CHAPTER 3 ALLOWABLE DEDUCTIONS

Deductions are expenses and losses incurred in connection with the realization of gross income,
which the law allows to be deducted from such income to arrive at the taxable net income. As a
rule, if a taxpayer does not within any year deduct his expenses, losses, interests, taxes or other
charges, he can no longer deduct them from the income of any succeeding year.

“SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation
income arising from personal services rendered under an employer-employee relationship where
no deductions shall be allowed under this Section other than under subsection (M) hereof, in
computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B)
and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; “

Deductions, in General

a. For individual with gross compensation income (there is an employer-employee

relationship)

No deductions in any form shall be deducted from their net taxable income.

b. and for individuals with gross income from business or practice of profession:

Itemized or optional standard deductions for ordinary and necessary business expenses..

b. For corporation
1. Itemized deductions
2. Optional Standard deductions

Income Subject to Allowable Deductions

1. Business and professional income of a general co-partnership;

2. Business income derived within and outside the Philippines by a domestic corporation;
3. Business income of proprietary educational institution and non-profit hospitals;
4. Business income of proprietary government owned or controlled corporation;
5. Business income within the Philippines earned by a foreign corporation.

Kinds of Deductions under the Tax Code

1. Itemized deductions
2. Optional Standard deductions
3. Special Deductions
Optional Standard Deductions

When the law dispenses with records, documents or receipts to support deductions, “optional
standard deduction” can be used to reduce gross income to arrive at the net income subject to tax.

 The OSD is an amount equal to forty percent (40%) of the gross income from business or
practice of profession of the taxpayer.

Rules in the Election of Optional Standard Deduction

1. Optional standard deduction is allowable only on gross income from profession, trade or
business. It is not allowed for gross compensation income.
2. It could be availed only by an individual taxpayer who is not a non-resident alien.
3. Supporting receipts or documents are not required in an optional standard deduction.
4. This kind of deduction is only applicable when the taxpayer has signified in his income tax
return his intention to use OSD instead of itemized deductions which will be irrevocable within
the taxable year.

Itemized Deductions

Itemized deductions, in general, are specific expenses permitted by the Tax Code to be
deducted from the gross income provided that supporting documents are available. By nature,
they may represent payments of liabilities, realized losses or reductions in value or interest of
property used in business. Generally, these items are shown as operating and other expenses in
the income statement.

1. General Business expenses

2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletions of oil and gas wells and mines
8. Pension Trust
9. Research Development
10. Charitable and other contributions

1. BUSINESS EXPENSES

General Business Expenses

Expenses in general include all ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly attributable to the development, management,
operations and/or conduct of the trade, business or exercise of a profession, including:
Requisites for Deductibility of General Business Expenses

1. It must be ordinary and necessary for the conduct of business or exercise of profession;
2. It must be directly attributed to the development, management, operation and/ or conduct of
the trade, business or exercise of profession;
3. It must be incurred or paid within the taxable year;
4. It must be reasonable amount;
5. It must not be contrary to law, morals, public policy, or public order;
6. It must be substantiated with official receipts or any other adequate records.

Substantiation Requirements. - No deduction from gross income shall be allowed hereof

unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other
adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or
relation of the expense being deducted to the development, management, operation and/or
conduct of the trade, business or profession of the taxpayer.

Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be
allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official
or employee of the national government, or to an official or employee of any local government
unit, or to an official or employee of a government-owned or -controlled corporation, or to an
official or employee or representative of a foreign government, or to a private corporation,
general professional partnership, or a similar entity, if the payment constitutes a bribe or
kickback.

a. Compensation Payments

 Inclusive are wages and other forms of compensation for personal services actually
rendered by employees under an employer-employee relationship.
 Fringe Benefits - the grossed-up monetary value of fringe benefits furnished or
granted by the employer to the employee provided that the final tax has been paid.

b. Travel Expenses

 These are expenses incurred within and outside the country while away from home in
the pursuit of trade, business or profession.

c. Rentals

 These are expenses incurred for the continued use or possession, for purposes of
trade, business or profession, of property to which the taxpayer has not taken or is not
taking title to or in which he has no equity other than that of a lessee, user or
possessor.
 d. Representation Expenses

 These are entertainment and recreation expenses incurred during the year which are
directly connected to the development, management and operation of the trade,
business or profession of the taxpayer, or that directly related to or in furtherance of
the conduct of his trade or exercise of profession.

e. Additional Deduction to a Private Educational Institution.

 It may deduct expenditures otherwise considered as capital outlays of depreciable
assets incurred during the taxable year for the expansion of school facilities, or deduct
allowance for depreciation thereof.

2. INTEREST EXPENSES

The cost of money paid or incurred within a taxable year on indebtedness in connection
with taxpayer’s profession, trade or business. It also includes the amount paid for the borrower’s
use of money during the term of the loan, as well as for his detention of money after the due date
for its repayment.

Requisites for Deductibility

1. There must be indebtedness;

2. There should be an interest expense paid or incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with taxpayer’s trade, business or exercise of profession;
5. The interest expense must have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest must not be incurred to finance petroleum operations; and
9. In case of interest incurred to acquire property used in trade, business or profession, the same
was not treated as capital expenditure.

3. TAXES

Taxes deductible from gross income are taxes proper only; interest and penalties incident to tax
delinquency are not deductible from gross income.
Taxes not deductible from gross income
1. Philippine Income Tax
2. Estate and Donors taxes
3. Special assessment tax
4. Foreign income tax
5. Percentage tax on stock transaction
 6. Value added tax
7. Compromise penalty
4. LOSSES
 In general, losses actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity shall be allowed as deductions:
 
(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises
from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.

(c) No loss shall be allowed as a deduction under this Subsection if at the time of
the filing of the return, such loss has been claimed as a deduction for estate tax
purposes in the estate tax return.

 Losses on property arising from fire, storms, shipwreck, other casualties, robbery, theft or
embezzlement, and other losses, if incurred in connection with trade, business or
profession actually sustained during the taxable year and not compensated for by
insurance or other form of indemnity, shall be allowed as deductions

 Net operating loss carry over (NOLCO)

Net operating loss shall mean the excess of allowable deductions over gross income of the
business in a taxable year.
The NOLCO of the business for any taxable year immediately preceeding the current
taxable year, which has not been previously off set as deductions from gross income shall
be carried over as a deduction from gross income for the next three (3) consecutive taxable
years immediately following the year of such loss.

5. BAD DEBTS

A bad debt results from the worthlessness or uncollectibility, in whole or in part, of

amounts due to the taxpayer by others, arising from money lent or from uncollectible amounts of
income from goods sold or services rendered.

Requisites for deductions:

1. There must be indebtedness due the taxpayer which must be valid and legally demandable.
2. The same must be connected with the taxpayer’s trade, business or practice of profession.
3. The same must not be sustained in a transaction entered into between related parties
enumerated under Section 36 (B) of the Tax Code.
4. The same must be actually charged off the books of accounts of the taxpayer as of the end of
the taxable year.
5. The same must be actually ascertained to be worthless and uncollectible as of the end of the
taxable year.
6. Depreciation Expense

An annual reasonable allowance to reduce the useful value of the tangible fixed assets
resulting from wear and tear, and normal obsolescence is allowed as a deduction from gross
income to enable taxpayer to recover the acquisition cost of the property used in the practice of
profession, business or trade.

Requisites for Deduction of Depreciation

1. The allowance must be reasonable.
2. The allowance must be charged off during the year.
3. The asset must be used in profession, trade or business, and
4. The asset must have limited useful life.

7. DEPLETION

Wasting assets or natural resources usually include coal, oil, ore, and precious metal like gold,
silver and timber. The allocation of the cost or other basis of a wasting asset over the period the
natural resource is extracted or produced is called depletion. Depletion allowance enables the
taxpayer to recover the capital interest-free from income tax, as its cost or some other basis.
1. Charitable Contributions Subject to Limitation

Donations, contributions or gifts actually paid or made within the taxable year to
accredited non-stock, non-profit corporations shall be allowed limited deductibility in an amount
not in excess of 10% for an individual donor, 5% for corporate donor, of the donor’s income
derived from trade, business or profession as computed without the benefit of this deduction.

Valuation - The amount of any charitable contribution of property other than money shall be
based on the acquisition cost of said property. 

Proof of Deductions - Contributions or gifts shall be allowable as deductions only if verified

under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of
the Commissioner.

9. REASEARCH AND DEVELOPMENT

In general, a taxpayer may treat research or development expenditures which are paid or
incurred by him during the taxable year in connection with his trade, business or profession as
ordinary and necessary business expenses which are not chargeable to capital account. The
expenditure so treated shall be allowed as deduction during the taxable when paid or incurred.

10. PENSION TRUST

An employer establishing or maintaining a pension trust to provide for the payment of
reasonable pensions to his employees shall be allowed as a deduction
 CHAPTER 4 TAX ON INDIVIDUALS

Classification of Income taxpayers

1. Individual
Refers to natural persons, whether Filipino citizens or not, and whether resident or non-
resident of the Philippines.

2. Corporation
It includes partnership, no matter how created or organized, joint-stock companies, joint
accounts, associations, or insurance companies, but does not included general professional
partnership and a joint venture or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the government.

3. Estate
Estate refers to all the property, rights and obligations of a person which are not
extinguished by his death and also those which have accrued thereto since the opening of the
succession. To be taxable, an estate must be under judicial settlement; otherwise, it is not subject
to income tax.
4. Trust
Is an arrangement created by will or an agreement under which title to the property is
passed to another for conservation or investment with the income therefrom and ultimately the
principal to be distributed in accordance with the directions of the creator as expressed in the
governing instrument. A trust to be taxable must be an irrevocable trust both as to principal and
income.

Definition of Individual Taxpayer

They are natural persons who generally derive income subject to tax within the
jurisdiction of a taxing authority.

General Principles of Income Taxation in the Philippines

Except when otherwise provided, Section 23 in this Code states that:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income derived from sources within the
Philippines: Provided, That 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;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.

CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS

1. Citizen

Classification of Citizens for Taxation Purposes

A. Resident Citizen- is a Filipino citizen who stayed permanently in the Philippines or

stayed outside the Philippines for less than 180 days during the taxable year.
B. Non-resident citizen- is a Filipino citizen who stayed outside the Philippines for
180 days or more during the taxable year and has established proof to the
Commissioner of Internal Revenue of his definite intention to reside outside the
Philippines on a permanent basis as an immigrant or an employee.

2. Alien

Classification of Aliens for Taxation Purposes

A. Resident Alien-
Is a person who is not a citizen of the Philippines but residing within the
Philippines. Also included are foreign individuals who have stayed in the Philippines
for more than one year from date of arrival.

B. Non-resident alien-
Are foreign individuals whose residence is not within the Philippines:
1. Those engaged in trade or business within the Philippines. (NRAETB)
2. Those not engaged in trade or business within the Philippines. (NRANETB)

C Special Aliens-

1. aliens employed by regional or area headquarters of multi-national corporation;

2. aliens employed by petroleum service constructor and sub-constructors;
 3. aliens employed by offshore banking units

Who is a Filipino Citizen?

The following shall be considered citizen of the Philippines:
a. Those who are citizens of the Philippines at the time of the adoption of the February 2,
1987 constitution;
b. Is born (by birth) with father and/or mother as Filipino citizens;
c. Those born before January 17,1973 of Filipino mother who elects Philippine
Citizenship upon reaching the age of majority; and
d. Acquired Philippine citizenship after birth (naturalized) in accordance with the
Philippine laws.

SOURCES OF INCOME

1. Resident citizens are taxable on all income derived from sources within and without.
2. Non-resident citizens and alien individuals- are taxable only on income derived from sources
within the Philippines.

Individual Income Taxes

Taxpayer Within Without

Citizen Yes Yes
Non-resident Yes No
citizen
Alien Individual Yes No

Categories or Sources of Income of Individual Taxpayer

1. Compensation Income- is an income or remuneration derived from services rendered

generally under an employer-employee relationship. If a taxpayer is receiving compensation
income from two or more employers, he must combine all compensation income received from
all employers for a calendar year.
 Example: Salaries, bonuses, allowances, pensions and other whether received in cash or
in kind.

2. Income from Profession- is an income derived from the practice of individual’s profession as
a sole proprietor or professional partnership.
 Example: Audit fee, retainer’s fee of a CPA or lawyer.

3. Business income is an income derived from trade or commercial activity.

This shall not include income from performance of services by the taxpayer as an
employee.
 Example: gain on sale of property, net income from merchandising or servicing
business.
4. Capital gains are earnings derived from sale of property not used in the business.
Taxed at 6% final tax on the gross selling price or current fair market value at the time of sale,
whichever is higher.
 Example: capital gains from sale or personal property; gain from sale of shares of
stock by a non-dealer of securities.

Illustration: In 2018, a resident citizen, sold his residential house and lot in Sagkahan, Tacloban
City for P2,500,000. The cost of the house and lot three years ago when he acquired the property
was P 1,500,000 and the fair market value at the time of sale is P 2,300,000. How much is the
capital gains tax from sale?
Selling Price P2,500,000
Tax rate 6%
Final tax P 150,000
5. Passive Income- is an income derived without active effort made by the taxpayer. This kind
of income is subject to final withholding tax ranging from 5% to 25%. Once subjected to final
withholding tax, it shall not be subjected to schedular tax.
 Example: Interest on cash deposits, dividend income, royalty income and others.

Illustration:
Helena, single and resident citizen, has the following passive income for the year 2018.
Interest from BPI Savings Deposit P75,000
Royalty from inventions 80,000
Prize in painting competition 30,000
Dividends received from domestic corporation 30,000

Computation of Final Tax:

Interest (P75,000 x 20%) P15,000
Royalty (P80,000 x 20%) 16,000
Prize ( P50,000 x 20%) 10,000
Dividends (P30,000 x 10%) 3,000
Total P44,000

6. Capital gains from sale of shares of stocks not traded through the stock exchange. Taxed
at 15% final taxes on a per transaction basis:

On the net capital gain: 15%

Illustration: In 2018, Ronnie, a resident citizen, owns and holds as capital assets, shares
of stocks of Prudential Guaranty, a domestic corporation, costing P40,000. He sold all the shares
directly to Lilibeth for P160,000. How much final tax must be paid?

Selling Price P160,000

Cost 40,000
Capital gains P120,000
 On P120,000 at 15 % P 18,000
7. Fringe Benefit-means any good, service, or other benefit furnished or granted by an
employer in cash or in kind in addition to basic salaries to an individual (except rank and file
employee) under an employee-employer relationship. Taxed at 35% final tax effective January
1, 2018, it is based on the grossed up monetary value. The gross-up monetary value is not to be
included in the gross income of the taxpayer for purposes of computing the income tax liability.

Illustration: In July 2018, Bernabe, a resident citizen, received from his employer fringe benefit
of P116,000. The fringe benefit is subject to the fringe benefit tax.

Monetary value of fringe benefit P116,000

Divide by: (2018 factor) 65%
Grossed-up monetary value 178,461.53
Multiply by : (2018 tax rate) 35%
Fringe benefit tax P 62,461.53

For married individuals, the husband and wife, subject to the provision of Section 51 (D)
of the Code, shall compute separately their individual income tax based on their respective total
taxable income: Provided, That if any income cannot be definitely attributed to or identified as
income exclusively earned or realized by either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining their respective taxable income.

“ Provided that minimum wage earners as defined in Section 22(HH) of this Code shall s
be exempt from of income tax on their taxable income, Provided further, That the holiday pay,
pay received by such minimum wage earners shall likewise be exempt from income tax.

Individual Exempt from Income Tax

A. Non-resident citizen who is:

 A citizen of the Philippines who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite intention to reside therein.
 A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as immigrant or for employment on a permanent basis.
 A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year.
 A citizen who has been previously considered as a non-resident citizen and who
arrives in the Philippines at any time during the year to reside permanently will be
treated as a non-resident alien during the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the date oh
his arrival in the Philippines.
B. Overseas contract workers, including overseas seaman.
C. Barangay Micro Business Enterprise
Income Tax Rates

(a) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

The tax shall be computed in accordance with and at the rates established in the following
schedule:

Effective January 1, 2023 and Onwards:

Income Tax Rates

I. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and Individuals
Engaged in Business and Practice of Profession
A. Graduated Income Tax Rates under Section 24(A)(2) of the Tax Code of 1997, as
amended by Republic Act No. 10963 

Amount of Net Taxable Income Rate

Over But Not Over  
- P250,000 0%
P250,000 P400,000 15% of the excess over P250,000
P400,000 P800,000 P22,500 + 20% of the excess over P400,000
P800,000 P2,000,000 P102,500 + 25% of the excess over P800,000
P2,000,000 P8,000,000 P402,500 + 30% of the excess over P2,000,000
P8,000,000   P2,202,500 + 35% of the excess over P8,000,000

B. For Purely Self-Employed Individuals and/or Professionals Whose Gross Sales/Receipts

and Other Non-Operating Income Do Not Exceed the VAT Threshold of P3,000,000, the
tax shall be, at the taxpayer’s option:
1. 8% Income Tax on Gross Sales or Gross Receipts in Excess of P250,000 in Lieu
of the Graduated Income Tax Rates and the Percentage Tax; Or
2. Income Tax Based on the Graduated Income Tax Rates
C. For Individuals Earning Both Compensation Income and Income from Business and/or
Practice of Profession, their income taxes shall be:
1. For Income from Compensation: Based on Graduated Income Tax Rates; and
2. For Income from Business and/or Practice of Profession:
a. If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of
P3,000,000, the Individual Taxpayer May Opt to Avail:
i. 8% Income Tax on Gross Sales/Receipts and Other Non-
Operating Income in Lieu of the Graduated Income Tax Rates
and the Percentage Tax; Or
ii. Income Tax Based on Graduated Income Tax Rates
b. If the total Gross Sales/Receipts Exceed VAT Threshold of P3,000,000
i. Income Tax Based on Graduated Income Tax Rates
D. On Certain Passive Income of Individual Citizens and Resident Aliens

Passive Income Tax Rate

1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Royalties (on books as well as literary & musical compositions) 10%
    - In general 20%
3. Prizes (P10,000 or less ) Graduated
Income Tax
Rates
    - Over P10,000 20%
4. Winnings (except from PCSO and Lotto amounting to P10,000 or less ) 20%
-   From PCSO and Lotto amounting to P10,000 or less exempt
5. Interest Income from a Depository Bank under the Expanded Foreign 15%
Currency Deposit System
6. Cash and/or Property Dividends received by an individual from a domestic  10%
corporation/ joint stock company/ insurance or mutual fund companies/
Regional Operating Headquarter of multinational companies
7. Share of an individual in the distributable net income after tax of a 10%
partnership (except GPPs)/ association, a joint account, a joint venture or
consortium taxable as corporation of which he is a member or co-venture
8. Capital gains from sale, exchange or other disposition of real property 6%
located in the Philippines, classified as capital asset
9. Net Capital gains from sale of shares of stock not traded in the stock 15% 
exchange
10. Interest Income from long-term deposit or investment in the form of savings, Exempt
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed on the
entire income from the proceeds of the long-term deposit based on the
remaining maturity thereof:
Holding Period
- Four (4) years to less than five (5) years 5%
- Three (3) years to less than four (4) years 12%
- Less than three (3) years 20%
 II. For Non-Resident Aliens Not Engaged in Trade or Business 

A. Tax Rate in General – on taxable income from all sources within the same manner as
Philippines individual
citizen and
resident alien
individual
B. Certain Passive Income Tax Rates
1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Royalties (on books as well as literary & musical compositions) 10%
    - In general 20%
3. Prizes (P10,000 or less ) Graduated
Income Tax
Rates
    - Over P10,000 20%
4. Winnings (except from PCSO and Lotto) 20%
   -  From PCSO and Lotto exempt
5. Cash and/or Property Dividends received from a domestic corporation/ joint 20%
stock company/ insurance/ mutual fund companies/ Regional Operating
Headquarter of multinational companies
6. Share of a non-resident alien individual in the distributable net income after 20%
tax of a partnership (except GPPs) of which he is a partner or from an
association, a joint account, a joint venture or consortium taxable as
corporation of which he is a member or co-venture
7. Interest Income from long-term deposit or investment in the form of savings, Exempt
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed on the
entire income from the proceeds of the long-term deposit based on the
remaining maturity thereof:
Holding Period
  - Four (4) years to less than five (5) years 5%
  - Three (3) years to less than four (4) years 12%
  - Less than three (3) years 20%
8. Capital from the sale, exchange or other disposition of real property located 6%
in the Philippines classified as capital asset
9. Net Capital gains from sale of shares of stock not traded in the Stock  
Exchange
   - Not over P100,000 5%
   - Any amount in excess of P100,000 10%

III. For Non-resident Aliens Not Engaged in Trade or Business 

1. Gross amount of income derived from all sources within the Philippines 25%
2. Capital gains from the exchange or other disposition of real property located in the 6%
Philippines
3. Net Capital gains from the sale of shares of stock not traded in the Stock Exchange  
- Not  Over  P100,000 5%
- Any amount in excess of P100,000 10%
 IV. For Alien Individuals Employed by Regional Headquarters (RHQ) or Area Headquarters and
Regional Operating Headquarters (ROH) of Multinational Companies, Offshore Banking Units
(OBUs), Petroleum Service Contractor and Subcontractor  

On the gross income consisting of salaries, wages, annuities, compensation, Graduated

remuneration and other emoluments, such as honoraria and emoluments Income Tax
derived from the Philippines Rates

V. For General Professional Partnerships 

Net Income of the Partnerships 0%

VI. For Domestic Corporations 

Rates of Tax on Certain Passive Income of Corporations Tax Rate

1. Interest from currency deposits, trust funds, deposit substitutes and similar 20%
arrangements received by domestic corporations
2. Royalties from sources within the Philippines 20%
3. Interest Income from a Depository Bank under Expanded Foreign Currency 15%
Deposit System
4. Cash and Property Dividends received by a domestic corporation from 0%
another domestic corporation
5. Capital gains from the sale, exchange or other disposition of lands and/or 6%
building
6. Net Capital gains from sale of shares of stock not traded in the stock 15% 
exchange

VII. *Beginning on the 4th year immediately following the year in which such corporation commenced
its business operations, when the minimum corporate income tax is greater than the tax
computed using the normal income tax.
VIII. For Resident Foreign Corporation 

1) a. In General – on taxable income derived from sources within the 30%

Philippines
    b. Minimum Corporate Income Tax – on gross income 2%
    c. Improperly Accumulated Earnings – on improperly accumulated taxable 10%
income
2) International Carriers – on gross Philippine billings 2½%
3) Regional Operating Headquarters of Multinational Companies– on taxable 10%
income
4.) Regional or Area Headquarters of Multinational Companies exempt
5) Corporation Covered by Special Laws Rate specified
under the
respective
special laws
6) Offshore Banking Units (OBUs) 10%
In general – Income derived by OBUs from foreign currency transactions with Exempt
non-residents, other OBUs, local commercial banks and branches of foreign
banks authorized by BSP
    On interest income derived from foreign currency loans granted to residents 10%
 other than offshore banking units or local commercial banks, local branches of
foreign banks authorized by BSP to transact business with OBUs
7) Income derived under the Expanded Foreign Currency Deposit System  
   Interest income derived by a depository bank under the expanded foreign 7½%
currency deposit system.
   On Income derived by depository banks under the expanded foreign exempt
currency deposit systems from foreign currency transactions with non-
residents, OBUs in the Philippines, local commercial banks including branches
of foreign banks that may be authorized by BSP
    On interest income derived from foreign currency loans granted by 10%
depository banks under the expanded foreign currency deposit systems to
residents other than offshore banking units in the Philippines or other
depository banks under the expanded system
8.) Branch Profit Remittances – on total profits applied or earmarked for 15%
remittance without any deduction for the tax component thereof (except those
activities which are registered with the Philippines Economic Zone Authority)
9.) Interest from currency deposits, trust funds, deposit substitutes and similar 20%
arrangements
10. Royalties derived from sources within the Philippines 20%

Illustrations:

1. Individuals Earning Purely Compensation Income

lndividuals earning purely compensation income shall be taxed based on the income tax rates
prescribed under subsection (A) here.

Taxable income for compensation earners is the gross compensation income less nontaxable
income/benefits such as but not limited to the Thirteenth (13th) month pay and other benefits
(subject to limitations, see Section 6(G)(e) of these Regulations), de minimis benefits, and
employee’s share in the SSS, GSIS, PHIC, Pag-ibig contributions and union dues.

Husband and wife shall compute their individual income tax separately based on their respective
taxable income; if any income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining their respective taxable income.

Minimum wage earners shall be exempt from the payment of income tax based on their statutory
minimum wage rates. The holiday pay, overtime pay, night shift differential pay and hazard pay
received by such earner are likewise exempt.
Sample BIR Computation: Individuals Earning Compensation Income

Mr. Mariano, a Financial comptroller of JAC Company, earned annual compensation in 2023 of
P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00.
Employee’s share in contributions to SSS and Philhealth, Pag-ibig etc. was P15,000.

TAX DUE ON COMPENSATION INCOME:

Total compensation income P1,500,000.00
Less: Non-taxable 13th month pay and other benefits (max) 90,000.00
Employee share in contributions to SSS/Philhealth 15,000.00
Taxable Compensation Income P1,395,000.00
Tax due on Compensation:
On P800,000.00 P102,500.00
On excess (P1,395,000 - P800,000) x 25% 148,750.00
Tax due on Compensation Income P251,250.00

2. Self-Employed Individuals Earning Income Purely from Self-Employment or

Practice of Profession

Individuals earning income purely from self-employment and/or practice of profession whose
gross sales/receipts and other non-operating income does not exceed the value-added tax (VAT)
threshold as provided under Section 109 (BB) of the Tax Code, as amended, shall have the
option to avail of:

1. The graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended; OR
2. An eight percent (8%) tax on gross sales or receipts and other non-operating income in
excess of two hundred fifty thousand pesos (P250,000.00) in lieu of the graduated income
tax rates under Section 24(A) and the percentage tax under Section 1 16 all under the Tax
Code, as amended.

Unless the taxpayer signifies the intention to elect the 8% income tax rate in the 1st Quarter
Percentage and/or Income Tax Return, or on the initial quarter return of the taxable year after the
commencement of a new business/practice of profession, the taxpayer shall be considered as
having availed of the graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended.
Such election shall be irrevocable and no amendment of option shall be made for the said taxable
year.

The option to be taxed at 8% income tax rate is not available to a VAT-registered taxpayer,
regardless of the amount of gross sales/receipts, and to a taxpayer who is subject to Other
Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section
116 of the same Title. Likewise, partners of a General Professional Partnership (GPP) by virtue
of their distributive share from GPP which is already net of cost and expenses cannot avail of the
8% income tax rate option.
A taxpayer who signifies the intention to avail of the 8% income tax rate option, and is
conclusively qualified for said option at the end of the taxable year [annual gross sales/receipts
and other non-operating income did not exceed the VAT threshold (P3,000,000.00)] shall
compute the final annual income tax due based on the actual annual gross sales/receipts and
other non-operating income. The said income tax due shall be in lieu of the graduated rates of
income tax and the percentage tax under Sec. 116 of the Tax Code, as amended. The Financial
Statements (FS) is not required to be attached in filing the final income tax return. However,
existing rules and regulations on bookkeeping and invoicing/receipting shall still apply.

A taxpayer shall automatically be subject to the graduated rates under Section 24(A)(2)(a) of the
Tax Code, as amended, even if the flat 8% income tax rate option is initially selected, when
taxpayer’s gross sales/receipts and other non operating income exceeded the VAT threshold
during the taxable year. In such case, his income tax shall be computed under the graduated
income tax rates and shall be allowed a tax credit for the previous quarter/s income tax
payment/s under the 8% income tax rate option.

In addition, a taxpayer subject to the graduated income tax rates (either selected this as the
income tax regime, or failed to signify chosen intention or failed to qualify to be taxed at the 8%
income tax rate) is also subject to the applicable business tax, if any, subject to the provisions of
Section 8 of these Regulations, an FS shall be required as an attachment to the annual income tax
return even if the gross sales/receipts and other non-operating income is less than the VAT
threshold. However, the annual income tax return of a taxpayer with gross sales/receipts and
other non-operating income of more than the said VAT threshold shall be accompanied by an
audited FS.

Taxable income for individuals earning income from self-employment/practice of profession

shall be the net income, if taxpayer opted to be taxed at graduated rates or has failed to signify
the chosen option. However, if the option availed is the 8% income tax rate, the taxable base is
the gross sales/receipts and other non-operating income.

Sample BIR Computation: Individuals Earning Purely Business Income

Mr. Cruz owns a convenience store, with gross sales of P2,400,000. His cost of sales and
operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating
income of P100,000.00.

a. Using the Graduated Rates

Gross Sales P2,400,000.00

Less: Cost of Sales 1,000,000.00
Gross Income P1,400,000.00
Less: Operating Expenses 600,000.00
Net Income from Operation P 800,000.00
Add: Non-operating Income 100,000.00
Total Taxable Income 900,000.00
Tax Due:
On P800,000.00 P102,500.00
On excess (P900,000 - 800,000) x 25% 25,000.00
127,500.00

b. Using the 8% Tax Rate

Gross Sales 2,400,000.00

Add: Non-operating Income 100,000.00
Gross Income 2,500,000.00
Less: 250,000.00
Net Taxable Income 2,250,000.00
Tax Rate 8%
Tax Due 180,000.00

TRAIN Income Tax Sample Computations (from BIR RR 8-2018)

The Bureau of Internal Revenue (BIR) has released Revenue Regulation No. 8-2018 (RR 2018)
which details the implementing guidelines governing the Income Tax provisions of the TRAIN
tax reform bill recently signed into law by Pres. Rodrigo Duterte.

Although RR 8-2018 was dated January 25, 2018, the complete guidelines was only released to
the public, via the official BIR website and Manila Bulletin publication, on February 22, 2018.
Still, circulars and memorandum orders issued by the BIR earlier this year mandated the
implementation of the TRAIN provisions and tax rates beginning January 1, 2018.

3. Sample BIR Computations: Taxes of Mixed Income Earners (Compensation and

Business Income)

Illustration 1

Mr. Madz, a Financial comptroller of JAC Company, earned annual compensation in 2023 of
P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 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. His cost of sales and operating expenses are
P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00.

Option 1: Eight Percent (8%) income tax rate on Gross Sales

His tax due for 2023 shall be computed as follows if he opted to be taxed at eight percent (8%)
income tax rate on his gross sales for his income from business:

(1) TAX DUE ON COMPENSATION INCOME:

Total compensation income P 1,500,000.00
Less: Non-taxable 13th month pay and other benefits (max) 90,000.00
Taxable Compensation Income P 1,410,000.00
Tax due on Compensation:
On P800,000.00 P 102,500.00
On excess (P1,410,000 - P800,000) x 25% 152,500.00
Tax due on Compensation Income P 255,000.00
(2) TAX DUE ON BUSINESS INCOME:
Gross Sales P2,400,000.00
Add: Non-operating Income 100,000.00
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
Tax Due on Business Income P 200,000.00
TOTAL INCOME TAX DUE (Compensation and Business) P 455,000.00

Option 1 CONCLUSIONS:

  The option of 8% income tax rate is applicable only to taxpayer’s income from business,
and the same is in lieu of the income tax under the graduated income tax rates and the
percentage tax under Section 116 of the Tax Code, as amended.
 The amount of P250,000.00 allowed as a deduction under the law for taxpayers earning
solely from self-employment/practice of profession, is not applicable for mixed-income
earner under the 8% income tax rate option.
 The P250,000.00 mentioned above is already incorporated in the first tier of the
graduated income tax rates applicable to compensation income.

Option 2: NOT Opting for 8% income tax on Gross Sales/Receipts and other non-operating
income

His tax due for 2023 shall be computed as follows if he did not opt for the eight percent (8%)
income tax based on gross sales/receipts and other non-operating income:
Total compensation income P1,500,000.00
Less: Non-taxable 13th month pay and other benefits-max 90,000.00
Taxable Compensation Income P1,410,000.00
Add: Taxable Income from Business -
Gross Sales P2,400,000.00
Less: Cost of Sales 1,000,000.00
Gross Income P1,400,000.00
Less: Operating Expenses 600,000.00
Net Income from Operation P 800,000.00
Add: Non-operating Income 100,000.00 900,000.00
Total Taxable Income P2,310,000.00
Tax Due:
On P2,000,000.00 P402,500.00
On excess (P2,310,000 - 2,000,000) x 30% 93,000.00
Total Income Tax P495,500.00

Option 2 CONCLUSIONS:

 The taxable income from both compensation and business shall be combined for purposes
of computing the income tax due if the taxpayer chose to be subject under the graduated
income tax rates.
 In addition to the income tax, Mr. Madz is likewise liable to pay percentage tax of
P72,000.00, which is 3% of P2,400,000.00.

  

How to Avail of 8% Tax Rate (for Self-Employed & Professionals)

Eligibility Requirements to Avail of 8% Tax Rate

Based on the BIR memo, the taxpayer must meet ALL four (4) criteria in order for the taxpayer
to be eligible to register for the 8% tax rate availment option:

1. Individuals (Single Proprietor or Professional or Mixed Income Earner) earning from

self-employment and/or practice of profession;
 2. Taxpayers whose gross sales/receipts and other non-operating income did not exceed the
P3,000,000 VAT threshold during the taxable year;
3. Taxpayers registered and subject only to percentage tax under Section 116 of the NIRC,
as amended; or taxpayers exempt from VAT or other percentage taxes; AND
4. Must have signified their intention to elect the 8% income tax rate thru any of the
enumerations under Section II(7) of this Order.

In addition, the BIR reiterates that the following taxpayers are NOT eligible to avail of the 8%
tax rate option.

1. Purely Compensation Income Earners;

2. VAT-registered taxpayers, regardless of the amount of gross sales or receipts and other
non-operating income;
3. Taxpayers exempt from VAT or other percentage taxes whose gross sales/receipts and
other non-operating income exceeded the P3,000,000 VAT threshold during the taxable
year;
4. Taxpayers who are subject to Other Percentage Taxes under Title V of the Tax Code, as
amended, except those subject under Section 116 of the same Title;
5. Partners of a General Professional Partnership (GPP);
6. Individuals enjoying income tax exemption.

The above taxpayers shall be taxed based on the graduated income tax rates prescribed under
Section 24 (A)(2)(a) of the NIRC, as amended. Click here if you want to view the new Income
Tax Rates under TRAIN.

From the BIR’s RMO 23-2018:

1. Self-employed individual may signify the intention to elect the 8% income tax rate option
by filing an Application for Registration Information Update (BIR Form No. 1905) at the
beginning of the taxable year.
2. Self-employed individual availing the 8% income tax rate option shall still be registered
with “Percentage Tax – Quarterly” tax type, and the 2551Q form type shall be end-dated.
On the beginning of the following/each year, the 2551Q form type shall be automatically
registered in the BIR registration system, to confirm that the taxpayer is subject to
graduated income tax rates on the beginning of the year and required to file the quarterly
percentage tax return, unless an application for registration information update to avail
the 8% income tax rate for the said taxable year has been submitted to the concerned
Revenue District Office or by selecting the 8% income tax rate option in filing the 1st
Quarterly Percentage or Income Tax Return.
3. A Non-VAT individual taxpayer who availed of the 8% income tax rate and subsequently
his cumulative gross sales and/or receipts exceeded the Three Million Pesos (P
3,000,000.00) threshold during the taxable year shall be liable to pay income tax under
the graduated income tax rates. The income tax shall be computed under the graduated
income tax rates and shall be allowed a tax credit for the previous quarter/s income tax
payment/s under the 8% income tax rate option. Taxpayer shall be required to update
his/her registration immediately within the month following the month s/he exceeded the
 VAT threshold. Taxpayer shall automatically be liable to VAT prospectively starting the
first day of the month following the month when the threshold is breached. The taxpayer
shall pay the required percentage tax covering the sales/receipts and other non-operating
income, from the beginning of the taxable year or commencement of business/practice of
profession until the time the taxpayer becomes liable to VAT.
4. A VAT-registered person whose gross sales and/or receipts for three (3) consecutive
years did not exceed the amount of Three Million Pesos (P 3,000,000.00), may update his
registration from VAT to Non-VAT in order to qualify and avail the 8% income tax rate
option, on or before the first quarter of a taxable year, following rules and regulations on
registrations, updates, verification, and the inventory and cancellation of VAT
invoices/receipts.

DECLARATION OF INCOME TAX FOR INDIVIDUALS

Installment Date
First April 15
Second August 15
Third November 15
Fourth April 15

Problem 1

Ms. Jane Rivera has the following data on her income and expenses for year 2023.

Compensation Income (Exclusive of P150,000 non-taxable other benefits) P 1,850,000

Royalties 20,000
Dividend 50,000
Gross Sales 2,200,000
Operating Expenses 800,000
Cost of Sales 500,000
Non-operating income 800,000
Ms. Rivera prefers the 8% tax rate.
Required:
1. Tax due if the taxpayer is a Purely Compensation Income Earner
2. Tax due if the taxpayer is a Purely Business income earner.
3. Tax due if the taxpayer is a Mixed Income Earner.

Comprehensive Problem
Resident Citizen Married Individual

Mr. Dave Cruz, a resident citizen, owns a factory that manufactures snacks in Malolos, Bulacan.
His wife, Athena, also a resident citizen, is a personnel officer in Citibank. In 2023, Athena gave
birth twice, one in January and another in December. The following are income earned by both
spouses.

Mr. Cruz
Gross business income, Philippines P 4,500,000
Deductions, Philippines 2,500,000
Gross income, China 2,000,000
Deductions, China 900,000

Mrs. Cruz
Gross compensation income 240,000
Prize in cross-stitching competition 20,000
Dividend from ABS-CBN stocks 10,000
Interest from Metrobank saving deposit 50,000

Mr, and Mrs Cruz

Rental income 350,000
Prize in ballroom dancing competition 50,000

1. Total final tax paid by Mrs. Cruz is ______________.

2. The taxable income of Mr. Cruz is _______________.
3. The taxable income of Mrs. Cruz is ____________.
4. The tax due of Mr. Cruz is ____________.