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Taxation One: Outline with Codals
Course Outline
Tax I
Based on Atty. Monteros outline, with integrated notes from Atty. Salvadors review class,
Reyes, some Mamalateo, and the various reviewers in school.
A. In General...........................................................................................................1
B. General Principles...............................................................................................1
C. Income Tax on Individuals..................................................................................2
D. Definitions........................................................................................................17
E. Income Tax ates.............................................................................................1!
". Proprietar# Educational Institutions and $ospitals...........................................1%
G. G&CCs...............................................................................................................2'
$. Passive Income.................................................................................................21
I. (inimum Corporate Income Tax )(CIT*............................................................2+
,. Income Tax on esident "orei-n Corporations..................................................2.
/. Income Tax on 0on1resident "orei-n Corporations...........................................2!
2. Improperl# Accumulated Earnin-s Tax )IAET*..................................................+2
(. Tax1exempt Corporations.................................................................................+.
0. Taxa3le Income................................................................................................+!
P. "rin-e Benefits Tax )"BT4 56ut up4*..................................................................7
7. Deductions........................................................................................................81
. Capital Gains and 2osses )9ale or Exc6an-e of Propert#*.................................7+
9. Determination of Gain or 2oss from 9ale or Transfer of Propert#......................77
T. 9itus of Taxation...............................................................................................!2
:. Accountin- Periods and (et6ods......................................................................!7
;. Estates and Trusts............................................................................................%1
5. eturns and Pa#ment of Taxes.........................................................................%.
5. 5it66oldin- Tax...............................................................................................%%
A. In General
Taxable Income
The essential difference between capital and income is that capital is a fund; and
income is a flow. Capital is wealth, while income is the service of wealth.
ropert! is a tree, income is the fruit. "abor is a tree, income is the fruit. Capital is a
tree, income the fruit.
Income means profits or gains. #$adrigal v %affert!&
Income ma! be defined as the amount of mone! coming to a person or corporation
within a specified time, whether as pa!ment for services, interest or profit from
investment.
o ' mere advance in the value of propert! of a person or a corporation in no
sense constitutes the (income) specified in the law. *uch advance constitutes
and can be treated merel! as an increase in capital. #+isher v Trinidad&
Cash dividends is taxed as income because it has been reali,ed-received, while stoc.
dividends is not taxed as income because it is merel! inchoate as it is a mere
anticipation of income #it becomes income once !ou sell it&.
o One is an actual receipt of profits; the other is a receipt of a representation of
the increased value of the assets of a corporation. #+isher v Trinidad&
When dealing with money or property, the questions you should as are!
o "s this capital or is this income#
o $as it %een reali&ed'received or is it merely inchoate#
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Taxation One: Outline with Codals
B. General Principles
*4C. /2. 5eneral rinciples of Income Taxation in the hilippines. 6 4xcept when otherwise provided in this Code:
#'& ' citi,en of the hilippines residing therein is taxable on all income derived from sources within and without the
hilippines;
#7& ' nonresident citi,en is taxable onl! on income derived from sources within the hilippines;
#C& 'n individual citi,en of the hilippines who is wor.ing and deriving income from abroad as an overseas contract
wor.er is taxable onl! on income derived from sources within the hilippines: rovided, That a seaman who is a
citi,en of the hilippines and who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusivel! in international trade shall be treated as an overseas contract wor.er;
#8& 'n alien individual, whether a resident or not of the hilippines, is taxable onl! on income derived from sources
within the hilippines;
#4& ' domestic corporation is taxable on all income derived from sources within and without the hilippines; and
#+& ' foreign corporation, whether engaged or not in trade or business in the hilippines, is taxable onl! on income
derived from sources within the hilippines.
9ho are taxable on income derived from all sources, whether within or outside the
hilippines: Taxed worldwide;
1. %esident citi,ens.
/. 8omestic corporations.
The other .inds of taxpa!ers are sub<ect to tax onl! on income derived from
hilippine sources.
Taxa3le Income Taxa3le Income
Citi<ens6ip = esidenc# Inside P &utside P
%esident Citi,en =es =es
>on6resident Citi,en =es >o
Overseas Contract 9or.er =es >o
%esident 'lien =es >o
>on6resident 'lien =es >o
8omestic Corp =es =es
+oreign Corp =es >o
C. Income Tax on Individuals
(efinitions
%esident citi,ens and resident aliens
*ection // #+& The term ?resident alien? means an individual whose residence is within the hilippines and who is
not a citi,en thereof.
%esident alien is an individual:
1. 9hose residence is within the hilippines
/. 9ho is not a citi,en
$ere ph!sical or bod! presence is enough. >ot intention to ma.e the countr! one)s
abode. #5arrison v C'&
'n alien actuall! present in the hilippines who is not a mere transient or so<ourner is a
resident of the hilippines for purposes of the income tax. 9hether he is a transient or
not is determined b! his intentions with regard to the length and nature of his sta!.
o ' mere floating intention indefinite as to time, to return to another countr! is not
sufficient to constitute him a transient.
o If he lives in the hilippines and has no definite intention as to his sta!, he is a
resident. One who comes to the hilippines for a definite purpose which in its
nature ma! be promptl! accomplished is a transient.
7ut if his purpose is of such a nature that an extended sta! ma! be
necessar! for its accomplishment, and to that end the alien ma.es his
home temporaril! in the hilippines, he becomes a resident, though it ma!
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Taxation One: Outline with Codals
be his intention at all times to return to his domicile abroad when the
purpose for which he came has been consummated or abandoned. #%% /&
>on6resident citi,ens
*ec // #4&. The term ?nonresident citi,en? means:
#1& ' citi,en of the hilippines who establishes to the satisfaction of the Commissioner the fact of his ph!sical
presence abroad with a definite intention to reside therein.
#/& ' citi,en of the hilippines who leaves the hilippines during the taxable !ear to reside abroad, either as an
immigrant or for emplo!ment on a permanent basis.
#2& ' citi,en of the hilippines who wor.s and derives income from abroad and whose emplo!ment thereat re@uires
him to be ph!sicall! present abroad most of the time during the taxable !ear.
#A& ' citi,en who has been previousl! considered as nonresident citi,en and who arrives in the hilippines at an!
time during the taxable !ear to reside permanentl! in the hilippines shall li.ewise be treated as a nonresident
citi,en for the taxable !ear in which he arrives in the hilippines with respect to his income derived from sources
abroad until the date of his arrival in the hilippines.
#B& The taxpa!er shall submit proof to the Commissioner to show his intention of leaving the hilippines to reside
permanentl! abroad or to return to and reside in the hilippines as the case ma! be for purpose of this *ection.
$eaning of non6resident citi,en:
1. Citi,en who establishes to the satisfaction of the Commissioner the fact of his
ph!sical presence abroad with a definite intention to reside therein
/. Citi,en who leaves the hilippines during the taxable !ear to reside abroad, either
as an immigrant or for emplo!ment on a permanent basis
2. Citi,en who wor.s and derives from abroad and whose emplo!ment thereat
re@uires him to be ph!sicall! present abroad most of the time during the taxable
!ear
A. Citi,en who has been previousl! considered as nonresident citi,en and who
arrives in the hilippines at an! time during the taxable !ear to reside
permanentl! in the hilippines shall li.ewise be treated as a nonresident citi,en
for the taxable !ear in which he arrives in the hilippines with respect to his
income derived from sources abroad until the date of his arrival in the hilippines.
9ho are non6resident citi,ens: #%% 16CD&
1. Immigrant 3 one who leaves the hilippines to reside abroad as an immigrant for
which a foreign visa has been secured
/. ermanent emplo!ee 3 one who leaves the hilippines to reside abroad for
emplo!ment on a more or less permanent basis
2. Contract wor.er 3 one who leaves the hilippines on account of a contract of
emplo!ment which is renewed from time to time under such circumstance as to
re@uire him to be ph!sicall! present abroad most of the time #not less than 1E2
da!s&
>on6resident citi,ens who are exempt from tax with respect to income derived from
sources outside the hilippines shall no longer be re@uired to file information returns
from sources outside the hilippines beginning /001. #%% B6/001&
The phrase Fmost of the timeG shall mean that the said citi,en shall have sta!ed abroad
for at least 1E2 da!s in a taxable !ear.
The same exemption applies to an OC9 but as such wor.er, the time spent abroad is
not material for tax exemption purposes all that is re@uired is for the wor.er)s
emplo!ement contract to pass through and be registered with the O4'. #7I% %uling
226/000&.
>on6resident aliens engaged in business in the hilippines
*ec //. #5& The term ?nonresident alien? means an individual whose residence is not within the hilippines and
who is not a citi,en thereof.
9ho are non6resident aliens:
1. 'n individual whose residence is not within the hilippines
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Taxation One: Outline with Codals
/. >ot a citi,en of the hilippines
o 8etermination is b! his intention with regard to the length and nature of his sta!.
#*ec B, %% /&
"oss of residence b! alien
o 'n alien who has ac@uired residence in the hilippines retains his status until he
abandons the same and actuall! departs from the hilippines.
o ' mere intention to change his residence does not change his status. 'n alien who
has ac@uired a residence is taxable as a resident for the remainder of his sta! in the
hilippines. #*ec. H, %% /&

$inimum wage earner
*ec //. #55& The term (statutor! minimum wage) earner shall refer to rate fixed b! the %egional Tripartite 9age
and roductivit! 7oard, as defined b! the 7ureau of "abor and 4mplo!ment *tatistics #7"4*& of the 8O"4.
#II& The term (minimum wage earner) shall refer to a wor.er in the private sector paid the statutor! minimum
wage; or to an emplo!ee in the public sector with compensation income of not more than the statutor! minimum
wage in the non6agricultural sector where he-she is assigned.
+ixed b! the %egional Tripartite 9age and roductivit! 7oard.
$inimum wage earner:
o rivate sector 3 paid the statutor! minimum wage
o ublic sector 3 not more than the statutor! minimum wage in the non6agricultural
sector where he-she is assigned
8ependent
*ec 2B. #7& +or purposes of this *ubsection, a ?dependent? means a legitimate, illegitimate or legall! adopted child
chiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!6one #/1& !ears of
age, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self6support
because of mental or ph!sical defect.
8ependent is aJ
o "egitimate, illegitimate or legall! adopted child and living with the taxpa!er
o 9ho must be:
>ot more than /1,
Knmarried, and
>ot gainfull! emplo!ed, O%
8ependent, regardless of age, is incapable of self6support because of
mental or ph!sical defect.
To summari,e, individual taxpa!ers are classified into:
1. Citi,ens, who are divided into:
o %esident citi,ens 3 those citi,ens whose residence is within the hilippines; and
o >on6resident citi,ens 3 those citi,ens whose resident is not within the hilippines.
/. 'liens, who are divided into:
o %esident aliens 3 those individuals whose residence is within the hilippines and
are not citi,ens thereof; and
o >on6resident aliens 3 those individuals whose residence is not within the
hilippines but temporaril! in the countr! and are not citi,ens thereof. The! are:
Those engaged in trade or business within the hilippines; and
Those who are not so engaged. #see *ec /26/B&
)inds of income and income ta* of individuals
Tax formula
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Taxation One: Outline with Codals
*4C. /A. Income Tax %ates. 6
#'& %ates of Income Tax on Individual Citi,en and Individual %esident 'lien of the hilippines.
#1& 'n income tax is hereb! imposed:
#a& On the taxable income defined in *ection 21 of this Code, other than income sub<ect to tax under *ubsections
#7&, #C& and #8& of this *ection, derived for each taxable !ear from all sources within and without the hilippines be
ever! individual citi,en of the hilippines residing therein;
#b& On the taxable income defined in *ection 21 of this Code, other than income sub<ect to tax under *ubsections
#7&, #C& and #8& of this *ection, derived for each taxable !ear from all sources within the hilippines b! an
individual citi,en of the hilippines who is residing outside of the hilippines including overseas contract wor.ers
referred to in *ubsection#C& of *ection /2 hereof; and
#c& On the taxable income defined in *ection 21 of this Code, other than income sub<ect to tax under *ubsections
#b&, #C& and #8& of this *ection, derived for each taxable !ear from all sources within the hilippines b! an
individual alien who is a resident of the hilippines.
#/& %ates of Tax on Taxable Income of Individuals. 6 The tax shall be computed in accordance with and at the rates
established in the following schedule: #<ust see chart below, it)s the same thing&
+or married individuals, the husband and wife, sub<ect to the provision of *ection B1 #8& hereof, shall compute
separatel! their individual income tax based on their respective total taxable income: +rovided, that if an! income
cannot be definitel! attributed to or identified as income exclusivel! earned or reali,ed b! either of the spouses, the
same shall be divided e@uall! between the spouses for the purpose of determining their respective taxable income.
?+rovided, That minimum wage earners as defined in *ection // #II& of this Code shall be exempt from the
pa!ment of income tax on their taxable income: +rovided, further, That the holida! pa!, overtime pa!, night shift
differential pa! and ha,ard pa! received b! such minimum wage earners shall li.ewise be exempt from income tax.
>ot over 10,000 BL
Over 10,000 but not over 20,000 B00 + 10L of the excess over
10,000
Over 20,000 but not over C0,000 /,B00 + 1BL of the excess over
20,000
Over C0,000 but not over 1A0,000 E,B00 + /0L of the excess over
C0,000
Over 1A0,000 but not over /B0,000 //,B00 + /BL of the excess over
1A0,000
Over /B0,000 but not over B00,000 B0,000 + 20L of the excess over
/B0,000
Over B00,000 1/B,000 + 2/L of the excess over
B00,000
5ross Income
"ess: 8eductions
Taxable Income
Tax %ate
Tax 8ue
)now the ta* %ase and the ta* rate,
Onl! resident citi,ens and domestic corporations are taxed on income derived from
abroad. 9orldwide taxable;
The tax is imposed upon taxable compensation or emplo!ment income, business income,
and income derived from the practice of professions derived b! citi,ens and resident
aliens.
$arried individuals shall compute separatel! their individual income tax based on their
respective total taxable income.
o If an! income cannot be definitel! attributed to, or identified as income
exclusivel! earned or reali,ed b! either of the spouses, the same shall be divided
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Taxation One: Outline with Codals
e@uall! between them for the purpose of determining their respective taxable
income.
$inimum wage earners are exempt from the pa!ment of income tax on their taxable
income. Iolida! pa!, overtime pa!, night shift differential pa!, and ha,ard pa! received
b! them are li.ewise exempt from income tax.
' non6resident alien individual engaged in trade or business in the hilippines is sub<ect
to the income tax in the same manner as an individual citi,en and a resident alien on
taxable income received from sources within the hilippines.
+or non6resident aliens not so engaged, the tax is
o /BL of the entire or gross income received from sources within the hilippines
and
o 1BL of the gross income received as compensation, salaries, and other
emoluments b! reason of his emplo!ment b!:
regional or area head@uarters and regional operating head@uarters of
multinational corporations;
offshore ban.ing units established b! a foreign corporation in the
hilippines; or
b! foreign petroleum service contractor or subcontractors operating in the
hilippines. #*ec /B #'64&&
-inal income ta* . interests, royalties, awards, dividends, capital gains on sale of shares,
realty
9ec 2.. )B* ate of Tax on Certain Passive Income.
#1& Interests, %o!alties, ri,es, and Other 9innings. 6 ' final tax at the rate of twent! percent #/0L& is hereb!
imposed upon the amount of interest from an! currenc! ban. deposit and !ield or an! other monetar! benefit from
deposit substitutes and from trust funds and similar arrangements; ro!alties, except on boo.s, as well as other
literar! wor.s and musical compositions, which shall be imposed a final tax of ten percent #10L&; pri,es #except
pri,es amounting to Ten thousand pesos #10,000& or less which shall be sub<ect to tax under *ubsection #'& of
*ection /A; and other winnings #except hilippine Charit! *weepsta.es and "otto winnings&, derived from sources
within the hilippines: rovided, however, That interest income received b! an individual taxpa!er #except a
nonresident individual& from a depositor! ban. under the expanded foreign currenc! deposit s!stem shall be
sub<ect to a final income tax at the rate of seven and one6half percent #C 1-/L& of such interest income: rovided,
further, That interest income from long6term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced b! certificates
in such form prescribed b! the 7ang.o *entral ng ilipinas #7*& shall be exempt from the tax imposed under this
*ubsection: rovided, finall!, That should the holder of the certificate pre6terminate the deposit or investment
before the fifth #Bth& !ear, a final tax shall be imposed on the entire income and shall be deducted and withheld b!
the depositor! ban. from the proceeds of the long6term deposit or investment certificate based on the remaining
maturit! thereof:

+our #A& !ears to less than five #B& !ears 6 BL;
Three #2& !ears to less than #A& !ears 6 1/L; and
"ess than three #2& !ears 6 /0L
#/& Cash and-or ropert! 8ividends 6 ' final tax at the following rates shall be imposed upon the cash and-or
propert! dividends actuall! or constructivel! received b! an individual from a domestic corporation or from a <oint
stoc. compan!, insurance or mutual fund companies and regional operating head@uarters of multinational
companies, or on the share of an individual in the distributable net income after tax of a partnership #except a
general professional partnership& of which he is a partner, or on the share of an individual in the net income after
tax of an association, a <oint account, or a <oint venture or consortium taxable as a corporation of which he is a
member or co6venturer:

*ix percent #HL& beginning Manuar! 1, 1DDE;
4ight percent #EL& beginning Manuar! 1, 1DDD; and
Ten percent #10L beginning Manuar! 1, /000.
rovided, however, That the tax on dividends shall appl! onl! on income earned on or after Manuar! 1, 1DDE.
Income forming part of retained earnings as of 8ecember 21, 1DDC shall not, even if declared or distributed on or
after Manuar! 1, 1DDE, be sub<ect to this tax.
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Taxation One: Outline with Codals
#C& Capital 5ains from *ale of *hares of *toc. not Traded in the *toc. 4xchange. 6 The provisions of *ection 2D#7&
notwithstanding, a final tax at the rates prescribed below is hereb! imposed upon the net capital gains reali,ed
during the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc. in a domestic
corporation, except shares sold, or disposed of through the stoc. exchange.
>ot over 100,000JJJJJJJJJJJ........ BL
On an! amount in excess of 100,000JJJJ 10L
#8& Capital 5ains from *ale of %eal ropert!. 6
#1& In 5eneral. 6 The provisions of *ection 2D#7& notwithstanding, a final tax of six percent #HL& based on the
gross selling price or current fair mar.et value as determined in accordance with *ection H#4& of this Code,
whichever is higher, is hereb! imposed upon capital gains presumed to have been reali,ed from the sale, exchange,
or other disposition of real propert! located in the hilippines, classified as capital assets, including pacto de retro
sales and other forms of conditional sales, b! individuals, including estates and trusts: rovided, That the tax
liabilit!, if an!, on gains from sales or other dispositions of real propert! to the government or an! of its political
subdivisions or agencies or to government6owned or controlled corporations shall be determined either under
*ection /A #'& or under this *ubsection, at the option of the taxpa!er.
#/& 4xception. 6 The provisions of paragraph #1& of this *ubsection to the contrar! notwithstanding, capital gains
presumed to have been reali,ed from the sale or disposition of their principal residence b! natural persons, the
proceeds of which is full! utili,ed in ac@uiring or constructing a new principal residence within eighteen #1E&
calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this
*ubsection: rovided, That the historical cost or ad<usted basis of the real propert! sold or disposed shall be
carried over to the new principal residence built or ac@uired: rovided, further, That the Commissioner shall have
been dul! notified b! the taxpa!er within thirt! #20& da!s from the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption herein mentioned: rovided, still further, That the said tax
exemption can onl! be availed of once ever! ten #10& !ears: rovided, finall!, that if there is no full utili,ation of
the proceeds of sale or disposition, the portion of the gain presumed to have been reali,ed from the sale or
disposition shall be sub<ect to capital gains tax. +or this purpose, the gross selling price or fair mar.et value at the
time of sale, whichever is higher, shall be multiplied b! a fraction which the unutili,ed amount bears to the gross
selling price in order to determine the taxable portion and the tax prescribed under paragraph #1& of this
*ubsection shall be imposed thereon.
*ec // #=& The term /deposit su%stitutes/ shall mean an alternative from of obtaining funds from the public #the
term NpublicN means borrowing from twent! #/0& or more individual or corporate lenders at an! one time& other
than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own
account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own
needs or the needs of their agent or dealer. These instruments ma! include, but need not be limited to ban.ersN
acceptances, promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b!
and between the 7ang.o *entral ng ilipinas #7*& and an! authori,ed agent ban., certificates of assignment or
participation and similar instruments with recourse: rovided, however, That debt instruments issued for interban.
call loans with maturit! of not more than five #B& da!s to cover deficienc! in reserves against deposit liabilities,
including those between or among ban.s and @uasi6ban.s, shall not be considered as deposit substitute debt
instruments.
Tax ate on Certain Passive Income on Citi<ens and esident
Aliens
"inal Tax
1. Interest under the expanded foreign currenc! deposit s!stem #see %%
106DE below& 0onresident citi&ens! e*empt
C.BL #vs exempt
for nonresident
aliens engaged in
trade-bi,&
/. %o!alt! from boo.s, literar! wor.s, O musical compositions 10L
2. %o!alt! other than above /0L
A. Interest on an! current ban. deposit, !ield or other monetar! benefits
from deposit substitute, trust fund O similar arrangement
/0L
B. ri,e exceeding 10,000 /0L
H. Other winnings, except hil Charit! *weepsta.es O "otto /0L
C. 8ividend from a domestic corp, or from a <oint stoc. compan!,
insurance or mutual fund compan!, O regional operating head@uarters of
multinational compan! or share in the distributive net income after tax o
a partnership #except a general professional partnership&, <oint stoc. or
<oint venture or consortium taxable as a corporation
10L #vs /0L for
non6resident aliens
engaged in
trade-bi,&
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Taxation One: Outline with Codals
But what a%out dividends from foreign corporations for citi&ens
1not resident aliens2# 9ell, the income here enters into the
computation for *ec /A #a& tax calendar. +or resident aliens, the!
are not taxed since it)s income derived from abroad.
E. Interest on long6term deposit or investment in ban.s #with maturit! of
B !ears or more&
exempt
ri,e 3 the result of an effort #li.e a pri,e in a beaut! contest&
9inning 3 the result of a transaction where the outcome depends upon
chance #li.e betting&
8eposit substitute 3 a means of borrowing mone! from the public #/0 or
more individual or corporate lenders& other than b! wa! of deposit with
ban.s through the issuance of debt instruments #li.e ban.er)s
acceptances, promissor! notes, repurchase agreements, certificates of
assignment or participation&
Tax ate on Interest Income from "orei-n Currenc# Deposit )
1'1%!*
1. Interest income actuall! received b! a resident citi,en or resident alien
from +C8
C.BL final
withholding tax
/. If it was deposited b! an OC9 or seaman or nonresident citi,en 4xempt
2. If it was in a ban. account in the <oint names of an OC9 and his
spouse #who is a resident&
B0L exempt-
B0L final
withholding tax
of C.BL
A. Interest income actuall! received b! a domestic corporation or
resident foreign corporation from +C8
C.BL final
withholding tax
Interest income which is actuall! or constructivel! received b! a resident citi,en of the
hilippines or b! a resident alien individual from a foreign currenc! ban. deposit will be
sub<ect to a final withholding tax of C.BL. The depositor! ban. will withhold and remit
the tax. If a ban. account is <ointl! in the name of a non6resident citi,en, B0L of the
interest income from such ban. deposit will be treated as exempt while the other B0L
will be sub<ect to a final withholding tax of C.BL. The %egulations will appl! on taxable
income derived beginning Manuar! 1, 1DDE pursuant to the provisions of *ection E of %'
EA/A. In case of deposits which were made in 1DDC, onl! that portion of interest which
was actuall! or constructivel! received b! a depositor starting Manuar! 1, 1DDE is
taxable. #%% 106DE&
Tax ate on Capital Gains
1. On sale of shares of stoc. of a domestic corporation 034
listed and 034 traded thru a local stoc. exchange held as
a capital asset,
o Capital gains not over 100,000
o Capital gains in excess of 100,000 #see %% H6/00E
below&
BL of the net capital gains
10L of the net capital gains
/. On sale of real propert! in the hilippines held as a capital
asset #see %% E6DE below& HL of the gross selling
price, or the current mar.et
value at the time of sale,
whichever is higher
Tax ate on Income from 9ale> Barter> Exc6an-e or
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amdg
Taxation One: Outline with Codals
ot6er Disposition of 96ares of 9toc? ) @12''!*
If shares of stoc. are listed and traded through the local
stoc. exchange
P of 1L #or .00BL& of the
gross selling price or gross
value in mone! of the
shares of stoc.
If shares not traded through the local stoc. exchange
o Capital gains not over 100,000
o Capital gains in excess of 100,000
BL of the net capital gains
10L of the net capital gains
9ho are liable:
1. Individual taxpa!er, whether citi,en or alien;
/. Corporate taxpa!er, whether domestic or foreign;
2. Other taxpa!ers not falling under #1& and #/& above, such as estate, trust, trust
funds and pension funds, among others.
9ho are exempt:
1. 8ealers in securities
/. Investors in shares of stoc. in a mutual fund compan!, as defined in *ec // #77&,
and *ection /#s& of these %egulations, in ocnnection with the gains reali,ed b! said
investor upon redemption of said shares of stoc. in a mutual fund compan!l and
2. 'll other persons, whether natural or <uridical, who are specificall! exempt from
national internal revenue taxes under existing investment incentives and other
special laws.
$oA to determine t6e tax 3ase of disposition
of stoc? ) @12''!*
"air (ar?et ;alue
*ales of stoc. listed and traded through the "*4 +$Q is the actual selling price
*ales of stoc. listed but not traded through the
"*4
+$Q is the closing price on the da!
when the shares were sold, transferred,
etc #if no sale was made on that da! in
the "*4, then the closing price on the
da! nearest to the date of sale,
transfer, or exchange of the said
shares&
*ales of stoc. not listed and not traded through
the "*4
+$Q is the boo. value of the shares of
stoc. as shown in the financial
statements dul! certified b! an
independent C' nearest to the date of
sale
"inal Tax ate on 9ales> Exc6an-es> or Transfers or eal
Properties Classified as Capital Assets ) !1%!*
*ale of real propert! in the hilippines HL of the gross selling
price, or the current
mar.et value at the time
of sale, whichever is
higher
If sale was made to the government or to 5OCCs 4ither HL of the gross
selling price-current
mar.et value or under
the normal income tax
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Taxation One: Outline with Codals
rate, taxpa!er)s option
Credita3le 5it66oldin- Tax on 9ales> Exc6an-es or
Transfers of eal Properties classified as &rdinar# Assets
) !1%!*
1. If the seller is ha%itually engaged in the real estate business
o *elling price is less than B00,000
o *elling price is B00,000 to /m
o *elling price is above /m
1.BL
2L
BL of gross selling
price-current mar.et
value, whichever is
higher
/. If the seller is not habituall! engaged in the real estate
business
C.BL of gross selling
price-current mar.et
value, whichever is
higher
2. If the seller is exempt from creditable withholding tax as per
%% /6DE
Exempt
Conditions to 3e exempt from capital -ains tax of @B on t6e sale> exc6an-e> or
disposition of a principal residence ) 1+1%%*
1. The proceeds from the sale, exchange, or disposition of his principal residence must
be full! utili,ed in ac@uiring or construing a new principal residence within 1E
months. There must be proof.
/. This can onl! be availed of O>"= O>C4 ever! 10 !ears
2. The historical cost of his old principal residence shall be carried over to the cost basis
of his new residence
A. If there is no full utili,ation, he shall be liable for the deficienc! capital gains tax of
the utili,ed portion
B. If the principal residence is disposed in exchange for a condo, and if it is used as his
new residence, then he is exempt
H. The HL capital gains tax otherwise due must be deposited in escrow with an
authori,ed agent ban., and can onl! be released when sufficient proof is shown that
the proceeds have been full! utili,ed within 1E months.
9hat is the principal residence an!wa!: # 1.12'''*
o It is the dwelling house, where the husband or wife or unmarried individual
resides; actual occupanc! is not interrupted or abandoned b! temporar! absence
due to travel, studies, or wor. abroad
o If the ownership of the land and the dwelling house belong to different persons,
onl! the dwelling house shall be treated as principal residence
a!ment of capital gains tax on foreclosure of mortgaged propert! # .1%%*
o If the mortgagor exercises his right of redemption within 1 !ear 3 no capital gains
tax because none has been derived and no transfer of propert! was reali,ed
In case of non6redemption, the capital gains will be due based on the bid price of the
highest bidder

ersonal and 'dditional 4xemptions
9EC. +8. Allowance of Personal Exemption for Individual Taxpayer. -
)A* In General. 6 +or purposes of determining the tax provided in *ection /A #'& of this Title, there shall be
allowed a basic personal exemption amounting to B0,000 for each individual taxpa!er.
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Taxation One: Outline with Codals
In the case of married individuals where onl! one of the spouses is deriving gross income, onl! such spouse shall
be allowed the personal exemption.
)B* Additional Exemption for Dependents. 6 There shall be allowed an additional exemption of twent! five
thousand pesos #/B,000& for each dependent not exceeding four #A&.
The additional exemption for dependent shall be claimed b! onl! one of the spouses in the case of married
individuals.
In the case of legall! separated spouses, additional exemptions ma! be claimed onl! b! the spouse who
has custod! of the child or children: rovided, That the total amount of additional exemptions that ma! be claimed
b! both shall not exceed the maximum additional exemptions herein allowed.
+or purposes of this *ubsection, a ?dependent? means a legitimate, illegitimate or legall! adopted child
chiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!6one #/1& !ears of
age, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self6support
because of mental or ph!sical defect. #'mended b! %' DB0A&
Personal and additional exemption for individual taxpa#er
7asic personal exemption for each individual taxpa!er
o If married and onl! one of the spouses is deriving gross income,
onl! such spouse shall be allowed the personal exemption.
B0,000
'dditional exemption for each dependent, not exceeding four #A&
o Claimed b! onl! one spouse in case of married individuals
o If legall! separated, additional exemptions claimed onl! b!
spouse who has custod!; should not exceed maximum
additional exemptions allowed
/B,000 per
dependent
4xemption statutes are not retroactive. #ensacola v CI%&
8iscounts for senior citi,ens is now treated as tax deductions, as per %' D/BC. This
suc.s for the taxpa!er because he doesn)t get the Fpeso for pesoG benefit which he
would have gotten if it were considered a tax credit as before. #$.4. Ioldings Corp v CI%
O CT'&
*enior Citi,ens are
o %esident citi,ens
o 't least H0 !ears old
The! are not exempt from income taxes unless the! are considered
minimum wage earners. #%' DDDA, which also too. out the previous
H0,000 re@uirement&
Change of status
9ec +8. )C* C6an-e of 9tatus. 6 If the taxpa!er marries or should have additional dependent#s& as defined above
during the taxable !ear, the taxpa!er ma! claim the corresponding additional exemption, as the case ma! be, in
full for such !ear.
If the taxpa!er dies during the taxable !ear, his estate ma! still claim the personal and additional
exemptions for himself and his dependent#s& as if he died at the close of such !ear.
If the spouse or an! of the dependents dies or if an! of such dependents marries, becomes twent!6one
#/1& !ears old or becomes gainfull! emplo!ed during the taxable !ear, the taxpa!er ma! still claim the same
exemptions as if the spouse or an! of the dependents died, or as if such dependents married, became twent!6one
#/1& !ears old or became gainfull! emplo!ed at the close of such !ear.
ersonal exemption allowable to nonresident alien individuals
9ec. +8 )D* Personal Exemption AlloAa3le to 0onresident Alien Individual. 6 ' nonresident alien individual
engaged in trade, business or in the exercise of a profession in the hilippines shall be entitled to a personal
exemption in the amount e@ual to the exemptions allowed in the income tax law in the countr! of which he is a
sub<ect 6 or citi,en, to citi,ens of the hilippines not residing in such countr!, not to exceed the amount fixed in this
*ection as exemption for citi,ens or resident of the hilippines: rovided, That said nonresident alien should file a
true and accurate return of the total income received b! him from all sources in the hilippines, as re@uired b! this
Title.
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Taxation One: Outline with Codals
Personal Exemptions alloAa3le to
nonresident alien individuals
If engaged in trade, business or in the exercise of
a profession
4ntitled to a personal exemption in the
amount e@ual to the exemptions
allowed in the income tax law of his
countr! for +ilipinos, but it shouldn)t
exceed the amount fixed here for
exemptions
If not engaged in trade, business or in the exercise
of a profession
>one, because *ec /B #7& states that
he will be taxed upon his entire
income.
8e "eon states that nonresident aliens are not entitled to additional e*emptions for
dependents. #. 12B, +undamentals of Taxation /00D&
Optional *tandard 8eduction
9ec. +. )2* &ptional 9tandard Deduction. 6 In lieu of the deductions allowed under the preceding *ubsections,
an individual sub<ect to tax under *ection /A, other than a nonresident alien, ma! elect a standard deduction in an
amount not exceeding fort! percent #A0L& of his gross sales or gross receipts, as the case ma! be. In the case of
a corporation sub<ect to tax under section /C#'& and /E#'&#1&, it ma! elect a standard deduction in an amount not
exceeding fort! percent #A0L& of it gross income as defined in *ection 2/ of this Code. Knless the taxpa!er
signifies in his return his intention to elect the optional standard deduction, he shall be considered as having
availed himself of the deductions allowed in the preceding *ubsections. *uch election when made in the return
shall be irrevocable for the taxable !ear for which the return is made: rovided, That an individual who is entitled
to and claimed for the optional standard shall not be re@uired to submit with his tax return such financial
statements otherwise re@uired under this Code: rovided, further, That except when the Commissioner otherwise
permits, the said individual shall .eep such records pertaining to his gross sales or gross receipts, or the said
corporation shall .eep such records pertaining to his gross income as defined in *ection 2/ of this Code during the
taxable !ear, as ma! be re@uired b! the rules and regulations promulgated b! the *ecretar! of +inance, upon
recommendation of the Commissioner.
Optional standard deduction is the deduction which an individual other than a non6
resident alien, or a corporation, sub<ect to income tax, ma! elect in an amount not
exceeding A0L of his gross sales or gross receipts, as the case ma! be, or a
corporation, in an amount not exceeding A0L of its gross income, in lie of ta.ing
itemi,ed deductions.
The O*8 ma! be availed of b!:
o ' citi,en, whether resident or non6resident
o %esident alien, and
o Taxable estate and trust.
' non6resident alien cannot claim O*8.
The O*8 allowed to individual taxpa!er shall be a maximum of A0L of gross sales or
gross receipts during the taxable !ear.
o If one uses the accrual basis of accounting for his income and deductions, the
O*8 shall be based on the gross sales during the taxable !ear.
o If one uses the cash basis, the O*8 shall be based on his gross receipts during
the taxable !ear.
o The law is specific that for individual taxpa!ers the basis of the A0L O*8 shall be
gross sales or gross receipts, not gross income, for which reason the Fcost of
salesG and the Fcost of servicesG are not allowed to be deducted for purposes of
determining the basis of the O*8.
o +or other individual taxpa!ers allowed b! law to report their income and
deductions under a different method of accounting, the gross sales or gross
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Taxation One: Outline with Codals
receipts shall be determined in accordance with the said acceptable method of
accounting.
4xample:
o *uppose a retailer of goods, an individual, whose accounting method is under the
accrual basis has a gross sales of 1m with a cost of sales amounting to E00..
the computation of the O*8 shall be determined as follows:
5ross *ales 1,000,000
5ess! 6o7S 88888888888888
7asis of the O*8 1,000,000
* 3S( Rate 1ma*2 .A0
O*8 'mount A00,000
If the taxpa!er opts to use the O*8 in lieu of the itemi,ed deductions allowed
under *ec 2A of the Tax Code, his net taxable income shall be as follows:
5ross *ales 1,000,000
5ess! 6o7S 888888888888
5ross *ales-5ross Inome1,000,000
5ess! 3S( 1ma*2 A00,000
>et Income H00,000
remium pa!ments on health and-or hospitali,ation insurance
9ec. +. )(* Premium Payments on Health andor Hospitali!ation Insurance of an Individual Taxpayer.
8 The amount of premiums not to exceed Two thousand four hundred pesos #/,A00& per famil! or Two hundred
pesos #/00& a month paid during the taxable !ear for health and-or hospitali,ation insurance ta.en b! the
taxpa!er for himself, including his famil!, shall be allowed as a deduction from his gross income: +rovided, That
said famil! has a gross income of not more than Two hundred fift! thousand pesos #/B0,000& for the taxable
!ear: +rovided, finally, That in the case of married taxpa!ers, onl! the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
The taxpa!er is allowed a deduction of /,A00-famil! or /00-month for health and-or
hospitali,ation insurance premiums, provided:
o *aid famil!)s gross income is not more than /B0,000 for the taxable !ear.
If married, onl! the spouse claiming the additional exemption for dependents can avail
of this.
4xclusions and deductions #discussion from 8e "eon)s boo., see also *ec H16HA of %% /&
4xclusions are incomes that are exempt from the tax. The! are not to be included in the
tax return unless information regarding it is specificall! called for.
o 4xamples:
"ife insurance proceeds paid to beneficiaries upon the death of the
insured.
Qalue of the propert! ac@uired b! inheritance or donation, because it is
sub<ect to estate or donor)s tax.
%etirement benefits, pensions, etc, received b! government officials and
emplo!ees from the 5*I* and *** in recognition of their services. *o with
retirement benefits of private firms, under certain conditions.
ri,es and awards made primaril! in recognition of religious, charitable,
scientific, educational, artistic, etc, competitions and tournaments.
Christmas bonus, 12
th
month pa!, productivit! incentives, and other
benefits received up to a max of 20,000.
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amdg
Taxation One: Outline with Codals
5ains from the sale or retirement of bonds or other certificates of
indebtedness with a maturit! of more than B !ears.
8eductions are items or amounts which the law allows to be deducted under certain
conditions from the gross income of a taxpa!er in order to arrive at the taxable income.
7oth reduce actual gross income although exclusions are not included in the income tax
return.
*ome general principals governing deductions include:
o The taxpa!er see.ing a deduction must point to some specific provision of the
statute authori,ing the deduction; and
o Ie must be able to prove that he is entitled to the deduction authori,ed or
allowed.
The! are allowed onl! where there is a clear provision in the statute for the
deduction claimed.
Taxable gross income is affected b! exclusions because the latter are omitted from the
former and are not reported on the income tax return but is not affected b! deductions
because the! are subtracted after gross income is determined and are reported on the
return.
Rinds of deductions:
1. 8eductions from compensation income.
/. 8eductions from business-professional income.
2. 8eductions from corporate income.
A. *pecial deductions
B. 8eductions allowed b! special laws.
Tax on non6resident aliens
>on6resident aliens engaged in business in the hilippines
9EC. 28. Tax on "onresident Alien Individual. 8
)A* "onresident Alien En#a#ed in trade or $usiness %ithin the Philippines. 8
#1& "n 7eneral. 6 ' nonresident alien individual engaged in trade or business in the hilippines shall be sub<ect to
an income tax in the same manner as an individual citi,en and a resident alien individual, on taxable income
received from all sources within the hilippines. ' nonresident alien individual who shall come to the hilippines
and sta! therein for an aggregate period of more than one hundred eight! #1E0& da!s during an! calendar !ear
shall be deemed a Nnonresident alien doing business in the hilippinesN. *ection // #5& of this Code
notwithstanding.
#/& Cash and-or ropert! 8ividends from a 8omestic Corporation or Moint *toc. Compan!, or Insurance or $utual
+und Compan! or %egional Operating Iead@uarters or $ultinational Compan!, or *hare in the 8istributable >et
Income of a artnership #4xcept a 5eneral rofessional artnership&, Moint 'ccount, Moint Qenture Taxable as a
Corporation or 'ssociation., Interests, %o!alties, ri,es, and Other 9innings. 6 Cash and-or propert! dividends from
a domestic corporation, or from a <oint stoc. compan!, or from an insurance or mutual fund compan! or from a
regional operating head@uarters of multinational compan!, or the share of a nonresident alien individual in the
distributable net income after tax of a partnership #except a general professional partnership& of which he is a
partner, or the share of a nonresident alien individual in the net income after tax of an association, a <oint account,
or a <oint venture taxable as a corporation of which he is a member or a co6venturer; interests; ro!alties #in an!
form&; and pri,es #except pri,es amounting to Ten thousand pesos #10,000& or less which shall be sub<ect to tax
under *ubsection #7&#1& of *ection /A& and other winnings #except hilippine Charit! *weepsta.es and "otto
winnings&; shall be sub<ect to an income tax of twent! percent #/0L& on the total amount thereof: +rovided,
however, that ro!alties on boo.s as well as other literar! wor.s, and ro!alties on musical compositions shall be
sub<ect to a final tax of ten percent #10L& on the total amount thereof: +rovided, further, That cinematographic
films and similar wor.s shall be sub<ect to the tax provided under *ection /E of this Code: +rovided, furthermore,
That interest income from long6term deposit or investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts and other investments evidenced b! certificates in
such form prescribed b! the 7ang.o *entral ng ilipinas #7*& shall be exempt from the tax imposed under this
*ubsection: +rovided, finally, that should the holder of the certificate pre6terminate the deposit or investment
before the fifth #B
th
& !ear, a final tax shall be imposed on the entire income and shall be deducted and withheld b!
the depositor! ban. from the proceeds of the long6term deposit or investment certificate based on the remaining
maturit! thereof:
0 +our #A& !ears to less than five #B& !ears 6 BL;
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1A
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amdg
Taxation One: Outline with Codals
0 Three #2& !ears to less than four #A& !ears 6 1/L; and
0 "ess than three #2& !ears 6 /0L.
#2& 6apital 7ains. 6 Capital gains reali,ed from sale, barter or exchange of shares of stoc. in domestic corporations
not traded through the local stoc. exchange, and real properties shall be sub<ect to the tax prescribed under
*ubsections #C& and #8& of *ection /A.
' nonresident alien engaged in trade or business in the hilippines is sub<ect to the
same income tax rate as citi,ens and resident aliens, on taxable income received from
all sources within the hilippines.
' nonresident alien who sta!s in the hilippines for an aggregate period of more than
1E0 da!s shall be deemed as nonresident alien doing business in the hilippines.
Tax ate on Certain Passive Income on 0onresident Aliens
En-a-ed in Trade> Business or Exercisin- a Profession
"inal Tax
1. Interest under the expanded foreign currenc! deposit s!stem exempt
/. %o!alt! from boo.s, literar! wor.s, O musical compositions 10L
2. %o!alt! other than above /0L
A. Interest on an! current ban. deposit, !ield or other monetar! benefits
from deposit substitute, trust fund O similar arrangement
/0L
B. ri,e exceeding 10,000 /0L
H. Other winnings, except hil Charit! *weepsta.es O "otto /0L
C. 8ividend from a domestic corp, or from a <oint stoc. compan!,
insurance or mutual fund compan!, O regional operating head@uarters of
multinational compan! or share in the distributive net income after tax o
a partnership #except a general professional partnership&, <oint stoc. or
<oint venture or consortium taxable as a corporation
9hat about dividends from foreign corps: 4xempt. >onresident
aliens are not taxed worldwide.
/0L #compare
with citi,ens and
resident aliens&
E. 5ross income from cinematographic films O similar wor.s /BL
D. Interest on long6term deposit or investment in ban.s #with maturit! of
B !ears or more&
exempt
Tax ate on Capital Gains )same Ait6 residents> and
nonresident aliens not en-a-ed in 3usiness*
/. On sale of shares of stoc. of a domestic corporation 034
listed and 034 traded thru a local stoc. exchange held as
a capital asset,
o Capital gains not over 100,000
o Capital gains in excess of 100,000
BL of the net capital gains
10L of the net capital gains
/. On sale of real propert! in the hilippines held as a capital
asset HL of the gross selling
price, or the current mar.et
value at the time of sale,
whichever is higher
>on6resident aliens not engaged in business in the hilippines
9ec. 28 )B* "onresident Alien Individual "ot En#a#ed in Trade or $usiness %ithin the Philippines. 8
There shall be levied, collected and paid for each taxable !ear upon the entire income received from all sources
within the hilippines b! ever! nonresident alien individual not engaged in trade or business within the hilippines
as interest, cash and-or propert! dividends, rents, salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income,
and capital gains, a tax e@ual to twent!6five percent #/BL& of such income. Capital gains reali,ed b! a nonresident
alien individual not engaged in trade or business in the hilippines from the sale of shares of stoc. in an! domestic
corporation and real propert! shall be sub<ect to the income tax prescribed under *ubsections #C& and #8& of
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1B
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amdg
Taxation One: Outline with Codals
*ection /A.
>onresident aliens not engaged in business are taxed /BL of their entire income within
the hilippines.
That means the! have no deductions;
Their capital gains are the same with nonresident aliens engaged in business #see table
above;&
*pecial aliens
9ec. 28 )C* Alien Individual Employed &y 'e#ional or Area Head(uarters and 'e#ional )peratin#
Head(uarters of *ultinational +ompanies. 6 There shall be levied, collected and paid for each taxable !ear
upon the gross income received b! ever! alien individual emplo!ed b! regional or area head@uarters and regional
operating head@uarters established in the hilippines b! multinational companies as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area
head@uarters and regional operating head@uarters, a tax e@ual to fifteen percent #1BL& of such gross income:
+rovided, however, That the same tax treatment shall appl! to +ilipinos emplo!ed and occup!ing the same position
as those of aliens emplo!ed b! these multinational companies. +or purposes of this Chapter, the term Nmultinational
compan!N means a foreign firm or entit! engaged in international trade with affiliates or subsidiaries or branch
offices in the 'sia6acific %egion and other foreign mar.ets.
#8& Alien "ndividual 9mployed %y 3ffshore Baning :nits. 6 There shall be levied, collected and paid for each
taxable !ear upon the gross income received b! ever! alien individual emplo!ed b! offshore ban.ing units
established in the hilippines as salaries, wages, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances, from such off6shore ban.ing units, a tax e@ual to fifteen percent #1BL& of such
gross income: +rovided, however, That the same tax treatment shall appl! to +ilipinos emplo!ed and occup!ing the
same positions as those of aliens emplo!ed b! these offshore ban.ing units.
#4& Alien "ndividual 9mployed %y +etroleum Service 6ontractor and Su%contractor. 6 'n 'lien individual who is a
permanent resident of a foreign countr! but who is emplo!ed and assigned in the hilippines b! a foreign service
contractor or b! a foreign service subcontractor engaged in petroleum operations in the hilippines shall be liable to
a tax of fifteen percent #1BL& of the salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, received from such contractor or subcontractor: +rovided,
however, That the same tax treatment shall appl! to a +ilipino emplo!ed and occup!ing the same position as an
alien emplo!ed b! petroleum service contractor and subcontractor.
'n! income earned from all other sources within the hilippines b! the alien emplo!ees referred to under
*ubsections #C&, #8& and #4& hereof shall be sub<ect to the pertinent income tax, as the case ma! be, imposed
under this Code.
9pecial Aliens
1. 4mplo!ed b! regional or area head@uarters O regional
operating head@uarters established in the hilippines b!
multinational;
1BL on gross income
/. 4mplo!ed b! offshore ban.ing units 1BL on gross income
2. ermanent resident of a foreign countr! but who is emplo!ed
and assigned in the hilippines b! a foreign service contractor or
b! a foreign service subcontractor engaged in petroleum
operations in the hilippines
1BL
rovided the same tax shall appl! to +ilipinos emplo!ed and occup!ing the same position
as these aliens.
These appl! onl! to positions of a highly technical or highly managerial nature. #Atty.
Montero2
'll income earned from all other sources within the hilippines b! the special alien
emplo!ees shall be sub<ect to the pertinent income tax imposed b! the Code.
Tips on answering
Thought process in answering problems:
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1H
+
amdg
Taxation One: Outline with Codals
1. Is this income: If not, then it)s not reall! a income tax problem.
/. 9ho)s the taxpa!er: 'nd what)s the source: %efer to *ec /2;
2. 9hat)s the specific rate: *ee sec /A6/B;
+or example, what is the tax rate of on income derived from dividends from foreign
corporations for 1. Citi,ens /. %esident aliens and 2. >onresident aliens engaged in trade or
business:
1. Citi,ens
a. =es, it)s income.
b. The source is outside the hilippines. 're the! liable for sources from outside
the hilippines: =es; Citi,ens are taxed worldwide;
c. 9hat)s the specific tax rate: ImmJ since it)s not in an! of the charts, but
the! still have to be taxed, then the income the! derive from dividends from
foreign corporations will be considered in computing the tax rate based on the
tax calendar of *ec /A#a&
/. %esident aliens
a. =es, it)s income.
b. The source is outside the hilippines. 're the! liable for sources from outside
the hilippines: >o; The! aren)t taxed worldwide.
2. >onresident aliens engaged in trade or business
a. =es, m! dear, it)s income.
b. The source is outside the hilippines. 're the! liable for source from outside
the hilippines: >o; The! aren)t taxed worldwide either.
D. Definitions
*ection //, Tax Code
8efinition of corporations
9ec 22 )B* The term ?corporation? shall include partnerships, no matter how created or organi,ed, <oint6stoc.
companies, <oint accounts #cuentas en participacion&, association, or insurance companies, but does not include
general professional partnerships and a <oint venture or consortium formed for the purpose of underta.ing
construction pro<ects or engaging in petroleum, coal, geothermal and other energ! operations pursuant to an
operating consortium agreement under a service contract with the 5overnment. ?5eneral professional
partnerships? are partnerships formed b! persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in an! trade or business.
Corporations include:
o artnerships, no matter how created or organi,ed
o Moint6stoc. companies
o Moint accounts
o 'ssociations
o Insurance companies
It does not include
o 5eneral professional partnerships;
o Moint venture or consortium formed for the purpose of underta.ing construction
pro<ects, or engaging in petroleum, coal, geothermal and other energ! operations
pursuant to an operating or consortium agreement under a service contract with
the government. #The MQ should >OT be incorporated.&
%emember !our partnership lessons; #'+I*CO and ascual cases&
'll co6owernships are not deemed unregistered partnerships.#Obillos v CI%&
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1C
+
amdg
Taxation One: Outline with Codals
The moment inheritance shares are used as part of the common assets to be used in
ma.ing profits, it is considered part of the taxable income of an unregistered
partnership. #Ona v CI%&
%e@uisites of a MQ:
1. Contribution b! each part!
/. rofits are shared among the parties
2. There is <oint right of mutual control over the sub<ect matter
A. There is a single business transaction rather than a general or continuous transaction
#7I% %uling 21C6D/, in this case, the first agreement of the two parties to construct the
HCB0 7ldg was not taxable because the! had not derived income-profits from it. the
construction of the building was mere return of the capital which the! shelled out.
Iowever, once the two corporations were placed under one sole management to operate
the business affairs of the two, the MQ was taxable separate from the two corporations
comprising it. The distribution b! the MQ to the two constituent corporations was not
taxable because it was considered intra6corporate dividends.&
E. Income Tax ates
9EC. 27. 'ates of Income tax on Domestic +orporations. -
#'& In 5eneral. 6 4xcept as otherwise provided in this Code, an income tax of thirt!6five percent #2BL& is hereb!
imposed upon the taxable income derived during each taxable !ear from all sources within and without the
hilippines b! ever! corporation, as defined in *ection //#7& of this Code and taxable under this Title as a
corporation, organi,ed in, or existing under the laws of the hilippines: rovided, That effective Manuar! 1, /00D,
the rate of income tax shall be thirt! percent #20L&.
In the case of corporations adopting the fiscal6!ear accounting period, the taxable income shall be computed
without regard to the specific date when specific sales, purchases and other transactions occur. Their income and
expenses for the fiscal !ear shall be deemed to have been earned and spent e@uall! for each month of the period.
The corporate income tax rates shall be applied on the amount computed b! multipl!ing the number of months
covered b! the new rates within the fiscal !ear b! the taxable income of the corporation for the period, divided b!
twelve.
rovided, further, That the resident, upon the recommendation of the *ecretar! of +inance, ma! effective Manuar!
1, /000, allow corporations the option to be taxed at fifteen percent #1BL& of gross income as defined herein, after
the following conditions have been satisfied:
#1& ' tax effort ratio of twent! percent #/0L& of 5ross >ational roduct #5>&;
#/& ' ratio of fort! percent #A0L& of income tax collection to total tax revenues;
#2& ' Q'T tax effort of four percent #AL& of 5>; and
#A& ' 0.D percent #0.DL& ratio of the Consolidated ublic *ector +inancial osition #C*+& to 5>.
The option to be taxed based on gross income shall be available onl! to firms whose ratio of cost of sales
to gross sales or receipts from all sources does not exceed fift!6five percent #BBL&.
The election of the gross income tax option b! the corporation shall be irrevocable for three #2&
consecutive taxable !ears during which the corporation is @ualified under the scheme.
+or purposes of this *ection, the term Ngross incomeN derived from business shall be e@uivalent to gross
sales less sales returns, discounts and allowances and cost of goods sold. ?Cost of goods sold? shall include all
business expenses directl! incurred to produce the merchandise to bring them to their present location and use.
+or a trading or merchandising concern, ?cost of goods? sold shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actuall! sold, including
insurance while the goods are in transit.
+or a manufacturing concern, ?cost of goods manufactured and sold? shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the factor! or warehouse.
In the case of taxpa!ers engaged in the sale of service, Ngross incomeN means gross receipts less sales
returns, allowances and discounts.
Tax rate of 8omestic Corporations 20L of taxable income from all sources within and
outside the hilippines, or
/L of gross income if $CIT applies, or
1BL of gross income if the following conditions
are met:
1. tax effort ratio of /0L of 5>
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1E
+
amdg
Taxation One: Outline with Codals
/. ratio of A0L of income tax collection to
total tax revenues
2. Q'T tax effort of AL of 5>; and
A. .DL ratio of the Consolidated ublic *ector
+inancial osition #C*+& to 5> #this last
one has !et to be implemented&
Option to be taxed based on gross income shall be available onl! to firms whose ratio of
cost of sales to gross sales or receipts from all sources does not exceed BBL
4lection of the gross income tax option b! the corporation shall be irrevocable for
2 consecutive taxable !ears
8omestic corporations are sub<ect to an! or some of the following:
Capital gains tax
+inal tax on passive income
>ormal tax
$inimum corporate income tax #$CIT&
5ross income tax #5IT&
Improperl! accumulated earnings tax #I'4T&
Gross Income Computation
5ross *ales
"ess: *ales %eturns
8iscounts
'llowances
Co5* #all business expenses directl! incurred to produce the merchandise and bring
them to their present location or use&
Total 5ross Income
CoG9 for a Tradin- or (erc6andise Concern
Invoice cost of goods sold
Import duties
+reight in transporting the goods to the place where the goods are actuall! sold
Insurance while the goods are in transit
CoG9 for a (anufacturin- Concern
'll costs of production of finished goods such as raw materials, direct labor O manufacturing
overhead
+reight cost
Insurance premiums
Other costs incurred to bring the raw materials to the factor! or warehouse
Gross Income Computation for a 9ervice Concern
5ross *ales
"ess: *ales %eturns
8iscounts
'llowances
Cost of *ervices #all direct costs O expenses necessaril! incurred to provide the
services re@uired b! the customers O clients including:
*alaries O emplo!ee benefits of personnel, consultants O specialists
directl! rendering the service
Cost of facilities directl! utili,ed in providing the service such as
depreciation or rental of e@uipment use O cost of supplies
If it)s a ban., interest expense is included
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1D
+
amdg
Taxation One: Outline with Codals
Total 5ross income of a service concern
". Proprietar# Educational Institutions and $ospitals
#7& roprietar! 4ducational Institutions and Iospitals. 6 roprietar! educational institutions and hospitals which are
nonprofit shall pa! a tax of ten percent #10L& on their taxable income except those covered b! *ubsection #8&
hereof: rovided, that if the gross income from unrelated trade, business or other activit! exceeds fift! percent
#B0L& of the total gross income derived b! such educational institutions or hospitals from all sources, the tax
prescribed in *ubsection #'& hereof shall be imposed on the entire taxable income. +or purposes of this *ubsection,
the term Nunrelated trade, business or other activit!N means an! trade, business or other activit!, the conduct of
which is not substantiall! related to the exercise or performance b! such educational institution or hospital of its
primar! purpose or function. ' ?roprietar! educational institution? is an! private school maintained and
administered b! private individuals or groups with an issued permit to operate from the 8epartment of 4ducation,
Culture and *ports #84C*&, or the Commission on Iigher 4ducation #CI48&, or the Technical 4ducation and *.ills
8evelopment 'uthorit! #T4*8'&, as the case ma! be, in accordance with existing laws and regulations.
roprietar! educational institution is:
o 'n! private school maintained O administered b! private individuals or groups
o 9ith an issued permit to operate from the 84C* or CI48 or T4*8'
Tax rate of proprietar! educational
institutions and hospitals
10L on their taxable income #except for passive
income&, or
20L on their entire taxable income if the gross
income from unrelated trade, business or other
activit! exceeds B0L of the total gross income of
the institution
Knrelated trade, business or other activit! means
o 'n! trade, business or other activit!
o The conduct of which is not su%stantially related to the exercise or performance
b! such its institution of its primar! purpose or function.
+or non6stoc., non6profit educational institutions, all revenues use actuall!, directl! and
exclusivel! for educational purposes are exempt.
o Their exemption refers onl! to revenues derived from assets used actuall!,
directl! and exclusivel! for educational purposes.
o Income from cafeterias, canteens O boo.stores are also exempt if the! are
owned O operated b! the educational institution and are located within the school
premises.
o Iowever, the! shall be sub<ect to internal revenue taxes on income from trade,
business or other activit!, the conduct of which is not related to the exercise or
performance b! such educational institutions of their educational purposes or
functions, i. e. rental pa!ment from their building-premises. # 7@12''+*
+or non6stoc., non6profit corporations who are exempt, the! are still liable for taxes on:
o Income derived from an! of their real properties #rental pa!ment form their
building premises&
o 'n! activit! conducted from profit regardless of disposition thereof
o Interest income from an! ban. deposits or !ield on deposit substitutes #final tax
of /0L&
o If its foreign currenc! deposit, final tax of C.BL #8ep Order 1AD6DB, 1DDB&
o The! shall also be withholding agents for their emplo!ee)s compensation income
sub<ect to withholding tax # 7@12''+*
+or private educational institutions, the! are exempt from Q'T, but the! must be
accredited with either 84C* or CI48.
o Iowever, income derived from trade, business or other activit! is still taxable.
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/0
+
amdg
Taxation One: Outline with Codals
o Their ban. deposits and foreign currenc! deposits are exempt from withholding
taxes but the! must show proof that such income is used to fund proposed
pro<ects for their institution)s improvement.
o The! shall also be the withholding agents for their emplo!ee)s compensation
income sub<ect to withholding tax.
G. G&CCs
9ec. 27 )C* Government-owned or +ontrolled-+orporations, A#encies or Instrumentalities. 6 The
provisions of existing special or general laws to the contrar! notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled b! the 5overnment, except the 5overnment *ervice Insurance *!stem
#5*I*&, the *ocial *ecurit! *!stem #***&, the hilippine Iealth Insurance Corporation #IIC&, and the hilippine
Charit! *weepsta.es Office #C*O&, shall pa! such rate of tax upon their taxable income as are imposed b! this
*ection upon corporations or associations engaged in s similar business, industr!, or activit!.
5OCCs are taxed on the same rate upon their taxable income upon corporations or
associations engaged in similar business, industr!, or activit!.
o 4xempt 5OCCs:
5*I*
***
IIC
C*O
's per %' D22C, '5CO% was deleted from the list of exempt 5OCCs.
$. Passive Income
9ec. 27 )D* 'ates of Tax on +ertain Passive Incomes. -
#1& "nterest from (eposits and ;ield or any other Monetary Benefit from (eposit Su%stitutes and from 4rust -unds
and Similar Arrangements, and Royalties. 6 ' final tax at the rate of twent! percent #/0L& is hereb! imposed upon
the amount of interest on currenc! ban. deposit and !ield or an! other monetar! benefit from deposit substitutes
and from trust funds and similar arrangements received b! domestic corporations, and ro!alties, derived from
sources within the hilippines: +rovided, however, That interest income derived b! a domestic corporation from a
depositor! ban. under the expanded foreign currenc! deposit s!stem shall be sub<ect to a final income tax at the
rate of seven and one6half percent #C 1-/L& of such interest income.
#/& 6apital 7ains from the Sale of Shares of Stoc 0ot 4raded in the Stoc 9*change. 8 ' final tax at the rates
prescribed below shall be imposed on net capital gains reali,ed during the taxable !ear from the sale, exchange or
other disposition of shares of stoc. in a domestic corporation except shares sold or disposed of through the stoc.
exchange:
>ot over 100,000JJJJJJJJJ..... BL
'mount in excess of 100,000JJJJJ.. 10L
#2& 4a* on "ncome (erived under the 9*panded -oreign 6urrency (eposit System. - Income derived b! a
depositor! ban. under the expanded foreign currenc! deposit s!stem from foreign currenc! transactions with
nonresidents, offshore ban.ing units in the hilippines, local commercial ban.s including branches of foreign ban.s
that ma! be authori,ed b! the 7ang.o *entral ng ilipinas #7*& to transact business with foreign currenc! deposit
s!stem shall be exempt from all taxes, except net income from such transactions as ma! be specified b! the
*ecretar! of +inance, upon recommendation b! the $onetar! 7oard to be sub<ect to the regular income tax
pa!able b! ban.s: +rovided, however, That interest income from foreign currenc! loans granted b! such depositor!
ban.s under said expanded s!stem to residents other than offshore ban.ing units in the hilippines or other
depositor! ban.s under the expanded s!stem shall be sub<ect to a final tax at the rate of ten percent #10L&.
'n! income of nonresidents, whether individuals or corporations, from transactions with depositor! ban.s under
the expanded s!stem shall be exempt from income tax
#A& "ntercorporate (ividends. 6 8ividends received b! a domestic corporation from another domestic corporation
shall not be sub<ect to tax.
#B& 6apital 7ains Reali&ed from the Sale, 9*change or (isposition of 5ands and'or Buildings. 8 ' final tax of six
percent #HL& is hereb! imposed on the gain presumed to have been reali,ed on the sale, exchange or disposition
of lands and-or buildings which are not actuall! used in the business of a corporation and are treated as capital
assets, based on the gross selling price of fair mar.et value as determined in accordance with *ection H#4& of this
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/1
+
amdg
Taxation One: Outline with Codals
Code, whichever is higher, of such lands and-or buildings.
Tax ate on Passive Income of Domestic Corporations "inal Tax
1. Interest under the expanded foreign currenc! deposit s!stem C.BL
/. %o!alt! of all t!pes within the hilippines
o %o!alt! from abroad: 4nters the taxable income 20L tax rate
/0L
2. Interest on an! current ban. deposit, !ield or other monetar! benefits
from deposit substitute, trust fund O similar arrangement
/0L
A. 8ividend from domestic corporations #inter6corporate dividend& exempt
Tax ate on Capital Gains )same as individuals*
2. On sale of shares of stoc. of a domestic corporation 034
listed and 034 traded thru a local stoc. exchange held as
a capital asset,
o Capital gains not over 100,000
o Capital gains in excess of 100,000
BL of the net capital gains
10L of the net capital gains
/. On sale of real propert! in the hilippines held as a capital
asset HL of the gross selling
price, or the current mar.et
value at the time of sale,
whichever is higher
Tax ate of BA0/9 on Income Derived under t6e Expanded "CD
9#stem
"inal Tax
1. Income derived b! a depositor! 7'>R from foreign currenc!
transactions with non6residents, O7Ks, etc
exempt
/. Interest income from foreign currenc! loans granted b! a ban. to
residents other than O7Ks
10L
Income of non6residents #individuals or corporations& from transactions with depositor!
ban. under the expanded +C8 s!stem are exempt.
9hat are deposit substitutes:
#=& The term ?deposit substitutes? shall mean an alternative from of obtaining funds from the public #the term
NpublicN means borrowing from twent! #/0& or more individual or corporate lenders at an! one time& other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account,
for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the
needs of their agent or dealer. These instruments ma! include, but need not be limited to ban.ersN acceptances,
promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b! and between
the 7ang.o *entral ng ilipinas #7*& and an! authori,ed agent ban., certificates of assignment or participation
and similar instruments with recourse: rovided, however, That debt instruments issued for interban. call loans
with maturit! of not more than five #B& da!s to cover deficienc! in reserves against deposit liabilities, including
those between or among ban.s and @uasi6ban.s, shall not be considered as deposit substitute debt instruments.
' deposit substitute is a means of borrowing mone! from the public #/0 or more
individual or corporate lenders& other than b! wa! of deposit with ban.s through the
issuance of debt instruments.
*ale of shares
Tax ate on Income from 9ale> Barter> Exc6an-e or
ot6er Disposition of 96ares of 9toc? ) @12''!*
If shares of stoc. are listed and traded through the local
stoc. exchange
P of 1L #or .00BL& of the
gross selling price or gross
value in mone! of the
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//
+
amdg
Taxation One: Outline with Codals
shares of stoc.
If shares not traded through the local stoc. exchange
o Capital gains not over 100,000
o Capital gains in excess of 100,000
BL of the net capital gains
10L of the net capital gains
+C8K
Income of non6residents #individuals or corporations& from transactions with depositor!
ban. under the expanded +C8 s!stem are exempt.
Intercorporate dividends
8ividends received b! a domestic corporation from another domestic corporation shall
not be sub<ect to tax.
o 9h!: "aw assumes that the dividends received will be in<ected to the capital,
which will eventuall! be taxed when the corporation gets income from the use of
the capital.
*ale of realt!
"inal Tax ate on 9ales> Exc6an-es> or Transfers or eal
Properties Classified as Capital Assets ) !1%!*
*ale of real propert! in the hilippines HL of the gross selling
price, or the current
mar.et value at the time
of sale, whichever is
higher
If sale was made to the government or to 5OCCs 4ither HL of the gross
selling price-current
mar.et value or under
the normal income tax
rate, taxpa!er)s option
Credita3le 5it66oldin- Tax on 9ales> Exc6an-es or
Transfers of eal Properties classified as &rdinar# Assets
) !1%!*
1. If the seller is ha%itually engaged in the real estate business
o *elling price is less than B00,000
o *elling price is B00,000 to /m
o *elling price is above /m
1.BL
2L
BL of gross selling
price-current mar.et
value, whichever is
higher
/. If the seller is not habituall! engaged in the real estate
business
C.BL of gross selling
price-current mar.et
value, whichever is
higher
2. If the seller is exempt from creditable withholding tax as per
%% /6DE
Exempt
If the mortgagor exercises his right of redemption within 1 !ear, no capital gains tax.
In case of non6redemption, the capital gains will be due based on the bid price of the
highest bidder. #%% A6DD&
I. (inimum Corporate Income Tax )(CIT*
9ec 27 )E* *inimum +orporate Income Tax on Domestic +orporations. .
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/2
+
amdg
Taxation One: Outline with Codals
#1& "mposition of 4a*. 6 ' minimum corporate income tax of two percent #/L0 of the gross income as of the end of
the taxable !ear, as defined herein, is hereb! imposed on a corporation taxable under this Title, beginning on the
fourth taxable !ear immediatel! following the !ear in which such corporation commenced its business operations,
when the minimum income tax is greater than the tax computed under *ubsection #'& of this *ection for the
taxable !ear.
#/& 6arry -orward of 9*cess Minimum 4a*. 6 'n! excess of the minimum corporate income tax over the normal
income tax as computed under *ubsection #'& of this *ection shall be carried forward and credited against the
normal income tax for the three #2& immediatel! succeeding taxable !ears.
#2& Relief from the Minimum 6orporate "ncome 4a* :nder 6ertain 6onditions. 6 The *ecretar! of +inance is hereb!
authori,ed to suspend the imposition of the minimum corporate income tax on an! corporation which suffers losses
on account of prolonged labor dispute, or because of force ma<eure, or because of legitimate business reverses.
The *ecretar! of +inance is hereb! authori,ed to promulgate, upon recommendation of the Commissioner, the
necessar! rules and regulation that shall define the terms and conditions under which he ma! suspend the
imposition of the minimum corporate income tax in a meritorious case.
#A& 7ross "ncome (efined. 6 +or purposes of appl!ing the minimum corporate income tax provided under
*ubsection #4& hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances
and cost of goods sold. /6ost of goods sold< shall include all business expenses directl! incurred to produce the
merchandise to bring them to their present location and use.
+or a trading or merchandising concern, /cost of goods sold< shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place where the goods are actuall! sold including insurance
while the goods are in transit.
+or a manufacturing concern, cost of /goods manufactured and sold/ shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factor! or warehouse.
In the case of taxpa!ers engaged in the sale of service, Ngross incomeN means gross receipts less sales returns,
allowances, discounts and cost of services. /6ost of services/ shall mean all direct costs and expenses necessaril!
incurred to provide the services re@uired b! the customers and clients including #'& salaries and emplo!ee benefits
of personnel, consultants and specialists directl! rendering the service and #7& cost of facilities directl! utili,ed in
providing the service such as depreciation or rental of e@uipment used and cost of supplies: +rovided, however,
That in the case of ban.s, /cost of services/ shall include interest expense.
7eginning with the fourth !ear of operations, a domestic corporation is taxed b!
whichever is higher:
o >ormal tax of 20L, or
o $inimum corporate income tax of /L
The minimum corporate income tax is /L of gross income #compare with the normal tax
which has taxable income as its tax base&
'n! excess of the $CIT over the normal tax of a !ear shall be carried forward and
credited against the normal tax for the three immediatel! succeeding taxable !ears.
o +or the carr! forward to appl!, the normal tax should be higher than the
minimum corporate income tax.
o Ksuall! follows the first6in, first6out #+I+O& method #'tt!. $ontero&
o *o, !ou usuall! compute both first, then appl! either the $CIT or >ormal Tax,
whichever is higher.
4xample
=ear A =ear B =ear H =ear C
$CIT /00 A00 100 100
>ormal 100 /00 200 /00
Income tax /00 A00 0 /00
4xcess $CIT #100& #100& u%os na yung year = e*cess
#/00&
$CIT is implemented on domestic and resident foreign corporations whenever the! have
,ero or negative taxable income, or when the $CIT is greater than the normal income
tax due. # %1%!*
The following are exempted from the $CIT:
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/A
+
amdg
Taxation One: Outline with Codals
o %esident foreign corporations engaged in business as international carriers #see
below for more discussion&
o %esident foreign corporations engaged in business as offshore ban.ing units
o %esident foreign corporations engaged in business as regional operating
head@uarters
o +irms that are taxed under a special income tax regime #li.e those under 4S' or
other economic ,ones&
,. Income Tax on esident "orei-n Corporations
9ec 2!)A* Tax on 'esident -orei#n +orporations. .
#1& "n 7eneral. 6 4xcept as otherwise provided in this Code, a corporation organi,ed, authori,ed, or existing under
the laws of an! foreign countr!, engaged in trade or business within the hilippines, shall be sub<ect to an income
tax e@uivalent to thirt!6five percent #2BL& of the taxable income derived in the preceding taxable !ear from all
sources within the hilippines: +rovided, That effective Manuar! 1, 1DDE, the rate of income tax shall be thirt!6four
percent #2AL&; effective Manuar! 1, 1DDD, the rate shall be thirt!6three percent #22L&, and effective Manuar! 1,
/000 and thereafter, the rate shall be thirt!6two percent #2/L&.
In the case of corporations adopting the fiscal6!ear accounting period, the taxable income shall be computed
without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses
for the fiscal !ear shall be deemed to have been earned and spent e@uall! for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed b! multipl!ing the number of
months covered b! the new rates within the fiscal !ear b! the taxable income of the corporation for the period,
divided b! twelve.
+rovided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent
#1BL& on gross income under the same conditions, as provided in *ection /C #'&.
#/& Minimum 6orporate "ncome 4a* on Resident -oreign 6orporations. 8 ' minimum corporate income tax of two
percent #/L& of gross income, as prescribed under *ection /C #4& of this Code, shall be imposed, under the same
conditions, on a resident foreign corporation taxable under paragraph #1& of this *ubsection.
' foreign corporation is one which is not domestic #ie organi,ed-incorporated here&. It
ma! be a resident or non6resident corporation.
' resident corporation is a foreign corporation engaged in business in the hilippines.
o ' foreign corporation can engage in business in the hilippines onl! after it had
registered with, and had been allowed b!, the regulator! agencies of the
hilippine government to engage in business in the hilippines.
Tax rate of "orei-n esident
Corporations
20L of taxable income from all sources within the
hilippines, or
/L of gross income if $CIT applies, or
1BL of gross income #again, the 7"4 has yet to
%e implemented2
Tax ate on Passive Income of "orei-n esident Corporations "inal Tax
1. Interest under the expanded foreign currenc! deposit s!stem C.BL
/. %o!alt! of all t!pes within the hilippines
o %o!alt! from abroad: Exempt. #remember, onl! taxed from
sources within the hilippines&
/0L
2. Interest on an! current ban. deposit, !ield or other monetar! benefits
from deposit substitute, trust fund O similar arrangement
/0L
A. 8ividend from domestic corporations #inter6corporate dividend& exempt
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'teneo "aw /01/
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/B
+
amdg
Taxation One: Outline with Codals
Tax ate on Capital Gains
A. On sale of shares of stoc. of a domestic corporation 034
listed and 034 traded thru a local stoc. exchange held as
a capital asset,
o Capital gains not over 100,000
o Capital gains in excess of 100,000
BL of the net capital gains
10L of the net capital gains
/. On sale of real propert! in the hilippines 0o provision for capital
gains for sale of realty.
Atty. Montero says that you
apply it to the normal
corporate ta* of >?@
International Carrier
*ec /E #'&
#2& "nternational 6arrier. 6 'n international carrier doing business in the hilippines shall pa! a tax of two and one6
half percent #/ 1-/L& on its /7ross +hilippine Billings/ as defined hereunder:
#a& "nternational Air 6arrier. 8 /7ross +hilippine Billings/ refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the hilippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of pa!ment of the tic.et or passage
document: +rovided, That tic.ets revalidated, exchanged and-or indorsed to another international airline form part
of the 5ross hilippine 7illings if the passenger boards a plane in a port or point in the hilippines: +rovided,
further, That for a flight which originates from the hilippines, but transshipment of passenger ta.es place at an!
port outside the hilippines on another airline, onl! the ali@uot portion of the cost of the tic.et corresponding to the
leg flown from the hilippines to the point of transshipment shall form part of 5ross hilippine 7illings.
#b& "nternational Shipping. 6 /7ross +hilippine Billings/ means gross revenue whether for passenger, cargo or mail
originating from the hilippines up to final destination, regardless of the place of sale or pa!ments of the passage
or freight documents.
Tax rate for international carriers is /.BL of 5ross hilippine 7illings
5ross hilippine 7illings refers to
o 5ross revenue derived from carriage of persons, excess baggage, cargo and mail
o 3riginating from the +hilippines in a continuous and uninterrupted flight
o "rrespective of the place of sale or issue and the place of pa!ment of the tic.et or
passage document
In CI% v 7O'C, 7ritish Overseas 'irwa!s did not have an! landing rights here nor did
the! have license to operate here. The! also did not carr! passengers or cargo to or
from the hilippines. The! did, however, have a general sales agent which sold 7O'C
tic.ets. The! were taxed for the sale of the tic.ets #because of the situs of taxation
principle&, even if the service to be rendered was outside the hilippines. The! weren)t
liable for carrier)s tax though.
o 8oing business has no specific criterion. 's long as there was a continuit! of
conduct and intention to establish a continuous business and not one of a
temporar! character, then !ou are doing business in the hilippines. #%emember
!our corp;&
'n offline airline which has a branch-agent in the hilippines and sells passage
documents to cover offline flights of its principal or other airlines is >OT considered
engaged in business as an international air carrier in the countr! and is >OT sub<ect to
the 57 nor to the 2L common carrier)s tax.
If the airline has flights which originate from an! point in the hilippines, it is sub<ect to
the /.BL 57 tax unless it is sub<ect to a different tax rate under a tax treat! to which
the hilippines is a signator!.
In a nutshell, if an international air carrier maintains flights to and from the hilippines,
it shall be taxed at the rate of /.BL 57 while international air carriers that do not have
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/H
+
amdg
Taxation One: Outline with Codals
flights to and from the hilippines but nonetheless earn income from other activities in
the countr! will be taxed at the rate of 2/L #now 20L& of such income. #*outh 'frican
'irwa!s, +eb 1H, /010&
9hat is included in computing the 57:
o 5ross revenue from passage of persons #actual amount as reflected in the tax
coupon part of the plane tic.et&
o 4xcess baggage
o Cargo and mail originating from the hilippines in a continuous and uninterrupted
flight
To compute the 57: #monthl! average net fare of all the tax coupons of plane tic.ets
per point of final destination, per class of passage, per classification of passenger&
$K"TI"I48 b! the #total number of passengers flown for the month as declared in the
flight manifest&
In case of passengers) flights from an! point in the hilippines and bac., that portion of
revenue pertaining to the return trip to the hilippines is >OT included as part of the
57. # 1812''2*
Offshore 7an.ing Knits
#A& 3ffshore Baning :nits. 6 The provisions of an! law to the contrar! notwithstanding, income derived b! offshore
ban.ing units authori,ed b! the 7ang.o *entral ng ilipinas #7*& to transact business with offshore ban.ing units,
including an! interest income derived from foreign currenc! loans granted to residents, shall be sub<ect to a final
income tax at the rate of ten percent #10L& of such income.
'n! income of nonresidents, whether individuals or corporations, from transactions with said offshore ban.ing units
shall be exempt from income tax.
Tax rate of offshore ban.ing units authori,ed b! the 7* #including an! interest income
foreign currenc! loans granted to residents& is 10L final tax.
Income of nonresidents from transactions with O7Ks shall be exempt from income tax.
'n offshore ban.ing unit is a branch of a foreign ban. whish is authori,ed b! the 7* to
transact offshore ban.ing business in the hilippines.
' foreign currenc! deposit unit is a department of a local ban. or an inexisting local
branch of a foreign ban. which is authori,ed b! the 7* to operated under the expanded
foreign currenc! deposit s!stem.
5ross onshore income covers all income arising from transactions allowed b! the 7*
conducted b! and between an offshore ban. with another offshore ban. or with an +C8K
or with a non6resident. # 1'17@*
The following are included in computing the gross onshore income of O7Ks and +C8Ks:
o 5ross interest income arising from foreign currenc! loans and advances and
investments with residents
o +ees, commissions and other charges which are integral parts of the income from
foreign currenc! loan transactions are 4T4$T. The! are not to be included in
computing the final tax. # 1.177*
o
Tax ate on Interest Income from "orei-n Currenc# Deposit )
1'1%!*
1. Interest income actuall! received b! a resident citi,en or resident alien
from +C8
C.BL final
withholding tax
/. If it was deposited b! an OC9 or seaman or nonresident citi,en 4xempt
2. If it was in a ban. account in the <oint names of an OC9 and his
spouse #who is a resident&
B0L exempt-
B0L final
withholding tax
of C.BL
A. Interest income actuall! received b! a domestic corporation or C.BL final
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/C
+
amdg
Taxation One: Outline with Codals
resident foreign corporation from +C8 withholding tax
7ranch rofit %emittance Tax
#B& 4a* on Branch +rofits Remittances. 6 'n! profit remitted b! a branch to its head office shall be sub<ect to a tax
of fifteen #1BL& which shall be based on the total profits applied or earmar.ed for remittance without an!
deduction for the tax component thereof #except those activities which are registered with the hilippine 4conomic
Sone 'uthorit!&. The tax shall be collected and paid in the same manner as provided in *ections BC and BE of this
Code: provided, that interests, dividends, rents, ro!alties, including remuneration for technical services, salaries,
wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits,
income and capital gains received b! a foreign corporation during each taxable !ear from all sources within the
hilippines shall not be treated as branch profits unless the same are effectivel! connected with the conduct of its
trade or business in the hilippines.
'n! profit remitted b! a branch to its head office shall be sub<ect to a tax of 1BL,
except those registered with 4S' #the! have their own tax rules as incentives&
9hat)s the base for the 7%T:
o It)s the total profits applied for remittance or earmar.ed for remittance without
an! deduction for the tax component, not the profit actually remitted a%road.
o If it is a foreign corporation, the following are not included:
Interests
8ividends
%ents
%o!alties
a!ment for technical services
*alaries and wage premiums
'nnuities, emoluments, or other fixed or determinable casual gains
rofits, income O capital gains
9*cept if the a%ove are connected with the conduct of its %usiness in the
+hilippines.
assive income is not included in computing for the 7%T. It is sub<ect to a final tax.
#Compania 5eneral de Tabacos v CI%&
o 4xcept when it arises from business activit! in which the corporation is engaged
or connected with the conduct of its business in the hilippines.
8ividends from a local corporation to a non6resident foreign corporation is not sub<ect to
7T but to final withholding tax. #$arubeni v CI%, 1DD0&
%egional or 'rea Iead@uarters and %OIUs
*ec //#88& The term /regional or area headquarters/ shall mean a branch established in the hilippines b!
multinational companies and which head@uarters do not earn or derive income from the hilippines and which act
as supervisor!, communications and coordinating center for their affiliates, subsidiaries, or branches in the 'sia6
acific %egion and other foreign mar.ets.
#44& The term /regional operating headquarters/ shall mean a branch established in the hilippines b!
multinational companies which are engaged in an! of the following services: general administration and planning;
business planning and coordination; sourcing and procurement of raw materials and components; corporate finance
advisor! services; mar.eting control and sales promotion; training and personnel management; logistic services;
research and development services and product development; technical support and maintenance; data processing
and communications; and business development.
%egional or 'rea Iead@uarters is a branch established in the hilippines b! multi6
nationals and which head@uarters:
o 8o >OT earn or derive income from the hilippines, and
o 9hich act as supervisor!, communications and coordinating center for their
affiliates, subsidiaries or branches in the 'sia6acific %egions.
The! are 4T4$T from income tax.
%egional Operating Iead@uarters is a branch established in the hilippines b! multi6
nationals which are engaged in an! of the following services:
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/E
+
amdg
Taxation One: Outline with Codals
o 5eneral admin and planning
o 7usiness planning and coordination;
o *ourcing and procurement of raw materials and components;
o Corporate finance advisor! services;
o $ar.eting control and sales promotion;
o Training and personnel management;
o "ogistic services;
o %esearch and development services and product development;
o Technical support and maintenance;
o 8ata processing and communications; and
o 7usiness development.
The! are taxed 10L on taxable income.
/. Income Tax on 0on1resident "orei-n Corporations
In general
#7& Tax on >onresident +oreign Corporation. 6
#1& "n 7eneral. 6 4xcept as otherwise provided in this Code, a foreign corporation not engaged in trade or business
in the hilippines shall pa! a tax e@ual to thirt!6five percent #2BL& of the gross income received during each
taxable !ear from all sources within the hilippines, such as interests, dividends, rents, ro!alties, salaries,
premiums #except reinsurance premiums&, annuities, emoluments or other fixed or determinable annual, periodic
or casual gains, profits and income, and capital gains, except capital gains sub<ect to tax under subparagraph B#c&
+rovided, That effective Manuar! 1, /00D, the rate of income tax shall be thirt! percent #20L&
>on6resident foreign corporations are sub<ect to 20L income tax on the gross income
derived during each taxable !ear from all sources within the hilippines onl!
o *pecial corporations #seen below& are sub<ect to a different tax rate
9hen the foreign corporation transacts business in the hilippines independentl! of its
branch in the countr!, the principal agent relationship is set aside. The transaction
becomes that of the foreign corporation, not of the branch, hence, the corporation is
considered a foreign non6resident corporation for that isolated and independent
transaction. #$arubeni v CI%&
' casual activit! in the hilippines b! a foreign corporation does not amount to engaging
in trade or business in the hilippines for income tax purposes. In order that a foreign
corporation ma! be considered engaged in trade or business, its business transactions
must be continuous. #>Q %eederi< v CI%&
*pecial non6resident foreign corporations
#/& 0onresident 6inematographic -ilm 3wner, 5essor or (istri%utor. 8 ' cinematographic film owner, lessor, or
distributor shall pa! a tax of twent!6five percent #/BL& of its gross income from all sources within the hilippines.
#2& 0onresident 3wner or 5essor of Aessels 6hartered %y +hilippine 0ationals. 8 ' nonresident owner or lessor of
vessels shall be sub<ect to a tax of four and one6half percent #A 1-/L& of gross rentals, lease or charter fees from
leases or charters to +ilipino citi,ens or corporations, as approved b! the $aritime Industr! 'uthorit!.
#A& 0onresident 3wner or 5essor of Aircraft, Machineries and 3ther 9quipment. 8 %entals, charters and other fees
derived b! a nonresident lessor of aircraft, machineries and other e@uipment shall be sub<ect to a tax of seven and
one6half percent #C 1-/L& of gross rentals or fees.
9PECIA2 C&P&ATI&09
Tax %ate Tax 7ase
>on6resident owner of lessor of
vessel
A.BL 5ross rentals, lease and
charter fees from the hil
>on6resident cinematographic film
owner, lessor, or distributor
/BL 5ross income from the hil
>on6resident lessor of aircraft,
machiner! and other e@uipment
C.BL 5ross rentals, charges and
other fees from hil sources
roprietar! educational institution and 10L Taxable income from all
$ic.e! Ingles
'teneo "aw /01/
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/D
+
amdg
Taxation One: Outline with Codals
non6profit hospital sources
%esident international carrier /.BL 5ross hilippine billings
%egional operating head@uarters of
multinational corporation
10L hilippine Taxable income
There)s no $CIT for special corporations
Tax rate on certain incomes of non6resident foreign corporations
#B& 4a* on 6ertain "ncomes Received %y a 0onresident -oreign 6orporation. 8
#a& "nterest on -oreign 5oans. 6 ' final withholding tax at the rate of twent! percent #/0L& is hereb! imposed on
the amount of interest on foreign loans contracted on or after 'ugust 1, 1DEH;
#b& "ntercorporate (ividends. 6 ' final withholding tax at the rate of fifteen percent #1BL& is hereb! imposed on
the amount of cash and-or propert! dividends received from a domestic corporation, which shall be collected and
paid as provided in *ection BC #'& of this Code, sub<ect to the condition that the countr! in which the nonresident
foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation
taxes deemed to have been paid in the hilippines e@uivalent to twent! percent #/0L&, which represents the
deifference between the regular income tax of 2BL and the 1BL tax on dividends as provided in this
subparagaprh: +rovided, that effective Manuar! 1, /00D, the credit against the tax due shall be e@uivalent to 1BL,
which represents the difference between the regular income tax of 20L and the 1BL tax on dividends. # As
amended %y RA B>>C2
#c& 9*change. 8 ' final tax at the rates prescribed below is hereb! imposed upon the net capital gains reali,ed
during the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc. in a domestic
corporation, except shares sold, or disposed of through the stoc. exchange:
>ot over 100,000JJJJ..JJJJJJ..........BL On an! amount in excess of 100,000JJJJ 10L
Tax ate on Passive Income of "orei-n 0on1esident
Corporations
"inal Tax
1. Interest on foreign loans
0on8resident lends to a domestic corporation
/0L
/. 8ividend from domestic corporations #inter6corporate dividend&
4his is su%Dect to the condition that the country in which the non8
resident foreign corporation is domiciled allows a credit against
the ta* due from the non8resident foreign corp ta*es deemed to
have %een paid in the +hilippines equivalent to EF@. "f they dont,
the dividends will %e ta*ed at >?@.
1BL
Tax ate on Capital Gains )same as forei-n resident
corporations*
B. On sale of shares of stoc. of a domestic corporation 034
listed and 034 traded thru a local stoc. exchange held as
a capital asset,
o Capital gains not over 100,000
o Capital gains in excess of 100,000
BL of the net capital gains
10L of the net capital gains
/. On sale of real propert! in the hilippines 0o provision for capital
gains for sale of realty.
Atty. Montero says that you
apply it to the normal
corporate ta* of >?@
On inter6corporate dividends #CI% v rocter and 5amble hilippine $anufacturing, 1DD1&
The ordinar! 2BL #now 20L& tax rate applicable to dividend remittances to non6
resident corporate stoc.holders of a hilippine corporation, goes down to 1BL if the
countr! of domicile of the foreign stoc.holder corporation Fshall allowG such foreign
corporation a tax credit for Ftaxes deemed paid in the hilippinesG, applicable against
the tax pa!able to the domiciliar! countr! b! the foreign stoc.holder corporation.
$ic.e! Ingles
'teneo "aw /01/
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20
+
amdg
Taxation One: Outline with Codals
In CI% v 5 #$C& #1DD1&, rocter and 5amble hilippines declared dividends to its
parent compan!, O56K*'. It deducted 2BL withholding tax, but now claimed for a
refund, stating that the reduced 1BL dividend tax rate should appl!.
o The *C said that the reduced 1BL dividend tax rate is applicable if the K*'
Fshall allowG to O56K*' a tax credit for Ftaxes deemed paid in the
hilippinesG applicable against the K* taxes of O56K*'.
o The >I%C specifies that such tax credit for Ftaxes deemed paid in the
hilippinesG must, as a minimum, reach an amount e@uivalent to /0L #now
1BL& which represents the difference between the regular 2BL #now >?@&
dividend tax rate and the preferred 1BL dividend tax rate. It is important to
note that *ec. /A#b&1 #now Sec. GH 1B2 1F2 1%2 of the >I%C does not re@uire
that the K* must give a Fdeemed paidG tax credit for the dividend tax #/0L
points& waived b! the hilippines in ma.ing applicable the preferred dividend
tax rate of 1BL.
o In other words, our >I%C does not re@uire that the K* tax law deem the
parent6corporation to have paid the /0L points of dividend tax waived b! the
hilippines. The >I%C onl! re@uires that the K* Fshall allowG O56K*' a
Fdeemed paidG tax credit in an amount e@uivalent to the /0L points waived
b! the hilippines.
CI% v 9ander hilippines had the same facts as CI% v O5$C. 7ut in 9ander, the
countr! at issue was *wit,erland and it did not even impose an! income tax on the
dividends received b! *wiss corporations from foreign corporations.
o TI4 *C said that the condition of Ftaxes deemed paidG was alread! complied
with since no income tax was imposed on the dividends in the first place.
In both cases, the taxpa!ers were entitled to a refund.
Income covered b! tax treaties
In negotiating tax treaties, the underl!ing rationale for reducing the tax rate is that the
hilippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed b! the other countr!. There would be some incentives
on the part of the foreigners to invest in the hilippines because the rates of tax are
lowered and at the same time, the! are credited against the domestic tax abroad a
figure higher than what was collected in the hilippines.
o Thus, if the rates of tax are lowered here, there should be a concomitant
commitment on the part of the state of residence #of the foreign corp& to grant
some form of tax relief, whether this be in the form of a tax credit or exemption.
Otherwise, the tax which would have been collected here will simpl! be collected
b! another state, defeating the ob<ect of the tax treat! since the tax burden
imposed would remain unrelieved.
o The purpose of the most favored nation clause is to establish the principle of
e@ualit! of international treatment b! providing that citi,ens of the contracting
nations ma! en<o! the privileges accorded b! either part! to those of the most
favored nation. This allows the taxpa!er in one state to avail of more liberal
provisions granted to another tax treat! to which his countr! or residence is also
a part!. Iowever, the use of the most favored nation clause is sub<ect to the
rationale of tax treaties.
o If the state of residence does not grant some form of tax relief to the investor
#the foreign non6resident corp&, no benefit would redound to the hilippines. #CI%
v *C Mohnson and *on, wherein the issue was with the pa!ment of taxes on
ro!alties. *C Mohnson wanted tax credit based on the K*6% tax treat! which had
a Fmost favored nation clause.G The 5erman!6% treat! was more beneficial
$ic.e! Ingles
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21
+
amdg
Taxation One: Outline with Codals
because it allowed a 10L rate on ro!alties. Iowever, the 5erman!6% treat! also
allowed for /0L matching credit for ro!alties. The K*6% tax treat! did >OT have
this /0L matching credit. *o the *C said that since the %6K* Tax Treat! does
not give a matching tax credit of /0 percent for the taxes paid to the hilippines
on ro!alties as allowed under the %6 5erman! Tax Treat!, *C Mohnson cannot be
deemed entitled to the 10 percent rate granted under the latter treat! for the
reason that there is no pa!ment of taxes on ro!alties under similar
circumstances.&
7ased on %$C AH6/00/ #affirmed b! 5olden 'rches v CI%, CT' Case HEH/, /00C&, the
10L rate of withholding tax on ro!alties remitted to residents of the K* ma! now be
availed of because of the %6China tax treat! which has the basicall! the same
provisions of the %6K* tax treat!. *o, the $+> of the %6K* tax treat! can refer to the
%6China tax treat! #as compared to the %65erman! treat! which were essentiall! not
the same&.
1
2. Improperl# Accumulated Earnin-s Tax )IAET*
*4C. /D. Imposition of Improperl! 'ccumulated 4arnings Tax. 6
#'& In 5eneral. 6 In addition to other taxes imposed b! this Title, there is hereb! imposed for each taxable !ear on
the improperl! accumulated taxable income of each corporation described in *ubsection 7 hereof, an improperl!
accumulated earnings tax e@ual to ten percent #10L& of the improperl! accumulated taxable income.
#7& Tax on Corporations *ub<ect to Improperl! 'ccumulated 4arnings Tax. 6
#1& In 5eneral. 6 The improperl! accumulated earnings tax imposed in the preceding *ection shall appl! to ever!
corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the
shareholders of an! other corporation, b! permitting earnings and profits to accumulate instead of being divided or
distributed.
#/& 4xceptions. 6 The improperl! accumulated earnings tax as provided for under this *ection shall not appl! to:
#a& ublicl!6held corporations;
#b& 7an.s and other nonban. financial intermediaries; and
#c& Insurance companies.
#C& 4vidence of urpose to 'void Income Tax. 6
#1& rima +acie 4vidence. 6 the fact that an! corporation is a mere holding compan! or investment compan! shall
be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
#/& 4vidence 8eterminative of urpose. 6 The fact that the earnings or profits of a corporation are permitted to
accumulate be!ond the reasonable needs of the business shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation, b! the clear preponderance of evidence, shall prove to
the contrar!.
#8& Improperl! 'ccumulated Taxable Income. 6 +or purposes of this *ection, the term Nimproperl! accumulated
taxable incomeN means taxable incomeN ad<usted b!:
#1& Income exempt from tax;
#/& Income excluded from gross income;
1
'rticle /2 of the %6K* tax treat! and 'rticle /2 of the %6China tax treat!, though differentl! worded, plainl!
reveal a similarit! in the provisions on relief from or avoidance of double taxation to their respective residents.
Thus, the tax on ro!alt! pa!ments to residents of K* and China are paid under similar circumstances, i.e., the
amount of ro!alt! income tax paid or accrued to the hilippines under the respective tax treaties is available as tax
credit against the income tax pa!able in their respective countries. K* residents ma!, therefore, invo.e the
preferential tax rate of 10L on ro!alties, accruing beginning Manuar! 1, /00/, arising in the hilippines ?from the
use of, or the right to use, an! patent, trademar., design or model, plan, secret formula or process, . . ., or for
information concerning industrial, commercial or scientific experience? under the %6China tax treat!, pursuant to
the ?most6favored6nation? clause of the %6K* tax treat!.
It bears stressing, however, that there are two important re@uirements that should be complied with before the
10L rate of withholding tax on ro!alties remitted to a resident of K* and China ma! be availed of, to wit:
1. It is necessar! that there be an agreement or a contract whereb! the ro!alties paid to the K* must originate
from the use of, or the right to use an! patent, trade mar., design or model, plan, secret formula or process, or
from the use, or the right to use, industrial, commercial or scientific experience; and
/. +or as long as the contract or agreement is sub<ect to approval under hilippine law, the same must be dul!
approved b! the hilippine competent authorities.
'll internal revenue officers, emplo!ees and others concerned are en<oined to give this Circular the widest publicit!
possible.
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amdg
Taxation One: Outline with Codals
#2& Income sub<ect to final tax; and
#A& The amount of net operating loss carr!6over deducted;
'nd reduced b! the sum of:
#1& 8ividends actuall! or constructivel! paid; and
#/& Income tax paid for the taxable !ear.
rovided, however, That for corporations using the calendar !ear basis, the accumulated earnings under tax shall
not appl! on improperl! accumulated income as of 8ecember 21, 1DDC. In the case of corporations adopting the
fiscal !ear accounting period, the improperl! accumulated income not sub<ect to this tax, shall be rec.oned, as of
the end of the month comprising the twelve #1/&6month period of fiscal !ear 1DDC61DDE.
#4& %easonable >eeds of the 7usiness. 6 +or purposes of this *ection, the term Nreasonable needs of the businessN
includes the reasonabl! anticipated needs of the business.
'n improperl! accumulated earnings tax of 10L of improperl! accumulated taxable
income is imposed on corporations which permit earnings and profits to accumulate
instead of being divided or distributed.
9ho are covered:
o 'll domestic corporations which are classified as closel! held corporations:
o ' closel!6held corporation are those at least B0L in value of the outstanding
capital stoc. or at least B0L of the total combined voting power of all classes of
stoc. is owned directl! or indirectl! b! not more than /0 individuals. # 21'1*
Iow do !ou determine if a corporation is a closel!6held one: "oo. at
stoc.6ownership;
If stoc. not owned b! individuals, it will be considered to be owned
proportionatel! b! its shareholders.
If it)s a famil! O partnership ownership, an individual shall be
considered to own the stoc. for his famil! members or partners.
If there)s an option to ac@uire stoc.s, it shall be considered as
being owned b! the person with the option. #BI ulin- 281'2*
9ho are not covered:
1. ublicl!6held corporations
2. 7an.s and other financial institutions
+. Insurance companies
.. Taxable partnerships
8. 5eneral professional partnerships
@. >on6taxable <oint ventures
7. 4nterprises registered with 4S' or with the 7C8' or with other special economic
,ones #the last four are %ased on 21'1*
9hat)s prima facie evidence of I'4:
o The fact that an! corporation is a mere holding compan! or investment compan!
o The fact that the earnings or profits of a corporation are permitted to accumulate
be!ond the reasonable needs of the business
o Investment of substantial earnings in unrelated business or in stoc. or securities
of an unrelated business
o Investment in bonds and other long term securities
o 'ccumulation of earnings in excess of 100L of paid up capital #the last three are
%ased on 21'1*
Iow do !ou compute for the improperl! accumulated taxable income:
Taxable Income,
I>C%4'*48 7=:
Income exempt from tax
Income excluded from gross income
Income sub<ect to final tax
The amount of net operating loss carr! over #>O"CO&
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22
+
amdg
Taxation One: Outline with Codals
848KCT48 7=:
8ividends actuall! or constructivel! paid
Income tax paid for the taxable !ear
Amount reserved for reasona%le needs of the %usiness
emanating from the covered years ta*a%le income 1from
%e!es, p. C1&
4UK'"*:
Improperl! accumulated taxable income
T 10L #I'4T&
9hat !ou have to pa!
F%easonable needsG means the immediate needs of the business. If the corporation can
not prove this, then it is not an immediate need. In order to determine whether profits
are accumulated for the reasonable needs of the business as to avoid the surtax upon
shareholders, the controlling intention of the taxpa!er is that which is manifested at the
time of accumulation, not subse@uentl! declared intentions which are merel! the product
of afterthought. #$anila 9ine $erchants v CI%&
o This is the immediac! test in 21'1.
%easonable needs means the immediate needs of the business including
reasonabl! anticipated needs. The burden of proof is with the corporation.
The touchstone of liabilit! is the purpose behind the accumulation of the income and not
the conse@uences of the accumulation. *o, if the failure to pa! dividends were for the
purpose of using the undistributed earnings and profits for the reasonable needs of the
business, that purpose would not fall within the interdiction of the statute. #CI% v
Tuason&
The tax on improper accumulation of surplus is essentiall! a penalt! tax designed to
compel corporations to distribute earnings so that the said earnings b! shareholders,
could, in turn, be taxed. 9hen corporations do not declare dividends, income taxes are
not paid on the undeclared dividends received b! the shareholders. #C!anamid v CT'&
9hat are considered reasonable:
a. 'llowance for the increase of accumulated earnings up to 100L of the paid6up
capital
3. 4arnings reserved for building, plant, or e@uipment ac@uisitions as approved b!
the 7oard of 8irectors #expansion, improvement, and repairs&
c. 4arnings reserved for compliance with an! loan or obligation established under a
legitimate business agreement #debt retirement&
d. In case of subsidiaries of foreign corporations in the hilippines, all undistributed
earnings intended or reserved for investments in the hilippines
e. 4arnings re@uired b! law to be retained # 21'1*
f. 'nticipated losses or reverses in business #%e!es, p. C0&
(. Tax1exempt Corporations
*4C. 20. 4xemptions from Tax on Corporations. 6 The following organi,ations shall not be taxed under this Title in
respect to income received b! them as such:
#'& "abor, agricultural or horticultural organi,ation not organi,ed principall! for profit;
#7& $utual savings ban. not having a capital stoc. represented b! shares, and cooperative ban. without capital
stoc. organi,ed and operated for mutual purposes and without profit;
#C& ' beneficiar! societ!, order or association, operating fort he exclusive benefit of the members such as a
fraternal organi,ation operating under the lodge s!stem, or mutual aid association or a nonstoc. corporation
organi,ed b! emplo!ees providing for the pa!ment of life, sic.ness, accident, or other benefits exclusivel! to the
members of such societ!, order, or association, or nonstoc. corporation or their dependents;
#8& Cemeter! compan! owned and operated exclusivel! for the benefit of its members;
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2A
+
amdg
Taxation One: Outline with Codals
#4& >onstoc. corporation or association organi,ed and operated exclusivel! for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to
or inures to the benefit of an! member, organi,er, officer or an! specific person;
#+& 7usiness league chamber of commerce, or board of trade, not organi,ed for profit and no part of the net
income of which inures to the benefit of an! private stoc.6holder, or individual;
#5& Civic league or organi,ation not organi,ed for profit but operated exclusivel! for the promotion of social
welfare;
#I& ' nonstoc. and nonprofit educational institution;
#I& 5overnment educational institution;
#M& +armersN or other mutual t!phoon or fire insurance compan!, mutual ditch or irrigation compan!, mutual or
cooperative telephone compan!, or li.e organi,ation of a purel! local character, the income of which consists solel!
of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
#R& +armersN, fruit growersN, or li.e association organi,ed and operated as a sales agent for the purpose of
mar.eting the products of its members and turning bac. to them the proceeds of sales, less the necessar! selling
expenses on the basis of the @uantit! of produce finished b! them;
>otwithstanding the provisions in the preceding paragraphs, the income of whatever .ind and character of the
foregoing organi,ations from an! of their properties, real or personal, or from an! of their activities conducted for
profit regardless of the disposition made of such income, shall be sub<ect to tax imposed under this Code.
The following organi,ations are tax6exempt, providing the! are not organi,ed for profitC
1. "abor, agricultural and horticultural organi,ations
/. $utual savings ban. without capital stoc. represented b! shares O cooperative ban.s
without capital stoc.
2. ' beneficiar! societ!, order or association operating for the exclusive benefit of the
members #li.e a frat operating under the lodge s!stem, a mutual aid association, a
non6stoc. corporation organi,ed b! emplo!ees providing for the pa!ment of life,
sic.ness, or other benefits exclusive to its members&
A. Cemeter! compan! owned O operated exclusivel! for the benefit of its members
B. >on6stoc. corporations or associations organi,ed and operated exclusivel! for
religious, charitable, scientific, athletic or cultural purposes or for the rehab of
veterans, no part of its net income or asset shall belong to or inures to the benefit of
an! member or specific person
H. 7usiness league chamber of commerce or board of trade, no part of its income inures
to an! individual
C. Civic league or organi,ation operated exclusivel! for the promotion of social welfare
E. ' non6stoc. and non6profit educational institution
D. 5overnment educational institution
10. +armers) or other mutual t!phoon or fire insurance compan!, mutual ditch or
irrigation compan!, mutual or cooperative telephone compan!, or li.e organi,ations
or a purel! local character, the income of which consists solel! of dues, assessments
O fees collected from members for the sole purpose of meeting its expenses
11. +armers), fruit growers) or li.e associations organi,ed and operated as sales agent for
the purpose of mar.eting the products of its members O turning bac. to them the
proceeds less expenses
The! are not sub<ect to income tax on income received b! them from underta.ings
which are essential to or necessaril! connected with the purposes for which the! were
organi,ed and operated.
o 7ut the! are sub<ect to income tax on income of whatever .ind and character
from an! of their properties #real or personal&, or from an! of their activities
#unrelated& conducted for profit, regardless of the disposition made of such
income.
*ome stuff from the Omnibus Investment Code of 1DEC #Art +%> E& 22@ 1 Incentives
to e-istered Enterprises under t6e Investment Priorities Plan& 3 these are
activit!6driven incentives:
o Income Tax Iolida!
+or pioneer firms 3 H !ears from commercial operation
+or non6pioneer firms 3 A !ears from commercial operation
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2B
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amdg
Taxation One: Outline with Codals
+or newl! registered firms 3 full! exempt from income taxes
4xtension of tax exemption for more than 1 !ear:
If the pro<ect meets the prescribed ratio of capital e@uipment to
number of wor.s set b! the 7oard
If the utili,ation of indigenous raw materials are at rates set b! the
7oard
If the net foreign exchange savings or earnings amount to at least
VBm annuall! during the first 2 !ears of operation
o 7ut no registered firm ma! avail of this incentive for a
period exceeding E !ears
4xemption for registered expanding firms:
+or a period of 2 !ears form commercial operation, registered
expanding firms are entitled to tax6exemption proportionate to
their expansion, but if it availed of this incentive during this period,
it is >OT entitled to additional deduction for incremental labor
expense
This incentive cannot be extended be!ond 2 !ears
o 'dditional deduction for labor expense
+or the first B !ears from registration, a registered enterprise is allowed an
additional deduction of B0L of the wages corresponding to the increment
in the number of 8I%4CT labor for s.illed and uns.illed labors if the
pro<ect meets the prescribed ratio of capital e@uipment to number of
wor.ers set b! the 7oard
This exemption shall be doubled if the activit! is located in less
developed areas
o Tax O 8ut! exemption on imported capital e@uipment
9ithin B !ears from the effectivit! of this code #until 1DD/&, importations
of machiner! and e@uipment and spare parts of registered enterprises
shall be 100L exempt of customs duties and revenue tax, but the
importation must compl! with the following conditions:
The! are not manufactured domesticall! in sufficient @uantit! of
comparable @ualit! and at reasonable prices
The! are reasonabl! needed and will be used exclusivel! b! the
registered enterprise in the manufacture of its products
The approval of the 7oard was obtained for such importation
o Tax credit for domestic capital e@uipment
' tax credit of 100L of the value of the revenue tax and customs duties
that would have been waived on the machiner! and e@uipment had these
been imported is given to registered enterprises which purchase them
from a domestic manufacturer
o 4xemption from contractor)s tax
The registered enterprise is exempt from contractor)s tax
*ome stuff from the 7ases Conversion and 8evelopment 'ct of 1DD/ and *pecial
4conomic Sone 'ct of 1DDB #A 7%1@> 9ec 2+128* D these are activit!6 and location6
driven incentives.
o +iscal Incentives
7usinesses operating within the 4COSO>4* shall be entitled to fiscal
incentives as per 8 HH #4S'& or with 4O //H.
4xporters using local materials as inputs shall get tax credits same as
those provided in the 4xport 8evelopment 'ct of 1DDA
o 4xemption from Taxes under the >I%C
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amdg
Taxation One: Outline with Codals
>o taxes #local O national& shall be imposed on businesses operating
within the 4COSO>4s
In lieu of taxes, BL of the gross income shall be remitted to the national
government
o 'pplicable national taxes
'll income derived b! persons and all services establishments in the
4COSO>4 are sub<ect to taxes under the Tax Code
Income derived from inside the ,ones should not be more than
20L of its total income. ) 212''8*
o >ote: %' DA00 has restored tax privileges to Clar. 'ir 7ase, Camp Mohn Ia!, oro
oint and $orong *pecial 4co Sone
In Mohn Ia! v "im, the *C said that Camp Mohn Ia! was not afforded tax
privilegs. 7ut %' DA00 has restored it.
*ome stuff from the Mewelr! Industr! 8evelopment 'ct of 1DDE #A !8'2& and %% 16DD
o Uualified <ewelr! enterprises
/
:
4xempted from excise tax of manufactured and produced <ewelries, if
shown to have been purchased from a @ualified <ewelr! enterprise; and
Iave additional deduction of B0L for training expenses incurred b!
@ualified <ewelr! enterprises.
Mewelr! enterprises availing of incentives shall still be eligible to incentives
provided b! other special laws such as %epublic 'ct >o. CEAA 19*port
(evelopment Act of EBB=2, %epublic 'ct >o. CD1H 1Special 9conomic Ione
Act of EBBF2, 4xecutive Order //H 1B3" 3mni%us "nvestments 6ode2,
among others: +rovided, That the activit! is export6oriented and that
there is no double availment of the same incentives.
*ome stuff from the Cooperative Code of the hilippines #%' HDE2& and %% /06/001
o Cooperatives which transact onl! with its members are exempt from:
Income tax
Qalue6'dded Tax #Q'T& under *ection 10D pars. #r&, #s&, #t& and #u&
2
2L ercentage Tax
8onor)s tax to accredited exempt
4xcise tax
8*T
/
*ec. A. 9ligi%ility for government assistance. W To @ualif! for the assistance, counselling and other incentives
envisioned in this 'ct, <ewelr! enterprises availing of the same must be dul! registered with the appropriate
government agencies as presentl! provided b! law.
Mewelr! enterprise as used in this 'ct shall refer to an! enterprise engaged in an! aspect in the manufacture of
goods commonl! or commerciall! .nown as fine and imitation <ewelr! including those producing, cutting and
polishing, shaping, refining, forming or fabricating real or imitation pearls, precious and semi6precious stones and
imitations thereof, goods made of precious metal and imitations thereof, and other raw materials and parts used in
the manufacture of <ewelr!.
2
*ec 10D, #r& *ales b! agricultural cooperatives dul! registered with the Cooperative 8evelopment 'uthorit! to
their members as well as sale of their produce, whether in its original state or processed form, to non6members;
their importation of direct farm inputs, machineries and e@uipment, including spare parts thereof, to be used
directl! and exclusivel! in the production and-or processing of their produce;
#s& *ales b! electric cooperatives dul! registered with the Cooperative 8evelopment authorit! or >ational
4lectrification 'dministration, relative to the generation and distribution of electricit! as well as their importation of
machineries and e@uipment, including spare parts, which shall be directl! used in the generation and distribution of
electricit!;
#t& 5ross receipts from lending activities b! credit or multi6purpose cooperatives dul! registered with the
Cooperative 8evelopment 'uthorit! whose lending operation is limited to their members;
#u& *ales b! non6agricultural, non6 electric and non6credit cooperatives dul! registered with the Cooperative
8evelopment 'uthorit!: rovided, That the share capital contribution of each member does not exceed +ifteen
thousand pesos #1B,000& and regardless of the aggregate capital and net surplus ratabl! distributed among the
members;
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amdg
Taxation One: Outline with Codals
7ut the other part! not exempt has to pa! the 8*T
'nnual registration fee of B00 under *ec /2H #7&
o If it deals with members and outsiders, see footnote.
A
o >ote: 'll income of the cooperative not related to its main-principal business-es
shall be sub<ect to all the appropriate taxes under the Tax Code of 1DDC. This is
applicable to all t!pes of cooperatives, whether dealing purel! with members or
both members and non6members.
o Cooperatives are >OT exempt from
final taxes on deposits, interest income and capital gains tax,
8*T if dealing with nonmembers and cooperative exceeding 10m,
Q'T billed on certain purchases
B
o The exemption of the cooperatives does not extend to their individual members.
Thus, members of cooperatives are liable to pa! all the necessar! internal
revenue taxes under the >ational Internal %evenue Code, including the tax on
earnings derived from their capital contribution.
rovided, however, that interests received b! members of a cooperative
with accumulated reserves and undivided net savings greater than Ten
$illion esos #10,000,000.00&, after the lapse of the ten6!ear exemption,
shall no longer be taxable in the hands of such members.
*ome stuff from the 7aranga! $icro 7usiness 4nterprises #7$74s& #A %17! and Dept
&rder 171'.*
o 7$74s
H
are exempt from income tax.
A
+or cooperatives with accumulated reserves and undivided net savings of not more than Ten $illion esos
#10,000,000.00&
a. 4xemption from all national internal revenue taxes for which the! aredirectl! liable, as enumerated under *ec.
2.1 of these %egulations.
II. +or cooperatives with accumulated reserves and undivided net savings of more than Ten $illion esos
#10,000,000.00& W
a. 4xemption from income tax for a period of ten #10& !ears from the dateof registration with the C8', provided,
that at least twent!6five percent#/BL& of the net income of the cooperative is returned to the membersin the form
of interest and-or patronage refund.
+or cooperatives whose exemptions were removed b! 4xecutive Order >o. D2, the ten6!ear period shall be
rec.oned from $arch 10, 1DEC #meaning, tax exemption is valid onl! until $arch 10, 1DDC&.
'fter the lapse of the above ten6!ear period, the! shall be sub<ect to income tax at the full rate on the amount
allocated for interests on capital, provided that the same is not conse@uentl! imposed on interest individuall!
received b! members;
The tax base for all cooperatives liable to income tax shall be the net surplus arising from business transactions
with non6members after deducting the amounts for the statutor! reserve funds as provided for in the Cooperative
Code and other laws.
b. 4xemption from Q'T under *ection 10D #r&, #s&, #t& and #u&, 2L percentage tax under *ection 11H, and the
B00.00 annual registration fee imposed under *ection /2H #7&, all of the Tax Code of 1DDC;
c. *ub<ect to all other internal revenue taxes unless otherwise provided b! law; and
d. 4ntitled to limited or full deductibilit! from the gross income of amount donated to dul! accredited charitable,
research and educational institutions and reinvestment to socio6economic pro<ects within the area of operation of
the cooperative.
B
e& Q'T billed on purchases of goods and services, except the Q'T on the importation b! agricultural cooperatives
of direct farm inputs, machineries and e@uipment, including spare parts thereof, to be used directl! and exclusivel!
in the production and-or processing of their produce, and importation b! electric cooperatives of machineries and
e@uipment, including spare parts, which shall be directl! used in the generation and distribution of electricit!,
pursuant to *ection 10D #r& and #s& of the Tax Code of 1DDC but which are not available locall! as certified b! the
8epartment of Trade and Industr!. 'll tax6free importations shall not be transferred to an! person until five #B&
!ears, otherwise, the cooperative and the transferee or assignee shall be solidaril! liable to pa! twice the amount
of the tax and-or the duties thereon;
H
?7aranga! $icro 7usiness 4nterprise,? hereinafter referred to as 7$74, refers to an! business entit! or enterprise
engaged in the production, processing or manufacturing of products or commodities, including agro6processing,
trading and services, whose total assets including those arising from loans but exclusive of the land on which the
particular business entit!Ns office, plant and e@uipment are situated, shall not be more than Three $illion esos
#2,000,000.00& The 'bove definition shall be sub<ected to review and upward ad<ustment b! the *$48 Council, as
mandated under %epublic 'ct >o. HDCC, as amended b! %epublic 'ct >o. E/ED
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2E
+
amdg
Taxation One: Outline with Codals
7ut not from final taxes on deposits, interest income, capital gains tax,
ro!alties, etc
*ome stuff from the Tourism 'ct of /00D #A %8%+ and its I&
o Income tax holida!
>ew enterprises in 5reenfield and 7rownfield Tourism Sones 3 H !ears
from start of business operations
4xisting enterprises in 7rownfield Tourism Sones 3 H !ears from time of
completion of expansion or upgrade
The income tax holida! can be extended but note more than H !ears
provided the facilities are upgraded to at least B0L of the original
investment
*pecial >O"CO rule: carried over for the next H consecutive !ears from
!ear of loss, provided loss has not been previousl! offset as a deduction
o 5ross income taxation: BL gross income tax, in lieu of all national internal
revenue taxes and local taxes, impost, assessments, fees and licenses
0. Taxa3le Income
9EC. +1. Taxa&le Income Defined. 1 The term taxable income means the pertinent items of gross income
specified in this Code, less the deductions and-or personal and additional exemptions, if an!, authori,ed for such
t!pes of income b! this Code or other special laws.
5ross Income
"ess: deductions
"ess: ersonal exemptions
Taxable income
&. Gross Income
*4C. 2/. 5ross Income. 6
#'& 5eneral 8efinition. 6 4xcept when otherwise provided in this Title, gross income means all income derived from
whatever source, including #but not limited to& the following items:
#1& Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items;
#/& 5ross income derived from the conduct of trade or business or the exercise of a profession;
#2& 5ains derived from dealings in propert!;
#A& Interests;
#B& %ents;
#H& %o!alties;
#C& 8ividends;
#E& 'nnuities;
#D& ri,es and winnings;
#10& ensions; and
#11& artnerNs distributive share from the net income of the general professional partnership.
5ross income means '"" I>CO$4 derived from 9I'T4Q4% *OK%C4. This includes, but
is not limited to, the enumeration in the codal.
In answering problems, the first thing !ou should as. is FIs this gross income:G, and
then !ou as. Fis this excludible:G #that)s the thought process to follow;&
Compensation
Compensation for services in whatever form paid, including, but not limited to:
o fees,
o salaries,
o wages,
o commissions,
o and similar items.
Compensation earners are not allowed to deduct an! other deductions from their salar!
$ic.e! Ingles
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+
amdg
Taxation One: Outline with Codals
o but the! ma! have deductions applied to income earned from other sources.
Iigh6ran.ing executive was given an apartment where he would host parties for the
clients of his compan!. Ie would also travel abroad with his wife to go on meetings. 're
these rental allowances and travel allowances part of the gross income:
o >O.
o Convenience of the emplo!er rule: >o part of these redounded to the executive)s
personal benefit, nor were such amounts retained b! him. These bills were paid
directl! b! the emplo!er6corporation. These expenses are CO$'>= 4T4>*4*,
not income b! emplo!ees which are sub<ect to tax. #Ienderson v Collector&
4%'
C
contributions from an emplo!er to an emplo!ee do >OT form part of his gross
income. #%% 1C6/011 and %' DB0B&
7usiness income
5ross income derived from the conduct of trade or business or the exercise of a
profession
In the case of manufacturing, merchandising or other business, gross income means:
Total *ales
"ess: cost of goods sold
'dd: all income from incidental and outside sources
5ross Income
5ains
5ains derived from dealings in propert!
5ain or loss on sale or exchange of propert! is recogni,ed when the propert! received in
exchange is essentiall! different from the propert! disposed and the propert! received
has mar.et value.
In sale or exchange of real or personal propert!, distinguish first between ordinar!
versus capital assets because capital assets have special rules governing them.
*ee % and * for more details
Interests
Income from interests are also to be included in computing for the gross income
In the case of / or more organi,ations, trades or businesses #whether organi,ed O
incorporated here or not& are owned or controlled 8I%4CT"= or I>8I%4CT"= b! the same
interests, the CI% is authori,ed to distribute, apportion or allocate gross income or
deductions between or among such orgs, trades or businesses, if the CI% determines
that such is necessar! in order to prevent tax evasion. #9ec 8'> 0IC*
o This is called Ftransfer pricingG or Fimputed interestG
o The standard to determine the fairness of related part! transactions is the arm)s
length standard.
It means that there should be no intimac! between the two.
It means that the corporation should deal with the related corporation in
the same manner it would with an uncontrolled taxpa!er.
o If a member of a group of controlled entities ma.es a loan or advances directl! or
indirectl! to another member of such group and does >OT charge an! interest or
charges interest not e@ual to an arm)s length, the CI% ma! ma.e appropriate
allocations to reflect arm)s length interest rate. #meaning the CI% can come in
and impose an interest on the transaction&
C
?ersonal 4@uit! and %etirement 'ccount #4%'&? refers to the voluntar! retirement account established b! and
for the exclusive use and benefit of the Contributor for the purpose of being invested solel! in 4%' investment
products in the hilippines. The Contributor shall retain the ownership, whether legal or beneficial, of funds placed
therein, including all earnings of such funds.
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Taxation One: Outline with Codals
o The arm)s length interest rate shall be:
The same rate of interest which would have been charged at the time the
indebtedness arose in an independent transaction between unrelated
parties under similar circumstances, or
The 7an. %eference rate b! the 7* #(& @+1%%*
%ents
%ents are included in the gross income
7ut what about improvements b! lessees: #9ection .%> 2*
o 9hen a lessee erects a building or ma.es improvements per agreement with the
lessor, the lessor ma! report the income therefrom upon either of the follow, at
his option:
't the time when such building or improvements are completed, the fair
mar.et value of such building or improvement
The lessor ma! spread over the life of the lease the estimated depreciated
value of such building or improvement at the termination of the lease and
report the income for each of the ade@uate part.
o If the lease is terminated, and it is not through purchase b! the lessor, so that
the lessor comes into possession of the propert! prior to the time originall! fixed,
the lessor is considered to receive additional income for that !ear #if the value of
the building exceeds the amount alread! reported as income&
>o appreciation value due to causes other than premature termination of
the lease shall be included.
o If the building is destro!ed before the expiration of the lease, the lessor is
entitled to deduct as loss for the !ear when such destruction occurred the
amount previousl! reported as income, less an! salvage value to the extent that
such loss was not compensated b! insurance.
o Obligations of lessor to third parties are assumed and paid b! the lessee. #:&
o 9hat about advanced rentals:
%o!alties
%o!alties are an! pa!ment of an! .ind received as consideration for the use of or right to
use:
1. 'n! patent, trademar., design or model
/. *ecret formula or process
2. Industrial, commercial or scientific e@uipment
A. Information concerning industrial, commercial or scientific experience.
8ividends
8ividends are an! distribution whether in cash or in other propert! in the ordinar!
course of business even if extraordinar! in amount, made b!:
o ' domestic or resident foreign corporation
o ' <oint stoc. corporation
o ' partnership
o ' <oint account
o 'n association
o 'n insurance compan!
To the shareholders or members out of its earnings or profits.
Tidbits:
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Taxation One: Outline with Codals
o 9hen the corporation receives dividends which are tax6fee #li.e intercorporate
dividends&, it becomes taxable as dividends when it distributes the same to its
shareholders.
o 9hen the dividend is paid b! a domestic corporation to a non6resident foreign
corporation, it is taxable in full. #*ec /E #Bb& of >I%C&
5eneral rule: Cash and propert! dividends are taxable. *toc. dividends are not taxable.
ropert! dividends #or securities other than its own stoc.& #9ection 281> 2*
o These are considered income in the amount of the full mar.et value as when
received b! the stoc.holder.
o The! are taxed 10L. #or /0L if >%'47&
o If it was paid in stoc. of another corporation, it is not considered a stoc.
dividend.
o The valuation is the mar.et value at the time the dividend becomes pa!able. #+or
shares of stoc. of another corporation given as dividends, it is the mar.et value
when the shares of stoc. are received&
*toc. dividends
o The! are not taxable.
4TC4T when the stoc. dividend causes change in the corporate identit!
or a change in the nature of the shares issued whereb! the proportional
interest of the stoc.holders after the distribution is essentiall! different
from his former interest. )9ection 282> 2*
' stoc. dividend constitutes income if it gives the shareholder an
interest different from that which his former stoc. represented.
9hen a stoc.holder receives a stoc. dividend which is taxable
income, the measure of income is the fair mar.et value of the
shares of stoc. received.
*ale of stoc. received as dividends #9ection 28+> 2*
o Once the recipient sells the stoc. dividend, he ma! reali,e gain or loss. This gain
or loss is treated as arising form the sale or exchange of a capital asset.
o Computation of gain or loss #the new basis per share is used in computing an!
gain or loss upon an! subse@uent sale of the shares&:
9hen stoc. dividend is the same character as the stoc. upon which it is
paid:
Cost: Old *hares - #total number of old and new shares&
9hen stoc. dividend materiall! differs from stoc. upon which it is paid:
Cost: Cost of shares of 1 class - number of shares in
that class
9hen stoc. was purchased at different times and at different prices so
that the identit! cannot be determined:
Cost: resumed to be from stoc. issued with respect to earliest
purchased stoc.
*toc. declaration and subse@uent redemption
o If after the stoc. dividend declaration, a corporation cancels or redeems the same
in such time and manner as to ma.e the distribution-redemption essentiall!
e@uivalent to a distribution of a taxable dividend, the amount received shall be
considered as a taxable dividend #10L final tax for individuals&. #9ection 28.>
2*
9h! do corporations do this:
*o that the shareholder will avoid pa!ing tax. %emember, stoc.
dividends are not taxable, but cash dividends are sub<ect to 10L
final tax for individuals #remember !our passive income charts;&.
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Taxation One: Outline with Codals
*o corporations declare stoc. dividends, and then redeem them
#b! giving their shareholders cash& to go around the tax. 7ut
because of the law, their subse@uent redemptions are now taxable.
The issuance of stoc. dividends and its subse@uent redemption
must be separate, distinct, and not related, for the redemption to
be considered a legitimate tax scheme.
o 8epending on each case, the exempting provision of *ec
E2#b& of the 1D2D Code #now, *ec /BA, %%/&, ma! not be
applicable if the redeemed shares were issued with %ona
fide business purpose, which is <udged after each and ever!
step of the transaction have been considered and the whole
transaction does not amount to a tax evasion scheme.
o It is in the issuance of the stoc.s which are subse@uentl!
redeemed that must have a %ona fide business purpose, not
the redemption. The existence of legitimate business
purposes in support of the redemption of stoc. dividends is
immaterial in income taxation. The test of taxabilit! under
the exempting clause is whether income was reali,ed
through the redemption of stoc. dividends. #CI% v C' O
'nscor&
In other words, if there was a legitimate business
purpose in issuing the shares, '>*CO% wouldn)t
have been taxed for the redemption. 7ut, the! failed
to show an! business purpose, their actuations were
mere afterthought.
*ources of distribution
o 4ver! distribution is made out of earnings or profits.
o 8etermine them to be coming from the earnings or profits of the taxable !ear. If
not, then to the past taxable !ears. #9ection 288> 2*
8istribution in li@uidation
o 9hen a corporation distributes all its properties or assets in complete li@uidation,
the gain reali,ed from this is taxable.
o Computation is based on *ec 2A #b& or #c& of the Tax Code #9ection 28@> 2*
9hen a corporation distributes all of its assets in complete dissolution and
li@uidation, there is no dividend income to the shareholder receiving the
li@uidating dividend. There is, instead, a sale or exchange of propert!. 'n!
gain reali,ed or loss sustained b! the stoc.holder, whether individual or
corporate, is taxable income or deductible loss, as the case ma! be.
9hen a corporation was dissolved and in process of complete li@uidation
and its shareholders surrendered their stoc. to it and it paid the sums in
@uestion to them in exchange, a transaction too. place, which was no
different in its essence from a sale of the same stoc. to a third part! who
paid therefore. #9ise v $eer&
In other words, the gain or loss one incurs when a corporation
li@uidates goes into !our ordinar! income #schedular rate for
individuals, 20L for resident corporations.&
o The 1/6month B0L-100L of gains threshold applies #see
below&
That)s the difference between redeemed shares #taxed at 10L&
and li@uidating shares #schedular rate for individuals, or 20L for
resident corporations&
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Taxation One: Outline with Codals
+or a trading compan! that is in the process of li@uidation, and whose stoc.holders are
to receive li@uidating dividends in excess of their investment, the gain is taxable because
the shareholders will reali,e capital gain or loss.
o *uch gain is the difference between the fair mar.et value of the li@uidating
dividends and the ad<usted cost to the stoc.holders of their respective
shareholdings. #BI ulin- +221!7*
7ut because of *ection 2A #b& of the tax code,
If the shareholder held his shares for more than 1/ months, onl!
B0L of the capital gains is taxable.
If less than 1/ months, the entire 100L of the capital gains is
taxable.
'nnuities
'n annuit! is a sum of mone! pa!able !earl! or at regular intervals.
'nnuities are tax6exempt.
ri,es and 9innings
ri,es and winnings are generall! taxable #the! are similar to gains derived from labor&
o 4TC4T: #these are not taxable&
1. If the recipient was selected without an! action on his part to enter the contest
and he was not re@uired to render substantial future services as a condition for
receiving the pri,e or award
/. Those granted to athletes are exempt
2. Those that are in the nature of gifts
ensions
' pension is a gratuit! granted as a favor or reward or one paid under given conditions
to a person following retirement from service or to surviving dependents
ensions are tax6exempt
*hare in 5)s Income
*4C. /H. Tax "iabilit! of $embers of 5eneral rofessional artnerships. 6 ' general professional partnership as such
shall not be sub<ect to the income tax imposed under this Chapter. ersons engaging in business as partners in a
general professional partnership shall be liable for income tax onl! in their separate and individual capacities.
+or purposes of computing the distributive share of the partners, the net income of the partnership shall be
computed in the same manner as a corporation.
4ach partner shall report as gross income his distributive share, actuall! or constructivel! received, in the net
income of the partnership.
The 5 is tax6exempt, but the income of the individual partners are sub<ect to tax.
o rofessional partnerships of real estate bro.ers are included in this exemption
#%uling /DA6EE, Mul! B, 1DEE&
4ach partner shall report as gross income his distributive share in the net income of the
partnership.
+rom whatever source
Cancellation or forgiveness of debt ma! amount to
o a!ment of income 3 that)s taxable. #a person performs service for a creditor who
cancels his debt&
o ' capital transaction 3 that)s taxable #a corporation forgives the debt of a
stoc.holder, that)s li.e pa!ing a dividend&
o ' gift 3 that)s exempt. #a creditor merel! wants to benefit a debtor b! canceling
the debt without an! consideration& #9ection 8'> 2*
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AA
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amdg
Taxation One: Outline with Codals
'c@uisition b! the 5overnment of private properties expropriation, said properties being
MK*T"= compensated, is embraced within the meaning of the term ?sale? ?disposition of
propert!?, and the proceeds should be included in the gross compensation. #5utierre, v
Collector, 101 hil CA2&
%efunds O Tax Credits
o Taxes which were previousl! claimed and allowed as deductions but subse@uentl!
was refunded or granted as tax credit should be declared as part of the gross
income of that !ear. The purpose of this is put !ou bac. in e@uilibrium 3 to bring
!our gross income bac. up.
o 4TC4T:
4state and donor)s tax
Income, war6profit and excess profit taxes imposed b! a foreign countr!
4state and gift taxes
Taxes assessed against local benefits of a .ind tending to increase the
value of the propert! assessed
*toc. transaction tax
4nerg! tax
Taxes which are not allowable as deductions under the law
9hen refunded, the! are not declarable as gross income because
the! are not allowable as deductions.
*pecial tax credits
o *ales, compensating and specific taxes paid on supplies and raw materials
imported b! a registered export producer: That)s given as tax credit.
o 9hen a registered 7OI O Tourism enterprise assumes pa!ment of taxes withheld
due from the foreign lender on interest pa!ments on foreign loans, that)s given
as a tax credit too. #(C 1+1!'*
o 9hen a 4%' Contributor contributes, he is given a tax credit of BL of the total
4%' contribution. #%' DB0B&
E
4xclusions
9ection +2 )B* Exclusions from Gross Income. 6 The following items shall not be included in gross income and
shall be exempt from taxation under this title:
#1& "ife Insurance. 6 The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise, but if such amounts are held b! the insurer under an agreement to
pa! interest thereon, the interest pa!ments shall be included in gross income.
#/& 'mount %eceived b! Insured as %eturn of remium. 6 The amount received b! the insured, as a return of
premiums paid b! him under life insurance, endowment, or annuit! contracts, either during the term or at the
maturit! of the term mentioned in the contract or upon surrender of the contract.
#2& 5ifts, 7e@uests, and 8evises. 6 The value of propert! ac@uired b! gift, be@uest, devise, or descent: rovided,
however, That income from such propert!, as well as gift, be@uest, devise or descent of income from an! propert!,
in cases of transfers of divided interest, shall be included in gross income.
#A& Compensation for In<uries or *ic.ness. 6 amounts received, through 'ccident or Iealth Insurance or under
9or.menNs Compensation 'cts, as compensation for personal in<uries or sic.ness, plus the amounts of an!
damages received, whether b! suit or agreement, on account of such in<uries or sic.ness.
#B& Income 4xempt under Treat!. 6 Income of an! .ind, to the extent re@uired b! an! treat! obligation binding
upon the 5overnment of the hilippines.
#H& %etirement 7enefits, ensions, 5ratuities, etc.6
#a& %etirement benefits received under %epublic 'ct >o. CHA1 and those received b! officials and emplo!ees of
private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained b!
E
9EC. !. Tax Treatment of +ontri&utions. 6 The Contributor shall be given an income tax credit e@uivalent to
five percent #BL& of the total 4%' contribution: +rovided, however: That in no instance can there be an! refund of
the said tax credit arising from the 4%' contributions. If the Contributor is an overseas +ilipino, he shall be
entitled to claim tax credit from an! tax pa!able to the national government under the >ational Internal %evenue
Code of 1DDC, as amended.
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Taxation One: Outline with Codals
the emplo!er: rovided, That the retiring official or emplo!ee has been in the service of the same emplo!er for at
least ten #10& !ears and is not less than fift! #B0& !ears of age at the time of his retirement: rovided, further, That
the benefits granted under this subparagraph shall be availed of b! an official or emplo!ee onl! once. +or purposes
of this *ubsection, the term Nreasonable private benefit planN means a pension, gratuit!, stoc. bonus or profit6
sharing plan maintained b! an emplo!er for the benefit of some or all of his officials or emplo!ees, wherein
contributions are made b! such emplo!er for the officials or emplo!ees, or both, for the purpose of distributing to
such officials and emplo!ees the earnings and principal of the fund thus accumulated, and wherein its is provided in
said plan that at no time shall an! part of the corpus or income of the fund be used for, or be diverted to, an!
purpose other than for the exclusive benefit of the said officials and emplo!ees.
#b& 'n! amount received b! an official or emplo!ee or b! his heirs from the emplo!er as a conse@uence of
separation of such official or emplo!ee from the service of the emplo!er because of death sic.ness or other
ph!sical disabilit! or for an! cause be!ond the control of the said official or emplo!ee.
#c& The provisions of an! existing law to the contrar! notwithstanding, social securit! benefits, retirement
gratuities, pensions and other similar benefits received b! resident or nonresident citi,ens of the hilippines or
aliens who come to reside permanentl! in the hilippines from foreign government agencies and other institutions,
private or public.
#d& a!ments of benefits due or to become due to an! person residing in the hilippines under the laws of the
Knited *tates administered b! the Knited *tates Qeterans 'dministration.
#e& 7enefits received from or en<o!ed under the *ocial *ecurit! *!stem in accordance with the provisions of
%epublic 'ct >o. E/E/.
#f& 7enefits received from the 5*I* under %epublic 'ct >o. E/D1, including retirement gratuit! received b!
government officials and emplo!ees.
#C& $iscellaneous Items. 6
#a& Income 8erived b! +oreign 5overnment. 6 Income derived from investments in the hilippines in loans, stoc.s,
bonds or other domestic securities, or from interest on deposits in ban.s in the hilippines b!
#i& foreign governments,
#ii& financing institutions owned, controlled, or en<o!ing refinancing from foreign governments, and
#iii& international or regional financial institutions established b! foreign governments.
#b& Income 8erived b! the 5overnment or its olitical *ubdivisions. 6 Income derived from an! public utilit! or
from the exercise of an! essential governmental function accruing to the 5overnment of the hilippines or to an!
political subdivision thereof.
#c& ri,es and 'wards. 6 ri,es and awards made primaril! in recognition of religious, charitable, scientific,
educational, artistic, literar!, or civic achievement but onl! if:
#i& The recipient was selected without an! action on his part to enter the contest or proceeding; and
#ii& The recipient is not re@uired to render substantial future services as a condition to receiving the pri,e or award.
#d& ri,es and 'wards in *ports Competition. 6 'll pri,es and awards granted to athletes in local and international
sports competitions and tournaments whether held in the hilippines or abroad and sanctioned b! their national
sports associations.
#e& 12th $onth a! and Other 7enefits. 6 5ross benefits received b! officials and emplo!ees of public and private
entities: rovided, however, That the total exclusion under this subparagraph shall not exceed Thirt! thousand
pesos #20,000& which shall cover:
#i& 7enefits received b! officials and emplo!ees of the national and local government pursuant to %epublic 'ct >o.
HHEH;
#ii& 7enefits received b! emplo!ees pursuant to residential 8ecree >o. EB1, as amended b! $emorandum Order
>o. /E, dated 'ugust 12, 1DEH;
#iii& 7enefits received b! officials and emplo!ees not covered b! residential decree >o. EB1, as amended b!
$emorandum Order >o. /E, dated 'ugust 12, 1DEH; and
#iv& Other benefits such as productivit! incentives and Christmas bonus: rovided, further, That the ceiling of
Thirt! thousand pesos #20,000& ma! be increased through rules and regulations issued b! the *ecretar! of
+inance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the
inflation rate at the end of the taxable !ear.
#f& 5*I*, ***, $edicare and Other Contributions. 6 5*I*, ***, $edicare and ag6ibig contributions, and union
dues of individuals.
#g& 5ains from the *ale of 7onds, 8ebentures or other Certificate of Indebtedness. 6 5ains reali,ed from the same
or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturit! of more than
five #B& !ears.
#h& 5ains from %edemption of *hares in $utual +und. 6 5ains reali,ed b! the investor upon redemption of shares
of stoc. in a mutual fund compan! as defined in *ection // #77& of this Code.
The following are tax6exempt and are >OT included in gross income:
1. "ife insurance #except if the proceeds are held b! the insurer under an agreement to
pa! interest thereon. The interest pa!ments onl! are included in the gross income&
2. 'mount received b! insured as return of premium
+. 5ifts, be@uests, devises or descents #but the income from such propert! ac@uired b!
these which shall be included in gross income&
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AH
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amdg
Taxation One: Outline with Codals
.. Compensation for income personal in<uries or sic.ness #plus the amounts of an!
damages received on account of such&
8. Income exempt under an! treat!
@. 7enefits received from the K* Qeterans 'dministration
7. %etirement benefits, pensions, gratuities #provided, the retiring person has been in
the service of the same emplo!er for at least 10 !ears and is not less than B0 !ears
of age at the time of his retirement. This benefit can onl! be availed of once& XA
.%17E
!. *eparation pa!, caused b! death, sic.ness or other disabilit! be!ond the control of
the emplo!ee #A .%17*
%
"i.e redundanc!, etc
If fault or conduct of emplo!ee is to blame, not exempted
%. *ocial securit! benefits, retirement gratuities, pensions and similar benefits from
foreign government agencies
1'.*** benefits
11.5*I* benefits
$iscellaneous tax6exempt items:
1. Income earned b! foreign governments in the hilippines
2. Income earned b! the hil government or its political subdivisions #li.e public
utilities&
+. ri,es and awards made primaril! in recognition of religious, charitable, scientific,
educational, artistic, literar! or civic achievement 3 but onl! if he was selected
without an! action on his part to enter the contest and he is not re@uired to render
substantial future services as a condition to receiving the pri,e or award
.. ri,es and awards in sports competitions sanctioned b! the national sports
associations
8. 12
th
month pa!, Christmas bonus, productivit! incentives, and other benefits #but
exemptions appl! onl! to the first 20,000& XA 7!++E
@. 5*I*, ***, $edicare, ag6ibig union dues and other contributions
7. 5ains from sale of bonds, debentures or other certificate of indebtedness with
maturities of more than B !ears
!. 5ains from redemption of shares in mutual funds
%. Interest received b! a non6resident individual or a non6resident corp from deposits
with depositor! ban.s under the expanded +C8K
1'. Intercompan! dividends #resident-domestic corps from domestic corps&
11. (e minimis benefits received b! a managerial or supervisor
12.Those under special laws #C*O and lotto winnings;&
D
*ection 1. 'n! provision of law to the contrar! notwithstanding, the retirement benefits received b! officials and
emplo!ees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan
maintained b! the emplo!er shall be exempt from all taxes and shall not be liable to attachment, garnishment, lev!
or sei,ure b! or under an! legal or e@uitable process whatsoever except to pa! a debt of the official or emplo!ee
concerned to the private benefit plan or that arising from liabilit! imposed in a criminal action: rovided, That the
retiring official or emplo!ee has been in the service of the same emplo!er for at least ten #10& !ears and is not less
than fift! !ears of age at the time of his retirement: rovided, further, That the benefits granted under this 'ct
shall be availed of b! an official or emplo!ee onl! once: rovided, finall!, That in case of separation of an official or
emplo!ee from the service of the emplo!er due to death, sic.ness or other ph!sical disabilit! or for an! cause
be!ond the control of the said official or emplo!ee, an! amount received b! him or b! his heirs from the emplo!er
as a conse@uence of such separation shall li.ewise be exempt as hereinabove provided.
's used in this 'ct, the term ?reasonable private benefit plan? means a pension, gratuit!, stoc. bonus or profit
sharing plan maintained b! an emplo!er for the benefit of some or all of his officials and emplo!ees, wherein
contributions are made b! such emplo!er or officials and emplo!ees, or both, for the purpose of distributing to
such officials and emplo!ees the earnings and principal of the fund thus accumulated, and wherein it is provided in
said plan that at no time shall an! part of the corpus or income of the fund be used for, or be diverted to, an!
purpose other than for the exclusive benefit of the said officials and emplo!ees.
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Taxation One: Outline with Codals
$inimum wage earners shall be exempt from the pa!ment of income tax too. Iolida!
pa!, overtime pa!, night shift differential pa! and ha,ard pa! received b! such minimum
wage earners shall li.ewise be exempt from income tax.
Income from emplo!ees) trusts are exempt from '"" .inds of taxes, including final
withholding tax on interest income. #CI% v C' O 5C"&
Terminal leave pa! is not part of gross salar!. It is a retirement benefit and is tax
exempt. #CI% v C' O Castaneda, and %e@uest of 'tt!. Sialcita&
If the emplo!ee is separated from a previous emplo!er, but is not emplo!ed b! another
emplo!er, he shall be refunded or credited the taxes withheld on his exempt 12
th
month
pa! and other benefits b! his present emplo!er.
If the emplo!ee is separated but has no present <ob, he shall claim his refund
with the 7I%. # 21%8 = (C +@1%.*
Income derived b! foreign government
+or it to be exempt, the income should be received b!:
7! foreign governments
7! financing institutions owned, controlled or en<o!ing re6financing from foreign
governments
7! international or regional financial institutions established b! foreign governments
P. "rin-e Benefits Tax )"BT4 56ut up4*
*4C. 22. *pecial Treatment of +ringe 7enefit.6
#'& Imposition of Tax.6 ' final tax of thirt!6four percent #2AL& effective Manuar! 1, 1DDE; thirt!6three percent
#22L& effective Manuar! 1, 1DDD; and thirt!6two percent #2/L& effective Manuar! 1, /000 and thereafter, is hereb!
imposed on the grossed6up monetar! value of fringe benefit furnished or granted to the emplo!ee #except ran. and
file emplo!ees as defined herein& b! the emplo!er, whether an individual or a corporation #unless the fringe benefit
is re@uired b! the nature of, or necessar! to the trade, business or profession of the emplo!er, or when the fringe
benefit is for the convenience or advantage of the emplo!er&. The tax herein imposed is pa!able b! the emplo!er
which tax shall be paid in the same manner as provided for under *ection BC #'& of this Code. The grossed6up
monetar! value of the fringe benefit shall be determined b! dividing the actual monetar! value of the fringe benefit
b! sixt!6six percent #HHL& effective Manuar! 1, 1DDE; sixt!6seven percent #HCL& effective Manuar! 1, 1DDD; and
sixt!6eight percent #HEL& effective Manuar! 1, /000 and thereafter: rovided, however, That fringe benefit
furnished to emplo!ees and taxable under *ubsections #7&, #C&, #8& and #4& of *ection /B shall be taxed at the
applicable rates imposed thereat: rovided, further, That the grossed 6Kp value of the fringe benefit shall be
determined b! dividing the actual monetar! value of the fringe benefit b! the difference between one hundred
percent #100L& and the applicable rates of income tax under *ubsections #7&, #C&, #8&, and #4& of *ection /B.
#7& +ringe 7enefit defined.6 +or purposes of this *ection, the term ?fringe benefit? means an! good, service or
other benefit furnished or granted in cash or in .ind b! an emplo!er to an individual emplo!ee #except ran. and file
emplo!ees as defined herein& such as, but not limited to, the following:
#1& Iousing;
#/& 4xpense account;
#2& Qehicle of an! .ind;
#A& Iousehold personnel, such as maid, driver and others;
#B& Interest on loan at less than mar.et rate to the extent of the difference between the mar.et rate and actual
rate granted;
#H& $embership fees, dues and other expenses borne b! the emplo!er for the emplo!ee in social and athletic clubs
or other similar organi,ations;
#C& 4xpenses for foreign travel;
#E& Iolida! and vacation expenses;
#D& 4ducational assistance to the emplo!ee or his dependents; and
#10& "ife or health insurance and other non6life insurance premiums or similar amounts in excess of what the law
allows.
#C& +ringe 7enefits >ot Taxable. 6 The following fringe benefits are not taxable under this *ection:
#1& fringe benefits which are authori,ed and exempted from tax under special laws;
#/& Contributions of the emplo!er for the benefit of the emplo!ee to retirement, insurance and hospitali,ation
benefit plans;
#2& 7enefits given to the ran. and file emplo!ees, whether granted under a collective bargaining agreement or
not; and
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Taxation One: Outline with Codals
#A& 8e minimis benefits as defined in the rules and regulations to be promulgated b! the *ecretar! of +inance,
upon recommendation of the Commissioner.
The *ecretar! of +inance is hereb! authori,ed to promulgate, upon recommendation of the Commissioner, such
rules and regulations as are necessar! to carr! out efficientl! and fairl! the provisions of this *ection, ta.ing into
account the peculiar nature and special need of the trade, business or profession of the emplo!er.
>ote: the +7T is paid b! the emplo!er.
+ringe benefit is an! good, service, or other benefit granted in cash or in .ind b! an
emplo!er to an emplo!ee #except ran. O file& such as:
1. Iousing
/. 4xpense account
2. Qehicle of an! .ind
A. Iousehold personnel, li.e maids and drivers
B. Interest on loan at less than mar.et rate, to the extent of the difference between the
mar.et rate and the actual rate granted
H. $embership fees, dues O other expenses in social O athletic clubs or similar orgs
C. 4xpenses for foreign travel
E. Iolida! and vacation expenses
D. 4ducational assistance to the emplo!ee or his dependents
10. "ife or health insurance O other non6life premiums
This list is not exclusive.
+ringe benefit tax: ' final tax of 2/L on the grossed up monetar! value of fringe
benefits will be imposed.
o The fringe benefit tax on the taxable fringe benefit is computed as follows:
i. 8etermine the grossed6up monetar! value of the fringe benefit. This is the
monetar! value of the benefit divided b! HEL
ii. Compute the fringe benefit tax b! multipl!ing the grossed6up monetar!
value of the fringe benefit b! 2/L
'ctual $onetar! Qalue-HEL Y 5rossed6up $onetar! Qalue
5rossed6up $onetar! Qalue x 2/L Y +7T
9pecial Cases for "BT "BT
%eceived b! non6resident alien not engaged
in trade or business
/BL
%eceived b! alien or +ilipino emplo!ed b! a
%OIU or %'IU
1BL
%eceived b! emplo!ees in a special economic
,one
/B L or 1BL #depends&
The +7T is also an expense which is deductible from the emplo!er)s gross income.
o The deduction for the emplo!er is the grossed6up monetar! value of the fringe
benefit.
The following fringe benefits are not sub<ect to the +7T:
1. Those that are necessar! or re@uired b! the trade O business of the emplo!er
/. Those for the convenience or advantage of the emplo!er
2. Those exempt under special laws
A. Contributions to retirement, insurance and hospitali,ation benefit plans
B. 8e minimis benefits #these are of relativel! small value O are furnished merel! as a
means of promoting the health, goodwill of the emplo!ees. *ee !1'' for
examples&
H. Those given to ran. O file emplo!ees #those who are holding neither managerial nor
supervisor! positions&
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Taxation One: Outline with Codals
Clarifications from +1%! #a bit mala%o, so chec. the %e!es boo. and that excel
reviewer thing&
&n 6ousin- privile-es (onetar# ;alue
If emplo!er leases a residential propert! for the use of the emplo!ee
and the propert! is the usual place of residence of the emplo!ee
B0L of the
monthl! rental paid
If the emplo!er purchases a residential propert! on installment basis
and allows the emplo!ee to use it as his usual place of residence
*ee page 21H of
%e!es
If the emplo!er purchases a residential propert! and transfers
ownership to the emplo!ee
*ee page 21H of
%e!es
Iousing of militar! officials 4xempt
Iousing which is situated inside or ad<acent to the premises of a
business or factor! #within B0 meters&
4xempt
Temporar! housing for emplo!ee who sta!s for not more than 2
months
4xempt
Expense Account 9u3Fect to "BT or
notG
If the expense was dul! receipted for and in the name of the emplo!er,
and the expense is not in the nature of a personal expense
attributable to the emplo!ee
>ope.
If these are personal expenses such as groceries, paid for or
reimbursed b! the emplo!er, even if these are dul! receipted for in the
name of the emplo!er
=up.
%'T' which are fixed in amount O regularl! given as part of monthl!
compensation
>ope, but to be
treated as income
of the emplo!ee.
(otor ;e6icles (onetar# ;alue
If emplo!er purchases vehicle in the name of the emplo!ee, regardless
of usage of the vehicle
100L of the value
#ac@uisition cost&
If emplo!er shoulders a portion of the amount of the purchase price of
a vehicle owned b! the emplo!ee
'mount shouldered
b! the emplo!er
If emplo!er owns O maintains a fleet of vehicles for the use of the
business and the emplo!ees
B0L of the value
Kse of aircraft owned O maintained b! the emplo!er 4xempt
Kse of !acht Qalue based on
depreciation
Expenses for "orei-n Travel (onetar# ;alue
If it is reasonable for the purpose of attending business meetings or
conventions
4xempt
If it)s for local travel expenses not more than K*V200 per da! #not
including lodging&
4xempt
Cost of plane tic.et if econom! or business class 4xempt
Cost of plane tic.et if first class 20L of the value
Travel expense of famil! members of the emplo!ee 100L of the value
Educational Assistance (onetar# ;alue
I+ the emplo!ee was granted a scholarship b! the emplo!er and the
education or stud! is directl! connected to the trade or business of the
emplo!er, and there is a written contract that the emplo!ee must
remain in emplo! for a period of time
4xempt
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Taxation One: Outline with Codals
If the assistance was extended to the emplo!ee)s dependents and was
provided through a scholarship program of the compan!
4xempt
2ife or $ealt6 Insurance> etc Premiums in Excess of 56at t6e
2aA AlloAs
(onetar# ;alue
If the contribution is pursuant to existing law such as to the 5*I* or
***
4xempt
If it is for the group insurance of the emplo!ees 4xempt
+or the others #household e*penses, mem%ership fees J other e*penses in social J
athletic clu%s, holiday J vacation e*penses2, these monetar! value will be 100L of the
value of the benefit received.
The following are considered de minimis benefits of '"" t!pes of emplo!ees. These are
exempt from tax. ) !1''*
1. $oneti,ed unused vaction leave, not exceeding 10 da!s per !ear
/. $edical cash allowance to dependents of emplo!ees not exceeding CB0-emplo!ee
per sem or 1/B-month
2. %ice subsid! of 1B00 or 1 sac. of B0 .g rice per month #sarap,2 1%% B6/00E&
A. Kniforms and clothing allowance not exceeding A,000-month #u%os sa Iara,2 #%% B6
/011&
B. 'ctual !earl! medical benefits not exceeding 10,000-month
H. "aundr! allowance not exceeding 200-month
C. 4mplo!ee achievement awards for length of service or safet! achievement in the
form of tangible propert! with value not exceeding 10,000
E. +lowers, fruits, boo.s given under special circumstances li.e illness, marriage, birth
of bab!
D. 5ifts given during Christmas O ma<or anniversaries not exceeding B,000-!ear
10. 8ail! meal allowance for overtime wor., not exceeding /BL of the basic minimum
wage
The amount of de minimis benefits is not computed in determining the 20,000 ceiling of
Fother benefitsG provided in *ec 2/#b& of the Tax Code #see e*clusions2,
o but if the emplo!er pa!s $O%4 than the ceilings prescribed above, the excess is
taxable to the emplo!ee O>"= if it is be!ond the 20,000 ceiling.
o In other words, when a benefit is de minimis with a ceiling, the benefit exempt
from the fringe benefit tax is up to the ceiling. 'n! excess over the ceiling shall
be part of the benefits which are exempt #exclusions from gross income& up to
20,000.
'n! amount given b! the emplo!er as benefits, whether de minimis or others, shall be
deductible as business expense. %emember this; # 1'1''*
To recapC
o +ringe benefit given to ran. and file emplo!ee is not sub<ect to the fringe benefit
tax.
o +ringe benefit given to a supervisor! or managerial emplo!ee is sub<ect to the
fringe benefit tax.
o (e minimis benefit, whether given to ran. and file emplo!ee or to supervisor! or
managerial emplo!ee, is not sub<ect to the fringe benefit tax.
7. Deductions
*4C. 2A. 8eductions from 5ross Income. 6 4xcept for taxpa!ers earning compensation income arising from
personal services rendered under an emplo!er6emplo!ee relationship where no deductions shall be allowed under
this *ection other than under subsection #$& hereof, in computing taxable income sub<ect to income tax under
*ections /A #'&; /B #'&; /H; /C #'&, #7& and #C&; and /E #'& #1&, there shall be allowed the following deductions
from gross income;
8eductions are amounts allowed b! law to reduce the gross income to taxable income.
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Taxation One: Outline with Codals
These amounts are allowed to taxpa!ers b! legislative grace and the taxpa!er claiming
them must prove compliance with the provisions of the law authori,ing the deductions.
The following are the deductions from gross income:
o +or individuals with gross compensation income #from emplo!er6emplo!ee
relationship& onl!:
i. remium pa!ments on health and-or hospitali,ation insurance #III&
ii. ersonal exemptions
o +or individuals with gross income from business or practice of profession:
i. Optional standard deduction #O*8&, or
ii. Itemi,ed deductions,
iii. III,
iv. ersonal exemptions.
o +or corporations:
i. Optional standard deduction #O*8&, or
ii. Itemi,ed deductions
Itemi,ed deductions are expenses and losses related to trade or business or the practice
of a profession.
o Itemi,ed deductions are what *ec. 2A tal.s about, and these do not appl! to
taxpa!ers earning compensation income from an emplo!er6emplo!ee
relationship.
The following are the itemi,ed deductions:
1. 4xpenses
/. Interest
2. Taxes
A. "osses
B. 7ad debts
H. 8epreciation
C. 8epletion
E. Charitable and other contributions
D. %esearch and development
10. ension trusts
4xpenses, in general
#'& 4xpenses. 6
#1& Ordinar! and >ecessar! Trade, 7usiness or rofessional 4xpenses.6
#a& In 5eneral. 6 There shall be allowed as deduction from gross income all the ordinar! and necessar! expenses
paid or incurred during the taxable !ear in carr!ing on or which are directl! attributable to, the development,
management, operation and-or conduct of the trade, business or exercise of a profession, including:
#i& ' reasonable allowance for salaries, wages, and other forms of compensation for personal services
actuall! rendered, including the grossed6up monetar! value of fringe benefit furnished or granted b! the emplo!er
to the emplo!ee: rovided, That the final tax imposed under *ection 22 hereof has been paid;
#ii& ' reasonable allowance for travel expenses, here and abroad, while awa! from home in the pursuit of
trade, business or profession;
#iii& ' reasonable allowance for rentals and-or other pa!ments which are re@uired as a condition for the
continued use or possession, for purposes of the trade, business or profession, of propert! to which the taxpa!er
has not ta.en or is not ta.ing title or in which he has no e@uit! other than that of a lessee, user or possessor;
#iv& ' reasonable allowance for entertainment, amusement and recreation expenses during the taxable
!ear, that are directl! connected to the development, management and operation of the trade, business or
profession of the taxpa!er, or that are directl! related to or in furtherance of the conduct of his or its trade,
business or exercise of a profession not to exceed such ceilings as the *ecretar! of +inance ma!, b! rules and
regulations prescribe, upon recommendation of the Commissioner, ta.ing into account the needs as well as the
special circumstances, nature and character of the industr!, trade, business, or profession of the taxpa!er:
rovided, That an! expense incurred for entertainment, amusement or recreation that is contrar! to law, morals
public polic! or public order shall in no case be allowed as a deduction.
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Taxation One: Outline with Codals
#b& *ubstantiation %e@uirements. 6 >o deduction from gross income shall be allowed under *ubsection #'& hereof
unless the taxpa!er shall substantiate with sufficient evidence, such as official receipts or other ade@uate records:
#i& the amount of the expense being deducted, and
#ii& the direct connection or relation of the expense being deducted to the development, management,
operation and-or conduct of the trade, business or profession of the taxpa!er.
#c& 7ribes, Ric.bac.s and Other *imilar a!ments. 6 >o deduction from gross income shall be allowed under
*ubsection #'& hereof for an! pa!ment made, directl! or indirectl!, to an official or emplo!ee of the national
government, or to an official or emplo!ee of an! local government unit, or to an official or emplo!ee of a
government6owned or 6controlled corporation, or to an official or emplo!ee or representative of a foreign
government, or to a private corporation, general professional partnership, or a similar entit!, if the pa!ment
constitutes a bribe or .ic.bac..
#/& 4xpenses 'llowable to rivate 4ducational Institutions. 6 In addition to the expenses allowable as deductions
under this Chapter, a private educational institution, referred to under *ection /C #7& of this Code, ma! at its
option elect either: #a& to deduct expenditures otherwise considered as capital outla!s of depreciable assets
incurred during the taxable !ear for the expansion of school facilities or #b& to deduct allowance for depreciation
thereof under *ubsection #+& hereof.
The codal considers as deductions all ordinar! and necessar! expenses in carr!ing on
the development, management, and operation of a trade, business or profession,
including a reasonable allowance for:
1. *alaries, wages, and other forms of compensation including fringe benefits
/. Travel expenses, here and abroad, in pursuit of trade and business
2. %entals and others which are re@uired for the continued use of propert!
A. 4ntertainment, amusement and recreation expenses that are directl! connected to
the trade, business, or profession #but should not be contrar! to law, morals, etc&
'ccording to the codal, these are the re@uirements for deductible claims:
1. *ufficient evidence #li.e official receipts&
/. ' direct connection of the expense to the development, management, operation,
and-or conduct of the trade, business or profession
a!ments of bribes O .ic.bac.s are not deductible.
Murisprudence expounded on the re@uirements with the following re@uisites for the
deductibilit! of ordinar! and necessar! trade, business, or professional expenses #CI% v
Isabela&:
1. 4xpense must be ordinar! and necessar!
/. $ust have been paid or incurred during the taxable !ear
2. $ust have been paid or incurred in carr!ing on the trade-business
A. $ust be supported b! receipts, records or other pertinent papers
' taxpa!er who is authori,ed to deduct certain expenses and other allowable deductions
for the current !ear but failed to do so cannot deduct the same for the next !ear.
It is ordinar! when it is normal in relation to the business of the taxpa!er. It need not be
recurring.
It is necessar! when it is appropriate and helpful in the development of the taxpa!er)s
business. *ee if it is intended to minimi,e losses, or to maximi,e profits.
%egarding advertising expenses #CI% v 5eneral +oods*:
o 'dvertising is generall! of two .inds:
i. To stimulate the current sale of merchandise or use of services
ii. To stimulate the future sale of merchandise or use of services
o The second t!pe involves expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpa!er)s trade or business or for the
industr! or profession of which the taxpa!er is a member.
o If it)s the first .ind, it)s definitel! deductible as a business expense, the onl!
@uestion to be answered is if it)s reasonable or not.
o If it)s the second .ind, normall! the! should be spread out over a reasonable
time.
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Taxation One: Outline with Codals
o In the case, the amount was not onl! huge #ie unreasonable&, but was also used
to protect the brand franchise. The *upreme Court said that it was analogous to
the maintenance of goodwill or title to one)s propert!. Thus, it was a capital
expenditure which should have been spread out over a reasonable period of time.
It was a.in to the ac@uisition of capital assets and therefore expenses related
thereto were not to be considered as business expenses but as capital
expenditures.
4xpenses paid to advertising firms to promote sale of capital stoc. for ac@uisition of
additional capital is not deductible from taxable income. 4fforts to establish reputation
are a.in to ac@uisition of capital assets, and therefore, expenses related thereto are not
business expense but capital expenditures. #'tlas Consolidated v CI%&
"itigation expenses incurred in defense of title to propert! is capital in nature and not
deductible. #'tlas&
7onuses to emplo!ees made in good faith and as additional compensation for the
services actuall! rendered b! the emplo!ees are deductible, provided such pa!ments,
when added to the stipulated salaries, do not exceed a reasonable compensation for the
services rendered. #Ruen,le v CI%&
o 7onus given to corporate officers out of sale of corporate land not deductible as
an ordinar! business expenses in the absence of showing what role said officers
performed to effectuate said sale. The taxpa!er must show that personal services
had been rendered and that the amount was reasonable. #'guinaldo Industries v
CI%&
o +or income tax purposes, the emplo!er cannot legall! claim such bonuses as
deductible expenses unless the! are shown to be reasonable. The conditions
precedent to the deduction of bonuses are:
1. The pa!ment of the bonuses is in fact compensation
/. It must be for personal services actuall! rendered, and
2. The bonuses, when added to the salaries, are reasonable when measured b!
the amount and @ualit! of the services performed with relation the business of
the taxpa!er. #C$ Ios.ins v CI%&
Contributions to a private entit! that gives dividends to stoc.holders not deductible
because the net income of the recipient inures to the benefit of its stoc.holders.
o Contributions to a government entit! is deductible when used exclusivel! for
public purposes #%oxas v CT'&
a!ment for police protection is illegal as it is a compensation given b! the petitioner to
the police for the performance b! the latter of the functions re@uired of them to be
rendered b! law. #Calanoc v CI%&
+or cost of materials, taxpa!ers carr!ing materials and supplies on hand should include
in expenses the charges of materials and supplies onl! to the amount that the! are
actuall! consumed and used in operation during the !ear 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 an! previous !ear.
o If a taxpa!er carries incidental materials or supplies on hand for which no record
of consumption is .ept or of which ph!sical inventories at the beginning and end
of the !ear are not ta.en, it will be permissible for the taxpa!er to include in his
expenses and deduct from gross income the total cost of such supplies and
materials as were purchased during the !ear for which the return is made,
provided the net income is clearl! reflected b! this method. #*ec HC, %% /&
+or repairs, the cost of incidental repairs which neither materiall! add to the value of the
propert! nor appreciabl! prolong its life, but .eep it in an ordinaril! efficient operating
condition, ma! be deducted as expense, provided the plant or propert! account is not
increased b! the amount of such expenditure.
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Taxation One: Outline with Codals
o %epairs in the nature of replacement, to the extent that the! arrest deterioration
and appreciabl! prolong the life of the propert! should be charged against the
depreciation reserves if such account is .ept. #*ec HE, %% /&
+or lease agreement expenses, the following are allowed deductions #*ec CA, %% /&:
o 9here a leasehold is ac@uired for business purposes for a specified sum, the
purchaser ma! ta.e deduction in his return for an ali@uot part of such sum each
!ear, based on the number of !ears the lease will run;
o Taxes paid b! a tenant to or for a landlord for business propert! are additional
rent and constitute a deductible item to the tenant and taxable income to the
landlord; the amount of the tax being deductible b! the latter.
o The cost of leasehold improvements are >OT considered business expenses since
the! are capital investments.
i. In order to return to such taxpa!er his investment of capital, an annual
deduction ma! be made from gross income of an amount e@ual to the cost
of such improvements divided b! the number of !ears remaining of the
term of the lease, and such deduction shall be in lieu of a deduction for
depreciation. If the remainder of the term of lease is greater than the
probable life of the building erected, or of the improvements made, this
deduction shall ta.e the form of an allowance for depreciation.
+or professional expenses, the following are allowed deductions #*ec HD, %% /&:
o Cost of supplies
o 4xpenses paid in the operation and repair of transportation e@uipment used in
ma.ing professional class
o 8ue to professional societies and subscriptions to professional <ournals
i. *o bar review tuition fees and bar examination fees paid are not
deductible
o %ent paid for offices
o 4xpenses for utilities on offices
o 4xpenses for hiring of office assistants
o 7oo.s, furniture and professional instruments and e@uipment with a *IO%T
useful life
i. Those with a permanent character are >OT allowable
rofessional expenses are deductible in the !ear the professional services are rendered,
not in the !ear the! are billed. #$amalateo&
+or farmer who operates for a profit , the! can deduct necessar! expenses all amounts
actuall! expended in the carr!on on of the business of farming.
10
10
The cost of ordinar! tools of short life or small cost, such as hand tools, including shovels, ra.es, etc., ma! be
included. The cost of feeding and raising livestoc. ma! be treated as an expense deduction, in so far as such cost
represents actual outla!, but not including the value of farm produce grown upon the far, or the laborer of the
taxpa!er. 9here a farmer is engaged in producing crops which ta.e more than a !ear from the time of planting to
the process of gathering and disposal, expenses deducted ma! be determined upon the crop basis, and such
deductions must be ta.en in the !ear in which the gross income from the crop has been reali,ed. The cost of farm
machiner!, e@uipment, and farm buildings represents a capital investment and is not allowable deduction as an
item of expense. 'mounts expended in the development of farms, orchards, and ranches, prior to the time when
the productive state is reached ma! be regarded as investments of capital. 'mounts expended in purchasing wor.,
breeding or dair! animals are regarded as investments of capital, and ma! be depreciated unless such animals are
included in an inventor! in accordance with section 1AD of these regulations. The purchase price of transportation
e@uipment if used wholl! used in carr!ing on farm operations, is not deductible but is regarded as an investment of
capital. The cost of gasoline or fuel, repairs, and up.eep of the transportation e@uipment if used wholl! in the
business of farming is deductible as an expense; if used partl! for business purposes and partl! for the pleasure or
convenience of the taxpa!er or his famil!, such cost ma! be apportioned according to the extent of the use for
purposes of business and pleasure or convenience, and onl! the proportion of such cost <ustl! attributable to
business purposes is deductible as a necessar! expense. If a farm is operated for recreation or pleasure and not on
a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt
therefrom, the entire receipts from the sale of products ma! be ignored in rendering a return of income, and the
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Taxation One: Outline with Codals
rivate educational institutions have special deductibles.:
E. The! are allowed to deduct expenditures otherwise considered as capital outla!s of
depreciable assets incurred for the expansion of school facilities, or
G. The! are allowed to capitali,e the expenditure, and claim deduction b! wa! of
depreciation.
Representation, amusement, recreation e*penses and entertainment facilities 1 1'1'2*
%epresentation expenses are expenses incurred in connection with the conduct of one)s
trade, business or profession in:
o 4ntertaining, providing amusement O recreation to, or meeting with guests
o 't a dining place, place of amusement, countr! club, theater, concert, pla!,
sporting event O similar places
i. If the taxpa!er is the registered member of a countr!, golf, or sports club,
the presumption is that the expenses are fringe benefits sub<ect to the
+7T unless the taxpa!er can prove that these are actuall! representation
expenses.
4ntertainment facilities refer to a !acht, vacation home or condominium O similar items
of real or personal propert! used b! the taxpa!er primaril! for entertainment,
amusement, or recreation of guests or emplo!ees.
o It must be owned or form part of the taxpa!er)s trade, bi,, or profession for
which he claims a rental expense.
o ' !acht is considered an entertainment facilit! if its use is not restricted to
specified officers or emplo!ees. If it was restricted to them, it would be a fringe
benefit, sub<ect to the +7T.
The following are not considered entertainment, amusement O recreation expenses:
1. Those that are treated as compensation for fringe benefits
/. 4xpenses for charitable O fund6raising events
2. 4xpenses for bona fide meeting of stoc.holders, partners or directors
A. 4xpenses for attending or sponsoring an emplo!ee to a business league or
professional org meeting
B. 4xpenses for events organi,ed for promotion, mar.eting O advertising including
concerts, conferences, seminars, wor.shops, conventions, etc
H. Other expenses of a similar nature
o 7KT; These ma! still be @ualified as deductions under other provisions of *ection
2A.
o ossible legal implication: The! won)t be sub<ect to the ceiling of representation
expenses #my opinion lang ah,2
%e@uisites of deductibilit! for entertainment, amusement, and recreational expense:
1. aid or incurred during the taxable !ear
/. $ust be directl! connected to the development, management O operation of
the trade, bi, or profession of the taxpa!er; or directl! related to or in
furtherance of, his or its trade, bi, or exercise of profession
2. >ot be contrar! to blah blah blah
A. >ot been paid to an official of the government as a bribe or .ic.bac.
B. $ust be substantiated b! ade@uate proof
H. $ust been withheld, if applicable, and paid to the 7I%
Ceilin- for epresentation> Entertainment and Amusement Expenses
Taxpa!ers engaged in sale of goods or properties 0.BL of net sales
Taxpa!ers engaged in sale of services, including exercise of
profession and use or lease of properties
1L of net revenue
expenses incurred, being regarded as personal expenses, will not constitute allowable deduction.
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Taxation One: Outline with Codals
+or constructive dividends, see footnote.
11
o *orr!, pagod na,
Interests
#7& Interest.6
#1& In 5eneral. 6 The amount of interest paid or incurred within a taxable !ear on indebtedness in connection with
the taxpa!erNs profession, trade or business shall be allowed as deduction from gross income: rovided, however,
That the taxpa!erNs otherwise allowable deduction for interest expense shall be reduced b! A/L of the interest
income sub<ect to final tax: +rovided, that effective Manuar! 1, /00D, the percentage shall be 22L.
#/& 4xceptions. 6 >o deduction shall be allowed in respect of interest under the succeeding subparagraphs:
#a& If within the taxable !ear an individual taxpa!er reporting income on the cash basis incurs an indebtedness on
which an interest is paid in advance through discount or otherwise: rovided, That such interest shall be allowed a
a deduction in the !ear the indebtedness is paid: rovided, further, That if the indebtedness is pa!able in periodic
amorti,ations, the amount of interest which corresponds to the amount of the principal amorti,ed or paid during
the !ear shall be allowed as deduction in such taxable !ear;
#b& If both the taxpa!er and the person to whom the pa!ment has been made or is to be made are persons
specified under *ection 2H #7&; or
#c&If the indebtedness is incurred to finance petroleum exploration.
#2& Optional Treatment of Interest 4xpense. 6 't the option of the taxpa!er, interest incurred to ac@uire propert!
used in trade business or exercise of a profession ma! be allowed as a deduction or treated as a capital
expenditure.
Interests paid on debts are allowed as deductions but:
o These must be incurred in connection with the taxpa!er)s profession, trade or bi,
o The allowable deduction is onl! 22L of the interest income sub<ect to final tax.
#more on this %elow2
%e@uisites for deductibilit! of interest expense # 1+1''*:
1. There must be an indebtedness
/. There should be an interest expense paid or incurred upon the indebtedness
#incurred meaning that it was due and demandable&
2. The indebtedness must be that of the taxpa!er
A. It must be connected with the taxpa!er)s trade, bi, or profession
B. The interest expense must have been paid or incurred during the taxable !ear
11
*ec. C0, %%6/
*ec. C0. Compensation for personal services.W 'mong the ordinar! and necessar! expenses paid or incurred in
carr!ing on an! trade or business ma! be included a reasonable allowance for salaries or other compensation for
personal services actuall! rendered. The test of deductibilit! in the case of compensation pa!ments is whether the!
are reasonable and are, in fact, pa!ments purel! for service. This test and its practical application ma! be further
stated and illustrated as follows:
#1& 'n! amount paid in the form of compensation, but not in fact as the purchase price services, is not deductible.
#a& an ostensible salar! paid b! a corporation ma! be a distribution of dividend on stoc.. This is li.el! to occur in
the case of a corporation having few shareholders, practicall! all of whom draw salaries. If in such a case the
salaries are in excess of those ordinaril! paid for similar services, and the excessive pa!ment correspond or bear a
close relationship to the stoc.holder of the officers or emplo!ees, it would seem li.el! that the salaries are not paid
wholl! for services rendered, but that the excessive pa!ments are a distribution of earnings upon the stoc.. #b& 'n
ostensible salar! ma! be in part pa!ment for propert!. This ma! occur, for example, where a partnership sells out
to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it ma!
be found that the salaries of the former partners are not merel! for services, but in part constitute pa!ment for the
transfer of their business.
#/& The form or method of fixing compensation is not decisive as to the deductibilit!. 9hile an! form of contingent
compensation invites scrutin! as a possible distribution of earnings of the enterprise, it does not follow that
pa!ments on a continent basis are to be treated fundamentall! on an! basis different from that appl!ing to
compensation at a flat rate. 5enerall! spea.ing, if contingent compensation is paid pursuant to a free bargain
between the emplo!er and the individual made before the services are rendered, not influenced b! an!
consideration on the part of the emplo!er other than that of securing on fair and advantageous terms the services
of the individual, it should be allowed as a deduction even though in the actual wor.ing out of the contract it ma!
prove to be greater than the amount which would ordinaril! be paid.
#2& In an! event the allowance for compensation paid ma! not exceed what is reasonable in all the circumstances.
It is in general <ust to assume that reasonable and true compensation is onl! such amount as would ordinaril! be
paid for li.e services b! li.e enterprises in li.e circumstances. The circumstances to be ta.en into consideration are
those existing at the date when the contract for services was made, not those existing at the date when the
contract is @uestioned.
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Taxation One: Outline with Codals
H. The interest must have been stipulated in writing
C. The interest must be legall! due
E. The interest pa!ment arrangement must not be between related taxpa!ers
D. The interest must not be incurred to finance petroleum operations
10. In case the interest was incurred to ac@uire propert! used in trade, bi, or profession,
it was not treated as capital expenditure.
o In cases li.e this, the axpa!er has the option to treat it as either
i. interest expense deductible in full or
ii. as a capital expenditure and claim as deduction onl! the periodic
amorti,ation-depreciation.
o 7ut he can onl! choose one, or else double deduction, that ain)t allowed. #*ec 2A
#7.2&, and icop Q C' where the *C allowed interest expense on a loan to bu!
machiner! as deductible.&
Interest is not deductible if:
o 7oth the taxpa!er and the person to whom interest was paid are related
taxpa!ers, meaning:
i. $embers of a famil!
ii. 'n individual and a corp where more than B0L of the outstanding stoc. of
the corp is owned b! the individual
iii.Two corps where more than B0L of the outstanding stoc. of each is owned
b! the other or b! the same individual
iv. 7etween grantor and fiduciar! of an! trust
v. 7etween fiduciar! of a trust and the fiduciar! of another trust if the same
person is a grantor with respect to each trust
vi. 7etween fiduciar! of a trust and the beneficiar!
If an individual is on the cash %asis of accounting, interest paid in advance, through
discount or otherwise, shall be allowed as deduction not in the !ear that the interest was
paid in advance, but in the !ear that the indebtedness was paid.
o 7ut if the indebtedness is pa!able in periodic amorti,ation, the amount of the
interest which corresponds to the amount of the principal amorti,ed or paid
during the !ear shall be allowed as deduction in such taxable !ear.
"ate pa!ment of tax is considered a debt, and therefore interest on taxes is interest on
indebtedness and is thus deductible. #CI% v de rieto&
If a taxpa!er has interest income sub<ect to final tax, the otherwise allowable deduction
for interest expense shall be reduced b! an amount e@ual to 22L of interest income
sub<ected to final tax. This 22L rule will onl! appl! if there is interest income sub<ect to
final tax. If none, then !ou can deduct in full.
The law assumes that the mone! borrowed is used to reinvest, legitimate business
purpose is irrelevant. #'tt!. $ontero&
The law effectivel! cancelled out the tax arbitrage advantage. Corporations before would
borrow mone! and use the interest the! had to pa! as a deduction, even if the!
reinvested the mone! elsewhere and got interest income.
+or example, Muan borrowed mone! from 7I. It had an interest expense of E,000. Ie
then deposited the mone! that he borrowed with I*7C, and it had an interest income on
it of D000 #net alread! of the /0L final tax&. Iow much is his deducible interest
expense: #p. /0D, %e!es&
Interest expense, unad<usted E,000
"ess: 'd<ustment for interest
Income sub<ect to final tax
#22L of D,000& /,DC0
'd<usted balance, deduction for interest expense B,020
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Taxation One: Outline with Codals
o 7ut interest paid or accrued on taxes related to business or practice of profession
can be deducted in full #it is not sub<ect to this rule on downward ad<ustment&
Taxes
#C& Taxes.6
#1& In 5eneral. 6 Taxes paid or incurred within the taxable !ear in connection with the taxpa!erNs profession, trade
or business, shall be allowed as deduction, except
#a& The income tax provided for under this Title;
#b& Income taxes imposed b! authorit! of an! foreign countr!; but this deduction shall be allowed in the case of a
taxpa!er who does not signif! in his return his desire to have to an! extent the benefits of paragraph #2& of this
subsection #relating to credits for taxes of foreign countries&;
#c& 4state and donorNs taxes; and
#d& Taxes assessed against local benefits of a .ind tending to increase the value of the propert! assessed.
rovided, That taxes allowed under this *ubsection, when refunded or credited, shall be included as part of gross
income in the !ear of receipt to the extent of the income tax benefit of said deduction.
#/& "imitations on 8eductions. 6 In the case of a nonresident alien individual engaged in trade or business in the
hilippines and a resident foreign corporation, the deductions for taxes provided in paragraph #1& of this *ubsection
#C& shall be allowed onl! if and to the extent that the! are connected with income from sources within the
hilippines.
#2& Credit 'gainst Tax for Taxes of +oreign Countries. 6 If the taxpa!er signifies in his return his desire to have the
benefits of this paragraph, the tax imposed b! this Title shall be credited with:
#a& Citi,en and 8omestic Corporation. 6 In the case of a citi,en of the hilippines and of a domestic corporation, the
amount of income taxes paid or incurred during the taxable !ear to an! foreign countr!; and
#b& artnerships and 4states. 6 In the case of an! such individual who is a member of a general professional
partnership or a beneficiar! of an estate or trust, his proportionate share of such taxes of the general professional
partnership or the estate or trust paid or incurred during the taxable !ear to a foreign countr!, if his distributive
share of the income of such partnership or trust is reported for taxation under this Title.
'n alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign
countries allowed under this paragraph.
#A& "imitations on Credit. 6 The amount of the credit ta.en under this *ection shall be sub<ect to each of the
following limitations:
#a& The amount of the credit in respect to the tax paid or incurred to an! countr! shall not exceed the same
proportion of the tax against which such credit is ta.en, which the taxpa!erNs taxable income from sources within
such countr! under this Title bears to his entire taxable income for the same taxable !ear; and
#b& The total amount of the credit shall not exceed the same proportion of the tax against which such credit is
ta.en, which the taxpa!erNs taxable income from sources without the hilippines taxable under this Title bears to
his entire taxable income for the same taxable !ear.
#B& 'd<ustments on a!ment of Incurred Taxes. 6 If accrued taxes when paid differ from the amounts claimed as
credits b! the taxpa!er, or if an! tax paid is refunded in whole or in part, the taxpa!er shall notif! the
Commissioner; who shall redetermine the amount of the tax for the !ear or !ears affected, and the amount of tax
due upon such redetermination, if an!, shall be paid b! the taxpa!er upon notice and demand b! the
Commissioner, or the amount of tax overpaid, if an!, shall be credited or refunded to the taxpa!er. In the case of
such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit ma!
re@uire the taxpa!er to give a bond with sureties satisfactor! to and to be approved b! the Commissioner in such
sum as he ma! re@uire, conditioned upon the pa!ment b! the taxpa!er of an! amount of tax found due upon an!
such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner ma!
re@uire.
#H& =ear in 9hich Credit Ta.en. 6 The credits provided for in *ubsection #C&#2& of this *ection ma!, at the option of
the taxpa!er and irrespective of the method of accounting emplo!ed in .eeping his boo.s, be ta.en in the !ear
which the taxes of the foreign countr! were incurred, sub<ect, however, to the conditions prescribed in *ubsection
#C&#B& of this *ection. If the taxpa!er elects to ta.e such credits in the !ear in which the taxes of the foreign
countr! accrued, the credits for all subse@uent !ears shall be ta.en upon the same basis and no portion of an!
such taxes shall be allowed as a deduction in the same or an! succeeding !ear.
#C& roof of Credits. 6 The credits provided in *ubsection #C&#2& hereof shall be allowed onl! if the taxpa!er
establishes to the satisfaction of the Commissioner the following:
#a& The total amount of income derived from sources without the hilippines;
#b& The amount of income derived from each countr!, 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 b! the *ecretar! of +inance;
and
#c& 'll other information necessar! for the verification and computation of such credits.
Taxes paid or accrued within the taxable !ear in connection with the taxpa!er)s trade or
business or exercise of a profession are deductible from gross income.
o 4TC4T: #*ec E/6E2, %% /&
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Taxation One: Outline with Codals
i. hilippine income tax #but the fringe benefit tax can be deducted;&
ii. 4state tax
iii. 8onor)s tax
iv. *pecial assessment #see footnote&
1/
v. Income tax imposed b! a foreign countr! for income sourced outside the
hilippines #but it shall be allowed if the taxpa!er does not signif! his
desire to en<o! an! benefits of the tax credit for taxes paid to foreign
countries&
vi. *toc. transaction tax
vii. Q'T on business #last two e*ceptions cited %y Reyes, p. GEG2
Income, war6profits, and excess6profits taxes imposed b! the authorit! of a foreign
countr! #including the Knited *tates and possessions thereof& are allowed as deductions
onl! if the taxpa!er does not signif! in his return his desire to have to an! extent the
benefits of the provisions of law allowing credits against the tax for taxes of foreign
countries. #*ec E/, %% /&
9ith regard to tax credits, onl! resident citi,ens and domestic corporations are affected
b! this, because the! are onl! ones taxed worldwide. 9hen a taxpa!er is @ualified for a
credit, he has the option of either:
o 8educting the foreign income tax from his gross income, or
o Claiming the tax credit.
Iow do we determine the amount of tax to be credited: Must follow the formulas below,
and choose which of them is lower;
1. >et income from foreign countr! x Taxes paid in the % Y ZZZZZZ
>et income worldwide
/. +oreign income tax paid Y ZZZZZZZZZZ
4xample
7lessings had a taxable income from the hilippines of 200,000 and from the K* of
100,000. 'n income tax of A0,000 was paid to the K*. If 7lessings chose to ta.e a tax
credit for the income tax paid to the *tates, how much tax does he have to pa! the
hilippine government after the tax credit would have been computed:
5ine everything up and now the ta*a%le income worldwide and the total ta*es paid
here,
Taxable income before tax credit, K*' 100,000
Taxable income before tax credit, hil 200,000
Taxable income, worldwide A00,000
Corporate income tax of 20L 1/0,000
"ess: Tax credit for foreign tax
+lug in the values,
#100,000-A00,000& x 1/0,000 Y 20,000
+oreign income tax paid Y A0,000
6hoose whats lower,'llowed tax credit 20,000
hilippine income tax still due D0,000
1/
' tax is considered assessed against local benefits when the propert! sub<ect to the tax is limited to the propert!
benefited. *pecial assessments are not deductible, even though an incidental benefit ma! inure to the public
welfare. The taxes deductible are those levied for the general public welfare, b! the proper taxing authorities at a
li.e rate against all propert! in the territor! over which such authorities have <urisdiction. 9hen assessments are
made for the purpose of maintenance or repair of local benefits, the taxpa!er ma! deduct assessments paid as an
expense incurred in business, if the pa!ment of such assessments is necessar! to the conduct of his business.
9hen the assessments are made for the purpose of constructing local benefits, the pa!ments b! the taxpa!er are
in the nature of capital expenditures and are not deductible. 9here assessments are made for the purpose of both
construction and maintenance or repairs, the burden is on the taxpa!er to show the allocation of the amounts
assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible.
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Taxation One: Outline with Codals
9hat would 7lessings bring home if the! chose to do the tax credit:
Taxable income, worldwide A00,000
D0,000
210,000
If 7lessings chose to deduct, this is what would have happened:
Taxable income worldwide A00,000
8eduction for foreign income tax paid A0,000
Taxable income 2H0,000
Income tax at 20L 10E,000
Income after tax #what 7lessings ta.es home& 1B/,000
It)s prett! obvious that !ou should go for a tax credit. =ou end up with more cash in !our
poc.ets at the end of the da!; 's 'tt!. $ontero said, !ou get 100L benefit, as
compared to deductions where all expenses benefit to the extent onl! of 20L #for
corporations&.
Can !ou deduct fines and penalties paid to the 7I% because of late pa!ment of taxes:
>O; #5utierre, v Collector, 1A *C%' 22&
"osses
#8& "osses. 6
#1& In 5eneral.6 "osses actuall! sustained during the taxable !ear and not compensated for b! insurance or other
forms of indemnit! shall be allowed as deductions:
#a& If incurred in trade, profession or business;
#b& Of propert! connected with the trade, business or profession, if the loss arises from fires, storms, shipwrec., or
other casualties, or from robber!, theft or embe,,lement.
The *ecretar! of +inance, upon recommendation of the Commissioner, is hereb! authori,ed to promulgate rules
and regulations prescribing, among other things, the time and manner b! which the taxpa!er shall submit a
declaration of loss sustained from casualt! or from robber!, theft or embe,,lement during the taxable !ear:
rovided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirt!
#20& da!s nor more than ninet! #D0& da!s from the date of discover! of the casualt! or robber!, theft or
embe,,lement giving rise to the loss.
#c& >o loss shall be allowed as a deduction under this *ubsection if at the time of the filing of the return, such loss
has been claimed as a deduction for estate tax purposes in the estate tax return.
#/& roof of "oss. 6 In the case of a nonresident alien individual or foreign corporation, the losses deductible shall
be those actuall! sustained during the !ear incurred in business, trade or exercise of a profession conducted within
the hilippines, when such losses are not compensated for b! insurance or other forms of indemnit!. The *ecretar!
of +inance, upon recommendation of the Commissioner, is hereb! authori,ed to promulgate rules and regulations
prescribing, among other things, the time and manner b! which the taxpa!er shall submit a declaration of loss
sustained from casualt! or from robber!, theft or embe,,lement during the taxable !ear: rovided, That the time
to be so prescribed in the rules and regulations shall not be less than thirt! #20& da!s nor more than ninet! #D0&
da!s from the date of discover! of the casualt! or robber!, theft or embe,,lement giving rise to the loss; and
"osses actuall! sustained during the taxable !ear and not compensated b! insurance or
other form of indemnit! are deductible from gross income:
o If incurred in trade, bi, or profession;
o Of propert! connected with trade, bi, or profession, if the loss arises from fire,
storm, shipwrec. or other casualt!, or from robber!, theft or embe,,lement.
+or non6resident individuals and foreign corporations, the losses should be those actuall!
sustained during the taxable !ear, incurred in trade, bi, or profession conducted within
the hilippines.
If the loss has alread! been claimed as deduction for estate tax purposes, it is no longer
deductible from gross income.
Casualt! means the complete or partial destruction of propert! resulting from an
identifiable event of a sudden, unexpected or unusual nature. The taxpa!er bears the
burden of proof. # 12177*
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amdg
Taxation One: Outline with Codals
*pecial rules on losses:
o Qoluntar! removal of buildings #*ec DC, %% /&:
i. "oss due to the voluntar! removal or demolition of old buildings, the
scrapping of old machiner!, e@uipment, etc., incident to renewals and
replacements will be deductible from gross income.
ii. 9hen a taxpa!er bu!s real estate upon which is located a building, which
he proceeds to ra,e with a view to erecting thereon another building, it
will be considered that the taxpa!er has sustained no deductible expense
on account of the cost of such removal, the value of the real estate,
exclusive of old improvements, being presumabl! e@ual to the purchase
price of the land and building plus the cost of removing the useless
building.
o "oss of useful value of assets #*ec DE, %% /&:
i. 9hen through some change in business conditions, the usefulness in the
business of some or all of the capital assets is suddenl! terminated, so
that the taxpa!er discontinues the business or discards such assets
permanentl! from use of such business, he ma! claim as deduction the
actual loss sustained.
In determining the amount of the loss, ad<ustment must be made,
however, for improvements, depreciation and the salvage value of
the propert!.
This exception to the rule re@uiring a sale or other disposition of
propert! in order to establish a loss re@uires proof of some
unforeseen cause b! reason of which the propert! has been
prematurel! discarded, as, for example, where an increase in the
cost or change in the manufacture of an! product ma.es it
necessar! to abandon such manufacture, to which special
machiner! is exclusivel! devoted, or where new legislation directl!
or indirectl! ma.es the continued profitable use of the propert!
impossible.
This exception does >OT extend to a case where the useful life of
propert! terminates solel! as a result of those gradual processes
for which depreciation allowance are authori,ed. It does not appl!
to inventories or to other than capital assets. The exception applies
to buildings onl! when the! are permanentl! abandoned or
permanentl! devoted to a radicall! different use, and to machiner!
onl! when its use as such is permanentl! abandoned. 'n! loss to
be deductible under this exception must be charged off in the
boo.s and full! explained in returns of income.
o *hrin.age in value of stoc.s #*ec DD, %% /&:
i. ' person possessing stoc. of a corporation can not deduct from gross
income an! amount claimed as a loss merel! on account of shrin.age in
value of such stoc. through fluctuation of the mar.et or otherwise.
The loss allowable in such case is that actuall! suffered when the
stoc. is disposed of.
ii. If stoc. of a corporation becomes worthless, its cost or other basis
determined in accordance with these regulations ma! be deducted b! the
owner in the taxable !ear in which the stoc. became worthless, provided a
satisfactor! showing of its worthlessness be made, as in the case of bad
debts.
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03563
#2& >et Operating "oss Carr!6Over. 6 The net operating loss of the business or enterprise for an! taxable !ear
immediatel! preceding the current taxable !ear, which had not been previousl! offset as deduction from gross
income shall be carried over as a deduction from gross income for the next three #2& consecutive taxable !ears
immediatel! following the !ear of such loss: rovided, however, That an! net loss incurred in a taxable !ear during
which the taxpa!er was exempt from income tax shall not be allowed as a deduction under this *ubsection:
rovided, further, That a net operating loss carr!6over shall be allowed onl! if there has been no substantial change
in the ownership of the business or enterprise in that 6
#i& >ot less than sevent!6five percent #CBL& in nominal value of outstanding issued shares., if the business is in the
name of a corporation, is held b! or on behalf of the same persons; or
#ii& >ot less than sevent!6five percent #CBL& of the paid up capital of the corporation, if the business is in the
name of a corporation, is held b! or on behalf of the same persons.
+or purposes of this subsection, the term ?not operating loss? shall mean the excess of allowable deduction over
gross income of the business in a taxable !ear.
rovided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives
provided for under 4xecutive Order >o. //H, as amended, otherwise .nown as the Omnibus Investments Code of
1DEC, incurred in an! of the first ten #10& !ears of operation ma! be carried over as a deduction from taxable
income for the next five #B& !ears immediatel! following the !ear of such loss. The entire amount of the loss shall
be carried over to the first of the five #B& taxable !ears following the loss, and an! portion of such loss which
exceeds, the taxable income of such first !ear shall be deducted in li.e manner form the taxable income of the next
remaining four #A& !ears.
>et operating loss is the excess of allowable deduction over gross income of the
business in a taxable !ear.
o >O"CO: The net operating loss of the business which has not been previousl!
offset as deduction shall be carried over as deduction from gross income for the
next 2 consecutive !ears immediatel! following the !ear of such loss
o This is allowed if there has been no substantial change in ownership of the
business, meaning
i. 9here not less than CBL of outstanding shares in the business is in the
name of a corporation held b! the same persons, or
ii. 9here not less than CBL of the paid6up capital of the corporation is held
b! the same persons
o +or mines other than oil and gas wells, a net operating loss without the benefit of
incentives provided for b! the Omnibus Investments Code ma! be carried over as
deduction for the next B !ears immediatel! following the !ear of loss
>O"CO is allowed regardless of the change in the ownership of a compan! in case of a
merger where the taxpa!er who accumulated the >O"CO is the surviving entit!
If the >O"CO arises from a merger, consolidation or combination, the
transferee-assignee is not entitled to cleaim the same >O"CO as deduction unless the
transferor gains control of at least CBL of he outstanding issues or paid0up capital of
the transferee.
>O"CO is not transferable or assignable to another person 4TC4T if there has been no
substantial change in the ownership of the business in that not less than CBL of the
paid6up capital of the business is held b! the same fol.
'n individual who claims the A0L O*8 cannot claim deduction of >O"CO simultaneousl!.
4ven if the >O"CO was not claimed, the 2 !ear period shall continue to run.
If the taxpa!er paid its income tax under the $CIT computation, the 2 !ear period still
runs. # 1.1'1*
9ho aren)t @ualified to >O"CO:
1. O7Ks for a foreign ban.ing corporation and +C8K of a domestic ban.ing corp
/. 4nterprise registered with the 7OI en<o!ing the Income Tax Iolida! Incentive
2. 4S'6registered enterprise
A. *7$'6registered enterprise
B. +oreign corp engaged in international shipping or air carriage business in the
hilippines
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Taxation One: Outline with Codals
H. 'n! person, natural or <uridical, en<o!ing exemption from income tax
4xample of >O"CO
/00B /00H /00C /00E /00D
5ross Income B00 H00 C00 B00 E00
"ess:deductions D00 B00 CB0 A/0 AB0
>et loss A00 B0
>et income 100 E0 2B0
"ess:
>olco
+rom /00B 100 E0
+rom /00C B0
Taxable income 0 0 0 0 200
#A& Capital "osses. 6
#a& "imitation. 6 "oss from sales or 4xchanges of capital assets shall be allowed onl! to the extent provided in
*ection 2D.
#b& *ecurities 7ecoming 9orthless. 6 If securities as defined in *ection // #T& become worthless during the taxable
!ear and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss
from the sale or exchange, on the last da! of such taxable !ear, of capital assets.
#B& "osses +rom 9ash *ales of *toc. or *ecurities. 6 "osses from ?wash sales? of stoc. or securities as provided in
*ection 2E.
#H& 9agering "osses. 6 "osses from wagering transactions shall b allowed onl! to the extent of the gains from such
transactions.
#C& 'bandonment "osses. 6
#a& In the event a contract area where petroleum operations are underta.en is partiall! or wholl! abandoned, all
accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction:
rovided, That accumulated expenditures incurred in that area prior to Manuar! 1, 1DCD shall be allowed as a
deduction onl! from an! income derived from the same contract area. In all cases, notices of abandonment shall be
filed with the Commissioner.
#b& In case a producing well is subse@uentl! abandoned, the unamorti,ed costs thereof, as well as the
undepreciated costs of e@uipment directl! used therein, shall be allowed as a deduction in the !ear such well,
e@uipment or facilit! is abandoned b! the contractor: rovided, That if such abandoned well is reentered and
production is resumed, or if such e@uipment or facilit! is restored into service, the said costs shall be included as
part of gross income in the !ear of resumption or restoration and shall be amorti,ed or depreciated, as the case
ma! be.
-ore* losses
9hen foreign currenc! is ac@uired in connection with the regular course of bi,, ordinar!
gain or loss results from the fluctuations. *uch loss is deductible onl! in the !ear that it
is sustained. 7ut since loans have not actuall! been paid !et, therefore the losses have
not !et been reali,ed and are not deductible !et. #BI ulin- 2'@1%'*
'nnual increase in value of an asset is not taxable income because such increase has not
!et been reali,ed. The increase in value can onl! be taxed when such is disposed and
there was a gain. The same is true of decrease in value. It is onl! when the decrease is
reali,ed, before it is allowed to be deducted. #BI ulin- 1..1!8*
Wagering loses
'llowed onl! to the extent of gains from such transactions
A%andonment loses
9hen a petroleum operation is partiall! or wholl! abandoned, all accumulated
exploration and development expenses shall be allowed as a deduction
7ad debts
#4& 7ad 8ebts. 6
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#1& In 5eneral. 6 8ebts due to the taxpa!er actuall! ascertained to be worthless and charged off within the taxable
!ear except those not connected with profession, trade or business and those sustained in a transaction entered
into between parties mentioned under *ection 2H #7& of this Code: rovided, That recover! of bad debts previousl!
allowed as deduction in the preceding !ears shall be included as part of the gross income in the !ear of recover! to
the extent of the income tax benefit of said deduction.
#/& *ecurities 7ecoming 9orthless. 6 If securities, as defined in *ection // #T&, are ascertained to be worthless and
charged off within the taxable !ear and are capital assets, the loss resulting therefrom shall, in the case of a
taxpa!er other than a ban. or trust compan! incorporated under the laws of the hilippines a substantial part of
whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or
exchange, on the last da! of such taxable !ear, of capital assets.
7ad debts are debts resulting from worthlessness or uncollectibilit! of amounts due the
taxpa!er b! others, arising from mone! lent or from uncollectible amounts of income
from goods sold or services rendered.
7ad debts are deductible provided that:
o There is an existing indebtedness due to the taxpa!er which is valid and legall!
demandable #and not losses from investments, as in Iermanos v CI%&
o The! are connected with trade, bi, or profession of the taxpa!er
o The! are actuall! ascertained to be worthless, uncollectible, and charged off
within the taxable !ear
o The taxpa!er must show that it its uncollectible even in the future #hil %efining v
CT'&
o The! are not sustained between related parties
o If the! are recovered, the! should be included as part of gross income in the !ear
of recover! #this is the tax benefit rule&
"osses or bad debts must be ascertained to be so and written off during the taxable
!ear. The! are therefore deductible in full or not at all. There)s no partial deductions.
#Iermanos v CI%&
Its worthless6ness depends on the particular facts of each case. It can)t be considered
worthless <ust because of its doubtful value or difficult! to collect.
If it)s a ban., the 7* is the one that will ascertain the worthlessness and uncollectibilit!
of the bad debts.
If the receivable is from an insurance compan!, it cannot be claimed as bad debt unless
the insurance compan! has been declared closed or insolvent b! the Insurance Commish
*ecurities become worthless are considered to be a loss from sale of capital assets on
the last da! of the taxable !ear except for a ban. or trust compan!.
Illustration of the tax benefit rule for bad debts
o /010 taxable income before bad debts: 100,000
o 7ad debts in /010: 1C0,000
o 7ad debts recovered in /011: 120,000
Iow much do I report in /011 as gross income, ie, how much did I benefit
from the bad debt I recorded as a deduction in /010:
100,000. That)s how much I benefited from the debts being
written off. I benefited from it because I didn)t have to pa! the
100,000 since the bad debt as a deduction covered it full!. #It
would be a different amount if the bad debts were less than the
taxable income before bad debs.& *o, I have to include this amount
in the computation in the gross income.
9hat happens to the 20,000: It)s non6taxable.
8epreciation
#+& 8epreciation. 6
#1& 5eneral %ule. 6 There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion,
wear and tear #including reasonable allowance for obsolescence& of propert! used in the trade or business. In the
case of propert! held b! one person for life with remainder to another person, the deduction shall be computed as
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if the life tenant were the absolute owner of the propert! and shall be allowed to the life tenant. In the case of
propert! held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the
trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such
provisions, on the basis of the trust income allowable to each.
#/& Kse of Certain $ethods and %ates. 6 The term ?reasonable allowance? as used in the preceding paragraph shall
include, but not limited to, an allowance computed in accordance with rules and regulations prescribed b! the
*ecretar! of +inance, upon recommendation of the Commissioner, under an! of the following methods:
#a& The straight6line method;
#b& 8eclining6balance method, using a rate not exceeding twice the rate which would have been used had the
annual allowance been computed under the method described in *ubsection #+& #1&;
#c& The sum6of6the6!ears6digit method; and
#d& an! other method which ma! be prescribed b! the *ecretar! of +inance upon recommendation of the
Commissioner.
#2& 'greement as to Kseful "ife on 9hich 8epreciation %ate is 7ased. 6 9here under rules and regulations
prescribed b! the *ecretar! of +inance upon recommendation of the Commissioner, the taxpa!er and the
Commissioner have entered into an agreement in writing specificall! dealing with the useful life and rate of
depreciation of an! propert!, the rate so agreed upon shall be binding on both the taxpa!er and the national
5overnment in the absence of facts and circumstances not ta.en into consideration during the adoption of such
agreement. The responsibilit! of establishing the existence of such facts and circumstances shall rest with the part!
initiating the modification. 'n! change in the agreed rate and useful life of the depreciable propert! as specified in
the agreement shall not be effective for taxable !ears prior to the taxable !ear in which notice in writing b!
certified mail or registered mail is served b! the part! initiating such change to the other part! to the agreement:
rovided, however, that where the taxpa!er has adopted such useful life and depreciation rate for an! depreciable
and claimed the depreciation expenses as deduction from his gross income, without an! written ob<ection on the
part of the Commissioner or his dul! authori,ed representatives, the aforesaid useful life and depreciation rate so
adopted b! the taxpa!er for the aforesaid depreciable asset shall be considered binding for purposes of this
*ubsection.
#A& 8epreciation of roperties Ksed in etroleum Operations. 6 'n allowance for depreciation in respect of all
properties directl! related to production of petroleum initiall! placed in service in a taxable !ear shall be allowed
under the straight6line or declining6balance method of depreciation at the option of the service contractor.
Iowever, if the service contractor initiall! elects the declining6balance method, it ma! at an! subse@uent date, shift
to the straight6line method.
The useful life of properties used in or related to production of petroleum shall be ten #10& !ears of such shorter life
as ma! be permitted b! the Commissioner.
roperties not used directl! in the production of petroleum shall be depreciated under the straight6line method on
the basis of an estimated useful life of five #B& !ears.
#B& 8epreciation of roperties Ksed in $ining Operations. 6 an allowance for depreciation in respect of all properties
used in mining operations other than petroleum operations, shall be computed as follows:
#a& 't the normal rate of depreciation if the expected life is ten #10& !ears or less; or
#b& 8epreciated over an! number of !ears between five #B& !ears and the expected life if the latter is more than
ten #10& !ears, and the depreciation thereon allowed as deduction from taxable income: rovided, That the
contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed b!
this *ection will be used.
#H& 8epreciation 8eductible b! >onresident 'liens 4ngaged in Trade or 7usiness or %esident +oreign Corporations. 6
In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a
reasonable allowance for the deterioration of ropert! arising out of its use or emplo!ment or its non6use in the
business trade or profession shall be permitted onl! when such propert! is located in the hilippines.
8epreciation is the gradual diminution in the useful value of tangible propert! resulting
from wear and tear and normal obsolescence
' reasonable allowance for depreciation is deductible
*ome methods to determine reasonable allowance can be found in the codal.
o If the taxpa!er and the CI% come to an agreement of the useful life on which
depreciation will be based, this agreement will be considered binding.
8epreciation is allowed on tangible propert! and intangible propert!.
' compan! has the right to claim depreciation, but the law does not allow depreciation
be!ond its ac@uisition cost. #7asilan v CI%&
Certain cases of depreciation
roperties used directl! in production of petroleum 10 !ears #straight6line-declining
method&
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Taxation One: Outline with Codals
roperties used indirectl! in production of
petroleum
B !ears #straight6line&
roperties used in mining operations If expected life is 10 !ears or less,
normal rate of depreciation
If expected life is more than 10 !ears,
notif! the CI%, bro.
+or non6resident aliens engaged in trade, or
business here, or resident foreign corporations
' reasonable rate is allowed onl! on
properties located in the hilippines
8epletion
#5& 8epletion of Oil and 5as 9ells and $ines. 6
#1& In 5eneral. 6 In the case of oil and gas wells or mines, a reasonable allowance for depletion or amorti,ation
computed in accordance with the cost6depletion method shall be granted under rules and regulations to be
prescribed b! the *ecretar! of finance, upon recommendation of the Commissioner. rovided, That when the
allowance for depletion shall e@ual the capital invested no further allowance shall be granted: rovided, further,
That after production in commercial @uantities has commenced, certain intangible exploration and development
drilling costs: #a& shall be deductible in the !ear incurred if such expenditures are incurred for non6producing wells
and-or mines, or #b& shall be deductible in full in the !ear paid or incurred or at the election of the taxpa!er, ma!
be capitali,ed and amorti,ed if such expenditures incurred are for producing wells and-or mines in the same
contract area.
?Intangible costs in petroleum operations? refers to an! cost incurred in petroleum operations which in itself has no
salvage value and which is incidental to and necessar! for the drilling of wells and preparation of wells for the
production of petroleum: rovided, That said costs shall not pertain to the ac@uisition or improvement of propert!
of a character sub<ect to the allowance for depreciation except that the allowances for depreciation on such
propert! shall be deductible under this *ubsection.
'n! intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income
during the !ear shall not be ta.en into consideration in computing the ad<usted cost basis for the purpose of
computing allowable cost depletion.
#/& 4lection to 8educt 4xploration and 8evelopment 4xpenditures. 6 In computing taxable income from mining
operations, the taxpa!er ma! at his option, deduct exploration and development expenditures accumulated as cost
or ad<usted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures
paid or incurred during the taxable !ear: rovided, That the amount deductible for exploration and development
expenditures shall not exceed twent!6five percent #/BL& of the net income from mining operations computed
without the benefit of an! tax incentives under existing laws. The actual exploration and development expenditures
minus twent!6five percent #/BL& of the net income from mining shall be carried forward to the succeeding !ears
until full! deducted.
The election b! the taxpa!er to deduct the exploration and development expenditures is irrevocable and shall be
binding in succeeding taxable !ears.
?>et income from mining operations?, as used in this *ubsection, shall mean gross income from operations less
?allowable deductions? which are necessar! or related to mining operations. ?'llowable deductions? shall include
mining, milling and mar.eting expenses, and depreciation of properties directl! used in the mining operations. This
paragraph shall not appl! to expenditures for the ac@uisition or improvement of propert! of a character which is
sub<ect to the allowance for depreciation.
In no case shall this paragraph appl! with respect to amounts paid or incurred for the exploration and development
of oil and gas.
The term ?exploration expenditures? means expenditures paid or incurred for the purpose of ascertaining the
existence, location, extent or @ualit! of an! deposit of ore or other mineral, and paid or incurred before the
beginning of the development stage of the mine or deposit.
The term ?development expenditures? means expenditures paid or incurred during the development stage of the
mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time
when deposits of ore or other minerals are shown to exist in sufficient commercial @uantit! and @ualit! and shall
end upon commencement of actual commercial extraction.
#2& 8epletion of Oil and 5as 9ells and $ines 8eductible b! a >onresident 'lien individual or +oreign Corporation. 6
In the case of a nonresident alien individual engaged in trade or business in the hilippines or a resident foreign
corporation, allowance for depletion of oil and gas wells or mines under paragraph #1& of this *ubsection shall be
authori,ed onl! in respect to oil and gas wells or mines located within the hilippines.
Oil O gas wells or mines are allowed a reasonable allowance for depletion or amorti,ation
computed using the cost6depletion method
9hen the allowance for depletion e@uals the capital invested, no further allowance shall
be granted
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'fter production in commercial @uantities has started, certain intangible exploration O
drilling costs will be deducted in the e!ar incurred if such were incurred for non6
producing wells or mines, or these ma! be capitali,ed O amorti,ed if such were incurred
for producing wells or mines in same contract area
If it was a non6resident alien or a resident foreign corporation, the allowance for
depletion is limited to oil wells O mines in the hilippines
The formula for rate of depletion is #cost of mine propert!&-#estimated ore deposit&
#Consolidated $ines v CT'&
Charitable and other Contributions
#I& Charitable and Other Contributions. 6
#1& In 5eneral. 6 Contributions or gifts actuall! paid or made within the taxable !ear to, or for the use of the
5overnment of the hilippines or an! of its agencies or an! political subdivision thereof exclusivel! for public
purposes, or to accredited domestic corporation or associations organi,ed and operated exclusivel! for religious,
charitable, scientific, !outh and sports development, cultural or educational purposes or for the rehabilitation of
veterans, or to social welfare institutions, or to non6government organi,ations, in accordance with rules and
regulations promulgated b! the *ecretar! of finance, upon recommendation of the Commissioner, no part of the
net income of which inures to the benefit of an! private stoc.holder or individual in an amount not in excess of ten
percent #10L& in the case of an individual, and five percent #L& in the case of a corporation, of the taxpa!erNs
taxable income derived from trade, business or profession as computed without the benefit of this and the
following subparagraphs.
#/& Contributions 8eductible in +ull. 6 >otwithstanding the provisions of the preceding subparagraph, donations to
the following institutions or entities shall be deductible in full;
#a& 8onations to the 5overnment. 6 8onations to the 5overnment of the hilippines or to an! of its agencies or
political subdivisions, including full!6owned government corporations, exclusivel! to finance, to provide for, or to be
used in underta.ing priorit! activities in education, health, !outh and sports development, human settlements,
science and culture, and in economic development according to a >ational riorit! lan determined b! the >ational
4conomic and 8evelopment 'uthorit! #>48'&, In consultation with appropriate government agencies, including its
regional development councils and private philantrophic persons and institutions: rovided, That an! donation
which is made to the 5overnment or to an! of its agencies or political subdivisions not in accordance with the said
annual priorit! plan shall be sub<ect to the limitations prescribed in paragraph #1& of this *ubsection;
#b& 8onations to Certain +oreign Institutions or International Organi,ations. 6 8onations to foreign institutions or
international organi,ations which are full! deductible in pursuance of or in compliance with agreements, treaties, or
commitments entered into b! the 5overnment of the hilippines and the foreign institutions or international
organi,ations or in pursuance of special laws;
#c& 8onations to 'ccredited >ongovernment Organi,ations. 6 The term ?nongovernment organi,ation? means a non
profit domestic corporation:
#1& Organi,ed and operated exclusivel! for scientific, research, educational, character6building and !outh and
sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the
net income of which inures to the benefit of an! private individual;
#/& 9hich, not later than the 1Bth da! of the third month after the close of the accredited nongovernment
organi,ations taxable !ear in which contributions are received, ma.es utili,ation directl! for the active conduct of
the activities constituting the purpose or function for which it is organi,ed and operated, unless an extended period
is granted b! the *ecretar! of +inance in accordance with the rules and regulations to be promulgated, upon
recommendation of the Commissioner;
#2& The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations
to be prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, but in no case to exceed
thirt! percent #20L& of the total expenses; and
#A& The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation
organi,ed for similar purpose or purposes, or to the state for public purpose, or would be distributed b! a court to
another organi,ation to be used in such manner as in the <udgment of said court shall best accomplish the general
purpose for which the dissolved organi,ation was organi,ed.
*ub<ect to such terms and conditions as ma! be prescribed b! the *ecretar! of +inance, the term ?utili,ation?
means:
#i& 'n! amount in cash or in .ind #including administrative expenses& paid or utili,ed to accomplish one or more
purposes for which the accredited nongovernment organi,ation was created or organi,ed.
#ii& 'n! amount paid to ac@uire an asset used #or held for use& directl! in carr!ing out one or more purposes for
which the accredited nongovernment organi,ation was created or organi,ed.
'n amount set aside for a specific pro<ect which comes within one or more purposes of the accredited
nongovernment organi,ation ma! be treated as a utili,ation, but onl! if at the time such amount is set aside, the
accredited nongovernment organi,ation has established to the satisfaction of the Commissioner that the amount
will be paid for the specific pro<ect within a period to be prescribed in rules and regulations to be promulgated b!
the *ecretar! of +inance, upon recommendation of the Commissioner, but not to exceed five #B& !ears, and the
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Taxation One: Outline with Codals
pro<ect is one which can be better accomplished b! setting aside such amount than b! immediate pa!ment of
funds.
#2& Qaluation. 6 The amount of an! charitable contribution of propert! other than mone! shall be based on the
ac@uisition cost of said propert!.
#A& roof of 8eductions. 6 Contributions or gifts shall be allowable as deductions onl! if verified under the rules and
regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner.
8onations to the following are partiall! deductible:
1. To the government, exclusivel! for public purposes
/. To accredited domestic corporations or associations which are organi,ed and
operated exclusivel! for religious, charitable, scientific, !outh O sports development,
cultural or educational purposes, or for the rehabilitation of veterans
2. To social welfare institutions
A. To non6accredited >5Os
o The amount that can be deducted should not exceed:
i. 10L #individuals&, or
ii. BL #corporations&
of the taxpa!er)s taxable income derived from trade, bi, or
profession before the deduction for contributions and donations.
*o, loo. at two things: 1. !our charitable contributions and /. 10L
or BL #as the case ma! be& of !our taxable income, and then see
what)s lower. That amount is what !our allowed to deduct.
8onations to the following are full! deductible:
1. To the government, exclusivel! to finance activities in education, !outh, health,
sports development, human settlements, science and culture, and in economic
development according to the >48' lan #in other words, government priorit!
activities&
/. To certain foreign institutions or international organi,ations #treat!6based, etc&
2. To accredited >5Os
>5O)s are non6profit domestic corporations organi,ed and operated exclusivel! for
scientific research, educational, character6building and !outh O sports development, etc,
where no part of the net income inures to the benefit of an! private individual or
stoc.holder. Their level of admin expenses cannot exceed 20L of the total expenses,
and the! must utili,e contributions not later than 1B
th
da! of the 2
rd
monthJ #see codal;&
%esearch and 8evelopment
#I& %esearch and 8evelopment.6
#1& In 5eneral. 6 a taxpa!er ma! treat research or development expenditures which are paid or incurred b! him
during the taxable !ear in connection with his trade, business or profession as ordinar! and necessar! expenses
which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the
taxable !ear when paid or incurred.
#/& 'morti,ation of Certain %esearch and 8evelopment 4xpenditures. 6 't the election of the taxpa!er and in
accordance with the rules and regulations to be prescribed b! the *ecretar! of +inance, upon recommendation of
the Commissioner, the following research and development expenditures ma! be treated as deferred expenses:
#a& aid or incurred b! the taxpa!er in connection with his trade, business or profession;
#b& >ot treated as expenses under paragraph D1& hereof; and
#c& Chargeable to capital account but not chargeable to propert! of a character which is sub<ect to depreciation or
depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction ratabl! distributed over a
period of not less than sixt! #H0& months as ma! be elected b! the taxpa!er #beginning with the month in which
the taxpa!er first reali,es benefits from such expenditures&.
The election provided b! paragraph #/& hereof ma! be made for an! taxable !ear beginning after the effectivit! of
this Code, but onl! if made not later than the time prescribed b! law for filing the return for such taxable !ear. The
method so elected, and the period selected b! the taxpa!er, shall be adhered to in computing taxable income for
the taxable !ear for which the election is made and for all subse@uent taxable !ears unless with the approval of the
Commissioner, a change to a different method is authori,ed with respect to a part or all of such expenditures. The
election shall not appl! to an! expenditure paid or incurred during an! taxable !ear for which the taxpa!er ma.es
the election.
#2& 5imitations on (eduction. 6 This *ubsection shall not appl! to:
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Taxation One: Outline with Codals
#a& 'n! expenditure for the ac@uisition or improvement of land, or for the improvement of propert! to be used in
connection with research and development of a character which is sub<ect to depreciation and depletion; and
#b& 'n! expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or @ualit! of
an! deposit of ore or other mineral, including oil or gas.
4xpenses for %O8 can be treated as ordinar! and necessar! expenses provided that:
1. It is incurred during the taxable !ear
/. It is incurred in connection with his trade or business
The taxpa!er can either full! deduct it or amorti,e the deductions.
This is not applicable to the expenses:
1. for the ac@uisition or improvement of land or propert! to be used in connection with
%O8 #these are sub<ect to depreciation or depletion&
/. incurred for the purpose of ascertaining the existence, location, extent or @ualit! of
an! deposit of minerals O oil.
ension trusts
),* Pension Trusts. 6 'n emplo!er establishing or maintaining a pension trust to provide for the pa!ment of
reasonable pensions to his emplo!ees shall be allowed as a deduction #in addition to the contributions to such trust
during the taxable !ear to cover the pension liabilit! accruing during the !ear, allowed as a deduction under
*ubsection #'& #1& of this *ection& a reasonable amount transferred or paid into such trust during the taxable !ear
in excess of such contributions, but onl! if such amount #1& has not theretofore been allowed as a deduction, and
#/& is apportioned in e@ual parts over a period of ten #10& consecutive !ears beginning with the !ear in which the
transfer or pa!ment is made.
Two .inds of deduction for emplo!er:
o Knder *ubsection #'& #1&: contributions to such trust to cover the pension liabilit!
during the !ear
o Knder this *ection: reasonable amount paid to the trust in excess of such
contributions
The emplo!er who established the pension trust for his emplo!ee)s benefit can deduct it
but:
o The amount paid to the trust is reasonable
o It must not have been previousl! allowed for deduction #double deduction&
o $ust be apportioned in e@ual parts over a period of 10 consecutive !ears,
beginning with the !ear in which the pa!ment is made.
*ee *ec 11E, %% / for more details
12
12
*4CTIO> 11E. a!ments to emplo!eesN pension trusts. W 'n emplo!er who adopts or has adopted a reasonable
pension plan, actuariall! sound, and who establishes, or has established, and maintains a pension trust for the
pa!ment of reasonable pensions to his emplo!ees shall be allowed to deduct from gross income reasonable
amounts paid to such trust, in accordance with the pension plan #including an! reasonable amendment thereof&, as
follows:
#a& If the plan contemplates the pa!ment to the trust, in advance of the time when pensions are granted, of
amounts to provide for future pensions pa!ments, then #1& reasonable amounts paid to the trust during the taxable
!ear representing the pension liabilit! applicable to such !ear, determined in accordance with the plan, shall be
allowed as a deduction for such !ear as an ordinar! and necessar! business expense, and in addition #/& one6tenth
of a reasonable amount transferred or paid to the trust during the taxable !ear to cover in whole or in part the
pension liabilit! applicable to the !ears prior to the taxable !ear, or so transferred or paid to place the trust on a
sound financial basis, shall be allowed as a deduction for the taxable !ear and for each of the nine succeeding
taxable !ears.
#b& If the plan does not contemplate the pa!ment to the trust, in advance of the time when pensions are
granted, of amounts to provide for future pension pa!ments, then #1& reasonable amounts paid to the trust during
the taxable !ear representing the present value of the expected future pa!ments in respect of pensions granted to
emplo!ees retired during the taxable !ear shall be allowed as deduction for such !ear as an ordinar! and necessar!
business expense, and in addition #/& one tenth of a reasonable amount transferred or paid to the trust during the
taxable !ear to cover in whole or in part the present value of the expected future pa!ments in respect of pensions
granted to emplo!ees retired prior to the taxable !ear, or so transferred or paid to place the trust on a sound
financial basis, shall be allowed as a deduction for the taxable !ear and for each of the nine succeeding taxable
!ears.
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Taxation One: Outline with Codals
9hen an emplo!er ma.es a contribution to his emplo!ee)s ersonal 4@uit! and
%etirement 'ccount #4%'&, the emplo!er can claim this amount as a deduction but onl!
to the extent of the emplo!er)s contribution that would complete the maximum allowable
4%' contribution of an emplo!ee. #%% /01161C, with %' DB0B&.
'dditional re@uirements for deductibilit!
)/* Additional 'e(uirements for Deducti&ility of +ertain Payments. 6 'n! amount paid or pa!able which is
otherwise deductible from, or ta.en into account in computing gross income or for which depreciation or
amorti,ation ma! be allowed under this *ection, shall be allowed as a deduction onl! if it is shown that the tax
re@uired to be deducted and withheld therefrom has been paid to the 7ureau of Internal %evenue in accordance
with this *ection BE and E1 of this Code
If the item to be deducted is from gross income is depreciated or amorti,ed, it must be
proven to have been withheld and paid to the 7I%, otherwise it won)t be allowed ot be
deducted.
Taxes which were not originall! withheld O paid, but were onl! paid during audit are
deductible in these conditions:
o >o withholding tax was made, but the pa!ee reported the income and the
withholding agent pa!s during the audit #with penalties&
o >o withholding tax was made and the pa!ee did not report the income, but the
withholding agent pa!s it during the audit
o The withholding agent erroneousl! underwithheld the tax but pa!s the difference
during the audit
o 9hen shown that pa!ee reported the income, and paid the income tax #no need
to pa! withholding, na%ayaran na eh2
Optional *tandard 8eduction
)2* )ptional /tandard Deduction. 6 In lieu of the deductions allowed under the preceding *ubsections, an
individual sub<ect to tax under *ection /A, other than a nonresident alien, ma! elect a standard deduction in an
amount not exceeding fort! percent #A0L& of his gross sales or gross receipts, as the case ma! be. In the case of
a corporation sub<ect to tax under section /C#'& and /E#'&#1&, it ma! elect a standard deduction in an amount not
exceeding fort! percent #A0L& of it gross income as defined in *ection 2/ of this Code. Knless the taxpa!er
signifies in his return his intention to elect the optional standard deduction, he shall be considered as having
availed himself of the deductions allowed in the preceding *ubsections. *uch election when made in the return
shall be irrevocable for the taxable !ear for which the return is made: +rovided, That an individual who is entitled
to and claimed for the optional standard shall not be re@uired to submit with his tax return such financial
statements otherwise re@uired under this Code: +rovided, further, That except when the Commissioner otherwise
permits, the said individual shall .eep such records pertaining to his gross sales or gross receipts, or the said
corporation shall .eep such records pertaining to his gross income as defined in *ection 2/ of this Code during the
taxable !ear, as ma! be re@uired b! the rules and regulations promulgated b! the *ecretar! of +inance, upon
recommendation of the Commissioner.
o The taxpa!er, except a non6resident alien, can choose to <ust have the O*8 of A0L of
his gross income, instead of going with the itemi,ed deductions.
Imposition of Ceilings b! the *ec of +inance
>otwithstanding the provision of the preceding *ubsections, The *ecretar! of +inance, upon recommendation of
the Commissioner, after a public hearing shall have been held for this purpose, ma! prescribe b! rules and
regulations, limitations or ceilings for an! of the itemi,ed deductions under *ubsections #'& to #M& of this *ection:
rovided, That for purposes of determining such ceilings or limitations, the *ecretar! of +inance shall consider the
following factors: #1& ade@uac! of the prescribed limits on the actual expenditure re@uirements of each particular
industr!; and #/&effects of inflation on expenditure levels: rovided, further, That no ceilings shall further be
imposed on items of expense alread! sub<ect to ceilings under present law.
The *ec of +inance can impose ceilings on the deductions after a public hearing
o Ceiling won)t appl! to O*8
>on6deductible expenses
*4C. 2H. Items >ot 8eductible.6
#'& 5eneral %ule. 6 In computing net income, no deduction shall in an! case be allowed in respect to 6
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Taxation One: Outline with Codals
#1& ersonal, living or famil! expenses;
#/& 'n! amount paid out for new buildings or for permanent improvements, or betterments made to increase the
value of an! propert! or estate;
This *ubsection shall not appl! to intangible drilling and development costs incurred in petroleum operations which
are deductible under *ubsection #5& #1& of *ection 2A of this Code.
#2& 'n! amount expended in restoring propert! or in ma.ing good the exhaustion thereof for which an allowance is
or has been made; or
#A& remiums paid on an! life insurance polic! covering the life of an! officer or emplo!ee, or of an! person
financiall! interested in an! trade or business carried on b! the taxpa!er, individual or corporate, when the
taxpa!er is directl! or indirectl! a beneficiar! under such polic!.
#7& "osses from *ales or 4xchanges of ropert!. 6 In computing net income, no deductions shall in an! case be
allowed in respect of losses from sales or exchanges of propert! directl! or indirectl! 6
#1& 7etween members of a famil!. +or purposes of this paragraph, the famil! of an individual shall include onl! his
brothers and sisters #whether b! the whole or half6blood&, spouse, ancestors, and lineal descendants; or
#/& 4xcept in the case of distributions in li@uidation, between an individual and corporation more than fift! percent
#B0L& in value of the outstanding stoc. of which is owned, directl! or indirectl!, b! or for such individual; or
#2& 4xcept in the case of distributions in li@uidation, between two corporations more than fift! percent #B0L& in
value of the outstanding stoc. of which is owned, directl! or indirectl!, b! or for the same individual if either one of
such corporations, with respect to the taxable !ear of the corporation preceding the date of the sale of exchange
was under the law applicable to such taxable !ear, a personal holding compan! or a foreign personal holding
compan!;
#A& 7etween the grantor and a fiduciar! of an! trust; or
#B& 7etween the fiduciar! of and the fiduciar! of a trust and the fiduciar! of another trust if the same person is a
grantor with respect to each trust; or
#H& 7etween a fiduciar! of a trust and beneficiar! of such trust.
The following are not deductible:
1. ersonal, living or famil! expenses
/. 'n! amount paid for new buildings or for permanent improvements made to increase
the value of an! propert! or estate
2. 'n! amount spent in resotring propert! or in ma.ing good the exhaustion thereof for
which an allowance has been made
A. remiums paid on an! life insurance polic! covering the life of an! officer, or
emplo!ee or if the taxpa!er is directl! or indirectl! a beneficiar! under the polic!.
>o deductions shall be allowed for:
1. "osses from sales or exchanges of propert!; or
/. Interest expense; or
2. 7ad debts
o 9here the transaction #either of 1, / or 2& is between related taxpa!ers
1A
.
The following personal expenses are not deductible either:
1. Insurance paid on a dwelling owned O occupied b! the taxpa!er
/. remiums paid for life insurance
2. 9hen a professional man rents a propert! for residential purposes but receives
clients in connection with his wor., no part of the rent is allowable as business
expense. #7ut if he uses part of his house as an office, that portion is considered
business expense, thus deductible&
1A
*4CTIO> 1//. "osses from sales or exchanges of propert!. W >o deduction is allowed in respect of losses from
sales or exchanges of propert!, directl! or indirectl! W
#a& 7etween members of a famil!. 's used in *ection 21, the famil! of an individual shall include onl! his
brothers and sisters #whether b! the whole or half blood&, spouse, ancestors, and lineal descendants;
#b& 4xcept in the case of distributions in li@uidation, between an individual and a corporation more than fift!
per centum in value of the outstanding stoc. of which is owned, directl! or indirectl!, b! or for such individual;
#c& 4xcept in the case of distributions in li@uidation, between two corporations more than B0 per cent in value
of the outstanding stoc. of each of which is owned, directl! or indirectl!, b! or for the same individual, if either one
of such corporations with respect to the taxable !ear of the corporation preceding the date of the sale or exchange
was, under the law applicable to such taxable !ear, a personal holding compan! or a foreign personal holding
compan!;
#d& 7etween a grantor and a fiduciar! of an! trust;
#e& 7etween the fiduciar! of a trust and the fiduciar! of another trust, if the same person is a grantor with
respect to each trust; or
#f& 7etween a fiduciar! of a trust and a beneficiar! of such trust.
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Taxation One: Outline with Codals
A. 'llowance given b! dadd! to .ids
B. 'limon! or allowance paid under a separation agreement
The following capital expenses are not deductible:
1. >ew buildings, permanent improvements, or an! amount spent in restoring propert!
2. Cost of defending or perfecting title to propert!
+. 'rchitect)s services
.. 4xpense for administration of estate, court costs, attorne!)s fees and executor)s
commissions
8. 'mount assess O paid under an agreement between bondholders O shareholders of a
corp, to be used in the reorgani,ation of the corp #9ec 11%1122> 2*
18
$argin levies are not deductible. #4sso v CI%&
. Capital Gains and 2osses )9ale or Exc6an-e of Propert#*
Capital 'ssets
*4C. 2D. Capital 5ains and "osses. 6
)A* Definitions. 1 As used in t6is Title 1
)1* Capital Assets. 6 The term ?capital assets? means propert! held b! the taxpa!er #whether or not connected
with his trade or business&, but does not include stoc. in trade of the taxpa!er or other propert! of a .ind which
would properl! be included in the inventor! of the taxpa!er if on hand at the close of the taxable !ear, or propert!
held b! the taxpa!er primaril! for sale to customers in the ordinar! course of his trade or business, or propert!
used in the trade or business, of a character which is sub<ect to the allowance for depreciation provided in
*ubsection #+& of *ection 2A; or real propert! used in trade or business of the taxpa!er.
)B* Percenta#e Ta0en Into Account. 6 In the case of a taxpa!er, other than a corporation, onl! the following
percentages of the gain or loss recogni,ed upon the sale or exchange of a capital asset shall be ta.en into account
in computing net capital gain, net capital loss, and net income:
#1& One hundred percent #100L& if the capital asset has been held for not more than twelve #1/& months; and
#/& +ift! percent #B0L& if the capital asset has been held for more than twelve #1/& months;
1B
*4CTIO> 11D. ersonal, living, and famil! expenses. W ersonal, living, and famil! expenses are not deductible.
Insurance paid on a dwelling owned and occupied b! a taxpa!er is a personal expense and not deductible.
remiums paid for life insurance b! the insured are not deductible. In the case of a professional man who rents a
propert! for residential purposes, but incidentall! receives his clients, patients, or callers in connection with his
professional wor. #his place of business being elsewhere&, no part of the rent is deductible as a business expense.
If however, he uses part of the house for his office, such portion of the rent as is properl! attributable to such office
is deductible. 9here the father is legall! entitled to the services of his minor children, an! allowances which he
gives them, whether said to be in consideration of services or otherwise, are not allowable deductions in his return
of income. 'limon!, and an allowance paid under a separation agreement are not deductible from gross income.
*4CTIO> 1/0. Capital expenditures. W >o deduction from gross income ma! be made for an! amounts paid out
for new buildings or for permanent improvements or betterments made to increase the value of the taxpa!erNs
propert!, or for an! amount expended in restoring propert! or in ma.ing good the exhaustion thereof for which an
allowance for depreciation or depletion or other allowance is or has been made. 'mounts expended for securing a
cop!right and plates, which remain the propert! of the person ma.ing the pa!ments, are investments of capital.
The cost of defending or perfecting title to propert! constitutes a part of the cost of the propert! and is not a
deductible expense. The amount expended for architectNs services is part of the cost of the building. Commissions
paid in purchasing securities are a part of the cost of such securities. Commissions paid in selling securities are an
offset against the selling price. 4xpenses of the administration of an estate, such as court costs, attorne!Ns fees,
and executorNs commissions, are chargeable against the ?corpus? of the estate and are not allowable deductions.
'mounts to be assessed and paid under an agreement between bondholders or shareholders of a corporation, to be
used in a reorgani,ation of the corporation, are investments of capital and not deductible for an! purpose in return
of income.
In the case of a corporation, expenses for organi,ation, such as incorporation fees, attorne!Ns fees and
accountantsN charges, are ordinaril! capital expenditures; but where such expenditures are limited to purel!
incidental expenses, a taxpa!er ma! charge such items against income in the !ear in which the! are incurred. '
holding compan! which guarantees dividends at a specified rate on the stoc. of a subsidiar! corporation for the
purpose of securing new capital for the subsidiar! and increasing the value of its stoc.holdings in the subsidiar!
ma! not deduct amounts paid in carr!ing out this guarant! in computing its net income, but such pa!ments ma!
be added to the cost of its stoc. in the subsidiar!.
*4CTIO> 1/1. remiums on life insurance of emplo!ees. W 'n! amounts paid for premiums on an! life
insurance polic! covering the life of an officer or emplo!ee or of an! person financiall! interested in the business of
the taxpa!er when the taxpa!er is directl! or indirectl! a beneficiar! under such polic! are not deductible.
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Taxation One: Outline with Codals
)C* 1imitation on +apital 1osses. 6 "osses from sales or exchanges of capital assets shall be allowed onl! to the
extent of the gains from such sales or exchanges. If a ban. or trust compan! incorporated under the laws of the
hilippines, a substantial part of whose business is the receipt of deposits, sells an! bond, debenture, note, or
certificate or other evidence of indebtedness issued b! an! corporation #including one issued b! a government or
political subdivision thereof&, with interest coupons or in registered form, an! loss resulting from such sale shall not
be sub<ect to the foregoing limitation and shall not be included in determining the applicabilit! of such limitation to
other losses.
)D* "et +apital 1oss +arry-over. 6 If an! taxpa!er, other than a corporation, sustains in an! taxable !ear a net
capital loss, such loss #in an amount not in excess of the net income for such !ear& shall be treated in the
succeeding taxable !ear as a loss from the sale or exchange of a capital asset held for not more than twelve #1/&
months.
)E* 'etirement of $onds, Etc. 6 +or purposes of this Title, amounts received b! the holder upon the retirement
of bonds, debentures, notes or certificates or other evidences of indebtedness issued b! an! corporation #including
those issued b! a government or political subdivision thereof& with interest coupons or in registered form, shall be
considered as amounts received in exchange therefor.
)"* Gains or 1osses -rom /hort /ales, Etc. 6 +or purposes of this Title 6
#1& 5ains or losses from short sales of propert! shall be considered as gains or losses from sales or exchanges of
capital assets; and
#/& 5ains or losses attributable to the failure to exercise privileges or options to bu! or sell propert! shall be
considered as capital gains or losses.
+irst of, what is a sale or exchange:
o There is a sale or exchange of propert! when there is an effective and actual
transfer of ownership of the propert! to another as would divest the transferors
of the benefits accruing from the ownership of the propert!, for a valuable
consideration.
o 9hat is important is when the sale or exchange is consummated, not perfected.
o Thus, it includes:
i. +orced sales
ii. 8istribution in complete li@uidation
o >OT sale or exchange:
i. 'ssignment b! Moh Corp of a countr! club share to $r. Mohn with $r. Mohn
signing a declaration of trust that Moh Corp is the owner of the share
#since no transfer of ownership, onl! beneficial ownership was transfered&
ii. Conve!ance of the common areas of a condominium from the developer to
the condominium corporation #since no consideration and conve!ance is
merel! for the management of the common areas&
It is important to .now whether the asset sold or exchanged was held as ordinar! asset
or capital asset because of the different rules which appl! to each.
*o, what are capital assets: 9ell, we .now what the! '%4>)T.
Capital assets are propert! held b! the taxpa!er #whether or not connected with his
trade or business& but does >OT include:
1. *toc. in trade of the taxpa!er,
/. Other propert! of a .ind which would properl! be included in the inventor! of the
taxpa!er if on hand at the close of the !ear
2. ropert! held b! the taxpa!er primaril! for sale to customers in the ordinar! course
of his trade or business
A. ropert! used in trade or business of a character which is sub<ect to allowance for
depreciation,
B. %eal propert! used in trade or business.
The codal enumerates what are ordinar! assets. 'll assets other than ordinar! assets
are capital assets.
ropert! initiall! classified as capital asset ma! later become an ordinar! asset and vice
versa. #Calasan, v CI%, wherein inherited land was developed into a subdivision,
changing it from capital to ordinar! asset&
*hares of stoc. would be ordinar! assets onl! to a dealer in securities or a person
engaged in the purchase and sale of, or an active trader in, securities. #China 7an. v C'&
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Taxation One: Outline with Codals
712''+ has also given guidelines in determining whether real propert! is a capital or
ordinar! asset, to wit #yun eh, 4o wit raw eh,&
o +or those engaged in real estate business, the following are ordinar! assets:
i. 'll real properties ac@uired b! the real estate dealer
ii. 'll real properties ac@uired b! the real estate developer, whether
developed or undeveloped
iii. 'll real properties held for sale or lease in the ordinar! course of business
or which would be properl! be included in the inventor!
iv. 'll real properties ac@uired for lease-rent
v. 'll real properties ac@uired in the ordinar! course of business b! a
taxpa!er habituall! engaged in the sale of real estate
o 9ill the propert! change nature from ordinar! to capital asset:
i. Changing from real estate business to a non6real estate business: >O
ii. Ceasing operations of the real estate business: >O
iii. The properties ac@uired b! the real estate business are abandoned: >O
iv. The properties ac@uired b! the real estate business become idle: >O
v. %eal estate business transfers the propert! to an ordinar! person: =4*
o The nature of the propert! C'> change in the hands of the bu!er-transferee.
o In case of involuntar! transfer #li.e expropriation or foreclosure&, the involuntar!
nature shall have >O effect on the classification in the hands of the involuntar!
seller.
o +or those >OT engaged in the real estate business, real propert! being used or
have been used in the trade or business are considered ordinar! assets.
i. Can these change into capital assets:
=4*, provided the! show proof that the same have not been used
in business for more than / !ears #prior to the taxable transaction&
o +or 4T4$T corporations, real propert! used in exempt transactions shall not be
considered for business purposes, and thus are C'IT'" assets.
The rules on capital gains and losses are the following: #*ee *ec 12/612B, %% /&
1. +irst, .eep me in mind that these rules do not appl! to:
a. %eal propert! with a capital gain tax, and
b. *hares of stoc. of a domestic corporation with a capital gain tax,
i. These two .inds of capital assets have their own rates. #%emember the
capital gains tax; The whole HL, BL-10L rates; 'n! capital gain
sub<ect to the capital gain tax shall not be included in the computation
of the taxable income and income tax at the end of the !ear.&
/. >ext, the transaction on the capital asset should be a sale or exchange
2. In the case of a taxpa!er other than a corporation #for individuals onl!&, the following
percentages of the gain or loss shall be ta.en into account in computing net capital
gain, net capital loss and net income:
a. 100L of the gain-loss, if the asset has been held for not more than 1/
months
b. B0L of the gain-loss, if the asset has been held for more than 1/ months.
o +or corporations, capital gains and losses are alwa!s considered at 100L.
A. "osses from sales or exchanges of capital assets shall be allowed onl! to the extent
of the gains from such sales or exchanges #limitation on capital loss& #see example
below&,
o If the taxpa!er incurs net capital loss, such loss cannot be deducted from his
ordinar! income because the loss can be deducted onl! to the extent of capital
gains.
B. If an! taxpa!er, other than a corporation, sustains in an! taxable !ear a net capital
loss, such loss, in an amount not in excess of the net income #taxable income& of
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Taxation One: Outline with Codals
such !ear, shall be treated in the succeeding !ear as a loss from a sale or exchange
of a capital asset held for not more than twelve months #meaning, 100L of the
loss&. This is what !ou call the net capital loss carr! over.
o Corporations don)t have net capital loss carr!6over.
4xample
$ao is in the bu! and sell business, and he had ordinar! income of /0,000, capital gains of
B,000 #from the sale of his personal art collection, which he held for 2 !ears&, and capital
losses of 2,000 #from the sale of his !acht, which he held for / !ears.
Ordinar! net income /0,000
5ains from sale of capital asset B,000
7ut held for 2 !ears; so B0L /,B00
"oss from sale of capital asset 2,000
7ut held for / !ears; so B0L 1,B00
>et taxable gain 1,000
Taxable Income /1,000
*ame facts, but $ao had capital gains of /,000, and capital losses of C,000.
Ordinar! net income /0,000
5ains from sale of capital asset /,000
B0L onl!; 1,000
"oss from sale of capital asset C,000
B0L onl!; 2,B00
>et capital loss /,B00
Taxable income /0,000
;ou cant deduct the capital loss of +G,F?? %ecause you can only deduct to the e*tent of
your capital gains.
BI ulin- 271'2 gives some steps to determine the tax in real estate transactions
o +irst, determine the character of propert! being sold.
If propert! is not used in business of seller, then it)s a capital asset and
the gain of the seller is sub<ect to HL capital gains tax based on gross
selling price or fair mar.et value.
If the propert! is used in the business of the seller, it is treated as
ordinar! asset, so the withholding tax rates below shall appl!. These rates
will depend on:
9hether the seller is exempt or taxable
9hether the seller is engaged in real estate business or not
If he is engaged in real estate business, what was the gross selling
price:
Different 9cenarios of 9ale of eal Propert# )seller not exempt and real propert# is
&DI0AH asset*
*eller 7u!er Tax Treatment
Corp engaged in real
estate business #sells
H parcels of land
within a !ear&
Corp engaged in real
estate business
Creditable withholding tax based on gross
selling price or fair mar.et value is
deducted b! the bu!er #to be credited to
the seller&
If selling price is B00,000 or less 1.BL
If it)s B00,000 to /$ 2L
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Taxation One: Outline with Codals
If its above /m BL
Corp engaged in real
estate business
Corp >OT engaged in
real estate business
*ame as above
Corp >OT engaged in
real estate business
Corp engaged in real
estate business
If propert! considered ordinar! asset HL
creditable withholding
If propert! considered capital asset HL
final tax
Corp engaged in real
estate business
Individual >OT
engaged in trade or
business
If on installment basis, no withholding tax
on periodic installments, it will be withheld
on the last pa!ment
If on cash basis or deferred pa!ment,
bu!er withholds the tax on the first
installment
Corp engaged in real
estate business
Individual engaged in
trade or business
If on installment, tax withheld b! the bu!er
on 4Q4%= installment
If it was on cash or deferred pa!ment,
bu!er withholds the tax on the first
installment
Installment plan: where the total pa!ment in the !ear of sale 8O4* >OT exceed /BL of
the total selling price
8eferred pa!ment plan: where the total pa!ment in the !ear of sale exceeds /BL of the
total selling price
3n mortgage and redemption of a capital asset
If the mortgagor exercises his right of redemption within 1 !ear, no capital gains tax.
In case of non6redemption, the capital gains will be due based on the bid price of the
highest bidder. #%% A6DD&
Remem%er the conditions for e*emption from capital gains ta* from the sale or e*change of
the principal residence 1See Sec G= 1d2 1G2, all the way near the start of this reviewer2
Ordinar! income
9ec 22 #S& The term /ordinary income/ includes an! gain from the sale or exchange of propert! which is not a
capital asset or propert! described in *ection 2D#'&#1&. 'n! gain from the sale or exchange of propert! which is
treated or considered, under other provisions of this Title, as Nordinar! incomeN shall be treated as gain from the
sale or exchange of propert! which is not a capital asset as defined in *ection 2D#'&#1&. The term Nordinar! lossN
includes an! loss from the sale or exchange of propert! which is not a capital asset. 'n! loss from the sale or
exchange of propert! which is treated or considered, under other provisions of this Title, as Nordinar! lossN shall be
treated as loss from the sale or exchange of propert! which is not a capital asset.
Ordinar! income is an! gain from sale or exchange of propert! which is not a capital
asset.
o Ordinar! loss is the opposite.
>et capital gain is the excess of the gains from such sales or exchanges of capital assets
over the losses from such sales or exchanges.
o >et capital loss is the opposite.
Is it better for real propert! to be considered capital or ordinar! asset:
o 8epends.
o +or example, the corporation !ou)re counsel for sells a piece of land for 100..
8o !ou want to consider it as capital or ordinar!:
i. If it were capital, !ou)d get taxed HL of 100. #capital gains tax&, that)s
H,000. =ou go home with DA..
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Taxation One: Outline with Codals
ii. If it were ordinar!, it)ll be part of !our gross income, which will be taxed
20L after all the deductions have been accounted for. The @uestion is, do
!ou have enough deductions #and proof& which will enable !ou to get a
better deal #i.e. more mone! after all the taxes are paid out&:
9. Determination of Gain or 2oss from 9ale or Transfer of Propert#
*ec A0 is chopped up in 2 parts. Reep this in mind for a better understanding of the
provision.
1. *ection A0 #'& which tells us how to arrive at the gain #or loss&.
/. *ection A0 #C 16/& which tells us the general rule and the exceptions #tax6free
exchanges&
2. *ection A0 #C B& which gives us the substituted basis; i.e. the basis for tax6free
exchanges when the transferor later sells the stoc. he got in the tax6free exchange.
*4C. A0. 8etermination of 'mount and %ecognition of 5ain or "oss. 6
#'& Computation of 5ain or "oss. 6 The gain from the sale or other disposition of propert! shall be the excess of the
amount reali,ed therefrom over the basis or ad<usted basis for determining gain, and the loss shall be the excess of
the basis or ad<usted basis for determining loss over the amount reali,ed. The amount reali,ed from the sale or
other disposition of propert! shall be the sum of mone! received plus the fair mar.et value of the propert! #other
than mone!& received;
5ain is the excess amount reali,ed over the basis for determining gain
"oss is the opposite
The amount reali,ed is the sum of mone! received plus the fair mar.et value of the
propert! #other than mone!& received
9hat is the basis of determining gain or loss:
#7& 7asis for 8etermining 5ain or "oss from *ale or 8isposition of ropert!. 6 The basis of propert! shall be 6
#1& The cost thereof in the case of propert! ac@uired on or after $arch 1, 1D12, if such propert! was ac@uired b!
purchase; or
#/& The fair mar.et price or value as of the date of ac@uisition, if the same was ac@uired b! inheritance; or
#2& If the propert! was ac@uired b! gift, the basis shall be the same as if it would be in the hands of the donor or
the last preceding owner b! whom it was not ac@uired b! gift, except that if such basis is greater than the fair
mar.et value of the propert! at the time of the gift then, for the purpose of determining loss, the basis shall be
such fair mar.et value; or
#A& If the propert! was ac@uired for less than an ade@uate consideration in mone! or mone!Ns worth, the basis of
such propert! is the amount paid b! the transferee for the propert!; or
#B& The basis as defined in paragraph #C&#B& of this *ection, if the propert! was ac@uired in a transaction where
gain or loss is not recogni,ed under paragraph #C&#/& of this *ection.
Basis for Determinin- Gain or 2oss from 9ale or Disposition of Propert# )&ri-inal
Basis
1@
*
$ode of ac@uisition Cost basis
1. 'c@uired b! purchase The actual cost
/. 7! inheritance +air mar.et value
1H
%% 1E6/001 C. The Original 7asis of ropert! to be Transferred. The original basis of the propert! to be
transferred shall be the following, as ma! be appropriate:
#a& The cost of the propert!, if ac@uired b! purchase on or after $arch 1, 1D12;
#b& The fair mar.et price or value as of the moment of death of the decedent, if ac@uired b! inheritance;
#c& The basis in the hands of the donor or the last preceding owner b! whom the propert! was not ac@uired b! gift,
if the propert! was ac@uired b! donation.
If the basis, however, is greater than the fair mar.et value of the propert! at the time of donation, then, for
purposes of determining loss, the basis shall be such fair mar.et value; or,
#d& The amount paid b! the transferee for the propert!, if the propert! was ac@uired for less than an ade@uate
consideration in mone! or mone!Ns worth.
#e& The ad<usted basis of #a& to #d& above, if the ac@uisition cost of the propert! is increased b! the amount of
improvements that materiall! add to the value of the propert! or appreciabl! prolong its life less accumulated
depreciation.
#f& The substituted basis, if the propert! was ac@uired in a previous tax6 free exchange under *ection A0#C&#/& of
the Tax Code of 1DDC.
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Taxation One: Outline with Codals
2. 7! gift The same as if it would be in the hands of
the donor or the last preceding owner,
7KT if the basis is greater than the fmv, then
the basis shall be the fmv #so, whatever)s
lower&
A. 'c@uired for less than an ade@uate
consideration in mone! or its worth
'mount paid b! the transferee for the
propert!
4xample
$ao sold a car worth 100 to 'pple Inc, in exchange for 110 worth of 'pple Inc stoc., 10
cash and /0 propert!. Iow much is the gain for $ao: 9hat about the loss for 'pple Inc:
7et the amount reali&ed first! 1A0 #cash + stoc. + propert!&
(educt the %asis! 100 #value of car&
5ain: A0 #gain for $ao&, loss of A0 for 'pple Inc
Iow do !ou ma.e the transaction a tax6free exchange: Chec. the codal below. It)s one of
the most used provisions.
#C& 4xchange of ropert!. 6
#1& 5eneral %ule. 6 4xcept as herein provided, upon the sale or exchange or propert!, the entire amount of the gain
or loss, as the case ma! be, shall be recogni,ed.
#/& 4xception. 6 >o gain or loss shall be recogni,ed if in pursuance of a plan of merger or consolidation 6
#a& ' corporation, which is a part! to a merger or consolidation, exchanges propert! solel! for stoc. in a
corporation, which is a part! to the merger or consolidation; or
#b& ' shareholder exchanges stoc. in a corporation, which is a part! to the merger or consolidation, solel! for the
stoc. of another corporation also a part! to the merger or consolidation; or
#c& ' securit! holder of a corporation, which is a part! to the merger or consolidation, exchanges his securities in
such corporation, solel! for stoc. or securities in such corporation, a part! to the merger or consolidation.
>o gain or loss shall also be recogni,ed if propert! is transferred to a corporation b! a person in exchange for stoc.
or unit of participation in such a corporation of which as a result of such exchange said person, alone or together
with others, not exceeding four #A& persons, gains control of said corporation: rovided, That stoc.s issued for
services shall not be considered as issued in return for propert!.
4xchange of propert!, and tax6free exchange.
5eneral rule: in a sale or exchange of propert!, the entire amount of gain or loss is
recogni,ed
o 4TC4T #no gain or loss is reali,ed&:
i. In a merger-consolidation #m-c&, where a corp exchanges propert! solel!
for stoc. in another corporation, which is also a part! to the m-c
ii. In a m-c, where a shareholder exchanges stoc. in a corp for the stoc. of
another corp, also a part! to the m-c
iii. In a m-c, where a securit! holder of a corp exchanges his securities in
such corp solel! for stoc. or securities in another corp also a part! to the
m-c
iv. 9here propert! is transferred to a corp b! a person in exchange for stoc.
in the corp, and the result of such exchange is that the person #and up to
A other persons& gains control of the corp, but the stoc.s issued for
services are not considered as issued in return for propert!.
%ule of momentar! control
o If two tax6free exchanges are done in the same taxable !ear, the! are not
considered tax6free. #'tt!. $ontero&
#H& 8efinitions. 6

#a& The term ?securities? means bonds and debentures but not ?notes? of whatever class or duration.
#b& The term ?merger? or ?consolidation?, when used in this *ection, shall be understood to mean: #i& the ordinar!
merger or consolidation, or #ii& the ac@uisition b! one corporation of all or substantiall! all the properties of another
corporation solel! for stoc.: rovided, That for a transaction to be regarded as a merger or consolidation within the
purview of this *ection, it must be underta.en for a bona fide business purpose and not solel! for the purpose of
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Taxation One: Outline with Codals
escaping the burden of taxation: rovided, further, That in determining whether a bona fide business purpose
exists, each and ever! step of the transaction shall be considered and the whole transaction or series of transaction
shall be treated as a single unit: rovided, finall! , That in determining whether the propert! transferred constitutes
a substantial portion of the propert! of the transferor, the term Npropert!N shall be ta.en to include the cash assets
of the transferor.
#c& The term ?control?, when used in this *ection, shall mean ownership of stoc.s in a corporation possessing at
least fift!6one percent #B1L& of the total voting power of all classes of stoc.s entitled to vote.
#d& The *ecretar! of +inance, upon recommendation of the Commissioner, is hereb! authori,ed to issue rules and
regulations for the purpose ?substantiall! all? and for the proper implementation of this *ection.
*ecurities means bonds and debentures, but not notes of whatever class or duration.
$erger or consolidation means:
o The ordinar! merger or consolidation
o The ac@uisition b! one corporation of all or almost all the properties of another
corporation solel! for stoc.
' corporate merger where the new corporation continued to operate the business of the
old corporation is not sub<ect to capital gains tax. The merger, however, must be
underta.en for a bona fide business purpose and not solel! for the purpose of escaping
the burden of taxation. #CI% v %ufino, where the merger was done to extend the life of
the corporation, this was legitimate&
Transfer of substantiall! FallG the assets means a transfer of at least E0L of the assets,
including cash, with some degree of permanence.
Transfer of propert! for shares of stoc.: no gain or loss is recogni,ed when a person
transfers propert! #not services& to a corporation in exchange for shares of stoc. #alone
or with A others&, where such person gains control of the corporation #at least B1L of
the total voting power&
The transfer of assets b! one corporation to another must have a business purpose.
#5regor! v Ielving&
'dministrative re@uirements in case of tax6free exchanges.
o =ou have to submit the following to the 7I%:
i. *worn certificate on the basis of propert! to be transferred
ii. Certified true copies #ctc& of the TCT
iii. Ctc of the corresponding tax declaration of the real properties to be
transferred
iv. Ctc of the certificates of stoc. evidencing shares of stoc. to be transferred
v. Ctc of the inventor! of the propert! to be transferred # 1!1'1*
4lements of a de factor merger #which is a valid merger&
1. Transfer of all or substantiall! all of the properties of the transferor corp solel! for
stoc.
/. Knderta.en for a bona fide bi, purpose, not for escaping taxes
Iow does a statutor! merger wor.:
o = corp ac@uires all the assets of T corp. T corp gets = shares in exchange. T corp
then dissolves and distributes these shares to its stoc.holders.
8ifference between a de facto merger v a statutor! merger
o In a de facto merger, the transferor is not automaticall! dissolved
o In a de facto merger, there is no automatic transfer to the transferee of all the
rights, privileges and liabilities of the transferor
8ifference between a de facto merger v a transfer to a controlled corporation
o In a de facto merger, the transferor is a corp. in the latter, the transferor ma! be
an individual.
o In a de facto merger, the re@uirement is that the transferee ac@uires all or
substantiall! all of the properties of the transferor. In the latter, the re@uirement
is that the transferor gains control of the transferee #own B1L of the voting
power&
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Taxation One: Outline with Codals
#2& 4xchange >ot *olel! in Rind. 6

#a& If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a securit!
holder or a corporation receives not onl! stoc. or securities permitted to be received without the recognition of gain
or loss, but also mone! and-or propert!, the gain, if an!, but not the loss, shall be recogni,ed but in an amount not
in excess of the sum of the mone! and fair mar.et value of such other propert! received: rovided, That as to the
shareholder, if the mone! and-or other propert! received has the effect of a distribution of a taxable dividend,
there shall be taxed as dividend to the shareholder an amount of the gain recogni,ed not in excess of his
proportionate share of the undistributed earnings and profits of the corporation; the remainder, if an!, of the gain
recogni,ed shall be treated as a capital gain.
#b& If, in connection with the exchange described in the above exceptions, the transferor corporation receives not
onl! stoc. permitted to be received without the recognition of gain or loss but also mone! and-or other propert!,
then #i& if the corporation receiving such mone! and-or other propert! distributes it in pursuance of the plan of
merger or consolidation, no gain to the corporation shall be recogni,ed from the exchange, but #ii& if the
corporation receiving such other propert! and-or mone! does not distribute it in pursuance of the plan of merger or
consolidation, the gain, if an!, but not the loss to the corporation shall be recogni,ed but in an amount not in
excess of the sum of such mone! and the fair mar.et value of such other propert! so received, which is not
distributed.
#A& 'ssumption of "iabilit!. 6
#a& If the taxpa!er, in connection with the exchanges described in the foregoing exceptions, receives stoc. or
securities which would be permitted to be received without the recognition of the gain if it were the sole
consideration, and as part of the consideration, another part! to the exchange assumes a liabilit! of the taxpa!er,
or ac@uires from the taxpa!er propert!, sub<ect to a liabilit!, then such assumption or ac@uisition shall not be
treated as mone! and-or other propert!, and shall not prevent the exchange from being within the exceptions.
#b& If the amount of the liabilities assumed plus the amount of the liabilities to which the propert! is sub<ect exceed
the total of the ad<usted basis of the propert! transferred pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a capital asset or of propert! which is not a capital asset, as the
case ma! be.
'ssumption of liabilit! in tax6free exchanges:
If the transferor receives stoc. or securities in a transfer of propert!, and as part of the
consideration, the other part! also assumes the liabilit! of the transferor or that the
propert! he assumes has a liabilit!, then the propert!-liabilit! ac@uired will >OT be
treated as mone! or other propert!, so that it still falls under the exception of the *ec A0
#C& and no gain or loss is recogni,ed.
7ut if the amount of the liabilit! assumed exceeds the total of the ad<usted basis of the
propert! transferred, then the excess is considered a gain from sale of either a capital
asset or an ordinar! asset, as the case ma! be.
4xample
Tob! transfers propert! to 'pple Inc with an ad<usted basis of 1Bm in exchange for
'pple Inc)s stoc. plus 'pple Inc assumes Tob!)s liabilit! of 10m. The exchange is
considered tax6free.
7ut if the liabilit! of Tob! is /0m, then this will exceed the ad<usted basis of 1Bm.
*o the Bm will be considered a gain and it will be taxable.
Cost or basis in tax6free exchanges
#B& Basis 6
#a& The basis of the stoc. or securities received b! the transferor upon the exchange specified in the above
exception shall be the same as the basis of the propert!, stoc. or securities exchanged, decreased b! #1& the
mone! received, and #/& the fair mar.et value of the other propert! received, and increased b! #a& the amount
treated as dividend of the shareholder and #b& the amount of an! gain that was recogni,ed on the exchange:
+rovided, That the propert! received as /%oot/ shall have as basis its fair mar.et value! +rovided, further, That if as
part of the consideration to the transferor, the transferee of propert! assumes a liabilit! of the transferor or
ac@uires form the latter propert! sub<ect to a liabilit!, such assumption or ac@uisition #in the amount of the liabilit!&
shall, for purposes of this paragraph, be treated as mone! received b! the transferor on the exchange! +rovided,
finally, That if the transferor receives several .inds of stoc. or securities, the Commissioner is hereb! authori,ed to
allocate the basis among the several classes of stoc.s or securities.
#b& The basis of the propert! transferred in the hands of the transferee shall be the same as it would be in the
hands of the transferor increased b! the amount of the gain recogni,ed to the transferor on the transfer.
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Taxation One: Outline with Codals
9hen the transferor later on sells or exchanges the stoc. he got tax6free, the basis for
determining the gain or loss is the substituted basis. This will also be the cost basis
when the transferee later on sells the propert! ac@uired.
Iow to compute the substituted basis:
1. Ta.e the original basis of the propert! #see the table a few pages bac.&
a. The original basis is usuall! what)s indicated in the deed of sale #the +$Q of
the propert! is used for accounting purposes& 3 'tt! *alvador
/. *ubtract an! mone! or the fair mar.et value of an! propert! that ma! have been
received aside from the shares of stoc.
2. 'dd the amount treated as dividend b! the shareholder O an! gain that was
recogni,ed on the exchange #if an!&
4xample
Ia!le! transfers propert! to 'pple Inc for shares of stoc.. The propert!)s sale value
was Bm and Ia!le! received an extra 1m from stoc. of inventor!.
If she later sells her shares of stoc. to $el, the substituted basis will be computed as
#Bm61m&YAm.
If Ia!le! sells the shares to $el for Hm, her gain will be #H6Am& /m and it will
be sub<ect to capital gains tax.
"osses from 9ash *ales of *toc.s or *ecurities
*4C. 2E. "osses from 9ash *ales of *toc. or *ecurities. 6
#'& In the case of an! loss claimed to have been sustained from an! sale or other disposition of shares of stoc. or
securities where it appears that within a period beginning thirt! #20& da!s before the date of such sale or
disposition and ending thirt! #20& da!s after such date, the taxpa!er has ac@uired #b! purchase or b! exchange
upon which the entire amount of gain or loss was recogni,ed b! law&, or has entered into a contact or option so to
ac@uire, substantiall! identical stoc. or securities, then no deduction for the loss shall be allowed under *ection 2A
unless the claim is made b! a dealer in stoc. or securities and with respect to a transaction made in the ordinar!
course of the business of such dealer.
#7& If the amount of stoc. or securities ac@uired #or covered b! the contract or option to ac@uire& is less than the
amount of stoc. or securities sold or otherwise disposed of, then the particular shares of stoc. or securities, the
loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations
prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner.
#C& If the amount of stoc. or securities ac@uired #or covered b! the contract or option to ac@uire which& resulted in
the non6deductibilit! of the loss, shall be determined under rules and regulations prescribed b! the *ecretar! of
+inance, upon recommendation of the Commissioner.
"osses are not allowed to be claimed in sales of stoc. or securities
o 9ithin a period of 20 da!s before the sale, and 20 da!s after the sale #H1 da!s
total&
o 9hen the taxpa!er ac@uires or enters into an option to purchase
o If substantiall! the same-identical stoc.s or securities
"osses are allowed onl! if the taxpa!er is a stoc.bro.er and the sale-purchase was made
in the regular course of business.
The important thing to remember is the H1 da! period. #9ec 1+1> 2*
o 4xample: Moe! bu!s share of stoc. in a corporation and within 20 da!s, bu!s
more shares. Then within another 20 da!s, he sells those shares at a loss. Ie
cannot claim this loss.
T. 9itus of Taxation
*4C. A/. Income from *ources 9ithin the hilippines.6
#'& 5ross Income +rom *ources 9ithin the hilippines. 6 The following items of gross income shall be treated as
gross income from sources within the hilippines:
#1& Interests. 6 Interests derived from sources within the hilippines, and interests on bonds, notes or other
interest6bearing obligation of residents, corporate or otherwise;
#/& 8ividends. 6 The amount received as dividends:
#a& from a domestic corporation; and
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Taxation One: Outline with Codals
#b& from a foreign corporation, unless less than fift! percent #B0L& of the gross income of such foreign corporation
for the three6!ear period ending with the close of its taxable !ear preceding the declaration of such dividends or for
such part of such period as the corporation has been in existence& was derived from sources within the hilippines
as determined under the provisions of this *ection; but onl! in an amount which bears the same ration to such
dividends as the gross income of the corporation for such period derived from sources within the hilippines bears
to its gross income from all sources.
#2& *ervices. 6 Compensation for labor or personal services performed in the hilippines;
#A& %entals and %o!alties. 6 %entals and ro!alties from propert! located in the hilippines or from an! interest in
such propert!, including rentals or ro!alties for 6
#a& The use of or the right or privilege to use in the hilippines an! cop!right, patent, design or model, plan, secret
formula or process, goodwill, trademar., trade brand or other li.e propert! or right;
#b& The use of, or the right to use in the hilippines an! industrial, commercial or scientific e@uipment;
#c& The suppl! of scientific, technical, industrial or commercial .nowledge or information;
#d& The suppl! of an! assistance that is ancillar! and subsidiar! to, and is furnished as a means of enabling the
application or en<o!ment of, an! such propert! or right as is mentioned in paragraph #a&, an! such e@uipment as is
mentioned in paragraph #b& or an! such .nowledge or information as is mentioned in paragraph #c&;
#e& The suppl! of services b! a nonresident person or his emplo!ee in connection with the use of propert! or rights
belonging to, or the installation or operation of an! brand, machiner! or other apparatus purchased from such
nonresident person;
#f& Technical advice, assistance or services rendered in connection with technical management or administration of
an! scientific, industrial or commercial underta.ing, venture, pro<ect or scheme; and
#g& The use of or the right to use:
#i& $otion picture films;
#ii& +ilms or video tapes for use in connection with television; and
#iii& Tapes for use in connection with radio broadcasting.
#B& *ale of %eal ropert!. 6 5ains, profits and income from the sale of real propert! located in the hilippines; and
#H& *ale of ersonal ropert!. 6 5ains; profits and income from the sale of personal propert!, as determined in
*ubsection #4& of this *ection.
#7& Taxable Income +rom *ources 9ithin the hilippines. 6
#1& 5eneral %ule. 6 +rom the items of gross income specified in *ubsection #'& of this *ection, there shall be
deducted the expenses, losses and other deductions properl! allocated thereto and a ratable part of expenses,
interests, losses and other deductions effectivel! connected with the business or trade conducted exclusivel! within
the hilippines which cannot definitel! be allocated to some items or class of gross income: rovided, That such
items of deductions shall be allowed onl! if full! substantiated b! all the information necessar! for its calculation.
The remainder, if an!, shall be treated in full as taxable income from sources within the hilippines.
#/& 4xception. 6 >o deductions for interest paid or incurred abroad shall be allowed from the item of gross income
specified in subsection #'& unless indebtedness was actuall! incurred to provide funds for use in connection with
the conduct or operation of trade or business in the hilippines.
This section is >OT relevant to domestic corporations and resident citi,ens because the!
are taxed worldwide an!wa!.
The following are treated as gross income from sources within the hilippines #*ec 1B/6
1HB, %% /&:
1. Interests 3 including interests on bonds, notes and other interest bearing obligations:
a. The loan was used here in the hilippines, or
b. The debtor is in the hilippines
/. 8ividends 3 from a domestic corporation and a foreign corporation,
a. Knless less than B0L of the gross income of the foreign corporation was
derived from the hilippines #the amount will be based on the same ratio to
dividends as the gross income for such period derived from sources within
hilippines to its gross income from all sources. 9hut:;&
i. 4xample, a Mapanese corporation, who derives income more than B0L
of its income in the hilippines, declares dividends to an 'merican in
"os 'ngeles. That will be taxed. I <ust don)t .now how much.
2. *ervices 3 compensation for labor or personal services performed in the hilippines
A. %entals O %o!alties 3 from propert! located in the hilippines or from an! interest in
such propert! for:
a. the use of an! cop!right, patent, design or model, plan, secret formula or
process, goodwill, trademar., trade brand or other similar stuff
b. the use of an! industrial, commercial or scientific e@uipment
c. the suppl! of scientific, technical, industrial or commercial .nowledge or info
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E2
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Taxation One: Outline with Codals
i. This includes investment, training and education accounting #hilamlife
C' 5% * 21/E2, 1DDB&
d. the suppl! of services b! a non6resident person in connection with those of
propert! or rights, or the installation or operation of an! brand, machiner!, or
other apparatus purchased from such non6resident person
e. technical advise, assistance or services rendered in connection with technical
management of an! scientific, industrial or commercial underta.ing
f. the use of motion picture films, films for tv, tapes for radio broadcast
B. *ale of real propert! 3 the gains, profits O income from sale of real propert! located
in the hilippines
H. *ale of personal propert! 3 gains, profits and income from sale of personal propert!,
determined b! subsection #4&
The place of the singing of a contract is >4Q4% an issue or a factor for determining the
source of income. #'tt! $ontero&
In the CI% v $arubeni case, what was involved was a turn.e! contract. $arubeni was a
non6resident foreign corporation. 9hat was interesting here, according to sir, is that a
turn.e! contract could be argued to be a divisible contract which has 2 stages 3
engineering, procurement, and construction. The tax implication of this is that certain
stages of the contract could be argued to be be!ond the taxing <urisdiction of the
hilippines.
o +or the engineering stage:
i. %o!alties is sourced here, so that)s taxed. #'ccording to hil6'm "ife v
CT', ro!alties are technical fees&
ii. *ervice fees are probabl! situated abroad, so that)s not taxed here.
o +or the procurement stage:
i. 9here was the stuff bought: It could be here #which would be taxed& or
abroad #then it wouldn)t be taxed&
o +or the construction stage:
i. That would definitel! be here, so it)ll be taxed.
o The implication here is that if !ou can argue that the contract is divisible, !ou can
also argue that some stages of the contract were not sourced here in the
hilippines, and thus be!ond the taxing <urisdiction of the hilippines.
o This would be huge, considering that if the contract was considered indivisible,
then ever!thing would be considered situated here in the hilippines and thus the
whole contract would be full! taxed. Thin. of how much !ou)d save;
4xpenses of a multination corporation directl! related to the production of hilippine6
derived income can be deducted from gross income in the hilippines without need of
apportionment, but overhead expenses of its parent compan! belong to a different
categor!.
o These are items which can)t be definitel! allocated or identified with the
operations of the hilippine branch. *o, the compan! can claim as its deductible
share a ratable part of such expenses based upon the ratio of the local branch)s
gross income to the total gross income, worldwide, of the multinational
corporation. #CI% v CT' and *mith Rline&
%einsurance premiums ceded to foreign reinsurers are considered income from hilippine
sources.
o It is the place of activit! creating the income which is controlling, and not the
place of business. #hil 5uarant! v CI%&
A(& 11%8 applies only to the income tax of:
1. hilippine branches and liaison offices of Mapanese trading firms
/. 'll other foreign trading companies
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EA
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Taxation One: Outline with Codals
-or solicitation and trading activities
9orldwide Operating Income T *ales to the hil x 'ttribution %ate #CBL& x Tax %ate #2BL&
9orldwide *ales
-or construction
>et Income from Construction and other activities x Tax %ate #2BL&
A(& 11!@ was implemented because the hilippine liaison offices of some
multinational companies were soliciting orders form local importers. 7ut then, these
liaison offices were not reporting as income the sales made to local importers because
the! claim that the sale was actuall! consummated b! their head office abroad.
o In this case, the sales purportedl! consummated abroad are deemed
constructivel! consummated here and thus be deemed income from sources
within the philippines
The other issue in A(& 11!@ was that the hilippine liaison office would solicit orders
from local importers. It then would rela! the information to its foreign head office which
loo.s for exporters of the product and earns a commission. 7ut the commission would be
earned b! the head office. *o, the hilippine liaison office would not pa! tax on these
bro.er)s commissions here.
o Iere, he branch shall be considered Fa commercial bro.erG or indentor; #ii& its
share from compensation as allocated b! its home office shall be sub<ect to
commercial bro.er gross receipts tax; #iii& the branch shall provide itself with
corresponding fixed tax as a commercial bro.er; and #iv& pa! income tax on its
share of compensation.
1@1!@ tal.s about the allocation of head office overhead expenses:
o +rom the items specified in *ection2C#a& as being derived specificall! from
sources within the hilippines, there shall be deducted the expenses, losses, and
other deductions properl! allocated thereto and a ratable part of an! other
expenses, losses and other deductions effectivel! connected with the business or
trade conducted Fexclusivel! within the hilippines which cannot definitel! be
allocated to some items or class of gross income. The remainder shall be included
in full as net income from sources within the hilippines. The ratable part shall be
based upon the following ratios consistentl! followed from !ear to !ear:
i. 5ross income from sources within the hilippines to the total gross
income.
ii. >et sales in the hilippines to total net sales.
iii. If an! other method of allocation is adopted, a written permission from
the CI% shall first be secured.
The problem here is that deductions being made b! the hilippine branch offices of
foreign corps are hard to chec. because the supporting documents O boo.s of accounts
are not accessible to the 7I%. *o, the hil branch offices onl! submit an audit
certification to bac.6up their claims for deductions. This order provides several
procedures for the 7I% to determine the correct deductions such as functional anal!sis,
relevance tests, reasonableness tests and other measures. #A(& .1!@*
(& ..12''8 gives the rules for sale of computer hardware bundled with software,
where the software is bundled I> TI4 II"II>4*. #those bundled outside the hil is
covered b! a different %$O&
o a!ments to a local cop!right owner for transfer of cop!right shall be sub<ect to
income tax
i. Transfer b! a resident individual owner of cop!right: amount paid shall
form part of cop!right owner)s gross income
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EB
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amdg
Taxation One: Outline with Codals
ii. Transfer b! a domestic corporation owner: amount paid shall form part of
corporate gross income
o a!ments made to a foreign cop!right owner
i. Transfer b! a non6resident alien individual: engaged in trade in business
taxed the same wa! a resident owner is
ii. Transfer b! a foreign corporation: amount paid shall form part of corporate
gross income
iii. Transfer b! a non6resident foreign corporation: 2/L final tax on the
amount paid in consideration
o If the foreign owner is resident of a countr! with a tax treat!, then ro!alties will
be based on the treat!.
o a!ments b! a local reseller-distributor
i. to a domestic corporate owner: /0L final tax on the ro!alties
ii. to a non6resident foreign owner: 2/L final tax to be collected b! the local
reseller
o a!ments b! the end6user to local resellers-distributors of resellers: amount paid
shall form part of resellers) gross income
i. 4nd6user will also withhold /L income tax against the taxable income of
the local subsidiaries, reseller or distributors, %OQI848 the end6user is
either:
' <uridical person, whether engaged in business or not, or
'n individual, with respect to pa!ments made in connection with
his business, or
' government office
o If a local end6user gets a license straight from the foreign owner, then the
ro!alties are sub<ect to 2/L income tax which will be withheld b! the local end6
user
o +or Q'T purposes, the following are also sub<ect to the Q'T:
i. %o!alt! pa!ments for the use of a cop!right over a software
ii. a!ments made to resellers-distributtors-retailers who are engaged in
trade or business
iii. a!ments for services rendered in the hilippines in connection with
software purchased
5ross income form sources outside #without& the hilippines
)C* Gross Income -rom /ources %ithout the Philippines. 6 The following items of gross income shall be
treated as income from sources without the hilippines:
#1& Interests other than those derived from sources within the hilippines as provided in
paragraph #1& of *ubsection #'& of this *ection;
#/& 8ividends other than those derived from sources within the hilippines as provided in
paragraph #/& of *ubsection #'& of this *ection;
#2& Compensation for labor or personal services performed without the hilippines;
#A& %entals or ro!alties from propert! located without the hilippines or from an! interest in
such propert! including rentals or ro!alties for the use of or for the privilege of using
without the hilippines, patents, cop!rights, secret processes and formulas, goodwill,
trademar.s, trade brands, franchises and other li.e properties; and
#B& 5ains, profits and income from the sale of real propert! located without the hilippines.
1. Interests other than those derived from sources within
/. 8ividends other than those derived from sources within
2. Compensation for labor or personal services performed outside the hil
A. %entals or ro!alties from propert! located outside the hilippines or an! interest in
such propert!
B. 5ains, profits, income from sale of real propert! located outside the hilippines
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EH
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amdg
Taxation One: Outline with Codals
Income from sources partl! within and partl! without the hilippines
)D* Taxa&le Income -rom /ources %ithout the Philippines. 8 +rom the items of gross income specified in
*ubsection #C& of this *ection there shall be deducted the expenses, losses, and other deductions properl!
apportioned or allocated thereto and a ratable part of an! expense, loss or other deduction which cannot definitel!
be allocated to some items or classes of gross income. The remainder, if an!, shall be treated in full as taxable
income from sources without the hilippines.
)E* Income -rom /ources Partly %ithin and Partly %ithout the Philippines.8 Items of gross income,
expenses, losses and deductions, other than those specified in *ubsections #'& and #C& of this *ection, shall be
allocated or apportioned to sources within or without the hilippines, under the rules and regulations prescribed b!
the *ecretar! of +inance, upon recommendation of the Commissioner. 9here items of gross income are separatel!
allocated to sources within the hilippines, there shall be deducted #for the purpose of computing the taxable
income therefrom& the expenses, losses and other deductions properl! apportioned or allocated thereto and a
ratable part of other expenses, losses or other deductions which cannot definitel! be allocated to some items or
classes of gross income. The remainder, if an!, shall be included in full as taxable income from sources within the
hilippines. In the case of gross income derived from sources partl! within and partl! without the hilippines, the
taxable income ma! first be computed b! deducting the expenses, losses or other deductions apportioned or
allocated thereto and a ratable part of an! expense, loss or other deduction which cannot definitel! be allocated to
some items or classes of gross income; and the portion of such taxable income attributable to sources within the
hilippines ma! be determined b! processes or formulas of general apportionment prescribed b! the *ecretar! of
+inance. 5ains, profits and income from the sale of personal propert! produced #in whole or in part& b! the
taxpa!er within and sold without the hilippines, or produced #in whole or in part& b! the taxpa!er without and sold
within the hilippines, shall be treated as derived partl! from sources within and partl! from sources without the
hilippines.
5ains, profits and income derived from the purchase of personal propert! within and its sale without the
hilippines, or from the purchase of personal propert! without and its sale within the hilippines shall be treated as
derived entirel! form sources within the countr! in which sold: +rovided, however, That gain from the sale of
shares of stoc. in a domestic corporation shall be treated as derived entirel! form sources within the hilippines
regardless of where the said shares are sold. The transfer b! a nonresident alien or a foreign corporation to an!one
of an! share of stoc. issued b! a domestic corporation shall not be effected or made in its boo. unless: #1& the
transferor has filed with the Commissioner a bond conditioned upon the future pa!ment b! him of an! income tax
that ma! be due on the gains derived from such transfer, or #/& the Commissioner has certified that the taxes, if
an!, imposed in this Title and due on the gain reali,ed from such sale or transfer have been paid. It shall be the
dut! of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of
this re@uirement.
)"* Definitions. 6 's used in this *ection the words /sale/ or /sold/ include /e*change/ or /e*changed/; and the
word /produced/ includes /created/, /fa%ricated/, /manufactured/, /e*tracted/, /processed/, /cured/ or /aged/.
+or the gross income items allocated to sources partl! within and partl! without the
hilippines,
o there shall be deducted the expenses, losses and other deductions properl!
apportioned, and
o and a ratable part of other expenses, losses O deductions which cannot properl!
be allocated to some item of gross income.
If there is an! remainder, it shall be included in full as taxable income from sources
within the hilippines
*itus of sale of personal propert!
5ains, profits and income derived from purchase of personal propert! within and sold
without, or from purchase without and sale within, are treated as derived entirel! from
sources with the countr! in which it is *O"8.
*itus of sale of stoc.s in a domestic corporation
5ains from sale of shares of stoc. in a domestic corporation are treated as 84%IQ48
4>TI%4"= from sources within the hilippines regardless of where the said shares are
sold.
:. Accountin- Periods and (et6ods
9EC. .+. General 'ule. 6 The taxable income shall be computed upon the basis of the taxpa!erNs annual
accounting period #fiscal !ear or calendar !ear, as the case ma! be& in accordance with the method of accounting
regularl! emplo!ed in .eeping the boo.s of such taxpa!er, but if no such method of accounting has been so
emplo!ed, or if the method emplo!ed does not clearl! reflect the income, the computation shall be made in
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EC
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amdg
Taxation One: Outline with Codals
accordance with such method as in the opinion of the Commissioner clearl! reflects the income. If the taxpa!erNs
annual accounting period is other than a fiscal !ear, as defined in *ection //#U&, or if the taxpa!er has no annual
accounting period, or does not .eep boo.s, or if the taxpa!er is an individual, the taxable income shall be
computed on the basis of the calendar !ear.
Taxable income is computed on the basis of the taxpa!er)s annual accounting period in
accordance with the method of accounting regularl! emplo!ed in .eeping his boo.s.
If there is no method emplo!ed or he doesn)t .eep boo.s, the taxable income shall be
computed on the basis of the calendar !ear.
If the taxpa!er is an individual, it shall be the calendar !ear.
'lthough the taxpa!er is allowed to do his own accounting method, some guidelines
should be followed
1C
:
o 9hen the production, purchase or sale of merchandise of an! .ind is an income
producing factor, inventories should be ta.en at the beginning and at the end of
the !ear
1C
%% /, *ec 1HH 5eneral %ule 3 The method of accounting regularl! emplo!ed b! the taxpa!er in .eeping his
boo.s, if such method clearl! reflects his income is to be followed with respect to the time as of which items of
gross income and deductions are to be accounted for. If the taxpa!er does not regularl! emplo! a method of
accounting which reflects his income, the computation shall be made in such manner as in the opinion of the
Commissioner of Internal %evenue clearl! reflects it. #*ee section 12C of these regulations for computation of net
income, and section 2E for bases of computation. +or the use of inventories, see sections 1AA to 1B1 of these
regulations.&
*ec 1HC $ethods of accounting 3 It is recogni,ed that no uniform method of accounting can be prescribed for all
taxpa!ers, and the law contemplates that each taxpa!er shall adopt such forms and s!stems of accounting as are
in his <udgment best suited to his purpose. 4ach taxpa!er is re@uired b! law to ma.e a return of his true income.
Ie must, therefore, maintain such accounting records as will enable him to do so. 'n! approved standard method
of accounting which reflects taxpa!er)s income ma! be adopted. 'mong the essential are the following:
#1& In all cases in which the production, purchase, or sale of merchandise of an! .ind is an income6producing
factor, inventories of the merchandise in hand #including finished goods, wor. in process, raw materials, and
supplies& should be ta.en at the beginning and end of the !ear and used in computing the net income of the !ear
in accordance with sections 1AA to 1B1 of these regulations.
#/& 4xpenditures made during the !ear should be properl! classified as between capital an income; that is to sa!,
expenditures for items of plant, e@uipment, etc. which have a useful life extending substantiall! be!ond the! !ear
should be charged to capital account and not to expense account; and
#2& In an! case in which the cost of capital assets is being recovered through deductions for wear and tear,
depletion, or obsolescence, an! expenditure Dother than ordinar! repairs& ZZZZZ restore the propert! or prolong its
useful life should be added to the propert! account or charged against the appropriate reserve and not to current
expenses.
*ec 1HE Changes in accounting methods 3 The true income, computed under the law, shall in all cases be entered
in the return. If for an! reason the basis of reporting income sub<ect to tax is changed, the taxpa!er shall attach to
is return a separate statement setting forth for the taxable !ear and for the preceding !ear the classes of items
differentl! treated under the two s!stems, specif!ing in particular all amounts duplicated or entirel! omitted as the
result of such change.
' taxpa!er who changes the method or recounting emplo!ed in .eeping his boo. shall, before computing his
income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal
%evenue. +or the purpose of this section, a change in the method of accounting emplo!ed in .eeping boo.s means
an! change in the accounting treatment of items of income or deduction, such as a change from cash receipts and
disbursement methods to the accrued method, or vice versa; a change involving the basis of valuation emplo!ed in
the computation of inventories #see sections 1AA to 1B1 of these regulations&; a change from the cash to accrual
method to the long6term contract method, or vice versa; a change in the long6term contract method from the
percentage of computation basis to the completed contract basis, or vice versa #see section AA of these
regulations&; or a change involving the adoption of, or a change in the use of, an! other speciali,ed basis of
computing net income such as the crop basis. 'pplication for permission to change the method accounting
emplo!ed and the basis upon which the return is made shall be filed within D0 da!s after the beginning of the
taxable !ear to be covered b! the return. The application shall be accompanied b! a statement specif!ing all
amounts which would be duplicated or entirel! omitted as a result of the proposed change. ermission to change
the method of accounting will not be granted unless the taxpa!er and the Commissioner of Internal %evenue agree
to the terms and conditions under which the change will be effected.
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EE
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amdg
Taxation One: Outline with Codals
o 4xpenses should be properl! classified between capital and income. Capital
expenses are those which have a long useful life extending substantiall! be!ond
the !ear
o 9hen the cost of capital assets is being recovered thru deductions for wear O
tear, etc, an! expenses made to restore the propert! or prolong its useful life
should be added to the propert! account, and not to current expenses
'ccrual basis is the default 3 meaning, !ou report income when earned and report
expense when incurred, i.e. when it)s legall! due, demandable and enforceable.
9EC. ... Period in which Items of Gross Income Included. 6 The amount of all items of gross income shall be
included in the gross income for the taxable !ear in which received b! the taxpa!er, unless, under methods of
accounting permitted under *ection A2, an! such amounts are to be properl! accounted for as of a different period.
In the case of the death of a taxpa!er, there shall be included in computing taxable income for the taxable period in
which falls the date of his death, amounts accrued up to the date of his death if not otherwise properl! includible in
respect of such period or a prior period.
The items of gross income are included in the taxable !ear that the! are received b! the
taxpa!er, unless the! are properl! accounted for as of a different period.
1E
9EC. .8. Period for which Deductions and +redits Ta0en. 6 The deductions provided for in this Title shall be
ta.en for the taxable !ear in which /paid or accrued/ or /paid or incurred/, dependent upon the method of
accounting the basis of which the net income is computed, unless in order to clearl! reflect the income, the
deductions should be ta.en as of a different period. In the case of the death of a taxpa!er, there shall be allowed
as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his
death if not otherwise properl! allowable in respect of such period or a prior period.
The deduction shall be ta.en for the taxable !ear in which it is incurred.
9EC. .@. +han#e of Accountin# Period. If a taxpa!er, other than an individual, changes his accounting period
from fiscal !ear to calendar !ear, from calendar !ear to fiscal !ear, or from one fiscal !ear to another, the net
income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period,
sub<ect to the provisions of *ection AC.
1E
*ec 1C0 9hen included in gross income 3 4xcept as otherwise provided in section 2D in the case of the death of
the taxpa!er, gains, profits, and income are to be included in the gross income for the taxable !ear in which the!
are received b! the taxpa!er, unless the! are included as of a different period in accordance with the approved
method of accounting followed b! him. If a taxpa!er has died there shall also be included in computing for the
taxable period in which he died amounts accrued up to the date of his death if not otherwise properl! includible in
respect of such period or a prior period, regardless of the fact that the decedent ma! have .ept his boo.s and
made his returns on the basis of cash receipts and disbursements.
#+or income not reduced to possession but considered as constructivel! received and for examples of constructive
receipt, see sections B/ and B2 of these regulations. +or the treatment of income long term contracts, see section
AA of these regulations.&
*ec 1C1 Faid or incurredG or Fpaid or accruedG 3 #a& The terms Fpaid or incurredG and Fpaid or accruedG will be
construed according to the method of accounting upon the basis of which the net income is computed b! the
taxpa!er. The deductions and credits must be ta.en for the taxable !ear, in which Fpaid or accruedG or (paid or
incurredG, unless in order clearl! to reflect the income such deductions or credits should be ta.en as of a different
period. If a taxpa!er desires to claim a deduction or a credit as of a period other than the period in which it was
Fpaid or accruedG or Fpaid or incurredG, he shall attach to his return a statement setting forth his re@uest for
consideration of the case b! the Commissioner of Internal %evenue together with a complete statement of the facts
upon which he relies. Iowever, in his income tax return he shall ta.e the deduction or credit onl! for the taxable
period in which it was actuall! Fpaid or incurredG, or Fpaid or accruedG, as the case ma! be. Kpon the audit of the
return, the Commissioner of Internal %evenue will decide whether the case is within the exception provided b! law,
and the taxpa!er will be advised as to the period for which the deduction or credit is properl! allowable.
#b& The provision of paragraph #a& of this section in general are not applicable with respect to the taxable period
during which the taxpa!er dies. In such case there shall also be allowed as deductions and credits for such taxable
period amounts accrued and credits for such taxable period, amounts accrued up to the date of his death if not
otherwise allowable with respect to such period or a prior period, regardless of the fact that the decedent was
re@uired to .eep his boo.s and ma.e his returns on the basis of cash receipts and disbursements.
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Taxation One: Outline with Codals
If the taxpa!er, other than an individual, changes his accounting period, the net income
will be computed on the basis of his new accounting period.
1D
9EC. .7. -inal or Ad2ustment 'eturns for a Period of 1ess than Twelve 3456 *onths. 8
)A* 'eturns for /hort Period 'esultin# from +han#e of Accountin# Period. 8 If a taxpa!er, other than an
individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal !ear to
calendar !ear, a separate final or ad<ustment return shall be made for the period between the close of the last fiscal
!ear for which return was made and the following 8ecember 21. If the change is from calendar !ear to fiscal !ear,
a separate final or ad<ustment return shall be made for the period between the close of the last calendar !ear for
which return was made and the date designated as the close of the fiscal !ear. If the change is from one fiscal !ear
to another fiscal !ear, a separate final or ad<ustment return shall be made for the period between the close of the
former fiscal !ear and the date designated as the close of the new fiscal !ear.
)B* Income +omputed on $asis of /hort Period. 6 9here a separate final or ad<ustment return is made under
*ubsection #'& on account of a change in the accounting period, and in all other cases where a separate final or
ad<ustment return is re@uired or permitted b! rules and regulations prescribed b! the *ecretar! of +inance, upon
recommendation of the Commissioner, to be made for a fractional part of a !ear, then the income shall be
computed on the basis of the period for which separate final or ad<ustment return is made.
If the taxpa!er changes his accounting period, a separate return must be made for the
gap caused b! the change. Income will be apportioned properl!.
/0
*hort6term periods are also needed in instances of death and dissolution of a
corporation.
9EC. .!. Accountin# for 1on#-Term +ontracts. 6 Income from long6term contracts shall be reported for tax
purposes in the manner as provided in this *ection. 's used herein, the term Nlong6term contractsN means building,
installation or construction contracts covering a period in excess of one #1& !ear. ersons whose gross income is
derived in whole or in part from such contracts shall report such income upon the basis of percentage of
completion. The return should be accompanied b! a return certificate of architects or engineers showing the
percentage of completion during the taxable !ear of the entire wor. performed under contract. There should be
deducted from such gross income all expenditures made during the taxable !ear on account of the contract,
account being ta.en of the material and supplies on hand at the beginning and end of the taxable period for use in
connection with the wor. under the contract but not !et so applied. If upon completion of a contract, it is found
that the taxable net income arising thereunder has not been clearl! reflected for an! !ear or !ears, the
Commissioner ma! permit or re@uire an amended return.
"ong term means building, installation or construction contracts covering a period in
excess of 1 !ear.
ersons reporting long6term contracts must report it on basis of percentage of
completion
/1
.
1D
*ec 1HD 'ccounting eriod 3 Income tax returns, whether for individual of for corporations, associations, or
partnerships, are re@uired to be made and their income computed for each calendar !ear ending on 8ecember 21st
of ever! !ear. Iowever, corporations, associations or partnerships ma! with the approval of the Commissioner of
Internal %evenue ZZZ secured, file their returns and compute their income on the basis of a fiscal !ear which
means an accounting period of twelve months ending on the last da! of an! month other than 8ecember. 7ut in no
instance shall individual taxpa!ers be authori,ed to establish fiscal !ear as basis for filing their returns and
computing their income. #+or authorit! to file on fiscal !ear basis see section 1C/ of these regulations&.
*ec 1C/ Change of accounting period. 3 If a corporation, including a dul! registered general partnership, desires to
change its accounting period from the fiscal !ear to calendar !ear or from calendar !ear to fiscal !ear, or from one
fiscal to another, it shall at an! time not less than thirt! da!s prior to the date fixed in section AH #b& of the Code
for the filing of its return on the basis of its original accounting period submit a written application to the
Commissioner of Internal %evenue designating the proposed date for the closing of its new taxable !ear, together
with a statement of the date on which the boo.s of account were opened and closed each !ear for the past three
!ears, the date on which the taxable !ear began and ended as shown on the returns filed for the past three !ears,
and the reasons wh! the change in accounting period is desired.
/0
*ec 1C2 %eturns for periods of less than twelve months 3 >o returns can be made for a period of more than
twelve months. ' separate return for the fractional part of a !ear is therefore re@uired whenever there is a change,
with the approval of the Commissioner of Internal %evenue, in the basis of computing net income from one taxable
!ear to another taxable !ear. The periods to be covered b! such separate returns in the several cases stated in
section A/ #a&. The re@uirements with respect to the filing of a separate return and the pa!ment of tax for a part of
a !ear are the same as for the filing of a separate return and the pa!ment of tax for a part of a !ear are the same
as for the filing of a return and the pa!ment of tax for a full taxable !ear closing at the same time.
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Taxation One: Outline with Codals
Total is B0$ =ear 1 =ear / =ear 2
/0L C0L 100L
10m 2Bm B0m
%unning cost Bm 20m A0m
>et Income Bm 0 #>I =ear /6 >I =ear 1&
9EC. .%. Installment $asis. 6
)A* /ales of Dealers in Personal Property. 6 Knder rules and regulations prescribed b! the *ecretar! of
+inance, upon recommendation of the Commissioner, a person who regularl! sells or otherwise disposes of personal
propert! on the installment plan ma! return as income therefrom in an! taxable !ear that proportion of the
installment pa!ments actuall! received in that !ear, which the gross profit reali,ed or to be reali,ed when pa!ment
is completed, bears to the total contract price.
)B* /ales of 'ealty and +asual /ales of Personality. 6 In the case #1& of a casual sale or other casual
disposition of personal propert! #other than propert! of a .ind which would properl! be included in the inventor! of
the taxpa!er if on hand at the close of the taxable !ear&, for a price exceeding One thousand pesos #1,000&, or
#/& of a sale or other disposition of real propert!, if in either case the initial pa!ments do not exceed twent!6five
percent #/BL& of the selling price, the income ma!, under the rules and regulations prescribed b! the *ecretar! of
+inance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed
in this *ection. 's used in this *ection, the term /initial payments/ means the pa!ments received in cash or
propert! other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other
disposition is made.
)C* /ales of 'eal Property +onsidered as +apital Asset &y Individuals. 6 'n individual who sells or disposes
of real propert!, considered as capital asset, and is otherwise @ualified to report the gain therefrom under
*ubsection #7& ma! pa! the capital gains tax in installments under rules and regulations to be promulgated b! the
*ecretar! of +inance, upon recommendation of the Commissioner.
)D* +han#e from Accrual to Installment $asis. 6 If a taxpa!er entitled to the benefits of *ubsection #'& elects
for an! taxable !ear to report his taxable income on the installment basis, then in computing his income for the
!ear of change or an! subse@uent !ear, amounts actuall! received during an! such !ear on account of sales or
other dispositions of propert! made in an! prior !ear shall not be excluded.
*ales of dealers in personal propert!
o ' person who regularl! sells personal propert! on the installment plan ma! return
as income in an! taxable !ear that proportion of the installment pa!ment which
the gross profit reali,ed bears to the total contract price
*ale of real propert! and casual sales of personal propert!
o If the price exceeds 1000 or where the initial pa!ment does not exceed /BL of
the selling price, the same basis as above ma! be followed
*ales of real propert! considered as capital asset b! individuals
/1
%%6/, *ec AA "ong term contracts. 3 Income from long6term contracts is taxable for the period in which the
income is determined, such determination depending upon the nature and terms of the particular contract. 's used
herein the term Flong6termG contracts mean building, installation or construction contracts covering a period in
excess of one !ear. ersons whose income is derived in whole or in part from such contracts ma!, as to such
income, prepare their returns upon the following bases:
#a& 5ross income derived from such contracts ma! be reported upon the basis of percentage of completion. In such
case there should accompan! the return certificate of architects, or engineers showing the percentage of
completion during the taxable !ear of the entire wor. performed under contract. There should be deducted from
such gross income all expenditures made during the taxable !ear on account of the contract, account being ta.en
of the material and supplies period for use in connection with the wor. under the contract but not !et so applied. If
upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearl!
reflected for an! !ear or !ears, the CI% ma! permit or re@uire an amended return.
#b& 5ross income ma! be reported in the taxable !ear in which the contract is finall! completed and accepted if the
taxpa!er elects as a consistent practice to treat such income, provided such method clearl! reflects the net income.
If this method is adopted there should be deducted from gross income all expenditures during the life of the
contract which are properl! allocated thereto, ta.ing into consideration an! material and supplies charged to the
wor. under the contract but remaining on hand at the time of the completion.
9hen a taxpa!er has filed his return in accordance with the method of accounting regularl! emplo!ed b! him in
.eeping his boo.s and such method clearl! reflects the income, he will not be re@uired to change either of the
methods above set forth. If a taxpa!er desires to change his method of accounting in accordance with paragraphs
#a& and #b& above, a statement showing the composition of all items appearing upon his balance sheet and used in
connection with the method of accounting formerl! emplo!ed b! him, should accompan! his return.
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D1
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Taxation One: Outline with Codals
o 'n individual who sells real propert! considered as capital asset ma! pa! the
capital gains tax in installments under the rules of the 7I%
Changes from 'ccrual to installment basis
o 9hen a taxpa!er decides to report his taxable income on the installment basis,
the amounts actuall! received in prior !ears are not excluded
*ee %% /, *ec 1CA61CD #ha%a eh, sayang sa papel2
If postdated chec.s were given to pa! a sale on installments, and then the postdated
chec.s were discounted #i.e. sold to a 2
rd
person to get the cash immediatel!&, this is
still considered a sale on installment. #7anas v C', because the postdated chec.s were
evidence of inde%tedness&
9EC. 8'. Allocation of Income and Deductions. 6 In the case of two or more organi,ations, trades or
businesses #whether or not incorporated and whether or not organi,ed in the hilippines& owned or controlled
directl! or indirectl! b! the same interests, the Commissioner is authori,ed to distribute, apportion or allocate
gross income or deductions between or among such organi,ation, trade or business, if he determined that such
distribution, apportionment or allocation is necessar! in order to prevent evasion of taxes or clearl! to reflect the
income of an! such organi,ation, trade or business.
9hen two or more organi,ations, trades or businesses are owned or controlled directl!
or indirectl! b! the same interests, the CI% can distribute, apportion or allocate gross
income or deductions between or among such orgs, trades or businesses, in order to
prevent tax evasion.
On the net worth method, from ere, v CT', "610B0C, $a! 20, 1DBE:
o On the application of the net worth method of determining taxable income, used
b! the collector and upheld b! the court below, it must he explained that the
method is based upon the general theor! that mone! and other assets in excess
of liabilities of a taxpa!er #after an accurate and proper ad<ustment of non6
deductible items& not accounted for b! his income tax returns, leads to the
inference that part of his income has not been reported. The authorit! to use this
method in determining income is rooted in or stems from section A1 of the
Internal %evenue Code of 1D2D of the Knited *tates. >o cogent reason is shown
for deviating from this practice in the hilippines. In fact section 2E of the
>ational Internal %evenue Code authori,es the application of the >et 9orth
$ethod in this <urisdiction.
;. Estates and Trusts
9EC. @'. Imposition of Tax. 6
#'& 'pplication of Tax. 6 The tax imposed b! this Title upon individuals shall appl! to the income of estates or of
an! .ind of propert! held in trust, including:
#1& Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent
interests, and income accumulated or held for future distribution under the terms of the will or trust;
#/& Income which is to be distributed currentl! b! the fiduciar! to the beneficiaries, and income collected b! a
guardian of an infant which is to be held or distributed as the court ma! direct;
#2& Income received b! estates of deceased persons during the period of administration or settlement of the
estate; and
(A& Income which, in the discretion of the fiduciar!, ma! be either distributed to the beneficiaries or accumulated.
#7& 4xception. 6 The tax imposed b! this Title shall not appl! to emplo!eeNs trust which forms part of a pension,
stoc. bonus or profit6sharing plan of an emplo!er for the benefit of some or all of his emplo!ees #1& if contributions
are made to the trust b! such emplo!er, or emplo!ees, or both for the purpose of distributing to such emplo!ees
the earnings and principal of the fund accumulated b! the trust in accordance with such plan, and #/& if under the
trust instrument it is impossible, at an! time prior to the satisfaction of all liabilities with respect to emplo!ees
under the trust, for an! part of the corpus or income to be #within the taxable !ear or thereafter& used for, or
diverted to, purposes other than for the exclusive benefit of his emplo!ees: rovided, That an! amount actuall!
distributed to an! emplo!ee or distributee shall be taxable to him in the !ear in which so distributed to the extent
that it exceeds the amount contributed b! such emplo!ee or distributee.
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Taxation One: Outline with Codals
#C& Computation and a!ment. 6
#1& In 5eneral. 6 The tax shall be computed upon the taxable income of the estate or trust and shall be paid b! the
fiduciar!, except as provided in *ection H2 #relating to revocable trusts& and *ection HA #relating to income for the
benefit of the grantor&. #/& Consolidation of Income of Two or $ore Trusts. 6 9here, in the case of two or more
trusts, the creator of the trust in each instance is the same person, and the beneficiar! in each instance is the
same, the taxable income of all the trusts shall be consolidated and the tax provided in this *ection computed on
such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which
the taxable income of the trust administered b! him bears to the consolidated income of the several trusts.

*4C. H1. Taxable Income. 6 The taxable income of the estate or trust shall be computed in the same manner and
on the same basis as in the case of an individual, except that:
#'& There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the
income of the estate or trust for the taxable !ear which is to be distributed currentl! b! the fiduciar! to the
beneficiaries, and the amount of the income collected b! a guardian of an infant which is to be held or distributed
as the court ma! direct, but the amount so allowed as a deduction shall be included in computing the taxable
income of the beneficiaries, whether distributed to them or not. 'n! amount allowed as a deduction under this
*ubsection shall not be allowed as a deduction under *ubsection #7& of this *ection in the same or an! succeeding
taxable !ear.
#7& In the case of income received b! estates of deceased persons during the period of administration or
settlement of the estate, and in the case of income which, in the discretion of the fiduciar!, ma! be either
distributed to the beneficiar! or accumulated, there shall be allowed as an additional deduction in computing the
taxable income of the estate or trust the amount of the income of the estate or trust for its taxable !ear, which is
properl! paid or credited during such !ear to an! legatee, heir or beneficiar! but the amount so allowed as a
deduction shall be included in computing the taxable income of the legatee, heir or beneficiar!.
#C& In the case of a trust administered in a foreign countr!, the deductions mentioned in *ubsections #'& and #7& of
this *ection shall not be allowed: rovided, That the amount of an! income included in the return of said trust shall
not be included in computing the income of the beneficiaries.

*4C. H/. 4xemption 'llowed to 4states and Trusts. 6 +or the purpose of the tax provided for in this Title, there shall
be allowed an exemption of Twent! thousand pesos #/0,000& from the income of the estate or trust.
*4C. H2. %evocable trusts. 6 9here at an! time the power to revest in the grantor title to an! part of the corpus of
the trust is vested #1& in the grantor either alone or in con<unction with an! person not having a substantial
adverse interest in the disposition of such part of the corpus or the income therefrom, or #/& in an! person not
having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the
income of such part of the trust shall be included in computing the taxable income of the grantor.
*4C. HA. Income for 7enefit of 5rantor.6
#'& 9here an! part of the income of a trust #1& is, or in the discretion of the grantor or of an! person not having a
substantial adverse interest in the disposition of such part of the income ma! be held or accumulated for future
distribution to the grantor, or #/& ma!, or in the discretion of the grantor or of an! person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to the grantor, or #2& is, or in the
discretion of the grantor or of an! person not having a substantial adverse interest in the disposition of such part of
the income ma! be applied to the pa!ment of premiums upon policies of insurance on the life of the grantor, such
part of the income of the trust shall be included in computing the taxable income of the grantor.
#7& 's used in this *ection, the term Nin the discretion of the grantorN means in the discretion of the grantor, either
alone or in con<unction with an! person not having a substantial adverse interest in the disposition of the part of
the income in @uestion.
*4C. HB. +iduciar! %eturns. 6 5uardians, trustees, executors, administrators, receivers, conservators and all
persons or corporations, acting in an! fiduciar! capacit!, shall render, in duplicate, a return of the income of the
person, trust or estate for whom or which the! act, and be sub<ect to all the provisions of this Title, which appl! to
individuals in case such person, estate or trust has a gross income of Twent! thousand pesos #/0,000& or over
during the taxable !ear. *uch fiduciar! or person filing the return for him or it, shall ta.e oath that he has sufficient
.nowledge of the affairs of such person, trust or estate to enable him to ma.e such return and that the same is, to
the best of his .nowledge and belief, true and correct, and be sub<ect to all the provisions of this Title which appl!
to individuals: rovided, That a return made b! or for one or two or more <oint fiduciaries filed in the province
where such fiduciaries reside; under such rules and regulations as the *ecretar! of +inance, upon recommendation
of the Commissioner, shall prescribe, shall be a sufficient compliance with the re@uirements of this *ection.
*4C. HH. +iduciaries Indemnified 'gainst Claims for Taxes aid. 6 Trustees, executors, administrators and other
fiduciaries are indemnified against the claims or demands of ever! beneficiar! for all pa!ments of taxes which the!
shall be re@uired to ma.e under the provisions of this Title, and the! shall have credit for the amount of such
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Taxation One: Outline with Codals
pa!ments against the beneficiar! or principal in an! accounting which the! ma.e as such trustees or other
fiduciaries.
' trust is a legal arrangement where the owner of the propert! #trustor& transfers
ownership to a person #trustee& to hold and control the propert! for the benefit of
another person #beneficiar!&
'n estate is created b! operation of law when an individual dies, leaving propreties to
heirs.
Taxable estates and trusts are taxed in the same manner and on the same basis as in
the case of an individual.
The following are allowed deductions for the estate and trust:
o amount distributed to the beneficiaries, or
o amount collected b! a guardian of an infant which is to be held or distributed as
the court ma! direct
in both these cases, the amount allowed shall be included in computing
the taxable income of the beneficiaries whether distributed to them or not
o %ule for income received b! estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income, which ma!
be either distributed to the beneficiar! or accumulated: the amount paid or
credited to an! legatee, heir or beneficiar! shall be allowed as a deduction
rovided that the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiar!
Trusts and estates are entitled to a personal exemption e@uivalent to a single individual
of /0,000.
The income of a trust will be taxed to the:
o Trustor, if revocable trust
o Trustee, if irrevocable trust
9hen this provision will >OT appl!: The income tax is >OT imposed on emplo!eesN trust
which forms part of a pension, stoc. bonus or profit sharing plan of an emplo!er for the
benefit of some or all of his emplo!ees
o if contributions are made to the trust b! such emplo!er, or emplo!ees, or both,
for the purpose of distributing to such emplo!ees the earnings and principal of
the fund accumulated b! the trust in accordance with such plan; and
o if under the trust instrument it is impossible, at an! time prior to the satisfaction
of all liabilities with respect to emplo!ees under the trust, for part of the corpus
or income to #within the taxable !ear or thereafter& used for, or diverted to,
purposes other than for the exclusive benefit of the emplo!ees.
o 'n! amount, however, actuall! distributed to an! emplo!ee or distributee shall be
taxable to him in the !ear in which so distributed to the extent that it exceeds the
amount contributed b! such emplo!ee or distributee.
Income for the benefit of the grantor:
o %ules on revocable trust will appl! for income for the benefit of the grantor.
o The following will be included in the taxable income of the grantor:
9here an! part of the income of a trust is, or in the discretion of the
grantor or of an! person not having a substantial adverse interest in the
disposition of such part of the income
ma! be held or accumulated for future distribution to the grantor;
or
ma!, or in the discretion of the grantor or of an! person not having
a substantial adverse interest in the disposition of such part of the
income, be distributed to the grantor; or
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Taxation One: Outline with Codals
is, or in the discretion of the grantor or of an! person not having a
substantial adverse interest in the disposition of such part of the
income ma! be applied to the pa!ment of the premiums upon
policies of insurance on the life of the grantor
%efer to *ec /0C6/12, %% / for more details
5. eturns and Pa#ment of Taxes
Individual %eturn
*4C. B1. Individual %eturn. 6
#'& %e@uirements. 6
#1& 4xcept as provided in paragraph #/& of this *ubsection, the following individuals are re@uired to file an income
tax return:
#a& 4ver! +ilipino citi,en residing in the hilippines;
#b& 4ver! +ilipino citi,en residing outside the hilippines, on his income from sources within the hilippines;
#c& 4ver! alien residing in the hilippines, on income derived from sources within the hilippines; and
#d& 4ver! nonresident alien engaged in trade or business or in the exercise of profession in the hilippines.
9ho are re@uired to file:
1. %esident citi,en, on income within and without the hilippines
/. >on6resident citi,en, on income within onl!
2. %esident alien, on income within onl!
A. >on6resident alien #engaged in bi, here&, on income within onl!
#/& The following individuals shall not be re@uired to file an income tax return;
#a& 'n individual whose gross income does not exceed his total personal and additional exemptions for dependents
under *ection 2B: rovided, That a citi,en of the hilippines and an! alien individual engaged in business or
practice of profession within the hilippine shall file an income tax return, regardless of the amount of gross
income;
#b& 'n individual with respect to pure compensation income, as defined in *ection 2/#'&#1&, derived from such
sources within the hilippines, the income tax on which has been correctl! withheld under the provisions of *ection
CD of this Code: +rovided, That an individual deriving compensation concurrentl! from two or more emplo!ers at
an! time during the taxable !ear shall file an income tax return;
#c& 'n individual whose sole income has been sub<ected to final withholding tax pursuant to *ection BC#'& of this
Code; and
#d& ' minimum wage earner as defined in *ection //#II& of this Code or an individual who is exempt from income
tax pursuant to the provisions of this Code and other laws, general or special.
#2& The forgoing notwithstanding, an! individual not re@uired to file an income tax return ma! nevertheless be
re@uired to file an information return pursuant to rules and regulations prescribed b! the *ecretar! of +inance,
upon recommendation of the Commissioner.
9ho are not re@uired to file:
1. Those whose gross income does not exceed his total personal and additional
exemptions
o 7ut those engaged in bi, or practices a profession must file, regardless of the
amount of gross income
/. Those who earn pure compensation income and the income tax on which has alread!
been correctl! withheld #substituted filing, done b! emplo!er&, provided that an
individual deriving compensation concurrentl! from / or or more emplo!ers at an!
time during the table !ear shall file an income tax return
2. The following are not re@uired to file, regardless of income amount #final withholding
taxed alread!&
a. Those whose income consists solel! of ro!alties, interests, pri,es, winnings,
dividends, etc and the share in a partnership or association, <oint venture, or
consortium taxable as a corp
b. 'liens emplo!ed b! %OIUs with respect to their compensation income
c. 'liens emplo!ed b! O7Ks with respect to their compensation income
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Taxation One: Outline with Codals
d. 'liens emplo!ed b! foreign service contractors and subcontractors engaged in
petroleum exploration, with respect to their compensation income
A. $inimum wage earners
B. Those exempted b! the Tax code and other special laws
#A& The income tax return shall be filed in duplicate b! the following persons:
#a& ' resident citi,en 6 on his income from all sources;
#b& ' nonresident citi,en 6 on his income derived from sources within the hilippines;
#c& ' resident alien 6 on his income derived from sources within the hilippines; and
#d& ' nonresident alien engaged in trade or business in the hilippines 6 on his income derived from sources within
the hilippines.
9here and when to file
#7& 9here to +ile. 6 4xcept in cases where the Commissioner otherwise permits, the return shall be filed with an
authori,ed agent ban., %evenue 8istrict Officer, Collection 'gent or dul! authori,ed Treasurer of the cit! or
municipalit! in which such person has his legal residence or principal place of business in the hilippines, or if there
be no legal residence or place of business in the hilippines, with the Office of the Commissioner.
#C& 9hen to +ile. 6
#1& The return of an! individual specified above shall be filed on or before the fifteenth #1Bth& da! of 'pril of each
!ear covering income for the preceding taxable !ear.
#/& Individuals sub<ect to tax on capital gains;
#a& +rom the sale or exchange of shares of stoc. not traded thru a local stoc. exchange as prescribed under
*ection /A#c& shall file a return within thirt! #20& da!s after each transaction and a final consolidated return on or
before 'pril 1B of each !ear covering all stoc. transactions of the preceding taxable !ear; and
#b& +rom the sale or disposition of real propert! under *ection /A#8& shall file a return within thirt! #20& da!s
following each sale or other disposition.
#8& Iusband and 9ife. 6 $arried individuals, whether citi,ens, resident or nonresident aliens, who do not derive
income purel! from compensation, shall file a return for the taxable !ear to include the income of both spouses,
but where it is impracticable for the spouses to file one return, each spouse ma! file a separate return of income
but the returns so filed shall be consolidated b! the 7ureau for purposes of verification for the taxable !ear.
#4& %eturn of arent to Include Income of Children. 6 The income of unmarried minors derived from properl!
received from a living parent shall be included in the return of the parent, except #1& when the donorNs tax has
been paid on such propert!, or #/& when the transfer of such propert! is exempt from donorNs tax. #+& ersons
Knder 8isabilit!. 6 If the taxpa!er is unable to ma.e his own return, the return ma! be made b! his dul! authori,ed
agent or representative or b! the guardian or other person charged with the care of his person or propert!, the
principal and his representative or guardian assuming the responsibilit! of ma.ing the return and incurring
penalties provided for erroneous, false or fraudulent returns. #5& *ignature resumed Correct. 6 The fact that an
individualNs name is signed to a filed return shall be prima facie evidence for all purposes that the return was
actuall! signed b! him.
9here to file:
1. 'uthori,ed agent ban.
/. %evenue district officer
2. Collection agent
A. 8ul! authori,ed cit! treasurer where he is legall! residing
B. Office of the commissioner
9hen to file:
On or before 'pril 1B of each !ear
9hat if husband and wife:
Those married individuals who do not derive income purel! from compensation shall file
a return to include income from both spouses. 7ut if impractical, then the! ma! file
separate returns.
Iow about parents and .ids:
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Taxation One: Outline with Codals
arents must include the income of unmarried minors derived from propert! received
from a living parent.
o 4TC4T
i. 9hen the donor)s tax has alread! been paid on such propert!
ii. 9hen the transfer of such propert! is exempt from donor)s tax
9hen to pa! #applies to both individuals and corporations&
*4C. BH. a!ment and 'ssessment of Income Tax for Individuals and Corporation. 6
#'& a!ment of Tax. 6
#1& In 5eneral. 6 The total amount of tax imposed b! this Title shall be paid b! the person sub<ect thereto at the
time the return is filed. In the case of tramp vessels, the shipping agents and-or the husbanding agents, and in
their absence, the captains thereof are re@uired to file the return herein provided and pa! the tax due thereon
before their departure. Kpon failure of the said agents or captains to file the return and pa! the tax, the 7ureau of
Customs is hereb! authori,ed to hold the vessel and prevent its departure until proof of pa!ment of the tax is
presented or a sufficient bond is filed to answer for the tax due.
#/& Installment of a!ment. 6 9hen the tax due is in excess of Two thousand pesos #/,000&, the taxpa!er other
than a corporation ma! elect to pa! the tax in two #/& e@ual installments in which case, the first installment shall
be paid at the time the return is filed and the second installment, on or before Mul! 1B following the close of the
calendar !ear. If an! installment is not paid on or before the date fixed for its pa!ment, the whole amount of the
tax unpaid becomes due and pa!able, together with the delin@uenc! penalties.
#2& a!ment of Capital 5ains Tax. 6 The total amount of tax imposed and prescribed under *ection /A #c&, /A#8&,
/C#4&#/&, /E#'&#E&#c& and /E#7&#B&#c& shall be paid on the date the return prescribed therefor is filed b! the person
liable thereto: rovided, That if the seller submits proof of his intention to avail himself of the benefit of exemption
of capital gains under existing special laws, no such pa!ments shall be re@uired : rovided, further, That in case of
failure to @ualif! for exemption under such special laws and implementing rules and regulations, the tax due on the
gains reali,ed from the original transaction shall immediatel! become due and pa!able, sub<ect to the penalties
prescribed under applicable provisions of this Code: rovided, finall!, That if the seller, having paid the tax, submits
such proof of intent within six #H& months from the registration of the document transferring the real propert!, he
shall be entitled to a refund of such tax upon verification of his compliance with the re@uirements for such
exemption.
In case the taxpa!er elects and is @ualified to report the gain b! installments under *ection AD of this Code, the tax
due from each installment pa!ment shall be paid within #20& da!s from the receipt of such pa!ments.
>o registration of an! document transferring real propert! shall be effected b! the %egister of 8eeds unless the
Commissioner or his dul! authori,ed representative has certified that such transfer has been reported, and the tax
herein imposed, if an!, has been paid.
#7& 'ssessment and a!ment of 8eficienc! Tax. 6 'fter the return is filed, the Commissioner shall examine it and
assess the correct amount of the tax. The tax or deficienc! income tax so discovered shall be paid upon notice and
demand from the Commissioner.
's used in this Chapter, in respect of a tax imposed b! this Title, the term ?deficienc!? means:
#1& The amount b! which the tax imposed b! this Title exceeds the amount shown as the tax b! the taxpa!er upon
his return; but the amount so shown on the return shall be increased b! the amounts previousl! assessed #or
collected without assessment& as a deficienc!, and decreased b! the amount previousl! abated, credited, returned
or otherwise repaid in respect of such tax; or #/& If no amount is shown as the tax b! the taxpa!er upon this
return, or if no return is made b! the taxpa!er, then the amount b! which the tax exceeds the amounts previousl!
assessed #or collected without assessment& as a deficienc!; but such amounts previousl! assessed or collected
without assessment shall first be decreased b! the amounts previousl! abated, credited returned or otherwise
repaid in respect of such tax.
It is Fpa!6as6!ou6fileG and Fpa!6where6!ou6fileG
' person ma! pa! in installments if the tax due exceeds /,000.
"ilin- of eturn coverin- Capital Gains
*ale or exchange of stoc. >OT traded thru
the local stoc. exchange
9ithin 20 da!s after each transaction O final
consolidated return on or before 'pril 1B
*ale or disposition of real propert! 9ithin 20 da!s following each sale or other
disposition
5ains received b! installment 9ithin 20 da!s from receipt of each
installment
'nnual 8eclaration of income tax
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Taxation One: Outline with Codals
*4C. CA. 8eclaration of Income Tax for Individuals. 6
#'& In 5eneral. 6 4xcept as otherwise provided in this *ection, ever! individual sub<ect to income tax under
*ections /A and /B#'& of this Title, who is receiving self6emplo!ment income, whether it constitutes the sole source
of his income or in combination with salaries, wages and other fixed or determinable income, shall ma.e and file a
declaration of his estimated income for the current taxable !ear on or before 'pril 1B of the same taxable !ear. In
general, self6emplo!ment income consists of the earnings derived b! the individual from the practice of profession
or conduct of trade or business carried on b! him as a sole proprietor or b! a partnership of which he is a member.
>onresident +ilipino citi,ens, with respect to income from without the hilippines, and nonresident aliens not
engaged in trade or business in the hilippines, are not re@uired to render a declaration of estimated income tax.
The declaration shall contain such pertinent information as the *ecretar! of +inance, upon recommendation of the
Commissioner, ma!, b! rules and regulations prescribe. 'n individual ma! ma.e amendments of a declaration filed
during the taxable !ear under the rules and regulations prescribed b! the *ecretar! of +inance, upon
recommendation of the Commissioner.
#7& %eturn and a!ment of 4stimated Income Tax b! Individuals. 6 The amount of estimated income as defined in
*ubsection #C& with respect to which a declaration is re@uired under *ubsection #'& shall be paid in four #A&
installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid
on 'ugust 1B and >ovember 1B of the current !ear, respectivel!. The fourth installment shall be paid on or before
'pril 1B of the following calendar !ear when the final ad<usted income tax return is due to be filed.
#C& 8efinition of 4stimated Tax. 6 In the case of an individual, the term ?estimated tax? means the amount which
the individual declared as income tax in his final ad<usted and annual income tax return for the preceding taxable
!ear minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable !ear,
the taxpa!er reasonable expects to pa! a bigger income tax, he shall file an amended declaration during an!
interval of installment pa!ment dates.
Individuals who receive self6emplo!ment income must ma.e and file a declaration of his
estimated income for the current !ear on or before 'pril 1B
o %emember this because as law!ers we will go under this provision
*elf6emplo!ment income consists of earnings from the practice of a profession or
conduct of trade or business carried on as the sole proprietor or a partnership of which
he is a member
Uuarterl! pa!ment of income tax, in A installments
o +irst at time of declaration
o *econd 'ugust 1B
o Third >ovember 1B
o +ourth On or before 'pril 1B
Corporate returns
*4C. B/. Corporation %eturns. 6
#'& %e@uirements. 6 4ver! corporation sub<ect to the tax herein imposed, except foreign corporations not engaged
in trade or business in the hilippines, shall render, in duplicate, a true and accurate @uarterl! income tax return
and final or ad<ustment return in accordance with the provisions of Chapter TII of this Title. The return shall be
filed b! the president, vice6president or other principal officer, and shall be sworn to b! such officer and b! the
treasurer or assistant treasurer.
#7& Taxable =ear of Corporation. 6 ' corporation ma! emplo! either calendar !ear or fiscal !ear as a basis for filing
its annual income tax return: rovided, That the corporation shall not change the accounting period emplo!ed
without prior approval from the Commissioner in accordance with the provisions of *ection AC of this Code.
#C& %eturn of Corporation Contemplating 8issolution or %eorgani,ation. 6 4ver! corporation shall, within thirt! #20&
da!s after the adoption b! the corporation of a resolution or plan for its dissolution, or for the li@uidation of the
whole or an! part of its capital stoc., including a corporation which has been notified of possible involuntar!
dissolution b! the *ecurities and 4xchange Commission, or for its reorgani,ation, render a correct return to the
Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as
the *ecretar! of +inance, upon recommendation of the commissioner, shall, b! rules and regulations, prescribe.
The dissolving or reorgani,ing corporation shall, prior to the issuance b! the *ecurities and 4xchange Commission
of the Certificate of 8issolution or %eorgani,ation, as ma! be defined b! rules and regulations prescribed b! the
*ecretar! of +inance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the
7ureau of Internal %evenue which certificate shall be submitted to the *ecurities and 4xchange Commission.
#8& %eturn on Capital 5ains %eali,ed from *ale of *hares of *toc. not Traded in the "ocal *toc. 4xchange. 6 4ver!
corporation deriving capital gains from the sale or exchange of shares of stoc. not traded thru a local stoc.
exchange as prescribed under *ections /A #c&, /B #'&#2&, /C #4&#/&, /E#'&#E&#c& and /E #7&#B&#c&, shall file a
return within thirt! #20& da!s after each transactions and a final consolidated return of all transactions during the
taxable !ear on or before the fifteenth #1Bth& da! of the fourth #Ath& month following the close of the taxable !ear.
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Taxation One: Outline with Codals
*4C. B2. 4xtension of Time to +ile %eturns. 6 The Commissioner ma!, in meritorious cases, grant a reasonable
extension of time for filing returns of income #or final and ad<ustment returns in case of corporations&, sub<ect to
the provisions of *ection BH of this Code.
'll corporations, except foreign corporation not engaged in trade or bi, in hilippines
#because the!)re sub<ect to final withholding tax alread!&, are re@uired to file:
o Uuarterl! income tax return, on a cumulative basis for the preceding @uarters
o ' final or ad<ustment return, on or before 'pril 1B
' corporation ma! use either calendar !ear or fiscal e!ar basis for filing
Uuarterl! income tax return
9EC. 78. Declaration of 7uarterly +orporate Income Tax. 6 4ver! corporation shall file in duplicate a
@uarterl! summar! declaration of its gross income and deductions on a cumulative basis for the preceding @uarter
or @uarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The
tax so computed shall be decreased b! the amount of tax previousl! paid or assessed during the preceding
@uarters and shall be paid not later than sixt! #H0& da!s from the close of each of the first three #2& @uarters of the
taxable !ear, whether calendar or fiscal !ear.
' corporation must file tax return for preceding @uarter within H0 da!s following the
close of each @uarter
+inal ad<ustment return
9EC. 7@. -inal Ad2ustment 'eturn. 6 4ver! corporation liable to tax under *ection /C shall file a final ad<ustment
return covering the total taxable income for the preceding calendar or fiscal !ear. If the sum of the @uarterl! tax
pa!ments made during the said taxable !ear is not e@ual to the total tax due on the entire taxable income of that
!ear, the corporation shall either:
#'& a! the balance of tax still due; or
#7& Carr!6over the excess credit; or
#C& 7e credited or refunded with the excess amount paid, as the case ma! be.
In case the corporation is entitled to a tax credit or refund of the excess estimated @uarterl! income taxes paid, the
excess amount shown on its final ad<ustment return ma! be carried over and credited against the estimated
@uarterl! income tax liabilities for the taxable @uarters of the succeeding taxable !ears. Once the option to carr!6
over and appl! the excess @uarterl! income tax against income tax due for the taxable @uarters of the succeeding
taxable !ears has been made, such option shall be considered irrevocable for that taxable period and no application
for cash refund or issuance of a tax credit certificate shall be allowed therefor.
' corp will file the final return at the end of either fiscal or calendar !ear
If the sum of the @uarterl! retruns is not e@ual to the total tax due, the corporation shall
either
o a! the balance;
o Carr! over the excess credit perpetuall!, or
o 7e credited or refunded with the excess amount.
i. 7ut the corporation can choose onl! 1 option and it is irrevocable, even if
!ou didn)t get the benefit of the overpa!ment.
The carr! over of the excess can be used perpetuall!. #*!stra v CI%&
*ubse@uent acts can show the exercise of the carr!6over, even if the corp didn)t chec.
the little box that said Fcarr! overG #hilam v CI%&
9here and when to file
*4C. CC. lace and Time of +iling and a!ment of Uuarterl! Corporate Income Tax. 6
#'& lace of +iling. 6 4xcept as the Commissioner other wise permits, the @uarterl! income tax declaration re@uired
in *ection CB and the final ad<ustment return re@uired in *ection CH shall be filed with the authori,ed agent ban.s
or %evenue 8istrict Officer or Collection 'gent or dul! authori,ed Treasurer of the cit! or municipalit! having
<urisdiction over the location of the principal office of the corporation filing the return or place where its main boo.s
of accounts and other data from which the return is prepared are .ept.
#7& Time of +iling the Income Tax %eturn. 6 The corporate @uarterl! declaration shall be filed within sixt! #H0& da!s
following the close of each of the first three #2& @uarters of the taxable !ear. The final ad<ustment return shall be
filed on or before the fifteenth #1B
th
& da! of 'pril, or on or before the fifteenth #1B
th
& da! of the fourth #A
th
& month
following the close of the fiscal !ear, as the case ma! be.
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Taxation One: Outline with Codals
#C& Time of a!ment of the Income Tax. 6 The income tax due on the corporate @uarterl! returns and the final
ad<ustment income tax returns computed in accordance with *ections CB and CH shall be paid at the time the
declaration or return is filed in a manner prescribed b! the Commissioner.
9here to file: same as individuals
9hen to file:
o +or @uarterl! declarations: within H0 da!s following the close of the @uarter
o +or final: on or before 'pril 1B, or the 1B
th
da! of the A
th
month following the
close of the fiscal !ear
9hen to pa!: same as individuals
+iling of return covering capital gains from shares of stoc.
9ec 82 )D* 'eturn on +apital Gains 'eali!ed from /ale of /hares of /toc0 not Traded in the 1ocal /toc0
Exchan#e. 6 4ver! corporation deriving capital gains from the sale or exchange of shares of stoc. not traded thru
a local stoc. exchange as prescribed under *ections /A #c&, /B #'&#2&, /C #4&#/&, /E#'&#E&#c& and /E #7&#B&#c&,
shall file a return within thirt! #20& da!s after each transactions and a final consolidated return of all transactions
during the taxable !ear on or before the fifteenth #1Bth& da! of the fourth #Ath& month following the close of the
taxable !ear.
+or sale of exchange of stoc. not traded thru local stoc. exchanges, within 20 da!s after
each transaction and a final consolidated return of '"" transactions during the !ear
%eturn of corporations contemplating dissolution-reorgani,ation
9ec 82)C* 'eturn of +orporation +ontemplatin# Dissolution or 'eor#ani!ation. 6 4ver! corporation shall,
within thirt! #20& da!s after the adoption b! the corporation of a resolution or plan for its dissolution, or for the
li@uidation of the whole or an! part of its capital stoc., including a corporation which has been notified of possible
involuntar! dissolution b! the *ecurities and 4xchange Commission, or for its reorgani,ation, render a correct
return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other
information as the *ecretar! of +inance, upon recommendation of the commissioner, shall, b! rules and
regulations, prescribe.
The dissolving or reorgani,ing corporation shall, prior to the issuance b! the *ecurities and 4xchange Commission
of the Certificate of 8issolution or %eorgani,ation, as ma! be defined b! rules and regulations prescribed b! the
*ecretar! of +inance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the
7ureau of Internal %evenue which certificate shall be submitted to the *ecurities and 4xchange Commission.
'fter the corp adopts a plan or resolution for its dissolution, it must submit to the 7I%,
within 20 da!s, a return specif!ing the terms of the resolution and other information. It
must secure a tax clearance certificate from the 7I% which it will submit to the *4C
before its dissolution. #*ec /AA, %% /&
The! have to submit to the 7I%:
o ' cop! of the resolution
o 7alance sheet at the date of dissolution and the income statement covering the
beginning of the !ear to the date of dissolution
o >ames and addresses of the shareholders and their holdings
o Qalue and a description of the assets received in li@uidation b! each shareholder
#*ec /AA, %% /&
The approval of the *4C of li@uidation is the starting point.
%eturn of 5eneral rofessional artnerships
9EC. 88. 'eturns of General Professional Partnerships. 6 4ver! general professional partnership shall file, in
duplicate, a return of its income, except income exempt under *ection 2/ #7& of this Title, setting forth the items of
gross income and of deductions allowed b! this Title, and the names, Taxpa!er Identification >umbers #TI>&,
addresses and shares of each of the partners
5eneral professional partnerships and <oint ventures for construction, and other exempt
corporations are *TI"" %4UKI%48 to file their tax return, which should specif!:
o The items of gross income,
o The deductions allowed, and
o The names, TI>, addresses and shares of each partner
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Taxation One: Outline with Codals
5. 5it66oldin- Tax
+inal 9ithholding Tax at *ource
*4C. BC. 9ithholding of Tax at *ource. 6
#'& 9ithholding of +inal Tax on Certain Incomes. 6 *ub<ect to rules and regulations the *ecretar! of +inance ma!
promulgate, upon the recommendation of the Commissioner, re@uiring the filing of income tax return b! certain
income pa!ees, the tax imposed or prescribed b! *ections /A#7&#1&, /A#7&#/&, /A#C&, /A#8&#1&; /B#'&#/&, /B#'&
#2&, /B#7&, /B#C&, /B#8&, /B#4&, /C#8&#;&, /C#8&#/&, /C#8&#2&, /C#8&#B&, /E #'&#A&, /E#'&#B&, /E#'&#C&#a&, /E#'&
#C&#b&, /E#'&#C&#c&, /E#7&#1&, /E#7&#/&, /E#7&#2&, /E#7&#A&, /E#7&#B&#a&, /E#7&#B&#b&, /E#7&#B&#c&; 22; and /E/ of
this Code on specified items of income shall be withheld b! pa!or6corporation and-or person and paid in the same
manner and sub<ect to the same conditions as provided in *ection BE of this Code.
Income sub<ect to final tax refers to income wherein the tax due is full! collected
through the withholding tax s!stem, wherein the pa!or of the income withholds the tax
and then remits it to the government.
Once full pa!ment has been withheld and remitted, there is no more tax obligation.
The withholding agent is entitled to refund or tax credit. #CI% v 9ander&
rinciples of +inal 9ithholding Tax #9ection 2.87 )A*> 21%!*
o The amount of tax withheld is full and final.
o The liabilit! for pa!ment of the tax rests primaril! on the withholding agent as
pa!or.
i. In case he fails to withhold, he will be liable for the deficienc!.
o The pa!ee is not re@uired to file and income tax return for the particular income.
o The finalit! of the withheld tax is limited on that particular income and will not
extend to the pa!ees) other tax liabilit! on said income.
i. +or example a ban. received income sub<ect to final withholding tax, the
same income can still be sub<ect to a percentage tax.
7asicall!, items under passive income are sub<ect to +I>'" T'T. 'nd then !ou have
other +I>'" T'T4* here and there #li.e the +7T, 7%T, Capital 5ains Tax, etc&. 'n!wa!,
here)s a rundown. 'gain, these ma! or ma! not be complete.
Income su3Fect to "inal 5it66oldin- Tax of CITIIE09 and
E9IDE0T A2IE09
"inal Tax
1. Interest under the expanded foreign currenc! deposit s!stem C.BL
/. %o!alt! from boo.s, literar! wor.s, O musical compositions 10L
2. %o!alt! other than above /0L
A. Interest on an! current ban. deposit, !ield or other monetar! benefits
from deposit substitute, trust fund O similar arrangement
/0L
B. ri,e exceeding 10,000 /0L
H. Other winnings, except hil Charit! *weepsta.es O "otto /0L
C. 8ividend from a domestic corp, or from a <oint stoc. compan!,
insurance or mutual fund compan!, O regional operating head@uarters of
multinational compan! or share in the distributive net income after tax o
a partnership #except a general professional partnership&, <oint stoc. or
<oint venture or consortium taxable as a corporation
E. Capital gains from %4'" %O4%T= located here classified as C'IT'"
assets
D. Capital gains from sale of shares of stoc. of a domestic corporation,
not listed and traded thru a local stoc. exchange
10L
HL
BL-10L
0&01E9IDE0T A2IE0 E0GAGED I0 TADE & BII
1. Interest under the expanded foreign currenc! deposit s!stem 9*empt,
/. %o!alt! from boo.s, literar! wor.s, O musical compositions 10L
2. %o!alt! other than above /0L
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101
+
amdg
Taxation One: Outline with Codals
A. Interest on an! current ban. deposit, !ield or other monetar! benefits
from deposit substitute, trust fund O similar arrangement
/0L
B. ri,e exceeding 10,000 /0L
H. Other winnings, except hil Charit! *weepsta.es O "otto /0L
C. 8ividend from a domestic corp, or from a <oint stoc. compan!,
insurance or mutual fund compan!, O regional operating head@uarters of
multinational compan! or share in the distributive net income after tax o
a partnership #except a general professional partnership&, <oint stoc. or
<oint venture or consortium taxable as a corporation
G?@
E. Capital gains from %4'" %O4%T= located here classified as C'IT'"
assets
HL
D. Capital gains from sale of shares of stoc. of a domestic corporation,
not listed and traded thru a local stoc. exchange
BL-10L
7asicall!, citi,ens-resident aliens and non6resident aliens are the same except for the
italici&ed items
0on1resident Alien 0&T en-a-ed in trade or 3i<
On income from '"" sources within the hilippines #important;& /BL
Capital gains from %4'" %O4%T= located here classified as C'IT'"
assets
Capital gains from sale of shares of stoc. of a domestic corporation, not
listed and traded thru a local stoc. exchange
HL
BL-10L
9pecial Aliens
4mplo!ed b! %OIU 1BL #except
income sub<ect
to +7T&
4mplo!ed b! O7K 1BL
4mplo!ed b! +oreign etroleum *ervice Contractors O *ubcontractors 1BL
Domestic Corporations "inal Tax
1. Interest under the expanded foreign currenc! deposit s!stem C.BL
/. %o!alt! of all t!pes within the hilippines
o %o!alt! from abroad: 4nters the taxable income 20L tax rate
/0L
2. Interest on an! current ban. deposit, !ield or other monetar! benefits
from deposit substitute, trust fund O similar arrangement
/0L
A. Income 7= ' 84O*ITO%= 7'>R under the +C8K 10L
B. Capital gains from %4'" %O4%T= located here classified as C'IT'"
assets
HL
H. Capital gains from sale of shares of stoc. of a domestic corporation,
not listed and traded thru a local stoc. exchange
BL-10L
"orei-n esident Corporations
1. Interest under the expanded foreign currenc! deposit s!stem C.BL
/. %o!alt! of all t!pes within the hilippines
o %o!alt! from abroad: Exempt. #remember, onl! taxed from
sources within the hilippines&
/0L
2. Interest on an! current ban. deposit, !ield or other monetar! benefits
from deposit substitute, trust fund O similar arrangement
/0L
A. Capital gains from %4'" %O4%T= located here classified as C'IT'"
assets
HL
B. Capital gains from sale of shares of stoc. of a domestic corporation,
not listed and traded thru a local stoc. exchange
BL-10L
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10/
+
amdg
Taxation One: Outline with Codals
H. 7ranch rofit %emittances 1BL
C. Offshore 7an.ing Knit 10L
"orei-n 0on1resident Corp
1. income from '"" *OK%C4* within the hilippines 20L
/. b! a non6resident cinematographic film owner-distributor /BL
2. gross rentals, lease and charter fees b! a non6resident owner or lessor
of vessels to +ilipino citi,ens or corps
A.BL
A. dividends from a domestic foreign corp #sub<ect to mutual tax credit& 1BL
B. interest on foreign loans /0L
&t6ers
+ringe 7enefit Taxes 2/L on grossed
up monetar!
value
Informer)s reward 10L
Creditable 9ithholding Tax
)B* %ithholdin# of +redita&le Tax at /ource. 6 The *ecretar! of +inance ma!, upon the recommendation of the
Commissioner, re@uire the withholding of a tax on the items of income pa!able to natural or <uridical persons,
residing in the hilippines, b! pa!or6corporation-persons as provided for b! law, at the rate of not less than one
percent #1L& but not more than thirt!6two percent #2/L& thereof, which shall be credited against the income tax
liabilit! of the taxpa!er for the taxable !ear.
Knder the creditable withholding tax s!stem, taxes withheld on certain income pa!ments
are intended to e@ual or at least approximate the tax due of the pa!ee on said income.
Creditable tax must be withheld 'T *OK%C4, but should still be included in the tax
return of the recipient.
o 'n! excess shall be refunded and an! deficienc! shall be paid b! the taxpa!er.
The liabilit! to withhold tax arises upon the accrual, not upon actual remittance. The
purpose of the withholding tax is to compel the agent to withhold under all
circumstances.
o Thus, it is when the right to receive income arises that determines when to
include that income as gross income, and when to appl! withholding tax.
#+ilipinas *!nthetic v C'&
Creditable withholding tax intends to approximate the tax on the pa!ee.
The subse@uent remittal does not remove the burden on the income recipient. Ie still
has to file for the credit.
The pa!or withholds, and the pa!ee gets credit. This is done so that the pa!or has
expenses that can be deducted, according to *ection 2A #.&
Three t!pes of creditable withholding taxes:
o 4xpanded withholding tax on certain income pa!ments made b! private persons
to resident taxpa!ers
o 9ithholding tax on compensation income done in the hilippines
o 9ithholding tax on mone! pa!ments of the government
9hen expanded withholding tax will appl!:
o 4xpense is paid b! the taxpa!er, which is income to the recipient thereof sub<ect
to income tax
o Income is fixed or determinable at the time of pa!ment
o Income is one of the income pa!ments listed in the regulations
o Income recipient is a resident of the hilippines liable to income tax
i. 9hat if the recipient is a non6resident taxpa!er:
Then income pa!ment sub<ect to final withholding tax, not
creditable.
o a!or6withholding agent is also a resident of the hilippines
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'tt!. $ontero and some stuff from 'tt!. *alvador #"ast updated: $a! 12, /01/ 3 $ic.e!&
102
+
amdg
Taxation One: Outline with Codals
i. *o foreign embassies in the hilippines and nonresident foreign corps
cannot be compelled to act as withholding agents #since government
cannot enforce its tax laws on them&
The withholding of creditable withholding tax shall not appl! to income pa!ments made
to the following:
o >ational government and its instrumentalities and public municipal corporations
i. 4TC4T 5OCCs
o Those en<o!ing exemption from pa!ment of income taxes pursuant to law
9ho are re@uired to deduct and withhold for the creditable withholding taxes: #%% /6DE&
o 'n! <uridical person, whether or not engaged in trade or business
o 'n individual, with respect to pa!ments made in connection with his trade or
business
i. 7ut for the disposition of real propert!, even those not engaged in trade or
business are withholding agents
o 'll government offices including government6owned or controlled corporations,
as well as provincial, cit! and municipal governments.
9ome Income 9u3Fect to CEDITAB2E 5it66oldin- Tax )9ection
2.87B = 2.87.2> 21%!*
professional fees, talent fees, rendered b! individuals and athletes
gross income exceeds C/0,000
gross income does not exceed C/0,000
1BL
10L
rofessional fees, talent fees for services but rendered b! <uridical persons 10L
%entals for continued use or possession of real properties used in bi,, which
the pa!or has not ta.en title
'lso applies to rentals of personal propert!, billboards, transmission facilities
BL
cinematorgraphic film rentals and other pa!ments BL
Income pa!ments to certain contractors, general engineering, general
building, specialt! and other contractors
1L
Income distributed to the beneficiaries of estates O trusts #except if alread!
sub<ect to final withhold or tax6exempt&
1BL
Income pa!ment to certain bro.ers O agents, customs, insurance, real
estate O commercial bro.ers O fees of agents of pro entertainers
10L
ro fees paid to medical practitioners b! hospitals or clinics or b! patients
#see %% 1/6DE below&
10L
%eal propert! which are >OT capital assets sold b! a person engaged in the
real estate bi,
If >OT engaged in real estate bi, #see p. D&
1.BL-2L-BL
C.BL
On additional pa!ments b! importers, shipping O airline companies to
government personnel for overtime services
1BL
On the amount paid b! an! credit card compan! to an! bi, entit!
representing the sale of goods, services made b! them to cardholders
.BL
a!ments made b! an! of the top /0,000 corporations to their local supplier
of goods
1L
a!ments b! the government to local supplier of goods #except if below
10,000&
1L
If the service b! a medical practitioner was thru a pro partnership of the
medical profession ) 121%!*
The hospital-clinic must withhold the tax
>o withholding tax applies if there is proof that no professional fee has
been charged
BL
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'teneo "aw /01/
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10A
+
amdg
Taxation One: Outline with Codals
If the pa!or is a "'%54 T'T'=4%, all pa!ments are sub<ect to withholding tax of
o 1L if engaged in goods or
o /L if engaged in services, if no specific rates under /6DE.
*o that a pa!or can be exempt from withholding tax, the pa!ee should also be exempt.
%eturn and a!ment of Tax
*4C. BE. %eturns and a!ment of Taxes 9ithheld at *ource. 6
#'& Uuarterl! %eturns and a!ments of Taxes 9ithheld. 6 Taxes deducted and withheld under *ection BC b!
withholding agents shall be covered b! a return and paid to, except in cases where the Commissioner otherwise
permits, an authori,ed Treasurer of the cit! or municipalit! where the withholding agent has his legal residence or
principal place of business, or where the withholding agent is a corporation, where the principal office is located.
The taxes deducted and withheld b! the withholding agent shall be held as a special fund in trust for the
government until paid to the collecting officers.
The return for final withholding tax shall be filed and the pa!ment made within twent!6five #/B& da!s from the
close of each calendar @uarter, while the return for creditable withholding taxes shall be filed and the pa!ment
made not later than the last da! of the month following the close of the @uarter during which withholding was
made: rovided, That the Commissioner, with the approval of the *ecretar! of +inance, ma! re@uire these
withholding agents to pa! or deposit the taxes deducted or withheld at more fre@uent intervals when necessar! to
protect the interest of the government.
#7& *tatement of Income a!ments $ade and Taxes 9ithheld. 6 4ver! withholding agent re@uired to deduct and
withhold taxes under *ection BC shall furnish each recipient, in respect to his or its receipts during the calendar
@uarter or !ear, a written statement showing the income or other pa!ments made b! the withholding agent during
such @uarter or !ear, and the amount of the tax deducted and withheld therefrom, simultaneousl! upon pa!ment at
the re@uest of the pa!ee, but not late than the twentieth #/0th& da! following the close of the @uarter in the case of
corporate pa!ee, or not later than $arch 1 of the following !ear in the case of individual pa!ee for creditable
withholding taxes. +or final withholding taxes, the statement should be given to the pa!ee on or before Manuar! 21
of the succeeding !ear.
#C& 'nnual Information %eturn. 6 4ver! withholding agent re@uired to deduct and withhold taxes under *ection BC
shall submit to the Commissioner an annual information return containing the list of pa!ees and income pa!ments,
amount of taxes withheld from each pa!ee and such other pertinent information as ma! be re@uired b! the
Commissioner. In the case of final withholding taxes, the return shall be filed on or before Manuar! 21 of the
succeeding !ear, and for creditable withholding taxes, not later than $arch 1 of the !ear following the !ear for
which the annual report is being submitted. This return, if made and filed in accordance with the rules and
regulations approved b! the *ecretar! of +inance, upon recommendation of the Commissioner, shall be sufficient
compliance with the re@uirements of *ection HE of this Title in respect to the income pa!ments.
The Commissioner ma!, b! rules and regulations, grant to an! withholding agent a reasonable extension of time to
furnish and submit the return re@uired in this *ubsection.
#8& Income of %ecipient. 6 Income upon which an! creditable tax is re@uired to be withheld at source under *ection
BC shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due
on his return shall be refunded to him sub<ect to the provisions of *ection /0A; if the income tax collected at
source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of
*ection BH.
'll taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereb!
considered trust funds and shall be maintained in a separate account and not commingled with an! other funds of
the withholding agent.
#4& %egistration with %egister of 8eeds. 6 >o registration of an! document transferring real propert! shall be
effected b! the %egister of 8eeds unless the Commissioner or his dul! authori,ed representative has certified that
such transfer has been reported, and the capital gains or creditable withholding tax, if an!, has been paid:
rovided, however, That the information as ma! be re@uired b! rules and regulations to be prescribed b! the
*ecretar! of +inance, upon recommendation of the Commissioner, shall be annotated b! the %egister of 8eeds in
the Transfer Certificate of Title or Condominium Certificate of Title: rovided, further, That in cases of transfer of
propert! to a corporation, pursuant to a merger, consolidation or reorgani,ation, and where the law allows deferred
recognition of income in accordance with *ection A0, the information as ma! be re@uired b! rules and regulations
to be prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, shall be annotated b!
the %egister of 8eeds at the bac. of the Transfer Certificate of Title or Condominium Certificate of Title of the real
propert! involved: rovided, finall!, That an! violation of this provision b! the %egister of 8eeds shall be sub<ect to
the penalties imposed under *ection /HD of this Code.
9ithholding agents must file a return and pa! to:
o 'n authori,ed agent ban.
o %evenue district officer
o Collection agent
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10B
+
amdg
Taxation One: Outline with Codals
o 8ul! authori,ed treasure of the cit! or municipalit! where he resides or has his
place of bi,ness
These taxes must be maintained in a separate account and >OT co6mingled with an!
other funds of the withholding agent
9hen to file and pa!
o +or +I>'" withholding tax, within /B da!s from the close of each calendar @uarter
o +or C%48IT'7"4 withholding tax, not later than the last da! of the month
following the close of the @uarter which withholding was made
If there is an! excess, it shall be either credited or refunded.
If there is deficienc!, then it shall be paid b! the taxpa!er.
Tax deemed paid on dividends: see discussion on inter6corporate dividends to non6
resident foreign corporations #page 21&
In $arubeni v CI% #1DD0&, $arubeni, a Mapanese corporation licensed to do business
here, received dividends from a local corporation. The *C said that the usual gross
income rate of 2BL was not applicable since there was a tax treat! with Mapan. The
treat!, read with the >I%C provision on dividends, allowed $arubeni a discounted rate of
1BL on the dividends received from the local corporation since Mapan extended in favor
of $arubeni a tax credit of not less than /0L of the dividends it received. This was
within the max ceiling of /BL of the gross amount of dividends as prescribed b! the tax
treat!. #8idn)t reall! understand what I <ust wrote.&
+or withholding tax on ro!alties and the $+> clause based on %6China Treat! #%$C AH6
/00/, see CI% v *C Mohnson and Mohnson #page 21&
9ithholding on 9ages
'pplies to '"" 4$"O=48 individuals whether citi,ens or aliens deriving income from
compensation for services rendered in the hil
9EC. 7!. Definitions. 6 's used in this Chapter:
)A* %a#es. 6 The term NwagesN means all remuneration #other than fees paid to a public official& for services
performed b! an emplo!ee for his emplo!er, including the cash value of all remuneration paid in an! medium other
than cash, except that such term shall not include remuneration paid:
#1& +or agricultural labor paid entirel! in products of the farm where the labor is performed, or
#/& +or domestic service in a private home, or
#2& +or casual labor not in the course of the emplo!erNs trade or business, or
#A& +or services b! a citi,en or resident of the hilippines for a foreign government or an international
organi,ation.
If the remuneration paid b! an emplo!er to an emplo!ee for services performed during one6half #1-/& or more of
an! pa!roll period of not more than thirt!6one #21& consecutive da!s constitutes wages, all the remuneration paid
b! such emplo!er to such emplo!ee for such period shall be deemed to be wages; but if the remuneration paid b!
an emplo!er to an emplo!ee for services performed during more than one 6half #1-/& of an! such pa!roll period
does not constitute wages, then none of the remuneration paid b! such emplo!er to such emplo!ee for such period
shall be deemed to be wages.
)B* Payroll Period. 6 The term Npa!roll periodN means a period for which pa!ment of wages is ordinaril! made to
the emplo!ee b! his emplo!er, and the term /miscellaneous payroll period/ means a pa!roll period other than, a
dail!, wee.l!, biwee.l!, semi6monthl!, monthl!, @uarterl!, semi6annual, or annual period.
)C* Employee. 6 The term Nemplo!eeN refers to an! individual who is the recipient of wages and includes an
officer, emplo!ee or elected official of the 5overnment of the hilippines or an! political subdivision, agenc! or
instrumentalit! thereof. The term /employee/ also includes an officer of a corporation.
)D* Employer. 6 The term /employer/ means the person for whom an individual performs or performed an!
service, of whatever nature, as the emplo!ee of such person, except that:
#1& If the person for whom the individual performs or performed an! service does not have control of the pa!ment
of the wages for such services, the term /employer/ #except for the purpose of *ubsection #'& means the person
having control of the pa!ment of such wages; and
#/& In the case of a person pa!ing wages on behalf of a nonresident alien individual, foreign partnership or foreign
corporation not engaged in trade or business within the hilippines, the term /employer/ #except for the purpose of
*ubsection #'& means such person.
9ages are all remuneration other than fees paid to a public official for services
performed b! an emplo!ee for his emplo!er #cash or .ind&.
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10H
+
amdg
Taxation One: Outline with Codals
o 4TC4T
i. 'gricultural labor paid entirel! in products of the farm where the labor is
perfomed
ii. 8omestic service in a private home #maids&
iii. Casual labor not in the course of the emplo!er)s trade or bi,
iv. *ervices b! a citi,en or resident of the hil for a foreign gov or
international org
9EC. 7%. Income Tax +ollected at /ource.-
)A* 'e(uirement of %ithholdin#. 8 4xcept in the case of a minimum wage earner as defined in *ection //#II&
of this code, ever! emplo!er ma.ing pa!ment of wages shall deduct and withhold upon such wages a tax
determined in accordance with the rules and regulations to be prescribed b! the *ecretar! of +inance, upon
recommendation of the Commissioner
)B* Tax Paid &y 'ecipient. 6 If the emplo!er, in violation of the provisions of this Chapter, fails to deduct and
withhold the tax as re@uired under this Chapter, and thereafter the tax against which such tax ma! be credited is
paid, the tax so re@uired to be deducted and withheld shall not be collected from the emplo!er; but this *ubsection
shall in no case relieve the emplo!er from liabilit! for an! penalt! or addition to the tax otherwise applicable in
respect of such failure to deduct and withhold.
)C* 'efunds or +redits. 8
#1& 9mployer. 6 9hen there has been an overpa!ment of tax under this *ection, refund or credit shall be made to
the emplo!er onl! to the extent that the amount of such overpa!ment was not deducted and withheld hereunder
b! the emplo!er.
#/& 9mployees. 6The amount deducted and withheld under this Chapter during an! calendar !ear shall be allowed
as a credit to the recipient of such income against the tax imposed under *ection /A#'& of this Title. %efunds and
credits in cases of excessive withholding shall be granted under rules and regulations promulgated b! the *ecretar!
of +inance, upon recommendation of the Commissioner.
'n! excess of the taxes withheld over the tax due from the taxpa!er shall be returned or credited within three #2&
months from the fifteenth #1B
th
& da! of 'pril. %efunds or credits made after such time shall earn interest at the rate
of six percent #HL& per annum, starting after the lapse of the three6month period to the date the refund of credit is
made.
%efunds shall be made upon warrants drawn b! the Commissioner or b! his dul! authori,ed representative without
the necessit! of counter6signature b! the Chairman, Commission on 'udit or the latterNs dul! authori,ed
representative as an exception to the re@uirement prescribed b! *ection AD, Chapter E, *ubtitle 7, Title 1 of 7oo.
Q of 4xecutive Order >o. /D/, otherwise .nown as the 'dministrative Code of 1DEC.
)D* Personal Exemptions. 8
)1* In General. 6 Knless otherwise provided b! this Chapter, the personal and additional exemptions applicable
under this Chapter shall be determined in accordance with the main provisions of this Title.
)2* Exemption +ertificate. 8
#a& When to -ile. 6 On or before the date of commencement of emplo!ment with an emplo!er, the emplo!ee shall
furnish the emplo!er with a signed withholding exemption certificate relating to the personal and additional
exemptions to which he is entitled.
#b& 6hange of Status. 6 In case of change of status of an emplo!ee as a result of which he would be entitled to a
lesser or greater amount of exemption, the emplo!ee shall, within ten #10& da!s from such change, file with the
emplo!er a new withholding exemption certificate reflecting the change.
#c& :se of 6ertificates. 6 The certificates filed hereunder shall be used b! the emplo!er in the determination of the
amount of taxes to be withheld.
#d& -ailure to -urnish 6ertificate. 6 9here an emplo!ee, in violation of this Chapter, either fails or refuses to file a
withholding exemption certificate, the emplo!er shall withhold the taxes prescribed under the schedule for ,ero
exemption of the withholding tax table determined pursuant to *ubsection #'& hereof.
)E* %ithholdin# on $asis of Avera#e %a#es. 6 The Commissioner ma!, under rules and regulations
promulgated b! the *ecretar! of +inance, authori,e emplo!ers to:
#1& estimate the wages which will be paid to an emplo!ee in an! @uarter of the calendar !ear;
#/& determine the amount to be deducted and withheld upon each pa!ment of wages to such emplo!ee during
such @uarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and
#2& deduct and withhold upon an! pa!ment of wages to such emplo!ee during ;such @uarter such amount as ma!
be re@uired to be deducted and withheld during such @uarter without regard to this *ubsection.
)"* Hus&and and %ife. 6 9hen a husband and wife each are recipients of wages, whether from the same or
from different emplo!ers, taxes to be withheld shall be determined on the following bases:
#1& The husband shall be deemed the head of the famil! and proper claimant of the additional exemption in
respect to an! dependent children, unless he explicitl! waives his right in favor of his wife in the withholding
exemption certificate.
#/& Taxes shall be withheld from the wages of the wife in accordance with the schedule for ,ero exemption of the
withholding tax table prescribed in *ubsection #8&#/&#d& hereof.
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'teneo "aw /01/
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10C
+
amdg
Taxation One: Outline with Codals
)G* "onresident Aliens. 6 9ages paid to nonresident alien individuals engaged in trade or business in the
hilippines shall be sub<ect to the provisions of this Chapter.
)$* 8ear-End Ad2ustment. 6 On or before the end of the calendar !ear but prior to the pa!ment of the
compensation for the last pa!roll period, the emplo!er shall determine the tax due from each emplo!ee on taxable
compensation income for the entire taxable !ear in accordance with *ection /A#'&. The difference between the tax
due from the emplo!ee for the entire !ear and the sum of taxes withheld from Manuar! to >ovember shall either be
withheld from his salar! in 8ecember of the current calendar !ear or refunded to the emplo!ee not later than
Manuar! /B of the succeeding !ear.
5eneral rule: 4ver! emplo!er ma.ing pa!ment of wages shall deduct from O withhold
tax
o 4xcept: for $inimum 9age 4arners
%efunds or credits
o To the emplo!er 3w hen there was an overpa!ment but onl! to the extent that
the amount of overpa!ment was not withheld b! the emplo!er
o To the emplo!ee 3 an! excess of taxes withheld shall be returned or credited
within 2 months from 'pril 1B, these refunds will earn interest at HL per annum
after the lapse of the 2 month period
7efore the start of emplo!ment, the emplo!ee should furnish the emplo!er with a signed
withholding exemption certificate and additional exemptions to which he is entitled.
o If he doesn)t, the emplo!er shall withhold tax under S4%O exemption.
9ages paid to non6resident aliens engaged in trade or bi, are also paid sub<ect to
withholding tax.
*ee codal for husband and wife.
9EC. !'. 1ia&ility for Tax. .
)A* Employer. 3 The emplo!er shall be liable for the withholding and remittance of the correct amount of tax
re@uired to be deducted and withheld under this Chapter. If the emplo!er fails to withhold and remit the correct
amount of tax as re@uired to be withheld under the provision of this Chapter, such tax shall be collected from the
emplo!er together with the penalties or additions to the tax otherwise applicable in respect to such failure to
withhold and remit.
)B* Employee. 6 9h3re an emplo!ee fails or refuses to file the withholding exemption certificate or willfull!
supplies false or inaccurate information thereunder, the tax otherwise re@uired to be withheld b! the emplo!er shall
be collected from him including penalties or additions to the tax from the due date of remittance until the date of
pa!ment. On the other hand, excess taxes withheld made b! the emplo!er due to:
#1& failure or refusal to file the withholding exemption certificate; or
#/& false and inaccurate information shall not be refunded to the emplo!ee but shall be forfeited in favor of the
5overnment.
4mplo!er liable if he fails to withhold O remit. It shall be collected from him with
penalties.
4mplo!ee liable if he fails to file the withholding tax certificate. The tax withheld b! the
emplo!er shall be collected from the emplo!ee including penalties. 4xcess taxes withheld
because of his refusal to file certificate or giving false information shall be forfeited to
the government.
9EC. !1. -ilin# of 'eturn and Payment of Taxes %ithheld. 6 4x3ept as the Commissioner otherwise permits,
taxes deducted and withheld b! the emplo!er on wages of emplo!ees shall be covered b! a return and paid to an
authori,ed agent ban.; Collection 'gent, or the dul! authori,ed Treasurer of the cit! or municipalit! where the
emplo!er has his legal residence or principal place of business, or in case the emplo!er is a corporation, where the
principal office is located.
The return shall be filed and the pa!ment made within twent!6five #/B& da!s from the close of each calendar
@uarter: +rovided, however, That the Commissioner ma!, with the approval of the *ecretar! of +inance, re@uire the
emplo!ers to pa! or deposit the taxes deducted and withheld at more fre@uent intervals, in cases where such
re@uirement is deemed necessar! to protect the interest of the 5overnment.
The taxes deducted and withheld b! emplo!ers shall be held in a special fund in trust for the 5overnment until the
same are paid to the said collecting officers.
*hould be filed and paid within /B da!s from the close of each calendar @uarter.
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+
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Taxation One: Outline with Codals
9EC. !2. 'eturn and Payment in +ase of Government Employees. 6 If3the emplo!er is the 5overnment of the
hilippines or an! political subdivision, agenc! or instrumentalit! thereof, the return of the amount deducted and
withheld upon an! wage shall be made b! the officer or emplo!ee having control of the pa!ment of such wage, or
b! an! officer or emplo!ee dul! designated for the purpose.
9ithholding tax b! government agencies:
o Income pa!ments, except an! single purchase of 10,000 O below, made b! a
government office, national or local, including 5OCCs, on their purchase og foods
from local suppliers sub<ect to withholding tax of 1L
9EC. !+. /tatements and 'eturns. 8
)A* 'e(uirements. 6 4ver! emplo!er re@uired to deduct and withhold a tax shall furnish to each such emplo!ee
in respect of his emplo!ment during the calendar !ear, on or before Manuar! thirt!6first #21
st
&
of
the succeeding !ear,
or if his emplo!ment is terminated before the close of such calendar !ear, on the same da! of which the last
pa!ment of wages is made, a written statement confirming the wages paid b! the emplo!er to such emplo!ee
during the calendar !ear, and the amount of tax deducted and withheld under this Chapter in respect of such
wages. The statement re@uired to be furnished b! this *ection in respect of an! wage shall contain such other
information, and shall be furnished at such other time and in such form as the *ecretar! of +inance, upon the
recommendation of the Commissioner, ma!, b! rules and regulation, prescribe.
)B* Annual Information 'eturns. 6 4ver! emplo!er re@uired to deduct and withhold the taxes in respect of the
wages of his emplo!ees shall, on or before Manuar! thirt!6first #21
st
&
of
the succeeding !ear, submit to the
Commissioner an annual information return containing a list of emplo!ees, the total amount of compensation
income of each emplo!ee, the total amount of taxes withheld therefrom during the !ear, accompanied b! copies of
the statement referred to in the preceding paragraph, and such other information as ma! be deemed necessar!.
This return, if made and filed in accordance with rules and regulations promulgated b! the *ecretar! of +inance,
upon recommendation of the Commissioner, shall be sufficient compliance with the re@uirements of *ection HE of
this Title in respect of such wages.
)C* Extension of time. 3 The Commissioner, under such rules and regulations as ma! be promulgated b! the
*ecretar! of +inance, ma! grant to an! emplo!er a reasonable extension of time to furnish and submit the
statements and returns re@uired under this *ection.
4mplo!ees must submit annual return on or before Man 21 of the succeeding !ear
containing all relevant emplo!ee info.
-or ta*ation of software payments, see p. H=.
=OK $'84 IT;;; 9OOIOOO;;;;; #unless !ou want to review again, then good luc.;&
lease pa! it forward.
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