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REVIEWER- TAXATION CLASS of ATTY.

IBANEZ
CHARMAGNE FERRER

PRESENT
SYSTEM
i.

INCOME

TAX

INDIVIDUAL INCOME TAXATION


a. SCHEDULAR TAX TREATMENT
(keyword: IRR)
i. Classifies income
ii. Provides different tax rules
iii. Imposes different tax rates
b. NET INCOME TAXATION COVERS:
i. RC
ii. NRC
iii. RA
iv. NRA-engaged in trade or
business in the Phil.

i. Residence

Resident
Foreign Corporation
ii. Place- non-Resident Foreign
Corporation
iii. Nationality-Domestic
Corporation
iii.

COMMON FEATURES
a. Pay as you file system
i. Individuals-upon filing of
their ITR
ii. Corporations- upon filing of
their quarterly corporate ITR
and final adjustment corp.
returns.

iv.

CREDITABLE
W/HOLDNG
TAX
SYSTEM
a. Withholding
agent
(source)withholds the tax and remits
the same to the BIR
b. Tax withheld- creditable against IT
due.

v.

FINAL
WITHHOLDING
TAX
SYSTEM
a. Withholding
agent
(source)withholds the tax and remits the
same to the BIR
b. Tax withheld- final settlement of
the tax liability on the income
covered.

c. GROSS
INCOME
TAXATION
COVERS:
i. NRA-not engaged in trade or
business in the Phil.
d. INCOME TAX SITUS
i. Residence- RC, RA
ii. Place-NRA, NRC
iii. Citizenship-RC
e. INDIVIDUAL TAXPAYERS WHO ARE
COMPENSATION EARNERS EXCEPT:
NRA-not
engaged
in
trade/business in the Phil. are
entitled to Personal Exemptions.
ii.

CORPORATE INCOME TAXATION


a. GLOBAL
TAX
TREATMENT:
(keyword: xI-RR)
i. Notgenerally
classifies
income
ii. generally provides different
tax rules
iii. generally imposes different
tax rates
b. Net income taxations covers:
i. Domestic Corporations
ii. Resident
Foreign
Corporations
c. Gross Income Taxation covers:
i. Non-resident
foreign
corporation
d. Income tax situs

GENERAL
PRINCIPLES
OF
INCOME TAXATION IN THE PHIL.
( SEC.23)
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 the
Philippines;
(B) A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

(C) An individual citizen of the Philippines


who is working and deriving income from
abroad as an overseas contract worker is
taxable only on income derived from
sources within the Philippines: Provided,
That a seaman who is a citizen of the
Philippines and who receives compensation
for services rendered abroad as a member
of the complement of a vessel engaged
exclusively in international trade shall be
treated as an overseas contract worker;
(D) An alien individual, whether a resident
or not of the Philippines, is taxable only on
income derived from sources within the
Philippines;

1) Domestic (DC)
2) Foreign
2.1 resident foreign corporation
(RFC)
2.2
non-resident
foreign
corporation
(NRFC)
c. Estates
d. Trusts
e. Partnerships

INDIVIDUALS
Situs of Taxation (Who are taxable?)
1. Resident Citizen (Art. 4 Consti)
RESIDENT a citizen is deemed as a
resident of the Philippines unless he
qualifies as a nonresident under Sec.
22E of the NIRC;

(E) A domestic corporation is taxable on all


income derived from sources within and
without the Philippines; and
(F) A foreign corporation, whether engaged
or not in trade or business in the
Philippines, is taxable only on income
derived from sources within the Philippines.
Income Capital

Classification
Taxpayers

of

a. Individuals
1) citizens
1.1 resident citizens (RC)
1.2 non-resident citizens (NRC)
2) aliens
2.1 resident aliens (RA)
2.2 non-resident aliens (NRA)
2.2.1 engaged in trade or
business
within the Philippines.
(NRAETB)
2.2.2 Not engaged in trade or
business
within
the
Philippines
(NRANETB)
b. Corporations

-taxable for income derived from all


sources based on taxable (i.e., net)
income
Section 1. The following are citizens of
the Philippines:
[1] Those who are citizens of the Philippines
at the time of the adoption of this
Constitution;
[2] Those whose fathers or mothers are
citizens of the Philippines;
[3] Those born before January 17, 1973, of
Filipino mothers, who elect Philippine
citizenship upon reaching the age of
majority; and
[4] Those who are
accordance with law.

naturalized

in

2. Non-resident Citizen
A non-resident citizen means, a
Filipino citizen:
i.

who establishes to the satisfaction of


the Commissioner the fact of their
physical presence abroad with a
definite intention to reside therein;

ii.

who leaves the Philippines during the


taxable year to reside abroad, either
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as an immigrant or for employment


on a permanent basis;
iii.

iv.

v.

who works and derives income from


abroad and whose employment
thereat requires him to be physically
present abroad most of the time
during the taxable year;
who is previously considered as a
nonresident and who arrives in the
Philippines at any time during the
taxable year to reside thereat
permanently shall be considered
nonresident for the taxable year in
which he arrives in the Philippines
with respect to his income derived
from sources abroad until the date of
his arrival in the Philippines.
The taxpayer shall submit proof to
the Commissioner to show his
intention of leaving the Philippines to
reside permanently abroad or to
return to and reside in the
Philippines as the case may be for
purpose of this Section. [Sec.22 (E)]
NOTES: An OVERSEAS CONTRACT
WORKER is taxable only on income
from sources within the Philippines.
(Sec. 23 (c))
NOTE FURTHER: A seaman who is a
Filipino citizen and who receives
compensation for services rendered
abroad
as
member
of
the
complement of a vessel engaged
exclusively in international trade is
treated as an overseas contract
worker.
Length of stay is indicative of
intention. A citizen of the Philippines
who shall have stayed outside the
Philippines for 183 days or more by
the end of the year is a non-resident
citizen.
His
presence
abroad,
however, need not be continuous.
[RR1-79]

3. Resident alien - means an individual


whose

residence
is
within
the
Philippines and who is not a
citizen thereof. [Sec.22 (F)]
RESIDENT residence is within the
Philippines and who is not a citizen
thereof. An alien actually present in
the Philippines who is not a mere
transient or sojourner is a resident of
the Philippines for income tax
purposes. A mere floating intention,
indefinite as to time, to return to
another country is not sufficient to
constitute him a transient.
taxable for income derived within
the Philippines based on taxable
(i.e., net) income
NON-RESIDENT residence is NOT
in the Philippines and who is not a
citizen thereof.
4. Non-resident alien engaged in trade
or business within the Philippines.
(Key: NRAETB)
A non-resident alien means an
individual whose residence is not
within the Philippines and who is not
a citizen thereof. [Sec.22 (G)]
The term trade or business includes
the performance of the functions of a
public office. [Sec. 22 (S)]
The
term
trade,
business
or
profession
shall
not
include
performance of services by the
taxpayer as an employee. [Sec. 22
(CC)]
A non-resident alien individual who
shall come to the Philippines and stay
therein for an aggregate period of
more than 180 days during any
calendar year shall be deemed a nonresident alien doing business in the
Philippines
Section
22(G)
notwithstanding [Sec. 25(A)(1)]
5. Non-resident aliens not engaged in
trade
or
business
within
the
Philippiness. (Key: NRANETB)
Note: ONLY RESIDENT CITIZENS
are taxable for income derived from
sources within and without the
Philippines.
All
other
individual
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CHARMAGNE FERRER

income taxpayers are taxable only for


income derived from sources within
the Philippines.
Note: An overseas contract worker
(OCW) is taxable only on income
derived from sources within the
Philippines. [Sec. 23 (B)(C)]
Note: A seaman is considered as an
OCW
provided
the
following
requirements are met:
1. receives compensation for
services rendered abroad as a
member of the complement of
a vessel; and
2. such vessel is engaged
exclusively international trade.
NOTES:
What makes an alien a resident or
non-resident alien is his intention with
regard to the length and nature of his stay.
Thus:
a. One who comes to the Philippines
for a definite purpose which in its
very nature may be promptly
accomplished is not a resident
citizen.
b. One who comes to the Philippines
for a definite purpose which in its
very nature would require an
extended stay, and to that end,
makes his home temporarily in the
Philippines, becomes a resident,
though it may be his intention at all
times to return to his domicile abroad
when the purpose for which he came
has
been
consummated
or
abandoned. (Sec. 5, RR 2)
Length of stay is indicative of intention.
An alien who shall have stayed in the
Philippines for more than one year by the
end of the taxable year is a resident alien.
NOTE FURTHER: An alien who shall come
to the Philippines and stay for an aggregate
period of more than one hundred eighty
days during a calendar year shall be
considered a non-resident alien in business,
or in the practice of profession, in the
Philippines. [Sec. 25(A)(1)] Thus, if an alien
stays in the Philippines for 180 days or less
during the calendar year, he shall be
deemed a non-resident alien not doing
business in the Philippines, regardless of
whether he owns

1. Stock in trade of the taxpayer, or


other property of a kind which would
properly be included in an inventory
of a taxpayer if on hand at the end of
the taxable year (example: Raw
Materials Inventory, Work in Process
Inventory, Office Supplies Inventory)
2. Property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or
business
(example:
Merchandise
Inventory)
3. Property used in the trade or
business which is subject to the
allowance for depreciation (example:
Office Equipment)
actually engages in trade or business
therein. (Mamalateo)
CORPORATIONS
Jurisdiction to Taxation (who are
taxable?)
1. Domestic Corporation created or
organized in the Philippines. or under its
law [Sec. 22(C)]
2. Resident Foreign Corporation
engaged in trade or business within the
Philippines [Sec. 22(H)]
3. Non-resident Foreign Corporation
not engaged in trade or business within the
Philippines [Sec. 22(I)]
Corporation
Includes:
1. Partnerships, no matter how created or
organized;
2. Joint-stock companies;
3. Joint accounts (cuentas en participacion)
4. Associations; or
5. Insurance companies [Sec. 22 (B)].
Excludes:
1. General professional partnerships;
2. Joint venture or consortium formed for
the purpose of undertaking construction
projects or engaging in petroleum, coal,
geothermal and other energy operations
pursuant to an operating or consortium
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agreement under a service contract with


the Government;
3. Co-ownership.
Corporations exempt from income
taxation (for income realized as such)
under RA 8424
1. Those enumerated under Sec. 30.
Exempt corporations are subject to
income tax on their income from any
of their properties, real or personal,
or
from
any
other
activities
conducted for profit, regardless of the
disposition made of such income.
2. With respect to GOCCs, the general rule
is that these corporations are taxable as
any other corporation except:
a. GSIS
b. SSS
c. PHIC
d. PCSO [Sec. 27 (C)]
NOTE: Sec. 27 (c) of the
NIRC amended by RA 9337,
therefore, PAGCOR is not
included in the GOCCC
exception and subject to tax.
3. Regional or Area Headquarters under
Sec.22 (DD)
NOTE: Regional operating
headquarters (ROH) under
Sec. 22(EE) shall pay a tax
of 10% of their taxable
income.
Note: ONLY DOMESTIC CORPORATIONS
are taxable for income derived from
sources within and without the Philippines.
All other corporate income taxpayers are
taxable only for income derived from
sources within the Philippines.

INCOME AND INCOME


CASES:
TAXATION
1. MADRIGAL V RAFFERTY
2. HOWDEN V CIR

3. DEFINED,
FISHER V TRINIDAD
I. INCOME
WHEN TAXABLE:
4. EISNER V MACUMBER
5. CONWI V CTA
6. VICTORIAS MILLING V PPA

Income all wealth which flows to the


taxpayer other than a mere return of
capital
It is an amount of money coming to
a
person/corporation
within
a
specified time, whether as payment
for services, interest or profit from
investment.
Unless
otherwise
specified, it means cash or its
equivalent. Income can also be
thought of as a flow of the fruits of
one's labor. (Conwi v. Court of
Tax Appeals)
Income includes earnings, lawfully
or
unlawfully
acquired,
without
consensual recognition, express or
implied, of an obligation to repay and
without
restriction
as
their
disposition.
REQUISITES FOR INCOME TO BE
TAXABLE:
1) There must be a gain or addition to
net worth
2) The gain must be realized or
received, actually or constructively;
recipient
must
have
complete
dominion
3) The gain must not be excluded by
law or treaty from taxation
Note:
Not recognized as income when
funds
were
merely
entrusted/held money in trust (with
obligation to return) to taxpayer
because taxpayer acquires no control
and does not receive economic
benefit from it.

Proceeds
of
embezzlement/swindling are income
because embezzler/swindler already
has complete dominion over them
and can use such for his economic
benefit.
Increase in the value of property is
not recognized as income; this only
constitutes an unrealized increase
which becomes taxable income only
upon disposition and realization of
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gains. Same situation for stocks and


stock dividends.
Deposit with no interest does not
produce income for the depositary;
there is no flow of wealth.
In a debt/loan situation it is
important to determine whether
there was an original intention to
pay/consensual recognition of an
obligation to repay.
If yes, then the liability that
results just offsets the increase
in assets of the taxpayer
borrower;
therefore,
no
increase in net worth and no
income
derived
from
the
debt/loan.
If no (as in the case of a
swindler/estafa), the proceeds
will be considered as income
and therefore taxable in the
hands of the borrower swindler.
Income can be realized actually and
constructively.
Assignment of Income Doctrine Ex:
A is entitled to his salary of P10m but
assigns it to B for unknown reasons. In this
case, both A and B realize income. A
constructively received income (because he
was able to assign thus has complete
control/dominion over it) and B actually
received it. The income is taxable in the
hands of both A and B.
Doctrine of Constructive Receipt Ex:
A was informed that his check dated
December 16 is already available and he
can get it anytime. A did not get the check
until January 30. In this case, A
constructively
received
income
in
December and is taxable in that taxable
period.
Not recognized as income if proceeds
are merely a return of capital. Ex. Creditor
lends debtor x amount. Debtor repays x
amount plus y interest. Creditor does not
have income on x amount as this is merely
return on capital; he has income only with
respect to the amount of y interest.

II. PHILIPPINE INCOME TAX LAW


a. HISTORICAL BACKGROUND
b. ACT OF US CONGRESS OF OCT 3,
1913,
GIVEN
RETROACTICE
APPLICATION ON MARCH 1, 1913
c. COMMONWEALTH
ACT
NO.
466
(1939)
d. LATEST AMENDMENT:
a. RA 8424 1997 NIRC
b. RA 9243 DST
c. RA 9337 INCOME AND VAT
III. CRITERIA IN IMPOSING PHILPPINE
INCOME TAX
A. Citizenship Principle A citizen of
the Philippines is subject to Philippine
income tax
(a.) on his worldwide income, if
he resides in the Philippines, or
(b.) only on his income from
sources within the Philippines,
if he qualifies as nonresident
citizen.
B. Residence Principle resident alien
is liable to pay income tax on his
income from sources within
the
Philippines but exempt from tax on
his income from sources outside the
Philippines.
C. Source Principle An alien is
subject to Philippine income tax
because he derives income from
sources within the Philippines. Thus,
a nonresident alien is liable to pay
Philippine income tax on his income
from sources within the Philippines
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such as dividend, interest, rent, or


royalty, despite the fact that he has
not set foot in the Philippines.

other benefit rendered by a fund of


capital in relation to such fund
through a period of time is called
income.

IV. TYPES OF PHILIPPINE INCOME TAX


A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.

GRADUATED I.T. ON INDIV


NORMAL CORP I.T. ON CORP
MCIT ON CORP
SPECIAL I.T. ON CERTAIN CORP
CGT ON SALE OR EXHANGE OF
SHARES OF STOCK OF DOMESTIC
CORP CLASSIFIED AS CAPITAL ASSET
CGT ON SALE OR EXHANGE OF
SHARES OF STOCK OF REAL PROP
CLASSIFEID AS CAPITAL ASSET
FINAL W/HOLDING TAX ON CERTAIN
PASSIVE NVESTMENT INCOME PAID
TO RESIDENTS
FINAL W/HOLDING TAX ON INCOME
PAYMENTS MADET NON- RSIDENTS
FRINGE BENEFIT TAX ON FRINGE
BENEFITS
OF
SUPERVISORY
OR
MANAGERIAL EMPLOYEES
BRANCH PROFIT REMITTANCE TAX
TAX ON IAE OF CORP.

Capital is wealth, while income is the


service of wealth. The Supreme Court
of Georgia expresses the thought in
the following figurative language:
"The fact is that property is a tree,
income is the fruit; labor is a tree,
income the fruit; capital is a tree,
income the fruit." A tax on income is
not a tax on property. "Income," as
here used, can be defined as "profits
or gains." (Madrigal v. Rafferty)
Increase in Property Value A mere
increase in the value of property is
NOT INCOME, but merely unrealized
increase in capital. The increase in
the value of property is also known as
appraisal surplus or revaluation
increment.

CASES:
1. PAPER INDUSTRIES V CIR
2. WESTERN MINDORO CORP V CIR

V.
INCOME, CAPITAL,
RECEIPTS DISTINGUSHED

REVENUE,

A. INCOME-FLOW, SERVICE OF WEALTH,


FRUIT.
INCOME CONNOTES GAIN DERIVED FROM
LABOR, CAPITAL OR PROPERTY, EXCLUDING
NON-INCOME ITEMS SUCH AS THE CAPITAL
INVESTMENT, COGS OR THOSE EXCLUDED
BY LAW FROM INCOME TAXATION.
Income all wealth which flows into the
taxpayer other than as a mere return of
capital.
B. CAPITAL-FUND, WEALTH, TREE
Capital resource of person which can be
used in producing goods and services.
Capital is a fund; income is a flow. A
fund of property existing at an instant
of time is called capital. A flow of
services rendered by that capital by
the payment of money from it or any

C. RECEIPTS- BROADER IN SCOPE, MAY


CONSTITUTE CAPITAL AS WELL AS
INCOME.
D. REVENUE-ALL FUNDS OR INCOME
DERIVED BY GVERNMENT WHETHER
FROM TAX OR OTHER SOURCES.
E. TAXABLE INCOME
Income Tax tax on all yearly profits arising
from property, possessions, trade or
business, or as a tax on a persons income,
emoluments, profits and the like (61 CJS
1559)
tax on income, whether gross or
net. (27 Am. Jur. 308)
Purpose(s) of Income Tax: Fiscal/NonFiscal(ROM)
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CHARMAGNE FERRER

raise revenue to defray the expenses of


the government;
offset regressive sales and consumption
taxes; and
together with estate tax, mitigate the
evils arising from the inequalities of
wealth by a progressive scheme of
taxation which places the burden on
those best able to pay.
CASE:
1. CIR V PAL

VI. SOURCES OF INCOME


A. PROPERTY (CAPITAL)
B. LABOR(SERVICES)
C. SALE/EXCHANGE
OF
ASSET AND ACTIVITY

CAPITAL

CASE:
1. COM. V BOAC

D. INCOME DERIVED FROM OTHER


SOURCES:
a. TREASURE FOUND OR PUNITIVE
DAMAGES
REPRESENTING
PROFIT LOST
b. AMOUNT RECEIVED BY MISTAKE
CASES:
1. JAVIER V CA
2. NORTH AMERICAN V BURNET

c. CANCELLATION OF TAXPAYERS
INDEBTEDNESS
d. PAYMENT
OF
USURIOUS
INTEREST
e. TAX REFUND
f. BAD DEBT RECOVERY

VII. INCOME TAX


A. NATURE
B. FUNCTIONS
C. BASIS- PARTNERSHIP THEORY
CASE:

2. COM. V LEDNICKY

VIII. REQUISITES
TAXABLE

FOR

INCOME

TO

BE

1. There must be a gain or profit.


2. The gain must be realized or
received.

Doctrine
of
Constructive
Receipt or Income Ex: A was
informed that his check dated
December 16 is already available and
he can get it anytime. A did not get
the check until January 30. In this
case, A constructively received
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income in December and is taxable in


that taxable period.
Not recognized as income if
proceeds are merely a return of
capital. Ex. Creditor lends debtor x
amount. Debtor repays x amount plus
y interest. Creditor does not have
income on x amount as this is merely
return on capital; he has income only
with respect to the amount of y
interest.
3. The gain must not be excluded by
law or
treaty from taxation.
IX. DOCTRINE ON DETERMINATION OF
TAXABLE INCOME
A. CLAIM OF RIGHT DOCTRINE

1. Flow of Wealth Test The determining


factor for the imposition of income tax is
whether any gain was derived from the
transaction.
2. Realization Test - unless the income is
deemed "realized," there is no taxable
income.
3. Economic-Benefit Principle - flow of
wealth realized is taxable only to the extent
that
the
taxpayer
is
economically
benefited.
IX. GROSS INCOME
A. GENERAL STATUTORY DEFINITION
(SEC. 32 NIRC)
I. GENERAL STATUTORY DEFINITION
All income derived from whatever source,
including
(but not limited to the following items)
(GRIP CARD
GPP)

CASE:
1. RUTKIN V US

B. SEVERANCE TEST THEORY

CASE:
EISNER V MACEMBER

C. CONTROL TEST

CASE:
1. HELVERING V HORT
2. CIR V JULIANE
3. CIR V BOAC

Tests on Taxability of Income

1) Gross income derived from the conduct


of trade or business or the exercise of a
profession
2) Rent Income
3) Interest Income
4) Prizes & winnings
5) Compensation for services in whatever
form paid, including, but not limited to fees,
salaries, wages, commissions & similar
items
6) Annuities
7) Royalties
8) Dividend Income
9) Gains derived from dealings in property
10) Pensions
11) Partners distributive share from the
net income of the GPP (distributive share
from ordinary partnerships is taxable as
dividends; in this case, the ordinary
partnership has already been subject to
ordinary corporate income tax)
all income derived from whatever
source embraces all income not
expressly exempted within the class of
taxable income under the law, irrespective
of the voluntary or involuntary action of the
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taxpayer in producing the gains, and


whether derived from legal or illegal
sources, such as:
1. Gains arising from expropriation of
property which constitute income
from dealings in property;
2. Income derived from illegal
sources, such as gambling, theft,
embezzlement, and smuggling;
3. Compensation for damages if it
represents payment for loss of
expected profits;
4. Bad debts previously charged-off
but afterwards recovered;
5. Contest awards and prizes for
commercial or non-commercial
contests; and
6. Taxes previously deducted as an
expense and subsequently refunded.
II. BROAD DEFINITION
The term gross income whenever used
without qualification, is comprehensive, as
defined above, and is different from the
limited meaning of gross income for
purposes of minimum corporate income tax
or the gross income tax of corporations.
SEE BOOK- DIMAAMPAO
Gross Income- Gross income means all
income derived from whatever source
Supplementary Discussion on Some
Items Included in Gross Income:
1. Compensation Income
a. income arising from an ER-EE
relationship.
It
means
all
remuneration for services performed
by an EE for his ER, including the
cash value of all remuneration paid in
any medium other than cash. [Sec.
78(A)]
It includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances
5. Bonuses
6. Fringe Benefits of rank and
file EEs

b. It does NOT include remuneration


paid:
For agricultural labor paid
entirely in products of the farm
where the labor is performed,
or
For domestic service in a
private home, or
For casual labor not in the
course of the employer's trade
or business, or
For services by a citizen or
resident of the Philippines for a
foreign govt or an intl
organization. [Sec. 78(A)]
Withholding Tax on Compensation
Income
The income recipient (i.e.,
EE) is the person liable to
pay the tax income, yet to
improve the collection of
compensation income of
EEs, the State requires the
ER to withhold the tax upon
payment
of
the
compensation income. It
does not include income
excluded or exempted by
law.
Fringe Benefits of Rank and File EEs
Basic Rule: Convenience of the ER Rule
If meals, living quarters, and
other facilities and privileges
are
furnished
to
an
employee
for
the
convenience
of
the
employer, and incidental to
the requirement of the
employees work or position,
the value of that privilege
need not be included as
compensation.
2. Gains Derived From Dealings In
Property
Dealings in property such as
sales or exchanges may
result in gain or loss. The
kind of property involved
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CHARMAGNE FERRER

(i.e., whether the property is


a capital asset or an
ordinary asset) determines
the tax implication and
income tax treatment, as
follows:

2. Property which should be included


in the inventory its latest inventory
value [RR-2 sec 136]
3. Property acquired by devise,
bequest or inheritance its fair
market price or value as of the date
of acquisition
4. Property acquired by gift or
donation the same as if it would be
in the hands of the donor or at last
preceding owner by whom it was not
acquired by gift, EXCEPT that if such
basis is greater than the FMV of the
property at the time of the gift then,
for the purpose of determining loss,
the basis shall be such FMV
5. Property (other than capital asset)
acquired for less than an adequate
consideration in moneys worth
a) the amount paid by the
transferee for the property; or
b) the transferors adjusted
basis at the time of the transfer
whichever is greater
6. Property acquired in a transaction
where gain or loss not recognized
The basis shall be the same as it
would have been in the hands of the
transferor increased by the amount of
gain recognized by the transferor on
the transfer.
3. Interest Income e.g., Interest income
from government securities such as
Treasury Bills

In computing the gain or loss from


the sale or other disposition of
property, the BASIS shall be as
follows:
1. Property acquired by purchase its
cost, i.e., the purchase price plus
expenses of acquisition.

4. Rental Income
Actual rent itself included in gross
income (taxable)
Payments by lessee of obligations
of lessor to third persons
considered as additional rent income
of the lessor, and therefore included
in gross income (taxable).
Advance Rentals Receipt of
advance rentals by the lessor may or
may not constitute taxable income to
him depending on the true nature of
the so-called advance rentals.

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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

If the advance rental is in


the nature of prepaid rent
(for the lessee), received by
the lessor under a claim of
right and without restriction
as to use, the entire amount
is taxable income of the
lessor in the year received.

2. It may amount to a gift. If a


creditor wishes merely to benefit the
debtor,
and
without
any
consideration therefore, cancels the
debt, the amount of the debt is a gift
to the debtor and need not be
included in the latters report of
income.

If the amount received is in


the nature of a security
deposit for the faithful
compliance by the lessee of
the terms of the contract,
there is no income to the
lessor unless the conditions
which make the security
deposit the property of the
lessor occur (i.e., the lessee
violates the terms of the
lease agreement)

3. It may amount to a capital


transaction. If a corporation to which
a stockholder is indebted forgives the
debt, the transaction has the effect of
a payment of dividend.

5. Dividends Any dividend which is not


exempt from income tax, or which is not
subject to final tax, is taxable dividend
included in the computation of the taxable
income (gross income) in the income tax
return at the end of the year.

9. Prizes and Awards Contest prizes


and awards received are generally taxable.
Such payment constitutes gain derived
from labor.
The EXCEPTIONS are as follows:

a. The recipient was selected


without any action on his part
to
enter
a
contest
or
proceedings; and
b. The recipient is not required to
render
substantial
future
services as a condition to
receiving the prize or award.

NOTE: Liquidating Dividend


distribution of all the property of a
corporation. It is strictly not dividend
income, but rather a sale of shares of
stock resulting in capital gain or loss.

6. Annuities income derived from a


capital amount paid to an insurance
company.
7. Pensions paid for past employment
services rendered.
8.
Cancellation
of
debt

The
cancellation or forgiveness of indebtedness
may
have
any
of
three
possible
consequences:
1. It may amount to payment of
income. If, for example, an individual
performs services to or for a creditor,
who, in consideration thereof, cancels
the debt, income in that amount is
realized
by
the
debtor
as
compensation for personal services.

Prizes and awards received in


recognition of religious, charitable,
scientific,
educational,
artistic,
literary or civic achievements are
EXCLUSIONS from gross income if:

Prizes and awards granted to athletes


in local and intl sports competitions
and
tournaments
held
in
the
Philippines
and
abroad
and
sanctioned
by
their
national
associations shall be EXEMPT from
income tax.

10. Damage recovery


Compensatory damages, as constituting
returns of capital, are not taxable. Thus,
amounts received as moral damages for
personal actions (such as alienation of
affection, libel, slander or breach of
promise to marry) are not taxable.

Recovered
damages
representing
recoveries of lost profits are taxable, just as
profits are taxable in the regular course of
12

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

business. Thus, damages recovered


patent infringement suits are taxable.

in

11. Bad Debt Recovery


Tax Benefit Rule Bad debts
claimed as a deduction in the
preceding year(s) but subsequently
recovered shall be included as part of
the taxpayers gross income in the
year of such recovery to the extent of
the income tax benefit of said
deduction. There is an income tax
benefit when the deduction of the
bad debt in the prior year resulted in
lesser income and hence tax savings
for the company. (Sec. 4, RR 5- 99)
ILLUSTRATION:

III.
FORMULAS
DETERMINATION OF:

USED

FOR

a. GROSS INCOME = ALL INCOME LESS


EXCLUSIONS
b.
NET OR TAXABLE INCOME=
GROSS INCOME LESS ALLOWABLE
DEDUCTIONS
c. TAXABLE
COMPENSATION
INCOME= GROSS COMPENSATION
INCOME
LESS
PERSONAL
AND
ADDITIONAL
EXEMPTIONS
(INDIVIDUAL TAXPAPERS)
d. INCOME TAX DUE= TAXABLE OR
NET INCOME MUTIPLIED BY INCOME
TAX RATE
e. INCOME TAX PAYABLE=INCOME
TAX
DUE
LESS
CREDITABLE
WITHHOLDING TAXATION
IV. GROSS INCOME TAXATION AND
NET
INCOME
TAXATION
DISTINGUISHED:
A. GROSS INCOME
TAXATION
allows no
1 deductions
grants no
2 exemptions

B. NET INCOME
TAXATION
deductions are
1 allowed
2 exemptions
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

tax base is gross


tax base is net
3 income
3 income
C. ADVANTAGES OF D. ADVANTAGES
GROSS INCOME
OF NET INCOME
TAXATION
TAXATION
fair and just due
simplifies the IT
to the grant of
1 system
1 deductions
does away with
wastage of
manpower and
tax audit
2 supples
2 minimizes fraud
3 substantial
3 provides
reduction in
equitable reliefs
corruption and tax
in he form of
evasion-exercise of
deductios,
discretion to allow
exmptions, and
or disallow
tax credits
deductions is
dispensed with
F.
E. DISADVANTAGES DISADVANTAG
OF GROSS INCOME
ES OF NET
TAXATION
INCOME
TAXATION
1 no deduction and
1 vulnerable to
exemptions are
corruption on
allowed
acount of the
margin of
discretion in the
grant of
deductions
susceptible of
confusing and
fraud in the
complex
absence of general
process of filing
2 audit
2 ITR
taxpayers lose
difficulty/costly
3 internet to earn
3 to administer
more thereby
lessening their
purchasing
capacity

X. EXCLUSIONS FROM GROSS INCOME


(SEC. 32B NIRC)
I. REASONS FOR EXCLUSION:

A. THEY REPRESENT
RETURN OF CAPITAL
OR ARE NOT INCOME,
GAIN OR PROFIT;
B. THEY ARE SUBJECT TO
ANOTHER KIND OF IR
TAX; OR
C. THEY ARE INCOME,
GAIN OR PROFIT THAT
ARE EXPRESSLY EXEMPT
FROM INCOME TAX
UNDER THE
CONSTITUTION, TAX
TREATY, TAX CODE OR A
GENERAL OR SPECIAL
LAW.
1. UNDER THE CONSTITUTION Art.
XIV Sec. 4(3)
All revenues and assets of non-stock,
non-profit educational institutions
used
actually,
directly,
and
exclusively for educational purposes
shall be exempt from taxes and
duties.
2. UNDER A TAX TREATY
Business
profits
of
a
foreign
corporation organized under the laws
of a treaty country from sources
within the Philippines are not subject
to Philippine IT, unless such profits
are attributable to a permanent
establishment
of
the
foreign
corporation created or deemed
created in the Philippines.
3. UNDER TAX CODE
[SEC.
32(B)-EXCLUSIONS
FROM
GROSS INCOME;
SEC. 30-EXEMPT CORP.; AND
SEC.
60
(B)EXEMPTION
OF
EMPLOYESTRUSTS.
4. UNDER SPECIAL LAWS
a) RA
6657
(Comprehensive
Agrarian Reform Package Lawgain arising from the transfer of
agricultural property covered by the
law shall be exempt from CGT.)
b) RA 6975 (National Power Corp.)interest on bonds paid by NPC to
foreign bondholders in US dollars and
other foreign currencies, regardless
of whether or not a tax treaty exists
between the Philippines and such
other country
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

c) RA 7103 (Iron and Steel Industry


Act) interest income from pesodenominated loans with maturity of 5
years or more and interest income
from foreign currency loans extended
by domestic banks to the Steel
Corporation of the Philippines is
exempt from IT and withholding tax.
d) RA 7279 (URBAN DEV. HOUSING
ACT OF 1992)- NHA is exempt from
all kind of fees and charges, whether
local or national such as income and
realty taxes, which the private sector
participating in socialized housing
shall be exempt from:
1. Project-related corporate or
individual IT on income directly
realized from the development
and/or
improvement
or
socialized housing sites, slum
areas,
resettlement
areas,
and/or construction and sale of
socialized housing units to
qualified
beneficiaries
as
approved by the HLURB or LGU
concerned.
2. CGT on sale of raw lands for
use
in
socialized
housing
projects.
e) RA
7459
(Inventors
and
Inventions Incentives Act of
1991)- prizes that winning inventors
will receive from the nationwide
contest for the most Innovative new
and Renewable Energy Systems are
exempt from taxes during the first
10 years reckoned from the date of
the first sale f the invented products,
provided that such sale does not
exceed P200,000 during any 12
months period.
f) RA 7653 (New Central Bank Act,
as amended by RA 8761) BSP is
exempt from all national, provincial,
municipal and city taxes.
g) RA 7916 (PEZA LAW) PEZA
registered enterprise are given IT
holidays of 6 or 4 years from date of
commercial operation depending on
whether
their
operations
are
considered pioneer or non-pioneer.
h) RA 9178 (Brgy. Miccro Business
Enterprises Act of 2002) BMBE
shall be exempt from IT for income

arising from the operation of the


enterprises.
CASE:
1. PLDT V CITY OF BACOLOD
2. PLDT VS LAGUNA
3. SMART V DAVAO

II. ITEMS EXCLUDED FROM GROSS


INCOME UNDER SEC. 23, NIRC

1. Proceeds of Life insurance


received in a single sum or
installment are not taxable.
Exception: interest payments if such
amount is held by the insurer under an
agreement to pay interest theron.
o Proceeds of life insurance
policies paid to the
heirs/beneficiaries upon the
death of the insured
o If such amounts are held by the
insurer under an agreement to
pay interest, the interest
payments shall be included in
the GI
o Insured must die to avail of
total exemption. If he survives,
there/s only partial exemption
to the extent that the proceeds
constitute return of capital
(total amount of premiums
paid).

General rule: The proceeds of life


insurance policies paid to heirs or
beneficiaries upon the death of the
insured

Reason: Insurance is a contract of


indemnity; hence, the proceeds should be
treated as indemnity and not as gain or
income

Exception: If such amounts are held by


the insurer under an agreement to pay
interest thereon, the interest payments
shall be included in gross income.
2. Amount received by insured as
return of premium (other than
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

amounts paid by reason of the death


of the insured and interest payments
on such amounts) under a life
insurance endowment or annuity
contracts, either during the term or
at maturity of the contract.
Cash Surrender Value- of the
policy is also NON-taxable.
Return of Premium- means a
repayment of a party or the whole of
the premiums paid.

But, income from such


property shall be included in GI
Must be characterized by
disinterested generosity and
pure liberality
Difficult to establish gift
situations if there is an Er-Ee
relationship (A
bonus/assistance as recognition
of service rendered is not
exempt)
If given under
a) constraining force of
any moral or legal duty or
b) from the incentive of
c) an anticipated benefit
of an economic nature or
where it is a return for
services rendered,
proceeds cannot qualify
as a gift.
Most critical consideration is
the givers intention or motive.
Can be a gift if given on
account of filial relationship.

o Under life insurance,


endowment, or annuity
contracts, received either
during the term or at the
maturity of the terms or upon
surrender of the contract.

General rule: The amount received by


the insured, as a return of premiums
paid by him under life insurance,
endowment, or annuity contracts, either
during the term or at the maturity of the
term mentioned in the contract or upon
surrender of the contract

Reason: This is a return of capital and not


income.
Exception: If the amounts received by
the insured (when added to the amounts
already received before the taxable year
under such contract) exceed the
aggregate premiums or considerations
paid (whether or not paid during the
taxable year), then the excess shall be
included in gross income. (source
unknown)
3. Gifts, bequests and devises
value of property acquired by gift,
bequest, devise or descent (Sec. 64,
RR 2) but not the income from such
property.
Also, if the amount received is on
account
of
services
rendered,
whether constituting a demandable
debt or not, or the use or opportunity
to use of capital, the receipt is
income.
CASE:

1. PIROVANO V. COM.

General rule: The value of property


acquired by gift, bequest, devise, or
descent.

Reason: These transactions are subject to


transfer taxes estate or donors taxes.

Exception: 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- Received through
Accident/Health Insurance or
Workmens Compensation Act, as
compensation for personal
injuries/sickness + amount of
damages received on account of such
injuries/sickness
o Damages will be exempt only if
they arise together with
personal injury; however, if
damages only amount to return
of capital, it is exempt (Ex.
Damages from car accident
exempt only if claim includes
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

compensation for personal


injury. If no personal injury,
damages for car wreckage will
only be exempt to the extent of
the amount of the actual
damage return of capital)
o Must be physical injury, not
injury to rights.
The amounts received as compensation for
personal injuries or sickness, plus the
amounts of any damages received,
whether by suit or agreement, on account
of such injuries or sickness.
5. Income exempt under treaty
a) Income derived by the US Consular
Officials in the Phil. In connection
with such consular service (US-PI
Consular Convention).
b) Income exempt under tax treaty with
foreign countries
CASE: NDC vs. COM. (note: under 1997
NIRC, exemption of interest on govt.
securities is no longer provided.

To the extent required by any treaty


obligation binding upon the Phil govt.

Income of any kind, to the extent required


by any treaty obligation binding upon the
Government of the Philippines.
6. Retirement benefits, pensions,
gratuities, etc.
1. RA 7641, RA 4917 and Sec. 60 (B) of
the tax code, subject to the ff.
requisites:
a. Reasonable private plan maintained
by the employer duly approved by
the BIR for the exclusive benefit of
the members employees.
b. Retiring official or employee has
rendered at least 10 years of
services;
c. Retiring official or employee is at
least 50 years of age at the time of
retirement; and
d. The benefit of exclusion is availed of
only once.
CASES: 1. CIR vs. GCL RETIREMENT
2.
INTERCONTINENTAL
AMARILLA

VS.

2. Separation benefits due to death,


sickness or other physical disability or for
any cause beyond the control of the said
official or employee.
a. TERMINAL LEAVE PAY- amount
received by way of commutation of
the employees accumulated Leave
credits as a result of his separation. It
is not considered compensation or
services and is excluded from gross
income considering that is paid when
the employer has already severed his
connection with his employee who is
no longer working.
CASE:

1 COM VS CASTANEDA

3. SS benefits, retirement gratuities


received by resident or non-resident
citizens from foreign government agencies
and other private or public institutions.
4. Benefits received from US Veterans
Administration (RA 360) by veterans
residing in the Philippines.
5. Benefits received from SSS per RA 8282
6. Benefits received from the GSIS under
RA 8291 including retirement gratuity.
DISCUSSIONS:
a) RA 7641
b) Amount received as a
consequence of separation for
any cause beyond control
(death, sickness or other
physical disability)
o Sickness must be job
threatening
must render
taxpayer incapable
of working (Ex.
Does not include
STD)
o Benefits from
separation due to
retrenchment come
under exemption (no
choice/option; but if the
Ee avails of an optional
early retirement plan, he
cannot reason that he
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

was separated for


reasons beyond his
control, therefore, he
cannot claim exemption
of the benefits on this
ground
but he can claim
under other
grounds such as
RPBP or RA 7641.
c) Benefits received from a
foreign government by resident
of nonresident citizens or aliens
who reside permanently in the
Philippines
d) Veterans benefits
e) Benefits under SSS
f) Benefits received from GSIS
2 Options under
paragraph (a), Section
32(B)(6)
g) RA 7641
o Conditions:
(i) at least 60 years
old;
(ii) 5 years of
service at time of
retirement
o Availed if there is no
reasonable private
benefit plan (benefits
under this option is less)
o Limted exemption:
month salary for every
year of service. In RPBP,
all is excludable.
h) Reasonable Private Benefit
Plan
o Conditions:
(i) at least 50 yrs old;
(ii) in the service of same
employer for at least 10
years at time of
retirement
o Must be approved by BIR
o A pension, gratuity, stock
bonus or profit sharing plan
maintained by an ER for the
benefit of some or all of his
officials/employees, wherein
contributions are made by such
ER for the officials/employees,
or both, for the purpose of
distributing to such officials &
employees the earnings &

principal of the fund thus


accumulated; & provided in the
plan that no part of the income
shall be used for/be diverted to
any purpose other than for the
exclusive benefit of the said
officials & employees
Service must be continuous.
You can avail of the benefits only
once (once youve availed of RPBP,
you cannot avail of another RPBP);
but you can avail of exemption under
another ground
o Ex. A government employee
can claim exemption for
retirement benefits received
from the GSIS even after
availing of RPBP
taxpayer can claim
RPBP after qualifying as
a private employee then
under GSIS proceeds
exemption after
qualifying as a
government employee
o Ex. Employee can claim
exemption under RPBP then
later claim on the ground that
the amount he received is a
consequence of his separation
in a subsequent job for any
cause beyond his control

Terminal Leave Pay: amount paid for


the commutation of leave credits
o Excludable only for
government employees (this
exemption does not find
support in NIRC but is backed
by

RETIREMENT Benefits, Pensions,


Gratuities, etc.a. Retirement benefits received under
RA 7641 and those received by officials
and employees of private firms in
accordance with a reasonable private
benefit plan maintained by the
employer.
REQUISITES:
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

a. The retiring employee has been


in the service of the same
employer for at least 10 years.
b. The retiring employee is not
less than 50 years of age at the
time of his retirement
c. The benefits shall be availed of
by an employee only once.
d. That there be a reasonable
private benefit plan as defined
below.
A 'reasonable private benefit plan'
means
a pension, gratuity, stock bonus or
profit-sharing plan maintained by an
employer for the benefit of some or
all of his employees

foreign government agencies and other


institutions
d. Payments of benefits due or to
become due to any person residing in
the Philippines under the laws of the
United States administered by the
United States Veterans Administration
e. Benefits received from or enjoyed
under the Social Security System
f. Benefits received from the GSIS,
including retirement gratuity received by
government officials and employees
CASE LAW:

wherein contributions are made by


such employer for the employees
for the purpose of distributing to
such employees the earnings and
principal of the fund thus
accumulated and
wherein it is provided in the plan
that at no time shall any part of the
corpus or income of the fund be used
for, or be diverted to, any purpose
other than for the exclusive benefit of
the said officials and employees.
b. Any amount received by an employee
or by his heirs from the employer as a
consequence of separation of such
official or employee from the service of
the employer because of
death
sickness
other physical disability or
for any cause beyond the control
of the employee (i.e., the
separation of the employee must
be involuntary and not initiated by
him)
c. The social security benefits,
retirement gratuities, pensions and
other similar benefits received by
resident or nonresident citizens of the
Philippines or aliens who come to reside
permanently in the Philippines from

BIR Ruling 125-98:


The phrase "shall not have availed of the
privilege under a retirement benefit plan of
the same or another employer" found in
Sec. 32 (B) (6) (a) of the Tax Code means
that the retiring official or employee must
not have previously received retirement
benefits from the same or another
employer who has a qualified retirement
benefit plan.
BIR Ruling 143-98:
The terminal leave pay of government
employees
whose
employment
is
coterminous is exempt since it falls within
the meaning of the phrase "for any cause
beyond the control of the said official or
employee" found in Sec. 32(B).
7. Miscellaneous items
(a) Income derived by foreign
government (from investments in
Philippines in loans, stocks, bonds or
other domestic securities)
Refers only to passive
income. If the foreign
government engages in trade,
income is taxable.
CASE: 1. COM VS. MITSUBISHI METAL RP

(b) Income derived by govt./its


political subdivisions (from public
utility
or
exercise
essential
governmental function)
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

Key: Income should accrue to


government; if the income is
retained by the public utility, it
is not exempt
look at charter of
political
subdivision/GOCC
to
determine whether its
income accrues to the
government or not.
(c)
prizes,
awards
in
sports
competition sanctioned by national
sports associations whether held in
Philippines or abroad
Contemplates a particular
competition, not a cumulative
achievement (Ex. Sportsman of
the year award does not qualify
for exemption)
(d) Prizes & awards under ff.
conditions:
1. received in recognition of
religious, charitable, scientific,
educational, artistic, literary or
civic achievement, but only if:
2. recipient was selected without
any action on his part
3. recipient not required to render
substantial future services as a
condition of receiving the
prize/award
Example: Nobel prize
award
Construed strictly, take note
of 7 categories.
It does not include
athletic achievement.
Contemplates a rational
selection
process; cannot just be
randomly selected.
(e) 13th month pay & other benefits
(i.e. productivity incentives &
Christmas bonus)
Total exclusion shall not
> P30,000
(f) GSIS, SSS, Medicare, Pag-ibig
contributions
& union dues of
individuals
(g) Gains form the sale of bonds,
debentures or other certificates of
indebtedness with a maturity of more
than 5 years

(h) Gains from redemption of shares


in mutual
fund
BIR Ruling #125-98
The phrase shall not have availed of the
privilege under a retirement benefit plan of
the same or another ER found in Sec. 32
(B) (6) (a) of the Tax Code means that the
retiring official or EE must not have
previously received retirement benefits
from the same or another employer who
has a qualified retirement benefit plan.
BIR Ruling #143-98
The terminal leave pay of government
employees whose employment is
coterminous is exempt since it falls within
the meaning of the phrase for any cause
beyond the control of the said official or
EE found in Sec. 32(B) of the CTRP.
8. income derived by foreign government
Income derived from
(1) investments in the Philippines in
domestic
securities (loans, stocks, bonds, etc.)
or from
(2) 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.
9. income derived by the government or its
political subdivision

Income derived from any public utility


or from the exercise of any essential
governmental function accruing to
the Government of the Philippines or
to any political subdivision thereof.
10. prizes and awards in sport
competition
All prizes and awards granted to
athletes
20

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

(1) in local and international


sports competitions and
(2) sanctioned by their national
sports associations.
11. prizes and awards which met the
conditions set in the Tax Code
Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic,
literary, or civic achievement but only
if:
i. recipient was selected
without any action on his part
to enter the contest or
proceeding and
ii. recipient is not required to
render substantial future
services as a condition to
receiving the prize or award
12.

13th month pay and other benefits

Other benefits cover productivity,


ncentives and Christmas bonus;
Total exclusion shall not notexceed
P30,000.00
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 thousand pesos (P30,000),
in excess of this amount is subject for
taxation
13th Month Pay and Other Benefits
Gross benefits received by employees
of public and private entities provided
that the total exclusion shall not
exceed P30,000 which shall cover:
i. Benefits received by
government employees under
RA 6686
ii. Benefits received by
employees pursuant to PD 851
(13th Month Pay Decree)
iii. Benefits received by
employees not covered by PD
851 as amended by
Memorandum Order No. 28 and
iv. Other benefits such as
productivity incentives and
Christmas bonus

What happens if the benefits exceed


P30,000? The amount in excess of
P30,000 will be considered as
compensation income.
GSIS, SSS, Medicare and other
contributions
GSIS, SSS, Medicare and Pag-ibig
contributions, and union dues of
individuals
gain from the sale of bonds, debentures
or other certificate of indebtedness
Gains realized from the sale or
exchange or retirement of bonds,
debentures or other certificate of
indebtedness with a maturity of more
than 5 years.
e. gain from redemption of shares in
mutual fund
Gains realized by the investor upon
redemption of shares of stock in a
mutual fund company

X. INDIVIDUAL INCOME TAXATION


I. Classification of Individual Taxpayers
a. Resident Citizen (Art. IV Consti.)
Section 1. The following are
citizens of the Philippines:
[1] Those who are citizens of the
Philippines at the time of the
adoption of this Constitution;
[2] Those whose fathers or mothers
are citizens of the Philippines;
[3] Those born before January 17,
1973, of Filipino mothers, who elect
Philippine citizenship upon reaching
the age of majority; and
[4] Those who are naturalized in
accordance with law.
b. Non- Resident Citizen
[1] Immigrant
[2] Employee on a more or less
permanent basis
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

[3] Contract workers whose contracts


of employment are renewed from
time to time within or during the
taxable year.
c. Resident Alien
[1] Not a mere transient or sojourner
[2] Maintains residence in the
Philippines
[3] Actual physical residence in the
Philippines
[4] His temporary stay 9with
intention to return) is on an extended
stay
[5] Resides for more than 1 year
[6] Losses his residency if he stays
outside the Philippines for a
continuous period exceeding 3
months as of and including
December 31
d. Non-resident Alien- neither citizen nor
resident of the Philippines
[1] Non-resident alien engaged in
trade or business in the Philippinescomes and stays in the Philippines for
an aggregate period of more than
180 days during the calendar
year (Sec. 25[A] [1], NIRC)
[2] Engaged in Trade or Business
includes the performance services
within the Philippines.
[3] Foreign technician of a job
contract for 1 year.
d. Non-resident Alien NOT engaged in trade
or business in the Philippines
His income is taxed at 25% final tax
based on gross or entire income. He is
taxed at 15% if employed by the following:
[1] Regional or area headquarters or
multinational corporations;
[2] Offshore banking units
established in the Philippines;
[3] Petroleum service contractors or
sub-contractors.
II. Categories of Income
1. COMPENSATION INCOME

1. DEFINITION- income arising from


an ER-EE relationship. It means all
remuneration for services performed
by an EE for his ER, including the
cash value of all remuneration paid in
any medium other than cash. [Sec.
78(A)]
2. ELEMENTS OF EMPLOYEREMPLOYEE RELATIONSHIP

Selection
Payment of wages
Power of Dismissal
Control

CASE: BROTHERHOOD VS ZAMORA

3. REQUISITES FOR TAXABILITY

1) There must be a gain or addition to net


worth
2) The gain must be realized or received,
actually or constructively; recipient must
have complete dominion
3) The gain must not be excluded by law
or treaty from taxation
4. FORMS OF COMPENSATION AND
TAX BASIS

It includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances
5. Bonuses
6. Fringe Benefits of rank and file EEs
It does NOT include remuneration paid:
For agricultural labor paid entirely in
products of the farm where the labor
is performed, or
For domestic service in a private
home, or
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CHARMAGNE FERRER

For casual labor not in the course of


the employer's trade or business, or
For services by a citizen or resident of
the Philippines for a foreign govt or
an intl organization. [Sec. 78(A)]
5. SPECIAL RULES ON FRINGE
BENEFITS
[Sec. 33 of the NIRC]
A. DEFINITION" Fringe Benefit Tax is
a final income tax on the employee which
shall be withheld and paid by the employer
on a quarterly basis.
Fringe Benefit
means any good, service or other
benefit furnished or granted in cash
or in kind by an employer to an
individual employee except rank
and file employees
(The fringe benefit covered by Sec 33
refers
to
those
enjoyed
by
managerial
and
supervisory
employees.)
Fringe benefit means any good, service
or other benefit furnished or granted in
cash or in kind by an employer to an
individual employee (except rank and file
employees) such as, but not limited to the
ff:
1) housing
2) expense account
3) vehicle of any kind
4) household personnel (such as
maid, driver &
others)
5) interest on loan at less than
market rate to the
extent of the difference between the
market rate
& actual rate granted
6) membership fees, dues & other
expenses borne
by the employer for the employee in
social &
athletic clubs or other similar
organizations
7) expenses for foreign travel
8) holiday & vacation expenses
9) educational assistance to the
employee or his

dependents
10) life or health insurance & other
non-life insurance premiums or
similar amounts in excess of what the
law allows
Persons liable
The EMPLOYER (as a withholding
agent),
whether
individual,
professional
partnership
or
a
corporation, regardless of whether
the corporation is taxable or not, or
the
government
and
its
instrumentalities
Tax rate: 32% (from January 1, 2000
onwards) of the Grossed up Monetary
Value (GMV) of fringe benefits.
In the case of aliens, the tax rates to
be applied on fringe benefit shall be
as follows:

1. NRANEBT 25%
2. Aliens employed by regional
HO 15 %
3. Aliens employed by OBU
15%
4.
Aliens
employed
by
Petroleum Service
5.
Contractors
and
Subcontractors
GMV
of
represents

the

fringe

benefit

1. the whole amount of income


realized by the employee which
includes the net amount of
money or net monetary value
of property which has been
received; plus
2. the amount of fringe benefit tax
thereon otherwise due from the
employee but paid by the
employer for and in behalf of
the employee.
GMV of the fringe benefit shall be
determined by dividing the monetary value
of the fringe benefit by the Grossed up
divisor. The Grossed up divisor is the
23

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

difference
between
applicable rates.

100%

and

the

income tax and withholding tax on


compensation income.
Payor of Fringe Benefit Tax (FBT)
the employer [but the law allows
the employer to deduct such tax as a
business expense, in determining his
taxable income]

B. NATURE OF FBT
Tax Rate and Tax Base
[Generally] 32% of the grossed-up
monetary
value
(GMV)
GMV
represents the whole amount of
income realized by the employee.
How GMV is determined GMV is
determined by dividing the actual
monetary value of the fringe benefit
by 68% [100% - tax rate of 32%]. For
example, the actual monetary value
of the fringe benefit is P1,000. The
GMV is equal to P1,470.59 [P1,000 /
0.68]. The fringe benefit tax,
therefore, is P470.59 [P1470.59 x
32%].
Special Cases:
For fringe benefits received by nonresident alien not engaged in trade of
business (NRANETB), the tax rate is
25% of the grossed-up monetary
value (GMV). The GMV is determined
by dividing the actual monetary value
of the fringe benefit by 75% [100% 25%].

For fringe benefits received by alien


individuals
and
Filipino
citizens
employed by regional or area
headquarters,
regional
operating
headquarters, offshore banking units
(OBUs), or Foreign Service contractor,
the tax rate is 15% of the grossed-up
monetary value (GMV). The GMV is
determined by dividing the actual
monetary value of the fringe benefit
by 85% [100% - 15%].

What is the tax implication if the


employer gives fringe benefits to
rank-and-file employees?
Fringe benefits given to a rank andfile employee are treated as part of
his compensation income subject to

Final tax imposed on the grossed-up


monetary value of fringe benefit
furnished/granted to the EE by the
ER, whether an individual or corp.
(payable by the employer)
Effective
34%

1/1/98
1/1/99
33%
1/1/00
32%

Fringe benefit is an income of the


employee subject to Fringe Benefit
Tax but is payable by the Employer.
Employer can deduct FBT from its
taxable income.
Fringe benefits are only for
corporate officers/management. For
rank and file, it is called an
allowance.
Allowances (benefits to rank and file)
are not subject to FBT.
C. PURPOSE OF FBT

D. MANAGERIAL, SUPERVISOR,
RANK AND FILE EMPLOYEES
DEFINED
Managerial employee
One who is vested with the powers or
prerogatives to lay down and execute
management policies and/or to hire,
transfer, suspend, lay-off, recall,
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

discharge,
employees.

assign

or

discipline

Supervisory employees
Those who, in the interest of the
employer, effectively recommend
such managerial actions if the
exercise of such authority is not
merely routinely or clerical in nature
but requires the use of independent
judgment.
Rank and File Employees
All employees not falling within any
of
the
above
definitions
are
considered
rank-and-file
employees.
shall mean all employees who are
holding
neither
managerial nor
supervisory position as defined in the
Labor Code
In the case of rank and file
employees, fringe benefits other than
those excluded from gross income
under the Tax Code and other special
laws, are taxable under the individual
normal tax rate.
Deductibility to the Taxable income of
the EMPLOYER
General Rule:
The amount of taxable fringe benefit
and the fringe benefits tax shall
constitute allowable deductions from
gross income of the employer.
Exception:
If the basis for computation of the
fringe benefits tax is the depreciation
value, the zonal value or the fair
market value, only the actual fringe
benefits tax paid shall constitute a
deductible expense for the employer.
The value of the fringe benefit shall
not be deductible and shall be
presumed to have been tacked on or
actually claimed as depreciation
expense by the employer.
Provided, however, that if the
aforesaid zonal value or fair market
value of the said property is greater
than its cost subject to depreciation,
the excess amount shall be allowed

as a deduction from the employer's


gross income as fringe benefit
expense. (Sec. 2.33[D], Rev. Reg. No.
3-98)
E. BENEFITS SUBJECT OF FBT
[EXAMPLE]
Such as, but not limited to the ff:
1) housing
2) expense account
3) vehicle of any kind
4) household personnel (such as
maid, driver &
others)
5) interest on loan at less than
market rate to the
extent of the difference between the
market rate & actual rate granted
6) membership fees, dues & other
expenses borne by the employer for
the employee in social & athletic
clubs or other similar organizations
7) expenses for foreign travel
8) holiday & vacation expenses
9) educational assistance to the
employee or his
dependents
10) life or health insurance & other
non-life insurance premiums or
similar amounts in excess of what the
law allows
F. BENEFITS NOT SUBJECT OF FBT
[EXAMPLE]

A. Fringe benefits not considered as


gross income 1. if it is required or necessary to the
business of employer
2. if it is for the convenience or
advantage of employer
B. Fringe Benefit that is not taxable
under Sec. 32 (B)
Exclusions from Gross Income
C. Fringe benefits not taxable under
Sec. 33 Fringe Benefit Tax:
Fringe Benefits which are not taxable
[Sec. 33 of the NIRC, consolidated
25

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

with Sec. 2.33(C) of RR 03-98] [RED


CNC]
1) Fringe
benefits
which
are
authorized and EXEMPTED from
tax under special laws, such as the
13th month Pay and Other
Benefits with the ceiling of P30,
000.
2) CONTRIBUTIONS of the employer
for the benefit of the employee to
retirement,
insurance
and
hospitalization benefit plans
3) Benefits given to the RANK AND
FILE employees, whether granted
under a collective bargaining
agreement or not
4) DE MINIMIS benefits- benefits
which are relatively small in value
offered by the employer as a
means of promoting goodwill,
contentment,
efficiency
of
Employees
5) If the grant of fringe benefits to
the employee is required by the
nature of, or NECESSARY to the
trade, business, or profession of
the employer
6) If the grant of fringe benefits is for
the
CONVENIENCE
of
the
employer [Convenience of the
Employer Rule]
G. BENEFITS CONSIDERED
NECESSARY TO THE BUSINESS
OF THE EMPLOYER, OR ARE
GRANTED FOR THE
CONVENIENCE OF THE
EMPLOYER [EXAMPLES]

H. CONVENIENCE OF THE EMPLOYER


RULE

If meals, living quarters, and other


facilities and privileges are furnished
to an employee for the convenience
of the employer, and incidental to the
requirement of the employees work
or position, the value of that privilege

need
not
be
compensation.

included

as

When a fringe benefit is given


solely for the convenience of the
employer, the fringe benefit is
exempt from FBT because the
employee does not recognize
income from the benefit.
Ex. Expenditure on housing of engineer
within factory premises is not subject to
FBT
General Rule: If housing is located
outside, it is subject to FBT.
Exception: If the nature of the Ers
business is hazardous to health of Ee,
housing can be located outside the
factory without being subject to FBT.
Ex. If employee is given housing
allowance in cash, this will constitute
compensation of the employee (income
from whatever source). However, if it
qualifies as a Fringe Benefit, then it will be
subject to FBT and the burden is shifted to
Er (Tax on Ee, Burden on Er)
I. DE MINIMIS DEFINED:
[EXAMPLES]
De minimis benefits means those which
are of relatively small value are offered by
the employer as a means of promoting
health, goodwill, contentment, or efficiency
of his employees, such as the following:
(CLAMMP RUST)
a. Monetized unused vacation
leave
credits
of
private
employees not exceeding 10
days during the year and
monetized value of leave
credits paid to government
officials and employees;
b. Medical cash allowance to
dependents of employees not
exceeding P750 per semester
or P125 per month
i. BIR Ruling 019-02: To be
considered de minimis
medical allowance, the
following conditions must
concur:
26

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

c.

d.
e.
f.
g.

h.

i.

j.

k.

ii. The amount given to the


EE shall be for his own
medical expense;
iii. The
amount
actually
given and actually spent
shall not exceed P10, 000
in any given calendar
year;
iv. The
EE
must
fully
substantiate with or in his
name
the
medical
allowance to be granted.
Rice subsidy of P1,000 or 1
sack of 50 kg rice amounting to
not more than P1,000 (P 350
per month)
Uniform
and
clothing
allowance
not
exceeding
P3,000 per year
Actual
yearly
medical
benefits
not
exceeding
P10,000
Laundry allowance of P300
per month
Employee
achievement
awards, for length of service
or safety achievement in the
form of tangible personal
property other than cash or gift
certificate, with an annual
monetary value not exceeding
P10,000
received
by
the
employee under an established
written plan which does not
discriminate in favor of highly
paid employees;
Christmas
and
major
anniversary celebrations not
exceeding
P5,000
per
employee per annum
Company picnics and sports
tournaments
in
the
Philippines and are participated
exclusively by employees;
Flowers, fruits, books or similar
items given to employees
under special circumstances
on account of illness, marriage,
birth of a baby, etc
Daily meal allowance of
overtime work not exceeding
25% of basic minimum wage

Tax implication of de minimis benefits:

EXEMPTED from tax. However,


should the amount of the benefits
given be in EXCESS of the ceilings
prescribed, the following rules apply:
o If given to managerial /
supervisory employees
The amount in excess of
the ceiling prescribed is
taxable
as
a
fringe
benefit (i.e., there will be
a 32% tax imposed on
the grossed-up monetary
value of the residual
amount).
o If given to rank-and-file
employees
The amount in excess of
the ceiling prescribed is
taxable as salary or
compensation income.
BIR Ruling 023-02: Meal and food
allowance,
although
not
for
overtime work, is considered de
minimis if it does not exceed 25% of
the basic wage. The rules and
regulations on de minimis benefits do
not allow aggregation of the amounts
set for each type of benefit.

BIR Ruling 034-02 (Aug 16,


2002):
Representation
and
Transportation Allowance (RATA) and
Personnel Economic Relief Allowance
(PERA) are not subject to Income Tax
and Withholding Tax. Additional
Compensation Allowance (ACA) is
part of other benefits under Sec.
32(b)(7)(e) of the Tax Code of 1997
which are excluded from gross
compensation income provided the
total amount of such benefits does
not exceed P30,000. It is also not
subject to withholding tax pending its
formal integration into basic pay.

Example of Benefits Necessary to the


Trade/ Business of the Employer: BIR
Ruling 013- 02:
Outstation Allowance given by the
Philippine Gaming Management
Corporation to its managerial and
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

supervisory employees (who will be


away from the office site for at least
8 hours to visit the lotto franchise
holders for repair and/or inspection of
equipment) intended to cover meals
and trip related expenses is clearly
required by the nature of or
necessary to the trade or business of
the employer and hence, not subject
to the fringe benefits tax. It is also
not subject to withholding tax.

income tax on their taxable income:


Provided, further, that the holiday
pay, overtime pay, night shift
differential pay and hazard pay
received by such minimum wage
earners shall likewise be exempt from
income tax.

Examples of Convenience of the


Employer Rule:

One of the highlights of RA 9504 is


the increase in tax exemption, how
much is the new annual personal and
additional tax exemption as
compared to the exemptions in the
old tax exemption law?

1. The value of the meals given to the


employee is not taxable, if the employer
provides the meals for a substantial noncompensatory
business
purpose
(generally, when employee is required to
be on duty during the meal period).
2. Lodging is not taxable if the employee
must accept the lodging on the
employers business premises as a
condition of his employment.
6. DOCTRINE OF CASH EQUIVALENT

CASES:

1. COM VS SMITH
2. COM VS LE BUE

7. ALLOWABLE DEDUCTIONS FROM


GROSS COMPENSATION INCOME
A. BASIC PERSONAL EXEMPTION [RA
9504]
Republic Act No. 9504 AN ACT
AMENDING SECTION 22, 24, 34, 35, 51,
AND 79 OF REPUBLIC ACT NO. 8424, AS
AMENDED OTHERWISE KNOWN AS THE
NATIONAL INTERNAL REVENUE OF 1997
Salient points of Republic Act No. 9504

Those minimum wage earners shall


be exempt from the payment of

NEW

OLD

Single

50,000.
00

20,000.0
0

Head of the
Family

50,000.
00

25,000.0
0

Married

50,000.
00

32,000.0
0

25,000.
00

8,000.00

Personal
Exemption

Additional
Exemption
For every
Qualified
Dependent

A. BASIC PERSONAL EXEMPTION


(RA 9504, JUNE 17, 2008)

There shall be allowed a basic


personal exemption amounting to
Fifty thousand pesos (P50, 000) for
each individual taxpayer.

"In the case of married individual


where only one of the spouses is
deriving gross income, only such
28

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

spouse shall be allowed the personal


exemption.

CASES:

II.

1. CIR VS BAIER-NICKEL
2. PANSACOLA VS CIR

ADDITIONAL EXEMPTION FR
QUALIFIED DEPENDENT CHILD
P25,000.00 BUT NOT LIMITED IN
EXESS OF FOUR

"Additional Exemption for Dependents.

There shall be allowed an additional


exemption of Twenty-five thousand
pesos (25,000) for each dependent
not exceeding four (4).

"The additional exemption for


dependents shall be claimed by
only one of the spouses in the case of
married individuals.

"In the case of legally separated


spouses, additional exemptions
may be claimed only by the spouse
who has custody of the child or
children:

"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 of age, unmarried and not
gainfully employed or if such
dependent, regardless of age, is
incapable of self-support because of
mental or physical defect.

Who is a dependent for purposes of


additional exemptions?
A legitimate, illegitimate or legally
adopted child chiefly dependent upon
and living with the taxpayer:
not more than 21 years old,
unmarried and not gainfully
employed OR

regardless of age, is
incapable of self-support
because of mental or
physical defect
NOTE: Only children may be considered
dependent for purposes of additional
exemptions.
Married Individuals
Additional exemptions are claimed by
only one spouse. Generally, the
spouse
who
is
the
gross
compensation earner is the claimant
of the additional exemptions.
Where the husband and wife are both
compensation income earners, the
husband is the proper claimant of the
additional exemptions EXCEPT if
there is an express waiver by the
husband in favor of his wife, as
embodied
in
the
withholding
exemption certificate.
When the spouses have business
and/or professional income only,
either may claim the additional
exemptions at the end of the year.
The wife claims the additional
exemptions
in
the
following
instances:
i. husband has no income
ii. husband works abroad
iii. Legally
separated
spouses Additional
exemptions can be
claimed
by
the
spouse
with
custody of the child
or children (but the
total amount for
the spouses shall
not
exceed
the
maximum of four).
[Sec 35(B), NIRC]
1. BASIS OF PERSONAL EXEMPTIONS

PERSONAL EXEMPTIONS- are arbitrary


amounts allowed by law to be deducted
from income to cover personal, living, or
family expenses of the taxpayer. These
deductions are allowed on the theory that
the minimum requirements of subsistence
of a taxpayer should be free from tax.
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER
CASE: MADRIGAL VS RAFFERTY

II. TAXPAYERS ENTITLED TO


PERSONAL EXEMPTIONS
Who may claim personal exemptions?

Citizens (whether resident or nonresident) and resident aliens are


allowed to avail of basic personal and
additional exemptions. Nonresident
aliens engaged in trade or
business are entitled to basic
personal exemptions only by way of
reciprocity, but not to additional
exemptions. [Sec. 35, NIRC]

Limit of BPE Allowed to NRAETB: An


amount equal to the exemptions allowed by
the non-resident aliens country to Filipino
citizens not residing therein but deriving
income therefrom, but not to exceed the
amount fixed by NIRC.[In other words,
whichever is LOWER]
III. CONDITIONS FOR THE GRANT
OF BASIC PERSONAL EXEMPTION
TO NRA ENGAGED IN
TRADE/BUSINESS IN THE PHIL.

IV. HEAD OF THE FAMILY, DEFINED


Head of the Family
1. Unmarried or legally separated
person with
a. one or both parents, or
b. one or more brothers or sisters,
or
c. one
or
more
legitimate,
recognized natural or legally
adopted children living with
and
dependent
upon
the
taxpayer
for
their
chief
support; and

2. Such dependent must be living with


AND dependent upon him for chief
support
3. Where such brother / sister or
children are
a. not more than 21 years of age,
b. unmarried and
c. not gainfully employed, or
d. where
such
dependents
regardless of age, are incapable
of self support because of
mental or physical defect.
Note: Senior Citizen Law (RA 7434 as
amended by 9257) provides in section 4
that senior citizens shall be treated as
dependents provided for in the NIRC, as
amended and as such, individual taxpayers
caring for them, be they be relatives or
not shall be accorded the privileges
granted by the Code insofar as having
dependents are concerned.
Senior Citizen is:
1. any resident citizen of the
Philippines
2. at least sixty 60 years old,
including those who have retired
from both government offices and
private enterprises, and
3. has an income of not more than
sixty thousand pesos per annum
subject to the review of the
National Economic Development
Authority(NEDA)
every
three
years.
NRAETB may deduct personal exemption
(but NOT additional exemption), but only to
the extent allowed by his country to
Filipinos not residing therein, and shall not
exceed the aforementioned amounts.
NRANETB cannot claim any personal or
additional exemption.
Dependent =
legitimate/illegitimate/legally
adopted child chiefly dependent upon
& living with the taxpayer if such
dependent is not > 21 years old,
unmarried & not gainfully employed
OR if such dependent regardless of
age is incapable of self-support
because of mental/physical defect
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REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

i.
ii.

For married individuals, claimed


by only 1 of the spouses
For legally separated spouses,
claimed only by the spouse who
has custody of the children; may
be claimed by both as long as they
have custody of the children but
total amount claimed by both shall
not exceed the maximum allowed
An illegitimate child is within the
meaning of a recognized natural
child.
Under the provision on additional
exemption
for
dependents,
illegitimate children are specifically
included
under
the
term
dependents.

A senior citizen, whether relative or


not, living with the taxpayer or not,
can be classified as a dependent to
make a taxpayer a head of a family
not exceeding 4 (RA 7432)
In case of married individuals, where
only 1 of the spouses is deriving
gross income, only such spouse shall
be allowed additional exemption.
Chief support means more than one
half of the requirements for support.
Parents, brothers, and sisters, who
are qualified dependents may entitle
the taxpayer to the personal
exemption of P25,000 as head of the
family but not to the additional
exemption of P8,000. (obsolete?)
Note:
Personal and additional exemptions
are available only to business income
and compensation income earners.
Non-resident aliens engaged in
trade or business (NRAETB) may
be entitled to personal exemptions
subject to reciprocity:
b) country from which he is a
citizen has an income tax law;
and
c) the income tax law of his
country
allows
personal
exemption to citizens of the
Philippines not residing therein
but deriving income therefrom
and not to exceed the amount
allowed in NIRC.

d) the personal exemption shall be


equal to that allowed by the
income tax law of the country
to a citizen of the Philippines
not residing therein, or the
amount provided in the NIRC,
whichever is LOWER.
V. WHO ARE QUALIFIED
DEPENDENTS?
1) PARENTS
2) BROTHERS AND SISTERS-FULL OR
HALF-BLOOD
3) CHILDREN-LEGITIMAE,
RECOGNIZED ILLEGITIMATE, &
LEGALLY ADOPTED
4) SENIOR CITIZAN
5) BENEFACTOR
Qualified dependent children
legitimate, recognized natural, illegitimate
and legally adopted The proper claimant of
the additional exemption would be the
husband, being the head of the family
except under the following cases:
1) husband is unemployed
2) husband is working abroad like an
OFW or a seaman
3) husband explicitly waived his right
of the exemption in favor of his
wife in the withholding exemption
certificate.
VI. LIVING WITH, MEANING

VII. CHIEF SUPPORT, DEFINED


Chief support
principal or main support given regularly
such that withdrawal will result in
destitute life for dependent; includes
situations where taxpayer is away from
home on business, or dependent is away
at school
31

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

more than one-half of the requirements


for support. Hence, if two children
contribute equal amounts to the support
of a parent, neither of them qualify as
head of the family.
VIII. RULES ON CHANGE OS STATUS
(SEC.35[C]), NIRC

Change of Status [Sec 35(C), NIRC]


1. If taxpayer marries during taxable
year, taxpayer may claim the
corresponding BPE in full for such
year (i.e., no need to prorate the
exemption).
2. If taxpayer should have additional
dependent(s) during taxable year,
taxpayer may claim corresponding AE
in full for such year.
3. If taxpayer dies during taxable year,
his estate may still claim BPE and AE
for himself and his dependent(s) as if
he died at the close of such year.
4. If during the taxable year
a) spouse dies or
b) any of the dependents dies or
marries, turns 21 years old or
becomes gainfully employed,
taxpayer may still claim same
exemptions as if the spouse or
any of the dependents died, or
married, turned 21 years old or
became gainfully employed at
the close of such year.
i. The death of the taxpayer during
the taxable year shall not affect the
amount of personal and additional
exemptions his estate can claim, as if
he died at the end of such year
ii. If the taxpayer got married or
should have additional dependent
(child born within the year) during
the taxable year, he may claim the
corresponding personal exemptions
in full for such year
iii. If the spouse should die or any of
the dependents become twenty one
years of age, or become gainfully
employed during the taxable year,
the taxpayer may still claim the same
exemptions as if he/she died, or
became twenty one years old or

became gainfully employed at the


close of such year.
NOTE:
Individuals not entitled to personal
and additional exemptions:
o Non-resident alien NOT
engaged in trade or business
o Alien individual employed by
Regional or Area Headquarters
of Multinational Companies
o Alien Individual employed by
Offshore Banking Units
o Alien Individual employed by
Pertroleum Service Contractor
and Subcontractor
TIP: When it comes to change of status,
the status beneficial to the taxpayer is used
for purposes of claiming deductions as long
as the taxpayer achieved such status at
any time during the taxable period.
III.

PPHI- PREMIUM PAYMENTS ON


HEALTH AND/OR
HOSPITALIZATION INSURANCE,
REQUISITES

An amount of premium on health and/or


hospitalization paid by an individual
taxpayer (head of family or married), for
himself and members of his family during
the taxable year.
REQUISITES FOR DEDUCTIBILITY:
a. Insurance must have actually been
taken;
b. The amount of premium deductible
from gross income does not exceed
P2400 per family or P200 per month
during the taxable year;
c. That said family had a gross income
of not more than P250,000 for the
taxable year; In case of married
individuals, only the spouse claiming
additional exemption shall be entitled
to this deduction.
Who may Avail of this deduction:
1) Individual
taxpayers
earning
purely
compensation
income
during the year.
32

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

2) Individual
taxpayers
earning
business income or in practice of
his profession whether availing of
itemized or optional standard
deductions during the year.

B. BUSINESS, TRADE, PROFESSIONAL


INCOME
1. INCOME COVERED:
1. INCOME DERIVED BY SELFEMLOYED FROM TRADE OR
BUSINESS
(TRADING,
MANUFACTURING,
MERCHANDISING, FARMING AND
OTHERS
a. SELF-EMPLOYEDDEFINED
b. SELF-EMPLOYED
2. INCOME
DERIVED
BY
PROFESSIONALS
FROM
THE
PRACTICE OF PROFESSION
a. PROFESSIONALSDEFINED
b. GROSS
INCME
OF
FARMERS
3. PASSIVE INVESTMENT INCOME
DEFINED
a. INTEREST INCOME
INTEREST shall refer to the payment for
the use or forbearance or detention of
money, regardless of the name it is called
or denominated. It includes the amount
paid for the borrower's use of, money
during the term of the loan, as well as for
his detention of money after the due date
for its repayment.
i. DEFINITION
ii. EXAMPLES
Interest Income e.g., Interest income
from government securities such as
Treasury Bills
b. RENTAL INCOME
i. DEIFINITION
ii. SCOPE, EXAMPLES
iii. TAXABILIT
OF
ADVANCE BENEFITS
Rental Income

Actual rent itself included in gross


income (taxable)
Payments by lessee of obligations
of lessor to third persons
considered as additional rent income
of the lessor, and therefore included
in gross income (taxable).
Advance Rentals Receipt of
advance rentals by the lessor may or
may not constitute taxable income to
him depending on the true nature of
the so-called advance rentals.

If the advance rental is in


the nature of prepaid rent
(for the lessee), received by
the lessor under a claim of
right and without restriction
as to use, the entire amount
is taxable income of the
lessor in the year received.

If the amount received is in


the nature of a security
deposit for the faithful
compliance by the lessee of
the terms of the contract,
there is no income to the
lessor unless the conditions
which make the security
deposit the property of the
lessor occur (i.e., the lessee
violates the terms of the
lease agreement)

c. DIVIDEND INCOME
i. DEFINITION
ii. KINDS
1. COMMON
2. PREFERRED
3. SCRIP
4. INDIRECT
5. LIQUIDATING
Dividends Any dividend which is not
exempt from income tax, or which is not
subject to final tax, is taxable dividend
included in the computation of the taxable
income (gross income) in the income tax
return at the end of the year.
NOTE: Liquidating Dividend
distribution of all the property of a
corporation. It is strictly not dividend
income, but rather a sale of shares of stock
resulting in capital gain or loss.
33

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

Appeals & ANSCOR, GR No.


108576, Jan. 30, 1999)
2. the recipient is other than the
shareholder (Bachrach vs. Seifert,
GR No. L-2659, October 12, 1950)
3. change in the stockholders equity
results by virtue of the stock
dividend issuance.

KINDS OF DIVIDENDS
1) Cash and Property Dividends
Individual Taxpayer
a. From Domestic Corporations
RC, NRC, RA 10% (Sec. 24A)
NRAETB 20% (Sec. 25A2)
NRANETB 25% on gross income
(Sec. 25B)
b. From Foreign Corporations
RC, NRC, RA, NRAETB 5-32% (Sec.
24, 25A1)
NRANETB 25% on gross income
(Sec. 25B)

3) Liquidating Dividends When a


corporation distributes all of its
assets in complete liquidation or
dissolution, the gain realized or loss
sustained by the stockholder,
whether individual or corporation, is
taxable income or deductible loss, as
the case may be. (Sec. 73A)

Corporate Taxpayer
a. Foreign to Domestic Corp. 32%(Sec.
32A)
b. Domestic to Domestic Corp. Exempt;
intercorporate
dividends (Sec. 27D)
c. Domestic to Foreign Corp. Resident Foreign Corp. Exempt
(Sec. 28 [A]
7d)
Nonresident Foreign Corp. 15%
subject to the condition stated in Sec.
28 [B] 5. Otherwise, it shall be taxed
at 32%. (See Commissioner vs.
Procter and Gamble, GR No. 66838,
December 2, 1991)

d. ROYALTY
e. PRIZES AND WINNINGS
a. PRIZES AMOUNTNG
TO MORE THAN
P10,000.00
b. WINNINGS EXCEPT
SWEEPSTAKES AND
LOTTO
f. PARTNERS SHARE FROM
THE NET INCOME AFTER
TAX
OF
BUSINESS
PARTNERSHIP,
JOINT
ACCOUNT, JOINT VENTURE
OR CONSORTUM

2) Stock Dividends
General rule: Not subject to tax because it
does not constitute income; it represents
transfer of surplus to capital account. (Sec.
73B, 1997 NIRC)
Exceptions:
1. Sec. 73B, 1997 NIRC
a. there is redemption or
cancellation
b. the transaction involves
stock dividends,
c. and the time and manner
of the transaction makes it
essentially equivalent to a
distribution of taxable
dividends. (see
Commissioner vs. Court of
Appeals, Court of Tax

A liquidating dividend is not a


dividend income. The transaction is
considered a sale or exchange of
property between the corporation
and the stockholder.

IV.

OTHER SOURCES OF INCOME


1) CG FROM SALE OF SHARES OF STOCK
a. IF NOT LISTED AND TRADED
THROUGH STOCK EXCHANGE
i. NET GAIN NOT OVER
P100K=5%
ii. AMT
IN
EXCESS
OF
100K=10%
b. IF
LISTED
AND
TRADED
THROUGH
LOCAL
STOCK
EXCHANGE- OF 1% GROSS
SELLING PRICE. THE TAX IS IN
THE NATURE OF PERCENTAGE
TAX NOT A INCOME TAX.
2) IF LISTED AND TRADED THROUGH
LOCAL EXHANGE- OF 1% OF
34

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

3)
4)
5)

6)

GROSS SELLING PRICE. THA TAX IS IN


THE NATURE OF PERCENTAGE TAX
NOT AN INCOME TAX
ILLEGAL GAINS- GAMBLING, BETTING,
LOTTERIES, EXTORTION OR FRAUD
RECOVERY OF DAMAGES- TAXALE IF
REPRESENTS LOST PROFIT/INCOME
BAD DEBT RECOVERY- TAXABE IF IT
RESULTS IN THE REDUCTION OF THE
TAXAYERS TAX LIABILITY IN THE
PREVIOUS YEAR. THE TAX BENEFIT
RULE
OR
THE
DOCTRINE
OF
EQUITABLE BENEFIT APPLIES IN THIS
CASE
a. IT MUST BE CLAIMED AS A
DEDUCTION FROM THE GROSS
INCOME IN THE PRECEDING
YEAR
b. THE REDUCTION RESULTS IN A
TAX BENEFIT
TAX REFUND- TAXABLE IF IT RESULTS
IN
THE
REDUCTION
OF
THE
TAXPAYERS
LIABILITY
IN
THE
PRECEDING YEAR. THIS MEANS THAT
THE TAX REFUNDED MUST BE
PREVIOUSLY CLAIMED AS DEDUCTION
FROM GROSS INCOME. TAX BENEFIT
RULE LIKEWISE APPLIES.

ANNUAL WITHHOLDING TAX TABLE


If
Taxable
Income
is:

Tax
Du
e
is:

Ov
er
30,
3 000

Ov
er
140
,00
50
Ov
er
250
,00
60

but
not
ov
er

but
not
ov
er

2
5
0,
0
0
0

but
not
ov
er

5
0
0,
0
0
0

Ov
er
500
,00
70

8,
5
0
0

20% of the
excess over
+ 70,000

2
2,
5
0
0

25% of the
excess over
+ 140,000

5
0,
0
0
0

30% of the
excess over
+ 250,000

1
2
5,
0
0
0

32% of the
excess over
+ 500,000

Sample Tax Computation:


Step 1: Determine your total Gross Income
Step 2: Compute for the Taxable Income
Step 3: Compute for the Tax Due
Note: Make sure that items prior to this are
reviewed and understood

Not
Ov
er
10,
1 000
Ov
er
10,
2 000

Ov
er
70,
4 000

1
4
0,
0
0
0

=
but
not
ov
er

3
0,
0
0
0

but
not
ov
er

7
0,
0
0
0

5%

5
0
0

10% of the
excess over
+ 10,000

2,
5
0
0

15% of the
excess over
+ 30,000

Given 1: A single employee with an annual


gross income of P160, 000, how much is
the annual tax due
Items
Notes
Gross
Income

160,00
0

Less:
Personal &
Additional
Exemption

50,000

Taxable
Income

110,00 Over 70,000 but


0
not over 140,000 =
8,500 20% of the
35

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

excess over 70,000

Tax Due

16500

8500+ .
20(110,00070,000)

CHAPTER XII CORPORATE INCOME


TAXATION

I. CORPORATION AS DEFINED IN NIRC

Given 2: Married employee with 3 children


all under the age of 21, with a spouse that
is currently not working on that taxable
year. With a monthly salary of P46, 000 and
received a 13th month pay of worth P
46,000. At the same time earned a total of
P20, 000 on interest bearing account. How
much is the annual tax due?

A
corporation
shall
include
partnerships, no matter how created
or organized. Joint stock companies,
joint accounts, associations, and
insurance companies
But does not include, for the purpose
of imposing ordinary 35% corporate
income tax:
o general
professional
partnerships
o joint venture or consortium
formed for the purpose of
undertaking
construction
projects
or
engaging
in
petroleum, coal, geothermal &
other
energy
operations
pursuant to an operating or
consortium agreement under a
service
contract
with
the
government.
Corporations
exempt
from
income taxation (for income
realized as such) under RA 8424
1. Those enumerated under Sec. 30.
Exempt corporations are
subject to income tax on their
income from any of their
properties, real or personal, or
from
any
other
activities
conducted for profit, regardless
of the disposition made of such
income.
2. With respect to GOCCs, the general
rule is that these corporations are
taxable as any other corporation
except:
a. GSIS
b. SSS
c. PHIC
d. PCSO [Sec. 27 (C)]
NOTE: Sec. 27 (c) of the NIRC amended by
RA 9337, therefore, PAGCOR is not included
in the GOCCC exception and subject to tax.
3. Regional or Area Headquarters under
Sec. 22 (DD)
36

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

NOTE: Regional operating headquarters


(ROH) under Sec. 22(EE) shall pay a tax of
10% of their taxable income.
Note: ONLY DOMESTIC CORPORATIONS are
taxable for income derived from sources
within and without the
Philippines. All other corporate income
taxpayers are taxable only for income
derived from sources within the Philippines.
General Types:
1) Domestic Corporation is created or
organized in the Philippines or under its
laws
2) Foreign Corporation is organized and
existing under the laws of a foreign country
(a) Resident foreign corporation
foreign corp. engaged in trade or
business within the Philippines
(b) Nonresident foreign
corporation foreign corp. not
engaged in trade or business within
the Philippines
I. DOMESTIC CORPORATIONS
A. In general
On taxable income from all sources
within and without the Philippines
o 32% (2000-2005)
o 35% (2006-2008)
o 30% (2009 ONWARDS)
A. CONSIDERED AS CORP. UNDER
NIRC
1. PARTNERSHIP, DEFINED. NO MATTER
HOW CREATED OR ORGANIZED
General Rule: Partnerships, no matter
how created, are subject to corporate
income tax.
General co-partnerships (GCP) are
partnerships which are by law assimilated
to be within the context of, and so legally
contemplated as, corporations. The
partnership itself is subject to corporate

taxation. The individual partners are


considered stockholders and, therefore,
profits distributed to them by the
partnership are taxable as dividends.
Exception:
o General Professional
Partnerships (GPPs) as such are
not subject to income tax. GPP
means:
1. a partnership formed by persons
for the sole purpose of exercising
their common profession; and
2. no part of the income of which is
derived from engaging in any
trade or business [Sec. 22(B)].

GPPs, however, are required to


file returns of their income for
the purpose of furnishing
information as to the share in
the net income of the
partnership which the partners
shall include in their individual
returns
Members of the GPP are liable
for income tax only in their
separate and individual
capacity. Each partner shall
report as gross income his
distributive share, actually or
constructively received, in the
net income of the partnership.

Kinds of Partnerships
1) General Professional Partnerships
Established solely for purpose of
exercising common profession and
not part of income derived from
engaging in trade or business.
As an entity, it is not subject to
income tax.
Partners are liable for income tax
on
their
distributive
share
(computed by dividing net income
of GPP). Each partner shall report
his distributive share as part of his
gross income.
2) Taxable/Business/Ordinary
Partnership
37

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

All other partnerships no matter


how created or organized.
Includes
unregistered
joint
ventures
and
business
partnerships.
Taxable as an entity
o ordinary corporate income
tax.
Joint ventures are not taxable as
corporations when its purpose if
o a) undertaking construction
projects; b) engaged in
petroleum, coal and other
energy operation under a
service contract with the
government.
Partners
are
considered
stockholders;
therefore,
their
distributive share is taxed as
dividends.
2.
3.
4.
5.

JOINT STOCK COMPANIES


JOINT ACCOUNTS
ASSOCIATIONS, OR
INSURANCE COMPANIES

CASE: AFISCO INSURANCE VS. COM

B. EXCEPTIONS
1. JOINT CONSTRUCTION VENTURE
2. GPP
3. JV FOR ENGAGING IN PETROLEUM,
COAL, GEOTHERMAL
CHAPTER XIII CORPORATE INCOME
TAXATION

I. CORPORATION (DEFINED IN NIRC)


a. PARTNERSHIS NO MATTER HOW
CREATED
OR
ORGANIZED,
JOINT STOCK COMPANIES, JOINT
ACCOUNTS, ASOCIATIONS OR
INSURANCE COMPANIES.
CASE: 1. AFISCO INSURANCE VS. COM.

b. NOT
INCLUDED
IN
NIRC
DEFINITION OF A CORP. ARE
JOINT
CONSTRUCTION
VENTURE, GPP, JOINT VENTURE
FOR ENGAGING IN PETROLEUM,
COAL,
GEOTHERMAL
AND
OTHER ENERGY OPERATIONS
PURSUANT TO A CONSORTION
AGREEMENT
WITH
THE
AGREEMENT
II. UNREGISTERED OR REGISTERED
PARTNERSHIP- TAXABLE AS
COPRORATION PROVIDED THE FF.
REQUISITE CONCUR:
a) Agreement, oral or written to
contribute money, property, or
industry to a common fund
b) Intention to divide the profits
CASES: 1. EVANGELISTA VS. COM
2. RALLOS VS RALLOS
3. ONA VS COM
4. PASCUAL VS COM
5. OBILLOS SR VS COM

NB:PP.38-39

B. RESIDENT FOREIGN
CORPORATIONS
III. JOINT ACCOUNTS OR JV FORMED
FOR PROFITS: JOINT EMERGENCY
OPERATIONSNB:PP.37
A. JOINT EMERGENCY OPERATIONS
(NO
PERSONALITY)
1. SOURCE
OF LEGAL
INCOME:
WITHIN THE PHIL.

2. TAX BASE: TAXABLE INCOME


3. TAX RATE: 35% EFFECTIVE JULY 1, 2005;
30% EFFECTIVE JAN. 1, 2009 PER RA
9337
4. SPECIAL RESIDENT FOREIGN CORP.
a. INTERNATIONAL CARRIERS
CASES: COLLECTOR
VS BATANGAS CO.
i. SOURCE=WITHIN
THE PHIL.
ii. TAX BASE= GROSS PHIL.
BILLINGS
NB:PP.37
B. JOINT
STOCK COMPANIES
iii. TAX RATE= 10%
1. CASES:
a. CIR VS TOKYO
b. CIR
VS.
MARUBENI
b. OFFSHORE NAKING UNIT
38
c. FOREIGN CURRENCY DEPOSIT UNIT
d. DEFINITION
OF TERMS
CASES: BROKI
VS AMERICAN
EXPRESS CO.

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

IV. MAJOR GROUPS OF


CORPORATIONS FOR INCOME TAX
PURPOSES
NB:PP.37

A. DOMESTIC
CORPORATIONS

I. SOURCE OF INCOME: W/ OR
W/OUT PHIL.

NB. DEFINITION OF TERMS PP. 39-40

CASES: 1. NV REEDERIF V CIR


2. CIR VS SC JOHNSON & SONS

CASES: 1. FAR EAST VS NANKAI KOGYO


2. GROSS PHILIPPINE BILLINGS DEFINED

2. TAXBASE: TAXABLE INCOME


NB:PP.40

C. NON-RES. FOREIGN
CORP.

3. TAX RATE: 35% EFFECTIVE JAN. 1,


2009 PER RA 9337
NB:PP.38
A. PRIVATE EDUCATIONAL INSTITUTION

4. SPECIAL DOMESTIC
CORPORATIONS:
B. NON-PROFIT HOSPITAL

I. SOURCE OF INCOME: W/ THE PHIL


2 . TAX BASE: GROSS INCOME
3. TAX RATE: 35% EFECTIVE JULY 1, 2005;
30% EFFECTIVE JAN. 1,2009 PER RA 9337
4. SPECIAL NON-RESIDENT FOREIGN CORP.: 39

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

F. OTHER CORPORATE TAX RATES

D. MCIT see pp. 40-43

CASE: 1. MANILA BANKING VS CIR


2. CIR VS PAL
3. MANILA BANKING VS CIR

E. IAET = 10%
(SEC. 29, NIRC; RR 2-2001) pp. 4345

1. COMMON TAX RATES


1. LABOR,
AGRICULTURAL
OR
HORTICUTURAL
ORG
NOT
ORG
PRINCIPALLY FOR PROFIT
2. MUTUAL
SAVINGS
BANKS
AND
COOPERATIVE BANKS
2. DOMESTIC CORP.
a. REQUISITES
i. _________________________________
_______________________________
ii. _________________________________
_______________________________
3. RESIDENT FOREIGN CORP.
iii. _________________________________
_______________________________
3. FRATERNAL
BENEFICIARY
SOCIETY,
CASE: 1. COM VS MARUBENI
ORDER OR ASSOC.
2. BANK OF AMERICA VS CA
a. REQUISITES
i. _________________________________
_______________________________
4. NON-RESIDENT FOREIGN CORP.
ii. _________________________________
_______________________________
iii. _________________________________
_______________________________
CASE: 1. COM VS PROCTOR & GAMBLE
CASE: COM. VS RODWAY
4. CEMENTERY COMPANIES
8. NON-STOCK
NON PROFIT EDUCATIONAL
a. REQUISITES
INSTITUTIONS
(RMC
76-2003)
i. _________________________________
_______________________________
ii. _________________________________
_______________________________
CASES: 1. CIR VS 1.
CA_________________________
2. VG SINCO VS
COLLECTOR
_________________________
3. JESUS
SACRED
HEART C VS
2. _________________________
COLLECTOR
_________________________
5. RELIGIOUS,
CHARITABLE,
SCIENTIFIC,
9.
GOVERNMENT
EDUCTIONAL
ATHLETIC
OR CULTURAL
CORP.INSTITUTION
a. REQUISITES
ACT NO. 1870
i. _________________________________
__________________________________________________
_______________________________
___________________________________________________
ii. _________________________________
___________________________________________________
_______________________________
6. ___________________________________________________
BUSINESS CHAMBER OF COMMERCE,
___________________________________________________
BOARD OF TRADE
______________________________________________
a. REQUISITES
i. _________________________________
G. TAX
EXEMPT
UNDER
SEC
10.
MUTUAL
FIRE CORP.
INSURANCE
COMPANIES
_________________________________
30
NIRC
AND
LIKE
ORGANIZATIONS
______________________________
a. REQUISITES
ii. _________________________________
i._________________________________
_________________________________
_______________________________
______________________________
ii.
_________________________________
iii. _________________________________
_______________________________
_________________________________
______________________________
11. FARMERS,
FRUIT GROWERS OR LIKE
iv. _________________________________
ASSOCIATION _________________________________
a. REQUISITES
______________________________
i. _________________________________
7. CIVIC LEAGUE
_______________________________
a. REQUISITES
_________________________________
i. ii._________________________________
_______________________________
_________________________________
iii.______________________________
_________________________________
40
_________________________________
ii. _________________________________
______________________________
_________________________________

REVIEWER- TAXATION CLASS of ATTY. IBANEZ


CHARMAGNE FERRER

H. TAX EXEMPT GOVT. OWNED AND


CONTROLLED CORP. (GOCC)
(SEC. 27[c] NIRC AS AMENDED
BY RA 9337)
1.
2.
3.
4.

GSIS
SSS
PHIC
PCSO

I. TAX-EXEMPT CORP. UNDER


SPECIAL LAWS
1. COOPERATIVES ARE EXEMPTED
FROM TAXES SUBJ TO CERTIN
CONDITIONS UNDER RA 6938;
RMC 48-91
2. FOUNDATION CREATED FOR
SCIENTIFI ADVANCEMENT IS
EXEMPT FROM TAX UNDER SEC. 24
OF RA 2067
ALLOWABLE DEDUCTIONS FROM
GROSS INCOME
DEDUCTIONDefinition: Items or amounts which the
law allows to be deducted from gross
income in order to arrive at the taxable
income.
The basic principle governing
deductions from gross income
apply to all taxpayers.
Because deductions are strictly
construed against the taxpayer,
one seeking a deduction must
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CHARMAGNE FERRER

point to some specific provisions


of the statute in which that
deduction is authorized & must be
able to prove that he is entitled to
the deduction which the law
allows.
Adequate records should be kept
to support the deductions.
The deduction claimed must have
been subjected to withholding tax,
if required.
Deductions for income tax
purposes partake of the nature of
tax exemptions; hence, if tax
exemptions are to be strictly
construed, then it follows that
deductions must be STRICTLY
construed.
He must be able to prove that he
is entitled to the deduction
authorized or allowed. (Atlas
Consolidated Mining & Devt.
Corp. vs. CIR, January 12,
1981)

THE FOLLOWING ARE THE ALLOWABLE


DEDUCTIONS FROM GROSS INCOME
BASED ON CLASSES OF TAXPAYER:
1. Individuals with gross income from
employee employer relationship only (gross
income only):

Premium payments on health and/or


hospital insurance (if requisites are
complied with)

Personal exemptions and additional


exemptions

2. Individuals with gross income from


business or practice of profession:

Optional Standard Deduction (OSD)


OR Itemized deductions

Optional Standard Deductions 10%


of the gross income. May be availed
only
by
individuals
(except
nonresident aliens) who are not
purely compensation income earners.
This is in lieu of the itemized
deductions.

Premium payments on health and/or


hospital insurance (if requisites are
complied with)

Personal and additional exemptions

WHO MAY AVAIL OF THE DEDUCTIONS?


1) Individuals
(a) citizen
(b)resident alien
(c) non-resident alien doing business in
the Philippines
(d)member of GPP
2) Corporations
(a) domestic corp.
(b)resident foreign corp.
(c) proprietary educational institutions &
hospitals
(d)GOCCs
WHO CANNOT AVAIL OF DEDUCTIONS
FROM GROSS INCOME:
1. Citizens and resident aliens whose
income is purely compensation
income (except for premium
payments on health and/or
hospitalization insurance);
2. Non-resident aliens not engaged in
trade or business in the
Philippines; and
3. Non-resident foreign corporation

3. Corporations

Itemized Deductions

4. Estates and Trusts

Section 62 of the NIRC

I. BASIC PRINCIPLES
Basic Principles governing
Deductions
1. The taxpayer seeking a deduction
must point to some specific
provisions of the statute
authorizing the deduction; and
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CHARMAGNE FERRER

2. He must be able to prove that he


is entitled to the deduction
authorized or allowed.
(Atlas Consolidated Mining &
Dev. Corp. vs. Comm.)
3. Any amount paid or payable which
is otherwise deductible from, or
taken into account in computing
gross income or for which
depreciation or amortization may
be allowed, shall be allowed as
deduction only if it is shown that
the tax required to be deducted
and withheld there from has been
paid to the BIR. (Sec. 34[K])
Note: Deductions for income tax purposes
partake of the nature of tax exemptions;
hence, if tax exemptions are to be strictly
construed, then it follows that deductions
must also be strictly construed.

D. DEDUCTIONS AS DISTINGUISED
FROM PERSONAL EXEMPTIONS

A. CONSTRUED STRICTLY AGAINST


THE TAXPAYER
CASE: 1. ATLAS CONSOLIDATED MINING
CO. VS CIR
2. WESTERN MINOKO CORP. VS. CIR
3. COM. OF CUSTOMS VS PHIL.
ACETYLENE CO.
4. COM. VS. ARNOLDUS CARPENTRY
SHOP

B. COHAN RULE PRINCIPLE (RMC-232000)


THERE IS NO SHOWING THAT EXPENSES
WERE
INCURRED
BUT
CANNOT
BE
ASCERTAINED DUE TO ABSENCE OF
DOCUMENARY EVIDENCE (RMC-23-2000)
C.
DEDUCTIONS
AS
FROM EXCLUSIONS

E. DEDUCTIONS AS DISTINGUISHED
FROM TAX CREDIT
CASE:
CORP.

1. CIR VS . BICOLANDIA DRUG

DISTINGUED

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II. KINDS OF ALLOWABLE


DEDUCTIONS

away from home in the pursuit of


trade, business or profession;

A. ITEMIZED DEDUCTONS IN SEC. 34


[A] TO [5] AND [M], NIRC

(iii) A reasonable allowance for


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

CHAPTER VII NIRC


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

(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 expenses paid 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
employer to 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

(iv) A reasonable allowance for


entertainment,
amusement
and
recreation expenses during the
taxable year, that are directly
connected to the development,
management and operation of the
trade, business or profession 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 and regulations
prescribe, upon recommendation of
the
Commissioner,
taking
into
account the needs as well as the
special 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, morals public 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) hereof unless
the taxpayer shall substantiate with
sufficient evidence, such as official receipts
or other adequate records: (i) the amount
of the expense being deducted, and (ii) the
direct connection or relation of the expense
being deducted to the development,
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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 under Subsection
(A) hereof for any payment made, directly
or indirectly, to an official or employee of
the national government, or to an official or
employee of any local government unit, or
to an official or employee of a governmentowned or -controlled corporation, or to an
official or employee or representative of a
foreign government, or to a private
corporation,
general
professional
partnership, or a similar entity, if the
payment constitutes a bribe or kickback.
(2)
Expenses Allowable to Private
Educational Institutions. - In addition to the
expenses allowable as deductions under
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
assets incurred during the taxable year for
the expansion of school facilities or (b) to
deduct allowance for depreciation thereof
under Subsection (F) hereof.
(B) Interest.(1) In General. - The amount of interest
paid or incurred within a taxable year on
indebtedness in connection with the
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 an
amount equal to the following percentages
of the interest income subjected to final
tax:
Forty-one percent (41%) beginning January
1, 1998;

Thirty-nine
percent
January 1, 1999; and

(39%)

beginning

Thirty-eight percent
January 1, 2000;

(38%)

beginning

(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 on which an
interest is paid in advance through discount
or otherwise: Provided, That such interest
shall be allowed a a deduction in the year
the indebtedness is paid: Provided, further,
That if the indebtedness is payable in
periodic amortizations, the amount of
interest which corresponds to the amount
of the principal amortized or paid during
the year shall be allowed as deduction in
such taxable year;
(b) If both the taxpayer and the person to
whom the payment has been made or is to
be made are persons specified 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 property used in trade
business or exercise of a profession may be
allowed as a deduction or treated as a
capital expenditure.
(C) Taxes.(1) In General. - Taxes paid or incurred
within the taxable year in connection with
the taxpayer's
profession,
trade
or
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
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shall be allowed in the case of a taxpayer


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 gross income 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 the Philippines 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 the Philippines.
(3) Credit Against Tax for Taxes of Foreign
Countries. - If the taxpayer signifies in his
return his desire to have the benefits of this
paragraph, the tax imposed by this Title
shall be credited with:
(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 professional partnership or a
beneficiary of an estate or trust, his
proportionate share of such taxes of the
general professional partnership or the
estate or trust paid or incurred during the
taxable year to a foreign country, if his
distributive share 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 foreign
countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of
the credit taken under this Section shall be
subject to each of the following limitations:
(a) The amount of the credit in respect to
the tax paid or incurred to any country shall
not exceed the same proportion of the tax
against which such credit is taken, which
the taxpayer's taxable income from sources
within such 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 is taken, which
the taxpayer's taxable income from sources
without the Philippines taxable under this
Title bears to his 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 as credits by the
taxpayer, or if any tax paid is refunded in
whole or in part, the taxpayer shall notify
the Commissioner; who shall redetermine
the amount of the tax for the year or years
affected, and the amount of tax due upon
such redetermination, if any, shall be paid
by the taxpayer upon notice and demand
by the Commissioner, or the amount of tax
overpaid, if any, shall be credited or
refunded to the taxpayer. In the case of
such a tax incurred but not paid, the
Commissioner as a condition precedent to
the allowance of this credit may require 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 any such redetermination. The
bond herein prescribed shall contain such
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further conditions as the Commissioner


may require.
(6) Year in Which Credit Taken. - The credits
provided for in Subsection (C)(3) of this
Section may, at the option of the taxpayer
and irrespective of the method of
accounting employed in keeping his books,
be taken in the year which 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 foreign
country accrued, the credits for all
subsequent years shall be taken upon the
same basis and no portion of any such
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 taxpayer establishes 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 under said
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.
(D) Losses. (1) In General.- Losses actually sustained
during
the
taxable
year
and
not
compensated for by insurance or other
forms of indemnity shall be allowed as
deductions:
(a) If incurred in trade, profession or
business;

(b) Of property connected with the trade,


business or profession, if the loss arises
from fires, storms, shipwreck, or other
casualties, or from robbery, theft or
embezzlement.
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 a declaration 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 or embezzlement 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 loss has 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 shall be
those actually sustained during the year
incurred in business, trade or exercise of a
profession conducted within the Philippines,
when such losses are not compensated for
by insurance or other forms of indemnity.
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 a declaration of loss
sustained from casualty or from robbery,
theft or embezzlement during the taxable
year: Provided, That the time 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
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or embezzlement giving rise to the loss;


and
(3) Net Operating Loss Carry-Over. - The
net operating loss of the business or
enterprise
for
any
taxable
year
immediately preceding the current taxable
year, which had not been previously offset
as deduction from gross income shall be
carried over as a deduction from gross
income for the next three (3) consecutive
taxable years immediately following the
year of such loss: Provided, however, That
any net loss incurred in a taxable year
during which 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 change in 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 in the 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 the name
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 over gross 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 of 1987, incurred in any
of the first ten (10) years of operation may
be carried over as a deduction from taxable
income for the next five (5) years
immediately following the year of such loss.
The entire amount of the loss shall be

carried over to the first of the five (5)


taxable years following the loss, and any
portion of such loss which exceeds, the
taxable income of such first year shall be
deducted in like manner form the taxable
income of the next remaining four (4)
years.
(4) Capital Losses. (a) Limitation. - Loss from sales or
Exchanges of capital assets shall be
allowed only to the extent provided in
Section 39.
(b) Securities Becoming Worthless. - If
securities as defined in Section 22 (T)
become worthless during the taxable year
and are capital assets, the loss resulting
therefrom shall, for purposes of this Title,
be considered as a loss from 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 in Section
38.
(6) Wagering Losses. - Losses from
wagering transactions shall b allowed only
to the extent of the gains from such
transactions.
(7) Abandonment Losses. (a) In the event a contract area where
petroleum operations are undertaken is
partially
or
wholly
abandoned,
all
accumulated 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 a deduction only from any
income derived from the same contract
area. In all cases, notices of abandonment
shall be filed with the Commissioner.
(b) In case a producing well is subsequently
abandoned, the unamortized costs thereof,
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as well as the undepreciated 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
and
production is resumed, or if such
equipment or facility is restored into
service, the said costs shall be included as
part of gross income in the year of
resumption or restoration and shall be
amortized or depreciated, as the case may
be.

(E) Bad Debts. (1) In General. - Debts due to the taxpayer


actually ascertained to be worthless and
charged off within the taxable year except
those not connected with profession, trade
or business and those sustained in a
transaction entered into between parties
mentioned under Section 36 (B) of this
Code: Provided, That recovery of bad debts
previously allowed as deduction in the
preceding years shall be included as part of
the gross income in the year of recovery to
the 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 and charged 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 of
whose business is the receipt of deposits,
for the purpose of this Title, be considered
as a loss from the sale or exchange, on the
last day of such taxable year, of capital
assets.
(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 the case of property held by
one person for life with remainder to
another person, the deduction shall be
computed as if the life tenant were the
absolute owner of the property and shall be
allowed to the life tenant. In the case of
property held in trust, the allowable
deduction shall be apportioned between
the income beneficiaries and the trustees
in accordance with the pertinent provisions
of the instrument creating the trust, or in
the absence of such provisions, 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 shall include, but not
limited to, an allowance computed in
accordance with rules and regulations
prescribed by the Secretary 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 the annual 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
the
Commissioner.
(3) Agreement as to Useful Life on Which
Depreciation Rate is Based. - Where under
rules and regulations prescribed by the
Secretary of Finance upon recommendation
of the Commissioner, the taxpayer and the
Commissioner have entered into an
agreement in writing specifically dealing
with the useful life and rate of depreciation
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of any property, the rate so agreed upon


shall be binding on both the taxpayer and
the national Government in the absence of
facts and circumstances not taken into
consideration during the adoption of such
agreement.
The
responsibility
of
establishing the existence of such facts and
circumstances shall rest with the party
initiating the modification. Any change in
the agreed rate and useful life of the
depreciable property as specified in the
agreement shall not be effective for taxable
years prior to the taxable year in which
notice in writing by certified 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 depreciable and
claimed the depreciation expenses as
deduction from his gross income, without
any written objection on the part of the
Commissioner or his duly authorized
representatives, the aforesaid useful life
and depreciation rate so adopted by the
taxpayer for the aforesaid depreciable
asset shall be considered binding for
purposes of this Subsection.
(4) Depreciation of Properties Used in
Petroleum Operations. - An allowance for
depreciation in respect of all properties
directly related to production of petroleum
initially placed in service in a taxable year
shall be allowed under 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 life as may
be permitted by the Commissioner.

Properties not used directly in the


production
of
petroleum
shall
be
depreciated under the straight-line method
on the 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 properties
used 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 than ten (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 by this 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, a reasonable allowance for the
deterioration of Property arising out of its
use or employment or its non-use in the
business trade or profession shall be
permitted only when such property is
located in the Philippines.
(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 amortization computed in
accordance with the cost-depletion method
shall be granted under rules and
regulations to be prescribed by the
Secretary of finance, upon recommendation
of the Commissioner. Provided, That when
the allowance for depletion shall equal the
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capital invested no further allowance shall


be granted: Provided, further, That after
production in commercial quantities has
commenced, certain intangible exploration
and development drilling costs: (a) shall be
deductible in the year incurred if such
expenditures
are
incurred
for
nonproducing wells and/or mines, or (b) shall
be deductible in full in the year paid or
incurred or at the election of the taxpayer,
may be capitalized and amortized if such
expenditures incurred are for producing
wells and/or mines in the same contract
area.
"Intangible costs in petroleum operations"
refers to any cost incurred in petroleum
operations which in itself has no salvage
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 property of a character
subject to the allowance for depreciation
except that the allowances for depreciation
on such property shall be deductible under
this Subsection.
Any intangible exploration, drilling and
development expenses allowed as a
deduction in computing taxable income
during the year shall not be taken into
consideration in computing the adjusted
cost basis for the purpose of computing
allowable cost depletion.
(2) Election to Deduct Exploration and
Development Expenditures. - In computing
taxable income from mining operations, the
taxpayer may at his option, deduct
exploration and development expenditures
accumulated as cost or adjusted basis for
cost depletion as of date of prospecting, as
well as exploration and development
expenditures paid or incurred during the
taxable year: Provided, That the amount
deductible for exploration and development
expenditures shall not exceed twenty-five

percent (25%) of the net income from


mining operations computed without the
benefit of any tax incentives under existing
laws.
The
actual
exploration
and
development expenditures minus twentyfive percent (25%) of the net income from
mining shall be carried forward to the
succeeding years until fully deducted.
The election by the taxpayer to deduct the
exploration and development expenditures
is irrevocable and shall be binding 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 include mining, milling
and marketing expenses, and depreciation
of properties directly used in the mining
operations. This paragraph shall not apply
to expenditures for the acquisition or
improvement of property of a character
which is subject to the allowance for
depreciation.
In no case shall this paragraph apply with
respect to amounts paid or incurred for the
exploration and development of oil and
gas.
The term "exploration expenditures" means
expenditures paid or incurred for the
purpose of ascertaining the existence,
location, extent or quality of any deposit of
ore or other mineral, and paid or incurred
before the beginning of the development
stage of the mine or deposit.
The term "development expenditures"
means expenditures paid or incurred during
the development stage of the mine or other
natural deposits. The development stage of
a mine or other natural deposit shall begin
at the time when deposits of ore or other
minerals are shown to exist in sufficient
commercial quantity and quality and shall
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end upon commencement


commercial extraction.

actual

following institutions or entities shall be


deductible in full;

(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
foreign
corporation, allowance for depletion of oil
and gas wells or mines under paragraph (1)
of this Subsection shall be authorized only
in respect to oil and gas wells or mines
located within the Philippines.

(a) Donations to the Government. Donations to the Government of the


Philippines or to any of its agencies or
political subdivisions, including fully-owned
government corporations, exclusively to
finance, to provide for, or to be used 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
National Economic and Development
Authority (NEDA), In consultation with
appropriate
government
agencies,
including its regional development councils
and private philantrophic persons and
institutions: Provided, That any donation
which is made to the Government or to any
of its agencies or political subdivisions not
in accordance with the said annual priority
plan shall be subject to the limitations
prescribed in paragraph (1) of this
Subsection;

(H)
Charitable
Contributions. -

and

of

Other

(1) In General. - Contributions or gifts


actually paid or made within the taxable
year to, or for the use of the Government of
the Philippines or any of its agencies or any
political subdivision thereof exclusively for
public purposes, 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 of
veterans, or to social welfare institutions, or
to
non-government
organizations,
in
accordance with rules and regulations
promulgated by the Secretary of finance,
upon
recommendation
of
the
Commissioner, no part of the net income of
which inures to the benefit of any private
stockholder or individual in an amount not
in excess of ten percent (10%) in the case
of an individual, and five percent (%) in the
case of a corporation, of the taxpayer's
taxable income derived from trade,
business or profession as computed without
the benefit of this and the following
subparagraphs.
(2) Contributions Deductible in Full. Notwithstanding the provisions of the
preceding subparagraph, donations to the

(b) Donations to Certain Foreign Institutions


or International Organizations. - Donations
to foreign institutions or international
organizations which are fully deductible in
pursuance of or in compliance with
agreements, treaties, or commitments
entered into by the Government of the
Philippines and the foreign institutions or
international organizations or in pursuance
of special laws;
(c) Donations to Accredited Nongovernment
Organizations. - The term "nongovernment
organization" means a non profit domestic
corporation:
(1) Organized and operated exclusively for
scientific, research, educational, characterbuilding
and
youth
and
sports
development,
health,
social
welfare,
cultural or charitable purposes, or a
combination thereof, no part of the net
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income of which inures to the benefit of


any private individual;

accredited nongovernment
was created or organized.

(2) Which, not later than the 15th day of


the third month after the close of the
accredited nongovernment organizations
taxable year in which contributions are
received, makes utilization directly for the
active conduct of the activities constituting
the purpose or function for which it is
organized
and operated, unless an
extended period is granted by the
Secretary of Finance in accordance with the
rules and regulations to be promulgated,
upon
recommendation
of
the
Commissioner;

An amount set aside for a specific project


which comes within one or more purposes
of
the
accredited
nongovernment
organization may be treated as a
utilization, but only if at the time such
amount is set aside, the accredited
nongovernment
organization
has
established to the satisfaction of the
Commissioner that the amount will be paid
for the specific project within a period to be
prescribed in rules and regulations to be
promulgated by the Secretary of Finance,
upon
recommendation
of
the
Commissioner, but not to exceed five (5)
years, and the project is one which can be
better accomplished by setting aside such
amount than by immediate payment of
funds.

(3) The level of administrative expense of


which shall, on an annual basis, conform
with the rules and regulations to be
prescribed by the Secretary of Finance,
upon
recommendation
of
the
Commissioner, but in no case to exceed
thirty percent (30%) of the total expenses;
and
(4) The assets of which, in the even of
dissolution, would be distributed to another
nonprofit domestic corporation organized
for similar purpose or purposes, or to the
state for public purpose, or would be
distributed by a court to another
organization to be used in such manner as
in the judgment of said court shall best
accomplish the general purpose for which
the dissolved organization was organized.

organization

(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 and regulations
prescribed by the Secretary of Finance,
upon
recommendation
of
the
Commissioner.
(I) Research and Development.-

(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.

(1) In General. - a taxpayer may treat


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

(ii) Any amount paid to acquire an asset


used (or held for use) directly in carrying
out one or more purposes for which the

(2) Amortization of Certain Research and


Development Expenditures. - At the
election of the taxpayer and in accordance

Subject to such terms and conditions as


may be prescribed by the Secretary of
Finance, the term "utilization" means:

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with the rules and regulations to be


prescribed by the Secretary of Finance,
upon
recommendation
of
the
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
paragraph 91) hereof; and

under

(c) Chargeable to capital account but not


chargeable to property of a character which
is subject to depreciation or depletion.
In computing taxable income, such
deferred expenses shall be allowed as
deduction ratably distributed over a period
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 of this Code,
but only if made not later than the time
prescribed by law for filing the return for
such taxable year. The method so elected,
and the period selected by the taxpayer,
shall be adhered to in computing taxable
income for the taxable year for which the
election is made and for all subsequent
taxable years unless with the approval of
the Commissioner, a change to a different
method is authorized with respect to a part
or all of such expenditures. The election
shall not apply to any expenditure paid or
incurred during any taxable year for which
the taxpayer makes the election.
(3) Limitations on Deduction.
Subsection shall not apply to:

This

(a) Any expenditure for the acquisition or


improvement
of
land,
or
for
the
improvement of property to be used in
connection with research and development

of a character which is subject


depreciation and depletion; and

to

(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.
(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 trust during the
taxable year to cover the pension liability
accruing during the year, allowed as a
deduction under Subsection (A) (1) of this
Section ) a reasonable amount transferred
or paid into such trust during the taxable
year in 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 the transfer or payment
is made.

(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 or amortization may be
allowed under this Section, shall be allowed
as a deduction only if it is shown that the
tax required to be deducted and withheld
therefrom has been paid to the Bureau of
Internal Revenue in accordance with this
Section 58 and 81 of this Code.

(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 an amount not exceeding ten
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percent (10%) of his gross income. Unless


the taxpayer signifies in his return his
intention to elect the optional standard
deduction, he shall be considered as having
availed himself of the deductions allowed in
the preceding Subsections. Such election
when made in the return shall be
irrevocable for the taxable year for which
the return is made: Provided, That an
individual who is entitled to and claimed for
the optional standard deduction shall not
be required to submit with his tax return
such
financial
statements
otherwise
required under this Code: Provided, further,
That except when the Commissioner
otherwise permits, the said individual shall
keep such records pertaining to his gross
income during the taxable year, as may be
required by the rules and regulations
promulgated by the Secretary of Finance,
upon
recommendation
of
the
Commissioner.

(M) Premium Payments on Health


and/or Hospitalization Insurance of an
Individual Taxpayer. - The amount of
premiums not to exceed Two thousand four
hundred pesos (P2,400) per family or Two
hundred pesos (P200) a month paid during
the taxable year for health and/or
hospitalization insurance taken by the
taxpayer for himself, including his family,
shall be allowed as a deduction from his
gross income: Provided, That said family
has a gross income of not more than Two
hundred fifty thousand pesos (P250,000)
for the taxable year: Provided, finally, That
in the case of married taxpayers, only the
spouse claiming the additional exemption
for dependents shall be entitled to this
deduction.
Notwithstanding the provision of the
preceding Subsections, The Secretary of
Finance, upon recommendation of the
Commissioner, after a public hearing shall
have been held for this purpose, may

prescribe by rules and regulations,


limitations or ceilings for any of the
itemized deductions under Subsections (A)
to (J) of this Section: Provided, That for
purposes of determining such ceilings or
limitations, the Secretary of Finance shall
consider the following factors: (1) adequacy
of the prescribed limits on the actual
expenditure
requirements
of
each
particular industry; and (2) effects of
inflation on expenditure levels: Provided,
further, That no ceilings shall further be
imposed on items of expense already
subject to ceilings under present law.

B. OSD IN SEC. 34 (L) NIRC


(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 an amount not exceeding ten
percent (10%) of his gross income. Unless
the taxpayer signifies in his return his
intention to elect the optional standard
deduction, he shall be considered as having
availed himself of the deductions allowed in
the preceding Subsections. Such election
when made in the return shall be
irrevocable for the taxable year for which
the return is made: Provided, That an
individual who is entitled to and claimed for
the optional standard deduction shall not
be required to submit with his tax return
such
financial
statements
otherwise
required under this Code: Provided, further,
That except when the Commissioner
otherwise permits, the said individual shall
keep such records pertaining to his gross
income during the taxable year, as may be
required by the rules and regulations
promulgated by the Secretary of Finance,
upon
recommendation
of
the
Commissioner.

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C. SPECIAL DEDUCTIONS IN SEC 37


AND 38, NIRC AND IN SPECIAL LAWS
LIKE BOI LAW [E.O.226]
1.
SEC.
37.
Special
Provisions
Regarding Income and Deductions of
Insurance
Companies,
Whether
Domestic or Foreign.
(A) Special Deduction Allowed to Insurance
Companies. - In the case of insurance
companies, whether domestic or foreign
doing business in the Philippines, the net
additions, if any, required by law to be
made within the year to reserve funds and
the sums other than dividends paid within
the year on policy and annuity contracts
may be deducted from their gross income:
Provided, however, That the released
reserve be treated as income for the year
of release.
(B) Mutual Insurance Companies. - In the
case of mutual fire and mutual employers'
liability
and
mutual
workmen's
compensation
and
mutual
casualty
insurance
companies
requiring
their
members to make premium deposits to
provide for losses and expenses, said
companies shall not return as income any
portion of the premium deposits returned
to their policyholders, but shall return as
taxable income all income received by
them from all other sources plus such
portion of the premium deposits as are
retained by the companies for purposes
other than the payment of losses and
expenses and reinsurance reserves.
(C) Mutual Marine Insurance Companies. Mutual marine insurance companies shall
include in their return of gross income,
gross premiums collected and received by
them less amounts paid to policyholders on
account of premiums previously paid by
them and interest paid upon those amounts
between the ascertainment and payment
thereof.
(D) Assessment Insurance Companies.Assessment insurance companies, whether
domestic or foreign, may deduct from their
gross income the actual deposit of sums
with the officers of the Government of the

Philippines pursuant to law, as additions to


guarantee or reserve funds.
2. SEC. 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 or securities
where it appears that within a period
beginning thirty (30) days before the date
of such sale or disposition and ending thirty
(30) days after such date, the taxpayer has
acquired (by purchase or by exchange upon
which the entire amount of gain or loss was
recognized by law), or has entered into a
contact
or
option
so
to
acquire,
substantially identical stock or securities,
then no deduction for the loss shall be
allowed under Section 34 unless the claim
is made by a dealer in stock or securities
and with respect to a transaction made in
the ordinary course 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 the amount
of stock or securities sold or otherwise
disposed of, then the particular shares of
stock or securities, the loss form the sale or
other disposition of which is not deductible,
shall be determined under rules and
regulations prescribed 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 in the
non-deductibility of the loss, shall be
determined under rules and regulations
prescribed by the Secretary of Finance,
upon
recommendation
of
the
Commissioner.
3. EXECUTIVE ORDER NO. 226 July 16,
1987
THE OMNIBUS INVESTMENTS CODE OF
1987
III. KINDS OF ITEMIZED DEDUCTIONS

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A. BUSINESS EXPENSE
1. Requisites of Business
Expense to be deductible
1) ordinary and necessary;
2) paid or incurred w/in the
taxable year;
3) paid or incurred in carrying
on a trade or business;
4) Substantiated with official
receipts or other adequate
records.
5) if subject to withholding
taxes proof of payment to
the BIR must be shown.
6) must be reasonable under
the circumstances.
CASES:
1. ATLAS VS. MINING
2. WELCH VS HELVERING
3. COLLECTOR VS PHIL EDUC CO.
4. HOSPITAL DE SAN JUAN DE DIOS VS
DIOS
5. ESSO STANDARD EASTERN VS CIR
6. BASILAN VS CIR
7. CIR VS GEN FOODS

B. Kinds of Business Expense


1) Compensation for personal
services
i. Requisites for
deductibility
ii. Examples
2) Travelling expenses
(Sec.65&66, RR2)
i. Requisites for
deductibility
3) Representation and
entertainment expenses
i. Requisites for
deductibility
4) Advertising and promotional
expenses
i. Requisites for
deductibility
5) Rent expense (RR 8-9, Oct
15, 1990)
6) Cost of materials and
supplies
7) Repairs

B. INTEREST EXPENSES
Requisites for deductibility

CASES: 1. KEUNZE VS CIR


2. PICOP VS CA

C. TAXES
1. EXCEPTION
2. REQUISITES FOR DEDUCTIBILITY

D. TAX CREDIT
CASES: 1. GUTIERREZ V COLLECTOR
2. COM V AMERICAN RUBBER
3. CEBER PORTLAND VS COLLECTOR

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G. DEPRECATION

E. LOSSES

CASES: 1. BASILAN ESTATES INC


*2. ZAMORA VS COLLECTOR
*3. LIMPAN INVESTM V COLLECTOR

H. DEPLETION

CASES: 1. MARCELO VS COLLECTOR


2. CITY OF LUMBER VS DOMINGO

3. PHIL SUGAR VS COLLECTOR


4. PLARIDEL VS COLLECTOR
*5. CIR VS PRISCILLA
**6. COM VS ASTURIAS
**7. PHIL SUGAR VS POSADAS
**8. CU UNJEING SONS VS BTA

F. BAD DEBTS

I. CHARITABLE AND OTHER


CONTRIBUTION

CASES: 1. COLLECTOR VS GOODRICH


2. FERNANDEZ V COLLECTOR
3. PRC VS COM
4. PHILEX MINING VS CIR

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J. RESEARCH AND DEVELOPMENT


EXPENDITURES

VI. ITEMS NOT DEDUCTIBLE

K. EMPLOYERS CONTRIBUTION TO
PENSION TRUST

IV. OSD-OPTIONAL STANDARD


DEDUCTION

V. SPECIAL DEDUCTIONS ALLOWED


INSURANCE OMPANIES

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DEDUCTIBLE INTEREST EXPENSE

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ESTATE AND TRUST

1. ESTATE

II. TRUSTS

III. COMPUTATION OF TAX ON ESTATE


AND TRUSTS

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CAPITAL TRANSACTIONS

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