INCOME TAXATION - Gross income means all income derived from whatever source, including but not limited

to the following items: Compensation for

services in whatever form paid, including but not limited to fees, salaries, wages, commissions, and similar items; Gross income derived from the
conduct of trade or business or the exercise of a profession; Gains derived from dealings in property; Interests; Rents; Royalties; Dividends; Annuities;
Prizes and winnings; Pensions; and Partners distributive share from the net income of the general professional partnership.
Taxable income gross income less deductions and/or personal exemptions
Special Rules on Gross Income: Compensation for personal service
Paid in cash actual amount paid is taxable
Paid in kind compensation income is the fair market value of the property received Compensation paid in promissory
Note: If the note can be discounted, the fair market value of note upon receipt is the fair discounted value.
Transportation, representation and other allowances received by officials or employees General Rule: Taxable as compensation income
Exception: If they are
1) Ordinary and necessary expenses of the employer;
2) Paid or incurred in the pursuit of trade, business or profession;
3) The employee is required to account/liquidate.
The excess of advances over the actual expenses incurred taxable income if such amount is not returned to the employer.
Vacation and sick leave allowances taxable except monetized value of unutilized leave credits not exceeding ten (10) days.
Condonation of debt Debtor rendered services to the creditor taxable income to the debtor
No services rendered taxable gift to the creditor as gift given to the debtor
Creditor is a corporation while debtor is a stockholder it has the effect of a payment of dividend
Creditor is the stockholder while debtor is the corporation amount condoned is considered as an additional investment
Recovery of bad debt previously deducted (application of the tax benefit rule)
Taxable if deduction of bad debt has reduced the tax liability of taxpayer.
Not taxable if there was no reduction in the tax liability of the taxpayer
Dividend Income Received by domestic corporation from another domestic corporation not taxable
Received by resident foreign corporation from a domestic corporation not taxable
Received by non-resident foreign corporation from a domestic corporation 155 subject to tax sparring credit
Received by domestic corporation from a resident foreign corporation taxable as ordinary income
Rules on lease contracts and leasehold improvements
Rent for the use of property taxable income to the lessor but deductible expense for the lessee
Taxes assumed by lessee on behalf of the lessor constitutes additional rent and taxable income to the lessor
If leasehold improvements on leased premises will go to the lessor upon termination income to the lessor which may be reported under either:
Outright method the fair market value of the improvements in the year of completion is reported as income
Spread out method the book value of the improvements at the termination of the lease contract is spread over the remaining term of the lease
Depreciation on the improvements the lessee may claim depreciation of the improvements over the remaining term of the lease or the life of the
improvements, whichever is shorter
Premature termination of lease the income to be reported by the lessor shall be computed by subtracting the amounts already reported as income by
the lessor from the book value upon termination.

EXCLUSIONS from gross income (EXEMPT from income tax) Proceeds of life insurance policy payable upon the death of the insured. However, it is
taxable if the insured outlives the policy.
Return of premiums either during the term, at the maturity, or upon surrender of the contract.
The value of the property acquired by gift, bequest, devise or descent.
Compensation for personal injuries or sickness received from insurance plus damages.
Income of any kind which are contained in a treaty biding upon the Philippine government.
Retirement benefits, pensions, etc.
Retirement benefits requisites
1) The employer must maintain a private pension plan which is approved by the BIR
2) The employee has been in the service of the same employer for at least 10 years
3) The retiring employee must not be less than 50 years old upon retirement
4) The benefit exemption can be availed of only once
Separation pay separation of employee from service must be due to:
1) Death, sickness, physical disability, or
2) Any cause beyond the control of the employee.
Prizes and awards given to religious, charitable, scientific, educational, artistic, literary, or civic achievement, provided that:
1) The recipient did not join the contest; and
2) He is not required to render substantial future services
Benefits received by persons residing in the Philippines under US laws administered by US Veteran Administration
Benefits received from SSS, GSIS including retirement gratuity received by government officials and employees.
Income derived by foreign governments
Income derived by the government or its political subdivisions from public utility or any essential governmental function
Prizes and awards granted to athletes in Local and international sports competition In the Philippines or abroad Sanctioned by their national sports
associations And the sport association must be recognized by the Philippine Olympic Committee 13th month pay and other benefits
GSIS, SSS, Medicare and Pag ibig and union dues of individuals
Gains from sales of bonds, debentures and other certificate of indebtedness with a maturity period of more than 5 years
Gains realized by investors upon redemption of shares in a mutual fund company
Compensation income of Minimum Wage Earners who worked in the private sector (and public sector not exceeding the minimum in the non-agricultural
sector) and being paid the Statutory Minimum Wage as fixed by the Regional Tripartite Wage and Productivity Board of the National Wage and
Productivity Commission applicable to the place where he is assigned, including their holiday pay, overtime pay, night shift differential pay and hazard
pay.

TAX ON INDIVIDUALS - Rules on Situs

Only resident citizens are taxable within and without
Resident aliens, non-resident citizens and non-resident aliens are taxable on income within only.
Basic Personal Exemption P50, 000 regardless of whether the taxpayer is married, unmarried, married but legally separated, or widow/widower,
whether with or without qualified dependents.

Additional Exemption P 25, 000 for each qualified dependent Limited to four (4) children only which includes legitimate, illegitimate, or legally
adoptedHusband shall claim the additional exemption unless
(1) he waives his right to claim;
(2) he is disqualified;
(3) he has no income;
(4) he is a non-resident citizen or resident alien and his income is derived purely from sources without.
In case of separated parents, the proper claimant is the custodian of the children. A dependent means a legitimate, illegitimate, or legally adopted child
chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such
dependents regardless of age, is incapable of self support because of mental or physical defect.
Non-resident alien (NETB) cannot claim personal exemption
Non-resident alien engaged in trade or business in the Philippines can claim basic personal exemption if his country grants personal exemption to
Filipinos residing therein but who derives income in that country (reciprocity).
The exemption shall be lesser amount between that allowed in his country and that allowed in the Philippines.
Change of status
Q: Can the taxpayer claim the necessary exemption: (kayo na mag lagay kung YES or NO)
Current Year -

Next Year

1) Taxpayer Marries
2) Dies
3) Dependent Child Born a) Reaches 21 years old
b) Marries
c) Gainfully employed
d) Dies

Senior Citizen A senior citizen is any resident citizen of the Philippines of at least 60 years old, including those who have retired from both government
offices and private enterprises. A qualified senior citizen is one whose annual taxable income does not exceed the poverty level as determined by NEDA
and has been qualified by the CIR or RDO having jurisdiction over the place where the senior citizen resides. He is exempt from income tax on
compensation, business, and other income received during each taxable year from all sources except the tax on passive income in the Philippines,
capital gains from sales of shares of stock and capital gains on sale of real property.
Tax on NRA NETB final tax of 25% from all sources within.
Exceptions:
Capital gains on sale, exchange, or other disposition of real property (capital asset) located In the Philippines capital gains tax
Sale of shares of stocks not listed or traded in the stock exchange
Tax base: Net capital gain
Tax rates: Not exceeding P100, 000 5% Excess over P100, 000 10% Income earned by special groups of aliens
Tax rate and base: 15% of the gross income coming from salaries, wages, annuities, compensation, remuneration, and other emoluments, such as
honoraria and allowances received by:
1) Aliens employed by Regional or Area Headquarters and Regional Operating Headquarters of multi-national companies.

2) Aliens employed by Offshore Banking Units.

3)Aliens employed by Foreign Petroleum Service Contractor and Subcontractor
RATES OF TAX ON CERTAIN PASSIVE INCOME
Income payments to resident citizen, resident alien, non-resident citizen and non-resident alien (ETB) taxpayers:
1) 20 % Final Tax on income derived from sources within Interest from any Philippine currency bank deposit;
2) Yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements;
3) Royalties (except on books and other literary works and musical compositions which shall be subject to 105 tax)
4) Prizes ( except prizes amounting to P10, 000 or less which shall be subject to schedular tax)
5) Winnings ( except from sweepstakes and lotto)Interest income from long term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts, and other investments evidenced by certificate which was preterminated by the holder before the 5th year at the tax rates herein prescribed:
Holding Period Rate:
4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%
Note: If the maturity is more than 5 years tax exempt Income payments to citizen or resident alien individuals:
7.5% on interest income received from a depositary bank under the Foreign Currency Deposit System.
10% final tax on cash and/or property dividends actually or constructively received from any of the following:
Domestic corporation
Joint stock corporation
Insurance or mutual fund companies.
On the share of an individual partner in the distributed net income after tax of a partnership (except general professional
partnership), or On the share of an individual in the net income after tax of an association, a joint account or a joint venture or
consortium of which he is a member or a co-venturer.
20% final tax on income payment to NRA ETB out of income from sources within:
Cash and/or property dividend from a domestic corporation
Share of a partner in the distributable net income after tax of a partnership (except general professional partnership), or
On the share of an individual in the net income after tax of an association, a joint account or a joint venture or consortium of which
he is a member or a co-venturer Interest from any currency bank deposit.
TAX ON CORPORATIONS - Situs of Taxable Income(kayo na mag lagay kung YES or NO)
Within

Without Tax Base

Domestic Corporation
Taxable Income
Resident Foreign
Taxable Income
Non-resident Foreign
Gross Income Minimum Corporate Income Tax (MCIT) - 2% of gross income if higher than Normal Income Tax (NIT) Effectivity 4th taxable year
immediately following the year the corporation has commenced business. Carry forward of excess MCIT three immediately succeeding taxable years.

Limitation on carry over the excess of MCIT over the NIT can be carried forward only to the next three years when the normal income tax is greater
than the MCIT. It cannot be claimed as a credit against the MCIT itself or against any other losses.
Special Corporations Rate
Tax Base Proprietary
Educational institutions and hospitals - 10% Taxable Income.
Exception:
1) If income from unrelated activity is more than 50% of entire gross income - 30% Taxable Income
International Carrier - 2.5% Gross Phil. Billings
Tax on Branch Profit Remittances - 15% Profit remitted abroad
Non-resident cinematographic film owner, lessor or distributor - 25% Gross Income within
NR owner or lessor of vessels chartered by - 4.5% Gross rental, lease, Philippine nationals or charter fees within
NR owner or lessor of aircraft, machineries - 7.5% Gross rentals or fees other equipment within
Interest on foreign loans 20% Interest on loans contracted on or after August 1, 1986
Passive income subject to final withholding tax
The following income within of a domestic corporation and resident foreign corporation shall be subject to 20% final tax:
Interest on any currency bank depositYield or any other monetary benefit from deposit substitutesYield from trust funds and similar
arrangements
Royalties Tax Exempt Corporations: Government Service Insurance SystemSocial Security System Philippine Charity Sweepstakes Office
Local Water Districts
Improperly Accumulated Earnings Tax (IAET)Rate and base: 10% of improperly accumulated taxable income
Improperly accumulated taxable income is adjusted by
Income exempt from tax Income excluded from gross income
Income subject to final tax
The amount of NOLCO deducted And reduced by Dividends actually/constructively paid/issued from applicable years taxable income
Amount reserved for reasonable needs of the business; and
Income tax paid/payable for the taxable year
EXEMPTIONS FROM TAX ON CORPORATIONS The following organizations are not taxable in respect to income received by them as such: Labor,
agricultural or horticultural organization not organized principally for profit.
1) Mutual saving bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit.
2) A beneficiary society, order or association operating for the exclusive benefit of the members such as fraternal organization
operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such society, order or association, non-stock
corporation or their dependents.
3) Cemetery company owned and operated exclusively for the benefit of its members.
4) Non-stock corporation or association organized and operated exclusively 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 inure to the benefit of any
member, organizer, officer, or any specific person.
5) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures
to the benefit of any private stockholder or individual.

6) Civic league or organization not organized for profit but operated exclusively for the promotion of the general welfare
7) A non-stock and non-profit educational institution.
8) Government educational institution.
9) Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character, the income of which consists solely for the sole purpose of meeting its
expenses.
10) Farmers fruit growers, or like association organized and operated as a sales agent for the purpose of marketing the products of
its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them.
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their
properties, real or personal, of from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax
imposed under the code.
TAX ON PARTNERSHIPS
General Professional Partnership tax exempt, but required to file income tax return.
Business partnership taxable as a corporation, subject to corporate tax.
Share of partners in the net income of business partnership subject to a final tax of 10%.
Shares of partners in the net income of professional partnership taxable to the partners as ordinary income, whether distributed to them or not
(principle of constructive receipt).
Income payment to the partners in a professional partnership in the form of drawings, advances, sharings, allowances, stipends, etc. subject to
creditable withholding tax of 15% if the income payment to the partner for the current year exceeds P720, 000, and 10% if otherwise.
Co-ownership refers to the ownership of undivided thing or right which belong to two or more persons. Exempt from income tax if the activities of the coowners are limited to the preservation of the property and collection of income therefrom
Taxable as a corporation if the co-owners make contribution or efforts, or new capital, or if the co-ownership income is reinvested.
Partnership formation -There must be an unmistakable intention among the partners to form a partnership. Mere sharing of gross returns does not in
itself form a partnership
ESTATES AND TRUSTS Estate all property, rights and obligations of a person which are not extinguished by his death and also those which have
accrued thereto since the opening of the succession.
Trust the arrangement created by will or an agreement under which the title of the property is passed to another for conservation or investment with
the income therefrom and ultimately the corpus (principal( to be distributed in accordance with the discretion of the creator as expressed in the governing
instrument. Taxable if the trust is irrevocable.
SOURCES OF INCOME - Income Test of Source of Income
Income from services - place of performance
Rent - location of property
Royalties - place of use of intangible
Gain on sale of real property - location of property
Gain on sale of personal property purchased in one country and sold in another - place of sale
Gain on sale of domestic shares of Stocks - income within
Interest - residence of the debtor
Dividend From domestic company - income within
From foreign company - partly income within and partly income without if 50% or more of the gross income of the company for the preceding 3 years
prior to declaration of dividend was derived from sources within.- income without if less than 50% of the gross income of the company for the preceding
3 years prior to declaration of dividend was derived from sources within.

CAPITAL ASSETS
Capital Assets means property held by the taxpayer (whether or not connected with his business) but does not include:
1) Stock in trade
2) Property which would be included in the inventory if on hand at the close of taxable year
3) Property primarily for sale in the ordinary course of his trade or business
4) Personal property used in business and subject to allowance for depreciation
5) Real property used in trade or business
Basic Rule on Sale or Exchange of Personal Property (Capital Asset) Capital losses deductible only from capital gain
Corporations no holding period, no carry over
Holding period Short term (not more than 12 months) 100%
Long term (more than 12 months) 50%
Sale of Real Property (Capital Asset) By individual 6% final tax
Tax Base: Whichever is the highest among:
1) Selling Price FMV as determined by CIR FMV as determined by the city or provincial assessor
Exemption:
Capital gains realized from sale of principal residence if1) The proceeds are utilized in acquiring new residence within 18 calendar months from the date of sale;
2) Commissioner is notified within 30 days from the sale or disposition;
3) The exemption can be availed of once in every ten years;
2) The 6% capital gain tax due on the presumed capital gains shall be deposited in interest bearing account with an authorized bank
under an escrow agreement.
By corporation 6% final tax on sale of lands and/or buildings not used in the business
Sale of Shares of Stocks Not traded shares
Tax Base: Net Capital GainTax Rates: Not over 100, 000 5% Any amount in excess of 100, 000 10%Traded shares (directly to buyers) the
sale is exempt from income tax, but subject to other percentage tax (Stock Transaction Tax)Transactions resulting to Capital Gains or Losses
even if there is no sale of Capital Assets:
Retirement of bonds
Short sale of properties
Option gains or losses
Worthless securities
Liquidating dividend
Liquidation of partnership
Wash Sales occur when substantially identical securities are acquired within a 61-day period beginning 30 days before the sale and ending 30
days after sale. Wash sales are not deductible from gross income. However, the wash sales provisions do not apply to:
1) Dealers in stock or securities if the sale or disposition is made in the ordinary course of business.
Short sales transactions A sale of stock which the seller does not own (he merely borrows the stock certificate through or from the broker)
and subsequently buys or covers the stock to complete the transaction.