GENERAL PRINCIPLES OF TAXATION Power of Taxation compared with Other Powers

Definition and Concept of Taxation TAX POLICE EMINENT

POWER DOMAIN
Power inherent in every sovereign State to impose a Concept
charge or burden upon persons, properties, or rights to Power to enforce Power to make Power to take
raise revenues for the use and support of the contribution to and implement private property
government to enable it to discharge its appropriate raise government laws for the for public use
functions. funds general welfare with just
Power by which an Independent State, through its compensation
lawmaking body, raises and accumulates revenue from Scope
its inhabitants to pay the necessary expenses of the Plenary, Broader in Merely a power
government. [51 AM JUR 341] comprehensive application to take private
and supreme General power to property for
Process or act of imposing a charge by governmental
make and public use
authority on property, individuals or transactions to
implement laws
raise money for public purposes. *Blacks Law Exercising Authority
Dictionary] Government or Government or Maybe granted to
Taxation is merely a way of apportioning the cost of political political public service
government among those who in some measure are subdivisions subdivisions companies or
privileged to enjoy its benefits and must bear its public utilities
burdens. [71 AM JUR 2ND 342] Purpose
Taxation is described as a destructive power which Raise revenue Exercise to The taking of
interferes with the personal and property rights of the promote public property for
people and takes from them a portion of their property welfare through public use
for the support of the government. Paseo Realty & regulation
Development Corporation v.CA, [2004] Amount of Imposition
No limit Limited to the No limit imposed,
Nature and Characteristics of Taxation cost of regulation, but the amount
issuance of should be based
The power of taxation is inherent in sovereignty as license, or on the market
an incident or attribute thereof, being essential to the surveillance value of the
existence of independent government. property
The right to tax exists apart from Constitutions and Effect
without being expressly conferred by the people. Becomes part of Restraint on the Transfer of right
It is legislative in character. public funds injurious use of to the property
It is generally not delegated to executive or judicial property
department. Exceptions: Persons Affected
To LGUs in respect to matters of local concern to Applies to all Applies to all Only particular
be exercised by the LG bodies thereof [Sec. 5, Art. persons, property persons, property property is
and excises that and excises that comprehended
X, 1987 Constitution];
may be subject may be subject
When allowed by the Constitution [Sec. 28[2],
thereto thereto
Art. VI, 1987 Constitution];
Superiority of Contracts
When the delegation relates merely to admin Contracts may be Contracts may be
implementation that may call for some degree of impaired unless impaired
discretionary powers under a set of sufficient (a) government is
standards expressed by law Cervantes v. Auditor party to contract
General, [91 Phil. 359], or implied from the policy granting
and purpose of the Act Maceda v. Macaraig, [197 exemption; or (b)
SCRA 771]. involves franchise
It is subject to constitutional and inherent Benefits Received
limitations. Protection and No direct or Market Value of
It must be used for public purposes It has been held general benefits immediate benefit the property
that tax has been utilized for public purpose if the from the but only such as
welfare of the nation or the greater portion of its government may arise from
the maintenance
population has benefited for use Gomez v. Palomar,
of a healthy
[25 SCRA 827]; Phil Guaranty Co., Inc. v.
economic
Commissioner, [13 SCRA 775]. standard of
It is the strongest of all the inherent powers of the society
government Sison v. Ancheta, [130 SCRA 654]. Relationship to Constitution
It is territorial in operation The power to tax can Subject to certain Relatively free Subject to certain
only be exercised within the territorial jurisdiction of constitutional from constitutional
a taxing authority [51 Am Jur 88], except when there limitations constitutional limitations
exists privity of relationship between the taxing State limitations
and the object of tax.
It is an enforced charge and contribution. Purpose of Taxation
Generally pecuniary in nature (payable in money).
1) Revenue-raising

Taxation is the power by which the sovereign raises

revenue to defray the necessary expenses of
government.
 It is to provide funds or property with which to As to IAET, the court held that there is no time limit
promote the general welfare and protection of the on the right of the BIR Commissioner to assess this
whole citizenry. type of tax [Sec. 25, NIRC].
It is raised to serve as a means to provide public The law on prescription being a remedial measure
improvements designed for the enjoyment of the should be interpreted liberally in order to protect the
citizenry within the States territory. taxpayer. Republic vs. Ablaza, [108 Phil 1105]

2) Non-revenue/special or regulatory 3) Double Taxation (DT)

Taxation is also used for regulatory purposes; it is used A. Direct Duplicate Taxation (Strict sense) To constitute
to attain non-revenue objectives and pursue policy double taxation in the objectionable or prohibited sense:
decisions.
The same property must be taxed twice when it
Principles of Sound Tax System (FAT) should be taxed once;
Both taxes must be imposed:
1) Fiscal Adequacy - the sources of tax revenue should 1. On the same property or subject matter;
coincide with and approximate the needs of the government 2. For the same purpose;
expenditures. 3. By the same State Government or taxing
2) Administrative Feasibility - the tax system should be authority;
capable of being properly and efficiently administered by the 4. Within the same jurisdiction or taxing
government and enforced with the least inconvenience to the district;
taxpayer. 5. during the same period; and
6. they must be the same kind or character of
3) Theoretical Justice - the tax system should be fair to the tax Villanueva v. City of Iloilo, [26 SCRA
average taxpayer and based upon the ability to pay. 578]

Theory and Basis of Taxation (JBL) B. Indirect Duplicate Taxation (Broad sense) It means
indirect duplicate taxation. It extends to all cases in w/c there
1) Jurisdiction over subject & objects are two or more pecuniary impositions. The Constitution does
not prohibit the imposition of double taxation in the broad sense
2) Benefits-Protection Theory (Symbiotic relationship)
The basis of taxation is found in the reciprocal duties of C. Constitutionality of DT The SC held that there is no
protection and support between the state and its inhabitants. In constitutional prohibition against double taxation in the Phils.
return for this contribution, the taxpayer receives the general Villanueva v. City of Iloilo, [26 SCRA 578], therefore it is not
advantages and protection which the government affords the a valid defense against the validity of a tax measure Pepsi Cola
taxpayer and his property. v. Tanauan, [69 SCRA 460].
3) Lifeblood/Necessity Theory - The power of taxation There is no double taxation in the following cases:
proceeds upon the theory that the existence of government is a
necessity; that it cannot continue without means to pay its 1. By taxing corporate income and stockholders
expenses; and that for those means it has the right to compel all dividends from the same corporation
citizens and property within its limits to contribute. 2. Tax imposed by the State and the local government
upon the same occupation, calling or activity
Doctrines in Taxation 3. Real estate tax and income tax collected on the same
real estate property leased for earning purposes.
1) Prospectivity of tax laws
Villanueva vs. City of Iloilo, [26 SCRA 578]
This principle provides that a tax bill must only be 4. Taxes are imposed on taxpayers final product and
applicable and operative after becoming a law. the storage of raw materials used in the production of
As a general rule, taxing authorities must be applied the final product. Procter and Gamble Philippines vs.
prospectively, except by express provision of the law. Municipality of Jana, [94 SCRA 894]
Ex post facto is not applicable for tax purposes.
D. Modes of eliminating DT
However when it comes to civil penalties like fines
and forfeiture (except interest), tax laws may be 1. Provide for exemptions or allowance of deduction or
applied retroactively unless it produces harsh and tax credit for foreign taxes
oppressive consequences w/c violate the taxpayers 2. Enter into treaties with other states [like the former
constitutional rights regarding equity and due process Phil-Am Military Bases Agreements as to income
Fernandez v. Fernandez, [99 Phil. 934]; Commissioner tax]
v. Filipinas Cia de Seguros, [107 Phil. 1055] 3. Application of the Principle of Reciprocity
2) Imprescriptibility 4) Escape from Taxation
Unless otherwise provided by the tax law itself, taxes A. Shifting of tax burden The imposition of tax is
in general are not cancelable Commissioner v. Ayala transferred from the statutory taxpayer to another without
Securities Corporation, [101 SCRA 231]. violating the law.
Although the NIRC provides for the limitation in the
assessment and collection of taxes imposed, such 1. Ways of shifting the tax burden (FBO)
prescriptive period will only be applicable to those Forward shifting the transfer of burden
taxes that were returnable. The prescriptive period from the producer to distributor until it finally
shall start from the time the taxpayer files the tax reaches the ultimate purchasers or consumers
return and declares his liability Collector v. Bisaya Backward shifting the reverse of forward
Land Transportation Co., [1958] shifting, e.g. the manufacturer has agreed to
 buy the suppliers product only if the price is law Manila Electric Company v. Vera, [67 SCRA
reduced by the amount of tax. 351].
Onward shifting the tax burden is shifted Exemptions are not presumed, but when public
twice or more either forward or backward property is involved, exemption is the rule, and
taxation, the exception
2. Taxes that can be shifted There can be no simultaneous exemptions under 2
VAT laws, one partial and the other total.
Percentage tax
Excise tax on excisable articles C. Kinds (ICE)
Ad valorem taxes that oil companies pay to Implied (or by omission) when a tax is levied on
BIR upon removal of petroleum products certain classes of person, properties or
from its refinery transactions without mentioning the other classes.
3. Meaning of impact and incidence of taxation Every tax statute makes exemptions since all
those not mentioned are deemed exempted. The
Impact of Taxation point on which the tax omission may either be accidental or intentional.
is originally imposed or the one on whom the Contractual those lawfully entered into by the
tax is formally assessed. government in contracts under existing laws.
Incidence of Taxation point on which the These exemptions must not be confused with the
tax burden finally rests or settles down. tax exemptions granted under franchises, which
are not contracts within the context of
Example: VAT is originally assessed against nonimpairment clause of the Constitution.
the seller who is required to pay the said tax, Cagayan Electronic Co. v. Commissioner, [138
but the burden is actually shifted or passed SCRA 629]
on to the buyer. Express (or affirmative) when certain persons,
property or transactions are, by express provision,
B. Tax avoidance also called Tax Minimization; tax saving exempted from all or certain taxes, either entirely
device that is legally permissible. or in part.
C. Tax evasion connotes fraud through the use of pretenses Examples of Statutory Tax Exemptions:
and forbidden devices to lessen or defeat taxes; must be willful Inter-corporate dividends by a
and intentional. domestic corporation from
another domestic corporation
It connotes the integration of three factors: [Sec. 27 D [4], NIRC]
Section 105 of the Tariff and
End to be achieved, i.e., the payment of less than that
Customs Code
known by the taxpayer to be legally due, or the non-
Section 234 of the Local
payment of tax when it is shown that a tax is due;
Government Code
Accompanying state of mind which is described as
Other special laws such as
being "evil," in "bad faith," "willful," or "deliberate
Omnibus Investment Code of
and not accidental"; and
1987, Philippine Overseas
Course of action or failure of action which is unlawful.
Shipping Act
Benigno vs. Toda, [G.R. Nos. 78583-4 March 26,
1990 D. Rationale/grounds for exemption
TAX EVASION TAX AVOIDANCE A presumption that the public interest will be
Other Name Tax Dodging Tax Minimization subserved by the exemption allowed. Grant of
Means Use illegal means Use legal means exemption rests upon that such will benefit the body
Penalty Punishable by law Not punishable by law of the people and not upon any idea of lessening the
Object To entirely escape To merely minimize burden of the individual owners of property.
payment of taxes payment of taxes Purpose is some public benefit or interest, which the
law-making body considers sufficient to offset the
5) Exemption from taxation monetary loss entailed in the grant of exemptions.
A. Meaning The grant of immunity to particular persons Created in a treaty on grounds of reciprocity or to
or corporations or to persons or corporations of a particular lessen the rigors of the international double or multiple
class from a tax which persons and corporations generally taxation.
within the same state or taxing district are obliged to pay. Equity is not a ground for tax exemption

i. It is an immunity or privilege; it is freedom from a E. Revocation

financial charge or burden to which others are Tax exemption is generally revocable
subjected. Greenfield v. Meer, [77 Phil 394] The congressional power to grant an exemption
B. Nature necessarily carries with it the consequent power to
revoke the same.
Exemption from taxes is personal in nature and covers In order to be irrevocable, the tax exemption must be
only taxes for which the taxpayer-grantee is directly founded on a contract or granted by the Constitution.
liable. In any case, it cannot be transferred or assigned Revocations are constitutional even though the
by the person to whom it is given without the consent corporate do not have to perform a reciprocal duty for
of the State. them to avail of tax exemptions.
Tax exemptions are strictly construed against the
taxpayer because such provisions are highly
disfavored and may almost be said to be odious to the
6) Compensation and Set-off B. Distinguished from tax exemption:

This doctrine states that taxes are not subject to set-off AMNESTY EXEMPTION
or legal compensation because the government and the Scope of Immunity from all Immunity from
taxpayer are not mutual creditor and debtor of each immunity criminal, civil and civil liability only
other Republic v. Mambulao Lumber Co., [6 SCRA administrative
622]; Caltex Phils. V. COA, [208 SCRA 726]. liabilities from
Not subject to set-off or compensation for the nonpayment of taxes
following reasons: To whom General pardon given A freedom from a
Taxes are of distinct kind, essence and nature, granted to all taxpayers charge or burden
to which others
and these impositions cannot be classed in
are subjected
merely the same category as ordinary
Application Applies only to past Generally,
obligations; tax periods hence prospective in
The applicable laws and principles governing retroactive application application
each are peculiar, not necessarily common, to Presence of Yes, there is revenue None, because
each; and Actual loss since there was there was no
Public policy is better subserved if the Revenue actually taxes due but actual taxes due as
integrity and independence of taxes are Loss collection was waived the person or
maintained Republic v. Mambulao Lumber by the government transaction is
Co., [6 SCRA 622]. protected by tax
A person cannot refuse to pay tax on the basis that the exemption
government owes him an amount equal to or greater
than the tax being collected. The collection of a tax 9) Construction and Interpretation of:
cannot await the results of a lawsuit against the
A. Tax Laws
government. Philex Mining Corp. v. Commissioner,
[1998]; Francia v. Intermediate Court, [162 SCRA I. General rule:
753] No person or property is subject to taxation
An exception to the rule is where both the claims of unless within the terms or plain import of a
the government and the taxpayer against each other taxing statute.
have already become due, demandable and fully In case of doubt, tax statutes are construed
liquidated. In this case, compensation takes place by strictly against the government and liberally
operation of law and both obligations are in favor of the taxpayer.
extinguished to their concurrent amounts. Domingo Taxes being burdens, they are not to be
v. Garlitos, [8 SCRA 443] presumed beyond what the statute expressly
and clearly declares.
7) Compromise
Tax statutes offering rewards are liberally
Compromises are generally allowed and enforceable construed in favor of informers.
when the subject matter thereof is not prohibited from II. Exception:
being compromised and the person entering such The rule of strict construction as against the
compromise is duly authorized to do so. government is not applicable where the
The law allows the ff: persons to do compromise in language of the tax statute is plain and there
behalf of the government: is no doubt as to the legislative intent. In such
a. BIR Commissioner as expressly authorized case, the words employed are to be given
by the NIRC subject to certain conditions their ordinary meaning.
[Sec. 204, NIRC]; Tax statutes are to receive a reasonable
b. Collector of Customs with respect to customs construction with a view to carrying out their
duties limited to cases where the legitimate purpose and intent. They should not be
authority is specifically granted such as in the construed as to permit the taxpayer to easily
remission of duties [Sec. 709, TCC]; and evade the payment of tax. Thus, good faith of
c. Customs Commissioner subject to the the taxpayer is not a sufficient justification
approval of the Secretary of Finance, in for exemption from the payment of
cases involving the imposition of fines, surcharges imposed by the law for failing to
surcharges, and forfeitures [Sec. 2316, pay tax within the period required.
TCC]. A tax statute should be construed to avoid the
possibilities of tax evasion.
8) Tax Amnesty
B. Tax Exemption and Exclusion
A. Meaning It is the general or intentional overlooking by
the State of its authority to impose penalties on persons I. General rule:
otherwise guilty of evasion or violation of a revenue or tax law. Exemptions are not favored and are
construed strictissimi juris [by the most strict
It partakes of an absolute forgiveness or waiver of the right or law] against the taxpayer.
Government of its right to collect. An exemption from the common burden
It is a way to give tax evaders, who wish to relent & cannot be permitted to exist upon vague
are willing to reform a chance to do so. implication or inference
The fundamental theory is that all taxable
property should bear its share of the cost and
expense of government.
Applying the rule of strict construction to
statutory provisions granting tax exemptions
 [or deductions] would minimize differential The rules and regulations promulgated by the
treatment and foster fairness and equality of CIR shall be retroactive in the following
treatment among taxpayers. cases:
Taxation is the rule and exemption, the Where the taxpayer deliberately
exception. misstates or omits material facts
Therefore, whoever claims exemption must from his return or any document
be able to justify his claim or right thereto, by required of him by the Bureau of
a grant expressed in terms too plain to be Internal Revenue;
mistaken and too categorical to be Where the facts subsequently
misinterpreted. gathered by the Bureau of Internal
If not expressly mentioned by law, it must at Revenue are materially different
least be within its purview by clear legislative from the facts on which the ruling is
intent. based; or
Claims for refund partake of the nature of tax Where the taxpayer acted in bad
exemptions and will not be allowed unless faith.
granted in the most explicit and categorical
language. Scope and Limitation of Taxation
II. Exception: 1) Inherent Limitations
When the law itself expressly provides for a
liberal construction, that is, in case of doubt, A. Public Purpose
it shall be resolved in favor of exemption
When the exemption is in favor of the Test: whether the proceeds will be used for something
government itself or its agencies because the which is the duty of the State to provide.
gen. rule is that they are exempt from tax. The public purpose of the tax law must exist at the time
When the exemption refers to religious, of its enactment. Pascual v. Secretary of Public Works,
charitable and educational institutions. [G.R. No. L-10405, December 29, 1960]
If there is an express mention or if the Legislature is not required to adopt a policy of all or
taxpayer falls within the purview of the none for the Congress has the power to select the
exemption by clear legislative intent, the rule object of taxation. Lutz v. Araneta, [G.R. No. L7859,
on strict construction does not apply. December 22, 1955]
C. Tax Rules and Regulations A special benefit to specific individual does not
diminish the nature of tax being for public purpose as
I. General rule only The construction placed by the long as it is incidental.
office charged with implementing and enforcing the
provisions of a Code should be given controlling B. Inherently Legislative
weight unless such interpretation is clearly erroneous. I. General rule power of taxation cannot be delegated.
D. Penal provisions of tax laws Contemplates the power to determine kind,
object, extent, amount, coverage, and situs of
Strict construction so as not to extend the plain terms tax;
thereof that might create offenses by mere Distinguish from power to assess and collect
implication not so intended by the legislative body II. Exceptions:
RP v. Martin, [G.R. No. L-38019, May 16, 1980]. a. Delegation to local governments It is in line
with the principle that the power to create
E. Non-retroactive application to taxpayer municipal corporations for purposes of local
The (tax) law cannot be given retroactive effect. It is selfgovernment carries with it the power to
established that tax laws are prospective in confer the power to tax on such local
application, unless it is expressly provided to apply governments.
retroactively. Carmelino F. Pansacola v. CIR, [G.R. b. Delegation to the President Certain aspects
No. 159991, November 16, 2006] of the taxing process that are not legislative
A tax law should not be given retroactive application in character may be vested to him.
when it would be harsh and oppressive, for in such c. Delegation to administrative agencies They
case, the constitutional limitation of due process are authorized to fix within specified limits,
would be violated. Tariff rates, import or export quotas, tonnage
Sec. 246 of the NIRC provides that any revocation, and wharfage dues and other duties or
modification or reversal of any of the rules and imposts.
regulations promulgated in accordance with Secs. C. Territorial
244 and 255 or any of the rulings or circulars
promulgated by the Commissioner shall not be given I. Situs of Taxation
retroactive application if the revocation, modification a. Meaning place of taxation; power to tax is
or reversal will be prejudicial to the taxpayers. limited to the territorial jurisdiction of the
taxing state.
I. Exceptions:
While it is not favored, a statute may EXCEPT where privity of relationship
nevertheless operate retroactively provided it exists, the State can exercise its taxing
is expressly declared or is clearly the powers over its citizen outside its territory.
legislative intent. For instance: the universal
practice of increasing taxes on income
already earned.
 b. Situs of Income Tax e. Situs of Business Tax Place where the
taxpayer is registered or required to register
1) From sources within the Philippines 1) Sale of Real Property
Interests derived from sources within the 2) Sale of Personal Property
Philippines 3) VAT
Dividends from domestic and foreign
corporations OBJECT SITUS RULE
Compensation for services performed Person Residence,
within the Philippines Domicile,
Citizenship
Rentals and royalties from properties
Real Property Location of the property
located in the Philippines or any interest
Tangible Personal Physical location although the owner
in such property including rentals or
Property resides in another jurisdiction
royalties for the use of or for the privilege Intangible Personal Domicile of the owner (mobilia
of using within the Philippines, patents, Property sequntur personam)
copyrights and other like properties. Income Citizenship
Sale of Real property located in the Residence
Philippines Source of Income
Sale of Personal property Gains, profit, Transfer of property Citizenship
and income derived from the purchase Residence
within and its sale without the Phil, or Location of Property
from the purchase without and its sale Business or Where the act/business/occupation
within shall be treated as derived entirely Occupation is performed/exercised
from sources within the country in which
the personal property is sold. Except: the
D. International Comity
gain from the sale of shares of stock in a
domestic corporation shall be treated as Property of a foreign State of government may not be
derived entirely from sources within the taxed by another.
Phils. regardless where the said shares are
sold. E. Exemption of Government Entities, Agencies, and
Instrumentalities
2) From sources without the Philippines
Taking money from one pocket to the other.
Interest other than those derived from Applies only to entities exercising sovereign functions
sources within the Philippines (acta jure imperii).
Dividends other than those derived from However, it can tax itself if there is a statutory
sources within the Philippines authority to do so and no express provision against
Compensation for services performed such act.
without the Philippines
Rentals and royalties from property 2) Constitutional Limitations
located without the Philippines or from
A. Provisions Directly Affecting Taxation
any interest in such property including
rentals or royalties for the use of or for the 1) Prohibition against imprisonment of non-payment of
privilege of using without the Philippines, poll tax [Sec. 20, Art. III]
patents, copyrights and other like Can still be made to pay fines and penalties
properties. for non-payment.
Taxpayer may be imprisoned for non-
3) Income partly within and partly without the payment of other kinds of taxes where the law
Philippines.
so expressly provides
2) Uniformity and equality of taxation [Sec. 28 (1), Art
Items other than those specified above in (1) and
VI]
(2) shall be allocated or apportioned to sources
Uniform: all articles or properties of the same
within or without the Philippines
class taxed at the same rate
c. Situs of Property Taxes Equity: apportionment must be more or less
just in the light of taxpayers ability to
1) Taxes on Real Property Location of the shoulder tax burden
property The equal protection clause refers more to
like treatment in like circumstances
2) Taxes on Personal Property
The uniformity and equity clause refers to the
i. Tangible Location of the property proper relative treatment for tax purposes of
ii. Intangible Domicile of the owner persons in unlike circumstances
3) Grant by Congress of authority to the President to
d. Situs of Excise Tax impose tariff rates/Flexible tariff clause [Sec. 28 (2),
Art. VI]
1) Estate Tax Domicile of the decedent at the Includes import and export quotas, tonnage
time of his death and wharfage dues aside from tariff rates
2) Donors Tax Domicile of the donor at the Delegated by Congress
time of the transfer Through a law; the Tariff and Customs Code
has provided for what has been termed as the
flexible tariff clause authorizing the
 President to modify import duties [Sec. 401, SUBSTANTIVE PROCEDURAL
TCC] Should not be harsh, No arbitrariness in
Subject to Congressional limits and oppressive, or confiscatory assessment and collection
restrictions (reasonableness)
Within the framework of national By authority of valid law Right to notice and hearing
development program Must be for a public
4) Prohibition against taxation of religious, charitable purpose
and educational entities/Exemption from real property Imposed within territorial
taxes [Sec. 28 (3), Art. VI of the Constitution] jurisdiction
Covers charitable institutions, churches, and
parsonages or convents appurtenant thereto, It can also be invoked by the government. Province of
mosques and non-profit cemeteries and all Abra v. Hernando, [G.R. No. L-49336 August 31,
lands, buildings and improvements 1981]
ACTUALLY, DIRECTLY and 2) Equal protection [Sec. 1, Art. III]
EXCLUSIVELY USED for charitable, All persons subject to legislation shall be treated alike,
religious and educational purposes under like circumstances and conditions both in
Pertains only to real estate tax privileges conferred and liabilities imposed. Sison, Jr.
Test of exemption: actual use of the v. Ancheta, [G.R. No. L-59431, 25 July 1984]
property, not ownership No violation of equal protection when there is proper
5) Prohibition against taxation of non-stock, nonprofit classification made; classification to be valid must:
[educational] institutions [Sec. 4(3&4), Art. XIV] Rest on substantial distinctions
Exempts from taxes all revenues and assets Be germane to the purpose of the law
of nonstock, non-profit educational Not be limited to existing conditions only;
institutions used ACTUALLY, DIRECTLY and
AND EXCLUSIVELY for educational Apply equally to all members of the same
purposes class
Exemption covers income, real estate, 3) Religious freedom [Sec. 5, Art III]
donors tax, and customs duties (distinguish The constitutional guaranty of the free exercise and
from the previous which pertains only to real enjoyment of religious profession and worship carries
estate tax) with it the right to disseminate religious information.
Income exempt provided it is used for American Bible Society v. City of Manila, [G.R. No.
maintenance or improvement of institution L-9637, April 30, 1957].
(indispensable or essential). Activities simply and purely for propagation of faith
The exemption is strictly personal. are exempt.
(nontransferable) Tax is unconstitutional if it operates as a prior restraint
Distinguish from tax treatment of on exercise of religion or favors a certain religion
i. Proprietary educational institutions (non-establishment of religion)
(Preferential Tax of 10%); Income of religious organizations from any activity
ii. Government educational institutions conducted for profit or from any of their property,
(exempt, ex. UP) real or personal, regardless of disposition of such
6) Majority vote of Congress for grant of tax exemption income, is taxable
[Sec. 28 (4), Art. VI] 4) Non-impairment of obligations [Sec. 10, Art. III]
Includes amnesties, condonations and Applies only when government is party to the
refunds contract granting exemption
Involves majority of all members voting EXCEPT if Franchise tax-exemption The
separately Constitution provides that franchise is subject to
Relative majority (majority of quorum) is amendment, alteration, or repeal by Congress.
sufficient to withdraw exemption
7) Prohibition on use of tax levied for special purpose Stages of Taxation (LAPR)
[Sec. 29 (3), Art. VI]
Revenues derived for a special fund shall be 1) Levy Refers to the enactment of a law by Congress,
administered for the purpose intended only. imposing a tax.
Once the purpose is achieved, the balance, if 2) Assessment The act of administration and implementation
any, is to be transferred to the general funds of the tax law by the executive department through the
of the government. administrative agencies
8) Presidents veto power on appropriation, revenue, and
tariff bills [Sec. 27 (2), Art. VI] 3) Payment Act of compliance by the taxpayer, including
9) Non impairment of jurisdiction of the SC [Sec. such options, schemes or remedies as may be legally available
5(2)(b), Art. VIII] to him.
10) Grant of power to the local government units to create
4) Refund Recovery of any tax alleged to have been
its own sources of revenue [Sec. 5, Art. X]
erroneously or illegally assessed or collected, or of any penalty
11) No appropriation or use of public money for religious
claimed to have been collected without authority, or of any sum
purposes [Sec. 29 (2), Art. VI]
alleged to have been excessively, or in any manner wrongfully,
B. Provisions Indirectly Affecting Taxation collected.

1) Due process [Sec. 1, Art. III]

Definition, Nature, and Characteristics of Taxes Taxs primary purpose, or at least one of the real and
substantial purposes is to raise revenue.
A burden, charge, exaction, imposition or contribution If amount is too high for regulation, it would be a tax;
assessed in accordance with some reasonable rule of unless imposed on non-useful occupations or
apportionment by authority of the sovereign state upon businesses.
the persons or property within its jurisdiction, to Purpose of distinction: limitations and exemptions
provide public revenue for the support of the apply only to one and not to the other (ex. Exemption
government, the administration of the law, or the from taxation does not include exemption from fee)
payment of public expenses. [71 AM JUR 2ND 343-
346] 4) Special Assessment
Any payment exacted by the State or its municipal
subdivisions as a contribution toward the cost of TAX SPECIAL
ASSESMENT
maintaining governmental functions, where the
Imposed on Persons, properties, Only on land
special benefits derived from the performance is
etc.
merged in the general benefit. Why Regardless of public Public improvement
Taxes operate in INVITUM and are in no way imposed improvement that benefits the land
dependent upon the will or contractual assent, express Purpose Support of Contribution to cost
or implied, of the person taxed. government of public
(1) Enforced (2) proportional and (3) pecuniary improvement
contributions (4) from persons and property (5) levied When Regular exaction Exceptional as to time
by law-making body of (6) the state having imposed and locality
jurisdiction over the subject of the burden (7) for the Basis Necessity Benefits obtained
support of the government and all public needs.
5) Debt
Requisites of a valid tax
TAX DEBT
Must be for a public purpose Source Law; legal obligation Based on contract
It should be uniform and equitable Nature Personal Assignable
That either the person or property taxed is within the Right to Generally not subject May be the subject
jurisdiction of the taxing authority set-off to compensation/ set- of compensation/set-
That it complies with the requirements of due process off off
That it does not infringe any constitutional limitations Effect Imprisonment is No imprisonment for
sanction for non-payment
Tax as distinguished from other forms of exactions nonpayment
1) Customs Duty/Tariff
Kinds of Taxes
TAX CUSTOM DUTY
Coverage More comprehensive Kind of tax 1) As to subject matter or object
than customs duty
Object Persons, prop, etc Goods imported or A. Personal, poll, capitation tax
exported
Fixed amount
2) Toll Individuals residing within specified territory
Without regard to their property, occupation or
TAX TOLL business
Kind of Demand of sovereignty Demand of Ex. Community Tax (Cedula)
demand ownership
Purpose Support of government Collection for the B. Property tax
use of property
Imposed on property, real or personal
Amount No limit depends on Fair return of the
In proportion to its value or other reasonable method
need of the cost of the property
government or improvement of apportionment
Ex. Real estate tax

3) License Fee C. Excise/Privilege tax - (different from the excise tax of

Title VI of the NIRC)
TAX LICENSE FEE
Source Exercise of Taxing Emanate from the Imposed upon performance of an act, the enjoyment of
power police power of the a privilege or the engaging in an occupation,
State profession or business
Purpose Raise revenue Regulation Ex. Income tax, VAT, estate tax, donors tax
Object Persons, property and Right to exercise a
2) As to who bears the burden or incidence
privilege privilege
Amount No limit Only necessary to A. Direct the tax is imposed on the person who also bears
carry out regulation the burden thereof

Distinction lies in the primary purpose: Ex. Income tax, community tax, estate tax

License fee primary purpose is to regulate and the B. Indirect imposed on the taxpayer who shifts the burden
excess of the amount collected from the cost to carry of the tax to another
out the regulation is minimal and incidental.
Ex. VAT, specific tax, percentage tax, customs duties
3) As to tax rates or determination of amount

A. Specific tax imposed and based on a physical unit of

measurement, as by head, number, weight, length or volume

Ex. Tax on distilled spirits, fermented liquors, cigars

B. Ad Valorem - tax of a fixed proportion of the value of

property with respect to which the tax is assessed; requires
intervention of assessor.

Ex. Real estate tax, excise tax on cars, nonessential goods

C. Mixed

4) As to purposes

A. General, fiscal or revenue - imposed for the general

purpose of supporting the government

Ex. Income tax, percentage tax

B. Special or regulatory - imposed for a special purpose, to

achieve some social or economic objectives

Ex. Protective tariffs or customs duties

5) As to scope or authority to impose

A. National - imposed by the national government

Ex. National internal revenue taxes, custom duties

B. Municipal or local - imposed by the municipal corporations

or local governments

Ex. Real estate tax, occupation tax

6) As to graduation of rate (Three systems of taxation)

A. Proportionate - based on a fixed percentage of the amount

of the property, income or other basis to be taxed

Ex. Real estate tax, VAT, percentage tax

B. Progressive or graduated - tax rate increases as the tax

base or bracket increases

Ex. Income tax, estate tax, donors tax

C. Regressive - tax rate decreases as the tax base increases

INCOME TAXATION 2) Features of the Philippine Income Tax Law

1) Income Tax Systems A. Direct tax tax burden us borne by the income tax recipient
upon whom the tax is imposed.
A. Global (unitary) Tax System the total allowable
deductions, as well as personal and additional exemptions, in B. Progressive tax tax rate increases as the tax base increases;
the case of qualified individuals, or the total allowable direct taxes are to be preferred and as much as possible, indirect
deductions only, in the case of corporations, are deducted from taxes should be minimized. Tolentino v. Secretary of Finance,
the gross income (i.e. sum of all items of taxable income, profit [G.R. No. 115455, October 30, 1995]
and gain) to arrive at the net taxable income subject to the
C. Comprehensive system adopts the citizenship principle,
graduated income tax rates, in the case of individuals, or to the
residence principle and the source principle
corporate income tax rate, in the case of corporations.
D. Semi-schedular or semi-global tax system certain
All items of gross income, deductions, personal and additional
passive incomes and capital gains are subject to final taxes at
exemptions are reported in one income tax return and a single
preferential rates while all other income are added together to
tax is imposed on all income received or earned by a person
arrive at the gross income and after deducting the sum of
irrespective of the activities which produced the income (i.e.
allowable deductions, the taxable income is subjected to one set
compensation income, net income from business, trade or
of graduated tax rates for an individual or normal corporate
profession).
income tax rate for corporations.
B. Schedular Tax System different types of incomes are
subjected to different sets of graduated or flat income tax rates.
3) Criteria in Imposing Philippine Tax Law
The applicable tax rates will depend on the classification of the
taxable income and the basis could be gross income or net A. Citizenship principle a citizen taxpayer is subject to
income (i.e. capital gains tax) income tax: (a) on his worldwide income if he resides in the
Philippines; or (b) only on his income from sources within the
C. Semi-Schedular or Semi-Global Tax System the
Philippines, if he qualifies as non-resident citizen.
compensation income, business or professional income, capital
gain and passive income not subject to final tax, and other B. Residence principle a resident alien is liable to pay income
income are added together to arrive at the gross income and tax on his income from sources within the Philippines but
after deducting the sum of allowable deductions, the taxable exempt from tax on his income from sources outside the
income is subjected to one set of graduated tax rates for an Philippines.
individual or normal corporate income tax rate for corporations.
C. Source principle a non-resident alien is subject to
With respect to the income, the computation of income is global Philippine income tax because he derives income from sources
while the scheduler tax system applied to the capital gains and within the Philippines such as dividend, interest, rent or royalty.
passive income subject to final tax at preferential tax rates.

4) Types of Philippine Income Tax

NOTE: Philippine income taxation is a combination of both
system but is more schedular for individual while more A. Net Income Tax/Taxable Income (GI Deductions
global for corporation. Exemptions)

GLOBAL SYSTEM SCHEDULAR SYSTEM B. Gross Income Tax

A system which imposes a A system which imposes C. Final Income Tax (On passive income and capital gains
personal tax upon the total various types of tax on
income of the taxpayer income producing activities D. Fringe Benefits Tax (amount of benefits to Managerial and
Emphasizes the burden Emphasizes on revenue and Supervisory Employee paid by Employer; employee is taxed
allocation aspects administrative aspects but burden is on employer)
Most equitable in Because of its multiple rates,
distributing tax burden, as the tax burden of a person E. Capital Gains Tax (Real property and stocks not traded in
burden of an individual is does not respond to his stock market)
closely related to his income but rather fall
resources and his ability to fortuitously on the type of F. Optional Corporate Income Tax
pay his income
It serves as a means for This function is alien to G. Minimum Corporate Income Tax (2% of gross income)
redistributing income and schedular system where in H. Improperly Accumulated Earnings Tax
wealth times of plenty or in times of
need, people pay the same I. Preferential Rates (for special corporations)
fixed tax on their income
It serves as a supplementary Schedular system cannot J. Branch Profit Remittance Tax
devise to accomplish perform these functions
nonfiscal goals of the
government 5) Taxable Period
Administration is not quite Administration is simple
GENERAL RULE: The accounting period of a taxpayer is a
as easy as schedular because being confined to each
period of twelve (12) months.
one has to consider all transaction or activity
income from whatever A. Calendar Year accounting period from January 1 to
sources December 31 which is allowed if the:

Taxpayer is an individual
Taxpayer is a partnership
Accounting period is other than a fiscal year
 Taxpayer has no accounting period immigrant or for employment on a
Taxpayer does not keep books. permanent basis
Works & derives income from
B. Fiscal Year accounting period of twelve (12) months abroad & whose employment
ending on the last day of any month other than December which requires him to be physically
is allowed ONLY to corporations. present abroad most of the time (i.e.
C. Short Period a taxpayer may have a taxable period of not less than 183 days) during the
less than twelve (12) months when: taxable year.
Was previously considered as
Taxpayer dies nonresident citizen & arrives in the
Corporation is newly organized Philippines at any time during the
Corporation changes its accounting period taxable year to reside permanently
Corporation is dissolved. in the Philippines.
Examples of non-resident citizens:
a. Immigrant one who
6) Kinds of Taxpayers
leaves the Philippines to
TAXPAYER TAX BASE TAXABLE ON reside abroad as an
INCOME immigrant for which a
Resident Citizen Taxable Income Within and foreign visa has been
without the secured
Philippines b. Permanent employee one
Nonresident Taxable Income Within the who leaves the Philippines
Citizen Philippines on a more or less
Resident Alien Taxable Income Within the permanent basis
Philippines c. Contract Worker one
Nonresident Alien who leaves the Philippines
engaged in trade Taxable Income Within the on account of a contract of
or business (more Philippines employment which is
than 180 days)
renewed from time to time
Taxable
under such circumstance
Nonresident Alien Within the
not engaged in Gross Income Philippines as to require him to be
trade or business physically present abroad
(180 days or less most of the time (not less
GPP itself not than 183 days)
General taxable, however,
Professional Taxable Income individual partners NOTE: The taxpayer shall submit proof to the CIR to show his
Partnership will be taxed intention of leaving the Philippines to reside permanently
depending on abroad or to return to and reside in the Philippines as the case
classification may be.
Same basis as an
Non-resident citizens who are exempt from tax with respect to
individual
Estate and Trust Taxable Income (depending on income derived from sources outside the Philippines shall no
classification of longer be required to file information returns from sources
decedent, if estate, outside the Philippines beginning 2001 [RR No. 5-2001]
trustor, if trust)
For Overseas Contract Worker, the time spent abroad is not
Domestic Within and
Corporation Taxable Income Without the material for tax exemption purposes. All that is required is for
Philippines the workers employment contract to pass through and be
Resident Foreign Taxable Income Within the registered with the POEA [BIR Ruling 33-2000]
Corporation Philippines
2) Aliens
Non-resident Within the
a. Resident Alien an individual whose
Foreign Gross Income Philippines
corporation residence is within the Philippines and who is
not a citizen thereof is taxable only on income
derived from sources within the Philippines.
A. Individual Taxpayers One who comes to the Philippines
for a definite purposes which in its
1) Citizens nature would require an extended
a. Resident Citizen citizen of the Philippines stay, and makes his home
residing therein is taxable on all income temporarily in the country becomes
derived from sources within and without the a resident alien
Philippines. Length of stay is indicative of
b. Nonresident Citizen citizen of the intention
Philippines who are taxable only on his An alien actually present in the
income from sources within the Philippines if Philippines who is not a mere
he: transient or sojourner is a resident of
Establishes the fact of his physical the Philippines for purposes of the
presence abroad with a definite income tax. Whether he is a
intention to reside therein. transient or not is determined by his
Leaves the Philippines during the intentions with regard to the length
taxable year to reside abroad, as and nature of his stay.
 A mere floating intention indefinite provisions of this Code and other
as to time, to return to another laws, general or special.
country is not sufficient to constitute o Corporations
him a transient. A corporation shall include partnerships, no
If he lives in the Philippines and has matter how created or organized. Joint stock
no definite intention as to his stay, companies, joint accounts, associations, and
he is a resident. One who comes to insurance companies.
the Philippines for a definite But does not include, for the purpose of
purpose which in its nature may be imposing ordinary 30% (starting 2009; 35%
promptly accomplished is a 2006 - 2008) corporate income tax:
transient. General professional partnerships
But if his purpose is of such a nature Joint venture or consortium formed
that an extended stay may be for the purpose of undertaking
necessary for its accomplishment, construction projects or engaging in
and to that end the alien makes his petroleum, coal, geothermal & other
home temporarily in the Philippines, energy operations pursuant to an
he becomes a resident, though it operating or consortium agreement
may be his intention at all times to under a service contract with the
return to his domicile abroad when government
the purpose for which he came has
been consummated or abandoned. 1) Domestic Corporation created or organized in the
[RR No. 2] Philippines or under its laws and is liable for income
Loss of Residence by alien derived from sources within and without.
An alien who has acquired residence 2) Foreign Corporation organized and existing under
in the Philippines retains his status the laws of a foreign country, which includes:
until he abandons the same and a. Resident foreign corporation foreign
actually departs from the corporation engaged in trade or business
Philippines A mere intention to within the Philippines and is liable from
change his residence does not sources within.
change hid status. An alien who has
acquired a residence is taxable as a In the case of CIR v. British Overseas Airways
resident for the remainder of his stay Corp, [G.R. No. L-65773-74, April 30, 1987], the
in the Philippines. [Sec. 6, RR. No. Court held that there is no specific criterion as to
2] what constitutes "doing" or "engaging in" or
b. Nonresident Alien an individual whose "transacting" business. Each case must be judged
residence is not within the Philippines and in the light of its peculiar environmental
who is not a citizen thereof but dong business circumstances. The term implies a continuity of
therein is taxable only on income from commercial dealings and arrangements, and
sources within. contemplates, to that extent, the performance of
a) Engaged in trade or business an acts or works or the exercise of some of the
alien who comes and stays in the functions normally incident to, and in progressive
Philippines for an aggregate period prosecution of commercial gain or for the purpose
of more than 180 days during any and object of the business organization. In order
calendar year. that a foreign corporation may be regarded as
b) Not engaged in trade or business doing business within a State, there must be
an alien whose stay in the continuity of conduct and intention to establish a
Philippines is 180 days or less. continuous business, such as the appointment of a
local agent, and not one of a temporary character.
3) Special Class of Individual Employees b. Nonresident foreign corporation foreign
a) Aliens employed by regional or area corporation not engaged in trade or business
headquarters and regional operating within the Philippines
headquarters of multinational companies in
the Philippines. o Partnerships. Taxed as a corporation.
b) Aliens employed by offshore banking units. o General Professional Partnerships
c) Aliens employed by petroleum contractors Established solely for purpose of exercising
and subcontractors. common profession and no part of income
d) Minimum Wage Earner derived from engaging in trade or business.
A worker in the private sector paid As an entity, it is not subject to income tax.
the statutory minimum wage, or to Partners are liable for income tax on their
an employee in the public sector distributive share (computed by dividing
with compensation income of not net income of GPP).
more than the statutory minimum
Each partner shall report his distributive
wage in the non-agricultural sector share as part of his gross income.
where he/she is assigned;
Individual partners are subject to regular
His earnings (i.e. SMW, holiday,
income tax rate on their taxable income.
overtime, night shift differential and
hazard pay) are exempt from
income tax pursuant to the
 Taxable/Business/Ordinary/General Direct Tax tax burden us borne by the income tax
Partnership recipient upon whom the tax is imposed.
All other partnerships no matter how Progressive Tax tax rate increases as the tax base
created or organized. increases; direct taxes are to be preferred and as much
Includes unregistered joint ventures and as possible, indirect taxes should be minimized.
business partnerships. Tolentino v. Secretary of Finance, [G.R. No. 115455,
Taxable as an entity ordinary October 30, 1995]
corporate income tax. Comprehensive System adopts the citizenship
Joint ventures are not taxable as principle, residence principle and the source principle
corporations when its purpose is: a) Semi-Schedular or Semi-Global Tax System
undertaking construction projects; b) certain passive incomes and capital gains are subject
engaged in petroleum, coal and other to final taxes at preferential rates while all other
energy operation under a service income are added together to arrive at the gross
contract with the government. income and after deducting the sum of allowable
Partners are considered stockholders; deductions, the taxable income is subjected to one set
therefore, their distributive share is taxed of graduated tax rates for an individual or normal
as dividends, thus subject to final income corporate income tax rate for corporations.
tax on their gross distributive share. C. General Principles

o Estate and Trusts TAXPAYER TAX BASE TAXABLE ON

Estate: property, rights and obligations of a INCOME
person which are not extinguished by his Resident Citizen Taxable Income Within and
death and those that accrues thereto; taxed in without the
the same way as an individual provided it is Philippines
irrevocable and earns income; what is taxed Nonresident Taxable Income Within the
is not the property that constitutes the trust Citizen Philippines
(this was already subject to donors tax) but Resident Alien Taxable Income Within the
Philippines
the income of such property.
Nonresident Alien Taxable Income Within the
Trust: arrangement created by agreement
engaged in trade or Philippines
under which title to property is passed to business (more than
another for conservation or investment with 180 days)
the income and the corpus/principal Nonresident Alien Gross Income Within the
distributed in accordance with the directions not engaged in Philippines
of the creator; to be taxable as a separate trade or business
entity, grantor must have absolutely and (180 days or less)
irrevocably given up control and benefit over General Taxable Income GPP itself not
the trust. Professional taxable, however,
o Co-ownerships Partnership individual
Exists whenever the ownership of an partners will be
undivided thing or right belongs to different taxed depending
persons. For income tax purposes, the on classification
individual co-owners are liable for the taxes Estate and Trust Taxable Income Same basis as an
individual
due on their respective shares and the co-
(depending on
ownership itself is not considered as a
classification of
separate taxable entity. decedent, if estate,
There is co-ownership in the following trustor, if trust)
instances: Domestic Taxable Income Within and
Two or more heirs inherit an Corporation Without the
undivided property from a decedent; Philippines
A donor makes a gift of an Resident Foreign Taxable Income Within the
undivided property in favor of two Corporation Philippines
or more donees. Non-resident Gross Income Within the
It is not taxable when the activities are limited Foreign Philippines
merely to preservation of the co-owned corporation
property but the co-owners are liable for
income tax in their separate and individual
8) Income
capacities.
It is taxable when the income of the co- A. Definition and Nature
ownership is invested by the co-owners in
business creating a partnership. Income, in the broad sense, means all wealth which
flows into the taxpayer other than as a mere return of
7) Income Taxation capital. It includes the forms of income specifically
described as gains and profits, including gains derived
A. Definition A tax on all yearly profits arising from property,
from the sale or other disposition of capital assets.
professions, trades, or offices, or as a tax on a persons income,
Income cannot be determined merely by reckoning
emoluments, profits and the life. Income tax is a direct tax
cash receipts, for the statute recognizes as income
B. Nature (same as Features of Philippine Income Tax Law) determining factor other items, among which are
inventories, accounts receivable, property exhaustion,
 and accounts payable for expenses incurred. [Sec. 36, ACCRUAL METHOD method under
RR No. 0240 dated 10 February 1940] which income, gains and profits are included
in gross income when earned whether
B. When income is taxable
received or not, and expenses are allowed as
1) Existence of income deductions when incurred, although not yet
paid. It is the right to receive and not the
For a taxable income to exist, gain or profit is actual receipt that determines the inclusion
necessary where there is an exchange of value of the amount in gross income.
received in the form of cash or its equivalent as a result Installment payment v. Deferred payment v.
of rendition of service or earnings in excess of capital Percentage of completion
invested. BIR Ruling [DA-(C-335) 815-09] dated INSTALLMENT METHOD the taxpayer
December 22, 2009 may report income over the several taxable
years in which collections are made based on
2) Realization of income the terms of payment.

Tests of Realization Generally, the income derived on installment

Under the REALIZATION PRINCIPLE, sale is the proportion of installment
revenue is generally recognized when both of collection actually received during the year in
the following conditions are met: relation to the gross profit and contract price.
The earning is complete or virtually
complete; and DEFERRED PAYMENT METHOD
An exchange has taken place. where the initial payments on installment
This principle requires that revenues must be sale exceed 25% of the selling price but they
earned before they are received. Amounts may only be realized in the subsequent year,
received in advance are not treated as revenue the taxpayer is allowed to defer reporting
of the period in which they are received, but income for accounting purposes but such
as revenue of the future period or period or sale is to be considered as the equivalent of
periods in which they are earned. These "cash" which will be considered as taxable
amounts are carried as unearned revenue, that in the month of sale. [Sec. 177, RR No. 2 as
is, liabilities to transfer goods or render cited in BIR Ruling No. 263-92 dated
services in the future until the earning September 16, 1992]
process is complete. Manila Mandarin Hotels
v. Commissioner, [CTA Case No. 5046, PERCENTAGE OF COMPLETION
March. 24, 1997] METHOD a method of recognizing the
earnings derived from long-term
Actual v. Constructive Receipt construction contracts. This method requires
ACTUAL RECEIPT occurs when there is a recognition of income based on the progress
physical transfer of the money consideration of work.
or its equivalent to a person.
CONSTRUCTIVE RECEIPT occurs when Tests in determining whether income is earned for tax
the money consideration or its equivalent is purposes
placed at the control of the person who
rendered the service without restrictions by 1) Under the REALIZATION PRINCIPLE, revenue is
the payor. For example: generally recognized when both of the following
a) Deposit in banks which are made conditions are met:
available to the seller of service the earning is complete or virtually complete;
without restrictions; and
b) Issuance by the debtor of a notice to an exchange has taken place.
offset any debt or obligation and
acceptance thereof by the seller as This principle requires that revenues must be
payment for services rendered; and earned before they are received. Amounts
c) Transfer of amounts retained by the received in advance are not treated as revenue of
payor to the account of the the period in which they are received, but as
contractor. [Section 4.108-411 of revenue of the future period or period or periods
RR No. 16-2005] in which they are earned. These amounts are
carried as unearned revenue, that is, liabilities to
3) Recognition of income transfer goods or render services in the future
until the earning process is complete. Manila
4) Methods of accounting Mandarin Hotels v. Commissioner, [CTA Case
No. 5046, March 24, 1997]
Cash method v. Accrual method 2) The "CLAIM-OF-RIGHT" DOCTRINE provides that
CASH METHOD recognition of income if a taxpayer receives earnings under a claim of right
and expense dependent on inflow or outflow and without restriction as to its disposition, he has
of cash (meaning, you recognize the income received income even though one may claim he is not
when you actually receive the cash payment entitled to the money. Should it later appear that the
for the sale, and you recognize the expense taxpayer was not entitled to keep the money, the
when you actually pay cash for the expense). taxpayer would be entitled to a deduction in the year
of repayment. North American Oil Consolidated v.
 Burnet as cited in [BIR Ruling DA-(C-168) 519-08 Compensation for services in whatever form paid,
dated December 12, 2008] including, but not limited to fees, salaries, wages,
commissions & similar items
3) The ECONOMIC BENEFIT THEORY provides that Annuities
anything which benefits a person materially or Royalties
economically in whatever way is taxable under the Dividend Income
law. [BIR Ruling No. 123-97 dated November 10, Gains derived from dealings in property
1997] Pensions
Partners distributive share from the net income of the
4) Under the SEVERANCE TEST THEORY, income is GPP (distributive share from ordinary partnerships is
recognized when there is a separation of something taxable as dividends; in this case, the ordinary
which is of exchangeable value. Eisner v. Macomber, partnership has already been subject to ordinary
[252 US 189] corporate income tax) Sec. 32.

The annual increase in value of an asset is not taxable Recovery of damages (compensation for Not taxable
income because such increase has not yet been injury; from tortuous acts)
Recovery of damages pertaining to recovery Taxable
realized. The increase in value i.e., the gain, could only
or return of loss income or profit
be taxed when a disposition of the property occurred
Recovery of items previously deducted from Taxable
which was of such a nature as to constitute a
gross income (tax benefit rule)
realization of such gain, that is, a severance of the gain Forgiveness of indebtedness (if effect of Not taxable
from the original capital invested in the property. The entire transaction is a reduction of purchase
same conclusion obtains as to losses. The annual price of property acquired in prior year)
decline in the value of property is not normally Forgiveness of indebtedness (of a stockholder Taxable
allowable as a deduction. Hence, to be allowable the is equivalent to dividend distribution)
loss must be realized. Surre Warren, Federal Income Forgiveness of indebtedness in exchange of a Taxable
Taxation, 1950, pp. 422-4, as cited in [BIR Ruling No. service performed
206-90 dated October 30, 1990] Income derived from illegal business (gain) Taxable
Recovery of lost earnings Taxable
To compute the reportable income:

Reportable Income = Installment collection received x Gross

profit Contract Price BIR Ruling No. 017-2003
The transfer of land made by a person to another in payment
of services rendered in the form of attorneys fees shall be
When Installment Method Allowed
considered as part of the gross income of the latter valued at
Installment sale of personal property either the fair market value or the zonal valuation, whichever
is higher, in the taxable year received
Personal property is regularly sold on an
installment basis by a dealer; Sec. 49(A)
Doctrine of Involuntary Conversion of Property
Casual sale if personal property on This is a doctrine provided for in US Jurisprudence (i.e.,
installment basis where the selling price Herver vs. Helvering) and was adopted by the BIR in several
exceeds P1,000 and the initial payments do of its rulings.
not exceed 25% of the selling price; Sec.
49(B) This doctrine states that if property (as a result of its
destruction, in whole or in part, theft or seizure, or an
NOTE: if the initial payment exceeds 25% of selling price, the exercise of the power of requisition or condemnation or the
transaction is considered cash sales; considered as initial threat or imminence thereof) is compulsorily or involuntarily
payments are the down payments and all other payments converted into property similar to the property so converted,
received by the seller during the year of sale, including excess or into money, which is forthwith in good faith expended in
mortgage assumed by the buyer over the basis or cost of the the acquisition of other property, or in the establishment of a
property sold. replacement fund, no gain or loss shall be recognized. If any
part of the money is not so expended, the gain shall be
Installment sale of real property recognized, but in an amount not in excess of the money so
Sale of realty (inventory) where the initial expended.
payments do not exceed 25% of the selling
price. Sec. 49(B) For example, if a taxpayer uses the proceeds received from a
Sale by individuals of real property property expropriated by the government to purchase
another similar asset as replacement, then the excess of the
considered as capital asset, if initial payments
proceeds over the cost of the expropriated property will not
do not exceed 25% of the selling price. Sec.
be considered taxable income. Any excess of the proceeds
49(C) over the replacement asset will be considered taxable gain
9) Gross Income

A. Definition - All income derived from whatever source, B. Concept of income from whatever source derived
including (but not limited to the following items) (GRIP CARD
GPP) Income from whatever sources derived means inclusion of all
income not expressly exempted within the class of taxable
Gross income derived from the conduct of trade or income under the laws irrespective of the voluntary or
business or the exercise of a profession involuntary action of the taxpayer in producing the gains, and
Rent Income whether derived from legal or illegal sources.
Interest Income
Prizes & winnings
 EXAMPLES OF INCOME EXAMPLES OF INCOME nothing of such dividends
FROM LEGAL SOURCES FROM ILLEGAL SOURCES forms part of income within
Employees salary, bonus; Gambling, kidnapping, Services (Compensation for Place of performance of
and commissions/rebates extortion, smuggling, labor/personal services) service
embezzlement Rentals Location of the
property/interest in such
C. Gross income v. net income v. taxable income property
Royalties Place of use or location of
GROSS INCOME is described as income from intangibles (such as patents,
whatever source, including compensation for trademarks, etc.) giving rise
services; the conduct of trade or business or the to royalties
exercise of profession; dealings in property; interests; Gain on sale of Real property Location of property
rents; royalties; dividends; annuities; prizes and Gain on sale of personal Place of Sale
winnings; pensions; and a partner's distributive share property other than shares of
in the net income of a general professional stock in a domestic
partnership. [Sec. 32 of the Tax Code as cited in corporation purchased in one
Commissioner of Internal Revenue v. PAL, Inc., G.R. country and sold in another
No. 180066, July 7, 2009] Gain on sale of shares of Philippines regardless of
stock in a domestic where sold
NET INCOME means gross income less statutory corporation
deductions and exemptions. It is referred to as
Taxable Income under the NIRC. NOTE:

ROYALTIES (from property or use of property

TAXABLE INCOME means the pertinent items of located in Philippines), includes:
gross income specified in this Code, less the a) Use of/the right/privilege to use in the
deductions and/or personal and additional Philippines any copyright, patent, design or
exemptions, if any, authorized for such types of model, plan, secret formula or process,
income by this Code or other special laws. [Sec. 31 goodwill, trademark, trade brand or other like
of the Tax Code as cited in Commissioner of Internal property or right
Revenue v. PAL, Inc., G.R. No. 180066, July 7, b) Use of/the right to use in the Philippines any
2009] industrial, commercial or scientific
D. Classification of Income as to Source equipment
c) Supply of scientific, technical, industrial or
1) Gross income and taxable income from sources commercial knowledge or information
within the Philippines d) Supply of any assistance that is ancillary &
subsidiary to, & is furnished as a means of
a) GROSS Income from Sources within the enabling the application or enjoyment of, any
Philippines such property/right in (a) above, such
equipment in (b) above or knowledge/info in
INCOME TEST OF SOURCE OF (c) above
INCOME e) Supply of services by a nonresident
Interests Residence of Debtor
person/his employees in connection with the
Dividends a) From domestic
use of prop./rights belonging to, or the
corporation income within
installation or operation of any brand,
b) From foreign
corporation: Income within machinery or other apparatus purchased from
if more than 50% of the such nonresident person
gross income of such f) Technical advice, assistance or services
foreign corp. for the 3-yr. rendered in connection with technical mgt.
period ending with the close /admin. of any scientific, industrial or
of the taxable year prior to commercial undertaking, venture or project
the declaration of dividends g) The use of or the right to use:
(or for such part of such motion picture films
period as the corporation films or video tapes for use in
has been in existence) was
connection with TV
derived from sources w/in
the Philippines tapes for use in connection with
radio broadcasting
Extent:
Phil GI x Dividend = Most favored nation clause Royalty income paid
Income within by a domestic corporation to a non-resident foreign
Total GI corporation which is a resident of a Contracting State
with which the Philippines has an effective tax treaty
Income without, if less than is generally subject to 15% final withholding tax, but
50% of the gross income of the rate may be reduced to 10% for certain royalty
such foreign corp. for the 3- payments or under the most-favored-nation-clause of
yr. period ending with the the tax treaty, such as the Philippines-US Tax Treaty.
close of the taxable year
The purpose of the clause in a tax treaty is
prior to the declaration of
dividends was derived from to grant to the other Contracting State a tax
sources w/in the treatment that is no less favorable than that
Philippines. Therefore,
 which is granted to the most favored use of or for the privilege of using
among other countries. w/o the Philippines, patents,
It means each party to the treaty pledges copyrights, secret processes &
that any tax concession given to any other formulas, goodwill, trademarks,
treaty country will also be extended to the trade brands, franchises & other like
other party to the treaty; that is, it will not properties
grant more favorable terms to other treaty Gains, profits & income from the
countries without granting the same sale of real property located without
concession to the treaty partner involved. the Philippines

b) TAXABLE Income from Sources within the Tip: The foregoing enumeration is
Philippines merely the reverse of the
General Rule: enumeration of gross income from
sources within the Philippines.
Gross Income (within the Philippines) Hence, so long as you know which
( - ) Deductions (attributable to GI within) income are considered as income
Taxable Income within, all else are income without.
By attributable is meant that the expense can be
identified as the expense that generated the income. b) TAXABLE Income from Sources Without
the Philippines
For instance, if ABC Corp. manufactures clothes and
sells it in the Phils. and sells shoes in the US. The cost General Rule:
of manufacturing the clothes are attributable to the
income generated from selling the clothes. Since the Gross Income (within the Philippines)
income from the sale of clothes is income within, then ( - ) Deductions (attributable to GI within)
the expense for manufacturing them must be deducted Taxable Income
from gross income within. However, the cost of Deductions:
selling the shoes may not be deducted from income Expenses, losses & other deductions
within since it is not attributable to income within. properly apportioned/ allocated
Rather, it is specifically attributable to income thereto and a ratable part of
without. expenses, interests, losses and other
Deductions: deductions which cannot definitely
Expenses, losses & other deductions properly be allocated to some items or class
allocated thereto and a ratable part of expenses, of gross income
interests, losses and other deductions effectively
connected with the business conducted exclusively 3) Income partly within or partly without the
within the Philippines which cannot definitely be Philippines
allocated to some items or class of gross income
These are:
Such deductions shall be allowed only if fully Income from services rendered
substantiated by all info necessary for its calculation partly within and partly without;
Exceptions: No deduction for interest paid/incurred Income from sale of personal
abroad shall be allowed unless: property produced (in whole or in
a) Indebtedness was actually incurred part) within and sold without the
b) Indebtedness must be that of the taxpayer Philippines;
c) Interest must be legally due and stipulated in Income from sale of personal
writing property produced (in whole or in
d) Interest must be paid or incurred during the part) without and sold within the
taxable year Philippines.
e) Indebtedness must be in connection w/ the
conduct or operation of trade/business in the PERSONAL PROPERTY INCOME
Philippines Manufacturing Business
Produced here and sold Income partly within, partly
without without
2) Gross income and taxable income from sources
Produced here and sold here Income within
without the Philippines
Produced abroad and sold Income partly within, partly
here without
a) GROSS Income from sources without the Trading Business
Philippines Purchased without and sold Income within
Interests (other than those derived within
from sources within the Philippines) Purchased within and sold Income without
Dividends (other than those derived without
from sources within the Philippines) Purchased within and sold Income within
Compensation for labor or personal within
services performed without the Taxpayer sells it abroad Income partly within, partly
Philippines through a sales office without
Rentals or royalties from property
located without the Philippines or
from any interest in such property
including rentals/royalties for the
As for unallocated expenses, meaning those which are not e) If the grant of fringe benefits to the employee is
entirely attributable to either income within or without, such required by the nature of, or necessary to the trade,
expenses shall be allocated using the following formula: business or profession of the employer; or
f) If the grant of the fringe benefit is for the
(Income without / Worldwide income) x Unallocated convenience or advantage of the employer.
Expense = Deductions from Income Without
14. De Minimis Benefits (Last amended by RR No. 5-
(Income within / Worldwide income) x Unallocated 2011)
Expense = Deductions from Income Within a) Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year
b) Monetized value of vacation and sick leave credits
E. Sources of income subject to tax paid to government officials and employees
c) Medical cash allowance to dependents of
1) Compensation Income
employees not exceeding P750 per semester or
In general, the term "compensation" means all
P125 per month
remuneration for services performed by an employee d) Rice subsidy of P1,500 or 1 sack of 50 kg rice
for his employer under an employer-employee amounting to not more than P1,500
relationship, unless specifically excluded by the Code. e) Uniform and clothing allowance not exceeding
Included only when the taxpayer is subject to Net P4,000 per year
Income Tax. f) Actual yearly medical benefits not exceeding
P10,000
2) Fringe Benefits g) Laundry allowance of P300 per month
Any good, service or other benefit furnished or granted h) Employee achievement awards, for length of
in cash or in kind by an employer to an individual service or safety achievement in the form of
employee (except rank and file employees) such as, tangible personal property other than cash or gift
but not limited to the following: certificate, with an annual monetary value not
exceeding P10,000 received by the employee under
a) Housing
an established written plan which does not
b) Expense account
discriminate in favor of highly paid employees
c) Vehicle of any kind i) Gifts given during Christmas and major anniversary
d) Household personnel (such as maid, driver & celebrations not exceeding P5,000 per employee
others) per annum
e) Interest on loan at less than market rate to the j) (j) Daily meal allowance for overtime work and
extent of the difference between the market night/graveyard shift not exceeding 25% of the
rate & actual rate basic minimum wage on a per region basis
f) Membership fees, dues & other expenses
borne by the employer for the employee in 15. Convenience of the Employee Rule
social & athletic clubs or other similar When a fringe benefit is given solely for the convenience of
organizations the employer, the fringe benefit is exempt from FBT because
the employee does not recognize income from the benefit.
g) Expenses for foreign travel
h) Holiday & vacation expenses
Ex. Expenditure on housing of engineer within factory
i) Educational assistance to the employee or his premises is not subject to FBT
dependents
j) Life or health insurance & other non-life General Rule: If housing is located outside, it is subject to
insurance premiums or similar amounts in FBT.
excess of what the law allows
Exception: If the nature of the employers business is
Special Rules on Fringe Benefit Tax hazardous to health of employee, housing can be located
outside the factory without being subject to FBT.
12. Nature of FBT
Final tax of 32% imposed on the grossed-up monetary value Ex. If employee is given housing allowance in cash, this
of fringe benefit furnished/granted to the Employee by the will constitute compensation of the employee (income from
Employer, whether an individual or corp. whatever source). However, if it qualifies as a Fringe
Benefit, then it will be subject to FBT and the burden is
Fringe benefit is an income of the employee subject to FBT shifted to employer.
but is payable by the Employer. Employer can deduct FBT
from its taxable income.
3) Professional Income
Fringe benefits are only for corporate officers / management. Income earned from the practice of profession
For rank and file, it is called an allowance. Allowances provided there is no employer-employee relationship
(benefits to rank and file) are not subject to FBT but rather between him and his clients.
compensation subject to income tax. Profession is primarily any endeavor or work
requiring specialized training in the field of learning,
13. Fringe Benefits not subject to FBT
a) Fringe benefit authorized & exempted from tax art, or science engaged in as a means of livelihood or
under special laws profit of an individual or group of individuals.
b) Contributions of employer for the benefit of the
employee to retirement, insurance & 4) Income from Business
hospitalizations benefit plan In the case of manufacturing, merchandising, or
c) Benefits given to the rank & file employees, mining business, gross income means the total sales,
whether granted under a CBA or not less cost of goods sold, plus any income from
d) De minimis benefits investments and from incidental or outside operations
or sources. In determining gross income, deductions
should not be made for depreciation, depletion, selling
 expenses or losses, or for items not ordinarily used in Actual gain is the amount realized from
computing the cost of goods sold. the sale of the asset in excess of the cost to
In the case of sellers of services, their gross income is the taxpayer.
computed by deducting all direct costs and expenses
as prescribed in RMC Nos. 04-03 and 3008. Presumed gain is the presumption of the
law of the existence of a gain from sale of
5) Income from Dealings in Property real property which subjects the said sale to
a) Types of Properties CGT of 6% based on the selling price or
i. Ordinary assets assets that are used primarily FMV whichever is HIGHER.
in the ordinary course of trade or business, such
as iii. Long term capital gain v. Short term capital
Stock in trade of taxpayer gain
Property which would properly be
included in an inventory of the taxpayer, if In case of individuals, the percentages of gain or
on hand loss to be taken into account shall be:
Merchandise inventory 100% if the capital asset has been held for
Depreciable assets used in the 12 months or less; and
trade/business 50% if the capital asset has been held for
Real property used in trade/business more than 12 months

ii. Capital Assets properties of a taxpayer other In case of a corporation, the holding period is not
than ordinary assets, such as applicable; the capital gain and loss are to be
Stock and securities held by taxpayers reported in full amount regardless of the number
other than dealers in securities Interest in of years the capital asset is held.
partnership and joint
iv. Net capital gain, net capital loss
Interest in partnership and joint venture
Net capital gain is added to ordinary gain.
Goodwill
Net capital loss is not deductible from
Real property not used in trade or business
ordinary gain.
like residential house and lot
Investment property v. Computation of the amount of gain or loss

b) Types of Gains from Dealings in Property GAIN = excess of the amount realized over
i. Ordinary gain (loss) v. Capital gain (loss) the basis/adjusted basis (selling price >
Ordinary gain is derived from the sale or cost)
exchange of ordinary assets including
gains from performance of services and LOSS = excess of the basis/adjusted basis
business; included in the gross income. over amount realized (cost > selling price)

Ordinary loss is the excess of business AMOUNT REALIZED = money

expenses and losses over the business received + fair market value of the property
income of the taxpayer derived from the (other than money, if any) received
sale or exchange of ordinary assets;
deductible from gross income. I. Cost or basis of property sold:

BASIS FOR DETERMINING

Capital gain is the excess of value MODE OF GAIN/LOSS FROM
received over the determined cost from the ACQUISITION SALE/DISPOSITION OF
sale or exchange of capital asset. The PROPERTY
following are the rules on the taxability of Purchase Cost of property acquired
capital gains: on/after 3/1/1913
Sale of Stocks of a domestic Inheritance Fair market value as of the date of
corporation subject to CGT acquisition (at the time of death)
Gain derived from sale of real Gift the cost to the donor or to the
property in the Philippines previous owner who did not
subject to CGT acquire it by gift; BUT, if such
Other Capital Assets excess of basis > FMV at the time of the
gift, the basis shall be such FMV
the gains from sales or exchanges
for the purpose of determining
of other capital assets over the
the loss
losses from such sales or Acquired for less than Amount paid by the transferee
exchanges; included in the gross adequate consideration
income Property acquired Basis of stock or securities
where gain or loss is not received by transferor:
Capital Loss is the excess of the losses recognized (tax-free
from sales or exchanges of other capital exchanges) Same as the basis of property,
assets over the gains from such sales or stock/ securities exchanged
exchanges; deductible only from capital 1) increased by:
gains. Dividends
Amount of any gain
ii. Actual gain v. Presumed gain recognized by the
exchange
 2) decreased by: vi. Income tax treatment of capital loss
money received
fair market value of the Limitation on Capital Loss
other property received General rule: Allowed only to the extent
liability assumed by the of the gains from such sales or exchanges,
transferee hence, the net capital loss is not
deductible from ordinary income;
Basis of the property transferred applicable to both corporations and
in the hands of the transferee: individuals.
Exception: Losses from such sale
Same as it would be in the hands incurred by a domestic bank/trust
of the transferor increased by the company substantial part of business is
amount of the gain recognized to
receipt of deposits, sell any bond,
the transferor on the transfer.
debenture, note or certificate or other
evidence of indebtedness issued by any
II. Cost or basis of the property exchanged in corporation, with interest coupons or in
corporate readjustment registered form (including one issued by
Non-recognition of gain or loss if exchange of the government or political subdivision)|
property is solely in kind:
A corporation exchanges property solely for Net Capital Loss Carry-over
stocks in a corp. (both parties to Corporations cannot carry over a net
merger/consolidation), or capital loss
A shareholder exchanges stock in a corp. for If net capital loss is sustained in any
the stock of another corp. (both corps. are taxable year, such loss is treated in the
parties to the merger/consolidation), or succeeding taxable year as a loss from the
A security holder of a corp. exchanges his sale/exchange of a capital asset held for
securities in such corp. solely for stock or not more than 12 mos. (100% deduction)
securities in another corp. (both corps. are Such net capital loss that should be carried
parties to the merger/consolidation) over should not exceed the net income for
If property is transferred to a corporation by the year Incurred (prior years net
a person in exchange for stock/unit of income)
participation in such corporation of which as Example:
a result of such exchange such person, NET INCOME in 2011 = P6,000
alone/together with others, not exceeding 4 NET CAPITAL LOSS in 2012 = 10,000
persons, gains control of said corporation Amount deductible in 2012 is
P6,000 only since it should not
III. Recognition of gain or loss in exchange of property exceed the net income of the
General Rule: the entire amount of the gain taxable year where the loss was
or loss shall be recognized upon the sale or incurred. Note that the allowable
exchange of property capital loss to be deducted in
Exception: no gain or loss is recognized 2012 (i.e. P6,000) is only to the
(tax-free exchanges) extent of the capital gain for
If in pursuance to a plan of merger or 2012.
consolidation, Net income should be
a corporation exchanges property understood as TAXABLE
solely for stocks in a corp. (both income according E.O. 37
parties to merger/consolidation), or
vii. Dealings in Real Property situated in the
A shareholder exchanges stock in a
Philippines
corp. for the stock of another corp.
(both corps. are parties to the Involves the sale or other disposition of real
merger/consolidation), or property classified as capital asset located in
A security holder of a corp. the Philippines by a non-dealer in real estate.
exchanges his securities in such If the sale is made by a dealer in securities
corp. solely for stock or securities in or if the real property is an ordinary asset,
another corp. (both corps. are parties the resulting gain or loss will be considered
to the merger/consolidation) as ordinary income.
Tax Base: the higher between
If property is transferred to a corporation by
Gross selling price
a person in exchange for stock/unit of
Prescribed zonal value of real
participation in such corporation of which as
properties determined by the
a result of such exchange such person,
Commissioner
alone/together with others, not exceeding 4
Fair Market Value as determined by
persons, gains control of said corporation
the Provincial and City Assessors
Control is ownership of stocks in a
NOTE: Gain or loss is immaterial since there
corporation possessing at least 51% of the
is a conclusive presumption of gain.
total voting power of all classes of stocks
entitled to vote. An individual taxpayer has the option to treat
the capital gain as subject to 6% CGT or 5-
32% graduated tax IF the buyer of the real
 property is the Government or any of its to travel or studies or work abroad or such
political subdivision, or GOCC other similar circumstances. Such principal
residence must be characterized by
Tax Rate: 6% permanency in that it must be the dwelling
viii. Dealings in shares of stock of Philippine house in which, whenever absent, the said
Corporations individual intends to return.

Listed and traded in the stock exchange General Rule: The address shown in the ITR
(Stock Transaction Tax) is conclusively presumed as the principal
residence.
Tax Rate one-half of one percent (1/2 of
1%) Exception: If the taxpayer is not required to
file a return, certification from Barangay
Tax Base Gross selling price or gross value Chairman or Building Administrator shall
in money of the shares of stock sold, bartered, suffice.
exchanged or otherwise disposed which shall
be assumed and paid by the seller or transferor Requisites:
through the remittance of the stock transaction Sale or disposition of the old actual
tax by the seller or transferor's broker. principal residence
By a citizen or resident alien
Not listed and not traded in the stock exchange Proceeds of which is utilized in
(Capital Gains Tax) acquiring or constructing a new
principal residence within 18
Amount of Capital Gain: Tax Rate calendar months from date of sale or
Not over Php100,000 5% disposition
On any amount in excess of 10% Notify the Commissioner within 30
Php100,000 days from the date of sale or
disposition through a prescribed
Tax Base net capital gains realized during return of his intention to avail tax
the taxable year from the sale, barter, exemption
exchange or disposition of shares of stock not Can be availed of only once every 10
listed and not traded in the stock exchange. years
The historical cost or adjusted basis
Dealer in securities (Ordinary Income) of his old principal residence shall be
carried over to the cost basis of his
The gain on this type of transaction shall be new principal residence
considered as ordinary income subject to 5%- If there is no full utilization, the
32% for individuals and 30% for corporations. portion of the gains presumed to have
been realized shall be subject to
NOTE: capital gains tax, and
The capital losses realized from the The 6% capital gains tax due shall be
sale or disposition of stocks not listed deposited with an authorized agent
and traded during the taxable year are bank subject to release upon
deductible only to the extent of certification by the RDO that the
capital gains from the same type of proceeds of the sale have been
transaction during the same period. utilized
If the transferor of the shares is an
individual, the rule on holding period 6) Passive Investment Income
and capital loss carry-over will not
apply. As a rule, passive income subjected to final tax is no
Non-deductibility of losses on wash longer included in the computation of the annual
sales and short sales taxable income.
Gains from sale of shares of stock in TAX RATE ON CERTAIN PASSIVE
a foreign corporation are not subject INCOME ON CITIZENS AND FINAL TAX
to capital gains tax but to graduated RESIDENT ALIENS
rates either as capital gain or ordinary 1.Interest under the expanded foreign 7.5%
income depending on the nature of currency deposit system [Exempt for
the trade or business of the taxpayer. nonresident
aliens
ix. Sale of principal residence [Nonresident citizens: Exempt] engaged in
trade or
The term "Principal Residence" shall refer to business
the dwelling house, including the land on 2. Royalty from books, literary works, & 10%
which it is situated, where the husband and musical compositions
wife or an unmarried individual, whether or 3. Royalty other than above 20%
not qualified as head of family, and members 4. Interest on any current bank deposit,
of his family reside. Actual occupancy of such yield or other monetary benefits from 20%
principal residence shall not be considered deposit substitute, trust fund & similar
interrupted or abandoned by reason of the arrangement
individual's temporary absence therefrom due 5. Prize exceeding P10,000 20%
6. Other winnings, except Phil Charity 20% Any distribution made by a corporation to its
Sweepstakes & Lotto shareholders out of its earnings or profits and
7. Dividend from a domestic corporation, or payable to its shareholders, whether in money
from a joint stock company, insurance or or in other property.
mutual fund company, & regional operating Types of Dividends:
headquarters of multinational company or 10% Cash Dividend valued and
share in the distributive net income after tax [20% for
taxable to the extent of amount of
of a partnership (except a general non-resident
money received by the stockholder.
professional partnership), joint stock or aliens
joint venture or consortium taxable as a engaged in Stock Dividend generally, pure
corporation trade or stock dividends are tax-exempt
business] except if a corporation cancels or
Note: Dividends from foreign corporation redeems stock issued as a dividend
Citizens - computed under Sec. 24 at such time and in such manner as
(a) tax table to make the distribution and
Resident aliens not taxable cancellation or redemption, in
(income derived from abroad) whole or in part, essentially
8. Interest on long-term deposit or Exempt equivalent to the distribution of a
investment in banks (with maturity of 5 taxable dividend, the amount so
years or more) distributed in redemption or
cancellation of the stock shall be
TAX RATE ON INTEREST INCOME FROM considered as taxable income to the
FOREIGN CURRENCY DEPOSIT [RR No. 10-98] extent that it represents a
1. Interest income actually received by 7.5% final distribution of earnings or profits.
a resident citizen or resident alien from withholding tax Property Dividend property of an
FCD issuing corporation distributed as a
2. If deposited by an OCW or seaman Exempt dividend; valued and taxable to the
or nonresident citizen extent of fair market value of the
3. If in a bank account in the joint 50% exempt/ 50% property received at the time of
names of an OCW and spouse final withholding declaration.
(resident) tax of 7.5% Liquidating Dividend return of
4. Interest income actually received by 7.5% final stockholders investment in the form
a domestic corporation or resident withholding tax of asset distribution upon corporate
foreign corporation from FCD
dissolution; generally, the gain
realized or loss sustained by the
a) Interest Income
stockholder, whether individual or
Interest income earned on currency bank
corporate, is a taxable income or a
deposits & yield or any other monetary
deductible loss, as the case may be.
benefit from deposit substitutes & from trust
funds & similar arrangement Script Dividend in the form of
promissory notes; taxable to the
Final Tax Rate extent of its fair market value and in
the year when the warrant was
RC, NRC, RA, NRA-ETB 20%
NRA-NETB 25% issued.
Tax Rules:
Interest Income received by an
individual (except a nonresident Tax Exempt:
individual) from a depositary bank Received from a Domestic
under the expanded foreign Corporation by:
currency deposit system Another domestic
corporation
Final Tax Rate 7.5% (RC, RA) Resident Foreign
Corporation
Interest income from long term
Pure Stock Dividend
deposit or investment in the form of
Pure Liquidating Dividend
savings, common or individual trust
fund, deposit substitutes, investment Subject to Final Tax (if received
management accounts & other from a Domestic Corporation)
investments evidenced by RC, NRC, RA 10%
certification in such form prescribed NRA-ETB 20%
by the BSP NRA-NETB 25%
Non-resident Foreign 15% subject to the
Final Tax Rate: rule on
For RC, NRC, RA, NRA-ETB Corporation tax credit for tax
Held for 5 years or more Exempt actually paid and tax
4 years to less than 5 years 5% deemed paid.
3 years to less than 4 years 12% Otherwise, subject to
less than 3 years 20% regular income tax
rate of 30% (35% for
For NRA-NETB 25% 2006-2008)

b) Dividend Income
 NOTE: Tax Sparing Credit c. Advance Payment/Long term lease
Tax reduced by the Philippines should be If the advance payment is a prepaid
fully applied or credited to the tax on rental without restriction as to use,
dividend income received by the non-resident the entire amount is taxable in the
foreign corporation imposed by the country year it is received.
of its domicile. This serves as an incentive by If the advance payment is a security
reducing their tax liability in the Philippines deposit which restricts the lessor as
and in their residence countries. to its use, such amount shall be
taxable only at the time it is applied.
Ex. Domestic corporation paid cash dividend
If the advance payment is a loan
to non-resident foreign corporation (NRFC)
deposit, or option money for the
organized in Brazil. This shall form part of
property or a security deposit to
NRFCs income therefore taxable also in
insure the faithful performance of
Brazil. The dividend received shall only be
certain obligations of the lessee,
taxed at 15% in the Phils (instead of 35%) IF
such amount shall not be taxable to
Brazil will reduce/credit at least 20% of the
the lessor unless the lessee violates
tax imposed in the Phils. from its tax imposed
the terms of the contract.
in Brazil. [See Sec. 28(B)(5)(b)]

c) Royalty income 7) Annuities, Proceeds from Life Insurance or Other

A payment or a portion of proceeds paid to the owner Types of Insurance
of a right for the use of such right.
From books, literary works and musical Annuity installment payments for life, or
sources for a guaranteed fixed period of time,
RC, NRC, RA, NRA-ETB 10% whichever is longer.
NRA-NETB 25% Amounts Excluded from Gross Income:
Other royalties Amount received by insured as return
RC, NRC, RA, NRA-ETB 20% of premium received either during the
NRA-NETB 25% term or at the maturity of the terms or
upon surrender of the contract
d) Rental income Proceeds of life insurance policies
Amount or compensation paid for the use or paid to the heirs/beneficiaries upon
enjoyment of a thing or a right and implies a the death of the insured;
fixed sum or property amounting to a fixed If such amounts are held by the insurer
sum to be paid at a stated time for the use of under an agreement to pay interest, the
property. interest payments shall be included in
Tax Treatment: the gross income
a. Income from Leasehold Improvements
when the lessee erected or built NOTE: The insured must die to avail of total
permanent improvements on the leased exemption. If he survives, there/s only partial
property, which will become the exemption to the extent that the proceeds
property of the lessor upon the expiration constitute return of capital (total amount of
of the lease, the value of the premiums previously paid).
improvements should be reported as 8) Prizes and Awards
income of the lessor either through: Amount in cash or in kind received by chance
Outright method the income or through luck are generally taxable unless
shall be recognized when the otherwise provided.
improvement is completed at its If the prizes are derived from sources within:
fair market value.
Spread-out method the PCSO and
estimated book value of the Taxpayer P10,000 or More than Lotto
leasehold improvement at the less P10,000 Winnings
end of the lease is spread out RC, NRC,
over the term of the lease and is RA, NRA- 5-32% 20% Exempt
reported as income for each ETB
year of the lease, an aliquot part NRA- 25% 25% Exempt
NETB
thereof.
Corporation 30% 30% Exempt
b. VAT added to rental/paid by the lessee
All forms of property for lease, If the prizes are derived from sources without
whether real or personal, are liable the said amount is included in the gross
to VAT. income for taxpayers who are taxable within
If advance payments are received and without the Philippines.
for the faithful performance of Prizes and awards made primarily in
certain obligations of the lessee, it is recognition of religious, charitable, scientific,
not subject to VAT. educational, artistic, literary or civic
A security deposit that is applied to achievement, but only if:
rental shall be subject to VAT at the Recipient was selected without any
time of its application action on his part
 Recipient not required to render C. Receipt of Tax Refund or Tax Credit
substantial future services as a Taxes, when refunded or credited,
condition of receiving the shall be included as part of gross
prize/award income in the year of receipt to the
Example: Nobel prize award extent of income tax benefit of said
Construed strictly, take note of 7 deduction. (Tax Benefit Rule)
categories. It does not include The following are non-taxable tax
athletic achievement. refunds: (non-deductible taxes)
Contemplates a rational selection Philippine income tax (but
process; cannot just be randomly FBT can be deducted from
selected. gross income as provided
Prizes, awards in sports competition for in RR 8-98))
sanctioned by national sports associations Income tax imposed by
whether held in Philippines or abroad authority of any foreign
Contemplates a particular country (except when the
competition, not a cumulative taxpayer signifies his
achievement (Ex. Sportsman of the desire to avail of the tax
year award does not qualify for credit for taxes of foreign
exemption) countries)
Estate & donors taxes
9) Pensions, retirement benefit or separation pay Taxes assessed against
Pension lump sum payment or on a local benefits of a kind
staggered basis in consideration of services tending to increase the
rendered given after an individual reaches the value of the property
age of retirement. assessed
Amounts Excluded from Gross Income (for Final taxes, being in the
further discussion, please see Exclusions nature of income tax
from Gross Income) Special assessments
Retirement benefits received under
RA 7641 (Labor Code of the D. Income from any source whatever
Philippines) Income from whatever sources
Retirement benefits received under derived means inclusion of all
a Reasonable Private Benefit Plan income not expressly exempted
Amount received as a consequence within the class of taxable income
of separation for any cause beyond under the laws irrespective of the
control (death, sickness or other voluntary or involuntary action of
physical disability) the taxpayer in producing the gains,
Benefits received from a foreign and whether derived from legal or
government by resident of illegal sources, such as:
nonresident citizens or aliens who Gains from expropriation
reside permanently in the of property
Philippines Income derived from
Veterans benefits illegal sources
Benefits under SSS Compensation for
Benefits received from GSIS damages if it represents
payment for loss of
10) Income from any source whatever expected profits
A. Forgiveness of Indebtedness
Source rules in determining income from within and
A GIFT if effect of entire without
transaction is a reduction of Not
purchase price of property Taxable INCOME TEST OF SOURCE OF
acquired in prior year) INCOME
A CAPITAL TRANSACTION Interests Residence of Debtor
if the forgiveness of a Dividends a) From domestic
stockholder is equivalent to Taxable corporation income within
dividend distribution b) From foreign
Taxable corporation: Income within
A TAXABLE INCOME in Taxable if more than 50% of the
exchange of a service performed gross income of such
foreign corp. for the 3-yr.
B. Recovery of amounts previously written period ending with the close
off of the taxable year prior to
Recovery of bad debts previously the declaration of dividends
(or for such part of such
allowed as deduction in the
period as the corporation
preceding years shall be included as has been in existence) was
part of gross income in the year of derived from sources w/in
recovery to the extent of the income the Philippines
tax benefit of such deduction. (Tax
Benefit Rule)
 Extent: Rentals and royalties from property
Phil GI x Dividend = located without the Philippines or from
Income within any interest in such property including
Total GI rentals or royalties for the use of or for the
privilege of using without the Philippines,
Income without, if less than patents, copyrights and other like
50% of the gross income of properties.
such foreign corp. for the 3-
yr. period ending with the
close of the taxable year 3) Income partly within and partly without the
prior to the declaration of Philippines.
dividends was derived from
sources w/in the Items other than those specified above in (1) and (2)
Philippines. Therefore, shall be allocated or apportioned to sources within or
nothing of such dividends without the Philippines
forms part of income within
Services (Compensation for Place of performance of Exclusions from Gross Income
labor/personal services) service
1) Rationale: it refers to items that are not included in the
Rentals Location of the
property/interest in such determination of gross income either because:
property They represent return of capital or are not
Royalties Place of use or location of income, gain or profit.
intangibles (such as patents, They are subject to another kind of internal
trademarks, etc.) giving rise revenue tax.
to royalties They are income, gain or profit that is
Gain on sale of Real property Location of property expressly exempt from income tax.
Gain on sale of personal Place of Sale
property other than shares of 2) Exclusions v. Deductions v. Tax Credit
stock in a domestic Deduction: included in the gross income but
corporation purchased in one later deducted
country and sold in another
Exclusion: not included in the computation
Gain on sale of shares of Philippines regardless of
of gross income. Refers to income received
stock in a domestic where sold
corporation or earned but is not taxable as income
because of exemption by virtue of a law or
Situs of Income Taxation treaty.
Tax Credit: paid beforehand and is deducted
1) From sources within the Philippines from the tax liability of the taxpayer.
Interests derived from sources within the
Philippines 3) Under the Constitution
Dividends from domestic and foreign Sec. 4(3) Art. XIV of the 1987 Constitution
corporations provides that all assets and revenues of a
Compensation for services performed nonstock, non-profit educational institution
within the Philippines used directly, actually and exclusively for
Rentals and royalties from properties private educational purposes shall be exempt
located in the Philippines or any interest from taxation.
in such property including rentals or
royalties for the use of or for the privilege 4) Under the Tax Code (GIRL CRM)
of using within the Philippines, patents, a) Gifts, Bequests & devises
copyrights and other like properties. But, income from such property shall be
Sale of Real property located in the included in gross income
Philippines Must be characterized by disinterested
Sale of Personal property Gains, profit, generosity and pure liberality
and income derived from the purchase Difficult to establish gift situations if there is
within and its sale without the Phil, or an Employer-Employee relationship (A
from the purchase without and its sale bonus/assistance in recognition of service
within shall be treated as derived entirely rendered is not exempt)
from sources within the country in which If given under a) constraining force of any
the personal property is sold. Except: the moral or legal duty or b) from the incentive
gain from the sale of shares of stock in a of c) an anticipated benefit of an economic
domestic corporation shall be treated as nature or where it is a return for services
derived entirely from sources within the rendered, proceeds cannot qualify as a gift.
Phils. regardless where the said shares are Most critical is the givers intention or
sold. motive.
Can be a gift if given on account of filial
2) From sources without the Philippines relationship.
Interest other than those derived from
sources within the Philippines b) Income Exempt under Treaty
Dividends other than those derived from To the extent required by any treaty
sources within the Philippines obligation binding upon the Phil govt.
Compensation for services performed
without the Philippines c) Amount Received by Insured as Return of Premium
 Under life insurance, endowment, or annuity accumulated; & provided in the plan
contracts, received either during the term or that no part of the income shall be
at the maturity of the terms or upon surrender used for/be diverted to any purpose
of the contract other than for the exclusive benefit
of the said officials & employees
d) Life Insurance Service must be continuous
Proceeds of life insurance policies paid to the
heirs/beneficiaries upon the death of the You can avail of the benefits only once (once youve
insured availed of RPBP, you cannot avail of another RPBP);
If such amounts are held by the insurer under but you can avail of exemption under another ground
an agreement to pay interest, the interest such as SSS or GSIS benefits.
payments shall be included in the gross
BIR Ruling No. 125-98
income The phrase shall not have availed of the privilege under a
Insured must die to avail of total exemption. retirement benefit plan of the same or another ER found in
If he survives, there/s only partial exemption Sec. 32(B)(6)(a) of the Tax Code means that the retiring
to the extent that the proceeds constitute official must not have previously received retirement
return of capital (total amount of premiums benefits from the same or another employer who has a
previously paid). qualified retirement benefit plan.

e) Compensation for Injuries or Sickness

3. Amount received as a consequence of
Received through Accident/Health Insurance
separation for any cause beyond control
or Workmens Compensation Act, as
(death, sickness or other physical disability)
compensation for personal injuries/sickness
+ amount of damages received on account of Sickness must be job threatening
such injuries/sickness (must render taxpayer incapable of
Damages will be exempt only if they arise working) (Ex. Does not include
together with personal injury; however, if STD)
damages only amount to return of capital, it Benefits from separation due to
is exempt (Ex. Damages from car accident retrenchment come under
exempt only if claim includes compensation exemption (no choice/option; but if
for personal injury. If no personal injury, the Employee avails of an optional
damages for car wreckage will only be early retirement plan, he cannot
exempt to the extent of the amount of the reason that he was separated for
actual damage return of capital) reasons beyond his control,
Must be physical injury, not injury to rights. therefore, he cannot claim
exemption of the benefits on this
f) Retirement Benefits, Pensions, Gratuities ground but he can claim under
Retirement benefits receive under R.A. 7641 other grounds such as RPBP or RA
(Labor Code of the Philippines) and those 7641.
received in accordance with a Reasonable BIR Ruling No. 143-98
Private Benefit Plan The terminal leave pay of government employees whose
employment is coterminous is exempt since it falls within the
1. R.A. 7641 meaning of the phrase for any cause beyond the control of
Conditions: (i) at least 60 years old; the said official or EE found in Sec. 32(B) of the CTRP.
(ii) 5 years of service at time of
retirement
4. Benefits received from a foreign government
Availed if there is no reasonable
by resident of nonresident citizens or aliens
private benefit plan (benefits under
who reside permanently in the Philippines
this option is less)
Limited exemption: month salary
5. Veterans benefits
for every year of service. In RPBP,
6. Benefits under SSS
all is excludable.
7. Benefits received from GSIS
2. Reasonable Private Benefit Plan (RPBP)
g) Miscellaneous Items
Conditions: (i) at least 50 yrs old;
1. Income derived by foreign government (from
(ii) in the service of same employer
investments in Philippines in loans, stocks,
for at least 10 years at time of
bonds or other domestic securities)
retirement
Must be approved by BIR Refers only to passive income. If the foreign
A pension, gratuity, stock bonus or government engages in trade, income is
profitsharing plan maintained by an taxable.
employer for the benefit of some or
all of his officials/employees, 2. Income derived by govt/its political
wherein contributions are made by subdivisions (from public utility or exercise
such employer for the essential governmental function)
officials/employees, or both, for the Key: Income should accrue to government; if
purpose of distributing to such the income is retained by the public utility, it
officials & employees the earnings is not exempt look at charter of political
& principal of the fund thus
 subdivision/GOCC to determine whether its fees and charges of any kind, whether local or national,
income accrues to the government or not. while the private sector participating in socialized
housing shall be exempt from taxes on project-related
3. Prizes, awards in sports competition income directly realized from the development and
sanctioned by national sports associations capital gains tax on sale of raw lands for use in
whether held in Philippines or abroad socialized housing.

Contemplates a particular competition, not a c) R.A. 7653 New Central Bank Act (as amended by
cumulative achievement (Ex. Sportsman of the R.A. 8791)
year award does not qualify for exemption) The BSP is exempt from all national, provincial,
municipal and city taxes for a period of five years. It
4. Prizes & Awards is exempt from DST under RA 9243.
in recognition of religious, charitable,
scientific, educational, artistic, literary d) R.A. 7916 PEZA Law (as amended)
or civic achievement, but only if: PEZA-registered enterprises are given income tax
recipient was selected without any holidays of 6 or 4 years from the date of commercial
action on his part operations if their activities are considered pioneer and
recipient not required to render non-pioneer, respectively.
substantial future services as a
condition of receiving the prize/award e) R.A. 9178 Barangay Micro Business Enterprises
Example: Nobel prize award (BMBE) Act of 2002
Construed strictly, take note of 7 BMBE shall be exempt from income tax from income
categories. It does not include athletic arising from the operation of the enterprise.
achievement
Contemplates a rational selection
process; cannot just be randomly Deductions from Gross Income
selected. 1) General Rules

5. 13th month pay & other benefits (i.e. To be deductible as a business expense:
productivity incentives & Christmas bonus)
the total of which does not exceed P30,000 a) The expense must be ordinary and necessary,
b) It must be paid or incurred within the taxable year, and
If the benefit exceeds P30,000, only the excess c) It must be paid or incurred in carrying on a trade or
will be taxable. business.
d) The expense must be substantially proved by evidence
6. GSIS, SSS, Medicare, Pag-ibig contributions or records the deductions claimed under the law,
& union dues of individuals
otherwise, the same will be disallowed. Esso Standard
Eastern, Inc. v. Commissioner of Internal Revenue,
7. Gains from the sale of bonds, debentures or [G.R. Nos. L-28508-9, July 7, 1989]
other certificates of indebtedness with a
maturity of more than 5 years NOTE: Any income payment which is otherwise
deductible under the Code shall be allowed as a
8. Gains from redemption of shares in mutual deduction from the payor's gross income only if it is
fund shown that the income tax required to be withheld has
been paid.
5) Under a Tax Treaty
Income of any kind, to the extent required by 2) Return of capital (cost of sales or services)
any treaty obligation binding upon the a) Sale of inventory of goods by manufacturers and
Government of the Philippines, is exempt dealers of properties the portion of the receipt
from income tax. representing the cost of goods manufacture and sold
Business profits of a foreign corporation (manufacturers) and cost of sales (dealers) are
organized under the laws of a treaty country deducted from the gross sales.
from sources within the Philippines are not b) Sale of stock in trade by a real estate dealer and dealer
subject to Philippine income tax, unless such in securities generally, the return of capital are not
profits are attributable to a permanent allowed to be deducted from the gross sales. Rather,
establishment of the foreign corporation they are required to deduct the total cost specifically
created or deemed created in the Philippines. identifiable to the real property or shares of stock sold
or exchanged.
6) Under Special Laws c) Sale of services not allowed to deduct any return of
a) R.A. 6938 Cooperative Code of the Philippines capital; thus the entire gross receipts are treated as part
Agricultural multi-purpose cooperative registered of income.
with the Cooperative Development Authority is
exempt from ordinary income tax on its transactions 3) Itemized Deductions (BELT DID CRP)
with members and non-members for a period of ten
(10) years from the date of registration. Thereafter, Bad Debts
the income tax exemption shall be limited to Expenses
business transactions with members only. Losses
Taxes
b) R.A. 7279 Urban Development Housing Act of 1992 Depreciation
The National Housing Authority is exempt from all Interest
 Depletion of oil & gas wells & mines deductible over time, such as in the form of
Charitable & other contributions depreciation.
Research & Development
Pension trusts NOTE: Expenses allowable to private educational
institutions: In addition to the expenses allowable as
a) Expenses deductions, a private educational institution has the
1. Requisites for deductibility option to elect either:
Must be ordinary AND necessary (both a) to deduct as expense those otherwise
must be complied with) trade, business considered as capital outlays of depreciable
or professional expenses only assets for the expansion of school facilities
Must be paid or incurred during the b) to capitalize asset & deduct allowance for
taxable year depreciation
Must be paid or incurred in carrying on
or which are directly attributable to, the
development, management, operation EXPENSES TO BE DEDUCTIBLE:
and or conduct of the trade, business or 1. Amount must be reasonable.
exercise of a profession. 2. Amount must be substantiated.
3. It is not contrary to law, public policy or morals.
There is yet to be a clear-cut criteria or a fixed test 4. Tax required to be withheld must have been paid to the
for determining the reasonableness of an BIR
advertising expense. There being no hard and fast
rule on the matter, the right to a deduction
depends on a number of factors such as but not 4. Salaries, wages & other forms of compensation
limited to: the type and size of business in which for personal services actually rendered (including
the taxpayer is engaged; the volume and amount grossed-up monetary value of FB); but the final
of its net earnings; the nature of the expenditure tax should have been paid
itself; the intention of the taxpayer and the general Among the ordinary and necessary
economic conditions. It is the interplay of these, expenses paid or incurred in carrying on
among other factors and properly weighed, that any trade or business may be included a
will yield a proper evaluation. We find the subject reasonable allowance for salaries or
expense for the advertisement of a single product other compensation for personal services
to be inordinately large. Therefore, even if it is actually rendered. The test of
necessary, it cannot be considered an ordinary deductibility in the case of compensation
expense deductible under the Tax Code. [CIR v. payments is whether they are reasonable
General Foods Phils.] and are, in fact, payments purely for
service.
2. Substantiation Requirements: sufficient evidence
(i.e. official receipts, financial statements or other 5. Travel expenses in pursuit of trade, business/
adequate records) to substantiate: profession
Amount of expense deducted Traveling expenses include
Direct connection/relation of the expense to transportation expenses and meals and
the development, management operation lodging incurred solely on business.
&/or conduct of the trade, business or
profession of the taxpayer 6. Cost of materials
In general, the cost of materials or
3. Classification of Expenses: supplies is deductible as expense when
Ordinary expense normal or usual in consumed or used in business operation
relation to the taxpayers business and the during the taxable period. Unused
surrounding circumstance. supplies and supplies not used for
business operation are not allowable
Necessary expense appropriate and helpful deductions.
in the development of taxpayers business If the materials or supplies are used
and are intended to minimize losses or to directly or indirectly in the production of
increase profits. These are the day to day the product, the related cost shall for part
expenses. of the cost of the product and will be
deductible as such when the products are
While illegal income will form part of the sold.
income of the taxpayer, expenses which
constitute bribe, kickback, and other similar 7. Rentals &/or other payments as lessee, user or
payment, being against law and public policy possessor
are not deductible from gross income. On the accrual basis, rent is deductible as
Business expense expenditure related to expense when liability is incurred during
the business that is deductible in the year the period of use. While on cash basis,
incurred, in the same taxable year. rent is deductible when incurred and
paid.
Capital expense expenditure that improves An advance payment is not deductible
or adds to the value of your property or expense of the lessee until the period is
equipment. Not immediately deductible. It is used, although the lessor may be
 required to report the amount when Interest must have been stipulated in
received. writing
Interest must be legally due
8. Repairs and maintenance Interest payment arrangement must not
Incidental (minor) repairs deductible be between related taxpayers
from gross income; does not materially Interest must not be incurred to finance
add to the value of the property nor petroleum operations
appreciably prolong its life, but keep it in In case of interest incurred to acquire
an ordinarily efficient operating property used in trade, business or
condition. exercise of profession, the same was not
Major repairs (replacement) not treated as a capital expenditure
deductible since it prolongs the life of the The interest is not expressly disallowed
asset; should be capitalized. by law to be deducted from gross
income of the taxpayer.
9. Expenses under lease agreements
NOTE: General Rule On Deduction
10. Expenses for professionals The amount of interest expense paid or incurred
The cost of supplies in the practice of his within a taxable year of indebtedness in
profession, expenses paid in the connection with the taxpayers trade, business,
operation and repair of transportation or exercise of profession shall be allowed as a
equipment used in making professional deduction from the taxpayers gross income.
calls, dues to professional societies and LIMITATION ON DEDUCTION Interest
subscriptions to professional journals, expense shall be reduced by an amount equal to
the rent paid for office rooms, the the following % of interest income subjected to
expenses of the fuel, light, water, final tax:
telephone, etc.; used in such offices, and
the hire of office assistants. 1/1/00 38%
Amounts currently expended for books, 1/1/06 42%
furniture, and professional instruments 1/1/09 33%
and equipment, the useful life of which
Example: Year 2012
is short, may be deducted.
Interest expense = P2,000
But amounts expended for books,
Interest income subject to final tax = P1,500
furniture, and professional instruments
Deductible interest expense = P1,505
and equipment of a permanent character
[P2,000 (P1,500 x 33%)]
are not allowable as deductions.
11. Entertainment, amusement & recreation expenses The objective of the limitation is to discourage
directly connected to the devt., mgt. & operation tax arbitrage on back-to-back loans, the proceeds
& conduct of trade, business/ profession of which are invested in income earning interest
Directly connected to the development, that is subject to 20% final tax.
management and operation of the trade,
business of profession of the taxpayer. TAX ARBITRAGE - is a method of borrowing
Subject to a limit of without entering into a debtor/creditor
0.50% of net sales (gross sales less relationship, often to resolve financing and
sales returns/allowances & sales exchange control problems. In tax cases, back-
discounts) for taxpayers engaged in to-back loan is used to take advantage of the
sale of goods or properties; lower rate of tax on interest income and a higher
1% of net revenue (gross revenue rate of tax on interest expense deduction.
less discounts) for those engaged in
2. Deductible Interest Expense:
sale of services, including exercise
Interest on taxes, such as those paid for
of profession and use or lease of
deficiency or delinquency, since taxes
properties. [RR No. 10-02]
are considered indebtedness (provided
that the tax is a deductible tax, except in
12. Political campaign expenses
the case of income tax). However, fines,
penalties, and surcharges on account of
13. Training expenses
taxes are not deductible. The interest on
unpaid business tax shall not be
b) Interest
subjected to the limitation on deduction
1. Requisites for deductibility, as implemented by
of 42%/33%.
Rev. Reg. 13-2000:
Interest paid by a corporation on scrip
There must be an indebtedness
dividends.
There should be an interest expense paid
Interest on deposits paid by authorized
or incurred upon such indebtedness
banks of the BSP to depositors, if it is
Indebtedness must be that of the
shown that the tax on such interest was
taxpayer
withheld.
Indebtedness must be connected with the
Interest paid by a corporate taxpayer
taxpayers trade, business or exercise of
who is liable on a mortgage upon real
profession
property of which the said corporation is
Interest expense must have been paid or
the legal or equitable owner, even
incurred during the taxable year
 though it is not directly liable for the Interests*
indebtedness. Surcharges
Penalties or fines incident to
3. Non-deductible Interest Expense: delinquency (Sec. 80, Rev. Reg. 2)
Interest paid in advance through
discount or otherwise (in case of cash * Interest incurred or paid by a taxpayer on
basis taxpayer) all unpaid business-related taxes shall be
Allowed as deduction in the year the fully deductible from gross income and shall
debt is paid not be subject to the limitation on deduction
If indebtedness is payable in of 42%/33% of interest income. (sec. 4(c)
periodic amortizations, int. is Rev. Reg. 13-00)
deducted in proportion of the amt. of 1. Deductible Taxes
the principal paid. All taxes, national, or local, paid or incurred
during the taxable year in connection with the
Payments made: taxpayers profession, trade or business, are
Between members of a family deductible from gross income.
(include only brothers & sisters,
spouse, ancestors, & lineal 2. Requisites for Deductibility
descendants) It must be paid or incurred within
Between an individual & a corp. the taxable year
more than 50% in value of It must be paid or incurred in
outstanding stock is owned by such connection with the taxpayers
individual (except in case of trade, profession or business
distributions in liquidation) It must be imposed directly on the
Between 2 corps. More than 50% in taxpayer
value of outstanding stock owned by It must not be specifically excluded
same individual, if either one is a by law from being deducted from
personal holding co. or a foreign the taxpayers gross income
holding co. during the taxable yr.
preceding the date of sale/exchange 3. Non-Deductible Taxes:
Between grantor & fiduciary of any Philippine income tax (but FBT can
trust be deducted from gross income as
Between fiduciary of a trust & the provided for in RR 8-98)
fiduciary of another if same person Income tax imposed by authority of
is a grantor to each trust any foreign country (except when
Between fiduciary & a beneficiary the taxpayer signifies his desire to
of a trust avail of the tax credit for taxes of
Indebtedness is incurred by a foreign countries)
service contractor to finance Estate & donors taxes
petroleum corp. Taxes assessed against local
Interest on preferred stock which in benefits of a kind tending to increase
reality is dividend the value of the property assessed
Interest on unpaid salaries and Final taxes, being in the nature of
bonuses income tax
Interest calculated for cost keeping Special assessments
on account of capital or surplus
invested in business which does not Taxes, when refunded or credited, shall be
represent charges arising under included as part of gross income in the year
interest-bearing obligation of receipt to the extent of income tax benefit
Interest paid when there is no of said deduction. (Tax Benefit Rule)
stipulation for the payment thereof For NRAETB and RFC, taxes paid or
incurred are allowed as deductions only if
4. Interest subject to special rules and to the extent that they are connected from
Interest paid in advance income within the Philippines.
Interest periodically amortized Exceptions to the rule that only such persons
Interest incurred to acquire property on whom the tax is imposed by law can claim
used in trade or business deduction thereof:
Taxes of shareholder upon his interest as
At the option of taxpayer, the interest may be
such and paid by the corporation without
allowed as:
reimbursement from him, can be claimed
as expense (outright deduction) by the corporation as deduction.
as capital expenditure (subject to A corporation paying the tax for the
depreciation) holder its bonds or other obligation
containing a tax-free covenant clause
c) Taxes cannot claim deduction for such taxes
The term taxes refers to national and local taxes, paid by it pursuant to such covenant.
and means TAXES PROPER, hence, no
deductions are allowed for: 4. Limitations on Deductions
 In case of a nonresident alien individual NOTE: Allowable Tax Credit shall be the
engaged in trade/business in the Philippines, LOWER of the actual tax paid to the foreign
taxes to be deducted shall be allowed only if country, per country limitation and global
& to the extent that they are connected with limitation.
income from sources w/in the Philippines
When Credit for Taxes may be Taken:
5. Tax Credit a right of an income taxpayer The credit for taxes provided by
to deduct from income tax payable the Section 34(C) (3) to (7) may ordinarily
foreign income tax he has paid to his foreign be taken either in the return for the
country subject to limitation. year in which the taxes accrued or on
Who can claim? which the taxes were paid, dependent
Citizen upon whether the accounts of the
Domestic Corporation taxpayer are kept and his returns filed
Member of GPP upon the accrual basis or upon cash
Beneficiary of an estate or trust receipts and disbursements.

Who cannot claim? 6. Tax Credit v. Deduction

Alien individual (except Deduction: included in the gross
resident aliens deriving income income but later deducted.
from within & without the Tax Credit: paid beforehand and is
Phils., if there is reciprocity) deducted from the tax liability of the
Foreign Corporation taxpayer.

Substantiation Requirements The EXAMPLE:

tax credit shall be allowed only if the Actual Phil Income
taxpayer establishes to the Foreign Tax Tax due at
satisfaction of the Commissioner the Particulars Net Income Paid in 30%
following: Philippine
The total amount of the income Peso
derived from sources without Country A P50,000 P18,000
the Philippines; Country B 40,000 P11,000
The amount of income derived Phil-source 110,000
from each country, the tax paid income
or incurred to which is claimed Tot NI all P200,000 P29,000 P60,00
as a credit under said
paragraph, such amount to be A. PER COUNTRY LIMITATION
determined under rules and Country A : [(50,000/200,000 x 60,000)] = 15,000
regulations prescribed by the Country B : [(40,000/200,000 x 60,000)] = 12,000
Secretary of Finance; and ** maximum tax credit limit
All other information necessary
B. GLOBAL LIMITATION
for the verification and
[(90,000/200,000 x 60,000)] = P27,700
computation of such credits.
What amount may be taken as tax Computation of Allowable tax credit
credit: The amount of tax credit Tax Due on P200,000 P60,000
allowed is equivalent to the tax paid Less: Allowable Foreign Tax Credit
or incurred to a foreign country Country A P15,000
during the taxable year but NOT TO Country B 11,000 26,000
EXCEED THE FOLLOWING Tax Still Due P34,000
LIMITS:
Per Country Limitation ** Cannot exceed maximum tax credit limit
Amount of credit to tax NOTE: For limitation A, Country A, 15K is lower than the
actual; Country B, 11K (actual) is the lower amount; get the
paid/incurred to any country
total of all per country amounts. For limitation B, 27.7K is
shall not exceed same lower than the total of the actual amount. Comparing the
proportion of the tax against total of limitation A vs. B, the former is the lower amount so
which such credit is taken that is the allowable tax credit.

d) Losses
PAGE 44
1. Requisites for deductibility of ordinary loss
Loss must be of the taxpayer
Actually sustained during the taxable year
Global Limitation Total Not compensated for by insurance or other
amount of credit shall not forms of indemnity
exceed same proportion of tax Incurred in trade, business or profession OR
which such credit is taken property connected w/ trade, business or
profession lost through fires, storm,
shipwreck, or other casualties OR from
robbery, theft or embezzlement
Evidenced by a completed transaction
 Not claimed as a deduction for estate tax indirect ownership (2) merger of the
purposes subsidiary into the parent company.
Notice of loss must be filed with the BIR
within 30 days but not more than 45 days 3. Special Types of Losses
from the date of discovery of the casualty or Capital Losses deductions allowed only to
robbery, theft or embezzlement the extent of the gains from such sales or
exchanges of capital assets (does not apply to
The taxpayers failure to record in his books banks and trust companies)
the alleged loss proves that the loss had not losses from sale or exchange of capital
been suffered, hence, not deductible. [City assets
Lumber vs. Domingo] losses resulting from securities
becoming worthless and which are
2. Category and Types of Losses capital assets
Ordinary Losses losses from short sales of property
incurred in trade or business, or practice losses due to failure to exercise privilege
of profession or option to buy or sell property
of property connected with the trade,
business, or profession, if the loss arises Losses from wash sales of stock or
from fires, storms, shipwreck or other securities
casualties, or from robbery, theft or 30 days before and after the date of the
embezzlement sale, the taxpayer has acquired or has
entered into a contract or option so as to
NOTE: Rev. Reg. No. 12-77 requires that a acquire, substantially identical
declaration of loss should be filed with the BIR stock/securities
within 45 days after the occurrence of the General rule: NOT deductible unless
casualty, robbery, etc. Failure to submit the claim is made by a dealer in
declaration within 45 days will result in the stock/securities & made in ordinary
disallowance of the loss. course of business
Net Operating Loss Carry-over
Wagering Losses - allowed only to the
Refers to the excess of allowable
extent of the gains from such losses
deductions over gross income of the
business for any taxable year, which has
Abandonment Losses
not been previously offset as deduction
In case of abandoned petroleum
from gross income.
operations, accumulated expenditures
The net operating loss of a business shall
incurred prior to 1/1/79 allowed as
be carried over as deduction from gross
deduction only from income derived
income for the next 3 consecutive
from same contract area; notice of
taxable years immediately following the
abandonment shall be filed with
year of such loss.
Commissioner
The 3 year period shall continue to run
In case of abandoned producing well,
notwithstanding that the corporation
unamortized cost & undepreciated costs
paid its taxes under MCIT, or that the
of equipment directly used, allowed as
individual availed of the Optional
deduction in the yr. of abandonment
Standard Deduction
Losses from Illegal Transactions - NOT
For mines other than oil & gas wells, if
deductible
loss incurred in any of the 1st 10 yrs. of
operation, carry-over for the next 5 yrs.
Losses due to voluntary removal of
Requirements:
building incident to renewal or
the taxpayer was not exempt from
replacements deductible expense from
income tax in the year of such net
gross income
the loss was not incurred in a taxable
year during which the taxpayer was
Loss of useful value of capital assets due to
exempt from income tax, and
charges in business conditions deductible
there has been no substantial change
expense only to the extent of actual loss
in the ownership of the business or
sustained (after adjustment for improvement,
enterprise.
depreciation, and salvage value)
There is no substantial change in the
ownership of the business when: Losses from sales or exchanges of property
between related taxpayers NOT
- not < 75% in nominal value of outstanding deductible as provided under Section 36 of
issued shares is held by same persons the NIRC but the gains are taxable
- not < 75% of paid up capital of corp. is held
e) Bad Debts
by same persons
Debts due to the taxpayer actually
NOTE: No actual change in ownership is ascertained to be worthless and charged off
involved in when: (1) in case the transfer during the year may be claimed as deduction.
involves change from direct ownership to Actually ascertained to be worthless
Worthlessness is not determined by an
 inflexible formula or slide rule calculation Depreciation of all properties
but upon the exercise of sound business directly related to production of
judgment. The determination of petroleum shall be allowed under
worthlessness must depend upon the straight-line or declining-balance
particular facts and circumstances of the case. (DB) method
It must be uncollectible even in the future. May shift from DB method to SL
Collector v. Goodrich International Rubber method
Co., [21 SCRA 1336] Useful life: 10 yrs. or shorter life as
may be permitted by Commissioner
1. Requisites for Deductibility: Useful life of prop. not used
Existing indebtedness due to the directly: 5 yrs. under straight-line
taxpayer which must be valid and legally method
demandable,
Connected with the taxpayers trade, Mining operations
business or practice of profession, depreciation on all properties in
Must not be sustained in a transaction mining operations other than
entered into between related parties, petroleum operations at the normal
Actually ascertained to be worthless and rate if expected life is 10 yrs or less.
uncollectible as of the end of the taxable if expected life is > 10 yrs.,
year, and depreciate over any no. of yrs. bet. 5
Actually charged off in the books of yrs. & the expected life
accounts of the taxpayer as of the end of
the taxable year. NOTE: Depreciation is deductible by
non-resident aliens engaged in
NOTE: Tax Benefit Rule - Recovery of bad trade/business or non-resident
debts previously allowed as deduction in the corporation only when such property is
preceding yrs. shall be included as part of gross located in the Philippines
income in the yr. of recovery to the extent of the
income tax benefit of such deduction The BIR and the taxpayer may agree in
writing on the useful life of the property
2. Ascertainment of Worthlessness (proof of two to be depreciated. The agreed rate may
facts): be modified if justified by facts or
Taxpayer did in fact ascertain the debt to circumstances. The change shall not be
be worthless in the year for which the effective before the taxable year on
deduction was sought; [Collector v. which notice in writing by certified
Goodrich] mail or registered mail is served by the
That in so doing, he acted in good faith party initiating.
[Collector v. Goodrich]
Depends upon the facts and the g) Depletion of oil and gas wells and mines
circumstances of the case The reduction of cost or value of natural resources
Good faith does not require that the such as oil & gas wells, & mines as the resources are
taxpayer be an incorrigible optimist but converted into inventories.
on the other hand, he may not be unduly
pessimistic No further allowance is granted if the allowance
for depletion = the capital invested
f) Depreciation 1. Intangible exploration & development
Gradual diminution in the service or useful value of drilling cost:
tangible property due from exhaustion, wear and tear deduct in the yr. incurred if incurred for
and normal obsolescence. Also applies to amortization non-producing wells & mines
of intangible assets, the use of which in trade or deduct in full OR capitalize & amortize
business is of limited duration. if incurred for producing wells & mines
1. Requisites for Deductibility: in same contract area
The allowance for depreciation must be
reasonable. 2. Election to deduct exploration &
It must be for property used for development expenditures for mining
employment in trade or business or out operations:
of its not being used temporarily during o deduct as cost
the year. o deduct as adjusted basis provided, total
The allowance must be charged off. amt. deductible shall not exceed 25% of
Schedule on the allowance must be net income
attached to the return. actual exploration & development expenditures
net of 25% of NI shall be carried forward to
2. Methods of Depreciation succeeding yrs. until fully deducted
Straight-line method: exploration expenditures = incurred for the
Declining balance method purpose of ascertaining the existence, location,
Sum of years digits method extent, or quality of any deposit of ore/other
mineral & pd/incurred before the beginning of the
3. Special Types of Depreciation development stage of the mine/deposit
Petroleum operations
 development expenditures = incurred during Donations to accredited NGOs
development stage of the mine or other natural Organized & operated exclusively for
deposits scientific, educational, character-
building & youth & sports development,
NOTE: Depletion of Oil and Gas wells and mines health, social welfare, cultural or
deductible by a non-resident alien or foreign charitable purposes or combination
corporation only in respect of oil and gas wells or thereof (no part of net income inures to
mines located in the Phils. the benefit of any private individual)
h) Charitable & other contributions
1. Requisites for Deductibility: Must be utilized within 15th of the 3rd
The contribution or gift must be actually paid month after the close of the taxable year,
It must be given to the organizations directly for the active conduct of
specified in the code activities constituting the purpose of the
The net income of the institution must not organization, unless period is extended
inure to the benefit of any private stockholder
or individual Administrative expense should not be
greater than 30% of total expenses
2. Valuation
Upon dissolution, assets would be
The amount of any charitable contribution of distributed to another nonprofit domestic
property other than money shall be based on the corp. organized for similar purpose or to
acquisition cost of said property. the state for public purpose or to another
org. to be used in same purpose as the
3. Contributions subject to limitations:
dissolved corp.
Contributions or gifts actually paid or made
w/in the taxable year
i) Research and Development
To or for the use of the government or its
Paid or incurred by a taxpayer during the taxable yr. in
agencies or any political subdivision,
connection with his trade, business or profession as
exclusively for public purpose, or
ordinary & necessary expenses which are not
To accredited domestic corps./associations
chargeable to capital account; allowed as deduction
organized and operated exclusively for:
during the taxable year when paid/incurred.
(a) Religious
Charitable
1. Requisites for Deductibility (as an Expense)
Scientific
Paid or incurred during the taxable year
Youth & sports development
Ordinary and necessary expenses in
Cultural or educational purposes
connection with trade business or profession
For the rehabilitation of veterans
Not chargeable to capital account
To social welfare institutions
2. Requisites for amortization of certain R&D
To NGOs expenditures (treated as deferred expenses):
No part of NI inures to the benefit of any paid/incurred by the taxpayer in connection
private stockholder or individual w/ his trade/business
not treated as expense
4. Limitation chargeable to capital acct. but not chargeable
For individual: not more than 10% of to property of a character w/c is subject to
taxable income before deducting the depreciation/depletion
charitable contributions amortized over a period of not < 60 months
For corporation: not more than 5 % of as may be elected by the taxpayer
taxable income before deducting the
charitable contributions 3. This subsection on research and development cost
is not applicable to:
5. Contributions deductible in full
Any expenditure for the acquisition or
Donations to the govt. to finance, to
improvement of land, or for the important of
provide for, or to be used in undertaking
prop. to be used in connection with R&D of
priority activities in education, health, youth
a character subject to depreciation and
& sports development, human settlements,
depletion
science & culture & in economic
Any expenditure paid/incurred for the
development according to National Priority
purpose of ascertaining the existence,
Plan determined by NEDA
location, extent, or quality of any deposit of
If not in accordance w/ annual priority
ore or other mineral, including oil or gas
plan, donation is subject to limitations in
(exploration exp.)
(a) above
j) Pension trusts (Past Service Cost)
Donations to certain foreign institutions or
Pension Trust Contributions a deduction
international organizations - in compliance
applicable only to the employer on account of its
with agreements, treaties, or commitments
contribution to a private pension plan for the
entered into by Phil. government and foreign
benefit of its employee. This deduction is purely
institutions/international organizations
business in character.
 Established or maintained by employer to provide 1. Requisites for Deductibility:
for the payment of reasonable pensions to his Insurance must have actually been taken;
employees. The amount of premium deductible from
gross income does not exceed P2,400 per
Normal Cost the contributions during the family or P200 per month during the taxable
taxable year to cover the pension liability year;
accruing during the taxable year. Allowed as a That said family had a gross income of not
deduction under Sec. 34(A)(1) as expenses in more than P250,000 for the taxable year;
general. In case of married individuals, only the
spouse claiming additional exemption shall
Past Service Cost amount in excess of the be entitled to this deduction.
above contribution (covering pension liability
pertaining to old employees which accrued during 2. Who may avail of this deduction?
the years previous to the establishment of the Individual taxpayers earning purely
pension trust); allowed as deduction only if: compensation income during the
o such amount not been allowed as a year.
deduction Individual taxpayers earning
o apportioned in equal parts over 10 business income or in practice of
consecutive years beginning with the his profession whether availing of
year in which the payment is made. itemized or optional standard
deductions during the year
1. Requisites for Deductibility of Past Service Cost
The employer must have established a 4) Optional standard deduction (OSD) [As amended by
pension or retirement plan to provide for the R.A. 9504 which took effect July 6, 2008]
payment of reasonable pensions to his a) An individual, other than a nonresident alien, may
employees; elect a standard deduction of 40% of his gross
The pension plan is reasonable and sales or gross receipts. (prior to RA 9504, rate is
actuarially sound; 10% of gross income)
It must be funded by the employer; b) In the case of a corporation, it may elect s standard
The amount contributed must be no longer deduction of 40% of its gross income as defined
subject to the control and disposition of the in Section 32 of the Tax Code. (prior to RA 9504,
employer; no OSD benefit for corporation)
The payment has not yet been allowed as a
deduction; and Such election should be signified in his return
The deduction is apportioned in equal parts & shall be irrevocable for the taxable year for
over a period of 10 consecutive years which the return was made
beginning with the year in which the transfer
of payment is made. 5) Personal and Additional Exemption
a) Basic Personal Exemption
2. Summary rules on Retirement Benefits
Plan/Pension Trust: Pursuant to amendments under RA No. 9504,
EXEMPT FROM INCOME TAX there shall be allowed personal exemptions
employees trust under Sec. 60(B) amounting to P50,000 for each individual
EXCLUSION FROM GROSS INCOME taxpayer regardless of whether he is single, head
amount received by the employee from the of the family or married.
fund upon compliance of certain conditions NOTE: Prior to R.A. 9504, personal exemptions
under Sec. 32(B)(6) are P20,000 for Single, P25,000 for Head of the
DEDUCTION FROM GROSS INCOME Family and P32,000 for each Married individual.
NOTE: Amounts contributed by the employer
during the taxable year into the pension plan to b) Additional Exemptions for Taxpayers with
cover the pension liability accruing during the Dependents
year considered as ordinary and necessary There shall also be allowed an additional
expenses under Sec. 34(A)(1). exemption of P25,000 for each dependent
not exceeding FOUR (4)
1/10 of the reasonable amount paid by the
employer to cover pension liability applicable to NOTE: Prior to R.A. 9504, additional
the years prior to the taxable year, or so paid to exemption amounted to only P8,000 each
place the trust in a sound financial basis dependent.
deductible under Sec. 34 (J).
A dependent means:
o A legitimate, illegitimate or legally
k) Premium payments on health and/or hospitalization adopted child
insurance o Chiefly dependent upon and living with
the taxpayer
An amount of premium on health and or o Not married, not gainfully employed, not
hospitalization paid by an individual taxpayer (head more than 21 years of age
of family or married), for himself and members of his o Except: If such dependent, regardless of
family during the taxable year. age, is incapable of self-support because
of mental or physical defect.
 In case of married individuals, the additional 3. If the spouse should die or any of the
exemption shall be claimed by only one of the dependents become twenty one years of age,
spouses. or become gainfully employed during the
taxable year, the taxpayer may still claim the
The proper claimant of the exemption would same exemptions as if he/she died, or became
generally be the husband, except if the twenty one years old or became gainfully
husband is (1) unemployed (2) working employed at the close of such year.
abroad like an OFW or seaman (3) husband
waived his right to the exemption. 6) Items not deductible
a) General Rules:
For legally separated spouses, the additional An expense will only be allowed as deduction
exemption may be claimed only by the only if the tax required to be deducted and
spouse who has custody of the child. withheld therefrom has been remitted to the BIR.

However, the total amount of additional b) Specific Items enumerated under Section 36:
exemption that may be claimed by both shall 1. Personal, living or family expenses
not exceed 4. 2. Amounts paid out for new buildings or for
permanent improvements or betterments
NOTE: Parents, brothers, and sisters may not made to increase the value of any property or
entitle the taxpayer to the additional estate (not applicable to intangible drilling
exemption of P25,000. and development costs incurred in petroleum
operation)
Non-resident aliens engaged in trade or 3. Amounts expended in restoring property or in
business (NRAETB) may be entitled to making good the exhaustion thereof for w/c
personal exemptions (but not additional an allowance is or has been made
exemption) subject to reciprocity such that: 4. Premiums on life insurance policy when the
taxpayer is directly/indirectly a beneficiary
1. The country from which he is a citizen under such policy
has an income tax law; and 5. No deduction shall be allowed in Losses from
2. The income tax law of his country allows Sales or Exchanges of Property
personal exemption to citizens of the directly/indirectly:
Philippines not residing therein but Between members of a family (include
deriving income therefrom and not to only brothers and sisters, spouse,
exceed the amount allowed in NIRC. ancestors, & lineal descendants)
Between an individual and a corporation
o The personal exemption shall be equal to more than 50% in value of outstanding
that allowed by the income tax law of the stock is owned by such individual
country to a citizen of the Philippines not (except in case of distributions in
residing therein, or the amount provided liquidation)
in the NIRC, whichever is LOWER. Between 2 corporations more than 50%
in value of outstanding stock owned by
NOTE: Non-resident aliens not engaged in same individual, if either one is a
trade or business cannot claim any personal personal holding company or a foreign
or additional exemption. holding company during the taxable year
preceding the date of sale/exchange
c) Individuals not entitled to personal and additional
Between grantor & fiduciary of any trust
exemptions:
Between fiduciary of a trust & the
Non-resident alien NOT engaged in
fiduciary of another if same person is a
trade or business
grantor to each trust
Alien individual employed by Regional
or Area Headquarters of Multinational
Companies Exempt Corporations
Alien Individual employed by Offshore
Banking Units Income received by the following corporations shall be
Alien Individual employed by Petroleum exempted from tax:
Service Contractor and Subcontractor
1. Government educational institutions
2. Non-stock non-profit educational institutions
d) Status-at-the-end-of-the-year-rule
3. Non-profit labor, agricultural or horticultural
1. The death of the taxpayer during the taxable
organizations
year shall not affect the amount of personal
4. Association of farmers, fruit growers, and the like
and additional exemptions his estate can
whose primary function is to market the product of
claim, as if he died at the end of such year
their members
5. Organizations with a purely local operation whose
2. If the taxpayer got married or should have
income is derived only from assessments, dues and
additional dependent (child born within the
fees collected from their members to meet operational
year) during the taxable year, he may claim
expenses
the corresponding personal exemptions in
6. Non-stock corporation or association organized and
full for such year
operated exclusively for religious, charitable,
scientific, athletic or cultural purposes, or for the
 rehabilitation of veterans; provided that no individual an employer to his employees that are of
person owns its assets or no individual person receives relatively small value and are offered or
benefit on its earnings furnished by the employer merely as a means
7. Non-stock/non-profit mutual savings bank or of promoting the health, goodwill,
nonstock/non-profit cooperative bank contentment, or efficiency of his employees.
8. Non-profit civic league or organization operating All other benefits given by the employers,
exclusively for the benefit of its members which are not included in the enumeration
9. Cemetery company owned and operated exclusively under RR No. 05-11, shall not be considered
for the benefit of its members de minimis benefits.
10. Non-profit business league, chamber of commerce, or
board of trade c. 13th month pay and other benefits
11. Associations, orders, beneficiary societies operating 13th month pay & other benefits (i.e.
for the exclusive benefits of their members productivity incentives & Christmas bonus)
the total of which does not exceed P30,000
10) Taxation of Resident Citizens, Non-resident Citizens f the benefit exceeds P30,000, only
and Resident Aliens the excess will be taxable.

a. General Rule 3. Deductions

1. Resident Citizen citizen of the Philippines a. Personal exemptions
residing therein is taxable on all income 1. Basic Exemption P50,000
derived from sources within and without the 2. Additional Exemption P25,000 for
Philippines. every qualified dependent children not to
exceed 4
2. Nonresident Citizen citizen of the (2) NOTE: A dependent means a
Philippines who are taxable only on his
income from sources within the Philippines if 1. Legitimate, illegitimate or legally adopted
he qualifies as a nonresident citizen. child,
2. Chiefly dependent upon,
3. Resident Alien an individual whose 3. Living with the taxpayer, and
residence is within the Philippines and who is 4. Not married, not gainfully employed, not
not a citizen thereof is taxable only on income more than 21 years old
derived from sources within the Philippines. Except: If such dependent, regardless of age,
is incapable of self-support because of mental
b. Taxation on Compensation Income or physical defect.
1. Inclusions
a. Monetary benefits 3. In the case of married individuals, the
Salaries, wages, emoluments and additional exemption can be claimed
honoraria, allowances, commissions only by one of the spouses.
(e.g. transportation, representation, 4. As a rule, the husband claims the
entertainment and the like); exemption, except if the husband
Fees including director's fees, if the Expressly waives in favor of the
director is, at the same time, an wife
employee of the Has no income
employer/corporation; Works abroad
Taxable pensions and retirement pay;
Other income of a similar nature 5. If legally separated, the spouse who has
custody of the dependent can claim the
b. Non-monetary additional exemption.
Taxable bonuses and fringe benefits 6. Resident aliens are qualified to deduct
except those which are subject to the additional exemptions ONLY if the
fringe benefits tax under Sec. 33 of the qualified dependent children are living
Code; with him in the Philippines.

2. Exclusions b. Health and Hospitalization Insurance

a. Fringe Benefit Subject to FBT The actual premium payments for health
Any good, service, or other benefit and hospital insurance taken by an
furnished or granted by an employer individual for himself or for his family are
in cash or in kind, in addition to allowed as deduction.
basic salaries, to a managerial or a
supervisory employee 1. Requisites:
Amount deductible should not
Subject to a final tax of 32% based
exceed P2,400 per family or P200
on the grossed-up monetary value of
per month whichever is LOWER
the benefit given withheld by the
during the year.
employer
The gross family income does not
b. De minimis benefits
exceed P250,000 for the calendar
Benefits which are exempt from the fringe year.
benefit tax shall, in general, be limited to
facilities or privileges furnished or offered by
 NOTE: The spouse claiming the Interest income earned from 20%
additional exemptions for dependents shall deposit NOT FCDU
be the one to claim the deduction for Interest income earned from 7.5%
premium payments. deposit FCDU
Cash and/or Property Dividends 10%
c. Taxation of Compensation Income of a
Minimum Wage Earner (MWE) e. Taxation of Capital Gains
Compensation income of MWEs shall be TAX BASE TAX RATE
exempt from income tax and consequently Capital Gains from Sale of Shares of
from the withholding tax on compensation Stock Not Traded in the Stock
if they work: Exchange
In the private sector and being paid Net Capital Gains: Final tax of
the SMW Not over P100,000 5%
In the public sector being paid On any amount in excess of 10%
compensation of not more than the P100,000
SMW in the nonagricultural sector Sale of shares of stocks traded in the
Local Stock Exchange (Stock 1/2 of 1%
STATUTORY MINIMUM WAGE (SMW) Transaction Tax)
Refers to the rate fixed by the Regional Tripartite Wage and Selling Price
Productivity Board (RTWPB), as defined by the Bureau of Capital gains on sale of Real Property
Labor and Employment Statistics (BLES) of the Department situated in the Philippines Final tax of 6%
of Labor and Employment (DOLE). The RTWPB of each Selling Price or FMV whichever
region shall determine the wage rates in the different regions is HIGHER
based on established criteria and shall be the basis of Income from the sale, exchange or Graduated Income
exemption from income tax for this purpose. other disposition of capital assets Tax Rate

Note: NOTE:
Holiday pay, overtime pay, night shift differential pay
and hazard pay earned by MWE shall likewise be Capital gains from sale/disposition of principal
covered by the above exemption. residence by natural persons may be EXEMPT
MWEs receiving other income, such as income from provided that:
the conduct of trade, business, or practice of profession, 1. Proceeds were fully utilized in
EXCEPT income subject to final tax, in addition to acquiring/constructing a new principal residence
compensation income are NOT exempted from income within 18 mos. from date of sale.
tax on their entire income earned during the taxable 2. Historical cost/adjusted basis of sold prop be
year BUR the SMW, Holiday pay, overtime pay, night carried to the new principal residence
shift differential pay and hazard pay shall still be built/acquired
EXEMPT FROM WITHHOLDING TAX.
3. Commissioner duly notified within 30 days from
MWEs who receives/earns additional compensation
sale
such as commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory amount of 4. Tax exemption can only be availed once every 10
P30,000.00, taxable allowances and other taxable years
income other than the SMW, holiday pay, overtime 5. If no full utilization of proceeds of sale, such
pay, hazard pay and night shift differential pay SHALL portion shall be subject to CGT
NOT ENJOY THE PRIVILEGE OF BEING A MWE
AND, THEREFORE, HIS/HER ENTIRE EARNINGS Capital gains from other capital assets are subject to
ARE NOT EXEMPT FORM INCOME TAX, AND the holding period. The reportable capital gain would
CONSEQUENTLY, FROM WITHHOLDING TAX. be:
1. 100% if the asset was held for one year or less.
c. Taxation of Business Income/Income from 2. 50% if the asset was held for more than one year.
Practice of Profession
Please refer to the discussion under Gross Income. There is a net capital loss carryover on the net capital
loss provided that the amount of loss does not exceed
d. Taxation of Passive Income the income before exemptions at the year the loss was
TAX BASE TAX RATE sustained to be recognized immediately succeeding
Royalties, except on books, other 20% the year it was sustained.
literary works and musical
composition
Prizes and other Winnings more than 20% 11) Taxation of Non-resident Aliens Engaged in Trade or
P10,000 Business
Interest Income from Long-Term
Deposit or investment (held for 5 years Exempt a. General rules
or more)
1. A nonresident alien individual who shall come to
the Philippines and stay therein for an aggregate
In case of pre-termination: if held for
4 years to less than 5 years 5% period of more than 180 days during any
3 years to less than 4 years 12% calendar year.
Less than 3 years 20% 2. Shall be taxed on income earned within the
Interest from Deposits and Yield or any Philippines, in the same manner as an individual
other Monetary Benefit from Deposit citizen or a resident alien.
Substitutes, Trust Funds and Similar 3. Except Cinematographic Film owner Taxable at
Arrangements and Royalties 25% of Gross Income.
 INCOME EARNED TAX RATE dividends, share from partnership) and Capital Gains
Cash and/or Property Dividends Tax.
Capital Gains from Sale of Shares of
Stock Not Traded in the Stock Exchange 2. Compliance Requirements:
Net Capital Gains: a. SCs must be qualified as such by the CIR of
Not over P100,000 5% the RDO by submitting a certified true copy
On any amount in excess of 10% of his OSCA ID.
P100,000 b. Must file a Sworn Statement on or before
January 31 of every year that his annual
12) Exclude Non-resident Aliens Not Engaged in Trade or taxable income does not exceed the poverty
Business level.
a. General rule: Taxable at a rate of 25% on his GROSS
INCOME WITHIN b. Exemptions granted under international
agreements
b. Except:
14) Taxation of Domestic Corporations
TAXPAYER TAX RATE
a. Tax payable
Alien Individual Employed 15% of gross income earned
1. Regular Corporate Income Tax (RCIT)
by Offshore Banking Units as such employee
Alien Individual Employed The use of regular domestic tax rates:
by Petroleum Service 15% of gross income earned YEAR APPLICABLE TAX RATE
Contractor and as such employee 2009 onwards 30%
Subcontractor
2006-2008 35%
Alien Individual Employed
by Regional or Area |15% of gross income Before 2006 32%
Headquarters and Regional earned as such employee
Operating Headquarters of
Multinational Companies 2. Minimum Corporate Income Tax (MCIT)
MCIT Rate = 2% of gross income (GI)
NOTE:
When to begin/apply MCIT? Beginning on
The same tax treatment shall also apply to Filipinos the 4th taxable year immediately following the
employed and occupying the same positions as those year in which such corporation commenced its
of the alien employees mentioned above. business operation
Only the income earned as an employee of the said
entities is subject to the preferential 15% rate; income NOTE: Commencement of Business
earned from other sources (i.e. rent) shall be taxable in Operation: Upon Issuance of BIR Certificate
the same manner as a Resident Alien or NRA-ETB. of Registration
Filipinos employed by ROHQs or RHQs in a
managerial or technical position shall have the option When will a corporation be liable for
to be taxed at either 15% of their gross income OR the MCIT? If 2% of the corporations gross
regular income tax rate on its taxable compensation income is greater than 35% of its taxable
income. income.
To qualify for the preferential 15% rate, the Filipinos
Rationale: This is designed to prevent
must satisfy 3 tests: (RR 11-2010)
corporations from escaping being taxed by
1. Position and Function Test must occupy a
including frivolous expenses in their statement
managerial position or technical position AND
of income (Ex. Over statement of depreciation
must actually exercise such function.
expense)
2. Compensation Threshold Test must have
received or is due to receive a gross annual taxable a) Carry Forward of Excess Minimum Tax
compensation of at least P975,000. Excess of MCIT over the normal income tax
3. Exclusivity Test must be exclusively working shall be carried forward & credited against
for the RHQ or ROHQ as a regular employee and normal income tax for the 3 succeeding years
not just a consultant or contractual personnel.
NOTE: You can deduct MCIT Carry
13) Individual Taxpayers Exempt from Income Tax Forward only if Regular Income Tax is
a. Senior citizens (SCs) greater than MCIT.
1. A Senior Citizen is
a. Any resident of the Philippines b) Relief from MCIT
b. At least 60 years old MCIT may be suspended by the Sec of
Finance when corporations losses are due to:
Generally, qualified Senior Citizens deriving income
1. prolonged labor dispute
during the taxable year are required to file and pay
2. force majeure
their income tax returns, except If the income earned
3. legitimate business reverses
is from compensation income qualified as a MWE, the
income is exempt If the aggregate amount of gross
c) Gross Income (for purposes of applying
income during the taxable year does not exceed the
MCIT)
amount of basic and additional exemptions
Gross income shall mean gross sales () sales
The said exemption does not extend to income subject returns, discounts and allowances () cost of
to Final Tax (i.e. Interest income from deposit, goods sold.
 Cost of goods sold shall mean all business 2. Optional Standard Deduction
expenses directly incurred to product the An amount not exceeding forty percent
merchandise to bring them to their present (40%) of gross income.
location and use. Gross Income shall mean the gross sales less
For taxpayers engaged in the sale of services, sales returns, discounts and allowances and
gross income shall mean gross receipts () cost of goods sold.
sales returns, discounts and allowances () A taxpayer who elected to avail of the OSD
cost of services shall signify in his/its return such intention,
Cost of services shall mean all direct costs otherwise he/it shall be considered as having
and expenses necessarily incurred to provide availed himself of the itemized deductions.
the services required by the customers and Once the election to avail the OSD is
clients. signified in the return, it shall be irrevocable
for the taxable year for which the return is
NOTE: Pursuant to RR No. 12-07, MCIT shall
made.
apply at the time of the filing of the quarterly
corporate income tax.
c. Taxation of capital gains
Example:
TAX BASE TAX RATE
The following dates are available for X Corp: Capital Gains from Sale of Shares of
Stock Not Traded in the Stock Exchange
SEC Registration December 17, 2004 Net Capital Gains: Final Tax
BIR Registration January 4, 2005 Not over P100,000 5%
Start of operations January 1, 2006 On any amount in excess of 10%
P100,000
The MCIT will be imposed on X Corp starting taxable year Sale of shares of stocks traded in the local
2009. stock exchange (Stock Transaction Tax) of 1%
Selling price
1) Computation of RCIT Capital gains on sale or exchange of
lands and or buildings located in the Final Tax
2008 2009 2010
Philippines 6%
Gross Sales P 3,000,000 P 4,000,000 P 5,000,000 Selling Price or FMV whichever is
Cost of 1,500,000 2,000,000 2,500,000 HIGHER Final Tax 6%
Goods Sold Net Capital gains on sales or exchange or Regular Corp.
Gross P 1,500,000 P 2,000,000 P 2,500,000 disposition of other capital assets Tax (30%)
Income
Operating 1,450,000 1,900,000 2,100,000
Expenses d. Taxation of Other Passive Income
Net Taxable P 50,000 P 100,000 P 400,000
Income TAX BASE TAX RATE
RCIT Rate 35% 30% 30% Interest from Deposits and Yield or any
RCIT P 17,500 P 30,000 P 120,000 other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar
Arrangements and Royalties
2) Computation of MCIT Interest income earned from deposit 20%
NOT FCDU
2009 2010 Interest income earned from deposit 7.5%
Gross Income P 2,000,000 P 2,500,000 FCDU
MCIT Rate 2% 2% Income Derived under the Expanded
MCIT P 40,000 P 50,000 Foreign Currency Deposit System
NOTE: The MCIT is not applicable in 2008 since it has /Income derived by a depository bank/
not yet reached the fourth taxable year requirement. under the FCDU system from foreign
currency transactions with local
3) Determination of Tax Due and Payable commercial banks (i.e. branches of 10%
foreign banks authorized by the BSP to
2008 2009 2010
transact business with FCDU)./ Interest
RCIT or MCIT income from foreign currency loans
(whichever is P 17,500 P 40,000 P 120,000 granted by depository banks under the
HIGHER) FCDU system to residents.
Less: Excess of - - 10,000 Intercorporate Dividends Exempt
MCIT over RCIT
Tax Due and P 17,500 P 30,000 P 110,000
Payable e. Tax on proprietary-educational institutions and
hospitals which are non-profit
4) Determination of Excess of MCIT over RCIT
TAX RATE BASIS
2009 MCIT P 40,000 10% On related trade, business or
Less: 2009 RCIT 30,000 activity;
Excess of MCIT over RCIT P 10,000 30% (2009 onwards) IF total gross income from
35% (2006-2008 unrelated trade, business, or
b. Allowable deductions activity exceed 50% of total
1. Itemized Deductions income
Items under Sec. 34 of the NIRC as discussed
under Deductions from Gross Income.
 Proprietary educational institution any private income from foreign currency loans
school maintained & administered by private granted by depository banks under the
individuals or groups with an issued permit to operate FCDU system to residents.
from DECS, or CHED or TESDA Capital Gains from Sale of Shares of
Stock Not Traded in the Stock Exchange
Net Capital Gains:
Taxable at 10% on TAXABLE INCOME, except on
Not over P100,000 5%
certain passive income (which are subject to final tax)
On any amount in excess of 10%
P100,000
Predominance Test: if gross income from unrelated Intercorporate Dividends Exempt
trade/business/other activity > 50% of the total gross
income from all sources, ENTIRE taxable income
shall be subject to the REGULAR corporate tax rate of NOTE: Any income of nonresidents, whether individuals
30% (35% - 2006-2008) or corporations, from transactions with depository banks
under the expanded system shall be exempt from income
Distinguish from non-profit non-stock educational tax.
institutions which are exempt from tax on revenues
d. Exclude:
and assets Actually, Directly and Exclusively used
for educational purposes (Sec 30 (H), NIRC; RMC PAGE 57
762003).

f. Tax on GOCCs, agencies and instrumentalities

TAX RATE BASIS

30% (2009 onwards) Same tax rate upon their
35% (2006-2008) taxable income in a similar
business, industry, or
activity

1. General Rule: all corporations, agencies, or

instrumentalities owned or controlled by the
govt. are taxable.

2. Exceptions:
a. GSIS
b. SSS
c. PHIC
d. PCSO

15) Taxation of Resident Foreign Corporations

a. General rules
The rest is the same rules as Domestic
Corporation

On taxable income from all 30% (2009 onwards)

sources within the 35% (2006-2008)
Philippines.

b. Minimum corporate income tax

Same rules as Domestic Corporation

c. Tax on certain income

TAX BASE TAX RATE

Interest from Deposits and Yield or any
other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar
Arrangements and Royalties (from
sources within)
Interest income earned from deposit 20%
NOT FCDU
Interest income earned from deposit 7.5%
FCDU
Income Derived under the Expanded
Foreign Currency Deposit System
/Income derived by a depository bank/
under the FCDU system from foreign
currency transactions with local
commercial banks (i.e. branches of 10%
foreign banks authorized by the BSP to
transact business with FCDU)./ Interest