INCOME TAXATION rendered by a fund of capital in relation to such

IN GENERAL fund through a period of time. Capital is wealth,

income is the service of wealth. [Madrigal v.
Income Tax Rafferty, 38 Phil 414]
Income tax has been defined as a tax on Capital is the tree while income is the fruit.
all yearly profits arising from property, profession, trade
or business, or as a tax on a persons income, SOURCES OF INCOME
emoluments, profits and the like.
It is generally regarded as an excise tax. It What produces income?
is not levied upon persons, property, funds or profits but The term source of income is not a place
upon the right of a person to receive income or profits. but the property, activity or service that produced the
income. In the case of income derived from labor, it is
Purposes of income taxation the place where the labor is performed; in the case of
1. To provide large amounts of revenues. income derived from the use of capital, it is the place
2. To offset regressive sales and consumption taxes. where the capital is employed; and in the case of profits
3. Together with estate tax, to mitigate the evils from the sale or exchange of capital assets, it is the
arising from the inequalities in the distribution of place where the sale or transaction occurs.
income and wealth, which are considered Commissioner v. BOAC: The source of
deterrents to social progress, by imposing a an income is the property, activity or service that
progressive scheme of taxation. produces the income. For the source of income to be
considered as coming from the Philippines, it is sufficient
Income that income is derived from activity within the
Income, in its broad sense, means all Philippines. IN BOACs case, the sale of tickets in the
wealth which flows into the taxpayer other than Philippines is the activity that produces the income. The
as a mere return on capital. [Section 36, tickets exchanged hands here and payments for fares
Revenue Regulations 2] were also made in Philippine currency. The site of the
Income means accession to wealth, gain or source of the income is the Philippines and the flow of
flow of wealth. wealth proceeded from and occurred in Philippine
Conwi v. CTA [213 SCRA 83]: Income territory, enjoying the protection accorded by the
may be defined as an amount of money coming Philippine government. Thus, said flow of wealth should
to a person or corporation within a specified share the burden of supporting the government.
time, whether as payment for services, interest,
or profit from investment. Sources of income
Commissioner v. BOAC [149 SCRA 395]: 1. Sources within the Philippines
Income means cash received or its equivalent. It is the 2. Sources without the Philippines
amount of money coming to a person within a specific 3. Sources partly within and partly without the
time. It is distinct from capital for, while the latter is a Philippines
fund, income is a flow. As used in our laws, income is
flow of wealth. The source of an income is the property, TAXABLE INCOME
activity or service that produces the income. For the Taxable income
source of income to be considered as coming from the The term taxable income means the
Philippines, it is sufficient that income is derived from pertinent items of gross income specified in the
activity within the Philippines. IN BOACs case, the sale NIRC, less the deductions and/or personal and
of tickets in the Philippines is the activity that produces additional exemptions, if any, authorized by
the income. such types of income by the NIRC or other
Fisher v. Trinidad [43 Phil 973]: Stock special laws.
dividend is not an income. It merely evidences
the interest of the stockholder in the increased Requisites for income to be taxable
capital of the corporation. An income may be 1. There must be a gain or profit.
defined as the amount of money coming to a 2. The gain must be realized or received.
person or corporation within a specified time, 3. The gain must not be excluded by law or treaty
whether as payment for services, interest, or from taxation.
profit for investment. A mere advance in the
value of property of a person or corporation in Gain must be realized or received
no sense constitutes the income specified in This implies that not all economic gains
the revenue law. Such advance constitutes and constitute taxable income. Thus, a mere
can be treated merely as an increase of capital. increase in the value of property is not income
An income means cash received or its but merely an unrealized increase in capital.
equivalent. It does not mean choses in action or
unrealized increments in the value of the When is income considered received?
property. 1. actual receipt
2. constructive receipt
Income v. capital
Capital is a fund or property existing at one Income constructively received
distinct point of time while income denotes a Income which is credited to the account of
flow of wealth during a definite period of time. or set apart for a taxpayer and which may be
The essential difference between capital drawn upon by him at any time is subject to tax
and income is that capital is a fund or property for the year during which so credited or set
existing at one distinct point of time; income is a apart, although not then actually reduced to
flow of services rendered by that capital by the possession.
payment of money from it or any other benefit
 To constitute receipt in such a case, the However, if the pre-existing
income must be credited to the taxpayer without proportionate interest of the stockholder is
any substantial limitation or restriction as to the substantially altered, the income is considered
time or manner of payment or condition upon derived to the extent of the benefit received.
which payment is to be made. [Section 52,
Revenue Regulations 2] Moreover, if as a result of an exchange of
Limpan Investment Company deemed to stocks, the person received something of value
have constructively received rental payments in 1957 which are essentially and fundamentally
when they were deposited in court due to its refusal to different from what he had before the
receive them. [Limpan v. CIR, 17 SCRA 703] exchange, income is realized within the meaning
of the revenue law.
Examples of constructive receipt
1. Interest coupons which have matured and are Flow of wealth test
payable, but have not been cashed.
2. Defaulted coupons are income for the year in The essential difference between capital
which paid. and income is that capital is a fund whereas
3. Partners distributive share in the profits of a income is the flow of wealth coming from such
general professional partnership is regarded as fund; capital is the tree, income is the fruit.
received by the partner, although not yet Income is the flow of wealth other than as a
distributed. mere return of capital.

Are the following items income? CLASSES OF INCOME

Found treasure - YES
Punitive damages - YES Kinds of taxable income or gain
Damages for breach of promise or
alienation of affection - YES 1. capital gain
Worthless debts subsequently collected -
YES 2. ordinary gain
Tax refund NO (but yes if the tax was
previously allowed as a deduction and a. business income
subsequently refunded or credited, as benefit
accrued to the taxpayer; see discussion on tax b. compensation income
as a deductible item)
Non-cash benefits - YES c. passive income
Income from illegal sources - YES
Psychological benefits of work - NO d. other income from whatever source
Give away prizes YES derived i.e. found treasure
Scholarships/fellowships YES
Stock dividends - NO Capital gains

Tests to determine realization of income Capital gains are gains or income from the
1. Severance test sale or exchange of capital assets. These
2. Substantial alteration of interest test include:
3. Flow of wealth test
1. Income from dealings in shares of stock
Severance test of domestic corporation whether or not
As capital or investment is not income through the stock exchange;
subject to tax, the gain or profit derived from
the exchange or transaction of said capital by 2. Income from dealings in real property
the taxpayer for his separate use, benefit and located in the Philippines; and
disposal is income subject to tax.
3. Income from dealings in other capital
Substantial alteration of interest test assets other than (a) and (b).
Income is earned when there is a
substantial alteration of the interest of a Ordinary gains
taxpayer, i.e. increase in proportionate share of
a stockholder in a corporation. Ordinary gains are gains or income from
Income to be returnable for taxation must the sale or exchange of property which are not
be fully and completely realized. Where there is capital assets.
no separation of gain or profit, or separation of
increase in value from capital, there is no Business income
income subject to tax.
Thus, stock dividends are not income 1. Income from trading, merchandising,
subject to tax on the part of the shareholder for manufacturing or mining
he had the same proportionate interest in the
assets of the corporation as he had before, and 2. Income from practice of profession
the stockholder was no richer and the
corporation no poorer after the declaration of Note: The term trade or business includes the
the dividend. performance of the functions of a public office.
[Section 22(S), NIRC]
Passive income
CLASSES OF INCOME TAXPAYERS
1. Passive income from Philippine sources subject to
final tax Basis of classification of taxpayers

2. Passive income from Philippine sources not 1. corporations v. individuals

subject to final tax
2. nationality
3. Passive income from sources outside the
Philippines 3. residence

Passive income again Classes of income taxpayers

1. Interest income 1. Individuals

2. Rentals/Leases a. Resident citizens

3. Royalties b. Non-resident citizens

4. Dividends c. Resident aliens

5. Annuities and proceeds of life insurance/other d. Non-resident aliens

types of insurance
i) engaged in trade or business in
6. Prizes and winnings, awards, and rewards the Philippines, or

7. Gifts, bequests, and devises ii) not engaged in trade or business

in the Philippines
8. Other types of passive income Note: A non-resident alien individual who shall come to
the Philippines and stay therein for an aggregate
APPROACHES IN INCOME RECOGNITION period of more than one hundred eighty (180)
days during any calendar year shall be deemed
Approaches in income recognition a non-resident alien doing business in the
Philippines. [Section 25(A)(1), NIRC]
1. schedular system
2. Corporations
2. global system
a. Domestic corporations
Schedular system
b. Resident foreign corporations
The schedular system is one where the
income tax treatment varies and is made to c. Non-resident foreign corporations
depend on the kind or category of taxable
income of the taxpayer. 3. Special

Global system a. Proprietary educational institutions and

hospitals that are non-profit
The global system is one where the tax
treatment views indifferently the tax base and b. Insurance companies
generally treats in common all categories of
taxable income of the taxpayer. c. General professional partnerships

Schedular system v. global system d. Estates and trusts

1. Under the schedular treatment, there are
different tax rates, while under the global treatment, Note: Estates and trusts are treated as individual
there is a unitary or single tax rate. taxpayers.
2. Under the schedular treatment, there are
different categories of taxable income, while Who is a non-resident citizen?
under the global treatment, there is no need for
classification as all taxpayers are subjected to a The term non-resident citizen means:
single rate.
3. The schedular treatment is usually used in the 1. A citizen of the Philippines who
income taxation of individuals while the global established to the satisfaction of the
treatment is usually applied to corporations. Commissioner the fact of his physical
presence abroad with a definite
Approach used in the Philippines intention to reside therein.

Partly schedular and partly global. The 2. A citizen of the Philippines who leaves the
schedular approach is used in the taxation of Philippines during the taxable year to
individuals while the global approach is used in reside abroad, either as an immigrant or
the taxation of corporations. for employment on a permanent basis.
 Ordinary business partnership
3. A citizen of the Philippines who works
and derives income from abroad and An ordinary business partnership is
whose employment thereat requires him considered as a corporation and is thus subject
to be physically present abroad most of to tax as such.
the time during the taxable year.
Partners are considered stockholders and,
4. A citizen who has been previously therefore, profits distributed to them by the
considered as a non-resident citizen and partnership are considered as dividends.
who arrives in the Philippines at any
time during the taxable year to reside Oa v. Commissioner, 45 SCRA 74 (1972):
permanently in the Philippines. Unregistered partnership

Corporation Although the CFI already approved the project

of partition of the estate of Julia Buales among her
A corporation, as used in income taxation, surviving spouse, Lorenzo Ona, and her five children, no
includes partnerships, no matter how created or attempt was made to divide the properties left by the
organized, joint stock companies, joint accounts decedent. Instead, the properties remained under the
(cuentas en participacion), and associations or management of Lorenzo Ona who used said properties
insurance companies. in business by leasing or selling them and investing the
income derived therefrom and the proceeds from the
However, it does not include: sales thereof in real property and securities. The said
incomes are recorded in the books of account kept by
1. a general professional partnership; and Lorenzo Ona where the corresponding shares of the
heirs in the net income for the year are known.
2. a joint venture or consortium formed for
the purpose of undertaking construction Based on these facts, the Commissioner ruled
projects or engaging in petroleum, coal, that the heirs formed an unregistered partnership which
geothermal and other energy operations is thus subject to corporate income tax. The Court of
pursuant to an operating or consortium Tax Appeals and the Supreme Court affirmed.
agreement under a service contract with
the government. For tax purposes, the co-ownership of inherited
properties is automatically converted into an
Resident foreign corporation unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are
The term applies to a foreign corporation used as a common fund with intent to produce profits
engaged in trade or business within the for the heirs in proportion to their respective shares in
Philippines. the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or
Non-resident foreign corporation approved by the court in the corresponding testate or
intestate proceeding.
The term applies to a foreign corporation
not engaged in trade of business in the The reason is simple. From the moment of such
Philippines. partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes
GENERAL PROFESSIONAL PARTNERSHIP V. ORDINARY thereof, for each of them to manage and dispose of as
BUSINESS PARTNERSHIP exclusively his own without the intervention of the other
heirs, and, accordingly, he becomes liable individually for
General professional partnerships all taxes in connection therewith. If after such partition,
General professional partnerships are he allows his share to be held in common with his co-
partnerships formed by persons for the sole heirs under a single management to be used with the
purpose of exercising their common profession, intent of making profit thereby in proportion to his
no part of the income of which is derived from share, there can be no doubt that, even if no document
engaging in any trade or business. [Section or instrument were executed, for the purpose, for tax
22(B), NIRC] purposes, at least, an unregistered partnership is
Persons engaging in business as partners in formed.
a general professional partnership shall be liable For purposes of the tax on corporations, the
for income tax only in their separate and NIRC, includes partnerships except general
individual capacities. [Section 26, NIRC] professional partnerships within the purview of the
For purposes of computing the distributive term corporation.
share of the partners, the net income of the
partnership shall be computed in the same Note: The income derived from inherited properties
manner as a corporation. [Section 26, NIRC] may be considered as individual income of the
Each partner shall report as gross income respective heirs only so long as the inheritance
his distributive share, actually or constructively or estate is not distributed or, at least,
received, in the net income of the partnership. partitioned, but the moment their respective
[Section 26, NIRC] known shares are used as part of the common
Income of a general professional assets of the heirs to be used in making profits,
partnership are deemed constructively received it is but proper that the income of such shares
by the partners. [Section 73(D), NIRC] be considered as part of the taxable income of
an unregistered partnership.
Gatchalian v. Collector, 102 Phil 140 GENERAL PRINCIPLES OF INCOME TAXATION IN THE
PHILIPPINES
Plaintiffs contributed money to buy a
sweepstakes ticket which subsequently won. The General principles of income taxation in the
Supreme Court held that they formed an unregistered Philippines
partnership. Plaintiffs formed a partnership of a civil
nature since each of them contributed money to a 1. A citizen of the Philippines residing therein is
common fund for the sole purpose of dividing equally taxable on all income derived from sources
the prize which they win. within and without the Philippines.

Pascual v. Commissioner 2. A non-resident citizen is taxable only on income

Petitioners bought two parcels of land in 1965, derived from sources within the Philippines.
however, they did not sell the same nor make any
improvements thereon. In 1966, they bought another 3. An individual citizen of the Philippines who is
three parcels of land. It was only in 1968 that they sold working and deriving income from abroad as an
the two parcels of land after which they did not make overseas contract worker is taxable only on
any additional or new purchase. The remaining three income from sources within the Philippines.
parcels of land were sold in 1970. Commissioner Provided, that a seaman who is a citizen of the
assessed them corporate income taxes on the ground Philippines and who receives compensation for
that petitioners established an unregistered partnership services rendered abroad as a member of the
engaged in real estate transactions. complement of a vessel engaged exclusively in
The Supreme Court ruled that no unregistered international trade shall be treated as an
partnership was formed. The sharing of returns does not overseas contract worker.
itself establish a partnership whether or not the persons
therein have a joint or common right or interest in the 4. An alien individual, whether a resident or not of
property. There must be a clear intent to form a the Philippines, is taxable only on income
partnership, the existence of which has the juridical derived from sources within the Philippines.
personality different from the individual partners and the
freedom of each party to transfer or assign the whole 5. A domestic corporation is taxable on all income
property. derived from sources within and without the
In this case, there was no showing of intent to Philippines.
form a partnership. The transactions were isolated;
therefore, the character of habituality peculiar to 6. A foreign corporation, whether engaged or not in
business transactions engaged for the purpose of gain trade or business in the Philippines, is taxable
was not present. only on income derived from sources within the
The essential elements of a partnership are: (1) Philippines.
an agreement to contribute money, property, or industry
to a common fund; and (2) an intent to divide the profits SOME RULES ON TAXATION OF THE VARIOUS TAXPAYERS
among the contracting parties.
Who are taxed on their global income?
Unregistered partnership v. co-ownership for tax
purposes 1. Resident citizens

If the activities of co-owners are limited to 2. Domestic corporations

the preservation of the property and the
collection of the income therefrom, in which Who are taxed only on their income from sources
case, each co-owner is taxed individually on his within the Philippines?
distributive share in the income of the co-
ownership. 1. Non-resident citizen

If the co-owners invest the income in 2. Overseas contract workers

business for profit, they would be constituting
themselves into a partnership taxable as a 3. Alien individual, whether a resident or not of the
corporation. Philippines

Joint venture, how created 4. Foreign corporation, whether engaged or not in

trade or business in the Philippines
A joint venture is created when two
corporations, while registered and operating Who are taxed based only on their net income?
separately, were placed under one sole
management which operated the business 1. Resident and non-resident citizens
affairs of said companies as though they
constituted a single entity thereby obtaining 2. Resident alien and non-resident alien engaged in
substantial economy and profits in the trade or business in the Philippines
operation.
3. Domestic corporation
As stated, a joint venture is not taxed as a
corporation, just like a general professional 4. Resident foreign corporation
partnership.
Who are taxed based on their gross income? A non-resident alien engaged in trade or
1. Non-resident alien not engaged in trade or business shall be subject to the same income
business in the Philippines tax rates as a citizen and a resident alien.
2. Non-resident foreign corporation
Thus, only a non-resident alien who is not
engaged in trade or business is taxed differently
TREATMENT OF SOME SPECIAL ITEMS from the other individual taxpayers.

Forgiveness of indebtedness On what income taxed?

The cancellation and forgiveness of A resident citizen is taxed on all income

indebtedness may, dependent upon the from sources within and outside the Philippines.
circumstances, amount to: The tax base is net income.

1. a payment of income; A non-resident citizen is taxed only on

income from sources within the Philippines. The
2. a gift; or tax base is net income.

3. a capital transaction. An alien, whether resident or not, is taxed

only on income from sources within the
If, for example, an individual performs Philippines. However, the tax base for a resident
services for a creditor who, in consideration alien and non-resident alien engaged in trade or
thereof cancels the debt, income to that amount business is net income while the tax base for a
is realized by the debtor as compensation for his non-resident alien not engaged in trade or
service. business is gross income.

If, however, a creditor merely desires to Types of income taxed

benefit a debtor and without any consideration
thereof cancels the debt, the amount of the debt 1. Items of income included in the gross income
is a gift from the creditor to the debtor and need
not be included in the latters gross income. 2. Passive income

If a corporation to which a stockholder is 3. Capital gains from sale of shares of stock not
indebted forgives the debt, the transaction has traded in the stock exchange
the effect of payment of a dividend. [Section 50,
Revenue Regulations 2] 4. Capital gains from the sale or exchange of real
property
Recovery of amounts previously written off

Considered as income
TAX ON INDIVIDUAL CITIZEN (RESIDENT AND NON-
GUIDE QUESTIONS IN DETERMINING TAXABLE INCOME RESIDENT) AND INDIVIDUAL RESIDENT ALIEN

1. Is there a gain or income? Items of income included in the gross income

2. Is the gain or income taxable? Is it excluded or A schedular rate of five percent (5%) to
exempt? P125,000 + 32% of excess over P500,000.00 by
01 January 2000 is imposed on items of income
3. What type of income is it: income includible in the of an individual citizen and individual resident
gross income, passive income, capital gains, alien which are properly includible in the gross
income derived from other source? income.

4. To what class does the taxpayer belong: Rates of tax on certain passive income
individual or corporate, citizen or not or
domestic or foreign, resident or not, engaged in 1. Interest from any currency bank deposit and yield
trade or business or not? or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements 20%
TAX ON INDIVIDUALS
2. Royalties, except on books, as well as other
literary works and musical compositions 20%
PRELIMINARY POINTS ON TAXATION OF INDIVIDUALS
3. Royalties on books, literary works and musical
How taxed? compositions 10%

An individual citizen, both resident and non- 4. Prizes over P10,000.00 20%
resident, and an individual resident alien are
taxed similarly. Note: Prizes less than P10,000.00 are included in the
income tax of the individual subject to the
schedular rate of 5% up to P125,000 + 32% of
excess over P500,000.00)
 gross selling price or fair market value,
5. Other winnings, except PCSO and lotto, derived whichever is higher, or the schedular tax rate of
from sources within the Philippines 20% 5% up to P125,000 + 32% of excess over
P500,000.
6. Interest income derived by a resident individual
(Note: non-resident citizen not included) from a Exception: The sale or disposition of the
depository bank under the expanded foreign principal residence of natural persons is exempt
currency deposit system 7.5% from capital gains tax if certain conditions are
met.
7. Interest income from long-term deposit or
investment evidenced by certificates prescribed Conditions for exemption of gain from sale or
by BSP exchange of principal residence:

a. Exempt if investment is held for more 1. Proceeds are fully utilized in acquiring or
than five years constructing a new principal residence
within 18 months from the date of sale
b. If investment is pre-terminated, interest or disposition;
income on such investment shall be
subject to the following rates: 2. Historical cost or adjusted basis of the
real property sold or disposed shall be
20% - if pre-terminated in less carried over to the new principal
than 3 years residence built or acquired;

12% - if pre-terminated after 3 3. Notice to the Commissioner of Internal

years to less than 4 years Revenue shall be given within thirty (30)
days from the date of sale or
5% - if pre-terminated after 4 disposition; and
years to less than 5 years
4. This exemption can only be availed of
8. Cash and/or property dividends once every ten years.

Ten percent (10%) final tax by 01 January 2000 If the proceeds of the sale were not
on the following: fully utilized, the portion of the gain presumed
to have been realized from the sale or
a. Cash and or property dividend actually or disposition shall be subject to capital gains tax.
constructively received from a domestic
corporation or from a joint stock GSP or FMV, whichever is higher x
company, insurance or mutual fund Unutilized proceeds/GSP = Taxable Portion
companies and regional operating
headquarters of multinational companies TAX ON NON-RESIDENT ALIEN INDIVIDUAL

b. Share of an individual in the distributable Remuneration received by a non-resident alien as

net income after tax of a partnership president of a domestic company taxable in the
except a general professional Philippines (Ms. Juliane Baier-Nickel, as
partnership of which he is a partner represented by Marina Q. Guzman v. CIR, CTA
Case No. 5514 dated 4/29/99)
c. Share of an individual in the net income
after tax of an association, joint A consultant, president of a domestic
account, or a joint venture or company or person involved with product
consortium taxable as a corporation of development is subject to Philippine income
which he is a member or a co-venturer taxation. Any remuneration received would stem
from her employment as company president and
Capital gains from the sale of shares of stock not thus, negates her allegation that she is just a
traded in the stock exchange sales agent who receives commissions. While
petitioner tried to show that she stayed in the
1. Not over P100,000 5% country for less than 180 days, her
remuneration in the form of commissions is still
2. Over P100,000 10% taxable in the Philippines since it is borne by a
permanent establishment in the Philippines.
Capital gains from the sale of real property
Non-resident alien engaged in trade or business
General rule: A final tax of six percent
(6%) is imposed on the gross selling price or A non-resident alien engaged in trade or
current fair market value, whichever is higher, business shall be subject to the same income
for every sale or exchange of real property. tax rates as a citizen and a resident alien.

Optional: If the sale is made to the Exception: Cash and/or property dividends
government or any of its political subdivisions or received by a non-resident alien individual shall
agencies or to government-owned or-controlled be subject to a final tax of 20%; for citizens and
corporations, the taxpayer has the option to resident aliens, the rate is 10% beginning in the
choose from the final tax of six percent (6%) of year 2000.
 The 15% preferential tax rate shall apply
Non-resident alien not engaged in trade or only in cases where an alien concurrently holds
business a position similar to that of the Filipino
employee. Thus, this preferential tax treatment
A non-resident alien individual not engaged shall not apply where the counterpart expatriate
in trade or business shall pay a tax equivalent to is recalled to the head office or reassigned
25% on all items of income, except for gain on elsewhere, whether temporarily or otherwise,
sale of shares of stock in any domestic and only Filipinos are the ones so employed by
corporation and real property which shall be an OBU for the time being or where the post
subject to the same rate applied to other vacated by the expatriate is subsequently
individual taxpayers. assumed by a Filipino to replace the expatriate,
as a result of which all top management posts
Gain on sale of shares of stock: are now being occupied by Filipinos.

1. Not over P100,000 5% Filipino staff of the ADB subject to 15%

preferential tax rate ( NO. 29-99 dated 3/11/99)
2. Over 100,000 10%
Filipino employees occupying managerial or
Capital gains tax on sale or disposition of technical positions as those of aliens employed
property 6% of GSP or FMV, whichever is by the Asian Development Bank (ADB), which is
higher. not only a regional or area headquarters in the
Philippines but the headquarters itself, are
OTHER INDIVIDUAL TAXPAYERS subject to the preferential tax rate of 15% on
their gross compensation income pursuant to
1. Alien individual employed by regional or area Section 25 ( C ) of the NIRC of 1997.
headquarters and regional operating
headquarters of multinational companies General professional partnerships

2. Alien individual employed by offshore banking General professional partnerships are

units partnerships formed by persons for the sole
purpose of exercising their common profession,
3. Alien individual employed by petroleum service no part of the income of which is derived from
contractor and subcontractor engaging in any trade or business.

Note: The salaries, wages, annuities, compensation, Persons engaging in business as partners in
remuneration and other emoluments, such as a general professional partnership shall be liable
honoraria and allowances received by these for income tax only in their separate and
individuals and their Filipino counterparts individual capacities.
occupying the same position as these alien
individuals shall be subject to 15% tax. Each partner shall report as gross income
his distributive share, actually or constructively
All other income derived by these received, in the net income of the partnership.
individuals shall be subject to the same rate as
that of other individual taxpayers. The net income of the general professional
partnership shall be computed in the same
Regional or area headquarters manner as a corporation for purposes of
computing the distributive shares of the
A regional or area headquarter is a branch partners.
established in the Philippines by multinational
companies and which headquarters do not earn
or derive income from the Philippines and which
act as supervisory, communications and
coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific
region and other foreign markets.

Regional operating headquarters

TAX ON CORPORATIONS
A regional operating headquarter shall
mean a branch established in the Philippines by RATES OF INCOME TAX ON DOMESTIC CORPORATIONS
multinational companies which are engaged in In General
certain specified services, i.e. general Rate of tax, in general
administration and planning, business planning
and coordination, sourcing and procurement of 1997 35%
raw materials and components, among others. 1998 34%
1999 33%
2000 onwards 32%
Tax is imposed on taxable or net income.
Taxation of OBU employees (BIR Ruling No. 147-
98 dated October 16, 1998) Optional 15% tax on gross income
 The President, upon the recommendation Unrelated trade, business or other activity
of the Secretary of Finance, may, effective 01 January This means any trade, business or other
2000, allow corporations the option to be taxed at activity, the conduct of which is not substantially
fifteen percent (15%) of gross income, provided certain related to the exercise or performance by such
conditions are satisfied. educational institution or hospital of its primary
purpose or function.
This is available to firms whose ratio of cost
of sales to gross sales or receipts from all Proprietary educational institution
sources does not exceed 55%. A proprietary educational institution is any
private school maintained and administered by
Once elected by the corporation, option private individuals or groups with an issued
shall be irrevocable for the three consecutive permit to operate from the DECS, or CHED, or
years. TESDA, as the case may be.

Conditions to be satisfied to avail of the 15% GOCCs, agencies or instrumentalities

optional corporate tax All corporations, agencies, or
instrumentalities owned and controlled by the
1. A tax effort ratio of twenty percent (20%) of government shall pay such rate of tax upon their
Gross National Product (GNP) taxable income as are imposed upon
corporations or associations engaged in a similar
2. A ratio of forty percent (40%) of income tax business, industry, or activity.
collection to total tax revenues Exceptions: GOCCs and instrumentalities
not subject to tax are the:
3. A VAT tax effort of four percent (4%) of GNP 1. Government Service Insurance System
(GSIS)
4. A 0.9 percent (0.9%) ratio of the Consolidated 2. Social Security System (SSS)
Public Sector Financial Position to GNP 3. Philippine Health Insurance Corporation
(PHIC)
Some definitions for this purpose 4. Philippine Charity Sweepstakes Office
(PCSO)
Gross income derived from business shall 5. Philippine Amusement and Gaming
be equivalent to gross sales less sales returns, Corporation (PAGCOR)
discounts and allowances and cost of goods
sold. Rates on certain passive income subject to final
tax
For taxpayers engaged in sale of
services, gross income means gross receipts 1. Interest from deposits and yield or any other
less sales returns, allowances and discounts. monetary benefit from deposit substitutes and
from trust funds and similar arrangements
Cost of goods sold shall include all 20%
business expenses directly incurred to produce 2. Royalties 20%
the merchandise to bring them to their present 3. Interest income derived from a depository bank
location and use. under the expanded foreign currency deposit
system 7 %
Trading Concern Manufacturing Concern 4. Capital gains from sale of shares of stock not
Cost of goods sold shall Cost of goods traded in the stock exchange
include the invoice cost of manufactured and sold a. Not over P100,000 5%
the goods sold, plus shall include all costs of b. Over P100,000 10%
import duties, freight in production of finished
transporting the goods to goods, such as raw 5. Tax on income derived by a depository bank
the place where the goods materials used, direct labor under the expanded foreign currency deposit
are actually sold, including and manufacturing system from foreign currency transactions
insurance while the goods overhead, freight cost, 10%
are in transit. insurance and other costs
incurred to bring the raw Note: This is different from the interest income.
materials to the factory or This pertains to the income derived by a
warehouse. depository bank itself.
Note: Any income of non-residents, whether
Tax rate for proprietary educational institutions individuals or corporations, from
and hospitals transactions with depository banks
10% on taxable income, except on certain under the expanded system is exempt
passive incomes from income tax.
The ordinary rate imposed on corporations
shall apply to proprietary educational institutions 6. Intercorporate dividends exempt
and hospitals when their gross income from
unrelated trade, business or other activity 7. Capital gains realized from the sale, exchange or
exceeds 50% of their total gross income derived disposition of lands and/or buildings 6%
from all sources.
Sale of corporate real property that has ceased to manufactured and of finished goods, such as raw
be used in trade or business subject to 6% capital sold for a materials used, direct labor and
gains tax ( No. 21-99 dated 2/25/99) manufacturing manufacturing overhead, freight
A final tax of 6% is imposed on the gains concern cost, insurance and other costs
presumed to have been realized in the sale, incurred to bring the raw materials
exchange or disposition of lands and/or to the factory or warehouse.
buildings which are not actively used in the Gross Income for gross receipts gross receipts less
business of a corporation and which are treated taxpayers less sales sales returns,
as capital assets based on the gross selling price engaged in sale of returns, allowances and
or fair market value, whichever is higher. service allowances discounts and
However, since in the instant case the taxpayer and discounts. cost of services
claimed a depreciation deduction when the Cost of services All direct costs
building and other improvements were not used and expenses
in trade or business, the taxpayer must file and necessarily
amend its income tax return and pay the incurred to
deficiency income tax, if any, plus surcharge and provide the
interest, based on its adjusted taxable income services required
resulting from the disallowance of the by the customers
depreciation deduction. and clients
including (A)
MINIMUM CORPORATE INCOME TAX salaries and
Minimum corporate income tax employee benefits
A minimum corporate income tax of two of personnel,
percent (2%) of the gross income as of the end consultants and
of the taxable year is hereby imposed on a specialists directly
corporation subject to income tax, beginning on rendering the
the fourth taxable year immediately following service and (B)
the year in which such corporation commenced cost of facilities
its business operations, when the minimum directly utilized in
income tax is greater than the regular corporate providing the
income tax for the taxable year. service such as
depreciation or
Carry forward of excess minimum tax rental of
Any excess of the minimum corporate equipment used
income tax over the normal income tax shall be and cost of
carried forward and credited against the normal supplies.
income tax payable for the next three years
immediately succeeding the taxable year in For banks, it
which the minimum corporate income tax was includes interest
paid. expense.

Relief from the minimum corporate income tax Note: Definition of gross income for taxpayers engaged
under certain conditions in the sale of service includes cost of services
The Secretary of Finance may suspend the in MCIT but not in the case of the optional 15%
imposition of the minimum corporate income tax tax on gross income [Section 27(A), NIRC].
on any corporation which suffers losses on
account of prolonged labor dispute, or because TAX ON RESIDENT FOREIGN CORPORATIONS
of force majeure, or because of legitimate
business reverses. Resident foreign corporation

Meaning of gross income and cost of goods sold A resident foreign corporation is one
under minimum corporate income tax compared organized, authorized, or existing under the laws
with meaning of gross income and cost of goods of any foreign country, engaged in trade or
sold under Section 27(A) business within the Philippines.

Section 27(A) Section 27(E) Income tax rate, in general

MCIT
Gross Income equivalent to gross sales less sales Rates of tax, in general
returns, discounts and allowances
and cost of goods sold. 1997 35%
Cost of goods sold shall include all business expenses 1998 34%
directly incurred to produce the 1999 33%
merchandise to bring them to their 2001 onwards 32%
present location and use.
Cost of goods sold shall include the invoice cost of the Tax is imposed on taxable or net income.
for a trading or goods sold, plus import duties,
merchandising freight in transporting the goods to Optional: 15% of Gross Income
concern the place where the goods are
actually sold, including insurance The option to be taxed at fifteen percent
while the goods are in transit. (15%) on gross income shall also be available to
Cost of goods shall include all costs of production
 resident foreign corporations, subject to the Gross Philippine Billings for international shipping
same conditions. Gross Philippine Billings means gross
revenue whether for passenger, cargo or mail originating
Available to firms whose ratio of cost of from the Philippines up to final destination, regardless of
sales to gross sales or receipts from all sources the place of sale or payments of the passage or freight
does not exceed 55%. documents.

Once elected by the corporation, option Tax on branch profits remittances

shall be irrevocable for the three consecutive
years. Any profit remitted by a branch to its head
office shall be subject to a tax of fifteen percent
Minimum corporate income tax on resident (15%) which shall be based on the total profits
foreign corporations applied or earmarked for remittance without any
deduction for the tax component thereof (except
All conditions of the MCIT on domestic those activities which are registered with the
corporations also apply to resident foreign Philippine Economic Zone Authority).
corporations.
The following shall not be treated as
TAX RATES ON SPECIFIC RESIDENT FOREIGN branch profits unless the same are effectively
CORPORATIONS connected with the conduct of its trade or
business in the Philippines:
1. International Carrier 2 % of Gross Philippine
Billings 1. interests
2. dividends
2. Offshore Banking Units 10% of income derived 3. rents
from foreign currency transactions with local 4. royalties
commercial banks, including branches of foreign 5. remuneration for technical services
banks that may be authorized by the BSP to 6. salaries
transact business with offshore banking units, 7. wages
including any interest income derived from 8. premiums
foreign currency loans granted to residents 9. annuities
10. emoluments
Any income of non-residents, whether 11. other fixed or determinable annual,
individuals or corporations, from transactions periodic or casual gains, profits, income
with said offshore banking units shall be exempt and capital gains
from income tax.
In Marubeni v. Commissioner,
3. Tax on Branch Profits Remittances 15% of total Marubeni-Japan invested directly in AG & P
profits applied or earmarked for remittance Manila. Since Marubeni has a branch in the
without deduction for the tax component thereof Philippines, AG & P withheld 15% as branch
profits remittance tax from the cash dividends.
4. Regional or area headquarters shall not be SC held that the dividends remitted were not
subject to income tax subject to the 15% branch profit remittance tax
as they were not income earned by a Philippine
5. Regional operating headquarters shall be subject branch of Marubeni-Japan.
to a tax of 10% of their taxable income
In the 15% remittance tax, the law
Gross Philippine Billings for international air specifies its own tax base to be on the profit
carrier remitted abroad. There is absolutely nothing
equivocal or uncertain about the language of the
Gross Philippine Billings refers to the provision. The tax is imposed on the amount
amount of gross revenue derived from carriage sent abroad, and the law calls for nothing
of persons, excess baggage, cargo and mail further. [Bank of America NT v. Court of
originating from the Philippines in a continuous Appeals, 234 SCRA 302]
and uninterrupted flight, irrespective of the
place of sale or issue and the place of payment Marubeni v. Commissioner, 177 SCRA 500
of the ticket or passage document.
Tickets revalidated, exchanged and/or Marubeni Corporation is a resident foreign
endorsed to another international airline form part of the corporation.
Gross Philippine Billings if the passenger boards a plane
in a port or point in the Philippines. A resident foreign corporation is one
For a flight which originates from the that is incorporated under the laws of a foreign
Philippines, but transshipment of passenger country and is engaged in trade or business in
takes place at any port outside the Philippines the Philippines. Marubeni Corporation is a
on another airline, only the aliquot portion of the foreign corporation duly organized under the
cost of the ticket corresponding to the leg flown laws of Japan and it is duly licensed to engage
from the Philippines to the point of in business under Philippine laws. Marubeni
transshipment shall form part of the Gross Corporation maintains a branch office to carry
Philippine Billing. out its business in the country.
 The equity investments of MC in AG&P are Regional or area headquarters of multinational
investments of the mother corporation and not companies
of its branch office.
Regional or area headquarters shall not be
The investment was in the name of the subject to income tax.
Marubeni Corporation and therefore, the
stockholder in AG&P is the mother corporation,
Marubeni Corporation, and not its branch office
in the Philippines. Marubeni Corporation, Regional operating headquarters of multinational
therefore, and not its branch office, is liable for companies
taxes on dividends earned on its investments. Regional operating headquarters shall pay
a tax of ten percent (10%) on their taxable income.
Branch profit remittance does not include
dividends on investments received from other Tax on certain incomes received by a resident
domestic corporations. foreign corporation

Only profits remitted abroad by a 1. Interest from deposits and yield or any other
branch office to its head office which are monetary benefit from deposit substitutes, trust
effectively connected with its trade or business funds and similar arrangements and royalties
in the Philippines are subject to the 15% profit Interest income from any currency bank
remittance tax. deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds
To be effectively connected, it is not and similar arrangements and royalties derived
necessary that the income be derived from the from sources within the Philippines shall be
actual operation of taxpayer-corporations trade subject to a final income tax at the rate of
or business; it is sufficient that the income arises twenty percent (20%) of such interest.
from the business activity in which the However, interest income derived by a
corporation is engaged. resident foreign corporation from a depositary
bank under the expanded foreign currency
The dividends received by Marubeni deposit system shall be subject to a final income
from AG&P are not income arising from the tax at the rate of seven and one-half percent
business activity in which Marubeni is involved. (71/2%) of such interest income.
Accordingly, said dividends if remitted abroad,
are not considered branch profits for purposes 2. Income derived under the expanded foreign
of the 15% profit remittance tax. currency deposit system
This refers to income derived by a
Note: Test of whether remittance of profit by a depositary bank under the expanded foreign
branch to its head office comes under the currency deposit system from foreign currency
purview of the profit remittance tax, the branch transactions with local commercial banks
itself should have made the remittance. In this including branches of foreign banks that may be
case, it was not Marubenis branch in the authorized by the Bangko Sentral ng Pilipinas to
Philippines, but the investee corporation, AG&P, transact business with foreign currency deposit
which directly remitted the dividends to system units and other depositary banks under
Marubeni of Japan. the expanded foreign currency deposit system,
including interest income from foreign currency
Also, only the branch office is the loans granted by such depositary banks under
authorized withholding agent for the profit said expanded foreign currency deposit system
remittance tax. AG&P, being an investee of to residents.
Marubeni, erred in withholding the profit
remittance tax from the dividends it remitted to A final income tax at the rate of ten
Marubeni. percent (10%) is imposed on such income.

Interest received by a foreign corporation from 3. Capital gains from sale of shares of stock not
Philippine sources not effectively connected with traded in the stock exchange
the conduct of its business not considered branch
profits. (Hongkong-Shanghai Hotels, Ltd. v. CIR, a. Not over P100,000 5%
CTA Case No. 5243 dated 4/29/99)
b. Over P100,000 10%
Interest received by a foreign corporation
during each taxable year from all sources within 4. Intercorporate dividends
the Philippines is not considered branch profits
except when the same is effectively connected Dividends received by a resident foreign
with the conduct of its business. In the instant corporation from a domestic corporation liable to
case, the interest income from bank placements tax under the NIRC shall not be subject to
is not effectively connected with the business of income tax.
hotel management, thus, it is excluded form
profits subject to the 15% branch profit
remittance tax.
TAX ON NON-RESIDENT FOREIGN CORPORATION
A final withholding tax at the rate of
Taxation of a non-resident foreign corporation, in twenty percent (20%) is hereby imposed on the
general amount of interest on foreign loans contracted
on or after 01 August 1986.
Rates of tax, in general
2. Intercorporate dividends
1997 - 35%
1998 - 34% A final withholding tax at the rate of
1999 - 33% fifteen percent (15%) is hereby imposed on the
2000 - 32% amount of cash and/or property dividends
received by a non-resident foreign corporation
However, the tax is imposed on gross from a domestic corporation, subject to the
income, not on taxable or net income. condition that the country in which the non-
resident foreign corporation is domiciled shall
Such gross income may include interests, allow a credit against the tax due from the non-
dividends, rents, royalties, salaries, premiums resident foreign corporation taxes deemed to
(except reinsurance premiums), annuities, have been paid in the Philippines equivalent to
emoluments or other fixed or determinable thirty two percent (32%) in the year 2000.
annual, periodic or casual gains, profits and
income, and capital gains, except capital gains This is the so-called tax sparing rule.
from the sale of shares of stock not traded in
the stock exchange. 3. Capital gains from sale of shares of stock not
traded in the stock exchange
Taxation of certain non-resident foreign
corporations a. Not over P100,000 5%

1. Non-resident cinematographic film owner, lessor b. Over P100,000 10%

or distributor 25% of gross income
Tax sparing rule
2. Non-resident owner or lessor of vessels chartered
by Philippine nationals 4% of gross rentals, Involves intercorporate dividends received
lease or charter fees by a non-resident foreign corporation from
a domestic corporation
3. Non-resident owner or lessor of aircraft,
machineries and other equipment 7% of Only 15% final withholding tax on cash
gross rentals or fees and/or property dividends is imposed

Non-resident cinematographic film owner, lessor Provided the country in which the non-
or distributor resident foreign corporation is domiciled shall
allow a credit against the tax due from the non-
A cinematographic film owner, lessor, or resident foreign corporation taxes deemed to
distributor shall pay a tax of twenty five percent have been paid in the Philippines, which is 32%
(25%) of its gross income from all sources by 2000 [Sec. 28, (B) (5) (b)]
within the Philippines.
TAX ON IMPROPERLY ACCUMULATED EARNINGS
Non-resident owner or lessor of vessels chartered
by Philippine nationals Imposition of the tax

A non-resident owner or lessor of vessels In addition to the other income taxes, there
shall be subject to a tax of four and one-half is hereby imposed for each taxable year on the
percent (4% ) of gross rentals, lease or improperly accumulated taxable income of each
charter fees from leases or charters to Filipino corporation an improperly accumulated earnings
citizens or corporations, as approved by the tax equal to ten percent (10%) of the
Maritime Industry Authority. improperly accumulated taxable income.
[Section 29, NIRC]

Corporations subject to improperly accumulated

Non-resident owner or lessor of aircraft, earnings tax
machineries and other equipment
The improperly accumulated earnings tax
Rentals, charters and other fees derived by shall apply to every corporation formed or
a non-resident lessor of aircraft, machineries availed for the purpose of avoiding the income
and other equipment shall be subject to a tax of tax with respect to shareholders or the
seven and one-half percent (7%) of gross shareholders of any other corporation, by
rentals or fees. permitting earnings and profits to accumulate
instead of being divided or distributed.
Tax on certain incomes received by a non-
resident foreign corporation Exceptions to improperly accumulated earnings
tax
1. Interest on foreign loans
 The improperly accumulated earnings tax EXEMPTION OF CERTAIN ORGANIZATIONS
shall not apply to:
Exemption from tax on corporations
1. Publicly-held corporations
The following organizations shall not be
2. Banks and other non-bank financial taxed in respect to income received by them as
intermediaries such:

3. Insurance companies 1. Labor, agricultural or horticultural

organization not organized principally
Evidence of purpose to avoid income tax for profit;

Prima Facie Evidence: The fact that any 2. Mutual savings bank not having a capital
corporation is a mere holding company or stock represented by shares, and
investment company shall be prima cooperative bank without capital stock
facie evidence of a purpose to avoid the tax organized and operated for mutual
upon its shareholders or members. purposes and without profit;

Evidence Determinative of Purpose: 3. A beneficiary society, order or

The fact that the earnings or profits of a association, operating for the exclusive
corporation are permitted to accumulate beyond benefit of the members such as a
the reasonable needs of the business shall be fraternal organization operating under
determinative of the purpose to avoid the tax the lodge system, or a mutual aid
upon its shareholders or members unless the association or a non-stock corporation
corporation, by clear preponderance of organized by employees providing for
evidence, shall prove to the contrary. the payment of life, sickness, accident,
or other benefits exclusively to the
The term reasonable needs of the members of such society, order, or
business includes the reasonably anticipated association, or non-stock corporation or
needs of the business. their dependents;

4. Cemetery company owned and operated

Computation of improperly accumulated taxable exclusively for the benefit of its
income members;

Taxable income adjusted by: 5. Non-stock corporation or association

organized and operated exclusively for
1. Income exempt from tax; religious, charitable, scientific, athletic,
or cultural purposes, or for the
2. Income excluded from gross income; rehabilitation of veterans, no part of its
net income or asset shall belong to or
3. Income subject to final tax; and inure to the benefit of any member,
organizers, officer or any specific
4. Amount of net operating loss carry-over person;
deducted;
6. Business league, chamber of commerce,
And reduced by the sum of: or board of trade not organized for
profit and no part of the net income of
1. Dividends actually or constructively paid; which inures to the benefit of any
and private stockholder or individual;

2. Income tax paid for the taxable year. 7. Civic league or organization not organized
for profit but operated exclusively for
Coverage the promotion of social welfare;

For corporations using the calendar basis, 8. A non-stock, non-profit educational

the accumulated earnings tax shall not apply on institution;
improperly accumulated income as of 31
December 1997. 9. Government educational institution;

For corporations adopting the fiscal year 10. Farmers or other mutual typhoon or fire
accounting period, the improperly accumulated insurance company, mutual ditch or
income not subject to this tax shall be reckoned irrigation company, mutual or
as of the end of the month comprising the 12- cooperative telephone company, or like
month period of fiscal year 1997-1998. organization of a purely local character,
the income of which consists solely of
assessments, dues, and fees collected
from members for the sole purpose of
meetings its expenses; and
 11. Farmers, fruit growers, or like requiring adherence to the letter in construing statutes
association organized and operated as a applies with peculiar strictness to tax laws and the
sales agent for the purpose of provisions of a taxing act are not to be extended by
marketing the products of its members implication.
and turning back to them the proceeds
of sales, less the necessary selling GROSS INCOME
expenses on the basis of the quantity of
products finished by them. [Section 30, Gross income
NIRC]
Gross income means all income derived
Income by exempted corporations which are not from whatever source, including (but not limited
exempted to) the following items:

Notwithstanding the provisions in the 1. Compensation for services in whatever

preceding paragraphs, the income of whatever form paid, including, but not limited to,
kind and character of the foregoing fees, salaries, wages, commissions, and
organizations from any of their properties, real similar items;
or personal, or from any of their activities
conducted for profit regardless of the disposition 2. Gross income derived from the conduct of
made of such income, shall be subject to tax trade or business or the exercise of a
imposed under this Code. [2nd pargraph, profession;
Section 30, NIRC]
3. Gains derived from dealings in property;
Thus, the following income of the exempted
organizations shall not be exempted: 4. Interests;

1. Income of whatever kind and character 5. Rents;

from any of their properties, real or
personal 6. Royalties;

2. Income from any of their activities 7. Dividends;

conducted for profit
8. Annuities;
See Commissioner v. CA re. YMCA case
in General Principles of Taxation 9. Prizes and winnings;

Commissioner v. CA, CTA & Ateneo de Manila 10. Pensions; and

University, 271 SCRA 605
11. Partners distributive share from the net
In conducting researches and studies of social income of the general professional
organizations and cultural values thru its IPC, is Ateneo partnership.
performing the work of an independent contractor and
thus taxable for the contractors tax? COMPENSATION FOR SERVICES

NO. An academic institution conducting Compensation for services

researches pursuant to its commitments to education
and ultimately to public service cannot be considered as This means all remuneration for services
an independent contractor when it accepts sponsorships performed by an employee for his employer
for its research activities from international under an employer-employee relationship.
organizations, private foundations and government
agencies.
Compensation paid in kind
The research activity of the IPC is done in
pursuance of maintaining Ateneo's university status and Compensation may be paid in money or in
not in the course of an independent business of selling some medium other than money.
such research with profit in mind.
Living quarters or meals
It is error to apply the principles of tax
exemption without first applying the well-settled doctrine If a person receives a salary as a
of strict interpretation in the imposition of taxes it is remuneration for services rendered and, in
obviously both illogical and impractical to determine who addition thereto, living quarters or meals are
are exempted without first determining who are covered provided, the value to such person of the
by a provision of the NIRC. quarters and meals so furnished shall be added
to the remuneration paid for the purpose of
Hornbook doctrine in the interpretation of tax determining the amount of compensation
laws: subject to withholding.
However, if living quarters or meals are
Statute will not be construed as imposing a tax furnished to an employee for the convenience of
unless it does so clearly, expressly, and unambiguously. the employer, the value thereof need not be
A tax cannot be imposed without clear and express included as part of compensation income.
words for that purpose. Accordingly, the general rule of [Section 2.78.1, Revenue Regulations 2-98]
 Facilities and privileges of a relatively small IMPOSITION OF FRINGE BENEFIT TAX
value
Imposition of fringe benefit tax
Facilities are not considered as
compensation subject to withholding if such A final tax of 32% effective 01 January
facilities or privileges are of relatively small value 2000 is imposed on the grossed-up monetary
and are offered or furnished by the employer value of fringe benefit furnished or granted to
merely as a means of promoting the health, the employee, except rank and file, by the
goodwill, contentment, or efficiency of his employer, whether an individual or a
employees. [Section 2.78.1, Revenue corporation.
Regulations 2-98]
The fringe benefit tax is paid by the
Tips and gratuities employer.

Tips or gratuities paid directly to an Grossed-up monetary value is acquired by

employee by a customer of the employer which dividing the actual monetary value of the fringe
are not accounted for by the employee to the benefit by 68% effective 01 January 2000.
employer are considered as taxable income but
not subject to withholding. Fringe benefit

Fixed or variable transportation, representation Fringe benefit means any good, service or
and other allowances other benefit furnished or granted in cash or in
kind by an employer to an individual employee,
In general, fixed or variable transportation, except rank and file employees, such as, but not
representation and other allowances which are limited to, the following:
received by a public officer or employee or
officer or employee of a private entity, in 1. Housing;
addition to the regular compensation fixed for
his position or office, is compensation subject to 2. Expense account;
withholding.
3. Vehicle of any kind;
Any amount paid specifically, either as
advancements or reimbursements, for traveling, 4. Household personnel, such as maid,
representation and other bona fide ordinary and driver and others;
necessary expenses incurred or reasonably
expected to be incurred by the employee in the 5. Interest on loan at less than market rate
performance of his duties are not compensation to the extent of the difference between
subject to withholding, if the following the market rate and actual rate granted;
conditions are satisfied:
6. Membership fees, dues and other
1. It is for ordinary and necessary traveling expenses borne by the employer for the
and representation or entertainment employee in social and athletic clubs or
expenses paid or incurred by the other similar organizations;
employee in the pursuit of the trade,
business or profession; and 7. Expenses for foreign travel;

2. The employee is required to account or 8. Holiday and vacation expenses;

liquidate for the foregoing expenses in
accordance with the specific 9. Educational assistance to the employee
requirements of substantiation for each or his dependents; and
category of expenses. The excess of 10. Life or health insurance and other non-life
actual expenses over advances made insurance premiums or similar amounts
shall constitute taxable income if such in excess of what the law allows.
amount is not returned to the employer.
Fringe benefits which are not subject to FBT
Vacation and sick leave allowances 1. Fringe benefits which are authorized and
exempted from tax under special laws.
Amounts of vacation allowances or leave 2. Contributions of the employer for the benefit of
credits which are paid to an employee the employee to retirement, insurance and
constitutes compensation. Thus, the salary of an hospitalization benefit plans.
employee on vacation or on sick leave, which 3. Benefits given to the rank and file employees,
are paid notwithstanding his absence from work whether granted under a collective bargaining
constitutes compensation. agreement or not.
4. De minimis benefits.
However, the monetized value of unutilized 5. Fringe benefit is required by the nature of, or
leave credits of ten (10) days or less which were necessary to the trade, business or profession of
paid to the employee during the year are not the employer.
subject to income tax. 6. It is for the convenience or advantage of the
employer.
Convenience of the employer rule the recovery of the balance of his costs and for
the rests of his profits from the sale or re-lease
Under this rule, allowances furnished to the of the returned assets at the end of the primary
employee for, and as a necessary incident to, lease period.
the performance of his duties are not taxable.
Finance lease
Thus, the value of meals and living quarters
given to a driver who is available any hour of Also called full payout lease is a contract
the day when needed by his doctor-employer is involving payment over an obligatory period
not considered income of the said driver. (also called primary or basic period) of specified
rental amounts for the use of a lessors
De minimis benefits property, sufficient in total to amortize the
capital outlay of the lessor and to provide for the
These are facilities or privileges furnished lessors borrowing costs and profits.
or offered by an employer to his employees that
are of relatively small value and are offered or Obligatory period is primary non-cancelable
furnished by the employer merely as a means of period of the lease which in no case shall be less
promoting the health, goodwill, contentment, or than 730 days.
efficiency of his employee.
Lessee exercises choice over the asset.
GROSS INCOME FROM THE CONDUCT OF TRADE OR
BUSINESS DIVIDEND INCOME

Performance of the functions of a public office Dividends

The term trade or business includes the Dividends means any distribution made
performance of the functions of a public office. by a corporation to its shareholders out of its
[Section 22(S), NIRC] earnings on profits and payable to its
shareholders, whether in money or in other
INTEREST INCOME property.

Sources of interest income Kinds of dividend income

1. interest on bank deposit/deposit substitutes/trust 1. Cash dividend

fund and similar arrangement
2. Stock dividend/stock rights
2. interest from lending/interest income from bonds
3. Property dividend
3. interest on uncollected salary
4. Liquidating dividend
4. interest on foreign bonds/government bonds

5. interest on treasury bills

Stock dividend
6. interest earned from deposits maintained under
the foreign currency deposit system A stock dividend representing the transfer
of surplus to capital account shall not be subject
7. interest income of pawnshop operators to tax.

Interest income earned by non-stock, non-profit It shall be taxable only if subsequently

educational institutions cancelled and redeemed by the corporation.

Interest income shall be exempt only when It is also taxable if it leads to a substantial
used directly and exclusively for educational alteration in the proportion of tax ownership in a
purposes. To substantiate this claim, the corporation.
institution must submit an annual information
return and duly audited financial statement. A When redemption of stock dividends by a
certification of actual utilization and the Board corporation is essentially equivalent to a
resolution on the proposed project to be funded distribution of taxable dividends (CIR v. CA, et.
out of the money deposited in banks must also al. , G.R. No. 108576 dated 1/20/99)
be submitted. [Department of Finance Order
149-95] If the source of the redeemed shares is the
original capital subscriptions upon establishment
RENTALS of the corporation or from initial capital
Operating lease investment in an existing enterprise, its
redemption to the concurrent value of
An operating lease is a contract under acquisition would not be income but a mere
which the asset is not wholly amortized during return of capital. On the other hand, if the
the primary period of the lease, and where the redeemed shares are from stock dividend
lessor does not rely solely on the rentals during declarations, the proceeds of the redemption is
the primary period for his profits, but looks for
 additional wealth, for it is not merely a return of 10. Prizes and awards in sports competitions
capital, and thus, deemed as taxable dividends. sanctioned by the national sports associations

Dividends paid in property 11. 13th month pay and other benefits not exceeding
P30,000.00
Dividends paid in securities or other
property, in which the earnings of a corporation 12. GSIS, SSS, Medicare and other contributions
have been invested, are income to the recipients
to the amount of the full market value of such 13. Gains from the sale of bonds, debentures or other
property when receivable by individual certificate of indebtedness
stockholders.
14. Gains from redemption of shares in mutual fund
A dividend paid in stock of another
corporation is not a stock dividend, even though Retirement benefits, pensions, gratuities, etc.
the stock distributed was acquired through the
transfer by the corporation declaring the Such exclusions include:
dividends of property to the corporation the
stock of which is distributed as a dividend. 1. Retirement benefits under RA No. 7641
[Section 251, Revenue Regulations 2] or a reasonable private benefit plan

Liquidating dividend 2. Amount received by an official or

employee or by his heirs from the
Where a corporation distributes all its employer due to separation from the
assets in complete liquidation or dissolution, the service because of death, sickness or
gain realized or loss sustained by the other physical disability or for any cause
stockholder, whether individual or corporation, is beyond the control of the official or
a taxable income or deductible loss, as the case employee
may be.
3. Social security benefits, retirement
Disguised dividends gratuities, pensions and other similar
benefits received by resident or non-
These are payments which are equivalent resident citizens or resident aliens from
to dividend distribution. foreign government agencies and other
institutions, private or public
In the case of excessive payments by
corporations, if such payments correspond or 4. Payment of benefits to a resident person
bear a close relationship to stockholdings, and under the United States Veterans
are found to be a distribution of earnings or Administration
profits, the excessive payments will be treated
as dividends. [Section 71, Revenue Regulation 5. Benefits received from or enjoyed under
2] the Social Security System

EXCLUSION 6. Benefits received from the Government

Service Insurance System, including
Exclusion retirement gratuity received by
government officials and employees
Exclusion refers to income received or
earned but is not taxable as income because it is Requisites for exclusion of retirement benefits
exempted by law or by treaty. Such tax-free 1. It must be received under RA 7641 or in
income is not to be included in the income tax accordance with a reasonable private benefit
return unless information regarding it is plan maintained by the employer.
specifically called for. 2. Retiring employee or official has been in the
service of the same employer for at least ten
Exclusions from gross income (10) years and is not less than fifty (50) years of
age at the time of his retirement.
1. Proceeds from life insurance 3. Benefits granted under the provision shall be
2. Amount received by insured as return of premium availed of by an official or employee only once.
3. Gifts, bequests and devises
4. Compensation for injuries or sickness Reasonable private benefit plan
5. Income exempt under treaty It means a pension, gratuity, stock bonus
6. Retirement benefits, pensions, gratuities, etc. or profit sharing plan maintained by an
employer for the benefit of some or all of his
7. Income derived by foreign government officials or employees, or both, for the purpose
of distributing to such officials and employees
8. Income derived by the Philippine Government or the earnings and principal of the fund thus
its political subdivisions accumulated, and wherein it is provided in said
plan that at no time shall any part of the corpus
9. Prizes and awards made primarily in recognition or income of the fund be used for, or be
of religious, charitable, scientific, educational, diverted to, any purpose other than for the
artistic, literary or civic achievement exclusive benefit of the said officials and
employees.
 Separation pay and amounts received due to 3. The recipient is not required to render substantial
involuntary separation future services as a condition to receiving the
prize or award.
Any amount received by an official or
employee or by his heirs from the employer due Prizes and awards in sports competitions
to death, sickness or other physical disability or
for any cause beyond the control of the said 1. Prizes and awards must be granted to athletes in
official or employee is excluded from gross local and international sports competitions and
income. tournaments.

Cause beyond the control of the employee 2. Sports competition or tournament held either in
the Philippines or abroad.
The phrase for any cause beyond the
control of the said official or 3. Sports competition or tournament must be
employee connotes involuntariness on the part sanctioned by their natural sports associations.
of the official or employee. The separation from
the service of the official or employee must not
be asked for or initiated by him. [Section 2.78.1, DEDUCTIONS
Revenue Regulation 2-98] The separation was IN GENERAL
not of his own making.
Deductions
Terminal leave pay
Deductions are items or amounts which the
Commutation of leave credits or terminal law allows to be deducted under certain
leave pay are given not only at the same time conditions from gross income in order to arrive
but also for the same policy considerations at taxable income.
governing retirement benefits. Thus, not being
part of the gross salary or income but a Deduction v. exemption
retirement benefit, terminal pay is not subject to
income tax. [Commissioner v. Court of Appeals, Deduction is an amount allowed by law to
203 SCRA 72] be subtracted from gross income to arrive at
taxable income. Exemption from taxation is the
Terminal leave pay is exempt from income grant of immunity to particular persons or
tax. [Zialcita case, 190 SCRA 851] corporations or to persons or corporations of a
particular class from a tax which others
Income derived by a foreign government generally within the same taxing district are
obliged to pay.
Income derived from investments in the
Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits
in banks in the Philippines by: Deduction v. exclusion

1. foreign governments; Deduction is an amount allowed by law to

be subtracted from gross income to arrive at
2. financing institutions owned, controlled, taxable income. Exclusion refers to income
or enjoying refinancing from foreign received or earned but is not taxable as income
governments; and because exempted by law or by treaty. Such
tax-free income is not to be included in the
3. international or regional financial income tax return unless information regarding
institutions established by foreign it is specifically called for. [Section 61, Revenue
governments. Regulation 2]

Income by the Philippine government Basic principles governing deductions

1. Income derived from any public utility or from the 1. The taxpayer seeking a deduction must point to
exercise of any essential governmental function some specific provisions of the statute
authorizing the deduction; and
2. Accruing to the Government or to any political
subdivision thereof. 2. He must be able to prove that he is entitled to
the deduction authorized or allowed.
Prizes and awards in recognition of religious,
charitable, scientific, educational, artistic, literary Kinds of deductions
or civic achievement
1. Itemized deduction which is available to individual
1. Made primarily in recognition of religious, and corporate taxpayers
charitable, scientific, educational, artistic, literary
or civic achievement. 2. Optional standard deduction which is available to
individual taxpayers only, except a non-resident
2. The recipient was selected without any action on alien
his part to enter the contest or proceeding.
3. Special deductions which is available, in addition alien, may elect the itemized deductions or the
to the itemized deductions, to certain optional standard deduction.
corporations, i.e. insurance companies and
proprietary educational corporations Thus, the optional standard deduction is
not available to corporations.
Time within which to claim deduction
An individual earning purely compensation
1. As a rule, if a taxpayer does not, within any year, income is not allowed itemized deductions,
deduct certain of his expenses, losses, interests, except premium payments on health and/or
taxes, or other charges, he cannot deduct them hospitalization insurance. In addition, he is also
from the income of the next or any succeeding granted personal and additional exemptions.
year.
An individual, who earns income other than
2. If he keeps his books on the cash receipts basis, purely compensation income, is allowed
the expenses are deductible in the year they are personal and additional exemptions in addition
paid. to the itemized deductions or the optional
standard deduction.
3. If on the accrual basis, then in the year they are
incurred, whether paid or not. Two kinds of deduction available to individuals,
except a non-resident alien
Who may not avail of deductions from gross
income? 1. Itemized deductions

1. Citizens and resident aliens whose income is 2. Optional standard deduction

purely compensation income.
Note: Optional standard deduction is not available to
They are allowed personal and additional corporations.
exemptions and deduction for premium
payments on health and hospitalization ORDINARY AND NECESSARY BUSINESS EXPENSES
insurance.
Business expense v. capital expenses
2. Non-resident aliens not engaged in trade or
business in the Philippines Business expenses refer to all the ordinary
and necessary expenses paid or incurred during
3. Non-resident foreign corporations the taxable year in carrying on or which are
directly attributable to the development,
Deductions from gross income management, operation and/or conduct of the
trade, business or the exercise of a profession.
1. Expenses
Capital expenses are expenditures for
2. Interest extraordinary repairs which are capitalized and
subject to depreciation. These are expenses
3. Taxes which tend to increase the value or prolong the
life of the taxpayers property.
4. Losses
Ordinary and necessary expenses
5. Bad debts
An expense is ordinary when it is commonly
6. Depreciation incurred in the trade or business of the taxpayer
as distinguished from capital expenditures. The
7. Depletion of oil and gas wells and mines payments, however, need not be normal or
habitual in the sense that the taxpayer will have
8. Charitable and other contributions to make them often. The payment may be
unique or non-recurring to the particular
9. Research and development taxpayer affected.

10. Pension trusts An expense is necessary when it is

appropriate and helpful to the taxpayers
11. Premium payments on health and/or business or if it is intended to realize a profit or
hospitalization insurance of an individual to minimize a loss.
taxpayer
Requisites for deductibility of business expense
Some rules on deduction
1. The expenses must be ordinary and necessary.
A corporation may avail only of the
deductions from (1) to (10); premium payments 2. It must be paid or incurred during the taxable
on health and/or hospitalization insurance is year.
deductible only by an individual taxpayer.
3. It must be paid or incurred in carrying on any
A corporation may avail only of the itemized trade or business or profession.
deductions; an individual, except a non-resident
4. It must be reasonable in amount. of the purchase price. [Section 71, Revenue
Regulations 2]
5. It must be substantiated by sufficient evidence
such as official receipts and other official Requisites for deductibility of bonuses to
records. employees

6. It must not be against law, morals, public policy 1. The bonuses are made in good faith.
or public order.
2. They are given for personal services actually
Substantiation requirement for business expense rendered.

Taxpayer need to substantiate with 3. They do not exceed a reasonable compensation

sufficient evidence, such as official receipts or for the services rendered, when added to the
other adequate records: stipulated salaries, measured by the amount and
quality of services performed in relation to the
1. the amount of the expense being taxpayers business. [Section 72, Revenue
deducted; and Regulations 2]

2. the direct connection or relation of the In Kuenzle v. CIR [28 SCRA 365]
expense being deducted to the and C.M. Hoskins v. CIR [30 SCRA 434], the
development, management, operation Supreme Court disallowed deductions for
and/or conduct of the trade, business or bonuses given to the top officers of the involved
profession of the taxpayer. corporations for being unreasonable.

What are included in business expenses? Pensions and compensation for injuries

Business expenses include: Amounts paid for pensions to retired

employees or to their families or others
1. Salaries, wages and other forms of dependent upon them, or on account of injuries
compensation for personal services received by the employee, and lump sum
actually rendered, including the amounts paid or accrued as compensation for
grossed-up monetary value of fringe injuries are proper deductions as ordinary and
benefit granted provided the fringe necessary expenses. Such deductions are limited
benefit tax has been paid. to the amount not compensated for by
insurance or otherwise.
2. Travel expenses, here and abroad, while
away from home. Rules on repairs

3. Rentals and/or other payments of Expenses for repairs are deductible if such
property to which the taxpayer has not repairs are incidental or ordinary, that is, made
taken or is not taking title or in which he to keep the property used in the trade or
has no equity other than that of a business of the taxpayer in an ordinarily efficient
lessee, user or possessor. operating condition.

4. Entertainment, amusement and Repairs in the nature of replacement to the

recreation expenses. extent that they arrest deterioration and prolong
the life of the property are capital expenditures
Requisites for deductibility of compensation and should be debited against the corresponding
payments allowance for depreciation. [Section 68,
Revenue Regulations 2]
1. The payments are reasonable.
Travel expenses
2. They are, in fact, payments for personal services
actually rendered. [Section 70, Revenue Travel expenses include transportation
Regulation 2] expenses and meals and lodging of an employee
paid for by the employer. [Section 66, Revenue
Regulations 2]

Treatment of excessive compensation Requisites for deductibility of travel expenses

In the case of excessive payments by 1. The expenses must be reasonable and necessary.
corporations, if such payments correspond or
bear a close relationship to stockholdings, and 2. They must be incurred or paid while away from
are found to be distribution of earnings or home.
profits, the excessive payments will be treated
as dividends. [Section 71, Revenue Regulations 3. They must be paid or incurred in the conduct of
2] trade or business.

If such payments constitute payment for

property, they should be treated by the payor as
capital expenditure and by the recipient as part
Tax home Option to private educational institutions

Tax home is the principal place of business, In addition to the allowable deductions, a
when referring to away from home. private educational institution may, at its option,
elect either:
Rental expense
1. To deduct expenditures otherwise
A reasonable allowance for rentals and/or considered as capital outlays of
other payments which are required as a depreciable assets incurred during the
condition for the continued use or possession, taxable year for the expansion of school
for purposes of the trade, business or property facilities; or
to which the taxpayer has not taken or is not
taking title or in which he has no equity other 2. To deduct allowance for depreciation
than that of a lessee, user or possessor is thereof.
deductible from the gross income.
Treatment of other expenses
Where a leasehold is acquired for business
purposes for a specified sum, the purchaser may 1. Advertising expense
take as a deduction in his return an adequate
part of such sum each year, based on the Not deductible business expense. Efforts
number of years the lease has to run. to establish reputation are akin to acquisition of
capital assets and, therefore, expenses related
Taxes paid by a tenant to or for a landlord thereto are not business expense but capital
for business property are additional rent and expenditures.
constitute a deductible rent to the tenant and
taxable income to the landlord; the amount of 2. Promotional expenses
tax being deductible by the latter.
Same as advertising expense
The cost borne by the lessee in erecting
buildings or making permanent improvements 3. Litigation expenses
on ground of which he is a lessee is held to be a
capital investment and not deductible as a Litigation expenses that are incurred in
business expense. the defense or protection of title are capital in
nature and not deductible.
Requisites for rental expense
In Gutierrez v. CIR [14 SCRA 34], it
1. Required as a condition for continued use or was held that litigation expenses defrayed by a
possession taxpayer to collect apartment rentals and to
eject delinquent tenants are ordinary and
2. For purposes of the trade, business or profession necessary expenses in pursuing his business.

3. Taxpayer has not taken or is not taking title to INTEREST EXPENSE

the property or has no equity other than that of
a lessee, user or possessor Interest

Entertainment, amusement and recreation The amount of interest paid or incurred

expense within a taxable year on indebtedness in
connection with the taxpayers profession, trade
1. Reasonable in amount or business shall be allowed as deduction from
gross income.
2. Incurred during the taxable period
Back-to-back interest
3. Directly connected to the development,
management, and operation of the trade, The taxpayers allowable deduction for
business, or profession of the taxpayer, or that interest expense shall be reduced by an amount
are directly related to or in furtherance of the equal to 38% by 01 January 2000 of the interest
conduct of his or its trade, business or income earned by him which has been subjected
profession to a final tax.

4. Not to exceed such ceiling as the Secretary of Interest which cannot be deducted
Finance may, by rules and regulations, prescribe
1. Interest is paid in advance through discount or
5. Any expense incurred for entertainment, otherwise by an individual taxpayer reporting
amusement or recreation which is contrary to income on the cash basis. Such interest shall be
law, morals, public policy, or public order shall in allowed as a deduction in the year the
no case be allowed as a deduction indebtedness is paid.

2. Interest between related taxpayers.

3. If the indebtedness is incurred to finance

petroleum exploration.
Requisites for deductibility of interest expense
Tax subsequently refunded or credited
1. There must be an indebtedness incurred by the
taxpayer in connection with the taxpayers Taxes previously allowed as deductions,
trade, business or profession. when refunded or credited, shall be included as
part of gross income in the year of receipt to the
2. The interest must have been paid or incurred extent of the income tax benefit of said
within the taxable year. deduction.

3. The interest must have been stipulated in writing. Limitations on deductions for non-resident alien
engaged in trade or business and resident foreign
corporation

Optional treatment of interest expense In the case of a non-resident alien

individual engaged in trade or business in the
At the option of the taxpayer, interest Philippines and a resident foreign corporation,
incurred to acquire property used in trade, deductions for taxes shall be allowed only if and
business or exercise of a profession may be to the extent that they are connected with
allowed as a deduction or treated as a capital income from sources within the Philippines.
expenditure.
Tax credit
Delinquency interest on tax payment deductible
Tax credit refers to the taxpayers right to
For interest to be allowed as deduction deduct from the income tax due the amount of
from gross income, it must be shown that there tax he has paid to a foreign country subject to
be an indebtedness, that there should be limitations.
interest upon it, and that what is claimed as an
interest deduction should have been paid or Tax deduction v. tax credit
accrued within the year. The
term indebtedness has been defined as an In the former, the taxes are deducted from
unconditional and legally enforceable obligation the gross income in computing the net income,
for the payment of money. Within the meaning while in the latter, the taxes are deducted from
of that definition, a tax may be considered as an Philippine income tax itself.
indebtedness. Hence, interest paid for late
payment of the donors tax is deductible from In the former, all taxes as a general rule,
gross income. [Commissioner v. Prieto, 109 are allowed as deductions with some
Phil 592] exemptions (enumerated above), while in the
latter, only foreign income taxes may be claimed
TAXES as credits against Philippine income tax.

What taxes are deductible? Proof of credits

As a general rule, all taxes, national or The credits shall be allowed only if the
local, paid or incurred with the taxable year in taxpayer establishes to the satisfaction of the
connection with the taxpayers trade, business Commissioner the following:
or profession are deductible from gross income.
1. The total amount of income from sources
Taxes means taxes proper and, therefore, without the Philippines;
no deductions are allowed for amounts
representing interest, surcharges and fines or 2. The amount of income derived from each
penalties incident to delinquency. country, the tax paid or incurred to
which is claimed as a credit; and
What taxes are not deductible from gross
income? 3. All other information necessary for the
verification and computation of such
1. Philippine income tax credits.

2. Income taxes imposed by the authority of any

foreign country but deduction is allowed only in
the case of a taxpayer who is entitled to tax Credit against tax for taxes of foreign countries
credit for taxes of foreign countries but does not
avail of the same Credit may be claimed by a citizen,
domestic corporation, members of general
3. Estate and donors taxes professional partnerships, and beneficiaries of
estates and trusts.
4. Special assessments or levies assessed against
local benefits of a kind tending to increase the An alien individual and a foreign
value of the property assessed corporation are not allowed to claim credits
against the tax for taxes of foreign countries.
Limitations on credit Note: Capital losses and securities becoming worthless
are governed by rules on loss from the sale or
The amount of the credit taken shall be exchange of capital assets.
subject to each of the following limitations:
Casualty loss
1. The amount of the credit in respect to the tax
paid or incurred to any country shall not exceed Loss arises from fires, storms, shipwreck, or
the same proportion of the tax against which other casualties, or from robbery, theft or
such credit is taken, which the taxpayers embezzlement.
taxable income from sources within such
country bears to his entire taxable income for Loss limitation rule for capital losses
the same taxable year; and
Losses from sales or exchanges of capital
2. The total amount of the credit shall not exceed assets shall be allowed only to the extent of the
the same proportion of the tax against which gains from such sales or exchanges.
such credit is taken, which the taxpayers
taxable income from sources without the Securities becoming worthless
Philippines taxable under this Title bears to his 1. Securities become worthless during the taxable
entire taxable income for the same taxable year. year
2. Securities are capital assets
LOSSES 3. Losses are considered as losses from the sale or
exchange, on the last day of such taxable year,
Losses of capital assets

The term implies an unintentional parting Net operating loss

with something of value. It means the excess of allowable deduction
over gross income of the business in a taxable year.
It is used in the income tax law in a very
broad sense to comprehend all losses which are Net operating loss carry-over (NOLCO)
not general or natural to the ordinary course of
business. NOLCO shall be carried over as a deduction
from the gross income for the next three (3)
consecutive taxable years immediately following
the year of loss.

Requisites for deductibility of loss Such loss shall be allowed as a deduction if

it had not been previously offset as deduction
1. The loss must be incurred in the trade, business from gross income.
or profession of the taxpayer.
However, any net loss incurred in a taxable
2. It must be actually sustained and charged off year during which the taxpayer was exempt
within the taxable year. from income tax shall not be allowed as a
deduction.
3. It must be evidenced by a closed and completed
transaction. NOLCO shall be allowed only if there has
been no substantial change in the ownership of
4. It must not be compensated for by insurance or the business or enterprise.
other forms of indemnity.
There is no substantial change when:
5. If it is a casualty loss, the taxpayer has filed a
sworn declaration of loss within 45 days after 1. Not less than 75% in nominal value of
the date of the discovery of the casualty or outstanding issued shares, if the
robbery, theft, or embezzlement. business is in the name of a corporation,
is held by or on behalf of the same
Some recognized losses persons; or

1. Ordinary losses/business losses 2. Not less than 75% of the paid up capital
of the corporation, if the business is in
2. Casualty losses the name of a corporation, is held by or
on behalf of the same persons.
3. Capital losses
Losses from wash sales of stock or securities
4. Securities becoming worthless
No deduction for loss shall be allowed for
5. Losses from wash sales or stock or securities wash sales unless the claim is made by a dealer
in stock or securities and with respect to a
6. Wagering losses transaction made in the ordinary course of the
business of such dealer.
7. Abandonment losses
Wash sale
 A wash sale occurs where it appears that
within a period beginning thirty (30) days before
the date of the sale or disposition of shares of Equitable doctrine of tax benefit
stock or securities and ending thirty (30) days
after such date, the taxpayer has acquired (by This doctrine holds that a recovery of bad
purchase or exchange) or has entered into a debt previously deducted from gross income
contract or option to so acquire, substantially constitutes taxable income if in the year the
identical stock or securities. account was written off, the deduction resulted
in a tax benefit, that is, in the reduction of
Wagering losses taxable income of the taxpayer.

Losses from wagering shall be allowed only DEPRECIATION

to the extent of gains from such transactions.
Depreciation

Depreciation is the gradual diminution in

Abandonment losses the useful value of tangible property used in
trade, business or profession resulting form
In the event a contract area where exhaustion, wear and tear, and obsolescence.
petroleum operations are undertaken is partially
or wholly abandoned, all accumulated The term is also applied to amortization of
exploration and development expenditures the value of intangible assets, the use of which
pertaining thereto shall be allowed as a in trade or business is definitely limited in
deduction. duration.

In case a producing well is subsequently The income tax law does not authorize the
abandoned, the unamortized costs thereof, as depreciation of an asset beyond its acquisition
well as the undepreciated costs of equipment cost. Hence, a deduction over and above the
directly used therein, shall be allowed as a cost cannot be claimed and allowed. [Basilan v.
deduction in the year such well, equipment or CIR, 21 SCRA 17]
facilitiy is abandoned by the contractor.

BAD DEBTS Depreciation is a question of fact

Depreciation is a question of fact and is
Bad Debts not measured by theoretical yardstick, but should be
determined by a consideration of actual facts. [Limpan
Bad debts are debts due to the taxpayer v. CIR, 17 SCRA 703]
which are actually ascertained to be worthless
and charged off within the taxable year. Requisites for deductibility of depreciation

Requisites for deductibility of bad debts 1. The allowance for depreciation must be
reasonable.
1. There must be a valid and subsisting debt.
2. It must be for property used in the trade,
2. The debt must be actually ascertained to be business or profession.
worthless and uncollectible during the taxable
year. 3. It must be charged off during the taxable year.

3. The debt must be charged off during the taxable 4. A statement on the allowance must be attached
year. to the return.

4. The debt must be connected with the trade, Deduction for obsolescence
business or profession of the taxpayer, and not
sustained in a transaction entered into between If the whole or any portion of physical
related taxpayers. property is clearly shown by the taxpayer as
being affected by economic conditions that will
Diligent efforts to collect result in its being abandoned at a future date
prior to the end of its natural life, so that
In addition to the four requisites, the depreciation deductions alone would be
taxpayer must show that the debt is indeed insufficient to return the cost at the end of its
uncollectible even in the future. economic terms of usefulness, a reasonable
deduction for obsolescence, in addition to
Furthermore, there are steps outlined to be depreciation, may be allowed.
undertaken by the taxpayer to prove that he
exerted diligent efforts to collect the debts, via: Property held for life
a) sending of statement of accounts; b) sending
of collection letters; c) giving the account to a In the case of property held by one person
lawyer for collection; and d) filing a collection for life with remainder to another person, the
case in court. [Philippine Refining Co. v. deduction shall be computed as if the life tenant
Court of Appeals, 256 SCRA 667] were the absolute owner of the property and
shall be allowed to the life tenant.
 Determination of amount of depletion cost
In case of property held in trust
In determining the amount of depletion
Allowable deductions shall be apportioned cost allowable, the following three factors are
between the income beneficiaries and the essential, namely:
trustees in accordance with the pertinent
provisions of the instrument creating the trust, 1. the basis of the property;
or in the absence of such provisions, on the
basis of the trust income allowable to each. 2. the estimated total recoverable units in
the property; and
Certain methods in computing depreciation
3. the number of units recovered during the
1. The straight line method taxable year in question.
[Consolidated Mines v. CTA, 58 SCRA
2. Declining balance method 618]

3. Sum-of-the-year-digit method. Basis means the amount of the taxpayers

capital or investment in the property which he is
4. Any other method which may be prescribed by entitled to recover tax-free during the period he
the Secretary of Finance upon recommendation is removing the mineral in the deposit.
of the Commissioner.
Intangible cost in petroleum operations
Agreement as to useful life on which depreciation
rate is based This refers to any cost incurred in
petroleum operations which in itself has no
Where the taxpayer and the Commissioner salvage value and which is incidental to and
have entered into an agreement in writing necessary for the drilling of wells and
specifically dealing with the useful life and rate preparation of wells for the production of
of depreciation of any property, the rate so petroleum.
agreed upon shall be binding on both the
taxpayer and the National Government in the
absence of facts and circumstances not taken
into consideration during the adoption of such
agreement. The responsibility of establishing the Depletion v. depreciation
existence of such facts and circumstances shall Both are predicated on the same basic
rest with the party initiating the modification. premise of avoiding a tax on capital.
However, depletion is based upon the
Where the taxpayer has adopted such concept of the exhaustion of a natural resource whereas
useful life and depreciation rate for any depreciation is based upon the concept of the
depreciable asset and claimed the depreciation exhaustion of the property, not otherwise a natural
expenses as deduction from his gross income resource, used in a trade or business or held for the
without any written objection on the part of the production of income. Thus, depletion and depreciation
Commissioner or his duly authorized are made applicable to different types of assets.
representative, the aforesaid useful life and
depreciation rate so adopted by the taxpayer CHARITABLE AND OTHER CONTRIBUTIONS
shall be considered binding.
Kinds of Charitable Contributions
Depreciation of patent or copyright 1. Ordinary or those which are subject to limitations
as to the amount deductible from gross income.
In computing a depreciation allowance in 2. Special or those which are deductible in full from
the case of a patent or copyright, the capital gross income.
sum to be replaced is the cost or other basis of
the patent or copyright. Requisite for deductibility of charitable
contributions
The allowance should be computed by an 1. The contribution must actually be paid or
apportionment of the cost or other basis of the made to the Philippine government or any
patent or copyright over the life of the patent or political subdivision thereof or to any of the
copyright since its grant, or since its acquisition domestic corporations or associations specified
by the taxpayer, or since March 1, 1913, as the by the NIRC.
case may be. 2. No part of the net income of the beneficiary must
inure to the benefit of any private stockholder or
DEPLETION OF OIL AND GAS WELLS AND MINES individual.
3. It must be made within the taxable year.
Depletion of Oil and Gas Wells and Mines 4. It must not exceed 10% in the case of an
individual and 5% in the case of a corporation of
Depletion is the exhaustion of natural the taxpayers taxable income (except where the
resources like mines and oil and gas wells as a donation is deductible in full) to be determined
result of production or severance from such without the benefit of the contribution.
mines or wells. 5. It must be evidenced by adequate records or
receipts.
Contributions deductible in full RESEARCH AND DEVELOPMENT

1. Donations to the Philippine government or Research and development

to any of its political subdivisions according to a
national priority plan determined by NEDA. A taxpayer may treat research or
development expenditures which are paid or
2. Donations to foreign institutions or international incurred by him during the taxable year in
organizations which are fully deductible in connection with his trade, business or profession
pursuance of or in compliance with agreements, as ordinary and necessary expenses which are
treaties or commitments entered into by the not chargeable to capital account. The
Philippines or in pursuance of special laws. expenditures so treated shall be allowed as
deduction during the taxable year when paid or
3. Donation to accredited non-governmental incurred.
organization.
Amortization of certain research and
Non-government organization development expenditures

It means a non-profit domestic corporation: Taxpayer may also elect to treat the
following research and development
1. Organized and operated exclusively for expenditures as deferred expenses:
scientific, research, educational,
character-building and youth and sports 1. Paid or incurred by the taxpayer in
development, health, social welfare, connection with his trade, business or
cultural or charitable purposes, or a profession;
combination thereof, no part of the net
income of which inures to the benefit of 2. Not treated as expenses; and
any private individual.
3. Chargeable to capital account but not
2. Utilizes the contribution directly for the chargeable to property of a character
active conduct of the activities which is subject to depreciation or
constituting the purpose or function for depletion.
which it is organized and operated not
later than the 15th day of the their Research and development expenses deductions
month after the close of the accredited shall not apply to:
NGOs taxable year in which the
contribution were received. 1. Any expenditure for the acquisition or
improvement of land, or for the improvement of
3. Administrative expense shall, in no case, property to be used in connection with research
exceed thirty percent (30%) of the total and development of a character which is subject
expenses. to depreciation or depletion.

4. The assets, in the event of dissolution, 2. Any expenditure paid or incurred for the purpose
would be distributed to another non- of ascertaining the existence, location, extent or
profit domestic corporation organized quality of any deposit of ore or other mineral,
for similar purpose, or to the State for including oil or gas.
public purpose, or would be distributed
by a court to another organization. PENSION TRUSTS

Utilization Requisites for deductibility of payments to

pension trusts
Utilization means:
1. The employer must have established a pension or
1. Any amount in cash or kind (including retirement plan to provide for the payment of
administrative expenses) paid or utilized to reasonable pensions to his employees.
accomplish one or more purposes for which the
accredited non-governmental organization was 2. The pension plan is reasonable and actuarially
created or organized. sound.

2. Any amount paid to acquire an asset used (or 3. It must be funded by the employer.
held for use) directly in carrying out one or more
purposes for which the accredited non- 4. The amount contributed must no longer be
governmental organization was created or subject to the control or disposition of the
organized. employer.

Proof of deductions 5. The payment has not yet been allowed as a

deduction.
Contributions or gifts shall be allowable as
deductions only if verified under the rules and 6. The deduction is apportioned in equal parts over
regulations prescribed by the Secretary of a period of ten (10) consecutive years beginning
Finance. with the year in which the transfer or payment is
made.
ADDITIONAL REQUIREMENT FOR DEDUCTIBILITY OF Personal exemptions
CERTAIN PAYMENTS
Personal exemptions are arbitrary amounts
Additional requirement for deductibility of certain allowed, in the nature of a deduction from
payments taxable income, for personal, living or family
expenses of an individual taxpayer. They are
Any amount paid or payable which is considered to be the equivalent of the minimum
otherwise deductible from, or taken into account of subsistence of the taxpayer.
in computing gross income or for which
depreciation or amortization may be allowed, Who are allowed personal exceptions?
shall be allowed as a deduction only if it is
shown that the tax required to be deducted and 1. Citizens
withheld therefrom has been paid to the Bureau
of Internal Revenue. 2. Resident aliens

Limitations or ceilings on itemized deductions 3. Non-resident aliens engaged in trade or business

in the Philippines under certain conditions
The Secretary of Finance may prescribe
limitations or ceilings for any of the itemized 4. Estates and trusts, which are treated for purposes
deductions from (1) to (10). This can be done of personal exemptions, as a single individual
through rules and regulations issued by the
Secretary upon the recommendation of the Amount of personal exemptions allowed to
Commissioner and after a public hearing has citizens and resident aliens
been held for such purpose.
P20,000 single person or a
The Secretary shall, for purposes of married person judicially
determining such ceilings or limitations, consider decreed as legally
the following factors: separated from his or
her spouse with no
1. Adequacy of the prescribed limits on the qualified dependents
actual expenditure requirements of each
particular industry; and P25,000 - head of a family

2. Effects of inflation on expenditure levels. P32,000 - married person

OPTIONAL STANDARD DEDUCTION Note: Only the spouse deriving taxable income can
claim the P32,000 personal exemption; if both
Optional Standard Deduction have taxable income, each can claim P32,000
exemption.
An individual subject to tax, other than a
non-resident alien, may elect a standard Head of the family
deduction in an amount not exceeding ten
percent (10%) of his gross income in lieu of It means an unmarried or legally separated
itemized deductions. man or woman with one or both parents, or with
one or more brothers or sisters, or with one or
Unless the taxpayer signifies in his return more legitimate, recognized natural or legally
his intention to elect the optional standard adopted children living with and dependent
deduction, he shall be considered as having upon him or her for their chief support.
availed himself of the itemized deductions.
Such brothers or sisters or children should
Such election when made in the return shall be not more than 21 years old, unmarried and
be irrevocable for the taxable year for which the not gainfully employed, or where such children,
return is made. brothers or sisters, regardless of age, are
incapable of self-support because of mental or
An individual who is entitled to and claimed physical defect.
for the optional standard deduction shall not be
required to submit with his tax return such A head of family is an individual who
financial statements otherwise required in the actually supports and maintains in one
NIRC. household one or more individuals, who are
closely connected with him by blood
relationship, relationship by marriage, or by
DEDUCTIONS ALLOWED ONLY TO INDIVIDUAL TAXPAYERS adoption, and whose right to exercise family
control and provide for these dependent
individuals is based upon some moral or legal
Deductions allowed only to individual taxpayers obligation.

1. Personal exemption Note: Consider discrepancy between definition of head

2. Additional exception of family and dependent i.e. children.
3. Premium payments on health and/or
hospitalization insurance
 To be a head of a family, one or Change of status
more legitimate, recognized natural, or
legally adopted children must live with and Taxpayer marries or have additional
depend on an unmarried or legally separated dependents
man or woman.
Taxpayer dies during the taxable year
A dependent, on the other hand, may
be a legitimate, illegitimate or legally If the spouse or any of the dependents dies
adopted child. or if any of such dependent marries, becomes
21 years old, or becomes gainfully employed
Both, however, define or qualify
different terms. Note: As a general rule, interpret in favor of taxpayer

Living with Personal exemptions to non-resident alien

individual
The term living with the person giving
support does not necessarily mean actual and Non-resident alien individual engaged in
physical dwelling together at all times and under trade or business
all circumstances.
Entitled only to personal exemption
Family
Amount allowed is limited to exemptions
The term family includes an unmarried or granted to Filipino citizens who are not residents
legally separated person with: in the aliens domicile country but not to
exceed the amount allowed to citizens or
1. one or both parents; residents of the Philippines in the NIRC.

2. one or more brothers or sisters; or Premium payment on health and/or

hospitalization insurance of an individual
3. one or more legitimate, recognized taxpayer
natural, or legally adopted children living
with and dependent upon him or her for Premium payments should not exceed
their chief support. P2,400 per family or P200 a month for a taxable
year
Additional exemption
Family has a gross income of not more than
A married person or a head of a family may P250,000 for the taxable year
claim an additional exemption of P8,000 for
each dependent, not exceeding four (4). In the case of married taxpayers, only the
spouse claiming the additional exemption for
The additional exemption shall be claimed dependents shall be entitled to this deduction.
by only one of the spouses in the case of
married individuals.
ITEMS NOT DEDUCTIBLE
In the case of legally separated spouses, it
may be claimed only by the spouse who has
custody of the child or children. Items not deductible

Dependent 1. Personal, living or family expenses

2. Capital expenditures
Refers only to the legitimate, illegitimate or a. Any amount paid out for new buildings or
legally adopted child of the taxpayer for permanent improvements, or
betterments made to increase the value
The child is: of any property or estate
b. Any amount expended in restoring
1. living with the taxpayer; property or in making good the
exhaustion thereof for which an
2. chiefly dependent upon the taxpayer for allowance is or has been made
support; 3. Premiums paid on any life insurance policy
covering the life of any officer or employee, or
3. not more than 21 years of age; of any person financially interested in any trade
or business carried on by the taxpayer,
4. not married; and individually or corporate, when the taxpayer is
directly or indirectly a beneficiary under such
5. not gainfully employed or, even though policy [Section 36, NIRC]
over 21 years old, incapable of self 4. Losses between related taxpayers.
support because of mental or physical 5. Losses on wash sales
defect. 6. Illegal expense i.e. bribes, kickbacks, and other
similar payments [Section 34(A)(1)(c), NIRC]
Capital expenditures
5. Between the fiduciary of a trust and the fiduciary
1. Any amount paid out for new buildings or for of another trust if the same person is a grantor
permanent improvements, or betterments made with respect to each trust
to increase the value of any property or estate
6. Between the fiduciary of a trust and a beneficiary
2. Any amount expended in restoring property or in of such trust [Section 36(B), NIRC]
making good the exhaustion thereof for which
an allowance is or has been made Relevant points regarding related taxpayers

3. Cost of defending or perfecting title to property 1. Payment of interest is not deductible.

constitutes a part of the cost of the property and
is not a deductible expense 2. Bad debts are not deductible.

4. The amount expended for architects services is 3. Losses from sales or exchanges of property are
part of the cost of the building not deductible.

5. Expenses of the administration of an estate such

as court costs, attorneys fees, and executors CAPITAL GAINS AND LOSSES
commissions are chargeable against
the corpus of the estate and are not allowable
deductions Ordinary asset

6. In case of a corporation, expenses for 1. Stock in trade of the taxpayer or other property
organization, such as incorporation fees, of a kind which would properly be included in
attorneys fees and accountants charges are the inventory of the taxpayer if on hand at the
ordinarily capital expenditures, but where such close of the taxable year.
expenditures are limited to purely incidental
expenses, a taxpayer may charge such items 2. Property held by the taxpayer primarily for sale to
against income in the year in which they are customers in the ordinary course of his trade or
incurred. [Section 120, Revenue Regulations 2] business.

Life or health insurance and other non-life 3. Property used in the trade or business, of a
insurance premiums or similar amounts in excess character which is subject to the allowance for
of what the law allows depreciation.

General rule: The cost of life or health 4. Real property used in the trade or business of the
insurance and other non-life insurance taxpayer.
premiums borne by the employer for his
employee shall be treated as taxable fringe Capital asset
benefit.
Property held by the taxpayer, whether or
Exceptions not connected with his trade or business, which
is not an ordinary asset.
1. Contribution of the employer for the
benefit of the employee pursuant to the Ordinary gain or income
provisions of existing law, i.e. SSS,
GSIS, among others. Ordinary income or gain includes any gain
from the sale or exchange of property which is
2. The cost of premiums borne by the not a capital asset.
employer for the group insurance of his
employees. [Revenue Regulations 3-98] Capital gain or income

Related taxpayers Capital gain or income is any gain from the

sale or exchange of a capital asset.
1. Between members of a family (which shall include
only his brothers and sisters, spouse, ancestors Net capital gain
and lineal descendants)
Net capital gain means the excess of the
2. Between an individual and a corporation more gains from sales or exchanges of capital assets
than 50% in value of the outstanding stock of over the losses from such sales or exchanges.
which is owned, directly or indirectly, by or for
such individual except in the case of Net capital loss
distributions in liquidation
Net capital loss means the excess of the
3. Between two corporations more than 50% in losses from sales or exchanges of capital assets
value of the outstanding stock of each of which over the gains from such sales or exchanges.
is owned, directly or indirectly by or for the
same individual

4. Between the grantor and the fiduciary of a trust

Three rules on the recognition of capital gains c. Exchange by a person of his property for
and losses stocks in a corporation as a result of
1. Holding rule which said person, alone or together
2. Loss limitation rule with others not exceeding four persons,
3. Net capital loss carry-over rule gains control of said corporation.

Note: The holding and net capital loss carry-over rules 2. Transactions where gain is recognized but not the
apply only to individual taxpayers and not to loss
corporate taxpayers.
a. Transactions between related taxpayers
Percentage taken into account or holding rule
In the case of an individual taxpayer, b. Illegal transactions
only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset c. Exchanges of property, not solely in kind,
shall be taken into account in computing net capital in pursuance of corporate mergers and
gain, net capital loss, and net income: consolidations

100% - if the capital asset has been held Merger or consolidation

for not more than 12 months
Merger or consolidation shall be understood
50% - if the capital asset has been held to mean the (a) ordinary merger or
for more than 12 months consolidation or (b) the acquisition by one
corporation of all or substantially all the
Loss limitation rule properties of another corporation solely for
stock.
Losses from sales or exchanges of capital
assets shall be allowed only to the extent of the Such merger or consolidation must be
gains from such sales or exchanges. undertaken for a bona fide business purpose
and not solely for the purpose of escaping the
Net capital loss carry-over burden of taxation.

If any taxpayer, other than a corporation,

sustains in any taxable year a net capital loss, SOURCES OF TAXATION
such loss (in an amount not in excess of the net
income for such year) shall be treated in the
succeeding taxable year as a loss from the sale Source of income
or exchange of a capital asset held for not more
than 12 months. The term source of income is not a place
but the property, activity or service that
Gains and losses from short sales, etc. produces the income. [Commissioner v.
BOAC]
Gains or losses from short sales of property
shall be considered as gains or loses from sales Dissent of Justice Feliciano in Commissioner v
or exchanges of capital assets. BOAC

Gains or losses attributable to the failure to The source of income relates not to the
exercise privileges or options to buy or sell physical sourcing of a flow of money or the
property shall be considered as capital gains or physical situs of payment but rather to
losses. the property, activity or service which produced
the income. Where a contract for rendition of
General rule on the recognition of gain or loss services is involved, the applicable source rule
upon the sale or exchange of property may be simply stated as follows: The income is
sourced in the place where the service
The general rule is that the entire amount contracted for is rendered.
of the gain or loss, as the case may be, shall be
recognized, i.e. taxable or deductible. Sources of taxation

Exceptions 1. Income from sources within the Philippines

1. Transactions where gains and losses are not 2. Income from sources without the Philippines
recognized
3. Income from sources partly within and partly
a. Exchange of property where the property without the Philippines
received is not substantially different
from the property disposed of. [Section
140, Reg. No. 2]

b. Exchange of property solely in kind in

pursuance of corporate mergers and
consolidations.
Gross income from sources within the Philippines from sources within the country in which sold.
[Section 42(E), NIRC]
The following items of gross income shall
be treated as gross income from sources within Gain from sale of shares of stock of a domestic
the Philippines: corporation

1. Interests derived from sources within the Gain from the sale of shares of stock in a
Philippines, and interests on bonds, domestic corporation shall be treated as derived
notes or other interest-bearing entirely from sources within the Philippines
obligations of residents, corporate or regardless of where the said shares are sold.
otherwise.
The transfer by a non-resident alien or a
2. Dividends received from a domestic foreign corporation to anyone of any share of
corporation and from a foreign stock issued by a domestic corporation shall not
corporation, unless less than 50% of the be effected or made in its book unless:
gross income of such foreign
corporation for the three-year period 1. The transferor has filed with the
ending with the close of its taxable year Commissioner a bond conditioned upon
preceding the declaration of such the future payment by him of any
dividends was derived from sources income tax that may be due on the
within the Philippines. gains derived from such transfer; or

3. Compensation for labor or personal 2. The Commissioner has certified that the
services performed in the Philippines. taxes, if any, imposed and due on the
gain realized from such sale or transfer
4. Rentals and royalties from property have been paid. [Section 42(E), NIRC]
located in the Philippines.

5. Gains, profits and income from the sale of ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
real property located in the Philippines.

6. Gains, profits and income from the sale of Methods of accounting

personal property if sold within the
Philippines. [Section 42(A), NIRC] General Rule: The taxable income shall be
computed upon the basis of the taxpayers
Interest income annual accounting period in accordance with the
method of accounting regularly employed in
The residence of the obligor who pays the keeping the books of such taxpayer.
interest, rather than the physical location of the
securities, bonds or notes or the place of Exception: Computations shall be made in
payment, is the determining factor of the source accordance with such method as in the opinion
of interest income. [National Development of the Commissioner clearly reflects the income:
Corporation v. Commissioner, 151 SCRA
472] a. If no such method of accounting has
been so employed; or
Gross income from sources without the
Philippines b. If the method employed does not clearly
reflect the income. [Section 43, NIRC]
Just the exact opposite of the items of
gross income from sources within the
Philippines. [Section 42(B), NIRC]
Taxable year
Income from sources partly within and partly
without the Philippines Taxable year means the calendar year, or
the fiscal year ending during such calendar year,
Gains, profits and income from the sale of upon the basis of which the net income is
personal property produced by the taxpayer computed.
within and sold without the Philippines, or
produced by the taxpayer without and sold Accounting periods
within the Philippines shall be treated as derived
partly from sources within and partly from 1. Calendar year - January 1 to December 31
sources without the Philippines. [Section 42(E),
NIRC] 2. Fiscal year an accounting period of twelve (12)
months ending on the last day of any month
Purchase or sale of personal property other than December.

Gains, profits and income derived from the

purchase of personal property within and its sale
without the Philippines, or from the purchase of
personal property without and its sale within the
Philippines shall be treated as derived entirely
When calendar year used? is so because of a fundamental difference in the
1. If the taxpayer chooses the calendar year ends the two concepts serve. Accounting
attempts to match cost against revenue. Tax
2. If the taxpayer has no annual accounting period law is aimed at collecting revenue. It is quick to
treat an item as income, slow to recognize
3. If the taxpayer does not keep books deductions as losses. Thus, tax law will not
recognized deductions for contingent future
2. If the taxpayer is an individual losses except in very limited situations. Good
accounting, on the other hand, requires their
When Commissioner is authorized to terminate recognition. [Consolidated Mines v. CTA, 58
taxable period SCRA 618]

1. When a taxpayer retires from business subject to Long-term contracts

tax
The term long term contracts means
2. When he intends to leave the Philippines building, installation or construction contracts
covering a period in excess of one year. [Section
3. When he removes his property from the 48, NIRC]
Philippines
Treatment of income from long-term contracts
4. When he hides or conceals his property
1. Percentage of completion basis
5. When he performs any act tending to obstruct
the proceedings for the collection of the tax for 2. Completed contract basis
the past or current quarter or year
Note: Section 48 of the NIRC provides that Persons
6. When he renders the collection of the tax totally whose gross income is derive in whole or in part
or partly ineffective from such (long term) contracts shall report
such income upon the basis of percentage of
Methods of accounting completion.

1. Cash Basis The return should be accompanied by a

return certificate of architects or engineers
Income, profits and gains earned by showing the percentage of completion during
taxpayer are not included in gross income until the taxable year of the entire work performed
received. under the contract.

Expenses are not deducted until paid Sales of dealers in personal property
within the taxable year.
A person who regularly sells or otherwise
2. Accrual Method disposes of personal property on the installment
plan may return as income therefrom in any
Income, gains and profits are included taxable year that proportion of the installment
in the gross income when earned, whether payments actually received in that year, which
received or not. the gross profit realized or to be realized when
payment is completed, bears to the total
Expenses are allowed as deductions contract price. [Section 49, NIRC]
when incurred, although not yet paid.
Treatment of sales of realty and casual sales of
3. Mixed/Hybrid personalty

Combination of the cash and accrual These include:

method.
1. Casual sale or other casual disposition of
4. Any other method which clearly reflects the personal property (other than property
income included in the inventory at the close of
the taxable year) for a price exceeding
Cash v. accrual method of accounting P1000; and

Gains, profits and income are to be 2. Sale or other disposition of real property.
included in the gross income for the taxable
year in which they are received by the taxpayer, Treated either on installment basis or
unless they are included when they accrue to deferred sales basis.
him in accordance with the approved method of
accounting followed by him. Installment basis - if the initial payments
do not exceed 25% of the selling price.
Tax accounting v. financial accounting
Deferred sales basis - if the initial payments
While taxable income is based on the exceed 25% of the selling price [Section 49,
method of accounting used by the taxpayer, it NIRC and Section 175, Revenue Regulations 2]
will always differ from accounting income. This
Initial payments Who are not required to file individual returns?

These include the payments received in 1. An individual whose gross income does not
cash or property other than evidences of exceed his total personal and additional
indebtedness of the purchaser during the exemptions.
taxable period in which the sale or other
disposition is made. However, a Filipino citizen and any alien
individual engaged in business or practice of
The term initial payments contemplates at profession within the Philippines shall file an
least one other payment in addition to the initial income tax return, regardless of the amount of
payment. [Section 175, Revenue Regulations 2] gross income.

Termination of leasehold 2. An individual with respect to pure compensation

income derived from sources within the
Lessor who acquires building or Philippines, the income tax on which has been
improvements made by the lessee after the correctly withheld.
termination of the lease has two options in
reporting said income: However, an individual deriving
compensation concurrently from two or more
1. Lessor may report as income at the time employees at any time during the taxable year
when such buildings or improvements shall file an income tax return.
are completed the fair market value of
such buildings or improvements; or Further, an individual whose pure
compensation income derived from sources
2. Lessor may spread over the life of the within the Philippines exceeds P60,000 shall also
lease the estimated depreciated value of file an income tax return.
such buildings or improvements at the
termination of the lease and report as 3. An individual whose sole income has been
income for each of the lease an subjected to a final withholding tax.
adequate part thereof. [Section 49,
Revenue Regulations 2] 4. An individual who is exempt from income tax
pursuant to the NIRC and other laws, general or
Allocation of income and deductions special.

In the case of two or more organizations, Where to file

trades or businesses (whether or not
incorporated and whether or not organized in 1. Authorized agent bank
the Philippines) owned or controlled, directly or
indirectly, by the same interests, the 2. Revenue District Officer
Commissioner is authorized to distribute,
apportion or allocate gross income or deductions 3. Collection agent
between or among such organization, trade or
business, if he determines that such distribution, 4. Duly authorized Treasurer of the city or
apportionment or allocation is necessary in order municipality in which such person has his legal
to prevent evasion of taxes or clearly to reflect residence or principal place of business in the
the income of any such organization, trade or Philippines
business. [Section 50, NIRC]
5. Office of the Commissioner if there be no legal
residence or place of business in the Philippines
RETURNS AND PAYMENT OF TAX
When to file

INDIVIDUAL INCOME TAX RETURNS On or before April 15 of each year covering

income from the preceding taxable year
Who are required to file individual returns?
Thirty (30) days from each transaction and
1. Every Filipino citizen residing in the Philippines a final consolidated return on or before April 15
covering all stock transactions of the preceding
2. Every Filipino citizen residing outside the year in case of sale or exchange of shares of
Philippines, on his income from sources within stock not traded through a local stock exchange
the Philippines
Thirty (30) days following each sale or
3. Every alien residing in the Philippines, on income other disposition in case of sale or disposition of
derived from sources within the Philippines real property

4. Every non-resident alien engaged in trade or Husband and wife

business or in the exercise of a profession in the Married individuals, whether citizens,
Philippines resident or non-resident aliens, who do not
derive income purely from compensation, shall
file a return for the taxable year to include the
income of both spouses.
 However, if it is impracticable for the CORPORATE RETURNS
spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall Corporation returns
be consolidated by the BIR for purposes of verification
for the taxable year. Every corporation subject to income tax,
except foreign corporations not engaged in
Return of parent to include income of children trade or business in the Philippines, shall render,
in duplicate, a true and accurate:
The income of unmarried minors derived
from property received from a living parent shall 1. Quarterly income tax return; and
be included in the return of the parent, except:
2. Final or adjustment return.
1. When the donors tax has been paid on
such property; or The return shall be filed by the president,
vice president or other principal officer, and shall
2. When the transfer of such property is be sworn to by such officer and by the treasurer
exempt from donors tax. or assistant treasurer.

SELF-EMPLOYED INDIVIDUALS A corporation may employ either the

calendar year or fiscal year as basis for filing its
Declaration of income tax for individuals annual income tax return.

Every individual subject to income tax, who Every corporation deriving capital gains
is receiving self-employment income, whether it from the sale or exchange of shares of stock not
constitutes the sole source of his income or in traded through a local stock exchange shall file
combination with salaries, wages and other fixed a return within thirty (30) days after each
or determinable income, shall make and file a transaction and a final consolidated return of all
declaration of his estimated income for the transactions during the taxable year on or
current taxable year on or before April 15 of the before the fifteenth (15th) day of the fourth
same taxable year. month following the close of the taxable year.

Non-resident Filipino citizens with respect Declaration of quarterly corporate income tax
to income from without the Philippines and non-
resident aliens not engaged in trade or business Every corporation shall file in duplicate a
in the Philippines are not required to render a quarterly summary declaration of its gross
declaration of estimate income tax. income and deductions on a cumulative basis for
the preceding quarter or quarters upon which
the income tax shall be levied, collected and
paid.
Self-employment income
The tax computed shall be decreased by
Self employment income consists of the the amount of tax previously paid or assessed
earnings derived by the individual from the during the preceding quarters and shall be paid
practice of profession or conduct of trade or not later than sixty (60) days from the close of
business carried on by him as a sole proprietor each of the first three (3) quarters of the taxable
or by a partnership of which he is a member. year, whether calendar or fiscal year.

Return and payment of estimate income tax by Final adjustment return

individuals
Every corporation liable for tax shall file a
The amount of estimated income shall be final adjustment return covering the total
paid in four (4) installments. taxable income for the preceding calendar or
fiscal year.
Estimated tax
If the sum of the quarterly tax payments
Estimated tax means the amount which the made during the said taxable year is not equal
individual declared as income tax in his final to the total tax due on the entire taxable income
adjusted and annual income tax return for the of that year, the corporation shall either:
preceding taxable year minus the sum of the
credits allowed against the said tax. 1. Pay the balance of tax still due; or

If, during the current taxable year, the 2. Carry over the excess credit; or
taxpayer reasonably expects to pay a bigger
income tax, he shall file an amended declaration 3. Be credited or refunded with the excess
during any interval of installment payment amount paid, as the case may be.
dates.
Carrying-over or crediting of excess to succeeding is made by the taxpayer, then the
quarters amount by which the tax exceeds the
amounts previously assessed (or
In case the corporation is entitled to a tax collected without assessment) as a
credit or refund of the excess estimated deficiency.
quarterly income taxes paid, the excess amount
shown on its final adjustment return may be However, such amounts
carried over and credited against the estimated previously assessed or collected without
quarterly income tax liabilities for the taxable assessment shall first be decreased by
quarters of the succeeding taxable years. the amounts previously abated,
credited, returned or otherwise repaid in
But this is not automatic. Need to apply for respect of such tax.
crediting of such excess or tax credit to
succeeding quarters. WITHHOLDING OF TAX AT SOURCE
Two kinds of withholding
PAYMENT AND ASSESSMENT OF INCOME TAX 1. Withholding of final tax on certain incomes
2. Withholding of creditable tax at source
Payment of tax, in general
The total amount of tax shall be paid by Fund withheld held in trust by withholding agent
the person subject thereto at the time the return is filed. The taxes deducted and withheld by the
withholding agent shall be held as a special fund in trust
Installment payment for the government until paid to the collecting officers.
A taxpayer, other than a corporation, may All taxes withheld pursuant to the NIRC
opt to pay the tax in two equal installments when the and its implementing rules and regulations are hereby
tax due is in excess of two thousand pesos (P2,000). considered trust funds and shall be maintained in a
In such cases, the first installment shall be separate account and not commingled with any other
paid at the time the return is filed and the second funds of the withholding agent.
installment on or before July 15 following the close of
the calendar year.
ESTATES AND TRUSTS
Payment of capital gains tax Taxation of estates and trusts

It shall be paid on the date the return Income tax imposed upon individuals shall
prescribed therefor is filed by the person liable also apply to the income of estates or of any
thereto. kind of property held in trust.

In case the taxpayer elects and is qualified The tax shall be computed upon taxable
to report the gain by installments, the tax due income of the estate or trust and shall be paid
from each installment payment shall be paid by the fiduciary.
within thirty (30) days from the receipt of such
payments. What are the income of the estates or trusts
which are included for taxation?
Assessment and payment of deficiency tax 1. Income accumulated in trust for the benefit of
unborn or unascertained person or persons with
After the return is filed, the Commissioner contingent interests, and income accumulated or held
shall examine it and assess the correct amount for future distribution under the terms of the will or
of tax. trust.
2. Income which is to be distributed currently by
The tax or deficiency income tax so the fiduciary to the beneficiaries, and income
discovered shall be paid upon notice and collected by a guardian of an infant which is to
demand from the Commissioner. be held or distributed as the court may direct.
3. Income received by estates of deceased persons
Deficiency during the period of administration or settlement
of the estate.
The term deficiency means: 4. Income which, in the discretion of the fiduciary,
may be either distributed to the beneficiaries or
1. The amount by which the tax imposed by accumulated.
this Title exceeds the amount shown as
the tax by the taxpayer upon his return. Exception from taxation of estates or trusts

However, the amount so shown Employees trust which forms part of a

on the return shall be increased by the pension, stock bonus or profit-sharing plan of an
amount previously assessed (or employer for the benefit of some or all of his
collected without assessment) as a employees shall be exempt from income tax:
deficiency, and decreased by the
amount previously abated, credited, 1. If contributions are made to the trust by
returned or otherwise repaid in respect such employer, or employees, or both,
of such tax; or for the purpose of distributing to such
employees the earnings and the
2. If no amount is shown as the tax by the principal of the fund accumulated by the
taxpayer upon his return, or if no return trust in accordance with such plan; and
 2. If under the trust instrument, it is
impossible, at any time prior to the Such fiduciary or person filing the return for
satisfaction of all liabilities with respect him or it, shall take oath that he has sufficient
to employees under the trust, for any knowledge of the affairs of such person, trust or
part of the corpus or income to be used estate to enable him to make such return and
for or diverted to purposes other than that the same is, to the best of his knowledge
for the exclusive benefit of the and belief, true and correct, and be subject to
employees. all the provisions of this Title which apply to
individuals.
However, any amount actually distributed
to any employee or distributee shall be taxable Fiduciaries indemnified against claims for taxes
to him in the year in which so distributed to the paid
extent that it exceeds the amount contributed
by such employee or distributee. Trustees, executors, administrators and
other fiduciaries are indemnified against the
Taxable income of estates or trusts claims or demands of every beneficiary for all
payments of taxes which they shall be required
The taxable income of the estate or trust to make under the provisions of this Title, and
shall be computed in the same manner and on they shall have credit for the amount of such
the same basis as in the case of an individual. payments against the beneficiary or principal in
any accounting which they make as such
However, there shall be allowed as a trustees or other fiduciaries.
deduction in computing the taxable income of
the estate or trust the amount of the income of Source: http://www.angelfire.com/me4/francute/inctax.htm
the estate or trust for the taxable year which is
to be distributed currently by the fiduciary to the
beneficiaries, and the amount of the income
collected by a guardian of an infant which is to
be held or distributed as the court may direct,
but the amount so allowed as a deduction shall
be included in computing the taxable income of
the beneficiaries, whether distributed or not.

In the case of income received by estates

of deceased persons during the period of
administration or settlement of the estate, and
in the case of income which, in the discretion of
the fiduciary, may be either distributed to the
beneficiary or accumulated, there shall be
allowed as an additional deduction in computing
the taxable income of the estate or trust the
amount of the income of the estate or trust for
its taxable year, which is properly paid or
credited during such year to any legatee, heir or
beneficiary, but the amount so allowed as a
deduction shall be included in computing the
taxable income of the legatee, heir or
beneficiary.

The deductions allowed above shall not be

allowed in case of a trust administered in a
foreign country.

Exemption allowed to estates and trusts

There shall be allowed an exemption of

twenty thousand pesos (P20,000) from the
income of the estate or trust.

Fiduciary returns

Guardians, trustees, executors,

administrators, receivers, conservators and all
persons or corporations acting in any fiduciary
capacity shall render a return of the income of
the persons, trust or estate for whom or which
they act, and be subject to all the provisions of
this Title, which apply to individuals in case such
person, estate or trust has a gross income of
twenty thousand pesos (P20,000) or over during
the taxable year.