Handout 3

Republic of the Philippines
CAMARINES NORTE STATE COLLEGE

F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines
COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

Income Taxationc(BA 101)
Handout No. 3: Taxation of Individuals
Name of Faculty: Eugene O. Balindan
Subject: BA 101 Income Taxation
Schedule for Instruction:
Course, Year & Section Schedule Time

BSA 2B TTH 9:30-11:00
BSA 2A TTH 11:00-12:30
Lesson/Topic: Taxation of Individuals
Objectives:
• Identify and differentiate different types of individual taxpayers and to compute their
taxable income and tax payable.
• Calculate correctly the amount of allowable interests, rents, royalties, and other passive
incomes.
• Identify the taxpayers allowed to claim a foreign tax credit.
• Compute the correct amount of foreign tax credit to be deducted.
• Compute the income subject to income tax
• Prepare income tax return/fill up BIR Forms
Discussion
A. Classification of Individual Taxpayers

1. Resident Citizen 3. Resident Alien
o An individual whose o An alien residing within the

residence is within the Philippines and who Philippines and who is not a citizen
is a citizen thereof. thereof (Section 22 (F), RA 8424). The
following are considered as resident
alien:
1. An alien actually present in the

Philippines who is not a mere transient or
sojourner. A person who comes to the
Philippines for a definite purpose, which
in its nature may be promptly
accomplished, is a transient.
2. An alien who comes to the Philippines
for a definite purpose, which, by its
nature, would require an extended stay
making his home temporarily in the
Philippines.
3. An alien who shall come to the
Philippines with no definite intention as to
his stay.
An alien has acquired residence in the

Philippines retains his status as a
resident until he abandons the same and
actually departs from the Philippines.
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2. Non- resident Citizen 4. Non-resident Alien

o A citizen: o Alien not residing in the
a) Who establishes to the satisfaction The Philippines and who is not a citizen
of the Commissioner of the fact of thereof.
his physical presence abroad with o Classified into:
definite intention to reside therein. a) Engaged in Trade or Business
b) Who leaves the Philippines to (ETB)
reside abroad either immigrant or • An alien individual
for employment on a permanent actually engaged in trade
basis. or business in the
c) Working and deriving income Philippines; and
abroad and whose employment • An alien who comes to the
requires physical presence abroad Philippines for an
most of the time (183 days or more) aggregate period of more
during the taxable year. than 180 days during the
d) Who has been previously calendar year during any
considered as a nonresident citizen calendar year shall be
who arrives in the Philippines at deemed a non-resident
any time during the taxable year to aliens doing business in
reside permanently in the the Philippines.
Philippines shall be considered a b) Not Engaged in Trade or
non-resident citizen for the taxable Business (NETB) – stayed in the
year in which he arrives in the Philippines for not more than 180
Philippines with respect to income days on aggregate and those not
derived from sources abroad until included above.
the date of his arrival in the
Philippines.
B. Sources of Taxable Income
Individual Taxpayer Income Within Income Without

1. Resident Citizen Taxable Taxable
2. Non-resident Citizen Taxable Not Taxable
3. Resident Alien Taxable Not Taxable
4. Non-resident Alien (ETB) Taxable Not Taxable
5. Non-resident Alien (NETB) Taxable Not Taxable
C. Tax on Income Earnings and Money Remittances of OCW/ OFW
Overseas Contract Workers (OCW) – Filipino citizens employed in foreign countries,

referred to as OFW’s, who are physically present in a foreign countries as a consequence
of their employment thereat.
• Overseas Contract Workers (OCW) refer to Filipino citizens employed in foreign

countries, commonly referred to as Overseas Filipino Workers (OFW), who are
physically present in a foreign country as a consequence of their employment
thereat.
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• Their salaries and wages are paid by an employer abroad and is not borne by any
entity or person in the Philippines.
• To be considered as an OCW or OFW, they must be duly registered as such with
the Philippine Overseas Employment Administration (POEA) with a valid Overseas
Employment Certificate (OEC) (RR No. 1-2011)
• A seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract worker.
(Section 23 (C), RA 8424).
Tax on Income Earnings and Money Remittances of OCW/ OFW
Taxable Exempted
o Income from the sources Income tax
within the Philippines.
o Income arising out of his Income tax

employment.
o Income earnings from Income tax
business activities or properties within the
Philippines.
o A depository bank under the 15% final tax
expanded foreign currency deposit system upon on interest
presentation of proof of non- residency. income
o An account is in the name of The other 50% 50% of the
the OCW and an individual who is living in the from the bank interest income
Philippines. deposit shall be from a bank
subjected to a deposit.
final withholding
tax of 15%.
D. Kinds of Income of Individual Taxpayer

1. Compensation Income – income arising from personal services under an
employer-employee relationship, whether it takes the form of salaries, bonuses,
pensions, allowances, representation fees, and other similar income, whether paid
in cash or in kind.
2. Business Income – earned by a sole proprietor or an independent contractor who
reports income earned from self-employment.
3. Professional Income – earned by professionals whose income is derived purely
from the practice of his profession.
4. Passive Income – income earned without working actively; they are subject to
different final withholding tax rates and shall not be included in the gross income
of the taxpayer.
Types of Income Taxes
1. Basic Income Tax on regular or ordinary income.
2. Final Withholding Tax on Passive Income derived from Philippine sources.
3. Capital Gains Tax on Sale of Shares of Stock of the unlisted domestic corporation
4. Capital Gains Tax on Sale of Real Properties located in the Philippines.
The total amount of the taxes above is known as “Total Income Tax
Expense.”
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E. Income Tax Rates for Individuals
Effective July 1, 2018, until December 31, 2022
Over Not over Tax Plus Of excess over
P 250,000 0%
P 250,000 400,000 20% - P 250,000
400,000 800,000 P 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000
Effective January 1, 2023, and onwards
Over Not over Tax Plus Of excess over

P 250,000 0%
P 250,000 400,000 15% - P 250,000
400,000 800,000 P 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 - 2,202,500 35% 8,000,000
• For married individuals (.e. husband and wife) are required by law to file a
consolidated income tax return, but they shall compute their individual income tax
separately.
• Income that cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be equally divided
between the spouses for purposes of determining their taxable income.
• If the spouses are only physically separated and there is no legal separation, they
are still required by law to file consolidated or joint returns for which they are
considered as jointly and severally liable to tax.
Illustration
Taxpayers are husband and wife with the following data in a taxable year:
Husband:
Gross receipts from the profession, net of a 10% withholding tax P360,000
Costs and expenses, the practice of profession 120,000
Quarterly income tax paid 16,800
Wife:
Gross compensation income, net of exclusions P200,000
Question: Income Tax due, end of the year of husband and wife
Answer/Solution:
Husband (a separate taxpayer)
Gross Receipts (P360,000/90%) P400,000
Less: Costs & Expenses 120,000
Taxable Income P280,000
Income tax at graduated rates P 6,000
Less: Quarterly income tax paid (16,800)
Income tax withheld (40,000)
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Income tax refundable P( 50,800)

Wife (a separate taxpayer)
Taxable compensation income, net of exclusions P 200,000
Income Tax Exempt
Note: In the gross income and the deductions for expenses and losses, there can be
centavos. In the taxable income, centavos are to be dropped. In the income tax arrived at
with the application of the tax rates, fifty (50) or more centavos will be considered as one
(1) peso, and less than fifty (50) centavos will be disregarded. (These rules on centavos
apply to all taxpayers in their respective formula). After deducting from the gross income
tax computed any creditable withholding income tax, and/or any quarterly income tax paid,
the income tax still due or refundable will have centavos.
F. Tax on Non-resident alien engaged in Trade or Business (NRA ETB)
A non-resident alien engaged in trade or business (ETB) is an individual who stayed

in the Philippines for more than 180 days on aggregate.
Individual Taxpayer Income Within Income Without

Non-resident Alien (ETB) Taxable Not Taxable
Illustration
In 2018, Julius, married with one dependent child, a foreign citizen residing
abroad but engaged in business in the Philippines, derived an income abroad of U.S.
$190,000 (U.S. $1.00: P50) and P220,000 in the Philippines.
His country grants a personal exemption of P50, 000 on married individuals
and P27, 000 on every dependent child.
Gross income, Philippines P220, 000
Tax on P220, 000 -------------------------------------- Exempt
 Non-resident aliens are taxable only on income derived from sources within the
Philippines.
 Individual taxpayers are not entitled to claim personal exemptions.
G. Income Earned by Alien Employees

➢ Subject to regular income tax rates, all employees of
- Regional or area of headquarters and regional operating headquarters of
multinational companies,
- Offshore banking units
- Petroleum service contractor and subcontractors
➢ They shall be subject to the regular income tax rates without prejudice to the
application of preferential tax rates under existing international tax treaties if
warranted.
Illustration
Ms. CCF, an alien employed in MCUD Corporation that is a Petroleum

Service Contractor, received a compensation income of P5,000,000 for 2018,
inclusive of 400,000 13th month pay and other benefits.
Gross Compensation Income P5,000, 000
th
Less: 13 month pay and other benefits 90,000
Taxable compensation income P4,910,000
Tax on P2, 000,000 P490, 000
Page 5 of 51

2,910,000 x 32% 931,200

Income tax due P1, 421,200
➢ As a rule, all employees of regional or area of headquarters and regional
operating headquarters of multinational companies, offshore banking
units, and petroleum service contractors and subcontractors shall be
subject to the regular income tax rate.
H. Passive Income
• An income earned without working actively; they are subject to final withholding
tax rates and shall not be included in the gross income of the taxpayer.
• Under the final withholding tax system, the amount of income withheld by the
withholding agent is constituted as full and final payment of the income tax due
from the payee on the said income.
• The liability for payment of the tax rests primarily on the payor as a withholding
agent. The payee is not required to file an income tax return for the particular
income.
• Passive Income derived from the Philippine sources subject to final withholding
tax:
A. Interest Income
B. Royalties
C. Dividends
D. Prizes
E. Other winnings.
The following shall be subject to final withholding tax:
Passive Income Resident or NRA NRA

Citizen ETB NETB
Interest from any currency bank deposit 20% 20% 25%
Yield or any other monetary benefit from deposit 20% 20% 25%
substitutes and from trust funds and similar
arrangements.
Deposit substitute is an alternative form of
obtaining funds from the Public other than deposits,
through issuance, endorsement, or acceptance of
“debt instruments” for the borrower’s own account,
for the purpose of re-lending or purchasing of
receivables and other obligations, or financing their
own needs or the needs of their agent or dealer
(RR-14-2012). The public is defined as borrowing
from twenty (20) or more individual or corporate
lenders at any one time.
Royalties 20% 20% 25%
Royalties on books and other literary works and 10% 10% 25%
musical compositions
Prizes amounting to more than P10,000 20% 20% 25%
Prizes amounting to P10,000 or less Basic Basic 25%
Income Tax Income Tax
(Included in (Included in
Taxable Taxable
Gross Gross
income) income)
*Other Winnings (regardless of amount) 20% 20% 25%
Page 6 of 51

Philippine Charity Sweepstakes winnings and Lotto Exempt Exempt 25%

winnings in the Philippines amounting to P10,000
or less
Philippine Charity Sweepstakes winnings and Lotto 20% Exempt 25%
winnings in the Philippines amounting to more than
P10,000
Interest income received from a depository bank 15% Exempt Exempt
under the Expanded Foreign Currency Deposit
System (OCW/OFW- exempt)
Cash and/ or property dividends actually or 10% 20% 25%
constructively received from any of the following:
a) Domestic corporation
b) Joint-stock company
c) Insurance or mutual fund companies
d) Regional operating headquarters of
multinational companies
e) On the share of an individual partner in the
distributable net income after tax of a
partnership (except a general professional
partnership), or
f) On the share of an individual in the net
income after tax of an association, a joint
or a joint venture or consortium of which he
is a member or a co-venture.
Income within on interest on long- term deposit or Exempt Exempt 25%
investment in banks with a maturity of 5 years or
more.
Interest income from long- term deposit or
investment in the term of savings, common or
individual trust funds, deposit substitutes,
investment management accounts and other
investments evidenced by certificates which was
pre-terminated by the holder before the 5th year
at the rates herein prescribed:
Holding Period
4 years to less than 5 years
3 years to less than 4 years 5% 5% 25%
Less than 3 years 12% 12% 25%
20% 20% 25%
*Not Included are winnings exempt from income tax such as but not limited to:
- Winnings under Sec. 126 of Tax Code (Winnings from horse racing) – subject only to Other
Percentage Tax (OPT) of 4% or 10%, as the case maybe
- Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
• The recipient was selected without any action on his part to enter the contest or
proceeding;
• The recipient is not required to render substantial future services as a condition of
receiving the prize or award.
- All prizes and awards granted to athletes in local and international sports competitions and
tournaments, whether held in the Philippines or abroad and sanctioned by their national
sports association.
Capital Gains Tax (CGT) and Stock Transaction Tax (STT) on Sale of Shares of Domestic
Corporation TAX RATE
- Not Through the local stock

exchange (sold directly to a buyer) CGT 15% of capital gain
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- Through the local stock exchange STT 6/10 of 1% of Gross selling Price
Sales of shares of a domestic corporation NOT Through the local stock exchange (directly
to the buyer) is subject to CGT.
FORMULA in computing the capital gain:

Selling Price PXX
Acquisition Cost (XX)
Net Capital Gain PXX
Rate 15%
CGT PXX
• Under RR 6-2013, the value of the shares of stock at the time of sale shall be the
fair market value. In determining the value of the shares, the Adjusted Net Asset
Method shall be used whereby all assets and liabilities are adjusted to market
values. For purposes of discussion, the selling price is assumed to be the market
value computed using the aforementioned method, assuming the latter is provided.
• All individual taxpayers are subject to CGT on shares of stock of domestic
corporations.
• The sale of shares of the domestic corporation through the local stock exchange
is not subject to income tax but to a “business tax” under Section 127 (A) of the
tax code. Tax rate beginning Jan. 1, 2018: STT of 6/10 of 1% of Gross Selling
Price.
• The sale of shares of stock of a foreign corporation is subject to basic income tax.
• The CGT and STT are applicable only to shareholders/investors because for
income taxation purposes, sale of shares of stock by a dealer in securities,
regardless of whether the shares were sold directly to a buyer or through the local
stock exchange, is subject to basic income tax. Moreover, issuance of shares by
the issuing corporation is not subject to tax except DST and Stock Transaction Tax
on Initial Public Offering under Section 127 (B) of the Tax Code
Illustration
Helena, single and a resident citizen, has the following passive income for the
year 2015:
Interest in BPI Savings and Deposit P75, 000
Royalty from invention 80,000
Prize in painting competition 50,000
Dividends received from a domestic corporation 30,000
REQUIRED: Final withholding taxes on the passive incomes of Helena.
ANSWER:
a) Interest in BPI Savings and Deposit P75, 000
Rate of tax 20%
Final withholding tax P15,000
b) Royalty from invention 80,000
Rate of tax 20%
c) Prize in painting competition 50,000
Rate of tax 20%
d) Dividends received from a domestic corporation 30,000
Rate of tax 10%
I. Tax on Non-resident Aliens Not Engaged in Trade or Business
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I. Tax on Non-resident Aliens Not Engaged in Trade or Business
• Normally subject to final withholding tax of 25% from all sources within the
Philippines only.
The following forms of income from sources within shall be subject to tax:
NRA-NETB is subject to:
• 25% FWT on ALL
A. Ordinary Income
B. Passive Income derived from sources within the Philippines (including interest
income from a long-term bank deposit or investment and PCSO/Lotto winnings except for
interest income on bank deposit under FCDU.
• CGT on the sale of shares of a domestic corporation directly to a buyer

• CGT on the sale of a real property classified as capital asset located in the
Philippines.
1. 25% final withholding tax in the gross amount of the following income:
a) Interest f) Cash and/ or property dividends
b) Rents g)Compensation, remunerations, emoluments
c) Salaries, wages h) Premiums
d) Annuities i) Other fixed/ determinable annual/ periodic
e) Capital gains, or casual gains, profits, and income
2. 6% capital gains on real properties located in the Philippines. The tax base shall be
whichever is higher between:
a) The gross selling price, and

b) Fair market value is determined by the Commissioner of Internal Revenue
(CIR), and the fair market value determined by the Provincial or City
Assessors.
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3. In case of dispositions of real property classified as capital assets is sold to

government or any political subdivisions or agencies or GOCC”s shall be
determined in either of the following, at the option of the taxpayer:
a) In accordance with the graduated tax, or
b) 6% final tax based on the gross selling price or fair market value, whichever
is higher.
4. 15% final is hereby imposed upon the net capital gains realized during the taxable
year from the sale, barter, exchange, or other disposition of shares of stock in a
domestic corporation, except shares sold, or disposed of through the stock
exchange.
5. 6% of capital gains on real properties are located in the Philippines. The tax base
shall be whichever is higher between:
c.) The gross selling price, and
d. Fair market value is determined by the Commissioner of Internal Revenue (CIR),
and the fair market value determined by the Provincial or City Assessors.
6. In case of dispositions of real property classified as capital assets shall be
determined in either of the following, at the option of the taxpayer:
c) In accordance with the graduated tax, or
d) 6% final tax based on the gross selling price or fair market value, whichever
is higher.
7. 15% final is hereby imposed upon the net capital gains realized during the taxable
year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation, except shares sold, or disposed of through the stock
exchange.
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c (BA 101)
Income Taxation
Illustration
Mr. Christopher is a non-resident alien not engaged in trade or business. Assume that he
earned both business and compensation income.
Cash dividend P60,000
Interest in dollar deposit 20,000
During the year, his condominium unit in Tagaytay, which has a market value of P1,800,000,
was sold for P2,000,000.
REQUIRED: compute the final withholding taxes on Mr. Christopher:

ANSWER:
Cash dividend P60,000
Rate of tax 25%
Gross selling price (condo unit) P2,000,000
Rate of tax 6%
J. Allowable Deductions from Income of Individual Taxpayers
The deductions allowed shall depend on the nature of income earned by the taxpayer,
a) Compensation Income and Passive Income- no deductions are allowed.

b) Business/ Professional- either itemized deductions or the optional standard
deduction.
Illustration
Mr. Antonio B., the taxpayer, is married, with 6 qualified dependent children. Taxable
year in 2015. The following data are available:
Gross compensation income P240,000
Premium payment on health insurance 10,000
REQUIRED: Compute the taxable income and tax due.
ANSWER:
Gross compensation income P240,000
Tax Due Exempt
Because of TRAIN Law, beginning January 1, 2018, individual taxpayers are not
allowed to any personal exemption and additional tax exemption.
K. Optional Standard Deduction (OSD)
In lieu of itemized deductions, an individual taxpayer (except NRA) may elect a standard
deduction in an amount not exceeding 40% of his gross sales or receipts, as the case may
be.
Illustration
Marlon, a businessman, has a gross income of P782,925 with allowable

itemized deductions of P485,920. For the last three quarters of the year, he
remitted tax in the amount of P200,000.
REQUIRED: Compute the income tax assuming Marlon availed of:
1. Itemized Deduction
2. Optional standard deduction
Page 12 of 51

c (BA 101)
Income Taxation
ANSWER:
1) Gross income P782,925
Less: Allowable deductions
Itemized deductions P485,920
Taxable income P297,005
2) Gross income P782,925
Less: Allowable deductions
OSD (40%) P313,170
L. Individuals Earning Income from Self- employment or Practice of Profession
Individuals Earning Income from Self- employment or Practice of Profession whose gross
sales/ receipts and other non- operating income does not exceed P3,000,000 shall have the
option to avail of:
1. Graduated rates
2. 8% tax on gross sales/ receipts and other non- operating in excess of P250,000 in lieu
of the graduated income tax rates and the percentage tax (3% Non- VAT)
Illustration
Ms. EBQ operates a convenience store while she offers bookkeeping services
to her clients. In 2018, her gross sales amounted to P800,000, in addition to
her receipts from bookkeeping services of P300,000. She already signified her
intention to be taxed at 8% income tax rate in her 1st quarter return. Her income
tax liability for the year will be computed as follows:
Gross sales– convenience store P800,000
Gross receipts– bookkeeping 300,000
Total sales/ receipts P1,100,000
Less: Amount allowed as deduction 250,000
Tax due:
8%x P850,000 P68,000
Note: under TRAIN Law, Self-Employed and Professionals (SEPs) are given the option
to be taxed at 8% income tax rate IN LIEU of the graduated income tax rate and OPT
under Section 116. This option is available only to taxpayers who are (a) non-VAT
registered and (b) those liable for Percentage Taxes under Title V of the NIRC (except
for Sec. 116) have no other option than to be taxed using the graduated rates.
The basis for the 8% income tax rate:
• Purely SEP(s): Gross sales and/or receipts and other non-operating income after
deducting P250,000.
• Mixed-income earner (SEP + income from employment): Gross sales and/or
receipts and other non-operating without deducting P250,000. The compensation
income will be taxed separately using the graduated tax rate.
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c (BA 101)
Income Taxation
M. A taxpayer is a Mixed-Income Earner
A taxpayer is a Compensation Income Earner or a Self- Employed

Compensation Income Self-Employment
• Subject to graduated rates of • Subject to either 8% income tax
tax or graduated tax after
deducting P250,000 to gross
sales or receipts
Illustration
Mr. MAG, a Financial Comptroller of JAB Company, earned annual

compensation in 2018 of P1,500,00, inclusive of 13th month and other benefits
in the amount of P120,00 but net of mandatory contributions to SSS and
PhilHealth. Aside from employment income, he owns a convenience store, with
gross sales of P2,400,000 cost of sales and operating expenses are
P1,000,000 and P600,000, respectively, with non- operating income of
P100,000.
a) His tax due for 2018 shall be computed as follows if he opted to be taxed
at 8% income tax rate on his gross sales for his income of P100,000.
Total compensation income P1,500,000
Less: 13th month and other benefits 90,000
Tax due:
On compensation:
On P800,00 P130,00
On excess (P1,410,000-800,000)x30% 183,000
Tax due on compensation income P313,000
On business income:
Gross sales P2,400,000
Add: Non-operating income 100,000
. Taxable business income P2,500,000
Income tax rate 8%
Tax due on business income P200,000
Total income tax due (compensation and business) P513,000
b. His tax due for 2018 shall be computed as follows if he did not opted for
the 8% income tax based on gross sales/ receipts and other non-
operating income:
Total compensation income P1,500,000
Less: 13th month and other benefits 90,000
Add: Taxable income from business P2,400,000
Less: Cost of sales 1,000,000
Gross income P1,400,000
Less: Operating expenses 600,000
Net income for operation P800,000
Add: Non- operating income 100,000 900,000
Total taxable income P2,310,000
Tax due:
On P2,000,000 P490,000
On excess (P2,310,000-2,000,000)x32% 99,200
Total income tax due P589,200
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c (BA 101)
Income Taxation
N. Other Taxpayers
A. The term “statutory minimum wage (SMW)” earner shall refer to a worker in the private sector
paid the statutory minimum wage, or to an employee in the public sector with compensation
income not more than the statutory minimum wage in the non-agricultural sector where he/she
is assigned (RR 10-2008). MWEs are exempt from income tax on:
1. Minimum Wage
2. Holiday pay
3. Overtime Pay
4. Night Shift Differential
5. Hazard Pay
B. Basic Income tax of Married Individuals
• Married individuals (i.e., husband and wife) are required by law to file a consolidated
income tax return, but they shall compute their individual income tax separately.
• Income that cannot be definitely attributed to or identified as income exclusively earned
or realized by either of the spouses, the same shall be equally divided between the
spouses for purposes of determining their taxable income.
• If the spouses are only physically separated and there is no legal separation, they are
still required by law to file consolidated or joint returns for which they are considered as
jointly and severally liable to the tax.
C. Income tax of Senior Citizens (SC) and Persons with Disability (PWDs)
• For income taxation purposes, SCs and PWDs are taxable in the same manner as an
ordinary individual taxpayer. Hence, SCs and PWDs are deriving returnable income are
required to file their income tax returns and pay the tax as they file the return.
• SCs/PWDs as MWE – Exempt from the income tax on the said compensation income.
• If aggregate gross income does not exceed P250,000, he shall be exempt from income
tax and shall not be required to file an income tax return.
Deductions
A deduction is any item or expenditure subtracted from gross income to reduce the amount
of income subject to income tax. It is also referred to as an "allowable deduction."
For a taxpayer to avail specific deduction, he bears the burden to prove that he is entitled to
the said deduction and to point provisions of the law that such deduction is authorized.
Deductions from gross income are given for the fairness of every individual, which have
different rates of earnings. It gives a fairer base to those taxpayers who earn a high amount of
gross income to deduct their business expenditures.
However, a taxpayer may opt to deduct from his gross income a lesser amount or not to claim
any, but he is prohibited from claiming beyond the amount authorized by law as a deduction.
Taxpayers Who May Avail of Deductions
• Individual Taxpayer
• Resident Citizen
• Non-resident Citizen
• Resident Aliens
• Non-resident aliens
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c (BA 101)
Income Taxation
• Corporations
• Domestic Corporations
• Resident Foreign Corporation
Estates and trusts are also allowed to claim deductions.
Non-resident aliens not engaged in trading or business in the Philippines (NRA NETB) and
non-resident foreign corporations (NRFC) are the only taxpayers not entitled to any deduction
because they are taxed based from sources of income within the Philippines only.
Allowable Deductions
Deductions are the tax-deductible expenses subtracted from adjusted gross income.
Deductions reduce taxable income and thereby reduce the tax liability. A deduction is also the
amount paid out-of-pocket for covered expenses before an insurance company will pay the
remaining costs.
Deductions allowed on individual taxpayers would depend on the nature of income they earn.
If it is compensation income from personal services rendered under an employer-employee
relationship, there is no deduction can be claimed.
However, if it is a business or professional income earned by self-employed or professionals

engaged in the practice of their profession, the deductions are similar to those allowed to
corporations.
Itemized Deductions
The following items shall be allowed as deductions from the gross income of an individual
and corporate taxpayers.
1. Expense
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable and other contributions
9. Research and development
10. Pension trusts
Optional Standard Deductions
In lieu of the itemized deductions, an individual or a corporation may elect a standard

deduction in an amount not exceeding 40% as follows:
1. Individual - Gross sales if engaged in the sale of goods or property and gross receipts if
engaged in the sale of services.
2. Corporation - Gross income as defined in Section 32 of the Code
Provided, however, that except when the Commissioner of Internal Revenue otherwise
permits, the said individual shall keep such records pertaining to his gross sales/receipts, or the
said corporation shall keep such records pertaining to his gross income during the taxable year.
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Expenses, Interest & Taxes
EXPENSES IN GENERAL
Requisites of Deductibility of Expenses
1. Ordinary and necessary

2. Paid or incurred during the taxable year
3. Directly attributable to the development, management, operation, and/or conduct of the
trade, business, or exercise of a profession
4. It must be supported by sufficient evidence
5. Must not be against the law or public policy
A. Compensation Payments
A reasonable allowance for salaries, wages, and other forms of compensation for personal
services actually rendered, including the grossed-up monetary value of fringe benefit furnished
for granted by the employer to the employee. Provided that in the case of fringe benefit, the final
tax imposed therein has been paid.
B. Travelling Expenses
Traveling expenses include transportation expenses, meals, and lodging paid by the
employer. It also includes laundry and incidental expenses that are directly connected with the
trip.
These expenses can be claimed as a deduction if the following requisites have complied:
• Reasonable and necessary

• Incurred while away from home
• Paid or incurred in the conduct of trade or business
C. Rentals and/or Other Payments
The reasonable allowance for rentals and other payments which are required as a condition
for the continued use or possession, for purposes of the trade, business or profession, or property
to which the taxpayer has not taken or is not taking title or in which he has no equity other than
that of a lessee, user of the possessor.
D. Entertainment, Amusement and Recreation Expenses
The requirement for entertainment, amusement, and recreation expenses to be deductible:
• Paid or incurred during the taxable year;

• It must be directly connected to the development, management, and operation of the
trade, business or profession of the taxpayer or directly related to or in furtherance of the
conduct of his or its trade, business, or exercise of the profession;
• Not contrary tp law, morals, good customs, public policy, or public order
• Not have been paid, directly or indirectly, to an employee as bribes, kickbacks, or other
similar payments;
• Must be duly substantiated by adequate proof;
• The appropriate amount of withholding tax, if applicable, should have been withheld
therefrom and paid to the Bureau of Internal Revenue;
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• It must not exceed the ceiling, which is 12% of net sales or 1%of net revenue or if the
taxpayer is deriving income from both sales of goods/properties and services, the ceiling
shall be determined based on the following apportionment formula:
Net Sales/Net Revenue x Actual Expense
Total Net Sales and net revenue
E. Bribes, Kickbacks and Similar Payments
If the payment constitutes bribe or kickback, payments to the following shall not be allowed
as a deduction from gross income, under expenses, for any payment made directly or indirectly
to:
▪ Official or employee of the national government;

▪ Official or employee of the government-owned or controlled corporation;
▪ Official or employee or representative of a foreign government;
▪ A private corporation, general professional partnership, or similar entity.
A bribe refers to any gift or emolument used corruptly to influence public officials or action,
while kickback refers to a consideration, usually, a bribe, given to someone in a position for the
granting of a privilege, power, etc.
Although the payment of illegal bribes or kickbacks is nondeductible, expenses incurred in

illegal activity are generally deductible if they are ordinary, necessary, and reasonable.
Special Deduction on Discounts and Compensation Payments to Senior Citizens
The term senior citizen or elderly refers to any Filipino citizen who is a resident of the
Philippines and is 60 years old or above.
It may also apply to senior citizens with dual citizenship status provided they prove their
Filipino citizenship and have at least six (6) months of residency in the Philippines.
The special deductions that may be allowed on certain establishments shall be:
• On the 20% sales discounts granted to senior citizens; and

• 15% of the total amount paid as salaries and wages to senior citizens.
Special deduction on the 20% Sales Discounts Granted to Senior Citizen
Sales discounts granted to senior citizens on the sale of goods/services specified thereunder
are entitled to be deducted from gross income subject to the following conditions:
• Only the portion of the gross sales exclusively used, consumed, or enjoyed by the senior
citizen shall be eligible for the deductible sales discount to customers;
• The selling price and the sales discount must be separately indicated in the official receipt
or sales invoice issued by the establishment for the sale of goods or services to the senior
citizen;
• Only the actual amount of the discount granted or a sales discount not exceeding 20% of
the gross selling price can be deducted from the gross income.
• The discount can only be allowed as a deduction from gross income from the same
taxable year that the discount is granted.
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• The business establishment giving a discount to qualified senior citizens is required to

keep a separate and accurate record of sales, which shall include the name of the senior
citizen, OSCA ID, gross sales/receipts, sales discount granted, date of the transaction,
and invoice number for every sale transaction to senior citizen.
Only the following establishments are allowed to claim as a deduction the discounts granted
to senior citizens:
• Hotel and similar lodging establishments (tourist inn, apartelle, motorist hotel, and pension
houses);
• Restaurants;
• Recreation centers;
• Theatres, cinema houses and concert halls, circuses, carnivals, and other similar places
of culture, leisure, and amusement;
• Drugstores, hospital pharmacies, medical and optical clinics, and similar establishments
dispensing medicines;
• Medical and dental services in private facilities;
• Domestic air and sea transportation companies;
• Public land transportation utilities
• Funeral parlors and similar establishments
Special Deduction of Amounts Paid as Salaries/Wages to Senior Citizen
Private establishments employing senior citizens shall be entitled to an additional deduction

from their gross income equivalent to 15% of the total amount paid as salaries and wages to
senior citizens subject to the provision of Section 34 of the Tax Code, and its implementing rules
and regulations provided the following conditions are met:
1. The employment shall have to continue for at least 6 months

2. The annual taxable income of the senior citizen does not exceed the poverty level as may
be determined by the National Economic Development Authority (NEDA) thru the National
Statistical Coordinating Board (NSCB). For this purpose, the senior citizen shall submit to
his employer a sworn certification that his annual taxable income does not exceed the
poverty level.
Sales on Discounts on Persons with Disability (PWD)
The term Person With Disability (PWD) shall refer to an individual suffering from restriction
or different abilities, as a result of mental, physical, or sensory impairment to perform an activity
in a manner or within the range considered normal for the human being.
Disability shall mean a physical or mental impairment that substantially limits one or more
psychological, physiological or anatomical function of an individual or activities of such individuals;
a record of such an impairment, or being regarded as having such an impairment.
Incentives to Guardians and Caregivers
Those caring for and living with PWD shall be granted the following incentives:
Individuals or nongovernmental institutions establishing homes, residential communities or

retirement villages solely to suit the needs and requirements of persons with disability shall be
accorded with the following:
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1. Realty tax holiday for the first five years of operation; and
2. Priority in the building and/or maintenance of provincial or municipal roads leading to the
aforesaid home, residential community, or retirement village.
Expenses not Deductible from Gross Income
As a rule, in computing net income, no deduction shall, in any case, be allowed with respect
to:
1. Personal, living, and family expenses

2. Any amount paid out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate;
Improvements or betterments are modifications or alterations which increase the service
life or the capacity of the asset.
The expenditures are capitalized instead of being treated as an expense during the
taxable year.
3. Any amount expended in restoring property or in making good exhaustion thereof for
which an allowance is or has been made; or
4. Premiums paid on any person financially interested in any trade or business carried on by
the taxpayer, individual or corporate when the taxpayer is directly or indirectly a beneficiary
under such policy.
A person is said to be financially interested in the taxpayers business if he is a
stockholder thereof or he is to receive as his compensation a share of the property of the
business.
INTEREST
Interest is defined as compensation for the use or forbearance or detention of money,

regardless of the name it is called or denominated.
Requisites for deductibility of interest:

1. There must be an indebtedness
2. The indebtedness must be that of the taxpayer
3. The indebtedness must be connected with the taxpayer's trade, business, or profession
4. The interest payment arrangement must not be between related taxpayers
5. There must be a legal liability to pay interest
6. The interest must have been stipulated in writing
The taxpayer's allowable deduction from interest expense shall be reduced by 33% of the
interest income, which had been subjected to final tax.
However, interest incurred or paid by the taxpayer on all unpaid business-related taxes shall
be duly deductible from gross income and shall not be subject to the limitation on deduction.
Optional Treatment of Interest
At the option of the taxpayer, interest incurred to acquire property used in trade, business, or
exercise of a profession may be allowed as a deduction or treated as capital expenditure.
Whenever a taxpayer opts to claim interest expense as capital expenditure, he can validly
claim deduction on the depreciation of the property but not the amount of interest paid.
Non-deductible Interest
No deduction shall be allowed in respect of interest under the following instances:
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1. Interest on the loan paid in advance through a discount or otherwise by an individual

taxpayer reporting income on a cash basis. Provided that such interest shall be allowed
as a deduction in the year the indebtedness is paid. Provided, further, that if the
indebtedness is payable in periodic amortization, the amount of interest which
corresponds to the amount of the principal amortized or paid during the year shall be
allowed as deduction in such taxable year.
2. Interest on loan between related taxpayers. The term "related taxpayers" refer to the
following:
• Between members of a family
• Between an individual and a corporation which takes place if more than 50% of the
outstanding stock of the corporation is owned directly or indirectly by or for such
individual.
• Between two corporations, more than 50% in value of the outstanding stock of each
of which is owned, directly or indirectly, by or for the same individual, if either one of
such corporations, with respect to the taxable year of the corporation preceding the
date of the sale or exchange was, under the law applicable to such taxable year, a
personal holding company, or a foreign personal holding company.
• Between the grantor and a fiduciary of any trust
• Between the fiduciary of a trust and the fiduciary of another trust
• Between a fiduciary of a trust and a beneficiary of such trust
3. If the indebtedness is incurred to finance petroleum operations.
TAXES
This pertains to taxes proper, which does not include surcharges, penalties, or fines incidents
to delinquency. As a rule, all taxes are deductible with the exception of those with respect to which
the law does not permit the deduction.
Under the tax benefit rule, taxes that have been previously deducted from the gross income
of a corporation and a refund of the same was received shall be included as part of the gross
income in the year of receipt to the extent of the income tax benefit of said deduction.
Taxes paid or incurred within the taxable year in connection with the taxpayer's profession,
trade or business, shall be allowed as a deduction, except:
1. Philippine income tax

2. Foreign income tax if claimed by the taxpayer as a tax credit
3. Estate and donor's tax
4. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed
5. Energy tax on electrical power consumption
6. Taxes which are not connected with the trade or business of the taxpayer
7. Value-added tax
8. Final withholding taxes(except fringe benefits tax)
Limitations on Deductions
In the case of a non-resident alien individual engaged in trade or business in the Philippines
and a resident foreign corporation, the deduction for taxes provided herein shall be allowed only
if and to the extent that they are connected with income from sources within the Philippines.
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Tax Credit
The term refers to the taxpayer's right to deduct from the gross income tax due to the amount
of tax he has paid to a foreign country, subject to limitations.
The purpose of this is to lessen the rigor of international double or multiple income taxation.
The tax credit is distinguished from the deduction in the sense that while the former is a
diminution from the tax itself to arrive at the income tax payable, the latter is a deduction from
gross income to arrive at the taxable income.
The following taxpayers are allowed to claim a tax credit
1. Resident citizens of the Philippines

2. Domestic Corporations
3. Members of general professional partnerships
4. Beneficiaries of estates or trusts
Limitations on Tax Credit
The amount of credit for foreign taxes shall be subject to limitations computed in accordance
with the following formula:
Formula 1: For taxes paid to one foreign country
Net income (per foreign country) x Philippine income tax
Total Net Income
Formula 2: For taxes paid to two or more foreign countries
Net income (all foreign country) x Philippine income tax
Total Net Income
In case the taxpayer pays in one foreign country only, the limitation on tax credit based on
formula 1 shall be applied.
In case he pays income tax in two or more foreign countries, both formulas (1 and 2) shall be
applied.
A. LOSSES
Requisites for deductibility of losses:
a. Sustained during the taxable year

b. Incurred in trade, profession or business
c. Not be compensated by insurance or other forms of indemnity
d. It must be filed within forty-five (45) days after the occurrence of such an event
e. The loss must arise from fire, storms, shipwreck, or other casualties, or from robbery,
theft, or embezzlement
f. It must not have been claimed as a deduction for estate tax purposes in the estate tax
return
CASUALTY LOSS is one that has occurred in an indefinite event that was:
Sudden is one that is swift, not gradual or progressive
Unexpected is one that is ordinarily unanticipated and one that is not intended
Unusual is one that is not a day-to-day occurrence and that is not typical of the activity in which
the taxpayer is engaged
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The amount of loss deductible shall be based on the following rules:
a. Total Destruction- the NET BOOK VALUE immediately preceding the casualty should
be used as the basis in claiming losses, to be reduced by an amount of insurance or
compensation received
b. Partial Destruction- the REPLACEMENT COST to restore the property back to its normal
operating condition should be used but in no case shall he deductible loss be more than
the net book value of the property as a whole immediately before the casualty. The excess
of the replacement cost over the book value should be capitalized. If the insurance
proceeds exceed the net book value of the damaged assets, such excess shall be subject
to regular income tax. (RMO 31-2009)
Example
The Buildings owned by Miss Hope were destroyed by fire on November 5, 2018. The
pertinent data of which are as follows:
Building 1 Building 2
Cost ₱2,000,000 ₱1,500,000
Accumulated depreciation 800,000 600,000
Indemnity from Insurance None 600,000
Extent of Destruction Partial Total
The replacement cost of Building 1 amounts to ₱1,500,000 while the remaining useful life
at the occurrence of lost was 10 years.
REQUIRED:
Compute for the following:
1. The deductible loss on Building 1

2. The deductible loss on Building 2
3. The depreciation over the remaining life of Building 1
SOLUTION:
1. Loss on Building 1
Cost ₱2,000,000
Less: Accumulated Depreciation 800,000
Book Value 1,200,000
Replacement Cost 1,500,000
Deductible loss (lower) 1,200,000
2. Loss on Building 2
Cost 1,500,000
Less: Accumulated Depreciation 600,000
Book Value 900,000
Less: Recovery from insurance 600,000
Deductible loss 300,000
3. Depreciation over the remaining life of Building 1
Book value at the occurrence of loss 1,200,000

Add: Excess of replacement cost over book value
(1,500,000-1,200,000) 300,000
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New cost basis 1,500,000

Divide by remaining life (in years) 10
Deductible loss 150,000
INSURANCE AND OTHER REIMBURSEMENTS
Reimbursements received as compensation for a loss must be subtracted in arriving at

the amount of the loss. This is necessary even when the reimbursement has not yet been
received, as long as there is a reasonable prospect that will be received in the future.
NET OPERATING LOSS CARRY OVER (NOLCO)
Operating loss is excess of allowable deduction over gross income of the business in a
taxable year (Sec. 34(D)
Net Operating Loss Carry-Over the net operating loss, which had not been previously
offset as a deduction from gross income that shall be carried over as a deduction from gross
income for the next three consecutive taxable years immediately following the year of such loss.
Taxpayers who are entitled to deduct NOLCO from gross income:
1. Individuals engaged in trade or business or in the exercise of his profession.

2. Domestic and resident foreign corporations subject to the normal income tax or
preferential tax rates:
3. Estates and trusts
The ff. is not entitled to deduct NOLCO from gross income:
1. Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency
Deposit Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such
by the Bangko Sentral ng Pilipinas.
2. An enterprise registered with the Board of Investments (BOI) with respect to its BOI-
registered activity enjoying the Income Tax Holiday incentive
3. An enterprise registered with the Philippine Economic Zone Authority (PEZA) with respect
to its PEZA-registered business activity
4. An enterprise registered under the Bases Conversion and Development Act of 1992, e.g.,
SBMA-registered enterprise, with respect to its registered business activity
5. Foreign corporations engaged in international shipping or air carriage business in the
Philippines; and
6. Any person, natural or juridical, enjoying exemption from income tax, with respect to its
operation during the period for which the exemption is applicable.
For purposes of carry-over, the following rules should be observed:
1. Any net loss incurred in a taxable year during which the taxpayer was exempt from income
tax shall not be allowed as a deduction.
2. The corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MICT in
any taxable year. However, the running of the three-year period for the expiry of NOLCO
shall not be interrupted by the fact that the corporation is subject to Minimum Corporate
Income-tax (MICT) in any taxable year during such three-year period
3. An individual taxpayer who claims the 40% Optional Standard Deduction (OSD) shall not
simultaneously claim a deduction of NOLCO. However, the 3-year reglementary period
for carry-over shall still continue to run
4. The carry-over shall be allowed only if there has been no substantial change in the
ownership of the business in that not less than 75% I nominal value of outstanding issued
shares or not less than 75% of the paid-up capital of the corporation if the business is in
the name of a corporation, is held by or on behalf of the same persons.
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LOSSES FROM WAGERING TRANSACTIONS
Wagering Losses are deductible only to the extent of gains from wagering transactions.
EXAMPLE
The records of Alice Corporation show the following wagering transactions or losses.
Indicate if the income/loss is taxable/deductible or not:
Case 1 Case 2 Case 3
Winnings 50,000 150,000 -
Losses (40,000) (200,000) (30,000)
Net 10,000 (50,000) (30,000)
ANSWER:
The net gain of ₱10,000 in Case 1 is taxable because gains on wagering transactions are
subject to tax.
The wagering losses of ₱50,000 in Case 2 and ₱30,000 in Case 3 are not deductible
from gross income because they are only allowed as deductions from gains on wagering
transactions.
VOLUNTARY REMOVALS OF BUILDINGS
Taxpayers may also demolish a structure they are currently using in order to construct new
facilities.
In such cases, the rules to be applied shall be as follows:
(1) Demolition incident to removals or replacements

Losses due to the voluntary removal or demolition of old buildings and scrapping of old
machinery, equipment, etc., incident to renewals and replacements will be deductible from
gross income.
(2) Demolition with a view of erecting another building
A real estate located a building, which he proceeds to raze with a view of erecting
another building. The taxpayer has sustained o deductible expense account of the cost of
such removal, the value of the real estate, exclusive of old improvements, being
presumably equal to the purchase price of the land and building, plus the cost of removing
the useless building.
LOSS OF USEFUL VALUE
It does not apply to a case where the useful life of property terminates solely as a result of
those gradual processes for which depreciation allowance is authorized and inventories or to
other than capital assets. It applies to buildings only when they are permanently abandoned or
only when its use, as such, is permanently abandoned.
EXAMPLE
The Courage Company is using two models 90s Toyota Corolla with a cost of ₱270,000 each
in its business operation. When the book value of each, was only ₱50,000, the company decided
to retire them from use and sold them at ₱30,000 each.
How much is the deductible loss of the corporation?
ANSWER:
Book Value of Cars (50,000x2) ₱100,000
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Less: Selling price (30,000x2) 60,000
Deductible Loss 40,000
SHRINKAGE IN VALUE OF SECURITIES
A person possessing stocks of a corporation cannot deduct from gross income any amount
claimed as a loss merely on account of shrinkage in the value of such stocks through fluctuation
of the market or otherwise. The loss allowable in such a case is that actually suffered when the
stocks are disposed of.
BAD DEBTS
Are debts due to the taxpayer which are actually ascertained to be worthless and charged off
within the taxable year (Sec.34[E [, ibid)
Requisites for its deductibility are the ff.:
1. Valid and subsisting debt

2. Ascertained to be worthless and uncollectible during the taxable year
3. Must be charged off during the taxable year
4. Must be connected with the trade, profession, or business of the taxpayer
5. Must not be substantially in a transaction entered into between members of the same
family or related taxpayers
UNCOLLECTED SERVICES RENDERED
They are deductible only if they are previously declared as income
DEBT MUST BE WORTHLESS
If only after taking reasonable steps to collect the debt, there is no likelihood of recovery at
any time in the future and need not legal action to prove that it's worthless.
It must be at the bankruptcy of the debtor, disappearance or death of a debtor, and repeated
unsuccessful attempts of collection.
EQUITABLE DOCTRINE OF TAX BENEFIT (TAX BENEFIT RULE)
The recovery of bad debts previously allowed as a deduction in the preceding years shall be
included as part of gross income in the year of recovery to the extent of the income in the year of
recovery to the extent of the income tax benefit of said deduction.
DEPRECIATION
It means the gradual diminution in the useful value of the property used in the trade of business
resulting from exhaustion, wear and tear, and normal adolescence.
REQUISITES FOR THE DEDUCTIBILITY OF DEPRECIATION
a. It must be reasonable
b. Asset must be used in trade or business
c. Charged off during the taxable year
d. Statement on allowance must be attached to the return
Methods of depreciation allowed under the NIRC:
1. Straight-line method
2. Declining balance method
3. Sum-of-years-digit method
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4. Any other method which may be prescribed by the Secretary of Finance upon the
recommendation of the Commissioner of Internal Revenue
DEPRECIATION ON VEHICLES
Guidelines whether depreciation expense can be claimed or not on account of vehicles capitalized
by the taxpayer:
A. No deduction for depreciation shall be allowed unless the taxpayer substantiates the
purchase of vehicles with sufficient evidence, such as official receipts of other adequate
records
B. Only one vehicle for land transport is allowed for the use of an official or employee, the
value of which should not exceed ₱2,400,000
C. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircraft and land
vehicles which exceed the above threshold amount unless the taxpayer’s main line of
business is transport operations or lease
D. The transportation equipment and the vehicle purchased is used in said operations
E. All maintenance expenses on account of non-depreciation vehicles for taxation purposes
are disallowed on its entirely
F. The input taxes on the purchase of non’- depreciable vehicles and all input taxes on
maintenance expenses incurred thereon are likewise disallowed for taxation purpose
DEPLETION
Depletion is the removal, extraction, or exhaustion of a natural resource like mines and gas
wells as a result of production or severance from such mine or wells.
Requisites of deductibility:
1. The method allowed under the rules and regulations prescribed by the Secretary of
Finance is the cost depletion method
2. This method can be availed by oil and gas wells and mines
3. The basis of cost depletion is the capital invested in the mine, which is the accumulated
exploration and development expenses
4. When the allowance shall equal the capital invested, no further allowance shall be granted
5. In the case of resident foreign corporations, allowance for depletion shall be authorized
only with respect to oil and gas wells and mines located in the Philippines.
EXPLORATION AND DEVELOPMENT EXPENDITURES
Exploration expenditures mean expenditures paid or incurred for the purpose of

ascertaining the existence, location, extent, or quality of any deposit of one or other mineral, and
paid or incurred before the beginning of the development stage of the mine or deposit
Development expenditures mean expenditures paid or incurred during the development

stage of the mine or other natural deposits. The development stage of a mine or other natural
deposit shall begin at the time when deposits of one or other minerals are shown to exist in
sufficient commercial quantity and quality and shall end upon commencement of actual
commercial extraction.
B. RESEARCH AND DEVELOPMENT

Treated as ordinary and necessary expenses which are not chargeable to capital account
when it was paid or incurred by him during the taxable year in connection with his trade, business
or profession.
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AMORTIZATIONS OF CERTAIN RESEARCH AND DEVELOPMENT EXPENDITURES

To account for research and development expenditures, the taxpayer has the following
alternatives:
1. To treat them as expense in the year it is paid or incurred, or
2. To treat them as deferred expenses which shall be allowed as deduction ratably
distributed over a period of not less than sixty (60) months, as may be selected by the
taxpayer first receives benefits from such expenditures
The deductibility of research and development expenditures shall not apply to:
1. Expenditures for acquisition or improvement of land
2. Expenditures paid or incurred for the purpose of ascertaining the existence, location,
extent, or quality of any deposit of one or other mineral, including oil or gas.
PENSION TRUSTS
Requisites for deductibility:
1. Employer must have established a pension or retirement plan
2. Pension plan must be reasonable
3. Must be funded by the employer
4. The amount contributed by the employer must no longer be subject to his control
DEDUCTIBLE CONTRIBUTIONS BY THE EMPLOYER

1. Payments to the trust to cover pension liabilities accruing during the year (deductible in
full)
2. Payments to the trust in excess of contributions in (1). This must be prorated over a period
of ten years, beginning with the year in which the contribution was made
EXAMPLE
Labo Company made the following payments to its pension. Indicate how much is
deductible in 2017 and 2018?
2017 2018
Payment of current pension ₱150,000 ₱150,000
Payment of past pension 900,000 800,000
ANSWER:
2017 2018
Payment of current pension ₱150,000 ₱150,000
Payment of past pension
(900,000/10years) 90,000 90,000
(800,000/10years) 80,000
Deductible expense 240,000 320,000
CHARITABLE AND OTHER CONTRIBUTIONS

Maybe deductible in full or subject to limitation depending upon the organization to which
the donation is given.
The amount of any charitable contribution of property other than money shall be based on
the acquisition cost paid of such property.
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Requisites for deductibility of contributions:
1. It must be actually paid

2. Must be given to an organization specified by law
3. Within the taxable year
4. Net income of the institution must not inure to the benefit of any private individual or
stockholder
5. The taxpayer claiming the deduction must be engaged in trade, profession or business
CONTRIBUTIONS DEDUCTIBLE IN FULL
A. Donations to the:
1. Government of the Philippines or
2. Any of its agencies
3. Political subdivisions
4. Fully owned government corporations
And to used exclusively in undertaking priority activities in:
1. Education
2. Health
3. Youth and sports development
4. Human settlements
5. Culture and sports
6. Economic development
Note: Priority plan must be determined by the National Economic Development Authority (NEDA)
B. Donations to certain foreign institutions or international organizations in compliance with

agreements or treaties
C. Donations to accredited Non-Government Organizations
Exclusively for:
1. Scientific research
2. Educational
3. Character building
4. Youth and sports development
5. Health
6. Social welfare
7. Cultural
8. Charitable purposes
9. A combination thereof
CONTRIBUTIONS DEDUCTIBLE SUBJECT TO LIMIT
1. Donations to the Government of the Philippines or political subdivisions for exclusively

public purposes
2. Donations to accredited non-government domestic corporations or associations organized
and operated exclusively for the following purposes:
a. Religious
b. Charitable
c. Scientific
d. Youth and sports development
e. Cultural
f. Educational purpose
g. Rehabilitation of veterans
h. Social welfare institutions
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If the donation is not deductible in full, it shall be subject to limit in an amount not in
excess of
a. Ten percent (10%) in case of an individual taxpayer, and

b. Five percent (5%) in case of a corporation
SALES OR EXCHANGE OF CAPITAL ASSETS AND OTHER PROPERTIES

Capital Asset
It is defined as a property held by the taxpayer, which does not include the
following:
a) Stock in trade or inventory on hand – It falls under the category of ordinary assets, but
when the estate taken over the stocks upon the death of the owner and, by way of passive
liquidation, sells the inventoriable items included therein, it becomes capital assets. Examples are
supplies on hand, merchandise inventory, raw materials, goods in process, and finished goods.
b) Property intended for sale – “with the purpose of.” Examples are subdivision lots held
for sale.
c) Personal property, which is subject to depreciation – It is used in the ordinary course of
trade or business. Examples are store and office equipment, delivery equipment, etc.
d) Real property – Properties acquired for the purpose of being used for commercial
purposes. Examples are land and buildings for rent and agricultural land.
CAPITAL GAIN VS CAPITAL LOSS
Capital gains
sell or exchange the capital asset for an amount more than its cost (It is the amount paid
for the property in cash or in fair market value given in exchange).
Capital losses
sell or exchange the capital asset for an amount less than its cost.
Classification of Capital gains and losses

• Long-term – held for more than twelve months.
• Short-term – held for less than twelve month/s.
Capital gain > Capital loss Capital gain < Capital loss
NET CAPITAL GAIN NET CAPITAL LOSS
• Holding period
-It is the length of time the asset has been held by the taxpayer.
-It is applicable only to individual taxpayer.
-The day of acquisition is excluded and the disposal date is included.
Date of Acquisition Date of sale/exchange

• Property received from a decedent
-It is deemed to be long-term and upon the death of the decedent, the property
may sell or dispose immediately by the estate or heirs.
Illustration:
Ezekiel, single shows the following financial data:
2018 2019
Gross business income ₱ 250,000 ₱ 370,000
Deductions 50,000 50,000
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Sales of Capital Assets:
Holding
Year Capital Asset Cost Selling price
period
₱1,000,000 ₱1,040,000
2018
Home 2 years
Bond 275,000 120,000 6 months

2019
Car 500,000 850,000 3 years

Stock 150,000 100,000 14 months
2018
Gross Income ₱ 250,000
Less: Deductions 50,000
Net Income 200,000
Sale of Capital Assets:
Home – Selling price ₱ 1,040,000
Cost 1,000,000
Capital Gain 40,000
Long-term (40,000X50%) ₱20,000
Bond – Selling price 120,000
Cost 275,000
Capital Loss (155,000)
Short-term (155,000X100%) (155,000)
Net Capital Loss (135,000)
Taxable Income 200,000
• Discussion: The net capital loss of ₱ 135,000 cannot be deducted from the net
income of ₱ 200,000 because of the rule that “capital losses are deductible ONLY from
the capital gains.” The net income is not a capital gain.
2019
Gross Income ₱ 370,000
Less: Deductions 50,000
Net Income 320,000
Sale of Capital Assets:
Car – Selling price ₱ 850,000
Cost 500,000
Capital Gain 350,000
Long-term (350,000X50%) ₱175,000
Stock – Selling price 100,000
Cost 150,000
Capital Loss (50,000)
Long-term (50,000X50%) (25,000)
Capital loss carry-over, limit (135,000) 15,000
Taxable Income 335,000
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Discussion: The net capital loss in 2018 is ₱135,000 but since the net income in that year
is ₱200,000, the carry-over to 2019 is the amount of net capital loss amounting to
₱135,000.
Rules in the classification of real property into a capital asset or ordinary asset
Real property
a) Real properties acquired by a) Ordinary assets which

real estate dealer, develop, lesser, or have not been used in business
for the course of trade or business. for more than two years.
b) Property purchased for future b) Real property transferred
use in the business. thru succession or donation by
c) Real properties which are which the heir or done does not
previously used in trade or business. subsequently use such property
d) Real properties held by the in trade or business.
taxpayer who change its real estate c) Real property received
business into non-real estate as dividend by the stockholder
business. who is not engaged in trade or
ORDINARY GAINS AND ORDINARY LOSSES
e) Tax-free exchange of real business.
Ordinary gains
property byare
These thethe
taxpayer.
gains derived from the sale or exchange of ordinary assets.
Ordinary losses
These are the losses derived from the sale or exchange of ordinary assets.
DISTINCTION BETWEEN ORDINARY GAINS AND LOSSES

Factors Capital assets Ordinary Assets
Sources Sales/exchange of capital Sales/exchange of
assets ordinary assets
Holding period Necessary Not necessarily required
Tax policy May or may not be taxable Taxable in full
in full
Rules on capital assets transactions

1. Capital losses are deductible ONLY from the capital gains.
2. If any individual taxpayer sustains in any taxable year a net capital loss, it can be CARRY-
OVER the loss in the succeeding year.
Limitations:
a) Capital loss < Net income
b) Carry-over = one year only
3. Percentage of gain or loss:
a) Short-term (100%) – 12 months > asset was held
b) Long-term (50%) – 12 months < asset was held
4. The sale or disposition of real property by an individual is subject to SIX PERCENT (6%)
CAPITAL GAINS TAX (final withholding tax).
5. Capital asset transaction for the corporation:
a) Holding period – not applicable
b) Carry-over the net capital loss – not applicable
c) Gain on sale of real property – ordinary gain
6. Capital gains and losses = proportion for each partners’ interest in the partnership.
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Transaction resulting in capital gains and losses even there is no sale or exchange of
capital assets
1. Retirement of Bonds – the retirement of evidence of indebtedness issued by the

corporation with interest coupon.
2. Short sales of property
a) Short sale – it is a transaction in which the speculator sells securities which he
does not own.
b) Treatment – gains or loss on short sales is always a short-term capital gain or
loss.
3. Option gains and losses – it is a contract granting a person the exclusive privilege to
buy or not certain objects at any time within the agreed period at a fixed place.
4. Securities being worthless – loss from shares of stock which have become worthless is
considered as a capital loss but not deductible against capital gains (sale. Barter, other forms of
disposition of the share of stock), rather, against other capital gains up to its extent.
5. Liquidating dividend – liquidation of the corporation’s asset, which might incur loss or
gain.
Installment:
a) Gains on Liquidation – first payments are applied against cost, which is returnable
once completely recovered.
b) Loss on liquidation – taken only upon the distribution of the final liquidating
dividend.
6. Liquidation of partnership – upon the retirement of the partnership, the partner may
realize gain or loss.
Sales of real property classified as capital assets

• Sale, exchange or disposition of real property which recognized as a capital asset by its
owner (individual, estate or trust) located in the Philippines shall be taxed at the rate of six
percent (6%) based on selling price, fair market value or zonal value (available only on land)
whichever is higher.
• Sale, exchange, or disposition of real property in favor of the government, the taxpayer
shall have two options: a) pay the tax based on this rule; b) include the gain in his gross income
subject to the graduated rates of tax.
Sale of real property shall be filed and paid within thirty (30) days following each
exchange or disposition. The date of sale or disposition shall be the date of the notarization of
the sales documents.
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Sale of principal residence by individuals
Principal Residence refers to the dwelling house, including the land on which it is
situated, where the husband and wife, unmarried individual, whether or not qualified as head of
the family reside.
Sale of principal Historical or adjusted cost basis
residence shall be of the old residence will be
exempt if the sale will carried over to the cost of the
be utilized in acquiring new residence.
new residence within
eighteen (18) months.
Six percent (6%) capital

gains tax due will be
deposited in interest
In case the seller fails to submit
bearing account with an
documentary evidence within
authorized bank under
thirty (30) days after 18 months
an escrow agreement.
has lapsed, he will be assessed
for deficiency capital gains tax
inclusive of 25% surcharge and
20% interest per annum.
No utilization – tax plus deficiency
capital gains tax due (20% interest
per annum).
Formula in computing capital gains tax:
Gross selling price/Fair

X Unutilized portion X 6%
market value
Gross selling price
(whichever is higher)
Sale of lands and/or building by corporations

Land and/or building which are not actually used in the business by a corporation is
considered as a capital asset, therefore, are subject to a final tax of 6% of its gross selling price
or fair market value, whichever is higher.
Documents to be submitted to the BIR

In order to secure a Certificate Authorizing Registration (CAR)/Tax Clearance (TCL), the
following must be complied:
BIR Capital Gains Tax Form (BIR Form 1706)
1. BIR Documentary Stamps Tax Form
2. Original photocopy of the notarized deed of sale or exchange
3. Transfer Certificate of Title
4. Latest Tax Declaration
5. Sworn Declaration of No Improvement/Certification of No Improvement issued by
Assessor’s office
6. Copy of BIR Rulings for tax exemption
7. Duly approved tax debit memo
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8. Sworn declaration of interest

9. Escrow Agreement
Tax on sale of real property which are not capital asset

Creditable withholding tax based on the gross selling price or fair market value whichever
is higher:
Percent/rate Condition/s
Exempt Seller is exempt from creditable withholding tax
6% Seller is not habitually engaged in the business
Seller is habitually engaged in the business
1.5% Selling price is = or < 500,000
3% 500,000 < Selling price < 2,000,000
5% Selling price > 2,000,000
Seller/transferor is considered as habitually engaged in the business if:

a) Registered with the Housing and Land Use Regulatory Board or Housing and Urban
Development Coordinating Council
b) Consummated at least six taxable real estate transaction
Reminder: BANK shall not be considered as habitually engaged in the real estate business.
Income from the sale of real property not located in the Philippines
Not located in the

Ordinary income tax
Philippines
Gains from the sale, Normal income tax or
exchange, or other Domestic corporations minimum corporate income
disposition of real tax
property Non-resident citizen, alien
individual, or foreign Exempted
corporation
Real property subject of involuntary transfer
Involuntary transfers of real properties have no effect on the classification of such real property to
the involuntary seller, either as capital or ordinary asset.
Example:
• Real state dealer > real property part of inventory foreclosed > purpose of
determining applicable tax > shall be treated as ordinary assets.
• Real estate buyer > real property > used in business > treated as an
ordinary asset
Capital gains on tax on stock transactions
15% - tax rate of

• Net capital gains - From sale, barter, or exchange
• Other disposition of shares of stock in a domestic corporation
Not disposed of through the stock exchange
• Within 30 days after each transaction
The return shall be filed- On or before 15 days of the 4th month following the close of the taxable
year
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Final consolidated return shall be filed
Example:
Dominic sold his shares of stock in a domestic corporation for ₱700,000. The
shares are recorded in its books at a cost of ₱612,000.
Case 1: Shares are not listed and traded in the stock exchange.
Selling price ₱700,000
Cost 612,000
Net Capital Gain ₱112,000
Rate of tax 15%
Capital Gains Tax ₱16,800
Case 2: Shares are listed and traded in stock exchange

Selling price ₱700,000
Rate of Tax 6/10%
Capital gains tax ₱4,200
Fair market value of stocks not listed and traded in the local stock exchanges
Adjusted Net Asset Method

• used in determining the fair market value of the shares
• all assets and liabilities are adjusted to FMV
• net of adjusted asset – liabilities = indicated value of equity
Appraised value of real property at the time of sale shall be the higher of:
Fair market value as

determined by the shown in the schedule determined by independent
Commissioner, or of values fixed by the Appraiser
Provincial and City
Assessors, or
Losses from wash sales of stocks or securities
• Wash Sale
These are the sale of securities where substantially identical (same class)
securities are acquired or purchased within:
• 61 day period beginning
• 30 days before the sale and ending
• 30 days after the sale
Not substantially identical
• Common stock and preferred stock of the same corporation

• Nonvoting and stocks with voting power
• Stocks of one corporation and stocks of another
Two series of bonds which differ on interest rates (but if the only difference is the maturity
date then they are treated as substantially identical)
One is secured by a mortgage and the other is not
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losses on wash sale are not deductible as losses from sales or exchanges of
property.
Wash sale provisions do not apply to the following:
• Individuals or corporations acting as the dealer in stock such as stockbrokers and banks
and trust companies, if the sale or other disposition is made in the ordinary course of trade
and business
• Short sale transactions
• Gains in wash sales as such gains are taxable
FRINGE BENEFITS TO RANK AND FILE EMPLOYEES
The fringe benefits tax shall not apply to rank and file employees. The fringe benefits received
by this class of employees shall form part of their taxable compensation income.
DE MINIMIS BENEFITS- are exempt from the fringe benefits tax shall, in general, of relatively
small value and are offered or furnished by the employer merely as a means promoting the health,
goodwill, contentment, or efficiency of his employees.
- not subject to income tax as well as withholding tax on compensation income of managerial,
supervisory, and rank-and-file employees.
1. Monetized unused vacation leave credits of employees not exceeding ten (10) days during
the year;
2. Monetized value of vacation and sick leave credits paid to government officials and
employees.
3. Medical cash allowance to dependents of employees not exceeding P1,500.00 per employee
per semester or P250 per month;
4. Rice subsidy of P2,000.00 or one (1) sack of 50 kg rice per month amounting to not more than
P2,000.00;
5. Uniforms and clothing allowance not exceeding P6,000.00 per annum;
6. Actual yearly medical benefits not exceeding P10,000.00 per annum;
7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards, e.g., for length of service or safety achievement, which must
be in the form of 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;
9. Gifts are given during Christmas and major anniversary celebrations not exceeding P5,000
per employee per annum;
10. Flowers, fruits, books, or similar items given to employees under special circumstances, e.g.,
on account of illness, marriage, the birth of a baby, etc.; and
11. Daily meal allowance for overtime work not exceeding twenty-five (25%) of the basic minimum
wage.
12. Benefits received by an employee by virtue of a Collective Bargaining Agreement (CBA) and
productivity incentives schemes provided that the total annual monetary value received from
both CBA and productivity incentives schemes combined, do not exceed P10, 000.00 per
employee per taxable year.
EMPLOYER GIVES BENEFIT BEYOND THE CEILING
The amount of de minimis benefits conforming to the ceilings herein prescribed shall not be
considered in determining the P90, 000 of other benefits. However, if the employer pays more
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than the ceiling, the excess shall be taxable to the employee receiving the benefits only if
such excess is beyond P90, 000 (RA 10963).
Such excess, therefore, shall be considered as ordinary income of the employee and shall
form part of his taxable income.
In any case, the amount given by the employer as a benefit (de minimis or fringe benefits) to its
employees shall be a deductible expense -of such employer.
TAX RATE AND TAX BASE
A final withholding tax at the rate of 35% is imposed on the grossed-up monetary value of
the fringe benefit furnished, granted, or paid by the employer to the employee.
The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary
value of the fringe benefit by 65%.
The grossed-up monetary value (100%) of the fringe benefit represents the whole amount of
income realized by the employee, which includes the following:
CASES ANNUAL VALUE VALUE OF BENEFITS

BENEFITS
1. Leases (as lessee) residential - Monthly rental paid by
property for the use of the employee. employer.
2. Owns residential property which was 5% of FMV of land and
assigned to an officer for his use as improvements.
residence.
3. Purchases residential property on 5% of acquisition cost
installment basis and allows the excluding interest.
employee to use the same as his
residence.
4. Purchases a residential property and - Acquisition cost or
transfers ownership thereof in the FMV, whichever is
name of the employee. higher.
5. Purchases a residential property and - FMV of CIR and FMV of
transfers ownership thereof to his Assessor, whichever is
employee for the latter's residential higher, minus the cost
use at a price less than the to the employee.
employer’s acquisition cost.
1. The net amount of money or net monetary value of property received 65%); and
2. The amount of fringe benefit tax (35%) thereon otherwise due from the
employee but paid by the employer for and in behalf of his employee.
The tax imposed shall be treated as a final income tax on the employee which shall be withheld
and paid by the employer on a calendar quarterly basis.
1. Since there is no transfer of ownership is Cases 1, 2 and 3, the monetary value of the benefit
is 50% only.
2. In Cases 4 and 5, there is transfer of ownership. Thus, the monetary value is the entire value
of the benefit.
3. In any case, the tax base in computing the fringe benefits tax is the grossed-up monetary value
of the benefit given.
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CASE TRANSACTION MONETARY VALUE OF BENEFIT

1 Purchases the motor vehicle in the name of the Acquisition Cost
employee.
2 Provides the employee with cash for the Amount of cash received by the
purchase of a motor vehicle in the name of the employee
employee.
3 Shoulders a portion of the amount of the Amount shouldered by the
purchase price of a motor vehicle in the name employer
of the employee.
4 Purchases the car on installment in the name of Acquisition cost (exclusive of
the employee. interest) divided by 5 years
5 Owns and maintains a fleet of motor vehicles Acquisition cost of all motor vehicles
for the use of the business and the employees. not normally used in business
divided by 5 years.
6 Leases and maintains a fleet of motor vehicles Amount of rental payment for motor
for the use of the business and the employees. vehicles not normally used in
business.
7 The use of yacht whether owned and Depreciation of yacht at an
maintained or leased by the employer. estimated useful life of 20 years
Table 2. Guidelines for valuation of the benefits given in the form of motor vehicle and including
the monetary value of the fringe benefits
1. The monetary value in Case 1-4 shall be the entire value of the benefit regardless of
whether the motor vehicle, is used partly for the personal purposes and partly for the
benefit of the employer.
2. In Cases 5 and 6, the monetary value of the fringe benefit is fifty percent (50%) of the
value of the benefit.
3. In any case, the tax base in computing the fringe benefits tax is the grossed-up monetary
value of the benefits given.
4. The use of aircraft (including helicopters) owned and maintained by the employer shall be
treated as business use and not subject to the fringe benefit tax.
FILING OF TAX RETURNS FOR FRINGE BENEFITS
The tax return (BIR Form No. 1603) shall be filed in triplicate by every withholding
agent/payor, whether individuals or non-individuals, required to deduct and withhold taxes on
fringe benefits.
If the Government of the Philippines, its political subdivisions or any Agency or

Instrumentality, as well as government-owned or controlled corporation is the withholding agent/
payor, the return may be made by the officer or employee having control or disbursement of
income payment or other officer or employee appropriately designated for the purpose.
If the person required to withhold and pay the tax is a corporation, the return shall be made
in the name of the corporation and shall be signed and verified by the president, vice-president,
any other authorized officer and countersigned by the treasurer or assistant treasurer.
PAYMENT OF TAX
Tax return shall be filed and the tax paid on or before the 25th day of the month following
the quarter in which the fringe benefits were granted to the recipients.
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It shall be filed and the tax paid with the Authorized Agent Banks (AAB), of the Revenue
District Office (RDO) having jurisdiction over the withholding agent's place of business/office.
In the places where there are no AAB, the return shall be filed and the tax paid with the RDO
or the duly Authorized City or Municipal Treasurer of the RDO having jurisdiction over the
withholding agent's place of business/office, who will issue a Revenue Official Receipt (BIR Form
No. 2524) therefor.
Where the return is filed with an AAB, the lower portion of the return must be properly
machine- validated and duly stamped by the AAB to serve as the receipt of payment. The machine
validation shall reflect the date of payment, amount aid and the transaction code, and the stamped
mark shall show the name of the bank, branch code, teller's code and teller's initial.
The AAB shall also issue an official receipt or bank debit advice or credit document,
whichever is applicable, as additional proof of payment.
A taxpayer may file a separate return for the head office and for each branch or pace
business/office or a consolidated return for the head office and all the branches/officers except in
case of large taxpayers where only one consolidated return is required.
ILLUSTRATIONS
Illustration: CONVENIENCE-OF-THE-EMPLOYER RULE
Engr. Delos Bastardos is the plant manager of Philippine Oil Company. During the year, he
received P220.000 as salary. In addition, he was given free meals with a value of P33, 000 and
living quarters with a value of P22, 500.
a. How much is the taxable compensation income of Engr. Delos Bastardos?
Answer:
Salary P 220, 000
Free meals 33, 000
Free living quarters 22, 500
Taxable compensation income P 275, 000
b. Suppose the factory operated on a 24-hour basis and Engr. Delos Bastardos was required to
live within the factory compound (with free meals and lodging), for the convenience of the
employer. How much is the taxable compensation income?
Answer:
Only the salary of P220, 000. The free meals and lodging are not taxable because they are
furnished for the convenience of the employer.
ILLUSTRATION: TAX RATE AND TAX BASE
Dimas Savy received the following from Sunstar Drug Company in 2018:
Monthly salary P 15, 000

Monthly rice allowance 2,500
Monthly medical cash allowance to child 625
13th month pay 15, 000
Loyalty award for 20 years of service 20, 000
Clothing allowance 8, 000
Grocery items allowance per month 1, 000
The monthly rental of his apartment is being paid by the company at P11, 700 a month.
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REQUIRED:
1. Compute the taxable compensation income in 2018 if Dimas Savy is a rank-and-file employee.
2. Compute the monthly fringe benefit tax due on the apartment if Dimas Savy is a supervisory
employee.
3. What is the nature of imposition and payment of fringe benefit tax?
ANSWER:
1. Fringe benefits to rank and file employee.

Salary (15,000 x 12) P 180, 000
Other benefits:
Rice allowance (2,500-2,000) x 12 P 6, 000
Medical allowance (625-250) x 12 4, 500
13th month pay 15, 000
Loyalty award 20, 000
Clothing allowance (8,000 -6,000) 2, 000
Total 47, 500
Less: Exemption 90, 000
Grocery allowance (1,000 x 12) 20, 000
Rental of apartment (11,700 x 12) 140, 400
Taxable compensation income P 332, 400
a. The excess over the ceiling of rice allowance, medical allowance and clothing
allowance are included as part of the "other benefits”.
b. The rental of the apartment is a fringe benefit to Dimas. However, it is not subject to
fringe benefit tax because he is a rank-and-file employee.
2. Fringe benefits to supervisory employee.
Monetary value of the benefit (11,700x 50%) P 5, 850

Divide by monetary value factor _65%
Grossed-up monetary value 9,000
Rate of tax 35%
Monthly fringe benefit tax P 3, 150
Since there is no transfer of ownership, the monetary value oi the benefit is 50% only of
the entire value.
ILLUSTRATION: HOUSING PRIVILEGE
Poo Mimiyuh Corporation operates different branches in key cities of the country. The managers
being assigned in the branch offices usually come from the main office in Cebu. Because of this
practice, they usually lease residential houses for their branch managers. During the year, they
paid monthly rental of P8,450 for the residential house in Iriga City.
1. How much is the tax per month on the fringe benefits furnished by Pooh Mimiyuh Corporation
to its branch manager in Iriga City?
Answer:
Applicable Rule: Case 1
Monetary value of the benefit (8,450 x 50%) P 4, 225
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Grossed-up monetary value (4,225/656) 6, 500

Rate of tax 35%
2. Suppose Poo Mimiyuh Corporation owns a condominium unit which was allowed to be used
as residence by the manager. The fair market value of which as determined by the Commissioner
of Internal Revenue is P3, 744,000 while the value per City Assessor is P 2, 500, 000. How much
is the fringe benefit tax per month?
Answer:

Monthly value of the benefit [(5% x 3,744,000) /12] P 15, 600
Multiply by taxable portion 50%
Monetary value 7, 800
Divide by 65%
Grossed-up monetary value 12, 000
Rate of tax 35%
3. Suppose Metro Gaisano Corporation purchased a condominium unit in installment at a contract

price of P3, 380,000 and allowed the branch manager to use it as his residence. How much is the
fringe benefit tax per month?
Answer:
Monetary value [(3.380, 000 x 5%) x 50%] P 84, 500.00

Divide by 65%
Grossed-up monetary value 130, 000.00
Divided by months in a year 12
Monthly grossed-up value 10, 833.33
Rate of tax 35%
Fringe benefit tax P 3, 791.67
1. Suppose Pooh Mimiyuh Corporation purchased a condominium unit for P1, 600,000
when its fair market value was P1, 820,000 and transferred ownership thereof in the
name of the manager. How much is the fringe benefit tax?
Answer:
Monetary value (market value is higher) P 1, 820, 000
Divide by 65%
Grossed-up monetary value 2, 800, 000
Rate of tax 35%
Fringe benefit tax 980, 000
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5. Suppose Pooh Mimiyuh Corporation purchased a condominium unit for P 2, 872, 500
and transferred title to for use as residence by the manager for P1800.000. The
Commissioner’s value of the property is P2, 820,000 while the value per City Assessor
1s P2, 150,000. How much is the fringe benefit tax?
Answer:
FMV per Commissioner (higher value) P 2, 872, 500

Less: Cost to employee 1, 800, 000
Value of the benefit 1, 072, 500
Divide by 65%
Grossed-up monetary value 1, 650, 000
Rate 35%
Fringe benefit tax 577, 500
Illustration MOTOR VEHICLE OF ANY KIND
During the year, Manoban Company purchased a brand new car for use by its marketing
manager. The car costing P1,170,000 was registered in the name of the manager. Most of the
time, the vehicle is being used for business purposes of the manager while from time to time, it is
being used for personal purposes.
1. How much is the fringe benefit tax?
Answer:

Monetary Value P 1,170,000
Divide by 65%
Grossed-up Monetary Value P 1,800,000
Tax Rate 35%
Fringe Benefit Tax P 630,000
2. Suppose the company paid only 70% of the value of car, while the balance was
paid by the manager. How much is the fringe benefit tax?
Answer:
Monetary Value P 819,000
Divide by 65%
Grossed-up Monetary Value P 1,260,000
Tax Rate 35%
3. Suppose the company purchased the car in the name of the manager on
installment basis. How much is the fringe benefit tax?
Answer:
Monetary Value P 234,000
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Divide by 65%
Grossed-up Monetary Value P 360,000
Tax Rate 35%
Illustration INTEREST ON LOAN AT LESS THAN MARKET RATE
During the year, Porpayb Company approved a loan of P 100,000 to its manager at 7.5%
interest rate. The loan is payable in 6 months. How much is the fringe benefit tax?
Interest at benchmark rate (100,000 x 12% x 6/12) P 6,000.00
Less: Interest at special rate (100,000 x 7.5% x 6/12) 3,750.00
Interest foregone/ Value of Benefit P 2,250.00
Divided by 65%
Grossed-up Monetary Value P 3,461.54
Tax Rate 35%
Fringe Benefit Tax P 1,211.54
Illustration: HOLIDAY AND VACATION EXPENSES

Sir JJ Mon, Dean of Business Education Department at Pamantasan ng Lungsod ng Quezon,
was required by the school to pursue Master in Business Administration (MBA) as required
by the Commission on Higher Education (CHED). His study was financed by the school. Is
the study grant subject to fringe benefit tax?
Answer:
No. The study grant is in compliance with the requirement of the CHED that all deans must
be masteral degree holders. Thus, it is connected with the trade or business of the school.
Illustration FRINGE BENEFIT OF NRA (NETB)
Madonna Watodo, an American residing in the US and not engaged in trade or business in the
Philippines was invited to perform in the Philippines at a fee of P 3,500,000. After that concert,
she was given by her employer in the Philippines a "3-day al expenses paid vacation" in Boracay.
The expenses of which amounted to P 120,000.
Questions:
1. How much is the final tax on the professional fee?
2. How much is the gringe benefit tax?
Answer:
1. Professional fee P 3,500,000
Rate of Tax 25%
Final tax 875,000
2. Value of Benefit 120,000

Divide by 75%
Grossed-up monetary value 160,000
Rate of tax 25%
Fringe benefit tax 45,000
Page 44 of 51

c (BA 101)
Income Taxation
ACCOUNTING APPLICATION OF FRINGE BENEFIT EXPENSE AND FRINGE BENEFIT TAX
Illustration
Angel Weng Corporation owns a condominium unit. During the year, the said corporation
furnished and granted the said property for the residential use of its Assistant Vice President. The
zonal value amounts to P 8,000,000.
Required:
1. Compute the monthly fringe benefit tax due thereon.
2. Give the accounting entry to record fringe benefit tax expense.
3. Give entry to record the monthly amortization if the acquisition coat of the property is P
7,000,000 only and its remaining estimated life is 15 years.
Answer:
1. Computation of fringe benefit tax
Monetary value [5% (10,000,000)] × 50% P250,000.00
Monthly rental value (250,000/12) 20,833.33
Divide by 65%
Grossed-up monetary value 32,051.28
Rate of tax 35%
Fringe benefit tax P11,217.95
2. Journal entry to record the fringe benefit tax expense forbthe residential property
furnished to employees.
Fringe benefit tax expense P 11,217.95
Cash/Fringe benefit tax payable P11,217.95

Note: Angel Weng Corporation cannot claim fringe benefit expense as deduction since
the cost for the use of the property had already been recovered as deduction from gross
income under Depreciation Expense. However, the fringe benefit tax expense is allowed
as a deduction from gross income.
3. To record the monthly amortization of excess of zonal value over acquisition cost.
Fringe benefit expense P16,666.67
Fringe benefit tax 11,217.95
Income constructively realized P16,666.97
Cash/Fringe benefit tax payable 11,217.95
Zonal value P 10,000,000

Less: Acquisition cost 7,000,000
Excess 3,000,000
Monthly amortization [(3,000,000/15 yrs.)/12 months] 16,666.67
Page 45 of 51

c (BA 101)
Income Taxation
Note: If the cost of the condominium unit subject to depreciation allowance (P7,000,000) is
lesser than its zonal value (P10,000,000), the excess amount of P3,000,000 shall be amortized
throughout the remaining estimated useful life (15 years) of the residential property used in
computing the said employer's depreciation expense and allowed as a deduction from the said
employer's gross income as fringe benefit expense.
Illustration
On December 31, 2018, Hug Memorial Corporation paid P6,500 for the monthly rental of a
residential house of Mr. A Tan, the company's branch manager in Dapitan City.
Required:
1. Compute the fringe benefit tax due thereon.
2. Give the accounting entries to record payment of the fringe benefit expense and the fringe
benefit tax expense.
3. Give the accounting entries if the fringe benefit tax and fringe benefit expense have already
accrued but not yet paid.
Answer:
1. Grossed-up monetary value (6,500/65%) P10,000
Multiply by the taxable portion 50%
Grossed-up monetary benefit 5,000
Multiply by the tax rate 35%
Fringe benefit tax P1,750
2. Journal entry to record payment of fringe benefit expense and fringe benefit tax
expense.
Fringe benefit expense P6,500
Fringe benefit tax expense 1,750
Cash P8,250
3. Journal entry if the fringe benefit expense and the fringe benefit tax expense have
already accrued but not yet paid.
Fringe benefit expense P6,500
Fringe benefit tax expense 1,750
Fringe benefit payable P6,500
Fringe benefit tax payable 1,750
Note: Both the Fringe Benefit Expense and the Fringe Benefit Hug Rizal Memorial
Corporation.
Filling of Tax returns
Manner of Filing
Filing of Tax Returns may be made through:
• Manual Filling
• Electronic Filing and Payment System (EFPS)
• eBIR Forms
Page 46 of 51

c (BA 101)
Income Taxation
1. Final Withholding Tax on passive income
MANUAL OF FILLING
January to November 10th day of the month following the
month the withholding was made
December January 15 of the succeeding year
2. Capital Gains tax
A. Shares of stock– 3O days after each transaction
B. Real Property – 30 days following each sale or other disposition
3. Fringe Benefits – shall be filed and the tax paid/remitted not later than the last day of the
month following the close of the quarter during which withholding was made (TRAIN Law;
RR- 11-2018).
4. Basic Income Tax
• Apply calendar year

• Purely Compensation Income earners: April 15 of the succeeding year.
• For business income earners including income from practice of profession:
The individual taxpayer is required to file a quarterly tax return (regardless of the
results of operations) as follows;
1st Quarter May 15 (TRAIN Law)
2nd Quarter Aug. 1 (or 45 days after the end of October
3rd Quarter Nov. 15 (or 45 days after end of Quarter)
Annual Return April 15 of the succeeding year (sane with 1st quarter return
for income earned prior to TRAIN Law)
Required to File:
1. Residents citizens receiving income from sources within or outside the Philippines.
2. Employees deriving purely compensation income from 2 or more employers, concurrently or

successively at anytime during the taxable year.
3. Employees deriving purely compensation income regardless of the amount, whether from a
single or several employers during the calendar year, the income tax of which has not been
withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or
refundable return.
4. Self-employed individuals receiving income from the conduct of trade or business and/or
practice of profession.
5. Individuals deriving mixed income, i.e., compensation income and income from the conduct of
trade or business and/or practice of profession.
6. Individuals deriving other non-business, non-professional related income in addition to

compensation income not otherwise subject to a final tax.
7. Individuals receiving purely compensation income from a single employer, although the
income of which has been correctly withheld, but whose spouse is not entitled to substituted
filling
Page 47 of 51

c (BA 101)
Income Taxation
8. Non-resident citizens receiving income from sources within the Philippines.
9. Aliens, whether resident or not, receiving income from sources within the Philippines.
Not Required to File:
1. An individual which is a minimum wage earner.
2. Marginal income earner (self-employed whose annual gross sales and/or receipts do not
exceed P100,000).
3. An individual whose income has been subjected to final withholding tax (including non-
resident aliens note engaged in trade or business).
4. Those who are qualified under “substituted filling” of income tax returns.
However, substituted filing applies only if all of the following requirements are present:
A. the employee received purely compensation income (regardless of amount) during

the taxable year
B. the employee received the income from only one employer in the Philippines during
the taxable year.
C. the amount tax due from the employee at the end of the year equals the amount of
tax withheld by the employer
D. the employee’s spouse also complies with all 3 conditions state above
E. the employer files the annual information return (BIR Form No. 1604-CF) the
employer issues BIR Form No. 2316 (Oct 2002 ENCS version) to each employee.
Evaluation
Direction: Please write your answers and solutions on a blank sheet of paper. The deadline will
be on October 23, 2020 and you can submit it in our google classroom or LMS or messenger.
Thank you, and God bless.
Val, Filipino residing in Manila had the following data during the year:
Gross receipts (gross of 15% withholding tax P 950,000
Expenses from profession, gross of tax 120,000
Interest of 6 years bank deposit 40,000
Interest on long-term deposit (preterminated after 3.5 years) 20,000
Winnings in a raffle draw 100,000
Prize won in contest 5,000
Winnings in lotto 10,000
Cash dividend received from Domestic Corp 6,000
Other income, net of 2,400 withholding tax 37,600
Property acquired thru devise 3,500
Page 48 of 51

c (BA 101)
Income Taxation
Rental Income (net of 5% WT) 38,000
Depreciation of rental equipment 8,000
Loan benefits from SSS 20,000
Received as a beneficiary in the life insurance policy of his father
who died during the year 150,000
DVD player received as birthday gift from mother 5,000
1. The taxable income if Val is single, supporting his only sibling, 30 years old, mentally
defective and his mother, a senior citizen.
A. 907,000 C. 879,600
B. 857,000 D. 877,600
2. The income tax payable if he availed of the graduated rates of tax –

A. 102,340 C. 15,200
B. 98,740 D. 92,340
3. The income tax payable before creditable withholding tax if Val availed of the 8% income
tax rate –
A. 79,600 C. 62,800
B. 15,200 D. 92,340
4. The total final withholding tax

A. 24,600 C. 32,600
B. 23,000 D. 31,000
5. The total amount of income received which is exempt from income tax
A. 173,500 C. 53,500
B. 50,000 D. 193,500
6. Jasmine, a non-resident citizen, incurred the following expenses:
Depreciation of an apartment house located in Labo, P 75,000

Depreciation of an apartment house located in Canada, P 100,000
Business Expenses in the Philippines, P25,000
Expenses in connection with the sale of personal property purchased in Canada and
sold in the Philippines, P 15,000
Unallocated Interest expense, P30,000
Assuming that the gross income derived from sources within is P 2,000,000 while
the gross income derived from sources without is P 1,000,000. The amount of deductible
expense is –
A. 135,000 C. 163,333
B. None D. 115,000
7. The following interest payments were made by an individual income taxpayer:
Interest on loan from BDO used to finance a business P 50,000

Interest on loan from Pag-ibig to build residence 100,000
Page 49 of 51

c (BA 101)
Income Taxation
Interest on loan obtained from brother & used in business 25,000

Interest on loan from BPI used to buy computer equipments
In the office 30,000
Interest for late payment of VAT 2,500
Interest on acquisition of residential lot bought in installments 2,000
Interest payment on a debt which has prescribed 12,000
The deductible amount of interest is –

A. P 221,500 C. P 175,000
B. 80,000 D. 82,500
Juan is a MIXED INCOME EARNER. He is a self-employed resident citizen and

currently the Finance manager of Omega Corporation. The following data were provided
for 2020 taxable year:
Compensation income P1,800,000

13th month pay and other benefits 150,000
Sales 2,800,000
Cost of Sales 1,125,000
Business Expenses 650,000
Interest Income from peso bank deposit 80,000
Interest income from bank deposit under FCDS 120,000
Gain on sale of land in the Philippines held as capital
Asset with cost of P1,500,000 when the zonal
Value is P1,200,000 500,000
Value is P1,200,000 500,000
Creditable withholding tax on compensation income 448,000
Creditable withholding tax on sale of goods 28,000
8. How much is his total income tax expense assuming he opted to be taxed at 8%?
a. P321,500 c. P826,000
b. P788,500 d. P358,000
9. How much is the income tax payable of Juan for the year?
a. P28,000 c. P448,000
b. P196,000 d. P672,000
Page 50 of 51

c (BA 101)
Income Taxation
II. Preparation of Income Tax Return

Problem:
Juan is a MIXED INCOME EARNER. He is a self-employed resident citizen and

currently the Finance manager of Omega Corporation. The following data were provided
for 2020 taxable year:
Compensation income P1,800,000

13th month pay and other benefits 150,000
Sales 2,800,000
Cost of Sales 1,125,000
Business Expenses 650,000
Interest Income from peso bank deposit 80,000
Interest income from bank deposit under FCDS 120,000
Value is P1,200,000 500,000
Value is P1,200,000 500,000
Creditable withholding tax on compensation income 448,000
Creditable withholding tax on sale of goods 28,000
Requirements:
A. Fill out the BIR Form 1701 (January 2018 (ENCS)): Annual Income Tax Return
B. Fill out the BIR Form 2316 (January 2018 (ENCS)): Certificate of Compensation
Payment/Tax Withheld
C. Fill out the BIR Form 2316 (January 2018 (ENCS)): Certificate of Creditable Tax
Withheld at Source
References:
Ampongan, CPA, Omar Erasmo G. (2020), Income Taxation
Banggawan, CPA, MBA, Rex B. (2019) Income Taxation, Laws, Principles and Applications
Tabag, Enrico D. & Garcia Earl Jimson R. (2020), Income taxation
Valencia, E. & Roxas, G. (2007). Income Taxation. Baguio City: Valencia Educational Supply.
Prepared by: Reviewed & Approved by:
EUGENE O. BALINDAN, CPA___ LUVY S. ASIS, MBA, CPA_____

Instructor 1, Accountancy Department Chairperson, Accountancy Department
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What are the different types of individual taxpayers?

What are the different types of individual taxpayers?

What are the sources of taxable income for different types of individual taxpayers?

What are the sources of taxable income for different types of individual taxpayers?

Republic of the Philippines

CAMARINES NORTE STATE COLLEGE

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

Name of Faculty: Eugene O. Balindan

Subject: BA 101 Income Taxation

Schedule for Instruction:

Course, Year & Section Schedule Time

Lesson/Topic: Taxation of Individuals

A. Classification of Individual Taxpayers

o An individual whose o An alien residing within the

1. An alien actually present in the

An alien has acquired residence in the

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

2. Non- resident Citizen 4. Non-resident Alien

B. Sources of Taxable Income

Individual Taxpayer Income Within Income Without

C. Tax on Income Earnings and Money Remittances of OCW/ OFW

Overseas Contract Workers (OCW) – Filipino citizens employed in foreign countries,

• Overseas Contract Workers (OCW) refer to Filipino citizens employed in foreign

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

o Income arising out of his Income tax

D. Kinds of Income of Individual Taxpayer

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

E. Income Tax Rates for Individuals

Effective July 1, 2018, until December 31, 2022

Over Not over Tax Plus Of excess over

Over Not over Tax Plus Of excess over

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

Income tax refundable P( 50,800)

F. Tax on Non-resident alien engaged in Trade or Business (NRA ETB)

A non-resident alien engaged in trade or business (ETB) is an individual who stayed

Individual Taxpayer Income Within Income Without

G. Income Earned by Alien Employees

Ms. CCF, an alien employed in MCUD Corporation that is a Petroleum

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

2,910,000 x 32% 931,200

The following shall be subject to final withholding tax:

Passive Income Resident or NRA NRA

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

Philippine Charity Sweepstakes winnings and Lotto Exempt Exempt 25%

- Not Through the local stock

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

FORMULA in computing the capital gain:

I. Tax on Non-resident Aliens Not Engaged in Trade or Business

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

I. Tax on Non-resident Aliens Not Engaged in Trade or Business

NRA-NETB is subject to:

• 25% FWT on ALL

• CGT on the sale of shares of a domestic corporation directly to a buyer

a) The gross selling price, and

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

3. In case of dispositions of real property classified as capital assets is sold to

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

REQUIRED: compute the final withholding taxes on Mr. Christopher:

J. Allowable Deductions from Income of Individual Taxpayers