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MODULE III
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Taxation of Individuals

Overview of the Module

This Module discusses the general concepts of the regular income taxation
including its nature and structures. It includes the following:

Lesson 1. Regular Income Taxation

Lesson 2. Allowable Deductions
Lesson 3. Income subject to regular and non-regular rates
Lesson 4. Dealings in Properties

Lesson 1. Regular Income Taxation

Characteristics of the Regular Income Tax

1. General in coverage
2. A net income tax
3. An annual tax
4. Creditable withholding tax

General Coverage . This regular income tax applies to all items of income
except those that are subject to final tax, capital gains tax and special tax
regimes.

Net Income Taxation. The regular tax is an imposition of residual profits or

gains after deduction for expenses allowable by law. Under the Train Law, an
individual earning income from self-employment and or practice of profession is
now taxed on gross sales or receipts if the option he or she availed of is 8%
income tax rate. However, if this individual chose to be taxed at the graduated
rates, the tax base shall be the Net Income.

Annual Tax. The regular income tax applies on yearly profits or gains. The
gross income or expenses of the taxpayer are measured using the accounting
methods adopted by the taxpayer and are reported to the government over the
accounting period selected by the taxpayer.

Creditable Withholding Tax. Most items of regular income are subject to

creditable withholding tax (CWT). The CWT is withheld at source by customers
or clients but not a final tax. It is an advance tax deductible against the annual
income tax due of the taxpayer.

GROSS INCOME
For purposes of the regular income tax, gross income constitutes all items of
income that are neither excluded in gross income nor subjected to final tax or
capital gains tax. Gross income as referred to under Sec 32 A of the Tax Code
includes the following :
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1. Compensation for services in whatever form paid including fees, salaries and
wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise
of a profession;
3. Gains from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10.Pensions; and
11.Partners’ distributive share from the net income of general professional
partnership.

Deductions from Gross Income. Deductions or allowable deductions are

business expenses and losses incurred which are allowed by statute to be
deducted from gross income to arrive at the net taxable income. However,
under RR 12-2013, deductible expenses like salaries shall not be allowed on
income payments if the applicable withholding taxes required by the BIR Rules
and Regulations were not withheld.

Exclusion from Gross Income. These pertain to items of gross income that
are excluded in the determination of the taxable income since there is a law or
treaty that provides for its exemption from taxation. Gross income includes the
following:

Exclusion from Compensation Income.

1. 13th month pay, and other benefits not exceeding 90,000 per year.
2. De Minimis benefits within the prescribed ceiling
3. Income earned outside the Philippines (compensation or business income) by
Overseas Filipino Contract Worker, Non-resident Filipino Citizen, resident
alien and foreign corporation.
4. Holiday pay, overtime pay, night shift differential pay, and hazard pay
earned by minimum wage earner, who has no other reportable income.
5. GSIS, SSS, Pag-ibig contributions, union dues of individuals, Medicare
(Philhealth)
6. Compensation under employer’s convenience benefit rule.
7. Proceeds of life insurance policies paid to the heirs upon the death of the
insured.
8. Retirement benefits under RA 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance
with a reasonable private plan maintained by the employer.
9. GSIS benefits including retirement gratuity received by government officials
and employees.
10.Gift, bequest, devise or descent
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11.Philippine Charity Sweeptakes winnings and Philippine Lotto winnings

(Those in excess of 10,000 shall be subject to final tax of 20% under the
Train Law)
12.Compensation income including holiday pay, overtime pay, night shift
differential pay, and hazard pay earned by minimum wage earner, who has
no other reportable income.
13.Compensation income and/or business income earned outside the
Philippines by a Filipino Overseas Contract Worker, nonresident Filipino
citizen, resident alien and foreign corporation.
14.Benefits received from or enjoyed under the Social Security System (SSS)
including maternity benefits as stipulated in RA 8282.
15.Amount received by an official or employee on account involuntary
separation from the employer on account of death, sickness or other
physical disability or for any cause because the control of the said official or
employee.

The “13th month pay” is the mandatory one (1) month basic salary of
government officials and employees in the national or local level including
GOCC’s and/or private offices received after the 12th month pay.

The “Other Benefits” may include Christmas bonus, productivity incentives,

loyalty award, gift in cash or in kind, and other benefits of similar nature
actually received by officials and employees of both government and private
offices, including Additional Compensation Allowance (ACA), granted and paid
to all officials and employees of the National Government Agencies (NGA)
including State Universities and Colleges (SUC’s), Government-Owned and/or
Controlled Corporations (GOCC’s), Government Financial Institutions and Local
Government Units (LGUs).

De Minimis. “De minimis” benefits are privileges of relatively small value

given by the employer to his employees as a means to promote their health,
goodwill, contentment, or efficiency.

These are exempt from income tax, withholding tax on compensation as

well as from fringe benefit tax. RR 5-2011 amended the listing and made it
exclusive and then followed by an amendment by RR 1-2015 and RR 11-2018. In
view of its exclusivity, all other benefits not included in the listing shall be
taxable and subject to withholding tax.

a) Monetized unused vacation leave credits of private employees not exceeding

10 days during the year.
b) Monetized value of vacation and sick leave credits paid to government
officials and employees.
c) Medical cash allowance to dependents of employees not exceeding P1,500
per employee per semester or P250 per month.
d) Rice subsidy of P2,000 or one (1) sack of 50-kg rice per month amounting to
not more than P2,000.
e) Uniform and clothing allowance not exceeding P6,000 per annum.
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f) Actual medical assistance, e.g. medical allowance to cover medical and

healthcare needs, annual medical/executive check-up, maternity
assistance, and routine consultations, not exceeding P10,000 per annum.
g) Laundry allowance not exceeding P300 per month.
h) Employees 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 P10,000 received by the employee under an established written
plan which does not discriminate in favor of highly paid employees.
i) Christmas gifts not exceeding P5,000 per employee per annum
j) Daily meal allowance for overtime work and night/graveyard shift not
exceeding 25% of the basic minimum wage on a per region basis; and
k) Benefits received by an employee by virtue of a collective bargaining
agreement (CBA) and productivity incentive schemes provided that the
total annual monetary value received from both CBA and productivity
incentive schemes do not exceed ten thousand pesos (P10,000) per
employee per taxable year.

Payments made by employer in excess of the ceiling prescribed by the

Revenue Regulations shall be taxable only if the same exceed the ceiling of
“other benefits” which is P90,000 per RA 10963.

Illustration : Toyd de la Serna received Christmas gift of P10,000. The

company where he is working paid him P80,000 13 th month pay without
receiving other benefits for the entire year.

Supplementary income
Christmas gift (as de minimis benefits) P10,000
Ceiling of Christmas gift 5,000
Excess (as other benefits) P 5,000
13th month pay P80,000
Add : Excess above 5,000
Total 13th month pay and other benefits P85,000

Taxable amount - (It is not taxable since it is still within the ceiling of
P90,000)

Fringe benefits – Sec. 33 (B) of the NIRC.

Refers to any good, service, or other benefit furnished or granted by an
employer, in cash or in kind, in addition to basic salaries, to an individual
employee such as, but are not limited to the following:
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.
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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.

This is given to encourage employee productivity and loyalty to employer.

Fringe Benefit Tax under the Train Law is now 35% of the grossed-up monetary
value of fringe benefits.

Gross-up monetary value is determined by dividing the monetary value of

the fringe benefits by 65% . The Gross-up monetary value of the Fringe Benefit
consists not only the amount of cash received by the employee but also the
amount of Fringe Benefit Tax paid by the employer.

Membership fee in Baguio Country Club paid by the Company (1,300,000)

Monetary value of membership fee 1,300,000
Divide by GMV factor 65%
Gross Up Monetary Value 2,000,000
Multiplied by Fringe Benefit Tax Rate 35%
Fringe Benefit Tax 700,000

When Fringe Benefits are given to rank and file employees, they are taxable
compensation income of the employee subject to normal income tax rate,
except de minimis benefits and benefits provided for the convenience of the
employer. Fringe Benefits given to managerial employees are taxable with final
fringe benefit tax of 35% . The employer pays the Fringe Benefit Tax.
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Self-Test

A. True or False. Write True if the statement is right and write False if the
statement is wrong.
1. An employee of a private domestic company can file monetization of his sick
leave credits.
2. A permanent employee of DMMMSU may avail only of limited monetization
of sick leave credits.
3. The excess of de minimis benefits above the limits provided by law are
always taxable form of compensation.
4. Fringe benefits received by rank and file employees are taxable to them.
5. The monetary value of the Fringe benefit received by a managerial
employee includes also the tax paid by the employer.
6. A lotto winnings of P20,000,000 used to be exempt from tax before January
01, 2018.
7. A minimum wage earner who earns substantial business income is still
exempt from income tax.
8. The separation pay received by an employee who voluntarily resigned from
his or her employment is taxable compensation.
9. “Exclusions” from gross income is not the same as “allowable deductions”
from gross income.
10.The option to be taxed at 8% based on gross receipts is available to an
individual receiving purely compensation income.

B. Answer the following briefly:

1. Discuss the distinction between De Minimis Benefits and Fringe Benefits.
2. Distinguish the monetization of leave credits granted to private employees
and those granted to government employees.
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Lesson 2. Allowable Deductions

Allowable deductions or simply “deductions” are expenses in the conduct of

business or exercise of profession. At the option of the taxpayer, either the
Itemized Deductions or Optional Deductions (OSD) may be claimed but not
both. For itemized deductions, the taxpayer should support every item of
deduction claimed; whereas the Optional Standard Deductions is a fixed
percentage of 40% of gross sales/receipts for individuals and 40% of its gross
income for corporation.

Those individuals earning purely compensation income in an employee-

employer relationship are not allowed to claim deductions. Likewise, taxpayers
who opted to be taxed at 8% income tax rate on their income from business or
profession are not allowed to claim either one of these two types of
deductions.

Itemized Deductions

Itemized deductions under Sec 34 of the National Internal Revenue Code

(NIRC) are the following:
1. General Business Expenses
2. Interest
3. Taxes
4. Losses
5. Bad Debts
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable and other contribution
9. Research and Development
10.Pension Trust
11.Premium payment on health and/or hospitalization insurance (for individual
taxpayers only)

Expenses incurred to match the income of the fiscal or calendar period are
deductible expenses to arrive at the income or loss for that period. These are
deductible expenses. Expenses related to the acquisition of fixed assets subject
to depreciation are not to be expensed but to be capitalized. In that sense,
these are not deductible expenses but the expired portion of the cost of the
asset will be charged as deductible depreciation expense.

The examiners of Bureau of Internal Revenue in auditing Financial

Statements of private individuals and corporate taxpayers are guided by the tax
law and BIR rules and regulations. Personal expenses, bribes and donations
during elections and other transactions from related parties such as payment of
interest for loans granted by relatives within the 2 nd civil degree of
consanguinity are not allowable expenses.
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As a general rule expenses are allowed as deductions by these BIR

enforcement officers when these are ordinary and necessary expenses for the
conduct of the business or exercise of a profession. In addition these expenses
should be substantiated with official receipts or other adequate and acceptable
documents, papers or records. When the amounts of expenses are not
reasonable, they will be subject to possible disallowance. When expenses are
contrary to law, morals, public order and public, the same will be disallowed as
being illegal. When the corresponding withholding taxes were not made for
these expenses such as withholding tax on Salaries and Rentals, the same will
not be allowed as deductible expenses. For taxpayers using the accrual method
of accounting, the expenses should be accrued and deducted within the taxable
year. For those taxpayers using the cash basis of accounting, the expenses
should be paid and deducted within the taxable year.

There are expenses, although allowed are subject to a limitation in amount.

Individual and corporate taxpayers usually allot resources for amusement,
entertainment and recreation expenses which are directly connected with the
management and operation of their business. These representation expenses
are limited in amount depending on the nature of the business or occupation.
For taxpayers engaged in the sale of services, exercise of a profession or lease
of properties, the limit of representation expense is 1% of Net Revenue and for
those engaged in the sale of goods, the limit of representation expense is ½% of
net sales.

For the cost of money borrowed, the payment of interest is allowable

deduction if the payment of interest is agreed in writing, the indebtedness in
directly connected with the trade, business or profession, the interest is not
paid to a relative and such interest is paid or accrued during such taxable year.
For interest paid in advance, the same is not allowed as deductible expense.

Not all taxes paid are deductible expenses. National taxes like income tax,
value added tax, estate tax, donor’s tax and foreign income tax if not claimed
as tax credit are not deductible expenses. However, there are also national
taxes that are allowable as deductions such as Percentage Taxes, Documentary
Stamp tax, Excise taxes and Import Duties. Taxes imposed by local government
units and some regulatory bodies are usually deductible such as Municipal Tax,
Community Tax, Occupational Tax, Privilege and License Taxes and Automobile
Registration Fees.

Valid claims for sales on credit that become worthless or uncollectible are
bad debts on the seller of goods or service. To be allowed as deductible bad
debts expense, the same should be written off within the taxable year. This
means that the corresponding asset account should have been credited and the
allowance account debited. Moreover for its deductibility, these bad debts
should be connected with the trade or business of the taxpayer, and not
between relatives.

Optional Standard Deduction

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When a taxpayer is taxable under the graduated income tax rates, it is

presumed that he availed of the itemized deductions unless he signifies in his
income tax return the intention to elect OSD. This intent is done by checking
the appropriate box in the income tax return filed the first or initial quarter.
Once there is election, the taxpayer should consistently use OSD in all the
succeeding Quarterly Returns and the final Annual Income Tax return for the
whole year. Such election is irrevocable for the taxable year in which the
return is filed.

For the taxpayer who is entitled and availed of OSD, there is no need any
more to submit the Financial Statements with the Tax Return. A General
Professional Partnership may avail of the OSD only once either by the GPP or
the Partners comprising the partnership.
Computation of OSD

Gross Sales 500,000

Cost of Goods Sold 400,000
Operating Expenses 40,000

Individual Corporation
Gross Sales 500,000 500,000
Less: Cost of Goods Sold _______ 400,000
Basis of OSD 500,000 100,000
OSD rate 40% 40%
OSD amount 200,000 40,000

Individual Corporation
Gross Sales 500,000 500,000
Less: Cost of Goods Sold _______ 400,000
Gross Income 500,000 100,000
OSD 200,000 40,000
Taxable Income 300,000 60,000_

An individual using OSD is no longer allowed to deduct cost of sales or cost

of service. For individuals, the tax base is the gross sales or gross receipts and
for Corporations, the tax base is the gross income.

Items of gross income not subjected to final taxes are excluded from the
gross income for corporate purposes
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Self-Test

A. True or False. Write True if the statement is right and write False if the
statement is wrong.
1. When a taxpayer elected the OSD, he should still file the Income Tax Return
but there is no need to attach the Balance Sheet and Income Statement.
2. The OSD for individual taxpayer is based on the Gross Income.
3. In computing the Taxable Income of a corporate taxpayer that uses OSD, the
Cost of Sales is still to be deducted.
4. A taxpayer cannot claim Itemized Deductions and Optional Deduction at the
same time in the same return.
5. The election to use OSD should not be presumed just from the intention of
the taxpayer.
6. Capital expenditures are deductible business expenses.
7. Revenue expenditures are allowable business expenses in general.
8. In the computation for the limit of representation expenses for taxpayers
engaged in the sale of goods, there is no need to consider the cost of sales.
9. Interest payment based on oral agreement to pay interest is allowable
business expense.
10. Allowances given by a sole proprietor to his children are not allowed as
business expenses.

B. Answer the following briefly:

1. Differentiate tax exclusions from tax deductions.
2. If you were the taxpayer, which type of deduction would you prefer,
Itemized or OSD and why?
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Lesson 3. Income Subject to regular rates or the non-regular rates

Types of Gross Income subject to regular rates or non-regular rates

1. Compensation Income
2. Business or Professional Income
3. Other Income. These are non-business income and non-compensation
income such as :
a. Gains from dealings in properties
b. Other active or passive income not subject to final tax

Compensation Income

Compensation Income generally comprises all remunerations under an

employer-employee relationship, such as the regular pay of employees every
payroll period and other benefits or incentives other than the basic pay which
are commonly known as “fringe benefits”.

Individuals Earning Purely Compensation Income

Individuals earning purely compensation income shall be taxed based on the

graduated income tax rates.

Taxable income is derived by deducting the non-taxable income/benefits

like 13th month pay and other benefits (but with ceiling limitation), de minimis
benefits, employee’s share in the SSS, GSIS, PHIC, Pag-ibig contribution and
union dues from the gross compensation income.

These “13th month pay” and “Other Benefits” shall cover not only paid
benefits for the year but also those accrued during the year provided these will
not exceed the ninety thousand pesos (P90,000).

A. Subject to Graduated Rates

Tax Reporting under BIR Form No. 1700, Annual ITR

Gross Compensation Income xxxx
Less : Non-Taxable / Exempt Compensation xxx
Gross Taxable Compensation Income xxxx

Husband and wife shall compute their income tax separately based on their
respective taxable income. If there is an income attributed to both of them and
it cannot be determined if such income is exclusively earned by the other
spouse, the same shall be divided equally between them for purposes of
determining their respective taxable income.
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Before the effectivity of the Train Law, individual taxpayer is allowed to

deduct personal exemption of P50,000 and additional exemption of P25,000 for
every qualified dependent child not exceeding four children. At present, the
Train Law removes such exemptions including the health and hospitalization
insurance taken by the taxpayer for himself which is P2,400 per family or P200
per month during the taxable year.

In lieu of the exemptions given by the old law, the Train Law replaces these
exemptions with a zero taxability for the first P250,000 of taxable income of
the individual taxpayer.

Minimum wage earner shall be exempt from the payment of income tax on
their statutory minimum wage rates. This earner refers to a worker in the
private sector, who is paid with a statutory minimum wage (SMW) rates, or to
an employee in the public sector with compensation income of not more than
the statutory minimum wage rates in the non-agricultural sector where the
worker or employee is assigned. Such statutory minimum wage rates are
exempted from income tax.

The holiday pay, overtime pay, night shift differential pay and hazard pay
received by such earner are likewise covered by the exemption. Additional
income received by such MWE from the conduct of trade, business or profession
shall be taxable on the entire income earned. However, the Statutory Minimum
Wage (SMW), holiday, overtime pay, night shift differential pay and hazard pay
shall still be exempt from withholding tax.

Hazard pay is usually given to employees who are assigned to perform work
in highly dangerous or strife-torn areas, or highly disease-infected areas or in a
distressed or isolated stations where they are exposed to great peril to life and
or health. Hazard Pay was paid to government employees who worked at the
height of the lockdown in areas where there was declaration of Enhanced
Community Quarantine.

Requirement of Withholding under RR 11-2018

Every employer whether from public or the private sector must withhold
from the compensation of an employee whether citizen or alien (except non-
resident alien not engaged in trade or business) based on the withholding tax
table, Annex “D” for compensation paid from January 1, 2018 until December
31, 2022 under RMC 1-2018 dated January 04, 2018 and Annex “E” for
compensation paid starting January 1, 2023.

The Statutory Minimum Wage of Minimum Wage Earners including their

holiday pay, overtime pay, night shift differential and hazard pay are not
subject to withholding tax. Additional compensation and benefits in excess of
the P90,000 such as commissions, honoraria, fringe benefits, taxable
allowances and other taxable income other than the SMW, holiday pay,
overtime pay, hazard pay, and night shift differential pay, shall be taxable only
on such additional compensation received.
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If the compensation is paid other than daily, weekly, semi-monthly or

monthly, the tax to be withheld shall be computed either Annually or Quarterly
and Semi-annually. For the “Annually”, use annualized computation. For the
“Quarterly and Semi-annually”, divide the compensation by 3 or 6 respectively
to determine the average monthly compensation and then use the monthly
withholding tax table to compute the tax, and the tax so computed shall be
multiplied by 3 or 6 accordingly.

Steps in computing the withholding tax

1. Determine the total monetary and non-monetary compensation paid for the
payroll period.

Separate the regular and supplementary compensation. Regular

compensation includes basic salary, fixed allowances for representation,
transportation and other allowances paid to an employee per payroll period.

Supplementary compensation refers to the non-regular taxable

compensation such as commission, overtime pay, taxable retirement,
taxable bonus, and other taxable benefits with or without regard to a
payroll period. Representation and Transportation Allowance (RATA) and
Personnel Economic Relief and Allowance (PERA) are exempt from income
tax and withholding tax and hence excluded in the computation.

2. Use the withholding tax table.

3. Determine the compensation range of the employee.
4. Compute the withholding tax due.

Employee Withholding Statement (BIR Form 2316)

It is the obligation of the employer to furnish every employee from whom

taxes were withheld a Certificate of Compensation Payment and Tax Withheld
(BIR Form 2316) on or before January 31 of every succeeding calendar year, or
if employment is terminated before the close of such calendar year on the day
on which the last payment of compensation is made. Every employer is also
required to issue the same BIR Form 2316 to Minimum Wage Earners and other
employees whose compensation were not subjected to withholding tax.

Substituted Filing

Only purely compensation income earners receiving income from only one
employer in the Philippines for the calendar year are qualified for substituted
filing provided that the income tax of which has been properly withheld
correctly which means that the tax due equals tax withheld. Such substituted
filing will exempt such individual taxpayers from filing the Annual Income Tax
Return (BIR Form No. 1700).

As a substitute thereof, the Certified List of Employees Qualified for

Substituted Filing of ITR with information regarding the name of compensation
earner, TIN, compensation paid, tax due and tax withheld filed with the BIR
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duly stamped “RECEIVED” by the latter shall be equivalent to the filing of the
ITRs.

The following individuals are not qualified for substituted filing.

1. Individuals deriving income from two or more employers concurrently or
successively at any time during the taxable year.
2. Employees whose income tax has not been correctly withheld resulting to a
collectible or refundable return.
3. Individuals deriving other non-business, non-professional-related income in
addition to compensation income not otherwise subject to a final tax.
4. Individuals whose spouse are disqualified based on 1, 2, 3 scenarios
mentioned above.
5. Non-resident alien not engaged in trade or business in the Philippines
deriving purely compensation income, or compensation income and other
non-business or non-professional-related income.

B. Subject to Flat Rate of 25% for NRANETB (Non-Resident Alien Not Engaged in
Trade or Business)

Tax Reporting under BIR Form No. 1700, Annual ITR

Gross Compensation Income xxxx
Less : Non-Taxable / Exempt Compensation xxx
Gross Taxable Compensation Income xxxx

Self-employed individuals

A self-employed individual can be a single proprietor or an independent

contractor who reports income from self-employment. This person is at liberty
to choose who work with him or her and to determine the manner how the
work is done and the time of its completion. A worker who is covered by a job
order or contract of service and professionals who practice their profession
independently without receiving compensation income in an employer-
employee relationship are self – employed persons.

Individuals earning business income solely from self-employment and/or

practice of profession whose gross sales/receipts and other non-operating
income does not exceed the VAT threshold of P3,000,000 shall have the option
to avail of the graduated rates or the 8% tax on gross sales or receipts.
Availment of the 8% income tax rates shall be in lieu of the graduated rates and
the percentage tax under Sec. 116 of the Tax Code

Individuals who legally practice their profession are those who passed the
bar exam or any board exam or any other government licensure examination
regulated by the Supreme Court, the Philippine Regulation Commission or other
Government regulatory bodies. Some of these professionals who are individually
engaged in the practice of their profession include but not limited to the
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following : lawyers, doctors of medicine, certified public accountants, civil,

mechanical, structural, sanitary or mining engineers, dentists and real estate
brokers. These professionals are required by the Local Government Code to pay
the annual professional tax in the province or city where they practice their
profession or where they maintain their principal office.

Vat threshold refers to the ceiling of P3,000,000 gross sales or receipts set
to determine whether a taxpayer is VAT registrable or not and this threshold is
also used to determine the income tax liability of self-employed and/or
professionals.

Taxpayer is considered to have availed of the graduated income tax rates if

such taxpayer fails to signify the intention to elect the 8% income tax rate in
the 1st quarter Percentage and/or Income Tax Return or on the initial quarter
return of the taxable year after the commencement of a new business/practice
of profession. Such election shall be irrevocable for the year it was made.

If the VAT threshold of P3,000,000 gross sales or receipts is exceeded at any

time during the taxable year, the graduated rates shall be automatically
applied and the taxpayer is no longer allowed to avail of the 8% income tax rate
option. The previous quarter/s income tax payment/s under the 8% income tax
rates shall be allowed as a tax credit.

A taxpayer who is subject to other Percentage Tax under Title V of the Tax
Code except those under Sec. 116 of the Tax Code and partners of a General
Professional Partnership (GPP) by virtue of their distributive share from GPP
which is already Net of Cost and Expenses are not allowed to avail of the 8%
income tax rate option.

For self-employed individuals and those engaged in the practice of their

profession, the term “Taxable Income” in so far as they relate to them would
now take on two distinct meanings. One is that the Taxable Income refers to
the “Net Income” per se if taxpayer opted to be taxed at graduated rates or
has failed to signify the chosen option.

For taxpayer availing of the 8%, the Taxable Income refers to the gross sales
or receipts and other non-operating income.

Business Income

Business income arises from habitual engagement in any commercial activity

involving regular sales of goods or services by an individual or a corporation.
The income from business, legal or illegal, registered or unregistered, is
taxable.

The business gross income from the sale of goods is computed as:
Sales xxxx
Less : Cost of Sales xxx
Gross Income xxxx
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Cost of Sales
Cost of Sales pertains to the acquisition cost of the goods sold or the
manufacturing cost of the goods sold.

Formula in Computing for Cost of Sales (Trading Business)

Beginning Inventory xxxx
Purchases, net of returns and allowances xxx
Freight-in xxx
Total goods available for sale xxxx
Less : Ending Inventory xxx
Cost of Goods Sold xxxx

Professional Income
The gross income from exercise of a profession or business gross income
from the sale of services is measured as follows :

Revenue or gross receipts xxxx

Less : Cost of Services xxx
Gross Income xxxx

Cost of Service
This pertains to all direct cost of rendering the services such as cost of
labor, materials and overhead costs.

Illustration.
For a practicing accountant/auditor, the cost of services shall include the
following:
Salaries of audit staff
Transportation expenses to and from the place of work
Rental expense on work space
Supplies used
Depreciation Equipment used in carrying out business

Net Income of Individuals Engaged in Business or Exercise of Profession

Net Sales/Receipts/Fees xxxx

Add : Other taxable income not subject to Final Tax xxx
Total Sales/Receipts/Fees xxxx
Less : Cost of Sales or Services xxx
Gross Income from business/profession xxxx
Add : Non-operating income xxx
Total Gross Income xxxx
Less : Allowable Deductions xxx
Net Income xxxx
 17

Other Taxable Income from Operations

Other Taxable Income from Operations includes revenues or receipts from
incidental or secondary operations aside from the primary operations.

Example : A dormitory has boarding fees as its primary revenue, but may have
laundry fees and canteen income as other operating revenues.

Non-operating income
1. Gains from dealing in properties
Dealings in properties pertain to the sale, exchange and other disposition
of properties by the taxpayer. Gains are net of the cost of the property
sold.
2. Income distribution from a general professional partnership, taxable trust or
estate, or from an exempt joint venture.
3. Casual active income
This includes active income from isolated or one time transactions such
as casual carpentry income of a person not engaged in carpentry business.
4. Passive Income not subject to Final Tax
These do not arise from the regular business operations, hence,
classified as non-operating income such as dividends from foreign
corporations.

Net Income of Corporate Taxpayers

Net Sales / Receipts / Fees xxxx
Less : Cost of Sales or Services xxx
Gross Income from Operations xxxx
Add : Other taxable income not subject to final tax xxx
Total Gross Income xxxx
Less : Allowable deductions xxx
Net Income xxxx

Mixed Income Earners

A Mixed Income Earner is an individual earning compensation income as an

employee and income from commercial or business activities, practice of
profession and/or other source outside employment.

The taxation for mixed income earner will be based on the nature of the
earnings and the amount of the gross sales or gross receipts. For the
compensation income, the graduated income tax rates shall be used and for the
business income or professional income, the income earner has two options
when the gross sales or gross receipts and other non-operating income do not
 18

exceed the VAT threshold of P3,000,000. So for the business income or

professional income, one option is to use the graduated income tax rates and
the other option is to use the 8% income tax rates based on gross sales or gross
receipts or other non-operating income.

However, if the gross sales from the business ventures or gross receipts from
professional income or other non-operating income exceed the VAT threshold,
the income earner has no option but to use the graduated income tax rates. In
this case, the compensation income and the business or professional income
shall be combined together.

The exemption of P250,000 is available only to purely self-employed

individuals and/or professionals and it is not applicable to mixed income
earners since it is already incorporated in the first tier of the graduated income
tax rates applicable to compensation.
 19

Self-Test

A. True or False. Write True if the statement is right and write False if the
statement is wrong.
1. Other secondary income subject to final tax is included in the
computation of the taxable income.
2. For a mixed income earner, the compensation income can be subjected
to 8% as an option.
3. A taxpayer deriving compensation income and professional income can
avail of the P250,000 exemption.
4. For taxpayer who avails of 8%, the Net Income is no longer the tax base.
5. RATA and PERA are considered supplementary income for purposes of
computing the withholding tax.
6. Taxpayers who are engaged in trade or business can avail of the
substituted filing.
7. The failure of the taxpayer to signify the use of the 8% income tax rate
in the initial quarter return will disqualify such taxpayer to use the
graduated rates.
8. Once qualified for substituted filing, the taxpayer must still file the
Annual ITR.
9. The BIR form 2316 shall serve the same purpose as if BIR Form 1700 had
been filed.
10. The withholding tax table is not applicable to non-resident alien not
engaged in trade or business.

B. Juan de la Cruz, a minimum wage earner receives the following income :

1. Basic Pay P140,000
2. Overtime Pay P90,000
3. Night Shift Differential P50,000
4. Hazard Pay P10,000
5. 13th month pay P10,000

In addition, he had an income from his Mini Mart business amounting to

P100,000. The total amount contributed to SSS, HDMF and Philhealth
amounted to P5,000.

a) Is he subject to Income Tax?

 20

b) Is he subject to Withholding Tax?

c) Compute the Income Tax due under the graduated rates if any.

Lesson 4: Dealings in Property

Dealings in Property.
This refers to the disposal through sale or exchange of (a) ordinary assets, or
(b) capital assets.

Ordinary Assets
These are assets used primarily for business and the gain or sale of ordinary
assets is subject to regular income tax. Specifically, these are properties
specifically excluded from the definition of capital assets under Sec. 39(A0 of
the NIRC, namely:

1. Stock in trade of a taxpayer or other real 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; or
2. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or
improvements) of a character which is subject to the allowance for
depreciation provided under Sec. 34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.

In short, ordinary assets are assets used primarily for business. The gain or
sale of ordinary assets is subject to regular income tax. Purchases of goods for
sale which become part of the merchandise inventory of the business are
ordinary assets. For real estate developers, house and lot sold is an ordinary
assets. Machineries used in the manufacture of plastic containers of a
manufacturing concern is also an ordinary asset. Apartments units being rented
when sold are ordinary assets.

Gains derived out of these above-mentioned ordinary assets are subject to

normal tax. If a corporation or an individual person sells several parcels of land
properly classified as ordinary assets and not capital assets, said corporation or
individual is subject to the regular income tax and the value added tax. But if
these parcels of land are not ordinary assets but capital assets, these are
subject to the 6% capital gains tax.

A creditable withholding tax based on the gross selling price/total amount

of consideration or the fair market value determined in accordance with
Section 6 E of the Tax Code, whichever is higher, paid to the seller/owner for
the sale, transfer or exchange of real property, other than capital asset, shall
 21

be imposed upon the withholding agent/buyer, in accordance with the

following schedule :

A. Where the seller/transferor is exempt from the creditable

Withholding tax in accordance with Sec. 2.57.5 of these Exempt
Regulations.

B. Upon the following values of real property, where the seller/

transferor is habitually engaged in the real estate business.

With selling price of five hundred thousand pesos

(P500,000) or less 1.5%

With a selling price or more than five hundred thousand

Pesos (P500,000) but not more than two million pesos
(P2,000,000). 3%

With selling price of more than two million pesos

(P2,000,000). 5%

C. Where the seller/transferor is not habitually engaged in

the real Estate business. 6%

In its initial year of selling house and lots, Blumentrit Corporation which is
engaged in the real estate business was able to sell 5 house and lots. The
Selling Price per house and lot is P2,000,000 each. The cost of sale per house
and lot is P1,000,000 but the fair market value of the 5 lots is P4,000,000. With
this information, the creditable withholding tax computation is presented
hereunder. The expenses incurred in its operation is P3,000,000.

Creditable Withholding Tax

Selling Price (5 x 2,000,000) 10,000,000
Multiply by tax rate 3%
Creditable Withholding Tax 300,000

In the Corporation’s Income Tax Return

Sales 10,000,000
Less : Cost of Sales 5,000,000
Gross Income 5,000,000
Less : Operating Expenses 3,000,000
Net Taxable Income 2,000,000
Multiply by Corporate Tax Rate 30%
Income Tax Due 600,000
Less : Creditable Withholding Tax 300,000
Income Tax still due and payable 300,000
 22

Registration with the HLURB or HUDCC shall be sufficient for a

Seller/transferor to be considered as habitually engaged in the real estate
business. If the seller/transferor is not registered with HLURB or HUDCC, he/it
may prove that he/it is engaged in the real estate business by offering other
satisfactory evidence (for example, he/it consummated during the preceding
year at least six taxable real estate transactions, regardless of amount).
Notwithstanding the foregoing for purposes of these Regulations, banks shall
not be considered as habitually engaged in the real estate business.

Capital Assets

The statutory definition of capital assets is by exclusion. If the property or

asset is among the exceptions, it is capital asset; conversely, assets covered by
the exceptions are ordinary assets. Sec. 39 (A) of the National Internal Revenue
Code provides that capital assets as property held by the taxpayer (whether or
not connected with his trade or business) but does not include ordinary assets
as defined in Sec. 39A of the NIRC.

Residential house and lot, jewelries, vehicles not used in business and
goodwill of a bakery business are all capital assets because these are not part
of the enumerations for ordinary assets.

Under RR 7-2003, ordinary assets can be converted to capital assets upon

the happening of two conditions. One is that the assets were previously used in
business by a taxpayer not engaged in the real estate business. The other
condition is that the assets have not been used in business for more than two
years.

The Capital gains on the sale of Shares of Stocks in a domestic corporation

not traded through the stock exchange is now increased from 5/10% Capital
Gains Tax to a flat rate of 15% Capital Gains Tax under the Train Law. If for
example, 100,000 Common Shares will be sold by a Corporation outside the
instrumentality of the Stock Exchange with P10 cost per share and at a Selling
Price of P1,200,000, the net capital gain would be P200,000. Under the Train
Law, the Capital Gains Tax is now computed at 15% flat rate based on the
capital gain of P200,000.

For sale of shares traded in the Stock Exchange, the sale is subject to a
Percentage Tax of ½% of 1% based on the Selling Price.
 23

Self-Test

A. True or False. Right True if the statement is right and write False if the
statement is wrong.
1. The seller is presumed to be habitually engaged in real estate business if
there is already registration with HLURB.
2. Ordinary assets previously used in business cannot be converted into
capital assets.
3. For a seller of real estate to be considered habitually engaged in the sale
of real estate, there must be six taxable transactions.
4. The Creditable Withholding Tax increases the Income Tax Due.
5. Gains derived from the sale of ordinary assets is subject to capital gains
tax.
6. The granting by Securities and Exchange Commission of permit to sell the
shares of a Corporation automatically makes such sale as being traded in
the Stock and Exchange.
7. The 15% CGT on the sale of shares not traded in the Stock Exchange is
based on the Selling Price.
8. The sale of goodwill of a business is subject to capital gains tax.
9. Capital asset is defined by enumeration of those assets subject to Capital
Gains Tax.
10.A commercial bank that sells a real estate for the tenth time is subject
to a lesser withholding tax than those habitually engaged in the sale of
real estate.

B. Plastic City Corporation is engaged in manufacturing plastic products.

Due to the effect of the Enhanced Community Quarantine for some time,
the income of the Corporation sharply declined so much so that the
Board of Directors decided to sell some of the machineries and
equipment used in the production of plastic products. The sale was made
one month after the issuance of the Board Resolution authorizing the
sale of such assets. Is the sale of the machineries and equipment subject
to normal income tax or to capital gains tax and why?
 24

MODULE IV

TAXATION OF PARTNERSHIP AND CORPORATION

Overview of the Module

This Module discusses the taxation of regular domestic and resident foreign
corporation, the improperly accumulated earnings tax, the branch profit
remittance tax concepts of the regular income taxation including its nature and
structures and taxation of Partnership. It includes the following:

Lesson 1. Regular Corporate Income Tax

Lesson 2. Tax Exempt Corporations
Lesson 3. Special Corporations
Lesson 4. Partnership and Joint Ventures

Lesson 1. Regular Corporate Income Tax

Concept of corporations
In taxation, a corporation includes joint stock companies, joint accounts,
associations, insurance companies or partnerships no matter how they were
created or organized.

For income tax purposes, however, a corporation does not include general
professional partnerships and a joint venture or consortium formed to
undertake construction projects or engage in petroleum, coal, geothermal and
other energy related operation, pursuant to an operating or consortium
agreement under a service contract with the Government.

Classification of Corporate Taxpayers

1. Domestic Corporation. It is one organized and existing under Philippine

laws. In general, it includes government owned and controlled corporations or
instrumentalities engaged in a similar business industry or activity.
 25

A domestic corporation is taxable on all income from all sources whether

within and outside the Philippines. The tax rate is 30% based on the taxable
income of the corporation.

2. Foreign Corporation. It is a corporation organized and existing under the

laws of the foreign country irrespective of the nationality of its stockholders.

Foreign Corporation is taxable only on income from sources within the

Philippines.

Foreign Corporation may either be a Resident Foreign Corporation, or a

Nonresident Foreign Corporation.

Resident Foreign Corporation. This refers to a corporation organized,

authorized or existing under the laws of any foreign country and engaged in
business or trade within the Philippines. Generally, it establishes a branch or an
office for the purpose of doing business or trade. The tax rate is 30% based on
its taxable income.

A Nonresident Foreign Corporation (NRFC). A corporation that does not

engage in business or trade in the Philippines. To support the status that it is
not doing business in the Philippines, said entity must be supported at the very
least by 1) Certificate of Nonregistration of the Corporation or Partnership duly
issued by the Security and Exchange Commission (SEC) and Proof of
incorporation or registration in a foreign country (e.g., Certificate of
Incorporation, Memorandum of Articles of Association, and Certificate of
Registration) or any equivalent document.

NRFC earnings are derived from fixed determinable income from sources
within the Philippines that are enumerated in the tax code as follows:
1. Interest, dividends, royalties;
2. Rents, salaries;
3. Premiums, except reinsurance premiums;
4. Annuities, emoluments or other fixed or determinable annual, periodic or
casual gains, profits and income; and
5. Capital gains, except capital gains from the sale of shares of stock not
traded in the stock exchange of domestic corporations.

The tax rate for Nonresident Foreign Corporation is 30% based on the Gross
Income (Final Withholding Tax Rate)

INCOME TAXES OF CORPORATIONS

Corporations maybe subjected to the following categories of taxes namely:

1) Normal Corporate Income Tax (NCIT) which is 30% based on taxable income
2) Minimum Corporate Income Tax (MCIT) which is 2% of gross income 3) Capital
Gains Tax (CGT) on the sale of real property or sale of shares of stocks, and 4)
Final Tax on passive income of the Corporation.

Computing the quarterly ITR for a Corporation availing itemized deductions

 26

1st Qtr 2nd Qtr 3rd Qtr

Jan-Mar Apr-Jun Jul-Sep
 27

Sales/Revenues 300,000 290,000 350,000

Less : Cost of Sales/Service 70,000 100,000 150,000
Gross Income 230,000 190,000 200,000
Less : Allowable Itemized 90,000 70,000 80,000
Deductions
Taxable Income This Quarter 140,000 120,000 120,000
Add: Taxable Income Previous _______ 140,000 260,000
Quarters
Taxable Income to Date 140,000 260,000 380,000
Multiply by Tax Rate (Regular) 30% 30% 30%
Tax Due 42,000 78,000 114,000
Less : Payments for the Previous _______ 42,000 78,000
Qtr/Qtrs
Total Amount Payable 42,000 36,000 36,000

The form type to be used in filing the quarterly ITR is 1702Q to be filed with
the authorized agent bank or the Collection Agent of the City or Municipality
where the principal place of business is located within 60 days following the
close of the quarter.

Annual Income Tax for Corporation availing of the itemized deductions

Sales/Revenues 1,300,000
Less : Cost of Sales/Service 430,000
Gross Income 870,000
Less : Allowable Itemized Deductions 340,000
Taxable Income This Quarter 530,000
Multiply by Income Tax Rate 30%
Tax Due 159,000
Less : Payments for the First Three 114,000
Quarters
Total Amount Payable 45,000

The form type to be used in filing the quarterly ITR is 1702 to be filed with
the authorized agent bank or the Collection Agent of the City or Municipality
where the principal place of business is located on or before April 15 the
following year.

Minimum Corporate Income Tax (MCIT)

Pursuant to Section 27(E) and Sec. 28(A2) of the NIRC, domestic and
resident foreign corporations shall be taxed with 2% based on gross income
(MCIT) and not on their net taxable income if the said corporations:
1. Incurred a net loss or zero taxable income, or a normal income tax that is
lesser than minimum income tax.
2. Beginning on the 4th taxable year immediately following the taxable year in
which such corporation commenced its business operations.

The Secretary of Finance is authorized to suspend the imposition of the

minimum corporate income tax on a corporate that suffers losses on account of
 28

prolonged labor dispute, or because of force majeure, or of legitimate business

reverses.

For purposes of minimum income tax, passive income that has been
subjected to a final tax shall not be included as a part of gross income.

Per BIR Form 1702, the format to compute the minimum corporate income tax
would be:

Gross income from operation P xxx

Add: Non-operating and other income not
Subjected to final / capital gains tax xxx
Total gross income subject to MCIT P xxx
Multiply by MCIT tax rate 2%
Minimum Corporate Income Tax (MCIT) P xxx

Timing of Imposition of MCIT

It is imposed beginning on the fourth taxable year immediately following the
year of operation in which such corporation commenced its operations. It could
be represented by the letter x which is the year of commencing its operation
plus 4 years. In short it is x + 4 years.

Illustration.

Rexlon Corporation commenced its operation in 2015. The results of its

operation for 2018 and 2019 are the following:

2018 2019
Total Gross Income 2,000,000 3,000,000
Operating expenses 2,200,000 2,500,000
Net Income (Net Loss) ( 200,000) 500,000

MCIT will start on 2019 (2015 + 4). There is no tax to be paid for 2018
since MCIT starts only on 2019.

Meaning of Gross Income in the sale of goods

This means that from Gross Sales, deduct sales returns, sales allowances,
sales discounts if there are any and COST of GOODS SOLD.

Meaning of Gross Income in the sale of service

This means that from Gross Receipts, deduct sales returns, allowances,
discounts if there are any and COST OF SERVICE.

Net Operating Loss Carry Over (NOLCO)

Pertains to the amount of net operating loss that is allowed by law to be
carried over as deduction against available net income in the following three
(3) years.
 29

Net Operating Loss (NOL)

The excess of allowable deductions over the gross income from business or
exercise of a profession during the taxable year.

Computation of NOLCO
Gross income subject to regular tax xx
Less : Total deductions excluding NOLCO from prior
years and deduction incentives under special laws xx
Net Operating Loss Carry-over xx

Illustration :
2012 2013 2014 2015
Gross Income 400,000 500,000 720,000 900,000
Less : Deductions 600,000 450,000 610,000 650,000
Net Income (NOLCO) (200,00) 50,000 110,000 250,000

Net Income/ (Loss) (200,000) 50,000 110,000 250,000

Carried over to 2013 50,000 (50,000) _______ _______
(150,000) - 110,000 250,000
Carried over to 2014 110,000 (110,000) ______
(40,000) - 250,000
Carried over to 2015 40,000 (40,000)
Adjusted Net Income - 210,000

Capital Gains Tax

The tax on capital gains of a corporation derived within the Philippines is
summarized as follows:

The Final Tax Rate on Net Capital Gains on sale, barter, exchange or other
disposition of shares of stock not traded through stock exchange is a flat rate of
15%. (Under the Train Law). Percentage tax on sale of shares of stock traded in
the local stock exchange is based on the Selling Price which is 6/10 of 1%
applicable to Domestic, Resident & Non Resident Foreign Corporation.

Capital asset transaction of Jollibab Corporation (not traded)

Sale of 100,000 Common Shares of Stock for P1,200,000

Cost per Stock is P10

Selling Price 1,200,000

Less : Cost of Stock (100,000 x 10) 1,000,000
Net Capital Gain 200,000

Capital Gains Tax (200,000 x 15%) 30,000

Capital Asset transaction of Jollibab Corporation (traded)

 30

Sale of 10,000 preferred shares of stock with a Selling Price of P1,200,000. Cost
per Stock is P100.

Selling Price 1,200,000

Multiply by (6/10 of 1%) .006
Capital Gains Tax 7,200

Lesson 1: Self-Test

C. True or False. Right True if the statement is right and write False if the
statement is wrong.
11.If MCIT applies, tax can still be collected even if the Corporation incurred
losses.
12.The MCIT is an addition to the regular corporate income tax.
13.A corporation starts to be covered by MCIT on the 4 th year after its
registration with the Securities and Exchange Commission.
14.NOLCO has the effect of increasing tax liability.
15.Adding Gross Income to Cost of Sales will give you Gross Sales if there are no
sales returns, allowances and sales discounts.
16.A Foreign Corporation is taxable only for income from within the
Philippines.
17.The amount of NOLCO should include the amount of deduction incentives
allowed by law.
18.The quarterly Income Tax Return (ITR) is a final return.
19.The recipient of the passive income is the real taxpayer and the payor acts
only as an agent of the government for the collection of the tax.
20.Taxable Corporations includes commercial partnership.

D. Answer the following briefly:

3. How does basic corporate income tax differ from minimum corporate
income tax?
4. What determines whether or not a foreign corporation is a resident of the
Philippines?
 31

TAX-EXEMPT CORPORATIONS

Exempt Domestic Corporations under the NIRC

a) Exempt non-profit Corporations under the NIRC
b) Government Agencies and Instrumentalities
c) Certain Government Owned or Controlled Corporations
d) Cooperatives

Exempt non-profit Corporations under the NIRC

Sec 30(E) of the NIRC defines the corporation or association that is exempt
from income tax. The tax code exempts the following from the payment of
income tax.
1. Government educational institutions.
2. Non-stock and nonprofit educational institutions.
3. Nonprofit labor, agricultural or horticultural organizations.
4. Associations of farmers, fruit growers, and the like whose primary function
is to market the product of their member.
5. Organizations with a purely local operation whose income is derived only
from assessments, dues, and fees collected from their member to meet
operational expenses such as fire insurance company, farmers’ or other
mutual typhoon associations, mutual ditch or irrigation company and mutual
or cooperative telephone company.
6. Non-stock Corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes or for the
rehabilitation of veterans; provided that no individual person owns its assets
or no individual person receives benefit on its earnings.
7. Non-stock/ nonprofit mutual savings bank or non-stock/ nonprofit
cooperative bank.
8. Nonprofit civic league or organization operating exclusively for the
promotion of social welfare.
9. Cemetery Company owned and operated exclusively for the benefit of its
member.
10.Nonprofit business league, chamber of commerce, or board of trade.
11.Associations, orders, beneficiary societies operating for the exclusive
benefits of their members.

Non-profit corporations or corporations must secure a Tax Exemption ruling

from the BIR which will issue a tax exemption certificate or letter that will be
valid for a period of 3 years unless sooner revoked or cancelled.
 32

Exempt Corporations are treated as regular domestic corporations with

regard to their income from unrelated sources.

Sec 30 (E) of the NIRC provides that a charitable institution must be:
1. A non-stock corporation or association
2. Organized exclusively for charitable purposes
3. Operated exclusively for charitable purposes; and
4. No part of its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person.

Government owned or controlled corporations (GOCCs)

These corporations are generally proprietary or commercial in nature and
therefore subject to regular corporate income tax. The Philippine Charity
Sweepstakes Office (PCSO), a GOCC used to be exempt from the payment of
Corporate Income Taxes but it is now subject 30% corporate income tax under
the Train Law. As exception, the following GOCC’s are not subject to income
tax: 1) Government Service Insurance System (GSIS) 2) Social Security System
(SSS) 3) Philippine Health and Insurance Corporation (PHIC) and 4) Local Water
Districts under RA No. 10026.

Qualification of Exemption of Exempt Non-profit Corporation

Income Tax exemption relates only to income from related activities.
Income from activities conducted for profit and income from properties are
taxable regardless of disposition made of those income. The income from
unrelated activities is subjected to regular income tax.

Lydia’s Helping Hand Mission Foundation, a social welfare charitable non-profit

corporation helping the poorest of the poor in Tondo, Manila had the following
statement of income and expenses.

Related Unrelated
Acitivities Activities Total
Gross Income 800,000 400,000 1,200,000
Less : Expenses 400,000 150,000 550,000
Net Surplus 400,000 250,000 650,000

Net Income or Surplus from Unrelated activities 250,000

Multiply by : Corporate tax rate 30%
Regular Corporate Income Tax 75,000

Net Income of Gamma Delta Epsilon (a fraternity association in a Law

School) amounting to P300,000 received as membership dues is exempt. If
there are additional Net Income of P200,000 as a result of fund raising
activities, this is taxable. Tax is 30% of P200,000. Fund raising activity is an
unrelated activities.

Cooperative
 33

It is an autonomous association of persons who voluntarily joined together

to achieve their social, economic and cultural needs and aspirations by making
equitable contributions to the capital required, patronizing their products and
services and accepting a fair share of risks and benefits of the undertaking.

Classification for taxation purposes

1. Transacting business only with members – not subject to any taxes and fees
a) Income Tax (on related regular income)
b) VAT and Percentage Tax
c) Donor’s Tax
d) Excise Tax
e) Documentary Stamp Tax
f) Annual Registration Fee
2. Transacting business with both members and non-members
a) Cooperatives with not more than 10 million accumulated reserves and
undivided net savings, exempt from the taxes as indicated above.
b) Those with more than 10 million accumulated reserves and undivided net
savings are subject to the following taxes:
b.1 Income tax on the full amount allocated for interest on capital.
b.2 VAT on transaction for nom-members
b.3 Percentage Tax to non-members
b.4 All other internal revenue taxes unless otherwise provided by law.

Accumulated Reserve
Commonly referred to as Reserve Fund. It refers to the totality of amounts
legally required to be deducted annually from the annual net surplus (income)
of the cooperative for its protection and stability.

Distribution of Net Surplus (Legal Requirement under RA 9520)

1. Reserve Fund – at least 10% of the net surplus but must not be less than 50%
of the net surplus in the first five years of operation.
2. Education and Training Fund – not more than 10% of the net surplus
3. Community Development Fund – not less than 3% of the net surplus
4. Optional Land and Building Fund – not to exceed 7% of the net surplus
5. Interest, which must not be less than 30% of the net surplus after deducting
the statutory reserves.
6. Any excess to reserve fund.

Taxability of Cooperatives
1. Income tax on unrelated income
2. Capital Gains Tax
3. Documentary Stamp Tax
4. VAT on purchases of goods or services except VAT exempt importations
5. Withholding Tax on Wages except minimum wage employees.
 34

Lesson 2: Self-Test

A. True or False. Right True if the statement is right and write False if the
statement is wrong.
1. A non-profit association is automatically considered a charitable entity.
2. Cooperatives are exempt from the payment of VAT for purchases from VAT
suppliers.
3. Government owned and controlled corporations are generally exempt from
Corporate Income tax rate.
4. Revenues of a Barangay derived from fees for the collection of garbage are
subject to taxation.
5. A Tax exempt association that is allowed to conduct activities for profit
would automatically lose its tax exempt status.
6. DMMMSU is not exempt from income tax.
7. Tax exempt corporations enumerated under the NIRC need not secure Tax
Exemption Ruling from the BIR in order to enjoy its status as exempt.
8. The exemption of non-profit association specifically pertains to income from
related activities.
9. Non-stock corporation or association organized and operated for religious,
charitable, scientific and cultural activities shall be exempt from income
tax.
10. Home Development Mutual Fund is an exempt corporation.

B. Answer the following briefly:

1. Why are Cooperatives generally exempt from taxation?
2. Why are certain corporations given special tax treatment?
 35

SPECIAL CORPORATIONS
There are corporations that are subjected to tax lower than the Corporate
Income Tax of 30%. These corporations are covered by preferential tax rates.

Proprietary Non-Profit Educational Institutions and Proprietary Non-Profit

Hospitals

Sec. 27(B) of the NIRC imposes a 10% a preferential tax rate for the two
entities above mentioned. The only qualifications for hospitals are that they
must be proprietary and non-profit. It is proprietary when it is a private
hospital maintained and administered by private individuals or groups with a
government permit. This is also the case of a “proprietary educational
institution” which is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the DECS, or CHED,
or TESDA. It is non-profit when no net income or asset accrues to or benefits
any member or specific person, with all the net income or asset devoted to the
institution’s purposes and all its activities conducted not for profit.

However, if their business income from unrelated business activities exceeds

50% of the total gross income from all sources, the regular corporate tax rate of
30% shall be applied.

The term “unrelated business activity” means any trade, business or other
activity, the conduct of which is mot substantially related to the exercise or
performance by such educational institution or hospital or its primary purpose
or function.

A “proprietary educational institution” is any private school maintained and

administered by private individuals or groups with an issued permit to operate
from the DECS, or CHED, or TESDA.

Predominance Test
If the gross income from unrelated trade, business or other activity exceeds
fifty (50%) percent of the total gross income derived by such educational
institution or hospitals from all sources, the 30% regular corporate income tax
applies.
 36

“Unrelated Business Activity”. The conduct of any trade, business or other

activity which is not substantially related to the exercise or performance by
such educational institution or hospital or its primary purpose.

Illustration of a Predominance Test, Income of a Private Hospital

Unrelated Related
Activities Activities Total
Rent Income 400,000 400,000
Tuition Fees 1,500,000 1,500,000

Miscellaneous Fees 100,000 100,000

Total Gross Income 400,000 1,600,000 2,000,000

P400,000 (unrelated income ) divide by 2,000,000 (total gross income) is 20%

which is less than 50%. This means that the rate of 10% still applies since the
predominant activity is more than 50%.

International Carrier
The tax is 2 ½ of the Gross Philippine Billings (GPB). 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 provided that for a flight which
originates from the Philippines, but transshipment of passenger takes place at
any port outside the Philippines on another airline, only the aliquot part of the
cost of the ticket corresponding to the leg flown from the Philippines to the
point of transshipment shall form part of the Philippine Gross Billings.

Air Canada has the following income for the period :

1. Flight from Manila to Singapore (continuous) 1,000 tickets at P2,000 per
ticket
2. Excess baggage P1,000,000
3. Direct flight from Manila to Malaysia, 2,000 tickets at P3,000 per ticket

Income Tax Due

1. From Manila to Singapore (1,000 tickets x P2,000) 2,000,000
2. Excess baggage P1,000,000 1,000,000
3. Direct flight from Manila to Malaysia (2,000 tickets x P3,000)6,000,000
Gross Revenue 9,000,000

Multiply by tax rate (2 ½%) 0.025

Income Tax 225,000

International Shipping
The tax is 2 ½ of the Gross Philippine Billings (GPB). “Gross Philippine Billings”
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.
 37

Offshore Banking Units (OBU)

Offshore Banking Unit shall mean a branch, subsidiary or affiliate of a
foreign banking corporation which is duly authorized by the Central Bank of the
Philippines to transact offshore banking business in the Philippines. Offshore
banking shall refer to the conduct of banking transactions in foreign currencies
involving receipt of funds from external sources and the utilization of such
funds.
These resident foreign corporations are subject to a 10% final tax on interest
income derived from foreign currency loans granted to residents.

Tax on Branch Profits Remittance

Foreign Corporations are subject to 15% tax on the total profits applied or
earmarked for remittance by branch to its head office excluding:
a. Income from activities that are registered with the Philippine Economic
Zone Authority.
b. Passive income, gains and profits received not directly connected with the
conduct of its trade or business in the Philippines such as interests,
dividends, rents, royalties, including remuneration for technical services
received by a foreign corporation within the Philippines.

4 LIFE Corporation, Philippines is a branch of 4 LIFE USA located in Caman

Islands. It has been doing business in the Philippines and had the following
income for the year 2016.

Net Operating Income After Tax 8,000,000

Dividend Income (Tax exempt) 3,000,000
Total Net Income
11,000,000

On 2017, 4 LIFE Corporation, Philippines would be remitting the P1,000,000

dividend and P6,000,000 of its net income after tax.

Required :
a) Compute the branch profit remittance tax
b) Net amount to be remitted

Net Income after tax for remittance 6,000,000

Branch Remittance Tax Rate 15%
Branch Profit Remittance Tax 900,000

Dividend Income 3,000,000

Net Income (net of branch profit remittance tax)
(6,000,000 – 900,000) 5,100,000
Total Amount for Remittance 8,100,000

Regional Operating Headquarters (ROHQs)

It shall mean a foreign business entity which is allowed to derive income in
the Philippines by performing qualifying services to its affiliates, subsidiaries or
branches in the Philippines, in the Asia-Pacific Region and in other foreign
markets.
 38

ROHQs may engage in any of the qualifying services such as General

administration and planning, Business planning and coordination, Sourcing and
procurement of raw materials and components, Corporate finance advisory
services, Marketing control and sales promotion, Training and personnel
management, Logistic services, Research and development services and product
development, Technical support and maintenance, Data processing and
communication and Business development. Income derived therefrom shall be
subject to a tax rate of 10% on their taxable income and the amount remitted
to parent company shall be subject to Branch Profit Remittance tax.

ROHQs however, are prohibited from offering qualifying services to entities

other than their affiliates, branches or subsidiaries, as declared in their
registration with the Securities and Exchange Commission nor shall they be
allowed to directly or indirectly solicit or market goods and services whether on
behalf of their mother company, branches, affiliates, subsidiaries or any other
company.

Illustration.

Parsons Pacific Group is engaged in corporate finance advisory services to its

affiliate, Parsons International Inc.

Sales 20,000,000
Cost of Sales 13,000,000
Gross Profit 7,000,000
Less: Operating Expenses 4,000,000
Net Taxable Income 3,000,000
Tax Rate 10%
Income Tax Due 300,000

SPECIAL NONRESIDENT FOREIGN CORPORATIONS

Non-resident cinematographic film owner, lessor/distributor

Non-resident cinematographic film owner, lessor/distributor shall pay a tax
of twenty-five percent (25%) of its gross income from all sources within the
Philippines.

Non-resident owner or lessor of vessels chartered by Philippine nationals

Non-resident owner or lessor of vessels shall be subject to a tax of four and
one-half percent (4½%) of gross rentals, lease or charter fees from leases or
charters to Filipino citizens or corporations, as approved by the Maritime
Industry Authority.

Non-resident owner or lessor of aircraft, machineries and other equipment

Rentals, charters and other fees derived by a non-resident lessor of aircraft,
machineries and other equipment shall be subject to a tax of seven and one-
half percent (7½%) of gross rentals or fees.
 39

FRANCHISING CORPORATIONS
If the royalty income is generated in the active pursuit and performance of
the corporation’s primary purpose, the same is not passive income and thus
subject to 30% regular corporate income tax as prescribed under Sec. 27 (A) of
the National Internal Revenue Code (NIRC). If royalties are derived from passive
income, these are generally subject to 20% final withholding tax under Sec 37
(D) of the NIRC.

Illustration
J Corporation, a franchisor of chain stores, granted franchise to a franchisee, M
Corporation. The franchise fee is P10, 000,000. The pre-operating and training
costs incurred was P2,000,000. Using OSD, how much is the income tax due for
this transaction?

The income tax due would be

Royalty fee P 10,000,000
Less: Pre-operating and training cost 2,000,000
Gross income P 8,000,000
Less:OSD (P8,000,000 x 40%) 3,200,000
Net taxable income P 4,800,000
Multiplied by normal tax rate 30%
Income tax due P 1,440,000

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

In general, accumulation of earnings and profits beyond the reasonable
needs of the business is subject to IAET which is 10% of the improperly
accumulated earnings. The government imposes the penalty to encourage the
distribution of the earnings and profits to individual non-corporate shareholders
who in turn would be liable for the 10% final withholding tax on dividends.

This tax is not imposed on publicly-held companies, banks and other non-
bank financial intermediaries and insurance companies. It is usually imposed on
closely-held or family-owned companies.

Once the profit has been subjected to IAET, the same shall no longer be
subjected to IAET in later years, even if not declared as dividend. The
reasonable needs of the business mean the immediate needs of the business,
including reasonably anticipated needs.

Exempt appropriations
1. Mandatory appropriations – appropriations required by law such as
appropriation to cover the cost of treasury stock acquisitions.
2. Contractual appropriations – appropriations required by contract such as
appropriation for bond sinking fund required by creditors
3. Reasonable appropriations – appropriation for reasonable needs of business

Pro-forma Computation:
 40

Taxable Income for the year xxxx

Add: Income exempt from Tax xxx
Income excluded from Gross Income xxx
Income subject to Final Tax xxx
The amount of NOLCO deducted xxx xxx

Less: Dividend actually or constructively paid xxx

Income Tax paid for the taxable year xxx xxx
Improperly Accumulated Taxable Income xxxx
Multiply by IAET rate 10%
Basic Deficiency IAET xxxx

Lesson 3: Self-Test

A. True or False. Right True if the statement is right and write False if the
statement is wrong.
1. IAET is a penalty imposed by government and is not in lieu of dividend tax.
2. A charitable institution organized and operated exclusively for charitable
purposes loses its tax exempt status if it is allowed to engage in some
activities conducted for profit.
3. For a royalty income to be subjected to final withholding tax, it should be
the result of an active and passive pursuit of the primary objectives of the
Corporation.
4. Regional Operating Headquarters are subject to Branch Profit Remittance
Tax.
5. The tax on Branch Profit Remittance is based on actual remittance.
6. The predominant test applies to non-stock, non-profit corporations and
associations.
7. The profits or earnings actually distributed to shareholders for the taxable
year shall be considered in the computation of IAET.
8. Offshore Banking units primarily deal in Philippine currencies.
9. Income from paying patients by a a non-stock, non-profit hospitals is an
income from “unrelated business activity”.
10.Private , non-profit educational institutions and private, non-profit hospitals
is tax-exempt.

B. Answer the following briefly:

1. What is the rationale behind the Improperly Accumulated Earnings Tax?
2. Why are certain corporations exempt from Improperly Accumulated Earnings
Tax?
 41

INCOME TAXES OF PARTNERSHIP & JOINT VENTURES

PARTNERSHIP DEFINED
A Partnership is defined as a contract whereby two or more persons bind
themselves to contribute money, property, or industry to a common fund to
engage in profitable activities with the intention of dividing the profits among
themselves.

For purposes of taxation, partnership is classified into two major categories:

(1) General Professional Partnership (GGP), and (2) General Co-Partnership
(GCP)

General Professional Partnership (GPP). It is one formed by two or several

persons for the sole purpose of exercising their common profession of which no
part of income is derived from engaging in any trade or business.

Examples : CPA firms, Law firms, Medical Partnerships.

A GPP is exempt from income tax but required to file a tax return for its
income for the purpose of furnishing information as to the share in the gains or
profits that each partner shall include in his individual tax return. GPP is not
also subject to withholding tax.

The partners in a general professional partnership shall be liable for income

tax only in their separate and individual capacities. Each partner shall report
his distributive share, actually or constructively received in the net income of
the partnership as gross income. The share of the partner shall be subject to
10% creditable withholding tax. If the income payments to the partner for the
current year exceeds P720,000, the withholding tax is 15%.

General Co-Partnership or Compania – Collectiva. It is a partnership wherein

part or all of its income is derived from the conduct of trade or business.

For taxation purposes, the general co-partnership is considered as a

corporation and therefore liable to corporate tax of 30%. A general commercial
partnership is also subject to MCIT in the same manner as a corporation.
 42

In commercial partnership, the partners are considered as stockholders. The

profits distributed to them by the partnership are considered dividends and
subject to a final tax of 10%.

General Professional Partnership engaged in commercial activity

If the general professional partnership is engaged in trade or business other
than the practice of the partners’ common profession it becomes taxable as a
corporation.

Profit Share of a Non-resident Alien

The income of a non-resident alien engaged in trade or business (NRAETB) in
the Philippines is to be taxed in the same manner as an individual citizen and a
resident alien individual on taxable income received from all sources within.
This includes his share from a general professional partnership.

Co-ownership
When more than one person acquired the right to own a piece of property or
mass of properties, a co-ownership exists. It may be due to estate succession or
donation. It is generally tax-exempt because the activities of the co-owners are
usually intended to preserve the property and to collect the income from the
property. The income derived by a co-owner from the property shall be
reported in his individual tax return regardless of whether such income is
actually or constructively received.

When Co-ownership is subject to Corporate Income Tax

1. When a co-ownership is formed or established voluntarily, or upon
agreement of the parties.
2. When the individual co-owner reinvested his share in the co-ownership to
produce another income-generating activity.
3. When the property remained undivided for more than ten years, and no
attempt was ever made to divide the among the co-heirs, nor was the
property under administration proceedings nor held in trust, the property
should be considered as owned by an unregistered partnership.

Joint Venture
In a business activity that is organized or established only for a temporary or
short-period of time. It is dissolved once its business objectives is
accomplished. An example of a joint venture is the undertaking of a
construction project by which when the project is completed, the joint venture
is also terminated. It is taxed like a corporation. The share of the joint venture
partners will no longer be taxable to them because they partake of dividends if
paid to a domestic or resident corporation.

An unincorporated joint venture formed for the purpose of undertaking

construction project or engaging in petroleum operations pursuant to the
consortium agreement with the Philippine Government is not subject to the
corporate income tax. Only the joint venture partners will be taxed on their
respective shares in the income of the joint venture.
 43

Lesson 4. Self-Test

A. Problem on Commercial Partnership

Alden and Maine are partners in a restaurant business with the business
trade name, ALMAIN Sweets Restaurant. Among others, they agreed to share
the profits of the partnership based on the following ratio: Alden, 60% and
Maine 40%. Income for the year before taxes is P1,000,000.

Compute the following :

1. The income tax due of the ALMAIN Sweets Restaurant.
2. Net Income after tax before distribution to partners.
3. The share of each partner.
4. Final income tax of each partner.

B. Greg Velayo and Gideon Sycip are partners in a CPA firm known as GM
Accounting Services. The P&L agreement incorporated the following profit
sharing arrangement: Greg, 60% and Gideon, 40%. The net income before
tax is P700,000. Greg has other income from his own grocery store which is
P500,000 gross sales and P150,000 operating expenses.

Compute the following :

1. Income Tax Due of GM accounting services
2. Share of Greg from Professional Partnership
3. Taxable Income of Greg
4. Income Tax Payable of Greg
 44

MODULE V

BUSINESS TAXES

Overview of the Module

This Module discusses the requirement for business registration, the value
added tax, Other percentage tax and Excise Tax. It includes the following :

Lesson 1. Business Registration

Lesson 2. Value Added Tax
Lesson 3. Other Percentage Tax
Lesson 4. Excise Tax

Lesson 1. Business Registration

Business, as defined in the Local Government Code (LGC) of 1991, pertains

to trade or commercial activity “regularly engaged in” as a means of livelihood
or with a viewpoint of obtaining profit.
To be lawful, the business must not be contrary to law, morals, good
customs, public order or public policy. For example, the sale of human organs
is unlawful because it is not within the commerce of men.
Initial Registration of Business. The application for registration must be
filed with the RDO where the principal place of business, branch, storage place
or premises is located, as the case may be, before the start of the business.
A person who is required to register must submit certain documents
containing basic information about his tax status, which are:
1. TIN application form;
2. Sketch of business site of taxpayer, if necessary;
3. Exemption certificate, if applicable;
4. Photocopy of the following:
a. Mayor’s permit and municipal license;
b. DTI Certificate of registration of business for single proprietorship and/or
SEC certificate of registration for corporation or partnership;
c. Articles or partnership of Incorporation for judicial persons;
d. Marriage contracts for individuals; and
e. Unit or agency charter for government agencies and local government units.

For tax identification purposes, a person who is subject to internal revenue

tax is issued with a TIN (Taxpayer’s Identification Number).
Exempt from Registration Fee
The following persons are exempt from payment of P500 registration fee:
 45

1. Individuals earning purely compensation income;

2. Overseas workers; and
3. Self-employed individuals where the gross sales or receipts do not exceed
P100,000 per year (subsistence livelihood earner).
VAT or Non-VAT Registration
Any person intending to engage in business shall determine whether he/she
has to register his/her business as VAT or Non-Vat.
A VAT-registered business is subject to 12% business tax while a non-VAT
business is generally subject to 3% other percentage tax on gross sales or gross
receipts.
1. Mandatory VAT-registration. A taxpayer’s registration for VAT business
becomes compulsory when:
a. His expected annual gross sales or receipts exceed P1,919,500. (now
P3,000,000 under the Train Law)
b. If a taxpayer has realized gross receipts/ sales of more than P1,919,500
(now P3,000,000 under the Train Law) a year.
For purposes of the threshold of P1,919,500.00 (now P3,000,000 under Train
Law), the husband and the wife shall be considered separate taxpayers.
However, the aggregation rule for each taxpayer shall apply. For instance, if a
professional, aside from the practice of his profession, also derives revenue
from other lines of business which are otherwise subject to VAT, the same shall
be combined for purposes of determining whether the threshold has been
exceeded. Thus, the VAT-exempt sales shall not be included in determining the
threshold.
Optional VAT-Registration. Persons with taxable business transactions that do
not exceed P1,919,500 (now P3,000,000 under the Train Law) per year has the
option to register under VAT-system.
R.A. 9337 introduced a new provision regarding VAT optional registration
available to VAT-exempt sales of VAT-registered taxpayers whose dominant
activities are subject to VAT.

This optional Vat registration is subjected to three (3) conditions:

a. The taxpayer’s dominant business is covered by the VAT law and has thus
registered as VAT taxpayer;
b. Said Vat-registered taxpayer has other business transactions which are
exempt from VAT, but has opted to regidter the same as well to be covered
by the VAT system; and
c. The optional VAT registration shall be irrevocable for a period of 3 years
from the date of registration.
Transaction Subject to Business Tax
As a rule, a transaction is subject to business tax if:
 46

1. It is a commercial activity. The sale of goods and services related to trade,

profession or business in the Philippines are generally subject to business
taxes, except when the law provides that they are exempt from business
taxes.
2. Service is rendered by a nonresident foreign person. Services rendered in
the Philippines by nonresident foreign persons shall be considered as being
in the course of business without regard to the “rule of regularity”.
Some Non-business Transactions
The Tax Code and other Revenue Regulations specifically identified some
non-business transactions which are subject to business taxes.
a. Sale of shares of stock through stock exchange is subject to ½ of 1% of other
percentage tax (OPT) based on selling price or gross value in money.
b. Overseas dispatch, communication originating from the Philippines is
subject to 10% OPT.
c. Horse race winning is subject to 10% OPT; also jai-alai is subject to 30%
OPT.
Casual sale
A casual sale is an occasional sale of goods or services by a person who is
not engaged in business or sale of assets that are not used in business. It
involves selling of personal properties or belongings not used in business.
For tax purposes, casual sales are not subject to business tax but subject to
income tax.
1. Sale of house and/or lot classified as capital asset (not used in business);
2. Sale of personal car and other tangible assets not used in business; and
3. Employment services.

Business Taxes
Business taxes are impositions collected by the National Government on
onerous transfer of property, service, or rights in the ordinary course of
business. Under the NIRC business taxes are classified as follows:
1. Value-Added Tax (VAT). It is general consumption tax that requires a 12%
additional tax on the sales price of goods and/or services by VAT-registered
seller or seller required by law to be under VAT-system.
2. Other Percentage Taxes. These are general consumption taxes imposed to
Non-VAT-registered businesses.
There are several tax rates for OPT but the most common is 3%. The tax
based of OPT is the gross sales or gross receipts of non-VAT businesses that are
not exempt from OPT.
3. Excise Taxes (ET). These are taxes imposed on products that are harmful to
health (such as alcohol or tobacco), goods that are nonessential, and
products that deplete natural resources (mineral products) that are
 47

manufactured or produced in the Philippines. This kind of tax is also levied

on some imported products to protect local industries.
Comparison of VAT and Non-VAT Business
The following contrast of VAT and non-VAT businesses may give the advantages
or disadvantages of the two business tax systems:

VAT- Registered Non-VAT Registered

1) Allowed to Output VAT from 1) No Output VAT allowed. The
customers. The Output VAT is a business tax is charged as operating
current liability to be remitted to the expense.
BIR.
2) Allowed to claim creditable Input 2) No Input VAT allowed. The Input
VAT on purchases from VAT- VAT (if any) is charged as part of cost
registered suppliers. The input VAT is of purchases.
a current asset, an advance payment
of VAT

The journal entries of the above business transactions assuming that Hilo
Enterprises is a (a) VAT-registered business and (b) non-VAT registered business
are as follows:

VAT-registered Non-VAT Registered

1. Purchases 5,000 Purchases 5,000

Cash 5,000 Cash 5,000

2. Purchases 10,000 Purchases 11,200

Input VAT 1,200 Cash 11,200
Cash 11,200

3. Cash 33,600 Cash 30,000

Sales 30,000 Sales 30,000
Output VAT 3,600

4. Output VAT 3,600 OPT expense 900

Input VAT 1,200 OPT payable 900
Cash 2,400 (P30,000 x 3%)

5. VAT payable 2,400 OPT payable 900

Cash 2,400 Cash 900

Cancellation of Vat Registration

Once a person registered his business under VAT system, such VAT registration
shall be irrevocable for 3 years from the quarter the VAT registration was
made.
A VAT-registered person remains to be liable to pay VAT until his VAT
registration was made.
 48

Non-VAT Person Collecting VAT

A non-VAT person who issues VAT invoice/official receipt shall pay the
following:
1. Other percentage taxes applicable to his transactions.
2. VAT due on the transaction under Section 106 or 108 of the Tax Code
without the benefit of any input tax credit; and
3. 50% surcharge under Sec. 248(B) of the Tax Code.
INVOICES AND RECEIPTS
General requirements. The taxpayer shall apply for the Authority to Print
with the BIR before the printing of invoice and receipts. The invoices and
receipts should be registered with the BIR.
Under certain conditions, cash register machines and their cash register sales
books or its equivalent may be used but should first be registered with the
appropriate RDO.

The cash register receipts must show, among others, the following:
Proprietor’s business name;
1. Business address;
2. VAT or non-VAT number ; and
3. Amount and date of transaction.
Invoicing and Accounting Requirements for VAT-Registered Persons
1. A VAT-Registered person shall issue
a. A VAT invoice for sale of goods or properties; and
b. VAT Official Receipt for sale of services or lease of goods or properties.
2. Information that shall appear in the VAT invoice or VAT official receipt:
a. A statement that the seller is a VAT-registered person followed by the
TIN.
b. The amount of tax shown as a separate item.
c. The word “VAT-exempt sale” is written or printed prominently if sale is
VAT-exempt.
d. The word “Zero-Rate Sale is written or printed prominently if sale in
subject to zero percent.
e. An option to issue combined or separate invoices receipts of sale on a
combination of VAT-liable and VAT-exempt sale.
f. Date of transaction, quantity, unit cost and description of the goods or
properties or the nature of the service.
g. For sale of VAT-registered persons amounting to P1,000 or more,
indicate the name, business style, address and TIN of the purchaser.
 49

Lesson 2. Value Added Tax

Value Added Tax (VAT)

VAT covers all vatable sales of goods, properties, services or lease of

properties. It does not cover exempt sales or receipts from services specifically
subject to percentage tax. Exempt sales are not subject to VAT and percentage
tax.

A VAT registered person is a person registered in the BIR as a VAT taxpayer

as shown in his Certificate of Registration. Such person is subject to VAT even if
its annual sales do not exceed the VAT threshold of P3,000,000 under the Train
Law. VAT registration becomes mandatory once the sale or lease of goods or
properties, or the performance of services other than those VAT exempt
transactions exceed the VAT threshhold of P3,000,000.

A registrable person or those whole sales or receipts exceed the VAT

threshold of P3,000,000 without registering as VAT taxpayers are subject to
VAT without the benefit of an input tax credit. The sale of such person must
not be Exempt Sales or Receipt from Services specifically subject to percentage
tax

Even if the sale of fertilizers, poultry, seeds, hog feeds, vegetables and
fruits exceed the VAT threshold of P3,000,000, the seller is not mandated to
register as VAT taxpayer because these are exempt sales. Neither is the seller
considered registrable person for the same reason. Operator of a fleet of taxi
cab whose gross receipts from its operation exceed the VAT threshold of
P3,000,000 is also not mandated to register as VAT taxpayer or considered
registrable person because taxi cab operation is subject to common carrier’s
tax.
 50

Taxpayers who do not exceed the VAT threshold has the option to register
as VAT taxpayer. This means that their sales (which are not exempt sales or
whose receipts from services are specifically subject to percentage tax) are
P3,000,000 and below. Once they opted to register as VAT taxpayer , such
taxpayer is not allowed to revoke his registration for a period of 3 years.
When a taxpayer has Vatable Sales or Receipts as well as Non-vatable Sales or
Receipts, the treatment must be to subject the vatable sales to VAT and non-
vatable sales (specifically subject to percentage) shall be subject to percentage
tax while non-vatable sales which are exempt shall remain to be exempt.

A. Computation of VAT Due

VAT Due is the amount that the taxpayer needs to pay to the BIR. To arrive at
the VAT due, the INPUT VAT shall be deducted from the OUTPUT VAT. The
formula is presented below :

OUTPUT VAT XX
Less : INPUT VAT XX
VAT DUE XX

The OUTPUT VAT pertains to Sales; the INPUT VAT pertains to Purchases. For
every purchase, the Purchaser pays 12% VAT on the domestic purchases from
VAT Suppliers or on the importation of goods or services. This tax is passed on
by the Supplier to the Purchaser. Later the Purchaser becomes now the seller
and sell these goods. For every sale, the seller is liable to pay 12% VAT on the
vatable sales or receipts. This tax is passed on to the buyer by the seller.

B. Exempt Sales

Businesses that only sell VAT exempt goods or services are not allowed to
register for VAT. Exempt Sales are not subject to 12% VAT and 3% Percentage
Tax.

The following are exempt Sale of Goods

1. Sale of essential goods to Senior Citizens (SC) and Persons with disability
(PWD)
2. Sale of Exempt goods
a) Agricultural and marine food products in their original state
b) Fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and
poultry feeds including ingredients used in the manufacture of finished
feeds.
c) Books, newspaper or magazines
d) Medicines prescribed for diabetes and hypertension
e) Passenger or cargo vessels and aircrafts
3. Sale of goods by Cooperatives
4. Sale of residential properties
5. Sale of gold to the Bangko Sentral ng Pilipinas
 51

6. Tax-free exchange of property

7. Treaty-Exempt sale of goods
8. Export Sales by Non-VAT persons

Exempt sale of essential goods to both SC and PWD include drugs, vaccines
and foods for special medical purpose and casket or urn. Sale of Vitamins and
Minerals is exempt sale in so far as SC is concerned but not considered exempt
sale for PWD. Likewise, sale of accessories and equipment by or for senior
citizens, such as eye glasses, hearing aid, dentures, prosthetics, artificial bone
replacements, walkers, crutches, wheelchairs, quad canes, geriatric diapers,
and other essential medical supplies, accessories and equipment is considered
exempt sale for SC but not for PWD.

In the sale of agricultural and marine products, to be exempt it should be

the sale of food products. Once there are sales of non-food products,

Lesson 3. Other Percentage Taxes

OTHER PERCENTAGE TAXES (OPT)

ON BUSINESS TRANSACTIONS
Other than the business transactions mentioned in paragraphs (A) to (U) of
Section 109 (1) of the tax code, the gross sales or receipts of nonVAT registered
persons which do not exceed P1,919,500 (now 3,000,000) per year is generally
subject to a percentage tax of 3% rather than 12% VAT.
Business Subject to Other Percentage Taxes
The following businesses are subject to percentage taxes:
1. Non-VAT businesses with annual sales of P1,919,500 (now 3,000,000) and
below;
2. Domestic carriers and keepers of garages;
3. Franchise;
4. Overseas dispatch or message from the Philippines;
5. Bank and non-bank financial institutions;
6. Life insurance companies;
7. Amusement places; and
8. Sales of shares of stock in local stock change.
Non-VAT Business
In general, a non-VAT business with annual gross sales or gross receipts of
P1,919,500 (now 3,000,000) and below is subject to 3% OPT on its transactions
mentioned in paragraphs A to U of Section 109 (1) of the NIRC.
International Air and Shipping Carriers
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International air carriers and international shipping carriers doing business in

the Philippines shall pay a tax of three percent (3%) of their quarterly gross
receipts.
“International carriers” that are subject to 3% international carriers tax would
refer to those “international carriers of foreign registry”.
The ‘international carriers of Philippine registry” are subject to 12% VAT on
their domestic transport of both passengers and cargo, but zero-rated on their
transport of passengers and cargo from the Philippine port to a foreign pot
(vice versa).
Franchises
A franchise is a privilege acquired by special grants from the public through the
legislature which imposes on the grantee as a consideration, a duty to the
public to see that they are properly used.
1. Gas and Water Franchises. A percentage tax of two percent (2%) tax on
gross receipts derived from the business covered by the law granting the
franchise on gas, and water utilities.
Under R.A. 9337, electric utilities are now subject to VAT on their
generation, transmission, and distribution of electricity. Consequently, only gas
and water utilities remain subject to the franchise tax under Section 119 of the
NIRC.
2. Radio and/or television broadcasting companies whose annual gross
receipts of the preceding year do not exceed Ten Million pesos (P10,000,000)
are subject to a percentage tax of 3%. These companies can opt to register as
VAT taxpayers and pay the corresponding Vat thereon. Once the option is
exercised, said option shall be irrevocable.
Mandatory registration applies within 30 days from the end of the taxable
year to radio/TV broadcasters whose gross annual receipt for the taxable year
exceeded P10,000,000.
3. Other franchises are subject to 12% value-added tax.
Overseas Dispatch, Message or Conversation
Overseas dispatches, messages, or conversations originating from the
Philippines by telephone, telegraph, telewriter, exchange, and other
communication equipment services are subject to 10% other percentage tax.
The 10% OPT is the expense of the caller to be withheld by the service
provider. This tax is required to be collected and paid by the person rendering
the services within 20 days after the end of each quarter.
Exemptions: The tax imposed herein shall not apply to the following:
1. Government. Amounts paid for messages transmitted by the Government of
the Philippines or any of its political subdivision or instrumentalities.
2. Diplomatic Services. Amounts paid for messages transmitted by any
embassy and consular offices of a foreign government.
3. International Organizations. Amount paid for messages transmitted by a
public international organization or any of its agencies based in the
Philippines enjoying privileges, exemptions, and immunities which the
government of the Philippines granted.
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4. News services. Amounts paid for messages from any newspaper, press
association, radio, or television news, broadcasting agency, or news stickers
services, to any other newspaper, press association, radio or television
newspaper, broadcasting agency, news sticker service or to a bona fide
correspondent, which messages deal exclusively with the collection of news
items for or through, public press, radio or television broadcasting or a news
sticker service furnishing a general news service similar to that of the public
press.
Life Insurance
As a rule governing Life Insurance Premium, a percentage tax of 5% of the
total premium collected shall be imposed on collection from every person,
except in the following:
1. The life insurance premium is refunded within six (6) months; and
2. Premiums collected outside the Philippines from nonresident persons.
Amusement Taxes
Section 125 of the NIRC provides that the following Other Percentage Taxes
(OPT) rates shall be collected from the gross receipts within of the proprietor
lessee or operator of the following amusement activities, irrespective whether
or not any amount is charged for admission:
Amusement activities:
OPT
1. Jai-alai and race tracts 30%
2. Cabarets, night or day clubs 18%
3. Cockpits 18%
4. Professional basketball games 15%
5. Boxing exhibitions 10%
Boxing exhibitions in any division whether for World or Oriental
Championships is exempt from amusement tax if the following conditions exist:
a. One of the contenders for the World or Oriental Championship is a citizen of
the Philippines, and
b. The promoter of the said boxing exhibition is a Filipino citizen. If the
promoter is a corporation or association, at least 60% of its capital is owned
by a Filipino citizen.
Horse Race Winnings
A ten percent (10%) tax on winnings or ‘dividends’ derived from horse races
based on the actual amount paid to person for every winning ticket after
deducting the cost of the ticket.
In the case of winning from “double” (winning number for 2 consecutive
races), “forcastiquinella” (winning numbers for 1 st and 2nd in a race) and
“trifecta” (winning numbers for 1st and 2nd in a race) bets, the tax shall be 4%.
This tax shall be paid within 20 days from the date it was deducted and
withheld by the person in charge of the horse races.
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Sale of Shares of Stock through Local Stock Exchange

Shares of stock sold, bartered, exchange, listed, or traded through the local
stock exchange, other than a sale by a dealer in securities, is subject to a
percentage tax of 6/10 of 1% based on the Gross Selling Price or Gross Value in
money of the sale of Shares of Stock sold, bartered or exchanged or otherwise
disposed of.
The 6/10 of 1% stock transaction tax is a final tax. The payment of such tax
will exempt from income tax any income derived from the said sale of shares of
stock.
This OPT shall be paid by the stockholder within 5 banking days from the date
of collection.
Gross Receipts Tax (GRT) on Banks and Quasi-Banks
There shall be collected on gross receipts from sources within the Philippines
by all banks and non-bank financial intermediaries performing quasi-banking
functions in accordance with the following schedule:
(a) On interest, commissions, and discounts from lending as well as income
from financial leasing, on the basis of remaining maturities of instruments
from which such receipts are derived:
Maturity period of five (5) years or less------------5%
Maturity period of more than five (5) years-------1%
(b) On dividends and equity shares in the net income of subsidiaries------------0%
(c) On royalties, rentals of real or personal property , profit from exchange
And all other items treated as gross income under Section 32 of the
code-------7%
(d) On net trading gains within the taxable year on foreign currency, debt
securities,
derivatives and other similar financial instruments---------------7%
Gross Receipts Tax on Other Non-Banks
Gross receipts of other non-bank financial intermediaries (non-bank financial
intermediary not performing quasi-banking functions) doing business in the
Philippines shall be subject to GRT at rates and on items of income provided
hereunder:
(a) From interest, commissions, discounts, and all other items treated as gross
income under the Code -----------5%
(b) On interest, commissions and discount from lending activities as well as
income from financial leasing, on the basis of remaining maturities of the
instruments from which such receipts are derived:
Maturity period id five (5) years or less -------------------------------- 5%
Maturity period is more than five (5) years---------------------------- 1%
In the case of financial leasing, the taxable gross receipts shall consist only
of interest income (recovery of principal not included). However, in the case of
transactions under operating lease agreements, the gross receipts refer to the
gross rental amount.
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Lesson 4. Excise Tax

Excise Tax – an excise tax like VAT, is another type of indirect tax imposed on
the producer but passed on to the consumer. It is imposed on limited and
specific types of goods.

Classification of Excise Tax

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1. Specific – an excise tax based on weight or volume capacity or any other

physical unit of measurement. Ex. P1.00 excise tax per piece of cigar
produced.
2. Ad valorem – an excise tax based on selling price or other specified value of
the goods.
Ex. 20% ad valorem tax of the wholesale price imposed on importation of
non-essential goods.

Purposes of Excise Tax

a) To curtail consumption of certain commodities which are considered
harmful to the individual as well as the community as a whole.
b) To protect domestic industries from competition caused by similar imported
products.
c) To distribute the tax burden in proportion to benefit derived from a
particular government service.
d) To raise revenue.

Goods subject to excise tax

1. Alcohol products (Distilled spirits, Wines, Fermented Liquors)
2. Tobacco Products (Cigars, Cigarettes)
3. Petroleum Products
4. On Miscellaneous Imported Articles and non-essential goods.
5. On Mineral Products.

Distilled Spirits – refer to the substance known as ethyl alcohol, ethanol or

spirits of wine, including all dilutions, purification and mixtures thereof, from
whatever source, by whatever process produced, and shall include whisky,
brandy, rum, gin, and vodka and other similar products or mixtures.

Fermented Liquors – refers to alcoholic beverages produced by fermentation

without distillation of grains or malt, which include beer, lager, ale porter and
other similar products but excluding tuba, basi, tapoy and other similar
domestic fermented liquor.

Cigars – would refer to all rolls of tobacco or any substitute thereof, wrapped in
tobacco leaf.

Miscellaneous Articles

Automobiles – shall refer to any four or more wheeled motor vehicle regardless
of its seating capacity, which is fueled by gasoline, diesel, electricity or any
motive power.

It does not include buses, trucks, cargo van, jeeps and single cab chasse.
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Non-essential goods – include all goods commonly or commercially known as

jewelry, whether real or imitation, pearls, precious and semi-precious stone
and imitations thereof; goods made of or ornamented, mounted, or fitted with,
precious metals or imitations thereof or ivory (not including surgical and dental
instruments, silver plated wares, frames or mountings for spectacles or
eyeglasses, and dental gold or gold alloys and other precious metals used for
filling, mounting, or fitting fo the teeth,) opera glasses and lorgnettes.

20% of the wholesale price or the value of importation used by the Bureau of
Customs in determining tariff and customs duties, net of excise tax and value
added tax.

Mineral Products – Shall mean naturally occurring inorganic substances (found

in nature) whether solid, liquid and gaseous or any intermediate state.

Mineral Products – shall mean things produced and prepared in a marketable

state by simple treatment processes and washing and drying, but without
undergoing chemical change or process or manufacturing by the lessee,
concessionaire, or owner of mineral lands.

Quarry Resources – shall mean any common stone or other common mineral
substances as the Director of the Bureau of Mines and Geo Sciences may
declare to be quarry resources such as , but not restricted to marble, granite,
volcanic cinders, basalt, tuff and rock phosphate.

1. P10 per metric ton on coal and coke

2. On all non-metallic minerals and quarry resources = 2% based on actual
market value of gross output thereof at the time of removal, in the case of
those locally extracted produced.

Copper and other metallic minerals = 2%

Gold and Chromite = 2%
On indigenous petroleum = 3%