TAXATION I – INCOME TAXATION

TITLE I. GENERAL PROVISIONS

SECTION I. BASIS OF INCOME TAXATION: Basis of Government’s right to impose tax on income:
Partnership theory

SECTION II. DEFINITION

1. Income – all wealth which flows into the taxpayer other than a mere return of capital. It includes the
forms of income specifically described as gains and profits including gains derived from the sale or
other disposition of capital assets
- a sale does not necessarily mean income.
- it includes both taxable and non-taxable income.

2. Capital – denotes the original investment or fund used in order to generate earnings (income).
3. Gross Receipts – receipts which may constitute capital as well as income

4. Revenue – refers to all funds/income derived by the government whether from tax or other sources.
Revenue is to the government as income is to private persons or corporations. (Commissioner vs.
BOAC, 149 SCRA 395)

SECTION III. SOURCES OF INCOME

1. Property
2. Labor (Service)
3. Sale/exchange of capital asset and activity

 For tax purposes, income from whatever source forms part of the taxpayer’s income.

Examples:
1. Treasure found or punitive damages representing profits loss.
2. Amount received by mistake
3. Cancellation of the taxpayer’s indebtedness. (Sec. 50, RR. No.2)
a) Payment of income
b) Gift
c) Capital transaction
4. Payment of usurious interest
5. Illegal gains - “Moral turpitude is not a touchstone of taxability.” (P. Hsbough Milk Co., 26 T.C. 707)
6. Tax refund
7. Bad debt recovery

SECTION IV. CLASSIFICATIONS OF INCOME SUBJECT TO PHILIPPINE INCOME

TAX

1. Compensation Income
2. Professional Income
3. Business Income
4. Passive Income
5. Capital gains
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 SECTION V. TESTS TO DETERMINE IF INCOME IS TAXABLE
1. DEFINITION: Taxable Income – means the pertinent items of gross income specified in the Tax
Code, less the deductions and/or personal and additional exemptions,
if any, authorized for such types of income by the Tax Code or
other special laws. (Sec. 31, NIRC of 1997)

2. REQUISITES FOR INCOME TO BE TAXABLE:

1. Existence of income - There must be gain or profit, whether in cash or its equivalent.
2. Realization of income - The gain must be realized or received. Thus, not all economic gains
constitute taxable income.
3. Recognition of Income - The gain must not be excluded by law or treaty from taxation.

DETAILS OF REQUISITES FOR INCOME TO BE TAXABLE:

1. Existence of Income - There must be gain or profit, whether in cash or its equivalent.
2. Realization of Income - The gain must be realized or received. Thus, not all economic gains
constitute taxable income.

GENERAL RULE:
 A mere increase in the value of property without actual realization, either through sale or other
disposition is not taxable.
 A mere expectation of profits is not an income.

EXCEPTION:
 Economic benefit principle (BIR Ruling No. 029 – 98, March 19, 1998, Revenue
Memorandum Circular 70-2010)

- receipt here includes constructive receipt. (Doctrine of Constructive Receipt of Income)

- Income which is credited to the account of or set apart for a taxpayer and which may be
drawn upon by him at any time is subject to tax for the year during which so credited or
set apart, although not then actually reduced to possession.

- To constitute receipt in such a case, the income must be credited to the taxpayer without
any substantial limitation or restriction as to the time or manner of payment or condition
upon which payment is to be made. [Section 52, Revenue Regulations 2]

Example: Partner’s distributive share in the profits of a general professional

partnership is regarded as received by the partner, although not yet distributed.

 TESTS TO DETERMINE WHETHER INCOME IS EARNED:

a. Realization test (BIR Ruling 091-99, 8 July 1999);

b.Claim of right doctrine or doctrine of ownership, command or control (CIR vs.

Javier,199SCRA824);

c. Economic benefit test or doctrine of proprietary interest (BIR Ruling 123-97, 10 Nov.
1997 and BIR Ruling 029-98, 19 Mar. 1998);

d. Severance test

e. All events test

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 3. Recognition of Income - The gain must not be excluded by law or treaty from taxation.

 METHODS OF ACCOUNTING (RECOGNITION OF INCOME)

A.) CASH METHOD - recognition of income and expense dependent on inflow or outflow of
cash (meaning, you recognize the income when you actually receive the cash payment for the
sale, and you recognize the expense when you actually pay cash for the expense)

B.) ACCRUAL METHOD - method under which income, gains and profits are included in
gross income when earned whether received or not, and expenses are allowed as deductions
when incurred, although not yet paid. It is the right to receive and not the actual receipt that
determines the inclusion of the amount in gross income Case: CIR vs. Isabela Cultural Corp,
12 Feb. 2007

C.) SPECIAL METHODS

1. INSTALLMENT

i. Sales of dealers in personal property

• Under Rules and Regulations (R&R) prescribed by the Sec. of Finance,
upon recommendation of the Commissioner: a person who regularly sells or
otherwise disposes of personal property on the installment plan may return as
income therefrom in any taxable year that proportion of the installment
payments actually received in that year, which the gross profit realized or to
be realized when payment is completed, bears to the contract price.

Example: Sale in 2011 payable in 2 equal annual installments. How to compute

for income: Contract Price/ Installments

Receivable P100,000
Cost 75,000
(GP) P 25,000

 Installments payable in 2 equal annual installments

GP/Contract Price ratio = 25T/100T = 25%
Collections in 2011 = P50T
Income for 2011 = P50T x 25% = P12,500

ii. Sales of realty and casual sales of personalty

a) in cases of:

(i) casual sale or other casual disposition of personal property (other than
inventory on hand of the taxpayer at the close of the taxable year) for a
price > P1,000, or

(ii) sale or other disposition of real property, if in either case the initial
payments do not exceed 25% of the selling price

- income may be recognized same as in sales of dealer in personal

property in (1).

iii. Sales of real property considered as capital asset by individuals

 Individual who sells of disposes of real property, considered as capital
asset & is otherwise qualified to report the gain under (2) above may pay the
capital gains tax in installments under R&R to be promulgated by the Sec. of
Finance, upon recommendation of the Commissioner

2. DEFERRED PAYMENT

3. LONG-TERM CONSTRUCTION CONTRACT – PERCENTAGE OF

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COMPLETION
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4. FARMING
 SECTION VI. INCOME TAX IN GENERAL
1. Income tax – a tax on all yearly profits arising from property, profession, trade or offices or as a tax on
person’s income, emoluments, profits and the like.

2. Nature of Philippine Income Tax:

1. It is a/an
a. direct tax
b. progressive tax (mainly)
c. excise tax
2. It is based on income, either gross or net, realized in one taxable year.
3. It is comprehensive.
4. It uses a semi-schedular or semi-global tax system.

3. Types of Philippine Income Tax

1. Net income tax

a. Graduated income tax on individuals
b. Normal corporate income tax on corporations
2. Gross income tax
a. Minimum corporate income tax of 2% of the gross income
b. Improperly Accumulated Earnings tax of 10% on improperly accumulated earnings
c. Optional Corporate Income Tax of 15% on Gross Income.
d. Gross Philippine Billings Tax
e. Gross onshore income Tax
f. Final withholding tax on passive income
g. Capital gains tax
3. Fringe benefit tax
4. Branch profit remittance tax
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 TITLE II. SITUS OF INCOME TAXATION
(Comprehensive Tax Situs)
 SITUS OF INCOME TAXATION: IT IS DETERMINED BY THE:

1. Nationality (Citizenship Principle)

2. Residence of the taxpayer (Residence Principle); and
3. Source of income (Source Principle).

DETAILS OF SITUS OF INCOME TAXATION:

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TAXPAYER; NATIONALITY AND RESIDENCE
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GENERAL CLASSIFICATION OF TAXPAYERS

1. WHO IS A TAXPAYER?
Under Sec 22(N), a taxpayer is any person subject to [income] tax.

Income taxpayers, with distinction based on the amount of income subject to tax, or the applicable tax
rates, or both, are classified as follows:

2. KINDS OF TAXPAYERS

A. INDIVIDUAL TAXPAYERS

KINDS OF INDIVIDUAL TAXPAYERS

1) Citizens
a) Resident citizens - Those residing in the Philippines unless he qualifies as a non-
resident under Sec. 22 (E) of the NIRC.

b) Non-resident citizens - Those not residing in the Philippines.

A “non-resident citizens” means

1.) One who establishes to the satisfaction of the Commissioner of Internal

Revenue (CIR) the fact of his physical presence abroad with a definite intention
to reside therein.

2.) A citizen of the Phils. who leaves the country during the taxable year to
reside abroad, either as immigrant or for employment or on permanent basis.

3.) A citizen of the Phils. who works and derive from abroad and whose
employment thereat requires him to be physically present abroad “most of the
time” (183 days) during the taxable year.

4.) A citizen who has been previously considered as non-resident citizen and
who arrives in the Phils. at any time during the taxable year to reside
permanently in the country.

5.) A citizen who shall have stayed outside the Phils. for 183 days or more by the
end of the year.

NOTA BENE: For purposes of income tax, an overseas contract worker who
is a Filipino citizen and deriving income from abroad is deemed a non-
resident citizen and therefore taxed only on income sourced within the
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Philippines. However, in order to qualify as a non-resident citizen, the worker

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must be physically present abroad most of the time or at least 183 days
(continuous or not) during the calendar year.
 2) Aliens
a) Resident aliens - Those residing in the Philippines though not a citizen thereof.
- Those who are actually present in the Phils. and who are not mere
transients or sojourners.

b) Non-resident aliens - Those not residing in the Phils. and who is not a citizen thereof.

(1) Engaged in trade or business

– comes and stays in the Phils. For an aggregate period of more than 180 days
during the calendar year.
- includes performance of personal services within the Phils.

(2) Not engaged in trade or business

B. CORPORATE TAXPAYERS

KINDS OF CORPORATE TAXPAYERS

1) Domestic corporations - Those created or organized in the Phils. or under its laws.
2) Foreign corporations - Those created, organized or existing under any laws other than those of the
Phils.

a. Resident - Those foreign corporation engaged in trade or business within the Phils.

b. Non-resident - Those foreign corporation not engaged in trade or business within the
Phils.
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 3. TABLE: SUMMARY OF SITUS OF INCOME IN RELATION TO TAXPAYER’S NATIONALITY
AND RESIDENCE.:

Primary Classification Sub-Classification/s

Citizens of the Residents of the Philippines (5%-34%)
Philippines Not residents of the Philippines (5%-34%) Sec. 22(E)
Residents of the Philippines (5%-34%) Sec. 22(F)

Engaged in Trade or Business

Aliens
Not Residents of the in the Philippines (5%-34%)
Philippines Sec. 22 (G) Not engaged in Trade or
Business in the Philippines
(25% of GI)
Individuals Individual Employed by Regional or Area Headquarters
and Regional
Operating Headquarters of Multinational Companies
(15% of GI)

Special classes of Individual Employed by Offshore Banking Units

Individuals (15% of GI)
Individual Employed by a foreign service contractor or by a
foreign service
subcontractor engaged in petroleum operations in the
Philippines
(15% of GI)

Estates and Trusts

Domestic Corporations (30%) Sec. 22 (C )
Foreign Corporations Resident Foreign Corporations Sec. 22 (H)
Sec. 22(D) Non-resident Sec. 22 (I)
Proprietary educational institutions and non-profit hospitals
Domestic Depositary Bank (Foreign Currency Deposit Units)
Resident international carriers
Offshore Banking Units
Corporations Resident Depositary Bank (Foreign Currency Deposit Units)
Special Classes
of Corporations Regional or Area Headquarters Sec. 22( DD) and Regional
Operating Headquarters Sec. 22 (EE) of Multinational
Companies
Non-resident cinematographic film owners, lessors or
distributors
Non-resident owners or lessors of vessels chartered by
Philippine Nationals
Non-resident lessors of aircraft, machinery and other equipment
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 3. Source Principle
In general, income may be earned from:

1. Within the Philippines

- compensation for labor/service derived from Philippine sources

(Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 121 Phil. 579; 13 SCRA 601
(1965); Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC), 149
SCRA 395; Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006;

- interest on bonds, notes, deposits and the like earned in the Philippines (residence of debtor)
- dividends declared by domestic corporations
- rentals and royalties from property located within the Philippines
- gains, profits and income from sale of real property located in the Phils. as well as from personal
property purchased in the Philippines.

(CIR vs. Japan Airlines, Inc., G.R. No. 60714, 6 March 1991, The Municipality of Jose Panganiban,
Province of Camarines Norte, etc. vs. The Shell Company of the Phils, Ltd., G.R. No. L-18349, 30
July 1966)

2. Without the Philippines

- compensation for labor/service rendered outside the Philippines
- interest on bonds, notes, deposits and the like earned abroad
- dividends declared by non-resident foreign corporations
- rentals and royalties from property located outside the Philippines
- gains, profits and income from sale of real property as well as from personal property outside the
Philippines

3. Partly within and partly without the Philippines

- transportation or other services rendered partly within and partly outside
- the sale of personal property produced within the sold outside, or vice versa

Pertinent Items

Subject to Final Tax (i.e. passive

income, capital gains, transaction tax

EXCLUSIONS/EXEMPTIONS
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 TITLE III- GROSS INCOME WITH
EXCLUSIONS/EXEMPTIONS, FINAL TAX, AND DEDUCTIONS.

FORMULA:
ITEMS OF GROSS INCOME
LESS: 1. EXEMPT ACTIVITIES OF EXEMPT CORPORATIONS/ENTITIES
2. EXCLUSIONS FROM GROSS INCOME

= ITEMS OF TAXABLE GROSS INCOME

LESS: TAXABLE GROSS INCOME SUBJECTED TO FINAL TAXES

= TAXABLE GROSS INCOME BEFORE ALLOWABLE DEDUCTIONS

LESS: ALLOWABLE DEDUCTIONS
1. ALLOWABLE ITEMIZED DEDUCTIONS AGAINST BUSINESS
INCOME/CAPITAL GAINS OR OTHER TYPES OF INCOME
2. 40% OPTIONAL STANDARD DEDUCTION IN LIEN OF ITEMIZED
DEDUCTIONS
3. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION
INSURANCE-ONLY FOR INDIVIDUAL TP

=INCOME AFTER DEDUCTIONS

LESS: PERSONAL EXEMPTIONS – ONLY FOR INDIVIDUAL TP

=TAXABLE INCOME

DEFINITION:

 Gross Income – Means all income derived from whatever source x x x (Sec. 32)

 Income subject to final tax – Income collected through the withholding tax system. It is a final settlement
of the income tax due on said income.

 Exclusions - Income received or earned but is not taxable as income because it is exempted by law or by
treaty.
-Income of individuals may either be subject to graduated income tax rates or to preferential tax
rates.
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 CHAPTER 1- COMPENSATION INCOME

SECTION 1- DEFINITION AND COMPOSITION

Compensation Income - is considered as having been earned in the place where the service was rendered and
not considered as sourced from the place of origin of the money;

- Payment for services, other than compensation income, is considered as having been earned at the place
where the activity or service was performed;

-Includes salaries, wages, commissions, fees, tips amd gratuities, hazard and emergency pay, overtime,
emoluments, honoraria, bonuses, fixed or variable allowances (BIR Ruling No. DA-233-2007, 17 Apr.
2007, BIR Ruling No. DA-018-2008, 16 Jan. 2008, BIR Ruling No. DA-778-2009, 15 Dec. 2009), fringe
benefits, pensions, retirement, separation pay, proceeds from profit-sharing, COLA, PERA, etc.

-However, it does not include compensation for services rendered by an independent contractor and
income derived from professional partnership.

SECTION 2- LESS

A. EXCLUDED/EXEMPT
1. Retirement benefits received under Republic Act 7641 and those received by officials and employees of
private firms under a reasonable private benefit plan maintained by the employer which meets the
following requirements:
 The plan must be reasonable;
 The benefit plan must be approved by the BIR;
 The retiring official must have been in the service of the same employer for at least ten
(10) years and is not less than fifty (50) years of age at the time of retirement, and
 The retiring official or employee should not have previously availed of the privilege
under the retirement benefit plan of the same or another employer.
Sec. 32(B)(6)(a)

2. Any amount received by an employee or by his heirs from the employer due to death, sickness or other
physical disability or for any cause beyond the control of said employee, such as retrenchment, redundancy
or cessation of business. Sec. 32(B)(6)(b)

3. Amounts received by reason of involuntary separation will be exempt from income tax even if the
employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty
(50) years of age.

4. Social security benefits, retirement gratuities, pensions and other similar benefits received by residents or
non- resident citizens or aliens who come to reside permanently in the Philippines from foreign government
agencies and other institutions, private or public.

5. Payment of benefits under the law of the United States administered by the United States Veterans
Administration. Sec. 32(B)(6)(d)

6. Payment of benefits made under the Social Security System. Sec. 32(B)(6)(e)

7. Benefits received from the GSIS Act of 1937, and the retirement gratuity received by government
officials and employees. Sec. 32(B)(6)(f)

8. Compensation Income shall not include remuneration paid for:

i. Agricultural labor paid entirely in products of the farm where the labor is performed; or
ii. Domestic service in a private home; or
iii. Casual labor not in the course of the employer’s trade or business; or
iv. Services by a citizen or resident of the Philippines for a foreign government of an
international organization. Sec. 78 (A)
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9. Actual, moral, exemplary and nominal damages in connection with a final judgment or compromise
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agreement arising out of or related to an employer-employee relationship.

 10. Life insurance proceeds paid to the heirs or beneficiaries upon death of the employee. However, interest
payments agreed under the policy for the amounts which are held by the insured will be included in the
gross income. Sec. 32(B)(1)

11. Amounts received by the insured as a return of premium Sec. 32(B)(2)

12. Compensation for injuries or sickness Sec. 32(B)(4)

13. Income exempt under any treaty obligation binding upon the Philippine government Sec. 32(B)(5)

14. Facilities or privileges are of relatively small value which are offered or furnished by the employer
merely as a means of promoting the health, goodwill, contentment or efficiency of his employees.

15. Benefits, privileges, and facilities which are given to employees for the exclusive benefit or
convenience of the employer. (Convenience of the Employer Rule) (Revenue Audit Memo No. 1-87, 23
April 1987)

De minimis benefits [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]

a. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during
the year and the monetized value of leave credits paid to government officials and employees;

b.Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per
month;

c. Rice subsidy of P1500 per month or one sack of 50 kg. Per month amounting to not more than
P1,500 granted by an employer to his employees (RR 5-2008);

d.Uniforms given to employees by the employer not exceeding P5,000 per annum; (R.R. 8-2012,
effective 1 January 2012)

e. Medical benefits given to the employees by the employer not exceeding P10,000 per annum;

BIR Ruling 019-02: To be considered “de minimis” medical allowance, the ff. conditions must
concur:
i. The amount given to the EE shall be for his own medical expense;

ii. The amount actually given and actually spent shall not exceed P10,000 in any given
calendar year;

iii. The EE must fully substantiate with or in his name the medical allowance to be
granted.

f. Laundry allowance of P300 per month;

f. Employee achievement awards, e.g. for length of service or safety achievement, which must be in
the form of a tangible personal property other than cash or gift certificate, with an annual monetary
value not exceeding P10,000 received by the employee under an established written plan which does
not discriminate in favor of highly paid employees;

g. Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;

h.Company picnics and sports tournaments in the Philippines and are participated exclusively by
employees; and – removed

i. Daily meal allowance for overtime work not exceeding twenty-five (25%) of the basic minimum wage.

j. Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on
account of illness, marriage, birth of a baby, etc. [as enumerated in RR 03-98, as amended by RR 10-
00] – removed (R.R. 5-2011)
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The amount of de minimis benefits conforming to the ceilings herein prescribed shall not be
considered in determining the ₱ 82,000 of other benefits (#17). However, if the employer pays more
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than the ceilings, the excess shall be taxable to the employee if such excess is beyond ₱ 82,000. (R.R.
3-2015)
 16. Advances or reimbursements for travelling, representation and other ordinary and necessary expenses
incurred by the employee in the performance of his duties, if the employee is required to account/liquidate for
said expenses. The excess of actual expenses over advances made shall be treated as taxable income if such
amount is not returned to the employer.

17. GSIS, SSS, Medicare and Pag-ibig contributions and union dues of individual employees.
Sec. 32(B)(7)(f) – RMC 53-2011, RMC 27-2011

18. Thirteenth (13th) month pay and other benefits such as Christmas bonus, productivity incentive bonus,
loyalty awards, gifts and other benefits of similar nature to the extent that the total amount thereof does not
exceed P82,000. Sec. 32(B)(7)(e)
* Revenue Regulation 3-2015

19. Anyone earning at least the minimum wage (including holiday pay, overtime pay, hazard pay, and night
shift differential) in his/her region and has no other reportable income will not pay income tax. (Sec. 6 of
R.A. 9504)

20. Salaries and stipends in dollars received by non-Filipino citizens serving as staff of the IRRI and the
Ford Foundation (R.A. 2707)

21. Tax exemption of allowances paid to military personnel.

22. Tax exemption of qualified senior citizen – provided he qualifies to be a minimum wage earner in
accordance with R.A. 9504. (R.A. 9994, 27 July 2009)
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 B. SUBJECT TO FINAL TAX – [FRINGE BENEFIT TAX SINCE THIS IS A COMPENSATION INCOME AS A
CONSEQUENCE OF EMPLOYER-EMPLOYEE RELATIONSHIP]

I. DEFINITION

Fringe Benefits Tax

Fringe benefits – refer to any good, service, or other benefit furnished or granted in cash or in kind by
an employer to an individual employee (except rank and file employees). Sec. 33(B)

Rank and file employees shall mean all employees who are holding neither managerial nor
supervisory position. Sec. 22 (AA)

Managerial employee – is one who is vested with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline
employees. (Labor Code)

Supervisory employees - those who, in the interest of the employer, effectively recommend such
managerial actions if the exercise of such authority is not merely routinary or clerical in nature but
requires the use of independent judgment. (Labor Code)

II. ITMES SUBJECT TO FRINGE BENEFIT TAX

1. HOUSING

Taxable

a) Lease of residential property for the use of the employee as his usual place of residence
b) Residential Property owned by employer and assigned to employee as his usual place of
residenc
c) Residential property purchased by employer on installment basis for the use of employer as
his usual place of residence.
d) Residential property purchased by ER and ownership is transferred to EE as his usual place
of residence.
e) Residential property transferred to employee at less than employer’s acquisition cost.

Not taxable

a) Housing privilege of military officials of the AFP located inside or near the military camps;
b) A housing unit which is situated inside or at most 50 m from the perimeter of the business
premises;
c) Temporary housing for an employee for 3 months or less;

2. EXPENSE ACCOUNT

Taxable
a. Expenses incurred by the employee which are paid or reimbursed by his employer not
supported by receipts in the name of the employer
b. Personal expense of the employee which are paid or reimbursed by his employer w/n
supported by receipts in the name of the employer
c. Household expenses of the employee borne by the employer.

Not taxable
a. Expenditures supported by receipts in the name of the employer and expenditure that
do not partake the nature of a personal expense attributable to the employee
b. Representation and Transportation Allowances (RATA)
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 3. MOTOR VEHICLE

Taxable when employer:

a) Purchase the motor vehicle in the name of the employee;

b) provides the employee with cash for the purchase of a motor vehicle in the name of the
employee;
c) shoulders a portion of the amount of the purchase price of a motor vehicle in the name of
the employee
d) Purchases the car on installment in the name of the employee;
e) owns and maintains a fleet of motor vehicle not normally used in business
f) leases and maintains a fleet of motor vehicles not normally used in business
g) the use of yacht whether owned and maintained or leased by the employer

 How about use of aircraft (including helicopters)?

Not taxable
Motor vehicles used for sales, freight, delivery service and other non-personal uses.

4. INTEREST ON LOAN AT LESS THAN MARKET RATE TO THE EXTENT OF THE

DIFFERENCE BETWEEN THE MARKET RATE AND ACTUAL RATE GRANTED

5. MEMBERSHIP FEES, DUES AND OTHER EXPENSES BORNE BY THE EMPLOYER FOR
THE EMPLOYEE IN SOCIAL AND ATHLETIC CLUBS OR OTHER SIMILAR
ORGANIZATIONS

6. EXPENSES FOR FOREIGN TRAVEL,

EXCEPT

Where the expenses for foreign travel paid by the employer for the employee are for the purpose
of attending business meeting or convention. The exemption covers only the following expenses:

a) Inland travel expenses except lodging cost in hotel averaging US$ 300 or less per day; and
b) Cost of economy or business class airline ticket. Travel expenses should be supported by
documents proving the actual occurrences of the meetings or conventions. Likewise,
documents and evidence showing the business purpose of the employees’ travel must be
presented otherwise, the entire cost will be considered taxable fringe benefit.

However, if the ticket is a first class one, 30% of the cost of the ticket shall be subject to a fringe
benefit tax.

7. HOLIDAY AND VACATION EXPENSES

8. EDUCATIONAL ASSISTANCE

Education granted to employee

Requisites:
1) Educational grant whereby the study is directly connected with the trade, business or
profession of the ER.
2) And there is a written contract obligating the EE to remain under the employment for a
certain period.
a. Educational Assistance granted to the dependents of the employee through a
competitive scheme under a scholarship program of the company.

9. LIFE OR HEALTH INSURANCE AND OTHER NON-LIFE INSURANCE PREMIUMS OR

SIMILAR AMOUNTS IN EXCESS OF WHAT THE LAW ALLOWS.

EXCEPT:
a) Contribution of the employer for the benefits of the employee pursuant to existing laws.
b) The cost of premium borne by the employer for the group insurance of his employees.
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 III- FRINGE BENEFIT TAX; HOW COMPUTED

Fringe Benefits Tax – tax imposed on fringe benefits which are granted or are paid by an
employer to an employee occupying managerial or supervisory position.

-It is a tax on the income of the employee although paid by the employer on behalf of the employee.

-The employer can claim the fringe benefit and the fringe benefit tax as a deductible expense from his
gross income.

Tax Rate and Tax Base –

GENERALLY - 32% of the grossed-up monetary value (GMV) GMV

represents the whole amount of income realized by the employee.

SPECIAL CASES:
a) For fringe benefits received by non-resident alien not engaged in trade of business
(NRANETB), the tax rate is 25% of thegrossed-up monetary value (GMV).
b)
c) For fringe benefits received by alien individuals and Filipino citizens employed by regional or
area headquarters, regional operating headquarters, offshore banking units (OBUs), or foreign
service contractor, the tax rate is 15% of the grossed-up monetary value (GMV).

IV - BENEFITS NOT SUBJECT TO FRINGE BENEFITS TAX:

1. Those that are exempted from income tax.
2. Contributions of the employer for the benefit of the employee retirement, insurance, and
hospitalization benefit plans.
3. Benefits granted to the rank and file, whether granted under a CBA or not.
4. De minimis benefits
5. Benefits granted to employees as required by the nature of, or necessary to the trade, business or
profession of the employer.
6. Benefits granted for the convenience of the employer. (Convenience of the Employer Rule)
CIR v. CA, 203 SCRA 72
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 C. PART OF THE PERTINENT ITEMS OF GROSS INCOME
- compensation income that is neither exempt/excluded nor subject to a final tax.

D. ALLOWABLE DEDUCTIONS FROM GROSS COMPENSATIOIN INCOME

a) Basic Personal exemption (R.A. 9504);

b) Additional exemption for qualified dependent child (R.A. 9504);

a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon
and living with the taxpayer if such dependent is not more than twenty-one (21) years of age,
unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of
self-support because of mental or physical defect.

c) Premium payments on health and/or hospitalization insurance Sec. 34(M)

SECTION 3- WITHHOLDING TAX [OF THE COMPENSATION INCOME OF THE EMPLOYEE BY THE
EMPLOYEE]

1. DEFINITION
Withholding Taxes – is a systematic way of collecting taxes at source.

2. TYPES OF WITHHOLDING AT SOURCE:

1) Final Withholding tax; and

Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income due from the payee
on the said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]

2) Creditable Withholding tax

Under the creditable withholding tax system, taxes withheld on certain income payments
are intended to equal or at least approximate the tax due from the payee on the said income.
The income recipient is still required to file an income tax return and/or pay the difference
between the tax withheld and the tax due on the income. [1st and 2nd sentences, Sec. 257(B),
Rev. Regs. No. 2-98]

Kinds of creditable withholding taxes:

(a) taxes withheld on income payments covered by the expanded withholding tax; and
(b) taxes withheld on compensation income.

3. BASIC RULES ON COMPENSATION WITHHOLDING TAXES

GENERAL RULE- all salaries earned by persons as government or non-government employees are
subject to withholding tax,

EXCEPTIONS:
1. Commission paid by an insurance agent to his sub-agents
2. Compensation for services by a citizen or resident of the Phils. for a foreign government
or an international organization.
3. Remuneration for casual labor not in the course of the employer’s trade/ business
4. Remuneration for private service performed by maids, cooks, gardener, family drivers
and the like
5. Remuneration paid to agricultural labor and paid entirely in products of the farm.
6. Minimum wage earners
16
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 CHAPTER 2- INCOME DERIVED FROM THE CONDUCT OF
TRADE OR BUSINESS OR THE EXERCISE OF A
PROFESSION

SECTION 1 – DEFINITION

Professional Income - Any other income that is not derived from personal services or not related to an
employer – employee relationship and is generally subject to tax on net income basis.
- The value derived from an exercise of profession, business or utilization of capital assets.

Income from Business - Gains or profits derived from rendering services, selling merchandise,
manufacturing products, farming and long- term construction contracts.

SECTION 2 - LESS
A. EXCLUDED/EXEMPT
1. The amount received by the insured, as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the
contract or upon surrender of the contract. Sec. 32(B)(2)
2. The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from
such property, as well as gift, bequest, devise or descent of income from any property, in cases of
transfers of divided interest, shall be included in gross income. Sec. 32(B)(3)

3. Income derived from any public utility or from the exercise of any essential governmental function
accruing to the Government of the Philippines or to any political subdivision thereof. Sec. 32(B)(7) (b)
4. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities,
or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing
institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international
or regional financial institutions established by foreign governments. 32(B)(7) (a)

5. Income exempt under any treaty obligation binding upon the Philippine Government Sec. 322 (B) (5)

6.Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years.

7. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as
defined in Section 22 (BB) of this Code.

8. Tax-exemption for 10-year period of the income generated from commercial sale of the invention of
inventors (R.A. 7459).

9. Income earned by Barnagay Micro Business Enterprise (BMBE)

B. INCOME SUBJECT TO FINAL TAX

C. PART OF THE PERTINENT ITEMS OF GROSS INCOME

1. FORMULA FOR SOLVING GROSS INCOME

NET SALES
LESS: COST OF GOODS SOLD/COST OF SALES
=GROSS INCOME

GROSS INCOME derived from business shall be equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold.

"COST OF GOODS SOLD' shall include all business expenses directly incurred to
17

produce the merchandise to bring them to their present location and use.
Page

GROSS INCOME = NET SALES – COST OF GOODS SOLD/COST OF SALES

 2. CLASSIFICATION OF GROSS INCOME FROM BUSINESS/PROFESSION:
1) Manufacturing, merchandising, and servicing
2) Farming
3) Long term contract

-The term “trade or business” includes the performance of the functions of a public
office. [Section 22(S), NIRC]

DETAILS OF CLASSIFICATION:

1. GROSS INCOME FROM MANUFACTURING, MERCHANDISING, AND

SERVICING

a) For a manufacturing concern, 'cost of goods manufactured and sold' shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred
to bring the raw materials to the factory or warehouse.

b) For a trading or merchandising concern, 'cost of goods' sold shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the goods
to the place where the goods are actually sold, including insurance while the goods
are in transit.

c) In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances and discounts.

2. GROSS INCOME FROM FARMING

Income from farming refers to earnings derived from its operation by a person. It includes
the following:

1. Gross receipts from sale of livestock and products purchased from others;
2. Cash received from sale of products raised in the farm;
3. Gains from sale of work animals and farm equipment; and
4. Miscellaneous income such as rent received on crop shares, proceeds of insurance on
growing crops, etc.

Methods of Computing Gross Income Derived from Farming:

1. Cash basis
2. Accrual basis

3. GROSS INCOME FROM LONG TERM CONSTRUCTION CONTRACTS

When income is derived from construction contracts, the completion of which
usually covers a period over one year.
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 D. ALLOWABLE DEDUCTIONS FROM GROSS BUSINESS/PROFESSIONAL INCOME

Kinds of Deductions:
1. Itemized deductions
2. Optional standard deduction (OSD)
3. Special deductions

General rules:
a) Deductions must be paid or incurred in connection with the taxpayer’s trade, business or
profession It must be directly connected with trade or business or profession of the taxpayer.

b) Deductions must be supported by adequate receipts or invoices

The claimed deduction must be evidenced by official receipts or other adequate records.

The evidence must establish the ff:

a) the amount of expenses being deducted

b) the direct relation of such to the development, management, operation, and/or conduct of the trade,
business or profession of the taxpayer.

Note: Cohan Rule Principle

DETAILS OF THE KINDS OF DEDUCTIONS

1. ITEMIZED DEDUCTIONS
I. Expenses
II. Interest
III. Taxes
IV. Losses
V. Bad debts
VI. Depreciation
VII. Depletion
VIII. Charitable and other contributions
IX. Research and Development
X. Pension and trust contribution

-----------NEXT PAGE-DETAILS OF EACH ITEMIZED DEDUCTIONS---------

19
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 I. EXPENSES

A. REQUISITES FOR DEDUCTIBILITY

1. BUSINESS TEST:
a) must be ordinary and necessary,
b) must be paid or incurred during the taxable year,
c) must be paid or incurred in carrying on or which are directly attributable to the
development, management, operation and/or conduct of the trade, business or
exercise of a profession,
d) must be reasonable, and
e) must not be against public policy, public moral or law

Cases: Hospital De San Juan De Dios vs. CIR (10

May 1990); ESSO Standard Eastern Inc. vs.
CIR (175 SCRA 158-159); CIR vs. Isabela
Cultural Corporation (12 February 2007)

2. SUBSTANTIATION TEST:
It must be substantiated with sufficient evidence, such as official receipts or other adequate
records, showing:

a) the amount of the expense being deducted, and

b) the direct connection or relation of the expense being deducted to the development,
management, operation and/or conduct of the trade, business or profession of the
taxpayer.

* The tax required to be withheld on the amount paid or payable must have been paid to
the BIR by the taxpayer, who is constituted as a withholding agent of the government.

B. KINDS OF BUSINESS EXPENSES:

1. Compensation for personal services
2. Travelling expenses
3. Representation and Entertainment expenses
4. Advertising and Promotional expenses
5. Rent expenses
6. Cost of material and supply
7. Repairs
Cases: Aguinaldo Industries vs. CIR (1982);

SPECIAL CASE OF EXPENSES FOR:

-A PRIVATE EDUCATIONAL INSTITUTION MAY, AT ITS OPTION, ELECT:

a) to deduct expenditures otherwise considered as capital outlays of depreciable

assets incurred during the taxable year for the expansion of school facilities; or

b) to deduct allowance for depreciation thereof Sec. 34(A)(2)

- It must be those referred under section 27
- Section 36(A)(2), (3) not applicable

Thus:
General Rule: These expenditures are not deductible as business expense
Exception: Private educational institution can claim it under Sec.
34(A)(2)
ALLOWANCE FOR
BUSINESS EXPENSE
DEPRECIATION
No carryover There is carryover
Can claim it for a longer period depending on
Can be claimed for one only year the life span of the property
20

If the amount of capital outlay is

substantial, it It can accommodate all of the expenses
Page

cannot accommodate all of the incurred

expenses incurred
 II. INTEREST
A. REQUISITES FOR DEDUCTIBILITY:
a) there must be indebtedness.
b) the indebtedness must be that of the taxpayer
c) the indebtedness must be connected with the trade, business or profession of the taxpayer
d) the interest must have been paid or incurred during the taxable year
e) the interest must have been stipulated in writing
f) the deduction for interest expense shall be reduced by an amount equal to 33% of the interest
income subject to final tax. (tax arbitrage)
g) The interest payment arrangement must not be between related taxpayer as mandated in Sec.
34(B)(2)(b), in relation to Sec. 36(B), both of the Tax Code of 1997.

*Interest between related taxpayers:

◦ Members of the family
◦ Individual and corp.
◦ Between corps.
◦ Grantor and fiduciary (trustee) of any trust.
◦ Fiduciary and another fiduciary – same grantor
◦ Fiduciary and beneficiary or such trust

h) The interest must not be incurred to finance petroleum operations.

i) In case of interest incurred to acquire property used in trade, business or exercise
of profession, the same was not treated as a capital expenditure.
*Optional treatment-?

B. DEDUCTIBLE INTEREST EXPENSES:

a) Interest on taxes. However, fines, penalties and surcharges on taxes are not deductible
b) Interest paid by corporation on script dividends
c) Interest on deposits paid by the authorized bank of the CB
d) Interest paid by legal or equitable owner on mortgage of real property

C. NON DEDUCTIBLE INTEREST EXPENSES

a) Interest paid on preferred stock which is considered interest on capital by virtue of RMC 17-71
b) Interest on undrawn salaries and bonuses
c) Interest on capital for cost keeping
d) Interest paid where parties provide no stipulation to pay interest in writing
e) Interest on indebtedness if incurred to finance petroleum and on interest paid on
indebtedness paid in advance through discount or otherwise
f) Section 34(B)(2)
21
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 III. TAXES
A. REQUISITES FOR DEDUCTIBILITY
1. It must be paid or incurred within the taxable year.
2. It must be paid or incurred in connection with the taxpayer’s trade, profession or business.

Examples:
a) Import duties
b) Business taxes
c) Occupation taxes
d) Privilege and license taxes
e) Excise taxes
f) Documentary stamp taxes
g) Automobile registration fees
h) Real property taxes

3. It must be imposed directly on the taxpayer.

4. It must not be specifically excluded by law from being deducted from the taxpayer’s gross income.

B. LIMITATION

In the case of a nonresident alien individual engaged in trade or business (NRAETB) and
a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to the
extent that they are connected with income from sources within the Philippines.

C. NON-DEDUCTIBLE TAXES
1. Foreign income tax, if not claimed as tax credit
2. Final Taxes
3. Estate and donor’s taxes
4. Stock transaction tax on the sale, barter or exchange of s/s listed and traded through the
local stock exchange.
5. Taxes assessed against local benefits tending to increase the value of the property
6. Taxes which are not in connection with the trade, business or profession of taxpayer.
7. Income tax imposed by the Philippine gov’t.
8. Value – added Tax (VAT)
9. Energy Taxes

D. TAX CREDIT VS TAX DEDUCTION

Tax Credit Tax Deduction

deducted from Phil. income tax deducted from the gross income

all taxes are allowed to be deducted only foreign income taxes may be claimed as
with the exception of the taxes credits
expressly excluded
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 IV. LOSSES
LOSSES actually sustained during the taxable year and not compensated for by insurance or
other forms of indemnity shall be allowed as deductions:
a) If incurred in trade, profession or business;
b) Of property connected with the trade, business or profession, if the loss arises from
fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

A. REQUISITES FOR DEDUCTIBILITY

a) The loss must be that of the taxpayer.
b) There must be an actual loss suffered in a closed and completed transaction.
c) The loss must be connected with the taxpayer’s trade, business or profession.
d) The loss must not be compensated for by insurance or otherwise.
e) The loss must not be compensated for by insurance or otherwise.
f) The loss must be actually sustained and charge – off during the taxable year.
g) In the case of casualty loss, declaration of loss must be filed within 45 days from
the occurrence of the casualty loss.
h) The loss must not be claimed as deduction for estate tax purposes in the estate tax return.

B. KINDS OF LOSSES

1. Transaction losses – losses arising from closed and completed transaction in the conduct
of trade and business. Example:
a. loss on sale of ordinary assets
b. foreign exchange losses

2. Casualty losses – loss of properties used in trade, business, or practice of profession.

Arising from fires, storms, shipwreck, or other casualties, or robbery, theft or embezzlement.

3. Capital losses – losses from capital asset other than those subjected to capital gains tax.
Deductible only up to the extent of capital gains.
Examples:
a. sale or exchange of capital assets;
b. short sales of properties;
c. securities becoming worthless;
d. loss for failure to exercise option to buy capital asset;
e. wagering/gambling losses.

4. Net operating loss carryover (NOLCO) – arises when allowable deductions exceeds gross
income.
Rules:
a. carried over for the next 3 immediately succeeding years;
b. not applicable under OSD;
c. not applicable against MCIT;
d. forms part of allowable deductions as a special allowable deduction upon application.

5. Special losses – with special or specific rules

based on its nature. Example:
a. loss on voluntary removal of buildings;
b. loss from illegal transactions;
c. loss on exchange between related parties;
d. shrinkage of value of shares;
e. write-off of inventories;
f. abandonment of petroleum operations.

C. PREFERENTIAL TAX TREATMENT FOR CAPITAL GAIN (LOSS):

1. Net capital gain is added to ordinary gain but net capital loss is not deductible from ordinary
gain.
2. Net ordinary loss is deductible from net capital gain.
3. Capital losses are deductible only to the extent of the capital gain.
4. For the individual the reportable percentages of capital gain or loss shall be:
a. 100% if the capital asset is held for one year or less
23

b. 50% if the capital asset is held for more than one year
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 V. BAD DEBTS
Bad debts - Debts due to the taxpayer when actually ascertained to be worthless and
charged- off within the taxable year.

A. REQUISITES FOR DEDUCTIBILITY

1) There must be a valid and subsisting debt.
2) The same must be connected with the taxpayer’s trade, business or practice of profession.
3) The same must not be sustained in a transaction entered into between related
parties enumerated under Sec. 36 (B) of the NIRC.
4) The same must be actually charged-off the books of accounts of the taxpayer as
of the end of the taxable year.

VI. DEPRECIATION
Depreciation-The gradual diminution in the useful value of tangible property used in trade
or business resulting from exhaustion, wear and tear, and normal obsolescence.

The term is also applied to amortization of value of intangible assets the use of which in trade
or business is definitely limited in duration. (Basilan Estates, Inc. vs. Comm., 5 September 1967)

A. REQUISITES FOR DEDUCTIBILITY

1) The allowance for depreciation must be reasonable
2) It must be for property arising out of its use or employment in the business or trade, or
out of its not being used temporarily during the year
3) It must be charged-off during the taxable year;
4) A statement on the allowance must be attached to the return.
5) The property must have a limited useful life.

VII. DEPLETION OF OIL AND GAS WELL AND MINES

Depletion - is the exhaustion of natural resources due to production. It is the reduction of cost
or value of natural resources such as oil and gas wells and mines as the resources
are converted into inventories.

A. LIMITATION: A reasonable allowance for depletion computed using the cost-

depletion method shall be granted provided that the allowance for depletion shall not
exceed the capital invested.

VIII. CHARITABLE AND OTHER CONTRIBUTIONS REQUISITES FOR

DEDUCTIBILITY

A. REQUISITES FOR DEDUCTIBILITY

1) The contribution must actually be paid or made to the Phil. Government or any of its
agencies or political subdivision or to any domestic corporations or associations specified
by the Tax Code or other entities as allowed by the Tax Code and existing special laws.
2) It must be made within the taxable year;
3) It must not exceed 10% of the individual’s taxable income and 5% of the corporation’s
taxable income before deducting the contribution (applicable only to contributions with
limit); and
4) It must be evidenced by adequate records or receipts.
24
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 B. LIMITATION
The following are subject to limit:
1) Donations to the Philippine government or any of its agencies or any
political subdivision thereof exclusively for public purposes;

2) Donations to accredited domestic corporations or associations organized and operated

exclusively for:
a. Religions;
b. Charitable;
c. Scientific;
d. Youth and sports development;
e. Cultural; or
f. Educational purposes; or for the
g. Rehabilitations of veterans; and

3) Donations to social welfare institutions or to non-government organizations in

accordance with rules and regulations promulgated by the Secretary of Finance
provided, no part of the net income of which inures to the benefit of any private
stockholders or individual.

C. DEDUCTIONS
Contributions deductible in full under the Tax Code:

1) Donations to the government of the Philippines or to any of its agencies or political

subdivisions including fully-owned government corporations exclusively to
finance, to provide for, or to be used in undertaking priority activities in:
a. Education;
b. Health;
c. Youth and sports development;
d. Human settlements;
e. Science and culture; and
f. Economic development

2) According to the national priority plan determined by NEDA provided, that donations
not in accordance with the said annual priority plan shall be with limit;

3) Donations to foreign institutions or international organizations in pursuance or

compliance with agreements, treaties, or commitments entered into by the
government of the and the foreign laws or international organizations or in
pursuance of special laws, and

4) Donations to certain accredited non-government organization.

25
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 IX. RESEARCH AND DEVELOPMENT
Research and Development- are for improvements of processes and formulas as well as the
development of improved or new products.

A. REQUISITES FOR DEDUCTIBILITY

AS A GENERAL RULE, R&D only extends from the laboratory or drawing board to
prototype status; i.e., so long as an activity still contains an element of
uncertainty/technical risk, it is within the realm of R&D.

SPECIAL CASE:
R&D expenditures which are paid or incurred by a taxpayer during the taxable year in
connection with his trade, business or profession may be treated EITHER as:

1) Ordinary and necessary expenses allowed as deduction during the taxable year
when paid or incurred (i.e., as an outright deduction for the full expenditure), or

2) Deferred asset (or deferred expense) which is periodically subject to amortization

B. LIMITATION ON DEDUCTION
The above tax treatment of R&D expenses does NOT apply to:

1. Any expenditure for the acquisition or improvement of land or the

improvement of depreciable property, used in connection with research
and development.

2. Any expenditure incurred in ascertaining the existence, location, extent, or quality

of any deposit of ore or other mineral, including oil or gas.

X. PENSION TRUST

A. REQUISITES FOR DEDUCTIBILITY

1) The employer must have established a pension or retirement plan to

provide for the payment of reasonable pensions to its employees;
2) The pension plan is reasonable and actuarially sound;
3) It must be funded by the employer; i.e., the employer contributes cash to the plan;
4) The amount contributed must no longer be subject to its control or disposition; and
5) The payment has not therefore been allowed as a deduction.
26
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 2. OPTIONAL STANDARD DEDUCTIONS
OPTIONAL STANDARD DEDUCTION as amended by R.A. 9504
- may be taken by an individual, in lieu of itemized deductions

A. REQUISITES:
1. Available only to citizens, resident aliens, domestic corporations and resident foreign corporations;

2. The standard deduction is optional;

i.e., unless the taxpayer signifies in his return his intention to elect this deduction, he is
considered as having availed of the itemized deductions.

3. Such election, when made by the qualified taxpayer, is irrevocable for the year in which
made; however, he can change to itemized deductions in succeeding years.

*Since an individual in business or in the practice of profession is required to file quarterly

income tax returns, can he choose the OSD in his quarterly returns and then choose the
itemized deductions in his annual income tax return, or vice versa?
YES, the OSD or Itemized Deductions is against the gross income of the year.
Quarterly income tax returns are only interim computations on the taxable income for the
year

4. The amount of standard deduction is limited to forty percent (40%) of:

Gross income – DC and RFC
Gross sales or receipts – RC, NRC, RA

[However, OSD is not available against compensation income arising out of an

employer-employee relationship.]

*NOTE: The “cost of sales” in case of individual seller of goods, or the “cost of services” in the
case of individual seller of services, is not allowed to be deducted for purposes of determining
the basis of the OSD.

5. Proof of actual expenses is not required, but the taxpayer should keep records pertaining to his
gross income during the taxable year.

3. SPECIAL DEDUCTIONS
SPECIAL DEDUCTIONS:

1. Premiums paid on hospitalization insurance. [Sec. 34 (M)]

2. Income currently distributed to beneficiaries under estates and trusts. [Sec. 61 (A)]
3. Section 37 of the NIRC

e.i. Net additions, if any, required by law to be made within the year to
reserve funds and the sums other than dividends paid within the year on policy and
annuity contracts (non-life insurance) [Sec. 37 (A)]
4. Basic and Personal Exemptions
27
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 CHAPTER 3 - GAINS DERIVED FROM DEALINGS IN
PROPERTY

SECTION 1- COMPOSITION AND MEASUREMENT OF GAIN/LOSS

1. COMPOSITION

Gains Derived From Dealings In Property - includes all gains or losses derived from the disposition of
property (real, personal or mixed) for money in case of sale, or for property in case of exchange, or from a
combination of both sale and exchange.

2. MEASUREMENT OF GAIN/LOSS

A. GAIN
excess of the AMOUNT REALIZED therefrom over the BASIS OR ADJUSTED BASIS for
determining gain.

B. LOSS
excess of the BASIS OR ADJUSTED BASIS over the AMOUNT REALIZED for determining loss.

-AMOUNT REALIZED = sum of money received plus the fair market value of the property
(other than money) received [Sec. 40 (A)]

-BASIS OF PROPERTY [SEC. 40 (B)]

– depends primarily on the manner in which the taxpayer acquired the property.

1. By purchase:
a.) acquired before 1 March 1913 – FMV on such date
b.) acquired on or after 1 March 1913 – Cost plus expenses of acquisition (Sec. 136,
Rev. Reg. No. 2)

2. Included in the inventory – latest inventory value (Sec. 136, Rev. Reg. No. 2)

3. By devise, bequest or inheritance – FMV or value of such property at the time of the
acquisition (death of decedent) (Sec. 139, Rev. Reg. No. 2)

4. By gift – same basis as it would have been in the hands of the donor or the last preceding
owner by whom it was not acquired by gift, except that if such basis is greater than the
FMV of the property at the time of the gift, then for the purpose of determining loss shall
be such fair market value.

5. Acquired (other than capital assets) for less than an adequate consideration in money or
money’s worth
– amount paid by the transferee

6. Stock or security or property received if the exchange is one where gain/loss may be
recognized – same as the basis of the stock, or security or property given in exchange.

7. Stock or security or property received if the exchange is one where the gain, if any,
but not the loss is to be recognized- basis of the property, stock or security given in
exchange less cash and FMV of property given in exchange add dividend and/or gain
recognized
28

8. Property transferred in the hands of transferee if the exchange is one where the gain,
if any, but not the loss is to be recognized – same basis as it would be in the hands of
Page

transferor increased by the amount of gain recognized to the transferor on the transfer.
 SECTION 2- ASSETS
1. TWO KINDS OF ASSETS/PROPERTIES:

a) ORDINARY ASSETS [Sec. 39 (A)]

COMPOSITION:
 Refer to properties held by the taxpayer in the pursuit of his profession, trade or business,
they are:
1) Stock in Trade;
2) Property of a kind which would properly be included in the inventory if on
hand at the close of the taxable year;
3) Property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
4) Property used in trade or business which in subject to the allowance for
depreciation; and Real property used in trade or business

b) CAPITAL ASSETS

1. COMPOSITION
 Property held by the taxpayer (whether or not connected with his trade or business) but does
not include:
1. Stock in trade;
2. Property of a kind which would properly be included in the inventory if on
hand at the close of the taxable year;
3. Property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
4. Property used in trade or business which in subject to the allowance for
depreciation; and Real property used in trade or business.

2. CLASSIFICATION OF CAPITAL ASSETS FOR INCOME TAX PURPOSES:

1. Sale of shares of stock of a domestic corporation not listed and traded through a local
stock exchange
2. Sale of real property
3. Sale of capital assets other than stocks and real property (sale of personal
property considered as capital asset other than shares of stock)

2. TYPES OF GAINS FROM DEALINGS IN PROPERTY

(1) Ordinary income vis-à-vis Capital gain
Includes any gain from the sale or exchange of property which is not a capital asset.
(2) Actual gain vis-à-vis Presumed gain
(3) Long term capital gain vis-à-vis Short term capital gain
(4) Net capital gain, Net capital loss
Net Capital gainis the excess of the gains from sales or exchange of capital assets over the losses
from such sales or exchanges.
Net capital Lossis the excess of the losses from sales or exchanges of capital assets over the gains
from such sales or exchanges.
29
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 SECTION 3- LESS

A. EXCLUDED/EXEMPT [Sec. 40 (C)(2)]

1. Exchange solely in kind in legitimate mergers and consolidation which includes:

a. Between corporation which are parties to a merger or consolidation (property for stock)
b. Between a stockholder of a corporation party to a merger or consolidation and the other
party corporation (stock for stock)
c. Between a security holder of a corporation which is a party to a merger or consolidation and
the other corporation (securities for securities or stock)

2. Transfer or exchange of property for stock resulting in acquisition of corporate control (Property for
stock) [Sec. 40 (C)(2)]

3. Sale/disposition of principal residence [Sec.24 (D)(2)]

4. Shares listed and traded in the stock exchange

B. INCOME SUBJECT TO FINAL TAX

1. Sale, barter, exchange or other disposition of shares of stock in a domestic corporation not listed and
traded through a local stock exchange. [Sec. 24(C)]

- If the transferor of the shares is an individual, the rule on holding period and capital loss carry-
over will not apply, notwithstanding the provisions of Section 39 of the Tax Code , as amended.
(Rev. Reg. No. 6-2008)

2. Sale, barter, exchange or other disposition of real property located in the Philippines, classified as
capital assets. [Sec. 24(D)(1)]

C. PART OF THE PERTINENT ITEMS OF GROSS INCOME

1. Gain from sale, exchange, or other disposition of real property classified as ordinary assets
(although subject to creditable withholding tax)

2. Gain from sale, exchange or other disposition of personal property classified as ordinary assets
except shares of stock.

3. Gain from sale, exchange or other disposition of other personal property classified as capital
asset.
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 PASSIVE INCOMES [Chapters 4-12]
CHAPTER 4 – INTEREST

SECTION 1- DEFINITION AND RULES

1. Definition
Interest- An earning derived from depositing or lending of money, goods or credits.

2. Rules
General rule: Interest received by a taxpayer, whether usurious or not, is subject to income tax.
Except: When interest income is exempted by law from income tax.

SECTION 2 - LESS
A. EXCLUDED/EXEMPT
1. Interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the BSP. [Sec. 24(B)(1)]

a) These must have a maturity period of not less than five years and must be issued by
banks in denominations of P10,000.
b) Applicable only to individual taxpayers except NRANETB
c) If the holder pre-terminate before the 5th year, a tax shall be imposed on the entire
income (final tax)

2. Interest earned if received from:

a) By members from duly-registered cooperative (Rev. Regs. No. 20-2001);

b) BSP prescribed form of investments maturing more than 5 years;
c) Expanded foreign currency deposit system by nonresidents; and
d) A tenant who paid to a landowner on the price of land under a tenant-purchaser
agreement as part of CARP.

B. INCOME SUBJECT TO FINAL TAX

1. Interest income from any currency bank deposit or yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements. – 20% [Sec. 24(B)(1)]

2. Interest income from a depositary bank under the expanded foreign currency deposit system. – 7
½% [Sec. 24(B)(1)]

3. Interest earnings from long-term deposits or investments where the holder of the certificate pre
terminate the deposit or investment before the fifth year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long
term deposit or investment certificate. [Sec. 24(B)(1)]

C. PART OF THE PERTINENT ITEMS OF GROSS INCOME

1. Interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise
(lending is the main course of business or merely incidental and not subjected to final withholding
tax ) CIR v. Mitsubishi, G.R. No. L-54908, Jan. 22, 1990
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 CHAPTER 5 – RENTS

SECTION 1- DEFINITION

Rents- refer to earning derived from leasing real estate as well as personal property. It includes all other
obligations assumed to be paid by the lessee to the third party in behalf of the lessor.

SECTION 2 – TAX TREATMENT ON PREPAID RENT AND LEASEHOLD

IMPROVEMENT BY LESSEE TO OR FOR A LESSOR

Tax treatments of leasehold improvements, advance rent and taxes paid by lessee to or for a lessor?

1. Prepaid Rent

a) If the advance payment is received without restrictions as to its use, the entire amount is taxable
in the year it is received.

b) If the advance payment is a security deposit which restricts the lessor as to its use, then such
amount should be excluded in the determination of rental income.

2. Leasehold improvement

When the lessee erected or built permanent improvements on the leased property which will
become the property of the lessor upon the expiration of the lease, the value of the improvements
should be reported as income of the lessor.

SECTION 2 – LESS
A. EXCLUDED/EXEMPT – NONE
* However, take note of a CTA case
(Commissioner of Internal Revenue v. De la Salle University, Inc., CTA EB No. 622,
December 10, 2010)

B. INCOME SUBJECT TO FINAL TAX – NONE

C. PART OF PERTINENT ITEMS OF GROSS INCOME

CHAPTER 6 – ROYALTIES
SECTION 1- DEFINITION
ROYALTIES - These are the compensations or payments for the use of property and are paid to the owner
of a right.

SECTION 2 – LESS
A. EXCLUDED/EXEMPT
1) Income exempt under any treaty obligation binding upon the Philippine government Sec. 32(B)(5)

B. INCOME SUBJECT TO FINAL TAX

1) Royalties on books, literary works and musical compositions – 10% [Sec. 24(B)(1)] -paid by
domestic corp.
2) Other royalties (eg. Those derived from natural resources or products such as coal, gas, oil, copper,
silver, gold, and other similar products) – 20% [Sec. 24(B)(1)] –paid by domestic corp.
*NRANETB = 25% FWT, NRFC = 32% FWT
32

C. PART OF PERTINENT ITEMS OF GROSS INCOME

Page

1. Royalties paid by a foreign corporation to resident citizens and domestic corporations.

 CHAPTER 7 – DIVIDENDS

SECTION 1- DEFINITION
Dividends - any distribution made by a corporation to its shareholders out of its earnings or profits and payable
to its shareholders, whether in money or in other property

SECTION 2 – KINDS AND RULES

A. KINDS
(1) Cash dividend - A dividend paid in cash and is taxable to the extent of the cash received.

(2) Stock dividend - Involves the transfer of a portion of retained earnings to capital stock by
action of stockholders. it simply means the capitalization of retained earnings.

(3) Property dividend - A dividend paid in property of a corporation such as stock investment,
bands or securities held by the corporation and to the extent of the FMV of the property received
at the time of the distribution.

(4) Liquidating dividend - A dividend distributed to the shareholders upon dissolution of the corporation.

B. RULES
General rule: A mere issuance of stock dividends is not subject to income tax, because it merely
represents capital and it does not constitute income to its recipient. Before disposition
thereof, stock dividends are nothing but a representation of interest in the corporate entity.

Exceptions: When stock dividends are subject to tax;

a) These shares are later redeemed for a consideration by the corporation or otherwise
conveyed by the stockholder to the extent of such contribution. Under the NIRC, if a
corporation, after the distribution of a non-taxable stock dividend, proceeds to cancel or
redeem its stock at such time and in such manner as to make the distribution and
cancellation or redemption essentially equivalent to the distribution of a tax of a taxable
dividend, the amount received in redemption CIR v. A. Soriano Corp., G.R. No. 108576,
Jan. 20, 1999 or cancellation of the stock shall be treated as a taxable dividend to the
extent that it represents a distribution of earnings or profits. (Sec.73 (B), NIRC).
Depending on the circumstances, corporate earnings may be distributed under the guise
of initial capitalization by declaring the stock dividends previously issued and later
redeem or cancel said dividends by paying cash to the stockholder. This process amounts
to distribution of taxable dividends which is just delayed so as to escape the tax. (CIR vs.
CA, 301 SCRA 152)

b) The recipient is other than the stockholder. (Bachrach vs. Seifert, 57 PHIL 483)

c) A change in the stockholder’s equity results by virtue of the stock dividend issuance.

SECTION 2 – LESS
A. EXCLUDED/EXEMPT
1. Pure stock dividends
2. Intercorporate dividends (DC to DC or RFC)

B. INCOME SUBJECT TO FINAL TAX

1. Cash and/or property dividends2 actually or constructively received by an individual from:
a) a domestic corporation
b) a joint stock company
c) insurance or mutual fund companies
d) regional operating headquarters of multinational companies [Sec. 24(B)(2)]

C or RA = 10% FWT; NRAETB = 20% FWT; NRANETB = 25% FWT; NRFC = 15%
33

C. PART OF PERTINENT ITEMS OF GROSS INCOME

Page

1. Dividends received from a foreign corporation

 CHAPTER 8 – ANNUITIES PROCEEDS FROM LIFE
INSURANCE OR OTHER TYPES OF INSURANCE

SECTION 1- DEFINITION
1. Annuities - amounts payable yearly or at other regular intervals for a certain or uncertain period.They
also represent as installment payments for life insurance sold by insurance companies.

2. Proceeds of life insurance paid by reason of the death of the insured to his estate or to any beneficiary,
directly or in trust.

3. Return of insurance premium

SECTION 2 – LESS
A. EXCLUDED/EXEMPT
1. Income exempt under any treaty obligation binding upon the Philippine government Sec. 32(B)(5)

B. INCOME SUBJECT TO FINAL TAX

1. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured,
whether in a single sum or otherwise. [Sec. 32(B)(1)]

2. The amounts received by the insured, as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term or at maturity of the term mentioned in the
contract or upon surrender of the contract. [Sec. 32(B)(2)]
C. PART OF PERTINENT ITEMS OF GROSS INCOME
 Any excess of the return of premiums

CHAPTER 9 – PRIZES AND AWARDS

SECTION 1- COMPOSITION
Prizes and awards:
-reward for a contest/competition.
- Contest prizes and awards received are generally taxable. Such payment constitutes gain
derived from labor.

SECTION 2 – LESS
A. EXCLUDED/EXEMPT
1. Prizes and awards received in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievements are exclusions from gross income if:

a. The recipient was selected without any action on his part to enter a contest or proceedings; and
b. The recipient is not required to render substantial future services as a condition to receiving
the prize or award. [Sec. 32 (B)(7)(c)]

2. Prizes and awards granted to athletes in local and int’l sports competitions and tournaments held in
the Philippines and abroad and sanctioned by their national associations. [Sec. 32 (B)(7)(d)]

B. INCOME SUBJECT TO FINAL TAX

 Prizes that are more than P10,000 – 20%

C. PART OF PERTINENT ITEMS OF GROSS INCOME

34

1. Prizes of P10,000 and below

Page

2. Prizes won abroad

 CHAPTER 10 – WINNINGS

SECTION 1- DEFINITION
Winnings – a reward for an event that depends on chance.

SECTION 2 – LESS
A. EXCLUDED/EXEMPT
1. Philippine Charity Sweepstakes and Lotto winnings [Sec. 24(B)(1)

B. INCOME SUBJECT TO FINAL TAX

1. All winnings regardless of amount – 20%

C. PART OF PERTINENT ITEMS OF GROSS INCOME

1. Winnings won outside of the Philippines

CHAPTER 11 – PENSIONS RETIREMENT BENEFIT, OR

SEPARATION PAY

SECTION 1- DEFINITION
Pension refers to allowance paid regularly to a person on his retirement or to his dependents on his death,
in consideration of past services, meritorious work, age, loss or injury.

SECTION 2 – LESS
A. EXCLUDED/EXEMPT

1. Retirement benefits received under RA 7641 and those received by officials and employees of
private firms in accordance with a reasonable private benefit plan maintained by the employer. [Sec.
32(B)(6)(a)]

2. Any amount received by an employee or by his heirs from the employer as a consequence of
separation of such official or employee from the service of the employer because of death, sickness,
other physical disability or for any cause beyond the control of the employee. [Sec. 32(B)(6)(b)]

3. The social security benefits, retirement gratuities, pensions and other similar benefits received by
resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions. [Sec. 32(B)(6)(c)

4. Payments of benefits due or to become due to any person residing in the Philippines under the laws
of the United States administered by the United States Veterans Administration [Sec. 32(B)(6)(d)

5. Benefits received from or enjoyed under the Social Security System. [Sec. 32(B)(6)(e)]

6. Benefits received from the GSIS, including retirement gratuity received by government officials and
employees. [Sec. 32(B)(6)(f)]

B. INCOME SUBJECT TO FINAL TAX – NONE

C. PART OF PERTINENT ITEMS OF GROSS INCOME

1. Pensions that do not comply with the requirements for exemption provided under [Sec. 32 (6)]
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 CHAPTER 12 – FORGIVENESS OF DEBT

SECTION 1- DEFINITION
Forgiveness of debt - The cancellation and forgiveness of indebtedness may, dependent upon the circumstances,
amount to:
1. a payment of income;
2. a gift; or
3. a capital transaction.

SECTION 2 – LESS
A. EXCLUDED/EXEMPT

1. When a creditor merely desires to benefit a debtor and without any consideration cancels the debt, the
amount of the debt is a gift not subject to income tax.

B. INCOME SUBJECT TO FINAL TAX

1. If a domestic corporation to which a stockholder is indebted forgives the debt, the transaction has the
effect of the payment of a dividend, thus subject to a final tax.

C. PART OF PERTINENT ITEMS OF GROSS INCOME

1. When an individual performs services for a creditor, who, in consideration thereof cancels the debt.
36
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 TITLE IV- TAXPAYERS

CHAPTER 1 – INDIVIDUAL TP

SECTION 1- CHART; SUMMARY OF INDIVIDUAL TP

Primary Sub-Classification/s
Classification
Citizens of the Residents of the Philippines (5%-34%)
Philippines Not residents of the Philippines (5%-34%) Sec. 22(E)
Residents of the Philippines (5%-34%) Sec. 22(F)

Engaged in Trade or Business

Aliens
Not Residents of the in the Philippines (5%-34%)
Philippines Sec. 22 (G) Not engaged in Trade or
Business in the Philippines
(25% of GI)
Individuals Individual Employed by Regional or Area Headquarters
and Regional
Operating Headquarters of Multinational Companies
(15% of GI)

Special classes of Individual Employed by Offshore Banking Units

Individuals (15% of GI)
Individual Employed by a foreign service contractor or by a
foreign service
subcontractor engaged in petroleum operations in the
Philippines
(15% of GI)

SECTION 2 - KINDS OF INDIVIDUAL TP

KINDS OF INDIVIDUAL TAXPAYERS
1) Citizens
a) Resident citizens - Those residing in the Philippines unless he qualifies as a non-resident under
Sec. 22 (E)of the NIRC.
b) Non-resident citizens - Those not residing in the Philippines.
A “non-resident citizens” means
1.) One who establishes to the satisfaction of the Commissioner of Internal Revenue (CIR)
the fact of his physical presence abroad with a definite intention to reside therein.
2.) A citizen of the Phils. who leaves the country during the taxable year to reside abroad,
either as immigrant or for employment or on permanent basis.
3.) A citizen of the Phils. who works and derive from abroad and whose employment
thereat requires him to be physically present abroad most of the time during the
taxable year.
4.) A citizen who has been previously considered as non-resident citizen and who
arrives in the Phils. at any time during the taxable year to reside permanently in the
country.
5.) A citizen who shall have stayed outside the Phils. for 180 days or more by the end of the
year.
2) Aliens
a) Resident aliens - Those residing in the Philippines though not a citizen thereof.
- Those who are actually present in the Phils. and who are not mere transients or sojourners.

b) Non-resident aliens - Those not residing in the Phils. and who is not a citizen thereof.
(1) Engaged in trade or business – comes and stays in the Phils. For an aggregate period of
37

more than 180 days during the calendar year.

- includes performance of personal services within the Phils.
Page

(2) Not engaged in trade or business

 SECTION 3- CHART; SUMMARY OF HOW INDIVIDUAL TPs ARE TAXED

Category of Resident Nonresident

Income CITIZEN ALIEN CITIZEN NRAEBT NRAEBT
All sources Within Within Within Within
Compensation,
Business/Profession
GIW 25%
Prizes of P10,000 or Schedular Normal Tax Rate
less
Proprietary,
N/A
educational/Hospital
Cinematographic
GIW 25%
Film and the like
Interest, Royalty,
Winnings/Prizes of 20% FINAL WITHHOLDING TAX (FWT)
P10,000 & below
Royalties-books, GIW 25%
10% FINAL WITHHOLDING TAX (FWT)
literary, musical
Interest (long term
EXEMPT
investment)
Cash/Property
6%(1998); 10%(2000), FWT GIW 20%
dividends
Interest (Foreign
currency deposit GIW 7.5% FWT EXEMPT
sys.)
Capital gains on
5% (not over P100,000); 10% (in excess of P100,000) FWT on net capital gains
sale of shares
Sale of shares EXEMPT
Capital gains on
6% FWT of Gross Selling Price or FMV whichever is higher
sale of real property
Winnings on Phil.
EXEMPT
Sweepstakes/Lotto
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Page
 CHAPTER 2 – CORPORATION TP

SECTION 1- COMPOSITION AND KINDS

1. COMPOSITION
Corporations, as used in income taxation, INCLUDES:
1. partnerships, no matter how created or organized, joint stock companies,
2. joint accounts (cuentas en participacion),
3. associations or insurance companies.

However, it does NOT INCLUDE:

1. a general professional partnership; and
2. a joint venture or consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the government.

2. KINDS OF CORPORATE TAXPAYERS

1) Domestic corporations - Those created or organized in the Phils. or under its laws.
2) Foreign corporations - Those created, organized or existing under any laws other than those of the
Phils.
a. Resident - Those foreign corporation engaged in trade or business within the Phils.
b. Non-resident - Those foreign corporation not engaged in trade or business within the Phils.

SECTION 2- INCOME TAXES OF A CORPORATION

Corporations may be subjected to the following income taxes:

1. 1.1 Normal Corporate Income Tax (NCIT) – 30% or

1.2 Minimum Corporate Income Tax (MCIT) – 2% or
1.3 Gross Income Tax (GIT) – 15%

2. Improperly Accumulated Earnings Tax (IAET) – 10%

3. Brach remittance profit
4. Capital Gains Tax – on sale of real property or on sale of shares of stock
5. Final tax on passive income

DETAILS OF INCOME TAXES OF A CORPORATION

1. 1.1. – NORMAL CORPORATE INCOME TAX (NCIT)

Estates and
Trusts
Domestic Corporations Sec. 22 (C ) – 30% on Taxable Income
Foreign Corporations Resident Foreign Corporations Sec. 22 (H) - 30% on Taxable Income
Sec. 22(D) Non-resident Sec. 22 (I) - 30% on Gross Income
Proprietary educational institutions and non-profit hospitals – 10% of
their taxable income
Domestic Depositary Bank (Foreign Currency Deposit Units) – 10%
of gross onshore income
Resident international carriers – 2.5% Gross Philippine Billings
Corporations Offshore Banking Units – 10% of gross onshore income
Special Classes Resident Depositary Bank (Foreign Currency Deposit Units) - 10% of
of Corporations gross onshore income
Regional or Area Headquarters Sec. 22( DD) and Regional Operating
Headquarters Sec. 22 (EE) of Multinational Companies
Non-resident cinematographic film owners, lessors or distributors -
25% final tax
Non-resident owners or lessors of vessels chartered by Philippine
39

Nationals – 4.5% final tax

Page

Non-resident lessors of aircraft, machinery and other equipment -

7.5% final tax
 1. 1.2. – MINIMUM CORPORATE INCOME TAX (MCIT)

DEFINITION:
Minimum Corporate Income Tax (MCIT) – is an estimate of the income tax that is due from a
firm. It is equal to 2% of the gross income of a corporation at the close of each taxable quarter.

-covers domestic and resident foreign corporations which are subject to NCIT.

-taxpayer shall pay the MCIT whenever it is greater than the NCIT.

- it starts on the 4th year of its business operations.

- “carry-forward” provision

*The Secretary of Finance is authorized to suspend the imposition of the minimum corporate
income tax on any corporation which suffers LOSSES:
a) -on account of prolonged labor dispute (losses from a strike staged by
employees that lasts for more than 6 months and caused the temporary
shutdown of operations), or

b) -because of force majeure (acts of God and other calamity; includes armed
conflicts like war or insurgency), or

c) -because of legitimate business reverses (substantial losses due to fire, robbery,

theft or other economic reasons).

1. 1.3 – GROSS INCOME TAX (GIT)

- The President, upon the recommendation of the Secretary of Finance, may allow
domestic corporations the option to be taxed at fifteen percent (15%) of gross income,
after the following conditions have been satisfied:

Tax effort ratio 20% of GNP

Ratio of IT collection to total tax revenue 40%
VAT tax effort 4% of GNP
Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP 0.90%
Ratio of the Corporation’s Cost of Sales to Gross Sales Does not exceed 55%

-The election of the gross income tax option by the corporation shall be irrevocable for three
(3)consecutive taxable years during which the corporation is qualified under the scheme.

2. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

There is imposed for each taxable year, in addition to other taxes, a tax equal to 10% of the
improperly accumulated taxable income of domestic and closely held corporations formed or
availed of for the purpose of avoiding the income tax with respect to its shareholders or the
shareholders of any other corporation, by permitting the earnings and profits of the corporation to
accumulate instead of dividing them among or distributing them to the shareholders.
- Only domestic and closely-held corporations are liable for IAET.

Exception:
The use of undistributed earnings and profits for the reasonable needs of the business would
not generally make the accumulated or undistributed earnings subject to the tax. What is meant by
“reasonable needs of the business” is determined by the IMMEDIACY TEST.

IMMEDIACY TEST - It states that the “reasonable needs of the business” are the:
1) immediate needs of the business; and
2) reasonably anticipated needs.
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 EXEMPT CORPORATIONS FROM IAET:
1. Banks and other non-bank financial intermediaries;
2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
5. General professional partnerships;
6. Non- taxable joint ventures; and
7. Enterprises that are registered:
a) with the Philippine Economic Zone Authority (PEZA) under R.A. 7916;
b) pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227; and
c) under special economic zones declared by law which enjoy payment of
special tax rate on their registered operations or activities in lieu of other
taxes, national or local.

3. BRANCH PROFIT REMITTANCE TAX

Tax base: Profits applied or earmarked for remittance
Tax Rate: 15% final tax
Condition: Branch profits are effectively connected with the conduct of its trade or business in the
Philippines.
Exempt: Profits remitted derived from activities registered with the Philippine Economic Zone Authority
(PEZA)

4. CAPITAL GAINS TAX

5. FINAL TAX ON PASSIVE INCOME ALREADY DISCUSSED IN TITLE III

SECTION 3 – TAX EXEMPT CORPORATIONS

A. TAX EXEMPT CORPORATIONS (NIRC):

1. Labor, agricultural or horticultural organization not organized principally for profit;

2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes and without profit;

3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as
a fraternal organization operating under the lodge system, or mutual aid association or a non-stock
corporation organized by employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or association, or non-stock corporation or
their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its members;

5. Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;
6. Business league chamber of commerce, or board of trade, not organized for profit and no part of
the net income of which inures to the benefit of any private stock-holder, or individual;

7. Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

8. A nonstock and nonprofit educational institution;

9. Government educational institution;

10. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like organization of a purely local character, the
income of which consists solely of assessments, dues, and fees collected from members for the sole
purpose of meeting its expenses; and
41

11. Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose
of marketing the products of its members and turning back to them the proceeds of sales, less the
Page

necessary selling expenses on the basis of the quantity of produce finished by them;
 B. TAX EXEMPT GOCCS:
1. GSIS
2. SSS
3. PHILIPPINE HEALTH INSURANCE CORP.
4. PCSO

C. TAX EXEMPT CORPORATIONS UNDER SPECIAL LAWS:

1. Cooperatives (Rev. Mem. Cir. 48-91)
2. Foundation created for scientific advancement (Sec. 24, R.A. 2067)
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 CHAPTER 3 – PARTNERSHIP TP
SECTION 1- TAXATION OF PARTNERSHIPS
RULES:
1. The partnership is subject to the same rules on corporations (capital gains tax, final tax on passive
income, normal tax, minimum corporate income tax [MCIT] and gross income tax [GIT]), but is not
subject to the improperly accumulated earnings tax [IAET]. The partnership must file quarterly and
year-end income tax returns.

2. The taxable income of the partnership, less the normal corporate income tax thereon, is the
distributable net income of the partnership.

3. The share of a partner in the partnership’s distributable net income of a year shall be deemed to
have been actually or constructively received by the partners in the same taxable year and shall be
taxed to them in their individual capacity, whether actually distributed or not. Such share will be
subjected to a final tax of 10% to be withheld by the partnership.

SECTION 2- TAXATION OF GENERAL PROFESSIONAL PARTNERSHIPS

RULES:
1. A GPP as such shall not be subject to the income tax.
2. The partners shall only be liable for income tax only in their separate and individual capacities.

3. For purposes of computing the distributive share of the partners, the net income of the GPP shall
be computed in the same manner as a corporation.

4. Each partner shall report as gross income his distributive share, actually or constructively received,
in the net income of the partnership.

 The share of a partner shall be subject to a creditable withholding income tax of 15%.

CHAPTER 4 – ESTATES AND TRUSTS TP

SECTION 1- TAXATION OF ESTATES AND TRUSTS

1. APPLICATION: The tax imposed upon individuals shall apply to the income of estates or of any kind of
property held in trust, including:
1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with
contingent interests, and income accumulated or held for future distribution under the terms of
the will or trust;

2. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to be held or distributed as the court may direct;

3. Income received by estates of deceased persons during the period of administration or settlement
of the estate; and

4. Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.

2. EXCEPTION
The tax shall not apply to employee's trust which forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all of his employees

i. if contributions are made to the trust by such employer, or employees, or both for the purpose
of distributing to such employees the earnings and principal of the fund accumulated by the
trust in accordance with such plan, and
43

ii. if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of the corpus or income to be used for, or diverted to,
Page

purposes other than for the exclusive benefit of his employees.