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INCOME AND WITHHOLDING TAXES

Atty. Vic C. Mamalateo


May 12-13, 2011
UP College of Law
INCOME TAX (TITLE II, NIRC)
BASIC TAX PRINCIPLES
LIFEBLOOD THEORY
o Taxation is the rule; exemption, the exception.
o In case of doubt, tax income or disallow deductions and tax credits.
Taxes are imposed by law (e.g., NIRC), while financial accounting are based on generally accepted accounting
standards. In case of conflict between tax rules and accounting rules, the former shall prevail.
INCOME TAX
INCOME TAX
o Tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a persons
income, emoluments, profits and the like (Fisher v. Trinidad).
o Income tax is a direct tax on taxable actual or presumed income (gross or net) of a taxpayer received,
accrued or realized during the taxable year.
WITHHOLDING TAX
o It is not an internal revenue tax but a mode of collecting income tax in advance on income of the recipient
of income thru the payor of income. [NOTE: Sec. 21, NIRC enumerates various internal revenue taxes.]
o There are 2 types of withholding taxes, namely: (1) final withholding tax; and (2) creditable withholding
tax, including expanded withholding tax.
FEATURES OF INCOME TAX
It is a direct tax.
It is a progressive tax, since the tax base increases as the tax rate increases. It is founded on the ability to pay
of taxpayer.
Phil adopted the most comprehensive system in imposing income tax.
Phil follows the semi-global or semi-schedular income tax system.
It is of American origin. Decisions of U.S. tax authorities have peculiar and persuasive effects for the Phil.
INCOME TAX SYSTEMS
GLOBAL TAX SYSTEM
o Compensation income not subject to FWT
o Business and/or professional income
o Capital gains not subject to FWT
o Passive investment income not subject to FWT
o Other income not subject to FWT
SCHEDULAR TAX SYSTEM
o Compensation income subject to FWT
o Capital gains subject to FWT
o Passive investment income subject to FWT
o Other income subject to FWT
The Philippines adopted the semi-global or semi-schedular tax system. Either the global or schedular system,
or both systems, may apply on income of a taxpayer.
FINAL WITHHOLDING TAX
Income payment is listed in Sec 57(A), NIRC, as subject to FWT.
FWT withheld by the payor of income (e.g., 20% FWT on interest income on bank deposits) represents FULL
payment of income tax due on such income of the recipient.

Income payee (or recipient of income) does not report income subjected to FWT in his income tax return,
although income is reflected in his audited financial statements for the year. However, he is not allowed to
claim any tax credit on income subjected to FWT.
Withholding agent (payor of income) files the withholding tax return, which includes the FWT deducted from
the income of payee, and pays the tax to the BIR. There is no Certificate of Tax Withheld issued to income
payee.
No Certificate of Tax Withheld (BIR Form 2307) is attached to the income tax return of recipient of income
because he does not claim any tax credit in his tax return.

CRITERIA IN IMPOSING INCOME TAX


Citizenship principle For Filipino citizens and domestic corporations, who are entitled to Philippine government
protection wherever they are situated.
Residence principle For alien individuals and foreign corporations
Source principle For alien individuals and foreign corporations
TYPES OF INCOME TAX
Graduated income tax on individuals;
Normal corporate income tax on corporations (RCIT);
Minimum corporate income tax on corporations (MCIT);
Special income tax on certain corporations (e.g., private educational institutions; foreign currency deposit
units; international carriers)
Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a
capital asset;
Capital gains tax on sale or exchange of real property located in the Philippines classified as a capital asset;
Final withholding tax on certain passive investment incomes;
Final withholding tax on income payments made to non-residents (individual or corporation);
Fringe benefit tax (FBT);
Branch profit remittance tax (BPRT); and
Tax on improperly accumulated earnings (IAET).
FORMULA
GLOBAL SYSTEM
Gross sales
Less: Cost of sales
Gross income
Less: Deductions PAE (for ind.)
Net taxable income
Multiplied by applicable rate
(graduated or flat)
Income tax due
Less: Creditable WT
Balance
NATURE OF ASSET
ORDINARY ASSET

SCHEDULAR SYSTEM
Gross selling price or fair market value,
whichever is higher times applicable tax
rate = Tax due (real property)
Gross selling price less cost or adjusted
basis = Capital gain times applicable tax rate
= Tax due (shares of dom corp)
Gross income times applicable rate = Tax
due (passive inv income; income paid to
non-resident person)

CAPITAL ASSET (Sec 38A)

Inventory if on hand at end of taxable year


Stock in trade held primarily for sale or for
lease in the course of trade or business
Asset used in trade or business, subject to
depreciation
Real property used in trade or business
All other assets, whether or not used in
trade or business, other than the above
assets

KINDS OF TAXPAYERS
INDIVIDUAL, including estate and trust
o CITIZEN
Resident (RC) Taxable on worldwide income
Non-resident immigrant, permanent worker, OFW (seamen)
o ALIEN
Resident
Non-resident
Engaged in trade or business (more than 180 days in the Phil)
Not engaged in trade or business (180 days or less stay in Phil)
CORPORATION, including partnership
o DOMESTIC (DC) Taxable on worldwide income
o FOREIGN
Resident (e.g., Phil branch of foreign corporation)
Non-resident
o TEST FOR TAX PURPOSES: Law of incorporation
RULE: All taxpayers are taxed only on income from sources within the Phil, except RC and DC.
PARTNERSHIPS
EXEMPT
o General professional partnership (GPP)
o Joint venture undertaking construction activity or energy-related activities with operating contract with
the government
TAXABLE
o Partnerships, no matter how created or organized
RULES:
o If taxable, partnership is taxed like a corporation.
o If taxable partnership derives net income during the year, the entire net income is deemed received by
the partners in the year it was earned by the partnership.
o If GPP adopts itemized deductions during the year, partners must use itemized deductions during the
same year.
RESIDENT FOREIGN CORPS
TAXABLE: RCIT & BPRT
o Ordinary branch of a foreign corporation in the Phil: 30% x net income from sources within the Phil
PEZA- & SBMA-registered branch of foreign corporation is exempt from 15% BPRT
o Regional operating headquarters (ROHQ): 10% x net income from sources within the Phil
o Offshore banking unit (OBU) and foreign currency deposit unit (FCDU) [ING Bank Manila v. CIR]: 10% x
gross interest income on forex loan to residents
o Foreign international carriers by air or water: 2.5% x GPB
o Foreign contractor or sub-contractor engaged in petroleum operations in the Phil: 8% x gross income
from sources within the Phil
EXEMPT: Not engaged in trade or business in the Phil
o Representative office
o Regional headquarters (RHQ)
JOINT VENTURE
Lease of properties under common management
o Three sisters borrowed money from their father and bought twenty-four (24) pieces of real property that
they leased to various tenants for over fifteen years and derived rentals therefrom. They appointed their
brother to manage their properties and to collect and receive rents.
o The court ruled that a taxable partnership was formed. There were series of transactions where
petitioners purchased twenty-four lots, showing that the purpose was not limited to the conservation of
the common fund or even the properties acquired by them. The character of habituality peculiar to
business transactions engaged in for the purpose of gain was present. The properties were leased out to

tenants for several years. Moreover, the term corporation includes organizations that are not
necessarily partnerships in the technical sense of the term as well as partnerships, no matter how
created or organized. This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for purposes of the tax on corporations
(Evangelista vs. Collector, 102 Phil. 140).
o When a father and son purchased a lot and building, entrusted the administration of the building to an
administrator and divided equally the net income, there is a taxable partnership (Reyes vs. Commissioner,
24 SCRA 198).
Insurance pool or clearing house
o An insurance pool or clearing house, composed of 41 non-life insurance corporations, whose role was
limited to its principal function of allocating and distributing the risks arising from the original insurance
among the signatories to the treaty or the members of the pool on their ability to absorb the risks ceded
as well as the performance of incidental functions, such as records, maintenance, collection and custody
of funds, and which did not insure or assure any risk in its own name, was treated as a partnership or
association subject to tax as a corporation.
o Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or more
persons bind themselves to contribute, money, property, or industry to a common fund, with the
intention of dividing the profits among themselves. Its requisites are mutual contribution to a common
stock, and a joint interest in the profits (AFISCO Insurance Corp et al. vs. Commissioner, G.R. No. 112675,
Jan. 25, 1999).
Agreement to manage and operate mine denominated as Power of Attorney
o Philex Mining Corporation entered into an agreement denominated as Power of Attorney with Baguio
Gold Mining Corporation to manage and operate the latters mining claim. In managing the project,
Philex made advances of cash and property. The mine suffered continuing losses resuling in Philexs
withdrawal as manager and cessation of mine operations.
o A Compromise with Dation in Payment was executed by the parties, where Baguio Gold admitted its
liabilities to Philex and agreed to pay the same.
o Philex wrote off in the books the remaining outstanding indebtedness of Baguio Gold by charging a
portion of the amount to allowances and reserves that were set up in 1981 and a portion to the 1982
operations. The amount allocated to 1982 was deducted from the 1982 gross income as loss on
settlement of receivables.
o The BIR disallowed the deduction for bad debt and assessed Philex deficiency taxes because the advances
are Philexs investment in a partnership with Baguio Gold for the exploitation and development of the
mine.
o The totality of the circumstances and the stipulations in the parties agreement indubitably lead to the
conclusion that a partnership was formed between the parties.
o First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by
Philex under the agreement.
o Second, the Tax Court correctly observed that it was unlikely for a business corporation to lend hundreds
of millions to another corporation with neither security nor collateral or a specific deed evidencing the
terms and conditions of such loans. The parties also did not provide for a specific maturity date for the
advances to become due and demandable, and the manner of payment was unclear.
o Third, the strongest indication that Philex was a partner is the fact that it would receive 50% of the net
profits as compensation under the agreement (Philex Mining Corporation vs. Commissioner, G.R. No.
148187, Apr. 16, 2008).

SOURCES OF INCOME
o Interest Interest from sources within Phil and interest on bonds and obligations of residents, corporate or
otherwise
o Dividend From domestic corporation and from foreign corporation, unless less than 50% of gross income of
foreign corporation for 3 years prior to declaration of dividends was derived from sources within the Phil, in
which case, apply only ratio of Phil-source income to gross income from all sources
o Services Place where services are performed, except in case of international air carrier and shipping lines
which are taxed at 2.5% on their Gross Phil Billings. Revenues from trips originating from the Phil are

o
o
o
o
o

considered as income from sources within the Philippines, while revenues from inbound trips are treated as
income from sources outside the Philippines.
Rentals and royalties Location or use of property or property right in Phil
Sale of real property Located in the Philippines
Sale of personal property Located in the Philippines
Gain from sale of shares of stocks of a domestic corporation is ALWAYS treated as income from sources
within the Philippines.
Other intangible property Mobilia sequuntur personam (e.g., gain from sale of shares of stocks of a foreign
corporation)

GROSS INCOME
SALE OF GOODS
Gross Sales
Less: Cost of Sales:
Beg. Inventory
+ Purchases
Total available for sale
Ending inventory
Cost of Sales
Gross income
Times 2%
MCIT

SALE OF SERVICES
Gross Revenue
Less: Cost of Service consisting of all direct
costs and expenses
Gross income
Timex 2%
MCIT

INCOME

INCOME means cash or its equivalent coming to a person within a specified period, whether as payment for
services, interest or profit from investment. It covers gain derived from capital, from labor, or from both
combined, including gain from sale or conversion of capital assets.
Return of capital is exempt from income tax. Capital, labor, or property is the tree; income is the fruit. Capital
is the fund, income is the flow of fund.
To be taxable, there must be income, gain or profit; gain is received, accrued or realized during the year; and it
is not exempt from income tax under the Constitution, treaty or law.
o Mere increase in the value of property does not constitute taxable income. It is not yet realized
during the year.
o Transfer of appreciated property to the employee for services rendered is taxable income.

TEST IN DETERMINING INCOME


Realization test
o There must be separation from capital of something of exchangeable value (e.g., sale of asset)
Claim of right doctrine
o CIR v. Javier, 199 SCRA 824 (bank erroneously paid $1 M, instead of $1,000)
Economic benefit test
o Stock option given to the employee
Income from whatever source
o All income not expressly exempted from income, irrespective of voluntary or involuntary action of
taxpayer in producing income
NATURE OF INCOME
COMPENSATION INCOME
o Existence of employer-employee relationship
BUSINESS AND/OR PROFESSIONAL INCOME
o NO employer-employee relationship
CAPITAL GAIN
o Real property in the Phil and shares of stock of domestic corporation
o Other sources of capital gain
PASSIVE INVESTMENT INCOME

o Interest, dividend, and royalty income


OTHER INCOME
o Prizes and winnings
o All other income, gain or profit not covered by the above classes

COMPENSATION INCOME
Compensation income falling within the meaning of statutory minimum wage(SMW) under R.A. 9504, effective
July 6, 2008, as implemented by Revenue Regulations No. 10-2008 dated July 8, 2008, shall be exempt from
income tax and withholding tax.
Holiday pay, overtime pay, night shift differential pay, and hazard pay earned by Minimum Wage Earner (MWE)
shall likewise be covered by the above exemption, provided that an employee who receives/earns additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of P30,000, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay,
hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her
entire earnings are not exempt from income tax and withholding tax.
COMMISSION INCOME
Commissions paid for marketing services rendered abroad for a Philippine company is considered foreign-source
income. The source of the income is the property, activity or service that produced the income. Place where
services are rendered determine taxation.
The fact that recipient of commission income is President and majority stockholder of the Philippine company does
not alter the source of income. There are only two ways by which the President and other members of the Board
can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing
their compensation; and (2) when the stockholders agree to give it to them. If none of these conditions are
present, commission income cannot be automatically attributed to petitioners position in the company (Juliane
Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)
Documents faxed to Philippine company bearing instructions as to sizes, designs and fabrics to be used in finished
products and sample sales orders relayed to clients abroad are not enough to show services were performed
abroad. Said documents must show that instructions or orders ripened into concluded or collected sales in
Germany (CIR v. Baier-Nickel, GR No. 153793, Aug 29, 2006).
ONSHORE AND OFFSHORE INCOME
Construction and installation works were subcontracted and done in the Philippines by a Phil corporation; hence,
income is from sources within the Philippines.
However, some pieces of equipment and supplies for NDC project and ammonia storage tanks and refrigeration
units were completely designed and engineered in Japan. All services for the design, fabrication, engineering and
manufacture of materials and equipment under Japanese Yen portion were made and completed in Japan; hence,
exempt from Phil income tax.
Service income from turn-key contract on a project in the Phil is divisible (CIR v. Marubeni Corp, GR No. 137377,
Dec 18, 2001).
GROSS PHIL BILLINGS
INTERNATIONAL AIR CARRIER
o On outbound trip: Flight from Phil to foreign destination, income is treated as from Philippine
sources; hence, subject to 2.5% on GPB
Continuous and uninterrupted flight
If transhipment of passenger in another country on another foreign airline takes place:
GPB tax applies only on aliquot portion of revenue on Philippine leg (Phil to foreign
country)
o On inbound trip: Flight from foreign country to the Phil, income is treated as from foreign
sources; hence, exempt from Phil income tax
INTERNATIONAL SHIPPING LINE
o From Phil to final foreign destination: entire income is taxable, even if transhipment of cargoes
took place in another country
o From foreign country to Phil: exempt

INTEREST INCOME
TYPES OF INTEREST INCOME
o Subject to FWT: Interest income on bank deposits, deposit substitutes, trust and other similar
arrangements
20% FWT peso deposit with bank
7.5% FWT foreign currency deposit with OBU/FCDU
o NOT subject to FWT but subject to global tax system: All other interest income or financing income not
covered above
o Exempt income:
Long-term deposit or investment (5 years or more) by individuals in the form of trust funds,
deposit substitutes, IMA and other investments prescribed by BSP
o Taxable income:
Preferential tax rate Pre-termination of long-term deposit by individual : 20%, 1- less than 3 yrs;
12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5 yrs); and interest on foreign loan (20%)
Regular tax rate All other cases
DIVIDEND INCOME
REQUISITES FOR DIVIDEND DECLARATION
o Presence of retained earnings
o No prohibition to declare dividend in loan agreement
o Declaration of dividend by Board of Directors
TYPES OF DIVIDENDS
o Taxable
Cash dividend
Property dividend
o Exempt
Stock dividend (except when there is change in proportionate interest among stockholders and
there is subsequent cancellation or redemption of shares declared as stock dividend)
NOTE: Liquidating dividend represents distribution of corporate assets to stockholders
Intra-corporate dividend: Exempt from tax
o Corporation paying dividend: Domestic corporation
o Recipient of dividend: Another domestic corporation or resident foreign corporation
Dividend paid to non-resident foreign corporation
o Corporation paying dividend: Domestic corporation
o Recipient of dividend
Foreign head office makes direct investment in Phil company: 15% FWT on gross dividend
income
Phil branch of foreign corporation makes investment in Phil company: Exempt from income tax
o Tax-sparing provision
If country of residence of the foreign corporation does not impose income tax on dividend paid
by a domestic corporation, impose 15% FWT only
Dividends are prima facie the income of the owner of the stock as of the date of declaration of the dividend and
are taxable to such owner. But where the record owner has sold the stock under an escrow agreement under
which title is to be retained by him, the dividends received by such owner and applied in reduction of the purchase
price are not taxable to him.
While there is transfer of the shares of stock/securities to the Borrower pursuant to the Securities Borrowing and
Lending (SBL) Agreement, the Lender retains certain rights accruing to the shares of stock/securities lent, such as
the right to receive cash, stock dividends or interest which the Borrower is obliged to manufacture or reimburse to
the Lender during the borrowing period. These cash, stock dividends or interest which the Borrower is required to
manufacture or reimburse to the Lender are otherwise referred to as "Manufactured Dividends or Benefits". The
Lender may likewise retain voting rights over the loaned shares of stock/securities while in the possession of the
Borrower, if mutually agreed upon by the parties.
Receipt of the Manufactured Dividends or Benefits shall not be a taxable income of the Lender since it just
represents dividends/other benefits that the lender would have received had the share not been loaned pursuant
to SBL agreement. However, the payment of such amount by the Borrower shall not be a tax deductible expense.

On the other hand, the receipt of cash dividend from the issuing company by the Borrower or Buyer shall be
subject to the provisions of existing laws (e.g., final withholding tax of 10% on gross dividend paid to a citizen).
OTHER INCOME
Income from any source whatever
o The words income from any source whatever discloses a legislative policy to include all income not
expressly exempted from the class of taxable income under our laws (Madrigal vs. Rafferty, supra;
Commissioner vs. BOAC). The words income from any source whatever is broad enough to cover gains
contemplated here. These words disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains (Gutierrez vs. Collector, CTA Case 65, Aug. 31, 1955).
o Any economic benefit to the employee whatever may have been the mode by which it is effected is
taxable. Thus, in stock options, the difference between the fair market value of the shares at the time the
option is exercised and the option price constitutes additional compensation income to the employee
(Commissioner vs. Smith, 324 U.S. 177).
TAX ON OBU/FCDU
Final tax on interest income from loans to resident borrower is a direct liability of FCDU
Failure of local borrower to withhold and remit the tax does not exempt OBU/FCDU on onshore interest income
(ING Bank v CIR, 2005).
The withholding agent-borrower may also be assessed deficiency withholding tax as penalty for failure to withhold
(RCBC v. CIR, CTA Case 2004).
EXCLUSIONS
Life insurance proceeds
Amount received by insured as return of premium
Gifts, bequests and devises
Compensation for injuries or sickness
Income exempt under treaty
Retirement benefits, pensions, gratuities
o R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)
Interest income of employee trust fund or accredited retirement plan is exempt from FWT (CIR v.
GCL Retirement Plan, 207 SCRA 487)
o Amount received as a consequence of separation because of death, sickness or other physical disability or
for any cause beyond the control of employee
Miscellaneous items
o Income of foreign government
o Income of government or its political subdivisions from any public utility or exercise of governmental
function
INCOME OF RETIREMENT FUND
COA alleged that DBP is actual owner of the trust fund and its income because:
o DBP made the contribution to the Fund
o Trustees of the Fund are merely administrators
o DBP employees only have an inchoate right to the Fund
DBP responded that the Trustees received and collected income and profit from the Fund and they maintained
separate books for that purpose. The principal and income will not revert to DBP, even if trust is subsequently
modified or terminated.
SC ruled that the beneficiaries of the Fund are the DBP officials and employees who will retire. It is not always
necessary that the beneficiaries should be named or even be in existence at the time the trust is created in his
favor, provided they are sufficiently certain or identifiable.
The Salary Loan Program did not terminate the trust to the Funds trustee. That the DBP Board of Directors
confirms the approval of the SLP by the Funds trustees does not make the fund property of DBP (DBP v. COA,
2004).

EXCLUSIONS
Miscellaneous items
o Prizes and awards
In recognition of religious, charitable, artistic, literary achievement, etc. (He did not enter contest
and is not required to render substantial future services)
Granted to athletes in local and international sports competitions, sanctioned by their national
sports associations
th
o 13 month pay and other benefits (up to P30,000)
o Gains from sale of long-term bonds, debentures and other certificates of indebtedness
o Gains from redemption of shares in mutual fund
GAIN v. INTEREST
Gains cannot include interest, since it clearly refers to gains from the sale of bonds, debentures and other
certificates of indebtedness. Whereas the term gains includes interest in its general sense, this rule cannot be
applied to Section 32(B)(7)(g) of the Tax Code in the specific sense. Section 32(A) of the Tax Code defines gross
income and it is clear that there is a distinction between gains derived from dealings in property and
interests. Gains realized from the sale or exchange or retirement of bonds, debentures and other certificate of
indebtedness would fall under the category of gains derived from dealings in property. On the other hand,
interests would include interest from bonds, debentures and other certificate of indebtedness. Only citizens,
resident aliens and non-resident aliens engaged in trade or business are exempt from income tax on interest from
long-term deposit or investment. On the other hand, domestic and resident foreign corporations are subject to a
20% final tax on such interest. If Congress intended to exempt interest from bonds, debentures and other
certificates of indebtedness under Section 32(B)(7)(g) of the Tax Code, it would have done so in clear and specific
terms (Nippon Life Insurance Company vs. Commissioner, CTA Case No. 6142, Feb 4, 2002). After all, exemptions
are construed strictly against the taxpayer and liberally in favor of the government.
DE MINIMIS BENEFITS
EXEMPT DE MINIMIS BENEFITS, REGARDLESS OF RECIPIENT (RANK AND FILE, OR MANAGERIAL OR SUPERVISORY)
a. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the
year and the monetized value of leave credits paid to government officials and employees;
b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester
or P125 per month;
c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg rice per month amounting to not more than P1,500.00;
d. Uniforms and clothing allowance not exceeding P4,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f. Laundry allowance not exceeding P300.00 per month;
g. Employees achievement awards (e.g., for length of service or safety achievement, which must be in the
form of a tangible personal property other than cash or gift certificate, with an annual monetary value not
exceeding P10,000.00 received by the employee under an established written plan which does not
discriminate in favor of highly paid employees;
h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee
per annum;
i. Flowers, fruits, books, or similar items given to employees under special circumstances (e.g., on account
of illness, marriage, birth of a baby, etc.); and
j. Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum
wage.
The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in
determining the P30,000.00 ceiling of other benefits provided under Sec. 32(b)(7)(e) of the Tax Code. However,
if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the
employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling. Any amount given by the
employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute
as deductible expense upon such employer.

EXEMPT ASSOCIATIONS
The phrase any of their activities conducted for profit does not qualify the word properties.-- The phrase
any of their activities conducted for profit does not qualify the word properties. This makes income from the
property of the organization taxable, regardless of how that income is used whether for profit or for lofty nonprofit purposes. Thus, the income derived from rentals of real property owned by the Young Mens Christian
Association of the Philippines, Inc. (YMCA), established as a welfare, education and charitable non-profit
corporation, is subject to income tax. The rental income cannot be exempted on the solitary but unconvincing
ground that said income is not collected for profit but is merely incidental to its operation. The law does not make
a distinction. Where the law does not distinguish, neither should we distinguish. Because taxes are the lifeblood
of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions.
YMCA is exempt from the payment of property taxes only but not income taxes because it is not an educational
institution devoting its income solely for educational purposes. The term educational institution has acquired a
well-known technical meaning. Under the Education Act of 1982, such term refers to schools. The school system
is synonymous with formal education which refers to the hierarchically structured and chronologically graded
learnings organized and provided by the formal school system and for which certification is required in order for
the learner to progress through the grades or move to higher levels (Commissioner vs. Court of Appeals and YMCA
of the Phils., G.R. No. 124043, Oct. 14, 1998).
DEDUCTIONS
KINDS OF DEDUCTIONS
o Itemized Deductions
o Optional Standard Deductions
o Special Deductions

ITEMIZED DEDUCTIONS
o Business expenses, incl. research and development
o Interests
o Taxes
o Losses
o Bad debts
o Depreciation
o Depletion
o Charitable contributions
o Contributions to pension trust
o Health or hospitalization premium

BUSINESS EXPENSES
1. The expense must be ordinary and necessary;
2. Paid or incurred during the taxable year;
3. In carrying on or which are directly attributable to the development, management, operation and/or
conduct of the trade, business or exercise of profession;
4. Supported by adequate invoices or receipts;
5. Not contrary to law, public policy or morals. Operating expenses of an illegal or questionable business are
deductible, but expenses of an inherently illegal nature, such as bribery and protection payments, are not.
6. The tax required to be withheld on the amount paid or payable is shown to have been paid to the BIR.
o An expense is ordinary when it connotes a payment, which is normal in relation to the business of the
taxpayer and the surrounding circumstances.
o An expense is necessary where the expenditure is appropriate or helpful in the development of
taxpayers business or that the same is proper for the purpose of realizing a profit or minimizing a loss.
o P9.4 M paid in 1985 for advertising a product was staggering incurred to create or maintain some form of
goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a
member.
o Goodwill generally denotes the benefit arising from connection and reputation, and efforts to establish
reputation are akin to acquisition of capital assets. Therefore, expenses related thereto are not business
expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672, Apr. 24, 2003).

TEST OF REASONABLENESS OF BONUS


o There is no fixed test for determining the reasonableness of a given bonus as compensation. This
depends upon many factors, one of them being the amount and quality of the services performed with
relation to the business.
o Other tests suggested are payment must be made in good faith, the character of the taxpayerSs business,
the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the
salary policy of the corporation, the size of the particular business, the employees qualifications and
contributions to the business venture, and general economic conditions.
o However, in determining whether the particular salary or compensation payment is reasonable, the
situation must be considered as a whole. Ordinarily, no single factor is decisive (C.M. Hoskins & Co., Inc.
vs. Commissioner, L-24059, Nov. 28, 1969; Pacific Banking Corp. vs. Commissioner, CTA Case 1667, Oct 29,
1970).

Legal and accountants fees for prior years were not billed in corresponding years (1984-1985). It was paid by
taxpayer in succeeding year (1986) when it was billed by the lawyer and accountant. Taxpayers uses accrual
method of accounting.
Accrual of income and expense is permitted when the all events test has been met. This test requires (1) fixing a
right to income or liability to pay, and (2) the availability of reasonably accurate determination of such income or
liability. It does not, however, demand that the amount of income or liability be known absolutely; it only requires
that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy,
which implies something less than an exact or completely accurate amount.
Moreover, deduction takes the nature of tax exemption; it must be construed strictly against the taxpayer
(Commissioner vs. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007).

Entertainment, amusement and recreation expenses are subject to limitation


o % of net sales for sellers of goods
o 1% of net sales for sellers of services

INTEREST EXPENSE
1. There must be a valid and existing indebtedness;
2. The indebtedness must be that of the taxpayer;
3. The interest must be legally due and stipulated in writing;
4. The interest expense must be paid or incurred during the taxable year;
5. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;
6. The interest payment arrangement must not be between related taxpayers as mandated in Section
34(B)(2)(b), in relation to Section 36(B), of the Tax Code;
7. The interest is not expressly disallowed by law to be deducted from the taxpayers gross income (e.g.,
interest on indebtedness to finance petroleum operations);
8. The amount of interest deducted from gross income does not exceed the limit set forth in the law. In
other words, the taxpayers otherwise allowable deduction for interest expense shall be reduced by fortytwo percent (42%) of the interest income subjected to final tax beginning November 1, 2005 under R.A.
9337, and that effective January 1, 2009, the percentage shall be thirty-three percent (33%) [Sec. 34(B)(1),
NIRC].

TAXES
1.
2.
3.
4.
o
o

Payments must be for taxes;


Taxes are imposed by law upon the taxpayer;
Taxes must be paid or accrued during the taxable year in connection with the taxpayers trade, business
or profession; and
Taxes are not specifically excluded by law from being deducted from the taxpayers gross income.
The word taxes means taxes proper and no deduction should be allowed for amounts representing
interest, surcharge or penalties. Interest on taxes is not deductible as taxes, but as an item of interest.
Only the person upon whom taxes are imposed may claim them as deduction, except: (1) Taxes upon an
individual upon his interest as shareholder of corporation which are paid by corporation without

reimbursement; and (2) Corporate bonds or other obligations containing a tax-free covenant clause, the
corporation paying the tax or any part of it for someone else (Sec. 80, RR 2).

NON-DEDUCTIBLE TAXES
1. Philippine income tax
2. Foreign income tax
3. Estate and donors taxes
4. Special assessments on real property
5. Electric energy consumption tax under B.P. 36.
6. VAT

LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79)
1. The loss must be that of the taxpayer;
2. The loss is actually sustained and charged off within the taxable year;
3. The loss is evidenced by a closed and completed transaction;
4. The loss is not claimed as a deduction for estate tax purposes;
5. The loss is not compensated for by insurance or otherwise;
6. In the case of an individual, the loss must be connected with his trade, business or profession, or incurred
in any transaction entered into for profit though not connected with his trade, business or profession; and
7. In the case of casualty loss, it has been reported to the BIR within forty-five days from date of occurrence
of the loss.

BAD DEBTS
1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;
2. The same must be connected with the taxpayer's trade, business or practice of profession;
3. The same must not be sustained in a transaction entered into between related parties enumerated under
Sec. 36(B) of the Tax Code of 1997;
4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable
year; and
5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.

TAX BENEFIT RULE


o The taxpayer is obliged to declare as taxable income any subsequent recovery of bad debts in the year
they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts were
written off and claimed as deduction from gross income.
o It also applies to taxes previously deducted from gross income but which were subsequently refunded or
credited by the BIR. He has to report income to the extent of the tax benefit derived in the year of
deduction.

DEPRECIATION
1. The allowance for depreciation must be reasonable;
2. It must be for property arising out of its use in the trade or business, or out of its not being used
temporarily during the year;
3. It must be charged off during the taxable year from the taxpayers books of accounts;
4. Depreciation shall be computed on the basis of historical cost or adjusted basis. While financial
accounting allows computation based on appraised value, recovery of investment for tax purposes shall
be limited to historical cost.

CHARITABLE CONTRIBUTIONS
1. The charitable contribution must actually be paid or made to the Philippine government or any political
subdivision thereof exclusively for public purposes, or any of the accredited domestic corporation or
association specified in the Tax Code;
2. It must be made within the taxable year;
3. It must not exceed 10% (individual) or 5% (corporation) of the taxpayers taxable income before
charitable contributions (whether deductible in full or subject to limitation);

4.
5.

It must be evidenced by adequate receipts or records; and


The amount of charitable contribution of property other than money shall be based on the acquisition
cost of said property (Sec. 34(H), NIRC). The limitation is imposed to prevent abuse of donating paintings
and other valuable properties and claiming excessive deductions therefrom.

OPTIONAL STANDARD DEDUCTION


o Privilege is available only to citizens or resident aliens as well corporations subject to the regular
corporate income tax; thus, non-resident aliens and non-resident foreign corporations are not entitled to
claim the optional standard deduction.
o Standard deduction is optional; i.e., unless taxpayer signifies in his/its return his/its intention to elect this
deduction, he/it is considered as having availed of the itemized deductions;
o Such election when made by the qualified taxpayer is irrevocable for the year in which made; however, he
can change to itemized deductions in succeeding year(s);
o Amount of standard deduction is limited to 40% of taxpayers gross sales or receipts (in the case of an
individual) or gross income (in the case of a corporation). If the individual is on the accrual basis of
accounting for his income and deductions, OSD shall be based on the gross sales during the year. If he
employs the cash basis of accounting, OSD shall be based on his gross receipts during the year. It should
be noted that cost of sales or cost of services shall not be allowed to be deducted from gross sales or
receipts.
o A general professional partnership (GPP) may claim either the itemized deductions or in lieu thereof, the
OSD allowed to corporations in claiming the deductions in an amount not exceeding 40% of its gross
income. The net income determined by either the itemized deduction or OSD from the GPPs gross
income is the distributable net income from which the share of each share is to be ascertained.
o Proof of actual expenses is not required; hence, he is not also required to keep books of accounts and
records with respect to his deductions during the year.

NON-DEDUCTIBLE ITEMS
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or for permanent improvements, or betterments made to increase
the value of any property or estate. This Subsection shall not apply to intangible drilling and development
costs incurred in petroleum operations, which are deductible under Subsection (G)(1) of Section 34 of this
Code.
3. Any amount expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made; or
4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person
financially interested in any trade or business carried on by the taxpayer, individual or corporate, when
the taxpayer is directly or indirectly a beneficiary under such policy
5. Losses from sales or exchanges of property between related parties

PERSONAL EXEMPTIONS
RA 8424: Jan 1, 1998
o Single and estate or trust P20,000
o Head of family P25,000
o Married P32,000
o For each child, not to exceed 4 P8,000

RA 9504: July 6, 2009


o Individual, whether single, HOF, or
married P50,000
o For each child, not to exceed 4
P25,000
o Law exempts income of minimum wage
earners and increases OSD from 10% to
40% of gross sales or receipts, for
individuals, and of gross income, for
corporations.

Status-at-the-end-of-the-year rule
o Status-at-the-end-of-the-year rule which means that whatever is the status of the taxpayer at the end
of the calendar year shall be used for purposes of determining his personal and additional exemptions
generally applies. A change of status of the taxpayer during the taxable year generally benefits, but does
not prejudice, him. Thus, if he marries at the end of the year, he shall be entitled to personal exemption
of P32,000/P50,000. If a child is born at any time during the calendar year, even on the last day of the
year, the taxpayer is entitled to claim his child as a dependent entitling him to deduct additional
exemption of P8,000/P25,000 for that year. On the other hand, if one of his qualified dependent children
dies during the year, the law considers that the child died on the last day of the year; hence, he is entitled
to claim the full amount of additional exemption of P8,000/P25,000 for the deceased child for the year.

TAX BASES AND RATES


COMPENSATION INCOME

FRINGE BENEFITS

Gross compensation income less PAE times


graduated rates
Gross compensation income of employees of
RHQ, ROHQ, OBU/FCDU, and petroleum
contractors times 15%

Grossed-up monetary value of fringe benefits


times taxable rate times 32% = FBT
_____________________________________________________________________________________________________
Gross sales
Less: Cost of sales or services
Gross income
Multiplied by: 2%
MCIT
Gross income
Less: Deductions
Net income
Multiplied by: 35%
RCIT
Less: CWT
Balance
_____________________________________________________________________________________________________
BUSINESS AND/OR PROFESSIONAL INCOME
o Corporations (see formula opposite
here)
o Individuals:
There is no MCIT.
Deduct applicable PAE.
Apply graduated rates of 5% to
32%
Pay IT on two equal
installments, provided amount
is more than P2,000.

CAPITAL ASSETS
REAL PROPERTY IN THE PHILIPPINES

SHARES OF STOCKS OF DOMESTIC


CORPORATION

OTHER CAPITAL ASSETS

Consideration or FMV, whichever is higher times


6% = CGT.
Sale of principal residence is exempt from CGT,
provided conditions are satisfied
Listed and traded in local stock exchange: GSP
times of 1% = Stock transaction tax
Listed but traded over the counter or unlisted
shares: Gross selling price less cost or adjusted
basis = Capital gain or loss times 5%/10% = CGT
Include in global tax system, but long-term
capital gain or loss shall be taxable or deductible
only at 50% thereof.

PASSIVE INCOME
A. Interest

B. Dividend

10% FWT Citizen


20% FWT Resident alien engaged in trade
25% FWT NRANE
0% -- DC & RFC
35%, unless tax sparing provi-sion applies -NRFC

10% FWT books, literary works and musical


compositions (citizen)
20% FWT general rate (NRAE, DC & RFC)
25% FWT NRANE
35% FWT NRFC

C. Royalty

D. Rental income

20% FWT (peso deposit) and deposit substitute


7.5% FWT (foreign exchange deposit)
Long-term deposits (5 years of more) of
individuals: exempt
Others: Global system

NRFC
o
o
o

25% x gross income: NR cinema film


owner, lessor or distributor
4.25% x gross income: NR owner or
lessor of vessels
7.5% x gross income: NR lessor of
aircraft, machineries and other
equipment

BRANCH PROFIT REMITTANCE TAX


Branch profit of the Phil. branch used as additional capital investment of the foreign head office in the Philippine
branch, pursuant to the requirements of the Bangko Sentral ng Pilipinas, is considered as profit constructively
remitted abroad.
Branch profit remittance tax (BPRT) applies not only when the profit is actually remitted but also when such profit
is constructively remitted to the head office abroad (ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, Mar. 11,
2002)
BPRT does not apply on profits remitted by an enterprise registered with PEZA or SBMA and other freeport zones.
Tax base of BPRT is the amount of profit earmarked for remittance to its head office abroad.
ACCOUNTING METHODS
Cash method
Accrual method
o All events test; amounts received in advance are not treated as revenue of the period in which received
but as revenue of future periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046,
Mar 24, 1997).
Installment sales
o Sale on the installment plan
Initial payments do not exceed 25% of GSP
o Deferred payment sale, not on the installment plan
Initial payments exceed 25% of GSP
Percentage of completion
Crop year method

FILING OF TAX RETURN


SUBSTITUTED FILING OF ITR: No individual income tax return for the year will be filed by the employee concerned,
and the employer is the one that files the return for him
o Applies only to individuals
o With only one (1) employer
o Who correctly withholds the income tax on compensation income paid to the employee and remits the
same to the BIR
Substituted filing of return does not apply when the conditions above are not met, such as when the individual has
(a) two or more employers, (b) mixed incomes, correct WT was not deducted from compensation income, etc.

Individual deriving mixed income, or purely business/ professional income, or other income must file his quarterly
income tax returns (BIR Form 1700 Q) and annual income tax return (BIR Form 1700 ) as follows:
Period
Due Date for Filing Return
Q1 Return
April 15 of same year
Q2 Return
August 15 of same year
Q3 Return
November 15 of same year
Annual Return
April 15 of the following year

A domestic corporation and resident foreign corporation shall file quarterly corporate income tax return (BIR Form
1702 Q) and annual corporate income tax return (BIR Form 1702 as follows:
Q1 Return
May 31 of same year
Q2 Return
August 31 of same year
Q3 Return
November 30 of same year
Annual Return
April 15 of the following year (if on calendar year), or 15th day of the fourth
month following the close of the fiscal year (if on fiscal year).

Computation of the quarterly and annual tax returns of individuals (except those receiving purely compensation
income) and corporations shall be made on the cumulative basis; i.e., gross income and deductions are
consolidated and the income tax liability is computed on the consolidated net income, and the income taxes paid
for the preceding quarter(s) are credited against the consolidated income tax due.

WITHHOLDING TAX
An income payment is subject to the expanded withholding tax if the following conditions concur:
1. An expense is paid or payable by the taxpayer, which is income to the recipient thereof subject to income
tax;
2. The income is fixed or determinable at the time of payment;
3. The income is one of the income payments listed in the regulations that is subject to withholding tax;
4. The income recipient is a resident of the Philippines liable to income tax; and
5. The payor-withholding agent is also a resident of the Philippines.

EXEMPT FROM EWT


1. National government and its instrumentalities, including provincial, city or municipal governments and
barangays, except government-owned or controlled corporations;
2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general
or special, such as but not limited to the following:
a. Sales of real property by a corporation which is registered with and certified by HLURB or HUDCC
as engaged in socialized housing project where the selling price of the house and lot or only the
lot does not exceed P180,000 in Metro Manila and other highly urbanized areas and P150,000 in
other areas;
b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemption from income tax
under E.O. 226, R.A. 7916, and R.A. 7227;
c. Corporations which are exempt from income tax under Section 30 of the Tax Code, such as GSIS,
SSS, PHIC, PCSO, and PAGCOR;
d. General professional partnerships; and

e.
f.
1.

2.

3.

4.
5.
6.
7.
8.

9.

10.
11.
12.

13.

14.
15.
16.
17.
18.
19.
20.

Joint ventures or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations
International carriers (by air or water) subject to 2.5% Gross Phil Billings

Professional fees for services rendered by individuals; and professional entertainers and athletes, and
directors:
a. If gross income for current year exceeds P720,000
10%
b. If gross income for current year does not P720,000
15%
If recipient of professional fees, talent fees, etc. is a juridical person:
a. If gross income for current year exceeds P720,000
10%
b. If gross income for current year does not P720,000
15%
Rental income
a. Real properties
5%
b. Personal properties of P10,000 per payment; P10,000 shall
not apply when accumulated rental to same lessor exceeds
or is reasonably expected to exceed P10,000 within a year
5%
c. Poles, satellites and transmission facilities
5%
d. Billboards
5%
Gross payments to resident individuals and corporate
cinematographic film owners, lessors, or distributors
5%
Gross payments to contractors
2%
Income distribution to beneficiaries
15%
Income payments to certain brokers and agents
10%
Income payments to partners of general professional
partnerships:
a. If gross income for current year exceedsP720,000
15%
b. If otherwise
10%
Professional fees paid to medical practitioners
a. If gross income for current year exceedsP720,000
15%
b. If otherwise
10%
Gross additional payments to government personnel from
importers, shipping and airline companies, or their agents
15%
One-half of gross amounts paid by any credit card company in the
Philippines
1%
Income payments made by any Top 20,000 Corp
a. Supplier of goods
1%
b. Supplier of services
2%
Income payments made by government to its local/resident supplier
of goods and services other than those covered by other rates of
withholding taxes
a. Supplier of goods
1%
b. Supplier of services
2%
Commissions of independent and exclusive distributors, and
marketing agents of companies
10%
Tolling fees paid to refineries
5%
Payments made by pre-need companies to funeral parlor
1%
Payments made to embalmers
1%
Income payments made to suppliers of agricultural products
1%
Income payments on purchases of minerals, mineral products and
quarry resources
10%
MERALCO refund to customers
a. With active contracts
25%
b. With terminated contracts
32%

REFUND
A taxpayer must do two things to be able to successfully make a claim for the tax refund of withholding tax on
compensation income:
o declare the income payments it received as part of its gross income and
o establish the fact of withholding.
The amounts of total taxes withheld for each redundant employees cannot be verified against the Summary of
Gross Compensation and Taxes Withheld for 1995 due to the fact that this summary enumerates the amounts of
income taxes withheld on per district/area basis. The SGV certification cannot be appreciated in PLDTs favor as
the courts cannot verify such claim. Besides, the documents from which SGV traced the Alpha List to the Monthly
Remittance Returns of Income Taxes have not been presented to the court, and this is fatal to PLDT . Also, the
cash salary vouchers for the rank and file employees do not have acknowledgment receipts (PLDT v. CIR, GR
157264, Jan 31, 2008).

Requisites of claim for refund are:


o Claim was filed within 2 years under Sec. 230, NIRC;
o Income upon which taxes were withheld were included in the return of the recipient; and
o Fact of withholding is established by a copy of statement (BIR Form 1743.1) duly issued by payor
(withholding agent) to payee, showing amount paid and amount of tax withheld (RR 6-85).
CTA found above requisites were satisfied. Findings of facts of CTA are entitled to great weight and will not be
disturbed on appeal, unless it is shown that the lower court committed gross error in the appreciation of facts.
Failure of respondent to indicate its option in its annual ITR to avail itself of either tax refund or tax credit is not
fatal to its claim for refund.
o Sec. 76, NIRC offers two options: refund or tax credit. The options are alternative and the choice of one
precludes the other. However, in Philam Asset Mgt v. CIR, this Court ruled that failure to indicate a choice
will not bar a valid request for refund, should this option be chosen by the taxpayer later on. The
requirement is only for the purpose of easing tax administration, particularly the self-assessment and
collection aspects.
Failure of respondent to present in evidence the 1998 ITR is not fatal to its claim for refund.
o CTA denied claim for 1997 tax credit of PERF because it failed to submit its 1998 ITR.
o PERF attached its 1998 ITR to its motion for reconsideration. The ITR is part of the records of the case and
clearly showed that income taxes were not claimed as tax credit in 1998.
o Technicalities should not be used to defeat substantive rights, especially those that have been held as a
matter of right.
o The CAs reliance on Rule 132, Sec. 34 of Rules of Evidence is misplaced. This provision should be taken in
the light of RA 1125; proceedings therein shall not be governed strictly by technical rules of evidence.
o No one shall unjustly enrich oneself at the expense of another. This applies not only to individuals but to
the State as well. In the field of taxation where the State exacts strict compliance upon its citizens, the
State must likewise deal with taxpayers with fairness and honesty. The harsh power of taxation must be
tempered with evenhandedness (CIR v. PERF Realty Corp., GR 163345, July 4, 2008).
Tax refunds or credits are not founded principally on legislative grace but on the legal principle which underlies all
quasi-contracts, abhorring a persons unjust enrichment at the expense of another. The dynamic of erroneous
payment of tax fits to a tee the prototypic quasi-contract, which covers not only mistake in fact but also mistake in
law. The government is not exempt from the application of solutio indebiti. Indeed, the taxpayer expects fair
dealing from the government, and the latter has the duty to refund without any unreasonable delay what it has
erroneously collected (CIR v. Fortune Tobacco Corp, GR 167274, July 21, 2008).

Atty. Vic C. Mamalateo


Mobile: 0918-9037436
Email: vicmamalateo@yahoo.com
vic.mamalateo@vcmlaw.com.ph