TAXATION

TOPIC 1: PRINCIPLES OF TAXATION

As a state power – an inherent power of the State to enforce a proportional contribution from its subject
for public purpose.
Taxation As a process – process of levying taxes by the legislature of the State to enforce proportional contributions
from its public purpose
As a mode of cost distribution – allocate government burden to people

TAXATION AS A POWER OF THE GOVERNMENT

DISTINCTION AMONG THE THREE (3) INHERENT POWERS OF THE STATE
Taxation Police Power Eminent Domain
Power to enforce Power to take private property
Power to make and implement laws for
NATURE contributions to raise gov’t for public use with just
the general welfare.
funds for public purpose. compensation.
May be granted to public
AUTHORITY Government only Government only
service/utility companies.
NECESSITY OF Necessity (local government could Due delegation (local gov’t
Not necessary
DELEGATION exercise it) and priv. party)
Revenue and support of The taking of private property
PURPOSE Protection of well-being of the people
the government for public use.
PERSONS Community or a class of On an individual as the owner
Community or a class of individuals.
AFFECTED individuals. of personal property.
No transfer of title. There may just be a
Contribution becomes
EFFECT restraint on the injurious use of There is a transfer of property.
part of public fund.
property.
No imposition. The owner is
AMOUNT OF Sufficient to cover the cost of
Unlimited paid equivalent to the fair
IMPOSITION regulation.
value of his property.
IMPORTANCE Most important Most superior
RELATIONSHIP
Inferior to the “Non Superior to the “Non Impairment Superior and may override the
WITH THE
Impairment Clause” Clause” “Non Impairment Clause”
CONSTITUTION
Constitutionally and Public interest and the requirement of Public purpose and just
LIMITATION
inherently restricted the process compensation
RIGHTS
Property right. Property right and liberty Property right
AFFECTED
SCOPE Comprehensive, Plenary, Broader in application. General power Merely a power to take private
(CPUS) Understanding, Supreme to make and implement law. property for public use.
No direct and immediate benefit but
In form of protection and
BENEFITS only such as may arise from the Market value of property
benefits received from
RECEIVED maintenance of a healthy economic taken.
government
standard of society.

SIMILARITIES among Taxation, Police Power, and Eminent Domain

1. Necessary attributed of sovereignty, resting upon necessity.
2. Inherent in the State.
3. Legislative in nature.
4. They’re ways in which the state interferes with private rights and property.
5. They exist independently of the constitution although the conditions for their exercise may be prescribed by the
constitution
6. Presuppose an equivalent compensation received, directly or indirectly, by the persons affected.
7. Exercise by the local government may be limited by national government.

TAXATION AS A PROCESS
Stages/Aspects of Taxation
Levy or Imposition (Legislative Act) Impact of Taxation
STAGES OF ASPECTS OF
Assessment and Collection Incidence of
TAXATION TAXATION
(Administrative Act) Taxation
 Assessment – determination by the executive branch of the correct amount of the tax.
 Collection of the tax levied, which is essentially administrative in character.

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 1. Amount/Rate of Tax
2. Kinds of Tax
3. Apportionment of the Tax
DISCRETION OF THE
4. The person, property and exercise to be taxed
TAXING POWER
5. Situs of Taxation
6. Method of Collection
7. Purposes for its levy, provided for public purpose

TAXATION AS A MODE OF COST ALLOCATION

Life Blood Doctrine – tax are indispensable to the nature of the state.

Primary Purposes to raise revenues/funds

PURPOSES
Secondary Purpose Regulatory - employed as a devise for regulation or control
OF TAXATION
Compensatory

TAXATION AS A MODE OF GOVERNMENT COST ALLOCATION

1. Benefit Received Theory Based on benefits received; receipt of payment is conclusively presumed
2. Ability to Pay Theory Tax payment is based on ability of taxpayers to pay
a. Vertical Equity The higher the value of the object, the higher the tax
b. Horizontal Equity Consider the circumstances of the object

THEORY OF The existence of the government is a necessity and it cannot continue without
TAXATION means to support itself.
BASIS OF The government and the people have the reciprocal and mutual duties of
TAXATION support and protection.

1. Comprehensive 1. Businesses
SCOPE OF
2. Plenary 2. Interests
TAXATION
3. Unlimited CURRENT 3. Transactions
(CPUS)
4. Supreme OBJECTS 4. Rights
OF 5. Acts
TAXATION 6. Persons
7. Properties
8. Privileges

LIMITATIONS OF TAXATION POWER

A. Inherent Limitation (TIP – END)
1. Territoriality
2. International Comity
3. Public Purpose
4. Exemption of the government
5. Non – Delegation of the power of taxation

B. Constitutional Limitation
1. Due process of law
2. Equal protection of law
3. Uniformity of taxation
4. Progressive scheme of taxation
5. Non - imprisonment for non-payment debt or poll ta
6. Non - impairment of obligation and contract
7. Free worship rule
8. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion
9. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosque from property taxes
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions including grants,
endowments, donations or contributions for educational purposes
11. Concurrence of a majority of all members of congress for the passage of a law granting tax exemption
12. Non – diversity of tax
13. Non – delegation of the power of taxation
Exception:
a. Power to tax was delegated to the President under the Flexibility Clause of the Tariff and Customs Code
b. Power to tax was delegated to the local government units under the Local Government Code
c. Matters involving the expedient and effective administration and implementations of assessment and collection of
taxes or certain aspects of taxing process that are not legislative in character
14. Non – impairment of the jurisdiction of the Supreme Court to review tax cases
15. Appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives but the senate may
propose or concur with amendments

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 16. Local government unit shall exercise the power to create its own sources of revenue and shall have a just share in the
national taxes

SITUS OF TAXATION (Place of taxation)

1. Persons Residence of the taxpayer

2. Community Development Residence or domicile of the taxpayer
APPLICATION OF SITUS

Tax
3. Business Taxes Where the business was conducted / transaction
4. Privilege or Occupation Privilege is exercised
Tax
5. Real Property Tax Where property is located
a. Tangible – where they are physically located
6. Personal Property Tax
b. Intangible – domicile of the owner unless the property has acquired
7. Income Place where the income is earned
8. Transfer Tax Residence or citizenship of the taxpayer
9. Franchise Tax State that grants the franchise
10. Corporate Tax Depend on the law of corporation

Direct Double Taxation - It violates the

DOUBLE constitutional provision of the country 1. Provision for tax exemption
TAXATION Indirect Double Taxation - No constitutional
2. Allowance for tax credit
violation REMEDIES OF
DOUBLE 3. Allowance for principle of
TAXATION reciprocity
International A double taxation caused by two different 4. Enter into treaties or
Double taxing authorities, one domestic and one agreements with foreign
Taxation foreign governments.

Not result in Shifting Transferring tax burden to other people

loss to the Capitalization Lower price of commodity, buyer will shoulder the tax
FORMS government Transformation Increase quantity of production
OF
ESCAPE Result in loss Tax Evasion Tax dodging – illegal reduces/escapes the payment
FROM to the Tax Avoidance Tax minimization scheme – legal reduction or totally
TAXATION government escaping payment of taxes
Tax Exemption Immunity, privilege or freedom from payment of charge or
burden

KINDS OF EXEMPTION
1. Express – granted by constitution, statute, treaties, ordinance, contracts or franchise
2. Implied - exempted by accidental or international omission
3. Total – exempt from all taxes (OFW)
4. Partial – exempt from certain taxes

DISTINCTIONS BETWEEN TAX EVASION AND TAX AVOIDANCE

TAX EVASION TAX AVOIDANCE
Scheme used outside of those lawful means and when Tax saving device within the means sanctioned by law
availed of, it usually subjects the taxpayer to penalties
Accomplished by breaking the law Accomplished by legal procedure and do not violate the law
Connotes fraud, deceit and malice No fraud is involved

DISTINCTIONS BETWEEN TAX AMNESTY AND TAX CONDONATION

TAX AMNESTY TAX CONDONATION
General pardon or intentional overlooking by the state of its To remit or to desist or refrain form exacting or imposing a
authority to impose penalties on persons otherwise guilty of tax. It cannot extend to refund of taxes already paid when
tax evasion or violation of tax laws. The purpose is to give obtaining condonation
the erring taxpayer a chance to reform and become part of
the society with a clean slate.
There is no tax liability at all Connotes condonation from payment of existing tax liability
The grantee need not pay anything The grantee pays a portion
Can be availed of by any qualified taxpayer Not always available

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PRINCIPLE OF SOUND TAX SYSTEM
a. Fiscal Adequacy – sources of revenue should be sufficient to meet the demand for public expenditure
b. Administrative Feasibility – tax laws must be capable of convenient, just, and effective administration
c. Theoretical Justice – tax must be imposed with equity and certainty and must consider the ability to pay and
benefits received

TAXATION AND ECONOMIC EFFICIENCY

a. Income Effect – makes people economically efficient (ex. transformation)
b. Substitution Effect – makes people economically inefficient (ex. Indirect taxes)

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 TAXATION
TOPIC 2: TAXES, TAX LAWS AND TAX ADMINISTRATION

TAX 1. Must not violate the constitutional, inherent and or contractual

limitation of the power of taxation
 Enforced proportionate 2. Must be uniform and equitable
contribution 3. Must be for a public purpose
ELEMENTS
 Within territorial
OF A VALID 4. Must be levied by the taxing power
jurisdiction
TAX 5. Must be proportionate in character
 Generally payable in
money 6. Generally payable in money, at regular interval (not regular
in payment)

CLASSIFICATIONS OF TAXES
Fiscal Tax imposed for general purpose (general, fiscal or
AS TO
revenue)
PURPOSE
Regulatory Tax imposed for special purpose (special or sumptuary)
Personal, poll or Tax of a fixed amount imposed on individuals (ex:
capitalization community tax certificate)
AS TO
Tax imposed on property, whether real or personal (ex: real
SUBJECT Property tax
estate tax)
MATTER
Excise tax or privilege Tax imposed upon the performance of an act (ex: income
tax tax, VAT)
AS TO Direct Tax is demanded from one person who is intended to pay
INCIDENCE Indirect Tax is demanded from one person to another taxpayer
AS TO Specific tax Tax of a fixed amount imposed by the head or number
AMOUNT Ad valorem Tax is imposed for a fixed proportion of the amount or value
Proportional or flat Tax is based on fixed percentage
rate
Progressive or Tax rate is increases as the tax base increases
AS TO RATE
graduated tax
Regressive tax Tax rate is decreases as the tax base increases
Mixed tax
Imposed by the National Government (P-DIVES)
a. Other Percentage Tax d. Value-Added Tax
National tax
b. Estate and Donors tax e. Excise Tax
AS TO c. Income Tax f. Documentary Stamp Tax
IMPOSING Imposed by the Local Government
AUTHORITY a. Real property tax d. Community tax
Local Tax b. Professional tax e. Tax on banks & other
Financial Institutions
c. Business taxes, fees, and charges

DISTINCTION OF TAX WITH SIMILAR ITEMS

TAX VS. REVENUE TAX VS. TOLL

TAX REVENUE TAX TOLL
Amount imposed Amount collected Demand of sovereignty Demand of ownership
Only one of the Product of taxation. It One support’s for the Compensation for the use of
sources of the refers to tall funds government somebody else’s property
government derived by the Imposed only by the May be imposed by the government
government whether government or by private individuals
from tax or from other Based on government Determined by the cost of the
sources. needs property or improvements thereon

TAX VS. LICENSE

Point of Distinction TAX LICENSE
Purpose For revenue For regulation
Amount No limit Limited
Person, properties, business rights, Required for the commencement of a business
Subject of Imposition
interests, privilege, acts and transactions profession
Does not necessarily make the act,
Effect of non-compliance Makes the business illegal
business or professional illegal
Revocability Has a nature of permanence Always revocable
Power to license does not include the power to
Scope Power to tax includes power to license
tax
When imposed Post-activity Pre-activity
Preceding year or quarter data. If new
Basis of imposition Current data
business, based on capitalization
Sources of power Taxing power of the government Police power of the government

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 TAX VS. DEBT
Point of Distinction TAX DEBT
Basis Law Contract
Assignable? No Yes
May involved imprisonment, except for
Effect of non-compliance No imprisonment
poll tax
Mode of settlement Money Cash or kind
Set-off? Not subject Subject
Draws interest when stipulated or when in
Interest Does not earn interest when delinquent
default

TAX VS. SPECIAL ASSESSMENT

Point of Distinction TAX SPECIAL ASSESSMENT
Business, interest, transactions, rights,
Subject of the imposition Land
person, properties, or privileges
Effect on the person May be made a person liability of the Cannot be made the person liability of person
owning the subject person assessed assessed
Necessity with no hope of direct or Entirely on benefits received
Basis of imposition
immediate benefit to the taxpayer
Coverage of application General application Exceptional in application

TAX VS. PENALTY

Point of Distinction TAX DEBT
Regulate conduct through punishment and
Purpose To raise revenue
suppression of injurious act
Exercising authority The government The government or by private individuals
Source Law Law or contract
Mode of settlement Money Money or kind

TARIFF
 Book of rates containing names of merchandise with corresponding duties.
 Imposed on imported or exported goods
 Customs duties and tariffs are used interchangeably

Constitution
Local Ordinances
SOURCES OF Administrative Issuances or BIR Rulings
TAX Statues and Presidential Decrees
(COASTER - Tax Treaties and Conventions with Foreign Countries
J) Executive Orders and Batas Pambansa
Revenue Regulation of by the DoF
Judicial Decisions

Tax Revenue Regulation Rulings

Source Congress Department of Finance Bureau of Internal Revenue
Superiority 1st 2nd 3rd
Scope Broad Broad Broad
Prospective Prospective Prospective

1 Chief Officer
BUREAU OF Legal Group
INTERNAL CHIEF OFFICIAL
4 Assistant Chiefs Operations Group
REVENUE (5 members)
(LORI) Resource Management Group
Information Management

BUREAU OF INTERNAL REVENUE

Powers of the Bureau

1. Assessment & collection of taxes
2. Enforcement of all forfeitures, penalties, fines & judgments
3. Giving effects to and administering the supervisory and police power
4. Assignment of IR officers and other employees
5. Provision & distribution to proper officials of forms, receipts, certificates, stamps, etc.
6. Issuances of receipts and clearances
7. Submit annual reports, pertinent information to congress

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Powers of the Commissioner of Internal Revenue
1. Interpret provisions (subject to review by the Secretary of Finance
2. To decide tax cases (subject to jurisdiction of Court of Tax Appeals)
3. To obtain information and summon
4. To make assessment and prescribe additional requirement
5. To make or amend a return in behalf of the taxpayer
6. Change a tax period
7. Compromise a tax liabilities of taxpayers
8. Conduct inventory surveillance
9. Prescribe presumptive gross sales or receipts
10. Prescribe real estate values
11. Accredit tax agents
12. Inquire into bank deposits under certain cases
13. Prescribe additional procedures
14. Delegate his powers to any subordinate
15. To refund or credit internal revenue taxes
16. To abate or cancel tax liabilities
17. To examine tax returns and determine tax due thereon
18. To cause revenue officers and employees to make canvas from time to time of any revenue district

Powers of the CIR that cannot be DELEGATED

1. Recommend the promulgation of rules and regulations
2. Issue rulings of first impressions
3. Compromise or abate tax liability
Exception:
 Assessment are issue by regional offices involving basic deficiency tax of P500,000
 Minor violations as may be determined by rules and regulations to be promulgated by SoF, upon recommendation
by CIR, discovered by regional and district officials
4. To assign and reassign internal revenue officers to establishment where articles subjects to excise tax

Tax on imported goods Commission of Customs

AGENTS AND DEPUTIES FOR Head of Appropriate Government
Collection of energy tax
COLLECTION OF NAT’L INTERNAL Offices
REVENUE TAXES Tax made through Banks duly recognized by the
banks Commissioner

Marshall Dictum “The power to tax includes the power to destroy.”

Holmes Doctrine “Taxation power is the power to build
Doctrine of Judicial Courts cannot inquire into the wisdom of a taxing act
Interference
Taxes are imprescriptible unless the law itself provides
Imprescriptibility in Taxation
such prescription
Laws are prescriptive in character and application
EXP: necessarily implied from the provisions of law
FUNDAMENTAL
Prospectivity of Tax Laws Involves income tax
DOCTRINES IN
Retroactive application is clearly the intent of the
TAXATION
Congress
Principle of “Strictissimi “Taxation is the rule of and exemption is the
Juris” exception.”
Doctrine of Equitable Doctrine of no prescription
Recoupment
Non-compensation or Set – Government and taxpayer are not creditor and debtor to
off Rule each other
Doctrine of Estoppel Operates only against the taxpayer

ADDITIONAL INFORMATION
Issuances signed by the Secretary of Finance, upon recommendation of the
CIR, that specify, prescribe or define rules and regulations for the effective
Revenue Regulations
enforcement of the provisions of the National Internal Revenue Code (NIRC)
and related statutes.
Issuances that publish pertinent and applicable portions, as well as
Revenue Memorandum
amplifications, of laws, rules, regulations and precedents issued by the BIR and
Circulars (RMCs)
other agencies/offices.
Issuances that provide directives or instructions; prescribe guidelines; and
Revenue Memorandum outline processes, operations, activities, workflows, methods and procedures
Orders (RMOs) necessary in the implementation of stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations, except auditing.
The official position of the Bureau to queries raised by taxpayers and other
BIR Rulings
stakeholders relative to clarification and interpretation of tax laws.

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 TAXATION
TOPIC 3: FUNDAMENTALS OF INCOME TAXATION

Return on Capital Return of Loss Profits –

a. Infinite Value – not taxable (life, health, reputation) Taxable
CHARACTERISTICS b. Finite Value – taxable
1. Crop or Livestock Insurance
OF GROSS INCOME Realized Benefit – increase of network due to an exchange
2. Damages under Patent or
(sale & barter) that involve other parties
Copyright Infringement Suit
Not exempted by Law, Treaty, Constitutional Contracts
3. Guarantee Income Payment

DOES NOT Return of Capital

Loss profits that are recovered
CONSTITUTE Unrealized Income
GROSS INCOME are taxable.
Exempted by Law, Treaty, Constitutional Contracts

Goods / Services Services

Selling Price Professional Fee TOTAL RETURN
Cost N/A RETURN OF CAPITAL
Gain / Loss Gain / Loss RETURN ON CAPITAL

CHARACTERISTICS OF TAXPAYERS CLASSIFICATION RULES

PH ABROAD
RC   INTENTION
NRC  RC TO ATLEAST 183
INDIVIDUALS /
RA 
ESTATES AND NRC DAYS ABROAD
NRA  ACTUAL
TRUSTS NRA MORE THAN 1
NRA – ETB  LENGTH
NRA – NETB  TO RA YEAR WITHIN PH
OF STAY
ETB MORE THAN 180
DC   DAYS WITHIN PH
CORPORATIONS RFC 
NRFC 

SPECIAL CONSIDERATIONS
Not taxable
General Professional
Withholding agent
Partners (GPP)
Common profession
PARTNERSHIP
General Co – Business partnership
Partnership (GCP) Withholding agent and tax payers

Not Exempt Taxable corporation

JOINT
VENTURE Oil exploration
Exempt
Construction

Juridical Partition Tax as an individual

ESTATE
Extrajudicial Not taxable, heirs will record

Donors retains control/ownership of property

Revocable
Donor is taxed
TRUST
Irrevocable Trust is taxed as individual

Exempt (GR) Not taxable

CO –
OWNERSHIP Investment in Income Becomes business partners
– Producing Property Taxable as corporation

1. Final tax on net gain

Capital Gains Tax
2. Final tax on gain on sale
PASSIVE INCOME TAX (Interest, Prizes, Winning, Royalties,
Other Withheld
Dividends received from domestic
GROSS INCOME Final Tax
corporation.
UNDER THE NIRC
REGULAR (ACTIVE) 1. Progressive Tax (0-35% scheduler rates
INCOME TAX Progressive Tax (individuals & corporations
(Compensation, Professional Final Tax 2. Final Tax – (25) – corporations
Business)

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 SITUS OF INCOME
INTEREST Debtor’s residence
 By a domestic corporation – within the Philippines
 By a foreign corporation – apply the income dominance test

BASIS:
World gross income for the three-year period ending the current taxable year preceding the
declaration of such dividends. If Philippine gross income is:
DIVIDENDS  Less than 50% basis, considered earned outside
 If at least 50% of this, considered earned within the Philippines

AT LEAST 50% = % *DIVIDEND WITHIN

GI – PH (FOR 3 YEARS)
GI – WORLD (FOR 3 YEARS)
LESS THAN 50% OUTSIDE
SERVICE Place of performance
RENT Location of property
ROYALTIES Place where intangible is used
a. Real Property – location of the Immovable @ Fixed Location
GAIN ON SALE b. Domestic Shares of Stock – always within the Philippines Gain on Sale
c. Personal Property – place of sale Movable @ Place of sale

MINING Location of mine

FARMING Location of farm
MERCHANDISING Place of sale
 Place of production AND sale
 Transfer Pricing Rule: @ arm’s length
 Whether full or partial processing:

MANUFACTURING PLACE OF PRODUCTION PLACE OF SALE INCOME IS EARNED

Within Within Within
Within Abroad Within and abroad
Abroad Within Within and abroad
Abroad Abroad Abroad

TAX ACCOUNTING PERIODS TAX PAYMENTS

Regular 12 Months Short or Less Than 12 Months 1. 15th day of the fourth month
1. Calendar Year – for individual 1. Death of a Taxpayer following the close of the taxpayer’s
and corporations 2. Newly Organized Business taxable year
2. Fiscal Year – for corporations 3. Dissolution of business 2. Individuals and Corporation engaged
only. 4. Change in accounting period in business:
5. Termination of accounting period by Individual – 45 days from the EOQ
the CIR Corporation – 60 days from the EOQ

TAX ACCOUNTING METHODS

 Principle 1: Advance Income is taxable upon-receipt
 Principle 2: Prepayments are non-deductible

 Cash Basis Method – record in actual receipt or payment

PRINCIPLE METHODS  Accrual Method – record when earned or incurred
 Hybrid Method – combination
 Installment Method
 Sale of Personal Property by Dealer
 Casual Sale of Payment Property wherein:
o SP is over 1,000
o Initial Payment < 25% of SP
o Normally included in inventory
 Initial Payment , 25% of SP
DEFERRED PAYMENT SALES Non – Dealer /
Dealer
Casual
Always Allowed
Movable With Limit
(W/O Limit)
Immovable With Limit With Limit
*Limit Initial Payment is less than 25% of SP.
𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛
= ∗ 𝐺𝑎𝑖𝑛𝑠 / 𝐿𝑜𝑠𝑠
𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠
 Deferred Payment – buyer issued notes
LONG – TERM CONSTRUCTION  Percentage of Completion – LTCC period more than 1 year
CONTRACTS (LTCC)  Completed Contract – Gross income is recognized upon completion
 Outright Method – reported at a time of completion of leasehold
LEASEHOLD IMPROVEMENT
 Spread Out Method – recognized over the lease term

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FARMING INCOME  Crop year basis – expense is deductible in year income is recognized

CASH BASIS

ANIMALS
ACCRUAL BASIS During the development
FARMING years, cost incurred are
CASH BASIS capitalized and then
INCOME amortized during the
SHORT – TERM
harvest.
ACCRUAL BASIS

CROPS
ANIMALS PERENNIAL CROPS More than 1 years of
cultivation and used
LONG – TERM

NON – PERENNIAL
CROPS One time, big time

Crop year basis

TWO – FOLD TAX OBLIGATIONS TAX RETURNS

1. Payment of tax under the self – assessment method 1. Income Tax Return
2. Remittance of withholding taxes 2. Withholding Tax Return

REGULAR INCOME TAX CAPITAL GAINS TAX

a. Form 1701 for individuals a. Form 1706 for sales of real property
b. Form 1702 for corporations b. Form 1707 for sales of stocks

TYPES OF WITHHOLDING Withholding Tax on Compensation

Creditable Withholding Tax
TAX RETURNS Expanded Withholding Tax
Final Income Tax

REQUIRED TO DEDUCT AND WITHHOLD TAX

Individual engaged in business or exercise of a profession
Corporations (whether or not engaged in business)

WHO SHALL FILE TAX RETURN NOT REQUIRED TO FILE

Resident Citizen Individual GI < 250K (XPN: Engaged in bus./ prof.
Non-resident citizen (within) Individual earning pure compensation
Resident alien (within) Individual on income subject to FIT
Non-resident alien engaged in trade & business (within) Individual exempt thru Tax Code

CLASSIFICATIONS OF TAXPAYERS FOR ADMINISTRATION PURPOSES

LARGE TAXPAYERS NON – LARGE TAXPAYERS
 eFPS filing to the BIR Large Taxpayer Service File at RDO
Division (LTSD)  Manual Filing
 eBIR Forms
 eFPS

CRITERIA FOR LARGE TAXPAYERS

TAX PAYMENTS (VIEW) FINANCIALS OTHER FACTORS
1. VAT – Exceed 200K per quarter 1. Sales/Revenue – exceed 1B per year
2. Income – Exceed 1M per year 2. Purchase – exceed 800K per year
3. Excise – Exceed 1M per year 3. Net Worth – exceed 300M at the end
4. Withholding – Exceed 1M per year of the year

WHERE TAX RETURNS ARE FILED

LARGE TAXPAYERS NON – LARGE TAXPAYERS
 Large Taxpayer Service Division (LTSD)  Authorized Agent Bank
 Revenue District Office
 Collection Agent
 City/Municipal Treasurer
 Office of the Commissioner
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 DETERMINING NON – COMPLIANCE WITH TAX
PENALTIES FOR NON - COMPLIANCE
OBLIGATIONS
 Lifestyle check  Surcharge – 25% of the basic assessed tax
 Inventory surveillance  Interest – 12% per annum x days/365
 Mystery shopping  Compromise – based on schedule
 Networth method

INCOME TAX RETURNS

Basic Tax Due
Add: Surcharge (25% of Basic Tax Due)
Add: Interest (Basic Tax Due * 12% P.A. *Prorated Actual Number of Days / 365
Total Assessment
Add: Compromise Penalty Settlement for violations in lieu of criminal
TOTAL INCOME TAX RETURNS

Payment:
1. Lump – sum
2. Installment – if tax due exceeds 2,000; 2 gives

PAYMENT OF INCOME TAX

TYPES OF INCOME TAX INDIVIDUAL TAXPAYERS CORPORATE TAXPAYERS
1. Regular Income Tax Outright or Installment Outright only
2. Capital Gains Tax Outright or Installment Outright or Installment

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 TAXATION
TOPIC 4: FINAL INCOME TAX

IDENTIFIED OF GROSS INCOME

FINAL INCOME TAX TAXABLE CAPITAL GAINS TAX

Certain passive income only AT Certain capital gains only

REGULAR INCOME TAX

Individuals: Progressive Taxation (20 – 35%)
Corporations: Proportional (25%)

FINAL INCOME TAX

1. Full amount withheld at source by payor
2. Deducted at final source is FINAL TAX
3. No need for the payee to file the tax return
4. Employed on “certain” passive income
5. For NRA – NETB and NRFC (25%, active or passive), applies to ALL INCOME earned WITHIN the Philippines
6. Remit quarterly but deducted monthly
7. Territorial / Jurisdiction

PASSIVE INCOME SUBJECT TO FINAL TAX

Interest income
Dividend income
Royalties
Prizes exceeding 10,000 Based on effort
Winnings Based on chance
Informer’s reward Lower of 1M of 10% of collection
Fringe Benefits Tax Managerial and supervisory
Interest payment to FCDUs/OBUs
Others Tax – free covenant bonds
Petroleum service contractors

ENTITIES EXEMPT FROM FINAL TAX

 Foreign government / Government – Owned Controlled Corporations
 International missions or organizations with tax immunity
 General professional partnership
 Qualified employee trust fund

FILING DEADLINE
Manual (1st 2 months) 10 days following the end of the month
Manual (Quarterly) Last day of the month following the quarter

Group A – 15 days following the end of the month

Group B – 14 days following the end of the month
eFPS Filing Group C – 13 days following the end of the month
Group D – 12 days following the end of the month
Group E – 11 days following the end of the month

FINAL WITHHOLDING TAX CREDITABLE WITHHOLDING TAX

Similarities The income payor withhold a percentage of the income.
Serves to avoid cash flow problems to taxpayers by collecting at the moment cash is available.

Differences
Income Tax Withheld Fully Only portion
Coverage Certain passive income Certain passive income and regular income tax
Who remits the tax? Income payor Income payor and the taxpayer
Necessity for a
consolidated/adjustment None Required
return

1
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON – RESIDENT PERSONS NOT ENGAGED IN TRADE OR BUSINESS
IN THE PHILIPPINES
NRA - NETB NRFC
GENERAL FINAL TAX RATE 25% 25%
EXCEPTIONS:
1. Capital gain on sale of domestic stocks
15% CGT 15% CGT
directly to buyer
2. Rentals on cinematographic films and
25% of rentals 25% of rentals
similar works
3. Rental of vessels 25% of rentals 4.5% of rentals
4. Rentals of aircraft, machineries, and other
25% of rentals 7.5% of rentals
equipment
5. Interest income under the foreign currency
EXEMPT EXEMPT
deposit system
6. Interest on foreign loans N/A 20%
7. Dividend income 25% 15% if tax is sparing rule is applicable
8. Tax on corporate bonds 30% 30%

FINAL INCOME TAX RATES ON CERTAIN PASSIVE INCOME

INDIVIDUAL CORPORATIONS
CITIZEN ALIEN
PASSIVE INCOME Non-Resident Non-
Non- Domestic Resident
Resident Resident Not resident
resident Engaged
Engaged
INTEREST
Local Currency Deposit 20% 20% 20% 20% 25% 20% 20% 25%
Long – Term (5 years) 20% 20%
(RIT for (RIT for
deposit deposit
EXEMPT EXEMPT EXEMPT EXEMPT 25% substitute substitut 25%
issued by e issued
non- by non-
banks) banks)
Preterminated < 3 years 20% 20% 20% 20% 25% 20% 20% 25%
Preterminated < 4 years 12% 12% 12% 12% 25% 20% 20% 25%
Preterminated < 5 years 5% 5% 5% 5% 25% 20% 20% 25%
Int. Inc. on FCFU Deposit 15% EXEMPT 15% EXEMPT EXEMPT 15% 15% EXEMPT
Int. Inc. on FCDU Banks N/A N/A N/A N/A N/A 10% 10% N/A
Int. Inc. on Foreign Banks N/A N/A N/A N/A N/A N/A N/A 20%

DIVIDENDS
From Domestic Corporation
- 01/01/1998 earnings 6% 6% 6%
20% 25% EXEMPT EXEMPT 15%*
- 01/01/1999 earnings 8% 8% 8%
- 01/01/2000 earnings 10% 10% 10%
From Foreign Corporation
RIT RIT RIT RIT RIT RIT RIT RIT
(resident and non-resident)

ROYALTIES
In general 20% 20% 20% 20% 25% 20% 20% 25%
Books, Literary, Music 10% 10% 10% 10% 25% 20% 20% 25%

PRIZES
10,000 and below RIT RIT RIT RIT RIT
N/A
More than 10,000 20% 20% 20% 20% 25%

WINNINGS
In general 20% 20% 20% 20% 25% RIT RIT 25%
PCSO – 10,000 below EXEMPT EXEMPT EXEMPT EXEMPT 25% EXEMPT EXEMPT 25%
PCSO – More than 10,000 20% 20% 20% 20% 25% 20% 20% 25%

INFORMER’S TAX REWARD 10% 10% 10% 10% 10% 10% 10% 10%

*Subject to condition that the country where the foreign corporation is domiciled shall allow a credit against the tax due from
the non-resident corporation taxes deemed to have been paid in the Philippines equivalent to 10 [Statutory formula: Philippine
Regular Corporate – Income Tax Dividend Tax (15%)].

**If a corporation derives prizes or winnings, regular income taxation (the general rule) would apply since there is no similar
provision imposing final tax.

2
Note on Prizes:
The following prizes are exempt:
1. The recipient is selected without active effort on his part to join the contest such as Nobel Prize, Most Outstanding
Citizen Award and similar.
2. Prizes earned with active participation are generally subject to tax except in cases of sports competitions that are
sanctioned by a national sport organization (such as Philippine Olympic Committee).

A cash reward may be given to any person instrumental in the

a. Discovery of violations of the National Internal Revenue Code; or
b. Discovery and seizure of smuggled goods

Requisites:
1. Definite sworn information which is not yet in the possession of the
2. The same lead to the discovery of fraud upon internal revenue laws or provisions
3. Enforcement results in recovery of revenues, surcharges and fees and or conviction of the guilty party or imposition
of any fine or penalty
4. The informer is other than a/an:
a. Internal Revenue officials or employees
b. Other public officials or employees
c. Relatives of those in a. and b. within the 6 degree of consanguinity

Cash Reward - Whichever is the lower of the following per case:

1. 10% of revenues, surcharges or fees recovered and or fine or penalty imposed and collected or
2. P1,000,000

3
 TAXATION
TOPIC 5: CAPITAL GAINS TAX

TYPES OF ASSETS

ORDINARY ASSETS CAPITAL ASSETS

 Stock in trade of the taxpayer, other property; inventoriable  Not ordinary assets
 Properties held by the taxpayer for sale in OCB  Not subject to VAT
 Properties used in trade or business, subject to depreciation  Example: Investment Properties, Notes Receivable &
 Real properties used in trade or business Investment in Equity or Debt Securities ( for a non-
 Example: Inventories, PPE security dealer taxpayer)

TYPES OF ORDINARY ASSETS TYPES OF CAPITAL ASSETS

 Held for Sale  Personal Non-Business Assets
 Held for Use  Other Business Assets (Financial / Intangible)

CHANGE OF HANDS TO RECEIPT NOT ENGAGED

CHANGE IN CLASSIFICATIONS
IN REAL ESTATE OR TO USE IN BUSINESS
 Transfer between taxpayer  Succession or Donation – Capital
 Employment of assets in business  Dividend – Capital
 Abandonment of asset  Exchange – Ordinary
 Involuntary Transfers – No effect

CAPITAL GAINS SUBJECT TO FINAL TAX

A. Capital gains tax on sale, barter, exchange and other disposition of domestic shares of stock directly to buyer

Requisites:
a. There is a net gain. b. The capital asset sold is a domestic stock. c. the sale is made directly to the buyer

SCOPE NOT COVERED

 Covers all disposition of domestic stocks classified as  SALE OF STOCKS THROUGH PSE (60% of 1 on SP of
capital assets directly to buyer by any taxpayer stocks)
regardless of classification  SALE OF STOCKS BY DEALERS OF SECURITIES

DEADLINE OF CGT RETURN MODE OF CGT PAYMENT

 PER TRANSACTION BASIS – within 30 days (BIR  Lump – sum – upon filing of return
Form 1707)  Installment – 30 days within each receipts of installment
 ANNUAL BASIS (BIR FORM 1707 A)
1. Individuals – on or before April 15 following year
2. Corporations – on or before 15th day of the 4th
month following the close taxable year

TAX RATES DOCUMENTARY STAMP TAX ON THE SALE OF STOCKS

 Real Property – 6% x Higher of SP and FMP  PAR VALUE STOCK: 1.5/200 x par value
 DST on Real Property – 15/1000 x Higher of SP and  NO-PAR STOCK: 25% of DST paid on orig. issue of stock
FMV  LIMITATION: Only 1 tax shall be collected on each sale
 Share of Stock (CGT) – 15% Net Capital Gains  DEADLINE: Filed within 10 days after the close of the
 Share of Stock – 6/10 of 1% x Gross Selling Price month

FORMULAS:
NET GAIN TRANSACTIONAL CAPITAL GAINS TAX
Selling Price XX Capital Gain XX
Less: Multiply by: Capital Gains Tax Rate XX
Basis of Stocks Dispensed XX Capital Gains Tax Due XX
Selling Expenses XX
Documentary Stamp Tax on the Sale XX
Net Capital Gain (Loss) XX
FORMULA:
INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX Selling Price XX
When domestic stock is sold in installments, the capital tax may also be paid Less: Cost of Shares Sold XX
in installment if the: Net Capital Gain XX
a. Selling Price exceeds 1,000 Multiply by: XX
b. Initial Payment does not exceed 25% of the selling price. Net Capital Gains Tax Due XX

SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS MEASUREMENT

1. WASH SALES
 Occur within 30 days before and after disposal
 Immediate reacquisition of shares makes the loss theoretical or feigned loss
 Securities must be identical
 FIFO basis

1
 2. TAX FREE CHARGES
INITIAL RECOGNITION SHARE FOR SHARE SWAP (MERGER/CONSOLIDATION)
 Investing Transaction  Return of capital (Excess of Other Assets Received)
 No recognition of Gain or Loss  No realization of gain
 Not taxable by CGT  Recognize implied gain

B. Sale, exchange or other disposition of real property in the Philippines classified as capital assets

REQUISITES
a. The real property is located in the Philippines c. The taxpayer is an individual or a domestic corporation
b. The property is classified as capital asset d. The tax payer is other than foreign corporation

Tax Rate and Tax Basis: 6% x (the higher of Gross Selling Price or Fair Market Value)

The fair market value for purpose of the capital gains tax is whichever is HIGHER of:
1. Zonal Value – prescribed by the Commissioner of Internal Revenue
2. Fair Value per Provincial or City Assessor’s Office

GROSS SELLING PRICE EXCESS MORTGAGE ASSUMED

The amount of any money received plus the fair market The excess of the mortgage assumed over the cost of the
value of any property received. Interest on the selling price property is included both in initial payment and selling since it
shall be treated separately as Other Income taxable under is a constructive receipt of income; in other words, it
regular income taxation. represents "extra consideration".

NOTE TO CANDIDATES: The basis of the tax is on the gross selling price or gross fair market value. This treatment presumes
the existence of gain and is applied regardless of the existence of actual gain

SCOPE OF THE 6% CAPITAL GAINS TAX

INDIVIDUAL
LOCATION CORPORATION
CITIZEN ALIEN
OF REAL
Non- NR - Non-
PROPERTY Resident Resident NR - ETB Domestic Resident
Resident NETB Resident
Philippines       Not Applicable
Abroad X X X X X X X X

NOTE TO CANDIDATE: Regular income taxation, being the general rule, applies where the 6% final capital gains tax do not
apply. Under regular taxation, the actual net gain is subject to regular income tax.

How is the capital gains tax paid?

1. The tax is withheld at source - the seller and buyer files a joint capital gains tax return (one return per sale or
foreclosure sale).
2. Installment (one return for each installment payment receive)
The tax is withheld at source in installments when the taxpayer qualifies and opted to be taxed on installments.

EXCEPTION TO THE SCOPE OF THE 6% CGT

1. ALTERNATIVE TAXATION – The actual net gain on the sale of real property may be included under progressive
income taxation.
REQUISITES OPTION TO BE TAXED
 The seller is individual  6% Capital Gains Tax
 The buyer is the government, its political or agencies, or GOCCs  Regular Income Tax

2. TAX EXEMPTION – The sale may be exempted from the payment of capital gains tax provided the following
conditions are met:
1. The seller is an individual citizen or resident alien.
2. The real property sold is his principal residence.
3. Full proceed of the sale is utilized
4. New residence must be acquired within 18 calendar months from the date of sale
5. The BIR is duly notified by the taxpayer of his intention to avail tax exemption within 30 days
6. The CGT is held in escrow
7. The tax exemption shall be availed once every 10 years
8. Buyer of principal residence shall deduct 6%, deposit in cash or manager’s check in an interest-bearing account
with an Authorized Agent Bank under an Escrow Agreement
9. The historical cost shall be carried over the new principal residence built or acquired
The tax on the unutilized portion shall be determines as follows:
𝑈𝑛𝑢𝑡𝑖𝑙𝑖𝑧𝑒𝑑 𝑃𝑜𝑟𝑡𝑖𝑜𝑛
(𝐺𝑆𝑃 𝑜𝑟 𝐹𝑀𝑉 𝑎𝑡 𝑡ℎ𝑒 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑠𝑎𝑙𝑒, 𝑤ℎ𝑖𝑐ℎ𝑒𝑣𝑒𝑟 𝑖𝑠 ℎ𝑖𝑔ℎ𝑒𝑟 𝑥 ) 𝑥 6%
𝐺𝑟𝑜𝑠𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒

Tax Basis of New Principal Residence

Tax Basis – when a property is acquired by purchase, the cost is the TAX BASIS.

2
LESS THAN FULL UTILIZATION OF PROCEEDS:
𝑼𝒕𝒊𝒍𝒊𝒛𝒆𝒅 𝑺𝒆𝒍𝒍𝒊𝒏𝒈
𝑵𝒆𝒘 𝑪𝒐𝒔𝒕 𝑩𝒂𝒔𝒊𝒔 = 𝒙 𝑩𝒂𝒔𝒊𝒔 𝒐𝒇 𝒕𝒉𝒆 𝑂𝑙𝑑 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑅𝑒𝑠𝑖𝑑𝑒𝑛𝑐𝑒
𝑮𝒓𝒐𝒔𝒔 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆
MORE THAN FULL UTILIZATION OF PROCEEDS:
𝑁𝑒𝑤 𝐶𝑜𝑠𝑡 𝐵𝑎𝑠𝑖𝑠 = 𝐵𝑎𝑠𝑖𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑂𝑙𝑑 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑅𝑒𝑠𝑖𝑑𝑒𝑛𝑐𝑒 + 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑖𝑛 𝐸𝑥𝑐𝑒𝑠𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠

Possible Gross Income – Personal Expenditures + Change in Networth*

*The change in Net worth is computed as:

Asset, End - Liabilities, End = Networth, end
Less: Assets, Beginning - Liabilities, Beginning = Networth, beginning
Change in Networth

Documentary Stamp Tax

AMOUNT DEADLINE
P15 – if SP after allowance for encumbrance does not exceed P1,000  Within 5 days after the close of the month when
P15 – for each P1,000 or fractional excess above P1,000 of such SP the taxable document was made, signed, issued,
accepted, or transferred

EXEMPT ENTITIES FROM CGT

1. Dealer in securities
2. Exempt under special laws
3. Exchange of real property solely for shares resulting in corporate control
4. GOCC selling real property
5. Disposition in gratuitous
6. Pursuant to CARP Law
7. Requirements above have been met (principal residence)

FORMULAS:
SELLING PRICE IMPLIED GAIN RETURN OF CAPITAL
FV Received XX Selling Price XX Other Asset Received XX
Other Assets Received XX Total Cost (XX) Implied Gain (XX)
Selling Price XX Implied Gain XX Return of Capital XX

NET COST OR TAX BASIS SELLING PRICE

Cost (Old) XX Fair Market Value of property received XX
Other Assets Given XX Cash received XX
Total Cost XX Receivables XX
Return of Capital XX Mortgaged assumed by the buyer XX
Net Cost / Tax Basis XX Selling Price XX

CONTRACT PRICE INITIAL PAYMENT

Selling Price XX Downpayment XX
Mortgage assumed by the buyer (XX) Collection in year of sale XX
Balance XX Excess of mortgage over cost XX
Excess mortgage over cost XX Initial Payment XX
Contract Price XX

INSTALLMENT CGT
𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛
𝑇𝑜𝑡𝑎𝑙 𝐶𝐺𝑇 𝑥
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒

3
 TAXATION
TOPIC 6: REGULAR INCOME TAX – GROSS INCOME

SCOPE NATURE
 All active income  General and a residual tax
 All other passive income not subjected/exempted to Final  Imposed on net income
Tax or Capital Gains Tax  Self-assessed tax by the taxpayer
 Employs creditable withholding system

Gross Income XX GROSS INCOME includes all income other than:

Less: Deductions (XX) 1. Exclusions in gross income
Taxable Income XX 2. Income exempted under special laws, treaties, or the Constitution
3. Income subjected to or exempted to final tax or capital gains tax

GROSS INCOME TAXATION NET INCOME TAXATION

Based on gross income, doesn’t allow deductions but allows Certain deductions are allowed and subtracted from
exclusions. Applicable to PASSIVE INCOME aggregate of income not subject to final tax. Tax computed
based on resulting net income.

EXCLUSION FIT – Managerial and Supervisory

Gross Income XX Fringe Benefits
RIT – Rank and File
Less: Deductions (XX)
Taxable Income XX INCLUSION Dealings in Properties CGT – Capital gains on stock and real property
RIT – other gains in dealings in properties

CLASSSIFICATION OF INDIVIDUAL TAXPAYERS

 Pure compensation income earner INDIVIDUAL CORPORATE
 Pure business or professional income earner TAXPAYERS TAXPAYERS
 Mixed income earner Quarterly Form 1701Q Form 1702Q
Returns Due: 45 days EOQ Due: 60 days EOQ
DETERMINATION OF INDIVIDUAL TAXABLE INCOME Form Form 1702RT/
 Classification Rule Annual 1700/1701/170A 1702EX/ 1702 MX
a. Compensation Income – income under employer- Returns Due: April 15, next Due: 15th day of 4th
employee relationship year month end of year
b. Business Income – business or profession (45 days EOQ (May 15, Aug. 15, Nov. 15, Annual)
c. Others – added to business income, if no business 1701 – Mixed Income Earners
added to compensation income 1701A – Pure business engaged in business/OSD/ 8%
 Globalization Rule 1702RT (Reg. Tax) – 30%
a. Deductions are against income from business only 1702EX – 0%
b. Negative business income is not deductible against 1702MX – Combination
1702Q – 60 days EOQ
compensation income

GROSS Mandatory Deductions TAXABLE COMPENSATION

COMPENSATION Exempt Benefits INCOME
ALL GROSS
INCOME RIT
BUSINESS/ NET INCOME
Deductions
PROFESSION
TAXABLE INCOME

TYPES OF REGULAR TAX INCOME

1. Progressive Income Tax

TAX RATES FOR YEAR 2018 TO 2022 TAX RATES FOR THE YEAR 2023 ONWARDS
0 0% 0 0%
200,000 – 400,000 20% in excess over 250K 200,000 – 400,000 15% in excess over 250K
400,000 – 800,000 30,000 + 25% in excess over 400K 400,000 – 800,000 22,500 + 20% in excess over 400K
800,000 – 2,000,000 130,000 + 30% in excess over 800K 800,000 – 2,000,000 102,500 + 25% in excess over 800K
2,000,000 – 8,000,000 490,000 + 32% in excess over 2M 2,000,000 – 8,000,000 402,500 + 30% in excess over 2M
8,000,000 – 2,410,000 + 35% in excess over 8M 8,000,000 – 2,202,500 + 35% in excess over 8M

2. Corporate Income Tax – 25% on taxable income effective July 1, 2020 (As amended by Sec. 6 of CREATE LAW)

INCLUSIONS FROM GROSS INCOME

1. Compensation for services 7. Dividends

2. Gross income (trade/business or exercise of profession) 8. Annuities
3. Gains derived from dealings in property 9. Prized and Winnings
4. Interest 10. Pensions
5. Rents 11. Partner’s distributive share from Net Income of the GPP
6. Royalties 12. Joint Venture

1
 EXCLUSION FROM GROSS INCOME

1. Proceed of a Life Insurance

 Received whether in lump-sum or
 If the proceeds are retained by the insurer under agreement to pay interest, the interest is included in gross
income.
2. Amount received by the insured as a return of premium - return of capital
3. Gifts, Bequests, and Devises or Descent – In case of transfer dividend interest, included in gross income
4. Compensation for injuries and sickness
5. Income exempt under treaty – Any treaty binding upon the government of the Philippines
6. Retirement Benefits, Pensions, Gratuities, etc

For employers with retirement plans: Retirement For employers without retirement basis:
benefit under RA 4917 Retirement Benefit under RA 7641
1. Employer maintains a reasonable private benefit plan 1. Retiring employee at least 60 years old
2. Retiring/employee has been in the services of the same 2. Must serve the company for at least 5 years
employer for at least 10 years
3. Retiring employee is at least 50 years old
4. First time availment of the exemption

Reasonable private benefit plan

A pension, gratuity, stock bonus/profit sharing plan maintain by the employer for the benefit of its employees
covered, wherein contributions are made by employer, employees, or both.

7. Separation or Termination Death

Sickness
DUE TO EMPLOYEE TAXABLE Retention
Lay-off
CONTROL Redundancy
BEYOND EMPLOYEE CONTROL EXEMPT Closure of business
Force Resignation

8. Retirement Gratuities, Social Security Benefits and Other Similar Benefits from Foreign Government
Agencies and Other Institutions – coming from abroad (NOT TAXABLE)
9. United States Veterans Administrations – administered benefits
10. SSS Benefits under RA 8282 received or enjoyed
11. GSIS Benefits under RA 8291 including retirement gratuity received by the government officials and employees
12. Investment Income in the Philippines in loans, stocks, bonds, or other domestic securities, or form interest
on deposits in banks in the Philippines by:
 Foreign government
 Financing institutions
 International/regional institutions
13. Income of the government and its political subdivisions
 Any public utility or exercise of essential government function
14. Prizes and Awards in recognition of religious, charitable, scientific, educational, artistic, literary, or civic
achievements
 Recipient was selected without any action on his part; and recipient is not required to render future services
15. Prizes and Awards in Sports Competitions granted to athletes

Accredited  Prizes are EXEMPT

Not Accredited  Taxable

16. 13th Month Pay and Other Benefits – not exceeding to 90,000
17. Contributions for GSIS, SSS, Medicare, Pag-ibig, and Union Dues – deducted from relevant income
18. Gains from Sale of Bonds, debentures or other certificate of indebtedness with a maturity of more than 5
years
19. Gains realized from redemption of shares in mutual fund by the investor
20. Certain benefits of minimum wager earners (HHON) – Holiday, Hazard, Overtime, Nightshift Differential
21. Income exempt under special laws or subject to special laws rules
 Income of BMBE
 Income on sale of gold to BSP
 Income of BOI-registered entities under ITH

SOURCES OF GROSS INCOME

A. Compensation for services – but not limited to fees, salaries, wages, commission and similar items
 If received in promissory note – the taxable portion is the fair value of the note
 Fringe benefits are not direct item of compensation

B. Trade, Business or Exercise of a Profession – except self-employed and a professionals opting to the 8%
commuted tax under TRAIN law

C. Gains derived from dealings in property

2
 D. Interest – interest income under land reform earned by landowner which the tenant-purchaser pays; and imputed
interest
E. Rents

Advance Deposit – TAXABLE Security Deposit – NOT INCOME

INCOME FROM LEASEHOLD

a. Outright Method – FV of the property will remain and be turn-over to the lessor upon termination of the
lease
b. Spread-out Method – recognize the book value of the property at the termination of the lease as income
over the period of the related lease

F. Royalties
G. Dividends – subject to regular income tax when it’s declared by foreign corporation
This is exempt if the receipt of dividends by a domestic corporation qualifies under conditional exemption:
 Recipient domestic corporation owns at least 20% voting stocks of the foreign corporation
 Stock investment in the foreign corporation is head at least 2 years
 Dividends is reinvested in the Philippines before the end of the following year

H. Annuities
I. Prizes and winnings
J. Pensions
K. Partner’s distributable share in the net income of the general professional partnership and exempt joint
venture

NOT TAXABLE  Joint Venture on Construction and Oil Exploration

OTHER SOURCES OF GROSS INCOME:

A. Farming
1. Livestock and farm products raised and sold – SELLING PRICE of the livestock is the GROSS INCOME
2. Livestock and farm purchased and sold – only the accounting gross income is included in the gross income
Taxation Rules:
1. May follow accrual or cash basis
2. Expenses in livestock are deductions from the computed gross income
3. Proceeds of crop insurance/livestock insurance constitute gross income

B. Tax Benefits – expenses prior accounting period

1. Bad Debt Recovery – GR: The recovery of bad debt previously written off constitute receipt of taxable income
2. Tax Refund – GR: Refund of taxes that entered the determination of taxable income should be reverted back
to gross income.

Refunds of taxes will not enter determination of taxable income:

a. Estate or Donor’s Tax d. PH income tax, except fringe benefits
b. Stock Transaction Tax e. Special assessment
c. Income Tax paid incurred to a foreign country

3. Unamortized Cost of Property abandoned and written off but was subsequently re-entered into use
GR: Cost previously expensed should be reverted back into gross income in the year extraction operations is
resumed.

Requisites:
1. Expense is claimed as deduction against gross income in previous years
2. Expense resulted in tax benefits

C. Cancellation of indebtedness
1. Consideration service – treated as a compensation income
2. With no consideration – not an income but a gift taxable
3. By a corporation in favor of a shareholder – declaration of dividend subject to final tax
4. As a capital transaction – treated as dividends and subject to dividend taxation rules

D. Damage recovery
1. Compensation Damages – return of capital, NOT TAXABLE
2. Recovered Damages – TAXABLE since they are recoveries of lost profit

SPECIAL REPORTING CONSIDERATIONS

1. Accounting Methods
2. Situs of Income
3. Effect of VAT
4. Creditable Withholding Tax
5. CIR’s Power to Redistribute Income and Expenses
6. The Classification and Globalization Rule

3
 TAXATION
TOPIC 6.1: COMPENSATION INCOME

TAX TABLE
Gross Compensation Income XX Taxable/exempt (not subject to FIT
COMPENSATION
Less: Non-taxable compensation
GROSS Mandatory Deductions XX SSS, GSIS, HDMF,
INCOME Exempt Benefits XX PHILHEALTH, UNION DUES

BUSINESS/PROFESSION Taxable Compensation Income XX

SERVICE

EMPLOYER – EMPLOYEE VS. CONTRACT FOR

RELATIONSHIP PROVISION OF SERVICES

INCOME TAX BUSINESS TAX

ONLY EMPLOYEE BENEFITS BUSINESS INCOME
AND INCOME TAX

COMPENSATION FRINGE BENEFITS

- Remuneration/Pay - Incentive
- Committed - Discretionary
- Performance Based - Given to few/
- Given to all selected employees

FEATURES OF EMPLOYER – EMPLOYEE RELATIONSHIP (FOUR – FOLD TEST)

1. Selection and engagement of employees – screening process in recruitment
2. Payment of wages – fix and controls the salaries and wages of the employees
3. Power of dismissal – employer has the power to retrench or terminate employees
4. Power of control – an authority to direct a performance of duty

EMPLOYEE BENEFITS
COMPENSATION FRINGE BENEFITS
Regular Income Tax Final Tax
Regular and Supplementary Additional Benefits
Subject to Withholding Tax Grossed – up Tax
Tax to the Employee Tax to the Employee
Remitted monthly Remitted quarterly

COMPOSITION OF COMPENSATION INCOME

SUPPLEMENTAL COMPENSATION INCOME

REGULAR COMPENSATION INCOME - Variable
- Fixed benefits everyday - EXCESS 13th month pay and other benefits above 90,000
- 100% taxable
- Basic Pay EXAMPLE OF SUPPLEMENTAL COMPENSATION INCOME
- Fixed Allowance (COLA, Fixed housing, 1. Overtime pay Fees, including director's fees
RATA, etc. 2. Commission Emoluments and honoraria
3. Hazard pay Taxable retirement/separation pay
4. Holiday pay Profit sharing and taxable bonuses
5. Night shift differential
6. Value of living quarters/meals and stock options
7. Emoluments and honoraria
8. Taxable retirement/separation pay
9. Profit sharing and taxable bonuses

EXEMPT BENEFITS EARNERS OF MINIMUM WAGE

1. Basic minimum wage Overtime pay 4. Overtime Pay

2. Holiday pay Night shift differential pay 5. Night Shift Differential Pay
3. Hazard pay

1
 NON-TAXES COMPENSATION

A. MANDATORY DEDUCTIONS – SSS, GSIS, PHILHEALTH, HDMF, UNION DUES

B. EXEMPT BENEFITS
1. Exempt retirement benefits 6. Fringe benefits subject to fringe benefits tax
7. Employee benefits exempt under treaty or international
2. Exempt separation benefits
agreements
8. Employee benefits required by the nature of, or necessary to,
3. De minimis benefits - within limits the trade, business or conduct of profession or business of the
employer
4. Mandatory contributions to SSS, PhilHealth, HDMF 9. Employee benefits for the convenience or advantage of the
and union dues employer
5. Exempt benefits of minimum wage earners

DE MINIMIS BENEFITS – small value and are offered or furnished merely as a means promoting goodwill, contentment
efficiency of his employees.

1. Monetized unused vacation credits of private employees – exceeding 10 days during the year leave
2. Monetized unused vacation and sick leave credits paid to government officials and employees
PRIVATE EMPLOYEES PUBLIC EMPLOYEES
VACATION LEAVE 10 days (exempt) ALL – EXEMPT
SICK LEAVE Taxable ALL – EXEMPT

3. Medical cash allowance to dependents of employees – not exceeding P1,500 per employee per semester, or P250 per
month
4. Rice subsidy – P1,500 or 1 sack of 50-kg rice per month amounting to not more than P2,000
5. Uniform and clothing allowance – not exceeding P6,000 per annum
6. Actual Medical Assistance – not exceeding P10,000 per annum
7. Laundry allowance – not exceeding P300 per month
8. Employee achievement award – in the form of tangible property other than cash or gift certificates, with an annual
monetary value not exceeding P10,000
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 or graveyard shift not exceeding 25% of the basic minimum wage
a per region basis
11. Productivity incentive bonus and benefits under CBA amounting to P10,000

NON-COMPENSATION INCOME ITEMS

NOT TAXABLE TAXABLE

1. Remuneration for agricultural labor paid entirely in production of the farm 1. Tips from customers
2. Remuneration for domestic services 2. Remuneration for casual labor not in
3. Damages paid by the employer to employees the course of the employer's trade or
4. Remunerations received as incidents of employment business

SUBSTITUTED FILING OF TAX RETURNS

Criteria for the substituted filing system:

1. Employee receives purely compensation income
2. Employee receives income from a single employer in the Philippines during the taxable year
3. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer
4. Employee’s spouse also complies with all three aforementioned conditions, otherwise receives no income
5. The employer files BIR Form 1604CF (Annual Information Return of Income Taxes Withheld on Compensation and Final
Withholding Taxes)
6. Employee has BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld) or Certificate of Final Tax Withheld At
Source (BIR Form 2306) issued by his employer.

2
 WITHHOLDING TAX TABLE FOR COMPENSATION INCOME

WITHHOLDING TAX ON COMPENSATION – method of collecting the income tax upon the receipt of the income

REVISED WITHHOLDING TAX TABLE

Effective January 1, 2018 to December 31, 2022
DAILY 1 2 3 4 5 6
Compensation ₱685 and ₱685 -
₱1,096 - ₱2,191 ₱2,192 - ₱5,478 ₱5,479 - ₱21,917 ₱21,918 and above
Range below ₱1,095
Prescribed 0.00 +20% ₱82.19 +25% ₱356.16 +30% ₱1,342.47 +32% ₱6,602.74 +35%
0.00
Withholding Tax over ₱685 over ₱1,096 over ₱2,192 over ₱5,479 over ₱21,918
WEEKLY 1 2 3 4 5 6
Compensation ₱4,808 and ₱4,808 - ₱38,462 - ₱153,846 and
₱7,692 - ₱15,384 ₱15,385 - ₱38,461
Range below ₱7,691 ₱153,845 above
Prescribed 0.00 +20% ₱576.92 +25% ₱2,500.00 +30% ₱9,423.08 +32% ₱46,346.15 +35%
0.00
Withholding Tax over ₱4,808 over ₱7,692 over ₱15,385 over ₱38,462 over ₱153,846
SEMI-MONTHLY 1 2 3 4 5 6
Compensation ₱10,417 ₱10,417 - ₱16,667 - ₱83,333 - ₱333,333 and
₱33,333 - ₱83,332
Range and below ₱16,666 ₱33,332 ₱333,332 above
Prescribed 0.00 +20% ₱1,250.00 +25% ₱5,416.67 +30% ₱20,416.67 +32% ₱100,416.67 +35%
0.00
Withholding Tax over ₱10,417 over ₱16,667 over ₱33,333 over ₱83,333 over ₱333,333
MONTHLY 1 2 3 4 5 6
Compensation ₱20,833 ₱20,833 - ₱33,333 - ₱66,667 - ₱166,667 - ₱666,667 and
Range and below ₱33,332 ₱66,666 ₱166,666 ₱666,666 above
Prescribed 0.00 +20% ₱2,500.00 +25% ₱10,833.33 +30% ₱40,833.33 +32% ₱200,833.33 +35%
0.00
Withholding Tax over ₱20,833 over ₱33,333 over ₱66,667 over ₱166,667 over ₱666,667

REVISED WITHHOLDING TAX TABLE

Effective January 1, 2023 and onwards
DAILY 1 2 3 4 5 6
Compensation ₱685 and
₱685 -₱1,095 ₱1,096 - ₱2,191 ₱2,192 - ₱5,478 ₱5,479 - ₱21,917 ₱21,918 and above
Range below
Prescribed 0.00 +15% ₱61.65 +20% ₱280.85 +25% ₱1,102.60 +30% ₱6,034.30 +35%
0.00
Withholding Tax over ₱685 over ₱1,096 over ₱2,192 over ₱5,479 over ₱21,918
WEEKLY 1 2 3 4 5 6
Compensation ₱4,808 and ₱4,808 - ₱15,385 - ₱38,462 - ₱153,846 and
₱7,692 - ₱15,384
Range below ₱7,691 ₱38,461 ₱153,845 above
Prescribed 0.00 +15% ₱432.60 +20% ₱1,971.20 +25% ₱7,740.45 +30% ₱42,355.65 +35%
0.00
Withholding Tax over ₱4,808 over ₱7,692 over ₱15,385 over ₱38,462 over ₱153,846
SEMI-MONTHLY 1 2 3 4 5 6
Compensation ₱10,417 ₱10,417 - ₱16,667 - ₱33,333 - ₱83,333 - ₱333,333 and
Range and below ₱16,666 ₱33,332 ₱83,332 ₱333,332 above
Prescribed 0.00 +15% ₱937.50 +20% ₱4,270.70 +25% ₱16,770.70 +30% ₱91,770.70 +35%
0.00
Withholding Tax over ₱10,417 over ₱16,667 over ₱33,333 over ₱83,333 over ₱333,333
MONTHLY 1 2 3 4 5 6
Compensation ₱20,833 ₱20,833 - ₱33,333 - ₱66,667 - ₱166,667 - ₱666,667 and
Range and below ₱33,332 ₱66,666 ₱166,666 ₱666,666 above
Prescribed 0.00 +15% ₱1,875.00 +20% ₱8,541.80 +25% ₱33,541.80 +30% ₱183,541.80 +35%
0.00
Withholding Tax over ₱20,833 over ₱33,333 over ₱66,667 over ₱166,667 over ₱666,667

SOURCE: https://www.bir.gov.ph/index.php/tax-information/withholding-tax.html

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 TAXATION
TOPIC 6.2: FRINGE BENEFIT TAX

FRINGE BENEFIT TAX – any goods, service, or other benefit furnished or granted in cash or in kind by an employer to an
individual employee.

NATURE OF FRINGE BENEFIT TAX EXEMPT FRINGE BENEFITS

1. Final Tax 1. Mandatory fringe benefits
2. Managerial/Supervisory Employee  SSS, Philhealth, HDMF
3. Paid by employer  Retirement/Hospitalization Plan
4. Grossed-up Tax  Military Housing
5. Quarterly Tax  Group Insurance Premium
2. De minimis benefits
3. Fringe benefits of rank and file employees
4. Those provided under convenience of the employee rule
5. Those that are necessary to the trade/business of the employer

PROCEDURE
According to Revenue Regulations No. 3 Series of 1998
Paid in Cash – Cash paid, EXP. Residential Rental x 50%
1. Determine the Monetary Value Paid in Kind – transfer of title, FV of the property given unless the BV is higher
Furnished – transfer of use, rental value x 50% (tax)

Depreciation Value

Presumptive Useful Life  Movable = 5 years

Immovable = 20 years
Under Revenue Regulations
Movable – Value x 20%
Immovable – Value x 5%
2. 3.
Citizen/Resident Alien – 35%  MV/65% X 35%
2. Grossed-up the Monetary Value
NRA – NETB – 25%  MV/75% X 25%
3. Compute the fringe benefits tax.

CLASSIFICATIONS OF FRINGE BENEFITS TAX

GIVEN TO RANK AND FILE EMPLOYEES

TAXABLE NOT TAXABLE
1. Meals furnished or subsidized by employer 1. Meals, living quarters, de minimis entertainment, medical
2. Rental value services, courtesy discounts on purchases, sack/rice for
3. Premium on life insurance the convenience of the employer or promoting the
4. Fixed or variable transportation contentment, health, efficiency or goodwill of the
5. Performance bonus employee
6. Personnel economic relief allowance (PERA) 2. Reimbursement type traveling representation and other
7. Salaries and allowance during leaves allowance
8. Fees received by an employee 3. Retirement and separation benefits
9. Dismissal payments

GIVEN TO MANAGERIAL OR SUPERVISORY EMPLOYEES

BENEFITS SUBJECT TO FINAL TAX
1. Housing Benefits
Exceptions:
a. Provided to militaries by AFP, Philippine Army, Philippine Navy, Philippine Air Force
b. Adjacent (50 meters) to the perimeters of a business or factory
c. Temporary housing for an employee
2. Interest on loans at less than market rate or at 0% rate – differential interest from 12%
3. Membership fees, dues, and other expenses borne by the employer
4. Expense for foreign business travel
a. 1st class airplane ticket – 30% of the cost of the ticket
b. Lodging cost in hotel – in excess of US $300 per day
c. Traveling expense
i. Business Meeting – supported by official communication from business associates
ii. Business Conventions – supported by invitations
5. Household personnel
a. Salaries of household helper
b. Personal driver
c. Similar expenses as payment for homeowners’ association
6. Expense account – GR: Expenses of the employees that are paid for the employees that are paid for the employer are
taxable fringe benefit
a. Expenses for reimbursement type b. Personal expenses (groceries)
1
 7. Holiday and vacation expense – incurred by the employees and shouldered by the employer
8. Life and Health insurance and other non-life insurance premium or similar amounts in excess of what the law
allows
Exceptions: SSS, GSIS, PHILHEALTH, HDMF, and cost of premium by the employer for group insurance
9. Vehicle of any kind
a. Aircraft or helicopter – treated for business purpose only, hence, not subject for fringe benefit tax
b. Yacht – whether owned and maintained by the employer considered not for business purpose, hence, taxable
fringe benefit
10. Educational assistance granted by employer
a. Employee – taxable as fringe benefit tax
Exceptions:
i. Education or study involved directly connected with employer’s trade/business/profession
ii. Written contract that the employee is under an obligation to employ for a given period of time
mutually agreed upon
b. Dependents of employee

BENEFITS NOT SUBJECT TO FRINGE BENEFIT TAX

1. Fringe benefits which are authorized and exempt from tax under special laws
2. Benefits given to rank and file
3. Benefits given as required by the nature, necessary to the trade, business/profession
4. Benefits given for the convenience
5. Contributions of the employer for the benefit of the employee to retirement
6. De minimis benefits

TAX RATES FOR FRINGE BENEFITS

Type of Employees
Resident or Citizens Non-resident Aliens
Fringe Benefits Tax Rates 35% 25%
Grossed – Up Rates 65% 75%

VALUATION OF TAXABLE FRINGE BENEFITS

1. Granted by money or directly paid by the employer, the value is the amount granter or paid for
2. Furnished by the taxpayer in property and ownership is transferred to the employee, the value of the FB shall be fair
value
3. Furnished by the taxpayer in property without the transfer of ownership, the value of the FB is equal to the
depreciation value of the property
a. Personal Property – depreciable life is 5 years (20%)
b. Real Property – presumptive life for 20 years (5%)
c. Supervisory and managerial employee cannot reasonably be expected to use the property
i. Usage is 50% for business use and 50% for personal use

DEDUCTIBLE AMOUNT OF FRINGE BENEFITS

GENERAL RULE: 𝑫𝒆𝒅𝒖𝒄𝒕𝒊𝒃𝒍𝒆 𝑨𝒎𝒐𝒖𝒏𝒕 = 𝑻𝒂𝒙𝒂𝒃𝒍𝒆 𝑭𝒓𝒊𝒏𝒈𝒆 𝑩𝒆𝒏𝒆𝒇𝒊𝒕𝒔 + 𝑭𝒓𝒊𝒏𝒈𝒆 𝑩𝒆𝒏𝒆𝒇𝒊𝒕𝒔 𝑻𝒂𝒙

EXCEPTION: 𝑫𝒆𝒅𝒖𝒄𝒕𝒊𝒃𝒍𝒆 𝑨𝒎𝒐𝒖𝒏𝒕 = 𝑭𝒓𝒊𝒏𝒈𝒆 𝑩𝒆𝒏𝒆𝒇𝒊𝒕 𝑻𝒂𝒙 𝑷𝒂𝒊𝒅

FILING OF RETURN

The fringe benefit withheld by the employer shall be remitted to BIR within 10 days after the end of each calendar quarter.
For EFPS, 5 days later.

2
 TAXATION
TOPIC 7: DEDUCTIONS FROM GROSS INCOME

DEDUCTIONS FROM GROSS INCOME

 Expenses of doing business or exercising a profession  Personal living expenses
 Period expenditures  Capital expenditures (CapEx)

PRINCIPLES OF DEDUCTIONS
1. LOAN
a. Legal
 Incurred in and for the current taxable period Examples:
 Not a capital expenditure  Bribes
 Pertains to the business or professional of the taxpayer  Kickbacks to gov’t officials
 Not contrary to law, public policy, or morals  Payment to police officers for protection
 Adequately substantiated with receipts or other documents  Revolutionary taxes

b. Ordinary – normal in relation to the business of the taxpayer and the surrounding circumstances
Ordinary – normally incurred by other taxpayers under the same line of business
 May be still be disallowed by the BIR if unnecessary or unreasonable

c. Actual – paid or resulted to an incurrence of an obligation to the taxpayer

Actual – closed and completed transaction

Examples of Non-Deductible Expense under this rule:

1. Decrease in Value of Properties or Investment
a. Securities such as stocks or bonds
b. Value of foreign currencies or foreign currency – denominate receivables
c. Value of machineries, equipment and building brought by obsolescence and impairment
2. Estimated Future Losses
a. Estimated loss on bad debts or uncollectible receivables
b. Estimated loss on lawsuit not yet confirmed by a final judgment
c. Estimated warranty expenses
3. Loss on Properties covered by Insurance or Indemnity Contracts

d. Necessary – reasonableness of amount

2. Matching Principle – only expenses of generating income subject to RIT is deductible

Exempt Income

EXPENSES NON – DEDUCTIBLE

FIT
Gross Income CGT
RIT DEDUCTIBLE

Examples of Non-Deductible Expenses under this rule:

 Expenses on exempt income  Expenses and taxes on income subject to final tax
or CGT
 Expense on income subject to a special tax regime  Foreign business expenses of taxpayers taxable
only to PH income
 Business expenses of taxpayer subject to FIT  Loss of income not yet recognized in gross income

3. Related Party Rule – gains realized between related parties are taxable
Related Party Rule – losses are non-deductible

Members of a Family
 Brothers/Sisters (whether half or full blood)  Grantor and fiduciary of any trust
 Spouse  Fiduciaries of trust with the same grantors
 Lineal ascendants and descendants  Fiduciary of a trust and the beneficiary of such trust

Control – ownership of more than ½ of the voting stocks of a corporation

4. Withholding Rule
o No withholding = NO DEDUCTION

Types Expenses Type BIR FORM Deadline

Withholding Tax on On or before the 10th day of
Compensation Expense 1601 – C
Compensation the month following the
Certain Passive Income and Fringe month in which withholding
Final Withholding Tax 0619 – F
Benefits was made. For EFPS filers,
Other Income payments which are their respective group
Expanded Withholding Tax 0619 – E deadlines apply.
subject to Regular Tax to the recipient

1
 Types of Withholding Taxes
a. Withholding Tax on Compensation – Creditable
b. Final Withholding Tax
c. Expanded Withholding Tax – Creditable
Withholding Tax
1. Sale of Goods 1%
2. Sale of Services (General Rule) 2%
a. Rentals (XPN) 5%
b. Professional Services
Individuals
o Gross ≤ 3,000,000 per year 5%
o Gross > 3,000,000 per year 10%
Corporations
o Gross ≤ 720,000 per year 10%
o Gross > 720,000 per year 15%
General Professional Partnership -

SPECIAL CONSIDERATION WITH DEDUCTIONS

1. Effects of VAT on Deductions
o VAT paid by NON-VAT are part of costs and expenses while VAT paid taxpayers are not.

2. Effects of Accounting Methods

Accrual Taxpayers Cash Basis Taxpayers
Accrued Expenses Deductible Non – Deductible
Prepayments Non – Deductible Non – Deductible

3. Effect of extent of Taxations

Taxpayer
Taxable ONLY in Philippines Taxable GLOBALLY
Philippine Expenses Deductible Deductible
Global Expenses Non – Deductible Deductible

MODES OF CLAIMING DEDUCTION

1. Itemized Deductions
2. Optional Standard Deductions
o Individual – 40% of gross sales/receipts
o Corporation – 40% of gross income

CLASSIFICATION OF ITEMIZED DEDUCTIONS

1. Cost of Goods Sold (COGS) / Cost of Sales (CoS)
o Deducted outright against sales, revenues, receipts or fees of individual taxpayers

2. Regular Allowable Itemized Deductions (RAID)

o Pertain to ALL necessary and ordinary expenses paid or incurred during the taxable year
o Indirect cost (administrative expense, selling expense, finance cost)

3. Special Allowable Itemized Deductions (SAID)

o Additional deductions as provided under the NIRC or special laws
o For the year only
o Categorized into two types:
 Actual Compliance Expense – actual payments or transfer of funds
 Deduction Incentives – not actual expenses, but are merely allowed by law to encourage taxpayers to
support government programs

4. Net Operating Loss Carry Over (NOLCO)

o Excess of expense deduction over gross income during taxable year which is allowed by law to be deducted
against the net income of the following three years.
o Not an expense. It is a special deduction incentive allowed by law.

ALLOCATION OF COMMON DEDUCTIONS

1. Common expenses between a taxable and non-taxable operations or between operations subject to regular tax and
an operation subject to special tax regime must be allocated on the basis of gross income.
2. Expenses of non-traceable income
3. Power of CIR to assign or allocate expenses

EXAMPLES OF NON-DEDUCTIBLE EXPENSES

1. Personal, living, or family expenses
2. Any amount paid out for new buildings or for permanent improvements, any property or estate Any amount expended in restoring property
or in making good the exhaustion thereof for which an allowance is or has been made
3. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade
or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy
4. Losses from sales or exchanges of property directly or indirectly between related parties

2
 TAXATION
TOPIC 7.1: ITEMIZED DEDUCTIONS

ITEMIZED DEDUCTIONS FROM GROSS INCOME

1. Interest Expense 6. Depletion
2. Taxes 7. Charitable and Other Contributions
3. Losses 8. Contributions to Pension and Trusts
4. Bad Debts 9. Research and Development Costs
5. Depreciation 10. Other Ordinary and Necessary T,B, or Prof. Exp.

INTEREST EXPENSE

Requisites:
1. Must be a valid indebtedness
2. Legal liability to pay interest
3. Indebtedness incurred in connection with the taxpayer’s trade, profession or business
4. For interest incurred abroad by taxpayers who are subject to income tax only on income earned within the Philippines,
the indebtedness must be incurred
5. Deductible Amount of Interest Expense
Effectivity % Note:
January 1, 2019 33% - This arbitrage limit does not apply to MSME domestic corporations qualified to the 20%
January 1, 2022 20% corporate income tax.
- This arbitrage always applies to individual taxpayers regardless of the level of income.
Non-deductible Interest
1. Interest paid in advance through discount on indebtedness incurred by an individual taxpayer
2. Interest payments with related parties
3. If the indebtedness to finance petroleum operations
Capitalization of Interest
Interest incurred to acquire property used in trade, business, or profession – ALLOWED as capital expenditure

Special Cases
a. Interest on Preferred Stock – dividends; NOT DEDUCTIBLE to interest
b. Interest on Scrip Dividends – DEDUCTIBLE interest

TAXES

Requisites:
1. Must be paid or accrued within the taxable year
2. Must be incurred in connection with the taxpayer’s trade, profession or business

Non-deductible Taxes Tax Credit for Foreign Income Tax Paid

1. PH income tax, except fringe benefit tax Can be claimed only by those taxable on world income – RC
2. Estate or Donor’s Tax and DC.
3. Special Assessment
4. Income Tax imposed by a foreign country Taxpayer option to claim the foreign income tax EITHER as:
5. Stock Transaction Tax 1. Tax credit OR
6. VAT on business 2. Deduction from income

Limit of Tax Credit

1. 1st Limitation: Per Country Evaluation – whichever is lower of the actual amount of foreign tax paid and the
amount which reflects the ratio with gross income from foreign country
𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑥 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥
𝑇𝑜𝑡𝑎𝑙 𝑊𝑜𝑟𝑙𝑑 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒

2. 2nd Limitation: Total Foreign Country Evaluation – whichever is lower of the aggregate lower values of the per-
country evaluation and the amount which reflects the ratio of the taxable income from all foreign countries
𝑇𝑜𝑡𝑎𝑙 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥
𝑇𝑜𝑡𝑎𝑙 𝑊𝑜𝑟𝑙𝑑 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒

Rules on Income Tax Paid

Taxpayers who are TAXABLE on: Note:
World Income Philippine Income ONLY *Other than the non-deductible
Foreign Taxes Paid* Deductible Qualified** taxes above
**Deductible to the extent they
Foreign Income Tax Paid Deductible/Creditable Non-deductible/Non-creditable
are connected with income from
Philippine Taxes Paid* Deductible Deductible the sources in the PH only.
Philippine Income Tax Paid Non-Deductible Non-deductible

Refund Taxes: The refund of a deductible tax is TAXABLE if it created a tax benefit in the year is deducted.

1
LOSSES
1. Ordinary Losses

Requisites:
1. Must be sustained during the taxable year
2. Not compensated for by insurance or other forms for indemnity
3. Sustained in a close and completed transaction
4. Loss must be that of the taxpayer
5. Loss must be reported to BIR with 45 days from the date loss or discovery
6. Not claimed as a deduction in the estate tax return (for individual taxpayers ONLY)

Deductible Losses Measure of the Loss

1. Loss incurred in trade, profession or business 1. Total Loss – book value of the property
2. Loss due to fire, storm, shipwreck or other casualty 2. Partial Loss – replacement cost of the damaged portion
3. Loss due to theft, robbery, or embezzlement or the book value at the time of loss, whichever is LOWER

Abandonment Losses Special Cases

1. Petroleum Operation – all accumulated exploration and 1. Pending proceeding in which the loss
development expenditures (partially or wholly abandoned of contract can be recovered – DEDUCTION for the
area) shall be allowed as a deduction, provided notice of loss is delayed until recovery becomes
abandonment shall be filed with the Commissioner of Internal impossible
Revenue. 2. Loss of Income – cannot be deducted
2. Producing Wells – the unamortized cost as well as the unless related income has already been
undepreciated costs of equipment directly used shall be allowed as included in gross income.
a deduction in the year such well, equipment or facility is 3. Losses on sale or exchanges of property
abandoned by the contractor with related parties – NOT DEDUCTIBLE

2. Capital Losses – DEDUCTIBLE only to the extent of capital gains

BAD DEBTS
Requisites:
1. Must be valid and subsisting debt to the taxpayer
2. Must be connected with taxpayer’s trade, profession or business
3. Debt is ascertained to be worthless
4. Charged-off within taxable years

Recovery of Bad Debts Non-Deductible Bad Debts

1. Taxpayers under cash basis – TAXABLE but 1. Those incurred under cash basis of reporting gross income
subject to Income Tax Benefit Rule 2. Those sustained in a transaction entered into by related parties
2. Taxpayers under accrual basis – ALWAYS 3. For taxpayers not taxable on world income, those that
TAXABLE represents loss of foreign income.

Special Cases with Bad Debts:

Receivables assigned without recourse – only the difference of amount paid and amount recovered is allowed as deduction.

DEPRECIATION
Requisites: Methods of Depreciation:
1. The property must be used in trade, profession or business 1. Straight line
2. The property must have a limited useful life 2. Declining balance
3. The provision must be charged off during the taxable year 3. Sum of years
4. The provision must be reasonable 4. Other methods prescribed by Secretary of
Finance upon recommendation of CIR.
Special Option with depreciation:
1. For a proprietary or private educational institution only
2. May either choose to:
a. Charged off as capital outlays of depreciable asset in the year of acquisition; or
b. Deduct allowance for depreciation

Petroleum Operation Mining Operations

The taxpayer may choose either declining- balance method or straight line For all properties used in mining operations
method at the option of the contractor. 1. 10 year useful life or less - At
normal rate of depreciation
Useful life of depreciable asset: 2. More than 10 years useful life
1. Used in or related to the production of petroleum - 10 years or shorter depreciated over any number of
2. Not used in or not related to the production of petroleum - 5 years years between 5 and the
under straight line method expected life.

DEPLETION (Cost Depletion)

- Available only for oil and gas wells and mines.
Exploration Expenditure Development Expenditure
Expenditures paid or incurred in ascertaining the existence, Paid or incurred during the development stage of the mine.
location and extent, or quality of any deposit or ore or other The development stage begins when ore or other minerals
minerals before the beginning of the development stage of are shown to exist in commercial quality and quantity and
the mine or deposit. end upon commencement of actual commercial extraction.

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Method to Use: Cost-Depletion Method
Depletion should be provided only up to the extent of capital investment in the mine only.
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 𝑡ℎ𝑒 𝑚𝑖𝑛𝑒
𝑁𝑜. 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑎𝑏𝑙𝑒
𝑈𝑛𝑖𝑡 𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑜𝑓 =
𝑈𝑛𝑖𝑡𝑠 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑎𝑏𝑙𝑒

Oil and Gas Wells or Mines: Treatment of Intangible Exploration and Development Drilling Costs
If intangible development drilling cost are incurred for:
1. Non-producing wells and or mines deductible in the year incurred
2. Producing wells and or mines at the option of the taxpayer, deduction in full in the year paid or incurred, or capitalized
and amortized

Irrevocable Alternative Deduction: Applicable to Mining Operation only

Limit: Shall not exceed 25% of taxable income, without the benefit of any tax incentive under existing laws.

Deductibility of Depreciation or Depletion on Mining Properties:

Taxpayers who are TAXABLE on:
World Income Philippine Income ONLY
Located abroad Deductible Non-deductible
Located in Philippines Deductible Deductible

CHARITABLE AND OTHER CONTRIBUTIONS

Requisites: Note: If the taxpayer is not engaged in
1. The contribution or gift must be actually paid trade, business or profession, the rules on
Donor's taxation applies. Similar gifts are
2. The contribution of property must be measured based on acquisition cost usually exempt under donor's taxation
3. It must be given to an organization specified by law provided that not more than 30% of the
4. Net income of the specified institution donation is used for administrative purposes
5. Must not inure to the benefit of any private stockholder or individual by such done non-profit entity.
6. The person making the contribution must be engaged in trade, business or profession

Classifications of Contributions:
A. Fully Deductible Contributions
1. Donation to the government or political subdivisions including fully owned government and controlled
corporations to be used exclusively in undertaking priority activities in:
1. Education 4. Human settlements
2. Health 5. Culture and Sports
3. Youth and Sport Development 6. Economic Developments

NOTE: Donation to the government that are not in accordance with priority activities are subject to limit.

2. Donation to foreign institution or international organization in compliance with agreement or treaties.

3. Donations to accredited domestic non - government organizations. These includes organizations
exclusively for:
1. Scientific 6. Health
2. Research 7. Social Welfare
3. Educational 8. Cultural
4. Character Building 9. Charitable
5. Youth and Sports Development 10. Any combination of the listed above

Requisites:
a. Must be utilized by the donee institution not later than the 15th day of the third month following the close of the
taxable year
b. Administrative expense must not exceed 30% of the total expenses
c. Upon dissolution, assets must be distributed to another non-profit domestic corporation of to the government
d. If these conditions are not complied with, the donation is subject to limit

B. Contributions Subject to Limits

1. Donations to the Government of the Philippines or political subdivisions exclusively for public purposes
2. Donation to non-government organization or to domestic corporations organized exclusively for the
following purposes:
1. Religious 5. Cultural
2. Charitable 6. Educational
3. Scientific 7. Rehabilitation of Veterans
4. Youth and Sports Development 8. Social Welfare

Limit of Deductions (either fully deductible or subject to limit)

1. 10% for Individual
2. 5% for Corporations

Deductible Contribution Subject to Limit: Whichever is lower of the actual contribution with the limit as set forth

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CONTRIBUTIONS TO PENSION AND TRUSTS
Current Service Cost – computed value of services rendered by a plan employee during the year
Past Service Cost – value of services rendered by employees in the past that partially satisfy vesting conditions

Rules for Pension Expense:

1. Payments to the trust to cover pension liability accruing during the year are FULLY DEDUCTIBLE expense for the
taxable year.
2. Funding of past service cost is amortized over a period of 10 years starting from the year in which the contribution
was made.

RESEARCH AND DEVELOPMENT COSTS

Requisites:
1. Must be paid or incurred during the taxable year
2. Must be connected with the trade, profession or business of the taxpayer
3. Not chargeable to capital accounts (capitalizable expenditure)

Amortization of Capitalizable Research and Development Costs that are not chargeable to a property of a kind that is subject
to depreciation or depletion:
1. The taxpayer should treat the expenditure as a deferred charge
2. Amortized over a period of not less than 60 months starting from the month in which the taxpayer first derived
benefits from such deferred expense

Non-deductible research and development costs

1. Expenditure for the acquisition of improvement of a land (in connection with research projects)
2. Any expenditure for the improvement of property to be used in connection with research and development of a kind
which is subject to depreciation and depletion; and (these items are capitalized then charged off to depreciation)
3. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral, including oil and gas. (exploration costs are non- deductible, only development costs)

OTHER ORDINARY AND NECESSARY TRADE, BUSINESS OR PROFESSIONAL EXPENSES

Requisites:
1. Ordinary and necessary
2. Paid or incurred during the taxable year
3. Directly attributable to the development, operation, management and or conduct of the trade, profession or business
4. Reasonable
5. The amount paid shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld
therefrom has been paid to the BIR
6. Must be supported by official receipts or adequate records

A. COMPENSATION B. TRAVEL EXPENSES

Requisites: Requisites:
1. Personal services must have been actually rendered 1. Must be incurred while away from home
2. The compensation for such services must be reasonable, including 2. In pursuant of a trade, profession or
the grossed-up monetary value of fringe benefit furnished to the business
employee and the applicable final tax remitted to the BIR

C. ENTERTAINMENT, AMUSEMENT OR RECREATION EXPENSES (EAR)

Requisites:
1. Directly related to the furtherance of the conduct of trade, profession or business
2. Not be contrary to law, morals, good customs, public policy or public order
3. Not have been paid directly or indirectly to an official or employee of the Government (local or national, including
government-owned and controlled corporations) or of a foreign government, or to a private individual, corporation,
General Professional Partnership or a similar entity, if it constitute bribe, kickback or other similar payments
4. The official receipts, invoices, bills or statement of accounts should be in the name of the taxpayer claiming the
deduction.

Limit of deductible amount for EAR:

A. Taxpayers deriving income from either sale of properties or sale of services:
Whichever is LOWER of the following and the actual EAR expense
a. Taxpayers engaged in sale of goods or properties - 12 of 1% (or.5%) of net sales
b. Taxpayers engaged in sale of services (profession, lessors) - 1% of net revenue
B. Taxpayers deriving income from both sales of properties and sales of services, the deductible amount shall be
whichever is LOWER between the two tests below: tests below: a

1st Limit Test: The final deductible amounts shall be WHICHEVER IS LOWER of the respective tentative deductible amount
and the respective amounts which the total sales or revenue bears to the total sales and revenue bears to the actual
entertainment, amusement or recreation expenses.

2nd Limit Test: 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠

x Actual Total EAR for Sales and Revenue
𝑇𝑜𝑡𝑎𝑙 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑎𝑛𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
x Actual Total EAR for Sales and Revenue
𝑇𝑜𝑡𝑎𝑙 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑎𝑛𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

4
MAJOR CLASSIFICATION OF ITEMS DEDUCTIONS
1. Cost of sales / cost of services 3. Special Allowable Itemized Deductions (SAID)
2. Ordinary allowable itemized deductions 4. Net Operating Loss Carry Over (NOLCO)

COST OF SERVICES – Covers all direct costs and expenses necessary to provide the service required by customers such as:
a. Salaries and employee benefits of personnel, consultants and specialists directly rendering the service
b. Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of
supplies.

SPECIAL ALLOWABLE DEDUCTIONS

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS
There are two types of special allowable itemized deductions:
1. Special expense under the NIRC and special laws with outflows
2. Deduction incentives under special laws no outflows

SPECIAL EXPENSE DEDUCTION EXPENSE

1. Income distribution of taxable estate and trust 1. Additional compensation expense for SCs and PWDs
to reserve fund and payment trust 2. Cost of facility improvements for PWDs
2. Transfers to reserve fund and payments to 3. Additional training expense on jewelry industry
policies and annuity contracts of insurance 4. Additional contribution expense on Adopt- a-School program
companies 5. Additional deductions on rooming-in and breastfeeding
3. Dividend distribution of REITs program
4. Transfers to reserve funds of cooperatives 6. Additional free legal assistance expense
5. Discounts to senior citizens and PWDs 7. Additional productivity incentive bonus expense
8. Additional apprenticeship expense (CREATE)

Required disclosures:
1. Description of the special deduction
2. Legal basis
3. Amount

NET OPERATING LOSS CARRY OVER

Measurement: Exclude NOLCO prior year and deduction incentives in the current year

Requisites:
1. Taxpayer must not be exempt from income tax during the taxable year the NOL was incurred.
2. There must be no substantial change in ownership of the business enterprise

NOTE:
 NOLCO is deductible over 3 years except taxpayers in the extractive industries such as mining or oil companies
where the carry over period is 5 years.
 For taxpayers under the fiscal year basis, this shall apply for those fiscal years ending on or before June 30, 2021
and June 30, 2022.

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 TAXATION
TOPIC 7.2: OPTIONAL STANDARD DEDUCTIONS

PERCENTAGE OF OPTIONAL STANDARD DEDUCTIONS

 For INDIVIDUALS – 40% of gross receipts or gross sales (cannot claim any deductions)
 For CORPORATIONS – 40% of gross income subject to REGULAR TAX (only deduct cost of
sales/cost of services)

MANDATORY ITEMIZED DEDUCTIONS

1. Taxpayers that are exempt with no taxable income
2. Taxpayers that are subject to special/preferential tax rates
3. Taxpayers subject to mixed tax rates

OSD AND GENERAL PROFESSIONAL PARTNERSHIP

 GPP net income shall be determined in the same manner as a corporation
 GPP OSD is 40% of gross income
 Partners can no longer claim expense against their share from GPP net income