GENERAL PRINCIPLES OF TAXATION

TAXATION – is the process by which the sovereign (independent State), through its lawmaking body (legislative),
raises revenue / income to defray the necessary expenses of the government.

In simple terms, it is the act of levying a tax to apportion the cost of the
government.

TAX – is an enforced proportional contribution levied by the lawmaking body of the State to raise revenue for
public purpose.

Purpose of Taxation

1. Primary: Revenue/Fiscal – to raise revenue to finance government expenses

2. Secondary: Regulatory – for regulation or control. E.g., Imposition of sintax
• Compensatory / Sumptuary – employed as a device for regulation or control (police power) by means
of which certain effects or conditions envisioned by the government may be achieved such as:
(PPRRE)
✓ Promotion of General Welfare
✓ Protectionism
✓ Reduction of Social Inequality – Ability to pay theory.
✓ Regulation
✓ Economic Growth

THEORY OF TAXATION

1. Lifeblood Doctrine – Taxes are indispensable, without taxes, government would be paralyzed.
Implications:
1. Tax is imposed even in the absence of a Constitutional grant.
2. Claims for tax exemption are construed against taxpayers. (Vague exemption laws)
3. The government reserves the right to choose the objects of taxation.
4. The courts are not allowed to interfere with the collection of taxes.
5. In income taxation:
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditures and prepayments are not allowed.
c. A lower amount of deduction is preferred.
d. A higher tax base is preferred.

2. Necessity Theory – existence of government and taxes is necessary.

3. Benefits-Protection Theory – SYMBIOTIC RELATIONSHIP IN TAXATION – reciprocal duties between the
citizen and the government. This mutuality support between the people and the government is what we
called the Basis of Taxation. *Receipt of benefits is conclusively presumed

Public services

Government People
TAXES

ASPECTS OF TAXATION / STAGES OF THE EXERCISE OF TAXATION POWER

1. Levying (Legislative Function) – enactment/imposition of tax law by congress

Province
E.g., LGU Senate
City Municipal Sanggunian
House of Representatives
Barangay

2. Assessment and Collection (Executive Function) – implemented by the administrative branch of the
government. incidence of taxation
BIR, BOC – National

LGU – Treasurers *RA 8424 (1997) TAX CODE/LAW – Implement by BIR

Nature / Characteristics of State’s Power to Tax

1. Inherent Power of the State – no grant/permission needed.

2. Legislative in Character – only the legislative can impose and enact tax laws.
3. Subject to Inherent and Constitutional Limitation – power of taxation is not absolute.

Government Functions:

• Essential Government Function (not for profit, not a business)

e.g., DSWD, DOJ, PNP – EXEMPT

• Proprietary Function – Business

e.g., LGU operates a market – taxable
GOCC – generally proprietary, generally taxable

Inherent Powers of the State

a. Taxation – levying or imposition of tax (person, properties, and rights / privileges) *strongest power
b. Eminent domain – taking of private property (e.g., construction of highways) * affects private indiv. Only
c. Police power – enactment of laws to promote public health, moral, welfare, safety and protection
*fixed amount – depends on the activity (e.g., driver’s license, business permits, etc.)

Similarities of the Inherent Powers of the State

1. Inherent in the State

2. Exist independently of the Constitution
3. Interfere with private property
4. Legislative in nature, character and implementation
5. Presupposes an equivalent compensation -received directly or indirectly by persons affected

Distinction of the Inherent Powers of the State

Point of Difference Taxation Police Power Eminent Domain

Exercising Authority Government Government Government and private
utilities
Purpose For the support of the To protect the general For public use
government welfare of the people
Persons affected Community or class of Community or class of Owner of the property
individuals individuals
Amount of Imposition Unlimited (Tax is based Limited (Imposition is No amount imposed.
on government needs.) limited to cover cost of (Just compensation)
regulation.)
Importance Most important Most superior Important
Relationship with the Inferior to the “non- Superior to the “non- Superior to the “non-
Constitution impairment clause” impairment clause” impairment clause”
Limitation Constitutional and Public interest and due Public purpose and just
inherent limitations process compensation

SCOPE OF THE TAXATION POWER LEGISLATIVE SCOPE: (SARPKASM)

Comprehensive Subject
Unlimited Amount
Plenary Rate
Supreme Purpose

Kind

THEORIES OF COST ALLOCATION Appointment

1. Benefit received theory – more benefit one Situs

receives, more taxes he should pay.
Mode
2. Ability to pay theory – contribution must be
based on relative capacity of the taxpayer.

*Why taxation is the strongest among inherent powers? Without tax, there will be no government.
CHARACTERISTICS OF TAX

1. Forced/enforced contribution - required (not optional)

2. Generally payable in money (However, there are instances that “public auction” is only the option)
3. Levied for public purpose
4. Exclusively levied by legislative
5. Levied within territorial jurisdiction
6. Proportionate in character.

BASIC PRINCIPLES OF SOUND TAX SYSTEM (FAT)

1. Fiscal Adequacy - sufficient to cover government costs.

2. Administrative Feasibility - efficient and effective administration to encourage compliance.
3. Theoretical Justice - consider Taxpayer’s ability to pay.
Without this, unconstitutional

LIMITATIONS OF THE TAXATION POWER

A. Inherent Limitations (TIPEN)

1. Territoriality - situs (place) of taxation
SUBJECT MATTER SITUS
Persons Residence
Real Property Location
Tangible Property Location
Intangible Property Domicile of the owner
Income Residence, citizenship,
source of income
Business Place of business
Gratuitous Transfer Residence of the
transferer

2. International Comity - No country is powerful against the other (par in parem no habel
imperium)
a. Governments do not tax the income and properties of other governments.
b. Governments give primacy to their treaty obligations over their own domestic tax
laws.

3. Public Purpose – taxes can’t be use for private interest.

4. Exemption of the Government – to avoid imputing additional costs.
Properties and activities conducted for profit, including income
from government owned and controlled are subject to tax.
5. Non-delegation of taxing power - what has been delegated cannot be further delegated.
Exceptions:

a. LGUs to exercise their fiscal autonomy.

b. President - tariffs and customs code.
c. Other cases that require expedient and effective administration and
implementation of assessment and collection of taxes.

B. Constitutional Limitations

1. Due process of law – measure should not be unconscionable and unjust

o Assessment shall be made within 3 years from the due date of filing of the return or
from the date of actual filing, whichever is later.
o Collection shall be made within 5 years from the date of assessment.

2. Equal protection of law – persons & properties w/ same conditions and circumstances are
taxed the same.

3. Uniformity rule in taxation – taxpayers under dissimilar circumstances should not be taxed
the same.

4. Progressive system of taxation – graduated (e.g., Income tax table)

5. Non-imprisonment for non-payment of poll tax – personal, community or residency tax

(cedula) *except falsification of community tax certificate and non-payment of other
taxes – tax evasion

6. Non-impairment of obligations and contracts – existing contracts should not be affected.

 7. Free worship rule – free to join religious activities, however, this does not extend to income
from properties or activities that are proprietary or commercial in nature.

8. Exemption of religious, charitable, non-profit cemeteries and churches and mosque from
property taxes (still subject to income tax) – applies only for properties ACTUALLY, DIRECTLY,
and EXCLUSIVELY used for charitable, religious and educational purposes. (Doctrine of use)

9. Non-appropriation of public funds or property for the benefits of any church, sect, or system
religion – separation of churches and state

10. Exemptions from taxes of the revenue and assets of non-profit, non-stock educational
institutions including grants, endowments, donations, or contributions for educational
purposes – exempt from both property and income taxes

*Private educational institutions are subject to minimal income tax – 10%

11. Concurrence of a majority of all members of Congress for the passage of law granting tax
exemption. ABSOLUTE MAJORITY

*Withdrawal of tax exemption – only a Relative Majority

12. Non-diversification of tax collections – used for public purpose

13. Non-delegation of the power of taxation – BIR may issue revenue regulations, rulings order
circulars, interpret and clarify proper application of law
Not allowed to introduce legislations
within the quasi-legislative authority.

14. Non-impairment of the jurisdiction of the Supreme Court to review taxes – All cases
involving taxes can be raised to, and be finally decided by the Supreme Court of the Philippines.

15. Appropriations, revenue, or tariffs bill must originate from the House of Representatives,
but senate may propose or concur with amendments

16. The President shall have the power to VETO any particular items in an appropriation,
revenue or tariff

17. LGUs can create its own sources of revenues (delegation of taxing power to LGUs)

OTHER FUNDAMENTAL DOCTRINES OF TAXATION

1. Marshall Doctrine – “The power of taxation involves the power to destroy.”

2. Holme’s Doctrine – “Taxation power is not the power to destroy while the court sits.”
3. Prospectivity of Tax laws – “ex post facto law” is prohibited by the Constitution (Art. III Bill of Rights,
s.22)
4. Non-compensation or set-off – tax is not a debt; hence, it is not subject to set off.
5. Non-assignment of taxes
6. Imprescriptibly in taxation – unless the law itself provides for such prescription.
7. Doctrine of estoppel Misrepresentation
Lapsing of right due to passage of time
8. Judicial Non-Interference
9. Strict Construction of Tax Laws – TAXATION IS THE RULE, EXEMPTION IS THE EXEPTION
➢ Vague Tax Laws – construed against the government (NO TAX LAW)
➢ Vague Exemption Laws - construed against taxpayer (NO EXEMPTION LAW)

DOUBLE TAXATION – occurs when the same taxpayers is taxed twice by the same tax jurisdiction, for the same
thing.

ELEMENTS OF DOUBLE TAXATION

1. Primary Element: Same Object

2. Secondary Element: (JPPT)
a) Same Jurisdiction
b) Same Period
c) Same Purpose
d) Same Type

TYPES OF DOUBLE TAXATION

1. Direct Double Taxation – All elements exist for both impositions. (UNCONSTITUTIONAL)
2. Indirect Double Taxation – At least one of the secondary elements is not common for both impositions

LEGAL
How can double taxation be minimized?

1. Provision of Tax exemptions

2. Allowing foreign tax credit

3. Allowing reciprocal tax treatment

4. Entering into treaties or bilateral agreements

ESCAPES FROM TAXATION – means available to the taxpayer to limit or even avoid the impact of taxation.

Categories of Escapes from Taxation

A. Those that results to loss of government revenue

1. Tax evasion – Tax dodging (ILLEGAL)

2. Tax avoidance – Tax minimization (LEGAL)

3. Tax exemption – Tax holiday

B. Those that do not result to loss of government revenue

1. Shifting – process of transferring tax burden to other taxpayers.

Forms of shifting:

a. Forward shifting – Manufacturers Wholesalers/Retailers Consumers

b. Backward shifting – Manufacturers Wholesalers/Retailers Consumers

c. Onward shifting – any tax shifting in the distribution channel.

2. Capitalization – adjustment of the value of an asset caused by changes in tax rates.

3. Transformation – elimination of wastes or losses by the taxpayer to compensate tax imposition.

TAX AMNESTY VS. TAX CONDONATION

Forgiveness of the tax obligation of a certain taxpayer under justifiable

grounds. Also referred as TAX REMISSION

COVERS CIVIL LIABILTIES ONLY

General pardon granted by the government.

An immunity from all criminal obligations arising from non-payment of taxes

Retroactive application and COVERS BOTH CIVIL AND CRIMINAL LIABILTIIES

BRANCHES OF GOVERNMENT

1. Legislative - Enactment of tax laws Congress Houses:

a. Senate (Upper)
BILL LAW b. House of Rep.
(Lower)
*House of Senate Bicameral President
Representatives (Senate Ver) Conference (Approval/ Note: Tax bills
(House Ver) Committee VETO) CANNOT originate
exclusively from the
2. Executive – Enforce, Assessment and Collection SENATE.

President and VP Cabinet Members Department (BIR or BOC)

3. Judiciary – Interpretation of tax laws tax cases

(SAR4M)
a. Supreme Court (Highest)
b. Lower Courts - Court of Appeals, Court of Tax Appeals, RTC, MeTC, MTCC, MTC, MCTC
TAXATION LAW – any law that arises from exercise of the taxation power of the state.

TYPES OF TAXATION LAWS

1. Tax laws – laws that provide for the assessment and collection of taxes.
E.g., NIRC, Tariff and Customs Code, Local Tax Code, Real Property Tax Code
2. Tax exemption laws – laws that grant certain immunity from taxation.
E.g., Minimum Wage Law, Omnibus Investment Code of 1987, BMBE Law, CDA

Sources of Taxation Laws

1. Constitution – e.g., Local government code

2. Statues and Presidential Decrees – issued by the President of the Philippines

3. Judicial Decisions or case laws

4. Executive Orders and Batas Pambansa

5. Administrative Issuances – BIR rulings

6. Local Ordinance

7. Tax Treaties and Conventions with foreign countries – e.g., Double Taxation Agreement

8. Revenue Regulations – specify, prescribe, or define rules and regulations

Types of Administrative Issuances

1. Revenue Regulations (RRs) – least source of tax laws, no need for legislative process

2. Revenue Memorandum (RMOs) – guidelines, procedures

3. Revenue Memorandum Rulings (RMRs) – interpretations

4. Revenue Memorandum Circulars (RMCs) – amplifications of laws, rules, regulations

5. Revenue Bulletins (RB) – periodic issuances

6. BIR Rulings – queries raised by taxpayers

Types of rulings

1. Value Added Tax (VAT) rulings

2. International Tax Affairs Division (ITAD) rulings

3. BIR rulings

4. Delegated Authority (DA) rulings

(GAAP) vs. TAX LAWS a special form of financial reporting which is intended to meet specific needs of
tax authorities.
are not tax laws, *for general purpose financial
reporting to meet the common needs for public.

NATURE OF PHILIPPINE TAX LAWS – Philippine tax laws are civil and not political in nature.

Our internal revenue laws are not penal in nature because they do not define crime.

Elements of a Valid Tax

1. Must not violate Constitutional and Inherent Limitations 6. Proportional in Character

2. Exclusively levied by legislative/law making body of the State

3. Generally payable in money

4. Levied for public purpose

5. Uniform and equitable

CLASSIFICATION OF TAXES

A. As to purpose

1. General, fiscal, or revenue tax – for general purpose

2. Special or regulatory – to regulate business, conduct, acts or transactions

3. Sumptuary – to achieve some social or economic objectives

B. As to subject matter

1. Personal, poll or capitation tax – a tax on persons who are residents of a particular territory.

2. Property tax – a tax on properties, real or personal (e.g., capital gains tax)

3. Excise or privilege tax – tax on the exercise of rights and privileges (E.g., income tax, donors’ tax)

C. As to burden

1. Direct tax – taxpayer (Liable and Pay) E.g., Income tax, Estate tax, donors’ tax

2. Indirect tax – taxpayer (Liable) E.g., VAT and OPT (Other percentage tax)

D. As to amount

1. Specific tax – PESO amount, FIXED AMOUNT – based on volume, weight, and quantity
*E.g., tax on cigarettes and liquor – pers stick, per pack, per liter, per kilo, etc.

2. Ad valorem tax – based on fixed proportion of value – usually in percentage

*E.g., Income tax, VAT, Estate tax

E. As to graduation or rate

1. Proportional tax – FLAT or fixed rate tax – based on fixed percentage amount

- e.g., VAT at 12%, OPT at 1%, Estate Tax at 6%

2. Progressive or graduated tax – as the tax base/bracket increases, the tax rate also increases

- e.g., Graduated Tax Table – Individuals

3. Regressive tax – as the tax base/bracket increases, the tax rate decreases (not applicable in the PH)

4. Mixed tax – combination of any of the above types of tax.

F. As to imposing authority

1. National tax – imposed by the national government

- E.g., Income tax, Estate tax, Donor’s tax, VAT, OPT, Excise TAX, Documentary stamp tax, etc.

2. Local tax – imposed by the municipal or local government (LGUs)

- E.g., Real property tax (Amilyar), Professional tax, Business taxes, Community tax, Tax on banks and
other financial institutions

TAX SYSTEM – refers to the methods or schemes of imposing, assessing, and collecting taxes. The Philippine tax
system is divided into two: the national system and the local tax system.

TYPES OF TAX SYSTEMS ACCORDING TO IMPOSITION AND IMPACT

1. Progressive – income of individuals and certain local business

- emphasizes direct taxes

2. Proportional – corporate income and business

3. Regressive – not employed in the Philippines

- emphasizes indirect taxes

 DISTINCTION OF TAXES WITH SIMILAR ITEMS TAXES

REVENUE All collections of the government Refers to the amount imposed by

which includes taxes, tariff, the government for public purpose
licenses, toll, penalties, etc.

LICENSE FEE Pre-activity imposition Post-activity imposition

TOLL A charge for the use of other’s Levy of government, a demand of

property, a demand of ownership sovereignty

DEBT Arises from private contracts, can Arises from law

be paid in kind (dacion en pago)

SPECIAL ASSESSMENT Levied by the government on lands Imposed upon persons, properties,
adjacent to a public improvement or privileges

TARIFF Amount imposed on imported or Imposed upon persons, privilege,

exported commodities transactions or properties

PENALTY Amount imposed to discourage an Imposed for the support of the

act government

TAX COLLECTION SYSTEMS

A. Withholding system on income tax – the payer of the income deducts the tax on the income of the payee
before releasing it and remits the same to the government.

1. Creditable withholding tax – intended to support the self-assessment method to lessen

the burden of lump sum tax payment.

a. Withholding tax on compensation – an estimated tax required by the government to be

withheld/deduct by employees against the compensation income to their employees.

b. Expanded withholding tax – to be deducted on certain income payments made by taxpayers

engaged in business.

2. Final withholding tax – payors are required to deduct the full tax on certain income payments

- intended to high risk of non-compliance

Similarities both withholds a fraction of income and remits to the government.

To minimize cash flow problems to the taxpayer and collection problems to the government

B. Withholding system on business tax – when GOCCs purchase goods or services from private suppliers,

the law requires withholding of the relevant business tax.

C. Voluntary compliance system – “self-assessment method”

D. Assessment or enforcement system – government identifies non-compliant taxpayers, assesses their tax dues
including penalties.

TAX ADMINISTRATION – refers to the management of the tax system. National tax system is entrusted to
BIR which is under the supervision and administration of the Department of Finance.
CHIEF OFFICIALS OF THE BIR a. Operations group
1) 1 Commissioner b. Legal Enforcement Group
2) 4 Deputy Commissioners
c. Information System Group
d. Resource Management
Group

Note: Withholding tax is not a tax, but a system

POWERS OF THE BEREAU OF INTERNAL REVENUE

1. Assessment and Collection of Taxes.

2. Enforcement of all forfeitures, penalties and fines, and judgments in all cases decided in
its favor by the courts.
3. Administering the supervisory and police powers conferred to it by the NIRC and other laws.
4. Assignment of internal revenue officers and other employees to other duties.
5. Provisions and distribution of forms, receipts, certificates, stamps, etc. to proper officials.
6. Issuance of receipts and clearances.
7. Submission of annual report, pertinent information to Congress and reports to Congressional
Oversight Committee in matters of taxation.

POWERS OF THE COMMISSIONER OF INTERNAL REVENUE

1. To interpret the provisions of the NIRC, subject to review by the Secretary of Finance.
2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
3. To obtain information and to summon, examine and take testimony of persons to effect tax
collection.
4. To make assessment and prescribe additional requirement for tax administration and enforcement.
5. To examine tax returns and determine tax due thereon.
6. To conduct inventory taking or surveillance.
7. To prescribe presumptive gross sales and receipts for a taxpayer when:
8. To terminate tax period when the taxpayer is
a. Retiring from business
b. Intending to leave the Philippines.
c. Intending to remove, hide, or conceal his property.
d. Intending to perform any act tending to obstruct the proceedings for the collection of the tax
or render the same ineffective.
9. To prescribe real property values ZONAL VALUE
10. To compromise tax liabilities of taxpayers negotiate
11. To inquire into bank deposits, only under the following instances:
a. Determination of the gross estate of a decedent
b. To substantiate the taxpayer's claim of financial incapacity to pay tax in an application for tax
compromise.
12. To accredit and register tax agents. RA 1205: Bank Deposit
13. To refund or credit internal revenue taxes. Secrecy Act
14. To abate or cancel tax liabilities in certain cases.
15. To prescribe additional procedures or documentary requirements.
16. To delegate his powers to any subordinate officer with a rank equivalent to a division
chief of an office.

NON-DELEGATED POWER OF THE CIR

1. The power to recommend the promulgation of rules and regulations to the Secretary of
Finance.
2. The power to issue rulings of first impression or to reverse, revoke or modify any
existing rulings of the Bureau.
3. The power to compromise or abate any tax liability
*Exceptionally, the Regional Evaluation Boards may compromise tax liabilities

a. Assessments are issued by the regional offices involving basic deficiency tax of
P500,000 or less, and
b. Minor criminal violations discovered by regional and district officials
Composition of the Regional Evaluation Board

a. Regional Director as chairman

b. Assistant Regional Director

c. Heads of the Legal, Assessment and Collection Division

d. Revenue District Officer having jurisdiction over the taxpayer

4. The power to assign and reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept.

Rules in assignments of revenue officers to other duties

o Excisable articles – not more than 2 years

o Assessment and collection – not more than 3 years

o Special duties – not more than 1 year

Agents and Deputies for collection of National Internal Revenue Taxes

1. The Commissioner of Customs - collection of national internal revenue taxes on imported goods.
2. The head of appropriate government offices - collection of energy tax.
3. Banks duly accredited by the Commissioner. Authorized government depository banks (AGDB).

OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES RELATED FUNCTIONS

1. Bureau of Customs (BOC) – tasked to administer collection of tariffs on imported articles and collection of the
VAT on importation. Headed by the Customs Commissioner and is assisted by
5 Deputy Commissioners and 14 District Collectors

2. Board of Investments (BOI) – lead the promotion of investments in the Philippines.

attached agency of DTI

3. Philippine Economic Zone Authority (PEZA) – created to promote investments

Registered enterprises enjoy tax holidays for certain years Also an attached agency of the DTI

4. Local Government Tax Collecting Units – imposed and collect taxes to rationalize their fiscal autonomy.

5. Fiscal Incentive Review Board (FIRB) – oversight function on the administration and grant of tax incentives by
the Investment Promotion Agencies.

TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION

1. Large taxpayers – under the supervision of the Large Taxpayer Service of the BIR National Office.

2. Non-large taxpayers – under the supervision of Revenue District Offices (RDOs) business, trade/prof. is situated

Criteria for Large Taxpayers

As to payment

1. VAT At least P200,000 per quarter for the preceding year

2. Excise Tax At least P1,000,000 tax paid for the preceding year

3. Income Tax At least P1,000,000 annual income tax paid for the preceding year

4. Withholding Tax At least P1,000,000 annual withholding tax payments

5. Percentage tax At least P200,000 percentage tax paid or payable per quarter ft pre.year

6. Documentary stamp tax At least P1,000,000 aggregate amount per year

As to financial conditions and results of operations

1. Gross receipts or sales P1,000,000,000 total annual gross sales or receipts

2. Net worth P300,000,000 total net worth at the close of each calendar or fiscal yr.

3. Gross purchases P800,000,000 total annual purchases for the preceding year

4. Top corporate taxpayer listed

and published by the SEC

Automatic classification of taxpayers as large taxpayers

1. Large Taxpayer’s Service branches 10. Corporate taxpayers with P100,000,000+

capital (banking, insurance, telecom, utilities,
2. Subsidiaries, affiliates, and conglomerate entities
petroleum, tobacco, alcohol)
3. Surviving companies in mergers or consolidations

4. Corporations in spin-offs of large taxpayers

5. Corporations with P300,000,000+ authorized capital

6. Multinational enterprises with P300,000,000+ capital

7. Publicly listed corporations

8. Universal, commercial, and foreign banks

9. Corporate taxpayers in metallic minerals production

 INTRODUCTION TO INCOME TAXATION

GROSS INCOME – the tax concept of income under the NIRC “Item of gross income” or “inclusion in
gross income” – taxable item of income
Any inflow of wealth to the taxpayer from whatever
source, legal or illegal, that increases net worth.

ELEMENTS OF GROSS INCOME

1. It is a RETURN ON CAPITAL that increases net worth.

any wealth or property; subject to INCOME TAX

Return of Capital is different as it merely

maintains net worth; hence, NOT TAXABLE

Capital items deemed with infinite value are exempt from INCOME TAX

1. LIFE – the value of life is immeasurable by money

Anything received as
2. HEALTH compensation for their loss is
deemed a return of capital.
3. HUMAN REPUTATION – cannot be measured financially

Recovery of lost capital – merely maintains net worth; therefore, a Return of Capital

Recovery of lost profits – increases net worth; so, a Return on Capital

(E.g., recoveries through insurance, indemnity contracts, or legal suits)

2. It is a REALIZED BENEFIT any form of advantage derived by the taxpayer.

There is a benefit when there is an Not benefits: Receipt of a loan

increase in the net worth of the taxpayer. Discovery of lost properties not taxable
Receipt of money or property
realized means earned.

Requisites of a realized benefit:

1. There must be an exchange transaction.

Living persons
2. The transaction involves another entity – every person, natural or juridical
Created by law
3. It increases the net worth of the recipient.

Types of Transfers

1. Bilateral transfers or exchanges, such as: Sale and Barter (onerous transactions)

“exchanges”, benefits derived are “earned or realized” – subject to INCOME TAX

2. Unilateral transfers, such as: Succession and Donation (gratuitous transactions)

“transfers”, benefits derived are subject to TRANSFER TAX

3. Complex transactions – partly gratuitous and partly onerous

referred as “transfers for less than full and adequate consideration.”

*Unrealized gains or holding gains are not taxable

Note: *Rendering of service for a consideration is an item of gross income

*Income received in non-cash considerations is taxable at the fair value of the property received

Mode of Receipt/Realization Benefits

1. Actual receipt – involves actual physical taking of the income in the form of cash or property.

2. Constructive receipt – involves no actual physical taking of the income but the taxpayer is effectively
benefited.

3. It is not exempted by LAW, CONTRACT, or TREATY – an item of gross income is not exempted by the
Constitution, law, contracts or treaties from taxation.
TYPES OF INCOME TAXPAYERS

A. Individuals

1. Citizen

A. Resident citizen – A Filipino citizen residing in the Philippines.

B. Non-resident citizen includes:

1. Immigrant, physical presence abroad with a definite intention to reside therein;

2. Permanent employee abroad;

3. OFW, employment requires an individual to be physically present abroad most of the time

during the taxable year – 183 days;

4. Both RC and NRC in one taxable year

2. Alien

A. Resident alien – an individual who is residing in the Philippines but is not a citizen thereof, such as:

1. An alien who lives in the PH without definite intention as to stay

2. One who comes to PH with definite purpose which in its nature require an extended stay,

although it may be always his intention to return to his domicile abroad

B. Non-resident alien – an individual who is not residing in the PH and not a citizen thereof

1. Non-resident aliens engaged in business (NRA-ETB) – stayed in the PH of more than 180 days

2. Non-resident aliens not engaged in business (NRA-NETB) – include:

a. Aliens who come to PH for a definite purpose which in nature may be promptly accomplished;

b. Aliens who come to PH and stay for not more than 180 days during the year

THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

1. Intention

2. Length of stay

Taxable Estates and Trusts

1. Estate – refers to the properties, rights, and obligations of a deceased person not extinguished by h

Under judicial settlement – estates are treated as individual taxpayers

(Estate is taxable on the income of the properties left by the decedent.)

Under extrajudicial settlement – estates are exempt entities

(Taxable to the heirs)

2. Trust – an arrangement whereby one-person (grantor or trustor) transfers (i.e., donates) property to another
person (beneficiary), which will be under the management of a third party (trustee or fiduciary)

* If irrevocable, a trust is treated as if an individual taxpayer – income of the property is taxable to the trust

* If revocable, a trust is not a taxable entity and not considered as individual taxpayer – taxable to the grantor
Note: when trust agreement is silent, it is presumed to be revocable

CORPORATE INCOME TAXPAYERS

Corporation – include one person corporations (OPCs), partnerships, join-stock companies, joint accounts,
association, or insurance companies, except general professional partnerships and joint venture or consortium
formed engaging energy operations.

Corporation includes profit-oriented and non-profit institutions.

Cooperatives, charitable institutions, etc.

Domestic Corporation is a corporation that is organized in accordance with Philippine laws.

Foreign Corporation is one organized under a foreign law.

Types of foreign corporations:

1. Residents foreign corporation (RFC) – a foreign corp. which operates and conducts business in the PH
through permanent establishments.

2. Non-resident foreign corporation (NRFC) – a foreign corp. which does not operate business in the PH.

Special Corporations – are domestic or foreign corp. which are subject to special tax rules.

OTHER CORPORATE TAXPAYERS

1. One-person corporation – a corp. with a single stockholder who may be a natural person, trust or an estate.

2. Partnership – owned by two or more persons for the purpose of dividing the profits from the venture.

Types of partnerships

a) General professional partnership (GPP) – not treated as a corporation and is not a taxable entity.

b) Business partnership – formed for profit and taxable as corporation.

3. Joint venture – may be organized as a partnership or a corporation.

Types of joint ventures

a) Exempt joint ventures – are those formed for the purpose of engaging energy operations. (similar to GPP)

b) Taxable joint ventures – all other joint ventures are taxable as corporations.

4. Co-ownership – joint ownership of a property formed for the purpose of preserving the same and/or dividing
its income. If limited only to property preservation/income collection not a taxable entity

THE GENERAL RULES IN INCOME TAXATION

Taxable on income earned

Individual taxpayers Within Without

Resident citizen ✓ ✓

Non-resident citizen ✓

Resident alien ✓

Non-resident alien ✓

Corporate taxpayers

Domestic corporation ✓ ✓

Resident foreign corporation ✓

Non-resident foreign corporation ✓

SITUS OF INCOME – place of taxation of income

Situs of income vs. source of income pertains to the activity or property that produces the income

INCOME SITUS RULES

Types of income Place of taxation (situs)

1. Interest income Debtor’s residence

2. Royalties Where the intangible is employed

3. Rent income Location of the property

4. Service income Place where the service is rendered

OTHER INOME SITUS RULES

A. Gain on sale of properties

1. Personal property – domestic securities presumed earned within the Philippines.

2. Real property – earned where the property is located.

B. Dividend income from:

1. Domestic corporation – presumed earned within

2. Foreign corporation – situs depends on pre-dominance test

The pre-dominance test (3 year period preceding the year of dividend declaration)
✓ At least 50%, the portion of the dividend corresponding to PH gross income ratio is earned
within
✓ Less than 50%, the entire dividends received is deemed earned abroad

C. Merchandising income – earned where the property is sold

D. Manufacturing income – earned where the goods are manufactured and sold

INCOME TAX SCHEMES, ACCOUNTING PERIODS, ACCOUNTING METHODS, AND REPORTING

INCOME TAXATION SCHEMES MUTUALLY EXCLUSIVE COVERAGE

FINAL INCOME TAXATION CAPITAL GAINS TAXATION REGULAR INCOME TAXATION

Domestic stock
Certain passive 15%
sold directly by
income listed by
buyer
the law
Graduated Tax Table
Real property
held as capital 6%
assets

ACCOUNTING PERIOD – length of time over which income is measured and reported.

Types of Accounting Periods

1. Regular accounting period – 12 months

a. Calendar – available to both corporate and individual taxpayers
b. Fiscal – corporate taxpayer only

2. Short accounting period – less than 12 months

*Instances:
▪ Newly commenced business – covers the date of the start of business until designated year-end
▪ Dissolution of business – covers the start of the current year until the dissolution
▪ Change of accounting period by corporate taxpayer – covers the start of previous accounting period
up to designated year-end
▪ Death of the taxpayer – covers the start of calendar year until the death of the taxpayer
▪ Termination of accounting period by the CIR – covers the start of current year until the date of
termination

Note: Under the NIRC, Deadline of Filing the Income Tax Return – 15th day of the 4th month following the
close of the taxable year of the taxpayer.

“PAY AS YOU FILE”

ACCOUNTING METHODS

Types of Accounting Methods

1. General methods

➢ Accrual basis – income is recognized when earned; expense is recognized when incurred.
➢ Cash basis – income is recognized when received; expense is recognized when paid.

Note: 1. In accounting accrual basis, advanced income is inherently not included in net income. For purposes of
taxation, advanced income is taxable. 2. Prepaid expense is non-deductible. 3. Special tax accounting
requirement must be followed

➢ Hybrid basis – combination of accrual, cash basis, and/or other methods

2. Installment method – gross income is recognized and reported in proportion to the collection

from installment sales

Requisites:
1. Dealer of personal property – regularly sell
2. Dealers of real properties – only if initial payment does not exceed 25% of the selling price
3. Casual sale of non-dealers – selling price exceeds P1,000 and initial payment does not exceed 25% of
selling price
Note: it must be understood that Initial payment means total payments in the taxable year
3. Deferred payment method – non-interest-bearing note is received as consideration in a sale.
4. Percentage of completion method – for construction contracts
5. Outright and spread-out method – income from leasehold improvements
6. Crop year basis – farming income of a particular crop harvest

TAX REPORTING
INCOME TAX RETURN INFORMATION RETURNS

WITHHOLDING TAX RETURNS

MODE OF FILING INCOME TAX RETURNS

1. Manual Filing System

A. An authorized agent bank (AAB)

B. Revenue Collection Officer

C. Municipal Treasurer (if there is no BIR office in the locality.)

2. e-BIR Forms

3. Electronic Filing and Payment System (eFPS)

PENALTIES FOR LATE FILING OR PAYMENT OF TAX

1. Surcharge

a. 25% of the basic tax for failure to file or pay deficiency tax on time

b. 50% for ‘willful neglect’ to file and pay taxes

2. Interest – double the legal interest rate for loans (12%)

3. Compromise penalty – amount paid in lieu of criminal prosecution over a tax violation
 FINAL INCOME TAXATION

FINAL TAX TAX WITHHOLDING AT SOURCE TERRITORIAL IMPOSITION

Imposed on certain passive income and persons not engaged in business in the Philippines.

RATIONALE of Final Income Taxation

The final withholding tax is built upon taxpayer and government convenience.

Most convenient and effective system in collecting taxes on income where there is a high risk of non-compliance
or tax evasion.
NRA-NETBs NRFCs

Non-resident person not engaged in trade or business General final tax rate

Non-resident alien not engaged in trade or business 25%

Non-resident foreign corporation 25%

PASSIVE INCOME SUBJECT TO FINAL TAX

1. INTEREST or yield from BANK DEPOSITS or DEPOSIT SUBSTITUTES

Note: The final tax on deposits applies only to those made with banks.

Classification of debt instruments

Number of borrowers at origination
Issuer of debt instrument 19 or less 20 or more

Corporate issuer Private borrowing Deposit substitute

Government including BSP Deposit substitute Deposit substitute

*Interest on deposit substitute is subject to final tax.

** Interest on private borrowing is subject to regular income tax.

Foreign currency deposit with foreign currency depositary banks

Taxpayer Individuals Corporations
Residents 15% 15%
Non-residents Exempt Exempt

2. DOMESTIC DIVIDENDS, in general

As a rule, dividends are income subject to tax. However, stock dividends and liquidating dividends are not income
for taxation purposes.
Dividend Tax Rules
Recipient of dividends
Source of dividends Individuals Corporations
Domestic corporation 10% final tax Exempt
Foreign corporation Regular tax Regular tax

3. DIVIDEND INCOME from a REAL ESTATE INVESTMENT TRUST

4. SHARE in the net income of a business partnership, taxable associations, joint ventures, joint accounts, or
co-ownership

5. ROYALTIES, in general

6. PRIZE EXCEEDING P10,000 – prizes are based on effort

7. WINNINGS – winnings are based on chance

8. INFORMER’S TAX REWARD

Amount of Cash Reward – whichever is the lower of the following per case:

1. 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and collected or

2. P1,000,000

*Cash reward is subject to FWT (10%)

9. INTEREST INCOME ON TAX-FREE CORPORATE COVENANT BONDS

Individuals Corporations
Tax on interest income on tax-free corporate covenant bonds 30% final tax RIT
Note:
1. The 30% final tax applies to all individuals, regardless of classification.
2. *This is subject to 20% final tax if the bonds qualify as deposit substitutes.

EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT ENGAGED IN TRADE OR BUSINESS
IN THE PHILIPPINES

NRA-NETB NRFC
General Final Tax Rate 25% 25%
Exceptions:
1. Capital gain on sale of domestic stocks directly to buyer 15% Capital gains tax 15% Capital gains tax
2. Rentals of vessels 25% of rentals 4.5% of rentals
3. Rentals of aircrafts, machineries, and other equipments 25% of rentals 7.5% of rentals
4. Interest income under the foreign currency deposit system Exempt Exempt
5. Interest on foreign loans N/A 20%
6. Dividend income 25% 15% if tax sparing
rule is applicable
7. Tax on tax-free corporate bonds 30% 20%

The Tax Sparing Rule

NFRCs shall be subject to a 15% final tax on dividend income instead of the 25% general final tax if the country of
domicile of the NRFC credits against the tax due of such NRFC taxes presumed to have been paid by such NRFC
from the Philippines equivalent to 10% of dividends.

OTHER FINAL INCOME TAXES

1. Fringe Benefits of managerial or supervisory employees

2. Interest and other income payments to depositary banks under the expanded foreign currency deposit system
2. Income payments to sub-contractors of petroleum service contractors
FINAL WITHHOLDING TAX RETURN

The final withholding tax return (BIR Form 0619-F), Monthly Remittance Return of Final Income Taxes Withheld,
shall be filed in triplicate by every withholding agent or payor who is either an individual or corporation for the
first two months of the quarter.

The withholding agent shall file (BIR Form 1601-FQ), Quarterly Remittance Return of Final Income Taxes
Withheld, on or before the last day of the month after each quarter.

Deadline and place for monthly manual filing

The return shall be filed, and the tax shall be paid on or before the 10th day of the month following the month
which withholding was made with: (AAB), Revenue collection officer & authorized city or municipal treasurer.

ENTITIES EXEMPT FROM FINAL INCOME TAX, CAPITAL GAINS TAX and REGULAR INCOME TAX

1. Foreign governments and foreign government-owned and controlled corporations

International comity
2. International missions or organizations with tax immunity

3. (GPP)
Exempt Under NIRC
4. Qualified employee trust fund

5. Personal Equity Retirement Account fund

 FINAL WITHHOLDING TAX
Passive Income RC, NRC, RA NRA-ETB NRA-NETB
INTEREST
From any currency bank deposits
Yield or any other monetary benefit from
❖ Deposit Substitutes 20% 20% 20%
❖ Trust Funds
❖ Similar Arrangement
Depository bank under Foreign Currency 15%
EXEMPT EXEMPT
Deposit System (FCDU) NRC = EXEMPT
Long term bank deposit 5 yrs/more EXEMPT EXEMPT
or investment
*at least 5-year maturity 4 - < 5 yrs 5% 5% 25%
3 - < 4 yrs 12% 12%
< 3 yrs 20% 20%

ROYALTIES 5% 5%
General 20% 20% 25%
Books
10% 10% 25%
Literary works
Musical Compositions
PRIZES
Amount > P 10,000 20% 20% 25%
Amount < P 10,000 Basic tax Basic tax 25%
WINNINGS
Other Winnings 20% 20% 25%
PCSO/LOTTO winnings
25%
Amount < P 10,000 EXEMPT EXEMPT
Amount > P 10,000 20% EXEMPT
*NOT INCLUDED IN WINNINGS – exempt from income tax
✓ Winnings subject to OPT (4%; 10%)
✓ In recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement
(REALSCC)
▪ Without any action on his part to enter the contest
▪ Not required to render substantial future services as a condition.
✓ Granted to athletes in local and international sports competitions and tournaments both in
PH/abroad sanctioned by their NATIONAL SPORTS ASSOCIATIONS.
*Can also be applied to PRIZES
DIVIDENDS
Received from 10% 20% 25%
▪ Domestic corp.
▪ Joint stock co.
▪ Insurance/mutual fund co.
▪ Regional Operation Headquarters (ROHQ)
of multinational co.
Share in distributable net income after tax of a 10% 20% 25%
partnership
*(Except GPP-BTX)
1. Share in the net income after tax
▪ Association 10% 20% 25%
▪ Joint Account
▪ Taxable Joint Venture/Consortium
 Share in the Net income – JOINT VENTURE
CO-VENTURER TAXABLE *NON-TAXABLE
Individual Dividend Income – 10% FWT Basic Tax
Corporation TAX EXEMPT Basic Corporate Tax
*Non-Taxable JV – JV organized for the purpose of:
1. Construction projects
2. Engaged in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium
agreement under a service contract with the government

CAPITAL GAINS TAXATION

Classification of Taxpayer’s Properties

Ordinary assets – assets used in business

a. Assets held for sale – such as inventory

b. Assets held for use – such as supplies and items of PPE like buildings and property improvements

Capital assets – any asset other than ordinary assets

3. Personal (non-business) assets of individual taxpayers

4. Business assets of any taxpayers which are:
a. Financial assets – such as cash, receivables, prepaid expenses and investments
b. Intangible assets – such as patent, copyrights, leasehold rights; franchise rights

INDIVIDUAL TAXPAYERS CORPORATE TAXPAYERS

Personal asset Business asset

Ordinary assets Capital assets
(All are capital assets)

Ordinary assets Capital assets

Asset Classification Rules

1. A property purchased for future use in business is an ordinary asset even though this purpose is later
thwarted by circumstances beyond the taxpayer's control.
2. Discontinuance of the active use of the property does not change its character previously established as
a business property.
3. Real properties used, being used, or have been previously used, in trade of the taxpayer shall be
considered ordinary assets.
4. Properties classified as ordinary assets for being used in business by a taxpayer not engaged in the real
estate business are automatically converted to capital assets upon showing of proof that the same have
not been used in business for more than 2 years prior to the consummation of the taxable transaction
involving such property.
5. A depreciable asset is an ordinary asset even if it is fully depreciated, or there is a failure to take
depreciation during the period of ownership.
6. Real properties used by an exempt corporation in its exempt operations are considered capital assets.
Exempt corporations are not business.
7. The classification of property transferred by sale, barter or exchange, inheritance, donation, or
declaration of property dividends shall depend on whether or not the acquirer uses it in business.
8. For real properties subject of involuntary transfer such as expropriation and foreclosure sale, the
involuntariness of such sale shall have no effect on the classification of such real property.
9. Change in business from real estate to non-real estate business shall not change the classification of
ordinary assets previously held.
TYPES OF GAINS ON DEALINGS IN PROPERTIES

1. Ordinary gain – sale of ordinary assets

2. Capital gain – sale of capital assets

Type of gain Applicable taxation scheme

Ordinary gains Regular income tax
Capital gains General Rule: Regular income tax
Exception rule: Capital gains tax

SCOPE OF CAPITAL GAINS TAXATION

Gains on dealings in capital assets Tax Rates

✓ Gain on the sale, exchange, and other disposition of 15% capital gains tax
domestic stocks directly to buyer
✓ Sale, exchange, and other disposition of real property in the 6% capital gains tax
Philippines
✓ Gains from other capital assets Regular income tax

CAPITAL GAIN ON THE SALE, EXCHANGE, AND OTHER DISPOSITION OF DOMESTIC STOCKS DIRECTLY TO BUYER

Domestic Stocks:

1. Preferred stocks (participative, cumulative, etc.)

2. Common stocks
3. Stock rights
4. Stock options
5. Stock warrants
6. Unit of participation in any association, recreation, or amusement club (golf, polo or similar clubs)

Also covers exchange of domestic stocks in kind and other dispositions:

1. Foreclosure of property in settlement of debt

2. Pacto de retro sales – sale with buy back agreement
3. Conditional sales – sales which will be perfected upon completion of certain specified conditions
4. Voluntary buy back of shares by the issuing corporation

Other disposition does not include:

1. Issuance of stocks by a corporation

2. Exchange of stocks for services
3. Redemption of shares in a mutual fund
4. Worthlessness of stocks
5. Redemption of stocks for cancellation by the issuing corporation
6. Gratuitous transfer of stocks

MODES OF DISPOSING DOMESTIC STOCKS

Shares of stocks may be sold, exchanged, or disposed:

1. Through the Philippine Stock Exchange (PSE)

Nondealer through PSE: Stock transaction tax = .6% of SP
*If dealer, RIT
2. Directly to buyer
SP – Tax basis – SellExp - Doc Tax = NCG(L)
*The total consideration received per deed of sale, in cash sale
**the sum of money and fair value of property received, if paid partly in money and partly in property
***the fair value of the property received, in case of exchanges

CAPITAL GAINS TAX ON SALE, EXCHANGE, AND OTHER DISPOSITIONS OF DOMESTIC STOCK DIRECTLY TO BUYER

Nature of the CGT:

1. Universal tax – applies to all taxpayers disposing stocks classified as capital assets regardless of
classification of the taxpayer.
2. Annual tax – imposed on the annual net gain
 TAX BASIS
❖ Purchase – cost
❖ Devise, bequest, or inheritance – Fair value at death
❖ Gift – lower of FV at gift date vs basis of last preceding owner who bought it
❖ Inadequate consideration – amount paid by the transferee for the property
❖ Tax free exchanges – substituted basis of stocks

TAX COMPLIANCE

1. Transactional capital gains tax – capital gains or losses are required to be reported after each sale, exchange,
and other dispositions through the CGT return, BIR Form 1707.

*For every sales transaction, the taxpayer shall file BIR Form 1707

2. Annual capital gains tax – The 15% CGT is an annual tax. It is recomputed on the annual net gains and
reported through a final consolidated return (BIR Form 1707A) on or before the 15th day of the fourth month.

*The taxpayer shall file BIR Form 1707A to claim refund if overpayment

No loss scenario – no CGT payable in the final consolidated return If all transactions resulted to a gain.

With loss scenario – it is best to offset losses first with subsequent gains. Residual tax payable must be settled.

INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX

When domestic stock is sold in installments, the capital gains tax may also be paid in installment if the:
a. Selling price exceeds P1,000; and
b. Initial payment does not exceed 25% of the selling price.
CGT payable every installment = Collection / Contract price x Capital gains tax
Note: selling price is used to measure the initial payment ratio, but the contract price is to CGT in installment

SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS MEASUREMENT

1. Wash sales rule – capital loss is added to tax basis of the replacement shares because the loss is fake

Occur when within 30 days before and 30 days after the losing sale, the taxpayer acquired
substantially identical securities. (61- day period)

Deferred loss – fake loss Deductible realized loss – the portion without replacement cover

2. Tax free exchanges – gain or loss are not recognized (share for share)

a. Corporate reorganization Merger – A+B = A / B

b. Initial acquisition of control Consolidation – A+B = C

Minimum public ownership – lower of 10% of issued and outstanding shares or that required by SEC or PSE

Persons not liable to the 15% capital gains tax

1. Dealers in securities
2. Investors in shares of stocks in a mutual fund company in connection with gains realized upon
redemption of stocks in the mutual company.
3. All other persons, whether natural or juridical, who are specifically exempt from national revenue taxes
under existing investment incentives and other special laws, such as:
a. Foreign governments and foreign government-owned and controlled corporations
b. Qualified employee trust funds
c. Qualified Personal Employee Retirement Accounts (PERA)
SALE, EXCHANGE, AND OTHER DISPOSITION OF REAL PROPERTY LOCATED IN THE PHILIPPINES

6% on the higher of gross selling price or current FMV (Zonal or Assessed)

Exceptions

1. Alternative taxation rule

Individual taxpayer and Sale to government, there’s an option to choose either:
a. Pay 6% capital gains tax or
b. Pay the regular income tax
2. Exemption under NIRC & Special laws

NIRC requisites for exemption:

1. The seller must be a citizen or resident alien.

2. The sale involves the principal residence of the seller-taxpayer.

Shown in the latest tax declaration
3. Proceeds is fully utilized in acquiring a new principal residence.

4. Notify the BIR Commissioner within 30 days from the date of sale of intention to avail the exemption.

5. Utilization within 18 calendar months from the date of sale.

6. Capital gain is held in escrow in favor of the government.

7. Can only be availed once every 10 years.

8. Historical cost or adjusted basis shall be carried over to the new principal residence acquired.

Note: Sale of principal residence must precede the acquisition of the new principal residence to be exempt.

CAPITAL GAINS TAX EXEMPTION UNDER SPECIAL LAWS

1. Sale of land pursuant to Comprehensive Agrarian Reform Program (CARP)

2. Sale of socialized housing units by National Housing Authority (NHA)

BIR Form 1707 – due w/in 30 days from date of sale or exchange of stocks
BIR Form 1707-A – on or before 15th day of the 4th month after close of taxable year
BIR Form 1706 – due w/in 30 days from the date of sale or exchange of Real Property

DOCUMENTARY STAMP TAX

Domestic stocks: P1.50/P200 of par value
Real properties: P15/P1,000 of tax basis

PENALTIES FOR LATE/NON-FILING OR NON-PAYMENT OF CGT

1. Surcharge – 25%: failure to file; 50%: willful neglect
2. Interest – 12% *period factor
3. Compromise penalty

COMPARISON OF THE 6% CGT AND 15% CGT

6% CGT 15% CGT
Tax object Gain on real property Gain on sale of stocks
Basis of the tax Presumed gain Actual gain
Nature of the tax Final tax Self-assessed tax
Frequency of payment Per transaction Transactional and annual tax
 CAPITAL GAINS TAX
SALE OF SHARES OF DOMESTIC CORP – SHAREHOLDERS AND
INVESTORS***
✓ Not through the local stock exchange (sold directly to
a buyer)

*Through – subject to BUSINESS TAX – Stock Transaction Tax

15% of capital gain
Prior 2018 = 1st P100,000 gain = 15%
(STT) – 6/10 of 1% of GSP
In excess of P100,000 = 10%
**FOREIGN CORP – Basic income tax
***SALE BY A DEALER – Basic income tax

❖ FORMULA
Selling price xx
Acquisition Cost (xx)
Cost to sell _(xx)_
Net Capital Gain xx
Rate %__
CGT XX

Sale of Real Property 6%

✓ Capital asset Tax base SP, FMV, Zonal Value
✓ Located in PH
(highest)

❖ FORMULA
Tax Base (highest)
SP, FMV, Zonal Value xx
Rate___________________%
CGT XX

OPTION of the SELLER in case SALE TO GOV’T or any POLITICAL

1. Pay CGT → 6%
2. Pay Basic Income Tax

EXEMPTIONS
▪ Property sold must be the principal residence of the seller
▪ Proceeds → fully utilized in acquiring or constructing new principal residence
▪ Within 18 calendar months from the date of sale / disposition of the intention to avail exemption
▪ Can only be availed once every 10 years

PARTIAL EXEMPTION → TAXABLE PORTION

▪ No full utilization
▪ Unutilized portion shall be paid within 30 days after the expiration of the 18 months period

Taxable Amount = Unutilized Portion x SP, FMV, Zonal Value

Gross
Gross Selling
Selling Price
Price
CGT = Taxable Amount x 6%
 INTRODUCTION TO REGULAR INCOME TAX

Characteristics of the Regular Income Tax

1. General in coverage – applies to all items of income except those that are subject to FWT, CGT, and special
tax regimes.
2. Net income taxation – the RIT is an imposition on residual profits or gains after deductions for expenses
and personal exemptions allowable by law.
3. Annual income tax – applies on yearly profits
4. Creditable withholding taxes – advanced taxes that must be deducted against regular tax due in
computing the tax still due to the government.
5. Progressive or proportional tax – NIRC imposes a progressive tax on the taxable income of individuals
while it imposes a flat or proportional tax of 25% upon the taxable income of corporations.

The Regular Income Tax Model

Gross income – inclusions P xxx
Less: Allowable deductions _______xxx
Taxable Income P xxx

Excluded income – those income excluded by the NIRC from regular income tax
Exempt income – all income exempt from tax whether FWT, CGT, or RIT (provided by NIRC or special laws)
Gross income – constitutes all items of income that are neither excluded in gross income nor subjected to FWT or
CGT
Allowable deductions – expenses of the conduct of business or exercise of profession (Business expenses)
Personal expenses – those that individual spends and are non-deductible against gross income

Individuals that are not engaged in business cannot claim deductions from gross income. Consequently,
individuals are classified as follows:
1. Pure compensation income earner
2. Pure business or professional earner
3. Mixed-income earner – an individual learning both compensation and business/professional

Determination of taxable income

➢ Classification rule – gross income is classified into:
a. Compensation income – arises from employer-employee relationship
b. Business income – arises from selling of goods or rendering of services
Taxable income of pure compensation income earner
Gross compensation income xxx
Less: Non-taxable compensation xxx
Taxable compensation income xxx

Taxable income of pure business or professional income earner

Gross income from business/profession xxx
Less: Allowable deductions xxx
Net income (net loss) xxx Gross income consists of the major topics:
Add: Non-operating income xxx
1. Exclusions of gross income
Taxable net income xxx
2. Inclusions in gross income

3. Special topics

a. Fringe benefits
b. Dealings in properties
 ➢ Globalization rule for mixed-income earner
Income of mixed-income earners from both sources is simply globalized or totaled. A net loss
when the deduction exceed gross income from business or profession shall not be offset against taxable
compensation income.

Note: A net loss may be carried over as deduction against net income of the succeeding three years. (NOLCO)

Taxable Income of corporate income taxpayers – computed in the same manner as pure business or
professional income earner.

Business Selling Goods – Sales-COS = Gross Income

Cost of Sales of a Trading Business – Beg.Inv + Net Purchases + Freight in = TGAS – End.Inv = COGS

Cost of Sales of a Manufacturing Business – almost the same as trading

Business Selling Services – Revenue (accrual basis) / Gross Receipts (cash basis) – COS = Gross income

Cost of services – all direct costs of rendering the services such as cost of labor, materials, and overhead costs

Reporting Format for Individuals Engaged in Business or Profession

Sales/Revenues/Receipts/Fees P xxx
Less: Sales returns, allowances and discounts xxx
Net Sales/Revenues/Receipts/Fees P xxx
Less: Cost of sales or services xxx
Gross Income (loss) from operations P xxx
Less: Allowable deductions xxx
Net income P xxx
Add: Non-operating income xxx
Taxable net income P xxx

Distinguished
Revenue – total return arising from the primary operations of the business
Sales – revenue from the sale of goods
Fees – revenue from the sale of services
Receipts – cash collection from the sale of goods or services

Revenue vs. Gross income includes return on capital, net of cost of sales or services

Includes both return on and return of capital

Other taxable income from operations includes revenues or receipts from incidental or secondary operations
aside from the primary operations

Non-operating income – all other items of gross income such as:

1. Gains from dealings in properties not subject to CGT

2. Income distribution from a GPP, Taxable Trust/Estate, or from an exempt joint venture
3. Casual active income – income from isolated or one-time transactions
4. Passive income not subject to FT – includes passive income not connected with the taxpayer’s business
not subject to FWT such as interest on advances to employees and dividends from foreign corporations
*These do not arise from regular business operations, hence, classified as non-operating income

Reporting Format for Corporate Taxpayers

Add: Other taxable income xxx
Sales/Revenues/Receipts/Fees P xxx
not subject to final tax
Less: Sales returns, allowances and discounts xxx
TOTAL TAXABLE INCOME P xxx
Net sales/revenues/receipts/fees xxx
Less: Allowable deductions xxx
Less: Cost of sales or services xxx
NET TAXABLE INCOME P xxx
Gross income from operations xxx
Basis of the Optional Standard Deduction (OSD)

Individual taxpayers – net revenues or receipts from operations

Corporate taxpayers – gross income subject to regular income tax

Separate bookkeeping for business and professional practice – The personal transactions of the individual
taxpayer must not be mixed with the transactions of the business/professional practice. The personal expenses
of the taxpayer cannot be deducted against the gross income of the business.

TYPES OF REGULAR INCOME TAX

1. Individual income tax

2. Corporate income tax

The Income Tax Table for Individual Taxpayers (Year 2023 onwards)

Taxable Income per Year Income Tax Rate

P 250,000 and below 0%
Above P250,000 to P400,000 15% of the excess over P250,000
Above P400,000 to P800,000 P 22,500 + 20% of the excess over P400,000
Above P800,000 to P2,000,000 P 102,500 + 25% of the excess over P800,000
Above P2,000,000 to P8,000,000 P 402,500 + 30% of the excess over P2,000,000
Above P8,000,000 P 2,205,500 + 35% of the excess over P8,000,000

Scope of the progressive tax – covers all individuals including taxable estates and trusts except NRA-NETB which
is subject to 25% FWT on gross income.

The Optional 8% Income Tax – The TRAIN Law introduced an optional income tax for self-employed and or
professionals (SEP) wherein they can opt to be taxed at 8% of sales or receipts and other non-operating income.

It shall be in lieu of the also known as bundled tax

a. Progressive income tax computed under individual tax table, and

b. 3% percentage business tax on sales or receipts

CORPORATE INCOME TAX (RCIT) – a proportional or flat tax at a rate of 25% on taxable income.
Applies to any corporation except:
a. Subject to FWT such as NRFC and FCDU interest income not subject to FWT.
b. Special corporations or those subject to preferential tax rates or special regimes (private schools,
nonprofit hospitals, PEZA/TIEZA registered enterprises)
c. Exempt corporations (0% tax rates, no tax dues, such as government agencies, non-profit organizations
with no taxable income, cooperatives, and those registered with BOI enjoying Income Tax Holiday
However, a lower 20% proportional tax is imposed on domestic micro-, small-, and medium-sized enterprises
(MSMEs) with not more than P100 million assets, excluding land, and not more than P5 million taxable income.
The Minimum Corporate Income Tax (MCIT) – Corporate taxpayers are normally subject to a minimum tax,
computed as 2% of total gross income subject to regular tax even if they are losing in business.
Deadline of Quarterly Income Tax Returns
1ST Quarter ITR 2ND Quarter ITR 3rd Quarter ITR
Individuals May 15, same year August 15, same year November 15, same year
Corporations 60 days end of 1st Qtr 60 days end of 2nd Qtr 60 days end of 3rd Qtr

Frequency of Reporting Per Taxpayer Type

Pure compensation income earner Annual
Purely engaged in business or profession, Mixed 3 Quarterly & 1 Annual
income earner, Corporations

Requisites for substituted filing system for employees

1. Pure compensation 2. No other taxable income 3. Employer correctly withheld

 EXCLUSIONS FROM GROSS INCOME

PAGCRIM

A. Proceeds of life insurance policy

B. Amount received by the insured or his heir as a return of premium
Note: proceeds of property insurance contracts in excess of the tax basis of the property lost or destroyed
is a taxable return on capital.
C. Gift, bequest, devise or descent – transfer tax
D. Compensation for injuries or sickness
E. Income exempt under treaty
F. Retirement benefits, pensions, gratuities and other benefits
▪ RA 7641, requisites of exemption: (1-10-50-RPBP)
1. Once in a lifetime
2. 10 years of service of the same employer
3. Retiring employee is at least 50 years of age
4. Employer maintains a reasonable private benefit plan
Absence of a retirement plan (requisites of exemption)
a. Retiring employee is at least 60 years of age
b. He must have served the employer for at least 5 years
Note: this also apply where the retirement plan is not approved by the BIR

▪ Separation or termination requisites:

1. Due to job threatening sickness, death, or other physical disability; and
2. Due to cause beyond employee control (REDCRS)
* Redundancy
* Employee lay off
* Downsizing However, backwages and terminal leave pay are taxable
* Closure of business
* Retrenchment
* Sickness or death of employee
▪ Social security benefits, retirement gratuities and other similar benefits from foreign government
agencies and other institutions, private or public
Under the situs rule, the foreign income of non-residents is not taxable in the Philippines
▪ United States Veterans Administration (USVA)
▪ SSS benefits under RA 8282
▪ GSIS benefits under RA 8291
G. Miscellaneous items
1. Income of Foreign Government or FGOCC
2. Income of the gov’t except GOCC
3. Prizes and awards REALSCC
4. PAS in athletic sports competition
5. Mandatory contributions
6. PERA contributions
7. PERA distributions and investment income
8. 13th month pay and other benefits not exceeding 90,000
9. Gains from sale of debts with maturity of more than 5 years
10. Gains from redemption of shares in mutual fund
11. Income from sale of gold pursuant to RA 7076 (People’s Small-Scale Mining Act of 1991)

Other exempt income under NIRC and special laws

1. MWE – MW and H2ON hazard, holiday, overtime and night

2. Income of BMBE (Total assets w/loan w/out land, 3M)
3. Income of cooperatives
4. Income of nonstock and nonprofit entities
5. Income of qualified employee trust funds

Exemption not automatic, secure the following:

Certificate of authority – BMBE

Certificate for Tax Exemption – Cooperatives

 INCOME TAX ON INDIVIDUALS

SOURCES OF INCOME FOR INDIVIDUAL TAXPAYERS

Compensation Income – all remuneration received for services performed by an employee for his employer for
his employee-employer relationship.
Business or Professional Income – income earned by an individual from his sole proprietorship business, from
the practice of profession, or share in the income of a general professional partnership subject to Income Tax
and Expanded Withholding Tax, whenever is applicable.
Income owned in common with the spouse – gain on disposal of an asset conjugally owned by the spouses
shall be divided equally to both the husband and wife → share also in such deduction equally.
Passive Income – income generated without any active conduct.
Capital Gains – arising from sale of capital assets which may be subject to Capital Gains Tax or as part of the
taxpayer’s gross income subject to income tax.

ALLOWABLE DEDUCTIONS FOR INDIVIDUAL TAXPAYERS

Compensation Income Business Income
▪ Individuals earning purely compensation ▪ Earning business income or income from the
income. practice of profession
▪ There is no allowable deduction. ▪ Allowed to claim itemized deductions or the
▪ However, the first P250,000 of their income is optional standard deduction
exempt from income tax. ▪ If income purely from business or practice of
profession, the first P250,000 of such income
is exempt from income tax
1. Itemized Deductions – expenses incurred in conducting the business or in the practice of profession are
allowed as deductions for income tax purposes.
2. Optional Standard Deduction (OSD) – in lieu of the itemized (per item) expenses mentioned above, the
Individual may opt to claim OSD. Accordingly, no other deductions for expenses shall be allowed.
Purpose: to make BIR Audit a little less complex
Basis of Computation: The OSD is 40% of Gross Sales or Receipts. If the individual has mixed income (from
business and compensation) the basis for the 40% will not include compensation income.
Note: The basis for the OSD is gross sales/receipts which is the amount BEFORE any deduction for COS.
The OSD cannot be claimed by Non-Resident Aliens
Period to elect: shall be made on the first quarter of the taxable year, upon filing of the first quarter return and
shall be irrevocable for the said year.

3. Special Allowable Itemized Deductions – e.g., rooming-in and breast-feeding practices, adopt a school
program, senior citizen discount.

All of the above deductions are not available:

a. Against compensation income – no deductions are allowed for a taxpayer who is a purely compensation
income earner. If the taxpayer is a mixed income earner, the deductions are available only against the
business or income from practice of profession and not against compensation income.
b. If the taxpayer opted to avail the 8% income tax, since the tax base for this tax is gross sales/receipts.

BASIC FORMAT OF COMPUTATIONS

1. Pure Compensation Income
Gross Taxable Compensation Income P XXX
Less: Non-Taxable Compensation Income (XXX)
Taxable Income XXX
Tax Due XXX
Less: Withholding Tax on Compensation (XXX)
Tax Payable (Refundable) XXXX
Includes those benefits provided for by the employer which are considered de minimis or otherwise exempted from income tax
such as mandatory government and other contributions.
Pure Business or Profession Income availing of the 8% Income Tax
Gross Sales/Receipts P XXX
Other Non-Operating Income XXX
Less: First P250,000 exempt from Income Tax (P 250,000)
Taxable Sales/Receipts XXX
Tax Rate 8%
Income Tax XXX
Less: Withholding Tax XXX
Creditable Tax XXX (XXX)
Tax Payable (Refundable) XXXX

Mixed Income Earners (from compensation and income from business or practice of profession) can be taxable as
follows:

a. COMPENSATION INCOME – is always subject to the graduated rates

b. INCOME FROM BUSINESS/PRACTICE OF PROFESSION:
i. If the taxpayer’s gross sales/receipts, together with other non-operating income, do not exceed
P 3,000,000:
a) 8% income tax rate without the first P250,000 exempt
b) Graduated rates
ii. If the taxpayer’s GS/R + Other operating income exceeds P3,000,000 – Graduated rates

The 8% Income Tax Rate applies ONLY to income from business or practice of profession where the gross sales or
receipts do not exceed P3,000,000 and only beginning the 2018 taxable year.

Rules applicable to the 8% income tax rate:

a. It shall be based on gross sales/receipts including other non-operating income, unlike the graduated rates which
are based on taxable income;

b. For those earning purely from business or practice of profession, the tax base shall be that in excess of P250,000

PURELY SEP
Gross Sales/Receipts
P3M and below

Graduated rate or 8% tax on gross sales/receipts and other operating income in excess of P250,000

Gross Sales/Receipts
More than P3M

Graduated rate

MIXED INCOME EARNER

Income from Self-employment
Gross Sales/Receipts not more than P3M

Graduated rate or 8% tax on gross sales/receipts and other operating income

Compensation Income

Graduated rate

Note: Unless the taxpayer signifies in the 1ST Quarter Return of the taxable year the intention to elect the 8%
income tax, the taxpayer shall be considered as having availed BASIC INCOME TAX; such election shall be
IRREVOCABLE.
*PROVIDED that anytime, a taxpayer’s gross sales/receipts EXCEEDED the VAT THRESHOLD (3M) → subject to RIT
 INCOME TAX ON ESTATES AND TRUSTS

TAXABILITY OF ESTATES TAXABILITY OF TRUSTS

An estate pertains to all property, rights and A trust is the arrangement created by will or an
obligations of a deceased person, including those that arrangement under which title to property is passed
accrue since the opening of succession. to another for consideration or investment with the
income therefrom and ultimately the corpus to be
An estate is taxable DURING judicial settlement, that distributed in accordance with the directions of the
is, during the time the estate is the subject of judicial creator as expressed in the governing instrument.
testamentary or intestate proceedings.
Parties:
Similar to an individual, except: Trustor/grantor – one who establishes the trust
1. An estate is required to obtain its own TIN Trustee/Fiduciary – one whom confidence is reposed
2. Distribution of the INCOME to the heirs shall be Beneficiary – one who benefit the established trust
deductible, such distribution shall be subject to a 15%
withholding tax. Kinds of trust:
1. Revocable – the grantor has the power to revest;
Period to start: from the death of the decedent the trust is not considered a separate taxable entity;
income from the corpus is taxable to the grantor.
Not under JUDICIAL settlement: treated as a co- 2. Irrevocable – the trust itself is considered a
ownership. separate taxable entity; taxed similar to an estate
under judicial settlement.
Liability to pay income tax: the administrator or
executor will be liable to pay the income tax liability Rules on Taxability:
of the estate. 1. If the income is distributed regularly, such will form
part of the taxable income of the beneficiary.
ESTATE
2. If the trust is revocable, the income forms part of
JUDICIAL EXTRA JUDICIAL
the taxable income of the trustor.
administrator/executor treated as co-ownership 3. Only when the trust is irrevocable and the income
is kept in the trust, would there be a need to compute
court who decides for the income tax liability of the trust.
treated as individual taxpayer 4. If treated as separate taxable unit, rules on
individuals are the same, except that the Distribution
of INCOME of the beneficiary shall be deductible for
purposes of computing the taxable income of the
Trust subject to 15% withholding tax.
*The amount distributed (gross of the withholding
tax) will form part of the beneficiary’s taxable income
but with a tax credit.

INCOME TAX ON PARTNERSHIPS, JOINT VENTURES and CO-OWNERSHIPS

TAXABILITY OF PARTNERSHIP AND PARTNERS

KINDS OF PARTNERSHIPS
1. General Professional Partnership are form for sole purpose of exercising common profession, no part of the
income of which is derived from engaging in any trade or business. Exempt from income tax.
2. Taxable Partnerships are those formed by persons for purpose of profits. Taxed similar to corporation.

GENERAL PROFESSIONAL PARTNERSHIPS – Tax Liability of Members

Persons engaged in business as partners shall be liable for income tax only in their individual capacities.
Each partner shall report as gross income his distributive share, actually or constructively received, in the
net income of the partnership.
Income payments made periodically or at the end of the taxable year by a GPP to the partners, such as
drawings, sharing and allowances, etc. shall be subject to 15% EWT if exceeds P720,000; 10% if not.
Every general partnership shall file, in duplicate, a return of its income, setting forth the items of gross
income and deductions and the names, TIN, Address and Shares of each partner.
TAXABLE PARTNERSHIPS → TAXED SIMILAR TO A CORPORATION
may claim itemized and optional standard deductions → same applicable rules for corporations.
They are also subject to the rules on Final Tax, Capital Gains Tax and MCIT EXCEPT Improperly Accumulated
Earnings Tax.
▪ The shares of the partners from its income are treated similar to dividends.
▪ A share in the profit of a partnership is deemed received by the partner even if no ACTUAL payment was
made, under the principles of constructive receipt.

TAXABILITY OF JOINT VENTURES

JOINT VENTURES → taxable joint ventures are taxed similar to a taxable partnership.
On the other hand, if the joint venture is considered as exempt, its taxation is similar to a GPP.
Exempt Joint Ventures:
a. If it formed for the purpose of undertaking construction projects.
*Except JV that is duly licensed by the Philippine Contractors Accreditation Board (PCAB) of the DTI.
b. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium
agreement under a service contract with the government.

Share in the Net income – JOINT VENTURE

CO-VENTURER TAXABLE *NON-TAXABLE
Individual Dividend Income – 10% FWT Basic Tax
Corporation TAX EXEMPT Basic Corporate Tax
*Non-Taxable JV – JV organized for the purpose of:
1. Construction projects
2. Engaged in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium
agreement under a service contract with the government

TAXABILITY OF CO-OWNERSHIPS
There is co-ownership whenever the ownership of an undivided things or right belongs to different persons.
Taxability: Generally, not taxable because the activities here are usually limited to the preservation of the property
owned in common and collection of the income therefrom.
The income of the property owned in common is divided among the co-owners who shall then report in their
respective income tax returns their shares of the income of the co-ownership.
When treated as a partnership: there must be unmistakable intention to form a partnership.
The mere sharing of gross returns does not in itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property from the returns are divided.
However, when the income of the co-ownership is invested by the co-owners in business or other income
producing properties, the co-ownership becomes taxable as a corporation because the co-owners have
constituted a partnership.
 INCLUSION IN GROSS INCOME

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX

Gross income includes, but not limited to:
C 2G I 2R DA 3P ITEMS OF GROSS INCOME
1. Compensation for services in whatever form paid 1. Gross income subject to final tax
2. Gross income from business/profession
2. Gross income subject to capital gains tax
3. Gains from dealings in properties
4. Interest 3. Gross income subject to regular tax
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the net income of GPP

1. Compensation for services in whatever form paid

See compensation income

2. Gross income from business/profession

Sales/Revenue/Receipts/Fees

Less: Cost of sales or services

Gross income from operations

The following are not included from Gross Income:

1. Business income exempt from income tax

a. BMBE

b. Tax Holiday

2. Business income subject to special tax regime

a. PEZA

b. TIEZA

c. Income who opted to be taxed under 8%

3. Business income subject to final tax

a. Subcontractors of petroleum subject to 8%

b. Income of FCDUs and eFCDUs from residents 10%

3. Gains from dealings in properties

See gains from dealings in properties
4. Interest income
Interest income other than passive interest subject to final tax, paid out of agreement to pay interest, example:
1. From lending activities by banks and other lenders
2. From bonds and promissory notes, except gov’t bonds
3. From banks deposits abroad
Exempt interest income:
1. Interest income earned by landowners pursuant to the Comprehensive Agrarian Reform Law
2. Imputed interest income (opportunity cost of money)
5. Rents
A passive income not subject to final tax under the NIRC, hence, subject to regular income tax.
Special considerations on rent
1. Obligations of lessor assumed by lessee
2. Advance rentals: unrestricted or restricted for future payments, exclude if loan or security deposit
6. Royalties
Active royalties within
Active and passive earned from abroad
7. Dividends
FROM FOREIGN CORPORATION, received by individuals and domestic corporation. (pre-dominance test)
COMPREHENSIVE SUMMARY OF RULES ON DIVIDENDS
Source of dividends
Recipient taxpayer Domestic corporation Foreign corporation
Individuals
- Citizens and residents 10% final tax Regular tax
- NRA - ETB 20% final tax Regular tax
- NRA - NETB 25% final tax 25% final tax
Corporations
- Domestic corporation Exempt Regular tax
- RFC Exempt Regular tax
- NRFC 15% final tax 25% final tax
Note: Subject to the tax sparing rule, otherwise, 25%; Subject to conditional exemption
8. Annuities
Annuity payments received in excess of premiums paid.
9. Prizes and winnings
If recipient is individual – ALL PRIZES AND WINNINGS earned from abroad are subject to RIT.
If recipient is corporation – ALL P&W is subject to RIT
Summary rules of prizes and winnings
Earned from sources
Prizes: Within Abroad
Individuals
- P10,000 and below Regular tax Regular tax
- More than P10,000 Final tax Regular tax
Corporations
- Prizes (regardless of amount) Regular tax Regular tax
- PCSO winnings, exceeding P10,000 Final tax N/A
- PCSO winnings, not exceeding P10,000 Exempt N/A
- Winnings from other sources Regular tax Regular tax
Winnings:
Applicable to Individual taxpayers
- PCSO winnings, exceeding P10,000 Final tax N/A
- PCSO winnings, not exceeding P10,000 Exempt N/A
- Winnings from other sources Final tax Regular tax

10. Pensions failing to meet the exclusion criteria

11. Partner’s distributive share from the net income of GPP, exempt joint venture and exempt co-ownership
Share in net income from business partnerships, taxable joint ventures and co-ownerships constituted abroad.

GENERAL CRITERIA FOR ITEMS OF GROSS INCOME

Under the NIRC, the regular income tax has a catch-all provision for all income derived from whatever sources:
1. not subject to final tax, capital gains tax, and special tax regime, and
2. not excluded or exempted by law, treaty, or contract from taxations.
OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable estate or trusts
• Gains arising from expropriation of
2. Share from the net income of other pass-through entities: property
a. Exempt joint venture • Gambling gains
b. Exempt co-ownership • Income from illegal business or from
embezzlement
3. Farming income • Prizes and awards

4. Recovery of past deductions

✓ Bad debt recovery is generally taxable.
✓ Tax benefit rule: If in the year the bad debt was written off there was a reduction of taxable income, bad
debt recovery shall constitute a taxable income.
5. Reimbursement of expenses
6. Damage recovery
o Recovery of lost profit is taxable.
o Recovery of lost capital is not taxable.
7. Forgiveness of debt
a. If debtor rendered service in favor of the creditor, forgiveness of debt results in a taxable income to the
debtor.
b. If the debtor did not render service in favor of the creditor, forgiveness of debt results in a taxable
indirect gift.
c. If the debtor is a stockholder of a corporation, forgiveness of debt by the creditor-corporation results in
dividend distribution. (indirect dividend)
8. Tax refunds
▪ If the refunded tax is a deductible tax, the tax refund is taxable.
▪ If the refunded tax is not a deductible tax, the tax refund is not taxable.
Examples of non-deductible taxes:
1. Philippine income tax Note: Percentage tax is
2. Transfer taxes (estate tax and donor’s tax) deductible

3. Special assessment
4. Foreign income tax claimed as tax credit
5. Value-Added Tax (VAT)
6. Stock transaction tax

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME

1. Accounting methods
✓ Cash basis – report gross receipts/collection as gross income
✓ Accrual basis – report revenue consisting of collected and uncollected income as gross income
Note: Advance income must be included in gross income regardless of the accounting methods
2. Situs rules
✓ All taxpayers are taxable only on the Philippine income except resident citizens and domestic corporation
3. Effect of value added tax
a. VAT taxpayers – sales/receipts exceed P3,000,000
b. Non-VAT taxpayers – below the VAT threshold or specifically designated by law to pay percentage taxes
4. Creditable withholding tax – not an exclusion in gross income, should be added back.
5. Power of the CIR to redistribute income and expenses – to prevent evasion of taxes

TRANSFER PRICING METHODS

Comparable Resale price Cost plus method Profit split method Transactional net
uncontrolled price method margin method
 COMPENSATION INCOME

EMPLOYER-EMPLOYEE RELATIONSHIP
▪ Employer – refers to any person for whom an individual performs any service of whatever nature as
employee of such person.
▪ Employee – refers to any individual who is a recipient of wages.

Elements of Employer-Employee Relationship Under Case Law

1. Selection and engagement of employees
2. Payment of wages (employer) An arrangement which does not manifest all the
3. Power of dismissal (employer) elements is not an employer-employee relationship but
4. Power of control (employer) an independent contract for the provision of services.

Types of Employees as to Function Types of Employees as to Taxability

1. Managerial employees 1. Minimum wage earners
2. Supervisory employees 2. Regular employees
3. Rank and file employees

MINIMUM WAGE EARNERS – refers to a worker in the private sector who is paid the minimum wage or to an
employee in the public sector with compensation income not more than the minimum wage.
MWEs are EXEMPT from income tax on: TAX MODEL ON COMPENSATION INCOME
✓ Minimum wage
Gross compensation income P xxx,xxx
✓ Holiday pay
✓ Overtime pay Less: Non-taxable compensation xxx,xxx
✓ Night shift differential HONZ
✓ Hazard pay Taxable compensation income P xxx,xxx

GROSS COMPENSATION INCOME – generally includes all remunerations received under an employer-employee
relationship.
NON-TAXANLE COMPENSATION
A. Mandatory deductions – GSIS, SSS, PhilHealth, HDMF, and union dues
B. Exempt benefits – benefits that are:
▪ excluded and/or exempted under the NIRC and special laws
▪ exempt under treaty or international agreements
▪ necessary to trade, business, or conduct of profession of the employer (necessity of the employer rule)
▪ for the convenience or advantage of the employer (convenience of the employer rule)
EXEMPT BENEFITS UNDER THE NIRC, AS AMENDED, AND SPECIAL LAWS
1. Remunerations received as incidents of employment
a. Exempt retirement benefits under RA 7641 including exempt retirement gratuities to government officials
and employees
b. Exempt termination benefits
c. Benefits from the United States Veterans Administration
d. Social security, retirement gratuities, pensions, and similar benefits from foreign government agencies and
other institutions, private or public
e. Benefits from SSS under the SSS Act of 1954, as amended
f. Benefits from GSIS under the GSIS Act of 1937, as amended
g. COVID-19 benefits to health workers under RA 11494 (BAYANIHAN 2)
a. Special Risk Allowance
b. Actual Hazard Duy Pay
c. Compensation paid to private and public health workers who have contracted COVID-19 in the
line of duty
2. De minimis benefits
3. 13th month pay and other benefits not exceeding P90,000
4. Certain benefits of minimum wage earners
De minimis benefits facilities or privileges such as entertainment, medical services, or courtesy discounts on
purchases that are of relatively small value and are furnished by the employer merely as a means of promoting
the health, goodwill, contentment, or efficiency of his employees. (petty fringe benefits exempt from income tax)
Tax exempt not exceeding the said amounts.
1. Monetized
a. Unused vacation leave – private → 10 days
*Terminal leave pay/commutation of unused leave credits due to involuntary separation is now treated as
de minimis benefits subject to the 10-day leave credit limit and is no longer exempt as part of exempt
termination benefits
b. Value of leave credits (vacation and sick) – gov’t officials/employees → no limit
2. Medical cash allowance → dependents → P1,500/employee/sem or P250/month
3. Rice subsidy → 2,000/month OR 1 sack (50kg)/month
4. Uniform and clothing allowance → P6,000/annum
5. Laundry allowance → P300/month
6. Employees achievement awards → tangible property → P10,000/annum
7. Gifts (Christmas/Major Anniversary) → 5,000/employee/annum
8. Daily meal allowance (overtime/night/graveyard) → 25% of basic minimum wage
9. Productivity incentive schemes/benefits by virtue of collective bargaining agreement (CBA)
→ P10,000/employee/taxable year
a. Total annual monetary value received from the two items combined must not exceed the said limit.
Note: If the amount exceeds P10,000, the entire amount is taxable “other benefits”
Taxable de minimis benefits
1. Excess de minimis over their regulatory limits
2. Other benefits of relatively small value that are not included in the list of de minimis benefits
Treatment of taxable de minimis benefits
a. For rank-and-file employees – taxable de minimis is treated as other compensation income under the category
“13th month pay and other benefits”
b. For managerial and supervisory employees – the taxable de minimis is treated as fringe benefit subject to final
fringe benefit tax

BENEFITS EXEMPT UNDER TREATY OR INTERNATIONAL AGREEMENTS

Exemption from withholding tax does not mean income tax exemption
Filipino employees of foreign governments, international missions, and organizations are taxable as a rule except
only to employees of the following organizations:
1. United Nations (UN) 6. United Nations Development Programme (UNDP)
2. Specialized Agencies of the United Nations 7. International Organization for Migration (IOM)
3. Australian Agency for International Development (AUSAID)
4. Food and Agriculture Organization (FAO) 8. International Seabed Authority (ISA)
5. World Health Organization (WHO)
SUMMARY OF RULES
Foreign embassy, missions, or Philippine embassy or consulate
organization office
In the Philippines
- Filipino citizens Taxable* N/A
- Aliens Exempt N/A
Abroad
- Filipino citizens Exempt Taxable
- Aliens Exempt Exempt
*Taxpayer must prove if there is an exemption grant under contract or special law. (no certificate, taxable)
BENEFITS REQUIRED BY THE NATURE OF, OR NECESSARY TO, THE TRADE, BUSINESS OR CONDUCT OF
PROFESSION OF THE EMPLOYER (NECESSITY OF THE EMPLOYER RULE)
▪ Benefits or allowances furnished by the employer to the employees to enable them to execute their duties
appropriately and effectively as require by the employment are exempt.
▪ These are not income but are expenses of the trade, business, or profession of the employer that are
incurred or paid through the employee.
BENEFITS FOR THE CONVENIENCE OR ADVANTAGE OF THE EMPLOYER (CONVENIENCE OF THE EMPLOYER RULE)
▪ Benefits or allowances which are intended for the furtherance of the interest of the employer’s business
are to ensure its smooth operations are likewise exempt from income tax.
▪ These types of employer spending are regarded as business expenses and are not considered as employee
rewards because they are not intended for the free personal consumption.

COMPOSITION OF TAXABLE COMPENSATION INCOME

1. Regular compensation – fixed remunerations received by the employee every payroll period.
2. Supplemental compensation – performance-based pays. The excess above P90,000 is added here.

REGULAR COMPENSATION INCOME

1. Basic salary
2. Fixed allowances such as cost-of-living allowance (COLA), fixed housing allowance, and other allowances
Exception rule on the taxability of allowances:
a. Ordinary and necessary allowances in pursuit of the employer’ trade, business or profession.
b. The expense is subject to accounting or liquidation.
c. Any excess advances are returned to the employer.
Valuation of compensation paid in kind – taxable at the fair value of the consideration received. If received in
shares, the fair value of the shares at the date services were provided is used.

SUPPLEMENTARY COMPENSATION
1. Overtime pay 7. Emoluments and honoraria
2. Hazard pay 8. Taxable retirement and separation pay
3. Night shift differential pay 9. Value of living quarters or meals
4. Holiday pay 10. Gains on exercise of stock options
5. Commissions 11. Profits sharing and taxable bonuses
6. Fees, including director’s fees (if director is an employee)

Stock option plans – two types:

1. Equity-settled options – entitles employees to purchase shares of stocks at a pre-determined exercise price
2. Cash-settled options – to receive in cash the excess of the fair value of stocks over the exercise price
Upon the exercise of the option, the excess of the book value or fair value of the stocks, whichever is higher, less
the exercise price set at grant date is treated as follows:
a. Additional compensation income – if the employee is a rank and file
b. Fringe benefits – if the employee is a managerial or a supervisory employee

Profit sharing or taxable bonus

Profit sharing is a reward for churning the business to post a profit. Bonuses are supplemental or additional
compensation, except if they are linked solely to productivity incentive plan, considered as de minimis benefits.
Productivity incentive vs. Profit sharing bonus
Productivity incentive is based upon cost savings; hence, it is payable even if the business poses a loss.
Profit sharing is payable only when the business posts a profit.
13TH MONTH PAY AND OTHER BENEFITS includes:
1. 13th month pay
▪ For government employees – consists of Christmas bonus equivalent to one-month salary plus a
P5,000 cash gift.
▪ For private employees – equivalent to one-month salary.
2. Other benefits
a. Christmas bonus or private employees
b. Cash gifts other than Christmas or anniversary gifts of private employees
c. Additional compensation allowance (ACA) of government personnel
d. 14th month pay, 15th month pay, etc.
e. Other fringe benefits of rank-and-file employees
Christmas bonus and Christmas gift
Government employees Private employees
Christmas bonus 13th month pay and other benefits 13th month pay and other benefits
Christmas gift 13th month pay and other benefits De minimis

Bonus vs. Gift

Bonus is performance-based and is non-discretionary to the employer while a gift is a gratuity and is discretionary upon the
employer.

Other Fringe Benefits

1. Employee personal expenses shouldered by the employer
2. Taxable de minimis benefit such as;
▪ Excess de minimis
▪ Benefits not included in the de minimis list
Treatment
a. For rank-and-file employees – treated as compensation income as part of “other benefits” under “13th
month pay and other benefits.”
b. For managerial and/or supervisory employees – treated as fringe benefit subject to FBT.
Note: “other fringe benefits” of managerial/supervisory employees are excluded from their “13th month pay and other
benefits.”

TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS

- Both public and private → not exceeding P90,000 EXEMPT from income tax and creditable withholding
tax on compensation income.
- Amount IN EXCESS → part of individual’s GROSS INCOME subj to income tax and applicable creditable
withholding tax.
Receipt of Other Taxable Income by Minimum Wage Earners
The MWEs are still exempt from income tax from the foregoing benefits even if they receive other taxable
compensation. However, they may be subjected to tax if their other taxable income exceeds the 250,000 for the
year.
Rules of Change in Status as a Minimum Wage Earner During the Year
1. When an employee becomes a MWE during the year, he shall be subject to income tax only on compensation
earned before becoming a MWE.
2. When an employee ceases to be a MWE during the year due to increase in salary, only the income for the rest
of the year is taxable.
3. When an employee ceases to be a MWE during the year by disqualification (i.e., earning taxable income), he
shall be taxable as a regular employee.
Treatment of COLA of Minimum Wage Earners – should be treated as part of the minimum wage and shall not be
treated as separate or other benefits.
The Withholding Tax on Compensation – method of collecting the income tax at source upon receipt of the income
tax. It applies to all employed individuals whether citizens or aliens. The employer is constituted as the withholding
agent.
Procedural Computation of the withholding tax on compensation
1. Determine the total monetary and non-monetary compensation of the employees for the payroll period.
Segregate nontaxable benefits, mandatory contributions, and supplemental compensation.
2. Determine the bracket that applies to the regular compensation of the employee for the applicable payroll
period. Determine the basic tax for the bracket.
3. Add supplemental compensation to the excess of the regular compensation. Subject the total for the
incremental tax rate for the bracket.
4. Total the basic tax and the incremental basic tax.

DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDING TAX ON COMPENSATION

Employers shall file the BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld on Compensation)
on or before the 10th day of the following month the withholding was made except for taxes withheld for December
which shall be filed/paid on or before January 15 of the succeeding year.
Employers are also required to file BIR Form 1604-CF (Annual Information Return of Income Taxes Withheld on
Compensation and Final Withholding Taxes) on or before January 31 of the following calendar year.
Employers shall furnish each employee-taxpayer a copy of BIR Form 2316 (Certificate of Compensation Payment
or Income Tax Withheld) on or before January 31 of the succeeding year.

Treatment of the Withholding Tax on Compensation

The withholding tax on compensation is credited against the total tax due in the consolidated income tax return.

Substituted filing of tax return

Under this system, the employer files the income tax return of the employee. If the amount of tax is correctly
withheld by the employer, the employee no longer needs to file an annual income tax return.

P-R-O-F-F-B-A-S-E (Inclusions in Compensation Income)

1. Pension (Voluntary)
2. Retirement and Separation Benefits not meeting the requirements
3. Other related Income
4. Fringe Benefits
5. Fees, Including Director’s Fees
6. Bonuses
7. Allowances
8. Salaries, Wages, Honorarium, Emoluments
9. Equity

L-B-G-T-R-1-P (Exclusions in Compensation Income)

1. Life and Health Insurances Payments (If Deducted, Add back)
2. Bequests, devises, Gifts- Part of Donor’s Tax or Estate Tax
3. Government Contributions- GSIS, PhilHealth, HDMF, SSS – except SSS LOAN
4. Treaty and International Commitments
5. Retirement Benefits and Separation Benefits meeting the requirements
6. 13th Month Pay and C-P-L-G (other benefits) subject to 90,000 ceiling, excess is taxable
1. Christmas Gifts 5,000 and below
2. Productivity Pay – 10,000 and Below
3. Loyalty Award
4. Gifts in Cash or in Kind
7. Personal Expenses (Ex. Transportation Expense)
 FRINGE BENEFIT TAX

FRINGE BENEFITS → Under NIRC, pertain to goods, services or other benefits furnished to the employees.
Under labor laws, pertain to all other benefits or incentives of employees other than the basic pay.
Tax treatments of fringe benefits
a. Fringe benefits that are fixed every payroll period – regular compensation.
b. Fringe benefits that are variable and performance-based – supplemental.
c. Fringe benefits in terms of incentives – 13th month pay and other benefits.
d. Fringe benefits furnished for employer’s convenience or necessity – exempt from income tax.
Scope of FBT – covers only the taxable fringe benefits of managerial/supervisory employees.
General Categories of Fringe Benefits Subject to FINAL TAX
1. Management perquisites benefits – management perks
2. Employee personal expenses shoulder by employer
3. Taxable de minimis benefits
a. Excess de minimis benefits
b. Benefits not included in the de minimis list
Hybrid Expenses
When the employer incurs expenses which is purported partly for business and partly for employee’s incentive,
only 50% of the expense representing the employee incentive is subject to fringe benefit tax (which is a final tax)
Exempt Fringe Benefits
1. Fringe benefits which are authorized and exempted from under special laws. (SSS, PhilHealth, HDMF, Group
insurance)
2. Benefits required by nature, or necessary to the trade, business or profession of employer.
3. Benefits given to the advantage of the employer
4. Contributions of the employer for the benefit of the employee to retirement, insurance, hospitalization benefit
plans.
5. Benefit given to rank and file employees
6. De minimis benefits within their legal limits.

THE FRINGE BENEFIT TAX - A final tax imposed on the fringe benefit furnished, granted, paid by the
employer (individual, professional partnership, corporation, government
and its instrumentalities), except rank-and-file employees.

Characteristics of the FBT

1. Final tax
2. Tax upon the fringe benefits of managerial/supervisory employees
3. Paid by employer
4. Grossed up tax – the benefit taken home is net of the final tax thus the
monetary value (value taken home) needs to be grossed up by the
complement percentage of the applicable fringe tax.
5. Due quarterly – due on or before the last day of the month following the
quarter in which withholding is made.

Procedures in computing 1. Determine the monetary value.

the fringe benefit tax Monetary value - Taxable amount of benefits taken home which is
presumed net of the final tax.
2. Determine the gross up rate (complement of the fringe benefit tax rate)
and the fringe benefit tax rate.
3. Gross up monetary value = monetary value/gross up rate
4. Determine the fringe benefit tax (FBT=Gross-up MV x FBT rate)
Rules on Valuation of
Fringe Benefits Monetary Value
1. Benefits paid in cash Amount paid in cash
2. Benefits paid in kind - Whichever is higher of the FV
of the thing given or book
value (cost-depreciation)
- If ownership is transferred to
the employee, the monetary
value is the entire FV.
3. Benefits that are furnished - 50% of the rental value
(free use) - If no rental value, depreciation
value is used.
- *Real property – 1/20 or 5%
- *Movable – 1/5 or 20%

Fringe benefits, but not HEV-HIM-EHEL

limited to 1. Housing Benefits
2. Expense account
3. Vehicles of any kind
4. Household personnel, such as maid, driver, or others
5. Interest for the difference between market rate (12%) and the actual
interest granted.
6. Membership fees, dues, and other expenses borne by the employer for
employee in social and athletic clubs.
7. Expense for foreign travel
8. Holiday and vacation expense
9. Educational assistance to the employee family members
10. Life/health and other non-life insurance premiums similar accounts in
excess of what the law allows.

Taxable Housing Benefits 1. Employer leases a residential property for the use of his employee and the
said property is the usual residence of the employee. – monetary value is
50% of the rental
2. Employer owns a residential property and assign the same for use of
employee thus, annual value is 5% of whichever is higher of zonal or
assessed value – monetary value is 50% of the annual value.
3. Employer purchases a residential property on installment basis and allows
employee to use thus annual value is 5% of the acquisition cost, exclusive
of interest – monetary value is 50% of the annual value of benefit
4. Purchase by the employer of residential property and transfer ownership
to the employee – monetary value is 100% of whichever is higher of the
acquisition cost or zonal value
5. Purchase by the employer of residential property and transfer ownership
to the employee for less than adequate consideration – monetary value is
the higher between FV and zonal value less consideration paid by the
employee.
NOT SUBJECT TO FBT 1. Fringe benefits give to RANK/FILE employees (but subj to BTX)
2. Exempt housing benefits/privilege:
a. Military officials of the AFP, PAF, Philippine Army, Phil Navy which
are within or accessible from the Military camp.
b. Housing unit situated or adjacent to the premises of
business/factory (within maximum 50 meters)
c. Temporary housing for an employee in a housing unit for 3 months
or less.
3. Expenses incurred by the employee which are paid by employer and
expenses paid for by the employee but reimbursed by his employer:
a. Expenses duly receipted for and in the name of the employer.
b. Does not partake the nature of personal expense attributable to
the employee.
4. Allowances subject to liquidation (Tax exempt allowances)
a. Allowances not subject to liquidation → TAXABLE
b. Representation and transportation allowances which are FIXED IN
AMOUNTS and are regularly received by the employees part of
monthly compensation → (subj to BTX)

Taxable Expense Account Personal expenses incurred by an employee but are paid by the employer or
incurred and paid by employee but reimbursed by the employer are taxable fringe
benefits.
Taxable Motor Vehicles of 1. Purchase by employer in the name of the employee – monetary value is
Any Kind 100% of the cost of the motor vehicle.
2. Cash benefit to employee for the purchase of a vehicle, even if the vehicle
is partly used in the business of the employer – monetary value is 100% of
the cash benefit given.
3. Purchase a car on installment basis by the employer with ownership placed
in the name of the employee – monetary value is 20% of the acquisition
cost.
4. Employer shoulders a portion and is placed under in the name of the
employee – monetary value is portion shouldered by the employer.

5. Fleet of motor vehicles owned for the use of business and the employees,
the value of the benefit is the cost of all motor vehicles not used for sales,
freight, delivery service, and other non-personal uses – monetary value is
50% of the value of benefit.
6. Fleet of motor vehicles leased for the use of business and the employees,
the value of the benefit is rental of all motor vehicles not used for sales,
freight, delivery service, and other non-personal uses – monetary value is
50% of the value of benefits.
7. Yachts whether owned and maintained or leased by the employer are
presumed not for business use – the monetary value of benefit is 50% of
the 5% of the cost or in case of lease, the whole rental payment.

Exempt vehicle from fringe benefit tax:

1. Aircrafts – deemed solely for business.
Taxable household Employee expenses borne by the employer for household personnel salaries,
expenses salaries of household help, personal driver, and personal expenses are taxable
fringe benefits. The monetary value is the amount paid.
Taxable interest loan at Taxable at the difference between the actual interest and market rate of 12%
less than the market rate
of 12%
Membership fees, dues in Monetary value is the amount paid.
social or athletic clubs
Expenses for foreign Taxable fringe benefits:
travels - Foreign travels not related to business of his/her employment that are
borne by the employer is taxable fringe benefit. Monetary value is the
amount paid.
- Lodging cost excess of $300/day
- Expenses for the family members of the employee shouldered by the
employer is taxable in full.
- 30% cost of first-class ticket for foreign travel

Exempt from fringe benefit tax

- Reasonable business expense for foreign travel for attending business is
exempt, such as the ff:
a. Inland travel expenses such as food, beverage, and local transportation
cost.
b. Lodging cost amounting to $300/day or less
c. Economy and business class airplane tickets
d. 70% of the cost of the first-class ticket
Holiday and Vacation If paid by the employer, it is a taxable fringe benefit. Monetary value is the amount
expenses paid.
Educational Assistance to - Generally educational assistance is taxable.
the employee or his
dependents. Exempt from FBT:
▪ To the EMPLOYEE
a. Directly connected with the employer’s business.
b. There is a written contract that the employee is under obligation to
remain in the employ of the employer
▪ To the DEPENDENTS
a. Provided through competitive scheme under the scholarship program of
the company
Life/health and other These are taxable fringe benefits except:
non-life insurance 1. Contributions of employee for SSS, PhilHealth, GSIS, and HDMF
premiums similar 2. Cost of premium for group insurance of employees.
accounts in excess of
what the law allows.
Fringe benefit tax rate
Employees Tax rates
RC, Non-resident citizens, resident aliens 35%
NRA – NETB 25%
NRA – ETB 25%

Employees
RC, NRC, RA NRAs
Monetary Value* xx xx
÷ GUMV Factor 65% 75%
GUMV xx xx
X FBT rate 35% 25%
FBT XX XX

*MONETARY VALUE
Money Amount of money
Non-cash property w/ transfer of ownership FMV or ZV
Non-cash property w/o Depreciation Value
Employer lends money free of interest Principal x 12%
Employer lends money at lower than 12% Principal x (12% - Actual Rate)

ACCOUNTING ENTRIES 1. Taxable benefits paid for in cash or in kind.

Fringe benefit expense (monetary value) xxx
Fringe benefit tax expense xxx
Cash/Tax basis of property given xxx
Fringe benefit tax payable xxx

2. Taxable benefits which do not involve payment of cash or transfer of

property.
Fringe benefit expense (monetary value) xxx
Fringe benefit tax payable xxx

3. Exempt benefits paid for in cash or in kind

Fringe benefit expense (monetary value) xxx
Cash/Property given xxx

4. Exempt benefits which do not involve payment of cash or transfer of

property.
No entry is required.
Tax Treatment of the Fringe benefit expense plus the fringe benefit tax expense is a deductible expense
Total Fringe Benefit Tax of the EMPLOYER against his gross income in the computation of taxable income.
Filing of Return - Shall be remitted by the employer to BIR within 10 days after the end of
each calendar quarter.
- For EFPS, 5 days after the end o each calendar quarter
 DEALINGS IN PROPERTIES

Dealings in ordinary assets Regular Income Tax Ordinary gain/ordinary loss

Dealings in capital assets, other than domestic Regular Income Tax Capital gain/capital loss
stocks and real properties

Determination of Gains or Losses in Dealings in Properties

Selling price P xxx
Less: Tax basis or adjusted basis of the asset disposed xxx
Gain or loss P xxx
Selling price – sum of money received, and fair value of non-cash properties received.
Tax basis – cost, carrying amount or depreciated cost of an asset
Tax Treatment of Ordinary Gains and Losses
▪ Ordinary gain – taxable in full
▪ Ordinary loss – deduction in full

Tax Treatment of Capital Gains and Losses

▪ Net Capital gain – item of gross income subject to regular income tax
▪ Net Capital loss – NOT an item of deduction against gross income
▪ Capital loss carry over is strictly for one year only and is applicable only to individual taxpayers.
Corporate taxpayers are not allowed under the NIRC to carry over net capital loss.
▪ There is no capital loss carry-over when the taxpayer incurs a net operating loss in the period the net
capital loss was sustained and when the following year results to a net capital loss.
Determination of net capital gain or net capital loss
A. INDIVIDUAL TAXPAYERS (HOLDING PERIOD RULE):
a. < 12 months (short-term holding period) – 100% of the capital gain or loss is recognized.
b. > 12 months (long-term holding period) – 50% of the capital gain or loss is recognized.

Nondeducibility of Net Capital LOSSES – Only up to the extent of capital gains, net capital loss is not deductible.
NCLCO is allowed.
Net Capital Loss Carry Over
▪ Allowed for INDIVIDUAL TAXPAYERS as a deduction against NET CAPITAL GAIN of the following year
subject to the following limits:
1) Actual NCL
Lowest 2) Limit 1 – net income in the year of the capital loss was sustained.
3) Limit 2 – available net capital gain in the ff. year

▪ Strictly for ONE YEAR ONLY and DOESN’T APPLY to CORPORATE TAXPAYERS.

B. CORPORATE TAXPAYERS – 100% of capital gain or loss is recognized.

Capital losses are allowed only to the extent of capital gains; hence, net capital losses are not deductible.
NCLCO is not allowed.

Situs on Dealings in Properties

▪ If taxable on world income, rules of dealings in properties apply to all properties regardless of location.
▪ If taxable only on Philippine income, the rules of dealings in properties will be applied only to properties
located in the Philippines
SPECIAL RULES IN THE DETERMINATION OF TAX BASIS
A. For assets acquired by purchase, the tax basis is the: C. For assets received by way of gratuitous title:

1. Acquisition cost for: 1. Donation – whichever is lower of:

▪ Capital assets a) the tax basis on the hand of the donor or the
▪ Non-depreciable ordinary assets such as land last preceding owner by whom it was not
▪ Any asset purchased for an inadequate acquired by donation or
consideration or those acquired at less than b) fair market value at the date of gift
their fair value at the date of acquisition 2. Inheritance – fair value of the property on the date
2. Depreciated cost for depreciable ordinary assets of the decedent
Acquisition costs include the purchase price, tax
assumed, and acquisition-related costs such as
commissions paid in acquiring the asset.
B. Other assets received by exchange; fair value of D. For shares received by way of tax-free exchanges.
asset received
Taxable Exchanges
1. Share-for-share swap transactions or property-for-share transaction that are not in pursuant to a plan
of merger or consolidation are taxable. Losses are recognized subject to the applicable tax rules.
2. Transfer of properties to a corporation alone or with four others which did not result in the acquisition
of corporate control.
3. Transfer of properties to a controlled corporation after the initial acquisition of control is taxable. Losses
are non-deductible since the transferee is a related party to the transferor
Gain on sale of indebtedness with maturity of more than 5 years shall not be subject to income tax
WASH SALES
The wash sales rules discussed under CGT also apply to the regular income tax particularly to sale by non-dealers
of securities of:
a. Foreign shares
b. Debt securities, foreign or domestic
TRANSACTIONS CONSIDERED EXCHANGES
The following are therefore subject to the rules of dealings in properties:
1. Retirement of bonds, debentures, notes, or certificates and other evidence of indebtedness
2. Short sale of properties
3. Failure to exercise a privilege or option to buy or sell property shall is a capital asset
4. Security becoming worthless.
5. Receipt of liquidating dividends
6. The amount received in liquidation of a partnership is also deemed in exchange of the partner’s
interest on the partnership.
7. Redemption of shares for cancellation or retirement by a corporation is considered exchange to an
investor, but not to the redeeming corporation.
8. Voluntary buy-back of shares to be held in treasury is considered exchange to the investor, but not to
the corporate issuer of the shares.
 PRINCIPLES OF DEDUCTIONS

Deductions from gross income pertains to business incurred by a taxpayer engaged in business or engaged in the
practice of profession.
Business means habitual engagement in a commercial activity involving the regular sale of goods and services to
a customer. In taxation, the term business is generally used to include the exercise of the profession. Self-
employment is a business, but employment is not a business.
Business Expense vs. Personal Expense
Business expense are costs of doing trade, business or Personal expenses include the living and family
practice of profession such as employee salaries, office expenses of individual taxpayers such as family food,
utilities, supplies and rent, taxes, losses, bad debts, personal recreation and transportation, medication,
depreciation on business properties, research and home rentals and utilities, tuition fees of dependents,
development, and the like and other similar expenses.
Allocation of common expenses
- Expenses that are intended for both the business and for personal use of the taxpayer are allocated
between the two. Only those that pertain to the business are deductible.
Business Expense vs. Business Capital Expenditure
Business expenses benefit only the current Capital expenditures are expense that benefit future
accounting period. These are costs of generating accounting periods. These are initially recorded as
income or gains for the current period. Hence, these assets upon acquisition then later deducted against
are deductible against gross income in the current future gross income when used in the trade,
period. business or profession of the taxpayer. The advance
▪ Salaries and wages expense deduction of capital expenditures is not warranted as
▪ Utilities expense it contradicts the Lifeblood Doctrine.
▪ Selling expense ▪ Items of PPE
▪ Rent Land used/intended to be used in the business.
▪ Local taxes and permits Depreciable properties

▪ Inventory – for sale/supplies used

▪ Investments – earn from appreciation
▪ Prepayments - advance
▪ Acquisitions of intangible assets such as
patent or franchise, including costs of
defending the same in court - amortized
▪ Expenses to promote business goodwill
▪ Rental on capital lease or finance lease that
transfer ownership – “rent to own”

Rules on Deducting Capital Expenditures

1. Non-depreciable asset
- The cost of assets that do not depreciate such as land is deducted against the selling price when sold.
2. Depreciable properties
- The "depreciable cost" or the acquisition cost, net of expected salvage value, is allocated as deduction
over the useful life the property. The useful life of the property is the length of time it is expected to be
serviceable or its legal life, if applicable, whichever is lower.
- Depreciable property is allowed to have depreciation accounted for over the useful life, such as vehicle, machine,
or building. Depreciable property must be used for business purposes and have a determinable useful life in excess
of one year.

Useful Life and Depreciation Rate

Under the NIRC, the taxpayer and the CIR may enter into a written agreement on the estimated useful
life and rate of depreciation of any property. Such agreement shall be binding on both the taxpayer and
the Government in the absence of facts and circumstances not taken into consideration during the
adoption of the agreement.
Any change in the agreed rate and useful life shall be applied prospectively.

Depreciation methods
The taxpayer may choose from the following methods:
a. Straight line method
The depreciable cost is simply spread equally over the useful life.
(Acquisition cost – salvage value) / useful life in years

b. Sum-of-the-years-digit method
n x (n + 1) /2
where “n” is the useful life of the asset
 c. Declining balance method (150% or 200%)
The salvage value is initially ignored but is considered in the terminal year of the property.

200%
Declining balance = SL rate x
150%

d. Other methods which may be prescribed by the Secretary of Finance upon recommendation
of the Commissioner of Internal Revenue

3. Intangible assets
Amortizable intangible assets or those that lose their value over time should be expensed over their
legal life or expected usage life, whichever is lower.
Intangible asset shall not be amortized when it does not lose their value, such as franchise of public
utility vehicles.
4. Inventory
For goods inventory and supplies, their costs are deducted when sold or used in the business using
inventory method or the specific identification method with the aid of the Point-of-Sale (POS) machine.
Beg. Inv + Net purchases – Ending Inventory = COGS
If supplies and tools, the resultant figure is referred to as “supplies expense” not COGS
applicable to taxpayers using either cash basis or accrual basis
5. Prepaid expenses
Prepayments are deducted in the future period as they expire or as they are used in the business or
profession of the taxpayer.

Note: The acquisition of items of property, plant and equipment, inventories or prepayments of expenses which
are immaterial in amount may be deducted outright as expense upon acquisition - this will not materially distort
net income.

SPECIAL CONSIDERATIONS WITH DEDUCTIONS

1. PROPERTY REPAIRS AND IMPROVEMENTS
▪ Repairs that significantly increase the value or prolong the useful life of properties are capital
expenditures.
▪ Repairs that merely restore the value of functionality of the property without causing increase in fair
value or useful life of the property shall be deducted as outright expense.
▪ If the fair value of the property increases due to repairs, improvements or additions, the actual cost of
the repairs, improvements or additions should be capitalized not to exceed the appreciation in fair
value.
▪ If the fair value of the property is not determinable, the excess of the actual repair cost over the tax
basis of the property is presumed a capitalizable increase in fair value.

Note: Improvements and additions to properties normally increase the value or useful life of properties; hence, these are
capitalized and depreciated.

Replacements of old or destroyed properties

capitalized as new expensed/deductible as a loss

Cost of demolishing old buildings

If acquired a land with an old building that was not intended to be used by the buyer – additional cost
to the land
If decided to replace the old building with a new one – the cost will be capitalized to the new building

2. ASSET ACQUISITION-RELATED COSTS

All cost directly related to the acquisition of an item of PPE are capitalizable.
Expenses incurred to acquisition of goods are capitalized to the Cost of the goods and are expensed
through COGS.
Cost of financing asset acquisition may, at the option of the taxpayer, be expensed outright or
capitalized and depreciated.

3. SECURITY ISSUE COSTS

Expenses of issuing equity or debt securities are not deductible expense against gross income. They are
deducted against the proceeds of such securities.

4. MANUFACTURING EXPENSES
Plant or factory expenses are capitalized as part of the cost of the goods being processed and are
expensed through COGS.
 5. EFFECT OF ACCOUNTING METHODS ON DEDUCTIONS
The methods adopted by the taxpayer in accounting for expense have a significant bearing on the
deductible expense.
▪ Cash basis – expenses are deductible when paid regardless of when they accrue.
▪ Accrual basis – expenses are deductible when they accrue regardless of when they are paid.
▪ However, prepayments and capital expenditures cannot be deducted outright.

6. EFFECT OF VALUE ADDED TAX ON DEDUCTIONS

When purchases of goods or services are made from VAT suppliers, taxpayers will pay the VAT passed-
on by the supplier.
▪ To the seller’s perspective – OUTPUT VAT
▪ To the buyer – INPUT VAT
What’s the Treatment of INPUT VAT?
a. For VAT taxpayer – INPUT VAT is claimable as tax credit against OUTPUT VAT; hence, not
claimable as deduction.
b. For non-VAT taxpayer – INPUT VAT is part of costs of the purchase or expense of the taxpayer;
hence, claimable as deduction.

GENERAL PRINCIPLES OF DEDUCTIONS FROM GROSS INCOME

1. Expenses must be Legitimate, Ordinary, Actual and Necessary (LOAN)
▪ Legitimate incurred in current taxable period
not a capital expenditure
business/profession of the taxpayer
not contrary to law, public policy, or morals
adequately substantiated with receipts/documents
▪ Ordinary normal in relation to the business and surrounding circumstances
normally incurred by other taxpayers in the same industry/line of business
▪ Actual paid/resulted to an incurrence of obligation
closed and completed transaction
no further transaction emanates from its occurrence
▪ Necessary reasonable and essential

Examples of non-deductible expense under this rule:

1. Decrease in value of properties or investments
2. Estimated future losses
3. Loss on properties received by insurance or indemnity contracts

2. The Matching Principle

Only business expenses which contribute to or are incurred in connection with the generation of
income, gain, or profits subject to regular income tax are deductible.

Examples of non-deductible expenses under this rule:

1. Expense on exempt income
2. Expenses on income subject to a special tax regime
3. Business expenses of taxpayers subject to final income tax
4. Expenses and taxes on income subject to final tax or capital gains tax
5. Foreign business expenses of taxpayers taxable only on Philippine income
6. Loss of income not yet recognized in gross income

3. The Related Pary Rule

Gains realized between related parties are taxable, but losses are non-deductible.
The rule is intended as a control measure due to the fact that related party transactions can be easily
tailored in a way to evade taxes.
Who are related parties?
▪ Members of a family
▪ Except in cases of distribution in liquidation, the direct or indirect controlling individual of a
corporation
▪ Except in cases of distribution in liquidation, corporations under direct or indirect common
control by or for the same individual
▪ Grantor and fiduciary of any trust
▪ Fiduciaries of trusts with the same grantor
▪ Fiduciary of a trust and the beneficiary of such trust

4. The Withholding Rule

Payors of income are required to withhold income taxes on their payments. The failure to comply with
this requirement shall result in the disallowance of the expense as deduction. The rule is “no
withholding, no deduction.”
 Types of Withholding Taxes:
Types Expense type BIR Form Deadline
a. Withholding tax on Compensation 1601-C
compensation expense On or before the 10th day of
Certain passive 0619-F the month following the
b. Final withholding tax income and fringe month in which withholding
benefits was made. For EFPS filers,
Other income their respective group
payments which deadlines apply.
c. Expanded withholding tax are subject to 0619-E
regular tax on the
recipient

SUMMARY OF EXPANDED WITHHOLDING TAX RATES:

Payments to suppliers of goods, in general 1%*
Payments to suppliers of services, in general 2%*
1. Rentals of properties or films and toll fees to refineries 5%
2. Professional services to:
a. individual professionals, brokers, agents, entertainers 5% or 10%
b. corporations 10% or 15%
c. general professional partnerships 0%
3. Embalmers by funeral companies 1%
4. Additional payments to government personnel from 15%
importers, shipping and airline companies or their agents for
overtime services
Income distribution by
1. Estates and trusts to heirs or beneficiaries 15%
2. General professional partnership to partners 10%
Payments made by credit card companies ½ of 1%
*1% and 2% withholding rates apply to top withholding agents only
✓ Professionals/Corporate taxpayer must submit a Sworn declaration – gross receipts/income
does not exceed P3,000,000/P720,000 in a year.

The withholding agent-payor must release to the recipient or payee of the income payments copies
of evidence of the withholding:
a. BIR Form 2306 (Certificate of final tax withheld at source)
b. BIR Form 2307 (Certificate of creditable tax withheld at source)
For income not subject to withholding tax – BIR Form 2304 (Certificate of income payments not
subject to withholding tax)

Timing of withholding
Whichever comes first:
a. Payment
b. When the income payment becomes due or payable
c. Recording of the income payment as expense or asset in the books

Late payment of withholding taxes

Under the new rule, the BIR held that expenses will still be deductible even if the withholding tax,
surcharge including interest of such late withholding is paid at the time of audit investigation or
reinvestigation.

PERIOD FOR WHICH DEDUCTIONS AND CREDITS ARE TAKEN

- Taxable year paid or accrued, depends on the method of accounting employed by the taxpayer, unless
if the deductions should be taken as of a different period in order to clearly reflect the income.

TAX REPORTING CLASSIFICATION OF DEDUCTIONS MODE OF CLAIMING DEDUCTIONS FROM

1. Cost of sales or cost of services GROSS INCOME
2. Ordinary allowable itemized deductions
1. Itemized deductions
3. Special allowable itemized deductions
4. Net Operating Loss Carry Over (NOLCO) 2. Optional standard deductions

EXTENT OF DEDUCTIBILITY OF DEDUCTION CLASSIFICATION

Cost of sales or cost of services Current and future period through NOLCO
Ordinary allowable deductions Current and future period through NOLCO
Special allowable deductions Current period only
NOLCO 3-year period
 ORDINARY ALLOWABLE ITEMIZED DEDUCTIONS

ITEMIZED DEDUCTIONS FROM GROSS INCOME

1. INTEREST EXPENSE
Requisites on the deductibility of interest:
1. There is valid indebtedness / interest expense must be the obligation of the taxpayer.
2. The indebtedness is connected with taxpayer’s business / profession.
3. There is a liability to pay interest on the debt (legally due) and the interest must have been paid or
accrued within the year.
4. It must be stipulated in writing

Non-deductible interest expense:

1. Related Party
2. Interest Expense to finance petroleum operations
3. If treated as capital expenditure – (Capitalizable Borrowing Cost)

Amount of Interest Expense xx

Less: 20% of Interest Income subject to Final Tax (arbitrage limit) (xx)
Deductible Interest Expense xxx

Rationale of the arbitrage limit

Intended to recover the tax savings of taxpayers who take advantage of higher regular tax savings
created from interest expense deduction and a lower final tax on deposit interest income.
Determination of Arbitrage Limit
(Corporate income tax rate – final tax on interest income) / Corporate income tax rate

Note: It is noteworthy to consider that there is no arbitrage for qualified MSMEs subject to 20%
corporate tax. Additionally, the revenue regulations currently exempt thrift banks from the coverage
of the arbitrage limit.
Discount or pre-deducted interest is a prepayment – not deductible upon release of the loan.

Optional treatment of interest expense – at the option of the taxpayer:

1. as an expense – deduction from gross income
2. as a capital expenditure – part of the cost of the property acquired/claimable through depreciation

Other deductible interest expense

1. Interest from tax delinquency
2. Interest from scrip dividends

2. TAXES
Taxes paid or incurred within the taxable year in connection with the taxpayer’s trade, business, or
exercise of profession shall be allowed as deduction except:
▪ Philippine income tax except fringe benefit tax Other non-deductible taxes
a. Final income tax
b. Capital gains tax 1. Business taxes, in particular the
c. Regular income tax Value added tax
▪ Foreign income tax, if claimed as tax credit
▪ Estate tax and donor’s tax 2. Surchargers or penalties on
▪ Special assessment delinquent taxes

Examples of deductible taxes:

1. Percentage tax 6. Fringe benefit tax
2. Excise tax 7. Local taxes except special assessment
3. Documentary stamp tax 8. Community tax
4. Occupational tax 9. Municipal tax
5. License tax 10. Foreign income tax if not claimed as tax credit

Note: Only the basic tax of a deductible tax is allowable as deduction. Tax surcharges for late
payments are non-deductible.

FOREIGN INCOME TAX – either be claimed as:

1. Deduction
2. Tax credit
 Determination of Foreign Tax credit: One foreign country
The foreign tax credit shall be the lower of the actual foreign income tax paid and the following
limit:
Foreign taxable income X Philippine income tax due
World taxable income

Determination of Foreign Tax credit: With multiple foreign countries

The final foreign tax credit shall be the lower of the total of the tax credit allowable per country
and the world income tax credit limit computed as follows:
Total foreign taxable income X Philippine income tax due
World taxable income

3. LOSSES
Requisites for the deduction of losses
1. It must be incurred in trade, profession, or business of the taxpayer. (The loss must be a business
loss, not a personal loss.)
2. It must pertain to property connected with the trade, business or profession, if the loss arises from
fires, storms, shipwrecks, or other casualties, or from robbery, theft, or embezzlement. (The loss must
be an ordinary loss.)
3. The loss must not be compensated by insurance or indemnity contract. (The loss must be actually
sustained, not temporary.)
4. A declaration of loss must have been filed by the taxpayer within 45 days from the date of discovery
of the casualty or robbery, theft or embezzlement giving rise to the loss.
5. The loss must not have been claimed as deduction for estate tax purposes in the estate tax return.
(Double deduction is not allowed.)

Types of losses
1. Ordinary loss – deductible in full
2. Capital loss – deductible only up to the extent of capital gains

Examples of deductible ordinary losses

a. Loss on disposal or destruction of any ordinary asset
b. Loss due to voluntary removal of building incident to renewal or replacement
c. Permanent or irreversible loss in value of assets
d. Abandonment loss

Rules on restoration or replacement of destroyed properties

1. Total destruction of properties – if the restoration involves total replacement of the previous
property, the tax basis of the old property shall be claimed as a loss while the entire replacement
cost is capitalized as cost of the replacement property subject to allowance for depreciation.
2. Partial destruction of properties – if the restoration involves partial replacement shall be
expensed up to the extent of the tax basis of the property immediately before the casualty. Any
excess is capitalized subject to allowance for depreciation.

Loss of value of assets – not deductible

Loss on Insured Property – excess is a deductible loss in the year of insurance settlement
Abandonment losses – allowed as a deduction
Losses from wagering transactions or passive activities – deductible only up to the extent of the
gains from the same transaction

4. BAD DEBTS
Requisites of claim for deduction of bad debt:
1. The debt must have been ascertained to be worthless.
2. It must be charged off within the taxable year.
3. It must be connected with the taxpayer’s profession, trade or business.
4. The taxpayer must be under the accrual basis of accounting.
5. It must not be incurred from a related party
5. DEPRECIATION
Special Rules on Depreciation
1. Life tenancy to a property - the deduction shall be computed as if the life tenant was the absolute
owner of the property.
2. Properties held in trust - the allowable deductions shall be apportioned between the income
beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating
the trust.
3. Revaluation on properties - not allowed to deduct the depreciation of the revaluation surplus on the
value of property as this is not an actual cost.
Impairment losses- not deductible, only if sustained through disposal/retirement of asset
4. Rules on depreciation of passenger vehicles
6. DEPLETION – For wasting assets such as minerals, gas, and oil.
Stages of wasting asset activities:
Exploration period → Development → Commercial production

Common rules for both mining and oil operations

1. Costs of acquisition or improvement of tangible properties.
Capitalized and deducted through allowance for depreciation subject to the following rules:
▪ Petroleum operations used directly – SL method/DB method – 10 yrs. useful life or shorter.
▪ Not used directly – SL method – 5 yrs. useful life
▪ Mining Operations – If 10 yrs. or less – normal rate of depreciation
If more than 10 yrs. – any number of yrs. between 5 and 10

2. Intangible exploration, drilling, and development costs.

A. Before commercial production – capitalized as cost of the wasting asset
B. After commencement of commercial production, if incurred with:
a. Capitalized and amortized using the cost-depletion method or
b. Deducted in the year paid or incurred

Treatment of exploration and development costs – costs incurred before commercial production are
capitalized as cost of the wasting asset. These will be deducted as depletion expense using the
cost-depletion formula:

Tax basis of wasting assets X Units extracted/Total Estimated Units*

*Total estimated units = units extracted for the year + estimated remaining units

The Expense Option on Non-producing Mines – deducted outright, but the deductible amount shall
not exceed 25% of the net income from mining operations.
7. CHARITABLE AND OTHER CONTRIBUTIONS
Requisites of claim for deduction on contributions:
1. The done institution must be a domestic institution.
2. No income of the donee institution must inure to the benefit of any private stockholder or individual.
3. The contribution must be valued at the tax basis of the property donated.
4. The taxpayer must be engaged in trade or business
5. The donee must issue a Certificate of Donation (BIR Form 2322) which includes a donor’s statement
of values.
6. If the amount of donation is at least P50,000 the donor shall file a Notice of Donation to the RDO
where he is registered within 30 days upon receipt of the Certificate of Donation.

Donations that fail any of the requisites are non-deductible. Those that meet the requisite are either:
a. Fully deductible
b. Partially deductible (deductible subject to limit)

Classification of contributions
A. Fully deductible contributions (Mnemonics: PTA)
1. Donations to the government or political subdivisions used exclusively in undertaking Priority activities
as determined by the National Economic Development Authority (NEDA) in:
a. Education c. Youth and sports development e. Culture and sports
b. Health d. Human settlements f. Economic developments

2. Donations to foreign institution in compliance with agreements, Treaties, or special laws

Note: this is an exception to the rule that the done institution must be a domestic organization .
3. Donations to Accredited domestic non-government organizations.
Requisites for full deductibility of contributions to accredited NGOs
1. The NGO must be organized and operated exclusively for the above purposes, and no income
inures to the benefit of any private individuals.
2. The non-profit organization makes utilization of the contribution not later than the 15th day
of the 3rd month after the close of its taxable period.
3. The administrative expenses of the NGO do not exceed 30% of its total expenses.
4. Members of the Board of Trustees must not receive remunerations.
5. In the event of liquidation, the asset of the NGO will be distributed to another non-profit
domestic corporation organized for similar purpose.
6. The amount of contribution of property other than money must be valued at acquisition cost.

B. Contributions subject to limit Limit of deduction for contributions

1. Not in accordance with priority activities
a. 10% for individuals
2. Non-accredited NGOs
b. 5% for corporations
 8. CONTRIBUTIONS TO PENSION TRUSTS
Types of Employee Pension Plans:
1. Defined contribution plan – employer does not guarantee the amount of benefits to the employees.
Contribution = Expense (deductible already)

2. Defined benefit plan – employer guarantees the amount of benefits to the employees.
Contribution is either or both:
Current service cost – deductible in full
Prior service cost – amortized for 10 years

Requisites of deductibility of pension expense

1. The employer must have established a pension or retirement fund to provide for payment of reasonable
pension to employees.
2. The actuarial assumptions used by the fund must be sound and reasonable.
3. The fund must be actually funded by the employer.
4. The fund assets must be independent from and not subject to the control or disposal of the employer.
5. Contribution for current service cost is deductible in full.
6. Contribution for past service cost is amortized over a period of 10 years.
9. RESEARCH AND DEVELOPMENT (R&D) COSTS
Tax Treatment of R&D Costs
1. Related to capital accounts/capital expenditure = capitalized as asset and deducted through
depreciation expense.
2. Not related to capital accounts/capital expenditure = option of the taxpayer to expense outright or
deferred for a minimum of 60 months.
10. EXPENSES, IN GENERAL
Other legal, ordinary, actual, and necessary expenses of business can be claimed by the taxpayers as
long as there are substantiated with official receipts or other pertinent records.
ENTERTAINMENT, AMUSEMENT, AND RECREATION (EAR) EXPENSE
Requisites of deductibility of EAR Expense
1. Paid incurred during the taxable year.
2. Related to the furtherance of the business.
3. Not contrary to law, morals, good customs, public policy, or public order.
4. Receipted to the business of the taxpayer.
5. Substantiated with adequate proof.
6. Correctly withheld and paid to the BIR.

Ceiling on Deduction:
▪ Sale of goods or properties – 0.5% of net sales gross sales less sales returns, allowances, and sales
discounts.
▪ Sale of services – 1% of net revenues gross revenue less discounts.
▪ Sale of both goods and services – formula:
Net sales/Net revenue X Actual EAR
Total net sales and net revenue

Transfer to reserve fund and payments to policies and annuity contracts of insurance companies
- Not actually an ordinary business expense but a legal requirement. It is a special deduction but the
regulations expressly include it as part of ordinary allowable itemized deductions.
 SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET OPERATING LOSS CARRY-OVER (NOLCO)

SPECIAL ALLOAWBLE ITEMIZED DEDUCTIONS – no actual expenses, grant/incentives only.

Deduction Incentives Under Additional deduction Requisites Limit

Special Laws
Compensation Expense for 15% of compensation to1. Employment shall have to None
Senior Citizen Employees senior citizen belowcontinue for at least 6 months.
poverty level 2. The annual taxable income of
the senior citizen does not exceed
the poverty level as determined
by the NEDA
Compensation Expense for 25% of compensation to 1. The entity presents proof as None
PWDs PWDs below poverty level certified by the Department of
Labor and Employment that
disabled persons are under their
employ.
2. The disabled employee is
accredited with the Department
of Labor and Employment and the
Department of Health as to his
disability, skills, and qualifications.
PWD facility improvement 50% of improvement cost
Jewelry training expense 50% of training expense 1. A qualified jewelry enterprise None
must submit to the BIR a certified
true copy of its Certificate of
Accreditation issued by the BOI.
2. The training scheme must be
approved and certified by TESDA
Apprenticeship labor training 50% labor training 1. Apprenticeship agreement 10% of
expense expense between the enterprise and the direct labor
trainees pursuant to the Labor wage
Code of the Philippines.
2. Certification from Dep-Ed,
TESDA, or CHED secured by the
enterprise
3. The amount of deductions shall
not exceed 10% of direct labor
wage.
Adopt-a-School Act of 1998 50% of actual 1. The deduction shall be availed
(RA 8525) contributions of in the taxable year in which the
*Public school expense is paid or incurred.
2. The expense is substantiated
with sufficient evidence such as
official receipts, delivery receipts,
and other adequate records
which shall set forth the
following:
a. The amount of expenses being
claimed as deductions.
b. Direct connection or relation of
the expenses to the adopting
private entity’s participation in
the Adopt-a-School Program.
c. Proof or acknowledgement of
receipt of the contribution or
donated property by the recipient
public school.
3. The application together with
the approved MOA endorsed by
the National Secretariat shall be
filed with the RDO having
jurisdiction over the place of
business of the adopting private
entity, copy furnished the RDO
having jurisdiction over the
property, if the contribution is in
the form of real.
 Breastfeeding promotion 100% of expense incurred 1. The deduction shall apply for
the taxable period when the
expenses were incurred.
2. All health or non-health
facilities, establishments and
institutions shall comply with the
IRR of RA 10028 within 6 months
after its approval.
3. The facility, establishment or
institution shall secure a “Working
Mother-Baby-Friendly Certificate”
from the Department of Health to
filed with the BIR.
Free Legal Assistance Value of actual free legal 10% of
service gross
income
from legal
profession
Productivity Bonus 50% of productivity bonus None
Manpower training or special 50% of grant to rank-and- None
studies file employees

SPECIAL DEDUCTIONS UNDER THE NIRC OR SPECIAL LAWS

INCOME DISTRIBUTION MADE BY TAXABLE ESTATES OR TRUSTS

- Special deduction against the gross income of the estate or trust

DIVIDEND DISTRIBUTION OF A REAL ESTATE INVESTMENT TRUST (REIT)

- A REIT is legally mandated to distribute 90% of its distributable income as dividends to shareholders.
- The dividend distributions of REITs are treated as special deductions against gross income.

TRANSFER TO RESERVE FUND OF COOPERATIVES

- The amount transferred to the reserve fund out of the net surplus from unrelated activities is an item of
deduction in the computation of the taxable net income of the cooperative.

THE EXPANDED SENIOR CITIZENS ACT OF 2003 (RA 9257)

- The discounts granted to senior citizens (20%) by covered establishments and service providers are allowed
as special deductions against gross income.
Conditions for deductibility of sales discounts to senior citizens
1. Only the portion of the gross sales exclusively used, consumed, or enjoyed by the senior citizen.
2. The gross selling price and the sales discount must be separately indicated in the official receipt or sales
invoice.
3. Only the actual amount of the discount granted or sales discount not exceeding 20% of the gross selling
price, net of VAT, if applicable.
4. Allowed as deduction from gross income for the same taxable year that the discount is granted.
5. The business establishment giving sales discount to qualified senior citizens is required to keep a
separate and accurate record of sales which shall include the name, TIN, ID, gross sales/receipts, discounts
granted, date of transaction, and invoice number.

DISCOUNTS TO DISABLED PERSONS (RA 7277)

- The discounts to persons with disability (20%) shall be allowed as a special deduction under the same terms
and conditions as those for senior citizens.
NET OPERATING LOSS CARRY-OVER

NOLCO is intended to allow the taxpayer to recoup his losses before taxation go full swing. Without NOLCO, income
taxation would result in taxation of recoveries of lost capital.

All taxpayers subject to tax on taxable income whether at the regular income tax or at preferential tax rate can
deduct NOLCO. Taxpayers who are exempt, enjoying a tax holiday, subject to tax on gross income, or those subject
to final income tax, cannot deduct NOLCO.

Gross income subject to regular income tax P xxx,xxx

Less: Ordinary allowable itemized deductions (xxx,xxx)
Net operating loss carry-over (P xxx,xxx)

Deduction incentives are not actual costs or expenses that’s why they cannot be included in the amount of
net operating loss carry over.
Deduction rules in the measurement of taxable net income or NOLCO
Sequence Deduction classification Deduction limit
1st Cost of sales / cost of services None, fully deductible
nd
2 Ordinary allowable deductions None, fully deductible
3rd Special allowable deductions Up to net income before SAID
th
4 Net operating loss carry over Up to net income after NOLCO

Treatment of NOLCO
- Treated as a separate item of deduction in the next three (3) consecutive taxable years to the extent of
the available net income before NOLCO deduction in those periods.
Requisites for the deductibility of NOLCO:
1. The taxpayer must not be exempt from income tax during the taxable year when the NOLCO was incurred.
2. There has been no substantial change in the ownership of the business or enterprise.
at least 75% of either paid up capital or nominal value

Rationale of the Disallowance of Carry-over of Net Operating Loss

Deductions are of no benefit to the taxpayer in an exempt year, hence, NOL should not be given value by
carry-over as this would cause undue enrichment to the taxpayer.

Rationale of the Rule on Substantial Change in Ownership

NOLCO is no longer allowed if there is a substantial change in ownership because the owners for whom the loss
recoupment is intended are no longer in the business. NOLCO is a privilege that is not transferrable.
Rules in Carry-Over of NOLCO
1. NOLCO is claimable in a first-in-first-out (FIFO) fashion.
2. NOLCO can be claimed only up to the extent of the business net income in the next three years.
3. Any NOLCO which remains unused at the end of the three-year perspective period will expire.

NOLCO FOR INDIVIDUAL TAXPAYERS

is measured by separating compensation income from business or professional income.

Special Rule on NOLCO for Mining Companies – allowed to carry over a period of 5 years.

NOLCO and Net Capital Loss Carry Over

NOLCO is deductible against available net income in the next three years of operation. Net capital loss carry-over
is deductible only up to the extent of the net capital gain in the immediately following year.

Merger and Consolidation

The acquired business is referred to as the “assignor” or “transferor” and the purchaser as the “transferee” or
“assignee”. In accounting, the assignor is called the “acquiree” while the purchaser is called the “acquirer.”

NOLCO of the Acquirer – continues to be deductible even after merger or consolidation so long as there is no
substantial change in ownership.

NOLCO if the Acquiree – NOLCO is not allowed as deduction when there is a substantial change in ownership of
the business. NOLCO is not a transferrable right, privilege, or interest.
 OPTIONAL STANDARD DEDUCTION

OSD – in lieu of allowable itemized deductions including NOLCO.

Who can claim OSD?
All taxpayers who are subject to tax on taxable net income can claim deductions except:
1. Non-resident alien engaged in trade or business (NRA-ETB)
2. Taxpayers mandated to used itemized deductions, such as:
a. Exempt taxpayers with no income subject to regular income tax
b. Taxpayers with income solely subject to special or preferential tax rates

The option to elect OSD or itemized deduction must be made in the first quarter return. Such election when made
shall be irrevocable in the taxable year for which the return is made.

PERCENTAGE OF OPTIONAL STANDARD DEDUCTIONS

1. Individual taxpayers – 40% of total sales/revenues/receipts/fees
a) Those selling goods under accrual basis – 40% of gross sales
b) Those selling services under the cash basis – 40% of gross receipts
c) Those selling services under the accrual basis – 40% of revenue
2. Corporate taxpayers – 40% of gross income

What items of deduction does the OSD replaces?

Item of deduction Individual OSD replaces Corporate OSD replaces
Cost of sales/cost of services? YES NO
Ordinary allowable itemized deductions YES YES
Special allowable itemized deductions? YES YES
Net operating loss carry-over (NOLCO)? YES YES
- Corporations can claim deduction for cost of sales/cost of services while individual taxpayers cannot.

RULES ON DETERMINATION OF OSD FOR INDIVIDUAL TAXPAYERS

It is important to exclude income or receipts that are not coming from the primary or secondary activities of the
business in the OSD base.

RULES ON DETERMINATION OF OSD FOR CORPORATE TAXPAYERS

Under the amendments of RA 9504, gross income for purposes of the OSD pertains to all gross income subject to
the regular income tax whether or not arising from business operations. Thus, corporate OSD is computed as:

Net Sales/Revenues/Receipts/Fees P xxx,xxx

Less: Cost of sales or services xxx,xxx
Gross income from operations P xxx,xxx
Add: Other taxable income, not subject to final tax xxx,xxx
Total gross income* P xxx,xxx
Multiply by: OSD percentage 40%
Optional standard deduction P xxx,xxx

*BIR Form 1702 refers to this as “total taxable income.”

OSD FOR GENERAL PROFESSIONAL PARTNERSHIPS

GPP can choose either itemized deduction or the OSD in computing its distributive net income. OSD shall be
40% of gross income similar to the OSD allowed for corporations.
However, partners in GPP cannot claim OSD against their share in net income.

Note: Partners may use OSD against their gross sales/receipts from business or profession. They are only precluded
from claiming deductions against their share in net income of the GPP.

Optional Standard Deduction and NOLCO

NOLCO cannot be claimed simultaneously with OSD because NOLCO is an item of deduction while OSD is a proxy
for all itemized deductions. NOLCO is deemed included in the claimable OSD.

Optional Standard Deduction and Net Capital Loss Carry Over

OSD does not replace net capital loss carry-over of individual taxpayers. The NCLCO is used in the measurement
of net capital gain which is an item of gross income. In other words, it is not an item of deduction.
 REGULAR INCOME TAXATION: INDIVIDUALS

TAXPAYERS SUBJECT TO PROGRESSIVE INCOME TAX

The progressive income tax for individuals covers the following:
1. Citizens
a. Resident citizen
b. Non-resident citizen
2. Aliens
a. Resident alien
b. Non-resident alien engaged in business
3. Taxable estate
4. Taxable trust
CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS
For purposes of the regular tax, individual income taxpayers are classified as:

1. Pure compensation income earner

➢ Compensation income is subject to withholding tax.
Treatment of the withholding tax on compensation:
1. Full payment – if the employee has no other income and the tax is correctly withheld.
2. Tax credit – if the employee has other taxable income or the tax is not correctly withheld.

SUBSTITUTED FILING OF INCOME TAX RETURN

➢ Employees with no other income
➢ Withholding tax on compensation is enough evidence of tax compliance
Conditions:
1. The employee received purely compensation income during the year
2. The employee received the income from only one employer in the Philippines during the taxable year
3. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by
the employer. (Correct tax is withheld)
4. The employee’s spouse also complies with all 3 conditions stated above.
5. The employer files the annual information return (BIR Forn No. 1604-CF).
6. The employer issues BIR Form No. 2316 to each employee.
BIR Form 1700/1701
NOTE: If not qualified as substituted filing system, must file Consolidated/ Annual/ Adjustment ITRs
CONSOLIDATED/ANNUAL/ADJUSTMENT INCOME TAX RETURNS
➢ Employed taxpayers who derive other income subject to regular tax other than from a single
employment and self-employed taxpayers must file an annual income tax return to include their other
income.
➢ The filing of a consolidated, annual or adjustment return is required under each of the following
circumstances:
✓ Concurrent employment during the year
✓ Successive employment during the year
✓ Incurrence of error by the employer/Correct tax is not withheld
✓ Employee or his spouse has other income
✓ Receipt of income distribution from a general professional partnership, taxable trusts, or
taxable estates, exempt co-ownership or exempt joint ventures.
✓ Taxpayers with both employment income and business income

2. Pure business or professional income earner

➢ Shall file quarterly ITRs (BIR Form 1701Q) and an annual tax return.
Quarterly Tax Returns Deadline
st
1 Quarter ITR – 1701Q May 15 of the same calendar year
nd
2 Quarter ITR – 1701Q August 15 of the same calendar year
rd
3 Quarter ITR – 1701Q November 15 of the same calendar year
Annual ITR – 1701A April 15, next year

➢ The taxable income from business or profession may be computed using:

1. Itemized deductions
2. Optional standard deduction
 Excess quarterly estimated tax – at the option of the taxpayer:
✓ Carry forward to quarters of the succeeding taxable year
✓ Claimed through tax refund – form of cash/tax credit certificate
Note: Once the option is made, it becomes irrevocable for that period.

3. Mixed income earner

➢ Report their business/professional income on quarterly basis under Form 1701Q.
➢ Compensation shall be reported only in the annual consolidated return.
➢ Mixed income earners shall use BIR Form 1701.

THE 8% INCOME TAX OPTION

➢ Must be indicated in the first quarter income tax return or in the first quarter percentage tax return.
➢ Upon election, the option shall be irrevocable for the calendar year.
Nature:
1. A bundled tax – it is in lieu of:
▪ Regular income tax, determined through the income tax table
▪ 3% general percentage tax
2. An annual option – valid as long as the taxpayer remained as a non-VAT taxpayer during the year.
3. Paid quarterly and annually
Scope:
▪ Pure business or professional income earners
▪ Mixed income earners

Business Tax: A Basic Overview

Aside from income tax, individuals engaged in business or exercise of a profession are also required to pay a
business tax which is either a 3% percentage tax or a 12% value added tax (VAT).
Types of business taxpayers:
1. Exempt businesses – not subject to VAT or percentage tax
Examples: Business selling agricultural products in original state; Book publishers or bookstores
2. Business specifically subject to other percentage tax – not subject to VAT but subject to percentage tax of
various rates
Examples: Common carriers by land; Operators of cockpits, cabarets, clubs, jai-alai/horse racetrack
3. Vatable businesses – other businesses
Vatable business either pay:
a) 12% VAT – if annual sales exceed P3,000,000 or when they registered as VAT taxpayers.
b) 3% general percentage tax – if does not exceed P3,000,000 and did not opt to reg. as VAT taxpayers.
Note: VAT-registered taxpayers pay VAT and regular income tax.

Covered businesses:
Only vatable businesses who are below the P3M annual VAT threshold and did not register as VAT taxpayer can
opt to be taxed under the 8% income tax.
Thus, the 8% income tax option is not available to:
1. VAT-registered business taxpayers
2. VAT-exempt business taxpayers
3. Individuals receiving income not subject to business tax

Tax obligations of individual non-VAT taxpayers:

Regular tax option 8% Income tax option

Regular income tax 3 quarterly 1701Qs and 1 annual 3 quarterly 1701Qs and 1 annual
1701 or 1701A 1701 or 1701A
Percentage tax 4 quarterly 1551Q None

Tax basis: The 8% optional income tax shall be based upon the gross sales or gross receipts.
Pure business or professional income earner – P250,000 annual income exemption shall be denied. Due to
this, the 8% shall be computed from the basis of net of P250,000.
Mixed income earner – Income tax due from compensation shall be separately determined using the income
tax table while the 8% income tax from the business/profession shall be separately computed. No more
P250,000 deduction allowable against the basis of the 8% income tax.
INTERIM TRANSITION TO THE VALUE ADDED TAX
➢ If exceeds the P3M VAT threshold during the year, mandatorily required to change registration from
non-VAT to a VAT taxpayer before the end of the month following the month exceeded the P3M.
➢ Pay regular income tax and pay VAT prospectively starting the month became a VAT taxpayer.
➢ 8% income tax payments shall be considered as tax credit against the RIT due
➢ Taxpayer shall be required to pay the 3% percentage tax for sales/receipts before becoming a VAT taxpyr.

TAXABLE ESTATES AND TRUSTS

➔ Consolidation of two or more trusts
Multiple trusts designated by the same grantor for the benefit of the same beneficiary shall be
consolidated for purposes of income tax.
This is to eliminate tax savings.

Employee trust funds

➔ An employee’s trust of an employer for the benefit of some or all of his employees is exempt.
➔ This exemption covers final tax, capital gains tax, and regular income tax.

ITR of Married Taxpayers

➢ Consolidated income tax return
➢ Compute separately their individual income tax
➢ Unidentified income by either one → equally divided between the spouses for the purposes of
determining their taxable income.
The income of unmarried minors derived from property received from a living parent shall be included in the
return of the parent except when:
1. The donor’s tax has been paid on such property.
2. The transfer of such property is exempt from donor’s tax.

PERSONAL EQUITY RETIREMENT ACCOUNTS TAX CREDIT (PERA-TCC)

➢ Qualified PERA contribution are entitled to a tax credit equivalent to 5% of said contributions.
➢ To avail, must directly request the issuance of PERA-TCC
Contributor classification PERA-TCC treatment
- Pure compensation earner Applied against withholding tax due
- Purely in business/profession or mixed Applied against individual income tax liability
income earner
- Overseas Filipino deriving purely from Applied against any direct internal revenue tax
abroad liability

INSTALLMENT PAYMENT OF THE REGULAR INCOME TAX

➢ When the tax due is in excess of P2,000, individual taxpayers (except corporations) may elect to pay the
tax in two equal installments:
a. The first installment shall be paid at the time the return is filed.
b. The second is due on or before October 15 following the close of the calendar year.

WHO ARE NOT REQUIRED TO FILE INCOME TAX RETURN?

1. Minimum wage earners
2. An individual whose gross income does not exceed P250,000
3. An individual whose compensation income derived from one employer does not exceed P60,0000 and
the income tax on which has been correctly withheld.
4. Individuals whose income has been subjected to final withholding tax such as in the case of non-resident
aliens not engaged in trade or business.
5. Pure compensation earners qualified under the substituted filing system.

AMENDMENTS OF INCOME TAX RETURN

➢ Within three years from the required date of filing of the return, taxpayer can amend the same so long
as no Letter of Authority for investigation is issued by the BIR.
➢ Amended returns shall not be subject to surcharges for late filing or late payment but shall be imposed
the interest penalties.
 REGULAR INCOME TAXATION – SPECIAL CORPORATIONS

GENERAL CLASSIFICATION AND TAXATION OF CORPORATIONS

Domestic corporations 25% or 20% regular corporate tax on world taxable
income
Resident foreign corporation 25% regular corporation tax on Philippine taxable
income
Non-resident foreign corporation 25% final tax on Philippine gross income

Lower corporate tax for domestic corporations

Under the CREATE law, domestic corporations are subject to a 20% regular corporate income tax under the ff:
a. Asset test – Total assets, excluding land does not exceed P100,000,000; and
b. Income test – Taxable income does not exceed P5,000,000
Note: MSMEs must qualify the asset and income test to avail of the lower corporate tax

Summary of regular corporate tax rates

Taxpayer type Domestic corporation Resident foreign corporation
MSME corporate taxpayers
- With < P5M taxable income 20% 25%
- With > P5M taxable income 25% 25%
Large corporate taxpayers
- With < P5M taxable income 25% 25%
- With > P5M taxable income 25% 25%

SPECIAL CORPORATIONS
Certain corporations are subject to a special tax treatments or preferential tax rates lower than the 25% RCIT.

SUB-CLASSIFICATION OF CORPORATE INCOME TAXPAYERS

A. Domestic corporations
1. Exempt domestic corporations

Qualification of Tax Exemption

➢ Income tax exemption relates only to income from related activities.
➢ The income from unrelated activities is subjected to regular income tax.

a. Exempt non-profit corporations under the NIRC

Requisites for exemption of non-stock, non-profit corporations
1. It must be organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans. (no profit motive)
2. It should meet the following tests:
▪ Organizational test – documents exclusively limit its purposes as mentioned above.
▪ Operational test – the regular activities must be exclusively devoted to the accomplishment
of the aforementioned purposes.
Note: a corporation fails this test if a substantial part of its operations is “activities conducted for profit”
3. All net income or assets must be devoted to its purposes.
4. It must not be a branch of a foreign non-stock, non-profit corporation.

Exception to the Classification rule: Non-profit educational institutions

The income from unrelated operations of non-stock non-profit educational institutions is still exempt
from income tax if used for educational purposes.

b. Government agencies and instrumentalities – inherently non-profit, hence, exempt from RCIT
c. Certain government-owned and controlled corporations
GOCCs are subject to RCIT except the following:
▪ GSIS, SSS, PHIC, HDMF, local water districts
 d. Cooperatives
Classification of registered cooperatives for taxation purposes:
A. Cooperatives which transact business only with members – not subject to any taxes and fees
B. Cooperatives which transact business with both members and non-members
▪ Those with not more than P10M accumulated reserve and undivided net savings – exempt
▪ Those with more than are subject to the following tax at full rate:
a. Income tax on the full amount allocated for interest on capital
b. Value Added Tax (VAT) on transactions with non-members
c. Percentage Tax on all sales of goods or services rendered to non-members
d. All other internal revenue taxes unless otherwise provided by the law

The net surplus of every cooperative shall be distributed as follows:

Reserve fund - At least 10% of the net surplus but must not be less than
50% of the net surplus in the first five years of operation.
Education and training fund - Not more than 10% of net surplus
Community development fund - Not more than 3% of net surplus
Optional land and building fund - Not to exceed 7% of net surplus
Interest - Shall not exceed normal rate of return on investments
Patronage refunds - Must not be less than 30% of the net surplus

Taxability of Cooperatives to Internal Revenue Tax

All cooperatives regardless of classification are subject to the following:
1. The applicable income tax on unrelated income
2. Capital gains tax
3. Documentary stamp tax
4. VAT on purchases of goods or services except VAT exempt importations
5. Withholding tax on wages except for minimum wage employees
6. All other taxes for which cooperatives are directly liable and not otherwise expressly exempt by law

REPORTING REQUIREMENTS
Exempt corporations w/out taxable income - BIR Form 1702-EX
Exempt corporations with taxable income - BIR Form 1702-RT
If earn income subject to special tax rates - BIR Form 1702-MX

2. Special domestic corporations

a. Proprietary/Private educational institutions and non-profit hospitals
Summary of Tax Rules on Educational Institutions and Hospitals
Owner Educational Institutions Hospitals
Private 10% (1%) of taxable income 25% (20%) of taxable income
Non-profit Exempt 10% (1%) of taxable income
Government Exempt Exempt

Pre-dominance Test
If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the
total gross income from all sources, the 25% regular corporate income tax applies.

b. Foreign currency deposit units (FCDUs) and Expanded FCDUs

SUMMARY OF TAX RULES ON FCDUs/EFCDUs
FROM
NATURE OF INCOME (E)FCDUs or OBUs Other Residents Non-Residents
Income from forex transactions
Interest income from:
- Forex loans & receivables Exempt 10% FIT Exempt
- Forex deposits Exempt - Exempt
Other forex income Exempt RCIT Exempt
Income from non-forex transactions RCIT RCIT RCIT
Note: Interest income of residents from depositary bank under FCDS/EFCDS is subject to 15% FIT.
Income from the regular banking unit of domestic banks is subject to the 25% RCIT.
c. PEZA or BOI-registered enterprises
 3. Regular domestic corporations

B. Resident foreign corporations

1. Special resident foreign corporations
a. Expanded FCDUs
The EFCDU of a resident foreign bank is subject to the same tax rules applicable to FCDUs/EFCDUs of
domestic local banks, except that all their offshore income is exempt from income tax because foreign
corporations are taxable only on income within the Philippines.

b. Regional Area Headquarters and Regional Operating Headquarters of Multinational Companies

RHQS are exempt from income tax since they are merely administrative offices. They do not earn
income.
ROHQs are now subject to income tax at 25% of taxable income. They are allowed to derive income on
their services.
RHQs and ROHQs are exempt from all kinds of local taxes, fees or charges, except real property tax on
land improvements and equipment.

c. International carrier
In the Philippine setting, international carriers are only of two types:
a. International air carrier
b. International sea or shipping carrier
Income tax rates to international carriers
✓ General rule: 2.5% of the Gross Philippine Billings
✓ Exception rule: Preferential rate or exemption on the basis of reciprocity applicable tax treaty
or reciprocity
Gross Philippine Billings – amount of gross revenue originating from the Philippines.
Note: Tickets revalidated, exchanged and/or endorsed to another international airline form part of
the Gross Philippine Billings of the carrying airline if the passenger boards a plane or a port or point
in the Philippines.

Exclusion in Gross Philippine Billings

1. Non-revenue passengers – those passengers qualifying under the free mileage programs of the
air carriers
2. Refunded tickets

Rule on transshipments or interrupted flights or voyages

For a flight which originates from the Philippines, but transshipment of passenger takes place at any
port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of transshipment shall form part
of Gross Philippine Billings.
The “48-hour” rule on transient passengers
Flights or voyages from foreign countries which will be interconnected in the Philippines for
continuance of the flight/voyage to a foreign destination by the same international carrier shall not
be considered originating from the Philippines if the actual departure is made within 48 hours,
except only when delayed by force majeure.
However, if made by another airline company or international sea carrier, the cost shall be included
in the Gross Philippine Billings.
Off-line international carriers is subject to the regular corporate income tax.

d. BOI or PEZA-registered enterprises

Boi-registered enterprises are given tax holidays whereas PEZA and other economic zones offers tax
holidays and or 5% gross income tax in lieu of all taxes, national, or local.

REPORTING OF SPECIAL CORPORATIONS TAXABLE ON NET INCOME

Special corporations, domestic or resident foreign, subject to tax on net income are mandatorily
required to use the itemized deduction. They are not allowed the optional standard deduction. They
file their income using BIR Form 1702-MX.

2. Regular resident foreign corporations

C. Non-resident foreign corporations
1. Special non-resident foreign corporations
a. Non-resident cinematographic film owner, lessor, or distributor
b. Non-resident lessor of vessels, chartered by Philippine nationals
c. Non-resident owner or lessor of aircraft, machineries, and other equipment

A Differentiation:
Lease or charter of:
Lessor Cinema films Vessels Aircraft Other equipment
Domestic 25% WTI 25% WTI 25% WTI 25% WTI
Resident foreign 25% PTI 2.5% GPB 2.5% GPB 2.5% PTI
Non-resident foreign 25% PGI 4.5% PGI 7.5% PGI 7.5% PGI
Legend:
WTI = World taxable income; PTI = Philippine Taxable Income
PGI = Philippine gross income; GPB = Gross Philippine Billings

Note: Gross income is gross receipts less the direct cost of services while Gross Philippine Billings relates
to gross receipts.

NRFCs, special or resident, do not file income tax returns.

Philippine residents who make income payments to them must withhold the final tax and remit the same
to the government through BIR Form 1601-F.

2. Regular non-resident foreign corporations

 REGULAR INCOME TAXATION: REGULAR CORPORATIONS

Income tax rules on regular corporations

Domestic Corporation 20% or 25% Regular Corporate Income Tax subject to the Minimum Corporate
Income Tax
Resident Corporation 25% Regular Corporate Income Tax subject to the Minimum Corporate Income Tax

THE MINIMUM CORPORATE INCOME TAX Prepaid tax

Corporations are subject to a minimum corporate income tax of 2% of gross income.
As a minimum tax, the MCIT is payable when:
a. The corporation has zero or negative taxable income.
b. MCIT is greater than the regular corporate income tax (RCIT)

Scope of the Minimum Corporate Income Tax

The MCIT is applicable to every corporation to the regular corporate income tax (25% or 20%) including non-profit,
exempt, and special corporations with respect to their taxable income subject to regular corporate income tax, but
not to their income subject to special tax rates.
MCIT Exempt entities:
1. Real Estate Investment Trusts or REITs under RA 9856
2. Domestic or resident corporations subject to special tax rates
a. Proprietary educational institutions, and non-profit hospitals
b. FCDUs and EFCDUs
c. International carriers
d. Firms under special tax regimes such as PEZA and BCDA locators
3. All non-resident foreign corporations

EXCESS MCIT CARRY-OVER

The excess of the MCIT over the RCIT in any year is a tax credit that is deductible against any RCIT tax due in the
immediately succeeding three years.
Rules:
▪ Excess MCIT can be used only as a tax credit against RCIT tax due in any of the three subsequent years.
Excess MCIT cannot be deducted against MCIT tax due.
▪ Credit for the Excess MCIT from prior years can be taken up to the full amount of RCIT tax due in the next
three years.
▪ When there are several Excess MCITs from prior years, tax crediting shall be made in a first in-first out
basis.
▪ Unused Excess MCIT at the end of the three-year period shall expire and can no longer be used.

QUARTERLY FILING OF INCOME TAX RETURN

Corporations shall file their quarterly income tax returns for the first three quarters of the year due on or before
60 days from the end of each quarter.
RELIEF FROM THE MINIMUM CORPORATE INCOME TAX
Upon recommendation of the Commissioner of Internal Revenue, the Secretary of Finance may suspend the
imposition of MCIT upon submission of proof that the corporation sustained substantial losses on account of:
a. prolonged labor dispute
b. force majeure
c. legitimate business reverses

BRANCH PROFIT REMITTANCE TAX Final tax

Any profit remitted by a branch to its head office abroad shall be subject to a tax of 15% based on the total profits
applied or earmarked for remittance without any deduction for the tax component thereof.
Passive investment income and gains are excluded.
Scope of the Branch Profit Remittance Tax
The tax covers the remittance of all resident foreign corporations including ROHQs of multinational companies,
FCDUs or OBUs of foreign banks, and international carriers, except PEZA-registered entities.

A Differentiation on foreign profit remittance:

Remitting entity to its head office Tax Rate
- Branch of resident foreign corporation 15% of branch remittance
- Subsidiary of a foreign corporation – through 25% final tax, 15% if the tax sparing rule applies
dividend declaration
- Branch of domestic corporation Not subject to tax