest on scrip dividends paid by corpo
law to be deducted • Interest on deposits paid by authorized banks to depositors, if tax on such interest was withheld
8. Amount if interest deducted does not • Interest paid by corpo liable on a mortgage upon real property
exceed limit set forth by law
Not deductible expense
• If indebtedness is incurred to finance petroleum operations
• Interest on preferred stocks
• Interest on undrawn salaries & bonuses.
• Interest on capital for cost keeping.
• Interest on indebtedness paid in advance through discount or otherwise (cash basis)
• Interest paid when there is no stipulation for payment of such
• Interest paid on indebtedness between related taxpayers.
Taxes 1. Payment must be for taxes Taxes not deductible:
2. Tax must be imposed by law on, and • Phils. Income tax
payable by the taxpayer (ex. VAT is • Foreign income tax, if taxpayer avails of foreign tax credit
deductible by seller) • Estate and donor’s tax
3. During taxable year • Special assessments
4. In connection with trade/business/ • Excess electric consumption tax
profession • Final taxes

The 20% discount granted to senior citizens is deductible (from gross income of grantor).
Losses 1. Loss by taxpayer Ordinary Loss Incurred in trade/business or practice of profession (NELCO)
2. Actually sustained & charged off
during taxable yr • Deductible from ordinary gain & capital gain

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 3. Evidenced by close & completed Casualty Loss Arises from fire, storms, shipwreck or other casualties, or from robbery, theft or
transaction embezzlement.
4. Not claimed as deduction for estate
tax purposes Sworn declaration of loss must be filed with BIR within 45 days after occurrence.
5. Not compensated for by insurance or
other form of indemnity
6. Connected with trade/business/
Capital Loss • Deductible only from capital gain
profession
Covers:
• Losses from sale/exchange of capital assets
• Losses resulting from securities becoming worthless & which are capital assets
• Losses from short sale of property
• Losses due to failure to exercise privilege or option to buy/sell property
Special Deductible up to extent of gain/winning
Losses
Wagering loss
Losses from illegal transaction are not
deductible.
Loss on wash sale of stocks Not deductible
Abandonment loss in petroleum
All exploration/dev’t expenditure are deductible
operation
Unamortized cost and undepreciated cost of
Abandonment loss in producing well
equipment are deductible
Loss due to voluntary removal of
building incident to renewal or Deductible
replacements
Deductible up to actual loss sustained after
Loss of useful value of capital assets
adjustment for improvement, depreciation &
due to change in business condition
salvage values
Loss from sale/exchange of property
Not deductible
between related taxpayers
Deductible, if incurred in operation of farm
Loss of farmers
business
Losses on sales w/c are not deductible
Loss in shrinkage in value of stock Deductible
Bad debts 1. Existing, valid & legally demandable • Recovery of bad debts previously charged off is taxable to the extent of income tax benefit of said
indebtedness (legal & factual) deduction
2. Connected with trade/business/
profession

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 3. Not between related taxpayers CONDONED DEBT:
4. Actually charged off in the books of • Constitutes compensation income if condoned in consideration of services rendered
accounts of the taxpayer • If no consideration is given, it amounts to a donation – subject to DONOR’S TAX (to Donor)
5. Actually ascertained to be worthless • If the creditor is a corporation and the debtor is a stockholder, it amounts to INDIRECT DIVIDEND –
& uncollectible as of the end of taxable as dividend income.
taxable yr
Depreciation 1. Reasonable Methods of determining depreciation:
of property 2. For property arising out of its use for 1. Straight-line method
trade/business, or out of its not being 2. Declining balance method
used temporarily during the year 3. Sum of the years digit method
3. Allowance must be charged off within 4. Any other method prescribed by Sec. of Finance
the taxable yr
4. Schedule on the allowance must be Non-depreciable assets:
attached to the return 1. Inventories or stock
2. Land & improvements
3. Bodies of mineral subject to depletion
4. Automobiles or transportation equipment for personal use (residence)
5. Building & furniture for personal use
6. Intangibles
7. Personal effects & clothing
Depletion of 1. Depletible asset Total amount deductible for exploration & development expenditures shall not exceed 25% of net income
oil and gas 2. Charged off w/n taxable year from mining operation.
wells and 3. Allowance for depletion is computed
mines in accordance w/ Cost Depletion The excess shall be carried forward to the succeeding year until fully deducted.
Method
Charitable & 1. Actually paid Contribution deductible in full:
other 2. w/n taxable year 1. Recipient is a foreign or int’l org. w/ agreement w/ Phils. gov’t on deductibility, or special law.
contributions 3. Given to organization specified by law 2. Recipient is the Phils. gov’t, any of its agencies or political subdivisions, or any fully-owned gov’t
4. Evidenced by adequate receipts & corpo., for exclusive & priority activity in:
records • Science
5. If other than money, amount is based • Education
on acquisition cost of the property • Culture
• Health
• Economic dev’t
• Human settlement
• Youth & sports dev’t
3. Recipient is an accredited NGO, organized exclusively for
• Scientific
• Educational
• Cultural
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 • Health
• Social Welfare
• Charitable
• Research
• Character Building/youth & sports dev’t

Contribution subject to limitation:

(should be </= 10% if individual or </= 5% if corpo, of gross income before charitable contribution)

1. Donation to the Phils. gov’t or political subdivision exclusive for public purposes
2. Donation to DC organized exclusively for
• Religious
• Charitable
• Scientific
• Cultural
• Educational
• Rehabilitation of Veteran
• Social Welfare

Deductible in full under special laws:

1. IBP
2. Dev’t Academy of the Phils.
3. SEAFDEC
4. Nat’l Social Action Council
5. Task Force on Human Settlement
6. National Museum, Library & Archives
7. Ministry of Youth & Sports Dev’t
8. Social Welfare, Cultural & Charitable Institution
9. Museum of Phils. Costumes
10. Intramuros Admin
11. Lungsod ng Kabataan
Research & Covers:
Dev’t Expense 1. Acquisition or improvement of property subject to depreciation or depletion used in research &
dev’t
2. Other research & dev’t costs.

Taxpayer may treat expense either as:

1. Revenue expense – deductible as ordinary & necessary expense
2. Deferred expense – distributable deduction over a period of time of at least 60 months starting
from the month benefits are received from such expenditure.
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 The ff expenditures are NOT deductible:
1. Any expenditure for the acquisition or improvement of land, or for the improvement of property to
be used in connection w/ research & dev’t of a character w/c is subject to depreciation
2. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent or
quality of any deposit of ore or other mineral, including oil or gas.
Pension trust 1. ER has established a pension or Deductible from ER as ordinary & necessary expense.
contributions retirement plan for the payment of
of ER reasonable pension to its EE The income from pension plan is not taxable to EE.
2. Pension plan is reasonable &
actuarially sound If any portion is reverted back to ER, taxable to ER.
3. Funded by ER
4. Amount contributed is longer in
control of ER
5. Payment has not yet been allowed
as deduction
Premium payments on health and/or hospitalization
insurance

22 of 23 ANALIA – INCOME TAX

 ITEMS NOT DEDUCTIBLE FROM GROSS INCOME
Reason:
Personal, living or family expenses Non-business expense
Amounts paid out for new buildings or for permanent Except: Capital expense
improvements, or betterment made to increase the value • Intangible drilling & dev’t cost
of any property or estate incurred in petroleum operations
Amounts expended in restoring property or in making Capital expense
good the exhaustion thereof for which an allowance has
been made
Premiums paid on a life insurance policy covering the life Not usually subject to income tax, so non-
of any officer/EE, or of any person financially interested in deductible.
any trade/business carried on by the taxpayer, when
taxpayer is directly or indirectly a beneficiary.
Losses from sales or exchanges of property between To prevent tax avoidance.
related taxpayers
• Capital expense/expenditure – expenditure w/c adds value to the property. It is not immediately deductible. It is deductible over a period of time,
such as depreciation
o E.g. Cost of defending or perfecting title to property
o Architect’s fee
o Commissions paid in selling securities
o Corporate expenses for reorg, ex. attorney’s fees.

BEWARE. ☺

23 of 23 ANALIA – INCOME TAX