taxation one complete

8/12/2019 Taxation One Complete

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Taxation One: Outline with Codals

Mickey Ingles2A (2C) Ateneo Law 2012Atty. Montero (Updated: December 14, 2011 – Mickey)

1

Course OutlineTax I

A. In GeneralTaxable Income

The essential difference between capital and income is that capital is a fund; and

income is a flow. Capital is wealth, while income is the service of wealth. Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a

tree, income the fruit.

Income means profits or gains. (Madrigal v Rafferty)

Income may be defined as the amount of money coming to a person or corporationwithin a specified time, whether as payment for services, interest or profit frominvestment.

o A mere advance in the value of property of a person or a corporation in nosense constitutes the ‘income’ specified in the law. Such advance constitutes

and can be treated merely as an increase in capital. (Fisher v Trinidad)

Cash dividends is taxed as income because it has been realized/received, while stock

dividends is not taxed as income because it is merely inchoate as it is a mereanticipation of income (it becomes income once you sell it).

o

One is an actual receipt of profits; the other is a receipt of a representation ofthe increased value of the assets of a corporation. (Fisher v Trinidad)

When dealing with money or property, the questions you should ask are:

o Is this capital or is this income? o Has it been realized/received or is it merely inchoate?

B. General Principles

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without thePhilippines;(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract

worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is acitizen of the Philippines and who receives compensation for services rendered abroad as a member of thecomplement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sourceswithin the Philippines;(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on incomederived from sources within the Philippines.

Who are taxable on income derived from all sources, whether within or outside thePhilippines? Taxed worldwide!

1. Resident citizens.

2. Domestic corporations.

The other kinds of taxpayers are subject to tax only on income derived from

Philippine sources.

Taxable Income Taxable Income

Citizenship & Residency Inside RP Outside RP

Resident Citizen Yes Yes

Non-resident Citizen Yes No

Overseas Contract Worker Yes No

Resident Alien Yes No

Non-resident Alien Yes No



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Domestic Corp Yes Yes

Foreign Corp Yes No

C. Income Tax on IndividualsDefinitions

Resident citizens and resident aliensSection 22 (F) The term "resident alien" means an individual whose residence is within the Philippines and who isnot a citizen thereof.

Resident alien is an individual:

1. Whose residence is within the Philippines

2. Who is not a citizen

Mere physical or body presence is enough. Not intention to make the country one’s

abode. (Garrison v CA)

Non-resident citizensSec 22 (E). The term "nonresident citizen" means:(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physicalpresence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as animmigrant or for employment on a permanent basis.(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requireshim to be physically present abroad most of the time during the taxable year.(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at anytime during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresidentcitizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sourcesabroad until the date of his arrival in the Philippines.(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to residepermanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

Meaning of non-resident citizen:1. Citizen who establishes to the satisfaction of the Commissioner the fact of his

physical presence abroad with a definite intention to reside therein

2. Citizen who leaves the Philippines during the taxable year to reside abroad, eitheras an immigrant or for employment on a permanent basis

3. Citizen who works and derives from abroad and whose employment thereat

requires him to be physically present abroad most of the time during the taxable

year4. Citizen who has been previously considered as nonresident citizen and who

arrives in the Philippines at any time during the taxable year to reside

permanently in the Philippines shall likewise be treated as a nonresident citizenfor the taxable year in which he arrives in the Philippines with respect to hisincome derived from sources abroad until the date of his arrival in the

Philippines.

Who are non-resident citizens? (RR 1-79)1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for

which a foreign visa has been secured2. Permanent employee – one who leaves the Philippines to reside abroad for

employment on a more or less permanent basis3. Contract worker – one who leaves the Philippines on account of a contract of

employment which is renewed from time to time under such circumstance as torequire him to be physically present abroad most of the time (not less than 183days)



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Non-resident citizens who are exempt from tax with respect to income derived fromsources outside the Philippines shall no longer be required to file information returns

from sources outside the Philippines beginning 2001. (RR 5-2001)

The phrase “most of the time” shall mean that the said citizen shall have stayed abroadfor at least 183 days in a taxable year.

The same exemption applies to an OCW but as such worker, the time spent abroad is

not material for tax exemption purposes all that is required is for the worker’semployement contract to pass through and be registered with the POEA. (BIR Ruling33-2000).

Non-resident aliens engaged in business in the PhilippinesSec 22. (G) The term "nonresident alien" means an individual whose residence is not within the Philippines andwho is not a citizen thereof.

Who are non-resident aliens?

1. An individual whose residence is not within the Philippines

2. Not a citizen of the Philippineso Determination is by his intention with regard to the length and nature of his stay.

(Sec 5, RR 2)

Loss of residence by alieno An alien who has acquired residence in the Philippines retains his status until he

abandons the same and actually departs from the Philippines.

o A mere intention to change his residence does not change his status. An alien who

has acquired a residence is taxable as a resident for the remainder of his stay in thePhilippines. (Sec. 6, RR 2)

Minimum wage earnerSec 22. (GG) The term ‘statutory minimum wage’ earner shall refer to rate fixed by the Regional Tripartite Wage

and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE.

(HH) The term ‘minimum wage earner’ shall refer to a worker in the private sector paid the statutory minimumwage; or to an employee in the public sector with compensation income of not more than the statutory minimumwage in the non-agricultural sector where he/she is assigned.

Fixed by the Regional Tripartite Wage and Productivity Board.

Minimum wage earner:

o Private sector – paid the statutory minimum wageo Public sector – not more than the statutory minimum wage in the non-

agricultural sector where he/she is assigned

DependentSec 35. (B) For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child

chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years ofage, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-supportbecause of mental or physical defect.

Dependent is a…

o Legitimate, illegitimate or legally adopted child and living with the taxpayer

o Who must be:

Not more than 21,

Unmarried, and

Not gainfully employed, OR if such, Dependent, regardless of age, is incapable of self-support because of

mental or physical defect.



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To summarize, individual taxpayers are classified into:

1. Citizens, who are divided into:o Resident citizens – those citizens whose residence is within the Philippines; and

o Non-resident citizens – those citizens whose resident is not within the Philippines.2. Aliens, who are divided into:

o

Resident aliens – those individuals whose residence is within the Philippines andare not citizens thereof; and

o Non-resident aliens – those individuals whose residence is not within the

Philippines but temporarily in the country and are not citizens thereof. They are:

Those engaged in trade or business within the Philippines; and

Those who are not so engaged. (see Sec 23-25)

Kinds of income and income tax of individualsTax formulaSEC. 24. Income Tax Rates. -(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.(1) An income tax is hereby imposed:(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections(B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines beevery individual citizen of the Philippines residing therein;(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections(B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by anindividual citizen of the Philippines who is residing outside of the Philippines including overseas contract workersreferred to in Subsection(C) of Section 23 hereof; and(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections(b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by anindividual alien who is a resident of the Philippines.(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the ratesestablished in the following schedule: (just see chart below, it’s the same thing)

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall computeseparately their individual income tax based on their respective total taxable income: Provided , that if any incomecannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses,the same shall be divided equally between the spouses for the purpose of determining their respective taxable

income."Provided , That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from thepayment of income tax on their taxable income: Provided , further , That the holiday pay, overtime pay, night shiftdifferential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

Not over P10,000 5%

Over P10,000 but not over P30,000 P500 + 10% of the excess overP10,000

Over P30,000 but not over P70,000 P2,500 + 15% of the excess overP30,000

Over P70,000 but not over P140,000 P8,500 + 20% of the excess over

P70,000

Over P140,000 but not over P250,000 P22,500 + 25% of the excess overP140,000

Over P250,000 but not over P500,000 P50,000 + 30% of the excess over

P250,000

Over P500,000 P125,000 + 32% of the excess over

P500,000



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Gross IncomeLess: Deductions

Taxable IncomeTax RateTax Due

Know the tax base and the tax rate!

Only resident citizens and domestic corporations are taxed on income derived from

abroad. Worldwide taxable!

The tax is imposed upon taxable compensation or employment income, businessincome, and income derived from the practice of professions derived by citizens andresident aliens.

Married individuals shall compute separately their individual income tax based on theirrespective total taxable income.

o If any income cannot be definitely attributed to, or identified as incomeexclusively earned or realized by either of the spouses, the same shall be divided

equally between them for the purpose of determining their respective taxableincome.

Minimum wage earners are exempt from the payment of income tax on their taxableincome. Holiday pay, overtime pay, night shift differential pay, and hazard pay receivedby them are likewise exempt from income tax.

A non-resident alien individual engaged in trade or business in the Philippines is subjectto the income tax in the same manner as an individual citizen and a resident alien on

taxable income received from sources within the Philippines.

For non-resident aliens not so engaged, the tax is

o 25% of the entire or gross income received from sources within the Philippinesand

o 15% of the gross income received as compensation, salaries, and other

emoluments by reason of his employment by: regional or area headquarters and regional operating headquarters of

multinational corporations; offshore banking units established by a foreign corporation in the

Philippines; or by foreign petroleum service contractor or subcontractors operating in the

Philippines. (Sec 25 (A-E))

Final income tax – interests, royalties, awards, dividends, capital gains on sale of shares,

realtySec 24. (B) Rate of Tax on Certain Passive Income.(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is herebyimposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit fromdeposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as otherliterary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (exceptprizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of

Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sourceswithin the Philippines: Provided, however, That interest income received by an individual taxpayer (except a

nonresident individual) from a depository bank under the expanded foreign currency deposit system shall besubject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided,further, That interest income from long-term deposit or investment in the form of savings, common or individualtrust funds, deposit substitutes, investment management accounts and other investments evidenced by certificatesin such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under thisSubsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investmentbefore the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld bythe depository bank from the proceeds of the long-term deposit or investment certificate based on the remainingmaturity thereof:



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Four (4) years to less than five (5) years - 5%;Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/orproperty dividends actually or constructively received by an individual from a domestic corporation or from a jointstock company, insurance or mutual fund companies and regional operating headquarters of multinationalcompanies, or on the share of an individual in the distributable net income after tax of a partnership (except ageneral professional partnership) of which he is a partner, or on the share of an individual in the net income aftertax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is amember or co-venturer:

Six percent (6%) beginning January 1, 1998;Eight percent (8%) beginning January 1, 1999; and

Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998.Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on orafter January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B)notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized

during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domesticcorporation, except shares sold, or disposed of through the stock exchange.Not over P100,000……………………………........ 5%

On any amount in excess of P100,000………… 10%

(D) Capital Gains from Sale of Real Property. -(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on thegross selling price or current fair market value as determined in accordance with Section 6(E) of this Code,whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale,exchange, or other disposition of real property located in the Philippines, classified as capital assets, includingpacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided,That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any ofits political subdivisions or agencies or to government-owned or controlled corporations shall be determined eitherunder Section 24 (A) or under this Subsection, at the option of the taxpayer.(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gainspresumed to have been realized from the sale or disposition of their principal residence by natural persons, the

proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18)calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under thisSubsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall becarried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall havebeen duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribedreturn of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said taxexemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization ofthe proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale ordisposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at thetime of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the grossselling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of thisSubsection shall be imposed thereon.

Sec 22 (Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (theterm 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other

than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers ownaccount, for the purpose of relending or purchasing of receivables and other obligations, or financing their ownneeds or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers'acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into byand between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment orparticipation and similar instruments with recourse: Provided, however, That debt instruments issued for interbankcall loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities,including those between or among banks and quasi-banks, shall not be considered as deposit substitute debtinstruments.

Tax Rate on Certain Passive Income on Citizens and Resident Final Tax



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Aliens

1. Interest under the expanded foreign currency deposit system (see RR

10-98 below) Nonresident citizens: exempt

7.5% (vs exempt

for nonresidentaliens engaged in

trade/biz) 2. Royalty from books, literary works, & musical compositions 10%

3. Royalty other than above 20%

4. Interest on any current bank deposit, yield or other monetary benefitsfrom deposit substitute, trust fund & similar arrangement

20%

5. Prize exceeding P10,000 20%

6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%

7. Dividend from a domestic corp, or from a joint stock company,

insurance or mutual fund company, & regional operating headquarters ofmultinational company or share in the distributive net income after tax oa partnership (except a general professional partnership), joint stock or

joint venture or consortium taxable as a corporation

But what about dividends from foreign corporations for citizens

(not resident aliens)? Well, the income here enters into the

computation for Sec 24 (a) tax calendar. For resident aliens, they

are not taxed since it’s income derived from abroad.

10% (vs 20% for

non-resident aliensengaged intrade/biz)

8. Interest on long-term deposit or investment in banks (with maturity of

5 years or more)

exempt

Prize – the result of an effort (like a prize in a beauty contest)Winning – the result of a transaction where the outcome depends upon

chance (like betting)

Deposit substitute – a means of borrowing money from the public (20 ormore individual or corporate lenders) other than by way of deposit withbanks through the issuance of debt instruments (like banker’s

acceptances, promissory notes, repurchase agreements, certificates ofassignment or participation)

Tax Rate on Interest Income from Foreign Currency Deposit (RR10-98)

1. Interest income actually received by a resident citizen or resident alien

from FCD

7.5% final

withholding tax

2. If it was deposited by an OCW or seaman or nonresident citizen Exempt

3. If it was in a bank account in the joint names of an OCW and his

spouse (who is a resident)

50% exempt/

50% finalwithholding tax

of 7.5%

4. Interest income actually received by a domestic corporation or

resident foreign corporation from FCD

7.5% final

withholding tax

Interest income which is actually or constructively received by a resident citizen of the

Philippines or by a resident alien individual from a foreign currency bank deposit will besubject to a final withholding tax of 7.5%. The depository bank will withhold and remitthe tax. If a bank account is jointly in the name of a non-resident citizen, 50% of the

interest income from such bank deposit will be treated as exempt while the other 50%will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable

income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA

8424. In case of deposits which were made in 1997, only that portion of interest whichwas actually or constructively received by a depositor starting January 1, 1998 is

taxable. (RR 10-98)



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Tax Rate on Capital Gains

1. On sale of shares of stock of a domestic corporation NOTlisted and NOT traded thru a local stock exchange held asa capital asset ,

o Capital gains not over P100,000

o

Capital gains in excess of P100,000 (see RR 6-2008below)

5% of the net capital gains


2. On sale of real property in the Philippines held as a capital

asset (see RR 8-98 below) 6% of the gross sellingprice, or the current market

value at the time of sale,whichever is higher

Tax Rate on Income from Sale, Barter, Exchange orother Disposition of Shares of Stock (RR 6-2008)

If shares of stock are listed and traded through the local

stock exchange

½ of 1% (or .005%) of the

gross selling price or gross

value in money of theshares of stock

If shares not traded through the local stock exchangeo Capital gains not over P100,000

o Capital gains in excess of P100,0005% of the net capital gains10% of the net capital gains

Who are liable?

1. Individual taxpayer, whether citizen or alien;

2. Corporate taxpayer, whether domestic or foreign;3. Other taxpayers not falling under (1) and (2) above, such as estate, trust, trust

funds and pension funds, among others.

Who are exempt?

1.

Dealers in securities2. Investors in shares of stock in a mutual fund company, as defined in Sec 22 (BB),

and Section 2(s) of these Regulations, in ocnnection with the gains realized by said

investor upon redemption of said shares of stock in a mutual fund companyl and3. All other persons, whether natural or juridical, who are specifically exempt from

national internal revenue taxes under existing investment incentives and other

special laws.

How to determine the tax base of disposition Fair Market Value



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of stock (RR 6-2008)

Sales of stock listed and traded through the LSE FMV is the actual selling price

Sales of stock listed but not traded through theLSE

FMV is the closing price on the daywhen the shares were sold, transferred,

etc (if no sale was made on that day inthe LSE, then the closing price on the

day nearest to the date of sale,transfer, or exchange of the said

shares)

Sales of stock not listed and not traded throughthe LSE

FMV is the book value of the shares ofstock as shown in the financial

statements duly certified by an

independent CPA nearest to the date ofsale

Final Tax Rate on Sales, Exchanges, or Transfers or RealProperties Classified as Capital Assets (RR 8-98)

Sale of real property in the Philippines 6% of the gross selling

price, or the currentmarket value at the time

of sale, whichever ishigher

If sale was made to the government or to GOCCs Either 6% of the gross

selling price/currentmarket value or under

the normal income tax

rate, taxpayer’s option

Creditable Withholding Tax on Sales, Exchanges or

Transfers of Real Properties classified as Ordinary Assets(RR 8-98)

1. If the seller is habitually engaged in the real estate businesso Selling price is less than P500,000

o Selling price is P500,000 to P2m

o Selling price is above P2m

1.5%3%

5% of gross selling

price/current marketvalue, whichever is

higher

2. If the seller is not habitually engaged in the real estate

business

7.5% of gross selling

price/current marketvalue, whichever is

higher

3. If the seller is exempt from creditable withholding tax as per

RR 2-98

Exempt

Conditions to be exempt from capital gains tax of 6% on the sale, exchange, ordisposition of a principal residence (RR 13-99)

1. The proceeds from the sale, exchange, or disposition of his principal residence must

be fully utilized in acquiring or construing a new principal residence within 18

months. There must be proof. 2. This can only be availed of ONLY ONCE every 10 years



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3. The historical cost of his old principal residence shall be carried over to the cost basisof his new residence

4. If there is no full utilization, he shall be liable for the deficiency capital gains tax ofthe utilized portion

5. If the principal residence is disposed in exchange for a condo, and if it is used as hisnew residence, then he is exempt

6.

The 6% capital gains tax otherwise due must be deposited in escrow with anauthorized agent bank, and can only be released when sufficient proof is shown thatthe proceeds have been fully utilized within 18 months.

What is the principal residence anyway? (RR 14-2000)

o It is the dwelling house, where the husband or wife or unmarried individualresides; actual occupancy is not interrupted or abandoned by temporary absencedue to travel, studies, or work abroad

o If the ownership of the land and the dwelling house belong to different persons,only the dwelling house shall be treated as principal residence

Payment of capital gains tax on foreclosure of mortgaged property (RR 4-99) o If the mortgagor exercises his right of redemption within 1 year – no capital

gains tax because none has been derived and no transfer of property wasrealized

In case of non-redemption, the capital gains will be due based on the bid price of thehighest bidder

Personal and Additional Exemptions

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -

(A) In General . - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall beallowed a basic personal exemption amounting to P50,000 for each individual taxpayer.

In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shallbe allowed the personal exemption.(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of twenty five

thousand pesos (P25,000) for each dependent not exceeding four (4).The additional exemption for dependent shall be claimed by only one of the spouses in the case of marriedindividuals.

In the case of legally separated spouses, additional exemptions may be claimed only by the spouse whohas custody of the child or children: Provided, That the total amount of additional exemptions that may be claimedby both shall not exceed the maximum additional exemptions herein allowed.

For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted childchiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years ofage, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-supportbecause of mental or physical defect. (Amended by RA 9504)

Personal and additional exemption for individual taxpayer

Basic personal exemption for each individual taxpayer

o If married and only one of the spouses is deriving gross income,

only such spouse shall be allowed the personal exemption.

P50,000

Additional exemption for each dependent, not exceeding four (4)

o Claimed by only one spouse in case of married individualso If legally separated, additional exemptions claimed only by

spouse who has custody; should not exceed maximum

additional exemptions allowed

P25,000 per

dependent

Exemption statutes are not retroactive. (Pensacola v CIR)



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Discounts for senior citizens is now treated as tax deductions, as per RA 9257. Thissucks for the taxpayer because he doesn’t get the “peso for peso” benefit which he

would have gotten if it were considered a tax credit as before. (M.E. Holdings Corp v CIR& CTA)

Senior Citizens are

o Resident citizens

o

At least 60 years old They are not exempt from income taxes unless they are considered

minimum wage earners. (RA 9994, which also took out the previous

P60,000 requirement)

Change of status

Sec 35. (C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during

the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full forsuch year.

If the taxpayer dies during the taxable year, his estate may still claim the personal and additionalexemptions for himself and his dependent(s) as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one(21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same

exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one(21) years old or became gainfully employed at the close of such year.

Personal exemption allowable to nonresident alien individualsSec. 35 (D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien individualengaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personalexemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is asubject - or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed inthis Section as exemption for citizens or resident of the Philippines: Provided, That said nonresident alien shouldfile a true and accurate return of the total income received by him from all sources in the Philippines, as requiredby this Title.

Personal Exemptions allowable to

nonresident alien individuals

If engaged in trade, business or in the exercise ofa profession

Entitled to a personal exemption in theamount equal to the exemptions

allowed in the income tax law of his

country for Filipinos, but it shouldn’texceed the amount fixed here forexemptions

If not engaged in trade, business or in the exerciseof a profession

None, because Sec 25 (B) states thathe will be taxed upon his entireincome.

De Leon states that nonresident aliens are not entitled to additional exemptions fordependents. (P. 135, Fundamentals of Taxation 2009)

Optional Standard DeductionSec. 34 (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections,

an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in anamount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case ofa corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount notexceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayersignifies in his return his intention to elect the optional standard deduction, he shall be considered as havingavailed himself of the deductions allowed in the preceding Subsections. Such election when made in the returnshall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitledto and claimed for the optional standard shall not be required to submit with his tax return such financial



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taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, Thatsaid family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxableyear: Provided, finally , That in the case of married taxpayers, only the spouse claiming the additional exemptionfor dependents shall be entitled to this deduction.

The taxpayer is allowed a deduction of P2,400/family or P200/month for health and/or

hospitalization insurance premiums, provided:o

Said family’s gross income is not more than P250,000 for the taxable year. If married, only the spouse claiming the additional exemption for dependents can avail

of this.

Exclusions and deductions (discussion from De Leon’s book)

Exclusions are incomes that are exempt from the tax. They are not to be included in the

tax return unless information regarding it is specifically called for.o Examples:

Life insurance proceeds paid to beneficiaries upon the death of the

insured. Value of the property acquired by inheritance or donation, because it is

subject to estate or donor’s tax.

Retirement benefits, pensions, etc, received by government officials andemployees from the GSIS and SSS in recognition of their services. So withretirement benefits of private firms, under certain conditions.

Prizes and awards made primarily in recognition of religious, charitable,

scientific, educational, artistic, etc, competitions and tournaments. Christmas bonus, 13th month pay, productivity incentives, and other

benefits received up to a max of P30,000.

Gains from the sale or retirement of bonds or other certificates ofindebtedness with a maturity of more than 5 years.

Deductions are items or amounts which the law allows to be deducted under certain

conditions from the gross income of a taxpayer in order to arrive at the taxable income.

Both reduce actual gross income although exclusions are not included in the income taxreturn.

Some general principals governing deductions include:o The taxpayer seeking a deduction must point to some specific provision of the

statute authorizing the deduction; and

o He must be able to prove that he is entitled to the deduction authorized or

allowed.

They are allowed only where there is a clear provision in the statute for thededuction claimed.

Taxable gross income is affected by exclusions because the latter are omitted from the

former and are not reported on the income tax return but is not affected by deductionsbecause they are subtracted after gross income is determined and are reported on thereturn.

Kinds of deductions:

1. Deductions from compensation income.2. Deductions from business/professional income.

3. Deductions from corporate income.

4. Special deductions5. Deductions allowed by special laws.

Tax on non-resident aliens

Non-resident aliens engaged in business in the PhilippinesSEC. 25. Tax on Nonresident Alien Individual. - (A) Nonresident Alien Engaged in trade or Business Within the Philippines. -



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• (1) In General . - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to

an income tax in the same manner as an individual citizen and a resident alien individual, on taxableincome received from all sources within the Philippines. A nonresident alien individual who shall come tothe Philippines and stay therein for an aggregate period of more than one hundred eighty (180) daysduring any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section22 (G) of this Code notwithstanding.

• (2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance orMutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in theDistributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, JointVenture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cashand/or property dividends from a domestic corporation, or from a joint stock company, or from aninsurance or mutual fund company or from a regional operating headquarters of multinational company,or the share of a nonresident alien individual in the distributable net income after tax of a partnership(except a general professional partnership) of which he is a partner, or the share of a nonresident alienindividual in the net income after tax of an association, a joint account, or a joint venture taxable as acorporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes(except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax underSubsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lottowinnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof:Provided, however, that royalties on books as well as other literary works, and royalties on musicalcompositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided,further , That cinematographic films and similar works shall be subject to the tax provided under Section28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the

form of savings, common or individual trust funds, deposit substitutes, investment management accountsand other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should theholder of the certificate pre-terminate the deposit or investment before the fifth (5 th) year, a final tax shallbe imposed on the entire income and shall be deducted and withheld by the depository bank from theproceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;Three (3) years to less than four (4) years - 12%; andLess than three (3) years - 20%.

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporationsnot traded through the local stock exchange, and real properties shall be subject to the tax prescribed underSubsections (C) and (D) of Section 24.

A nonresident alien engaged in trade or business in the Philippines is subject to thesame income tax rate as citizens and resident aliens, on taxable income received from

all sources within the Philippines. A nonresident alien who stays in the Philippines for an aggregate period of more than

180 days shall be deemed as nonresident alien doing business in the Philippines.

Tax Rate on Certain Passive Income on Nonresident Aliens

Engaged in Trade, Business or Exercising a Profession

Final Tax

1. Interest under the expanded foreign currency deposit system exempt

2. Royalty from books, literary works, & musical compositions 10%

3. Royalty other than above 20%

4. Interest on any current bank deposit, yield or other monetary benefits

from deposit substitute, trust fund & similar arrangement

20%

5. Prize exceeding P10,000 20%

6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%7. Dividend from a domestic corp, or from a joint stock company,

insurance or mutual fund company, & regional operating headquarters ofmultinational company or share in the distributive net income after tax oa partnership (except a general professional partnership), joint stock or

joint venture or consortium taxable as a corporation

What about dividends from foreign corps? Exempt. Nonresidentaliens are not taxed worldwide.

20% (compare

with citizens andresident aliens)

8. Gross income from cinematographic films & similar works 25%



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9. Interest on long-term deposit or investment in banks (with maturity of5 years or more)

exempt

Tax Rate on Capital Gains (same with residents, and

nonresident aliens not engaged in business)

2. On sale of shares of stock of a domestic corporation NOT

listed and NOT traded thru a local stock exchange held asa capital asset ,


o Capital gains in excess of P100,000



2. On sale of real property in the Philippines held as a capitalasset 6% of the gross selling

price, or the current marketvalue at the time of sale,

whichever is higher

Non-resident aliens not engaged in business in the PhilippinesSec. 25 (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources

within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippinesas interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation,remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income,and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresidentalien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domesticcorporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) ofSection 24.

Nonresident aliens not engaged in business are taxed 25% of their entire income within

the Philippines.

That means they have no deductions!

Their capital gains are the same with nonresident aliens engaged in business (see table

above!)

Special aliensSec. 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating

Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable yearupon the gross income received by every alien individual employed by regional or area headquarters and regionaloperating headquarters established in the Philippines by multinational companies as salaries, wages, annuities,compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or areaheadquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income:Provided, however , That the same tax treatment shall apply to Filipinos employed and occupying the same positionas those of aliens employed by these multinational companies. For purposes of this Chapter, the term'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiariesor branch offices in the Asia-Pacific Region and other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for eachtaxable year upon the gross income received by every alien individual employed by offshore banking unitsestablished in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments,such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of suchgross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying thesame positions as those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is apermanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign servicecontractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liableto a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and otheremoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided,however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an



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alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred to underSubsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposedunder this Code.

Special Aliens

1. Employed by regional or area headquarters & regionaloperating headquarters established in the Philippines by

multinational;

15% on gross income

2. Employed by offshore banking units 15% on gross income

3. Permanent resident of a foreign country but who is employed

and assigned in the Philippines by a foreign service contractor orby a foreign service subcontractor engaged in petroleumoperations in the Philippines

15%

Provided the same tax shall apply to Filipinos employed and occupying the same positionas these aliens.

These apply only to positions of a highly technical or highly managerial nature. ( Atty.Montero)

All income earned from all other sources within the Philippines by the special alienemployees shall be subject to the pertinent income tax imposed by the Code.

Tips on answering

Thought process in answering problems:

1. Is this income? If not, then it’s not really a income tax problem. 2. Who’s the taxpayer? And what’s the source? Refer to Sec 23!

3. What’s the specific rate? See sec 24-25!

For example, what is the tax rate of on income derived from dividends from foreigncorporations for 1. Citizens 2. Resident aliens and 3. Nonresident aliens engaged in trade or

business?

1.

Citizens

a. Yes, it’s income.

b. The source is outside the Philippines. Are they liable for sources from outsidethe Philippines? Yes! Citizens are taxed worldwide!

c. What’s the specific tax rate? Hmm… since it’s not in any of the charts, but

they still have to be taxed, then the income they derive from dividends fromforeign corporations will be considered in computing the tax rate based on thetax calendar of Sec 24(a)

2. Resident aliens

a. Yes, it’s income. b. The source is outside the Philippines. Are they liable for sources from outside

the Philippines? No! They aren’t taxed worldwide.

3.

Nonresident aliens engaged in trade or businessa. Yes, my dear, it’s income. b. The source is outside the Philippines. Are they liable for source from outside

the Philippines? No! They aren’t taxed worldwide either.

D. Definitions Section 22, Tax Code

Definition of corporations



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Sec 22 (B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock

companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not includegeneral professional partnerships and a joint venture or consortium formed for the purpose of undertakingconstruction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to anoperating consortium agreement under a service contract with the Government. "General professionalpartnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, nopart of the income of which is derived from engaging in any trade or business.

Corporations include:

o Partnerships, no matter how created or organized

o Joint-stock companies

o Joint accounts

o Associations

o Insurance companies

It does not includeo General professional partnerships;

o Joint venture or consortium formed for the purpose of undertaking construction

projects, or engaging in petroleum, coal, geothermal and other energy operationspursuant to an operating or consortium agreement under a service contract withthe government.

Remember your partnership lessons! (AFISCO and Pascual cases) All co-owernships are not deemed unregistered partnerships.(Obillos v CIR)

The moment inheritance shares are used as part of the common assets to be used in

making profits, it is considered part of the taxable income of an unregistered

partnership. (Ona v CIR)

Requisites of a JV:1. Contribution by each party

2. Profits are shared among the parties

3. There is joint right of mutual control over the subject matter4. There is a single business transaction rather than a general or continuous transaction

(BIR Ruling 317-92, in this case, the first agreement of the two parties to construct the

6750 Bldg was not taxable because they had not derived income/profits from it. the

construction of the building was mere return of the capital which they shelled out.However, once the two corporations were placed under one sole management to operate

the business affairs of the two, the JV was taxable separate from the two corporationscomprising it. The distribution by the JV to the two constituent corporations was nottaxable because it was considered intra-corporate dividends.)

E. Income Tax RatesSEC. 27. Rates of Income tax on Domestic Corporations. -

(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is herebyimposed upon the taxable income derived during each taxable year from all sources within and without thePhilippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as acorporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009,the rate of income tax shall be thirty percent (30%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computedwithout regard to the specific date when specific sales, purchases and other transactions occur. Their income andexpenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.The corporate income tax rates shall be applied on the amount computed by multiplying the number of monthscovered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided bytwelve.Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, afterthe following conditions have been satisfied:(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;



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(3) A VAT tax effort of four percent (4%) of GNP; and

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales

to gross sales or receipts from all sources does not exceed fifty-five percent (55%).The election of the gross income tax option by the corporation shall be irrevocable for three (3)

consecutive taxable years during which the corporation is qualified under the scheme.For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross

sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include allbusiness expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goodssold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, includinginsurance while the goods are in transit.

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

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

Tax rate of Domestic Corporations 30% of taxable income from all sources withinand outside the Philippines, or2% of gross income if MCIT applies, or

15% of gross income if the following conditions

are met:1. tax effort ratio of 20% of GNP

2. ratio of 40% of income tax collection to

total tax revenues3. VAT tax effort of 4% of GNP; and4. .9% ratio of the Consolidated Public Sector

Financial Position (CPSFP) to GNP (this lastone has yet to be implemented)

Option to be taxed based on gross income shall be available only to firms whose ratio of

cost of sales to gross sales or receipts from all sources does not exceed 55%

Election of the gross income tax option by the corporation shall be irrevocable for

3 consecutive taxable years

Domestic corporations are subject to any or some of the following: Capital gains tax

Final tax on passive income

Normal tax

Minimum corporate income tax (MCIT)

Gross income tax (GIT)

Improperly accumulated earnings tax (IAET)

Gross Income Computation

Gross Sales

Less: Sales Returns

Discounts

Allowances

CoGS (all business expenses directly incurred to produce the merchandise and bringthem to their present location or use)

Total Gross Income

CoGS for a Trading or Merchandise Concern

Invoice cost of goods sold

Import duties

Freight in transporting the goods to the place where the goods are actually sold

Insurance while the goods are in transit



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CoGS for a Manufacturing Concern

All costs of production of finished goods such as raw materials, direct labor & manufacturingoverhead

Freight cost

Insurance premiums

Other costs incurred to bring the raw materials to the factory or warehouse

Gross Income Computation for a Service Concern

Gross Sales

Less: Sales Returns

Discounts

Allowances

Cost of Services (all direct costs & expenses necessarily incurred to provide theservices required by the customers & clients including:

Salaries & employee benefits of personnel, consultants & specialistsdirectly rendering the service

Cost of facilities directly utilized in providing the service such as

depreciation or rental of equipment use & cost of supplies If it’s a bank, interest expense is included

Total Gross income of a service concern

F. Proprietary Educational Institutions and Hospitals

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which arenonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D)hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent(50%) of the total gross income derived by such educational institutions or hospitals from all sources, the taxprescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection,the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct ofwhich is not substantially related to the exercise or performance by such educational institution or hospital of its

primary purpose or function. A "Proprietary educational institution" is any private school maintained andadministered by private individuals or groups with an issued permit to operate from the Department of Education,Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and SkillsDevelopment Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

Proprietary educational institution is:o Any private school maintained & administered by private individuals or groups

o With an issued permit to operate from the DECS or CHED or TESDA

Tax rate of proprietary educational

institutions and hospitals

10% on their taxable income (except for passive

income), or30% on their entire taxable income if the gross

income from unrelated trade, business or other

activity exceeds 50% of the total gross income of

the institution Unrelated trade, business or other activity means

o Any trade, business or other activity

o The conduct of which is not substantially related to the exercise or performance

by such its institution of its primary purpose or function.

For non-stock, non-profit educational institutions, all revenues use actually, directly andexclusively for educational purposes are exempt.

o Their exemption refers only to revenues derived from assets used actually,

directly and exclusively for educational purposes.



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o Income from cafeterias, canteens & bookstores are also exempt if they areowned & operated by the educational institution and are located within the school

premises.o However, they shall be subject to internal revenue taxes on income from trade,

business or other activity, the conduct of which is not related to the exercise orperformance by such educational institutions of their educational purposes or

functions, i. e. rental payment from their building/premises. (RR 76-2003) For non-stock, non-profit corporations who are exempt, they are still liable for taxes on:

o Income derived from any of their real properties (rental payment form their

building premises)

o Any activity conducted from profit regardless of disposition thereof

o Interest income from any bank deposits or yield on deposit substitutes (final taxof 20%)

o If its foreign currency deposit, final tax of 7.5%

o They shall also be withholding agents for their employee’s compensation income

subject to withholding tax (RR 76-2003)

For private educational institutions, they are exempt from VAT, but they must be

accredited with either DECS or CHED.

o However, income derived from trade, business or other activity is still taxable.

o

Their bank deposits and foreign currency deposits are exempt from withholdingtaxes but they must show proof that such income is used to fund proposedprojects for their institution’s improvement.

o They shall also be the withholding agents for their employee’s compensationincome subject to withholding tax.

G. GOCCs

Sec. 27 (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The

provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, orinstrumentalities owned or controlled by the Government, except the Government Service Insurance System(GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the PhilippineCharity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this

Section upon corporations or associations engaged in s similar business, industry, or activity.

GOCCs are taxed on the same rate upon their taxable income upon corporations orassociations engaged in similar business, industry, or activity.

o Exempt GOCCs:

GSIS

SSS PHIC

PCSO

As per RA 9337, PAGCOR was deleted from the list of exempt GOCCs.

H. Passive Income

Sec. 27 (D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Fundsand Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed uponthe amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutesand from trust funds and similar arrangements received by domestic corporations, and royalties, derived fromsources within the Philippines: Provided, however, That interest income derived by a domestic corporation from adepository bank under the expanded foreign currency deposit system shall be subject to a final income tax at therate of seven and one-half percent (7 1/2%) of such interest income.



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(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates

prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange orother disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stockexchange:Not over P100,000………………………..... 5%Amount in excess of P100,000…………….. 10% (3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a

depository bank under the expanded foreign currency deposit system from foreign currency transactions withnonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banksthat may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depositsystem shall be exempt from all taxes, except net income from such transactions as may be specified by theSecretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income taxpayable by banks: Provided, however, That interest income from foreign currency loans granted by such depositorybanks under said expanded system to residents other than offshore banking units in the Philippines or otherdepository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks underthe expanded system shall be exempt from income tax

(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporationshall not be subject to tax.(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six

percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or dispositionof lands and/or buildings which are not actually used in the business of a corporation and are treated as capitalassets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of thisCode, whichever is higher, of such lands and/or buildings.

Tax Rate on Passive Income of Domestic Corporations Final Tax

1. Interest under the expanded foreign currency deposit system 7.5%

2. Royalty of all types within the Philippines

o Royalty from abroad? Enters the taxable income 30% tax rate

20%



20%

4. Dividend from domestic corporations (inter-corporate dividend) exempt

Tax Rate on Capital Gains (same as individuals)






2. On sale of real property in the Philippines held as a capitalasset 6% of the gross selling

price, or the current market

value at the time of sale,whichever is higher

Tax Rate of BANKS on Income Derived under the Expanded FCDSystem

Final Tax

1. Income derived by a depository BANK from foreign currencytransactions with non-residents, OBUs, etc

exempt

2. Interest income from foreign currency loans granted by a bank toresidents other than OBUs

10%

Income of non-residents (individuals or corporations) from transactions with depository

bank under the expanded FCD system are exempt.



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What are deposit substitutes?(Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (the term'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other thandeposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account,for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or theneeds of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances,

promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and betweenthe Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or part icipationand similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loanswith maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, includingthose between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.

A deposit substitute is a means of borrowing money from the public (20 or moreindividual or corporate lenders) other than by way of deposit with banks through the

issuance of debt instruments.

Sale of shares

Tax Rate on Income from Sale, Barter, Exchange or

other Disposition of Shares of Stock (RR 6-2008)

If shares of stock are listed and traded through the local

stock exchange

½ of 1% (or .005%) of the

gross selling price or grossvalue in money of theshares of stock

If shares not traded through the local stock exchange



FCDU

Income of non-residents (individuals or corporations) from transactions with depositorybank under the expanded FCD system are exempt.

Intercorporate dividends

Dividends received by a domestic corporation from another domestic corporation shall

not be subject to tax.o Why? Law assumes that the dividends received will be injected to the capital,

which will eventually be taxed when the corporation gets income from the use ofthe capital.

Sale of realty

Final Tax Rate on Sales, Exchanges, or Transfers or RealProperties Classified as Capital Assets (RR 8-98)

Sale of real property in the Philippines 6% of the gross sellingprice, or the current

market value at the time

of sale, whichever is

higherIf sale was made to the government or to GOCCs Either 6% of the gross

selling price/currentmarket value or under

the normal income taxrate, taxpayer’s option

Creditable Withholding Tax on Sales, Exchanges or

Transfers of Real Properties classified as Ordinary Assets



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(RR 8-98)

1. If the seller is habitually engaged in the real estate business

o Selling price is less than P500,000o Selling price is P500,000 to P2m

o Selling price is above P2m

1.5%3%

5% of gross selling

price/current market

value, whichever ishigher

2. If the seller is not habitually engaged in the real estatebusiness

7.5% of gross sellingprice/current marketvalue, whichever is

higher

3. If the seller is exempt from creditable withholding tax as perRR 2-98

Exempt

If the mortgagor exercises his right of redemption within 1 year, no capital gains tax.

In case of non-redemption, the capital gains will be due based on the bid price of thehighest bidder. (RR 4-99)

I. Minimum Corporate Income Tax (MCIT)Sec 27 (E) Minimum Corporate Income Tax on Domestic Corporations. – (1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end ofthe taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on thefourth taxable year immediately following the year in which such corporation commenced its business operations,when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for thetaxable year.(2) Carry Forward of Excess Minimum Tax . - Any excess of the minimum corporate income tax over the normalincome tax as computed under Subsection (A) of this Section shall be carried forward and credited against thenormal income tax for the three (3) immediately succeeding taxable years.(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is herebyauthorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losseson account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, thenecessary rules and regulation that shall define the terms and conditions under which he may suspend theimposition of the minimum corporate income tax in a meritorious case.

(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided underSubsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowancesand cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce themerchandise to bring them to their present location and use.For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plusimport duties, freight in transporting the goods to the place where the goods are actually sold including insurancewhile the goods are in transit.For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finishedgoods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums andother costs incurred to bring the raw materials to the factory or warehouse.In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns,allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarilyincurred to provide the services required by the customers and clients including (A) salaries and employee benefitsof personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized inproviding the service such as depreciation or rental of equipment used and cost of supplies: Provided, however,That in the case of banks, "cost of services" shall include interest expense.

Beginning with the fourth year of operations, a domestic corporation is taxed bywhichever is higher:

o Normal tax of 30%, or

o Minimum corporate income tax of 2%

The minimum corporate income tax is 2% of gross income (compare with the normal taxwhich has taxable income as its tax base)

Any excess of the over the normal tax of a year shall be carried forward and credited

against the normal tax for the three immediately succeeding taxable years.



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o For the carry forward to apply, the normal tax should be higher than theminimum corporate income tax.

o Usually follows the first-in, first-out (FIFO) method (Atty. Montero) o So, you usually compute both first, then apply either the MCIT or Normal Tax,

whichever is higher.

ExampleYear 4 Year 5 Year 6 Year 7

MCIT 200 400 100 100

Normal 100 200 300 200

Income tax 200 400 0 200Excess MCIT (100) (100) ubos na yung year 4 excess

(200)

MCIT is implemented on domestic and resident foreign corporations whenever they have

zero or negative taxable income, or when the MCIT is greater than the normal incometax due. (RR 9-98)

The following are exempted from the MCIT:

o Resident foreign corporations engaged in business as international carriers (see

below for more discussion)o Resident foreign corporations engaged in business as offshore banking units

o Resident foreign corporations engaged in business as regional operating

headquarterso Firms that are taxed under a special income tax regime (like those under PEZA or

other economic zones)

J. Income Tax on Resident Foreign CorporationsSec 28(A) Tax on Resident Foreign Corporations. –

(1) In General . - Except as otherwise provided in this Code, a corporation organized, authorized, or existing underthe laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an incometax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from allsources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-fourpercent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1,2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computedwithout regard to the specific date when sales, purchases and other transactions occur. Their income and expensesfor the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number ofmonths covered by the new rates within the fiscal year by the taxable income of the corporation for the period,divided by twelve.Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent(15%) on gross income under the same conditions, as provided in Section 27 (A).

(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of twopercent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the sameconditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.

A foreign corporation is one which is not domestic (ie organized/incorporated here). It

may be a resident or non-resident corporation.

A resident corporation is a foreign corporation engaged in business in the Philippines.



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o A foreign corporation can engage in business in the Philippines only after it hadregistered with, and had been allowed by, the regulatory agencies of the

Philippine government to engage in business in the Philippines.

Tax rate of Foreign Resident

Corporations

30% of taxable income from all sources within the

Philippines, or

2% of gross income if MCIT applies, or15% of gross income (again, the GIT has yet tobe implemented)

Tax Rate on Passive Income of Foreign Resident Corporations Final Tax



o Royalty from abroad? Exempt. (remember, only taxed fromsources within the Philippines)

20%


20%

4. Dividend from domestic corporations (inter-corporate dividend) exempt

Tax Rate on Capital Gains

4. On sale of shares of stock of a domestic corporation NOT

listed and NOT traded thru a local stock exchange held asa capital asset ,





2. On sale of real property in the Philippines No provision for capitalgains for sale of realty.

Atty. Montero says that you

apply it to the normalcorporate tax of 30%

International CarrierSec 28 (A)(3) International Carrier . - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder:(a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue derived fromcarriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous anduninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passagedocument: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form partof the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided,further , That for a flight which originates from the Philippines, but transshipment of passenger takes place at anyport outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to theleg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.(b) International Shipping. - "Gross Philippine Billings" means gross revenue whether for passenger, cargo or mailoriginating from the Philippines up to final destination, regardless of the place of sale or payments of the passage

or freight documents.

Tax rate for international carriers is 2.5% of Gross Philippine Billings

Gross Philippine Billings refers to

o Gross revenue derived from carriage of persons, excess baggage, cargo and mail

o Originating from the Philippines in a continuous and uninterrupted flight

o Irrespective of the place of sale or issue and the place of payment of the ticket orpassage document



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In CIR v BOAC, British Overseas Airways did not have any landing rights here nor didthey have license to operate here. They also did not carry passengers or cargo to or

from the Philppines. They did, however, have a general sales agent which sold BOACtickets. They were taxed for the sale of the tickets (because of the situs of taxationprinciple), even if the service to be rendered was outside the Philippines. They weren’tliable for carrier’s tax though.

o

Doing business has no specific criterion. As long as there was a continuity ofconduct and intention to establish a continuous business and not one of atemporary character, then you are doing business in the Philippines. (Remember

your corp!)

An offline airline which has a branch/agent in the Philippines and sells passagedocuments to cover offline flights of its principal or other airlines in considered engagedin business as an international air carrier in the country and is NOT subject to the GPB

nor to the 3% common carrier’s tax.

If the airline has flights which originate from any point in the Philippines, it is subject to

the 2.5% GPB tax unless it is subject to a different tax rate under a tax treaty to whichthe Philippines is a signatory.

What is included in computing the GPB?

o Gross revenue from passage of persons (actual amount as reflected in the tax

coupon part of the plane ticket)o Excess baggage

o Cargo and mail originating from the Philippines in a continuous and uninterrupted

flight

To compute the GPB: (monthly average net fare of all the tax coupons of plane tickets

per point of final destination, per class of passage, per classification of passenger)MULTIPLIED by the (total number of passengers flown for the month as declared in the

flight manifest)

In case of passengers’ flights from any point in the Philippines and back, that portion of

revenue pertaining to the return trip to the Philippines is NOT included as part of the

GPB. (RR 15-2002)

Offshore Banking Units(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshorebanking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units,including any interest income derived from foreign currency loans granted to residents, shall be subject to a finalincome tax at the rate of ten percent (10%) of such income.Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking unitsshall be exempt from income tax.

Tax rate of offshore banking units authorized by the BSP (including any interest incomeforeign currency loans granted to residents) is 10% final tax.

Income of nonresidents from transactions with OBUs shall be exempt from income tax.

An offshore banking unit is a branch of a foreign bank whish is authorized by the BSP totransact offshore banking business in the Philippines.

A foreign currency deposit unit is a department of a local bank or an inexisting local

branch of a foreign bank which is authorized by the BSP to operated under the expandedforeign currency deposit system.

Gross onshore income covers all income arising from transactions allowed by the BSP

conducted by and between an offshore bank with another offshore bank or with an FCDUor with a non-resident. (RR 10-76)

The following are included in computing the gross onshore income of OBUs and FCDUs?

o Gross interest income arising from foreign currency loans and advances and

investments with residents



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27

o Fees, commissions and other charges which are integral parts of the income fromforeign currency loan transactions are EXEMPT. They are not to be included in

computing the final tax. (RR 14-77) o

Tax Rate on Interest Income from Foreign Currency Deposit (RR

10-98)

1. Interest income actually received by a resident citizen or resident alienfrom FCD

7.5% finalwithholding tax

2. If it was deposited by an OCW or seaman or nonresident citizen Exempt

3. If it was in a bank account in the joint names of an OCW and hisspouse (who is a resident)

50% exempt/50% final

withholding tax

of 7.5%

4. Interest income actually received by a domestic corporation or

resident foreign corporation from FCD

7.5% final

withholding tax

Branch Profit Remittance Tax(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a taxof fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any

deduction for the tax component thereof (except those activities which are registered with the Philippine EconomicZone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of thisCode: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries,wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits,income and capital gains received by a foreign corporation during each taxable year from all sources within thePhilippines shall not be treated as branch profits unless the same are effectively connected with the conduct of itstrade or business in the Philippines.

Any profit remitted by a branch to its head office shall be subject to a tax of 15%,except those registered with PEZA (they have their own tax rules as incentives)

What’s the base for the BPRT?

o It’s the total profits applied for remittance or earmarked for remittance withoutany deduction for the tax component, not the profit actually remitted abroad.

o If it is a foreign corporation, the following are not included:

Interests Dividends

Rents

Royalties

Payment for technical services

Salaries and wage premiums

Annuities, emoluments, or other fixed or determinable casual gains

Profits, income & capital gains Except if the above are connected with the conduct of its business in the

Philippines. Passive income is not included in computing for the BPRT. It is subject to a final tax.

(Compania General de Tabacos v CIR)

o Except when it arises from business activity in which the corporation is engaged

or connected with the conduct of its business in the Philippines.

Regional or Area Headquarters and ROHQs

Sec 22(DD) The term "regional or area headquarters" shall mean a branch established in the Philippines by

multinational companies and which headquarters do not earn or derive income from the Philippines and which actas supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.(EE) The term "regional operating headquarters" shall mean a branch established in the Philippines bymultinational companies which are engaged in any of the following services: general administration and planning;



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28

business planning and coordination; sourcing and procurement of raw materials and components; corporatefinance advisory services; marketing control and sales promotion; training and personnel management; logisticservices; research and development services and product development; technical support and maintenance; dataprocessing and communications; and business development.

Regional or Area Headquarters is a branch established in the Philippines by multi-nationals and which headquarters:

o

Do NOT earn or derive income from the Philippines, ando Which act as supervisory, communications and coordinating center for their

affiliates, subsidiaries or branches in the Asia-Pacific Regions. They are EXEMPT from income tax.

Regional Operating Headquarters is a branch established in the Philippines by multi-

nationals which are engaged in any of the following services:o General admin and planning

o Business planning and coordination;

o Sourcing and procurement of raw materials and components;

o Corporate finance advisory services;

o Marketing control and sales promotion;

o Training and personnel management;o Logistic services;

o Research and development services and product development;

o Technical support and maintenance;

o Data processing and communications; and

o Business development.

They are taxed 10% on taxable income.

K. Income Tax on Non-resident Foreign Corporations

In general(B) Tax on Nonresident Foreign Corporation. -

(1) In General . - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or businessin the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during eachtaxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries,

premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodicor casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c)Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)

Non-resident foreign corporations are subject to 30% income tax on the gross income

derived during each taxable year from all sources within the Philippines onlyo Special corporations (seen below) are subject to a different tax rate

When the foreign corporation transacts business in the Philippines independently of its

branch in the country, the principal agent relationship is set aside. The transaction

becomes that of the foreign corporation, not of the branch, hence, the corporation isconsidered a foreign non-resident corporation for that isolated and independent

transaction. (Marubeni v CIR)

A casual activity in the Philippines by a foreign corporation does not amount to engagingin trade or business in the Philippines for income tax purposes. In order that a foreign

corporation may be considered engaged in trade or business, its business transactionsmust be continuous. (NV Reederij v CIR)

Special non-resident foreign corporations(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, ordistributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor ofvessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees fromleases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.



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(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees

derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven andone-half percent (7 1/2%) of gross rentals or fees.

SPECIAL CORPORATIONS

Tax Rate Tax Base

Non-resident owner of lessor ofvessel

4.5% Gross rentals, lease andcharter fees from the Phil

Non-resident cinematographic filmowner, lessor, or distributor

25% Gross income from the Phil

Non-resident lessor of aircraft,machinery and other equipment

7.5% Gross rentals, charges andother fees from Phil sources

Proprietary educational institution

and non-profit hospital

10% Taxable income from all

sources

Resident international carrier 2.5% Gross Philippine billings

Regional operating headquarters or

multinational corporation

10% Philippine Taxable income

There’s no MCIT for special corporations

Tax rate on certain incomes of non-resident foreign corporations(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed onthe amount of interest on foreign loans contracted on or after August 1, 1986;(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed onthe amount of cash and/or property dividends received from a domestic corporation, which shall be collected andpaid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresidentforeign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporationtaxes deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents thedeifference between the regular income tax of 35% and the 15% tax on dividends as provided in thissubparagaprh: Provided , that effective January 1, 2009, the credit against the tax due shall be equivalent to 15%,which represents the difference between the regular income tax of 30% and the 15% tax on dividends. ( Asamended by RA 9337)(c) Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realizedduring the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic

corporation, except shares sold, or disposed of through the stock exchange:Not over P100,000…………..………………..........5% On any amount in excess of P100,000………… 10%

Tax Rate on Passive Income of Foreign Non-ResidentCorporations

Final Tax

1. Interest on foreign loans

Non-resident lends to a domestic corporation

20%

2. Dividend from domestic corporations (inter-corporate dividend)

This is subject to the condition that the country in which the non-

resident foreign corporation is domiciled allows a credit againstthe tax due from the non-resident foreign corp taxes deemed tohave been paid in the Philippines equivalent to 15%. If they don’t,

the dividends will be taxed at 30%.

15%

Tax Rate on Capital Gains (same as foreign residentcorporations)




2. On sale of real property in the Philippines No provision for capital



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gains for sale of realty. Atty. Montero says that you

apply it to the normal

corporate tax of 30%

Income covered by tax treaties

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that thePhilippines will give up a part of the tax in the expectation that the tax given up for this

particular investment is not taxed by the other country. There would be some incentives

on the part of the foreigners to invest in the Philippines because the rates of tax arelowered and at the same time, they are credited against the domestic tax abroad a

figure higher than what was collected in the Philippines.o Thus, if the rates of tax are lowered here, there should be a concomitant

commitment on the part of the state of residence (of the foreign corp) to grant

some form of tax relief, whether this be in the form of a tax credit or exemption.Otherwise, the tax which would have been collected here will simply be collected

by another state, defeating the object of the tax treaty since the tax burdenimposed would remain unrelieved.

o The purpose of the most favored nation clause is to establish the principle of

equality of international treatment by providing that citizens of the contractingnations may enjoy the privileges accorded by either party to those of the most

favored nation. This allows the taxpayer in one state to avail of more liberalprovisions granted to another tax treaty to which his country or residence is alsoa party. However, the use of the most favored nation clause is subject to the

rationale of tax treaties.

o If the state of residence does not grant some form of tax relief to the investor(the foreign non-resident corp), no benefit would redound to the Philippines. (CIR

v SC Johnson and Son)

L. Improperly Accumulated Earnings Tax (IAET)SEC. 29. Imposition of Improperly Accumulated Earnings Tax. -(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on

the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperlyaccumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.

(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -(1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to everycorporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or theshareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided ordistributed.(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to:(a) Publicly-held corporations;(b) Banks and other nonbank financial intermediaries; and(c) Insurance companies.

(C) Evidence of Purpose to Avoid Income Tax. -(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment company shall

be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted toaccumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the taxupon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove tothe contrary.

(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulatedtaxable income' means taxable income' adjusted by:(1) Income exempt from tax;(2) Income excluded from gross income;

(3) Income subject to final tax; and(4) The amount of net operating loss carry-over deducted;



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And reduced by the sum of:

(1) Dividends actually or constructively paid; and(2) Income tax paid for the taxable year.Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shallnot apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting thefiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as ofthe end of the month comprising the twelve (12)-month period of fiscal year 1997-1998.

(E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business'includes the reasonably anticipated needs of the business.

An improperly accumulated earnings tax of 10% of improperly accumulated taxable

income is imposed on corporations which permit earnings and profits to accumulate

instead of being divided or distributed.

Who are covered?

o All domestic corporations which are classified as closely held corporations?

o A closely-held corporation are those at least 50% in value of the outstandingcapital stock or at least 50% of the total combined voting power of all classes ofstock is owned directly or indirectly by not more than 20 individuals. (RR 2-01)

How do you determine if a corporation is a closely-held one? Look at

stock-ownership!

If stock not owned by individuals, it will be considered to be ownedproportionately by its shareholders.

If it’s a family & partnership ownership, an individual shall beconsidered to own the stock for his family members or partners.

If there’s an option to acquire stocks, it shall be considered as

being owned by the person with the option. (BIR Ruling 25-02)

Who are not covered?1. Publicly-held corporations2. Banks and other financial institutions

3. Insurance companies4. Taxable partnerships5. General professional partnerships

6.

Non-taxable joint ventures7. Enterprises registered with PEZA or with the BCDA or with other special economic

zones (the last four are based on RR 2-01)

What’s prima facie evidence of IAE? o The fact that any corporation is a mere holding company or investment company

o The fact that the earnings or profits of a corporation are permitted to accumulatebeyond the reasonable needs of the business

o Investment of substantial earnings in unrelated business or in stock or securities

of an unrelated business

o Investment in bonds and other long term securities

o Accumulation of earnings in excess of 100% of paid up capital (the last three arebased on RR 2-01)

How do you compute for the improperly accumulated taxable income?

Taxable Income,INCREASED BY:

Income exempt from taxIncome excluded from gross income

Income subject to final taxThe amount of net operating loss carry over (NOLCO)

DEDUCTED BY:Dividends actually or constructively paid

Income tax paid for the taxable year



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32

Amount reserved for reasonable needs of the business

emanating from the covered year’s taxable income ( from

Reyes, p. 71)EQUALS:Improperly accumulated taxable incomeX 10% (IAET)

What you have to pay

“Reasonable needs” means the immediate needs of the business. If the corporation can

not prove this, then it is not an immediate need. In order to determine whether profits

are accumulated for the reasonable needs of the business as to avoid the surtax uponshareholders, the controlling intention of the taxpayer is that which is manifested at thetime of accumulation, not subsequently declared intentions which are merely the product

of afterthought. (Manila Wine Merchants v CIR)

o This is the immediacy test in RR 2-01.

Reasonable needs means the immediate needs of the business includingreasonably anticipated needs. The burden of proof is with the corporation.

The touchstone of liability is the purpose behind the accumulation of the income and notthe consequences of the accumulation. So, if the failure to pay dividends were for the

purpose of using the undistributed earnings and profits for the reasonable needs of thebusiness, that purpose would not fall within the interdiction of the statute. (CIR vTuason)

The tax on improper accumulation of surplus is essentially a penalty tax designed tocomple corporations to distribute earnings so that the said earnings by shareholders,

could, in turn, be taxed. When corporations do not declare dividends, income taxes arenot paid on the undeclared dividends received by the shareholders. (Cyanamid v CTA)

What are considered reasonable?a. Allowance for the increase of accumulated earnings up to 100% of the paid-up

capital

b. Earnings reserved for building, plant, or equipment acquisitions as approved bythe Board of Directors (expansion, improvement, and repairs)

c.

Earnings reserved for compliance with any loan or obligation established under alegitimate business agreement (debt retirement)

d. In case of subsidiaries of foreign corporations in the Philippines, all undistributedearnings intended or reserved for investments in the Philippines

e. Earnings required by law to be retained (RR 2-01)

f. Anticipated losses or reverses in business (Reyes, p. 70)

M. Tax-exempt CorporationsSEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in

respect to income received by them as such:(A) Labor, agricultural or horticultural organization not organized principally for profit;(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capitalstock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as afraternal organization operating under the lodge system, or mutual aid association or a nonstock corporationorganized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to themembers of such society, order, or association, or nonstock corporation or their dependents;(D) Cemetery company owned and operated exclusively for the benefit of its members;(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong toor inures to the benefit of any member, organizer, officer or any specific person;(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the netincome of which inures to the benefit of any private stock-holder, or individual;



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33

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social

welfare;(H) A nonstock and nonprofit educational institution;(I) Government educational institution;(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual orcooperative telephone company, or like organization of a purely local character, the income of which consists solelyof assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose ofmarketing the products of its members and turning back to them the proceeds of sales, less the necessary sellingexpenses on the basis of the quantity of produce finished by them;Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of theforegoing organizations from any of their properties, real or personal, or from any of their activities conducted forprofit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

The following organizations are tax-exempt, providing they are not organized for profit :

1. Labor, agricultural and horticultural organizations2. Mutual savings bank without capital stock represented by shares & cooperative

banks without capital stock

3. A beneficiary society, order or association operating for the exclusive benefit of the

members (like a frat operating under the lodge system, a mutual aid association, anon-stock corporation organized by employees providing for the payment of life,

sickness, or other benefits exclusive to its members)

4.

Cemetery company owned & operated exclusively for the benefit of its members5. Non-stock corporations or associations organized and operated exclusively for

religious, charitable, scientific, athletic or cultural purposes or for the rehab of

veterans, no part of its net income or asset shall belong to or inures to the benefit of

any member or specific person6. Business league chamber of commerce or board of trade, no part of its income inures

to any individual7. Civic league or organization operated exclusively for the promotion of social welfare

8. A non-stock and non-profit educational institution9. Government educational institution

10. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or

irrigation company, mutual or cooperative telephone company, or like organizationsor a purely local character, the income of which consists solely of dues, assessments

& fees collected from members for the sole purpose of meeting its expenses11. Farmers’, fruit growers’ or like associations organized and operated as sales agent

for the purpose of marketing the products of its members & turning back to them theproceeds less expenses

They are not subject to income tax on income received by them from undertakings

which are essential to or necessarily connected with the purposes for which they wereorganized and operated.

o But they are subject to income tax on income of whatever kind and characterfrom any of their properties (real or personal), or from any of their activities

(unrelated) conducted for profit, regardless of the disposition made of such

income.

Some stuff from the Omnibus Investment Code of 1987 (Art 39, EO 226 - Incentives

to Registered Enterprises under the Investment Priorities Plan) – these areactivity-driven incentives:

o Income Tax Holiday For pioneer firms – 6 years from commercial operation

For non-pioneer firms – 4 years from commercial operation

For newly registered firms – fully exempt from income taxes Extension of tax exemption for more than 1 year:

If the project meets the prescribed ratio of capital equipment to

number of works set by the Board



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If the utilization of indigenous raw materials are at rates set by theBoard

If the net foreign exchange savings or earnings amount to at least$5m annually during the first 3 years of operation

o But no registered firm may avail of this incentive for aperiod exceeding 8 years

Exemption for registered expanding firms: For a period of 3 years form commercial operation, registered

expanding firms are entitled to tax-exemption proportionate to

their expansion, but if it availed of this incentive during this period,

it is NOT entitled to additional deduction for incremental laborexpense

This incentive cannot be extended beyond 3 years

o Additional deduction for labor expense

For the first 5 years from registration, a registered enterprise is allowed

an additional deduction of 50% of the wages corresponding to theincrement in the number of DIRECT labor for skilled and unskilled labors if

the project meets the prescribed ratio of capital equipment to number ofworkers set by the Board

This exemption shall be doubled if the activity is located in lessdeveloped areas

o Tax & Duty exemption on imported capital equipment

Within 5 years from the effectivity of this code (until 1992), importationsof machinery and equipment and spare parts of registered enterprises

shall be 100% exempt of customs duties and revenue tax, but theimportation must comply with the following conditions:

They are not manufactured domestically in sufficient quantity ofcomparable quality and at reasonable prices

They are reasonably needed and will be used exclusively by the

registered enterprise in the manufacture of its products

The approval of the Board was obtained for such importation

o

Tax credit for domestic capital equipment A tax credit of 100% of the value of the revenue tax and customs duties

that would have been waived on the machinery and equipment had thesebeen imported is given to registered enterprises which purchase them

from a domestic manufacturer

o Exemption from contractor’s tax The registered enterprise is exempt from contractor’s tax

Some stuff from the Special Economic Zone Act of 1995 (RA 7916, Sec 23-25) – theseare activity- and location-driven incentives.

o Fiscal Incentives

Businesses operating within the ECOZONES shall be entitled to fiscal

incentives as per PD 66 (EPZA) or with EO 226.

Exporters using local materials as inputs shall get tax credits same as

those provided in the Export Development Act of 1994o Exemption from Taxes under the NIRC

No taxes (local & national) shall be imposed on businesses operatingiwhtin the ECOZONEs

In lieu of taxes, 5% of the gross income shall be remitted to the national

government

o Applicable national taxes All income derived by persons and all services establishments in the

ECOZONE are subject to taxes under the Tax Code



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N. Taxable IncomeSEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross incomespecified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for suchtypes of income by this Code or other special laws.

Gross IncomeLess: deductions

Less: Personal exemptionsTaxable income

O. Gross IncomeSEC. 32. Gross Income. -(A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived fromwhatever source, including (but not limited to) the following items:(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,commissions, and similar items;(2) Gross income derived from the conduct of trade or business or the exercise of a profession;(3) Gains derived from dealings in property;(4) Interests;(5) Rents;(6) Royalties;(7) Dividends;(8) Annuities;(9) Prizes and winnings;(10) Pensions; and(11) Partner's distributive share from the net income of the general professional partnership.

Gross income means ALL INCOME derived from WHATEVER SOURCE. This includes, butis not limited to, the enumeration in the codal.

In answering problems, the first thing you should ask is “Is this gross income?”, and

then you ask “is this excludible?” (that’s the thought process to follow!)

Compensation

Compensation for services in whatever form paid, including, but not limited to:o fees,o salaries,

o wages,

o commissions,o and similar items.

Compensation earners are not allowed to deduct any other deductions from their salary

o but they may have deductions applied to income earned from other sources.

Business income

Gross income derived from the conduct of trade or business or the exercise of a

profession

In the case of manufacturing, merchandising or other business, gross income means:

Total SalesLess: cost of goods sold

Add: all income from incidental and outside sourcesGross Income

Gains

Gains derived from dealings in property



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Gain or loss on sale or exchange of property is recognized when the property received inexchange is essentially different from the property disposed and the property received

has market value.

In sale or exchange of real or personal property, distinguish first between ordinaryversus capital assets because capital assets have special rules governing them.

See R and S for more details

Interests

Income from interests are also to be included in computing for the gross income

In the case of 2 or more organizations, trades or businesses (whether organized &

incorporated here or not) are owned or controlled DIRECTLY or INDIRECTLY by the sameinterests, the CIR is authorized to distribute, apportion or allocate gross income ordeductions between or among such orgs, trades or businesses, if the CIR determines

that such is necessary in order to prevent tax evasion. (Sec 50, NIRC)

o This is called “transfer pricing”

o The standard to determine the fairness of related party transactions is the arm’slength standard.

It means that there should be no intimacy between the two.

It means that the corporation should deal with the related corporation in

the same manner it would with an uncontrolled taxpayer.o If a member of a group of controlled entities makes a loan or advances directly or

indirectly to another member of such group and does NOT charge any interest or

charges interest not equal to an arm’s length, the CIR may make appropriateallocations to reflect arm’s length interest rate. (meaning the CIR can come in

and impose an interest on the transaction)

o The arm’s length interest rate shall be:

The same rate of interest which would have been charged at the time theindebtedness arose in an independent transaction between unrelated

parties under similar circumstances, or

The Bank Reference rate by the BSP (RMO 63-99)

Rents Rents are included in the gross income

But what about improvements by lessees? (Section 49, RR 2) o When a lessee erects a building or makes improvements per agreement with the

lessor, the lessor may report the income therefrom upon either of the follow, at

his option: At the time when such building or improvements are completed, the fair

market value of such building or improvement

The lessor may spread over the life of the lease the estimated depreciated

value of such building or improvement at the termination of the lease andreport the income for each of the adequate part.

o If the lease is terminated, and it is not through purchase by the lessor, so that

the lessor comes into possession of the property prior to the time originally fixed,

the lessor is considered to receive additional income for that year (if the value ofthe building exceeds the amount already reported as income)

No appreciation value due to causes other than premature termination ofthe lease shall be included.

o If the building is destroyed before the expiration of the lease, the lessor is

entitled to deduct as loss for the year when such destruction occurred the

amount previously reported as income, less any salvage value to the extent thatsuch loss was not compensated by insurance.



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Royalties

Royalties are any payment of any kind received as consideration for the use of or right

to use:1. Any patent, trademark, design or model2. Secret formula or process3. Industrial, commercial or scientific equipment

4.

Information concerning industrial, commercial or scientific experience.

Dividends

Dividends are any distribution whether in cash or in other property in the ordinary

course of business even if extraordinary in amount, made by:

o A domestic or resident foreign corporation

o A joint stock corporation

o A partnership

o A joint account

o An associationo An insurance company

To the shareholders or members out of its earnings or profits.

Tidbits:

o

When the corporation receives dividends which are tax-fee (like intercorporatedividends), it becomes taxable as dividends when it distributes the same to itsshareholders.

o When the dividend is paid by a domestic corporation to a non-resident foreigncorporation, it is taxable in full. (Sec 28 (5b) of NIRC)

General rule: Cash and property dividends are taxable. Stock dividends are not taxable.

Property dividends (or securities other than its own stock) (Section 251, RR 2)

o These are considered income in the amount of the full market value as whenreceived by the stockholder.

o They are taxed 10%.

o If it was paid in stock of another corporation, it is not considered a stockdividend.

o

The valuation is the market value at the time the dividend becomes payable. (Forshares of stock of another corporation given as dividends, it is the market value

when the shares of stock are received)

Stock dividends

o They are not taxable.

EXCEPT when the stock dividend causes change in the corporate identityor a change in the nature of the shares issued whereby the proportional

interest of the stockholders after the distribution is essentially differentfrom his former interest. (Section 252, RR 2)

A stock dividend constitutes income if it gives the shareholder aninterest different from that which his former stock represented.

When a stockholder receives a stock dividend which is taxable

income, the measure of income is the fair market value of the

shares of stock received. Sale of stock received as dividends (Section 253, RR 2)

o Once the recipient sells the stock dividend, he may realize gain or loss. This gainor loss is treated as arising form the sale or exchange of a capital asset.

o Computation of gain or loss (the new basis per share is used in comuting any

gain or loss upon any subsequent sale of the shares):

When stock dividend is the same character as the stock upon which it ispaid:

Cost: Old Shares / (total number of old and new shares)



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When stock dividend materially differs from stock upon which it is paid:Cost: Cost of shares of 1 class / number of shares in that class

When stock was purchased at different times and at different prices sothat the identity cannot be determined:

Cost: Presumed to be from stock issued with respect to earliestpurchased stock

Stock declaration and subsequent redemptiono If after the stock dividend declaration, a corporation cancels or redeems the

same in such time and manner as to make the distribution/redemption essentially

equivalent to a distribution of a taxable dividend, the amount received shall be

considered as a taxable dividend (10% final tax for individuals). (Section 254,

RR 2)

Why do corporations do this?

So that the shareholder will avoid paying tax. Remember, stockdividends are not taxable, but cash dividends are subject to 10%

final tax for individuals (remember your passive income charts!).So corporations declare stock dividends, and then redeem them

(by giving their shareholders cash) to go around the tax. Butbecause of the law, their subsequent redemptions are now taxable.

The issuance of stock dividends and its subsequent redemptionmust be separate, distinct, and not related, for the redemption tobe considered a legitimate tax scheme.

o Depending on each case, the exempting provision of Sec83(b) of the 1939 Code (now, Sec 254, RR2), may not be

applicable if the redeemed shares were issued with bona

fide business purpose, which is judged after each and every

step of the transaction have been considered and the wholetransaction does not amount to a tax evasion scheme.

o It is in the issuance of the stocks which are subsequently

redeemed that must have a bona fide business purpose, notthe redemption. The existence of legitimate business

purposes in support of the redemption of stock dividends isimmaterial in income taxation. The test of taxability under

the exempting clause is whether income was realizedthrough the redemption of stock dividends. (CIR v CA &

Anscor) In other words, if there was a legitimate business

purpose in issuing the shares, ANSCOR wouldn’t

have been taxed for the redemption. But, they failedto show any business purpose, their actuations were

mere afterthought.

Sources of distribution

o Every distribution is made out of earnings or profits. o Determine them to be coming from the earnings or profits of the taxable year. If

not, then to the past taxable years. (Section 255, RR 2) Distribution in liquidation

o When a corporation distributes all its properties or assets in complete liquidation,the gain realized from this is taxable.

o Computation is based on Sec 34 (b) or (c) of the Tax Code (Section 256, RR 2)

When a corporation distributes all of its assets in complete dissolution and

liquidation, there is no dividend income to the shareholder receiving theliquidating dividend. There is, instead, a sale or exchange of property. Any



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gain realized or loss sustained by the stockholder, whether individual orcorporate, is taxable income or deductible loss, as the case may be.

When a corporation was dissolved and in process of complete liquidationand its shareholders surrendered their stock to it and it paid the sums inquestion to them in exchange, a transaction took place, which was nodifferent in its essence from a sale of the same stock to a third party who

paid therefore. (Wise v Meet) In other words, the gain or loss one incurs when a corporation

liquidates goes into your ordinary income (schedular rate for

individuals, 30% for resident corporations.)

o The 12-month 50%/100% of gains threshold applies (seebelow)

That’s the difference between redeemed shares (taxed at 10%)

and liquidating shares (schedular rate for individuals, or 30% forresident corporations)

For a trading company that is in the process of liquidation, and whose stockholders areto receive liquidating dividends in excess of their investment, the gain is taxable because

the shareholders will realize capital gain or loss.

o Such gain is the difference between the fair market value of the liquidating

dividends and the adjusted cost to the stockholders of their respectiveshareholdings. (BIR Ruling 322-87)

But because of Section 34 (b) of the tax code, If the shareholder held his shares for more than 12 months, only

50% of the capital gains is taxable.

If less than 12 months, the entire 100% of the capital gains istaxable.

Annuities

An annuity is a sum of money payable yearly or at regular intervals.

Annuities are tax-exempt.

Prizes and Winnings Prizes and winnings are generally taxable (they are similar to gains derived from labor)

o EXCEPT: (these are not taxable)1. If the recipient was selected without any action on his part to enter the contest

and he was not required to render substantial future services as a condition for

receiving the prize or award2. Those granted to athletes are exempt

3. Those that are in the nature of gifts

Pensions

A pension is a gratuity granted as a favor or reward or one paid under given conditions

to a person following retirement from service or to surviving dependents

Pensions are tax-exempt

Share in GPP’s Income SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as suchshall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in ageneral professional partnership shall be liable for income tax only in their separate and individual capacities.For purposes of computing the distributive share of the partners, the net income of the partnership shall becomputed in the same manner as a corporation.

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



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The GPP is tax-exempt, but the income of the individual partners are subject to tax.

Each partner shall report as gross income his distributive share in the net income of the

partnership.

From whatever source

Cancellation or forgiveness of debt may amount to

o

Payment of income – that’s taxable. (a person performs service for a creditorwho cancels his debt)

o A capital transaction – that’s taxable (a corporation forgives the debt of a

stockholder, that’s like paying a dividend)

o A gift – that’s exempt. (a creditor merely wants to benefit a debtor by cancelingthe debt without any consideration) (Section 50, RR 2)

Refunds & Tax Credits

o Taxes which were previously claimed and allowed as deductions but subsequentlywas refunded or granted as tax credit should be declared as part of the gross

income of that year. The purpose of this is put you back in equilibrium – to bringyour gross income back up.

o EXCEPT:

Estate and donor’s tax

Income, war-profit and excess profit taxes imposed by a foreign country Estate and gift taxes

Taxes assessed against local benefits of a kind tending to increase the

value of the property assessed Stock transaction tax

Energy tax

Taxes which are not allowable as deductions under the law

When refunded, they are not declarable as gross income becausethey are not allowable as deductions.

Special tax credits

o Sales, compensating and specific taxes paid on supplies and raw materialsimported by a registered export producer? That’s given as tax credit.

o

When a registered BOI & Tourism enterprise assumes payment of taxes withhelddue from the foreign lender on interest payments on foreign loans, that’s given

as a tax credit too. (RMC 13-80)

ExclusionsSection 32 (B) Exclusions from Gross Income. - The following items shall not be included in gross income and

shall be exempt from taxation under this title:(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of theinsured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement topay interest thereon, the interest payments shall be included in gross income.(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return ofpremiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at thematurity of the term mentioned in the contract or upon surrender of the contract.(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided,however, That income from such property, as well as gift, bequest, devise or descent of income from any property,in cases of transfers of divided interest, shall be included in gross income.(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or underWorkmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of anydamages received, whether by suit or agreement, on account of such injuries or sickness.(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation bindingupon the Government of the Philippines.(6) Retirement Benefits, Pensions, Gratuities, etc.-(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees ofprivate firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained bythe employer: Provided, That the retiring official or employee has been in the service of the same employer for at



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41

least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further,That the benefits granted under this subparagraph shall be availed of by an official or employee only once. Forpurposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus orprofit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, whereincontributions are made by such employer for the officials or employees, or both, for the purpose of distributing tosuch officials and employees the earnings and principal of the fund thus accumulated, and wherein its is providedin said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, anypurpose other than for the exclusive benefit of the said officials and employees.

(b) Any amount received by an official or employee or by his heirs from the employer as a consequence ofseparation of such official or employee from the service of the employer because of death sickness or otherphysical disability or for any cause beyond the control of the said official or employee.(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirementgratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines oraliens who come to reside permanently in the Philippines from foreign government agencies and other institutions,private or public.(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of theUnited States administered by the United States Veterans Administration.(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions ofRepublic Act No. 8282.(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received bygovernment officials and employees.(7) Miscellaneous Items. -(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks,bonds or other domestic securities, or from interest on deposits in banks in the Philippines by

(i) foreign governments,(ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and

(iii) international or regional financial institutions established by foreign governments.(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility orfrom the exercise of any essential governmental function accruing to the Government of the Philippines or to anypolitical subdivision thereof.(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific,educational, artistic, literary, or civic achievement but only if:(i) The recipient was selected without any action on his part to enter the contest or proceeding; and(ii) The recipient is not required to render substantial future services as a condition to receiving the prize oraward.(d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and internationalsports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their nationalsports associations.(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private

entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousandpesos (P30,000) which shall cover:(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No.6686;(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum OrderNo. 28, dated August 13, 1986;(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended byMemorandum Order No. 28, dated August 13, 1986; and(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling ofThirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary ofFinance, upon recommendation of the Commissioner, after considering among others, the effect on the same of theinflation rate at the end of the taxable year.(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and uniondues of individuals.(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the sameor exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than

five (5) years.(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of sharesof stock in a mutual fund company as defined in Section 22 (BB) of this Code.

The following are tax-exempt and are NOT included in gross income:1. Life insurance (except if the proceeds are held by the insurer under an agreement to

pay interest thereon. The interest payments only are included in the gross income)

2. Amount received by insured as return of premium

3. Gifts, bequests, devises or descents (but the income from such property acquired bythese which shall be included in gross income)



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4. Compensation for income personal injuries or sickness (plus the amounts of anydamages received on account of such)

5. Income exempt under any treaty6. Benefits received from the US Veterans Administration7. Retirement benefits, pensions, gratuities (provided, the retiring person has been in

the service of the same employer for at least 10 years and is not less than 50 years

of age at the time of his retirement. This benefit can only be availed of once) [RA4917]

8. Separation pay, caused by death, sickness or other disability (RA 4917)

9. Social security benefits, retirement gratuities, pensions and similar benefits from

foreign government agencies10. SSS benefits11. GSIS benefits

Miscellaneous tax-exempt items:

1. Income earned by foreign governments in the Philippines2. Income earned by the Phil government or its political subdivisions (like public

utilities)3. Prizes and awards made primarily in recognition of religious, charitable, scientific,

educational, artistic, literary or civic achievement – but only if he was selectedwithout any action on his part to enter the contest and he is not required to rendersubstantial future services as a condition to receiving the prize or award

4. Prizes and awards in sports competitions sanctioned by the national sportsassociations

5. 13th month pay, Christmas bonus, productivity incentives, and other benefits (butexemptions apply only to the first P30,000) [RA 7833]

6. GSIS, SSS, Medicare, Pag-ibig union dues and other contributions7. Gains from sale of bonds, debentures or other certificate of indebtedness with

maturities of more than 5 years

8. Gains from redemption of shares in mutual funds9. Interest received by a non-resident individual or a non-resident corp from deposits

with depository banks under the expanded FCDU10. Intercompany dividends (resident/domestic corps from domestic corps)

11. De minimis benefits received by a managerial or supervisor12. Those under special laws (PCSO and lotto winnings!)

Minimum wage earners shall be exempt from the payment of income tax too. Holidaypay, overtime pay, night shift differential pay and hazard pay received by such minimum

wage earners shall likewise be exempt from income tax.

Income from employees’ trusts are exempt from ALL kinds of taxes, including final

withholding tax on interest income. (CIR v CA & GCL)

Terminal leave pay is not part of gross salary. It is a retirement benefit and is tax

exempt. (CIR v CA & Castaneda, and Request of Atty. Zialcita)

If the employee is separated from a previous employer, but is not employed by another

employer, he shall be refunded or credited the taxes withheld on his exempt 13 th monthpay and other benefits by his present employer.

If the employee is separated but has no present job, he shall claim his refundwith the BIR. (RR 2-95 & RMC 36-94)

Income derived by foreign government

For it to be exempt, the income should be received by:

By foreign governments



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By financing institutions owned, controlled or enjoying re-financing from foreigngovernments

By international or regional financial institutions established by foreign governments

P. Fringe Benefits Tax (FBT! Whut up!)SEC. 33. Special Treatment of Fringe Benefit.-

(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent(33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is herebyimposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rankand file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringebenefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when thefringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by theemployer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. Thegrossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of thefringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1,1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringebenefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed atthe applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall bedetermined by dividing the actual monetary value of the fringe benefit by the difference between one hundredpercent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any good, service orother benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file

employees as defined herein) such as, but not limited to, the following:(1) Housing;(2) Expense account;(3) Vehicle of any kind;(4) Household personnel, such as maid, driver and others;(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actualrate granted;(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubsor other similar organizations;(7) Expenses for foreign travel;(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the lawallows.(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:(1) fringe benefits which are authorized and exempted from tax under special laws;

(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalizationbenefit plans;(3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement ornot; and(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance,upon recommendation of the Commissioner.The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, suchrules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking intoaccount the peculiar nature and special need of the trade, business or profession of the employer.

Fringe benefit is any good, service, or other benefit granted in cash or in kind by an

employer to an employee (except rank & file) such as:

1. Housing2. Expense account

3.

Vehicle of any kind4. Household personnel, like maids and drivers

5. Interest on loan at less than market rate, to the extent of the difference between themarket rate and the actual rate granted

6. Membership fees, dues & other expenses in social & athletic clubs or similar orgs

7. Expenses for foreign travel8. Holiday and vacation expenses9. Educational assistance to the employee or his dependents

10. Life or health insurance & other non-life premiums



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This list is not exclusive.

Fringe benefit tax? A final tax of 32% on the grossed up monetary value of fringe

benefits will be imposed.o The fringe benefit tax on the taxable fringe benefit is computed as follows:

i. Determine the grossed-up monetary value of the fringe benefit. This is themonetary value of the benefit divided by 68%

ii.

Compute the fringe benefit tax by multiplying the grossed-up monetaryvalue of the fringe benefit by 32%

Actual Monetary Value/68% = Grossed-up Monetary Value

Grossed-up Monetary Value x 32% = FBT

Special Cases for FBT FBT

Received by non-resident alien not engaged

in trade or business

25%

Received by alien or Filipino employed by a

ROHQ or RAHQ

15%

Received by employees in a special economiczone

25 % or 15% (depends)

The FBT is also an expense which is deductible from the employer’s gross income.

o The deduction for the employer is the grossed-up monetary value of the fringe

benefit.

The following fringe benefits are not subject to the FBT:1. Those that are necessary or required by the trade & business of the employer

2. Those for the convenience or advantage of the employer

3. Those exempt under special laws4. Contributions to retirement, insurance and hospitalization benefit plans

5. De minimis benefits (these are of relatively small value & are furnished merely as a

means of promoting the health, goodwill of the employees. See RR 8-00 forexamples)

6. Those given to rank & file employees (those who are holding neither managerial nor

supervisory positions)

Clarifications from RR 3-98 (a bit malabo, so check the Reyes book and that excel

reviewer thing)

On housing privileges Monetary Value

If employer leases a residential property for the use of the employee

and the property is the usual place of residence of the employee

50% of the

monthly rental

paid

If the employer purchases a residential property on installment basisand allows the employee to use it as his usual place of residence

See page 316 ofReyes

If the employer purchases a residential property and transfersownership to the employee

See page 316 ofReyes

Housing of military officials ExemptHousing which is situated inside or adjacent to the premises of abusiness or factory (within 50 meters)

Exempt

Temporary housing for employee who stays for not more than 3months

Exempt

Expense Account Subject to FBT ornot?

If the expense was duly receipted for and in the name of the Nope.



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employer, and the expense is not in the nature of a personal expenseattributable to the employee

If these are personal expenses such as groceries, paid for orreimbursed by the employer, even if these are duly receipted for in thename of the employer

Yup.

RATA which are fixed in amount & regularly given as part of monthly

compensation

Nope, but to be

treated as incomeof the employee.

Motor Vehicles Monetary Value

If employer purchases vehicle in the name of the employee, regardlessof usage of the vehicle

100% of the value(acquisition cost)

If employer shoulders a portion of the amount of the purchase price of

a vehicle owned by the employee

Amount shouldered

by the employer

If employer owns & maintains a fleet of vehicles for the use of the

business and the employees

50% of the value

Use of aircraft owned & maintained by the employer Exempt

Use of yacht Value based on

depreciation

Expenses for Foreign Travel Monetary Value

If it is reasonable for the purpose of attending business meetings orconventions

Exempt

If it’s for local travel expenses not more than US$300 per day (notincluding lodging)

Exempt

Cost of plane ticket if economy or business class Exempt

Cost of plane ticket if first class 30% of the value

Travel expense of family members of the employee 100% of the value

Educational Assistance Monetary Value

IF the employee was granted a scholarship by the employer and theeducation or study is directly connected to the trade or business of theemployer, and there is a written contract that the employee mustremain in employ for a period of time

Exempt

If the assistance was extended to the employee’s dependents and wasprovided through a scholarship program of the company

Exempt

Life or Health Insurance, etc Premiums in Excess of What theLaw Allows

Monetary Value

If the contribution is pursuant to existing law such as to the GSIS orSSS

Exempt

If it is for the group insurance of the employees Exempt

For the others (household expenses, membership fees & other expenses in social &

athletic clubs, holiday & vacation expenses), these monetary value will be 100% of thevalue of the benefit received.

The following are considered de minimis benefits of ALL types of employees. These areexempt from tax. (RR 8-00) 1. Monetized unused vaction leave, not exceeding 10 days per year

2. Medical cash allowance to dependents of employees not exceeding P750/employeeper sem or P125/month

3. Rice subsidy of P1000 or 1 sack of 50 kg rice per month (sarap!)

4. Uniforms and clothing allowance not exceeding P3,000/month (ubos sa Zara!)



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5. Actual yearly medical benefits not exceeding P10,000/month6. Laundry allowance not exceeding P300/month

7. Employee achievement awards for length of service or safety achievement in theform of tangible property with value not exceeding P10,000

8. Flowers, fruits, books given under special circumstances like illness, marriage, birthof baby

9.

Gifts given during Christmas & major anniversaries not exceeding P5,000/year10. Daily meal allowance for overtime work, not exceeding 25% of the basic minimum

wage

The amount of de minimis benefits is not computed in determining the P30,000 ceiling of

“other benefits” provided in Sec 32(b) of the Tax Code (see exclusions),

o but if the employer pays MORE than the ceilings prescribed above, the excess istaxable to the employee ONLY if it is beyond the P30,000 ceiling.

o In other words, when a benefit is de minimis with a ceiling, the benefit exemptfrom the fringe benefit tax is up to the ceiling. Any excess over the ceiling shall

be part of the benefits which are exempt (exclusions from gross income) up toP30,000.

Any amount given by the employer as benefits, whether de minimis or others, shall bedeductible as business expense. Remember this! (RR 10-00)

To recap: o Fringe benefit given to rank and file employee is not subject to the fringe benefit

tax.

o Fringe benefit given to a supervisory or managerial employee is subject to thefringe benefit tax.

o De minimis benefit, whether given to rank and file employee or to supervisory ormanagerial employee, is not subject to the fringe benefit tax.

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

from gross income; Deductions are amounts allowed by law to reduce the gross income to taxable income.

These amounts are allowed to taxpayers by legislative grace and the taxpayer claimingthem must prove compliance with the provisions of the law authorizing the deductions.

The following are the deductions from gross income:

o For individuals with gross compensation income (from employer-employeerelationship) only:

i. Premium payments on health and/or hospitalization insurance (PHHI)

ii. Personal exemptionso For individuals with gross income from business or practice of profession:

i. Optional standard deduction (OSD), or

ii. Itemized deductions,iii. PHHI,iv. Personal exemptions.

o For corporations:

i. Optional standard deduction (OSD), orii. Itemized deductions

Itemized deductions are expenses and losses related to trade or business or the practice

of a profession.o Itemized deductions are what Sec. 34 talks about, and these do not apply to

taxpayers earning compensation income from an employer-employeerelationship.



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The following are the itemized deductions:1. Expenses

2. Interest3. Taxes4. Losses5. Bad debts

6.

Depreciation7. Depletion8. Charitable and other contributions

9. Research and development

10. Pension trusts

Expenses, in general(A) Expenses. -(1) Ordinary and Necessary Trade, Business or Professional Expenses.-(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expensespaid or incurred during the taxable year in carrying on or which are directly attributable to, the development,management, operation and/or conduct of the trade, business or exercise of a profession, including:

(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services

actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employerto the employee: Provided, That the final tax imposed under Section 33 hereof has been paid;

(ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit oftrade, business or profession;

(iii) A reasonable allowance for rentals and/or other payments which are required as a condition for thecontinued use or possession, for purposes of the trade, business or profession, of property to which the taxpayerhas not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor;

(iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxableyear, that are directly connected to the development, management and operation of the trade, business orprofession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade,business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules andregulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as thespecial circumstances, nature and character of the industry, trade, business, or profession of the taxpayer:Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, moralspublic policy or public order shall in no case be allowed as a deduction.

(b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereofunless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records:

(i) the amount of the expense being deducted, and(ii) the direct connection or relation of the expense being deducted to the development, management,

operation and/or conduct of the trade, business or profession of the taxpayer.

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

(2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as deductionsunder this Chapter, a private educational institution, referred to under Section 27 (B) of this Code, may at its

option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assetsincurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciationthereof under Subsection (F) hereof.

The codal considers as deductions all ordinary and necessary expenses in carrying onthe development, management, and operation of a trade, business or profession,including a reasonable allowance for:

1. Salaries, wages, and other forms of compensation including fringe benefits2. Travel expenses, here and abroad, in pursuit of trade and business3. Rentals and others which are required for the continued use of property



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48

4. Entertainment, amusement and recreation expenses that are directly connected tothe trade, business, or profession (but should not be contrary to law, morals, etc)

According to the codal, these are the requirements for deductible claims:1. Sufficient evidence (like official receipts)2. A direct connection of the expense to the development, management, operation,

and/or conduct of the trade, business or profession

Payments of bribes & kickbacks are not deductible. Jurisprudence expounded on the requirements with the following requisites for the

deductibility of ordinary and necessary trade, business, or professional expenses (CIR v

Isabela):

1. Expense must be ordinary and necessary2. Must have been paid or incurred during the taxable year3. Must have been paid or incurred in carrying on the trade/business

4. Must be supported by receipts, records or other pertinent papers

A taxpayer who is authorized to deduct certain expenses and other allowable deductions

for the current year but failed to do so cannot deduct the same for the next year.

It is ordinary when it is normal in relation to the business of the taxpayer. It need not be

recurring.

It is necessary when it is appropriate and helpful in the development of the taxpayer’s

business. See if it is intended to minimize losses, or to maximize profits. Regarding advertising expenses (CIR v General Foods):

o Advertising is generally of two kinds:

i. To stimulate the current sale of merchandise or use of servicesii. To stimulate the future sale of merchandise or use of services

o The second type involves expenditures incurred, in whole or in part, to create ormaintain some form of goodwill for the taxpayer’s trade or business or for the

industry or profession of which the taxpayer is a member.o If it’s the first kind, it’s definitely deductible as a business expense, the only

question to be answered is if it’s reasonable or not.

o If it’s the second kind, normally they should be spread out over a reasonabletime.

o

In the case, the amount was not only huge (ie unreasonable), but was also usedto protect the brand franchise. The Supreme Court said that it was analogous to

the maintenance of goodwill or title to one’s property. Thus, it was a capi talexpenditure which should have been spread out over a reasonable period of time.

It was akin to the acquisition of capital assets and therefore expenses related

thereto were not to be considered as business expenses but as capitalexpenditures.

Expenses paid to advertising firms to promote sale of capital stock for acquisition ofadditional capital is not deductible from taxable income. Efforts to establish reputation

are akin to acquisition of capital assets, and therefore, expenses related thereto are not business expense but capital expenditures. (Atlas Consolidated v CIR)

Litigation expenses incurred in defense of title to property is capital in nature and notdeductible. (Atlas)

Bonuses to employees made in good faith and as additional compensation for theservices actually rendered by the employees are deductible, provided such payments,

when added to the stipulated salaries, do not exceed a reasonable compensation for theservices rendered. (Kuenzle v CIR)

o Bonus given to corporate officers out of sale of corporate land not deductible as

an ordinary business expenses in the absence of showing what role said officers

performed to effectuate said sale. The taxpayer must show that personal serviceshad been rendered and that the amount was reasonable. (Aguinaldo Industries vCIR)



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o For income tax purposes, the employer cannot legally claim such bonuses asdeductible expenses unless they are shown to be reasonable. The conditions

precedent to the deduction of bonuses are:1. The payment of the bonuses is in fact compensation2. It must be for personal services actually rendered, and3. The bonuses, when added to the salaries, are reasonable when measured by

the amount and quality of the services performed with relation the businessof the taxpayer. (CM Hoskins v CIR)

Contributions to a private entity that gives dividends to stockholders not deductible

because the net income of the recipient inures to the benefit of its stockholders.

o Contributions to a government entity is deductible when used exclusively forpublic purposes (Roxas v CTA)

Payment for police protection is illegal as it is a compensation given by the petitioner to

the police for the performance by the latter of the functions required of them to berendered by law. (Calanoc v CIR)

Private educational institutions have special deductibles.:1. They are allowed to deduct expenditures otherwise considered as capital outlays of

depreciable assets incurred for the expansion of school facilities, or 2. They are allowed to capitalize the expenditure, and claim deduction by way of

depreciation.

Representation, amusement, recreation expenses and entertainment facilities ( RR 10-02) Representation expenses are expenses incurred in connection with the conduct of one’s

trade, business or profession in:

o Entertaining, providing amusement & recreation to, or meeting with guests

o At a dining place, place of amusement, country club, theater, concert, play,

sporting event & similar placesi. If the taxpayer is the registered member of a country, golf, or sports club,

the presumption is that the expenses are fringe benefits subject to the

FBT unless the taxpayer can prove that these are actually representationexpenses.

Entertainment facilities refer to a yacht, vacation home or condominium & similar itemsof real or personal property used by the taxpayer primarily for entertainment,

amusement, or recreation of guests or employees.o It must be owned or form part of the taxpayer’s trade, biz, or profession for

which he claims a rental expense.

o A yacht is considered an entertainment facility if its use is not restricted tospecified officers or employees. If it was restricted to them, it would be a fringe

benefit, subject to the FBT.

The following are not considered entertainment, amusement & recreation expenses:

1. Those that are treated as compensation for fringe benefits2. Expenses for charitable & fund-raising events

3. Expenses for bona fide meeting of stockholders, partners or directors

4. Expenses for attending or sponsoring an employee to a business league or

professional org meeting5. Expenses for events organized for promotion, marketing & advertising including

concerts, conferences, seminars, workshops, conventions, etc6. Other expenses of a similar nature

o BUT! These may still be qualified as deductions under other provisions of Section

34.

o Possible legal implication? They won’t be subject to the ceiling of representationexpenses (my opinion lang ah!)

Requisites of deductibility for entertainment, amusement, and recreational expense:



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1. Paid or incurred during the taxable year2. Must be directly connected to the development, management & operation of

the trade, biz or profession of the taxpayer; or directly related to or infurtherance of, his or its trade, biz or exercise of profession

3. Not be contrary to blah blah blah4. Not been paid to an official of the government as a bribe or kickback

5.

Must be substantiated by adequate proof6. Must been withheld, if applicable, and paid to the BIR

Ceiling for Representation, Entertainment and Amusement Expenses

Taxpayers engaged in sale of goods or properties 0.5% of net sales

Taxpayers engaged in sale of services, including exercise of

profession and use or lease of properties

1% of net revenue

Interests(B) Interest.-(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection withthe taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however,That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by 42% of the interestincome subject to final tax: Provided , that effective January 1, 2009, the percentage shall be 33%.(2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs:(a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness onwhich an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed aa deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodicamortizations, the amount of interest which corresponds to the amount of the principal amortized or paid duringthe year shall be allowed as deduction in such taxable year;(b) If both the taxpayer and the person to whom the payment has been made or is to be made are personsspecified under Section 36 (B); or(c)If the indebtedness is incurred to finance petroleum exploration.(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire propertyused in trade business or exercise of a profession may be allowed as a deduction or treated as a capitalexpenditure.

Interests paid on debts are allowed as deductions but:

o These must be incurred in connection with the taxpayer’s profession, trade or biz

o

The allowable deduction is only 33% of the interest income subject to final tax.(more on this below)

Requisites for deductibility of interest expense (RR 13-00):

1. There must be an indebtedness

2. There should be an interest expense paid or incurred upon the indebtedness

(incurred meaning that it was due and demandable)3. The indebtedness must be that of the taxpayer4. It must be connected with the taxpayer’s trade, biz or profession

5. The interest expense must have been paid or incurred during the taxable year6. The interest must have been stipulated in writing7. The interest must be legally due

8. The interest payment arrangement must not be between related taxpayers9. The interest must not be incurred to finance petroleum operations

10. In case the interest was incurred to acquire property used in trade, biz or profession,it was not treated as capital expenditure.

o In cases like this, the axpayer has the option to treat it as eitheri. interest expense deductible in full orii. as a capital expenditure and claim as deduction only the periodic

amortization/depreciation.o But he can only choose one, or else double deduction, that ain’t allowed. (Sec 34

(B.3), and Picop V CA where the SC allowed interest expense on a loan to buy

machinery as deductible.)



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Interest is not deductible if:

o Both the taxpayer and the person to whom interest was paid are related

taxpayers, meaning:i. Members of a familyii. An individual and a corp where more than 50% of the outstanding stock of

the corp is owned by the individual

iii. Two corps where more than 50% of the outstanding stock of each is ownedby the other or by the same individual

iv. Between grantor and fiduciary of any trust

v. Between fiduciary of a trust and the fiduciary of another trust if the same

person is a grantor with respect to each trustvi. Between fiduciary of a trust and the beneficiary

If an individual is on the cash basis of accounting, interest paid in advance, through

discount or otherwise, shall be allowed as deduction not in the year that the interest waspaid in advance, but in the year that the indebtedness was paid.

o But if the indebtedness is payable in periodic amortization, the amount of theinterest which corresponds to the amount of the principal amortized or paid

during the year shall be allowed as deduction in such taxable year.

Late payment of tax is considered a debt, and therefore interest on taxes is interest on

indebtedness and is thus deductible. (CIR v de Prieto) If a taxpayer has interest income subject to final tax, the otherwise allowable deduction

for interest expense shall be reduced by an amount equal to 33% of interest income

subjected to final tax. This 33% rule will only apply if there is interest income subject tofinal tax. If none, then you can deduct in full.

The law assumes that the money borrowed is used to reinvest, legitimate businesspurpose is irrelevant. (Atty. Montero)

For example, Juan borrowed money from BPI. It had an interest expense of P8,000. Hethen deposited the money which he borrow with HSBC, and it had an interest income on

it of P9000. How much is his deducible interest expense? (p. 209, Reyes)

Interest expense, unadjusted P8,000Less: Adjustment for interest

Income subject to final tax(33% of P9,000) 2,970

Adjusted balance, deduction for interest expense P5,030

o But interest paid or accrued on taxes related to business or practice of profession

can be deducted in full (it is not subject to this rule on downward adjustment)

Taxes(C) Taxes.-(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, tradeor business, shall be allowed as deduction, except(a) The income tax provided for under this Title;(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of ataxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this

subsection (relating to credits for taxes of foreign countries);(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of grossincome in the year of receipt to the extent of the income tax benefit of said deduction.(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in thePhilippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection(C) shall be allowed only if and to the extent that they are connected with income from sources within thePhilippines.(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have thebenefits of this paragraph, the tax imposed by this Title shall be credited with:



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(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the

amount of income taxes paid or incurred during the taxable year to any foreign country; and(b) Partnerships and Estates. - In the case of any such individual who is a member of a general professionalpartnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professionalpartnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributiveshare of the income of such partnership or trust is reported for taxation under this Title.An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreigncountries allowed under this paragraph.(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of thefollowing limitations:(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the sameproportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources withinsuch country under this Title bears to his entire taxable income for the same taxable year; and(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit istaken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears tohis entire taxable income for the same taxable year.(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed ascredits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify theCommissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of taxdue upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by theCommissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case ofsuch a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit mayrequire the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such

sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon anysuch redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner mayrequire.(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option ofthe taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the yearwhich the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection(C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreigncountry accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of anysuch taxes shall be allowed as a deduction in the same or any succeeding year.(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayerestablishes to the satisfaction of the Commissioner the following:(a) The total amount of income derived from sources without the Philippines;(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit undersaid paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance;and(c) All other information necessary for the verification and computation of such credits.

Taxes paid or accrued within the taxable year in connection with the taxpayer’s trade orbusiness or exercise of a profession are deductible from gross income.

o EXCEPT:

i. Philippine income tax (but the fringe benefit tax can be deducted!)

ii. Estate or donor’s tax iii. Special assessment

iv. Income tax imposed by a foreign country for income sourced outside the

Philippines (but it shall be allowed if the taxpayer does not signify hisdesire to enjoy any benefits of the tax credit for taxes paid to foreigncountries)

v. Stock transaction taxvi. VAT on business (last two exceptions cited by Reyes, p. 212)

With regard to tax credits, only resident citizens and domestic corporations are affected

by this, because they are only ones taxed worldwide. When a taxpayer is qualified for a

credit, he has the option of either:o Deducting the foreign income tax from his gross income, or

o Claiming the tax credit.

How do we determine the amount of tax to be credited? Just follow the formulas below,and choose which of them is lower!

1. Net income from foreign country x Taxes paid in the RP = ______Net income worldwide



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2. Foreign income tax paid = __________

ExampleBlessings had a taxable income from the Philippines of P300,000 and from the US of

P100,000. An income tax of P40,000 was paid to the US. If Blessings chose to take a tax

credit for the income tax paid to the States, how much tax does he have to pay thePhilippine government after the tax credit would have been computed?

Line everything up and know the taxable income worldwide and the total taxes paidhere!

Taxable income before tax credit, USA P100,000Taxable income before tax credit, Phil P300,000Taxable income, worldwide P400,000

Corporate income tax of 30% P120,000Less: Tax credit for foreign tax

Plug in the values!(100,000/400,000) x 120,000 = P30,000

Foreign income tax paid = P40,000

Choose what’s lower! Allowed tax credit P 30,000

Philippine income tax still due P 90,000

What would Blessings bring home if they chose to do the tax credit?

Taxable income, worldwide P400,000P 90,000

P310,000

If Blessings chose to deduct , this is what would have happened:Taxable income worldwide P400,000

Deduction for foreign income tax paid 40,000

Taxable income P360,000Income tax at 30% P108,000

Income after tax (what Blessings takes home) P152,000 It’s pretty obvious that you should go for a tax credit. You end up with more cash in

your pockets at the end of the day! As Atty. Montero said, you get 100% benefit, ascompared to deductions where all expenses benefit to the extent only of 30% (for

corporations).

Losses(D) Losses. -(1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or otherforms of indemnity shall be allowed as deductions:(a) If incurred in trade, profession or business;(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, orother casualties, or from robbery, theft or embezzlement.The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules

and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit adeclaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year:Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty(30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft orembezzlement giving rise to the loss.(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such losshas been claimed as a deduction for estate tax purposes in the estate tax return.(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shallbe those actually sustained during the year incurred in business, trade or exercise of a profession conducted withinthe Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The Secretaryof Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations



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prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of losssustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the timeto be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90)days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and

Losses actually sustained during the taxable year and not compensated by insurance or

other form of indemnity are deductible from gross income:o If incurred in trade, biz or profession;

o Of property connected with trade, biz or profession, if the loss arises from fire,

storm, shipwreck or other casualty, or from robbery, theft or embezzlement.

For non-resident individuals and foreign corporations, the losses should be those actuallysustained during the taxable year, incurred in trade, biz or profession conducted within

the Philippines.

If the loss has already been claimed as deduction for estate tax purposes, it is no longer deductible from gross income.

Casualty means the complete or partial destruction of property resulting from an

identifiable event of a sudden, unexpected or unusual nature. The taxpayer bears theburden of proof. (RR 12-77)

NOLCO(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable yearimmediately preceding the current taxable year, which had not been previously offset as deduction from grossincome shall be carried over as a deduction from gross income for the next three (3) consecutive taxable yearsimmediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year duringwhich the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection:Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial changein the ownership of the business or enterprise in that -(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is inthe name of a corporation, is held by or on behalf of the same persons; or(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in thename of a corporation, is held by or on behalf of the same persons.For purposes of this subsection, the term "not operating loss" shall mean the excess of allowable deduction overgross income of the business in a taxable year.Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives

provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxableincome for the next five (5) years immediately following the year of such loss. The entire amount of the loss shallbe carried over to the first of the five (5) taxable years following the loss, and any portion of such loss whichexceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the nextremaining four (4) years.

Net operating loss is the excess of allowable deduction over gross income of thebusiness in a taxable year.

o NOLCO: The net operating loss of the business which has not been previously

offset as deduction shall be carried over as deduction from gross income for the

next 3 consecutive years immediately following the year of such loss

o This is allowed if there has been no substantial change in ownership of thebusiness, meaning

i.

Where not less than 75% of outstanding shares in the business is in the

name of a corporation held by the same persons, or

ii. Where not less than 75% of the paid-up capital of the corporation is heldby the same persons

o For mines other than oil and gas wells, a net operating loss without the benefit of

incentives provided for by the Omnibus Investments Code may be carried over asdeduction for the next 5 years immediately following the year of loss

NOLCO is allowed regardless of the change in the ownership of a company in case of a

merger where the taxpayer who accumulated the NOLCO is the surviving entity



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If the NOLCO arises from a merger, consolidation or combination, thetransferee/assignee is not entitled to cleaim the same NOLCO as deduction unless the

transferor gains control of at least 75% of he outstanding issues or paid0up capital ofthe transferee.

NOLCO is not transferable or assignable to another person EXCEPT if there has been nosubstantial change in the ownership of the business in that not less than 75% of the

paid-up capital of the business is held by the same folk An individual who claims the 40% OSD cannot claim deduction of NOLCO

simultaneously. Even if the NOLCO was not claimed, the 3 year period shall continue to

run.

If the taxpayer paid its income tax under the MCIT computation, the 3 year period stillruns. (RR 14-01)

Who aren’t qualified to NOLCO?

1. OBUs for a foreign banking corporation and FCDU of a domestic banking corp2. Enterprise registered with the BOI enjoying the Income Tax Holiday Incentive

3. PEZA-registered enterprise4. SBMA-registered enterprise

5. Foreign corp engaged in international shipping or air carriage business in thePhilippines

6.

Any person, natural or juridical, enjoying exemption from income tax

Example of NOLCO

2005 2006 2007 2008 2009Gross Income 500 600 700 500 800

Less:deductions 900 500 750 420 450Net loss 400 50

Net income 100 80 350

Less:Nolco

From 2005 100 80From 2007 50

Taxable income 0 0 0 0 300

(4) Capital Losses. -(a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided inSection 39.(b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become worthless during the taxableyear and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a lossfrom the sale or exchange, on the last day of such taxable year, of capital assets.(5) Losses From Wash Sales of Stock or Securities. - Losses from "wash sales" of stock or securities as provided inSection 38.(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from suchtransactions.(7) Abandonment Losses. -

(a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, allaccumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction:

Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as adeduction only from any income derived from the same contract area. In all cases, notices of abandonment shall befiled with the Commissioner.(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as theundepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such well,equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered andproduction is resumed, or if such equipment or facility is restored into service, the said costs shall be included aspart of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the casemay be.



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Forex losses

When foreign currency is acquired in connection with the regular course of biz, ordinarygain or loss results from the fluctuations. Such loss is deductible only in the year that itis sustained. But since loans have not actually been paid yet, therefore the losses havenot yet been realized and are not deductible yet. (BIR Ruling 206-90)

Annual increase in value of an asset is not taxable income because such increase has notyet been realized. The increase in value can only be taxed when such is disposed andthere was a gain. The same is true of decrease in value. It is only when the decrease is

realized, before it is allowed to be deducted. (BIR Ruling 144-85)

Bad debts(E) Bad Debts. -(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxableyear except those not connected with profession, trade or business and those sustained in a transaction enteredinto between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previouslyallowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery tothe extent of the income tax benefit of said deduction.(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless andcharged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a

taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part ofwhose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale orexchange, on the last day of such taxable year, of capital assets.

Bad debts are deductible provided that:1. There is an existing indebtedness due to the taxpayer which is valid and legally

demandable (and not losses from investments, as in Hermanos v CIR)

2. They are connected with trade, biz or profession of the taxpayer

3. They are actually ascertained to be worthless, uncollectible, and charged offwithin the taxable year

4. The taxpayer must show that it its uncollectible even in the future (Phil Refining v

CTA)5. They are not sustained between related parties6. If they are recovered, they should be included as part of gross income in the year

of recovery Bad debts are debts resulting from worthlessness or uncollectibility of amounts due the

taxpayer by others, arising from money lent or from uncollectible amounts of income

from goods sold or services rendered.

Losses or bad debts must be ascertained to be so and written off during the taxable

year. They are therefore deductible in full or not at all. There’s no partial deductions.(Hermanos v CIR)

Its worthless-ness depends on the particular facts of each case. It can’t be considered

worthless just because of its doubtful value or difficulty to collect.

If it’s a bank, the BSP is the one that will ascertain the worthlessness and uncollectibility

of the bad debts.

If the receivable is from an insurance company, it cannot be claimed as bad debt unless

the insurance company has been declared closed or insolvent by the Insurance Commish

Securities become worthless are considered to be a loss from sale of capital assets onthe last day of the taxable year except for a bank or trust company.

Depreciation(F) Depreciation. -

(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion,wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In thecase of property held by one person for life with remainder to another person, the deduction shall be computed asif the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case ofproperty held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the



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trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of suchprovisions, on the basis of the trust income allowable to each.(2) Use of Certain Methods and Rates. - The term "reasonable allowance" as used in the preceding paragraph shallinclude, but not limited to, an allowance computed in accordance with rules and regulations prescribed by theSecretary of Finance, upon recommendation of the Commissioner, under any of the following methods:(a) The straight-line method;(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had theannual allowance been computed under the method described in Subsection (F) (1);

(c) The sum-of-the-years-digit method; and(d) any other method which may be prescribed by the Secretary of Finance upon recommendation of theCommissioner.(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulationsprescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and theCommissioner have entered into an agreement in writing specifically dealing with the useful life and rate ofdepreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the nationalGovernment in the absence of facts and circumstances not taken into consideration during the adoption of suchagreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the partyinitiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified inthe agreement shall not be effective for taxable years prior to the taxable year in which notice in writing bycertified mail or registered mail is served by the party initiating such change to the other party to the agreement:Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciableand claimed the depreciation expenses as deduction from his gross income, without any written objection on thepart of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate soadopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of thisSubsection.(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of allproperties directly related to production of petroleum initially placed in service in a taxable year shall be allowedunder the straight-line or declining-balance method of depreciation at the option of the service contractor.However, if the service contractor initially elects the declining-balance method, it may at any subsequent date,shift to the straight-line method.The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter lifeas may be permitted by the Commissioner.Properties not used directly in the production of petroleum shall be depreciated under the straight-line method onthe basis of an estimated useful life of five (5) years.(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all propertiesused in mining operations other than petroleum operations, shall be computed as follows:(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or(b) Depreciated over any number of years between five (5) years and the expected life if the latter is more thanten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the

contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed bythis Section will be used.(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations.- In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, areasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in thebusiness trade or profession shall be permitted only when such property is located in the Philippines.

Depreciation is the gradual dimunition in the useful value of tangible property resultingfrom war and tear and normal obsolescence

A reasonable allowance for depreciation is deductible

Some methods to determine reasonable allowance can be found in the codal.

o If the taxpayer and the CIR come to an agreement of the useful life on whichdepreciation will be based, this agreement will be considered binding.

Depreciation is allowed on tangible property and intangible property.

A company has the right to claim depreciation, but the law does not allow depreciationbeyond its acquisition cost. (Basilan v CIR)

Certain cases of depreciation

Properties used directly in production of petroleum 10 years (straight-line/declining

method)

Properties used indirectly in production of

petroleum

5 years (straight-line)



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Properties used in mining operations If expected life is 10 years or less,normal rate of depreciation

If expected life is more than 10years, notify the CIR, bro.

For non-resident aliens engaged in trade, or

business here, or resident foreign corporations

A reasonable rate is allowed only on

properties located in the Philippines

Depletion(G) Depletion of Oil and Gas Wells and Mines. -

(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortizationcomputed in accordance with the cost-depletion method shall be granted under rules and regulations to beprescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when theallowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further,That after production in commercial quantities has commenced, certain intangible exploration and developmentdrilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wellsand/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, maybe capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the samecontract area."Intangible costs in petroleum operations" refers to any cost incurred in petroleum operations which in itself has nosalvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the

production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of propertyof a character subject to the allowance for depreciation except that the allowances for depreciation on suchproperty shall be deductible under this Subsection.Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable incomeduring the year shall not be taken into consideration in computing the adjusted cost basis for the purpose ofcomputing allowable cost depletion.(2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from miningoperations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as costor adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditurespaid or incurred during the taxable year: Provided, That the amount deductible for exploration and developmentexpenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computedwithout the benefit of any tax incentives under existing laws. The actual exploration and development expendituresminus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding yearsuntil fully deducted.The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall bebinding in succeeding taxable years."Net income from mining operations", as used in this Subsection, shall mean gross income from operations less"allowable deductions" which are necessary or related to mining operations. "Allowable deductions" shall includemining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. Thisparagraph shall not apply to expenditures for the acquisition or improvement of property of a character which issubject to the allowance for depreciation.In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and developmentof oil and gas.The term "exploration expenditures" means expenditures paid or incurred for the purpose of ascertaining theexistence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before thebeginning of the development stage of the mine or deposit.The term "development expenditures" means expenditures paid or incurred during the development stage of themine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the timewhen deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shallend upon commencement of actual commercial extraction.(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. -

In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreigncorporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall beauthorized only in respect to oil and gas wells or mines located within the Philippines.

Oil & gas wells or mines are allowed a reasonable allowance for depletion oramortization computed using the cost-depletion method

When the allowance for depletion equals the capital invested, no further allowance shall

be granted

After production in commercial quantities has started, certain intangible exploration &drilling costs will be deducted in the eyar incurred if such were incurred for non-



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producing wells or mines, or these may be capitalized & amortized if such were incurredfor producing wells or mines in same contract area

If it was a non-resident alien or a resident foreign corporation, the allowance fordepletion is limited to oil wells & mines in the Philippines

The formula for rate of depletion is (cost of mine property)/(estimated ore deposit)[Consolidated Mines v CTA)

Charitable and other Contributions(H) Charitable and Other Contributions. -(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of theGovernment of the Philippines or any of its agencies or any political subdivision thereof exclusively for publicpurposes, or to accredited domestic corporation or associations organized and operated exclusively for religious,charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation ofveterans, or to social welfare institutions, or to non-government organizations, in accordance with rules andregulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of thenet income of which inures to the benefit of any private stockholder or individual in an amount not in excess of tenpercent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer'staxable income derived from trade, business or profession as computed without the benefit of this and thefollowing subparagraphs.(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations tothe following institutions or entities shall be deductible in full;

(a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies orpolitical subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to beused in undertaking priority activities in education, health, youth and sports development, human settlements,science and culture, and in economic development according to a National Priority Plan determined by the NationalEconomic and Development Authority (NEDA), In consultation with appropriate government agencies, including itsregional development councils and private philantrophic persons and institutions: Provided, That any donationwhich is made to the Government or to any of its agencies or political subdivisions not in accordance with the saidannual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;(b) Donations to Certain Foreign Institutions or International Organizations. - Donations to foreign institutions orinternational organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, orcommitments entered into by the Government of the Philippines and the foreign institutions or internationalorganizations or in pursuance of special laws;(c) Donations to Accredited Nongovernment Organizations. - The term "nongovernment organization" means a nonprofit domestic corporation:(1) Organized and operated exclusively for scientific, research, educational, character-building and youth andsports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the

net income of which inures to the benefit of any private individual;(2) Which, not later than the 15th day of the third month after the close of the accredited nongovernmentorganizations taxable year in which contributions are received, makes utilization directly for the active conduct ofthe activities constituting the purpose or function for which it is organized and operated, unless an extended periodis granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, uponrecommendation of the Commissioner;(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulationsto be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceedthirty percent (30%) of the total expenses; and(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporationorganized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court toanother organization to be used in such manner as in the judgment of said court shall best accomplish the generalpurpose for which the dissolved organization was organized.Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term "utilization"means:(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more

purposes for which the accredited nongovernment organization was created or organized.(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes forwhich the accredited nongovernment organization was created or organized.An amount set aside for a specific project which comes within one or more purposes of the accreditednongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, theaccredited nongovernment organization has established to the satisfaction of the Commissioner that the amountwill be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated bythe Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and theproject is one which can be better accomplished by setting aside such amount than by immediate payment offunds.



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(3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the

acquisition cost of said property.(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules andregulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

Donations to the following are partially deductible:1. To the government, exclusively for public purposes

2. To accredited domestic corporations or associations which are organized and

operated exclusively for religious, charitable, scientific, youth & sports development,cultural or educational purposes, or for the rehabilitation of veterans

3. To social welfare institutions

4. To non-accredited NGOs

o The amount that can be deducted should not exceed:i. 10% (individuals), or

ii. 5% (corporations)

of the taxpayer’s taxable income derived from trade, biz or

profession before the deduction for contributions and donations.

So, look at two things: 1. your charitable contributions and 2. 10%

or 5% (as the case may be) of your taxable income, and then seewhat’s lower. That amount is what your allowed to deduct.

Donations to the following are fully deductible:1. To the government, exclusively to finance activities in education, youth, health,

sports development, human settlements, science and culture, and in economicdevelopment according to the NEDA Plan (in other words, government priorityactivities)

2. To certain foreign institutions or international organizations (treaty-based, etc)3. To accredited NGOs

NGO’s are non-profit domestic corporations organized and operated exclusively forscientific research, educational, character-building and youth & sports development, etc,

where no part of the net income inures to the benefit of any private individual orstockholder. Their level of admin expenses cannot exceed 30% of the total expenses,and they must utilize contributions not later than 15 th day of the 3rd month… (see codal!)

Research and Development(I) Research and Development.- (1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred by himduring the taxable year in connection with his trade, business or profession as ordinary and necessary expenseswhich are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during thetaxable year when paid or incurred. (2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and inaccordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation ofthe Commissioner, the following research and development expenditures may be treated as deferred expenses: (a) Paid or incurred by the taxpayer in connection with his trade, business or profession;(b) Not treated as expenses under paragraph 91) hereof; and(c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation ordepletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over aperiod of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which

the taxpayer first realizes benefits from such expenditures). The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity ofthis Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. Themethod so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income forthe taxable year for which the election is made and for all subsequent taxable years unless with the approval of theCommissioner, a change to a different method is authorized with respect to a part or all of such expenditures. Theelection shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makesthe election.(3) Limitations on Deduction. - This Subsection shall not apply to: (a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used inconnection with research and development of a character which is subject to depreciation and depletion; and



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(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of

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

Expenses for R&D can be treated as ordinary and necessary expenses provided that:

1. It is incurred during the taxable year

2. It is incurred in connection with his trade or business

The taxpayer can either fully deduct it or amortize the deductions.

This is not applicable to the expenses:1. for the acquisition or improvement of land or property to be used in connection with

R&D (these are subject to depreciation or depletion)2. incurred for the purpose of ascertaining the existence, location, extent or quality of

any deposit of minerals & oil.

Pension trusts(J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of

reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trustduring the taxable year to cover the pension liability accruing during the year, allowed as a deduction underSubsection (A) (1) of this Section ) a reasonable amount transferred or paid into such trust during the taxable yearin excess of such contributions, but only if such amount (1) has not theretofore been allowed as a deduction, and(2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which thetransfer or payment is made.

The employer who established the pension trust for his employee’s benefit can deduct itbut:

o The amount paid to the trust is reasonableo It must not have been previously allowed for deduction (double deduction)

o It is apportioned in equal parts over a period of 10 consecutive years, beginning

with the year in which the payment is made.

Additional requirements for deductibility(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is

otherwise deductible from, or taken into account in computing gross income or for which depreciation oramortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the taxrequired to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordancewith this Section 58 and 81 of this Code

If the item to be deducted is from gross income is depreciated or amortized, it must beproven to have been withheld and paid to the BIR, otherwise it won’t be allowed ot bededucted.

Taxes which were not originally withheld & paid, but were only paid during audit are

deductible in these conditions:

o No withholding tax was made, but the payee reported the income and the

withholding agent pays during the audit (with penalties)

o No withholding tax was made and the payee did not report the income, but thewithholding agent pays it during the audit

o The withholding agent erroneously underwithheld the tax but pays the difference

during the audit

o When shown that payee reported the income, and paid the income tax (no need

to pay withholding, nabayaran na eh)

Optional Standard Deduction(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, anindividual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in anamount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case ofa corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount notexceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayersignifies in his return his intention to elect the optional standard deduction, he shall be considered as havingavailed himself of the deductions allowed in the preceding Subsections. Such election when made in the returnshall be irrevocable for the taxable year for which the return is made: Provided , That an individual who is entitled



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to and claimed for the optional standard shall not be required to submit with his tax return such financialstatements otherwise required under this Code: Provided , further , That except when the Commissioner otherwisepermits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the saidcorporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during thetaxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, uponrecommendation of the Commissioner.

o The taxpayer, except a non-resident alien, can choose to just have the OSD of 40% of

his gross income, instead of going with the itemized deductions.

Non-deductible expensesSEC. 36. Items Not Deductible.- (A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to -(1) Personal, living or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase thevalue of any property or estate; This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations whichare deductible under Subsection (G) (1) of Section 34 of this Code. (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance isor has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any personfinancially interested in any trade or business carried on by the taxpayer, individual or corporate, when the

taxpayer is directly or indirectly a beneficiary under such policy. (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case beallowed in respect of losses from sales or exchanges of property directly or indirectly - (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only hisbrothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent(50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) invalue of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one ofsuch corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchangewas under the law applicable to such taxable year, a personal holding company or a foreign personal holdingcompany; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the f iduciary of a trust and the fiduciary of another trust if the same person is agrantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust.

The following are not deductible:1. Personal, living or family expenses

2. Any amount paid for new buildings or for permanent improvements made to increasethe value of any property or estate

3. Any amount spent in resotring property or in making good the exhaustion thereof for

which an allowance has been made4. Premiums paid on any life insurance policy covering the life of any officer, or

employee or if the taxpayer is directly or indirectly a beneficiary under the policy.

No deductions shall be allowed for:

1. Losses from sales or exchanges of property; or2. Interest expense; or

3. Bad debts

o

Where the transaction is between related taxpayers. Who are they? (see page51)

The following personal expenses are not deductible either:

1. Insurance paid on a dwelling owned & occupied by the taxpayer2. Premiums paid for life insurance3. When a professional man rents a property for residential purposes but receives

clients in connection with his work, no part of the rent is allowable as business

expense. (But if he uses part of his house as an office, that portion is consideredbusiness expense, thus deductible)



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4. Allowance given by daddy to kids5. Alimony or allowance paid under a separation agreement

The following capital expenses are not deductible:1. New buildings, permanent improvements, or any amount spent in restoring property2. Cost of defending or perfecting title to property3. Architect’s services

4.

Expense for administration of estate, court costs, attorney’s fees and executor’scommissions

5. Amount assess & paid under an agreement between bondholders & shareholders of a

corp, to be used in the reorganization of the corp (Sec 199-122, RR 2)

Margin levies are not deductible. (Esso v CIR)

R. Capital Gains and Losses

Capital AssetsSEC. 39. Capital Gains and Losses. -(A) Definitions. - As used in this Title - (1) Capital Assets. - The term "capital assets" means property held by the taxpayer (whether or not connected withhis trade or business), but does not include stock in trade of the taxpayer or other property of a kind which wouldproperly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property heldby the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in

the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F)of Section 34; or real property used in trade or business of the taxpayer.(B) Percentage Taken Into Account . - In the case of a taxpayer, other than a corporation, only the followingpercentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into accountin computing net capital gain, net capital loss, and net income: (1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months; (C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to theextent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of thePhilippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, orcertificate or other evidence of indebtedness issued by any corporation (including one issued by a government orpolitical subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall notbe subject to the foregoing limitation and shall not be included in determining the applicability of such limitation toother losses.(D) Net Capital Loss Carry-over . - If any taxpayer, other than a corporation, sustains in any taxable year a netcapital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in thesucceeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12)months.(E) Retirement of Bonds, Etc . - For purposes of this Title, amounts received by the holder upon the retirementof bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation (includingthose issued by a government or political subdivision thereof) with interest coupons or in registered form, shall beconsidered as amounts received in exchange therefor. (F) Gains or Losses From Short Sales, Etc . - For purposes of this Title -(1) Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges ofcapital assets; and (2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall beconsidered as capital gains or losses.

It is important to know whether the asset sold or exchanged was held as ordinary asset

or capital asset because of the different rules which apply to each.

So, what are capital assets? Well, we know what they AREN’T.

Capital assets are property held by the taxpayer (whether or not connected with histrade or business) but does NOT include:

1. Stock in trade of the taxpayer,2. Other property of a kind which would properly be included in the inventory of the

taxpayer if on hand at the close of the year

3. Property held by the taxpayer primarily for sale to customers in the ordinary courseof his trade or business

4. Property used in trade or business of a character which is subject to allowance for

depreciation,



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5. Real property used in trade or business.

The codal enumerates what are ordinary assets. All assets other than ordinary assets

are capital assets.

Property initially classified as capital asset may later become an ordinary asset and viceversa. (Calasanz v CIR, wherein inherited land was developed into a subdivision,changing it from capital to ordinary asset)

Shares of stock would be ordinary assets only to a dealer in securities or a personengaged in the purchase and sale of, or an active trader in, securities. (China Bank vCA)

The rules on capital gains and losses are the following:

1. First, keep me in mind that these rules do not apply to:a. Real property with a capital gain tax, andb. Shares of stock of a domestic corporation with a capital gain tax,

i. These two kinds of capital assets have their own rates. (Remember thecapital gains tax! The whole 6%, 5%/10% rates! Any capital gain

subject to the capital gain tax shall not be included in the computationof the taxable income and income tax at the end of the year.)

2. Next, the transaction on the capital asset should be a sale or exchange3. In the case of a taxpayer other than a corporation (for individuals only), the

following percentages of the gain or loss shall be taken into account in computing netcapital gain, net capital loss and net income:

a. 100% of the gain/loss, if the asset has been held for not more than 12

monthsb. 50% of the gain/loss, if the asset has been held for more than 12 months.

o For corporations, capital gains and losses are always considered at 100%.

4. Losses from sales or exchanges of capital assets shall be allowed only to the extentof the gains from such sales or exchanges (see example below),

o If the taxpayer incurs net capital loss, such loss cannot be deducted from his

ordinary income because the loss can be deducted only to the extent of capitalgains.

5.

If any taxpayer, other than a corporation, sustains in any taxable year a net capitalloss, such loss, in an amount not in excess of the net income (taxable income) of

such year, shall be treated in the succeeding year as a loss from a sale or exchangeof a capital asset held for not more than twelve months (meaning, 100% of the

loss). This is what you call the net capital loss carry over.

o Corporations don’t have net capital loss carry-over.

ExampleMao is in the buy and sell business, and he had ordinary income of P20,000, capital gains of

P5,000 (from the sale of his personal art collection, which he held for 3 years), and capitallosses of P3,000 (from the sale of his yacht, which he held for 2 years.

Ordinary net income P20,000

Gains from sale of capital asset P5,000But held for 3 years! so 50% P2,500

Loss from sale of capital asset P3,000But held for 2 years! so 50% P1,500Net taxable gain P1,000

Taxable Income P21,000

Same facts, but Mao had capital gains of P2,000, and capital losses of P7,000.



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Ordinary net income P20,000Gains from sale of capital asset P2,000

50% only! P1,000Loss from sale of capital asset P7,00050% only! P3,500Net capital loss P2,500

Taxable income P20,000You can’t deduct the capital loss of P2,500 because you can only deduct to the extent of

your capital gains.

BIR Ruling 27-02 gives some steps to determine the tax in real estate transactions1. First, determine the character of property being sold.

i. If property is not used in business of seller, then it’s a capital asset and

the gain of the seller is subject to 6% capital gains tax based on grossselling price or fair market value.

ii. If the property is used in the business of the seller, it is treated asordinary asset, so that the withholding tax rates shall apply. These rates

will depend on:

Whether the seller is exempt or taxable

Whether the seller is engaged in real estate business or not If he is engaged in real estate business, what was the gross selling

price?

Different Scenarios of Sale of Real Property (seller not exempt and real propertyis ORDINARY asset)

Seller Buyer Tax Treatment

Corp engaged in realestate business (sells

6 parcels of land

within a year)

Corp engaged in realestate business

Creditable withholding tax based on grossselling price or fair market value is

deducted by the buyer (to be credited to

the seller)If selling price is P500,000 or less 1.5%

If it’s P500,000 to P2M 3% If its above P2m 5%


Corp NOT engaged inreal estate business

Same as above

Corp NOT engaged inreal estate business


If property considered ordinary asset 6%creditable withholdingIf property considered capital asset 6%

final tax


Individual NOTengaged in trade orbusiness

If on installment basis, no withholding taxon periodic installments, it will be withheldon the last payment

If on cash basis or deferred payment,buyer withholds the tax on the first

installment

Corp engaged in real

estate business

Individual engaged in

trade or business

If on installment, tax withheld by the buyer

on EVERY installment

If it was on cash or deferred payment,buyer withholds the tax on the first

installment



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Installment plan: where the total payment in the year of sale DOES NOT exceed 25% ofthe total selling price

Deferred payment plan: where the total payment in the year of sale exceeds 25% of thetotal selling price

Ordinary income

(Z) The term "ordinary income" includes any gain from the sale or exchange of property which is not a capital assetor property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated orconsidered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale orexchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includesany loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange ofproperty which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated asloss from the sale or exchange of property which is not a capital asset.

Ordinary income is any gain from sale or exchange of property which is not a capital

asset. Ordinary loss is the opposite.

Net capital gain is the excess of the gains from such sales or exchanges of capital assets

over the losses from such sales or exchanges. Net capital loss is the opposite.

Is it better for real property to be considered capital or ordinary asset?o Depends.

o For example, the corporation you’re counsel for sells a piece of land for P100k.

Do you want to consider it as capital or ordinary?i. If it were capital, you’d get taxed 6% of P100k (capital gains tax), that’s

P6,000. You go home with P94k.

ii. If it were ordinary, it’ll be part of your gross income, which will be taxed

30% after all the deductions have been accounted for. The question is, doyou have enough deductions (and proof) which will enable you to get abetter deal (i.e. more money after all the taxes are paid out)?

S. Determination of Gain or Loss from Sale or Transfer of PropertySec 40 is chopped up in 3 parts. Keep this in mind for a better understanding of the

provision.

1.

Section 40 (A) which tells us how to arrive at the gain (or loss).2. Section 40 (C 1-2) which tells us the general rule and the exceptions (tax-free

exchanges)3. Section 40 (C 5) which gives us the substituted basis; i.e. the basis for tax-free

exchanges when the transferor later sells the stock he got in the tax-free exchange.

SEC. 40. Determination of Amount and Recognition of Gain or Loss. -(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property shall be the excess of theamount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excessof the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale orother disposition of property shall be the sum of money received plus the fair market value of the property (otherthan money) received;

Gain is the excess amount realized over the basis for determining gain

Loss is the opposite

The amount realized is the sum of money received plus the fair market value of theproperty (other than money) received

What is the basis of determining gain or loss?(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of property shall be -(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired bypurchase; or (2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or (3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor orthe last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair



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market value of the property at the time of the gift then, for the purpose of determining loss, the basis shall besuch fair market value; or (4) If the property was acquired for less than an adequate consideration in money or money's worth, the basis ofsuch property is the amount paid by the transferee for the property; or (5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction wheregain or loss is not recognized under paragraph (C)(2) of this Section.

Basis for Determining Gain or Loss from Sale or Disposition of Property (Original

Basis)Mode of acquisition Cost basis

1. Acquired by purchase The actual cost

2. By inheritance Fair market value

3. By gift The same as if it would be in the hands of

the donor or the last preceding owner,BUT if the basis is greater than the fmv,

then the basis shall be the fmv (so,

whatever’s lower)

4. Acquired for less than an adequate

consideration in money or its worth

Amount paid by the transferee for the

property

Example

Mao sold a car worth P100 to Apple Inc, in exchange for P110 worth of Apple Inc stock, P10cash and P20 property. How much is the gain for Mao? What about the loss for Apple Inc?

Get the amount realized first: P140 (cash + stock + property)

Deduct the basis: P100 (value of car)Gain: P 40 (gain for Mao), loss of P40 for Apple Inc

How do you make the transaction a tax-free exchange? Check the codal below. It’s one ofthe most used provisions.

(C) Exchange of Property. -(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire amount of thegain or loss, as the case may be, shall be recognized. (2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation - (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a

corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for thestock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities insuch corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stockor unit of participation in such a corporation of which as a result of such exchange said person, alone or togetherwith others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued forservices shall not be considered as issued in return for property. Exchange of property, and tax-free exchange.

General rule: in a sale or exchange of property, the entire amount of gain or loss is

recognized

o EXCEPT (no gain or loss is realized):i. In a merger/consolidation (m/c), where a corp exchanges property solely

for stock in another corporation, which is also a party to the m/cii. In a m/c, where a shareholder exchanges stock in a corp for the stock of

another corp, also a party to the m/ciii. In a m/c, where a security holder of a corp exchanges his securities in

such corp solely for stock or securities in another corp also a party to the

m/civ. Where property is transferred to a corp by a person in exchange for stock

in the corp, and the result of such exchange is that the person (and up to



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4 other persons) gains control of the corp, but the stocks issued forservices are not considered as issued in return for property.

Rule of momentary controlo If two tax-free exchanges are done in the same taxable year, they are not

considered tax-free. (Atty. Montero)(6) Definitions. -

(a) The term "securities" means bonds and debentures but not "notes" of whatever class or duration. (b) The term "merger" or "consolidation", when used in this Section, shall be understood to mean: (i) the ordinarymerger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of anothercorporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within thepurview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose ofescaping the burden of taxation: Provided, further, That in determining whether a bona fide business purposeexists, each and every step of the transaction shall be considered and the whole transaction or series of transactionshall be treated as a single unit: Provided, finally , That in determining whether the property transferredconstitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include thecash assets of the transferor. (c) The term "control", when used in this Section, shall mean ownership of stocks in a corporation possessing atleast fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. (d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules andregulations for the purpose "substantially all" and for the proper implementation of this Section.

Securities means bonds and debentures, but not notes of whatever class or duration.

Merger or consolidation means:

o The ordinary merger or consolidation

o The acquisition by one corporation of all or almost all the properties of anothercorporation solely for stock

A corporate merger where the new corporation continued to operate the business of the

old corporation is not subject to capital gains tax. The merger, however, must be

undertaken for a bona fide business purpose and not solely for the purpose of escapingthe burden of taxation. (CIR v Rufino, where the merger was done to extend the life ofthe corporation, this was legitimate)

Transfer of substantially “all” the assets means a transfer of at least 80% of the assets,including cash, with some degree of permanence.

Transfer of property for shares of stock: no gain or loss is recognized when a person

transfers property (not services) to a corporation in exchange for shares of stock (aloneor with 4 others), where such person gains control of the corporation (at least 51% ofthe total voting power)

The transfer of assets by one corporation to another must have a business purpose.(Gregory v Helving)

Administrative requirements in case of tax-free exchanges.

o You have to submit the following to the BIR:

i. Sworn certificate on the basis of property to be transferred

ii. Certified true copies (ctc) of the TCTiii. Ctc of the corresponding tax declaration of the real properties to be

transferrediv. Ctc of the certificates of stock evidencing shares of stock to be transferred

v. Ctc of the inventory of the property to be transferred (RR 18-01)

Elements of a de factor merger (valid merger)1. Transfer of all or substantially all of the properties of the transferor corp solely for

stock2. Undertaken for a bona fide biz purpose, not for escaping taxes

Difference between a de facto merger v a statutory mergero In a de facto merger, the transferor is not automatically dissolved

o In a de facto merger, there is no automatic transfer to the transferee of all therights, privileges and liabilities of the transferor

Difference between a de facto merger v a transfer to a controlled corporation



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o In a de facto merger, the transferor is a corp. in the latter, the transferor may bean individual.

o In a de facto merger, the requirement is that the transferee acquires all orsubstantially all of the properties of the transferor. In the latter, the requirementis that the transferor gains control of the transferee (own 51% of the votingpower)

(3) Exchange Not Solely in Kind. -

(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a securityholder or a corporation receives not only stock or securities permitted to be received without the recognition ofgain or loss, but also money and/or property, the gain, if any, but not the loss, shall be recognized but in anamount not in excess of the sum of the money and fair market value of such other property received: Provided,That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxabledividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of hisproportionate share of the undistributed earnings and profits of the corporation; the remainder, if any, of the gainrecognized shall be treated as a capital gain. (b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives notonly stock permitted to be received without the recognition of gain or loss but also money and/or other property,then (i) if the corporation receiving such money and/or other property distributes it in pursuance of the plan ofmerger or consolidation, no gain to the corporation shall be recognized from the exchange, but (ii) if thecorporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger orconsolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in

excess of the sum of such money and the fair market value of such other property so received, which is notdistributed. (4) Assumption of Liability. - (a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock orsecurities which would be permitted to be received without the recognition of the gain if it were the soleconsideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer,or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not betreated as money and/or other property, and shall not prevent the exchange from being within the exceptions. (b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceedthe total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall beconsidered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as thecase may be. Assumption of liability in tax-free exchanges:

If the transferor receives stock or securities in a transfer of property, and as part of theconsideration, the other party also assumes the liability of the transferor or that the

property he assumes has a liability, then the property/liability acquired will NOT betreated as money or other property, so that it still falls under the exception of the Sec

40 (C) and no gain or loss is recognized.

But if the amount of the liability assumed exceeds the total of the adjusted basis of the

property transferred, then the excess is considered a gain from sale of either a capital

asset or an ordinary asset, as the case may be.Example

Toby transfers property to Apple Inc with an adjusted basis of P15m in exchange forApple Inc’s stock plus Apple Inc assumes Toby’s liability of P10m. The exchange is

considered tax-free.

But if the liability of Toby is P20m, then this will exceed the adjusted basis of P15m.So the P5m will be considered a gain and it will be taxable.

Cost or basis in tax-free exchanges(5) Basis - (a) The basis of the stock or securities received by the transferor upon the exchange specified in the aboveexception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) themoney received, and (2) the fair market value of the other property received, and increased by (a) the amounttreated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange: Provided , That the property received as "boot" shall have as basis its fair market value: Provided, further , That ifas part of the consideration to the transferor, the transferee of property assumes a liability of the transferor oracquires form the latter property subject to a liability, such assumption or acquisition (in the amount of theliability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange:



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Provided, finally , That if the transferor receives several kinds of stock or securities, the Commissioner is herebyauthorized to allocate the basis among the several classes of stocks or securities. (b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in thehands of the transferor increased by the amount of the gain recognized to the transferor on the transfer. When the transferor later on sells or exchanges the stock he got tax-free, the basis for

determining the gain or loss is the substituted basis. This will also be the cost basis

when the transferee later on sells the property acquired.

How to compute the substituted basis:1. Take the original basis of the property (usually the cost or book value)

2. Subtract any money or the fair market value of any property that may have beenreceived aside from the shares of stock

3. Add the amount treated as dividend by the shareholder & any gain that wasrecognized on the exchange (if any)

ExampleHayley transfers property to Apple Inc for shares of stock. The property’s book value

was P5m and Hayley received an extra P1m from stock.

If she later sells her shares of stock to Mel, the substituted basis will be computed as(P5m-P1m)=P4m.

If Hayley sells the shares to Mel for P6m, her gain will be (P6-P4m) P2m and it will

be subject to capital gains tax.

Losses from Wash Sales of Stocks or SecuritiesSEC. 38. Losses from Wash Sales of Stock or Securities. -(A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock orsecurities where it appears that within a period beginning thirty (30) days before the date of such sale ordisposition and ending thirty (30) days after such date, the taxpayer has acquired (by purchase or by exchangeupon which the entire amount of gain or loss was recognized by law), or has entered into a contact or option so toacquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinarycourse of the business of such dealer.(B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than theamount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, theloss form the sale or other disposition of which is not deductible, shall be determined under rules and regulationsprescribed by the Secretary of Finance, upon recommendation of the Commissioner.

(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire which) resulted inthe non-deductibility of the loss, shall be determined under rules and regulations prescribed by the Secretary ofFinance, upon recommendation of the Commissioner.

Losses are not allowed to be claimed in sales of stock or securities

o Within a period of 30 days before the sale, and 30 days after the sale (61 days

total)

o When the taxpayer acquires or enters into an option to purchase

o If substantially the same/identical stocks or securities

Losses are allowed only if the taxpayer is a stockbroker and the sale/purchase was made

in the regular course of business.

The important thing to remember is the 61 day period. (Sec 131, RR 2)

o Example: Joey buys share of stock in a corporation and within 30 days, buysmore shares. Then within another 30 days, he sells those shares at a loss. He

cannot claim this loss.

T. Situs of TaxationSEC. 42. Income from Sources Within the Philippines.-(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated asgross income from sources within the Philippines:(1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or otherinterest-bearing obligation of residents, corporate or otherwise;(2) Dividends. - The amount received as dividends: (a) from a domestic corporation; and



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(b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation

for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or forsuch part of such period as the corporation has been in existence) was derived from sources within the Philippinesas determined under the provisions of this Section; but only in an amount which bears the same ration to suchdividends as the gross income of the corporation for such period derived from sources within the Philippines bearsto its gross income from all sources. (3) Services. - Compensation for labor or personal services performed in the Philippines; (4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest insuch property, including rentals or royalties for - (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secretformula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling theapplication or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as ismentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rightsbelonging to, or the installation or operation of any brand, machinery or other apparatus purchased from suchnonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration ofany scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and(iii) Tapes for use in connection with radio broadcasting. (5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. - Gains; profits and income from the sale of personal property, as determined inSubsection (E) of this Section. (B) Taxable Income From Sources Within the Philippines. - (1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall bededucted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses,interests, losses and other deductions effectively connected with the business or trade conducted exclusively withinthe Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That suchitems of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation.The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. (2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross incomespecified in subsection (A) unless indebtedness was actually incurred to provide funds for use in connection withthe conduct or operation of trade or business in the Philippines.

This section is not relevant to domestic corporations and resident citizens because they

are taxed worldwide anyway.

The following are treated as gross income from sources within the Philippines:

1. Interests – including interests on bonds, notes and other interest bearingobligations:

a. The loan was used here in the Philippines, or

b. The debtor is in the Philippines2. Dividends – from a domestic corporation and a foreign corporation,

a. Unless less than 50% of the gross income of the foreign corporation wasderived from the Philippines (the amount will be based on the same ratio to

dividends as the gross income for such period derived from sources within

Philippines to its gross income from all sources. Whut?!)i. Example, a Japanese corporation, who derives income more than 50%

of its income in the Philippines, declares dividends to an American inLos Angeles. That will be taxed. I just don’t know how much.

3. Services – compensation for labor or personal services performed in the Philippines4. Rentals & Royalties – from property located in the Philippines or from any interest in

such property for:

a. the use of any copyright, patent, design or model, plan, secret formula orprocess, goodwill, trademark, trade brand or other similar stuff

b. the use of any industrial, commercial or scientific equipment

c. the supply of scientific, technical, industrial or commercial knowledge or info



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d. the supply of services by a non-resident person in connection with thuse ofproperty or rights, or the installation or operation of any brand, machinery, or

other apparatus purchased from such non-resident persone. technical advise, assistance or services rendered in connection with technical

management of any scientific, industrial or commercial undertakingf. the use of motion picture films, films for tv, tapes for radio broadcast

5.

Sale of real property – the gains, profits & income from sale of real property locatedin the Philippines

6. Sale of personal property – gains, profits and income from sale of personal property,

determined by subsection (E)

The place of the singing of a contract is NEVER an issue or a factor for determining thesource of income. (Atty Montero)

In the CIR v Marubeni case, what was involved was a turnkey contract. Marubeni was a

non-resident foreign corporation. What was interesting here, according to sir, is that aturnkey contract could be argued to be a divisible contract which has 3 stages –

engineering, procurement, and construction. The tax implication of this is that certainstages of the contract could be argued to be beyond the taxing jurisdiction of the

Philippines.

o For the engineering stage:

i.

Royalties is sourced here, so that’s taxed. (According to Phil-Am Life vCTA, royalties are technical fees)

ii. Service fees are probably situated abroad, so that’s not taxed here.

o For the procurement stage:i. Where was the stuff bought? It could be here (which would be taxed) or

abroad (then it wouldn’t be taxed)

o For the construction stage:

i. That would definitely be here, so it’ll be taxed. o The implication here is that if you can argue that the contract is indivisible, you

can also argue that some stages of the contract were not sourced here in the

Philippines, and thus beyond the taxing jurisdiction of the Philippines.o This would be huge, considering that if the contract was considered indivisible,

then everything would be considered situated here in the Philippines and thus thewhole contract would be fully taxed. Think of how much you’d save!

Expenses of a multination corporation directly related to the production of Philippine-derived income can be deducted from gross income in the Philippines without need of

apportionment, but overhead expenses of its parent company belong to a different

category.o These are items which can’t be definitely allocated or identi fied with the

operations of the Philippine branch. So, the company can claim as its deductibleshare a ratable part of such expenses based upon the ratio of the local branch’s

gross income to the total gross income, worldwide, of the multinationalcorporation. (CIR v CTA and Smith Kline)

Reinsurance premiums ceded to foreign reinsurers are considered income from

Philippine sources.o

It is the place of activity creating the income which is controlling, and not theplace of business. (Phil Guaranty v CIR)

RAMO 1-95 applies only to the income tax of:1. Philippine brances and liason offices of Japanese trading firms2. All other foreign trading companies

For solicitation and trading activities

Worldwide Operating Income X Sales to the Phil x Attribution Rate (75%) x Tax Rate (35%)Worldwide Sales



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For construction

Net Income from Construction and other activities x Tax Rate (35%)

The order was implemented because the Philippine liaison offices of some multinationalcompanies are soliciting orders form local importers. But then, these liaison offices arenot reporting as income the sales made to local importers because they claim that the

sale was actually consummated by their head office abroad. The other way is that thePhilippine liaison office solicits orders from local importers. It then relays the informationto its foreign head office which looks for exporters of the product and earns a

commission. But the commission is earned by the head office. So, the Philippine liaison

office does not pay tax on these broker’s commissions here.

o So now, these transactions will be considered as constructively consummated bythe Philippine liaison office/branch office as trading activities or brokering

activities. (RAMO 1-86)

The problem here is that deductions being made by the Philippine branch offices of

foreign corps are hard to check because the supporting documens & books of accountsare not accessible to the BIR. So, the Phil branch offices only submit an audit

certification to back-up their claims for deductions. This order provides severalprocedures for the BIR to determine the correct deductions such as functional analysis,

relevance tests, reasonableness tests and other measures. (RAMO 4-86)

Gross income form sources outside (without) the Philippines(C) Gross Income From Sources Without the Philippines. - The following items of gross income shall betreated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in

paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in

paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in

such property including rentals or royalties for the use of or for the privilege of usingwithout the Philippines, patents, copyrights, secret processes and formulas, goodwill,trademarks, trade brands, franchises and other like properties; and

(5) Gains, profits and income from the sale of real property located without the Philippines.

1. Interests other than those derived from sources within

2. Dividends other than those derived from sources within3. Compensation for labor or personal services performed outside the Phil4. Rentals or royalties from property located outside the Philippines or any interest in

such property

5. Gains, profits, income from sale of real property located outside the Philippines

Income from sources partly within and partly without the Philippines(D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified inSubsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properlyapportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitelybe allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxableincome from sources without the Philippines.

(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income,expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall beallocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed bythe Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separatelyallocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxableincome therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and aratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items orclasses of gross income. The remainder, if any, shall be included in full as taxable income from sources within thePhilippines. In the case of gross income derived from sources partly within and partly without the Philippines, thetaxable income may first be computed by deducting the expenses, losses or other deductions apportioned orallocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to



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some items or classes of gross income; and the portion of such taxable income attributable to sources within thePhilippines may be determined by processes or formulas of general apportionment prescribed by the Secretary ofFinance. Gains, profits and income from the sale of personal property produced (in whole or in part) by thetaxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and soldwithin the Philippines, shall be treated as derived partly from sources within and partly from sources without thePhilippines. Gains, profits and income derived from the purchase of personal property within and its sale without thePhilippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as

derived entirely form sources within the country in which sold: Provided, however , That gain from the sale ofshares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippinesregardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyoneof any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) thetransferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income taxthat may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, ifany, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be theduty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee ofthis requirement. (F) Definitions. - As used in this Section the words "sale" or "sold" include "exchange" or "exchanged" ; and theword "produced" includes "created" , "fabricated" , "manufactured", "extracted" , "processed" , "cured" or "aged" .

For the gross income items allocated to sources partly within and partly without thePhilippines,

o there shall be deducted the expenses, losses and other deductions properly

apportioned, ando and a ratable part of other expenses, losses & deductions which cannot properly

be allocated to some item of gross income.

If there is any remainder, it shall be included in full as taxable income from sources

within the Philippines

Situs of sale of personal property

Gains, profits and income derived from purchase of personal property within and soldwithout, or from purchase without and sale within, are treated as derived entirely fromsources with the country in which it is SOLD.

Situs of sale of stocks in a domestic corporation

Gains from sale of shares of stock in a domestic corporation are treated as DERIVED

ENTIRELY from sources within the Philippines regardless of where the said shares aresold.

U. Accounting Periods and MethodsSEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annualaccounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accountingregularly employed in keeping the books of such taxpayer, but if no such method of accounting has been soemployed, or if the method employed does not clearly reflect the income, the computation shall be made inaccordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer'sannual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annualaccounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall becomputed on the basis of the calendar year.

Taxable income is computed on the basis of the taxpayer’s annual accounting period inaccordance with the method of accounting regularly employed in keeping his books.

If there is no method emploed or he doesn’t keep books, the taxable income shall becomputed on the basis of the calendar year.

If the taxpayer is an individual, it shall be the calendar year.

Although the taxpayer is allowed to do his own accounting method, some guidelines

should be followed:

o When the production, purchase or sale of merchandise of any kind is an incomeproducing factor, inventories should be taken at the beginning and at the end ofthe year



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o Expenses should be properly classified between capital and income. Capitalexpenses are those which have a long useful life extending substantially beyond

the yearo When the cost of capital assets is being recovered thru deductions for wear &

tear, etc, any expenses made to restore the property or prolong its useful lifeshould be added to the property account, and not to current expenses

Accrual basis is the default – meaning, you report income when earned and reportexpense when incurred, i.e. when it’s legally due, demandable and enforceable.

SEC. 44. Period in which Items of Gross Income Included . - The amount of all items of gross income shall be

included in the gross income for the taxable year in which received by the taxpayer, unless, under methods ofaccounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period.In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable periodin which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includiblein respect of such period or a prior period.

The items of gross income are included in the taxable year that they are received by thetaxpayer, unless they are properly accounted for as of a different period.

SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title shall be

taken for the taxable year in which "paid or accrued" or "paid or incurred" , dependent upon the method of

accounting the basis of which the net income is computed, unless in order to clearly reflect the income, thedeductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowedas deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of hisdeath if not otherwise properly allowable in respect of such period or a prior period.

The deduction shall be taken for the taxable year in which it is incurred.

SEC. 46. Change of Accounting Period . If a taxpayer, other than an individual, changes his accounting periodfrom fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the netincome shall, with the approval of the Commissioner, be computed on the basis of such new accounting period,subject to the provisions of Section 47.

If the taxpayer, other than an individual, changes his accounting period, the net incomewill be computed on the basis of his new accounting period.

SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. - (A) Returns for Short Period Resulting from Change of Accounting Period . - If a taxpayer, other than anindividual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year tocalendar year, a separate final or adjustment return shall be made for the period between the close of the lastfiscal year for which return was made and the following December 31. If the change is from calendar year to fiscalyear, a separate final or adjustment return shall be made for the period between the close of the last calendar yearfor which return was made and the date designated as the close of the fiscal year. If the change is from one fiscalyear to another fiscal year, a separate final or adjustment return shall be made for the period between the close ofthe former fiscal year and the date designated as the close of the new fiscal year. (B) Income Computed on Basis of Short Period . - Where a separate final or adjustment return is made underSubsection (A) on account of a change in the accounting period, and in all other cases where a separate final oradjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, uponrecommendation of the Commissioner, to be made for a fractional part of a year, then the income shall becomputed on the basis of the period for which separate final or adjustment return is made.

If the taxpayer changes his accounting period, a separate return must be made for thegap caused by the change. Income will be apportioned properly.

Short-term periods are also needed in instances of death and dissolution of a

corporation.

SEC. 48. Accounting for Long-Term Contracts. - Income from long-term contracts shall be reported for taxpurposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building,installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income isderived in whole or in part from such contracts shall report such income upon the basis of percentage of



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completion. The return should be accompanied by a return certificate of architects or engineers showing thepercentage of completion during the taxable year of the entire work performed under contract. There should bededucted from such gross income all expenditures made during the taxable year on account of the contract,account being taken of the material and supplies on hand at the beginning and end of the taxable period for use inconnection with the work under the contract but not yet so applied. If upon completion of a contract, it is foundthat the taxable net income arising thereunder has not been clearly reflected for any year or years, theCommissioner may permit or require an amended return.

Long term means building, installation or construction contracts covering a period inexcess of 1 year.

Persons reporting long-term contracts must report it on basis of percentage ofcompletion.

Total is 50M Year 1 Year 2 Year 3

20% 70% 100%

10m 35m 50mRunning cost 5m 30m 40m

Net Income 5m 0 (NI Year 2- NI Year 1)

SEC. 49. Installment Basis. - (A) Sales of Dealers in Personal Property . - Under rules and regulations prescribed by the Secretary ofFinance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes ofpersonal property on the installment plan may return as income therefrom in any taxable year that proportion ofthe installment payments actually received in that year, which the gross profit realized or to be realized whenpayment is completed, bears to the total contract price. (B) Sales of Realty and Casual Sales of Personality . - In the case (1) of a casual sale or other casualdisposition of personal property (other than property of a kind which would properly be included in the inventory ofthe taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or(2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-fivepercent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary ofFinance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribedin this Section. As used in this Section, the term "initial payments" means the payments received in cash orproperty other than evidences of indebtedness of the purchaser during the taxable period in which the sale or otherdisposition is made. (C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes

of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom underSubsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by theSecretary of Finance, upon recommendation of the Commissioner. (D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) electsfor any taxable year to report his taxable income on the installment basis, then in computing his income for theyear of change or any subsequent year, amounts actually received during any such year on account of sales orother dispositions of property made in any prior year shall not be excluded.

Sales of dealers in personal property

o A person who regularly sells personal property on the installment plan may

return as income in any taxable year that proportion of the installment paymentwhich the gross profit realized bears to the total contract price

Sale of real property and casual sales of personal propertyo If the price exceeds P1000 or where the initial payment does not exceed 25% of

the selling price, the same basis as above may be followed Sales of real property considered as capital asset by individuals

o An individual who sells real property considered as capital asset may pay the

capital gains tax in installments under the rules of the BIR

Changes from Accrual to installment basis

o When a taxpayer decides to report his taxable income on the installment basis,the amounts actually received in prior years are not excluded

If postdated checks were given to pay a sale on installments, and then the postdatedchecks were discounted (i.e. sold to a 3 rd person to get the cash immediately), this is



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still considered a sale on installment. (Banas v CA, because the postdated checks were

evidences of indebtedness)

SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades orbusinesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlleddirectly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate

gross income or deductions between or among such organization, trade or business, if he determined that suchdistribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect theincome of any such organization, trade or business. When two or more organizations, trades or businesses are owned or controlled directly

or indirectly by the same interests, the CIR can distribute, apportion or allocate grossincome or deductions between or among such orgs, trades or businesses, in order to

prevent tax evasion.

V. Returns and Payment of TaxesIndividual ReturnSEC. 51. Individual Return. - (A) Requirements. - (1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an incometax return: (a) Every Filipino citizen residing in the Philippines; (b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and (d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.

Who are required to file?1. Resident citizen, on income within and without the Philippines2. Non-resident citizen, on income within only

3. Resident alien, on income within only

4. Non-resident alien (engaged in biz here), on income within only

(2) The following individuals shall not be required to file an income tax return; (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents

under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business orpractice of profession within the Philippine shall file an income tax return, regardless of the amount of grossincome; (b) An individual with respect to pure compensation income, as defined in Section 32(A)(1), derived from suchsources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section79 of this Code: Provided , That an individual deriving compensation concurrently from two or more employers atany time during the taxable year shall file an income tax return; (c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of thisCode; and (d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from incometax pursuant to the provisions of this Code and other laws, general or special.(3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless berequired to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance,upon recommendation of the Commissioner.

Who are not required to file?1. Those whose gross income does not exceed his total personal and additionalexemptions

o But those engaged in biz or practices a profession must file, regardless of the

amount of gross income2. Those who earn pure compensation income and the income tax on which has already

been correctly withheld (substituted filing, done by employer), provided that an

individual deriving compensation concurrently from 2 or or more employers at any

time during the table year shall file an income tax return



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3. The following are not required to file, regardless of income amount (final withholdingtaxed already)

a. Those whose income consists solely of royalties, interests, prizes, winnings,dividends, etc and the share in a partnership or association, joint venture, orconsortium taxable as a corp

b. Aliens employed by ROHQs with respect to their compensation income

c.

Aliens employed by OBUs with respect to their compensation incomed. Aliens employed by foreign service contractors and subcontractors engaged in

petroleum exploration, with respect to their compensation income

4. Minimum wage earners

5. Those exempted by the Tax code and other special laws

(4) The income tax return shall be filed in duplicate by the following persons: (a) A resident citizen - on his income from all sources; (b) A nonresident citizen - on his income derived from sources within the Philippines; (c) A resident alien - on his income derived from sources within the Philippines; and (d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources withinthe Philippines.

Where and when to file(B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with anauthorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city ormunicipality in which such person has his legal residence or principal place of business in the Philippines, or if therebe no legal residence or place of business in the Philippines, with the Office of the Commissioner.

(C) When to File. - (1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of eachyear covering income for the preceding taxable year. (2) Individuals subject to tax on capital gains; (a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed underSection 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on orbefore April 15 of each year covering all stock transactions of the preceding taxable year; and (b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) daysfollowing each sale or other disposition. (D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive

income purely from compensation, shall file a return for the taxable year to include the income of both spouses,but where it is impracticable for the spouses to file one return, each spouse may file a separate return of incomebut the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. (E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properlyreceived from a living parent shall be included in the return of the parent, except (1) when the donor's tax hasbeen paid on such property, or (2) when the transfer of such property is exempt from donor's tax. (F) Persons

Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorizedagent or representative or by the guardian or other person charged with the care of his person or property, theprincipal and his representative or guardian assuming the responsibility of making the return and incurringpenalties provided for erroneous, false or fraudulent returns. (G) Signature Presumed Correct. - The fact thatan individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return wasactually signed by him.

Where to file?

1.

Authorized agent bank2. Revenue district officer3. Collection agent4. Duly authorized city treasurer where he is legally residing

5. Office of the commissioner

When to file?

On or before April 15 of each year



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What if husband and wife?

Those married individuals who do not derive income purely from compensation shall file

a return to include income from both spouses. But if impractical, then they may fileseparate returns.

How about parents and kids?

Parents must include the income of unmarried minors derived from property receivedfrom a living parent.

o EXCEPT

i. When the donor’s tax has already been paid on such property

ii. When the transfer of such property is exempt from donor’s tax

When to pay (applies to both individuals and corporations)SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. - (A) Payment of Tax. - (1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at thetime the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and intheir absence, the captains thereof are required to file the return herein provided and pay the tax due thereonbefore their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of

Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax ispresented or a sufficient bond is filed to answer for the tax due. (2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer otherthan a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shallbe paid at the time the return is filed and the second installment, on or before July 15 following the close of thecalendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of thetax unpaid becomes due and payable, together with the delinquency penalties. (3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D),27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the personliable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemptionof capital gains under existing special laws, no such payments shall be required : Provided, further, That in case offailure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on thegains realized from the original transaction shall immediately become due and payable, subject to the penaltiesprescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax,submits such proof of intent within six (6) months from the registration of the document transferring the realproperty, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements forsuch exemption. In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the taxdue from each installment payment shall be paid within (30) days from the receipt of such payments. No registration of any document transferring real property shall be effected by the Register of Deeds unless theCommissioner or his duly authorized representative has certified that such transfer has been reported, and the taxherein imposed, if any, has been paid.(B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it andassess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice anddemand from the Commissioner. As used in this Chapter, in respect of a tax imposed by this Title, the term "deficiency" means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer uponhis return; but the amount so shown on the return shall be increased by the amounts previously assessed (orcollected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returnedor otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon thisreturn, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously

assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collectedwithout assessment shall first be decreased by the amounts previously abated, credited returned or otherwiserepaid in respect of such tax.

It is “pay-as-you-file” and “pay-where-you-file”

A person may pay in installments if the tax due exceeds P2,000.

Filing of Return covering Capital Gains

Sale or exchange of stock NOT traded thruthe local stock exchange

Within 30 days after each transaction & finalconsolidated return on or before April 15



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Sale or disposition of real property Within 30 days following each sale or otherdisposition

Gains received by installment Within 30 days from receipt of eachinstallment

Annual Declaration of income tax

SEC. 74. Declaration of Income Tax for Individuals. -(A) In General. - Except as otherwise provided in this Section, every individual subject to income tax underSections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole sourceof his income or in combination with salaries, wages and other fixed or determinable income, shall make and file adeclaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. Ingeneral, self-employment income consists of the earnings derived by the individual from the practice of professionor conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member.Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens notengaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax.The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of theCommissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration filedduring the taxable year under the rules and regulations prescribed by the Secretary of Finance, uponrecommendation of the Commissioner. (B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined inSubsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4)installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid

on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or beforeApril 15 of the following calendar year when the final adjusted income tax return is due to be filed. (C) Definition of Estimated Tax. - In the case of an individual, the term "estimated tax" means the amount whichthe individual declared as income tax in his final adjusted and annual income tax return for the preceding taxableyear minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year,the taxpayer reasonable expects to pay a bigger income tax, he shall file an amended declaration during anyinterval of installment payment dates.

Individuals who receive self-employment income must make and file a declaration of hisestimated income for the current year on or before April 15

Self-employemnet income consists of earnings from the practice of a profession or

conduct of trade or business carried on as the sole proprietor or a partnership of whichhe is a member

Quarterly payment of income tax, in 4 installmentso First at time of declaration

o Second August 15

o Third November 15

o Fourth On or before April 15

Corporate returnsSEC. 52. Corporation Returns. - (A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engagedin trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax returnand final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall befiled by the president, vice-president or other principal officer, and shall be sworn to by such officer and by thetreasurer or assistant treasurer. (B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filingits annual income tax return: Provided, That the corporation shall not change the accounting period employedwithout prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code. (C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30)days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of thewhole or any part of its capital stock, including a corporation which has been notified of possible involuntarydissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to theCommissioner, verified under oath, setting forth the terms of such resolution or plan and such other information asthe Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commissionof the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by theSecretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from theBureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.



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(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every

corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stockexchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file areturn within thirty (30) days after each transactions and a final consolidated return of all transactions during thetaxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year. SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a reasonableextension of time for filing returns of income (or final and adjustment returns in case of corporations), subject tothe provisions of Section 56 of this Code.

All corporations, except foreign corporation not engaged in trade or biz in Philippines(because they’re subject to final withholding tax already), are required to file:

o Quarterly income tax return, on a cumulative basis for the preceding quarterso A final or adjustment return, on or before April 15

A corporation may use either calendar year or fiscal eyar basis for filing

Quarterly income tax returnSEC. 75. Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate aquarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarteror quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. Thetax so computed shall be decreased by the amount of tax previously paid or assessed during the precedingquarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of thetaxable year, whether calendar or fiscal year.

A corporation must file tax return for preceding quarter within 60 days following theclose of each quarter

Final adjustment returnSEC. 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustmentreturn covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly taxpayments made during the said taxable year is not equal to the total tax due on the entire taxable income of thatyear, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, theexcess amount shown on its final adjustment return may be carried over and credited against the estimatedquarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding

taxable years has been made, such option shall be considered irrevocable for that taxable period and no applicationfor cash refund or issuance of a tax credit certificate shall be allowed therefor.

A corp will file the final return at the end of either fiscal or calendar year

If the sum of the quarterly retruns is not equal to the total tax due, the corporation shalleither

o Pay the balance;

o Carry over the excess credit perpetually, or

o Be credited or refunded with the excess amount.

i. But the corporation can choose only 1 option and it is irrevocable, even if

you didn’t get the benefit of the overpayment.

The carry over of the excess can be used perpetually. (Systra v CIR)

Subsequent acts can show the exercise of the carry-over, even if the corp didn’t checkthe little box that said “carry over” (Philam v CIR)

Where and when to fileSEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -

(A) Place of Filing. - Except as the Commissioner other wise permits, the quarterly income tax declaration requiredin Section 75 and the final adjustment return required in Section 76 shall be filed with the authorized agent banksor Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having

jurisdiction over the location of the principal office of the corporation filing the return or place where its main booksof accounts and other data from which the return is prepared are kept.(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) daysfollowing the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be



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filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) monthfollowing the close of the fiscal year, as the case may be.(C) Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the finaladjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time thedeclaration or return is filed in a manner prescribed by the Commissioner.

Where to file: same as individuals

When to file:

o

For quarterly declarations: within 60 days following the close of the quartero For final: on or before April 15, or the 15 th day of the 4th month following the

close of the fiscal year

When to pay: same as individuals

Filing of return covering capital gains from shares of stockSec 52 (D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local StockExchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thrua local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c),shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactionsduring the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of thetaxable year.

For sale of exchange of stock not traded thru local stock exchanges, within 30 days aftereach transaction and a final consolidated return of ALL transactions during the year

Return of corporations contemplating dissolution/reorganizationSec 52(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall,within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for theliquidation of the whole or any part of its capital stock, including a corporation which has been notified of possibleinvoluntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correctreturn to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such otherinformation as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules andregulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commissionof the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by theSecretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from theBureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

After the corp adopts a plan or resolution for its dissolution, it must submit to the BIR,

within 30 days, a return specifying the terms of the resolution and other information. Itmust secure a tax clearance certificate from the BIR which it will submit to the SECbefore its dissolution.

They have to submit to the BIR:

o A copoy of the resulotuiono Balance sheet at the date of dissolution and the income statement covering the

beginning of the year to the date of dissolution

o Names and addresses of the shareholders and their holdingso Value and a description of the assets received in liquidation by each shareholder

The approval of the SEC of liquidation is the starting point.

Return of General Professional PartnershipsSEC. 55. Returns of General Professional Partnerships. - Every general professional partnership shall file, in

duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting forth the items ofgross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN),addresses and shares of each of the partners

General professional partnerships and joint ventures for construction, and other exemptcorporations are STILL REQUIRED to file their tax return, which should specify:

o The items of gross income,

o The deductions allowed, ando The names, TIN, addresses and shares of each partner



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insurance or mutual fund company, & regional operating headquarters ofmultinational company or share in the distributive net income after tax o

a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation

20%

8. Capital gains from REAL PROPERTY located here classified as CAPITAL

assets6%

9. Capital gains from sale of shares of stock of a domestic corporation,not listed and traded thru a local stock exchange

5%/10%

Basically, citizens/resident aliens and non-resident aliens are the same except for theitalicized items

Non-resident Alien NOT engaged in trade or biz

On income from ALL sources within the Philippines 25%

Capital gains from REAL PROPERTY located here classified as CAPITALassets

Capital gains from sale of shares of stock of a domestic corporation, not

listed and traded thru a local stock exchange

6%

5%/10%

Special Aliens

Employed by ROHQ 15% (exceptincome subject

to FBT)

Employed by OBU 15%

Employed by Foreign Petroleum Service Contractors & Subcontractors 15%

Domestic Corporations Final Tax



o Royalty from abroad? Enters the taxable income 30% tax rate

20%


20%

4. Income BY A DEPOSITORY BANK under the FCDU 10%


assets

6%


5%/10%

Foreign Resident Corporations



o Royalty from abroad? Exempt. (remember, only taxed fromsources within the Philippines)

20%



20%


assets

6%


5%/10%

6. Branch Profit Remittances 15%

7. Offshore Banking Unit 10%

Foreign Non-resident Corp

1. income from ALL SOURCES within the Philippines 32%



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2. by a non-resident cinematographic film owner/distributor 25%

3. gross rentals, lease and charter fees by a non-resident owner or lessor

of vessels to Filipino citizens or corps

4.5%

4. dividends from a domestic foreign corp (subject to mutual tax credit) 15%

5. interest on foreign loans 20%

Others

Fringe Benefit Taxes 32% on grossedup monetary

value

Informer’s reward 10%

Creditable Withholding Tax(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of theCommissioner, require the withholding of a tax on the items of income payable to natural or juridical persons,residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than onepercent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income taxliability of the taxpayer for the taxable year.

Creditable tax must be withheld AT SOURCE, but should still be included in the taxreturn of the recipient.

o

Any excess shall be refunded and any deficiency shall be paid by the taxpayer. The liability to withhold tax arises upon the accrual, not upon actual remittance. The

purpose of the withholding tax is to compel the agent to withhold under allcircumstances.

o Thus, it is when the right to receive income arises that determines when to

include that income as gross income, and when to apply withholding tax.(Filipinas Synthetic v CA)

Creditable withholding tax intends to approximate the tax on the payee.

The subsequent remittal does not remove the burden on the income recipient. He stillhas to file for the credit.

The payor withholds, and the payee gets credit. This is done so that the payor hasexpenses that can be deducted, according to Section 34 (k)

Some Income Subject to CREDITABLE Withholding Tax (Section

2.57B & 2.57.2, RR 2-98)

professional fees, talent fees, rendered by individuals 10%

same, but rendered by juridical persons 5%

Rentals for continued use or possession of real properties used in biz, whichthe payor has not taken title

5%

cinematorgraphic film rentals and other payments 5%

Income payments to certain contractors, general engineering, generalbuilding, specialty and other contractors

1%

Income distributed to the beneficiaries of estates & trusts (except if alreadysubject to final withhold or tax-exempt)

15%

Income payment to certain brokers & agents, customs, insurance, real

estate & commercial brokers & fees of agents of pro entertainers

5%

Pro fees paid to medical practitioners by hospitals or clinics or by patients(see RR 12-98 below)

10%

Real property which are NOT capital assets sold by a person engaged in thereal estate biz

If NOT engaged in real estate biz (see p. 9)

1.5%/3%/5%

7.5%

On additional payments by importers, shipping & airline companies to

government personnel for overtime services

15%

On the amount paid by any credit card company to any biz entity .5%



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86

representing the sale of goods, services made by them to cardholders

Payments made by any of the top 5,000 corporations to their local supplier

of goods

1%

Payments by the government to local supplier of goods (except if below

P10,000)

1%

If the service by a medical practitioner was thru a pro partnership of the

medical profession (RR 12-98) The hospital/clinic must withhold the tax

No withholding tax applies if there is proof that no professional fee has

been charged

5%

If the payor is a LARGE TAXPAYER, all payments are subject to withholding tax of 1% if

engaged in goods or 2% if engaged in services, if no specific rates under 2-98.

So that a payor can be exempt from withholding tax, the payee should also be exempt.

Return and Payment of TaxSEC. 58. Returns and Payment of Taxes Withheld at Source. - (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 bywithholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise

permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence orprincipal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for thegovernment until paid to the collecting officers. The return for final withholding tax shall be f iled and the payment made within twenty-five (25) days from theclose of each calendar quarter, while the return for creditable withholding taxes shall be filed and the paymentmade not later than the last day of the month following the close of the quarter during which withholding wasmade: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require thesewithholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary toprotect the interest of the government. (B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct andwithhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendarquarter or year, a written statement showing the income or other payments made by the withholding agent duringsuch quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon paymentat the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in thecase of corporate payee, or not later than March 1 of the following year in the case of individual payee for

creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or beforeJanuary 31 of the succeeding year. (C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57shall submit to the Commissioner an annual information return containing the list of payees and income payments,amount of taxes withheld from each payee and such other pertinent information as may be required by theCommissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of thesucceeding year, and for creditable withholding taxes, not later than March 1 of the year following the year forwhich the annual report is being submitted. This return, if made and filed in accordance with the rules andregulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficientcompliance with the requirements of Section 68 of this Title in respect to the income payments. The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time tofurnish and submit the return required in this Subsection. (D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due

on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected atsource is less than the tax due on his return, the difference shall be paid in accordance with the provisions ofSection 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are herebyconsidered trust funds and shall be maintained in a separate account and not commingled with any other funds ofthe withholding agent. (E) Registration with Register of Deeds. - No registration of any document transferring real property shall beeffected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified thatsuch transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid:Provided, however, That the information as may be required by rules and regulations to be prescribed by theSecretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds inthe Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer ofproperty to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred



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recognition of income in accordance with Section 40, the information as may be required by rules and regulationsto be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated bythe Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the realproperty involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject tothe penalties imposed under Section 269 of this Code.

Withholding agents must file a return and pay to:o An authorized agent bank

o

Revenue district officero Collection agent

o Duly authorized treasure of the city or municipality where he resides or has hisplace of bizness

These taxes must be maintained in a separate account and NOT co-mingled with any

other funds of the withholding agent

When to file and pay

o For FINAL withholding tax, within 25 days from the close of each calendar quarter

o For CREDITABLE withholding tax, not later than the last day of the month

following the close of the quarter which withholding was made

If there is any excess, it shall be either credited or refunded.

If there is deficiency, then it shall be paid by the taxpayer.

Withholding on Wages

Applies to ALL EMPLOYED individuals whether citizens or aliens deriving income from

compensation for services rendered in the PhilSEC. 78. Definitions. - As used in this Chapter: (A) Wages. - The term 'wages' means all remuneration (other than fees paid to a public official) for servicesperformed by an employee for his employer, including the cash value of all remuneration paid in any medium otherthan cash, except that such term shall not include remuneration paid: (1) For agricultural labor paid entirely in products of the farm where the labor is performed, or (2) For domestic service in a private home, or (3) For casual labor not in the course of the employer's trade or business, or (4) For services by a citizen or resident of the Philippines for a foreign government or an internationalorganization. If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more ofany payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid

by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid byan employer to an employee for services performed during more than one -half (1/2) of any such payroll perioddoes not constitute wages, then none of the remuneration paid by such employer to such employee for such periodshall be deemed to be wages.(B) Payroll Period . - The term 'payroll period' means a period for which payment of wages is ordinarily made tothe employee by his employer, and the term "miscellaneous payroll period" means a payroll period other than, adaily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period.

(C) Employee. - The term 'employee' refers to any individual who is the recipient of wages and includes anofficer, employee or elected official of the Government of the Philippines or any political subdivision, agency orinstrumentality thereof. The term "employee" also includes an officer of a corporation.(D) Employer . - The term "employer" means the person for whom an individual performs or performed anyservice, of whatever nature, as the employee of such person, except that: (1) If the person for whom the individual performs or performed any service does not have control of the paymentof the wages for such services, the term "employer" (except for the purpose of Subsection (A) means the personhaving control of the payment of such wages; and (2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign

corporation not engaged in trade or business within the Philippines, the term "employer" (except for the purpose ofSubsection (A) means such person.

Wages are all remuneration other than fees paid to a public official for services

performed by an employee for his employer (cash or kind).o EXCEPT

i. Agricultural labor paid entirely in products of the farm where the labor isperfomed

ii. Domestic service in a private home (maids)



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88

iii. Casual labor not in the course of the employer’s trade or biz

iv. Services by a citizen or resident of the Phil for a foreign gov or

international org

SEC. 79. Income Tax Collected at Source.- (A) Requirement of Withholding. - Except in the case of a minimum wage earner as defined in Section 22(HH)of this code, every employer making payment of wages shall deduct and withhold upon such wages a tax

determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, uponrecommendation of the Commissioner

(B) Tax Paid by Recipient . - If the employer, in violation of the provisions of this Chapter, fails to deduct andwithhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited ispaid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsectionshall in no case relieve the employer from liability for any penalty or addition to the tax otherwise applicable inrespect of such failure to deduct and withhold.(C) Refunds or Credits. - (1) Employer. - When there has been an overpayment of tax under this Section, refund or credit shall be made tothe employer only to the extent that the amount of such overpayment was not deducted and withheld hereunderby the employer. (2) Employees. -The amount deducted and withheld under this Chapter during any calendar year shall be allowedas a credit to the recipient of such income against the tax imposed under Section 24(A) of this Title. Refunds andcredits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretaryof Finance, upon recommendation of the Commissioner. Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3)

months from the fifteenth (15th

) day of April. Refunds or credits made after such time shall earn interest at the

rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund ofcredit is made. Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative withoutthe necessity of counter-signature by the Chairman, Commission on Audit or the latter's duly authorizedrepresentative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of BookV of Executive Order No. 292, otherwise known as the Administrative Code of 1987. (D) Personal Exemptions. - (1) In General . - Unless otherwise provided by this Chapter, the personal and additional exemptions applicableunder this Chapter shall be determined in accordance with the main provisions of this Title. (2) Exemption Certificate. - (a) When to File. - On or before the date of commencement of employment with an employer, the employee shallfurnish the employer with a signed withholding exemption certificate relating to the personal and additionalexemptions to which he is entitled. (b) Change of Status. - In case of change of status of an employee as a result of which he would be entitled to alesser or greater amount of exemption, the employee shall, within ten (10) days from such change, file with theemployer a new withholding exemption certificate reflecting the change. (c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the determination of theamount of taxes to be withheld. (d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or refuses to file awithholding exemption certificate, the employer shall withhold the taxes prescribed under the schedule for zeroexemption of the withholding tax table determined pursuant to Subsection (A) hereof. (E) Withholding on Basis of Average Wages. - The Commissioner may, under rules and regulationspromulgated by the Secretary of Finance, authorize employers to: (1) estimate the wages which will be paid to an employee in any quarter of the calendar year; (2) determine the amount to be deducted and withheld upon each payment of wages to such employee duringsuch quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and (3) deduct and withhold upon any payment of wages to such employee during ;such quarter such amount as maybe required to be deducted and withheld during such quarter without regard to this Subsection. (F) Husband and Wife. - When a husband and wife each are recipients of wages, whether from the same or

from different employers, taxes to be withheld shall be determined on the following bases: (1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in

respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholdingexemption certificate. (2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero exemption of thewithholding tax table prescribed in Subsection (D)(2)(d) hereof. (G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in trade or business in thePhilippines shall be subject to the provisions of this Chapter.(H) Year-End Adjustment . - On or before the end of the calendar year but prior to the payment of thecompensation for the last payroll period, the employer shall determine the tax due from each employee on taxablecompensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax



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89

due from the employee for the entire year and the sum of taxes withheld from January to November shall either bewithheld from his salary in December of the current calendar year or refunded to the employee not later thanJanuary 25 of the succeeding year.

General rule: Every employer making payment of wages shall deduct from & withholdtax

o Except: for Minimum Wage Earners Refunds or credits

o To the employer –w hen there was an overpayment but only to the extent that

the amount of overpayment was not withheld by the employer

o To the employee – any excess of taxes withheld shall be returned or credited

within 3 monts from April 15, these refunds will earn interest at 6% per annumafter the lapse of the 3 month period

Before the start of employment, the employee should furnish the employer with a signedwithholding exemption certificate and additional exemptions to which he is entitled.

o If he doesn’t, the employer shall withhold tax under ZERO exemption.

Wages paid to non-resident aliens engaged in trade or biz are also paid subject towithholding tax.

See codal for husband and wife.

SEC. 80. Liability for Tax . – (A) Employer . – The employer shall be liable for the withholding and remittance of the correct amount of taxrequired to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correctamount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from theemployer together with the penalties or additions to the tax otherwise applicable in respect to such failure towithhold and remit.(B) Employee. - Wh–re an employee fails or refuses to file the withholding exemption certificate or willfullysupplies false or inaccurate information thereunder, the tax otherwise required to be withheld by the employershall be collected from him including penalties or additions to the tax from the due date of remittance until the dateof payment. On the other hand, excess taxes withheld made by the employer due to: (1) failure or refusal to file the withholding exemption certificate; or (2) false and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of theGovernment.

Employer liable if he fails to withhold & remit. It shall be collected from him with

penalties. Employee liable if he fails to file the withholding tax certificate. The tax withheld by the

employer shall be collected from the employee including penalties. Excess taxeswithheld because of his refusal to file certificate or giving false information shall be

forfeited to the government.

SEC. 81. Filing of Return and Payment of Taxes Withheld . - Ex–ept as the Commissioner otherwise permits,taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to anauthorized agent bank; Collection Agent, or the duly authorized Treasurer of the city or municipality where theemployer has his legal residence or principal place of business, or in case the employer is a corporation, where theprincipal office is located.The return shall be filed and the payment made within twenty-five (25) days from the close of each calendarquarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the

employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where suchrequirement is deemed necessary to protect the interest of the Government.The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the

same are paid to the said collecting officers.

Should be filed and paid within 25 days from the close of each calendar quarter.

SEC. 82. Return and Payment in Case of Government Employees. - If –the employer is the Government ofthe Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deductedand withheld upon any wage shall be made by the officer or employee having control of the payment of such wage,or by any officer or employee duly designated for the purpose.



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Withholding tax by government agencies:

o Income payments, except any single purchase of P10,000 & below, made by a

government office, national or local, including GOCCs, on their purchase og foodsfrom local suppliers subject to withholding tax of 1%

SEC. 83. Statements and Returns. -

(A) Requirements. - Ev–ry employer required to deduct and withhold a tax shall furnish to each such employeein respect of his employment during the calendar year, on or before January thirty-first (31st) of the succeedingyear, or if his employment is terminated before the close of such calendar year, on the same day of which the lastpayment of wages is made, a written statement confirming the wages paid by the employer to such employeeduring the calendar year, and the amount of tax deducted and withheld under this Chapter in respect of suchwages. The statement required to be furnished by this Section in respect of any wage shall contain such otherinformation, and shall be furnished at such other time and in such form as the Secretary of Finance, upon therecommendation of the Commissioner, may, by rules and regulation, prescribe.(B) Annual Information Returns. - Ev–ry employer required to deduct and withhold the taxes in respect of thewages of his employees shall, on or before January thirty-first (31st) of the succeeding year, submit to theCommissioner an annual information return containing a list of employees, the total amount of compensationincome of each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies ofthe statement referred to in the preceding paragraph, and such other information as may be deemed necessary.This return, if made and filed in accordance with rules and regulations promulgated by the Secretary of Finance,upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 ofthis Title in respect of such wages.

(C) Extension of time. - Th– Commissioner, under such rules and regulations as may be promulgated by theSecretary of Finance, may grant to any employer a reasonable extension of time to furnish and submit thestatements and returns required under this Section.

employees must submit annual return on or before Jan 31 of the succeeding yearcontaining all relevant employee info.

YOU MADE IT!!! WOOHOOO!!!!! (unless you want to review again, then good luck!)

taxation one complete

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