Income Taxation

TAXING AUTHORITY TO GROSS INCOME

ATTY. EDISON JAMES F. PAGALILAUAN, LLM.
 What are the Powers and duties of the
BIR?

Classification: GENERAL
  1. To assess and collect national internal revenue taxes, fees and charges;
 2. To enforce all forfeiture, penalties, and fines connected with the
assessment and collection of taxes, fees and charges;
 3. To execute judgment in all cases decided in its favor by the CTA and
the ordinary courts; and
 4. To effect and administer the supervisory and police powers conferred
upon it by the NIRC and other special laws.

Classification: GENERAL
 What are the Powers of the
Commissioner of Internal Revenue?

Classification: GENERAL
  1. Power to interpret tax laws and decide tax cases (Sec. 4)
 2. Power to obtain information and to summon/examine and take
testimony of persons (Sec. 5)
 3. Power to make assessments and prescribe additional requirements for
tax administration and enforcement (Sec. 6)

Classification: GENERAL
 Explain the Power of CIR to interpret
the NIRC and other tax laws.

Classification: GENERAL
  Under the exclusive and original jurisdiction of the CIR, subject to review by the
Secretary of Finance (Sec. 4)6
 Under RMC No. 37-07, the authority of the CIR to sign rulings granting and/or
confirming tax incentives, and tax treaty relief through the ruling process is now
delegated to the Deputy Commissioner of the Legal and Inspection Group
and to the Assistant Commissioner of the Legal Service Group.
 However, the CIR is empowered, motu proprio, to reverse, modify or alter any
such ruling issued by the Deputy Commissioner of the Legal and Inspection
Group or the Assistant Commissioner of the Legal Service Group, subject to the
non-retroactivity rule.
 All rulings of first impression shall be signed by the CIR.

Classification: GENERAL
 Explain the power of the CIR to
decide tax cases.

Classification: GENERAL
  Includes the power to decide:
 1. Disputed assessments;
 2. Refunds of internal revenue taxes, fees or other charges;
 3. Penalties imposed in relation to the above; and
 4. Other matters arising under the NIRC.
 Note: Decisions (quasi-judicial, such as decisions on assessment, refunds, and
other matters) of the CIR are subject to the exclusive appellate jurisdiction of
the CTA.
 Note: Those decided by the CIR/ other officers in the exercise of their
interpretative (quasi-legislative) powers are appealable before the Secretary of
Finance. The decision then, of the Secretary, should it remain unfavorable,
could fall under “other matters” and shall now be appealable before the CTA.

Classification: GENERAL
 What are the Other powers of the
CIR?

Classification: GENERAL
  1. Power to Prescribe Real Property Values
 2. Power to Inquire into Bank Deposits
 The Commissioner is authorized to inquire into the bank deposits and other
related information held by financial institution of:
 ● A decedent to determine his gross estate
 ● Any taxpayer who has filed an application for compromise of his tax liability
under Section 204(A)(2) of this Code by reason of financial incapacity to pay
his tax liability.
 *Application shall not be considered unless and until he waives in writing his
privilege under Republic Act No. 1405 or under other general or special laws
and such waiver shall constitute the authority of the Commissioner to inquire
into the bank deposits of the taxpayer.

Classification: GENERAL
 Discuss the Authority of the Secretary
of Finance to promulgate rules and
regulations.

Classification: GENERAL
  The Secretary of Finance, upon recommendation of the CIR, shall
promulgate all needful rules and regulations for the effective enforcement
of the provisions of this Code. (Sec. 244)
 The power of the Secretary of Finance to review rulings issued by the CIR,
which includes the power to reverse, revise or modify, is limited only to
rulings that are adverse to the taxpayers.

Classification: GENERAL
 What are some jurisprudential
doctrines on the rule-making authority
of the Sec. of Finance?

Classification: GENERAL
  In order to place Champion, Hope and More cigarettes within the scope of RA 7654 and
subject them to an increased tax rate, RMC 37-93 was issued. In so doing the BIR did not
simply interpret the law; verily it legislated under its quasi-legislative authority. The due
observance of the requirement of notice, of hearing and of publication should not have
been ignored. The Supreme Court eventually found that the hastily promulgated RMC 37-
93 fell short of a valid and effective administrative issuance. (CIR v. CA, G.R. No. 119761,
1996)
 Administrative rules and regulations are intended to carry out, neither to supplant nor to
modify, the law. (CIR v CA, ROH x Auto Products Phil, Inc. and CTA, GR No. 108358, 1995)
It is applied prospectively. (ABS-CBN v. CTA, G.R. No. 52306, 1981)
 While a government is not bound by the error of its agents issuing ruling, in the interest of
justice and fair play, such may not be given retroactive effect. Hence, a VAT ruling
subsequently issued to correct a prior one cannot be applied retroactively when
taxpayers have already relied on the said erroneous ruling. (CIR v. Benguet Corporation,
G.R. Nos. 134587 & 134588, 2005)

Classification: GENERAL
 What is INCOME TAX?

Classification: GENERAL
  A tax on all yearly profits arising from property, professions, trades, or
offices, or as a tax on a person’s income, emoluments, profits and the like.
Income tax is a direct tax.

Classification: GENERAL
 What are the three systems of income
taxation?

Classification: GENERAL
  i. Global
 The total allowable deductions are deducted from the gross income to
arrive at the net taxable income subject to the relevant income tax rate.
 All items of gross income and deductions are reported in one income tax
return and a single tax is imposed on all income received or earned by a
person irrespective of the activities which produced the income (i.e.
compensation income, net income from business, trade or profession.)

Classification: GENERAL
  ii. Schedular
 Different types of income are subjected to different sets of graduated or
flat income tax rates. The applicable tax rates will depend on the
classification of the taxable income and the basis could be gross income
or net income (i.e. capital gains tax).

Classification: GENERAL
  Iii. Semi-Schedular or Semi-Global Tax System – The compensation income,
business or professional income, capital gain and passive income not
subject to final tax, and other income are added together to arrive at the
gross income and after deducting the sum of allowable deductions, the
taxable income is subjected to the relevant income tax rate.
 With respect to the income, the computation of income is global while the
schedular tax system applied to the capital gains and passive income
subject to final tax at preferential tax rates.

Classification: GENERAL
 Distinguish global from schedular
system of taxation.

Classification: GENERAL
 General View: (Mamalateo)

Classification: GENERAL
  Alternative view: (Justice Dimaampao)
 Under the global system, there is no need for classification as all taxpayers
are subjected to a single rate, while under the schedular system, there are
different categories of taxable income.
 Global treatment is usually applied to corporations, as corporations are
taxed at a single rate, regardless of the tax base; while the schedular
system is usually applied to individuals as they are subjected to different
tax rates based on their tax bracket.

Classification: GENERAL
 What are the Features of the
Philippine Income Tax Law?

Classification: GENERAL
  i. Direct tax – Tax burden is borne by the income recipient upon whom the tax is imposed.
 ii. Progressive tax – Tax rate increases as the tax base increases; direct taxes are to be
preferred and as much as possible, indirect taxes should be minimized. (Tolentino v.
Secretary of Finance, G.R. No. 115455, 1995)
 iii. Comprehensive system – Adopts the citizenship principle, residence principle, and the
source principle.
 iv. Semi-schedular or semi-global tax system – Certain passive incomes and capital gains
are subject to final taxes at preferential rates while all other incomes are added together
to arrive at the gross income. After deducting the sum of allowable deductions, the
taxable income is subjected to one set of graduated tax rates for an individual or normal
corporate income tax rate for corporations.

Classification: GENERAL
 What are the Criteria in imposing
Philippine Income Tax?

Classification: GENERAL
  i. Citizenship – A citizen taxpayer is subject to income tax: (a) on his
worldwide income if he resides in the Philippines; or (b) only on his income
from sources within the Philippines, if he qualifies as a non-resident citizen.
 ii. Residence – A resident alien is liable to pay income tax on his income
from sources within the Philippines but exempt from tax on his income from
sources outside the Philippines.
 iii. Source – A non-resident alien could be subject to Philippine income tax
if he derives income from sources within the Philippines such as dividend,
interest, rent or royalty.

Classification: GENERAL
 What are the General principles of
income taxation?

Classification: GENERAL
  Except when otherwise provided in this Code: (NIRC, Sect. 23)
 i. A citizen of the Philippines residing therein is taxable on all income derived from sources within
and without the Philippines;
 ii. A non-resident citizen is taxable only on income derived from sources within the Philippines;
 iii. An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker (OCW) is taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas contract worker;
 iv. An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
 v. A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and
 vi. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.

Classification: GENERAL
Classification: GENERAL
 What are the Types of Philippine
Income Taxes?

Classification: GENERAL
  1. Net Income Tax/Taxable Income (GI – Deductions)
 2. Gross Income Tax
 3. Final Income Tax (on passive income and capital gains)
 4. Fringe Benefits Tax (amount of benefits to managerial and supervisory
employee paid by employer; employee is taxed but burden is on employer)
 5. Capital Gains Tax (real property and shares of stock not traded in stock
market)
 6. Corporate Income Tax
 7. Minimum Corporate Income Tax (2% of gross income)
 8. Improperly Accumulated Earnings Tax (IAET)
 9. Branch Profit Remittance Tax

Classification: GENERAL
 What are the Kinds of Taxpayers?

Classification: GENERAL
  1. Individual Taxpayers
 i. Citizens
 (a) Resident Citizen (RC) – citizen of the Philippines residing therein is taxable on all income derived from sources within
and without the Philippines.
 (b) Nonresident Citizen (NRC) – citizen of the Philippines who is taxable only on his income from sources within the
Philippines if he:
 ● Establishes the fact of his physical presence abroad with a definite intention to reside therein.
 ● Leaves the Philippines during the taxable year to reside abroad, as immigrant or for employment on a permanent basis.
 ● Works & derives income from abroad & whose employment requires him to be physically present abroad most of the
time (i.e. not less than 183 days) during the taxable year.
 ● Was previously considered as nonresident citizen & arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines.
 Examples of non-resident citizens:
 ● Immigrant – one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured
 ● Permanent employee abroad – one who leaves the Philippines and works abroad on a more or less permanent basis

Classification: GENERAL
  Iii) Contract Worker or Overseas Contract worker (OCW) – one who leaves
the Philippines on account of a contract of employment which is renewed
from time to time under such circumstance as to require him to be
physically present abroad most of the time.
 Under SEC. 23.(C) An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas contract worker is
taxable only on income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the 24 National Tax Research
Center Philippines and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged exclusively
in international trade shall be treated as an overseas contract worker;

Classification: GENERAL
  For OCWs, the time spent abroad is not material for tax exemption purposes. All
that is required is for the worker’s employment contract to pass through and be
registered with the POEA. (BIR Ruling No. 33-00; BIR Ruling No. DA-428-04)
 An OCW is a Filipino citizen who:
 ● Holds a job outside the Philippines,
 ● Is physically present in that foreign country where the job is,
 ● Is registered with the POEA,
 ● Has a valid overseas employment certificate, and
 ● His/her salaries and wages are paid by an employer abroad and are not
borne by any entity or person in the Philippines. (Rev. Regs. 01-11)

Classification: GENERAL
  Aliens
 (a) Resident Alien (RA) – an individual whose residence is within the Philippines and who is
not a citizen thereof is taxable only on income derived from sources within the Philippines.
 Under SEC. 23.(D) An alien individual, whether a resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines;
 One who comes to the Philippines for a definite purpose which in its nature would require
an extended stay, and makes his home temporarily in the country, becomes a resident
alien. The length of stay is indicative of intention.
 An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the income tax. Whether he is a transient or not
is determined by his intentions with regard to the length and nature of his stay.
 A mere floating intention, indefinite as to time, to return to another country is not sufficient
to constitute him a transient.

Classification: GENERAL
  b) Nonresident Alien (NRA) – an individual whose residence is not within
the Philippines and who is not a citizen thereof but doing business therein is
taxable only on income from sources within.
 (1) Engaged in trade or business (NRA-ETB) – an alien who comes and stays
in the Philippines for an aggregate period of more than 180 days during
any calendar year
 (2) Not engaged in trade or business (NRA-NETB) – an alien whose stay in
the Philippines is 180 days or less

Classification: GENERAL
  Special Class of Individual Employees
 (a) Minimum Wage Earner
 A worker in the private sector paid the statutory minimum wage, or an
employee in the public sector with compensation income of not more
than the statutory minimum wage in the non-agricultural sector where
he/she is assigned;
 His earnings (i.e. SMW, holiday, overtime, night-shift differential and hazard
pay) are exempt from income tax pursuant to the provisions of the NIRC
and other laws, general or special.

Classification: GENERAL
  (a) Aliens employed by regional or area headquarters and regional
operating headquarters of multinational companies in the Philippines.
 The preferential tax rate of 15% is no longer applicable, without prejudice
to preferential rates under existing tax treaties.
 (b) Aliens employed by offshore banking units.
 His gross income is no longer subject to the preferential tax rate of 15%,
without prejudice to preferential rates under existing tax treaties.
 (c) Aliens employed by petroleum contractors and subcontractors.
 His gross income is no longer subject to the preferential tax rate of 15%,
without prejudice to preferential rates under existing tax treaties.

Classification: GENERAL
  1. Corporations
 A corporation shall include partnerships, no matter how created or
organized. It includes joint stock companies, joint accounts, associations,
and insurance companies.
 But does not include, for the purpose of imposing the 30% regular
corporate income tax (RCIT):
 1. General professional partnerships; and
 2. Joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium
agreement under a service contract with the government.

Classification: GENERAL
  Kinds of Corporations
 (i) Domestic Corporation (DC) – created or organized in the Philippines or under its laws and is
liable for income derived from sources within and without
 (ii) Foreign Corporation (FC) – organized and existing under the laws of a foreign country, which
includes:
 Kinds of foreign corporations
 (i) Resident foreign corporation (RFC) – foreign corporation engaged in trade or business within
the Philippines and is liable from sources within.
 There is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting”
business. Each case must be judged in the light of its peculiar circumstances.
 The term implies a continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and object of
the business organization.

Classification: GENERAL
  (ii) Nonresident foreign corporation – foreign corporation not engaged in
trade or business within the Philippines
 Joint Venture and Consortium
 Joint venture is a commercial undertaking by two or more persons,
differing from a partnership that it relates to the disposition of a single lot of
goods or the completion of a single project.
 Consortium is an association, typically of several business companies.

Classification: GENERAL
  2. Partnerships
 Taxed as a corporation Includes unregistered joint ventures and business
partnerships
 Exception: that joint ventures are not taxable as corporations when the
purpose is for:
 ● Undertaking construction projects; or
 ● Engaging in petroleum, coal, and other energy operation under a service
contract with the government.
 Partners in a business partnership are considered stockholders. Their distributive
shares are taxed as dividends, and thus subject to final income tax on their
gross distributive share.

Classification: GENERAL
  3. General Professional Partnerships
 Established solely for purpose of exercising common profession and no part
of income derived from engaging in trade or business.
 As an entity, it is not subject to income tax.
 Partners are liable for income tax on their distributive share (computed by
dividing net income of GPP). Each partner shall report his distributive share
as part of his gross income.
 Individual partners are subject to regular income tax rate on their taxable
income

Classification: GENERAL
  4. Estate and Trusts
 Estate – property, rights, and obligations of a person which are not
extinguished by his death and those that accrue thereto
 Trust – arrangement created by agreement under which title to property is
passed to another for conservation or investment with the income and the
corpus/principal distributed in accordance with the directions of the
creator; to be taxable as a separate entity, grantor must have absolutely
and irrevocably given up control and benefit over the trust

Classification: GENERAL
  5. Co-ownership
 Exists whenever the ownership of an undivided thing or right belongs to different persons;
for income tax purposes, the individual co-owners are liable for the taxes due on their
respective shares and the co-ownership itself is not considered as a separate taxable
entity
 There is co-ownership in the following instances:
 ● Two or more heirs inherit an undivided property from a decedent; or
 ● A donor makes a gift of an undivided property in favor of two or more donees.
 It is not taxable when the activities are limited merely to preservation of the co-owned
property but the co-owners are liable for income tax in their separate and individual
capacities.
 It is taxable when the income of the co-ownership is invested by the co-owners in business
creating a partnership.

Classification: GENERAL
Classification: GENERAL
 What is the Taxable Period?

Classification: GENERAL
  General Rule: The accounting period of a taxpayer is a period of twelve (12) months.
 (1) Calendar Year – accounting period from January 1 to December 31 which is allowed if the:
 ● Taxpayer is an individual
 ● Taxpayer is a partnership
 o Under Section 52(B) of the NIRC, in relation to Section 22(B), a “corporation” includes a “partnership – no matter how created or organized.”
 ● Accounting period is other than a fiscal year
 ● Taxpayer has no accounting period
 ● Taxpayer does not keep books
 ● Taxpayer is an estate or trust
 (2) Fiscal Year – Accounting period of twelve (12) months ending on the last day of any month other than December which is allowed only for corporations.
 (3) Short Period – A taxpayer may have a taxable period of less than twelve (12) months when:
 1. Taxpayer dies
 2. Corporation is newly organized
 3. Corporation changes its accounting period
 4. Corporation is dissolved

Classification: GENERAL
 Define income.

Classification: GENERAL
  Income, in the broad sense, means all wealth, which flows into the
taxpayer other than as a mere return of capital. It includes the forms of
income specifically described as gains and profits, including gains derived
from the sale or other disposition of capital assets.

Classification: GENERAL
 Distinguish income from capital.

Classification: GENERAL
  The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such
fund through a period of time is called an income. Capital is wealth, while
income is the service of wealth.
 Income refers to net profit, i.e. what remains after expenses and taxes are
subtracted from revenue. Income is gain derived and severed from capital.
 Capital is a fund or property existing at one distinct point in time while income
denotes a flow of wealth during a definite period of time. It is the wealth in the
form of money or other assets contributed for a particular purpose such as
starting a company or investing. It is the source of the flow of the fund or
revenue. Being the source of revenue, it is not taxable.

Classification: GENERAL
 Distinguish revenue from income.

Classification: GENERAL
  Revenue is the total amount of money the business receives from its
customers for its products and services. It is the total inflow of money or
goods to a person without taking into consideration the costs incurred in
generating the said revenue. Revenue means income derived from
whatever source, including compensation for services; the conduct of
trade or business or the exercise of a profession; dealings in property;
interests; rents; royalties; dividends; annuities; prizes and winnings; pensions;
and a partner's distributive share in the net income of a general
professional partnership, among others.

Classification: GENERAL
 When is income taxable?

Classification: GENERAL
  i. Existence of income
 For a taxable income to exist, gain or profit is necessary. Before a
condonation or forgiveness of debt will give rise to a taxable income,
there must be an increase in the assets of the debtor thereby enriching the
latter. The condonation of debt will not be subject to income tax if it does
not result in the reduction of the taxable income of the debtor or the
debtor is in a capital deficit position after the condonation. (BIR Ruling No.
DA-(C-335)815-09)

Classification: GENERAL
 What is the realization test?

Classification: GENERAL
  Under the Realization Principle, revenue is generally recognized when both
of the following conditions are met:
 1. The earning is complete or virtually complete; and
 2. An exchange has taken place.
 This principle requires that revenues must be earned before they are
received. Amounts received in advance are not treated as revenue of the
period in which they are received, but as revenue of the future period or
periods in which they are earned. These amounts are carried as unearned
revenue, that is, liabilities to transfer goods or render services in the future
— until the earning process is complete. (Manila Mandarin Hotels v.
Commissioner, CTA Case No. 5046, 1997)

Classification: GENERAL
 Distinguish actual from constructive
receipt.

Classification: GENERAL
  Actual Receipt occurs when there is a physical transfer of the money
consideration or its equivalent to a person.
 Constructive Receipt occurs when the money consideration or its equivalent, is
placed at the control of the person who rendered the service without
restrictions by the payor.
 Examples:
 ● Deposits in banks which are made available to the seller of service without
restrictions;
 ● Issuance by the payor of a notice to offset any debt or obligation and
acceptance thereof by the seller as payment for services rendered; and
 ● Transfer of amounts retained by the payor for the account of the seller. (Rev.
Regs.16-05, Sec. 4.108-4)

Classification: GENERAL
 What are the Tests in Determining
whether Income is Earned for Tax
Purposes?

Classification: GENERAL
  i. Realization test
 While not new in Philippine jurisprudence, courts have not fully adopted
the doctrine. (See discussion on “Tests of Realization”)
 ii. Claim of right doctrine or doctrine of ownership, command or control
 The “Claim-of-Right” Doctrine provides that if a taxpayer receives earnings
under a claim of right and without restriction as to its disposition, he has
received income even though one may claim he is not entitled to the
money. Should it later appear that the taxpayer was not entitled to keep
the money, the taxpayer would be entitled to a deduction in the year of
repayment. (BIR Ruling No. DA-(C-168)519-08 citing the US case of North
American Oil Consolidated v. Burnet)

Classification: GENERAL
  iii. Economic benefit test or doctrine of proprietary interest
 The Economic Benefit Theory provides that anything, which benefits a
person materially or economically in whatever way, is taxable under the
law. (BIR Ruling No. 123-97)
 As a general rule, in this jurisdiction, mere increase in the value of property
without actual realization, either through sale or other disposition, is not
taxable, the only exception being that even without sale or other
disposition, if by reason of appraisal, the cost basis of property is increased
and the resultant basis is used as the new tax base for purposes of
computing the allowable depreciation expense, the net difference
between the original cost basis and new basis due to appraisal is taxable
under the economic-benefit principle. (BIR Ruling No. 029-98)

Classification: GENERAL
  iv. Severance test
 Under the Severance Theory Test, income is recognized when there is a
separation of something which is of exchangeable value. (Eisner v. Macomber,
252 U.S. 189, 1920)
 The annual increase in value of an asset is not taxable income because such
increase has not yet been realized. The increase in value i.e., the gain, could
only be taxed when a disposition of the property occurred which was of such a
nature as to constitute a realization of such gain, that is, a severance of the
gain from the original capital invested in the property. The same conclusion
obtains as to losses. The annual decline in the value of property is not normally
allowable as a deduction. Hence, to be allowable, the loss must be realized.
(BIR Ruling No. 206-90 citing Surre Warren, Federal Income Taxation)

Classification: GENERAL
 Distinguish cash from accrual method.

Classification: GENERAL
  The accrual method relies upon the taxpayer’s right to receive amounts or
its obligation to pay them, in opposition to actual receipt or payment,
which characterizes the cash method of accounting. Amounts of income
accrue where the right to receive them become fixed, where there is
created an enforceable liability. Similarly, liabilities are accrued when fixed
and determinable in amount, without regard to indeterminacy merely of
time of payment. (CIR v. Isabela Cultural Corporation, G.R. No. 172231,
2007)

Classification: GENERAL
 What are the Factors that determine
the situs of income tax?

Classification: GENERAL
  1. Nationality
 2. Residency
 3. Source of Income

Classification: GENERAL
Classification: GENERAL
 What is the Most-favored nation
clause?

Classification: GENERAL
  Royalty income paid by a domestic corporation to a non-resident foreign
corporation which is a resident of a Contracting State with which the
Philippines has an effective tax treaty is generally subject to 15% final
withholding tax, but the rate may be reduced to 10% for certain royalty
payments or under the most-favored nation clause of the tax treaty, such
as the Philippines-US Tax Treaty.
 The purpose of the clause in a tax treaty is to grant to the other
Contracting State a tax treatment that is no less favorable than that which
is granted to the “most favored” among other countries.

Classification: GENERAL
 Distinguish gross from net income.

Classification: GENERAL
  Gross Income is described as income from whatever source, including
compensation for services; the conduct of trade or business or the exercise
of profession; dealings in property; interests; rents; royalties; dividends;
annuities; prizes and winnings; pensions; and a partner's distributive share in
the net income of a general professional partnership. (NIRC, Sec. 32 as
cited in CIR v. PAL, Inc., G.R. No. 180066, 2009)
 Net Income means gross income less statutory deductions. It is referred to
as “Taxable Income” under the NIRC.

Classification: GENERAL
 What are the inclusions under gross
income?

Classification: GENERAL
  1. Gross income derived from the conduct of trade or business or the exercise of a profession
 2. Rent Income
 3. Interest Income
 4. Prizes & winnings
 5. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions &
similar items
 6. Annuities
 7. Royalties
 8. Dividend Income
 9. Gains derived from dealings in property
 10.Pensions
 11.Partner’s distributive share from the net income of the GPP (distributive share from ordinary partnerships is taxable as
dividends; in this case, the ordinary partnership has already been subject to ordinary corporate income tax)

Classification: GENERAL
 What are fringe benefits?

Classification: GENERAL
  Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee
(except rank-and-file employees) such as, but not limited to the following:
 a. Housing
 b. Expense account
 c. Vehicle of any kind
 d. Household personnel (such as maid, driver and others)
 e. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate
 f. Membership fees, dues and other expenses borne by the employer for the employee in social & athletic clubs or other
similar organizations
 g. Expenses for foreign travel
 h. Holiday and vacation expenses
 i. Educational assistance to the employee or his dependents
 j. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows

Classification: GENERAL
 What are Fringe benefits not subject
to FBT?

Classification: GENERAL
  1. Fringe benefit authorized and exempted from tax under special laws;
 2. Contributions of employer for the benefit of the employee to retirement, insurance and
hospitalizations benefit plan;
 3. Benefits given to the rank-and-file employees, whether granted under a CBA or not;
 4. Benefits received by virtue of a CBA and productivity incentive schemes provided that
the total annual monetary value received from both combined do not exceed P10,000
per employee per taxable year; (Rev. Regs. 01-15)
 5. De minimis benefits;
 6. If the grant of fringe benefits to the employee is required by the nature of, or necessary
to the trade, business or profession of the employer; or
 7. If the grant of the fringe benefit is for the convenience or advantage of the employer.

Classification: GENERAL
 What are De Minimis Benefits?

Classification: GENERAL
  1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year;
 2. Monetized value of vacation and sick leave credits paid to government officials and employees;
 3. Medical cash allowance to dependents of employees not exceeding P1,500 per employee per
 semester or P 250 per month; (Rev. Regs. 11-18)
 4. Rice subsidy of P 2,000 or 1 sack of 50 kg rice amounting to not more than P 2,000
 per month; (Rev. Regs. 11-18)
 5. Uniform and clothing allowance not exceeding P6,000 per year; (Rev. Regs. 11-18)
 6. Actual yearly medical benefits not exceeding P10,000;
 7. Laundry allowance of P300 per month;
 8. Employee achievement awards, for length of service or safety achievement in the form of 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;
 9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
 10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis; and
 11. Benefits received by virtue of a CBA and productivity incentive schemes provided that the total annual monetary value received from both
combined do not exceed P10,000 per employee per taxable year; (Rev. Regs. 01-15)

Classification: GENERAL
 Explain Convenience of the Employer
Rule.

Classification: GENERAL
  When a fringe benefit is given solely for the convenience of the employer, the
fringe benefit is exempt from FBT because the employee does not recognize
income from the benefit.
 Example: Expenditure on housing of engineer within factory premises is not
subject to FBT
 General Rule: If housing is located outside, it is subject to FBT.
 Exception: If the nature of the employer’s business is hazardous to health of
employee, housing can be located outside the factory without being subject
to FBT.
 Example: If employee is given housing allowance in cash, this will constitute
compensation of the employee (income from whatever source). However, if it
qualifies as a fringe benefit, then it will be subject to FBT and the burden is
shifted to employer

Classification: GENERAL
 Explain professional income.

Classification: GENERAL
  Income earned from the practice of profession provided there is no
employer-employee relationship between him and his clients.
 Profession is primarily any endeavor or work requiring specialized training in
the field of learning, art, or science engaged in as a means of livelihood or
profit of an individual or group of individuals.
 Professional- a person formally certified by a professional body belonging
to a specific profession b1, virtue of having competence a required
examination or course of studies and/or practice, whose competence
can usually be measured against an established set of standards. It also
refers to a person who engages in some art or sport for money, as a means
of livelihood, rather than as a hobby. (Rev. Regs. 08-18, Sec. 2 (n) 2nd par)

Classification: GENERAL
 Explain business income.

Classification: GENERAL
  In the case of manufacturing, merchandising, or mining business, “gross
income” means the total sales, less cost of goods sold, plus any income
from investments and from incidental or outside operations or sources. In
determining gross income, deductions should not be made for
depreciation, depletion, selling expenses or losses, or for items not
ordinarily used in computing the cost of goods sold.
 In the case of sellers of services, gross income is computed by deducting
“cost of services” which pertains to all direct costs and expenses
exclusively and directly incurred in relation to the revenue realized by such
sellers. These refer to costs which are considered indispensable to the
earning of the revenue such that without such costs, no revenue can be
generated. (Rev. Regs. 24-08)

Classification: GENERAL
 Distinguish ordinary asset and capital
asset.

Classification: GENERAL
  Ordinary asset – assets that are used primarily in the ordinary course of trade or business, such as:
 1. Stock in trade of taxpayer
 2. Property which would properly be included in an inventory of the taxpayer, if on hand
 3. Merchandise inventory
 4. Depreciable assets used in the trade/business
 5. Real property used in trade/business
 Capital assets – properties of a taxpayer other than ordinary assets, such as:
 1. Stock and securities held by taxpayers other than dealers in securities
 2. Interest in partnership and joint venture
 3. Goodwill
 4. Real property not used in trade or business like residential house and lot
 5. Investment property

Classification: GENERAL
 Distinguish ordinary gain/loss from
capital gain/loss.

Classification: GENERAL
  Ordinary gain is derived from the sale or exchange of ordinary assets including gains from
performance of services and business; included in the gross income.
 Ordinary loss is the excess of business expenses and losses over the business income of the
taxpayer derived from the sale or exchange of ordinary assets; deductible from gross
income.
 Capital gain is the excess of value received over the determined cost from the sale or
exchange of capital asset. The following are the rules on the taxability of capital gains:
 ● Sale of unlisted shares of stock in a domestic corporation – subject to CGT
 ● Gain derived from sale of real property in the Philippines – subject to CGT
 ● Other capital assets: excess of the gains from sales or exchanges of other capital assets
over the losses from such sales or exchanges; included in the gross income
 Capital loss is the excess of the losses from sales or exchanges of other capital assets over
the gains from such sales or exchanges; deductible only from capital gains.

Classification: GENERAL
 Distinguish actual gain from presumed
gain.

Classification: GENERAL
  Actual gain is the amount realized from the sale of the asset in excess of
the cost to the taxpayer.
 Presumed gain is the presumption of the law of the existence of a gain
from sale of real property which subjects the said sale to CGT of 6% based
on the selling price or FMV, whichever is HIGHER. Acquisition cost is not
taken into account.

Classification: GENERAL
 Distinguish long-term capital gain from
short-term capital gain.

Classification: GENERAL
  Long-term capital gain v. Short-term capital gain
 In case of individuals, the percentages of gain or loss to be taken into
account shall be:
 ● 100% if the capital asset has been held for 12 months or less; and
 ● 50% if the capital asset has been held for more than 12 months
 In case of a corporation, the holding period is not applicable. The capital
gain and loss are to be reported in the full amount regardless of the
number of years the capital asset is held.

Classification: GENERAL
 Explain Income from dealings in real
property classified as capital assets
situated in the Philippines.

Classification: GENERAL
  General rule
 Involves the sale or other disposition of real property classified as capital asset located in the Philippines by a non-dealer in
real estate
 If the sale is made by a dealer in securities or if the real property is an ordinary asset, the resulting gain or loss will be
considered in the computation of ordinary income.
 Tax Rate: 6%
 Tax Base: The HIGHER between
 ● Gross selling price;
 ● Prescribed zonal value of real properties as determined by the CIR; or
 ● Fair market value as determined by the provincial and city assessors.
 Note:
 Gain or loss from the sale of a capital asset is immaterial since there is a conclusive presumption of gain.
 An individual taxpayer has the option to treat the capital gain as subject to 6% CGT or 20-35% graduated tax IF the buyer
of the real property is the Government or any of its political subdivisions or GOCCs

Classification: GENERAL
  Exception
 Capital gains presumed to have been realized from the sale or disposition of their principal
residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a
new principal residence within eighteen (18) calendar months from the date of sale or
disposition, may be exempt from the capital gains tax, subject to certain conditions.
 Requisites:
 1. Sale or disposition of the old actual principal residence;
 2. By a citizen or resident alien;
 3. Proceeds of which are utilized in acquiring or constructing a new principal residence within 18
calendar months from date of sale or disposition;
 4. Notice to the CIR within 30 days from the date of sale or disposition through a prescribed
return of his intention to avail tax exemption;
 5. Can be availed of only once every 10 years;

Classification: GENERAL
  6. The historical cost or adjusted basis of his old principal residence shall be
carried over to the cost basis of his new principal residence;
 7. If there is no full utilization, the portion of the gains presumed to have
been realized shall be subject to capital gains tax; and
 8. The 6% capital gains tax due shall be deposited with an authorized
agent bank subject to release upon certification by the RDO that the
proceeds of the sale have been utilized.
 The date of sale or disposition of a property refers to the date of
notarization of the document evidencing the transfer of said property.
(Rev. Regs. 13-99, as amended by Rev. Regs. 14-00)

Classification: GENERAL
 Explain Dealings in shares of stock of
Philippine corporations.

Classification: GENERAL
  (a) Listed and traded in the stock exchange (Stock Transaction Tax)38
 Tax Rate — six-tenths of one percent (6/10 of 1%)
 Tax Base — Gross selling price or gross value in money of the shares of stock
sold, bartered, exchanged or otherwise disposed which shall be assumed and
paid by the seller or transferor through the remittance of the stock transaction
tax by the seller or transferor's broker. (RMC No. 21-08)
 (b) Not listed and not traded in the stock exchange (Capital Gains Tax)
 Tax Rate — final tax at the rate of fifteen percent (15%)
 Tax Base – net capital gains realized during the taxable year from the sale,
barter, exchange or disposition of shares of stock not listed and not traded in
the stock exchange.

Classification: GENERAL
 Can corporations carry over net
capital loss?

Classification: GENERAL
  No.
 Corporations cannot carry over a net capital loss.39
 If any taxpayer, other than corporations, sustained a net capital loss in any taxable year, such loss is
treated in the succeeding taxable year as a loss from the sale/exchange of a capital asset held for not
more than 12 months (100% deduction)
 Such net capital loss that should be carried over should not exceed the net income for the year
Incurred (prior year’s net income)
 Example:
 Net income in 2011 = P6,000
 Net capital loss in 2011 = P10,000
 Amount deductible in 2012 is P6,000 only since it should not exceed the net income of the taxable year
where the loss was incurred. Note that the allowable capital loss to be deducted in 2012 (i.e. P6,000) is
only to the extent of the capital gain for 2012.
 Net income should be understood as TAXABLE income according E.O. 37.

Classification: GENERAL
 Explain Summary of Rules with regard
to NOLCO.

Classification: GENERAL
  1. Allowed to any taxpayers, other than corporations;
 2. The net loss can be carried over only to the extent of net income for the
year sustained (loss limitation rule);
 3. The net loss carry-over is deductible only for the succeeding year (loss
carry-over rule);
 4. Capital asset must be held for not more than 12 months (holding period
rule);
 5. Do not apply to sale or disposition of the following capital assets:
 a. shares of stock of a domestic corporation not traded through the local
stock exchange

Classification: GENERAL
 What are the tax-free exchanges?

Classification: GENERAL
  Tax-free exchanges refer to those instances enumerated in Section
40(C)(2) of the NIRC that are not subject to Income Tax, Capital Gains Tax,
Documentary Stamp Tax and/or Value-added Tax, as the case may be.
 In general, there are two kinds of tax-free exchange: (1) transfer to a
controlled corporation; and, (2) merger or consolidation.

Classification: GENERAL
  a. Transfer to a controlled corporation
 No gain or loss shall be recognized if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four persons, gains control
of said corporation.
 b. Merger or Consolidation
 No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation ---
 a. a corporation, which is a party to a merger or consolidation, exchanges property solely for
stock in a corporation, which is a party to the merger or consolidation; or
 b. a shareholder exchanges stock in a corporation, which is a party to the merger or
consolidation, solely for the stock of another corporation also a party to the merger or
consolidation; or
 c. a security holder of a corporation, which is a party to the merger or consolidation, exchanges
his securities in such corporation, solely for stock or securities in another corporation, a party to
the merger or consolidation.

Classification: GENERAL
 Explain Passive investment income.

Classification: GENERAL
  As a rule, passive income subjected to final tax is no longer included in the
computation of the annual taxable income.

Classification: GENERAL
  (a) Interest
 Earned on currency bank deposits and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangement
 Rate of Final Tax
 RC, NRC, RA, NRA-ETB - 20%; NRA-NETB 25%
 Interest income received by an individual (except a nonresident
individual) from a depositary bank under the expanded foreign currency
deposit system

Classification: GENERAL
  Rate of Final Tax – Exempt
 Interest income from long term deposit or investment in the form of
savings, common or individual trust fund, deposit substitutes, investment
management accounts and other investments evidenced by certification
in such form prescribed by the BSP.
 Should the holder of the certificate pre-terminate the deposit or
investment before the fifth (5th) year, a final tax shall be imposed on the
entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof.

Classification: GENERAL
 Explain deposit substitutes.

Classification: GENERAL
  They are defined as an alternative form of obtaining funds from the public
(meaning borrowing from 20 or more lenders at any one time) other than
deposits.40
 Tax treatment of interest income derived from government debt
instruments and securities: Government debt instruments and securities to
be considered as deposit substitutes must still follow the 20-lender rule as
defined in Section 22(Y) of the NIRC. (Rev. Regs. 14-12, Sec. 2)
 Interest income derived from deposit substitutes is subject to 20% FWT,
while that derived from any other debt instruments not within the
coverage of deposit substitutes is subject to 20% CWT. (Rev. Regs. 14-12,
Secs. 2 and 7)

Classification: GENERAL
 Explain tax treatment of Dividends.

Classification: GENERAL
  Any distribution made by a corporation to its shareholders out of its earnings or profits and payable to
its shareholders, whether in money or in other property.
 Stock dividends represent the transfer of surplus to capital account and shall not be subject to tax.
 However, if a corporation cancels or redeems stock issued as dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation shall be considered as taxable income to the extent that it represents a distribution of
earnings or profits.
 General Rule: Cash and property dividends are taxable. Stock dividends are not taxable.
 Property dividends:
 These are considered income in the amount of the full market value as when received by the
stockholder.
 ● If it was paid in stock of another corporation, it is not considered a stock dividend. It is still considered
property dividend.

Classification: GENERAL
 Explain tax treatment of liquidating
dividends.

Classification: GENERAL
  Liquidating dividends: taxable
 ● When a corporation distributes all its properties or assets in complete liquidation, the
gain realized is taxable.
 ● Computation:
 o When a corporation distributes all of its assets in complete dissolution and liquidation,
there is no dividend income to the shareholder. Instead, there is a sale or exchange of
property. (Rev. Regs. 02-40, Sec. 256)
 o When a corporation is dissolved and in process of complete liquidation and its
shareholders surrendered their stock to it and paid the sums in question to them in
exchange, a transaction took place, which was no different in its essence from a sale of
the same stock to a third party. (Wise v. Meer, G.R. No. 48231, 1947)
 The gain is a capital gain, but subject to ordinary/regular income tax (Sec. 9, Rev. Regs.
6-2008)

Classification: GENERAL
 Explain Tax Treatment on Corporations
of income derived from dividends.

Classification: GENERAL
  (a) If the dividends are from a domestic corporation:
 Domestic and resident foreign corporations are tax-exempt as they are treated
as inter-corporate dividends.
 For non-resident foreign corporations, the dividend is subject to:
 (1) Tax treaty rate, if applicable
 (2) 15% if no tax treaty but satisfies the tax-sparing provision (3) 30% if no tax
treaty and does not comply with the tax-sparing provision
 (b) If the dividends are from a foreign corporation:
 The income shall form part of the gross income of the corporation but the situs
of the income becomes material except for a domestic corporation which is
taxed on worldwide income.

Classification: GENERAL
 Explain tax treatment of royalty
income.

Classification: GENERAL
  A payment or a portion of proceeds paid to the owner of a right for the
use of such right.
 From books, literary works and musical sources:
 RC, NRC, RA, NRA-ETB = 10%; NRA-NETB = 25%
 Other royalties:
 RC, NRC, RA, NRA-ETB
 20% NRA-NETB 25%

Classification: GENERAL
 Explain tax treatment of rental
income.

Classification: GENERAL
  Amount or compensation paid for the use or enjoyment of a thing or a
right and implies a fixed sum or property amounting to a fixed sum to be
paid at a stated time for the use of property
 Lease of personal property
 Rental income on the lease of personal property located in the Philippines
and paid to a nonresident taxpayer shall be taxed as follows: NRFC (RA
NO. 9337, Sec. 2) NRA
 Vessel : NRFC = 4.5% NRA = 25%
 Aircraft, machineries, and other equipment : NRFC = 7.5%; NRA = 25%
 Other assets : NRFC = 32% NRA = 25%

Classification: GENERAL
 Explain tax treatment of Lease of real
property.

Classification: GENERAL
  The lease of real property shall be considered as conduct of trade or business on the part
of the lessor; hence, the rental income therefrom shall be considered as business income
which shall be included in the computation of the year-end gross income of the lessor,
and not as a passive investment income subject to withholding tax
 Improvements made by lessees are taxable as income on the part of the lessor provided
that such buildings or improvements are not subject to the removal by the lessee.
 The lessor may either:
 ● Report the improvements as income at the time when such improvements are
completed based on their fair market value [outright method]; or
 ● Spread over the life of the lease the estimated depreciated value of the improvements
at the termination of the lease and report as income for each year of the lease an aliquot
part thereof [spread-out method] (Rev. Regs. 02-40, Sec. 49)

Classification: GENERAL
  RC, NRC, RA, NRA-ETB: Net taxable income shall be subject to the graduated
income tax rates.
 NRA-NETB: Rental income from real property located in the Philippines: shall be
subject to 25% final withholding tax unless a lower rate is imposed pursuant to an
effective tax treaty.
 DC, RFC: Net taxable income shall be subject to 30% corporate income tax or its
gross income will be subject to 2% MCIT.
 NRFC: Gross rental income from real property located in the Philippines shall be
subject to 30% corporate income tax, such tax to be withheld and remitted by the
lessee in the Philippines.

Classification: GENERAL
 Explain tax treatment of Annuities and
proceeds from life insurance or other
types of insurance.

Classification: GENERAL
  Annuity – installment payments of income or pension by insurance
companies during the life of a person or for a guaranteed fixed period of
time, whichever is longer.
 Amounts excluded from gross income:
 ● Amount received by insured as return of premium received either during
the term or at the maturity of the terms or upon surrender of the contract;
 Note: If such amounts are held by the insurer under an agreement to pay
interest, the interest payments shall be included in the gross income.

Classification: GENERAL
  Proceeds of life insurance policies paid to the heirs/beneficiaries upon the
death of the insured; (See Sec. 32(B)(1))
 ● If such amounts are held by the insurer under an agreement to pay
interest, the interest payments shall be included in the gross income
 Note: The insured must die to avail of total exemption. If he survives,
there/s only partial exemption to the extent that the proceeds constitute
return of capital (total amount of premiums previously paid).

Classification: GENERAL
  If the prizes are derived from sources within:
 P10,000 OR LESS MORE THAN P10,000
 RC, NRC, RA, NRA-ETB 20-35% 20%
 NRA-NETB 25% 25%
 Corporation 30% 30%

Classification: GENERAL
  PCSO AND LOTTO WINNINGS
 TAX-PAYER P10,000 OR LESS MORE THAN P10,000
 RC, NRC, RA,
 NRA-ETB Exempt 20%
 NRA-NETB Exempt 25%
 Corporation Exempt 30%

Classification: GENERAL
  If the prizes are derived from sources without – the said amount is included in the gross income for taxpayers
who are taxable within and without the Philippines.
 Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or
civic achievement are excluded from the gross income, but only if:
 1. Recipient was selected without any action on his part; and
 2. Recipient not required to render substantial future services as a condition of receiving the prize/award.
 Example: Nobel prize
 Construed strictly; must be given in 1 of 7 given categories, which do not include athletic achievements
 Contemplates a rational selection process; cannot just be randomly selected
 Prizes/awards in a sports competition sanctioned by national sports associations whether held in the Philippines
or abroad are also excluded from the gross income.
 Contemplates a particular competition, not a cumulative achievement (e.g. Sportsman of the year award
does not qualify for exemption)

Classification: GENERAL
 Explain tax treatment of Pension,
retirement benefit, or separation pay.

Classification: GENERAL
  Lump sum payment or on a staggered basis in consideration of services rendered given
after an individual reaches the age of retirement
 Amounts excluded from gross income:
 1. Retirement benefits received under RA 7641 (Labor Code of the Philippines)
 2. Retirement benefits received under a reasonable private benefit plan
 3. Amount received as a consequence of separation for any cause beyond control
(death, sickness or other physical disability)
 4. Benefits received from a foreign government by resident or nonresident citizens or
aliens who reside permanently in the Philippines
 5. Veterans benefits
 6. Benefits under SSS
 7. Benefits received from GSIS

Classification: GENERAL
 Discuss tax treatment of income from
whatever sources.

Classification: GENERAL
  (a) Condonation of indebtedness - Pertains to forgiveness of indebtedness
 A GIFT – if the forgiveness of the debt is without any consideration
whatsoever - Not Taxable as income tax but may be subject to donor’s tax
 A CAPITAL TRANSACTION – if the forgiveness of a stockholder is equivalent
to dividend distribution - Taxable
 A TAXABLE INCOME – in exchange of a service performed - Taxable

Classification: GENERAL
 Explain tax treatment of Recovery of
accounts previously written off.

 Recovery of bad debts previously allowed as deduction in the preceding

years shall be included as part of gross income in the year of recovery to
the extent of the income tax benefit of such deduction (tax benefit rule).

Classification: GENERAL
 Explain tax treatment of Receipt of tax
refunds or credit.

Classification: GENERAL
  Taxes, when refunded or credited, shall be included as part of gross income in the year of
receipt to the extent of income tax benefit of said deduction.
 The following are non-taxable tax refunds (i.e., non-deductible taxes):
 ● In general, Philippine income tax
 ● Final taxes, being in the nature of income tax
 ● Income tax imposed by authority of any foreign country (except when the taxpayer
signifies his desire to avail of the tax credit for taxes of foreign countries)
 ● Estate and donor’s taxes
 ● Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed
 ● Special assessments

Classification: GENERAL
 Expound “Income from whatever
sources derived”.

Classification: GENERAL
  “Income from whatever sources derived” means inclusion of all income
not expressly exempted within the class of taxable income under the laws
irrespective of the voluntary or involuntary action of the taxpayer in
producing the gains, and whether derived from legal or illegal sources.
 EXAMPLES OF INCOME FROM LEGAL SOURCES
 Employee’s salary, bonus, and commissions/ rebates
 EXAMPLES OF INCOME FROM ILLEGAL SOURCES
 Gambling, kidnapping, extortion, smuggling, embezzlement

Classification: GENERAL
  This includes:
 ● Income derived from illegal sources
 Rationale:
 1. Shouldn’t give tax benefit to thieves when taxing law-abiding citizens.
 2. Enforcement of non-tax criminal issues An unlawful gain, as well as a lawful
one, constitutes taxable income when its recipient has such control over it that,
as a practical matter, he derives readily realizable economic value from it.
Hence, money obtained by extortion is income taxable to the extortioner only
when he personally benefitted from the funds. (Hobson v. Commisioner,
U.S.14850-89, 1992) It is well settled that profits or gains earned illegally
constitute gross income. (James v. United States 366 U.S. 213 1961)

Classification: GENERAL
 Explain exclusions.

Classification: GENERAL
  These are items not included in the determination of gross income either
because:
 ● They represent return of capital or are not income, gain or profit;
 ● They are subject to another kind of internal revenue tax; or
 ● They are income, gain or profit that is expressly exempt from income tax.

Classification: GENERAL
 Distinguish: exclusions, deductions,
and tax credits.

Classification: GENERAL
  Exclusion: not included in the computation of gross income; income
received or earned but is not taxable as income because of exemption by
virtue of a law or treaty.
 Deduction: these are included in the gross income but are later deducted
to compute the net income or taxable income.
 Tax Credit: these refers to taxes paid beforehand but later claimed as tax
credits, hence, is deducted from the tax liability of the taxpayer.

Classification: GENERAL
 Enumerate the different items of
exclusion.

Classification: GENERAL
  (a) Under the Constitution
 Income derived by the Government or its political subdivision, including
government instrumentalities, from the exercise of any essential
government function

Classification: GENERAL
  (b) Under the Tax Code
 i. Proceeds of life insurance policies
 Proceeds of life insurance policies paid to the heirs/beneficiaries upon the
death of the insured.
 Insured must die to avail of total exemption. If he survives, there’s only
partial exemption to the extent that the proceeds constitute return of
capital (total amount of premiums previously paid.)
 However, if such amounts are held by the insurer under an agreement to
pay interest, the interest payments shall be included in the gross income.

Classification: GENERAL
  ii. Amount received by insured as return of premium
 The amount received by the insured, as a return of premiums paid by him under life insurance, endowment or
annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon
surrender of the contract are excluded from gross income.
 iii. Amounts received under life insurance, endowment or annuity contracts
 Under life insurance, endowment, or annuity contracts, amounts received either during the term or at the
maturity of the terms or upon surrender of the contract are excluded from gross income.
 iv. Value of property acquired by gifts, bequest, devise or descent
 To be excluded from gross income, must be characterized by disinterested generosity and pure liberality.
 However, income from such property shall be included in gross income.
 Difficult to establish gift situations if there is an employer-employee relationship; a bonus/assistance in
recognition of service rendered is not exempt.
 If given under a) constraining force of any moral or legal duty, or b) from the incentive of an anticipated
benefit of an economic nature; or c) where it is a return for services rendered, proceeds cannot qualify as a gift.

Classification: GENERAL
  v. Amount received through accident or health insurance plus damages received
 Received through Accident/Health Insurance or Workmen’s Compensation Act, as
compensation for personal injuries/sickness + amount of damages received on account
of such injuries/sickness.
 Damages will be exempt only if they arise together with personal injury; however, if
damages only amount to return of capital, it is exempt (e.g. damages from car accident
exempt only if claim includes compensation for personal injury; if no personal injury,
damages for car wreckage will only be exempt to the extent of the amount of the actual
damage as return of capital.)
 Must be physical injury, not injury to rights.
 vi. Income exempt under treaty
 To the extent required by any treaty obligation binding upon the Philippine government.

Classification: GENERAL
  vii. Retirement benefits, pensions, gratuities53
 Retirement benefits received under RA 7641 (amending the Labor Code) and those
received in accordance with a reasonable private benefit plan.
 “Under RA 7641”
 Conditions:
 (a) At least 60 years old;
 b) 5 years of service at time of retirement; and
 (c) Retirement upon reaching the retirement age established in the CBA or other
applicable employment contract
 Availed if there is no reasonable private benefit plan.
 Limited exemption: ½ month salary for every year of service; in a reasonable private
benefit plan, all is excludable.

Classification: GENERAL
 Discuss “Reasonable private benefit
plan”.

Classification: GENERAL
  Conditions:
 (a) At least 50 years old; and
 (b) In the service of same employer for at least 10 years at time of retirement
 Must be approved by the BIR
 A pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the
benefit of some or all of his officials/employees, wherein contributions are made by such
employer for the officials/employees, or both, for the purpose of distributing to such
officials & employees the earnings & principal of the fund thus accumulated; no part of
the income shall be used for/be diverted to any purpose other than for the exclusive
benefit of the said officials & employees.
 Service must be continuous.
 Can be availed of only once (once one has availed of RPBP, he cannot avail of another
RPBP); however, he can avail of exemption under another ground such as SSS or GSIS
benefits.

Classification: GENERAL
  The phrase “shall not have availed of the privilege under a retirement benefit plan of the same
or another employer” found in Sec. 32(B)(6)(a) of the NIRC means that the retiring official must
not have previously received retirement benefits from the same or another employer who has a
qualified retirement benefit plan. (BIR Ruling No. 125-98)
 viii.Amount received as a consequence of separation for any cause beyond control of
employee (death, sickness or other physical disability)
 Sickness must be job threatening and must render taxpayer incapable of working (excludes
STD.)
 Benefits from separation due to retrenchment come under exemption (no choice/option); but if
the employee avails of an optional early retirement plan, he cannot reason that he was
separated for reasons beyond his control, therefore, he cannot claim exemption of the benefits
on this ground but he can claim under other grounds such as RPBP or RA 7641.
 The terminal leave pay of government employees whose employment is coterminous is exempt
since it falls within the meaning of the phrase “for any cause beyond the control of the said
official or employee” found in Sec. 32(B)(6)(b) of the NIRC. (BIR Ruling No. 143-98)

Classification: GENERAL
  ix. Benefits received from a foreign government by residents or nonresident citizens or aliens who reside permanently
in the Philippines
 x. Veterans benefits
 xi. Benefits under SSS
 xii. Benefits received from GSIS
 xiii. Income Derived by the Government or its Political Subdivisions
 xiv.Winnings, prizes and awards
 Prizes and awards in sports competition sanctioned by national sports associations whether held in Philippines or
abroad. Contemplates a particular competition, not a cumulative achievement.
 “Prizes and awards”
 1. In recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement, but only if:
 ● Recipient was selected without any action on his part; and
 ● Recipient not required to render substantial future services as a condition of receiving the prize/award

Classification: GENERAL
  (c) Under Special laws
 RA No. 9505: Personal Equity and Retirement Account (PERA) Act of 2008 (Rev.
Regs. 17-11)
 PERA shall refer to an employee-contributor’s voluntary retirement account
established from the contributor’s own contributions and/or his employer’s
contributions, for the purpose of being invested solely in qualified/eligible PERA
investment products.
 PERA contributions from the employer to the employee’s PERA are excluded
from the employee’s gross income. On the other hand, the employer can
claim the actual amount of his contribution as a deduction from his gross
income, but only to the extent of his contribution that would complete the
maximum allowable PERA contribution of the employee.

Classification: GENERAL
 What are the general requisites to be
deductible from gross income?

Classification: GENERAL
  1. The expense must be ordinary and necessary;
 2. It must be paid or incurred within the taxable year;
 3. It must be paid or incurred in carrying on a trade or business; (business
test) and
 4. It must be substantially proven by evidence or records (Esso Standard
Eastern, Inc. v. CIR, G.R. No. L-28508-9, 1989)
 Note: Any income payment which is otherwise deductible under the NIRC
shall be allowed as a deduction from the payor's gross income only if it is
shown that the income tax required to be withheld has been paid to the
BIR.

Classification: GENERAL
  The “all events test” is used to determine when an accrual of income or
expense is permitted for claiming deductions. It requires:
 1. Fixing of a right to income or liability to pay; and
 2. The availability of the reasonable accurate determination of such
income or liability.
 Under this test, the amount of deduction need not be determined exactly
as long as the same may be determined with reasonable accuracy. The
term “reasonable accuracy” clearly implies something less than an exact
or completely accurate amount. (CIR v. Isabela Cultural Corporation, G.R.
No. 172231, 2007)

Classification: GENERAL
 Give some examples to illustrate the
“Concept of Return of Capital”

Classification: GENERAL
  Sale of inventory of goods by manufacturers and dealers of properties –
The portion of the receipt representing the cost of goods manufactured
and sold (manufacturers) and cost of sales (dealers) are deducted from
the gross sales.
 Sale of stock in trade by a real estate dealer and dealer in securities –
Generally, the return of capital is not allowed to be deducted from the
gross sales. Taxpayers are required to deduct the total cost specifically
identifiable to the real property or shares of stock sold or exchanged.
 Sale of services – Generally, the return of capital is not allowed to be
deducted from the gross sales. Thus, the entire gross receipts are treated
as part of income.

Classification: GENERAL
 What are the kinds of deductions?

Classification: GENERAL
  1. Itemized deductions
 2. Optional standard deduction (OSD)
 3. Special deductions

Classification: GENERAL
 What are the itemized deductions?

Classification: GENERAL
  1. Bad debts
 2. Business Expenses
 3. Losses
 4. Taxes
 5. Depreciation
 6. Interest
 7. Depletion of oil & gas wells & mines
 8. Charitable & other contributions
 9. Pension trusts
 10. Research & development

Classification: GENERAL
 Explain bad debts.

Classification: GENERAL
  Bad Debts
 Bad debts are debts due to the taxpayer actually ascertained to be worthless and charged off
during the year may be claimed as a deduction.
 Requisites for deductibility:
 1. There must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable;
 2. It must be connected with the taxpayer’s trade, business or practice of profession;
 3. It must not be sustained in a transaction entered into between related parties;
 4. It must actually be charged off in the books of accounts of the taxpayer as of the end of the
taxable year;
 5. It must actually be ascertained to be worthless and uncollectible as of the end of the taxable
year (Rev. Regs. 05-99, as amended by Rev. Regs. 25-02)
 6. The bad debt must not be one contracted with a related party

Classification: GENERAL
  Bad debts arising from transactions between related parties are NOT deductible.
 a. Between members of a family (includes only brothers & sisters, spouse, ancestors, &
lineal descendants)
 b. Between an individual & a corporation, more than 50% in value of outstanding stock is
owned by such individual (except in case of distributions in liquidation)
 c. Between 2 corporations more than 50% in value of outstanding stock owned by same
individual, if either one is a personal holding company or a foreign holding company
during the taxable year preceding the date of sale/exchange
 d. Between grantor & fiduciary of any trust
 e. Between fiduciary of a trust & the fiduciary of another if same person is a grantor to
each trust
 f. Between fiduciary & a beneficiary of a trust

Classification: GENERAL
 Explain business expenses.

Classification: GENERAL
  Requisites for deductibility
 1. Must be ordinary and necessary.
 2. Must have been paid or incurred during the taxable year.
 3. Must have been paid or incurred in carrying on the trade or business of
the taxpayer.
 4. Must be supported by receipts, records or other pertinent papers. (CIR v.
General Foods Phils. G.R. No. 143672, 2003)

Classification: GENERAL
  Expenses to be deductible:
 • Amount must be reasonable
 • It must be substantiated
 • It is not contrary to law, public policy or morals
 • Tax required to be withheld must have been paid to the BIR
 Substantiation requirements
 Sufficient evidence (i.e. official receipts, financial statements or other adequate records)
to substantiate:
 • Amount of expense deducted; and
 • Direct connection/relation of the expense to the development, management
operation and/or conduct of the trade, business or profession of the taxpayer.

Classification: GENERAL
 Discuss advertising expenses as
deduction.

Classification: GENERAL
  There is yet to be a clear-cut criterion or a fixed test for determining the
reasonableness of an advertising expense. There being no hard and fast
rule, the right to a deduction depends on a number of factors such as but
not limited to: the type and size of business in which the taxpayer is
engaged; the volume and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer; and the general
economic conditions. (CIR v. General Foods Phils. G.R. No. 143672, 2003)

Classification: GENERAL
 Discuss cost of materials as deduction.

Classification: GENERAL
  Taxpayers should include in expenses the charges for materials and
supplies only to the amount that they are actually consumed and used in
operation during the year for which the return is made, provided that the
cost of such materials and supplies has not been deducted in determining
the net income for any previous year. (Rev. Regs. 02-40, Sec. 67)
 If the materials or supplies are used directly or indirectly in the production
of the product, the related cost shall form part of the cost of the product
and will be deductible as such when the product is sold.

Classification: GENERAL
 Discuss Rentals and/or other payments
as lessee, user or possessor as
deduction.

Classification: GENERAL
  On accrual basis, rent is deductible as expense when liability is incurred
during the period of use. On cash basis, rent is deductible when incurred
and paid.
 An advance payment is not deductible expense on the part of the lessee
until the same is used for the relevant period, although the lessor may be
required to report the amount when received.

Classification: GENERAL
 Discuss Expenses under lease
agreements as deduction.

Classification: GENERAL
  Lessor
 All ordinary and necessary expenses paid or incurred during the taxable
year which are attributable to earning the lease income are deductible.
 Lessee
 All expenses which under the terms of the agreement the lessee is required
to pay to the lessor are allowable deductions.
 If the payments are so arranged as to constitute advance rentals, the
same shall be duly apportioned over the lease term. In computing the
term of the lease, all options to renew shall be taken into consideration if
there is a reasonable expectation that such options will be exercised. (Rev.
Regs. 19-86, Sec. 3)

Classification: GENERAL
 Discuss Repairs and maintenance as
deduction.

Classification: GENERAL
  Incidental (minor) repairs are deductible from gross income. They do not
materially add to the value of the property nor appreciably prolong its life
but keep it in an ordinarily efficient operating condition.
 Major repairs (replacement) are not deductible from gross income. They
prolong the life of the asset and thus should be capitalized.

Classification: GENERAL
 Discuss Expenses for professionals as
deduction.

Classification: GENERAL
  Amounts expended for books, furniture, and professional instruments and
equipment, the useful life of which is short, may be deducted.
 However, amounts expended for books, furniture, and professional
instruments and equipment of a permanent character are not allowable
as deductions.

Classification: GENERAL
 Explain deductibility of Entertainment, amusement & recreation
expenses directly connected to the development, management &
operation & conduct of trade., business/ profession.

Classification: GENERAL
  Requisites for deductibility:
 1. Must be paid or incurred during the taxable year
 2. Must be directly connected to the development, management and
operation of trade, or business, profession of the taxpayer
 3. Not contrary to law, morals, good customs, public policy or public order
 4. Must not have been paid, directly or indirectly, to any person as a bribe,
kickback or other similar payment;
 5. Must be duly substantiated by adequate proof; and
 6. Appropriate amount of withholding tax, if applicable, should have been
withheld and paid to the BIR. (Rev. Regs. 10-02)

Classification: GENERAL
 Discuss deductibility of political
campaign expenses.

Classification: GENERAL
  As a rule, campaign contributions are not included in the taxable income
of the candidate to whom they were given.
 Unutilized campaign funds shall be subject to income tax.
 Any candidate (winner or loser) must file with the COMELEC his/her
statement of expenditures. If not, he/she will be precluded from using such
expenditures as deductions from his/her campaign contributions. As such,
the entire amount of such contributions will be directly subject to income
tax. (Rev. Regs. 07-11, Sec. 2)

Classification: GENERAL
 What are the Requisites for
deductibility of ordinary loss?

Classification: GENERAL
  1. Must be of the taxpayer;
 2. Actually sustained during the taxable year;
 3. Not compensated for by insurance or other forms of indemnity;
 4. Incurred in trade, business or profession OR property connected with trade, business or profession lost through
fires, storm, shipwreck, other casualties, robbery, theft or embezzlement;
 5. Evidenced by a completed transaction;
 6. Not claimed as a deduction for estate tax purposes; and
 7. Notice of loss must be filed with the BIR within 30 days but not more than 45 days from the date of discovery of
the casualty or robbery, theft or embezzlement
 The taxpayer’s failure to record in his books the alleged loss proves that the loss had not been suffered, hence, not
deductible. (City Lumber v. Domingo, G.R. No. L-18611, 1964)
 Note: A declaration of loss should be filed with the BIR within 45 days after the occurrence of the casualty,
robbery, etc. Failure to submit the declaration within the prescribed time will result in the disallowance of the loss.
However, the mere filing of the declaration of loss does not automatically entitle the taxpayer to deduct the
alleged loss from gross income. (Rev. Regs. 12-77, as amended by Rev. Regs. 10-79)

Classification: GENERAL
 Discuss the other types of losses aside
from ordinary losses.

Classification: GENERAL
  a) Capital losses – deductions allowed only to the extent of the gains from
pertinent sales or exchanges of capital assets
 • Losses from sale or exchange of capital assets
 • Losses resulting from securities becoming worthless and which are capital
assets
 • Losses from short sales of property
 • Losses due to failure to exercise privilege or option to buy or sell property

Classification: GENERAL
  (b) Securities becoming worthless
 Loss resulting from securities62 becoming worthless shall be considered loss
from the sale or exchange of capital asset.
 Such loss shall be computed on the last day of the taxable year.
 General Rule: securities becoming worthless are deductible
 Exemption: not deductible in case of banks or trust companies
incorporated under the laws of the Philippines, a substantial part of whose
business is the receipt of deposits. (Rev. Regs. 05-99, Sec. 5)

Classification: GENERAL
  Losses from wash sales of stock or securities
 Wash sale is a sale or other disposition of stock or securities where
substantially identical securities are acquired or purchased within a 61-day
period, beginning 30 days before the sale and ending 30 days after the
sale.
 General rule: not deductible
 Exception: unless claim is made by a dealer in stock/securities and made
in ordinary course of business
 Wagering losses
 Allowed only to the extent of the gains from such losses

Classification: GENERAL
 Discuss Net operating loss carry-over
(NOLCO).

Classification: GENERAL
  Net operating loss refers to the excess of allowable deductions over gross income of the business for any
taxable year, which has not been previously offset as deduction from gross income. The net operating loss
of a business shall be carried over as a deduction from gross income for the next 3 consecutive taxable
years immediately following the year of such loss.
 The 3-year period shall continue to run notwithstanding that the corporation paid its taxes under MCIT, or
that the individual availed of the Optional Standard Deduction.
 For mines, other than oil & gas wells, if loss is incurred in any of the first 10 years of operation, it may be
carried over for the next 5 years.
 Requirements:
 1. The taxpayer was not exempt from income tax in the year of such net operating loss;
 2. The loss was not incurred in a taxable year during which the taxpayer was exempt from income tax, and
 3. There has been no substantial change in the ownership of the business or enterprise.
 A merged with B, with A as the surviving corporation. A cannot claim B’s prior losses as deductions (PICOP
v. CA, G.R. Nos. 106949-50 & 106984-85, 1995).

Classification: GENERAL
  There is no substantial change in the ownership of the business when:
 (ii) Not<75% in nominal value of outstanding issued shares is held by same persons
 (iii) Not<75% of paid up capital of corp. is held by same persons
 Note: No actual change in ownership occurs:
 1. in case the transfer involves change from direct ownership to indirect ownership, or
 2. merger of the subsidiary into the parent company.

Classification: GENERAL
 What are the Requisites for
deductibility of taxes?

Classification: GENERAL
  1. It must be paid or incurred within the taxable year;
 2. It must be paid or incurred in connection with the taxpayer’s trade, profession or business;
 3. It must be imposed directly on the taxpayer; and
 4. It must not be specifically excluded by law from being deducted from the taxpayer’s gross income
 Examples:
 1. Percentage tax
 2. Excise tax
 3. Documentary Stamp tax
 4. Occupational tax
 5. License tax
 6. Fringe Benefit tax
 7. Local taxes except special assessment
 8. Community tax
 9. Municipal tax (Banggawan)

Classification: GENERAL
  Non-Deductible Taxes:
 1. Philippine income tax
 b. Final income tax
 c. Capital gains tax
 d. Regular income tax
 2. Income taxes imposed by authority of any foreign country except when the
taxpayer does not signify in his return his desire to claim it as tax credit;
 3. Estate and donor’s taxes
 4. Special assessments, i.e., taxes assessed against local benefits of a kind
tending to increase the value of the property assessed
 5. VAT

Classification: GENERAL
 Distinguish tax credit versus tax
deduction.

Classification: GENERAL
  Tax deduction is treated as a tax-deductible expense that is subtracted from
the gross income and results in a lower taxable income. It is an amount that is
allowed by law to reduce the income prior to the application of the tax rate to
compute the amount of tax which is due. Being a tax deduction, the discount
does not reduce taxes owed on a peso for peso basis but merely offers a
fractional reductions in taxes owed. On the other hand, a tax credit is a peso-
for-peso deduction from a taxpayer’s tax liability due to the government.
(Carlos Superdrug Corp. v. DSWD, GR No. 166494, 2007)
 Taxes, when refunded or credited, shall be included as part of gross income in
the year of receipt to the extent of income tax benefit of said deduction (tax
benefit rule).
 For NRA-ETB and RFC, taxes paid or incurred are allowed as deductions only if
and to the extent that they are connected from income within the Philippines.
(Rev. Regs. 02-40, Sec. 80)

Classification: GENERAL
  Exception to the rule that only such persons on whom the tax is imposed by law can claim deduction thereof - Taxes of
shareholder upon his interest as such and paid by the corporation without reimbursement from him can be claimed by the
corporation as deduction.
 Exception to the exception - A corporation paying the tax for the holder of its bonds or other obligations containing a tax-
free covenant clause cannot claim deduction for such taxes paid by it pursuant to such covenant.
 Tax Sparing Rule – a right of an income taxpayer to deduct from income tax payable the foreign income tax he has paid
to his foreign country subject to certain limitations.
 Who can claim taxes as allowable deductions
 1. Citizen
 2. Domestic Corporation
 3. Member of GPP
 4. Beneficiary of an estate or trust
 Who cannot claim taxes as allowable deductions
 1. Alien individual (except resident aliens deriving income from within & without the Philippines, if there is reciprocity)
 2. Foreign corporation

Classification: GENERAL
  Substantiation Requirements for Tax Credit
 The tax credit shall be allowed only if the taxpayer establishes to the
satisfaction of the CIR the following:
 1. The total amount of income derived from sources without the
Philippines;
 2. The amount of income derived from each country, the tax paid or
incurred to which is claimed as a credit under said paragraph, such
amount to be determined under rules and regulations prescribed by the
Secretary of Finance; and
 3. All other information necessary for the verification and computation of
such credits

Classification: GENERAL
 Define depreciation.

Classification: GENERAL
  Refers to the gradual diminution in the service or useful value of tangible
property due from exhaustion, wear and tear and normal obsolescence;
also applies to amortization of intangible assets, the use of which in trade
or business is of limited duration.
 Requisites for deductibility:
 1. The allowance for depreciation must be reasonable;
 2. It must be for property used for employment in trade or business or out of
its not being used temporarily during the year;
 3. The allowance must be charged off; and
 4. Schedule on the allowance must be attached to the return

Classification: GENERAL
 Enumerate the Requisites for
deductibility on depreciation of land,
vehicles capitalized by the taxpayer.

Classification: GENERAL
  1. The taxpayer must substantiate the purchase of vehicle with sufficient evidence;
 2. Only one vehicle for land transport is allowed for the use of an official or employee, the
value of which should not exceed P2.4 million;
 3. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and
land vehicles which exceed the above threshold amount, unless the taxpayer’s main line
of business is transport operations or lease of transportation equipment and the vehicles
purchased are used in said operations;
 4. All maintenance expenses on account of non-depreciable vehicles for taxation
purposes are disallowed in their entirety; and
 5. The input taxes on the purchase of non-depreciable vehicles and all input taxes on
maintenance expenses incurred thereon are likewise disallowed for taxation purposes.
(Rev. Regs. 12-12, Sec. 3, as clarified by RMC No. 02-13)

Classification: GENERAL
  Depreciation is deductible by NRA-ETB or NRC only when such property is
located in the Philippines.
 The BIR and the taxpayer may agree in writing on the useful life of the
property to be depreciated. The agreed rate may be modified if justified
by facts or circumstances. The change shall not be effective before the
taxable year on which notice in writing by registered mail is served by the
party initiating.

Classification: GENERAL
 What are the Requisites for
deductibility of interest?

Classification: GENERAL
  1. There must be an Indebtedness;
 2. There should be an interest expense paid or Incurred upon such indebtedness;
 3. Indebtedness must be that of the Taxpayer;
 4. Indebtedness must be Connected with the taxpayer’s trade, business or exercise of profession;
 5. Interest expense must have been paid or Incurred during the taxable year;
 6. Interest must have been stipulated in Writing;
 7. Interest must be legally Due;
 8. Interest payment arrangement must not be between Related taxpayers;
 9. Interest must not be incurred to finance Petroleum operations;
 10.In case of interest incurred to acquire property used in Trade, business or exercise of profession, the same was
NOT treated as a capital expenditure; and
 11.The interest is not expressly disallowed by Law to be deducted from gross income of the taxpayer (Rev. Regs.
No. 13-00)

Classification: GENERAL
  General Rule on Deduction of Interest Expense
 The amount of interest expense paid or incurred within a taxable year of
indebtedness in connection with the taxpayer’s trade, business, or exercise
of profession shall be allowed as a deduction from the taxpayer’s gross
income.
 Limitation on Deduction of Interest Expense
 A taxpayer’s otherwise allowable deduction for interest expense shall be
reduced by 33% effective 1 January 2009 of the interest income subjected
to final tax. (Sec. 34 (B)(1))

Classification: GENERAL
  Tax Arbitrage - a method of borrowing without entering into a debtor/creditor relationship, often
to resolve financing and exchange control problems; in tax cases, back-to-back loan is used to
take advantage of the lower rate of tax on interest income and a higher rate of tax on interest
expense deduction.
 Deductible Interest Expense
 Interest on taxes (discussed in the succeeding page), such as those paid for deficiency or
delinquency, since taxes are considered indebtedness (provided that the tax is a deductible
tax); however, fines, penalties, and surcharges on account of taxes are not deductible; interest
on unpaid business tax shall not be subjected to the limitation on deduction of 33%.
 Interest paid by a corporation on scrip dividends. (Rev. Regs. 02-40, Sec. 78)
 Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown that the tax
on such interest was withheld.
 Interest paid by a corporate taxpayer which is liable on a mortgage upon real property of which
the said corporation is the legal or equitable owner, even though it is not directly liable for the
indebtedness. (Rev. Regs. 02-40, Sec. 78)

Classification: GENERAL
 What are non-deductible interest
expenses?

Classification: GENERAL
  No deduction shall be allowed in respect to the ff:
 a. If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness
on which an interest is paid in advance through discount or otherwise. Provided, that such interest shall be
allowed as a deduction in the year that the indebtedness is paid. Provided, further, that if the indebtedness is
payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal
amortized or paid during the year shall be allowed as a deduction in such taxable year;
 b. If both the taxpayer and the person to whom the payment has been made or is to be made are:
 o Between members of a family (includes only brothers & sisters, spouse, ancestors, & lineal descendants);
 o Between an individual & a corporation, more than 50% in value of outstanding stock is owned by such
individual (except in case of distributions in liquidation);
 o Between 2 corporations more than 50% in value of outstanding stock owned by the same individual, if either
one is a personal holding company or a foreign holding company during the taxable year preceding the date
of sale/exchange (except in case of distributions in liquidation);
 o Between grantor & fiduciary of any trust;

Classification: GENERAL
  o Between fiduciary of a trust & the fiduciary of another if same person is a
grantor to each trust;
 o Between fiduciary & a beneficiary of a trust (Sec. 34(B)(2))
 c. If the indebtedness is incurred to finance petroleum exploration;
 d. Interest on preferred stock which in reality is dividend
 e. Interest on unpaid salaries and bonuses
 f. Interest calculated for cost keeping on account of capital or surplus
invested in business which does not represent charges arising under
interest-bearing obligation
 g. Interest paid when there is no stipulation for the payment thereof

Classification: GENERAL
 What are the Requisites for
Deductibility of charitable and other
contributions?

Classification: GENERAL
  1. Contributions or gifts must be actually paid or made within the taxable year;
 2. To or for the use of the government or its agencies or any political subdivision, exclusively for public purpose; or
 3. To accredited domestic corporations or associations organized and operated exclusively for:
 • Religious
 • Charitable
 • Scientific
 • Youth & sports development
 • Cultural or educational purposes
 • Rehabilitation of veterans
 • Social welfare institutions
 • NGOs
 No part of net income inures to the benefit of any private stockholder or individual in excess of the following limitation:
 a. For individual: not more than 10% of taxable income before deducting the charitable contributions.
 b. For corporation: not more than 5% of taxable income before deducting the charitable contributions.

Classification: GENERAL
 What are the Contributions deductible
in full?

Classification: GENERAL
  • Donations to the government – to finance, to provide for, or to be used in undertaking priority activities in
education, health, youth & sports development, human settlements science & culture & in economic
development according to National Priority Plan determined by NEDA
 If not in accordance with annual priority plan, donation is subject to 10% / 5% limitation
 • Donations to certain foreign institutions or international organizations – in compliance with agreements,
treaties, or commitments entered into by Philippine government and foreign institutions/international
organizations or in pursuance to special laws
 • Donations to accredited NGOs – Organized & operated exclusively for scientific, educational, character-
building & youth & sports development, health, social welfare, cultural or charitable purposes or combination
thereof (no part of net income inures to the benefit of any private individual)
 Must be utilized not later than the 15th day of the 3rd month after the close of the taxable year, directly for
the active conduct of activities constituting the purpose of the organization, unless period is extended.
 The level of administrative expense must conform with the rules and regulations prescribed by the Secretary
of Finance but should not be greater than 30% of total expenses.

Classification: GENERAL
 Discuss deductibility of pension trusts.

Classification: GENERAL
  Pension Trust Contributions – a deduction applicable only to the employer on account of his contributions to a private
pension plan for the benefit of his employees; purely business in character.
 Normal Cost – the contributions during the taxable year to cover the pension liability accruing during such taxable year;
allowed as a deduction under Sec. 34(A)(1) of the NIRC as “expenses in general.”
 Past Service Cost – amount in excess of the above contribution (covering pension liability pertaining to old employees
which accrued during the years previous to the establishment of the pension trust); allowed as deduction only if all of
the requisites below concur.
 Requisites for deductibility of past service cost:
 1. The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions
to his employees;
 2. The pension plan is reasonable and actuarially sound;
 3. The pension plan must be funded by the employer;
 4. The amount contributed must no longer be subject to the control and disposition of the employer;
 5. The payment has not yet been allowed as a deduction; and
 6. The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which
the transfer of payment is made.

Classification: GENERAL
  Nothing precludes the employer from making property contributions (other
than monetary contributions) to the pension plan for as long as no part of
the corpus or income of the fund shall be used for, or be diverted to, any
purpose other than for the exclusive benefit of the employees. The transfer
of property to the pension plan is neither a sale nor a donation. (BIR Ruling
No. DA-486-04)

Classification: GENERAL
 Discuss optional standard deduction.

Classification: GENERAL
  Individual other than a nonresident alien - may elect a standard deduction of 40% of his gross sales
or gross receipts.
 b. Corporation other than non-resident foreign corporations- may elect a standard deduction of
40% of its gross income as defined in Section 32 of the NIRC.
 c. General professional partnerships - GPP and the partners comprising such partnership may avail
of the OSD only once, either by the GPP or the partners comprising the partnership.
 Note: No deductions shall be allowed to individual taxpayers earning compensation income arising
from personal services rendered under an employee-employer relationship and those who opted
to be taxed a 8% income tax rate on their income from business/practice of profession. (Rev. Regs.
08-18, Sec. 8)
 There is no need to substantiate OSD. Unless the taxpayer signifies in his first quarter return his
intention to elect the OSD, he shall be considered as having availed himself of the deductions in
Secs. 34(A) to (K) of the NIRC as amended by TRAIN Law. Such election when made in the return
shall be irrevocable for the taxable year for which the return is made. (Sec. 34(L))

Classification: GENERAL
 Who may claim for Optional Standard
Deduction?

Classification: GENERAL
  All taxpayers who are subject to tax on taxable net income (RC, NRC, RA, DC, RFC) can claim except the following:
 1. Those not subject to income tax in the Philippines
 a. NRA whether or not engaged in trade or business in the Philippines
 b. NRFC
 2. Taxpayers mandated to use itemized deductions under RR 2-2014, Sec.5:
 a. Corporations, partnerships and other non-individuals:
 1. Those exempt under the Tax Code, as amended [Section 30 and those exempted
 under Section 27(C)] and other special laws, with no other taxable income;
 2. Those with income subject to special/preferential tax rates; and
 3. Those with income subject to income tax rate under Section 27(A) and 28(A)(1) of the Tax Code, as amended, and also with income subject to
special/preferential tax rates.
 b. Individual taxpayers who are not entitled to avail of the OSD and thus use only the itemized deduction method are as follows:
 1. Those exempt under the Tax Code, as amended, and other special laws with no other taxable income [e.g. Barangay Micro Business Enterprise (BMBE)];
 2. Those with income subject to special/preferential tax rates; and
 3. Those with income subject to income tax rate under Section 24 of the Tax Code, as amended, and also with income subject to special/preferential tax
rates.

Classification: GENERAL
 What are some deductions under
special laws?

Classification: GENERAL
  RA 10028: expenses incurred by a private health and non-health facility to comply with the Breast Milk Act is deductible up to
TWICE of the actual amount incurred (RMC No. 47-10)
 RA 8502: additional deduction of 50% of expenses incurred in training schemes in the jewelry industry approved by the
appropriate agency (RMC No. 33-04)
 RA 8525: additional deduction equivalent to 50% of expenses incurred in joining the Adopt-a-School program (Rev. Regs. 10-
03aa)
 RA 9999: for free legal assistance, taxpayers can deduct the amount that could have been collected from the client, or up to
10% of gross income derived from the actual performance of legal services, whichever is LOWER
 RA 7277: private entities that employ disabled persons are entitled to an additional deduction equivalent to 25% of the total
amount paid as salaries and wages to disabled persons; private entities that improved or modify their physical facilities in
order to provide reasonable accommodation for disabled persons shall also be entitled to an additional deduction from their
net taxable income, equivalent to 50% of the direct costs of the improvements or modifications.
 The following are individual taxpayers who are mandated to use only the itemized deductions:
 (a) Those exempt under the NIRC and other special laws, with no other taxable income (e.g. Barangay Micro Business
Enterprise [BMBE]);
 (b) Those with income subject to special/preferential tax rates; and
 (c) Those with income partially subject to income tax rate under Sec. 24 of the NIRC and partially subject to
special/preferential tax rates. (Rev. Regs. 02-14, Sec. 5)

Classification: GENERAL
 What are items not deductible?

Classification: GENERAL
  General Rule – An expense will be allowed as a deduction only if the tax required to be deducted and withheld therefrom has been remitted to the BIR;
 In computing net income, no deduction shall in any case be allowed in respect to the ff (Sec. 36):
 1. Personal, living or family expenses;
 2. Amounts paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate (not
applicable to intangible drilling and development costs incurred in petroleum operation);
 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;
 4. Premiums paid on any life insurance policy covering the life of any officer or employee, or any person financially interested in trade or business carried
on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy;
 5. Losses from sales or exchanges of property indirectly or directly
 • Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the
whole or half-blood), spouse, ancestors, and lineal descendants; or
 • Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for such individual; or • Except in the case of distributions in liquidation, between two corporations more
than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such
taxable year, a personal holding company or a foreign personal holding company;
 • Between grantor & fiduciary of any trust;
 • Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or •
Between a fiduciary of a trust and beneficiary of such trust.

Classification: GENERAL
  6. Non-deductible interest, such as:

 • Interest on preferred stock, which in reality is dividend;

 • Interest on unpaid salaries and bonuses;

 • Interest calculated for cost keeping;

 • Interest paid where parties did not agree in writing to pay interest;

 • Interest paid on indebtedness between two taxpayers;

 • Interest on indebtedness paid in advance and the taxpayer reports income on cash basis;

 7. Interest expense, bad debts, and losses from sales of property between related parties;

 8. Non-deductible taxes, such as:

 • Income tax provided under the NIRC;

 • Income taxes imposed by foreign authority, except when the taxpayer did not signify in his return that he will avail of the tax credit;

 • Estate tax and donor’s taxes;

 • Special assessments – taxes levied against any local upgrades which potentially benefit/increase the value of the property assessed;

 • Stock Transaction Tax

 • Final Taxes

 • Presumed Capital Gains Tax

Classification: GENERAL
  • VAT
 9. Non-deductible losses, such as
 • Losses not incurred in trade, profession or business or in any transaction entered into
profit;
 • Losses from sales or exchanges of property entered into between related taxpayers (not
deductible as provided under Section 36 of the NIRC but the gains are taxable;
 • Losses from exchanges of property in a corporate readjustment;
 • Losses from illegal transactions;
 • Loss on voluntary removal of building on land purchased with a view to erect another
building (such shall form part of the cost of the new building to be erected). (Tabag)
 10. Losses from wash sales of stock or securities (Sec. 38)

Classification: GENERAL
 What is the present tax table?

Classification: GENERAL
  Effective January 1, 2023 and onwards:
 Not over P250,000 - 0%
 Over P250,000 but not over P400,000 - 15% of the excess over P250,000
 Over P400,000 but not over P800,000 - P22,500 + 20% of the excess over P400,000
 Over P800,000 but not over P2,000,000 - P102,500 + 25% of the excess over P800,00
 Over P2,000,000 but not over P8,000,000 - P402,00 + 30% of the excess over P2,000,000
 Over P8,000,000 - P2,202,500 + 35% of the excess over P8,000,000

Classification: GENERAL
 What are the classifications of
taxpayers?

Classification: GENERAL
  I. Compensation Income Earner- individuals whose source of income is
purely derived from an employer-employee relationship.
 Individuals earning purely compensation income shall be taxed based on
the graduated tax rates. Taxable income is the gross compensation
income less non-taxable income/benefits such as but not limited to the
13th month pay and other benefits (subject to limitations), de minimis
benefits, and employee’s share in the SSS, GSIS, PHIC, Pag-IBIG, and union
dues (Rev. Regs. 08-18 Sec. 3).

Classification: GENERAL
  Inclusion and Exclusion
 In general, the term “compensation” means all remuneration for services performed by an employee for his employer under an employer-employee
relationship, unless specifically excluded by the NIRC.
 Types of Employees as to Taxability
 1. Minimum wage earners- exempt from income tax on compensation
 2. Regular employees- subject to regular progressive income tax
 3. Mixed earners
 (a) Inclusions – monetary and non-monetary compensation
 Monetary benefits
 • Salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like);
 • Fees including director's fees, if the director is, at the same time, an employee of the employer/corporation;
 • Taxable pensions and retirement pay; and
 • Other income of a similar nature
 Non-monetary benefits
 • Taxable bonuses and fringe benefits, except those which are subject to the Fringe Benefit Tax (FBT) under Sec. 33 of the NIRC

Classification: GENERAL
  (b) Exclusions/ Non-taxable Compensation
 a. Mandatory deductions- include employees’ mandatory contribution to GSIS, SSS, PhilHealth, HDMF, union dues
 b. Exempt benefits
 i. Renumeration received as incidents of employment
 1. Exempt retirement benefits under RA 7641
 2. Exempt termination benefits
 3. Benefits from United States Veterans Administration
 4. Social Security, retirement gratuities, pensions, similar benefits from foreign government agencies
 5. Benefits from SSS
 6. Benefits from GSIS
 ii. De minimis benefits
 iii. 13th month pay and other benefits not exceeding P90,000

Classification: GENERAL
  iv. Certain benefits of MWEs
 1. Holiday pay
 2. Hazard pay
 3. Overtime pay
 4. Night shift differential pay

Classification: GENERAL
  II. Taxation on business income/income from practice of profession
 Income from business
 In the case of manufacturing, merchandising, or mining business, “gross income” means the total sales, less cost of goods
sold, plus any income from investments and from incidental or outside operations or sources.
 In determining gross income, deductions should not be made for depreciation, depletion, selling expenses or losses, or for
items not ordinarily used in computing the cost of goods sold.
 In the case of sellers of services, gross income is computed by deducting “cost of services” which pertains to all direct
costs and expenses exclusively and directly incurred in relation to the revenue realized by such sellers. These refer to costs
which are considered indispensable to the earning of the revenue such that without such costs, no revenue can be
generated. (Rev. Regs. 24-08)
 Professional income
 Income earned from the practice of profession provided there is no employer-employee relationship between him and
his clients.
 Profession is primarily any endeavor or work requiring specialized training in the field of learning, art, or science engaged
in as a means of livelihood or profit of an individual or group of individuals.

Classification: GENERAL
  Optional 8% income tax
 Self-employed individuals and/or professionals whose gross sales/gross
receipts and other non-operating income does not exceed the VAT
threshold of P3,000,000 shall have the option to avail of an eight percent
(8%) tax on gross sales or gross receipts and other non-operating income in
excess of P250,000 in lieu of the graduated income tax rates and
percentage tax.

Classification: GENERAL
  Mixed Income Earner – an individual earning both compensation income from
employment and income from business, practice of profession and/or sources aside from
employment shall be subject to the following tax rates:
 a. Compensation income – graduated rates under Sec. 24(A)(2) of NIRC as amended;
and
 b. Income from business or practice of profession
 • If Total Gross Sales and/or Gross Receipts and Other Non-Operating Income does not
exceed VAT threshold (P3,000,000), the individual has the option to be taxed at:
 i. Graduated rates; OR
 ii. 8% income tax on gross sales or gross receipts and other non-operating income in
excess of P250,000.
 • Exceeds P3,000,000 – graduated rates

Classification: GENERAL
  Note: Unless the taxpayer signifies the intention to elect the 8% income tax rate in the 1st
quarter percentage and/or ITR, or on the initial quarter return of the taxable year after the
commencement of a new business/practice of profession, the taxpayer shall be
considered as having availed of the graduated rates. Such election, shall be irrevocable
and no amendment of option shall be made for the said taxable year.
 The option to be taxed at 8% income tax rate is not available to a VAT-registered
taxpayer, regardless of the amount of gross sales/receipts, and to a taxpayer who is
subject to Other Percentage Tax, except those subject under Sec. 116. Likewise, partners
of a General Professional Partnership (GPP) by virtue of their distributive share from GPP
which is already net of cost and expenses cannot avail of the 8% income tax rate option.
 A taxpayer shall automatically be subject to the graduated rates even if the flat 8%
income tax rate option is initially selected, when taxpayer’s gross sales/receipts and other
non-operating income exceeded the VAT threshold during the taxable year. (Rev. Regs.
08-18 Sec. 3)

Classification: GENERAL
  III. Taxation of partners in general professional partnership (GPP)
 A general professional partnership shall not be subject to the income tax. Persons engaging in
business as partners in a general professional partnership shall be liable for income tax only in their
separate and individual capacities. Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the partnership. (Sec. 26)
 The partners shall be liable to pay income tax on their separate and individual capacities for their
respective distributive share in the net income of the GPP. The GPP is not a taxable entity for income
tax purposes since it is only acting as a "pass-through” entity where its income is ultimately taxed to
the partners comprising it.
 For purposes of computing the distributive share of the partners, the net income of the GPP shall be
computed in the same manner as a corporation. As such, a GPP may claim either:
 a. itemized deductions allowed under Section 34 of the Code or
 b. Optional standard deduction allowed to corporations in claiming the deductions in an amount
not exceeding forty percent (40%) of its gross income (Rev. Regs. 08-18, Sec. 8).

Classification: GENERAL
  In computing taxable income defined under Section 31 of the Tax code, as amended,
the following may be allowed as deductions:
 a. itemized expenses which are ordinary and necessary, incurred or paid for the practice
of Profession; OR
 b. Optional Standard Deduction (OSD).
 The share in the net income of the partnership, actually or constructively received, shall
be reported as taxable income of each partner. The partners comprising the GPP can no
longer claim further deduction from their distributive share in the net income of the GPP
and are not allowed to avail of the 8% income tax rate option since their distributive share
from the GPP is already net of cost and expenses. If the partner also derives other income
from trade, business or practice of profession apart and distinct from the share in the net
income of the GPP, the deduction that can be claimed from the other income would
either be the itemized deductions or OSD. (Rev. Regs. 08-18, Sec. 8).

Classification: GENERAL
 Who are the Individual Taxpayers
Exempt from Income Tax?

Classification: GENERAL
  1. Minimum wage earners
 2. Exemptions granted under international agreement
 3. Senior citizens

Classification: GENERAL
  I. Minimum wage earners (MWE)
 shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not
more than the statutory minimum wage in the non-agricultural sector where he/she is assigned. (Sec. 22(HH))
 Definition of statutory minimum wage (SMW)
 Refers to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment (DOLE); the RTWPB of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose.
 Compensation income of MWEs shall be exempt from income tax and consequently from withholding tax on compensation if they work:
 a. In the private sector and being paid the SMW; or
 b. In the public sector and being paid compensation of not more than the SMW in the non-agricultural sector
 Other income of MWEs which are tax-exempt (Sec. 24(2)(A)):
 a. Holiday pay
 b. Overtime pay
 c. Night shift differential pay and
 d. Hazard pay

Classification: GENERAL
  Additional compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of ₱90,000.00, taxable allowances, and other
taxable income given to an MWE by the same employer other than those which are
expressly exempt from income tax shall be subject to withholding tax (Rev. Regs. 02-98,
Sec. 2.7.81 as amended by R.A. No. 9504)
 Note: MWEs do not lose their tax-exempt status even though they have received other
benefits in excess of the statutory limit of P30,000. (Soriano v. Secretary of Finance, G.R.
No. 184450, 2017)
 MWEs receiving other income from other sources in addition to compensation income,
such as income from other concurrent employers, from the conduct of trade, business, or
practice of profession, except income subject to final tax, are subject to income tax only
to the extent of income other than SMW, holiday pay, overtime pay, night shift differential
pay, and hazard pay earned during the taxable year (Rev. Regs. 02-98, Sec. 2. 7.8 as
amended by R.A. No. 9504).

Classification: GENERAL
  II. Employees granted under international agreements71
 Employee benefits of non-Filipino nationals and/or non-permanent residents of the Philippines from foreign governments,
embassies or diplomatic missions, and internationals organizations in the Philippines are exempt from income tax.
 Filipino employees of foreign governments, international missions and organizations are taxable as rule except only to
employee of the following organizations:
 a. United Nations
 b. World Health Organization
 c. Food and Agriculture Organization
 d. United Nations Development Organization
 e. Specialized Agencies of the United Nations
 f. International Organization for Migration
 g. International Seabed Authority (Banggawan)

Classification: GENERAL
  III. Senior citizens (SC)

 1. Any resident of the Philippines; and

 2. At least 60 years old.

 General Rule: Qualified Senior Citizens (SC) deriving income during the taxable year, whether from compensation or otherwise, are required to file
their income tax returns and pay the tax as they file the return.

 Exceptions:

 • If income is in the nature of compensation income and the SC qualifies as a MWE, he shall be exempt from income tax on said compensation
income, subject to the rules of RA 9504 and RR No. 10-08.

 71 SEC. 32 (B) (5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of
the Philippines.

 • If the aggregate amount of gross income earned by the SC during the taxable year does not exceed the amount of basic and additional
exemptions, he shall be exempt from payment of income tax and filing of an ITR.

 Note: The income tax exemptions granted, as stated above, to SCs does not extend to income subject to final tax (e.g., interest income from bank
deposits, dividends, capital gains tax) (Expanded Senior Citizens Act of 2003; Rev. Regs. 07-10)

 Compliance Requirements for Income Tax Exemption:

 (i) Must first be qualified as such by the CIR or the RDO by submitting a certified true copy of his OSCA ID; and

 (ii) Must file a sworn statement on or before January 31 of every year that his annual taxable income does not exceed the poverty level.

Classification: GENERAL
 Discuss Minimum Corporate Income
Tax.

Classification: GENERAL
  Minimum Corporate Income Tax (MCIT)
 The MCIT is applicable to every corporation taxable to the 30% regular corporate income tax including
non-profit, exempt, and special corporations with respect to their taxable income subject to the regular
corporate income tax, but not to the income subject to special tax rates. (Banggawan)
 Imposition of MCIT
 Computed as 2% of gross income subject to regular income tax (GI)72
 The MCIT is not a tax on capital. It is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses
from gross sales. Clearly, the capital is not being taxed. Thus, MCIT is constitutional. (Chamber of Real
Estate and Builders’ Associations, Inc. v. Romulo, G.R. No. 160756, 2010)
 When applicable: Beginning on the 4th taxable year from the year in which such corporation
commenced its business operation, i.e. the year when corporation registers with the BIR, regardless of
whether the corporation is using calendar or fiscal year. Thus, a corporation which started operations on
any day in 2012 will be covered by the MCIT in 2016.

Classification: GENERAL
  When computed/paid: At the time of filing of quarterly corporate income tax as prescribed
under Secs. 75 and 77 of the NIRC. (Rev. Regs. 12-07)
 Rationale: Designed to prevent corporations from escaping tax by including frivolous expenses
in their statement of income (e.g., over-statement of depreciation expense).
 Concept of Gross income for MCIT purposes
 For corporations involved in
 a. sale of goods- Gross sales less sales returns, discounts, allowances, and cost of goods sold
 b. sale of service- Gross receipts less sales returns, allowances, discounts, and cost of services.
 Cost of goods sold shall mean all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
 Cost of services shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients.

Classification: GENERAL
  Excess MCIT Carry-over
 Excess of MCIT over the RCIT shall be carried forward and credited against RCIT tax due in the
immediately succeeding three (3) years.
 Rules for MCIT carry-over
 1. Excess MCIT can be used as tax credit against RCIT if RCIT is greater than MCIT. Excess MCIT cannot
be deducted against MCIT tax due.
 2. Unused MCIT at the end of the 3-year period shall expire and will no longer be used.
 Relief from MCIT
 Upon recommendation of the CIR, MCIT may be suspended by the Sec. of Finance upon submission of
proof that the corporation sustained losses on account of:
 a. Prolonged labor dispute
 b. Force majeure
 c. Legitimate business reverses

Classification: GENERAL
 Discuss Improperly Accumulated
Earnings Tax (IAET).

Classification: GENERAL
  IAET is a 10% penalty tax imposed on the improper accumulation of corporate earnings beyond the needs of the business.
 Scope
 The IAET covers improperly accumulated earnings or profits of domestic corporations only, whether special or regular domestic corporations.
 Tax base (Rev. Regs. 02-01, Sec. 5)
 For corporations found subject to IAET, the "Improperly Accumulated Taxable Income" for a particular year is first determined by adding to that year’s taxable income
the following:
 a. income exempt from tax
 b. income excluded from gross income
 c. income subject to final tax and
 d. the amount of net operating loss carry-over (NOLCO) deducted and
 Taxable income shall be reduced by
 - income tax paid/payable for the taxable year
 - dividends actually or constructively paid
 - amount reserved for reasonable needs of the business
 Rationale: If the earnings and profits were distributed, the shareholders would then be liable for income tax. If the distribution were not made to them, they would incur
no tax in respect of the undistributed earnings and profits of the corporation. It is a tax in the nature of a penalty to the corporation for the improper accumulation of its
earnings, and a deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them. (Rev. Regs. 02-01, Sec.
2)

Classification: GENERAL
  Exception: The use of undistributed earnings and profits for the reasonable
needs of the business would not generally make the accumulated or
undistributed earnings subject to the tax. What is meant by “reasonable
needs of the business” is determined by the Immediacy Test.
 Immediacy Test – It states that the “reasonable needs of the business” are
the immediate needs of the business, including reasonably anticipated
needs (e.g., expansion).

Classification: GENERAL
 What constitute accumulation of
earnings for the reasonable needs of
the business?

Classification: GENERAL
  (1) Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the
corporation as of Balance Sheet date, inclusive of accumulations taken from other years;
 (2) Earnings reserved for definite corporate Expansion projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or equivalent body;
 (3) Earnings reserved for Building, plant, or equipment acquisition as approved by the Board of Directors
or equivalent body;
 (4) Earnings reserved for compliance with any Loan covenant or pre-existing obligation established under
a legitimate business agreement;
 (5) Earnings required by Law or applicable regulations to be retained by the corporation or in respect of
which there is legal prohibition against its distribution; and
 (6) In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended
or reserved for Investments within the Philippines as can be proven by corporate records and/or relevant
documentary evidence.

Classification: GENERAL
 What are the corporations exempt
from MCIT?

Classification: GENERAL
  1. Banks and other non-bank financial intermediaries
 2. Insurance companies;
 3. Publicly-held corporations;
 4. Taxable partnerships;
 5. General professional partnerships;
 6. Non- taxable joint ventures; and
 7. Enterprises that are registered:
 a. with the Philippine Economic Zone Authority (PEZA) under RA 7916;
 b. pursuant to the Bases Conversion and Development Act of 1992 under RA 7227; and
 c. under special economic zones declared by law which enjoy payment of special tax
rate on their registered operations or activities in lieu of other taxes, national or local.

Classification: GENERAL
 Discuss tax treatment of Proprietary
Non-Profit Educational Institution and
non-profit hospitals.

Classification: GENERAL
  Proprietary Non-Profit Educational Institution – any non-profit private school
maintained & administered by private individuals or groups with an issued
permit to operate from DepEd, CHED, or TESDA; “proprietary” and “non-profit”
must concur.
 Taxable at 10% on taxable income, except on certain passive income (which
shall be subject to final tax)
 Predominance Test: If the gross income from unrelated trade/business/other
activity exceeds 50% of the total gross income from all sources, entire taxable
income shall be subject to RCIT of 30%
 “Unrelated trade, business or other activity” means any trade, business or other
activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital from its primary
purpose or function.

Classification: GENERAL
  As distinguished from proprietary educational institution, a non-stock non-profit educational
institution is exempt from tax on all revenues and assets used actually, directly and exclusively for
educational purposes. Income from cafeterias, canteens, and bookstores are also exempt if
they are owned and operated by the educational institution and are located within school
premises. (RMC 76-03)
 Note: Assets used actually, directly, and exclusively for educational purposes are exempt.
 Sec. 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit
hospitals under Sec. 30(E) and (G). Sec. 27(B) on one hand, and Sec. 30(E) and (G) on the other
hand, can be construed together without the removal of such tax exemption.
 Sec. 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions, and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit.
 “Proprietary” means private, following the definition of a “proprietary educational institution” as
“any private school maintained and administered by private individuals or groups” with a
government permit.

Classification: GENERAL
  “Non-profit” means that 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. (CIR v. St.
Luke’s Medical, G.R. No. 195909, 2012)

Classification: GENERAL
 Discuss tax treatment of Government-
owned or controlled corporations,
agencies, instrumentalities.

Classification: GENERAL
  General Rule: GOCCs, agencies, or instrumentalities owned or controlled
by the government are taxable and shall pay the same rate upon their
taxable income upon corporations or associations engaged in similar
business, industry or activity. (Ingles)
 Exceptions:
 (a) GSIS
 (b) SSS
 (c) PHIC
 (d) PCSO
 (e) the local water districts

Classification: GENERAL
 Discuss tax treatment of Foreign
currency deposit units.

Classification: GENERAL
  Foreign currency deposit units (FCDUs) and Expanded FCDUs (EFCDUs)
refer to a unit or department of a local bank or a local branch of a foreign
bank authorized by the BSP to engage in foreign currency denominated
transactions pursuant tot R.A. No. 6426, as amended
 Distinction of FCDU, OBU, and EFCDU (Banggawan)
 FCDUs are limited to short-term foreign currency transactions while EFCDUs
are allowed both short-term and longer-term foreign currency-
denominated transactions An FCDU is a division of a domestic bank. An
OBU is.a division of a foreign bank which is authorized to conduct foreign
currency denominated transactions. An EFCDU may be a division of.a
domestic bank or a resident foreign bank authorized to conduct banking
under the expanded foreign currency deposit system.

Classification: GENERAL
  Tax on EFCDUs and OBUs
 The income of depositary banks under the Expanded Foreign Currency Deposit System from foreign currency transactions
with
 A. Non-residents- exempt from tax
 B. Residents
 a. Banks under the foreign currency deposit system such as OBUs, local commercial banks and branches of foreign banks
authorized by the BSP to transact business with FCDUs – exempt from income tax
 b. Other residents
 i. Interest income- 10% final tax
 ii. Other income, such as commissions and gains, RCIT
 Tax on income of depositors under the EFCDs
 Any income of nonresidents from transactions with depositary banks under the expanded system shall be exempt from
income tax. Interest income of resident from depositary bank under FCDS/EFCDS is subject to 7.5% final tax.
 b.

Classification: GENERAL
 Explain the Concept of Withholding
Taxes.

Classification: GENERAL
  Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income.
 Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least
approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return to
report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on
income payments covered by the expanded withholding tax and compensation income are creditable in nature. A CWT
is considered a prepayment or an advance payment of eventual income taxes due at the end of the taxable year
 Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on
said income.
 The payor endorses the pertinent Certificate of Creditable Tax Withheld at Source to the payee for use by the payee
against his tax liability at the end of a taxable year.
 The following are creditable withholding taxes:
 a. Expanded Withholding Tax (EWT) on certain income payments
 b. Withholding Tax on Compensation
 c. Withholding Tax on money payments to the government

Classification: GENERAL
  Expanded withholding tax
 Expanded withholding tax will apply:
 - Expense is paid by the taxpayer, which is income to the recipient thereof
subject to income tax;
 - Income is fixed or determinable at the time of payment
 - Income is one of the income payments listen in the regulations; and
 - Income recipient is a resident of the Philippines liable to income tax
 o If recipient is a non-resident taxpayer, then the income payment is subject to
FWT, not creditable
 - Payor-withholding agent is also a resident of the Philippines (Ingles)

Classification: GENERAL
 Discuss liabilities of employer and
employee in withholding.

Classification: GENERAL
  (A) Employer. - The employer shall be liable for the withholding and remittance of the correct
amount of tax required to be deducted and withheld under this Chapter. If the employer fails to
withhold and remit the correct amount of tax as required to be withheld, such tax shall be
collected from the employer together with the penalties or additions to the tax otherwise
applicable in respect to such failure to withhold and remit.
 (B) Employee. - Where an employee fails or refuses to file the withholding exemption certificate
or willfully supplies false or inaccurate information thereunder, the tax otherwise required to be
withheld by the employer shall be collected from him including penalties or additions to the tax
from the due date of remittance until the date of payment. On the other hand, excess taxes
withheld made by the employer due to:
 (1) Failure or refusal to file the withholding exemption certificate; or
 (2) False and inaccurate information shall not be refunded to the employee but shall be
forfeited in favor of the Government. If the employer is the Government of the Philippines or any
political subdivision, agency or instrumentality thereof, the return of the amount deducted and
withheld upon any wage shall be made by the officer or employee having control of the
payment of such wage, or by any officer or employee duly designated for the purpose. (Sec.
82)

Classification: GENERAL
  The End.
 Caveat: This is a summary only intended for lecture purposes. It will not in
any way guarantee that only those stated herein will be asked in the
exams, and those not contained here will not be asked therein.
 Good luck and God bless!

Classification: GENERAL